Document 1 of 100

WORKPLACE HOMICIDES: WHY THE SOUTH LEADS THE WAY

Author: Mayfield, Hill; Borstorff, Patricia C

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Abstract:

Workplace violence resulting in homicides continues to be a major concern for

companies. While most companies have their Violence Prevention and Management Plan policies in place, it is still one of the most feared management nightmares. Of particular interest is a comparison of workplace homicides in the different regions in the United States. Then comparing these regions for a thirteen (13) year period from 1997-2009, (representing the most recent available data), the South easily leads the country in both workplace homicides and violent acts of employees. Of the total 8,127 workplace homicides during this period, the South had 3,784, representing 46.6% of the total, followed by the West with 1639 or 20.2%, the Midwest with 1,491 or 18.3%, and the Northeast with 1,212 or 14.9% of the total. There are a number of potential reasons as to why the South has such a profound lead for violence in the workplace. In particular, Southern culture, employee behaviors, the work environment, and the current high unemployment rate are discussed. Actual examples of workplace homicides are provided.

Full text:

INTRODUCTION

The most dangerous place in America is how the U.S. Justice Department describes the workplace. Virtually unheard of a half century ago, workplace homicide is now the second leading cause of fatal occupational injury in the United States. Workplace homicides can and does happen anywhere, at anytime, in large cities, in small towns, in large businesses or industries, in "mom and pop" operations, in hospitals, and yes, even on college campuses. The impact of each incident is overwhelming. It is often compared to an airplane crash because when something happens, it receives several days' worth of national coverage and creates a fear mentality that disrupts feeling of safety for some time to come.

Recent incidents involving the office shootings in Orlando, FL., in November 2009, the shootings at the University of Alabama in Huntsville in February 2010, the shootings at a manufacturing plant in Albuquerque, N.M., in July 2010, and the January, 2012 triple homicide at McBride's Lumber Company in Star, North Carolina, along with other examples, will be discussed in detail later in this paper. It is interesting to note that three of the above four recent examples occurred in the South. This brings us to one of the focus points of this research regarding the reasons for the Southern states leading the way in incidents of workplace homicides and violence in general.

VARIATIONS BY REGION

The South is significantly more prone to workplace violence resulting in homicides when compared to the other regions of the United States. The Southern states averaged 221 homicides, or 46.6%, of all workplace homicides during the studied period from 1997 through 2009. This is quite remarkable when compared to the remaining three major regions consisting of the Northeast which averaged 135 homicides per state, or 14.9% of the total; the Midwest which averaged 124 homicides per state, or 18.3% of the total; and the West which averaged 126 homicides per state, or 20.2% of the total homicides during these 13 years.

EXAMPLES OF SOUTHERN WORKPLACE HOMICIDES

Workplace homicide examples in the South, or in the United States as a whole, cannot be studied without a review of the U.S. postal incident in Edmond, OK some eight years later in 1986. The actions of a postal employee named Patrick Henry Sherrill brought the issue of violence in the workplace into the spotlight of the media more than any other individual. Sherrill, age 44, was an angry and surly employee, as described by co-workers. He had been reprimanded by his supervisor and told to expect a poor performance review. The next morning Sherrill put on his postal service uniform and packed his mail bag with two Colt .45 caliber pistols, a .22 caliber handgun and hundreds of rounds of ammunition. With a weapon in each hand and without speaking to anyone, he walked up to two supervisors and shot them dead. According to the account of one surviving witness, "Sherrill didn't have any preference about who he was shooting. Women and men, black and white were shot. He shot anything that moved." He continued looking for other victims shooting some at their work stations, others as they walked down a hall. His last victim was himself. He left 14 dead, excluding himself, and six wounded. It was the third worst mass murder by a single gunman in US history, surpassed only by the massacre at a McDonald's restaurant in San Ysidro, CA, in 1984, in which 21 persons were killed, and the 16 persons killed in 1966 by a sniper from a tower at the University of Texas in Austin (Baron, 1993).

While much has been written about workplace homicides in the South, few attempts, if any, have been made at explaining the reasons why the Southern states clearly lead in these incidents. The remainder of this study will focus on these reasons as provided by research data and as observed throughout my 35 year career in Human Resources.

WORK AND SELF-ESTEEM

More than any other region of the country that I have lived, employees in the South tie their personal self-worth directly to their work. Job lost is a traumatic blow to their pride and self-esteem. Prior to the 1980's, employees had satisfaction in knowing there was job security and they could go perform their work each day without the fear of losing their job. Major layoffs, terminations, early retirements, acquisitions, sales, mergers, takeovers, and corporate restructuring have all been a very real source of fear during the last 30 years and there is no end in sight now. The constant fear of losing jobs, and increased resentment toward corporations, have led to what is known as "excessive anxiety" or the feeling that you have no control over what is happening to you. This type of fear makes employees feel powerless as they face lifeshattering changes. Many employees go into a state of denial or resistance to change, worry, and become nervous, jerky with behavior that is often extreme and frequently inconsistent. These people become psychologically battered, looking for potential coercion, malicious in their wishes and are often described in the following ways:

Narcissistic: "I'm watching out for number one."

Paranoid: "I think everyone's out to get me"

Territorial: "I'm grabbing my turf and surrounding it with barbed wire."

Rigid: "I'm hanging on to what I know."

Cynical: "I'll believe it when I see it."

Political: "I'm keeping my eyes open" (Bardwick, 1991).

Many of the above descriptions are consistent with the psychological state of Patrick Henry Sherrill prior to the shootings in Oklahoma. Sherrill could easily be described as narcissistic, paranoid, territorial and rigid when he complained to his union official that his supervisors were picking on him and said "I gotta do something now, right now." The next morning he began killing co-workers, not strangers, and then finally himself.

SOUTHERN CULTURE AND GUNS

In the South, there is an easy access to guns. Guns can be easily purchased not only at regular gun shops and gun exhibits but also at trade shows, craft and collection gatherings, and parking lot swap meets. At the informal gatherings, no identification is necessary nor is a registration made of the gun transfer. In the South, there is a 'macho' image attached to owning guns and weapons. The South has a high acceptance and tolerance of guns. In the rural areas, guns are used for protection and hunting. Women have guns and know how to use them. This is acceptable behavior. Children are taught to use guns as they grew up around them. Children are given guns at an early age, with many boys receiving b-b guns or pellet rifles when they are as young as 7 or 8. There is a tolerance of violence (as protection of the 'old way' of life). In addition, for many people there is a tolerance and/or appreciation of the KKK, Alabama Militia and other organizations such as these. Lastly, people take pride in the ownership of their guns, showing them off to their friends and fellow workers. An example, in our immediate area was a terminated worker who came in with a shot gun and killed his boss. All the witnesses told police that they thought he was showing off his new gun so no one attempted to stop him.

INFATUATION WITH WEAPONS AND VIOLENCE

During my 35 year Human Resource career, I was amazed at the infatuation with guns, and violence in general, at my Southern plant assignments. I can give numerous examples of required discipline at assignments in Alabama, Tennessee, and Texas involving guns, knives, and physical violence in general. From the above described homicide of a spouse at the Alabama plant; to a gun that was brought into the Tennessee plant in an employee's lunch kit who stated he needed protection from the demons in the janitor's closet (no, he didn't test positive to drugs to everyone's surprise); to the employee at a Texas plant who threatened to "stick a (coemployee) with a knife and watch him bleed to death"; guns and violence were simply part of the Southern culture.

JUDGMENTAL OF OTHERS

Another lesson learned during my career in Human Resources is that, unfortunately, the people in the "Bible Belt" (South) are simply more judgmental of other individuals. This, along with Biblical teaching heard throughout their lives, often leads to another infatuation - with death. It is most interesting to note that the great majority of workplace homicides end with the shooter turning the gun on himself in the end. Again, look at the above examples. Almost all ended with the killers taking their own lives. Could this be their way of spiritual justice for taking the lives of others in cold blood? I'm certainly ofthat opinion.

SOUTHERN ENTITLEMENT MENTALITY

Another unfortunate observation as a Human Resource Manager is that employees in the South have more of an entitlement mentality than in other regions of the United States. While we strongly feel that all individuals should have a good job and a rewarding career, we must stop short of saying this is an "entitlement". Entitlement is an attitude, a way of looking at life. Employees who have this attitude believe that they do not have to earn what they get. They feel that they should get something because they are owed it, or entitled to it. Entitlement is running rampant in most occupations today. We have people not really contributing but still expecting to get their raise and their scheduled promotion. The entitlement attitude was created when employers stopped requiring performance as a condition for keeping a job or getting a raise. Simply put, entitlement destroys motivation in individuals and in the long run crushes selfesteem. Beginning in the 1980's, corporations that rarely laid off or terminated employees began to do so. Later in the decade the rate of reductions increased, with 1989 and 1990 seeing more cutbacks than ever. This trend has continued at an even more alarming pace in the 21st century with the recession of 2003 and the great recession beginning in 2008 and continuing to the present.

UNEMPLOYMENT RATES

Another factor that can be linked to work and self-esteem is regional unemployment rates. While past studies have been inconsistent, social scientists generally agree that persistent, long-term unemployment leads to higher crime rates. In their study of the effect of annual changes in unemployment on changes in the crime rate, David Cantor and Kenneth C. Land find significant effects related to negative opportunity for homicide, robbery, and burglary, and a significant positive motivation for robbery and burglary. Other studies, however, have identified relationships between unemployment and involvement in a crime, suggesting that the decrease in income and potential earnings associated with involuntary unemployment increases the relative returns of illegal activity (Janicak, 2003).

PROFILE OF THE SOUTHERN WORKPLACE KILLER

Based upon our studies in the above areas, a profile of the typical workplace killer in the Southern states would possess the following characteristics:

* Is a middle-aged Caucasian male

* is profoundly narcissistic, holds himself out to be superior

* exhibits an entitlement mentality

* is inclined to feeling powerless when rejected resulting in violence

* feels he is a victim of injustice while being judgmental of others

* is controlling and demanding, making co-workers uncomfortable

* is prone to multiple gun ownership with a fascination for weapons and violence

* is task-oriented rather than people-oriented, insensitive to co-workers

* subject to excessive drinking or drug abuse

* suddenly becomes unemployed due to layoff or employment termination

* finds self-esteem and identity through his job

* blames others for his problems

* has sudden changes in behavior (particularly appearance or attitude)

* has a history of depression or paranoia

* files numerous grievances and makes "mountains out of molehills"

CONCLUSION

Experts are predicting that workplace violence will increase even more in the next five to 10 years as teenagers not respectful of authority enter the workforce (Slage, 1997). This is evident based upon the bullying epidemic our nation is currently encountering, along with the overall unruly and disrespectful behavior of many of our youth.

Because employees need unlimited access to the workplace and to their co-workers, employee violence is difficult to control. Interpersonal relationships are supposed to develop more in a team atmosphere which is frequently found today. The need for the average worker to depend on his or her co-worker puts strain on that relationship and can often lead to violence. As this study shows workplace violence leading to homicides is not distributed evenly across our nation. As the U.S. economy continues to shift toward the Southern states and service sectors, potential workplace violence and homicides will be an increasingly important issue that must be properly identified and addressed by employers.

Subject: Workplace violence; Murders & murder attempts; Regions; Work environment; Unemployment; Firearms

Location: United States--US, Southern states

Classification: 6100: Human resource planning; 1110: Economic conditions & forecasts; 9190: United States

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

Volume: 19

Issue: 1

Pages: 43-48

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: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Business Case, Conference Proceedings

ProQuest document ID: 1271916554

Document URL: http://search.proquest.com/docview/1271916554?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2012

Last updated: 2013-09-23

Database: ABI/INFORM Complete

Document 2 of 100

The Criticality Of Cultural Awareness In Global Marketing: Some Case Examples

Author: Hunt, Kenneth A.; Hodkin, William

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Abstract:

International trade has taken place for thousands of years. One might assume that with such a long history, those involved with international business would have learned how it is done. For the most part, the major players are sensitive to cultural differences and how important it is to conduct business within the boundaries of the prevailing culture. However, there are hundreds of examples of cultural faux pas. This paper focuses on some of the top trading partners with the United States and the business opportunities that they represent. It also addresses general business etiquette guidelines that should be understood and applied when working with the key trading partners. Several cultural business missteps are presented to illustrate that the simplest decision can lead to embarrassment or worse, major economic loss. The need to research foreign cultural and language differences is just as important as researching the market for sales opportunities. In the global marketplace, the players who are aware and sensitive to the culture of their trading partners have a greater probability of success, than those who do not.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: International; Marketing; Culture; Case studies

Location: United States--US

Classification: 9190: United States; 9130: Experimental/theoretical; 1200: Social policy; 7000: Marketing; 9180: International

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 1

Pages: 1

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: 1418711147

Document URL: http://search.proquest.com/docview/1418711147?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 3 of 100

Principled Entrepreneurship And Shared Leadership: The Case Of TEOCO (The Employee Owned Company)

Author: Calo, Thomas J.; Roche, Olivier; Shipper, Frank

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Abstract:

This case describes a unique corporate culture, focused on employee ownership and employee-centered Human Resource practices, which fosters employee loyalty and motivates employee focus on organization objectives. The organization's CEO and senior management team discuss in detail the company's development strategy, the concept of shared leadership, and its strategic focus on Human Resource Management. Also emphasized is how the organization's recent partnership with a private equity firm, and its acquisition of an international organization of similar size, may change TEOCO's culture and its business model.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Investment companies; Corporate culture; Human resource management; Employee ownership; Software industry; Corporate profiles; Case studies

Location: United States--US

Company / organization: Name: TEOCO Corp; NAICS: 511210

Classification: 9190: United States; 8302: Software & computer services industry; 9130: Experimental/theoretical; 6100: Human resource planning; 2500: Organizational behavior; 8130: Investment services

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 1

Pages: 11

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: 1418711266

Document URL: http://search.proquest.com/docview/1418711266?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 4 of 100

Teaching Case: New Product Development And Pre-Launch Plans For Tickets Sales, Inc.

Author: Lefebvre, Jean M.; Gendron, Michael

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Abstract:

Ticket Sales, Inc (TSI) [1] is a startup business that has received seed funding. TSI is using the seed funding to perform a number of feasibility studies that will enable it to seek first-round venture capital. TSI has already performed a technology feasibility study and a marketing feasibility study, including a 5-year total cost of ownership pro forma budget. Outside consultants were retained to perform the studies. The case presents the Marketing Analysis and Feasibility Study performed by Big Apple Marketing. The TSI management team desires a second opinion concerning the work of Big Apple Marketing[1] and this case asks that NYC Associates[1] prepare an assessment of the Marketing Analysis and Feasibility Study in light of documented best practices in new product development.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Product development; Feasibility studies; Venture capital; Marketing; Startups; Case studies

Location: United States--US

Classification: 9190: United States; 9130: Experimental/theoretical; 9520: Small business; 3400: Investment analysis & personal finance; 7500: Product planning & development

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 1

Pages: 37

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: 1418711236

Document URL: http://search.proquest.com/docview/1418711236?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 5 of 100

Microcredit As A Tool For Rural Development: A Case Study Of Malaysia

Author: Mondal, Wali I.

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Abstract:

Malaysia is a prosperous country in Southeast Asia with two distinct geographical sections separated by the China Sea. Because the country has one of the lowest poverty rates of any developing country with 5.1 per cent of its population living below the poverty line, microcredit projects which are typically aimed at poverty alleviation, have not grown as rapidly as in other developing countries. However, microcredit and microfinancing lead to the growth of the microentrepreneur class in both rural and urban areas. Historically, of the 11 economic sectors of Malaysia, four sectors, namely Agriculture, forestry and fisheries; Mining and quarrying; Construction; and Wholesale and retail trade, hotels and restaurant did not grow at the rate of other economic sectors. A significant amount of economic activities of these four sectors take place in rural Malaysia. This was confirmed by the results of a Shift-Share analysis conducted by the author for the period of 2000-2005 and later compared with similar statistics for 2010. Using these results and comparing the success of microcredit in other developing countries, a case is made for sustained investment in microenterprises throughout rural Malaysia in the four sectors noted above.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Microfinance; Economic development; Geographic profiles; Entrepreneurs; Case studies

Location: Malaysia

Classification: 9179: Asia & the Pacific; 9130: Experimental/theoretical; 9520: Small business; 1120: Economic policy & planning; 8100: Financial services industry

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 1

Pages: 87

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: 1418711027

Document URL: http://search.proquest.com/docview/1418711027?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 6 of 100

Largest IM Platform In China - Tecent's QQ

Author: Wu, Jane Peihusn; Frantz, Terrill L.

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Abstract:

This case illustrates how Mainland China based Tencent Holdings Ltd., through focusing on its core competencies, has rapidly evolved into a technology powerhouse in the global Instant Messaging market. In just over a decade, the company has influenced and changed the communication methods and life-style of hundreds of millions of Chinese in China and around the world. Staying true to its core competencies, such as intense attention to innovation, efficiency, and customer responsiveness, the company successfully expanded its marketplace footprint from a locally-sighted, straight-forward telecommunications service provider into a complex, internet value-added service provider with a global reach. This case includes an introduction to the instant messaging industry, followed by a profile of the company. Also, an extensive analysis of Tencent's core competencies is presented, along with a summary of the company's path towards internationalization.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Core competencies; Instant messaging; Globalization; Statistical analysis; Internet service providers; Case studies

Location: China

Company / organization: Name: Tencent Holdings Ltd; NAICS: 517210

Classification: 8331: Internet services industry; 1300: International trade & foreign investment; 9179: Asia & the Pacific; 9130: Experimental/theoretical; 5250: Telecommunications systems & Internet communications; 2310: Planning

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 1

Pages: 95

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: 1418711175

Document URL: http://search.proquest.com/docview/1418711175?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 7 of 100

We Are Not Publicly Traded And So The Rules Don't Apply... Or Do They... Should They?

Author: Noe, Kelly

ProQuest document link

Abstract:

This paper presents a case study of the accounting practices of a company that is privately held. The company "follows" Generally Accepted Accounting Principles (GAAP) but has some questionable transactions. The paper then follows up with a discussion of baby-GAAP and possible consequences of two different GAAP options.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: GAAP; Accounting procedures; Case studies; Accounting standards; Regulation

Location: United States--US

Classification: 9190: United States; 9130: Experimental/theoretical; 4120: Accounting policies & procedures; 4310: Regulation

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 1

Pages: 103

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: 1418711097

Document URL: http://search.proquest.com/docview/1418711097?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 8 of 100

The Role of Network Facilitators in Fostering Trust within Strategic Alliances: A Longitudinal Case Study

Author: Cannatelli, Benedetto; Antoldi, Fabio

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Abstract:

The paper describes how the role of network facilitator played by a third party institution may substantially contribute to the development of trust among SMEs involved in a strategic alliance. In our work, empirical evidence is presented by a longitudinal analysis of a case history. The case study focuses on eight international-oriented SMEs located in an industrial district in Northern Italy that built up a formal network called 'I-Style Partners'. Two rounds of in-depth interviews were carried out with firm leaders and facilitator's managers involved in the strategic alliance over a three-year period. This paper contribute to theory generation suggesting a three-stage process model in which a network facilitator may enhance interorganizational trust by constituting in turn a substitute of alliance members' perceptions of ability, integrity and benevolence.

Full text:

Introduction

Joining a strategic alliance has been acknowledged as a valuable path for small and medium enterprises (SMEs) striving to gain a sustainable competitive advantage within their settings (Ahuja, 2000). In particular, lower transaction costs, social capital creation, entering foreign markets and achieving economies of scale have been all accounted as positive outputs of establishing ties with competitors in the markets (Jarrillo, 1988; Rosenfield, 1996; Nahapiet, and Ghoshal, 1998; Doz, and Hamel, 1998; Inkpen, and Tsang, 2005; Cruickshank and Rolland, 2006). However, alliance building among SMEs is far from being an easy-to-accomplish task-due to the risk of opportunism among partners, reaching the goal of collaboration can be a complex and risky venture (Medcof, 1997; Luo, 2006).

In such a context, the development of trust among alliance members has been widely recognized as a fundamental issue for establishing effective relational ties (Zaheer, McEvily, and Perrone, 1998; Pahrke, 1998). However, even if former research succeed in accounting for the beneficial effects of trustworthy relationships, questions regarding which actors can facilitate the process and how and why they can effectively do that still need to be addressed. In this paper, we recall the notion of network facilitator from McEvily and Zaheer (2004) to understand how and why a 'third party' can facilitate the process of trust development within strategic alliances among SMEs by fostering on reciprocal perceptions of ability, benevolence and integrity (Mayer, Davis and Schoorman, 1995). Evidence is based on a longitudinal case study involving eight Italian SMEs and a firm association acting as network facilitator. By means of an inductive approach, this paper contributes to extant literature on trust through theory generation. Specifically, results suggest network facilitators accounting as warrantor of integrity and benevolence in the early stages of the alliance.

The paper proceeds as follow: first, we review literature on trust within strategic alliance frameworks and focus on the concepts of network facilitator. This leads into our research questions and a description of the main methodological issues related to data collection and analysis. Following an account of the case study, we then present a longitudinal analysis of the alliance and advance a three-stage process explaining how and why a network facilitator may support alliance development among SMEs by leveraging on trust. Finally, we suggest directions for future research and consider the implications of our study for SMEs.

Literature Review

Trust has been largely acknowledged as a key factor affecting the performance of organizations engaged in strategic alliances (Zaheer and Harris, 2006). Specifically, extant literature suggests trust plays a constitutive role in designing alliance relationships by compensating incompleteness of contracts and incorporating relational elements (Williamson, 1993; Ring and Van de Ven, 1992; Lane and Bachmann, 1998).

The relevance it assumes in the alliance creation process led scholars analyzing trust from a number of perspectives. Specifically, previous studies can be divided into those focusing on antecedents of trust development within strategic alliances and those focusing on its consequences (Zaheer and Harris, 2006). In this paper, we assume the former perspective, thus focusing on factors leading to trust creation within strategic alliances among SMEs.

Extant literature in this vein developed along three main streams of inquiry. The first focuses on the costs related to trust creation, in terms of time, relations, and resources to be invested to allow trust to emerge among partners (Larson, 1992; Sapienza and Korsgaard, 1996). The second stream considers the role of interpersonal trust, explaining under which circumstances it may constitute an antecedent of trust at the interorganizational level (Zaheer, McEviliy and Perrone, 1998; Dyer and Chu, 2003 Hagen and Simons, 2003). The third stream deals with institutional factors facilitating the establishment of trust among alliance partners, specifically national and regional culture (Gulati, 1995; Sako, 1998; Dyer and Chu, 2003).

Though a number of studies on trust's antecedents within strategic alliances can be traced back to the above-mentioned streams, questions regarding how and why third parties can foster the development of trust within a strategic alliance fall out of those domains. Strategic alliances may benefit to a large extent from participation of third party institutions acting as mediator, especially when alliance partners perceive themselves as competitors on the same market and pre-existing social relationships among partners are missing.

To this aim, we build on the concept of network facilitators, introduced by McEvily and Zaheer (2004), to analyze the role of institutions (such as associations of firms) in fostering collaboration among actors involved in geographical industrial networks. Specifically, with the acceptation of 'Architects of Trust,' these authors focused on the dynamic through which trust is built among people belonging to geographically close organizations involved in the alliance. They proposed the performance of an exploratory in-depth case study on the activities led by an institution called the Western Michigan Manufacturing Technology Center (WMMTC) so as to foster trust within a network called the Office Furniture Industry Council (OFIC). The main result of their study has been a better understanding of the importance of the presence of a third party that is trusted by each participant due to the presence of a pre-existing relationship.

Even if it has been observed that network facilitators play a relevant role in building trust among participants (Obstfeld 2005), the dynamic according to which this occurs is still unclear, especially from a longitudinal perspective.

Addressing such an issue requires a better understanding of the factors that traditionally lead an actor-the trustor-granting trust to another actor-the trustee-in order to detect the contribution of the facilitator.

To this aim we recall the model proposed by Mayer, Davis and Schoorman (1995) predicting perceptions of ability, benevolence and integrity as main elements leading an individual to trust another actor. In this perspective, perception of ability lead the trustor conceiving the trustee as an actor holding a set of skills and competencies that may exert influence in a specific domain (Mayer, Davis and Schoorman, 1995). Acknowledging peculiar or unique characteristics to its counterpart provides the trustor with confidence that the trustee holds the expertise required to accomplish given tasks. Perception of benevolence is "the extent to which a trustee is believed to do good to the trustor, aside from an egocentric profit motive" (Mayer, Davis and Schoorman, 1995: 718). In this sense, the trustor conceives the trustee's actions as driven by altruism, preventing the risk of opportunism. Then, perception of integrity refers to the extent the trustee is seen as adhering to principles and values judged acceptable by the trustor (Mayer, Davis and Schoorman, 1995). While benevolence is a characteristic of the relationship itself, integrity is conceived as a personal characteristic of the trustee that may be detected among different domains and relationships.

Understanding the role of network facilitators in fostering trust among partners implies greater comprehension of how it may leverage on the trustor's perceptions of ability, benevolence and integrity to foster the development of trusting relationships. Comprehending such relations is even more important when assuming a longitudinal perspective, so as to detect variance among variables over time. Thus, in regard to the invitation by Zaheer and Harris (2006) to better analyze the role of the network facilitator in fostering trust within strategic alliances we state our research question:

How do network facilitators leverage on a trustor's perceptions of ability, benevolence and integrity to foster the development of trust within a strategic alliance over time?

Data Collection and Methodology

The research performed here is a longitudinal case study with an exploratory purpose. The field case analysis carried out focuses on the I-Style Partners experience, a strategic alliance among eight firms belonging to the industrial furniture district of Brianza, a geographical area in Northern Italy. These firms are: Feg-Salvarani Group, Lema (through its business unit called 'Concept International Office'), Mobileffe, Misuraemme, Giellesse, Turri, Zanaboni and Coro. They are all SMEs-their number of employees ranges from 20 to a maximum of 200. It is important to note that they all belong to the same local association of firms, Compagnia delle Opere (CdO), which acts as network facilitator in the case history.

Wide access to internal information and successfulness of the case study constituted the main two selection criteria. Getting internal access to a proven successful initiative is consistent with the purpose of theoretical sampling, which focuses on cases with "rare" qualities and whose dynamics may be easily detected, allowing processes that can exist in other contexts to emerge sharply (Eisenhardt, 1989; Pettigrew, 1990; Pratt, Rockmann and Kaufmann, 2006; Tracey and Jarvis, 2007; Kreiner, Hollensbe and Sheep, 2009). Hence, we could access information providing answers to how and why questions-such as those driving our study-focusing on the antecedents of trust and the notion of network facilitator.

To lead an in-depth case study makes it possible to explore causal links that are too complex to be analysed, for example, through a survey (Yin, 1984; Eisenhardt, 1989). Indeed, adopting a longitudinal perspective is consistent with the research objective-explore the dynamics where trust is created and maintained among a group of entrepreneurs, as well as the call for research to explain the evolution of such trust over time (Zaheer, McEvily, and Perrone, 1998). Again, longitudinal perspective is also a key tool to advance new insights in the small business and entrepreneurial field, as it enhance research by suggesting variability among variables interaction over time (Henry, Hill and Leitch, 2004).

Following Eisenhardt and Bourgeois (1988), narrative has been used as basic tool for analysis. This is consistent with both the need to re-enact main events of the case history and to describe motivations and actions carried out by different actors along the process. Adopting the entrepreneurs' subjective perspectives is critical to explore the social world in which they are embedded and not lose the 'entrepreneur's personal representation of salient moments which was of prime importance' (Perren and Ram, 2000; Cope and Watts, 2000).

The validity of the construct is enhanced by triangulation among multiple sources of evidence: two rounds of in-depth interviews with each entrepreneur and manager of the CdO-registered and verbatim transcribed, backed up by a systematic review by the interviewee, then codified by the authors-over a period of two years (see Table 1); analysis of corporate documents, including brochures, meeting reports and email exchanges (about 300 pages); and direct observations made by the authors during the alliance meetings. Some extracts of the interviews are reported and commented on in the following paragraphs. Leading two rounds of interviews at two different stages of the alliance was consistent with the purpose of a process study, since it allowed variance in partners' perceptions of ability, integrity and benevolence to be detected. Moreover, the decision about the timing of the second interview round-which took place between the end of 2007 and the beginning of 2008-was based on authors' and CdO managers' perceptions of trust emergence among the alliance. In this vein, a continuous monitoring activity performed by CdO managers and authors themselves-which periodically attended partners meetings-resulted in a precious mean to keep track of members' relationships evolution.

Finally, research practices compliance is strengthened by the adoption of a case study protocol as well as the creation of a database that reports all documents and interviews that qualify as research data.

I-Style Partners and the Brianza Furniture District

The furniture district of Brianza is composed of 4,476 independent enterprises, all specializing in the production of furniture, co-located within an area of 258 km2 in the Lombardy Region. In reference to the number of employees, the average size of the firms is only 3.6 units. Indeed, this is the result of the co-existence of enterprises that differ among each other. In fact, three classes of SMEs can be found in the region: the micro-firms, with no more than 9 employees (they work mainly as subcontractors for other manufacturers in the district); the small enterprises, with 10-49 employees (they work both as subcontractors or directly for the wholesale dealers or retailers); and medium enterprises, with 50-249 employees, with focus on the market, subcontract for several stages of the supply chain to smaller enterprises in the district. Only a small number of firms inside the district have more than 250 employees (fewer than 10) and none of them have more than 400.

The initial proposal of gathering the eight entrepreneurs was made in the spring of 2005 by the local office of Compagnia delle Opere (CdO)-an association of firms with branches all over Italy and in 14 other countries. Two weeks before, CdO was involved in a large real estate redevelopment project in Ivory Coast. CdO asked for a collaboration to occur among the eight associated firms. In Table 2, the eight firms involved in the I-Style Partners alliance are depicted.

The process of forming the group has been a progressive effort. Only three firms were involved at the outset: Lema, Mobileffe and Giellesse. They mainly deal with modern, day and night furnishings and, thanks to Concept (Lema's business unit), they could assure the coverage of all possible office furnishing needs. The fourth firm asked to collaborate was Turri, the only one with the expertise to produce furniture with a classic style, which is especially appreciated abroad. Then, production volume and the investment budget were estimated, and the need to call on additional firms within the district became evident. In order to avoid product overlap within the group, the selection process had to be accurate. That was when another business, Feg-Salvarani Group, was invited to join the alliance. In fact, with the aid of the Salvarani unit, the group also would have been able to satisfy the demand for kitchens. Finally, Zanaboni, Misuraemme and Coro were added to the strategic alliance so as to increase the productive capacity for classical, modern and garden furnishings.

The next step, in 2006, was to establish a temporary association of firms in order to create a single juridical institution to interact with the Ivory Coast purchaser. The establishment of a formal agreement encouraged first interactions among the entrepreneurs. Common meetings were held at CdO headquarter on a monthly basis, where entrepreneurs often discussed their business interest even beyond the Ivory Coast project. Indeed, it was not unusual that the topic of the meeting shifted to common issues that they faced within the sector.

After almost two years of start-up process, in early 2007, the original project suddenly seemed to fail because of a series of financial and legal problems that seemed to arise to the purchaser.

Notwithstanding the halt, CdO still had the willingness to hold on to everything that had been built in the previous months among the entrepreneurs. CdO's idea was to push the 'entrepreneurs' table' (they used to call themselves this way) toward the sharing of a strategic solution, which would have led to a brand value increase in new markets such as the Far East and South America.

In addition to the need for a strategic repositioning in new markets, a structure targeting the contract segment of the furniture industry, which had not been present within the firms involved, was needed. With this structure, the relationships built over two years of collaboration would not be lost with the dissolution of the original project. Facing these arguments from the CdO, all members of the 'entrepreneurs' table' agreed to continue the path they were following a few weeks before; they agreed to a formal strategic alliance within the SMEs. All of the enterprises joined forces and presented themselves 'under the same roof' at an international trade fair in 2008.

In May 2008, all eight of the entrepreneurs further committed themselves and employed a full-time manager to lead the business of the alliance. The shared mission regarded the collaboration in the contract segment in foreign countries, with a particular focus on India, Russia, the US, and the main tourist regions abroad.

Their first target was a deal with Ventaglio Real Estate for the furnishings of 120 apartments and 120 hotel rooms in Rosa de Bayahibe in the Dominican Republic, a business deal worth euro35 million.

Longitudinal Analysis

The I-Style Partners case study provides evidence about the role played by a network facilitator in supporting a strategic alliance among SMEs by enhancing trust among members. Specifically, the case history suggests three main stages in which the network facilitator assumes the role of guarantor of the alliance by acting, in turn, as substitute of trustors' perceptions of ability, integrity and benevolence. The three stages are represented in Figure 1 and analysed in the following sections. Extracts from the interviews are reported to provide evidence about the role played by the network facilitator in each stage.

Stage 1: network facilitator as substitute of integrity and benevolence. The first stage-that goes from the inception of the alliance and extends for all the partner selection process-occurs in response to a business opportunity identified by the network facilitator. The project advanced by CdO was so vast that no firm within the district could deal with it by itself. Indeed, the opportunity became feasible just after the hypothesis of collaboration was considered. One of the entrepreneurs involved in the alliance pointed out the prevalence of the business opportunity as initial driver of the alliance:

"The project was so huge that no one of us would have been able to cope with it on his own. This opportunity was almost incredible. It would have provided business for all of Brianza for the following five years... Indeed, when the numbers allow everybody to make their profit, it is much easier to find an agreement... while, in the usual market in which everyone competes for a larger market share it is much harder." Entrepreneur #1 - Round 1

In this perspective, the strategic alliance was mainly seen as a mere means to pursue a business opportunity and the time perspective was limited to the length of the project. Moreover, collaboration among competitors was rarely considered a valuable development pattern by the alliance participants. Most of them ascribe such an approach to a non-cooperative culture and adverse market conditions:

"... We are in Brianza, where it is very hard to collaborate. The typical behaviour among us is well described by the sentence 'Your loss, my gain'. Collaboration among competitors is completely absent. On the contrary, we are very reluctant to seek it. The success of an enterprise is strictly related to the failure of its competitors. The saturation of the market and the consequent reduction of profits in the last years have contributed to the development of such a situation." Entrepreneur #2 - Round 1

"There's no cooperation at all. Other firms are mainly seen as competitors." Entrepreneur #1 - Round 1

"From a business perspective, cooperation is completely absent, meaning that we are all fighting the same war. We are basically all competitors. Let's say that friendship and business stand on opposite sides." Entrepreneur #3 - Round 1

Since CdO provided the opportunity, it had a prominent role in the partner selection process. Firms were invited to join the alliance according to their specific, technical features. Firms were selected to provide the alliance with a wide range of complementary products and production flexibility, as well as to ensure the same quality standard. In this perspective, trust among partners was built prominently on each other's perception of ability. Such a perception emerged as a consequence of previous experience in competing on the national market and of members' belonging to the Brianza furniture industrial district, this being a sort of guarantee of high standard quality products.

"The Brianza furniture ... has a quality that no other will ever attain. Our product breathes our air, which is different." Entrepreneur #4 - Round 1

However, missing a history of social interaction and collaboration among partners, perceptions of integrity and benevolence did not emerge. The absence of these dimensions-which account as antecedents of interorganizational trust-was filled by the network facilitator, which acted as guarantor for other participants. Rather than perceiving each other as honest and benevolent, partners granted their trust to the network facilitator, because of their long-standing relationship with it. Entrepreneurs #5 and #6 underline the importance of the network facilitator in the early stage of the alliance:

"The presence of a playmaker not involved in the industry, and thus supposedly impartial, is clearly a benefit because of his 'super partes' status. It demonstrated its fairness by supporting many of us for many years before starting this project. Trusted relationships like this are tried in such circumstances. These are relationships that cannot be created in a few weeks. The role that CdO is playing is fully reliable and is the result of years of collaboration." Entrepreneur #5 - Round 1

"My father tried this path several times without success, maybe because they were different times and the mentality was different. We needed something like CdO, someone who believes in the project and who manages to get people working together; if this is attempted by a peer - a competitor - that is no longer feasible. It took a coordinator, a third party..." Entrepreneur #6 - Round 2

Indeed, in the first stage, the network facilitator not only provided the business opportunity available to the alliance; it also accounted as a substitute to interorganizational trust among members by catalysing members' perceptions of integrity and benevolence.

Stage 2: network facilitator as substitute of benevolence. The second stage-between the partner selection process and the collapse of the Ivory Coast project in early 2007-was characterized by high interaction among the entrepreneurs heading the eight firms. Since then, they met every month to come up with a strategy to deal successfully with the purchaser.

Such interaction resulted in the emergence of a reciprocal perception of integrity within the group. While in the first stage the lack of social interaction among firm leaders prevented them from having a positive or negative assessment about other members' level of integrity, meeting on a regular basis allowed individual values and principles to be reciprocally evaluated. In the I-Style case, a set of values rooted in the same religious and cultural beliefs emerged as the backbone of reciprocal perception on integrity. Evidence of that is shown in some extracts of the interviews of both firms and CdO leaders:

"The key issue in networks is trust. What flows among people cannot flow among corporate structures. This initiative was conceived in Brianza, where there are firms in the furniture industry that share a common catholic and cultural background, based on the willingness to build, contributing to society, trust and an attitude to hard work." CdO President - Round 1

"We all know each other within the district but collaboration was never considered as a feasible option. Those who tried this path some years ago failed since they could never overcome leadership and competitive issues. In this case - instead - we leftaside egocentrism and individualism for the sake of the common good, since we are all dealing with an unstable market and we all adhered to a set of principles based on honesty, commitment to hard work and reciprocity." Entrepreneur #6 - Round 2

"We all know that the main driver of the alliance was to exploit a business opportunity. However, it must be said that we were lucky since we are all reasonable people who are easy to discuss with and who share a pretty similar background." Entrepreneur #3 - Round 2

Moreover, perception of ability?-that in the first stage was mainly based on competi-competi-first competition in the same markets and geographical closeness-benefited also from social interac-interac-benefited interaction in stage two. Working together to come to a suitable offer for the Ivory Coast purchaser required firms opening their boundaries and sharing internal information with alliance partners, which could get previous perceptions of partners' ability confirmed. In this vein, perception of integrity was key in inducing firm leaders to discuss openly about critical issues like internal cost structures and marginal profitability, which are usually kept highly confidential by business organizations:

"By working with this group of firms, by letting a new way of doing business emerge-completely different from our traditional approach-by collaborating, we have introduced a new work conceptualisation in Brianza. To have the opportunity of entering a competitor's firm was impossible until recently. Now we are tuned on a 'your life, my life' philosophy. Thanks to the confrontation I see that, even though we naturally are still competitors, there is an exchange of information that is very important." Entrepreneur #2 - Round 2

"...know-how began to flow, without any of the enterprises losing its own identity or being robbed of its ideas. In this way, by discussing issues concerning our industry single enterprises, it allowed the facing of these issues together. This is one of the benefits that we got just by sitting around the same table." Entrepreneur #7 - Round 2

However, the role of network facilitator in this stage still remained critical in substituting perceptions of benevolence among alliance members. Being out of the circle of competitors and having long-term relationships with each partner positioned CdO as guarantor of alliance members' individual goodwill. Indeed, in stage two the risk of opportunism by other members could not be excluded a priori by any actors, giving the uncertainty around the deal and the limited time perspective of the partnership.

"The key element is reciprocal trust and esteem with CdO. It goes beyond the professional dimension. It holds at the individual level. I'm totally serene in relying on CdO since I know they will act for the interests of my business. That's the main difference with traditional export consortia in which the same treatment is not guaranteed to all of the members." Entrepreneur #3 - Round 2

Stage 3: the rise of full interorganizational trust. Stage three starts in early 2007, when the Ivory Coast deal finally failed and firm leaders decided not to give up the alliance. On the contrary, they agreed to pursue a collaborative path with a broader scope.

The idea that, notwithstanding the original goal's failure, a path for a strategic alliance was still practicable was strongly brought forward by CdO managers:

"... For us, who promoted and supported such a meeting in neutral territory - CdO headquarters - it seemed a pity not to persist in the same direction with a broader perspective." CdO President - Round 2

This meant shifting from a short-term-project perspective to a strategic perspective, implying higher investments and long-term commitment. The terms of the strategic agreement provided for full business independence within the national market-where they remain basically competitors-and collaborative involvement for international deals in the contract sector. Sharing a goal implied firm leaders developing a shared vision to be pursued as a collective effort.

Establishing a collective goal being supported by a non-competitor institution boasting privileged relationships with each organization allowed a sense of benevolence to emerge among firm leaders. Such a perception stemmed as a result of intensive interaction among peers with similar cultural and social background and dealing with similar issues in the market. Realizing that almost all of the entrepreneurs were facing the same challenges and struggling on similar problems among the stages of the value chain induced a sense of solidarity between alliance members, resulting in proactive and reciprocal supporting actions that lie outside strict economic motives. Entrepreneur #8 expresses this concept with an example:

"A kind of common sense of mutual aid-I would say-emerged over time. The beauty of that is that it started to hold even beyond the mere actions required by the I-style alliance. For example, when a few weeks ago, I received a purchase that exceeded my production capacity, I gladly involved one of the partners who was in need of work as subcontractor... and I'm pretty sure that if I need help in the future, him or someone else will find a way to support me." Entrepreneur #8 - Round 2

The role played by CdO as network facilitator was a key antecedent to perception of benevolence and - to a wider perspective - interorganizational trust to emerge. As illustrated in Figure 2, by virtue of the dyadic relationships that it holds with each entrepreneur and the contemporary absence of ties with other members, the position of the network facilitator in the first stage is pivotal. In the early stage, the contribution of the network facilitator, in terms of activities, is to:

* identify the business opportunity;

* rationalize the business opportunity, making it accessible for the firms;

* design the framework for cooperation;

* coordinate activities (as the pivot of the alliance), and keep the cohesive factor achievable.

In the second stage, because of the trust relationships that exist between the network facilitator and the members, its position remains central, even if it ceases to be exclusive: i.e., loose ties between firms begin to take shape. However, as the warrantor of entrepreneurs' behaviour with other members, the presence of the network facilitator is still critical, and its role could be defined as mediator. The activities led here are mainly oriented toward the facilitation of the germination of relationships among members, making the dialogue among them as smooth as possible. These activities are:

* to summon meetings;

* to assure equilibrium in the workloads;

* to give input toward a new perspective of the alliance.

In the last stage, trustworthiness among members reaches its maturity; ties are strengthened from the knowledge transfer and common experiences gained during the previous years. Hence, the need of a warrantor gradually decreases, as each entrepreneur freely decides to trust other members of the alliance. As such, the network will no longer need an internal facilitator. Rather, it will cast aside the mediator position on behalf of an internal leadership that assures that entrepreneurial guidance is in place for the alliance. Nevertheless, the activities carried out in this stage, in which the facilitator assumes the position of advisor, are:

* to hand over the coordination of the alliance to an internal leadership;

* to externally support the alliance by continuously looking for opportunities and watching over relationships.

In summary, by leveraging social interaction among alliance members, CdO fostered inter-group perceptions of ability, integrity and benevolence leading to interorganizational trust, overcoming cultural and competitive barriers usually keeping firms from collaborating:

"The most important thing is that leaders of firms competing for three generations - who didn't even greet each other - sat around the same table: amazing." Entrepreneur #3 - Round 2

Theoretical and Managerial Implications

Based on a longitudinal case study, an exploratory analysis of an alliance building process among SMEs has been developed. The I-Style Partnership is a successful example of how a strategic alliance among local businesses - competing within the same industry in international markets - can be supported in the creation and early development stage.

In particular, it has been found that network facilitators can foster an alliance building process among SMEs by leveraging on different members' perceptions at different stages in order for trust to emerge.

Such a finding holds implications for both theory and managerial practices. From a theoretical perspective, this study contributes to extant literature on trust and strategic alliances among SMEs by underlining the role of third party institutions in enhancing members' perceptions of ability, integrity and benevolence. Specifically, it advances further development to the model of trust proposed by Mayer, Davis and Schoorman (1995) in two ways. First, by introducing the notion of network facilitator, it advances another variable moderating the relationship between perceptions of ability, integrity and benevolence and interorganizational trust; second, it suggests the three above-mentioned perceptions occurring in a specific order rather than simultaneously or randomly. Specifically, perception of integrity and benevolence could not emerge without social interaction. Instead, that is why perception of ability may emerge earlier in the alliance building process, since another party's ability can be acknowledged indirectly, for example, by reputation. Indeed, the role played by the network facilitator is key since it acts as a substitute of perceptions of integrity and benevolence in the early stages, providing a warranty to partners' behaviours and reducing the risk of opportunism related to trust.

This work, because of its inductive approach, contributes to the literature in terms of theory generation. Further research is needed to empirically test our findings through quantitative surveys or more extensive case studies. Several conditions have to be considered here in order to gauge these findings: the I-Style Partners' alliance involves eight firms belonging to the same industrial district and sharing the same culture, even while being naturally adverse to such cooperation. Further research, studying the alliance building dynamics among firms with different cultural backgrounds could contribute significantly to the growth of the field. Other rare insights would be likely to come from further research focusing on the effect that joint performances have on the development of trust, something that was beyond the scope of this work due the present stage of the alliance. While the overall literature showed a positive relation between trust and performance (Zaheer, McEvily, and Perrone 1998; Sako 1998; Dyer and Chou, 2003; Hagen and Simons, 2003; Jap and Anderson, 2003), almost none of it focused on the inverse relation, leaving a gap that yet remains in this field.

Major limitations affecting the research are related to the presence of variables that are difficult to manage, such as those coming from the psychological arena. Whereas there are several models for the economic and sociological behaviours considered above, it is much more difficult to find uniformity regarding the psychological factors that support the model. Indeed, as stated above, the validity of the model proposed has to be tested further through both multiple case studies and statistical inference.

Several managerial implications stand out as a result of this study, especially with regard to the great potential of network facilitators, such as multi-firm associations and service centres acting within a local area, to foster alliance creation among SMEs. In particular, great importance has been given to the history of the interaction built through the years between the facilitator and the alliance members. This seems to be a basic feature that the network facilitator is required to have in order to be a credible warrantor of other members' behaviour-acting as a safeguard from opportunism.

Subject: Small & medium sized enterprises-SME; Alliances; Trust; Statistical analysis; Case studies

Location: Italy

Classification: 9175: Western Europe; 9520: Small business; 9130: Experiment/theoretical treatment

Publication title: Journal of Small Business and Entrepreneurship

Volume: 25

Issue: 1

Pages: 19-33,127

Number of pages: 16

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: Feature, Business Case

Document feature: Tables Diagrams References

ProQuest document ID: 1021195735

Document URL: http://search.proquest.com/docview/1021195735?accountid=38610

Copyright: Copyright Journal of Small Business and Entrepreneurship 2012

Last updated: 2013-10-01

Database: ABI/INFORM Complete

Document 9 of 100

SMALL TOWNS DON'T ALWAYS HAVE SMALL PROBLEMS: ASHVILLE CASE STUDY

Author: Newton, Stan; Borstorff, Patricia C

ProQuest document link

Abstract:

This case deals with an Organization Analysis (OA) for the city government of a small southern town. OA is an internal evaluation of an organization's strengths and weakness that will provide unbiased findings and recommendations to address shortcomings. The design of an organization can impact everything, from proper work flow to the efficient allocation of resources. The characters and situation that comes to life in the case are those of a popular but ineffective politician, an under-performing municipal government, and the consultant retained to perform this analysis. In spite of recent economic downturns the city is doing relative well and it is with considerable anticipation that Dr. Russell, the consultant, undertakes this behind the scenes evaluation. Dr. Russell's methodology for deriving the needed information is to interview a total of 26 persons holding leadership positions. While the interviews revealed somewhat diverse opinions, some consistent themes appeared. After analyzing this primary data, Dr. Russell felt he had ascertained the principle problems and makes recommendations to correct them. Students find themselves entwined in the dilemma of striving to attain an acceptable level of city governmental performance while dealing with long standing traditions and pleasing, but ineffective, political operatives. Like the consultant, students are asked to provide solutions. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTOR'S NOTES RECOMMENDATIONS FOR TEACHING APPROACHES

This case helps students appreciate the challenges and opportunities in small town governance. In all towns, municipalities, and cities, there are issues that lead to conflict and inefficiencies. Personalities as well as policies or the lack thereof can result in hurt feelings, fewer services offered to citizens, and duplication of effort. Allow the students to read the case and then assign the questions. They can use the Internet to find all the answers which are provided below. Students are adept at finding information on the Internet and enjoy the success that this case brings.

We suggest to first investigate county governance, institutional analysis and communication problems. The students should answer the following questions:

1. What does reactive and proactive strategy mean and under what circumstances would they be successful?

Reactive strategy means an organization is slow to respond to their environment. More often than not management only takes corrective or responsive action when forced to do so. Proactive strategy means an organization is looking for problems and opportunities and what actions need to be taken to address them. With this type of strategy, opportunities can to be exploited for any possible competitive advantage they provide and problems are addressed before they become a crisis.

2. What are some considerations for the problems between police and fire personnel concerning adequate compensation?

The problem of parity between the police and fire departments is quite common in municipalities of any size. As both professions come under the domain of public safety there is a perception in some circles that pay equality should exist; however, in most towns police are paid at a slightly higher rate. In the case of Ashville, with the fire department having the additional obligation of dual qualifications (Firefighter and EMT), perhaps the point of parity is valid and should be given full consideration.

3. What are some essential functions needed in the job description of the newly formed position of administrator? What employee qualifications would be adequate for such a position?

Essential functions for position:

Executive leadership in which advice and counsel would be given to the Mayor; Knowledge of public administration, with particular reference to municipal administration, including the basic principles of organization and budget preparation; Knowledge of city organization and functions; Human Resource development to include the facilitation of a team management approach; Ensure employee participation and collaboration in problem solving; Knowledge of the relationships within local government and other levels of government; Knowledge of research methods and techniques utilized to assemble, organize, and present in written or oral form statistical, financial, or factual information derived from a variety of sources; Knowledge of financial planning and budget management; Knowledge of the laws, ordinances, and other requirements governing local government; High degree of computer literacy, good writing and presentation skills.

Employee qualifications:

Bachelor's degree in business or public administration with adequate technical augmentation; Minimum of three years of experience in an administrative capacity in either a municipal or business environment; Ability to deal with the public, other officials, members of other boards and state and federal officers or representatives in a professional manner.

4. What suggestions might you give to the city mayor as to how to increase her effectiveness? What about additional training?

Effectiveness of the entire city government seemed to be restricted by the Mayor's lack of leadership. Which, in turn, is related to her lack of technical expertise and the excessive number of direct reports for which she is responsible. A solution to this problem could be the establishment of a new technical administrative position to relieve part of the Mayor's over burdensome supervisory obligations. This action would provide professional supervision to the technical areas while freeing the Mayor up to take advantage of available leadership training. Consolidation of departments may also be a viable solution.

5. How often should the mayor and department heads meet separately and collectively? How did you arrive at that amount? Also, how often to meet with an administrator.

Once a week meetings together would keep communication lines flowing among the various departments. It would also serve to lessen the duplication of services offered and that could help save money. As far as individual meetings, at least once monthly the individual should have an assessment meeting with the Mayor. This should be 'on the books' for the Mayor. Then the Mayor must be available for any decision that needs to be made by the various department heads. When an administrator is hired, he or she should have weekly scheduled meetings with the department heads.

6. How is the appraisal of the mayor done?

The mayor is an elected position so the people either re-elect her or choose someone else. She answers to no one in city government.

7. Give suggestions as to how the fire and police departments can improve retention?

Investigate the establishment of a tuition reimbursement program for newly hired college graduates to serve as a recruiting incentive. Identify available rewards for exceptional performance. Implement a coaching and mentoring program. Develop a leadership training program. Research and implement a career development system that includes a career track for those who desire professional enhancements outside of the traditional rank structure. Provide training and counseling in life management skills. Provide continuous training and educational development, as well as career opportunities.

8. Discuss how training and required employee retention can be related? Would you consider requiring a certain amount of service for any training program?

Training and retention go hand in hand. When an organization invests in its people, the people respond with loyalty and good service. Although training might make the employee more employable (somewhere else), it is also making them a more effective employee at this location. One should never deny training just because one might lose an employee. When employees are sent to training (especially police and fire certification schools), the investment should be protected by requiring that they must stay with the city for a specific amount of time. If they fail to do so, then it must be spelled out how much, in monetary terms, that they must reimburse the city for their training. Typically, for every year of training, two years of employment is required. The financial penalty can be determined by looking at the cost of the schooling and that amount passed on to the employee.

9. How do municipalities manage the competition between fire and police for compensation? What do you suggest?

Some of this may depend on the services that they provide. For example, there are fire departments that provide EMT or First Responder services, and these require greater expertise and training, which probably results in higher levels of pay. Additional services provided by fire departments are coverage for emergency medical incidents, hazardous materials emergencies and natural disasters. The main issue is with inactive station house time that firefighters have as compared to that of the police department. A combination of a base salary, shift differential and longevity pay should be considered. Additionally, the issue of overtime should be addressed. If not the full time and a half, an agreed upon percentage may be the best alternative.

10. How do we deal with the duplication of services and duplication of personnel? Should downsizing be considered; if so, why?

The city's responsibilities have been reduced somewhat by the departure of their largest employer. However, the stabilization of the decline and the growth of other entities seem to indicate a need for the approximate current level of services and infrastructure. Perhaps the current duplications could be best addressed by the appointment of a technical administrative assistant to the mayor. This action would allow for the supervision of technical areas by a qualified individual while relieving the mayor of her over burdensome supervisory responsibility. Department consolidation may also be a viable option.

Downsizing' s role here maybe that of attrition, with vacancies being filled only on an as needed basis. This would, over time, reduce city expenses while leaving the frame work to gearup if the current growth trend continues.

11. What can we do about the lack of guidance from the Mayor's office to all constituents?

Pointing out to the mayor where there are bottlenecks in service to the city residents can be a powerful wake-up call. If the city is not responsive to the constituents, she will not be reelected. Although the mayor believes that being at luncheons, award ceremonies, and other high profile activities is important, this does not take the place of the city functioning effectively and meeting the needs of the residents.

12. What is span of control? What is the ideal number of people reporting to a manager?

Span of control simply refers to the number of subordinates a manager has. Issues that directly affect the span of control and the number of people who report to a manger are things such as physical proximity, capability of subordinates, support systems and available personnel, and the similarity of the task being performed. Traditional views recommend about 7 (seven) subordinates per manager.

Subject: Organizational structure; Municipal government; Rural areas; Case studies

Location: United States--US

Classification: 9130: Experiment/theoretical treatment; 2320: Organizational structure; 9550: Public sector; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 1-5

Number of pages: 5

Publication year: 2011

Publication date: 2011

Year: 2011

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: 912513109

Document URL: http://search.proquest.com/docview/912513109?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 10 of 100

THE TALE OF TWO BANKS: SOCIEÉTÉ GÉNÉRALE AND BARINGS

Author: Canac, Pierre; Dykman, Charlene

ProQuest document link

Abstract:

This case study documents the stories of two "rogue traders', Nick Leeson of Barings Bank PLC in 1995 and Jerome Kerviel of Société Générale in 2008. The esteemed history of each banking institution adds to the drama of the case. Nicholas ("Nick") William Leeson was the chief trader at the Singapore branch of Barings Bank PLC, while Jerome Kerviel was a low-level trader working in the Paris headquarters of Société Générale. These financial frauds led to bankruptcy for Barings (founded in 1762) and more than $7 billion in losses at Société Générale (founded in 1864). Both of these "rogue traders" did not fit the typical psychological profile of successful traders who are usually educated at top-tier universities, are gregarious, possess a sense of invincibility, work extraordinarily longs hours, are always connected to the market, sleep very little and react with joy or sadness based on the state of the market on a given day. Leeson and Kerviel were both from humble origins and earned degrees at second-tier universities and seemed far removed from the typical high-flying trading elite. The case discusses the career path followed by each trader, the insider knowledge gained along the way, and the lack of oversight that provided opportunities for their fraudulent activities. These frauds are separated by more than thirteen years and many miles geographically, with the Barings fraud taking place in Asia in 1994-1995 and Société Générale in Europe in 2008. It seems that Société Générale failed to learn from the experiences at Barings which took place many years prior. Discussion is included about the dissimilar impacts each of the rogue trader's actions had on their respective banks. Questions are raised regarding what went wrong, the lack of operational and managerial controls and how similar frauds can be prevented in the future. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES RECOMMENDATIONS FOR TEACHING APPROACHES

This case study is appropriate at the late undergraduate or MBA levels. The focus of the case requires only basic understanding of banking and financial instruments. This case can be used effectively in finance, auditing, information systems or management classes. The focus of the case is on controls, oversight, management practice and auditing for conformance to required procedures. Auditing background is not required, as the case itself provides an opportunity to discuss the issues related to auditing practices. The case requires approximately three hours for students to prepare and can be handled effectively in a three hour class discussion.

Students may be provided the questions posed below, prior to the class discussion. Or the professor may pose these questions to the class when the discussion begins. Students must read the case prior to the class discussion. Minimal additional Internet based research may be suggested to the students to supplement the facts included in the case.

Another effective way to use this case is for the purpose of examination. This is especially effective in an Information Systems Auditing Class, where students have a solid background in auditing process and procedures prior to dealing with this case. The questions given may be posed as examination questions for a two or three hour exam period.

ASSIGNMENT QUESTIONS

The assignment questions are focused on the lessons that should have been learned as a result of the Barings and SocGen debacles. Apparently few lessons were learned from the Barings fraud scandal as some 15 years later SocGen was hit by an even bigger rogue trading scandal. What have been some of the most fundamental failures at Barings and SocGen, and why is it that we seem to move from one scandal to another? Would some of the same activities that led to the Barings and SocGen scandals also be responsible for the risk management failures resulting in the subprime mortgage crisis that started in 2007 in the U.S. and then spreading to the rest of the world?

1. Discuss the lack of direct management oversight. Where was this evident at Barings and Société Générale?

Clearly any successful bank should allow a significant amount of discretion to employees in order to facilitate innovation. Some employees misuse the level of discretion that is granted to them while others don't. This raises issue of whether the problem comes from a lack of monitoring of employees' actions or from a bad hiring decision which led to the job being given to an untrustworthy individual. However since it is never possible to be 100% sure about someone's trustworthiness, it can be assumed that it will always be necessary to monitor employees' actions.

Even though Leeson at Barings had never held a trading license prior to his arrival in Singapore, there was little oversight of his activities and no individual was directly responsible for monitoring his trading strategies. Similarly Kerviel only became a junior trader in 2005 and had little trading experience when he began to build up his concealed position in the first three months of 2007. He also took advantage of the fact that his immediate supervisor had resigned and had not yet been replaced. The new direct manager, hired in April, 2007, failed to carry out any detailed check of the earnings generated by his traders, including Kerviel. Not only was this manager new and seemingly lacking the experience required to supervise several traders, he was also not given enough support and guidance from higher level management on the Delta One trading team. However, even under the previous manager, Kerviel was able to take unauthorized intraday directional positions on index futures and equities. This is even more remarkable because, unlike Leeson at Barings, Kerviel was working at the headquarters of a supposedly sophisticated financial institution.

2. Discuss and give examples of the lack of internal checks and balances at Barings and Société Générale. How could this lack of controls have been prevented?

Both Leeson and Kerviel were able to exploit their previous experience in the back office. For example, Kerviel knew that certain trades were only monitored at the end of the month. Thus he made sure to cancel them before the controls took place, and varied his techniques to avoid dealing with the same control agents when questions arose.

The most obvious way to prevent this overlapping situation is to clearly separate the front office from the back office and not to allow an individual to be promoted from the back office to the front office. In no circumstances should a trader be able to control the back office. If Barings and SocGen had not violated this basic rule, their respective rogue traders would have most likely been caught much earlier thereby avoiding the large losses incurred by the two banks.

Concurrently it might be appropriate to give more power to the back office or to ensure that a back office representative approves all trades. However this could have a damaging impact on both profitability and growth. Generally back office staff adds cost but does not generate revenue. Thus it is unlikely that the industry would want to give more strategic power to the back office. As long as this is so, the back and middle office teams may not be able to hold traders in check and enforce the necessary controls and rules. Instead they will only ensure that trades are properly executed rather than within the rules for trading.

Such lack of oversight was certainly predominant at SocGen as its highly profitable and growing investment banking business was given free rein. Clearly the bank, under its CEO, Mr. Bouton, appears to have favored growth over risk controls while the middle and back offices had to struggle the best they could in order to cope. Procedures and rules were not explicitly made clear, allowing traders to bypass them and collude with each other in order to cover their tracks and make it difficult for the control staff to identify potential violations.

However, the atypical behavior of Mr. Kerviel who regularly cancelled or modified trades claiming to have made a mistake, who had transactions recorded at off-market prices and who paid exaggerated brokerage fees should have aroused the suspicion of even the most overwhelmed middle and back office. His deception should have become obvious when SocGen reconciled its trading accounts with the bank's cash position. Yet the bank remained unaware of the gap - sometimes reaching several billion euros - between Kerviel' s actual position and the false trades he entered into the system. When an internal Société Générale report came out after the trading scandal, it established that the bank had failed to follow up on 75 warnings related to Kerviel's trading positions.

SocGen also admitted that it did not change its computer passwords regularly, as standard industry practice required, thus making it possible for Kerviel to record fake transactions under a false identity.

3. Discuss how assessing risk on a net basis (difference between the buy and sell prices) rather than a gross basis can hide the true risks faced by a bank and result in the inability of the compliance team to control and monitor the traders9 accounts. Suggest ways to address the issues involved.

Like most banks, SocGen assesses its traders' risks on a net basis. Thus even a junior trader can buy euro50 billion of equity derivatives, as long as he also takes offsetting short positions. This approach to risk management, focusing on net positions, is dangerous. Even traders who do not falsify their hedges can make massive bets that appear to involve small risks. This is particularly true if risk management assumptions are based on historical data or do not account for worst-case scenarios as is usually the case. The problem extends beyond equity derivatives; with the recent advent of derivative instruments such as credit default swaps (CDS), many of which are recorded as hedges, few people are confident that banks have accurately assessed the risks associated with these derivative products. Thus this focus on net exposure causes a lack of transparency.

As shown in the two cases considered in this paper, it is important for controllers to track not only the traders' net, but also gross risk exposures. This would reduce the incentive to enter into fake hedging transactions to hide highly risky trades. In order to insure that this is done, banks could be required to set up an internal fraud investigation group separate from its riskcontrol and trading divisions. This would require that new regulations be introduced to force banks to add another layer of costly controls that might significantly reduce their profit potential.

4. Discuss the impacts from a lack of limits on risk and suggest ways to address this issue.

Risk must be quantified and risk limits set and obeyed. Exceeding risk limits should not be acceptable even when they result in high profits. Clearly banks tend to be unwilling to punish a trader whose trades have been highly profitable. However, management should not allow high profits generated by taking risk levels that exceed approved limits. Thus Kerviel had started making unauthorized - but successful - trading bets as early as 2005. At times though, his profits would become so large that he feared that they would arouse the suspicion of his managers. Thus when he made a euro1.4 billion ($2 billion) profit for Société Générale in 2007, a sum equivalent to more than half the revenues of SocGen' s entire equities division, he covered it up for fear of being caught. He delayed the settlement date on the profitable trades and made loss making trades in early January 2008 to hide his abnormally high profit. This allowed him to declare a profit of only euro55 million to his employer.

Generally his managers did not pay much attention to existing data on his positions, valuations, earnings and cash flows that would have alerted them to Kernel's unauthorized trades. If they had been more attentive, they would have realized that he did not respect the limits that had been set. The bank seemed to be totally oblivious to the risk of fraud and abuse in day-to-day operations as long as profits were being generated.

5. Discuss the apparent lack of understanding of the trading business among the top management and auditors of Barings and SocGen. How did this impact the ability of the two rogue traders to conduct their frauds?

If Barings and SocGen' s auditors and top management had understood the trading business, they would have realized that it was not possible for Leeson and Kerviel to be making the profits that they were reporting without taking on huge risks, and where the money was coming from might have been questioned (Savage, 2008). Arbitrage and hedging, unlike speculation which both Leeson and Kerviel were not allowed to do, are supposed to be low risk, and hence low profit transactions, so those large profits should have caused management to investigate the matter. Given that arbitrage should be near cash-neutral, additional alarm bells should have gone off when Barings had to wire hundreds of millions of dollars from London to Singapore in order to comply with margin calls. Likewise Kerviel was supposedly responsible only for plain vanilla futures hedging on European equity market indices. Thus it is hard to believe that the bank was totally unaware of the fact that he was involved in more complicated strategies, including large speculative bets on European stock indices. The fact that his bets were covered up by entering false hedges into SocGen' s risk management system does not reduce management responsibility.

Moreover, it should be noted that the bank itself is responsible for a significant portion of the losses suffered in early January 2008. Kernel's trades initially caused a direct loss of euro1.5 bllion when SocGen first discovered the fraud. SocGen' s management was responsible for the additional euro3.4 billion loss that resulted from abruptly unwinding Kerviel' s positions in a declining market.

In addition, the euro3.4 billion trading loss by management was not the only risk management failure disclosed in January 2008. There was also a write-down of euro2.60 billion on unhedged collateralized debt obligations (CDO) and subprime-related mortgage backed securities (MBS). The euro1.5 billion loss by Kerviel was only ranked third on the list of bad news hitting SocGen during that time. As a consolation, many banks, including Merrill Lynch, Citigroup, Morgan Stanley, Bear Stearns, Northern Rock, UBS, Royal Bank of Scotland, and others have suffered even heavier losses from subprime-related derivatives and CDOs than SocGen. As was the case at SocGen, these banks' risk management systems did not alert managers, directors, or shareholders to the risk that a handful of people could significantly hurt their bottom lines. Thus one could argue that the banking system, not only SocGen, was impacted by a systemic problem caused by a risk management failure associated with derivatives.

6. Discuss the issue of a lack of a clear reporting line, especially for Leeson at Barings. How did this impact the potential for fraud?

Leeson's fraud may have been facilitated by the confusion caused by the lack of a single person within Barings in charge of supervising him. Instead there were at least two reporting lines: one to London and another to Singapore and even Tokyo. Such dual reporting can only blur the lines and encourage fraud (Marthinsen, 2009).

For Kerviel, the reporting line was clearer as he was working in Paris at the bank's headquarters, unlike Leeson who was "exiled" in Singapore. Thus, Kerviel knew who his direct supervisors were; he simply chose to ignore them as they ignored him.

7. Discuss the role of the global regulators with respect to the disclosure of data.

Although banking and finance are global, regulations are, for the most part, national with little coordination and cooperation among national regulators. There is currently some movement toward adopting some common regulatory standards, such as an agreement on capital requirements and bonus payments. However, fraudulent activities are likely to remain under the jurisdiction of national authorities.

The lack of disclosure to regulators results in the lack of information/transparency undermining the confidence of investors in a little understood area of modern finance that has been growing very rapidly (derivatives in general and collateralized debt obligations and mortgage backed securities in particular). The accounting rules related to the reporting of derivatives lack clarity.

There are two basic approaches toward regulations. The first one is the principles-based approach which requires regulators and those being regulated to engage in a constant dialogue about risk and compliance. This system encourages a more collaborative relationship with those being regulated, backed up by enforcement powers in cases of fraud, price manipulation or other market abuses. Another advantage to this principles-based regulation is its requirement that regulators incorporate cost-benefit judgments into their decision making. The British system is more consistent with this approach.

The second approach is a rules-based system which relies on market participants adhering to a fixed set of rules. The U.S. system follows this approach as it is largely based on rules built up since the Wall Street crash of 1929, although some of these rules have been weakened over the last 25 years (i.e. repeal of the Glass-Steagall act in 1999). One of its disadvantages is that it may not be flexible enough to deal with rapid product innovation, technological changes, and cross-border movement of capital. Some argue that this system is best for the U.S. as specific rules are needed for participants to know the limits of their behavior given that the U.S. system of litigation relies on strict rules that can be enforced. It has been argued that the shift away from rules in the U.S. has created a lax setting that is partly to blame for the subprime mortgage crisis. French banking was deregulated in the 1980s. As a result, the regulatory environment for French banks has changed radically as they have been adopting the rules and risk management models endorsed by the successive accords known as the Basel I and II accords. On-site inspection teams from the French Commission Bancaire verify that the reforms are being carried our while allowing for some flexibility. However SocGen has admitted that it had not integrated sufficiently the risk and control measures authorized by Basel II.

8. Discuss the role of the apparent inefficiencies in settling trades in increasing the potential for fraud:

According to the International Swaps and Derivatives Association (ISDA), an industry body, there is a huge back-office backlog in handling equity derivatives. This causes large delays in settling trades and allowed Jérôme Kerviel to prevent his fake trades from going through the settlement process, thereby avoiding detection. This is largely due to the low level of electronic settlement in the industry. The annual ISDA report, which covered 66 derivatives dealers around the world dealing in over-the-counter derivatives, showed that at the start of 2007 about 15 per cent of all equity derivatives trades contained mistakes in their paperwork that needed to be corrected before the trades could be settled. As a result the implied number of days needed to settle unconfirmed trades was fourteen for equity derivatives and five for credit derivatives. While regulators such as the New York Federal Reserve have been leaning on banks to improve their back-office procedures, bankers say that little progress has been made. Such delays allow rogue traders to enter into fictitious trades that can be reversed before they have time to settle.

9. Discuss the role of the remuneration structure (high remuneration and short term rewards) in encouraging these frauds. How can this be addressed?

High bonuses that reward short-term performance only encourage more risk taking by managers. In the past, senior executives who have been responsible for the large losses suffered by their institutions did not suffer any losses in compensation. Although they may be forced to resign their position, they often end up keeping their bonuses and receiving large golden parachutes on their way out.

Risk and uncertainty create an asymmetry in the reward system. At the upper end, the size of the bonus is not limited while at the lower end it is limited to zero. Thus while higher profits translate into higher bonuses for the traders and their supervisors, large losses are borne entirely by the bank and shareholders, and occasionally even taxpayers. This asymmetry provides an incentive for the managers and traders to take larger risks than those authorized by shareholders.

Bonus schemes need to be more long-term oriented. One way to achieve this result would be to link bankers' pay to realized cash flows instead of unrealized short-term profits. Another method would be to pay only part of the bonuses during profitable years. The rest would be placed in a reserves account to be used to cover future losses. If no losses occur, then the accrued bonuses would be eventually paid out. Additionally, the average size of the bonus should be reduced to take into account the fact that employees are not liable for potential losses. Also some "claw back" procedures could force employees to return their bonuses when shortterm profits change into long-term losses. Finally the practice, sometimes used, of guaranteeing bonuses should be abolished since bonuses constitute, by definition, the variable part of the compensation.

Since we cannot expect that bankers will voluntarily agree to change their pay structures and receive lower compensation, it is only through mandatory industry approved guidelines or regulations that this problem can be addressed. It is important that these guidelines be mandatory; otherwise, if they are voluntary, the institutions that follow the guidelines would pay lower bonuses and have a hard time retaining their senior staff. Thus, following its successful rights issue following the Kerviel scandal, SocGen continued paying bonuses to its traders in order to prevent them from defecting to another institution. This demonstrates that without mandatory regulations rationalizing the payment of bonuses, financial firms may be forced to keep paying large bonus payouts even when faced with declining earnings and a slowing global economy.

10. Compare the Barings and SocGen cases to the recent financial scandals involving Bernard Madoff and R. Allen Stanford? Discuss the major similarities and differences.

One can think about the international banking aspects of the Stanford case (Antiguan banking relationships) and how that compares with the Barings and SocGen cases. In the Madoff and Stanford cases there were very serious financial impacts on a large number of individuals while the Barings and SocGen losses were relatively small with few victims. Leeson and Kerviel in the Barings and SocGen cases were bank employees. Stanford and Madoff were owners/bosses.

In spite of these very significant differences, there are also glaring similarities in that all four of these financial frauds were conducted under the radar of the auditors, the oversight commissions and the regulators. It appears that fraud will continue to be a serious problem until oversight of financial transactions is taken seriously with a real assessment of the risks involved.

11. What is the role of Information Technology in helping to manage the risks involved in financial transactions?

Information Systems Auditors are professionals who should be encouraged to understand the underlying financial transactions taking place. Instead, the focus of the training is on looking at the computer-based information systems and assessing whether they are working as they are intended to work and whether management procedure are being followed as they should. Such auditors have relatively limited knowledge of the financial industry and how it works. They are unlikely to understand derivatives, swaps, hedge funds, etc. Information Systems professionals need training in the fundamentals of banking transactions and the basic financial and regulatory controls in order to be able to effectively audit and evaluate what is taking place. Additionally, systems would benefit from more transparency where transactions are not hidden from the view of upper management as well as those charged with oversight. Audits are usually conducted on an "engagement" basis, with clear definition of which systems and/or procedures will be audited, when, and exactly what within the system and/or will be evaluated. Random and unexpected audits should become an accepted practice in the banking industry.

12. Did Leeson at Barings and Kerviel at Société Générale suffer too much of the blame for what took place? Who else deserves part of the blame - management, Board of Directors, auditors, national regulators, global regulators?

The Barings and Société Générale rogue trading frauds had plenty of blame to go around. However, blame is different than criminal culpability. Henry Theroux, our consultant who is trying to develop a training program to be given at the Banking Institutes International Conference will need to separate the idea of poor management and ineffective controls from the idea of outright fraud. Similar to Sarbanes-Oxley, we seem to be moving in the direction of holding management criminally responsible for illegalities conducted on their watches. Until that happen, we need to be certain internal and external auditors, regulators, and managers know how to do their jobs and understand the serious impacts that failure to do their jobs effectively may have. Information Technology professionals need to understand the underlying business operations of the systems they are reviewing. Similarly, banking management, auditors, and regulators must understand the operational processes of the information systems used and the controls which need to be implemented (Curtis, 2009). Henry's workshop needs to view these issues broadly to assure that those charged with all aspects of oversight are adequately prepared to accomplish their goals.

CONCLUSION

Risk management is not about eliminating risk, but about taking a level of risk that is commensurate with one's business model. Clearly this is easier said than done when financial products are continuously becoming more complex and regulations do not keep up with the pace of innovation. It is only when major corporate failures occur (i.e. Enron) that regulatory and control procedures are updated. At the same time, and even more importantly, institutions must continuously develop and maintain a governance structure able to correctly identify, measure, and manage their exposure to risk. In a world of greed and fraudulent behavior, a firm cannot afford to be complacent when agreed upon risk-management practices and risk limits are not closely observed.

We can conclude from the comparison of the Barings and SocGen cases that a common element in rogue trading scandals results from the failure on the part of management to insist that: (1) trading, risk control, and settlement systems are separate and no individual has access to more than one system; (2) losses are discovered before they have reached catastrophic proportions; and (3) all elements of the trading system are reconciled regularly with other internal, client and external data.

A management culture that tolerates deviations from these principles is exposed to large "surprise" rogue losses. It is also necessary for the compensation structure to be adjusted so that managers are less likely to disregard these principles when traders make large gains. This requires that a high-performance trading floor culture that ignores risk is not allowed to subsist.

Finally no amount of regulation will get traders and their managers to behave properly if individuals, both traders and managers, lack moral integrity. Firms need to find a way to make their employees proud of being honest.

Subject: Bank fraud; Scandals; Risk management; Case studies; Business ethics

Classification: 9130: Experiment/theoretical treatment; 3300: Risk management; 4300: Law; 8100: Financial services industry; 2410: Social responsibility

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 7-16

Number of pages: 10

Publication year: 2011

Publication date: 2011

Year: 2011

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

ProQuest document ID: 912512908

Document URL: http://search.proquest.com/docview/912512908?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 11 of 100

AN INTERNATIONAL ACQUISITION FOR 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 strategy for long-term growth had previously been focused on expanding the breast health segment, the largest of the three divisions. In response to the potential vulnerability of the breast health division, Holgen'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 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. Cybertech, a publicly traded company listed on the London Stock Exchange, has a current market capitalization of about 252 million British pounds. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS9 NOTE CASE OVERVIEW

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 is the Hologen's largest division, contributing to about 60% of sales. Even though Hologen is well positioned in the digital mammography idustry, with a market leading 65% share in the United States, the company is concerned the US market is becoming saturated.

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 3 D imaging devices, which the company believes is the next frontier for digital mammography. In response to the potential vulnerability to the breast health division, Holgen's CEO has suggested the company pursue an acquisition that would diversify its product line as well as increase its international exposure. 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 become a participant in the diagnostic health-care segment and increase international sales.

Hologen felt the quickest and more cost effective way to accomplish these goals is 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 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. Cybertech, a publicly traded company listed on the London Stock Exchange, has a current market capitalization of about 252 million GBP.

TASKS TO BE PERFORMED

1) What is the highest per share cash offer Hologen could make using a free-cash flow model of valuation of Cybertech under Hologen 's management given the following assumptions:

a. Revenues are expected to increase 10% the first year, 12% the second year, and 8% the third year. After the third year revenues are expected to increase at a long-run constant rate of 6%.

b. Gross margins will increase to 52%. Gross Margins are equal to Gross Profits/Revenues. Gross Profits are equal to Sales Revenues minus Cost of Goods Sold.

c. SG&A expenses will be reduced to 10% of Sales Revenues

d. R&D expenses will be reduced to 9% of Sales Revenues

e. Depreciation is expected to remain constant at 1 million GBP per year

f. The tax rate of Cybertech 's earnings is expected to be 38%

g. Cybertech would require 3 million pounds in cash each year to support existing operations for capital expenditures and increase in net working capital

h. The free cash flows generated by Cybertech would be remitted back to Hologen each year assuming a constant exchange rate of $ L 60/1 GBP.

i. The current exchange rate is $1. 59/1 GBP

j. Scott has estimated that the appropriate required rate of return for this acquisition is 2) How would short-term changes in the value of the British pound affect the likelihood of acquiring Cybertech with an all cash offer? (Assume the free-cash flows generated by Cybertech would still be remitted back to Hologen at a constant exchange rate of $1.60/1 GBP)

Cybertech future cash flows are current worth $499 million dollars to Hologen. At a current exchange rate of $1.59/1GBP, this is equivalent to 313.88 million pounds. There are 60 million shares outstanding resulting in a maximum price per share offer of 523 pence. If the British pound were to appreciate in the short run, $499 million dollars would be worth fewer pounds and the maximum per share offer would decrease, reducing the probability of a successful acquisition. For example, if the British pound were to appreciate in the short term to $1.63/GBP, $499 million dollars would be equivalent to only 306 million pounds. With 60 million pounds outstanding, this would reduce the maximum per share offer to 510 pence. If the British pound were to weaken in the short run, this would allow Hologen to increase the maximum per share offer in pounds.

3) How would short-term changes in London stock market conditions affect the likelihood of acquiring Cybertech with an all cash offer?

Cybertech is currently trading at 420 pence. Changes in stock market conditions affect the price per share of each stock in the market. Since the acquiring firm will need to offer a substantial premium over the current stock price to acquire all outstanding shares, any changes in the current stock price will impact the percentage premium offered. Holding all other variables constant, Cybertech' s cash flows are worth $499 million to Hologen. At a current exchange rate of $1.59, this translates into a maximum offer of 523 pence. This represents about a 25% premium above the current stock price. However, assume that market conditions in England improve and Cybertech' s stock price rises to 460 pence, Hologen offer of 523 pence will only represent a 14% premium reducing the likelihood that Cybertech' s shareholders will accept the offer.

4) Assume the terms of the long-term currency swap changed to S1.55/1GBP. What impact would this have on the highest per share cash offer Hologen could make and the likelihood of acquiring Cybertech holding all other assumptions constant?

The total free cash flows from Cybertech are forecasted as follows:

The highest per share offer price would be reduced from 523 pence to 507 pence. This reduces the premium over the current share price from 24.6% to 20.7%. The pounds generated by Cybertech are remitted back at a lower exchange rate, thereby reducing the value of the foreign acquisition from Hologen's point of view.

5) Assume the terms of the long-term currency swap changed to S1.63/1GBP. What impact would this have on the highest per share cash offer Hologen could make and the likelihood of acquiring Cybertech holding all other assumptions constant?

The total free cash flows from Cybertech are forecasted as follows:

The highest per share offer price would increase from 523 pence to 533 pence. This increases the premium over the current share price from 24.6% to 26.9%. The pounds generated by Cybertech are remitted back at a higher exchange rate, thereby increasing the value of the foreign acquisition from Hologen's point of view.

6) Assume that Rollins is not able to implement the desired cost savings after acquiring Cybertech and Gross Margins would remain at their historical average of 48%. (Utilize all other base assumptions from questions 1) What impact would this have on the highest per share cash offer Hologen could make and the likelihood of acquiring Cybertech without the additional cost savings?

7) Address the potential strengths and weaknesses of the proposed acquisition of Cybertech.

Hologen' s proposed acquisition of Cybertech appears to address some concerns Hologen has in regards to future growth opportunities. It addresses the desire to expand into global markets where higher growth opportunities reside. There core business of breast imaging products is becoming saturated in the US market and margins are diminishing. Expanding into a higher margin segment of diagnostics via an acquisition of Cybertech should help drive sales going forward. In addition, Cybertech' s established sales force in Europe should provide crossselling opportunities between divisions. Under the original assumptions, Hologen could offer Cybertech' s shareholders a 24.6% premium over current share prices. Given that successful takeovers typically require a premium of 15% to 35% over current share prices, this acquisition has a better than average chance of success. However, there are significant risks involved with integrating an acquisition into existing operations. Hologen may not be able to fully realize the revenue enhancement and cost savings projected. The addition risks involved with an international acquisition include short-run changes in currency values and stock prices as well as future exchange rates. In order to justify a significant premium, the cost saving and revenue enhancement must be successfully integrated.

Subject: Medical technology; Medical device industry; Acquisitions & mergers; Capital markets; Case studies

Location: United States--US

Company / organization: Name: Hologen Inc; NAICS: 339112, 339113

Classification: 3400: Investment analysis & personal finance; 2330: Acquisitions & mergers; 9190: United States; 9130: Experiment/theoretical treatment; 8650: Electrical & electronics industries

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 17-22

Number of pages: 6

Publication year: 2011

Publication date: 2011

Year: 2011

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: 912512894

Document URL: http://search.proquest.com/docview/912512894?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 12 of 100

OMEGA GEOPHYSICAL CORPORATION

Author: Matthews, Robert (Chip); James, Joe; Bexley, James B

ProQuest document link

Abstract:

The case contains sufficiently complex decisions and concepts to challenge advanced graduate students, but is flexible enough to not overwhelm junior and senior level undergraduate students if the faculty member directs the focus to the less complicated issues. In addition to the standard issues involved in commercial lending, there are production, marketing, human resources, and ethics issues that can be considered for focal points of study. Cases based upon the material included can also be developed for use in Human Resources Management, Operations Management, Marketing, and Business Ethics courses at similar levels with the same limitations. There is flexibility built into the materials and the teaching notes to allow the faculty member to adapt the case to meet instructional needs either the undergraduate or graduate level and to focus on the specific discipline of the course in which the students are enrolled. The case is designed to be taught in two to three class hours and is expected to require six to eight hours of outside preparation by students. The faculty member can choose to include all or part of the material provided. The case provides ample opportunity for faculty modification to meet individual styles and needs in commercial lending as well as the different disciplines mentioned above. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTOR'S NOTES RECOMMENDATIONS FOR TEACHING APPROACHES

This case addresses several major issues facing the United States and its economy at this time. As such, it enables the instructor to focus on those elements appropriate for the discipline where the case is used. Although developed primarily as a commercial lending course appropriate for more advanced undergraduate or for graduate students, it also contains material adaptable to legal, marketing, international business, and human resources courses. To stimulate interest in using the case for other than commercial lending, example questions have been included that could be used in a human resources environment.

When using similar cases in commercial lending, the authors have had success with dividing the class into groups and having each group either work on the same case or another case. Materials provided to the student consist of the case narrative and select financial exhibits. For the advanced audience where this case was intended, the exhibits only include the borrower's balance sheet and income statement. The other exhibits are expected to be constructed by the students and provided as part of the assignment. Thus they are not included with the case introduction material that ends with the Sample Questions but have been attached as exhibits with the Instructors' Notes. These exhibits can be selected and provided as the instructor deems necessary, especially when dealing with disciplines other than commercial lending.

Exhibit 3 provides the cash flow statements to accompany the balance sheets and income statements included in Exhibits 1 and 2, respectively. In Exhibits 4 and 5 ratios are calculated to provide both common size financial statements and to provide the basis for the pro forma financiáis found in Exhibits 6 and 7.

At first glance, the pro forma financial statements may appear to be more generous than the common size calculations would indicate. This is because the most conservative treatment of expectations for the future would result from the loan approval and immediate funding of the entire amount. Since it is unlikely that the entire loan proceeds would be funded at closing this provides the worst case scenario that would be expected and therefore we consider it to be the situation that would cause the most risk to the lender.

SAMPLE QUESTIONS AND POSSIBLE ANSWERS

1. If you were OMEGA's banker, would you make the requested loan?

Although the financial information is showing some volatility, it generally indicates a borrower that has the capability to repay the loan. Additional considerations appear in the successive questions and possible answers.

2. What factors favor making the loan?

* Growth in sales, operating income, and net income.

* Sufficient net income and cash flow from operations to service debt.

* Positive net working capital.

3. What factors oppose making the loan?

* Lending concentration issues.

* Opportunity costs foregone with other projects.

* Questions as to whether projected cost reductions may in fact be realized.

* Realizability of goodwill and other intangible assets.

* Potential problems with collateral preservation and collection relating to foreign operations.

* Potential ethical/public relations issues resulting from facilitating move of American jobs offshore.

* Potential lingering impact of any issues from prior years' shareholder-management dispute.

* Potential lingering impact of any Sarbanes-Oxley deficiencies identified in prior years.

* Potential exposure to liability relating to employment of undocumented aliens.

* Potential issues regarding successful integration of operations after significant shifts in geographic location.

4 Would you make the loan alone or with another bank?

The information provided in the case material provides evidence to support either answer the student group chooses. However, the concerns related to opportunity costs foregone with other possible projects as well the lending concentration issues should receive strong consideration and would be the basis for our choice to not tackle the entire loan in-house.

5. If you elect not to make the loan alone, what would be the advantages to consider by participating with another bank?

The immediate advantages would be reduced risk and lending concentration. A longterm advantage could be the opportunity for reciprocal participation opportunities from other institutions.

6. What about the possibility of participating partners in one of the countries to which operations are being moved (Brazil, India)?

If a suitable opportunity is available, this option offers some definite advantages. First, there may be governmental restrictions that require such an arrangement. In addition, the local institution would have advantages of being familiar with the business environment, culture, and political realities in the local area.

7. If you would not make the loan as requested, are there changes which could be made that would cause you to change your mind?

In the event the group does not decide to grant the loan as requested, there may be a smaller amount that the company could agree to accept. This would require some change in the capital structure that OMEGA had in mind when they inquired about the loan. If the relationship is strong enough, this may be possible. However, there is also the possibility that the project may be presented to another lender.

8. How do you as a banker achieve adequate collateral security for the repayment of the requested loan if you elect to make the loan?

This is a very serious concern when lending on an international project. The answer may lie in very carefully constructed restrictive loan covenants that ensure early indicators of any future problems that may develop. In addition, other banking relationships OMEGA may have with the lender as well as compensating balances may be appropriate areas for additional consideration. Although the bank is relying on the cash flow of the borrower for repayment, it would be advantageous to have a participating bank in the country where the particular equipment/facilities are located to facilitate securing them under the laws ofthat nation.

Subject: Commercial credit; Relocation; Financial statements; Case studies

Location: United States--US

Classification: 9190: United States; 8110: Commercial banking services; 9130: Experiment/theoretical treatment; 4120: Accounting policies & procedures

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 23-33

Number of pages: 11

Publication year: 2011

Publication date: 2011

Year: 2011

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables

ProQuest document ID: 912512899

Document URL: http://search.proquest.com/docview/912512899?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 13 of 100

LEHMAN TRIKES: A STORY WITHIN A STORY

Author: Looney, Donald C; Ryerson, Annette

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Abstract:

This case analyzes the strategic alliance between Lehman Trikes, a small but rapidly growing leading manufacturer of three-wheeled motorcycles, and Harley-Davidson. The case also examines the strategies chosen by Lehman and Harley to implement the alliance, and simultaneously deal with the worldwide recession of 2008-2009. Lehman Trikes, located in Spearfish, South Dakota, is a publicly owned company trading on the TSX Canadian Venture Exchange. As the world was in the midst of a crippling recession, on Jul 22, 2008, Harley-Davidson unveiled the new Tri Glide three-wheeled motorcycle at the annual dealer meeting in Las Vegas. At the same meeting, Harley announced that Lehman Trikes would be the exclusive supplier to Harley-Davidson of the Tri Glide. Ron Hutchinson, SVP of product development for Harley-Davidson said that this is a big deal. The three-wheeled market is a market that they believe has been effectively underserved because it has been done in the aftermarket.

Full text:

INSTRUCTOR'S NOTES RECOMMENDATIONS FOR TEACHING APPROACHES

The Lehman Trikes case should be appealing to most business students because of the popularity of Harley -Davidson and the unusual alliance with a small entrepreneurial, niche market company, Lehman Trikes. The instructor is provided with a case that is exciting to the student, yet teaches management strategy, marketing and entrepreneurship. Instructors will find that many of the students are familiar with Harley -Davidson or have aspirations to own one of their motorcycles. The uniqueness of the trike market and the success of a start up like Lehman Trikes should also provide a level of interest from the students. Discussing Lehman Trikes and their agreement with Harley -Davidson should generate a lively discussion amongst students about the two companies' strategies. The Lehman Trikes case provides sufficient financiáis, thereby giving students the opportunity to practice financial ratio analysis and assess Lehman's and Harley' s financial strength. The class discussion can begin with an analysis of the case, followed by a discussion of both companies' strategies. Students should analyze and discuss the relevant questions in the final Epilogue section and conclude with recommendations for each company going forward. Instructors may want to use the following questions to initiate a discussion.

1. Did Harley-Davidson and Lehman Trikes develop what appeared to be a successful strategic alliance which met both of their initial goals?

Students will probably recognize that Harley-Davidson saw the potential of the trike market having a history with the Servi-car and having developed a relationship with Lehman's management. They should also recognize that the supply agreement with Lehman represented a low risk entry into the trike market with minimal investment. By outsourcing the assembly of the Tri Glide line to Lehman, Harley also avoided an expensive and possibly contentious production start-up in their own union factories with a history of union problems. The volume was relatively so low at this stage that it was no doubt cheaper for Harley to have Lehman assemble the trikes than to do so internally. Harley must be have been pleased with the relationship as they developed and launched the new Street Glide model for 2010 on the one year anniversary of the agreement. As long as Lehman continued to meet their production quotas for the Tri Glide, Harley should have been satisfied.

For Lehman Trikes, the alliance with Harley has to been seen as fortuitous timing. At a critical stage in the company's history, the agreement satisfied a number of goals. The volume of the Tri Glides was significant and provided Lehman with a critical mass of sales at a time of recession when the non-Harley side of the business was hurting. The alliance with Harley gave Lehman immediate credibility and legitimized the trike market. Harley owners who may have been interested in a trike but wanted the Harley brand and warranty were a prime target market. Harley' s marketing and distribution clout opened up the U.S. dealer network of 684 dealers, the majority of which never carried the Lehman line. With two Harley employees on site at Lehman, Lehman gained from increased knowledge of product design and production systems design.

2. Discuss the benefits to each organization from the strategic alliance.

An option for this question would be to have the instructor divide the class in half and have one side represent Harley-Davidson and the other Lehman Trikes. Writing the benefits on the board can also help assist in answering question three. The goal is to determine if one organization benefits over another or at the expense of the other.

Lehman Trikes benefits: An organization with basically no name recognition was partnering with a prominent name brand like Harley-Davidson. After a thorough examination of the trike market, Harley selected Lehman to manufacture their trikes. Lehman does not have the benefit of having their name on the final Tri-glide product, yet their workmanship is evident in the quality of the product. Lehman has proven their ability to work with a major motorcycle manufacturer, thereby proving to other potential partners that they are capable. To date, their professionalism and manufacturing capabilities have not disappointed Harley. Nonetheless, having settled with their unions, Harley chose to discontinue the alliance, perhaps as a bone to the unions who had given up so much.

Harley-Davidson benefits: Harley-Davidson deepened their product line by offering the Tri Glide to new riders or existing Harley riders. Their strategy falls between a line extension strategy and a brand extension strategy. They are in the same market with a trike, yet they are expanding beyond the two-wheeled motorcycle market. The transition to a Tri Glide can be smooth for those Harley riders who feel they need more stability than their current motorcycle offers. The Harley name on the Tri-Glide has minimized the need for additional product search in the trike market. Loyal customers trust Harley products and will make the switch more easily. Harley also benefited by signing only a one year contract with Lehman. Harley did not make a manufacturing investment for the production of the Tri-Glide. They signed for one year at a time with Lehman, thereby minimizing their risk. Harley also benefited because of the lower cost of labor in South Dakota and the lack of unionization. These are issues that Harley had been dealing with in Wisconsin. Partnering with a non union business that can provide the product at an affordable price also gave Harley-Davidson more pricing flexibility.

3. What risks do smaller organizations like Lehman take when agreeing to partner with larger organizations such as Harley Davidson? (Comes from the Epilogue section)

Instructors should give the students the opportunity to brainstorm on this question. Students should consider the size and demographic profile of the Spearfish, SD community. The purpose of this exercise is to give the students the opportunity to realize that partnership with a larger organization does not come without limitations or risks. Harley-Davidson had signed a one year contract with Lehman. Lehman was taking a risk with regard to enhancing their manufacturing and personnel for essentially a one year contract. The risk was that Lehman prepared for the expansion in production and before they could pay off their expansion while Harley-Davidson had the option not to renew the contract. Being a smaller company, which became more dependent upon the 'Harley side' of the business, Lehman had become more vulnerable.

Lehman also manufactured a product for Harley that had no name recognition for them. Lehman is known among trike enthusiasts as a quality product, yet they are contracting with Harley and receiving no name recognition in front of the customers. Lehman could have been cannibalizing their own future trike market by producing for Harley and not receiving the benefit in front of the customer.

Being in a smaller community like Spearfish, SD the opportunities to hire qualified individuals are limited. Also, with the contract not renewed Lehman faces the threat of having to lay off workers. In a small community, an organization can lose respect among the community for hiring and firing too frequently.

The discussion should lead into two questions that deal with the future of Lehman and Harley, such as; "Would a logical next step have been for Harley be to acquire Lehman?" and "Why did Harley consider producing their own trike?"

Clearly Harley could have acquired Lehman. However, Harley' s new management was in a divestiture mode not an acquisition mode. As part of their "go-forward" business strategy Harley' s new management had decided to focus on the Harley brand and therefore decided to divest the MV Augusta business and discontinue the Buell line. Also the acquisition of Lehman may have caused considerable problems to the union agreement they would have been negotiating at a time when considering the future of their trike business. Part of the union's concessions was to severely limit the number of job classification in the York factory from sixty down to only five classifications. This would have given Harley' s production management a lot more flexibility in creating assembly teams for their trike.

4. Did Harley do the fair and right thing in terminating the Lehman supply agreement?

The Epilogue leaves Lehman in a difficult situation with the future loss of over half their business by the end of the summer 2010. This may lead students to a discussion of the ethical and fairness issues in the case. The Agreement Lehman signed with Harley was for a yearly contract for the supply of Lehman assembled trikes. Harley owned the brand name Tri -glide, the Harley design and specifications with no residual rights granted to Lehman. Termination (or really nonrenewal) of the contract was perfectly within their legal rights. Lehman knew the risks from the beginning and throughout the contract. Nonrenewal was cited as Lehman's CEO's biggest fear. Lehman obviously thought that the legitimization of the trike market, the name recognition they gained as a result of the alliance with Harley, and the sheer volume increase they gained during a major recession was worth the risk. It is the opinion of the authors that Lehman probably would not have survived the recession without the Harley business. Harley was upfront and transparent at all stages of their dealings with Lehman. Harley made a pure business decision which was predictable given the success of the Tri -glide and the major renegotiation of the union contract. And for Lehman it's not really a zero sum game. They still have gained the legitimacy of not only the trike market but also Lehman as a brand that Harley chose and trusted to build their initial trikes. While Lehman will no doubt have to reduce their workforce, with the economy improving and consumer confidence returning, they are positioned to survive, a little bruised, but viable.

5. With the strategy of limiting the supply of Tri-glides to the market, was this the best strategy for Harley-Davidson to pursue during these challenging economic times?

A class discussion can be geared toward brand equity and the strategy of limiting product supply. Harley-Davidson has been successful in achieving brand equity. They have progressed through the steps of developing brand awareness, creating strong and favorable brand associations, having positive consumer judgments and finally retaining intense loyalty on the part of consumer brand resonance. With brand equity being achieved, Harley-Davidson stood to be successful with a limited supply offering of the Tri-Glide. Consumers who have had a positive experience with Harley-Davidson will transfer those feelings to other Harley-Davidson products, and ultimately to the Tri-Glide. One of the unique qualities of Harley-Davidson is that they have been successful in limiting the supply of their products in the past. Customers are typically willing to wait to get the Harley-Davidson product they want.

With the decrease in sales of motorcycles averaging 35% in 2009, concern existed as to whether there would be an over abundance of new and used products on the market. With this oversupply of motorcycles, the oversupply of trikes could soon follow.

6. Was Lehman's business model of selling into four segments a viable model or could it have been strengthened?

Before the announcement of Harley terminating the agreement, students will recognize that the revenue growth of 48% in a recession year and a return to profitability certainly indicate a viable model. The model was also low investment with a sales to asset ratio less than three to one. But the weakness of the model was that the only value added by Lehman was assembly of outsourced components and painting. This was easily duplicated by Harley when they decided the market was right for the trike and they got concessions from their unions for the required flexibility in production. The other concern that Lehman realized when entering into the Agreement with Harley was the huge market potential of Harley' s 684 dealers and the cache of the Harley brand, but the downside was the risk of becoming overly dependent upon the Harley side of the business. An interesting class discussion on the risks of entrepreneurship should ensue around the basic question of whether Lehman pursued the right strategy in entering into an agreement with Harley or was the risk of becoming overly dependent and eventually losing the business worthwhile. Entering into similar agreements with other major motorcycle manufacturers would have lessened the risk, but Lehman tried to no avail.

Subject: Recessions; Securities trading; Case studies; Joint ventures

Location: United States--US, Canada

Classification: 9190: United States; 9172: Canada; 9130: Experiment/theoretical treatment; 1110: Economic conditions & forecasts; 3400: Investment analysis & personal finance

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 35-39

Number of pages: 5

Publication year: 2011

Publication date: 2011

Year: 2011

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: 912512902

Document URL: http://search.proquest.com/docview/912512902?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 14 of 100

ETHICAL ISSUES IN PROFESSIONAL TAX PRACTICE

Author: Powell, Richard; Bolt-Lee, Cynthia E

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Abstract:

Students are placed in the role of inexperienced tax practitioners who must deal with aggressive clients wanting to minimize their tax liability. The student must analyze several tax issues, determine the appropriate tax treatment, and address the technical and ethical limits on the tax positions a CPA can take. Students must address numerous sanctions including penalties, malpractice claims, expulsion from the AICPA, loss of a CPA license, and even imprisonment. As a recent college graduate with an accounting degree, a CPA license, and membership in the AICPA, the student, in a role play, is a recent hire at a regional CPA firm, Burst and Packend. The CPA has spent two years mostly in auditing, has obtained the experience necessary for licensing, but has decided to move into the tax department for a trial run. It is March 2009 and the CPA is meeting, for the first time, John and Mary Smith, who are coming in for an appointment to discuss their return. The supervising partner encourages development of an excellent relationship with the Smiths because they have been good clients who have paid high fees over the years. An audit manager, called upon to help during last year's heavy tax season, prepared their 2007 tax return. The Smiths tend to be aggressive in seeking deductions and minimizing their tax liabilities. They have dropped off various tax documents for review prior to their appointment. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES RECOMMENDATIONS FOR TEACHING APPROACHES

CPA tax practitioners operate in a highly competitive environment. When employed in aggressive firms, they face strong incentives to maximize professional revenue. They may confront immense pressure to retain old clients and recruit new ones. At times, these clients may demand that their CPAs utilize aggressive tax positions to minimize tax liabilities. But there are technical and ethical limits on the tax positions a CPA can take. The CPA who oversteps these limits can suffer numerous sanctions including penalties, malpractice claims, expulsion from the AICPA, loss of a CPA license, and even imprisonment.

Recent problems related to aggressive tax shelters illustrate the prevalence of these pressures and sanctions (Kahn, 2003; Halper, 2005.) Large accounting firms have suffered penalties for providing overzealous tax advice. Some tax preparers feel pressured to provide aggressive tax advice because their clients are aware of the low percentage of tax returns subjected to audit. But if tax preparers permit even minor violations of tax law, they can create an atmosphere that is desensitized to unethical conduct.

The market for tax advice is large. Yetmar and Rioux (2004) report estimated expenditures of $11 billion for professional tax advice in 2002 with 62% of returns receiving professional advice. Their research also reports that approximately one-fourth of all preparers will be assessed a preparer penalty during their careers.

The tax profession has recognized the need for sensitivity to ethics issues. A study of senior level members of the AICPA found that 47% considered their most difficult ethical issue to be "client proposals of tax alteration and tax fraud" (Finn, Chonko & Hunt, 1988.) According to a 1997 survey of members of the AICPA Tax Division, personal moral values and standards, followed by the firm culture and management philosophy, were of greater help to the tax professional in ethical dealings than professional guidelines, although to some extent the fear of losing licensure did affect work-related ethics (Yetmar, Cooper & Frank, 1999.)

In response to a need for effective ethical guidelines, the AICPA adopted new tax practice standards in 2000. The Statements on Standards for Tax Services (SSTS) replaced the more advisory Statement on Responsibilities in Tax Practice. Preface #1 of the SSTS states:

"Practice standards are the hallmark of calling one's self a professional. Members should fulfill their responsibilities as professionals by instituting and maintaining standards against which their professional performance can be measured. Compliance with professional standards of tax practice also confirms the public's awareness of the professionalism that is associated with CPAs as well as the AICPA."

Ethics instruction should be an essential component of today's tax curriculum, yet it is often overlooked (Grasso & Kaplan, 1998; Finn et al 1988.) Ethics cases are common in the audit and assurance services area, but there is a strong need for ethics cases in tax (Grasso and Kaplan, 1998; Hite & Hasseldine, 2001.)

In addition to the prevalence of ethical issues in the tax setting, ethics issues are commonplace in the general business setting, leading to a call for better ethics education in business schools. The AACSB has gathered numerous articles on ethics education at its ethics education resource center with many of these articles containing relevance for the taxation classroom. The report of the Ethics Education Task Force of AACSB International (2004) stresses this ideal in their introduction: "This report is based on the premise that the time has come for business schools - supported by AACSB - to renew and revitalize their commitment to the centrality of ethical responsibility at both the individual and corporate levels in preparing business leaders for the twenty-first century." (p. 9) The Task Force emphasizes that business schools must encourage students to develop a better understanding of ethical issues, provide them with tools for recognizing ethical issues, and engage them through analyses of business examples. They further write, "Students especially need to be exposed to cases and types of ethical issues that they are likely to face in the business world." (p. 13)

This teaching case responds to this AACSB recommendation. In this case, students are placed in the role of inexperienced tax practitioners who must deal with two aggressive clients wanting to minimize their tax liability. The students must analyze several tax issues, determine the appropriate tax treatment, and address the ethical ramifications given the most recent IRS and AICPA rulings. The purpose of the case is to improve the student's ability to deal with technical and ethical issues that can typically arise early in the career of a tax professional and to understand the often tenuous client-practitioner relationship. Educators can use the case in the middle or late stages of an introductory taxation course.

DISCUSSION QUESTIONS

1. What are the individual tax issues in this case? List each issue individually, state your position on each issue, and indicate, by general citation, the law that addresses the issue.

The Smiths have presented numerous tax issues. For 2007, they have neglected to report income from gambling and bartering and they have inappropriately taken several deductions. Several of the issues are repeating in 2008.

For 2007, the Smiths deducted Mary's tuition as an itemized deduction. Because their adjusted gross income exceeded the limits for the limited education deduction under IRC Section 222 or for any education credits, the only possible deduction for education expenses was under Section 162.

Generally, under section 162, an employee can deduct expenses incurred for education as ordinary and necessary business expenses provided the expenses are for either of two reasons: 1) to maintain or improve existing skills required in the present job; or 2) to meet the express requirements of the employer or the requirements imposed by law to retain his or her employment status. Education expenses are not deductible if they are to meet the minimum educational standards for qualification in the taxpayer's existing job or to qualify the taxpayer for a new trade or business. Because Mary's completion of a law degree qualifies her for a new trade or business, her law school tuition was not deductible even if she can demonstrate the courses improve her skills as a marketing executive.

As an AICPA member who is now aware of an error in the 2007 return, you must advise the taxpayers promptly that an error has occurred. (SSTS No. 6) A similar obligation exists under IRS Circular 230. Your advice should include a recommendation for appropriate measures the taxpayer should take regarding their prior year return. In this instance the taxpayers should notify the IRS, file an amended return, and pay any tax liability. However, you are not obligated to inform the IRS of the situation nor may you do so without the permission of the taxpayers, except as provided by law. If the Smiths want you to prepare the 2008 return but have not taken action to correct the 2007 return, you should consider whether to continue your professional relationship or withdraw from the engagement. If you prepare the 2008 return, you should ensure that the error is not repeated.

The Smiths have taken a deduction for John's home office. Under IRC Section 280A, employees and self-employed individuals are not allowed a deduction for a home office unless the office is used exclusively on a regular basis as either of the following: 1) the principal place of business for the taxpayer; or 2) a place of business used by clients, patients, or customers. Employees must also show that the use is for the convenience of the employer rather than being merely helpful. The principal place of business must be used to conduct administrative or management activities and there must be no other fixed location of the trade or business where the taxpayer conducts these activities.

John cannot take deductions for home office expenses. As an employee, he cannot show that the home office is for the convenience of the employer. In addition, he has a campus office available for preparing his academic research. Also, the personal items such as the home computer and the pullout sofa violate the rule requiring exclusive business use of the office. As discussed above with respect to the law school tuition, you must now take action to alert the taxpayers to the error in the 2007 return and ensure that the error does not repeat on the 2008 return.

John can deduct the cost of paints and other supplies as ordinary and necessary business expenses under Section 162. He can allocate the cost of the camera between business and personal use and deduct the business portion. If John can verify that the travel to study abroad was necessary for his business and any pleasure associated with the trip was incidental, then he can deduct the business travel costs as ordinary and necessary under Section 162.

On the 2007 return, Mary has taken a deduction for mileage in connection with her work. An employee like Mary may deduct unreimbursed employment-related transportation expenses as an itemized deduction from AGI. The burden is on the taxpayer to keep records to support the deduction. (IRC Section 162, 274, and the Cohan rule)

In this instance, Mary is not keeping contemporaneous records of her business mileage and is instead making a year-end estimate. The deduction is therefore invalid.

John Smith has delivered paintings to his neighbor, Brian Westbrook, in return for free daycare services. John believes he has no income from the transactions. But such barter transactions trigger income recognition despite the absence of cash payment. John should be recognizing income equal to the fair market value of the service provided. The Smiths had gambling winnings in 2007 and gambling losses in 2008. Under IRC Section 61, the winnings in 2007 are income and should have been reported on the 2007 tax return. Again, you must alert the taxpayers to the error.

As for the gambling losses in 2008, they can be itemized deductions up to the amount of gambling winnings. (IRC Section 165) The conference cost of $1,800 is not taxable since John attended an academic conference while in Las Vegas.

The CPA firm has placed an ad saying, "We win when the IRS audits our clients. For peace of mind, come to Burst and Packend." This ad is an ethics violation. A CPA must not seek clients through false, misleading, or deceptive advertising (Rule 502 of the AICPA Code of Professional Conduct).

John Smith would like to arrange for a contingent fee equal to 20% of the refund for 2008. Such an arrangement would be an ethics violation. Tax practitioners are prohibited from charging contingent fees on an original tax return. (Section 10.27 of Circular 230 and Rule 302 of the AICPA Code of Professional Conduct)

The CPA firm's ethics policy should be examined. If an ethics policy is not established at the firm, one should be developed to ensure that firm members are aware of the ethical responsibilities associated with their practice. Undoubtedly, the prior year's return should be amended. The client should be notified, preferably in writing, of the firm's policy for amending returns.

You should inform your supervisor of the errors in 2007 so that the prior year preparer, if still employed with the firm, can be advised and given the opportunity to make appropriate corrections. The possibility exists that the prior year's preparer was not given full information in 2007 or did not ask the appropriate questions regarding income and deductions. Should your supervisor take the position that a 2007 amended return is not necessary due to the possibility of losing the Smiths as a client, you need to examine your personal ethical responsibilities and whether you should continue your employment at the firm.

2. What ethics regulations apply to the tax preparers in this case?

Tax preparers are subject to various statutes, rules, and codes of professional conduct. Raabe, Whittenburg and Sanders (2003) summarize a complex regulatory environment for tax preparers.

All tax practitioners are subject to IRS Circular 230: Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers before the Internal Revenue Service, updated in April 2008 to address ethical practice guidelines for practitioners. The Internal Revenue Code specifies numerous penalties and rules that apply to all tax practitioners. In addition, CPAs who are members of the American Institute of Certified Public Accountants (AICPA) must comply with its Code of Professional Conduct and other rules created by state boards of accountancy. The AICPA' s Statements on Standards for Tax Services (SSTS) provide guidelines for member CPAs who prepare tax returns which are very similar to Circular 230 and include sanctions as well.

To enforce taxpayer compliance, Congress has enacted penalties. Criminal penalties can include imprisonment. Civil penalties are of two types: ad valorem penalties and assessable penalties. Ad valorem penalties are additions to tax that are based on a percentage of the delinquent tax. Assessable penalties typically are a flat dollar amount. Civil penalties are imposed when tax statues are violated without reasonable cause, as a result of negligence or intentional disregard of rules, or through willful disobethence or fraud. Civil penalties can arise for failure to file a tax return, failure to pay tax, failure to pay estimated income taxes, negligent understatement of income tax, substantial understatement of the tax liability, and other instances.

An accuracy related penalty, based on negligent or substantial understatement of income tax liability, amounts to 20 percent of the portion of the tax attributable to negligence or substantial understatement of tax. The penalty applies only if the taxpayer fails to show either a reasonable cause for the underpayment or a good-faith effort to comply with the tax law. Negligence can include the failure to report gross income, the overstatement of deductions, and the failure to keep adequate records. For IRS fiscal year 2007, civil penalties for negligence (pre-abatement) related to individual income tax filings totaled almost $15 billion; fraud penalties (pre-abatement) totaled over $122 million.

Under Section 10.34 of Circular 230, tax practitioners must not sign tax returns if they determine that a position taken on the return does not have a realistic possibility of being sustained if challenged by the IRS unless the position is not frivolous and is accompanied by adequate disclosure. The position needs "a confidence level of at least more likely than not" - essentially a greater than 50% chance. A fairly similar "realistic possibility" standard applies under SSTS No. 1, stating that the AICPA member must have a "good faith belief that the tax return position being recommended has a realistic possibility of being sustained administratively or judicially on its merits, if challenged." In addition, Rule 501 of the AICPA Code of Professional Conduct states that a CPA must not sign a false document.

EPILOGUE

In this teaching case, students are placed in the role of inexperienced tax practitioners who must deal with two aggressive clients who want to minimize their tax liabilities. The students must analyze several tax issues, determine the appropriate tax treatment for each issue, and identify ethical issues. The purpose of the case is to improve the student's ability to deal with technical and ethical issues that can typically arise early in the career of a tax professional.

The students have a supervisor who encourages them to have an excellent relationship with these long-time clients. Unfortunately, the clients' 2007 tax return contains underreported taxable income and improper deductions. As a consequence, the clients need to contact the IRS, report the errors, and pay additional tax. The preparer of the 2007 return must determine if the errors were made based upon incomplete information or were in fact professional mistakes that must be corrected for the client at no cost for preparation. Often, when CPA firms discover professional mistakes, they will pay for related penalties but not for the additional tax and interest. The clients may be unhappy and complain to the supervisor. But, despite the wishes of the clients, there are technical and ethical limits on the tax positions a CPA can take. The CPAs who overstep these limits can suffer numerous sanctions including penalties, malpractice claims, expulsion from the AICPA, loss of a CPA license, and even imprisonment.

If conflict arises with the clients due to professional mistakes in the prior tax return and the denial of deductions for the current return, the CPA can try to minimize the stress by maintaining a highly professional approach. The CPA can carefully explain the nature of each problem, the rules that apply, and the required actions for both tax returns. The explanations can show how careful compliance with tax law is mutually beneficial to both the clients and the CPA.

A CPA can avoid many of these problems by carefully evaluating a CPA firm prior to accepting a job offer. It can be important to avoid employment at a firm that has a reputation for mistakes, ethical lapses, and conflicts with clients.

Subject: Client relationships; Taxation; Accounting firms; Case studies; Professional ethics

Classification: 9130: Experiment/theoretical treatment; 8305: Professional services not elsewhere classified; 2410: Social responsibility

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 41-48

Number of pages: 8

Publication year: 2011

Publication date: 2011

Year: 2011

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 References

ProQuest document ID: 912512912

Document URL: http://search.proquest.com/docview/912512912?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 15 of 100

APPLE INC.: PRODUCT PORTFOLIO ANALYSIS

Author: Mallin, Michael L; Finkle, Todd A

ProQuest document link

Abstract:

The Apple Computer Company is arguably one of the most innovative technology companies to emerge in the last three decades. Apple, Inc. is responsible for bringing to market such products as the Macintosh desktop and portable computer, iPod and iTunes, and most recently, the iPhone. The success of the company can be traced to the ingenuity of their founder and CEO, Steven Jobs. This philosophy has always been to create products that consumers will find easy to use and marry innovative technology to work productivity and personal entertainment. Throughout its history, Apple Inc. has accomplished these goals. However, with a growing line of products, a competitive market landscape, and an unpredictable technology lifecycle curve, the company faces challenges as to how to decide which product lines to hold, build, harvest cash, or divest. This case overviews a tool used to analyze a company's product line portfolio and applies it to Apple Inc.'s array of products. Questions for discussion are provided to enable students to use critical thinking skills in applying the case material. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTOR NOTES CASE OVERVIEW AND RECOMMENDATIONS FOR TEACHING APPROACHES

Students will find the case very interesting and relevant as most of them will have used at least one of Apple's products or a similar product offered by an Apple competitor. Students will combine the facts presented in the case with their own perceptions and experiences with Apple's products to answer the discussion questions. The case enables students to analyze some basic financial data (e.g., company market share and industry demand forecasts) to identify how each of the Apple product lines (reviewed in the case) fit and are classified within the BCG growthshare matrix (also reviewed in the case). Case discussion questions will then allow the student to identify other marketing factors (e.g., competitor, demand, trends, etc.) that could cause Apple products to be reclassified. The case promotes critical and strategic thinking in that students will be required to make judgments as to how they would decide the future of such Apple products as lines of personal computers, iPod, and iPhone. A unique aspect of this case is that Apple products are so ubiquitous that most students will have experienced the technological innovativeness of the company through personal ownership of an Apple product (or a similar competing company product). This aspect should make the case both relevant and interesting to students.

An approach for teaching this case could require students to read and prepare responses to the case discussion questions via a homework assignment and the class period could be devoted to an instructor led discussion of all of the questions. An alternative approach may include dividing the class into teams or small groups. Each group could address the following discussion questions relative to one Apple product line (e.g., group 1 = iMAC desktop computer, group 2 = iBook portable computer, group 3 = iPod, group 4 = iPhone). Class time could be divided to allow discussion of the questions (within the groups) followed by an instructor facilitated "readout" from each group or group representative. This would allow all students in the class to reap the benefits from the individual group discussions and offer additional comment or insight.

DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS

1. How would you classify each of the Apple product lines (desktop computers, portable computers, iPod, and iPhone) according to the BCG Growth-Share Matrix (star, question-mark, cash-cow, or dog). Justify why you placed each product line in its class.

The BCG Growth/Share matrix is a product portfolio analysis tool that enables firms to classify all of their product lines in a 2 ? 2 matrix according to the dimensions; relative market share and market growth rate.

The dimension of relative market share (horizontal axis) is defined by the product line's market share as compared to its largest competitor in the industry. Market growth rate (vertical axis) is a measure of how attractive a particular market is to the firm and is quantified by the annual growth rate (usually expressed as percent growth) for that product line. Given the estimates of relative market share (low-high) and its market growth rate (low-high), a product line can be categorized in one of the four cells illustratively named for the amount of resources generated from and requires from the firm (Grewal and Levy 2010).

Using the data from the tables provided in the case (see Exhibits 2 and 3 below), the Apple product lines can be classified as: desktop computers - dog, portable computers - question mark, iPhone - question mark, iPod - cash cow (see Figure 1 below).

The justification for each of the classification was as follows:

The iMAC desktop computer was classified as a "Dog" due to its low relative market share (8.8%) as compared to the industry leader which was Dell (26.2%) and the low market forecast calling for a decline of over 20%. The industry outlook for desktop computer demand was rapidly eroding.

The MAC portable line of computers (or MacBook) can be classified as a "questionmark" due to its relatively low market share (8.8%) as compared to the industry leader which was Dell (26.2%) and the high market forecast for demand and growth potential in the portable computer segment of 52.4%. Seeing that computers are continuing the trend of smaller and more portable, This Apple line has the potential to be built into a "star" (with increasing market share).

The iPod line of products can be classified as a "cash-cow" mainly driven by Apple's (71%) share of the MP3 market and relative to the next largest competitor (Scandisk with 1 1%). The project growth rate for standalone MP3 players was negative but with 2010 forecasts (2.1%) improving over the 2009 levels (-16%). Most SmartPhones have music playing capability which may contribute the declining demand for standalone MP3 players.

The iPhone can be classified as a "question-mark" due to its relatively low market share (14.4%) as compared to the industry leader which was Nokia (36.4%) and the high market forecast for demand and projected growth rate of the Smartphone industry (upwards of 45% in 2010). SmartPhones are quickly becoming the portable choice for music, applications, and communication therefore the Apple iPhone has the potential to build into a "star" (with increasing market share).

2. For each of the Apple product lines classified, describe two factors that could cause it to be re-classified (e.g., move from a question-mark to either a star or dog)? For each factor, how would each be re-classified? Justify your answers.

iMac Desktop Computers - The iMac desktop computer line was currently classified as a "dog", mainly due to low market share in a relatively low projected growth market. Two factors that could impact This product line's BCG classification was an increase in market share or an increase in projected demand for desktop computers.

An increase in market share (alone) for Apple's iMac desktop computer line would move it into the "cash cow" classification. An increase in market demand (alone) for desktop computers would move it into the "question market" classification. An (unlikely) increase in both factors (market share and market demand) would make the iMac desktop computer line a "star". Students may justify their answers by speculating on what changes would need to occur in the competitive marketplace to support the most likely scenario - Apple's gain in market share (e.g., product failures on the part of large competitors, mergers, etc.) as well as increased consumer demand for desktop computing (e.g., computer use preferences relative to portability, worker office environment, etc.)

iMac Portable Computers - The iMac portable computer line was currently classified as a "question mark", mainly due to low market share in a relatively high projected growth market. Two factors that could impact this product line's BCG classification was an increase in market share or a decrease in projected demand for portable computers.

An increase in market share (alone) for Apple's iMac portable computer line would move it into the "star" classification. A decrease in market demand (alone) for portable computers would move it into the "dog" classification. An (unlikely) change in both factors (increased market share and decreased market demand) would make the iMac portable computer line a "cash cow". Students may justify their answers by speculating on what changes would need to occur in the competitive marketplace to support the most likely scenario - Apple's gain in market share (e.g., product failures on the part of large competitors, mergers, etc.) as well as decreasing consumer demand for portable computers (e.g., computer use preferences relative to portability, worker office environment, etc.)

iPod - The iPod line of MP3 player was currently classified as a "cash cow", mainly due to high market share in a relatively low projected growth market. Two factors that could impact This product line's BCG classification was a decrease in market share or an increase in projected demand for MP3 players.

A decrease in market share (alone) for Apple's iPod line of products would move it into the "dog" classification. An increase in market demand (alone) for the iPod line would move it into the "star" classification. An (unlikely) change in both factors (decreased market share and increased market demand) would make the iPod a "question mark". Students may justify their answers by speculating on what changes would need to occur in the competitive marketplace to support the most likely scenario - Apple's loss of a very large market share (e.g., competitors focus on a specific market demographic, competitive product improvements, etc.j. However, a substantial loss of share would be necessary for the iPod to move from its "cash cow" position.

iPhone - The iPhone was currently classified as a "question mark", mainly due to low market share in a relatively high projected growth market. Two factors that could impact This product line's BCG classification was an increase in market share or a decrease in projected demand for SmartPhones.

An increase in market share (alone) for Apple's iPhone would move it into the "star" classification. A decrease in market demand (alone) for the iPhone would move it into the "dog" classification. An (unlikely) change in both factors (increased market share and decreased market demand) would make the iPhone a "cash cow". Students may justify their answers by speculating on what changes would need to occur in the competitive marketplace to support the most likely scenario - Apple's gain in market share (e.g., relationships with partner companies, mergers, etc.) as well as increased consumer demand for SmartPhones (e.g., desire for all in one communication devices, range and availability of applications, etc.)

3. What should Apple do to build their question mark product line(s) ?

The two product lines that were "question marks" are the iMac portable computer and the iPhone. The strategy for product lines in this category was to build into stars or phase out. For the iMac portable line of computers, Apple should draw on their loyal base of customers to continue to buy portable "Mac" computers. This can be done by continuing to make portable computers thinner, lighter, and affordable without compromising the functionality and ease of use that attracts and retains Mac users. Apple's main challenge with portable computers was gaining market share of the Windows -based PC user. To overcome This challenge, Apple needs to find a price point and/or incentive program that will attract the PC user to try a Mac upon their next portable computer purchase.

The strategy to build the iPhone into a "star" will be based on increasing market share. The main factor here is the exclusive network relationships (with AT&T for example) which prevent some consumers from buying the iPhone (they may be under a non AT&T contract). Agreements between Apple and other cellular network companies to provide iPhone service will attract a new segment of the market that will increase share.

4. How should Apple leverage their cash-cow product line(s) ?

Apple's "cash cow" was its iPod line of products. The strategy for product lines in this category was to harvest cash in order to pay for the investments required to build "question marks" and hold "stars". In Apple's case, the cash reaped from the sale of iPods can be used to market the iPhone and iMac portable line of computers. Apple's strategy for the iPod line was to offer various models based on the size, capacity, and functionality needs of its users. As long as Apple maintains its dominant share (71%) of the MP3 market, it should continue to market, sell, and use the cash from iPod sales to fund the research, development, and marketing efforts of its other product lines.

5. What should Apple do with their dog product-line(s) ? What justification can you provide to support keeping it?

According to the BCG classification model, the iMac desktop line of computers was Apple's "dog". Due to its low relative market share and the lack of growth and profit potential projected in the desktop computer market, this line was a candidate for product divestiture. Given the move toward personal computing portability, it was unlikely that demand for this product line will increase. Unless Apple can find a way to overcome the challenges inherent with a large embedded base of Windows-based PC users, the iMac desktop computer line, it was difficult to justify keeping it. One alternative was to continue to offer the product line but not invest in research, development, and marketing costs. To minimize support costs, technical support for this product line could be offered online only. The main justification for keeping this line might stem from the opportunity to offer corporate customers desktop computers for their office employees. Under these conditions, profitable corporate contracts could be structured to offer multi-year term agreements for bundled service offerings comprised of both computer/software products and support services.

6. Think of an experience you have had as a consumer of any one Apple or competitor product (e.g., desktop/portable computer, MP3 player, Smartphone, etc.). Do you agree with the prediction for market growth of this product as described in the case? Why or why not?

For this question, students will draw mainly from their personal experiences. Most students will have either owned or used an iPod or a MacBook laptop computer. Few may own or may have used the new iPhone.

For comparison, students may have a MP3 player from a competing company (e.g., Scandisk, Sony, Samsung). Rival PC or laptops may include Dell, HP, Acer (mini laptops). Competitors to the iPhone are Blackberry, Palm, LG, Nokia (among others). As a suggestion for facilitating in-class discussion, the following table could be filled out as students volunteer answers - listed are some possible answers students may offer:

The most interesting point of this discussion was that the perspectives being offered are those of 20-22 year old college students. Therefore, the arguments presented will center primarily on their financial and entertainment concerns. This perspective may be different coming from working professionals whose primary concerns are productivity and convenience.

EPILOGUE

By consistently designing beautiful products that consumers line-up to buy the day it hits stores, Steve Jobs and Apple, Inc. have managed to change expectations about how technology should work. Within the first decade of the new millennium, Jobs and Apple have succeeded in the digital convergence of the personal computer with other consumer electronics devices and for his efforts, Jobs was named Fortune Magazine's "CEO of the decade" (November 5, 2009). However, to continue this trend of innovative product offerings, Jobs and Apple Inc. need to remain out in front of the demand curve by strategically designing and marketing new products to capture the productivity, communication, and entertainment needs of a very loyal customer base.

In January of 2010, Jobs told a crowd of reporters that he wanted to begin the year by introducing a "truly magical and revolutionary product" (Quittner, 2010, p. 34). The result was the birth of the iPad - a single portable device capable of functioning as part laptop computer, part iPod, and part iPhone. The iPad works like a giant iPod touch, weighing only 1.5 pounds, with a 10 inch screen and starting at an affordable $499. Jobs described it as "way better than a laptop, way better than a Smartphone ... it feels like your typical Apple product: smooth, sleek, a slice of the future" (Quittner, 2010, p. 35). Analysts estimate that Apple could sell 6 million iPads in 2010; that would surpass sales of the iPhone in its first year (Grossman, 2010). Furthermore, industry experts suggest that upward of 10.5 million traditional and next generation tablet computers will be shipped in 2010 (www.gartner.comd). The impact to Apple's bottom line was expected to be $2.5 billion in new revenues in 2010 (Lyons, 2010).

With the visionary Steve Jobs in charge, Apple's future remains bright. Annual revenues (2010) are projected to be $54 billion, which was an expected fiscal increase of nearly 50 percent (Lyons, 2010). What will be Steve Jobs' curtain call to this? If the last 10 years are any indication, consumers of electronic devices have only seen "the tip of the iceberg".

Subject: Computer industry; Product lines; Portfolio performance; Case studies

Location: United States--US

Company / organization: Name: Apple Inc; NAICS: 334111, 334220, 511210

Classification: 9130: Experiment/theoretical treatment; 9190: United States; 3400: Investment analysis & personal finance; 8651: Computer industry; 7500: Product planning & development

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 49-56

Number of pages: 8

Publication year: 2011

Publication date: 2011

Year: 2011

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 References

ProQuest document ID: 912512879

Document URL: http://search.proquest.com/docview/912512879?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 16 of 100

FLOATING ISLAND INTERNATIONAL

Author: McNally, Mary; Wilkinson, Timothy J

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Abstract:

Floating Island International (FII) explores the challenges faced by a Montana entrepreneur who used principles of biomimicry to invent BioHavens, a potential water treatment technology. A BioHaven floating island is a man-made ecosystem which mimics natural wetlands, and can be used to help clean water and create riparian habitat. After four years of operation, his small company had produced and deployed over 3,000 islands and had established a network of 8 licensees, including 2 outside the US. BioHavens were being used in a variety of ways and settings, but to date the dominant applications were small scale and largely ornamental or aesthetic. However, the potential to use BioHavens as a vehicle for wastewater treatment and water remediation was immense, particularly in smaller communities and/or areas with limited infrastructure. FII had obtained some money for research and field applications, but the islands were a new technology and data documenting their water quality performance was far from complete. Many potential clients weren't interested in buying a technology whose effectiveness was not thoroughly documented. Water treatment represented totally new markets for FII, a 'blue ocean' scenario, and the company and its licensees were unsure how to best proceed. The case encourages students to consider the possibility of a solutions-based business model as one way of moving FII ahead, and to address the challenges of prospering in new markets. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTE RECOMMENDATIONS FOR TEACHING APPROACHES

The teaching objective is twofold:

1.To provide insight into an small entrepreneurial company using biomimicry to develop and nurture a new technology;

2.To engage students in the challenges of successfully bringing a unproven technology to new markets ('blue oceans'), relying in part on solutions-based thinking.

In preparation for case analysis we suggest that students read Lovins, Lovins and Hawken, "A Road Map for Natural Capitalism," Harvard Business Review, May-June 1999; summary material on biomimicry, such as Matt Velia, "Using Nature as a Design Guide," Business Week Feb. 11, 2008 (accessed online at www. Businessweek.com); and Kim, W.C., Mauborgne, R. "Blue Ocean Strategy: From Theory to Practice," California Management Review, Vol. 47, No. 3 (2005), pp. 105-21.

DISCUSSION QUESTIONS

1. What are the major challenges (financial, organizational, intellectual property) facing FII in their attempt to commercialize their product? How can FII overcome these challenges?

a.) Financial. The financial information included in the case indicates that the firm is not yet profitable but is being financed by its founder's other money making endeavors. FII has had some success in attracting outside funding to help support research on BioHaven efficacy, but these funds are limited and inadequate to meet on-going R&D requirements. The company could seek outside money through New Venture Funds or Angel Investors. It might also be a good time for Bruce to sell to a large corporation that could take the company to the next level. Licensing is a slow revenue generator and may stifle growth in the long run.

b.) Organizational. FII has only a few employees and is not well positioned for supporting growth. Bruce is an inventor, and that is where his attention and interest are focused. On the other hand, FII is building a network of licensees who are an integral part of the organization. Many of the traditional organizational functions (notably marketing and production) are effectively 'outsourced' to the growing licensee network, thus reducing the need for a large organizational staff at FII itself.

c) Intellectual Property Rights. FII currently has a number of patents related to BioHavens pending, but protecting and defending these will be an ongoing concern, particularly in an international context. FII is only beginning to seriously consider foreign expansion, and the opportunities and challenges of protecting patents is international markets is a major concern for Bruce.

FII needs to make sure that it meets the patent requirements of every market that it is operating in, regardless of the level of intellectual property-rights enforcement. However, the best defense of its intellectual property is product innovation coupled with the company's ability to prove the efficacy of the product to potential customers - particularly government entities. The ability to provide credible studies which back up its claims will go a long way toward protecting the business' s intellectual property in the marketplace.

2. FII and several licensees believe that BioHavens have significant potential as a water quality treatment technology. What are the major opportunities and challenges facing FII in terms of this application and market?

One important realization is that FII has developed a product that represents an innovative approach to enhancing water quality. The last third of the case essentially focuses on this issue. Floating Island has the potential to revolutionize wastewater treatment, pollution control, and water management practices both in the U.S. and overseas. The technology is relatively easy to produce, transport, and deploy. It is 'scalable' and can be applied in a variety of situations. It is particularly well suited for a variety of applications, particularly in rural areas with limited infrastructure. There is data that demonstrates it has water cleaning properties and helps reduce levels of specific nutrients, including copper, zinc, nitrates and Phosphorus.

Opportunities: The stricter EPA standards for wastewater effluent that are pending represent a challenge for rural communities and a terrific opportunity for BioHavens. Traditional methods of treating wastewater (additional treatment ponds; filtering mechanisms; chemicals; etc.) represent significant capital investments, particularly for small communities. The successful introduction of BioHavens as a treatment option to help polish the effluent to meet the new EPA standards would provide a cost effective, ecologically friendly solution for these communities and a great opportunity for FII.

It is significant that there are no directly competing products for BioHavens; in fact, there is nothing quite like them. In essence FII is in the process of creating a new industrial segment, and is literally creating a 'blue ocean'. As Kim and Mauborgne note in their article, blue ocean strategists hold a '^constructionist' view of markets, and create new industries and new 'rules of the game.' The process of doing this, however, is relatively unchartered territory.

The principles embodied in natural capitalism also provide strategic direction in this case, specifically the focus on a solutions-based model. In the wastewater industry, potential customers (small communities) are not interested in the aesthetic properties of BioHavens, or even in owning a floating island. Rather, they want the ecological services that BioHavens can provide: the ability to remove or reduce specific nutrients and meet new EPA standards. Instead of selling BioHavens, FII licensees could sell the "clean-up" service provided by the floating islands.

Using these insights, FIT s strategy could be to at least initially provide BioHavens to rural communities on a modified lease or pay for performance basis. Nutrient levels in wastewater settling ponds with BioHavens would be monitored on an on-going basis by the municipalities, and FII would be paid on the basis of the reduction in unwanted nutrients, and/or the ongoing maintenance of desired water quality measures. This approach would provide the communities with the ecological service they require, and also help FII gather the data to prove the efficacy of BioHavens in a variety of field settings.

Challenges: There are several major challenges facing FII.

1. There are obvious risks in the pay for performance approach discussed above. Developing the exact parameters for the appropriately sized BioHaven to maximize efficient uptake while minimizing scale (and cost) may take time to refine. In the short term FII may provide more 'island' than a particular situation requires (thus increasing their costs), or not enough to completely polish the water. Determining the appropriate pricing for the services of the BioHaven will also require careful calculation.

The advantages of this approach are significant, particularly in the short run. Pay for performance clearly reduces the risk for potential clients in terms of trying the new technology. FII will reap the benefits from entering a new market, gain critical experience and exposure, gather performance data, and be able to position BioHavens as a BMP option for the EPA in the future. With over 400 potential sites in rural communities that will require additional wastewater treatment in Montana alone, the potential local market is large enough to target, but small enough for FII and its Headwater FI licensee to manage in the next several years. In fact, this is just the strategy FII - and Headwaters FI - have chosen to pursue.

2. Biohavens remain a largely 'unproven' and relatively unknown technology. For example, FII cannot yet say that, given a wastewater lagoon with particular characteristics, they can guarantee that this configuration of a BioHaven will definitely solve the problem. FII does have research and evidence documenting aspects of effectiveness, but they need more field studies and/or data to be able to document performance for potential clients. Given this level of uncertainty, municipalities or other government entities are unlikely to be willing to purchase a BioHaven. And the EPA will not endorse it as a proven technology, an endorsement that would be very beneficial.

3. In addition to Water Quality, what are some of the potential markets for FII?

Floating Island's initial success has been in the man-made garden (ornamental) pond market, but BioHavens clearly have potential in a variety of other markets. Given the broad potential applications, developing a strategic focus is an immediate challenge. The Floating Island website (www.floatingislandinternational.com) lists over 25 categories of potential applications. Bruce Kania, as an inventor, has a broad and expansive vision about the possibilities embodied in BioHavens. Because there are so many potential applications, one challenge is deciding where the firm should focus its R&D efforts.

The following chart can be used to help students understand which markets have the most potential, both in economic terms and in terms of the vision Bruce has for the environment. We suggest that instructors sketch out the first rows and then invite students to come up with opportunities and constraints.

Subject: Small business; Water treatment; Product development; Case studies

Location: United States--US

Classification: 9130: Experiment/theoretical treatment; 7500: Product planning & development; 9520: Small business; 8340: Electric, water & gas utilities

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 57-61

Number of pages: 5

Publication year: 2011

Publication date: 2011

Year: 2011

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables

ProQuest document ID: 912512809

Document URL: http://search.proquest.com/docview/912512809?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 17 of 100

FOREIGN DIRECT INVESTMENT IN ARGENTINA AND URUGUAY

Author: Marshall, Paul S; Noble, Clement H

ProQuest document link

Abstract:

Two German professors travel from Ulm to Buenos Aires to investigate potential real estate investments for their consulting client. Their colleague, a real estate professor in an Argentine university, assists by finding students to help them. The case deals with the problems the professors endure and the adventures they experience in their search for data necessary to help their client make informed investment decisions. This case is unusual for U.S. students in that the perspective they must take is that of a German rather than an American. [PUBLICATION ABSTRACT]

Full text:

(ProQuest: ... denotes formula omitted.)

INSTRUCTOR'S NOTES RECOMMENDATION FOR TEACHING APPROACHES

This case study has been tested in our home university both in a graduate elective course in Real Estate Finance typically taken by second year MBAs and in a required undergraduate course in International Business typically taken by third year undergraduate students. It is believed that students in our university are most comfortable using directed questions, as shown at the end of the case. Perhaps better students might benefit from both deciding which questions to ask and what the appropriate answers are? If so, case questions could be deleted from the material presented to students.

For undergraduate students in International Business questions 3, 4 and 5 were removed. Those students were then additionally asked to translate all case words shown in Spanish and German into English. Typically they used an on-line dictionary such as available on Google for this assignment. They were also asked to write a 500 word essay on the economic history of Argentina and of Uruguay. Here the CIA World Fact Book seemed useful.

This case is a combination factual and fictional experiences, designed to combine realism with the content necessary for a business school case. As such, inclusion of references and an epilogue are inappropriate.

SUGGESTED CASE QUESTIONS

Each question is printed in italics and then answered as we believe most appropriate. Certainly, some disagreement on the best answer to any question is possible. Good luck!

Question 1. Real estate students need to be comfortable with maps, even in the days of Mapquest and the GPS systems. Get a map of Buenos Aires on-line (try www.allaboutar.com) and locate the following: Avenida Santa Fe, Recoleta, Oblisco, Palermo, Avenida Las Her as, Avenida Liberador, San Telmo, Puerto Madero Avenida 9* Julio, Casa Rosada, Congresso, Avenida de Mayo, Lezama Park andMalabia. You may exclude three of your choice.

1. All of the requested locations can be found at the suggested web site, "www.allaboutar.com." An overview map is shown below as a guide for finding the locations requested. Each district shown can be searched for the required locations.

Overall distance about 10 KM wide by about 3 Vi KM tall. The orientation (strangely) is top = west, right side = north.

Question 2. Drs. Bayern and Rodemann seem to be having substantial problems with Jose and Eva. What is your theory on the reason? What could they do to mitigate that problem?

2. There are many possibilities to explain why Eva and Jose failed to deliver the quality of service expected by Drs. Bayern and Rodemann. Possibilities include: (1) they are incompetent, (2) they are lazy, (3) they are bashful, or (4) their culture treats "time" differently than the Germans expect. Another possibility and the one we think is most likely is that the students and the Germans have a serious communication problem, and the Germans have done nothing to correct it.

At the first sign of trouble, the professors should have done everything possible to find out what problem caused the students to fail to deliver as expected. The students need to know that they can speak freely and openly with the Germans about any unexpected problems they face. It is the German's responsibility, as both mature adults and as professors use to dealing with students, to assure that lines of communication remain open and any problems are solved quickly. Our students insist that the Germans' lack of cell phones was a crucial mistake

Question 3. Table 1 gives rental and purchase information for apartments in Buenos Aires. Use the income capitalization approach, where NOI ** capitalization rate = estimated value. Do so for each location and number of bedroom combinations. The commission to rent apartments is 10% of effective gross income. You may assume that Table 1 includes all expenses necessary to calculate NOI and you may round to the nearest euro.

(HINT: You must calculate the NOI of each option, and then use an assumed 8% capitalization rate to computed "value. " The lower the recorded selling price (in Table 1) compared to your calculated value, the better the bargain.)

For purposes of this question, answer the following:

a. Which area/# of bedrooms combination is the best value?

b. Which areas, if there is more than one, should the investors focus on and why?

c. Table 1 provides information on the standard deviation for each input variable. Which two are most important? How might the investor use this information?

3 A. The economic analysis shown below clearly show that the Recoleta two bedroom flat is the best value with our estimate of value being 3 1.4% above market value.

3B. Recall that all economics are based on mean values. Given that Barrio Norte -2 at 26.4% above, Palermo -3 at 17.0% above, Palermo -2 at 16.8% above and Recoleta -3 at 12.2% above market values are all likely places for investors to focus. Since property samples have variation in each area, it is possible that some properties in areas with an estimated value below average market price will also be attractive. Many such properties can probably be found in Barrio Norte -3 (-1.7%). Likelihood is a function of the size of the negative estimate of value compared to mean market value.

3C. The standard deviation of rent per month and selling price would be most important. The possibility of a "high" rent combined with a "low" selling price would be most powerful in generating a very profitably investment.

Question 4. A two-bedroom apartment in Recoleta seems to be the market favorite. Calculate the IRR of an investment in the average such apartment over a 5-year investment time horizon. You may assume that inflation (affecting the usual income statement terms) is 4% per year, depreciation is 5% per year straight line to zero salvage value on the entire purchase price, the tax rate is 40% on ordinary income and on depreciation recapture; 25% on capital gain, the apartment will appreciate 8% per year. Calculate the IRR both using a 50% UV ratio for a 7%, 20 year loan and assuming 100% equity financing.

4. The following financial analysis calculates the IRRs as requested. Using 50% leverage the IRR is 17.95%. With all equity the IRR falls to 11.71%, below the Pensin Plan's hurdle rate of 12% on equity.

Question 5. Table 2 gives partially unprocessed data on Uruguayan raw land Recall that Dr. Rodemann has developed a model to estimate the price per hectare for large tracts of developable land based on the characteristics shown in Table 2. The model in equation form is as follows:

Value = 874 + 3.35 ? (Sum B / Sum A - Sum C /Sum AxK) ? D ? Ex Fx GxH (where value is calculated in euros per hectare and multiplicative coefficients D through H are as defined on Table 3 from Rodemann 9S model.)

For purposes of Dr. Rodemann 's valuation equation Sum A, Sum B and Sum C are simply the sums shown under each column A9 B and C in Table 2. The value of K is assumed to be 8% in this case. The multiplicative factors D through H are based on the size weighted mean values calculated from the data in columns D through H adjusted by their economic impact as shown in Table 3. For example, the 5.94 shown beneath column D in Table 2 is the weighted average "shape" variable, weighted by the size of the property shown in Column A. To calculate 5.94 multiply 10 times 0.9 and add it to 10 times 6.1 and add it to 6 times 6.0, etc. Dividing the nine term sum by the total size (32 hectares) yields 5. 94%. Table 3 is then applied to calculate the economic impact of the weight-averaged "shape" variable. As Table 3 shows, Column D values in the range 3.01 to 6 have a 20% value reduction factor, i.e. a D value of 0.80. That number (0.80) is then put into Dr. Rodemann9 s equation for value. Students must calculate weight averages for columns E through H and interpret them using Table 3.

a) Calculate the hectare size weighted mean for variable E, F, G and H listed in Table 2. Combine that information with the coefficient values shown in Table 3 to estimate the value of a large tract of raw land in the Colonia area using Dr. Rodemann 's model.

b) Pick two variables (D through H) and discuss why Rodemann 9S coefficients from Table 3 make sense or do not.

5A. The size weighted means from data in Table 2 and the economic impact of each variable as described in Table 3 are shown below:

Applying these factors in Dr. Rodemann' s valuation equation yields an estimated value of a large tract of land to be 6406 euro / hectare or about $4150 / acre, as shown below:

...

5B. Students are asked to discuss only two of the variables below:

Column D describes the "shape" of the property on a scale of 0 to 10 with 10 being a square and other value relating to other less optimal shapes. Values between 6 and 10 are "acceptable" and are assigned a factor of 1. Values between 3 and 6 reduce property values by 20%, thus a 0.8 factor is assigned. Values between 0 and 3 severely depress the market value by 40% thus a 0.6 factor is assigned.

Column E describes distance from the river (or other pertinent location) where large scale development is planned. Values between 0 and 0.3 KM are acceptable and are assigned a factor of 1. As distance from the river increases, coefficient value declines, as shown in Table 3, such that at 5KM or more value is reduced by 63% and an 0.37 factor is assigned.

Column F shows distance from Colonia, Uruguay (or in the model any secondary pertinent location.) This time a close sample property will likely have a high value based on proximity, but large scale development will want to be away from the location. Table 3 shows that values need substantial reduction if they are close and small upward revisions if they are farther away.

Column G shows access to the property. Good access is expected and has a 1 factor assigned. Poorer access is penalized either 5% or 10% as shown in Exhibit 3.

Column H describes whether the property is clear or wooded. If wooded, it must be cleared. Clearing is estimated to cost 5% of value. The factors assigned in Table 3 take this into account.

Question 6. Ethical issues are always a concern in business school cases. In this case Drs. Bayern and Rodemann seem to constantly be ordering alcoholic beverages and breaking for happy hour. Is this ethical behavior?

On another ethical issue, Dr. Bayern said, <6Not a peso for that madchen!" He implied that he did not plan to pay Eva, since, in his view at least she provided essentially no services. Is his behavior ethical?

6. Even though the use of alcohol is no longer politically correct, beer, wine and spirits are all legal products. The professors have violated no laws (such as underage drinking or DUI) by using the product. Therefore we support their right to happy hour! There is no alcohol related ethical problem identified in the case.

Regarding paying Eva, clearly she delivered little if any value to the professors though apparently she spent some time and effort trying and perhaps had bad luck. The answer depends on whether you consider the students to be employees of the professors or independent contractors. Employees are paid for their time regardless of the value of the results. Though, of course, if they continually fail to deliver value they will be fired. Independent contractors are paid only if they deliver the promised work, independent of how hard they try. The students are on a one-time assignment. We suggest they are most like independent contractors. Therefore, Dr. Bayern' s refusal to pay Eva is ethical.

Question 7. There are nine "issues" listed 1}} to 9}} in the cases. Write a short answer for each question below:

* {{1}} Though not politically correct, why does Bayern laugh?

Many high ranking Nazis escaped to South America at the end of World War II. Argentina was a favorite destination. Rodemann was hinting that native German speakers might be old Nazis.

* {{2}} What does BASF stand for?

BASF originally stood for Badische Anilin und Soda Fabrik (Baden Aniline and Soda Factory). Today, the four letters are a registered trademark and this German company is listed on the Frankfurt Stock Exchange. It is one of the world's largest chemical companies

* {{3}} What exactly is "Mendoza merlot"?

Mendoza is a major city in Western Argentina near the Andes. It is the center of fruit production and viniculture. Most of the best Argentine wine comes from Mendoza. Merlot is a variety of both grapes and a type of red wine made from those grapes.

* {{4}} What are 75 pesos and 75 euros worth in American money?

As of today (1/19/10) there are 3.80 Argentine pesos per dollar and 0.699 euros per dollar. Therefore 75 pesos is about $19.74 and 75 euros is about $107.30.

* {{5}} What are "Clarín" and La Nación"? Do they exist? Show proof if yes.

"Garin" and "La Nación" are both large Buenos Aires newspapers. Links to their respective web-sites follow: http://www.clarin.com and http://www.lanacion.com.ar

* {{6}} What does the expression "U$S" mean?

The term "U$S" is the way Argentines write the U.S. Dollar. They use the symbol "$" to indicate Argentine Pesos.

* {{7}} What is the "secret" ingrethent in the risotto?

Since the name of the restaurant means "snail" in English. A snail product of some form seems to be a likely candidate for the secret ingrethent in the risotto.

* {{8}} How did the expression, "reading him the riot act, " originate?

Quoting "World Wide Words"( at http://www.worldwidewords.org/qa/qa-real.htm) "These days, it's just a figurative expression meaning to give an individual or a group a severe scolding or caution, or to announce that some unruly behaviour must cease. But originally it was a deadly serious injunction to a rioting crowd to disperse.

The Riot Act was passed by the British government in 1714 and came into force in 1715. This was the period of the Catholic Jacobite riots, when mobs opposed to the new Hanoverian king, George I, were attacking the meeting houses of dissenting groups. There was a very real threat of invasion by supporters of the deposed Stuart kings - as actually happened later that year and also in 1745. The government feared uprisings, and passed a draconian law making it a felony if a group of more than twelve persons refused to disperse more than an hour after magistrates had told them to do so. To invoke the law, the magistrates had to read the proclamation contained in the Act aloud to the mob, something that often required more courage than they could summon up."

* {{9}} Jose could not write a receipt. Write one for him.

We propose that the following would do nicely.

To: Herr Doctor Gunthar Rodemann

From: Paco Sanchez

Date: XX/XX/XXXX

Re: Receipt for Payment of Services Provided

Today you paid me 75 Argentine pesos as full payment for all services and expenses that I provided you in connection with your work on real estate in Colonia Province, Uruguay.

Subject: Foreign investment; REITs; Financial analysis; Case studies; Real estate

Location: Argentina, Uruguay, Germany

Classification: 9130: Experiment/theoretical treatment; 3100: Capital & debt management; 1300: International trade & foreign investment; 9173: Latin America; 9175: Western Europe

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 63-71

Number of pages: 9

Publication year: 2011

Publication date: 2011

Year: 2011

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: Illustrations Tables

ProQuest document ID: 912512803

Document URL: http://search.proquest.com/docview/912512803?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 18 of 100

WOMEN CONSUMERS IN THE CHINA COSMETIC SURGERY MARKET

Author: Chen, Junsong

ProQuest document link

Abstract:

The case is about a Korean businessman who has conducted a market research in Shanghai before he builds up a cosmetic surgery clinic. The survey has investigated many consumer parameters. Therefore the first task for students is to learn how to analyze the relationship between marketing variables, such as consumers' purchase intention, demographics, price sensitivity, and so on. More importantly, students should be able to identify the business implications behind the data. This case is deliberated kept sufficiently simple to direct students' attention to the use of research findings, not to the intricacies of research design and execution. Information in the tables is displayed in a way that reflects how research is often presented in practice, in less than optimal ways, forcing students to come to an independent interpretation, including some recalculation of the data. Therefore, this case is suitable for a marketing research course, or for a general marketing course. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTOR'S NOTES

TEACHING OBJECTIVES

This case is designed to direct students to learn how to analyze the data collected in a market survey. This case is deliberately kept sufficiently simple to direct students' attention to the use of research findings, not to the intricacies of research design and execution. The case is well suited for a marketing homework assignment.

The case can be studied to achieve the following objectives:

* Students should learn how to analyze the relationship between marketing variables, such as consumers' purchase intention, demographics, price sensitivity, and so on.

* Students should be able to identify the key characters of the group of interest by comparing it to the whole sample population.

* Students should grasp the correct way to understand tables and figures.

* Students should learn how to explain the facts and identify implications of the facts.

QUESTIONS

Q1. According to Tables 2 and 3, what can you tell between consumers' income and their purchase intention and price sensitivity?

There are actually two questions in Ql. The first is about consumers' income and their purchase intention of the cosmetic surgery, and the second is about consumers' income and their price sensitivity. In the case, Table 2 gives the income distribution of all respondents, while Table 3 contains the information of income distribution of potential users. Now all the data have been incorporated into the following table (See Table A). As for the first question in Ql, we conclude that consumers' income does influence their purchase intention.

Some students may argue that people with 1,000-5,000RMB income are mostly like to try the surgery, as suggested by the large number of potential users in these two income categories. However, this is due to the large percentage of the two categories in the whole sample population. Actually, as indicated in Table A, consumer categories with 5000 RMB above monthly income have higher proportion of potential users than other income categories.

In the main text of the case, we have given a cross-table (Table 3) which details the distribution of potential users in different price ranges in numbers and percentage. Therefore, the distribution of every income group across the four price categories will reflect how sensitive a certain income group is to the price. With a careful look at Table B and Figure A, we can conclude that:

Consumer income does influence how much consumers are willing to pay for the laser surgery.

Once consumers' incomes are above 2,500RMB, they are relatively insensitive to the price and there is no substantial difference in price sensitivity across income groups.

Q2. According to Tables 1 and 4, how does age and marital status affect consumers' interest in cosmetic surgery?

As we can observe in Table C, the potential user is quite evenly distributed among the five age groups. Therefore, we conclude that age does not affect consumer interest to try this cosmetic surgery.

Judging by Table 4 in the case, some students may conclude that women married without children are more likely to try the cosmetic surgery as indicated by the highest percentage of this group in potential users (115/394=29.2%). However, this is because the highest percentage of this group in the whole sample population (500/1339=37.3%). As a matter of fact, smart students should look at the numbers in a different way. It is helpful if students could calculate the percentage of potential users in every group as shown in the table above. If we merge the data from "single without a partner" and "single in relation with a partner" into a category named "unmarried in total", we could find that the interest towards the laser surgery of this category is higher than married women as indicated by the percentage 31.8% vs. 28.0%. Therefore we conclude that marriage status affects women's interest to try the laser surgery.

However, a further look into the data of married and unmarried women will gain more information. The user percentage of married women without a child is 23.0% which is much lower than that of married women with a child which is 36.1%. This indicates that having a child will strongly affect women's interest towards the laser surgery. For the unmarried women, those who have a partner show less interest towards the laser surgery than those who do not have a partner. This is partly due to that the former group is less worried about their appearance since they have already had a partner. Finally, for divorced or widowed women, their small number in the sample population makes them negligible in the study.

Q3. According to the findings in Table 5, what would you recommend Mr. Li for the communication strategy (how to design the ad)?

Table 5 in the case contains six questions on several aspects of life, including attitudes on beauty, health, wealth, career, family, and independence. Based on Table 5, we can draw the following conclusions and implications.

All age groups strongly agree that a woman should try to be beautiful, and therefore beauty should certainly be the most important appeal of cosmetic surgery.

These results suggest that associating the cosmetic surgery with trying to be beautiful, with change, and with health will work well across age groups and respondents. But we can see from the responses to item 6 that associations with being a strong and independent woman should be avoided. Therefore, "I try to be beautiful, that's why I choose XXX cosmetic surgery" would, for example, be a better slogan than "I make my own choices and I choose XXX cosmetic surgery."

Q4. Which advertisement is the best and why?

This question is designed to teach students how to compare advertisements, what key criteria to use in evaluating an advertisement, and what factors to consider in developing an advertisement.

Seven questions were asked to compare the three ads on five dimensions: aesthetic appeal (questions 1 and 2), information availability (questions 4 and 5), attitude towards the ad (question 6), and attitude towards the product (question 3)

Ad. A has the highest score on the dimension of aesthetic appeal and attitude towards the ad, due to nice pictures of beautiful models in the ad. Besides, it also has the highest overall score. Therefore, some students may think ad A is the best advertisement. However, on the dimension of attitude towards the product and information availability, ad B has the highest score. Smart students may have realized that although respondents like ad A the most, they are not very interested in the product after seeing this advertisement. In contrast, people generally are more interested in the product after seeing ad B. This is mainly due to that ad B contains detailed information regarding the cosmetic surgery.

The results suggest that for a new product which involves high risk, it doesn't matter whether the message points are presented in a likable or unlikable manner as long as the points are accepted by the target audience. Mr. Li should concentrate on loading the copy with convincing claims to reduce the typically high perceived risk. The target audience has to accept the ad's main benefit claims but does not have to like the ad itself. When the basis of the brand attitude is information, whether people like the way the information is presented is a less important consideration.

Q5. What recommendations do you have for Mr. Li?

Shanghai is a big city with some 15 million people. Mr. Li probably should concentrate his marketing spending rather than try to reach the whole market. Since his clinic will be a Korean-owned clinic and Korea has a good reputation in the cosmetic surgery field, it should be possible for him to appeal successfully to the 10,000 plus income category. Mr. Li should concentrate his resources, use advertisements providing detailed information and emphasizing beauty, and charge prices higher than average. Among the high income group, Mr. Li should find ways to concentrate on those who are married with a child, and then his marketing money will be especially well spent.

Subject: Plastic surgery; Clinics; Consumer behavior; Case studies; Market research

Location: China

Classification: 9130: Experiment/theoretical treatment; 7100: Market research; 8320: Health care industry; 9179: Asia & the Pacific

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 73-78

Number of pages: 6

Publication year: 2011

Publication date: 2011

Year: 2011

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 Graphs

ProQuest document ID: 912512806

Document URL: http://search.proquest.com/docview/912512806?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 19 of 100

DETERMINING THE VALUE OF THE COCA COLA COMPANY - A CASE ANALYSIS

Author: Regassa, Hailu; Corradino, Laurie

ProQuest document link

Abstract:

Nicki James, a CFO of a wealth fund management advisory group, had been successful in solving the financial woes of her clients for a number of years. During that time, she had also dabbled in some investing of her own and was always looking for new opportunities. Therefore it was no surprise that ideas randomly came to her as one did on that fall day in 2009 as she was sipping from her can of Classic Coca Cola. Coke, as many referred to the product, had been a part of her life ever since her early childhood. Thus the well-established nature of the company along with the new prospects in sight for the organization inspired her to instruct her assistant and recent MBA graduate, Sarah Mills, to perform some financial analysis on her behalf. Could Coca Cola stock be the financial goldmine that both Nicki and her clients had always sought? With a little research and a few calculations, Nicki and Sarah were determined to find out! [PUBLICATION ABSTRACT]

Full text:

(ProQuest: ... denotes formulae omitted.)

INSTRUCTOR'S NOTES INTRODUCTION

This case focuses on finance related topics and uses actual financial data to assess the rationale for why and when various models can be used to determine the stock price performance of the Coca Cola Company. This case further examines the value of the company using the discounted cash flow model. It enables students to apply their knowledge of the principles of finance and accounting to a real world example.

The case was originally developed as a graduate course project and was updated for publication purposes. Various online financial sources were used in the development and data specific to the Coca Cola Company was applied to various financial models that are often taught in undergraduate and graduate courses.

Ideally, the case should be assigned as a group activity either inside or outside of class but preferably outside of class. Students should be instructed to carefully read through the case narrative and to analyze all of the tables provided. After fully understanding the case, students should begin to answer the case questions based on knowledge that they have obtained through their various finance and accounting courses. We suggest that all of the questions be assigned but you may assign those questions you deem most appropriate for specific class purposes. Along with a case write-up, you may also choose to ask students to prepare a presentation for in-class discussion.

While the answers presented in these instructor's notes represent what we deem to be the most appropriate responses, students' answers likely will vary. We suggest that you always require students to provide justification for their responses and evaluate such responses based on such reasoning.

CASE OVERVIEW

The case narrative introduces the main characters and some of the current events affecting the Coca Cola Company. In addition to the narrative, the company's income statement, balance sheet, and free cash flows for the last five years are presented in the tables that follow the case along with information regarding the company's outstanding bond issues, historical dividends, and treasury and growth rates among other pertinent items.

Most of the data contained in the cases must be utilized by students in attempting to answer the case questions. However, there is some additional, non-essential data that has been included as well so that students will be required to sift through the numbers and use only what is needed. While the balance sheet and income statement serve as good references and are used to an extent, the most important tables are Tables 3, 4, 5, 7, and 8. Additionally, advise students that they will need to use a financial calculator or spreadsheet in determining the cost of debt for the various bond issues. A small amount of outside research may be required for question #10. Direct students to access a comparative chart for the Coca Cola Company and its competitors as listed on Yahoo Finance and use that as well as other competitor data to answer the question.

DISCUSSION QUESTIONS AND SOLUTIONS

1. Mention and provide rationale for when and why various financial models can be used to determine the value of the Coca Cola Company stock.

Sarah may use, among others, the following valuation models:

* Zero growth or earnings capitalization model: This model is used for companies that do not pay dividends and when all earnings are assumed to be paid out as dividends. This model is not an appropriate model to be used since the Coca Cola Company pays dividends and actually ploughs back, or retains, a portion of its earnings. Looking at earnings per share, dividends, and revenues, the company has been continuously growing over the past five years and will likely continue to do so in the future.

* Constant growth model: The company's sales, earnings and annual dividends have been growing steadily. Based on the data provided, this model appears to be an appropriate model to be considered. However, the growth patterns are not constant across the various metrics.

* Variable growth model: This model appears to be the most appropriate dividend valuation model since it takes into account the variations in dividends and earnings over the past five years. One can assess the lower and upper bounds of the discounted future dividend cash flow streams under various growth assumptions using a sensitivity analysis.

* Capital asset pricing model: This is an alternative valuation model that explicitly accounts for market risk and can be used to assess the expected return on the Coca Cola Company stock.

* Price/earnings multiple model: This model provides an accurate assessment of the price of stock provided the company's operations are fairly aligned with its competitors in the industry, i.e., the company is not considerably under- or over- performing from the industry benchmark.

* Free cash flow model: As an alternative, the value of the entire firm can also be assessed using projected free cash flow streams. The value of the firm is the discounted value of the free cash flows generated over the life of the firm. The market value of the stock can be determined by subtracting the market value of debt from the market value of the firm.

2. Determine the market value of debt and equity and the composition of the capital structure of the company.

3. Determine the cost of equity using the capital asset pricing model (CAPM)9 where Rf = 4.28%, ß = 0.62, and RM = S&P 500 daily return compounded daily.

R^sub M^ = [(1.0003)?365] - 1 = 11.57%

k^sub c^ = 4.58% + 0.62(11.57% - 4.58%) = 8.914%

4. Determine the before- and after-tax cost of debt given the various bond issues, current prices, coupon rates and an appropriate tax rate. (Hint: Use the market value of each bond issue, determine the yield to maturity, the proportion of each issue and the weighted average of the yields).

Yield to Maturities (before tax) are determined using a financial calculator (the equation is provided below). Students may also use spreadsheets to determine the yield.

B^sub 0^ = 1(PVOAIF ^sub n =?, kd=?^) + 1 ,000(P VIF ^sub n = ? kd = ?^)

where: I = Coupon payment

PVOAIF = present value ordinary annuity interest factor

PVIF = present value interest factor

n = number of periods

k^sub d^ = discount rate (YTM)

B^sub 0^ = current price of bond

The average tax rates for the past five years and the current year are calculated below. One can use the overall average of 24.65% or the recent tax rate of 29.89% (rounded to 30%). We consider the latter to be the most appropriate. The after-tax cost of debt under each scenario is calculated immediately after the table presented below.

5. Using the appropriate market value proportions, the after-tax cost of debt calculated in question #4 and the cost of equity from question #3, determine the weighted average cost of capital (WACC).

WACC = (1 - Tc) rdebt [D / (D+E)] + requity [E / (D + E)]

WACC based on current tax rate:

WACC = 2.737% (0.0395) + 8.914% (0.9605) = 8.67%

Note: Even if the average tax rate for the six-year period is used, it will not significantly alter the value of WACC since the cost of long-term debt is such a small proportion of the firm's capital structure.

6. Determine the sustainable growth rate and interpret your result.

Sustainable Growth Rate = Return on Equity (ROE) ? Plowback Ratio

...

Plowback Ratio = 1- Payout Ratio = 1 - 0.56 = 0.44

Sustainable Growth Rate = 0.3015 ? 0.44 = 0.13266 = 13.27%

13.27% is the maximum that the Coca Cola Company can grow its earnings and dividends without changing its target capital structure and raising outside equity. Considering the growth rates estimated by financial analysts and the historical growth rates, 13.27% is on the high side.

7. Determine the value of the entire company using the discounted free cash flow model and the weighted average cost of capital calculated in question #5. Provide rationale for the assumptions that you use in projecting the future free cash flow streams and the rate at which they are expected to grow. Based on your results and using the current stock price of $56.54 as your benchmark, assess whether the stock is over- or undervalued.

If we use the historical growth rate of 7.9 percent, the lowest growth estimate, for the projected free cash flows for the next five years, an average industry growth rate of 5% thereafter, and a discount rate (WACC) of 8.67%, we arrive at an estimated price today of $71.70. The result suggests that the current price of the stock is undervalued. Based on this finding, Sarah may very well recommend that it is worth buying at the current price.

On the other hand, if we use a growth rate of 8.5 percent, the highest growth estimate by Reuters for the projected free cash flows for the next 5 years, a growth rate of 5 percent (the average industry growth rate) thereafter, and a discount rate (WACC) of 8.67 percent, we come up with an estimated price today of $73.78. The result suggests that the current price of the stock is undervalued as well. Again, based on this finding, Sarah may very well recommend that it is worth buying at the current price. We therefore conclude that the Coca Cola Company's stock deserves a higher premium to reflect its potential.

One could also use the sustainable growth rate of 13.27 percent but it is significantly too high and may not be a realistic estimate of the company's future growth potential.

8. What will the price of the Coca Cola Company stock be like if the zero growth, constant growth, and variable growth models are used? In using the zero growth model, assume all earnings are paid out as dividends. Based on your findings, comment on the appropriateness of each of the valuation models.

...

**The 6 percent growth rate is slightly above the industry average but considerably below the lowest growth estimate of 7.9% by analysts.

Since the company has been growing steadily and is the leader in the industry, the zero growth is certainly not the right model to use. The value of the stock varies greatly depending on the growth assumptions used under the constant dividend discount model. Given the lowest growth rate of 7.9% and above for the company, a 6% growth rate appears reasonable. In that case, the current price may be substantially undervalued and may not fully reflect the long term growth potential of the company.

P^sub 2009^ with variable growth

Projected price of stock using 5-year compound dividend growth rate of 7.9% for the first five years and a growth of 5% thereafter discounted at 8.67% yields the following result:

Projected price of stock using 5-year compound dividend growth rate of 8.5% for the first five years and a growth of 5% thereafter discounted at 8.67% yields the following result:

The variable growth model may be the most appropriate model given the different growth estimates and the non constant growth in historical earnings and dividends. Students can come up with their own assumptions within the bounds of the growth estimates provided in Table 8 to determine whether Coca Cola's stock price is under- or overvalued. Given the assumptions we have laid out, the $53.31 price we have calculated is just slightly below the trading price as of December 31, 2009 of $56.54. The same holds true for the $54.72 value obtained using a 5-year growth rate of 8.5%.

9. Using the company's current earnings per share and the industry P/E multiple, estimate the value per share. Comment on whether this model is the appropriate model to consider.

P^sub 0^ = EPS (The Coca Cola Company) ? P/E multiple (Industry)

P^sub 2009^ = $2.93 x 17.23 = $50.48

Based on this model, the value of each share is only $50.48 compared with the current selling price as of December 31, 2009, of $56.54. This model would have been justified if the stock price performance of the company mirrored that of the industry benchmark. The Coca Cola Company's growth potential appears to exceed that of the industry, however. As a result, the estimated price may not accurately reflect the value of the stock.

10. How does the company's Coca Cola's stock price performance fare compared to its peers over the past five years.

On average, the Coca Cola Company has normally performed better than the market, the S&P500, and Pepsi. Until mid-2008, the company's performance was almost exactly aligned with that of the Dr. Pepper Snapple Group but the latter has fared better in 2009. The Nestle Company, which produces products other than beverages and is well diversified, has consistently outperformed Coca Cola.

Subject: Soft drink industry; Financial analysis; Case studies; Business valuation

Location: United States--US

Company / organization: Name: Coca-Cola Co; NAICS: 312111

Classification: 9190: United States; 3100: Capital & debt management; 9130: Experiment/theoretical treatment; 8610: Food processing industry

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 79-86

Number of pages: 8

Publication year: 2011

Publication date: 2011

Year: 2011

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 Equations

ProQuest document ID: 912512977

Document URL: http://search.proquest.com/docview/912512977?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 20 of 100

TRANSFORMING THE TEXAS PLANT

Author: Pryor, Mildred Golden; Humphreys, John H; Taneja, Sonia

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Abstract:

The primary subject matter of this case is organizational transformation, along with the leadership and management theories that are necessary for success. The setting is a Texas plant that builds good products but has many personnel and operations problems that need to be resolved rapidly if it is to be competitive in the short run and survive in the long run. The case has a difficulty level of three to six depending on the assignments. Therefore, it could be used in junior- or senior-level undergraduate courses or first year graduate courses in leadership, management, organizational behavior, high performance teams, and organizational transformation. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS9 NOTES CASE OBJECTIVES

The teaching objectives for this case are: (1) To facilitate discussions about the leadership and management concepts that are required in organizational transformation initiatives; (2) To help students understand that changes must become an integral part of the system of an organization if they are to exist long term; (3) To help students learn how and why people must be involved in order for them to deliberately positively impact organizational transformation from a process and systems perspective; and (4) To help students understand that there are tools such as Force Field Analysis that can be used in organizational transformation.

David, the vice president and top person at the Texas Plant, hired Paula as an organizational development (OD) manager without first discussing with his leadership team that the plant needed an OD manager for organizational transformation. Harvey, the HR manager, was particularly angry over this situation because Paula would report to him but do what David assigned her to do. Paula went to work immediately and began the organizational transformation process, also without involving Harvey or other members of David's executive leadership team. Harvey engaged Joe, the plant manager, to help him negatively impact Paula's transformation efforts.

Eventually, Paula reported to David, but Harvey had taken all but one of her employees. So Paula was frustrated that she could not achieve more success. After three years, Paula left the Texas Plant. Soon thereafter, David transferred to another plant within the company. With the changes achieved by David and Paula, the Texas Plant had become the best plant in the company. However, after David and Paula left, the numerous changes that they had made began to revert to the "old ways." The Texas Plant then became the worst plant in the company.

COURSES AND LEVELS

This case could be used in junior- or senior-level undergraduate courses or first year graduate courses in leadership, management, organizational behavior, high performance teams, and organizational transformation.

CASE DISCUSSION QUESTIONSAND ANSWERS

1. Should Paula resign? Answer: If David leaves the situation as it is (i.e., Paula has one direct report; and Harvey and Joe are still able to use their power to thwart Paula's attempts to help David transform the Plant), then Paula should resign. Her staying will not benefit her or the Plant.

If Paula submits her resignation, should David accept it, or should he ask her to continue in her position at the Texas Plant? What is best for the Texas Plant? What is best for Paula? Answer: David should accept her resignation unless he is willing to function as a transformational leader and ensure the positive participation of all who are on his leadership team. This would be best for the Texas Plant and for Paula.

What actions could David take to ensure success for the organizational transformation effort if Paula stays? Answer: David should remove Joe and Harvey from their positions or limit their power. He should return her 1 1 direct reports to her.

What actions should David take to ensure success for the organizational transformation effort if Paula leaves? Answer: Whether or not Paula leaves, the best solution would be to remove Joe and Harvey from their positions. Their replacements should be knowledgeable about, and experienced in, organizational transformation (Bass, 1990; Choi, 2006; Eldrod & Tippett, 2002; Humphreys & Einstein, 2003, 2004; Loup & Koller, 2005). Their leadership styles should be compatible with David's leadership style.

2. Discuss David's (the VP's) actions from the viewpoint of various leadership and management theories related to roles and responsibilities, organizational transformation, power, empowerment, high performance teams, trust, etc. Answer: If David expected his executive leadership team to be a high performance team (and to function as transformational leaders who were involved in transforming the organization), he should have included them in the decisions relating to the need for an organizational development expert and the hiring of the OD manager (Bass, 1985, 1990; Humphreys & Einstein, 2003; Katzenbach, 1997; Tichy & Ulrich, 1984). David and his leadership team should have discussed the roles and responsibilities of the OD manager and the extent to which she was empowered to make decisions and take action without first getting approval. He should have hired the OD manager at the executive team level and had her report to him. An HR director would have typically been heavily involved in the design and implementation of an organizational transformation initiative. If Harvey had proven himself untrustworthy and/or not capable of being involved in such an initiative, he should not have been HR director.

What were the positive and negative results of David's actions? Answer - Positive results were: The organizational changes happened fast because the OD manager was empowered to make decisions and take actions without waiting for approval. Members of the "old guard" were forced to confront change and at least minimally participate in the effort.

Negative results were: David allowed members of his executive leadership team (i.e., Harvey and Joe) to make negative impact on the plant and on the organizational transformation efforts. As a result, the changes were not made an integral part of the system for the long-term operation of the plant.

What should David have done differently? Answer: Organizational transformation should have been an integral part of strategic and tactical plans and the execution of those plans (Beer & Einstadt, 2000; Porter, 1985; Pryor, Anderson, Toombs, & Humphreys, 2007). It should not have been something that was given to one person (the new OD manager) as a job requirement. It should have been part of all managers' and non-managers' jobs. In the strategic plan, David and his leadership team should have developed and promoted the organization's common vision, mission, goals and objectives, strategies and tactics, and measurements of achievement (key performance indicators). The tactical action plans should have included communication and training plans so that all employees would understand the level and type of change that would be required and their respective roles and responsibilities. Perhaps David should have designated coaches and mentors to assist others with the transformation efforts.

David should have discussed with his leadership team why an organizational development person was needed, and he should have asked for their input. This is a matter of professional protocol and respect. In additional, by including his team members in the decision making process, David would have had more "buy-in" and cooperation from them when the OD manager came on board. David should have hired Paula at the executive leadership team level and had her report directly to him. David's desire to be a Power Leader was never fully realized because he let the Power Mongers (Harvey and Joe) disrupt the organizational transformation efforts (Pryor, Humphreys, Anderson & Taneja, 2009). He should have decided earlier how to stop Harvey's and Joe's negative impact on the plant and the organizational transformation efforts. He should have refused to let Harvey have 1 1 of Paula's people. He knew that she could not do the same organizational transformation job with 1/12 as many people. Also David should have involved his leadership team in planning for organizational transformation based on the contingency that he or any one of them might leave.

David and his leadership team should have learned and applied motivation theories as well as how to build high performance teams and a culture that supports organizational transformation (Cummings & Worley, 2009; Humphreys & Langford, 2008; Katzenbach & Smith, 1993; Stogdill, 1959).

3. Discuss Paula's (the OD manager's) actions from the viewpoint of various leadership and management theories related to roles and responsibilities, organizational transformation, power, empowerment, teams, trust, etc. Answer: Paula understood (and used) theories relating to organizational transformation, empowerment, etc. (Block, 1987; Burns, 1996; Cummings & Worley, 2009; Humphreys & Einstein, 2004). However, she violated some critical components of those theories. While David empowered Paula to make decisions and take actions, she reported to Harvey. She basically ignored Harvey and certainly did not treat him like he was her supervisor. She did not attempt to get buy-in from him or other members of the leadership team before she made decisions and took actions. Paula left prematurely.

What were the positive and negative results of the Paula's actions? Answer: She made changes occur by directly confronting the needs of the plant at the highest level (the leadership team) and vertically and horizontally throughout the plant. If she and David had stayed with the plant longer, they could have made the changes a part of the long-term survival of the plant. As it was, her leaving helped expedite the end of the changes and reverting back to the old ways and the old culture.

What should Paula have done differently? Answer: Paula should have asked David to make her position report directly to him so that she would be a peer with the members of David's leadership team. She should have communicated more (and better) with members of the leadership team and involved them in the decisions and actions that were required for organizational transformation (Lewis, Stephens & Weir, 2006). She should have made them part of the change process (Higgs & Rowland, 2005; Loup & Koller, 2005). Paula was a change agent, not the vice president. She should have sent out messages over David's signature indicating required changes in processes, systems, etc. Paula should have challenged Harvey when he took 1 1 of her people. She should have asked David to have the HR director move the 1 1 people with her when she was moved to report to David.

4. Discuss Harvey's (the HR Director's) actions from the viewpoint of various leadership and management theories related to roles and responsibilities, organizational transformation, power, empowerment, teams, trust, and organizational politics. Answer: It is possible that Harvey had shown himself not to be trustworthy or capable in some areas since David did not include him in any of the decisions relating to the organizational transformation effort, including the hiring of Paula, the OD manager (Humphreys & Einstein, 2004; Podsakoff, MacKenzie, Moorman, & Fetter, 1990). Another possibility is that David was aware of the negative results of Harvey's engaging in organizational politics with Joe, et al (Ferris & Kacmar, 1992; Ferris, Dwight, Galang, Zhou, Kacmar, & Howard, 1996; Miller, Rutherford, & Kolodinsky, 2008; Sussman, Adams, Kuzmits, & Raho, 2002).

What were the positive and negative results of Harvey's actions? Answer: There were no positive results. Harvey spent a lot of time blaming, whining, threatening, and taking other negative actions. The results were dramatic. David and Paula had to spend a lot of their time trying to counteract his negative actions. Paula left prematurely. Organizational changes were short term primarily because Harvey and Joe spent their time fighting Paula AND David.

What should Harvey have done differently? Answer: As HR director, Harvey knew that the organizational transformation initiative would work better if the OD manager reported directly to David. He should have made that happen when Paula was hired. Harvey should have stepped up to the challenges presented by the organizational transformation initiative. He should have offered to help David and Paula with the design and implementation of changes. He should not have solicited Joe's help in rejecting Paula and her efforts. He and Joe should have been loyal to David, their boss, and to the initiatives to improve the plant.

5. Discuss specific leadership and management concepts relating to this case, including, but not limited to, transformational leadership, change management, organizational transformation, organizational politics, roles and responsibilities, unity of command, strategic management, and high performance teams. Answer: Students should research each of the terms and provide answers based on their research. References should be utilized. A reference list is provided. It is not all inclusive, but it is an excellent starting point for students conducting research on various leadership and management topics.

GENERAL DISCUSSION

This case can be used to teach leadership and management concepts which would be required for organizational transformation to be successful. Organizational transformation is a strategy so it should be integrated into the organization's strategic plan, and tactical action plans should be developed (Beer & Eisenstat, 2000; Pryor, Anderson, Toombs, & Humphreys, 2007). Even in a situation where transformation is required, roles and responsibilities should be clearly defined. In addition to the previously mentioned problems, there were clearly communication issues as well as structural, chain of command, and unity of command issues (Fayol, 1949, 1955). The leadership team, particularly those reporting directly to a vice president should have all been briefed in advance in terms of the new OD Manager's level of empowerment. In fact, the best scenario would have been that the members of the executive leadership team would agree on the need for organizational transformation and the need to hire someone to assist with it. The new OD Manager was hired to be a change agent. When the change/transformation is going to be organization-wide, the change agent should report to the top person in the organization. So Paula should have reported to David from the beginning. Harvey could have been an advocate for the transformation if this issue had been handled correctly.

However, David apparently did not trust all members of the leadership team (particularly Harvey), so he did not adequately inform them or include them in decisions. Trust is essential if an organization is going to positively transform and continue its transformation over the long term (Cummings & Worley, 2009; Humphreys & Langford; Loup & Koller, 2005). The transformation was so dependent on David and Paula that when both of them left, the organization reverted to its old ways and became the worst plant in the company. Organizational transformation should be achieved by changing systems and involving the people who manage the systems in the transformation efforts. That way, those people will buy into the changes and help them succeed over the long term.

Harvey was clearly aligned with Joe, the Plant Manager, not David, Joe's boss. As a result, they not only did not implement David's ideas, they actively fought against the implementation. There were obvious needs for team building at the executive leadership team level and perhaps vertically throughout the departments and lower level organizational units in the plant (Katzenbach, 1997). It will be difficult to re-energize the organizational transformation effort, but it will be necessary for this plant to survive.

Power leaders perpetuate the constructive use of power (Pryor, Humphreys, Anderson & Taneja, 2009). They use their power for positive purposes and service to others - their employees, their organizations, their communities, their nations, their churches, and society in general. David wanted to be a Power Leader, and he had the capability to be one. He cared about the management and non-management people in the plant, and he wanted the best for all of them. Also David liked what Paula had accomplished and he supported her initiatives. However, he never directly confronted Harvey. David could have stopped Harvey at any point, but he did not. David's failure to exercise his own power allowed Harvey to continue to threaten Paula and misuse and abuse power. As a result, Paula resigned. As Paula left, she encouraged David to take control of his plant, to put a stop to the negatives things that Harvey and Joe were doing to counteract David's positive leadership.

EPILOGUE

Two weeks after Paula left, David sent the Joe, the Plant Manager back to corporate. However, it was six more years before Harvey was forced to leave. David transferred to a plant in another state, and the Texas plant went from best to worst in the company. The corporate Human Resources vice president came down, stayed a week at the plant, fired Harvey, and put an interim HR Director in place. Whether the Texas plant will ever be the best again is not known at this time. What is known is that Harvey, someone whom Paula believed to be a power monger, is gone from the plant. Perhaps now, Power Leaders will step up and use power in positive ways.

STUDENT ASSIGNMENTS

1. Students should conduct research and answer the case questions, citing references. A reference list is provided. It is not all inclusive, but it is an excellent starting point for students conducting research on various leadership and management topics.

2. In teams of 3 to 5 people, students should also do the following:

a. Develop a list of what needs to be done to re-energize the organizational transformation effort.

b. Develop a force field analysis chart on the situation as described for the Texas Plant at the end of the case. The teacher can teach force field analysis or ask students to individually (or as a team) conduct research on force field analysis as well as other strategic and tactical tools that may be used in organizational transformation initiatives. When you know your current situation (A) and you want to change to another situation or desired state (B), Force Field Analysis can be used to determine existing forces in the environment which can assist or inhibit as you try to move from A to B. see Source : Mildred Golden Pryor, J. Chris White, and Leslie A. Toombs (2007, 1998). Strategic Quality Management: A Strategic Systems Approach to Continuous Improvement. USA: Cengage Learning (South-Westem Publishing).

Subject: Leadership; Management theory; Competitive advantage; Organizational behavior; Case studies

Location: United States--US

Classification: 9190: United States; 9130: Experiment/theoretical treatment; 2500: Organizational behavior

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 87-98

Number of pages: 12

Publication year: 2011

Publication date: 2011

Year: 2011

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

ProQuest document ID: 912512768

Document URL: http://search.proquest.com/docview/912512768?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 21 of 100

CHANGING AUDITORS-THE CASE OF CALLAWAY GOLF COMPANY AND ITS FOUR DIFFERENT AUDITORS IN ONE YEAR

Author: Hunt, Allen K; Reed, Brad J; Sierra, Gregory

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Abstract:

What circumstances induced a well known NYSE traded company to employ four different auditors in the span of approximately one year? The principal event in this case is a disagreement between Callaway and the auditing firm of KPMG Peat Marwick (KPMG) over the interpretation of and accounting treatment for certain transactions. Although most companies and auditors go to great efforts to keep any accounting dispute private, both Callaway and the previous auditor in this case made the details of their dispute public, providing the public with interesting details on a dispute between a company and its auditor and how accounting standards are often open to different interpretations. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS9 NOTES RECOMMENDED TEACHING APPROACHES

The case works well if the instructor provides some historical background for why Callaway chose to switch from their first auditor (PricewaterhouseCoopers). Begin the discussion with the fact that in the early 2000' s there were a series of large-scale accounting frauds and audit failures in the United States. This led to a widespread belief that auditors may have lost their independence and objectivity. Some companies began to change auditors voluntarily in an effort to bring in an auditor that did not have a close relationship with management. Companies felt that a new auditor would be more independent and objective. This was the case with Callaway. The first auditor change that led to the multiple auditor changes was a voluntary auditor change started by the company in an effort to strengthen the company's corporate governance. At this point ask the class how they believe the market would view a company's voluntary auditor change in this circumstance. Most students believe that the market would view this type of change as positive.

Since Callaway's second auditor was Arthur Andersen, the students normally find it interesting to discuss a little about the Arthur Andersen case involving Enron and how this case led to the demise of Arthur Andersen.

It is important to note that historically it has been uncommon for a company to change its auditor. However, due to complaints regarding poor audit quality and the passing of the Sarbanes-Oxley Act (2002), auditor changes have become more common. Since 2002 6,500 companies have changed auditors, which represents just over half of the public companies in the United States (Grothe & Weirich, 2007).

This case has been tested and found to work well as an assignment (memo) that students prepare outside of class and then bring their memo to class to use in a discussion format. Questions that the student can be asked to address in the assigned memo are detailed in the following section along with suggested answers to the questions. The case is also sufficiently succinct to be presented by a professor in one class section and used as a discussion vehicle for teaching auditor changes.

KEY ISSUES FOR DISCUSSION/STUDENT ASSIGNMENT

1. What are some of the reasons a company may change auditors?

Companies are free to change auditors at anytime with no specific reason required. Possible reasons that companies may change auditors are:

* Companies may be dissatisfied with audit quality because they believe the audit firm's staff is inexperienced or incompetent or provides poor customer service. Some auditors have acquired specialized industry knowledge and a company might change to an industry specialist.

* Companies are always looking for way to cut costs. The company may be able to obtain lower audit fees by changing auditors.

* A company might switch auditors if it disagrees with an accounting treatment that the auditor is requiring.

* If a company has grown so large that the current auditor cannot effectively audit them, the company might switch to a larger auditor.

* Callaway switched from PricewaterhouseCoopers LLP (PWC) who had been the company's auditor since Callaway's IPO, in June 2001 because Callaway's audit committee believed that having a new auditor would enhance the auditor's independence.

* Subsequently in March 2002, Callaway dismissed Arthur Andersen due to concerns about the future of Arthur Andersen.

* In December 2002, KPMG was dismissed due to a disagreement over the warranty liability accounting treatment.

2. Why would a company feel that a new auditor might be more independent than the company's current auditor with whom the company has a long-term relationship?

Auditors must be independent and exercise professional skepticism when auditing a client. Over time the level of an auditor's independence and professional skepticism can be weakened due to the ongoing relationship with the client. Some efforts to minimize the risk of decreased independence were made with the Sarbanes-Oxley act that requires mandatory auditor partner rotation. The instructor may wish to discuss with students that some countries require mandatory audit firm rotation. PricewaterhouseCoopers LLP had been Callaway's auditor since Callaway's IPO.

3. Callaway dismissed KPMG regarding a disagreement over an accounting estimate. What do the auditing standards require of an auditor regarding auditing an estimate?

Auditing Estimates in the financial statements is covered by the Public Company Accounting Oversight Board's (PCAOB) interim auditing standards section AU 342, Auditing Accounting Estimates (available at www.pcaob.org), for non-public companies the relevant guidance is found in Statement on Auditing Standard No. 57). AU 342 requires the auditor to evaluate the reasonableness of the accounting estimate. The reasonableness of the estimate can be audited by using one or more of the following steps:

* Review and test the process used by management to develop the estimate.

* Develop an independent expectation of the estimate to corroborate the reasonableness of management's estimate.

* Review subsequent events or transactions occurring prior to the date of the auditor's report (AU 342, par. 10).

4 What is the relevant section of GAAS that discusses a change in auditors? What does GAAS require of the new auditor when there is a change in auditors?

The auditing standards have specific guidance regarding the steps an auditor must take when there is a change in auditors. Section AU 315 of the PCAOB' s interim auditing standards, Communications Between Predecessor and Successor Auditors (available at www.pcaob.org), for non-public companies the relevant standard is Statement on Auditing Standard No. 84, sets guidelines for the required communication between predecessor and successor auditors. As AU 315 states,

"...inquiry of the predecessor auditor is a necessary procedure because the predecessor auditor may be able to provide information that will assist the successor auditor in determining whether to accept the engagement..."

AU 315 facilitates the communication of this essential information by requiring "specific and reasonable inquiries" of the predecessor in matters that may affect the successor's decision to accept the engagement. Specifically, the successor auditor must inquire as to:

* Information that may bear on the integrity of management.

* Disagreements with management as to accounting principles, auditing procedures, or other significant matters.

* Communications to audit committees or other equivalent authority and responsibility regarding fraud, illegal acts by clients, and internal control related matters.

* The predecessor auditor's understanding about the reason for the change of auditors (AU 315).

5. What is a Form 8-K. What is its purpose? What are the rules regarding 8-K' s when there is a change of auditors?

A Form 8-K is required whenever current events affecting a company occur and are too material to wait till the end of the financial reporting period. The purpose of an 8-K is to provide useful information to investors and creditors on a timely basis. When a public company decides to change its auditor, it must file a Form 8-K with the SEC. The Form 8-K has to be filed within 4 days after a company changes its auditors, or it risks SEC sanctions. The appointment of a new auditor and the firing of the old one are separate events that have to be reported on separate 8-Ks even if they occur at the same time. The company must state the reasons for the dismissal of their previous auditors. Once the auditor responds to the 8-K filed by the company, the company files another 8-K with the auditors' responses attached to it. According to SEC Regulation S-K, Item 304(a) the following information must be reported on the Form 8-K:

* Whether the accountant resigned, declined to stand for reelection or was discharged (one of these must be specifically stated in the filing);

* The date of resignation or discharge;

* Whether the decision was recommended or approved by the Board of Directors or a committee thereof;

* Whether the accountant had issued a report in the last two fiscal years containing a disclaimer or adverse opinion, or that was qualified or modified. A modified opinion includes an opinion that expresses substantial doubt about a company's ability to continue as a soins concern:

* Whether in connection with audits of the two most recent years through the date of resignation or discharge there were any disagreements with the former accountant on any matter which, if not resolved to the satisfaction of the accountant, would have caused the accountant to make reference in its report to the matter. Among other items specified in S-K 304(a)(l)(iv), the filing should describe the subject matter of any such disagreement. Disagreements required to be reported include both those resolved to the satisfaction of the accountant and those not resolved to the satisfaction of the accountant.

* If there were any reportable events described under S-K 304(a)(l)(v) during the two most recent years and any interim period preceding the former accountant's resignation or discharge, provide the disclosures required by S-K 304(a)(l)(iv). If the event led to a disagreement, then it should be reported as described under Section 4510.2(e) and need not be repeated.

The instructor may find it useful to look up the Callaway 8-K dated December 12, 2002 on the SEC website to present in class which contains the following quote. It appears that Callaway and KPMG tried to reconcile their differences, even consulting with SEC on the matter, before KPMG was dismissed.

"In the third quarter of 2002 the Company completed a review of its warranty reserves, and concluded that a reduction of approximately $17 million was warranted. This non-cash adjustment would result in an increase to the Company's income in the period in which the adjustment is taken. While KPMG did not object to the magnitude of the reduction, management and KPMG could not agree on the proper period or periods in which to record the adjustment. Management believed that the reduction was the result of a current change in the estimation process, and that therefore the entire reduction should be reflected in the third quarter. KPMG ultimately advised the Company that a substantial portion of the reduction related to periods prior to 2002, and the Company's financial statements for prior periods should be restated for a correction of an error to reflect the warranty reserve based upon the best information available to the Company at the time those prior period financial statements were prepared. Despite lengthy discussions between management and KPMG, including consultation with the staff of the Securities and Exchange Commission, management and KPMG could not reach agreement on a proper accounting treatment" (p. 2).

Subject: Stock exchanges; Auditors; Accounting standards; Case studies

Classification: 9130: Experiment/theoretical treatment; 4130: Auditing; 8130: Investment services; 3400: Investment analysis & personal finance

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 99-104

Number of pages: 6

Publication year: 2011

Publication date: 2011

Year: 2011

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

ProQuest document ID: 912512871

Document URL: http://search.proquest.com/docview/912512871?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 22 of 100

ALIBABA: CHANGING THE WAY BUSINESS IS CONDUCTED IN THE INFORMATION ECONOMY

Author: Barczyk, Casimir; Falk, Gideon; Feldman, Lori; Rarick, Charles

ProQuest document link

Abstract:

The Chinese company, Alibaba, is changing the way global business is conducted. This fast growing B2B company has benefited from the explosion in information technology and has developed a unique business model. This case examines Alibaba's success and how the company is unique from most Western companies. With the explosive growth of Alibaba in China, the company is now ready to expand to the rest of the world. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES RECOMMENDATIONS FOR TEACHING APPROACH

This case explores the activities, values, and strategy of the Alibaba Group - an impressive and rapidly growing Chinese company. Alibaba and its founder, Jack Ma, seek to change the way business in conducted and to improve the competitiveness of small and medium sized businesses worldwide. While the company is Chinese in origin, it has expanded into a number of other countries with its unique approach to business. The case is diverse enough to be of value to many different types of courses.

Teaching Objectives and Target Audience

This case has a number of objectives, including introducing readers to a unique Chinese business. The case examines an innovative company, business model, and set of corporate values that are instructive in developing a more global view of business. With the rise of Chinese businesses in the world, the case seeks to have readers explore the differences in approaches found between this organization and the typical approaches found in the West. In addition, the case seeks to have readers think critically about the future of international business and how different cultural values may change global strategies.

The case is written primarily for an undergraduate audience; however, it could have usefulness in some graduate courses as well. This case is perhaps most useful in courses covering international business issues (i.e., international business, international management and international marketing); courses in strategic management; and courses in e-commerce and B2B. While the case is primarily targeted toward the audience in an introductory international business course, it would be a good supplement to many courses that touch upon global business issues and information technology.

Teaching Approach and Strategy

This case can be used in a number of different ways. The case is appropriate for general class discussion, group project assignments, or as individual homework. While a number of approaches are appropriate for the case, it is probably most useful when students have the opportunity to discuss their analysis in an open forum. The case addresses questions that are best explored through interaction with individuals having differing viewpoints. A discussion of the appropriate ranking of organizational stakeholders, for example, can lead to a rich exchange of ideas.

Since the company is evolving rapidly, it might be useful to have students research any changes that have occurred since the case was written. An investigation of changes could provide additional discussion and learning opportunities.

While the authors have provided discussion questions thought to be most important to the case, users should feel free to add any additional questions they think would be helpful to students in the courses they are teaching. Students in various courses may benefit from different questions, especially those in courses that are more technology-oriented.

ANALYSIS

Possible answers to the discussion questions can be found below. While these are the recommendations of the case writers, they are not intended to be the definitive answers to questions.

1. What do you think of Jack Mafs priority list which places shareholders last? Do you think this approach will work if he seeks capital outside of China? Explain.

The approach of Ma is quite unique, especially from a Western perspective. Maximizing the value of the firm and increasing shareholder wealth are standard objectives of most companies. This approach is influenced by cultural values. While Ma and the Alibaba Group seek to increase the success of the firm and its market capitalization, it is a long-term perspective that makes the difference in the priority ranking. Chinese culture has historically had a long-term perspective, or long-term orientation (LTO) according to Hofstede. When Ma says that he wants "shareholders" and not "share traders" he is emphasizing the fact that investors should be in it for the long-term if they associate with the Alibaba Group. It could be reasoned that by putting customers first and employees second in the priority list, the company will prosper and shareholders will be long-term beneficiaries. While reducing membership fees during difficult economic times may decrease short-term profitability, the long-term effect of such a move may be quite different.

If Ma eventually seeks capital outside of China (trading on the Hong Kong exchange does attract some outside investors) he will face some resistance to his approach. Western investors, who have a short-term orientation and concern themselves with daily price valuation, may not appreciate Ma's long-term thinking. As the company continues to develop and mature, a longer track record will emerge, which may change the mind of some investors.

2. What are the unique components of Alibaba's business model/strategy?

Alibaba has several unique aspects to its business model/strategy. The following list represents some of those unique aspects, which can be explored in more detail through classroom discussion.

A. Company goal: Facilitate export by medium and small businesses, especially Chinese firms, in order to provide more jobs to the Chinese people. Ma's focus is on helping smaller firms that do not have the resources to promote their products.

B. Focus on and facilitate B2B transactions

C. Use of IT to expedite international trade

D. A collection of inter-related firms

E. Long term perspective

F. Put the customer before the shareholders

G. Stakeholder philosophy: customers, employees, shareholders

H. Intimate knowledge and understanding of the Chinese market

3. Many successful companies have controversial or provocative names such as Caterpillar, Gap, Virgin, and Yahoo. In what way is the name Alibaba controversial? How does this name advance Alibaba Group's strategy?

The name Alibaba is controversial because it connotes some negative images. The idea of thieves, killing, and deception are interwoven into the 18th century tale of "Alibaba and the Forty Thieves". Consumers doing business with Ma's company view these negative images in a positive way. The name is a provocation because customers do not take the name literally. This happens because the name maps to the positioning point of the brand. The negative images associated with the name give it greater depth. By using a slice of the connotative images associated with the word "Alibaba", and mapping that slice to a portion of the company's positioning, the word becomes redefined. So now, when customers hear the name Alibaba they think of gold, caves, opportunity, and a smart woodcutter who helped his village. The gold, of course, is symbolic of the money to be made when doing business through Alibaba.com. The cave (the place where the gold was hidden in the original tale) is a metaphor for untapped B2B opportunities available to small and medium size businesses registered with Alibaba. The woodcutter becomes a symbol for businesses that see opportunities to make money using the power of networking afforded by this Chinese B2B organization.

The provocative name Ma selected for his firm advances the corporate strategy of the Alibaba Group because it is not a typical Chinese name. But it is one known to people from many cultures and is nearly globally identifiable. Most people have heard and can spell the name. They associate it with the tale. Any negative power connected with the word Alibaba (because of its connection to thieves) is forgotten because people do not interpret the word literally. The connection between gold and Alibaba, as well as the village woodcutter who seizes the gold, symbolize the core activities of Jack Ma's firm. The name is provocative for a company engaged in bringing businesses together because it is not linear or obvious, i.e., it does not include words such as "networking" or "connections". Alibaba is a folk tale character who works hard to help his village, just like the Alibaba Group that helps make fortunes for its registered members. Consumers do not usually deconstruct names in a literal or a negative way. Rather, they interpret them in a context defined by the brand. Caterpillar, for example, is an effective name in the earth-moving equipment industry because the name is a provocation. The company name is not "Elephant" or "Bull" or anything else that is obvious. Caterpillars are tiny insects that are easily squashed and weak by nature. Yet Caterpillar, as a company name, is one of the most engaging in the earth-moving industry.

4 How would you assess Alibaba Group's reaction to Google's conflict with the Chinese government over its censoring of search engine results?

Google considered closing its China offices following the cyber attacks by hackers in China. This is significant because it set off an alarm to an Internet-connected public that is the world's largest at 384 million people. Google hopes that it can persuade the Chinese government to agree to changes that would enable its website in China to show uncensored search results. At present, Beijing requires Internet traffic to pass through gateways that are controlled by the government. Those gateways block access to material deemed pornographic or subversive by the Chinese government. Google's China-based site excludes from its search-engine results any foreign websites to which access is blocked by the government.

Alibaba sharply criticized Yahoo when it said that it is "aligned with Google" in condemning the cyber attacks experienced by Google and 34 other companies by hackers in China. Yahoo supported Google in its conflict with the Chinese government because of its owners' Western values. Alibaba, an e-commerce B2B company, in which Yahoo owns a 40% share, stated that Yahoo's position was reckless and based on insufficient facts. The position of the Chinese government is clear. They want to control information disseminated over the Internet. This amounts to censorship. Google does not want its search results censored by the Chinese government or anyone for that matter.

In 1999 Yahoo was one of the first foreign Internet companies to become established in China. This was in part due to the friendship between Jerry Yang, co-founder of Yahoo, and Jack Ma. The relationship enabled Yahoo to experience accelerated growth in China. In 2005 Yahoo paid $1 billion and handed over its Chinese operations to Alibaba in return for a near 40% equity stake in the company. Yahoo benefited from this investment in that Alibaba Group, which owns Alibaba.com, has a current net worth of several billion dollars.

Among other things, Yahoo is concerned with its image when it comes to protecting client privacy. Yahoo's management suffered public backlash over its decision to hand over information to the Chinese government that resulted in the imprisonment of Shi Tao and another dissident. Mr. Yang personally apologized to the families of Shi Tao and the other person for Yahoo's providing personal email information to Beijing. The late Tom Lantos, a congressman from California, sharply criticized Yahoo's management saying "while technologically and financially you are giants, morally you are pygmies." Yahoo did not want a repetition of this public relations disaster and it aligned itself with Google against the Chinese government on the issue of censorship.

Alibaba, wanting to do business in China, and interested in appeasing bureaucrats in Beijing, took issue with the position of Yahoo and Google on the matter of censorship. When queried, Alibaba clearly stated that it would cooperate with the Chinese government in any future conflicts. Jack Ma's position is that he is not a political group. He is a businessman. The Google issue has strained relations between Yahoo and Alibaba. Where the relationship will go in the future is unclear. Had Alibaba supported Yahoo, it would likely be out of business in China.

5. Do you think the future of international business will change as more people become familiar with the Alibaba business model? Explain.

As technology improves, it makes it easier to communicate and to conduct business internationally. The ability to communicate with foreign suppliers in real time, to remotely view their operations, and to receive product samples quickly can change the way international business has traditionally been conducted. For example, it is conceivable that the importance of trade shows and foreign plant visits may be reduced as technology continues to improve. With the assurances provided by Alibaba concerning the reliability of its suppliers and the ability of buyers to remotely assess their potential business partners, more international business may be conducted through the Internet than in person. Alibaba's approach, with its emphasis on SMEs also has the potential to level the playing field internationally. Companies that previously had little opportunity to engage in international business activity now have an international storefront and can offer their goods to the world. The overall changes in trade practices associated with the Alibaba model may be more virtual international business interactions and a far greater field of international players.

Subject: Project management; Business models; International business; Case studies; Information technology

Location: China

Company / organization: Name: Alibaba Group; NAICS: 519130

Classification: 9130: Experiment/theoretical treatment; 9179: Asia & the Pacific; 2310: Planning; 5220: Information technology management

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 105-109

Number of pages: 5

Publication year: 2011

Publication date: 2011

Year: 2011

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: 912512973

Document URL: http://search.proquest.com/docview/912512973?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 23 of 100

A SYSTEMS ANALYSIS, DESIGN, AND DEVELOPMENT CASE STUDY: WILLIAMS BROS. APPLIANCES INVENTORY & POINT-OF-SALE SYSTEM

Author: Fox, Terry L

ProQuest document link

Abstract:

Dr. Thomas Waggoner, an information systems professor at the local university, has just received a phone call from his friend, Ted Williams, co-owner with his brother Will of Williams Bros. Appliances in River Falls, Iowa. Ted is extremely frustrated with their current slow, manual method of processing sales and tracking inventory, and is afraid that they are losing sales because of it. Ted explains what he needs and Dr. Waggoner thinks that this will be a great project for his students. He makes an appointment with Ted to get a better understanding of the initial requirements. He then begins organizing the students in his Systems Analysis and Design class and his capstone class in System Development to see if they can develop a solution for the Williams Bros'. [PUBLICATION ABSTRACT]

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TEACHING NOTES CASE PURPOSE/OBJECTIVES

The purpose of this case study is to provide an opportunity for students to apply systems analysis and design theory and modeling techniques in a semi-realistic environment. Furthermore, it offers students in a system development course an opportunity to experience a situation very similar to what they might see in a consulting engagement. The interview notes and supporting documents provided in the case offer an added sense of reality.

METHODOLOGY

This case is based on the author's own consulting experiences. The system was developed for an appliance store very similar to the one discussed, the names and identifying information having been changed. This particular consulting engagement offers students a small but realistic opportunity to analyze, design, and develop an inventory and point of sale system for an organization that should be somewhat familiar to them. This case study has been used by the author in a systems analysis and design course with great success.

TEACHING SUGGESTIONS

This case is designed to be a major project for the semester. In my systems development courses a group of 4-5 students would work on a project of this size for most of the semester, with the requirement that it had to be completed in order to receive credit for the class. This type of course is typically the capstone for graduating seniors, and as such they would have taken systems analysis and design, programming, and database courses. For a systems analysis and design course, the project could be introduced around mid-semester, after process and data modeling have been discussed, and assigned to a small group of students to complete. Once the topic of interface design has been presented, the students could proceed to incorporate these concepts into the project. This case is most appropriate at the undergraduate level, but could certainly be applied in a graduate-level systems analysis and design course.

For both the systems analysis and design course and the systems development course, an additional requirement could be to develop an initial project plan, schedule, and budget to incorporate project management techniques. A good suggestion is then to have the students record their actual time spent working on various tasks on a prepared time sheet, and on a regular basis compare the actual progress against the plan. At the completion of the project the students could include an assessment of the variances in their pre- or post-implementation review. This review is very useful to the students in that it gives them an opportunity to think back over the project, critique the work that was done, identify things that went well and which they can apply to subsequent projects, and also identify areas where problems occur in order to analyze the causes and hopefully prevent their reoccurrence. Items often discussed include group dynamics, scheduling issues, work assignments, tools used, etc.

For instructors of the systems development course in particular, two significant personal requirements are strong technical skills and good project management ability. Most likely, there will be several different projects being worked on by various groups; the instructor must have the ability to act as a program manager over the projects, and must be able to help solve the technical issues as they arise.

PROPOSED SOLUTION

The suggested solution provided is for an object-oriented approach, but can be modified for a traditional approach to systems analysis and design. Suggested Use Case Diagram, Class Diagram, and example User Interface designs are provided below.

CONCLUSION

This case study offers students a unique opportunity to apply the concepts and techniques learned in systems analysis and design to a realistic and reasonably-sized project. For systems development students it provides the opportunity to completely develop a working system for a relatively common environment while still offering challenges that require drawing on skills learned in analysis and design, database, and programming courses.

Subject: Point of sale systems; Appliance industry; Inventory management; Systems analysis; Case studies

Classification: 9130: Experiment/theoretical treatment; 5330: Inventory management; 8650: Electrical & electronics industries

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 111-116

Number of pages: 6

Publication year: 2011

Publication date: 2011

Year: 2011

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 Illustrations

ProQuest document ID: 912512798

Document URL: http://search.proquest.com/docview/912512798?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 24 of 100

THE INVESTMENT

Author: Elrod, Henry

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Abstract:

Nita Beth and her husband David are middle-America, middle class college graduates with some sophistication in investing. They are confronted by the need to invest for the future, and the opportunity to make an investment with high potential returns. Jacob is dying, and needs cash for his medical expenses. He has life insurance, but how can he get the cash he needs now? A viatical settlement transaction may be the answer for these people. Or, is it? [PUBLICATION ABSTRACT]

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INSTRUCTOR'S NOTES THE INVESTMENT

The epilogue to the case is that, as happened in many viatical settlement investments, the seller Jacob got the $70,000 he needed, but more important, he got the benefit of great advances in the treatment of HIV/ AIDS, and is still living over a decade later. The investors, David and Nita Beth, ultimately lost their investment, as the viatical settlement pool was unable to continue paying the premiums on the policies purchased for the investors, let the policies lapse, and failed.

Students should consider the information following in their analysis of this case. Here are optional discussion questions:

1. Do you think David and Nita Beth should make this investment? Why, or why not?

2. Should Jacob sell his insurance? Who is affected by his decision? What other alternatives should he investigate?

3. Prepare a presentation or report to support your answers to 1 and 2. Consider the investment from the point of view of the seller as well as the buyer, and report on the tax, insurance, investment, and ethical aspects of the transaction, and how these aspects support your recommendation for David and Beth, and for Jacob.

4. David and Beth were introduced to the investment by advisors who were not investment professionals (a life insurance agent and his next door neighbor, a real estate agent. What steps could they have taken to improve their chance of getting sound professional investment advice?

TAX.

Students should discover that the proceeds of the death benefit of a life insurance policy are not taxable income to the beneficiary. They should also discover that there are restrictions on the investments that can be made in an IRA or 401 -K that may cause the income from the viatical settlement investment to lose its character and become taxable income. Whether the benefit is taxable to the buyer upon the death of the insured depends on the status of the viatical settlement provider under IRS Reg. § 101(g)(2)(B) and the status of the insured under IRS Reg. § 101(g)(4)(A) and IRS Reg. § 101(g)(4)(B). Revenue Ruling 2002-82 explains the requirements that viatical settlement providers who own the life insurance contracts from which death benefits are paid, and that the insured who sells the contract, must meet to enjoy the exclusion from income of the proceeds of the sale and the proceeds of the policy upon the death of the insured. Generally, under Section 101(a)(1) of the Health Insurance Portability and Accountability Act of 1996, the amounts received under a life insurance contract by reason of the death of the insured are excluded from gross income (IRS, 2002).

Normally, the sales price paid to the insured selling the policy is considered a death benefit under the policy for tax purposes if the seller is certified by a Doctor to have 24 months or less time to live, i.e., the seller must be terminally ill (APLA, 2008). For those only chronically ill, where death might occur in five years or less, for instance, the payment to the seller can be taxable, depending on the type of policy and the relationship of the settlement payment to the cash value and death benefit before and after the transaction. The relationship of the total premiums paid to the cash value and to the death benefit before and after the transaction, will determine whether the income from a life settlement for a chronically ill seller is taxed at capital gains rates or as ordinary income, or both.

The seller should also consider whether the receipt of a lump sum settlement, which will count as income whether taxable or not, might affect their eligibility for SSI and/or Medicaid payments (APLA, 2008).

FINANCIAL AND INVESTMENT.

Once invested in viatical settlements such as the one Nita Beth and David bought, investors cannot easily get their cash investment back. Viatical settlements are not considered liquid investments, as there is no functioning market for these products, and the syndicator or pool manager may be unwilling or unable to buy an interest back. From an investment perspective, students should be expected to understand the fundamentals of how life insurance works, and be able to select an appropriate discount rate to use in the present value calculation. The important issue is the time to the maturity of the policy. Students could use health statistics on various cancers and HIV/ AID S to estimate probabilities for survival periods of less than five years, six to ten years, and so on, and use these probabilities to estimate a probability weighted time to maturity to use in the present value calculations. Students can also attempt to add or subtract from the basic discount rate to account for various extraneous risks, such as the risk that a cure will be found, the risk of suicide (in which the policy would not pay in the first two years) and so on. (See also section on investment advice.)

FRAUD.

Sophisticated investors should be aware of the possibility of fraud. Sources such as the American Association of Retired Persons (AARP, 2002), and the National Association of Insurance Commissioners (NAIC, 2004) have useful viatical settlement anti-fraud information available on the Internet. Typical frauds might resemble Ponzi schemes, where skeptical diligence with respect to the existence of and terms of the insurance policies and diligence with respect to the financial and ethical history of the promoter would serve an investor well. The AARP web page was set up to provide information to members about the pitfalls of investing in viatical settlements. The chief problems they described included (a) improved medical care that extends the lives of the insureds, (b) the potential for fraud in that the insured and/or the policy might not exist, (c) the policy may have been sold to others, (d) the viatical settlement company may go out of business or otherwise fail to pay the premiums, and (e) that the insured's heirs may contest the changes to the policy beneficiary.

The insured has to die to generate the insurance death benefit, and even then, several things may happen that could reduce or eliminate the payout. First, as an investor through a pool arrangement, you do not know the names of the insureds, and you do not have any first hand information about them or their insurance policies, as you have to rely on the pool syndicator. Are they really sick? Are the policies as advertised? Do the insureds actually exist? The policy interests may have been sold to too many investors. There is great potential for fraud in these arrangements.

INSURANCE.

In a principles class, the case could be used as the starting point for discussion of the terms of various life insurance products, and for an understanding of the economic model of the insurance industry. Additionally, the NAIC has a model Viatical Settlements Act that could be incorporated (NAIC, 2004). The insurance issues are not clear. Is a viatical settlement an insurance product? The answer depends on where the transaction takes place. States regulate their own insurance industries, and there are substantive differences from state to state. Certain tax treatments require the settlement company to be licensed by the state with jurisdiction, but only if the state requires a license to deal in viatical settlements ("Health Insurance Portability and Accountability Act," 1996).

RISK ANALYSIS.

Another consideration in any investment is an evaluation of the relationship of potential reward to the apparent risk involved in the investment. Risk is perhaps widely misunderstood, and the term is used in every day conversation. People talk of a risky foreign policy, the risk of catching the flu, and the risk associated with securities as though the term meant the same thing in every context. With regard to investments and securities risk is the standard deviation of all the probable or expected returns over a given period of time, or as Sharpe (2005) put it, the uncertainty associated with the end value of an investment. If the distribution of returns is normal (a condition facilitated by a large number of trials), an investment will offer a range of returns for which the moderate returns are numerous and the extreme returns are few. Thus, investments that entail a potential for a very high reward will include a potential for complete or nearly complete loss, leading to the more common observation that if it sounds too good to be true, it probably is. By definition, investments with high potential reward are high-risk.

OTHER CONSIDERATIONS.

Assuming there is no fraud in the investment scheme, there are still problems that can arise, that students should consider. For instance, the insured's' relatives who were the original beneficiaries of the policies may not be aware of the sales of the insurance policies, and they may contest the sales, claiming the death benefits for themselves. Another problem is that the tax treatment expected may not be available. David rolled over his police retirement account to an IRA, but IRC 408(a)(3) says IRA funds may not be invested in insurance contracts. Even worse, it is possible that the insurance company could go out of business before the insured dies. Most states have guaranty funds to help policyholders when insurance companies fail, but they may not pay one hundred cents on the dollar.

For older investors, the insured may out-live the investor. Even if that does not happen, investors like David and Nita Beth should have considered that advances in medicine, as have occurred in the treatment of HIV/ AIDS, may come along that increase the lives of the insured, who like Jacob, may still be alive today. This delay in the payout of the investment may reduce the anticipated return to a much lower figure than anticipated. Worse for the investor, the pool may have to pay the life insurance premiums far longer than anticipated, and the pool may run out of money and fail.

ETHICAL CONSIDERATIONS.

Trinkaus and Giacalone (2002) discussed the ethical aspects of viatical settlements, as opposed to an economic analysis of the transactions in which the ownership of a life insurance policy is transferred to an investor who does not have a traditional insurable interest in the insured. They raise three important issues. First, as noted, the viatical settlement transfers the life policy to an owner without an insurable interest in the insured, thus creating a conflict of interest. For the investment to be successful, the new owner must hope for the early demise of the insured, contra to the interests of the insured and the interests of the insurance underwriter. Second, the transaction creates a situation contra to public policy that ethical investors should avoid: they are making money off the ill health and ultimate death of the other party to the transaction. This should certainly be distasteful to most investors. Third, the transaction invariably occurs at a time of great stress in the lives of the terminally ill patients who are the typical sellers of the policies, so the playing field is not level. Ethical buyers should take great care here as well.

Sandel (1998) discussed the moral aspect of viatical settlements, citing the view that making money from the death of another is a moral outrage and contra to sound public policy. For those who might point out that many industries profit from the misfortune of others, such as the life insurance industry itself, he noted that in a life insurance contract the insurance company makes more money in direct proportion, rather than in inverse proportion, to the length of life of the insured. In a viatical settlement the investor (in Sandel' s example) paid $50,000 for a $100,000 death benefit policy insuring the life of an AIDS patient who had been given only a couple of years to live. If the patient died within a year, the investor would earn a 100% return on his capital investment. If the patient lived for two years, the return to the investor was reduced to a 50% annual rate. Thus, the investor's interest in the viatical settlement transaction was contra to the interest of the insured, whereas the insurance company's interest was congruent with that of the insured.

INVESTMENT ADVICE.

Nita Beth and David were advised by a life insurance agent who had brought them the check from the life insurance policy, and his friend Tom, who was a part-time real estate broker and part-time investment advisor. While they were appropriately licensed and may have been fine professionals in their primary fields, probably they were not the best source for financial planning and investment advice that the Sandovals could have used. The choice of investment advisor, even for reasonably sophisticated investors, is nonetheless critical to effective investment decisions and financial planning.

There are numerous sources of advice on how to pick an investment advisor, including the Securities and Exchange Commission (2010), the Certified Financial Planner Board of Standards (2010), and the National Association of Personal Financial Advisors (2010). Generally, they advocate asking potential investment advisors (a) to produce their financial planning credentials, (b) about their experience financial advising, (c) what services they offer, and (d) how they are compensated. They also suggest meeting the advisors face to face, asking whether they have ever been disciplined by any regulatory body, and asking the advisor to explain their investment and financial planning philosophies, strategies, and overall approaches.

Although the case, as presented, does not contain evidence to support conclusions, it appears that had Nita Beth and David asked their insurance agent's friend Tom these simple types of questions, they might have determined that his compensation came directly from the products he recommended to them, and that he had no particular qualifications by training, experience, or licensure to qualify him to act as an investment advisor. Finally, some discussion of the philosophy and approach to investing and the character of the viatical settlement as an investment, may well have revealed to the Sandoval family that the idea of the investment suggested, although legal, was at least contra to sound public policy, if not abhorrent to ethical investors.

CONCLUSION.

There is no "right answer" to this case. There is no mathematical solution that can be worked to produce a neat financial or investment solution. The tax issues are murky, depending on the facts of each situation. The potential for fraud is mixed into all aspects of the case. Even the insurance issues are not clear. Thus, the case reflects the hard reality of business. The exercise of business judgment is based on experience and education, and it requires critical thinking and the empathy to see situations form the point of view of another. The case can be expected to draw interest in the classroom, and to raise arguments with some emotional content, as well as to challenge the analytical ability of the students given the myriad of issues that are included.

In the situation described, as happened in many viatical settlement investments in the 1990s, the seller Jacob got the money and the benefit of great advances in the treatment of HIV/ AIDS, and is still living over a decade later. The investors, David and Nita Beth, ultimately lost their investment capital, as the viatical settlement pool was unable to continue paying the premiums on the policies purchased for the investors, and ultimately failed.

Subject: Life insurance; Investment advisors; Risk management; Case studies

Location: United States--US

Classification: 9130: Experimental/theoretical; 3300: Risk management; 8210: Life & health insurance; 8130: Investment services

Publication title: Journal of the International Academy for Case Studies

Volume: 17

Issue: 8

Pages: 117-123

Number of pages: 7

Publication year: 2011

Publication date: 2011

Year: 2011

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

ProQuest document ID: 912512886

Document URL: http://search.proquest.com/docview/912512886?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2011

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 25 of 100

The Dark Side of Light-Handed Regulation: Mercury Energy and the Death of Folole Muliaga

Author: Bridgman, Todd

ProQuest document link

Abstract:

On May 29, 2007, Folole Muliaga died following the disconnection of her home power supply for an overdue bill. Mrs. Muliaga had been receiving oxygen therapy at home for treatment of breathing difficulties associated with her obesity, and the cessation of oxygen caused by the disconnection led directly to her death. The power company, Mercury Energy, initially denied any wrongdoing, but in the days following Mrs. Muliaga's death it became apparent that Mercury Energy was not compliant with government guidelines on disconnections involving low-income consumers. The guidelines, created by the national regulator, the Electricity Commission, were voluntary rather than compulsory, in keeping with a government approach that preferred self-regulation by companies to "heavy-handed" regulation by government. The case focuses on the social responsibilities of both Mercury Energy and the government. [PUB ABSTRACT]

Full text:

Folole Muliaga, a 45-year-old Samoan woman, and her son Ietitaia were in their Mangere Bridge, Auckland home on the morning of May 29, 2007.3 Mrs. Muliaga was in the dining room and Ietitaia was seated at the computer in the living room. At around 10:25 a.m., Ietitaia saw a man walk to the rear of the house and knock on the door, which he answered. "Good morning, I.m from Mercury Energy and Mercury Energy is disconnecting your power for arrears," said the man, an employee of VirCom Energy Management Services (hereafter VirCom), which was contracted to perform Mercury Energy.s disconnections.4 He handed Ietitaia a disconnection notice which he took to his mother, who told him to invite the man in to speak with her. By the time Ietitaia went outside again to do this, the contractor had cut the power supply to the house. Ietitaia asked him to come inside, and the man followed him to the dining room, stepping over a tube running from a machine in Mrs. Muliaga.s bedroom to the prongs attached to her nose.

Folole Muliaga was not a well woman. Since migrating to New Zealand in 2000 with her husband Lopaavea and four children in search of a better life, her health had deteriorated. A trained school teacher, she first received treatment at Auckland.s Middlemore Hospital on April 5, 2007 for breathing difficulties associated with her weight, which had risen to 212 kilograms. She was diagnosed with obesity hyperventilation syndrome, an illness that prevented her from breathing adequately to remove carbon dioxide from her body. Mrs. Muliaga was treated with drugs and a ventilator and by the time of her discharge from hospital on May 11, 2007, her weight had fallen to 184 kilograms. She was given two machines to continue oxygen treatment at home.

Eighteen days later, the contractor, a trained electrical installer, was led by Ietitaia into the dining room where his mother was seated. The contractor explained that he had disconnected the power on instruction from her power company, Mercury Energy, as the account was NZ$168.40 (US$87) in arrears. Mrs. Muliaga asked, "So how do I get my power on?" to which the contractor replied, "You either pay or ring Mercury Energy." Ietitaia did not hear all of the conversation, but heard his mother say "Please give us a chance," to which the contractor replied "I.m just doing my job." The contractor could see the plastic tubes coming from Mrs. Muliaga.s nose, but he did not know what they were for and did not feel it was his business to ask about them. He did not see any oxygen machines or any tubes on the floor. He also did not hear the alarm that was triggered when power supply to the oxygen machine was cut.

Once the contractor left the house, Mrs. Muliaga.s health deteriorated rapidly. She took some pills, but Ietitaia and his brother Ruatesi, who had arrived home, were concerned. She asked Ietitaia to play a song on the guitar but halfway through the song she was struggling to breathe. Ietitaia went to the dining room to call an ambulance but their phone was disconnected. He returned to find his mother unconscious and Ruatesi attempting resuscitation. Ietitaia went to the neighbours. house and an ambulance was called. Two ambulance staff arrived and continued attempts to resuscitate her but it was too late. Folole Muliaga was dead.

The "Blame Game" Begins

Mercury Energy was the third largest energy retailer in New Zealand, providing electricity and gas services to 315,000 residential and business customers throughout New Zealand. It was a profitable business - between 2003 and 2007, its earnings nearly doubled to more than NZ$300 million, though its return on shareholders. equity fell by more than half during this time, to less than 6% (see Appendix1). Mercury Energy had a strong presence in Auckland, with more than 50 years of history supplying customers in the region. The Auckland region is ethnically diverse - of the population of 1.2 million, 15% identified as Pacific people, (for example, Samoans, Tongans, Fijians), 19% Asian and 11% Maori.1 Mercury Energy attributed its strong market position to "industry-leading levels of service and customer-friendly initiatives and products."2 Mercury Energy was active in community initiatives to support the company.s goal of "the natural evolution of partnerships which genuinely benefit those local to its facilities and customers, bringing together the Company and surrounding communities so that the needs of each are mutually understood."3 For example, in 2007, Mercury Energy insulated free of charge the homes of 50 patients of Auckland.s Starship Children.s Hospital who were suffering from respiratory illnesses, to make their houses warmer and drier.

The day following Mrs. Muliaga.s death, news reports began to surface in New Zealand. These were soon picked up by international news outlets, including the BBC and CNN, their attention drawn by the apparent death of a woman over a $168.40 electricity bill. "Lopaavea Muliaga.s wife died for the sake of less than £70," reported the BBC.1 Politicians from New Zealand.s government and opposition parties were quick to start pointing the finger of blame. Prime Minister Helen Clark accused Mercury Energy of a "hard-nosed commercial attitude"2 and said it was unbelievable the contractor had gone ahead with the disconnection even though he saw a tube coming out of Mrs. Muliaga.s nose. Ms. Clark said it was intolerable that such heartlessness on the part of a company and a contractor had conveyed a poor and inaccurate image of New Zealand around the world.3 Former State-Owned Enterprises Minister Richard Prebble said it was ironic Prime Minister Clark was attacking Mercury Energy, given that her government owned it.4

Pressure intensified on Mercury Energy when it emerged that the company had refused to reconnect the Muliaga.s power later on the day of her death, even when told that Mrs. Muliaga had died.5 Mercury Energy initially insisted it had done nothing wrong. Doug Heffernan, chief executive of Mercury Energy.s parent company, Mighty River Power, said the company did not know of Mrs. Muliaga.s medical condition. While the family had made two recent payments and the date for final payment on the outstanding amount of $168.40 was not until June 13, the family was using more power than the amount of the repayments, meaning they were getting further into debt, he said. Mercury Energy.s general manager James Moulder said he felt sure the power supplier was not to blame. "Throughout the 6-7 week process of disconnecting the home, and on the day in question, we were not alerted that there was a person resident dependent on a medical device reliant on electricity," he said.6

In the days after Mrs. Muliaga.s death, Mercury Energy softened its stance as further details of the case were revealed. Senior management visited the family.s home to offer their condolences and a $10,000 cheque to cover funeral expenses.7 They had been coached by members of their staff in the Samoan custom of ifoga, where the wrongdoer appears before the wronged. Dressed in traditional Samoan lava-lavas wrapped around their suits, they were left standing outside the house for more than two hours before being invited in by the family. Inside, the group sat cross- legged on mats in the living room surrounded by Muliaga family members, their eyes lowered as they were addressed by a Samoan high chief. Mr. Heffernan told the family: "I hope the pain will pass and that you will be able to get strength from the memories you have of your wife, your mother," while Mr. Moulder assured the gathering that the company.s condolences were sincere. "We are deeply remorseful... Thank you very much for receiving us."8 Mrs. Muliaga.s nephew Brenden Sheehan said the family accepted the executives. show of remorse as "human beings," but "as managers of companies, they should be sacked."9

The question of who was most to blame for Mrs. Muliaga.s death became the subject of intense public debate, with several national media outlets running polls. One poll, taken before it became public that the Muliaga family had sought help from Mercury Energy about their power bill weeks before her death, found that 40% of New Zealanders believed the Muliaga family was most to blame.1 It was argued that Mrs. Muliaga was responsible for letting her health deteriorate deteriorate to the point it had and that her sons should have done more to seek medical attention once they saw her condition worsen after the power was disconnected. In the poll, 22% said Mercury Energy was most to blame because it ordered the disconnection, while 5% blamed the health system for failing to provide adequate care for Mrs. Muliaga. While the public debated whether the Muliaga family or Mercury Energy were most to blame, sections of the media also raised the possibility that the regulatory structure of New Zealand.s electricity sector might also have been a key contributor to the tragedy. According to an editorial in New Zealand.s largest newspaper, "the contractor who pulled the plug in Mangere Bridge was the last link in a very long chain of policy-setting and decision-making that stretches back to Wellington and, through both Labour and National administrators, to 1984."2

New Zealand's Electricity Industry Reforms Since 1984

Prior to 1984, electricity generation and transmission had been the responsibility of the Ministry of Energy, a government department, which was also responsible for policy advice and regulatory functions. The Ministry of Energy operated New Zealand.s hydro-electricity network and its gas and coal-fired stations, as well as maintaining the transmission system that distributed electricity to local power boards and councils, which sold it to consumers.

In 1984, the newly elected Labour government faced a foreign-exchange crisis that provided the catalyst for a series of wide-ranging neo-liberal economic reforms that transformed New Zealand from one of the most regulated economies in the OECD to arguably the least regulated. Treasury, the department that advised the government on economic policy, argued the Ministry of Energy was over-staffed and inefficient and suggested a number of market reforms for the sector.3

In 1987, the Electricity Corporation of New Zealand (ECNZ) was set up as a company under the State-Owned Enterprises Act to own and operate New Zealand.s generating stations and the transmission system. Policy and regulatory activities were separated out and largely retained within the Ministry of Energy. Section 4 of the State-Owned Enterprises Act 1986 stated that:

[1] The principal objective of every State Enterprise shall be to operate as a successful business and, to this end, to be -

[a] As profitable and efficient as comparable businesses that are not owned by the Crown;

[b] A good employer; and

[c] An organisation that exhibits the sense of social responsibility by having regard to the interests of the community in which it operates and by endeavouring to accommodate or encourage these when able to do so.

An Electricity Task Force comprising members from government departments, ECNZ and local suppliers was established in 1987 to advise the government on the structure and regulatory environment for the industry. Among a series of recommendations made in 1989 was the development of a "light-handed" regulatory regime that involved the use of the existing competition policy regime (the Commerce Act 1986) to deal with anti-competitive behaviour, together with extensive information disclosure and the threat of further regulation if dominant market players abused their position as a natural monopoly. "Light-handed" regulation was seen as preferable to "heavy-handed" regulation, such as price controls, which were considered complex, costly to administer and not always capable of producing the desired result. By maintaining a light-handed approach, regulations could be kept to a minimum, with additional measures introduced to overcome any weaknesses in the regulatory framework that arose over time.1

In 1989, the Ministry of Energy was abolished, with its policy, regulatory and other non- commercial roles transferred to the Ministry of Commerce. The national government elected in 1990 continued to reform the electricity industry by introducing a range of competitive incentives in an attempt to improve efficiency and effectiveness. Wholesale and retail markets for electricity were created, so that instead of having to buy electricity from one state-owned monopoly, wholesale customers now had a choice of power suppliers. In the competitive retail market, consumers were given the choice of a range of electricity retailers. In 1998, ECNZ was split into four different generation companies - Meridian, Genesis, Mighty River and Contact, the last of which was privatized.

In 1999, the newly elected Labour government inherited an electricity industry that was largely self-regulating, with market participants subject to few legislative and government restrictions. While it was Labour that had begun the neo-liberal reforms in 1984, its electoral success in 1999 was based on a pledge to curb the excesses of the free market, especially in the provision of essential services, such as electricity. The following year, the government announced a ministerial inquiry into the electricity industry, with the inquiry panel subsequently supporting the continuation of a light-handed regulatory approach. Government stated that it favoured industry solutions where possible, but signalled its intention to regulate if the industry failed to self-regulate responsibly. In late 2000, it announced a new governance structure for the industry, including a self-governance board. However, by 2003, industry participants had failed to reach agreement on self-governance arrangements, prompting the government to establish an Electricity Commission (EC) to take over governance of the industry.

While the electricity reforms since 1984 had their supporters as well as critics, there was agreement that, for whatever reason, the reforms had largely failed to benefit domestic consumers. In the mid 1990s, electricity prices fell for residential, commercial and industrial users, but these gains did not last for residential customers. Between 2000 and 2007, real consumer prices (adjusted for inflation) increased nearly 40%, with the difference between industrial and commercial prices continuing to increase.1

The Electricity Commission and Its Guidelines for Low-Income Customers

The EC, funded by a levy on electricity companies, was responsible for overseeing the governance and operations of New Zealand.s electricity market. The EC.s principal objective was to ensure that electricity was produced and delivered to all classes of consumers in an efficient, fair, reliable and environmentally sustainable manner. Consistent with New Zealand.s light-handed regulatory approach, the EC had extensive powers to regulate but was expected to use "its power of persuasion and promotion, and provision of information and model arrangements to achieve its objectives rather than recommending regulations and rules."2 The Commission was governed by an executive chair and four other members appointed by the Minister of Energy.

In July 2005, the EC announced it was considering implementing a set of guidelines to assist low-income domestic consumers to ensure that minimal disconnections occurred, and to establish standards for these disconnections. It was hoped that by introducing guidelines, all parties would benefit - retailers. bad debts would be reduced as well as the costs that resulted from enforcing them, social agencies would reduce the money they were advancing to customers struggling to pay their bills and consumers would benefit from a continuous supply of electricity. The EC.s preferred approach was "a series of guidelines that electricity retailers should be encouraged to implement... rather than regulation."3 The EC noted that all retailers had initiatives in place for dealing with low-income customers, but some made more strenuous efforts than others before making a disconnection.

The proposed guidelines drew formal submissions from, among others, Contact Energy and Mighty River Power. Contact Energy was concerned that the guidelines would become de facto regulations. While accepting that electricity retailers, such as themselves, had a role to play, they argued that "electricity retailers are first and foremost businesses (as are retailers of other life essentials such as food and clothing)" and additional costs caused by more stringent processes related to disconnection would have to be passed on to other customers.4

Mighty River Power, parent company of Mercury Energy, supported the objectives of the guidelines but said that retailers already had disconnection processes and the EC had failed to demonstrate there was a problem with them. Mighty River Power said that while disconnection was considered a "last resort,"5 the ability to disconnect was needed to ensure bad debts did not get too big and to provide an incentive for bad debtors to pay their bills. Any actions which delayed disconnection would:

distort the current prioritisation process by sending a very clear signal to low income and vulnerable individuals that electricity should be the last obligation that they should be concerned about.1

Both Contact Energy and Mighty River Power preferred guidelines to regulations, but this view was not shared by all who made submissions to the EC. Wellington resident Jim Delahunty argued for "an absolute right of heat and light"2 and said that State Owned Enterprises should not be allowed to disconnect consumers. With regard to the proposed guidelines, Mr. Delahunty concluded that "trying to make private or public capitalists into Mr. Nice Guys is a waste of time."3

Grey Power, a lobby group for those aged 50+, also favoured regulations, saying electricity retailers might ignore guidelines they found difficult or costly to implement. The only way for the EC to ensure low-income consumers would be protected, they argued, was to regulate.4

Findings of the Coroner's Inquest into the Death of Folole Muliaga

Two weeks after Folole Muliaga.s death, police announced there was no evidence to justify any charges against either Mercury Energy or their contractors, VirCom, and they referred the case to the coroner. The inquest was conducted by Coroner Gordon Matenga in May 2008, and his report, released in September 2008, concluded that Mrs. Muliaga died of an arrhythmia caused by morbid obesity and that "the cessation of oxygen therapy and stress arising from the fact of the disconnection (as opposed to the way in which the power was disconnected) have contributed to her death."5

The VirCom contractor escaped blame, with the coroner accepting that he knew nothing of Mrs. Muliaga.s medical condition, the oxygen machine or the need for power to keep it operating. The coroner accepted that had the contractor been aware of the situation, he would have followed the standard procedure and telephoned Mercury Energy to advise them that the power should not be cut off. The contractor had given two examples when he had done this in the past, one case involving children with intellectual disabilities and the other a newborn child.

The coroner also made a series of findings regarding the medical treatment Mrs. Muliaga received from her local health provider, Counties Manukau District Health Board. He was concerned about communication between medical staff and Mrs. Muliaga and her family, and investigated the extent to which she and her family knew the seriousness of her condition. The coroner concluded that her children did not know how sick she was and that they did not know doctors felt resuscitation should not be attempted if she went into cardiac arrest. Counties Manukau District Health Board did not follow its own policy when the decision about the non- resuscitation order was made, since no discussion was held with Mrs. Muliaga or her family. A series of recommendations for improving the health board.s communication processes were included in the coroner.s report.

The remainder of the coroner.s report concerned the actions of Mercury Energy. The coroner found that Mercury Energy sent a warning notice to the Muliaga household on April 23, 2007, while Mrs. Muliaga was in hospital. Her husband, Lopaavea, called Mercury Energy on May 1 to attempt to pay off the bill at $50 per week. He said his wife, who was the account holder,1 was in hospital. The Mercury Energy employee who took the call advised Mr. Muliaga that because of New Zealand.s privacy laws she could not discuss the account with him. She said Mrs. Muliaga would have to call back and that the overdue amount would need to be paid in full. The coroner concluded that Mercury Energy.s systems had failed, since the call-taker should have referred the call to her manager, which she did not. Once aware of Mrs. Muliaga.s health issues, further enquiries should have been made to assess whether the Muliaga family was a vulnerable customer. No such enquiries were made.

Critical to the coroner.s investigation were Mercury Energy.s actions leading up to the disconnection being ordered, in relation to the EC.s guidelines concerning low-income consumers. The guidelines involved a two-step process: first, the electricity retailer would inform its customers on how to identify themselves as a low-income domestic consumer who would face hardship if the electricity was disconnected. The onus was then on vulnerable customers to follow the process. At the time of Mrs. Muliaga.s death, Mercury Energy did have a "Do Not Disconnect List" that included 59 customers with medical conditions, but she was not on the list. Mercury Energy accepted they had not fully complied with the guidelines. While they did assist vulnerable customers who identified themselves, they did not provide information on the process of self-identifying as a vulnerable customer. The coroner concluded that:

It is perhaps no surprise that the Muliaga family did not advise Mercury Energy of Mrs. Muliaga.s medical condition. There is no evidence before me that the Muliaga family was aware that help was available to them.2

The coroner concluded by congratulating Mercury Energy for acknowledging that their previous practices were not compliant with the 2005 guidelines and for voluntarily making changes to their disconnection practices in the weeks following Mrs. Muliaga.s death. The changes include treating all customers as vulnerable to ensure no one is missed and producing information brochures in six different languages (including Samoan). In addition, it was now routine procedure to ask customers calling Mercury Energy whether anyone in the household was either vulnerable or medically dependent on electricity.

EC's Revised Guidelines Following the Death

In June 2007, as a direct result of the death of Folole Muliaga, the Electricity Commission issued a revised set of guidelines for assisting low-income consumers, which included enhanced processes concerning disconnections. Whereas the 2005 guidelines were "advisory, in line with its objective to encourage rather than regulate,"1 the 2007 guidelines stated that "retailers must report annually on their level of compliance with the guidelines, and where the guidelines have been deviated from, provide reasons for each type of deviation."2 This compliance information would be publicly available on the Commission.s website.

Despite the tougher stance it had taken, the EC stopped short of imposing regulations. Consistent with the "light-handed" regulatory approach taken since 1984, the Commission.s 2007 guidelines threatened regulation in the event that electricity retailers did not respond satisfactorily to the guidelines.

Some commentators, including Sue Bradford, Member of Parliament for the Green Party, believed the guidelines did not go far enough:

In this case it appears that the threat of regulation is considered to be more important than the possible consequence of not doing something more regulatory, leading to the consequence of possible further tragic circumstances.

Effectively, the companies are being slapped on the wrist and told: "Don.t do it again," when we have already had codes of responsibility and codes of practice for them that should have stopped them from doing this, but did not.3

2011-11-08

Subject: Social responsibility; Electric utilities; Wrongful death; Business government relations; Case studies

Location: New Zealand

Classification: 2430: Business-government relations; 8340: Electric, water & gas utilities; 4330: Litigation; 9179: Asia & the Pacific; 9130: Experimental/theoretical

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

Volume: 9

Issue: 4

Supplement: Special Dark Side Issue

Pages: 1-12

Number of pages: 12

Publication year: 2011

Publication date: Nov 2011

Year: 2011

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: Graphs References Tables

ProQuest document ID: 914721851

Document URL: http://search.proquest.com/docview/914721851?accountid=38610

Copyright: Copyright HEC Montréal Nov 2011

Last updated: 2013-09-26

Database: ABI/INFORM Complete

Document 26 of 100

The Olivieri Case: An Ethical Dilemma of Clinical Research and Corporate Sponsorship

Author: Weigand, Heidi; Mills, Albert J, Professor

ProQuest document link

Abstract:

The 'Olivieri Case' was a high-profile series of ethical disputes concerning multiple institutions and individual researchers involved in the clinical research on a new drug. The drug was developed during the mid-1980s to mid-1990s to treat an inherited, potentially fatal blood disorder called thalassemia. The initial dispute arose from an attempt to advise patients of potential side effects of Deferiprone (L1). It was subsequently compounded by oversights, mistakes and misjudgements by individuals, public institutions, a private corporation and inquiry panels. This case focuses on issues of research ethics and academic freedom so important to the public interest that it attracted national and international attention. [PUB ABSTRACT]

Full text:

"You do not know about Emrich?"

"That she had emigrated to Canada. But she was still working for KVH [the multi-national drug company]."

"You do not know what her position is now - her problem?"

"She quarrelled with Kovacs."

"Kovacs is nothing. Emrich has quarrelled with KVH."

"What on earth about?"

"Dypraxa. She believes she has identified certain very negative side-effects. KVH believes she has not."

"What have they done about it?" asked Justin.

"So far they have only destroyed her reputation and her career."

"That's all."

"That's all."

- John le Carré, The Constant Gardener, 2001, pp. 361-362

Preface

As she watched The Constant Gardener - the movie based on John le Carré.s novel of the same title - Nancy Olivieri reflected on her life over the past eight years. She had never met le Carré, but the movie, and especially the book on which it was based, contained "intriguing parallels" to her own case.4 Like Lara Emrich, one of the book.s key characters, Olivieri is a Canadian-based doctor and researcher whose "troubles begin when she signs a contract with a drug company, forbidding her to publish findings from a clinical trial without the company.s consent."5 Olivieri reflected that years earlier she had "signed a similar research contract, approved by [the Toronto Hospital for Sick Children]. Like me, Lara studied a drug to be prescribed in poorer countries and, when she sought to disclose her subsequent concerns about the drug, was met with vigorous opposition within her hospital."1 These thoughts brought back "memories of [her] own unhappy experience" at the Sick Children.s Hospital and the "years of harassment, false accusations and legal threats" that she faced as the result of her decision to inform patients of the potentially dangerous side-effects of the drug she was administering.2 As she noted, the book.s description of "anonymous hate mail" sent to the heroine, warning her to stop "poisoning decent people.s lives. was similar to those that she and her colleagues had received warning them to "stop poisoning the air and fabric. of "decent people. at the Sick Children.s Hospital.3 Vindicated by the Ontario College of Physicians, the Canadian Association of University Teachers (CAUT) and other independent bodies, Olivieri would nonetheless continue to be vilified by some in the medical profession and sections of the media.4 Applauding The Constant Gardener's dramatization of "the exploitation of vulnerable patients in medical research conducted by certain drug companies,"5 Olivieri could not be blamed for pondering the very difficult and ethically problematic road she had travelled to this point. Nonetheless, as the case will show, there are still debates around her approach to the ethics of the case.6

Introduction

For Nancy Olivieri, John le Carré.s story of The Constant Gardener was not a "thriller" but a realistic account of the situation that individuals can find themselves in when confronting institutions and large corporations. The story of what was to become the "Olivieri case. began in 1989 when Dr. Nancy Olivieri became involved in an initial pilot study of an experimental drug developed to deal with a potentially fatal blood disorder called thalassemia. Initial promising results at the Hospital for Sick Children (HSC) in Toronto encouraged Olivieri to seek funding to continue research on the drug. An extension of the clinical drug trials was supported by Apotex Inc., a private pharmaceutical manufacturer, and in 1993 Olivieri and HSC.s associate director for clinical research, Dr. Gideon Koren, signed a contract with Apotex. The contract included confidentiality, communication and intellectual rights clauses and the level of profits that would accrue to the company in exchange for continued funding for the clinical trials. The unexpected effects of the trial drug (Deferiprone) ultimately changed the direction of this story. The effects included the "toxicity" of the drug (i.e., it had poisonous effects on some patients) and the "inefficacious" nature of the drug (i.e., the drug.s positive effects were reversed in some cases).1 In other words, the drug appeared to increase some patient.s health problems and in others ceased to be effective after a period of time.

Problems arose when Olivieri set out to report her findings to the university.s Research Ethics Board (REB) and to inform her patients - i.e., the parents of the sick children involved - of the changing "risk/benefit" ratio as required under the REB.s ethics codes.2

Under contractual obligations to Apotex, Olivieri began by trying to convince the company of her need to report her adverse findings. Apotex disagreed with her findings and her request to notify the REB, placing Olivieri in an ethical dilemma of honouring either her contractual obligations to Apotex or her broader commitment to uphold the ethics of medical practice in general and those of the REB in particular. She chose the latter and ended up embroiled in a series of disputes in which she found herself confronted by legal challenges from Apotex, institutional pressures from the University of Toronto and the HSC and attacks on her character from various people, including her colleague Dr. Gideon Koren.

To put it in terms of le Carré.s novel, Koren was Olivieri.s Kovac, KVH was her Apotex, and Dypraxa was her Deferiprone. But fiction merged with fact when Olivieri found her reputation as a scientist, a researcher and a person was attacked on all fronts. In the novel, under severe pressures, Lara Emrich chose to run away from the issues involved. Nancy Olivieri chose to make a stand. The case, as we shall show, raises important questions about ethics at work and issues of the contexts in which organizational members attempt to make decisions. Knowing some of the key facts of the case, one wonders whether Olivieri would do it again if she had to. The case highlights the ethical dilemmas involved and asks students to consider how they would respond if placed in a similar situation.

The 'Facts' of the Case1

The "Olivieri case. was a high-profile series of ethical disputes concerning multiple institutions and individual researchers involved in the clinical research on a new drug. The drug was developed during the period of the mid-1980s to the mid-1990s to treat an inherited, potentially fatal blood disorder called thalassemia.

The initial dispute over the drug.s potential use arose from an attempt to advise patients of potential side effects of Deferiprone (L1) and was compounded by oversights, mistakes or misjudgements by individuals, public institutions, a private corporation and inquiry panels. The focus of this case revolves around issues of research ethics and academic freedom so important to the public interest that it attracted national and international attention.2

The primary conflict involved Apotex Inc., a private pharmaceutical manufacturer; the Hospital for Sick Children (HSC) in Toronto, a teaching hospital affiliated with the University of Toronto; Dr. Nancy Olivieri, a clinical researcher; and Dr. Gideon Koren, associate director for clinical research at the HSC. Drs. Olivieri and Koren were both associated with the University of Toronto. Additional parties are the Hospital Medical Advisory Committee (MAC), the Canadian Association of University Teachers (CAUT) and, not least, the sick children and their parents who constituted the patient group primarily affected by the drug trials.

The L1 Drug Trials and Contractual Agreements

In 1989, an initial pilot study of a new (experimental iron chelation) drug called Deferiprone (L1) was initiated to assess its long-term efficacy and safety at the Hospital for Sick Children (HSC), one of the fully affiliated teaching hospitals of the University of Toronto. In the early 1990s, Dr. Nancy Olivieri, a specialist in the treatment of hereditary blood diseases, wished to further study the L1 drug, as it had shown promise in the pilot study. It appeared to reduce tissue iron loading in a group of transfusion-dependent thalassemia, patients.3 The funding requirements were exceptionally high and could only be fulfilled through a corporate sponsor. Dr. Koren negotiated an arrangement with Apotex Incorporated, which agreed to acquire the commercial development rights for L1 and to sponsor the clinical drug trials.

In April 1993, Dr. Olivieri and Dr. Koren signed a contract with Apotex to conduct a new randomized trial to compare L1 with the standard treatment, the drug Deferoxamine (DFO) with child-age patients. This contract contained a confidentiality clause giving Apotex the right to control communication of trial data for one year after the termination of the trial, and Apotex had the right to terminate the trial at any time. This provision was fully in accordance with the University of Toronto.s policy on contract research.

The 1989 pilot study was continued with the support of Apotex, although the contract for this new trial, in 1993, was signed two years later in October of 1995, which did not contain the confidentiality clause for the continued pilot study. The hope was that the trials would lead to the licensing of L1 for therapeutic use and Apotex would be able to market the drug as an alternate to the current DFO treatment that was known to be very hard on patients. These two studies were the only two clinical trials in any centre that included baseline assessments of liver iron concentration and liver histology, the most accurate measures of the long-term efficacy and safety of an iron chelation drug.1

Apotex.s investment meant the trial was eligible for matching funding from the Medical Research Council (MRC) under its university-industry program, which Dr. Olivieri was able to secure with the approval of the HSC and the University of Toronto. Around the same time, the University of Toronto and Apotex had been engaged in discussions for a multimillion-dollar donation, intended to allow a new biomedical research centre to be built that would benefit the university and its affiliated health care institutions.

The Beginning of the Conflict

In early 1996, Dr. Olivieri identified an unexpected risk of the L1 drug related to growth retardation in youth and moved to disclose the findings to her patient.s parents. Apotex issued warnings of legal action if she disclosed the risk to family members of the child patients or to anyone else, as she was under a confidentiality agreement. However, HSC.s Research Ethics Board (REB) accepted that Dr. Olivieri had an obligation to inform patients of the risk and issued a directive from the REB chair to that effect. In May, when Dr. Olivieri moved to inform the patients and their parents, Apotex terminated the trials and simultaneously issued warnings of legal action if she disclosed the risk to her patients or anyone else because it "could not allow such information to be transmitted to patients."2 The termination of the trials caused significant concern for patients for whom the L1 drug was working well during the trials.

The university was drawn into the conflict between Dr. Olivieri and Apotex because two key ethics principles were in contention: (i) academic freedom and (ii) the rights of participants in a clinical trial and their parents to be informed of risk. In June, University of Toronto.s Dean of Medicine, Dr. Arnold Aberman, mediated a new arrangement between Dr. Olivieri and Apotex under the Emergency Drug Release program of Health Canada. Apotex agreed to reinstate the supply of its L1 drug for those patients who appeared to be benefitting. Dr. Olivieri agreed to administer it to those particular patients on condition that they and their parents were informed of and accepted the new risk, and agreed to monitoring tests for safety. The patients were no longer in a research trial and so were not under the jurisdiction of the hospital.s Research Ethics Board. It was also agreed that Apotex would continue very substantial research funding to Dr. Koren.

It would later be revealed - during the CAUT review of the Olivieri case - that Koren gave repeated reassurances to Olivieri that he agreed with her findings while also telling Apotex that he agreed with the company.s position that there was no risk of loss of sustained efficacy of its drug.1 Unknown to Olivieri until after the fact, Koren subsequently re-analyzed data from the terminated L1 trials and published findings that the drug was effective and safe. Koren.s publications did not disclose Apotex.s financial support for his research, made no reference to the risks of the L1 drug identified by Olivieri and did not acknowledge her contributions to generating the data he used. Consequently, Apotex used Koren.s statements about the L1 drug to counter Olivieri.s adverse findings on its drug.

In the fall of 1996, Apotex stopped supplying the drug for a second time, causing concern to the patients and their parents. Following another intervention by Dr. Arnold Aberman, Apotex again agreed to reinstate the supply, but the supply of L1 nevertheless remained irregular into early 1997. In February 1997, Dr. Olivieri identified a second, more serious risk (that the drug may cause progression of liver fibrosis)2 through reviews of patients. charts. Apotex issued legal warnings against disclosure again. Despite the possible legal action by the company and the lack of effective assistance from her university and hospital, Olivieri informed her child-age patients, their parents and the scientific community of the risks she had identified.

Dr. Olivieri began the process of transitioning her patients back to the standard treatment, a complex process that takes a number of weeks. The newly identified risk related to liver fibrosis was not an acute one, so there was time for a safe and orderly transition. During the transition period, a dispute developed between Olivieri and Dr. Hugh O.Brodovich, HSC.s Paediatrician- in-Chief. Following discussions with Apotex and Koren, O.Brodovich appeared to have drawn the incorrect conclusion that the newly identified risk was one of acute toxicity. It is possible that he drew this conclusion because his expertise was not in the specific field in question - haematology. O.Brodovich also incorrectly supposed that the hospital.s Research Ethics Board had jurisdiction over the matter and that Dr. Olivieri was obligated to notify the REB of the risk. Later, these errors would play a further role in the dispute (see below). Meanwhile, in March, this latter dispute was resolved through discussion between the two doctors.

At the same time, Apotex began efforts to persuade medical administrators and patients in Toronto, as well as regulatory agencies and the scientific community, that L1 was effective and safe and should be in wider use. Apotex proposed a new treatment arrangement for Toronto thalassemia patients in which an annual liver biopsy, the test that had led to the identification of both of the unexpected risks of L1, would not be an integral part of the safety monitoring regime for all patients. Olivieri did not accept this proposal, as she had phased out L1 in the clinics she directed. She had the support of haematologist Dr. Michael Baker, Physician-in-Chief of the Toronto Hospital, where adult thalassemia patients received their care under her supervision.

The Scientific Community Concerns

In 1997 and 1998, increasing numbers of medical scientists expressed concerns over the lack of effective action by HSC and the university to assist Dr. Olivieri in contending with Apotex.s actions against her. This led to calls for an independent inquiry into the controversy.

In early 1998, Apotex submitted licensing applications for L1 in several jurisdictions and alleged that data from the terminated Toronto trials had been compromised by protocol violations by Dr. Olivieri. The company used the short-term trials conducted by Dr. Olivieri at sites outside Canada to meet the licensing requirements for the U.S. FDA. The trials. primary objective was an assessment of known acute-toxicity effects of L1 and used this as the pivotal efficacy and safety trial. Unlike the randomized and long-term trials conducted in Toronto, the short-term trial did not include baseline and annual determination of liver iron concentration and liver histology for all participants.

This all occurred against a background where, in the spring of 1998, agreement in principle was reached between the University of Toronto and Apotex for what would have been the largest donation the university had ever received. Through matching funding from other sources, it would have been approximately $92 million. However, in the wake of the controversy, the university and Apotex decided to suspend discussions until the dispute involving Dr. Olivieri and Apotex was resolved.

The issue goes public

In August 1998, more than two years after the controversy began, it became public. Without giving Olivieri an opportunity to respond, the HSC executive issued a public statement repeating many allegations made privately to it by Apotex against the quality of Dr. Olivieri.s scientific work. One week later, the hospital unilaterally established a review of the controversy and appointed Dr. Arnold Naimark of the University of Manitoba as its reviewer. This became known as the Naimark Review, but Nancy Olivieri and her supporters, suspecting the biases of Naimark and what they saw as the narrow focus of the review, declined to participate in it.

The Naimark Review

During the Naimark Review, Koren and O.Brodovich put forward testimony against Olivieri on several topics that would later prove to be incorrect. Worse, it was later proven that Koren was sending anonymous letters to the media and to colleagues disparaging Olivieri and others. Dr. Aideen Moore, who became Chair of the HSC Research Ethics Board shortly after the Toronto trials were terminated, also wrongly claimed in testimony that Olivieri had failed in her obligations to report new risks to the REB in later drug trials. The Naimark Review accepted the testimony of these witnesses as true and castigated Olivieri for dereliction of duty.

In December 1998, HSC.s Board of Trustees, acting on the Naimark Review, declared that Olivieri had "failed" in a reporting obligation - namely, to notify the REB of an unexpected risk in a timely way. The Board directed the hospital.s Medical Advisory Committee to inquire further into Olivieri.s conduct. During this follow-up inquiry, Koren and O.Brodovich introduced new allegations concerning Olivieri.s care of thalassemia patients during the period in early 1997, when the second risk of L1 was identified and patients were being transferred to standard therapy. They had alleged that a test (liver biopsy) that Olivieri had performed on some patients was a risky procedure and was not clinically indicated. On January 6, 1999, following an unrelated event,1 Olivieri was removed from her post as director of the HSC hemoglobinopathy program with no opportunity to respond to HSC.s charges against her. HSC issued directives that Dr. Olivieri and her colleagues - Drs. Chan, Durie and Gallie - were not to discuss their concerns publicly. As a result of these two HSC actions, legal counsel for Olivieri, distinguished scientists from abroad, the Canadian Association of University Teachers (CAUT), the University of Toronto Faculty Association and the University of Toronto administration intervened. This would result in a CAUT Report of the Committee of Inquiry, or the "Olivieri Report..

On January 25, 1999, University of Toronto President Robert Prichard mediated an agreement that was signed by HSC and Dr. Olivieri to resolve a range of issues. The agreement restored Olivieri.s authority over research and clinical care of HSC hemoglobinopathy patients, and affirmed the right to academic freedom for university faculty working at HSC. It also provided assurance of HSC.s financial support for Dr. Olivieri in the event of legal action against her by Apotex.

Dr. Gideon Koren takes a front-row seat in the conflict

In May 1999, Drs. Olivieri, Chan, Durie and Gallie lodged a complaint against Dr. Koren on the basis of substantial forensic evidence identifying him as the author of a series of anonymous letters to the press which, arguably, presented a false impression of Olivieri and others. role in the L1 trials. Koren initially denied his involvement, until additional DNA evidence was obtained identifying him as the author. He was provided with all the details and given a chance to respond before the disciplinary action was imposed on him in April 2000.

By this time, Apotex and the university had resumed discussions about the multimillion-dollar donation and the company requested assistance from university President Prichard in lobbying the government of Canada against proposed changes to drug patent regulations that would adversely affect the company.s revenues. Prichard wrote to the prime minister, stating the proposed government action could jeopardize the building of the university.s proposed new medical sciences centre. He later apologized to the university community, saying he had acted inappropriately. The lobbying efforts were unsuccessful and Apotex withdrew from the 1998 agreement in principle on the donation. Nonetheless, for reasons that are not clear, in 2000, Apotex made a substantial, albeit smaller, multi-million dollar donation to the university.

In April 2000, HSC and the University of Toronto disciplined Koren for gross misconduct - namely, sending anonymous letters disparaging the personal and professional integrity of Drs. Olivieri, Chan, Durie and Gallie, and persistently lying to conceal his actions. In a press conference after the disciplinary actions were taken against Dr. Koren, the hospital Board and MAC announced they were referring the allegations against Dr. Olivieri, cast in the form of publicly expressed concerns, to the College of Physicians and Surgeons of Ontario and the University of Toronto for investigation. Nonetheless, the MAC and the university still persisted with some of the allegations against Olivieri, not taking the time to review the contradictions in Koren.s own correspondence before going public with the actions against Olivieri. Apotex used the allegations against Dr. Olivieri and the MAC allegations to the College of Physicians and Surgeons of Ontario (CPSO) to defend the reputation of its L1 drug in legal proceedings.

The CAUT Report of the Committee of Inquiry

Reporting in 2001, the CAUT review of the Olivieri case1 concluded that Olivieri had in fact fulfilled all her reporting obligations and that she had rightly put the patients. right to be informed ahead of concerns of possible legal action against her by Apotex. The report noted that the Naimark Review had mistakenly characterized Olivieri.s later work on patients as "drug trials. and thus covered by REB requirements. This was not the case, and therefore the charges against her were unfounded. Equally, the report dismissed the allegations that Olivieri had performed risky procedures. They found the allegations were incorrect and could have been corrected if anyone on the MAC had checked the literature or well-established practices at the hospital. In fact, O.Brodovich had been repeatedly advised by Olivieri in writing that these biopsies were being scheduled and of the clinical indication for them, and he had not opposed them at the time. Dr. Olivieri was not aware of the case against her and had no opportunity to respond. Non-experts in the field made the decision without checking relevant facts. The report cleared Olivieri of any wrongdoing and, as a result, she was able continue her work as a clinical researcher with the university and the hospital.

The Aftermath

So where do we find Dr. Olivieri five years after the Olivieri Report? She has been honoured and recognized for her contributions to medical research by receiving the 2009 Scientific Freedom and Responsibility Award by the American Association for Advancement from Science, "for her indefatigable determination that patient safety and research integrity come before institutional and commercial interests" (CAUT Bulletin, 2010).

Nonetheless, the controversy continues. A recent book claims that Olivieri.s activities were less than heroic and have left patients in dire need of a proper treatment (Shuchman, 2005). The author, Miriam Shuchman, also contends that "there are people who would be alive if L1 had continued to be available in North America and had they stayed on it" (quoted in Gatehouse, 2005). Olivieri has since responded that Shuchman fails to disclose her association with one of the people who gave incorrect evidence against her at the Naimark Review - namely, her husband Dr. Donald Redelmeier (Olivieri, 2006).1

In the meantime, Dr. Gideon Koren, who was found guilty of gross misconduct at one university, has nonetheless managed to find a distinguished place in the medical profession. In 2010, he received the Canadian Society for Clinical Investigation Distinguished Scientist Award, and he holds several important positions in the field.2

The Constant Gardener Comes to Life

As was stated at the opening of the case, some aspects of the Olivieri case bear uncanny resemblance to John le Carré.s The Constant Gardener. Both involve "heroic. women whose efforts to expose aspects of the use and production of certain drugs lead them into serious conflict with a powerful drug manufacturer. However, there are important points of departure that make the Olivieri case more complex. Unlike the fictitious KVH, Apotex is not some conspiratorial organization that operates outside the law. On the contrary, it is the very legal processes involved that reveal the complex ethical issues involved. That Nancy Olivieri found herself fighting to save her reputation and career speaks to the complex and contextual nature of business ethics; a context that saw her and other medical doctors knowingly placing themselves in a potential conflict of interest and ethical dilemma. The ethical decision making of the various players involved - Olivieri, Gideon, Apotex, members of the relevant Research Ethics Board and senior administrators at the University of Toronto and the Hospital for Sick Children - reveals a process bounded by competing interests. What those competing interests are and how they shape ethical decision making is the subject of this case.

Subject: Blood diseases; Business ethics; Corporate responsibility; Pharmaceutical industry; Organizational behavior; Side effects; Case studies; Clinical trials

Location: Canada

People: Olivieri, Nancy

Classification: 9172: Canada; 2410: Social responsibility; 2500: Organizational behavior; 8641: Pharmaceuticals industry; 9130: Experimental/theoretical

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

Volume: 9

Issue: 4

Supplement: Special Dark Side Issue

Pages: 1-11

Number of pages: 11

Publication year: 2011

Publication date: Nov 2011

Year: 2011

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 Charts

ProQuest document ID: 914721888

Document URL: http://search.proquest.com/docview/914721888?accountid=38610

Copyright: Copyright HEC Montréal Nov 2011

Last updated: 2013-09-26

Database: ABI/INFORM Complete

Document 27 of 100

Perfect Pizza - Credit Card Processing Decisions

Author: Kaciuba, Gail

ProQuest document link

Abstract:

This case is based on a consulting project the author conducted with a credit card processing company, although the names and the numbers have been adjusted for use in the classroom. The case describes the nature of the credit card processing industry and asks students to prepare worksheets and graphs to determine credit card costs from the merchant's perspective and revenues from the processor's perspective. The workbook tasks require the use of absolute and relative cell-referencing and the MAX function, and also contain formatting issues for spreadsheets and graphs. The students are also asked to write a memo and to respond to several questions about decision making by the merchant and by the processor. One series of open-ended questions asks students to reflect on uncertainty, information bias, and risk aversion as elements of the decision making process.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Credit cards; Spreadsheets; Decision making; Writing; Case studies

Location: United States--US

Classification: 9190: United States; 9130: Experimental/theoretical; 5240: Software & systems; 8120: Retail banking services

Publication title: Journal of Business Case Studies (Online)

Volume: 7

Issue: 6

Pages: 1

Publication year: 2011

Publication date: 2011

Year: 2011

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: 1418709175

Document URL: http://search.proquest.com/docview/1418709175?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2011

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 28 of 100

Cost Assignments In A Managerial Accounting Contract Logging Context

Author: Kilpatrick, D.J.; Reider, Barbara P.; Taylor, Cathy Y.

ProQuest document link

Abstract:

This case describes a firm where the controller is planning to use his expertise in accounting for company-owned timber to consider logging on a contract basis for others. To develop the contract strategy, the controller must understand the firm's costs so that he can prepare competitive bids and provide an adequate profit margin. This case requires students to engage in the first steps of developing a cost management system for a contracting situation. Students must: (1) identify management's information needs, (2) identify cost objects, (3) identify appropriate costs to assign to cost objects, (4) identify potential allocation bases for indirect costs, and (5) describe cost behavior.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Cost allocation; Cost accounting; Costs; Timber industry; Case studies

Location: Alaska

Classification: 9190: United States; 9130: Experimental/theoretical; 8630: Lumber & wood products industries; 4120: Accounting policies & procedures

Publication title: Journal of Business Case Studies (Online)

Volume: 7

Issue: 6

Pages: 7

Publication year: 2011

Publication date: 2011

Year: 2011

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: 1418709116

Document URL: http://search.proquest.com/docview/1418709116?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2011

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 29 of 100

What Executives Can Learn From Bono

Author: Petit, Francis

ProQuest document link

Abstract:

The purpose of this research is to determine what executives can learn from Paul David Hewson (aka Bono). To determine this information, a historical study of Bono's life was conducted with the hopes of uncovering key learning points and takeaways for executives. The main findings of this study indicate that there are various lessons executives can learn from Bono's unconventional voyage to stardom and power. The results of this exploratory study can potentially ignite increased research on Bono's journey and what executives and corporate America can learn from this musician from Dublin.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Executives; Professional development; Social responsibility; Celebrities; Brands; Case studies

People: Bono (Paul Hewson)

Classification: 9130: Experimental/theoretical; 8307: Arts, entertainment & recreation; 2410: Social responsibility; 6200: Training & development; 2130: Executives

Publication title: Journal of Business Case Studies (Online)

Volume: 7

Issue: 6

Pages: 17

Publication year: 2011

Publication date: 2011

Year: 2011

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: 1418709444

Document URL: http://search.proquest.com/docview/1418709444?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2011

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 30 of 100

Fighting For Control Power Of GOME Inc.: A Case Study

Author: Huang, Yinfang; Huang, Chia-Hsing; Li, Xueqi

ProQuest document link

Abstract:

At 2:30pm, September 28, 2010, a special shareholder meeting for GOME is called by the largest shareholder of GOME, Guangyu Huang, to be held on the first floor of Regal Hotels, 88 Yee Wo Street, Causeway Bay, Hong Kong. GOME Electrical Appliances is one of the largest electrical appliance retailers in Mainland China and Hong Kong. Huang Guangyu, the founder and largest shareholder of GOME, is currently in jail. The purpose of this meeting is to vote on the eight items on the agenda, including deposing the professional manager, Xiao Chen, from the CEO position of GOME. Should the investors support the largest shareholder or the professional manager? It may be the toughest problem GOME has faced in its history. It seems that no matter who wins, the result may not be good news to GOME and its investors. This case is about corporate governance and agency problems and is appropriate for undergraduate and graduate courses in Investment, Corporate Finance and Financial Markets.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Shareholder meetings; Retailing industry; Investors; Corporate governance; Managers; Corporate profiles; Case studies

Location: China

Company / organization: Name: GOME Electrical Appliances Holdings Ltd; NAICS: 443142

Classification: 9179: Asia & the Pacific; 9130: Experimental/theoretical; 2110: Boards of directors; 8390: Retailing industry; 3400: Investment analysis & personal finance

Publication title: Journal of Business Case Studies (Online)

Volume: 7

Issue: 6

Pages: 23

Publication year: 2011

Publication date: 2011

Year: 2011

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: 1418709121

Document URL: http://search.proquest.com/docview/1418709121?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2011

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 31 of 100

Crossing Borders: The Case Of Mexican Tomatoes

Author: Paden, Nita

ProQuest document link

Abstract:

The case involves distributors who import Mexican produce into the United States. To-Mex faces several problems. First, U.S. homeland security is at an all time high and is likely to continue growing tighter. The potential for delays at customs is significant. Second, Mexican produce has image issues in the U.S. market. Some American consumers have the perception that Mexican produce may not be safe to eat. Changing those perceptions is critical. The third issue relates to product strategies, including a possible move from predominantly field grown tomatoes to greenhouse operations, possible development of consumer brands for produce, and the potential effects of country of origin labeling on consumer produce preferences.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Vegetables; Imports; Distributors; Rule of origin; Brands; Case studies

Location: Mexico, United States--US

Classification: 9190: United States; 9173: Latin America; 9130: Experimental/theoretical; 8303: Wholesale industry; 1300: International trade & foreign investment; 8400: Agriculture industry

Publication title: Journal of Business Case Studies (Online)

Volume: 7

Issue: 6

Pages: 39

Publication year: 2011

Publication date: 2011

Year: 2011

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: 1418710373

Document URL: http://search.proquest.com/docview/1418710373?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2011

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 32 of 100

Susan's Career Dilemma At MGR, LLC

Author: Mento, Anthony J.; Cummings, Jeffrey L.

ProQuest document link

Abstract:

Professionals starting their first job after graduate school want to launch a successful career. Unfortunately, some of them soon find out that performing at a high level does not always guarantee rapid promotion or success in their organization. This is a story about Susan, a highly recruited attorney, who joined an established law firm in Washington, DC, and was slow to realize that managing her boss is a critical skill needed for her survival and prosperity. Carlos, her direct supervisor and advocate of a tough love approach to management, views the effective nurturance and mentoring of new employees as his means of entrée into the ranks of senior partner. Carlos and Susan are on a collision course with a potential impact on both of their careers. Susan needed to decide at the end of the case what to do to strategically manage her career.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Supervisors; Employee management relations; Management styles; Influence; Attorneys; Law firms; Case studies

Location: United States--US

Classification: 8305: Professional services not elsewhere classified; 9190: United States; 9130: Experimental/theoretical; 2200: Managerial skills; 6100: Human resource planning; 2400: Public relations

Publication title: Journal of Business Case Studies (Online)

Volume: 7

Issue: 6

Pages: 49

Publication year: 2011

Publication date: 2011

Year: 2011

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: 1418710366

Document URL: http://search.proquest.com/docview/1418710366?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2011

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 33 of 100

Making Compelling Movie Posters Using Statistical Science And An Eye Mark Recorder

Author: Uchida, Kazunori; Kohara, Daisuke; Yamada, Maho; Amasaka, Kakuro

ProQuest document link

Abstract:

This study focuses on advertising posters for movies, investigating methods of designing compelling posters to encourage viewing. The results of questionnaire surveys were analyzed using statistical science to produce new movie poster designs. The effects of the new posters were then validated using an eye mark recorder. As a result, the authors have succeeded in creating a decision-making method to assist in designing compelling movie posters.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Motion pictures; Print advertising; Design; Decision making; Case studies

Location: United States--US

Classification: 9190: United States; 9130: Experimental/theoretical; 7200: Advertising; 8307: Arts, entertainment & recreation

Publication title: Journal of Business Case Studies (Online)

Volume: 7

Issue: 6

Pages: 63

Publication year: 2011

Publication date: 2011

Year: 2011

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: 1418710052

Document URL: http://search.proquest.com/docview/1418710052?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2011

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 34 of 100

Franklin Enterprises: The New Division

Author: Ellis, Crystal; Austin, Nathan

ProQuest document link

Abstract:

Franklin Enterprises, a leading supplier of industry plumbing, heating and cooling equipment, decided to set up an eBusiness division, Franklin Online (FOL), to develop online services for corporate account holders. Cody Lewis, an exemplary inside sales person, was appointed a Regional Business Development Manager (RBDM) for the newly established eBusiness division. With his sales skills, he created a team of sales people in his region that helped increase sales significantly through much quicker market penetration activities. He also worked closely with the other RBDM's in order to maximize the success of each territory. The very significant growth of the eBusiness division for corporate accounts led Franklin Enterprises to subsequently extend the service to the non-account consumer market as well.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Divisions; Total quality; Leadership; Organization development; Electronic commerce; Suppliers; Case studies

Location: Canada

Company / organization: Name: Franklin Enterprises; NAICS: 333515

Classification: 5250: Telecommunications systems & Internet communications; 9172: Canada; 9130: Experimental/theoretical; 2500: Organizational behavior; 2200: Managerial skills; 5320: Quality control; 8303: Wholesale industry

Publication title: Journal of Business Case Studies (Online)

Volume: 7

Issue: 6

Pages: 71

Publication year: 2011

Publication date: 2011

Year: 2011

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: 1418709064

Document URL: http://search.proquest.com/docview/1418709064?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2011

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 35 of 100

Automating The Improvement Of Service Quality: The TELCO Case

Author: Harison, Elad; Barkai, Ofer

ProQuest document link

Abstract:

The case under discussion presents a new and innovative framework for implementing preventive service systems that detect potential service malfunctions, attempt to automatically prevent them and notify customers about the results of these operations. Such automated systems may proactively avert service malfunctions and reduce the volume of customer complaints due to service outages. The presented framework is based on four major stages: continuous detection of service delivery infrastructure and equipment, prevention of identified service failures, notification of customers about service failures and follow-up activities. Telco is a major Israeli telecommunications operator that implemented the preventive service methodology and systems to improve the quality of its services to the satisfaction of its largest customers. The model presented in this paper can be utilized by a broad variety of firms and service providers as means for improving the quality of their services, the satisfaction and the loyalty of customers and the ability to retain them for longer periods in an increasingly competitive environment.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Customer satisfaction; Complaints; Quality of service; Telecommunications industry; Case studies

Location: Israel

Classification: 9178: Middle East; 9130: Experimental/theoretical; 8330: Broadcasting & telecommunications industry; 5320: Quality control; 2400: Public relations

Publication title: Journal of Business Case Studies (Online)

Volume: 7

Issue: 6

Pages: 81

Publication year: 2011

Publication date: 2011

Year: 2011

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: 1418709996

Document URL: http://search.proquest.com/docview/1418709996?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2011

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 36 of 100

Implementing Planning in Reverse in strategic business, education and public leadership courses

Author: Ballantyne, Scott

ProQuest document link

Abstract:

The purpose of this paper is to provide a pathway for instructors and presenters to implement the Planning in Reverse process. This process is a much needed component that should be added to administrative and management classes in business, education and public administration. The changes in the economy have caused a fundamental need to alter the way organizations approach the strategic planning process. The focus of organizational leaders and its member stakeholders can play an important role in the success of the organization by utilizing this new procedure to maintain viability of an organization. A practical approach to employee involvement at a commitment level that is achievable by all organizations will be discussed. Finally, an outline that can be utilized to incorporate Planning in Reverse as a module in an existing business, education or public administration courses is included. [PUBLICATION ABSTRACT]

Full text:

Introduction

The purpose of this paper is to provide a helpful process to include the newly created Planning in Reverse process in curricula where it is appropriate. This new strategic planning process may be essential to the future health of organizations as the economic uncertainty of recent times continues. By understanding the Planning in Reverse process faculty members and workshop presenters will understand how to properly incorporate the new process into existing courses and presentations on strategic planning and strategic leadership. This, in turn, will then adequately prepare students to embrace the new process that may become the standard in the strategic planning process.

The process is a needed addition for organizations in all disciplines to better address the escalating rate of change. Essential to K-12 education settings, colleges and universities, small and large businesses and governmental and not for profit agencies for improved awareness, it allows the inclusion of all stakeholders. Implementation is surprisingly easy and can be completed with little cost to the organizations. Individuals departments may benefit from implementation within a segment of an organization.

Training to provide a change in the way leadership views change may be the most expensive component of converting to the Planning in Reverse process. Ultimately, even this cost is minimal. For most of the stakeholders, their involvement will require implication scans which take little time but can become extremely valuable to the organization. Planning in Reverse is a needed change in the way organizational leadership completes strategic planning.

Background

Strategic Planning has been the tool utilized to formulate order for an organization to move forward. It is a plan that sets up goals and objectives that drive an organization towards fulfilling its mission. In the past long term strategic plans were typically five to ten years. These plans were often static with little flexibility (Ballantyne, Berret & Wells, 2011). A trend has begun to develop whereas strategic plans typically cover three to seven years. Many organizations have implemented very sophisticated strategic plans. In addition, there are many organizations that have not implemented sophisticated strategic plans, in both cases organizations have succeeded and failed with and without strategic plans (Ballantyne, Berret & Wells, 2011). This phenomenon posits the idea that strategic plans may lack a fundamental component that helps organizations succeed. What causes these organizations to succeed or fail with or without strategic plans? Change is the answer.

These organizations may have not reacted as quickly as they should have based on rapid change that affected their organizations. The rate of change is increasing exponentially leading to the new reality that the 21st century will be equivalent to 20,000 years of progress at the current rate of change (Kurzweil & Meyer, 2003). This acceleration of the rate of change can be identified as a new deficiency in the long term strategic planning process. Coupling the accelerating rate of change with the change in economic conditions has caused the traditional static strategic plan to become compromised as a guiding plan for organizational success.

Leadership skills need to be enhanced. With the change in economic conditions along with the acceleration of the rate of change, an enhancement to current leadership practices is needed. This enhancement is necessary so that Planning in Reverse can be successfully implemented into organizations thereby improving the opportunity to sustain organizations by returning the strategic planning process to a viable planning tool. The most important skill to enhance when making the switch to Planning in Reverse is listening. It is important to recognize that plans do not accomplish anything, people accomplish the necessary items that make organizations successful (Musso, 2011),

Planning in Reverse

Planning in reverse is a process. It was developed so that organizations can effectively utilize change to their advantage. The long term strategic plan develops deficiencies due to the accelerating rate of change. Planning in reverse incorporates the change into the strategic planning process. It accomplishes this task through the i-process which provides a model to implement adjustments based on implication scans. Implication scans are the initial step in the Planning in Reverse process. (Ballantyne, Berret & Wells, 2011). Implication scans are observed and reported by all stakeholders associated with the organization. This is where the initial observation, collected by a stakeholder, is processed to determine the affect they may have on an organization.

These scans are never summarily dismissed. Each scan receives the same initial review. If the committee does not believe the scan reaches the level of impact it is not categorized, it is closed and no further consideration is required. Implication scans that do reach the level of impact are further defined as an internal or external. An internal impact is one in which the change scan affects operations within the confines of the organization. An external impact is one that affects the organization but is driven by outside forces exerted on the organization (Ballantyne, Berret & Wells, 2011). These impacts are then further delineated into improvements or impediments by a committee designated to review all implication scans (Ballantyne, Berret & Wells, 2011).

This is an area where transparent communication is necessary. Everybody in the organization needs to know the status of each scan as it proceeds through the i-process. Transparency and effective two way communication must be started no later than the impact level, preferable it should start at the implication scan. (Ballantyne, Berret & Wells, 2011).

As the impact is formulated into an improvement or an impediment, an itemized action plan (IAP) is developed (Ballantyne, Berret & Wells, 2011). This plan will include a series of recommendations that will be utilized to take advantage of the affect that the indicated change may have on the organization. The organization will rely on this plan as the basis for moving forward.

After completion of the itemized action plan, the plan moves forward in the i-process for implementation. Implementation is the process whereas timelines and assigned responsibilities are received. The implementation process begins to assemble the cost and timelines necessary to harness the positive benefits of an improvement impact. Conversely, it has the same effect on an impediment impact except that the motives are to limit the negative impact on the organization (Ballantyne, Berret & Wells, 2011).

Integration is the next step in the i-process. Integration is the process of changing the culture to accept the new method or procedure being implemented into the organizational processes. Integration requires the inclusion of all peripheral stakeholders that will be affected by the new process (Ballantyne, Berret & Wells, 2011). It is at this point that additional valuable information is learned from the stakeholders. Alterations prior to initiation may be necessary as individuals begin to understand what needs to change to accommodate the new process or procedure. Revisions are acceptable if the revisions will benefit the organization.

Finally, initiation begins. Initiation is the final step in the i-process. It is the complete integration of the necessary changes to move the organization forward. With initiation the process is complete for this particular implication scan. The process is circular however, so it is a continuous process of scanning by stakeholders. These short term adjustments are needed to improve the chances for long term viability (Ballantyne, Berret & Wells, 2011).

Teaching Planning in Reverse

Planning in Reverse can be revealed through several different techniques. The least intrusive may be to simply place the book that explains the process on a required reading list for students in certain courses. For business students, strategic management courses are most appropriate. For education courses, school administration classes that deal with strategic planning are most appropriate. For public administration and not for profit programs, courses directed at strategic leadership are most appropriate. While this will make students aware of the new process, it will not provide an interactive experience that allows a more intensive experience.

Inclusion in existing courses is a potential compromise that will provide students with the opportunity to have a more robust approach to Planning in Reverse. The suggested approach is to require students to read several chapters of the book prior to the assigned class period. The class period will require a general discussion on the chapters covered and a question and answer period. As students begin to grasp the concept a simulation based on implication scans can be very beneficial for student understanding. If this method is utilized, four to eight hours of instruction may be adequate. Adjustments in time requirements can be made by the professor as familiarity with the content begins.

The best opportunity for complete understanding and effective comprehension is developing a full course on Planning in Reverse. The book is relatively inexpensive and easily understood. It is not a very long read so it is easy to complete the book in any hybrid model course design. The key to understanding Planning in Reverse is to include an experiential component. Experiential learning provides an additional component to the course that will help students more fully understand the concepts discussed in the book (Kolb, 1983). Students should be encouraged to select a potential company and then employ the techniques associated with Planning in Reverse. As students begin to create implication scans, the i-process can be continued so students can see how a tiny clue can require major restructuring within an organization. At this point, students will gain confidence in their ability to strategically lead an organization in this time of change.

Finally, workshops and presentations provide an introduction to Planning in Reverse or in an ideal situation, provide an opportunity for students to discuss their understanding with one of the authors that created the Planning in Reverse process. These workshops can be set up via access to the Planning in Reverse website at www.planninginreverse.com. These workshops and presentations make excellent keynote speaker presentations for business and school organizations as well as student organizations and groups.

Partial and full sample syllabi are included as a resource for potential course leaders and professors to help in the inclusion of planning in reverse in the curriculum at the website (planninginreverse.com, 2010). These syllabi are available free of charge. In addition, periodically checking the website is helpful in teaching the Planning in Reverse process. Additional resources will be posted on the website as new materials are released. Access to the authors is possible through the website. The authors will provide timely responses to questions regarding the process. Students and faculty are encouraged to provide any examples utilized in the instructional process so they can be shared with other interested parties.

Summary

Planning in Reverse is an innovative new process that may replace traditional static strategic planning in small organizations and will enhance the strategic planning process in larger organizations (Ballantyne, Berret & Wells, 2011) Planning in reverse is necessary in all organizations. The effect of change and the increasing rate of change have caused a need to fundamentally alter the process used by organizations to remain viable into the future. Combining the change factor with current economic realities requires organizations to be proactive in addressing issues which effect the operation. This is handled best by including all stakeholders in the process of creating long term viability. Planning in Reverse is the answer to this new reality in which organizations operate. Perhaps, this process will improve the opportunity to be successful for all organizations and strategic planning will become a more fluid tool.

Subject: Strategic planning; Leadership; Business ethics; Employee involvement; Case studies

Classification: 2410: Social responsibility; 2200: Managerial skills; 2310: Planning; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 4

Pages: 1-5

Number of pages: 5

Publication year: 2011

Publication date: Oct 2011

Year: 2011

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: 888056202

Document URL: http://search.proquest.com/docview/888056202?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Oct 2011

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 37 of 100

Enlightened entertainment: what are friends for? a business ethics case study

Author: Stell, Roxanne; Watkins, Larry; Yordy, Eric

ProQuest document link

Abstract:

The case focuses on a Chief Financial Officer's ethical dilemma resulting from the Chief Executive Officer's decisions that appear to serve him and his friend rather than the stockholders. Students are provided an opportunity to evaluate an ethical dilemma from multiple perspectives. The teaching note provides several questions that can be used by the instructor to guide student analysis. Since students can approach ethical decision making from a variety of perspectives, the teaching note also offers multiple solutions (code, outcome, values, editorial, and rule analysis) and sections from the American Institute for Certified Public Accountants (AICPA) Code of Professional Conduct. This case is appropriate for use in business ethics, legal environment of business, business law and accounting courses. [PUBLICATION ABSTRACT]

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INTRODUCTION: THE CASE

Enlightened Entertainment, Inc. (EEI) is a publicly traded company that engages in the production and distribution of motion picture entertainment products online and through traditional delivery arrangements. Ira Simon founded the company in southern California some twenty-five years ago and, after later taking the company public, remains as chairman of the board of directors and Chief Executive Officer (CEO). Even though the total capitalization of EEI is only $200 million, there is a full complement of executives including president, chief operating officer, chief financial officer, chief information officer, and general counsel. EEI decision-making appears to be based on perceived benefit of executive management. There is no mission statement or strategic plan for the company. Strategic decisions are made with the stated intention of maximizing stock value although it appears many such decisions are also made with the intent of ensuring that the CEO maintains his position in the company. The compensation level of executive management is approximately 25% above the norm for companies of comparable size. Neither the company nor its management participates in any civic or philanthropic activities.

Ira Simon met Billy Meacham when Ira was struggling to get on his feet financially with his new company (EEI). Since that time they have remained fast friends and have belonged to the same social circles for decades. They occasionally get together for dinner, drinks and discussions about various topics. Meacham owns several automobile dealerships in the Los Angeles area. Meacham was one of the early investors in EEI and still owns 1,000,000 shares (<2%) of EEI stock.

Boyd Ashcroft has been a very successful business man, owning several local franchise restaurants. Ashcroft and Meacham, in addition to their respective individual businesses, had formed a partnership, B & B Partners, to facilitate other investments. Fifteen years ago B & B Partners loaned $2,000,000 to EEI when EEI was experiencing a cash crunch. Twelve years ago EEI repaid the $2,000,000 plus interest to Ashcroft as instructed by B & B Partners as payment in full. Unfortunately, Ashcroft was experiencing financial difficulties and did not remit to Meacham as agreed. Meacham sued Ashcroft, but was unsuccessful in collecting any award. Meacham then sued EEI for one-half of the amount, $1,000,000 plus interest, and litigation has been on-going for the last 10 years. EEI's general counsel, Rick Turner, indicated on multiple occasions that there was a high probability that EEI would win the case based on his assessment and that of outside counsel.

In the last quarter of 2008 the U.S. economy was under severe stress with record unemployment, massive financial institution failures, and near trillion dollar federal "bailouts". The domestic auto industry was on the verge of bankruptcy due in no small part to sales declines of forty percent or more. As a result, Billy Meacham was experiencing financial setbacks unimagined just months prior and stood to lose virtually all the personal wealth he had amassed over his lifetime.

At the beginning of December 2008, Simon called Chris Meyers, a Certified Public Accountant (CPA) and the CFO (Chief Financial Officer) of EEI, and Rick Turner, the general counsel, into his office on a Monday morning. Simon provided the two with a brief overview of the history of B & B Partners' dealings with EEI, including recent settlement discussions between Simon and Meacham. Then he directed Turner to write up an agreement between EEI and Meacham effectively ending the ongoing litigation in return for a $50,000 cash payment from EEI to Meacham. Meyers was concurrently directed to issue a check for $50,000 to Billy Meacham. Turner and Meyers expressed severe reservations to Simon since all indications were that the litigation may well have been near final resolution in the judicial process. Simon ended the exchange by saying it was a business decision he made to end the litigation and put an end to the ongoing legal costs. Legal costs to date were approximately $20,000 an amount which EEI stood to recover if the judicial outcome was favorable to EEI.

After a lengthy discussion Meyers and Turner scheduled another meeting with Simon on Tuesday morning to discuss the proposed Meacham settlement. Meyers and Turner presented what they believed were well reasoned arguments as to why the proposed settlement was not advisable. Simon was unmoved and reiterated his position that he was making a business decision that, in his opinion as CEO, was best for all concerned.

Meyers is very uncomfortable with the decision made by Simon and is considering taking the issue to the board of directors. However, the board members were all handpicked by Simon and are unlikely to risk opposing their benefactor. Each board member receives $25,000 for each of the four one-day board meetings they attend annually. Additionally, only one of the nine board members (an attorney) is sophisticated enough in business dealings to understand the potential ramifications of Simon's actions.

THE TEACHING NOTE

This case is appropriate for use in undergraduate business ethics courses, legal environment of business courses, business law courses, or undergraduate/graduate accounting courses. This case deals with issues of corporate governance, management indiscretion or perhaps managerial malfeasance relating to a public company all in an ethics setting. The write-up of the solution to this case is also a useful vehicle for student preparation of either a professional memo or an executive summary. Both provide reinforcement of technical writing skills.

CASE QUESTIONS

Although not included in the body of the case, to allow instructor discretion regarding guidance, the following six questions can be provided to student users of this case. This provides a more structured approach which may be appropriate for undergraduate students.

1) What are the facts relating to the proposed settlement?

2) What don't you know that would be helpful?

3) If there is an ethical dilemma what is it?

4) Who are the stakeholders in this situation?

5) What are the alternatives?

6) What is the best alternative for Chris Meyers?

THE CASE SOLUTION

1) What are the facts relating to the proposed settlement?

The following facts can be identified: (a) there was a loan made to the corporation; (b) the loan was made by a partnership that consisted of one minority stockholder and one non¬stockholder; (c) the corporation paid back the loan to the partner who was not a stockholder in the corporation; (d) the partner receiving payment did not share the proceeds with his partner; (e) the unpaid partner, who also is a stockholder in the corporation, sued the corporation; (f) after ten years of litigation, the Chief Executive Officer (CEO) of the corporation decided to offer a settlement.

2) What don't you know that would be helpful?

It might be helpful to have answers to the following questions: (a) Are Meacham and Ashcroft a true legal partnership? What is the nature of their business? If they are a partnership, what does the partnership agreement say about this sort of issue? If the partnership agreement is silent, does the state law address disputes amongst partners in this type of situation? If so, what guidance does it give? Did the loan come from the partnership or from the two individuals acting outside of the partnership? How was it documented to make sure it was not a partnership loan if it was not meant to be? (b) Is the $50,000 a proposed settlement offer or is it the result of some negotiation between Simon and Meacham? (c) What was the procedural history of this dispute? Were there early attempts at negotiation, mediation, arbitration, etc.? (Note: It is our understanding that there were no earlier official attempts to negotiate or settle). (d) What are the terms of the release of liability? (e) Why did Simon choose to offer a settlement (or agree to a settlement) when the litigation was near its end? (f) Was there a stock buy-back program approved by the board?

3) If there is an ethical dilemma what is it?

The main ethical dilemma in the case deals with Meyers. Is it ethical for a Chief Financial Officer, Certified Public Accountant (Meyers) to cut a check for an agreement made under the circumstances listed above without approval from the board or the stockholders? Additional ethical dilemmas to discuss include: Is it ethical for the CEO of a corporation (Simon) to offer a settlement to a friend in need when it appears that a dispute between the corporation and the friend will be resolved in the corporation's favor? EEI: Is it ethical to pay $100,000 for board members to attend four meetings per year? Is it ethical to have a board that lacks sophistication regarding corporate business dealings?

4) Who are the stakeholders in this situation?

At least eight stakeholders can be identified, they include: (a) Chris Meyers and his dependents; (b) Ira Simon; (c) Billy Meacham; (d) Rick Turner; (e) Other management personnel of EEI (President, Chief Operating Officer, Chief Information Officer, etc.); (f) Board of Directors of EEI; (g) Stockholders of EEI; (h) Potentially Boyd Ashcroft (if he was a party to the litigation which he should have been)

5) What are the alternatives?

A. Write the check on the orders of the CEO

B. Tell the CEO that you need to run something like this past the Board or the Stockholder

C. Refuse to write the check and resign

D. Buy back Meacham's stock (If EEI has a stock buy-back program in effect at this time and Meacham was to request that EEI purchase his shares. It should be noted that EEI cannot make an offer to acquire Meacham's shares since to do so would likely be considered a tender offer by the SEC which raises multiple legal issues beyond the scope of this case.)

E. Try to convince Simon that it is not in the best interest of the company to settle with Meacham by looking at the public relations aspects of the settlement. Point out how bad it might look.

6) What is the best alternative for Chris Meyers?

This response depends on the objective of the instructor. For example, using this case in an accounting course to familiarize students with the American Institute for Certified Public Accountants (AICPA) Code of Professional Conduct will provide one response. Alternatively, if the instructor wants the students to do a thorough ethical analysis different responses will likely surface.

EVALUATING ALTERNATIVES WITH THE COVER MODEL

For the analysis of alternatives the 'Cover Model' for ethical decision-making by Mitchell and Yordy (2010) is used. This model incorporates many of the ethical theories found in business ethics textbooks and asks students to examine an ethical dilemma from multiple perspectives to achieve a well-reasoned answer. As such, the remaining discussion in the teaching note examines the previously stated alternatives (A-E) using each of the five components of the Cover Model (i.e. code, outcome, values, editorial, and rules analysis). If the instructor wishes, it is appropriate to select one or more components of the Cover Model while eliminating others. For example, they could have students focus on values analysis and editorial analysis when examining alternatives and determining the best course of action for Chris Meyers. Although not included in the teaching note, additional solution models that may be more familiar to the instructor are also appropriate.

CODE ANALYSIS

The Code Analysis requires students to look at any codified behavioral guidelines such as statutes, regulations, or codes of conduct or ethics (profession, industry or company specific). In this section, students would examine the alternatives (A-E) from case question 5, in relation to any relevant codes.

A. Write the Check

Statutes and Regulations. There generally is nothing illegal or in violation of regulations in settling a lawsuit and writing a check to the other party as directed by one's superior. Assuming that the payment will be accurately reflected in the financial statements, there is no violation of the Sarbanes-Oxley Act.

In law, the duty of care and a duty of loyalty are imposed on officers and directors of corporations. As CFO, Meyers is most likely subject to those duties. The duty of care requires an officer to act as a reasonably prudent officer would act, investigating alternatives and making a reasonable (not perfect or best) business judgment. The duty of loyalty requires that the officer not serve two masters. In this case, Meyers probably is fine writing the check as there is uncertainty in whether the law suit will be won. There is an argument that Simon will be violating the duty of loyalty since he appears to be putting friendship before the best interest of the company.

AICPA Code of Professional Conduct. (a) The AICPA Code of Professional Conduct espouses certain values. One of these, integrity, looks at what is "right or just." (Conduct section 54.03). Writing the check to Meacham when there is a high probability that EEI will win the lawsuit and recover all costs may be seen as a violation of this principle. At the same time, there never is certainty in lawsuits and EEI may lose and owe Meacham $1,000,000. (b) While there are no indications in the case that Simon intends to obfuscate settlement of the litigation in the financial statements, Meyers should be careful that the settlement is appropriately disclosed in those statements. (AICPA Code of Professional Conduct section 102.02).

State Law. Students should do some investigating based on the particular laws of the state. For example: (a) Section 8.42 of the American Bar Association (2003) Model Business Corporations Act (3rd edition) states,

"An officer shall discharge his or her duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances and in a manner the officer reasonably believes to be in the best interests of the corporation. The officer is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by either: 1. One or more directors, officers or employees of the corporation whom the officer reasonably believes to be reliable and competent in the matters presented. 2. Legal counsel, public accountants or other persons as to matters the officer reasonably believes are within the person's professional or expert competence."

(b) See also, Arizona Revised Statutes, Section 10-842 (Arizona's codification of the Model Business Corporations Act, Section 8.42).

B. Board Approval

Tell Simon that he must receive Board approval. For this situation, one must look to the Bylaws of the organization. If the bylaws do not require clearance of the board for checks of this magnitude, or clearance of any legal settlement, then there is probably not a good basis for this request.

C. Refusal - Resignation

Meyers can refuse to write the check and/or resign from the company. There is nothing in the code to prevent this alternative although there will likely be negative consequences for Meyers

D. Buy-Back Meacham's Stock

If there is a stock buy-back program, propose that the corporation offer to buy Meacham's stock at market value if the CEO's purpose is to provide cash to Meacham.

Rule 14(d) 10 of the Securities Exchange Act of 1934, sometimes referred to as the "All holders best price rule," precludes offering to buy a stockholder's shares unless the same offer is made to all stockholders of that class of stock.

There may be fraud issues. For example Section 44-1991of the Arizona Revised Statutes states,

"It is a fraudulent practice and unlawful for a person, in connection with a transaction or transactions within or from this state involving an offer to sell or buy securities, or a sale or purchase of securities... directly or indirectly to do any of the following: 1. Employ any device, scheme or artifice to defraud. 2. Make any untrue statement of material fact, or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. 3. Engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit."

E. Convince Simon

Try to convince Simon that the proposed settlement is not in the best interest of the company by looking at the public relations aspects of the settlement. Point out how bad his proposed action might look even though there is nothing illegal about persuasion.

Code Analysis: Conclusion

The result of this analysis is that there is nothing legal or codified to prevent Meyers from pursuing any of the alternatives unless it entails the purchase of Meacham's stock. Even so, students may wish to eliminate the stock buy back plan as impracticable.

OUTCOME ANALYSIS 1

The Outcome Analysis is centered in the ethical idea of Utilitarianism. In this analysis students do a cost/benefit analysis of each alternative as indicated in Table 1 (appendix). Students must determine which alternative has the higher positive net impact. Again, students may wish to eliminate the stock buyback option at this point due to the significant risk involved.

VALUES ANALYSIS

The Values Analysis is based in values ethics. For the purpose of business ethics, students look to evidence of the company's values to determine if the alternatives are in line with those values. That evidence typically comes in the form of Mission Statement and company culture. The values of EEI are stated in the text of the case: decision-making at EEI tends to reflect a protective stance toward existing management. There is no mission statement or strategic plan.

A. Write the Check

This option will allow Simon to move past the issue and put some closure to it. Lack of attention to continued litigation may protect his position. From Meyers' perspective, this option is uncomfortable based on his personal ethics and it may be reason to evaluate the person/organization fit.

B. Board Approval

Tell the CEO that you need to run something like this past the Board or the Stockholders. Simon won't like this option as he is more likely to feel his position is at risk. In addition, the Board may buy into the culture of protecting the CEO and so will automatically approve his actions. On the personal side, this may allow Meyers to feel like he has done all he can do.

C. Refusal - Resignation

Refuse to write the check and resign. This won't have negative consequences for Simon. He will find someone to replace Meyers who will write the check. From Meyers' point of view, this may allow him to walk away feeling guilt free.

D. Buy-Back Meacham's Stock

Propose that the corporation offer to buy Meacham's stock at market value if Simon's purpose is to provide cash to Meacham. Simon may be willing to do this as it makes the settlement look like a legitimate business transaction while protecting his position as CEO. At the same time, there are significant business risks (as they would have to make the same offer to all shareholders or risk SEC censure).

E. Convince Simon

Try to convince Simon that it is not in the best interest of the company to settle with Meacham by looking at the public relations aspects of the settlement point out how bad it might look. Simon will have to weigh the negative publicity associated with "cronyism" with the negative publicity of ongoing litigation. If Meyers can be persuasive, this would be in line with the company culture of protecting the CEO.

Values Analysis: Conclusion

The result of this analysis will depend in part on the class's vision of the company values and any discussion of person/organization fit. To stay true to the company's values and yet be true to his own values, Meyers should first try to persuade Simon not to issue the check. A second option to discuss seriously with the class is the issue of Meyer's resignation.

EDITORIAL ANALYSIS

This analysis asks the students to take any negative publicity from the cost/benefit analysis (or brainstorm for negative publicity effects if it did not come out in the Outcome Analysis) and apply the values to those effects. It asks, "For each alternative, what is the negative publicity effect and how does the decision-maker feel about addressing that effect?"

A. Write the Check

Negative publicity could focus on the duty of loyalty and duty of care problems of the CEO and the blind following by the CFO. Per the statement of the case, Meyers is not comfortable with this situation and having to defend that position.

B. Board Approval

Tell the CEO that you need to run something like this past the Board or the Stockholders. Chances are good that there would be no negative publicity effect here. But if this alternative is selected and the Board approves the payment, the negative publicity may focus on the duty of loyalty or care problems with Simon selecting the Board. The media may focus on the attempt to create a false appearance of fairness. Again, Meyers may not be comfortable facing the stockholders and analysts to defend a decision to issue a check to Meacham after consulting a clearly biased board.

C. Refusal-Resignation

The resignation of a member of senior management always brings close scrutiny by investors and analysts. This scrutiny would likely discover the reason for the resignation possibly leading to significant negative publicity for EEI. Although it is unlikely that Meyers would be viewed negatively by stockholders or analysts, he may have a difficult time finding another CEO that would hire him. If Meyers refuses to write the check, and it leads to continued litigation and a subsequent loss by the company requiring a $1,000,000 payment, the negative publicity would be significant.

D. Buy-Back Meacham's Stock

Propose that the corporation offer to buy Meacham's stock at market value if Simon's purpose is to provide cash to Meacham: The negative publicity here would focus on the personal relationship of Meacham and Simon. The negative publicity for Meyers may be minimal but he would be associated with a company where this relational decision-making is accepted. There may be further negative publicity related to violation of SEC rules if the offer is only made to Meacham.

E. Convince Simon.

Try to convince Simon that the proposed settlement is not in the best interest of the company by looking at the public relations aspects of the settlement. Point out how bad it might look. Meyers would try to use the editorial analysis to convince Simon that the decision is not a good one. If Meyers attempts and fails, then writes the check, the negative publicity would relate to his knowledge that it was a poor decision (in the eyes of the public) and yet he acquiesced in the end.

Editorial Analysis: Conclusion

The result of this analysis will depend in part on Meyers' personal values. Students should discuss their own values and which alternative they would feel most comfortable defending if they found themselves in Meyers' circumstance.

RULE ANALYSIS

Rule Analysis is based in Kant's categorical imperative and asks, "What would the world be like if everyone made the decision I am about to make?" The key to this analysis is that this does not allow anyone to minimize his or her impact.

A. Write the Check

Meyers can write the check on the orders of the CEO. If everyone in Meyers' situation wrote the check, it could erode what little faith Americans have in corporations. There would be a perception that all corporations are out to benefit the friends of the corporate leaders to the detriment of the shareholders.

B. Board Approval

Tell the CEO that you need to present something like this to the Board or the Stockholders. If all CFOs approached uncomfortable decisions in this manner, it could lead to a re-evaluation of corporate decision-making to clarify what the Board or shareholders need to see. It also could create more distrust between the CEO position and the financial positions within corporations resulting in less efficient operations.

C. Refusal - Resignation

If all CFO's in similar situations refused to write the check, it could improve corporate stewardship.

D. Buy-Back Meacham's Stock

Selective repurchase of stock to settle unsolidified but potential debt could result in a lack of trust in corporate America. Additionally such action appears to be in violation of SEC rules.

E. Convince Simon

Try to convince Simon that settlement is not in the best interest of the company by looking at the public relations aspects of the settlement. Point out how bad it might look if all CFO's attempt to persuade their CEO's to take various courses of action because of perceived ethical problems. It could result in CEO's hiring less ethical-focused CFO's or it could result in more vibrant discussion among corporate leadership as leaders seek to make the best decisions for the corporation.

Rules Analysis: Conclusion

Students will have to look at these globalized effects and determine under a values-based approach which alternatives result in a better world and which in a worse world.

EPILOGUE

The first thing that Meyers did was contact the law firm that provides advice to EEI regarding SEC matters to determine his obligations under the Securities Act of 1933, the Securities Exchange Act of 1934, and subsequent rules and regulations. The response he received from the engagement partner was "you have met your obligations under the Acts and other than making the necessary disclosures of the settlement in the appropriate SEC filings you have no further legal obligations".

Two days after directing the CFO and general counsel to draw up the agreement and issue the check, but prior to executing the agreement and paying Meacham, EEI receives a summary judgment from the court. This court action absolves EEI of any obligation to Meacham and allows EEI to seek $20,000 reimbursement from the partnership for legal fees. Simon was visibly upset at this turn of events and instructed general counsel to drop the issue and not seek reimbursement.

Subject: Business ethics; Professional relationships; Decision making; Strategic management; Chief financial officers; Chief executive officers; Case studies

Classification: 2130: Executives; 2310: Planning; 2410: Social responsibility; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 4

Pages: 1-12

Number of pages: 12

Publication year: 2011

Publication date: Oct 2011

Year: 2011

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 Tables

ProQuest document ID: 888056203

Document URL: http://search.proquest.com/docview/888056203?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Oct 2011

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 38 of 100

All you have to do is rearrange the numbers

Author: Joseph, Gilbert W; Pergola, Teresa M; Butler, Maureen G

ProQuest document link

Abstract:

This case helps students develop critical thinking skills required to address ethical problems common in a cost accounting context. The ethical issues arise from a request from the VP of Sales, asking the newly hired Chief Accountant to change maintenance and quality control costs from variable to fixed costs by changing an operational practice. The change would allow the VP of sales to maintain contribution margin targets that he could not otherwise attain. The case imposes on the Chief Accountant overt and implied managerial accounting and ethical issues. The case questions focus the participant's attention on the ethical environment of organizations and the ethical conduct of managerial accountants. Participants use the IMA's Statement of Ethical Professional Practice as a guide to propose solutions. Appropriate recommendations should also include creating incentives for future ethical conduct in the organization. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Background

This case is designed to help students develop critical thinking skills required to address problems common in a cost accounting context from an ethical perspective. The scenario illustrates how decisions regarding managerial accounting issues such as cost structure, the cost of quality and variable costing can lead to ethical dilemmas for accountants. One unique feature of the case is that the ethical issues arise from a request from someone other than a superior. In addition, students are prompted to explore organizational factors and professional standards in developing courses of action. The extensive teaching notes provide material for instructors to teach the students the fundamentals of ethical conduct in the accounting profession and then assign or discuss this case that applies those concepts in a managerial accounting context.

The scenario described in this case involves a company that manufactures a single product that is wholesaled to retail outlets. The company's cost structure and desired profit target dictate a selling price and related contribution margin that the Vice President of Sales thinks is unattainable. He is also concerned that he will not be able to retain his best sales people. The Vice President of Sales approaches the newly hired Chief Accountant with a plan to alter the cost structure so that the sales and profit goals can be achieved in the current market. He asks the Chief Accountant to agree to the plan.

The Vice President of Sales' plan is to change the nature of maintenance and quality control costs from variable to fixed by changing an operational practice. He suggests periodic maintenance and inspection as opposed to the current practice based on production volume. Changing the nature of the cost would allow him to reduce the selling price and meet the contribution margin and profit targets established by the company. He reasons that by reducing the selling price, he can sell more units, meet the sales and profit targets, and keep his salespeople happy.

The case introduces a number of managerial accounting issues, some overt and some implied, in addition to the ethical implications for the Chief Accountant. The case questions are written to focus student's attention on the ethical environment of an organization in addition to ethical conduct of managerial accountants. Students should approach the case from the perspective of a managerial accountant using the Institute of Management Accountants' (IMA) Statement of Ethical Professional Practice as a guide to analyzing the issues and proposing solutions to the problem. However, appropriate recommendations should also include suggestions to change practices that may provide incentives for unethical conduct in an organization.

Learning Objectives and Suggested Use of the Case

The learning objectives of the case are for students to:

1. demonstrate an understanding of the ethical considerations of the problem from an organizational perspective;

2. demonstrate an understanding of the ethical considerations of the problem from a professional perspective as defined by the IMA Statement of Ethical Professional Practice;

3. demonstrate an understanding of who is affected by ethical conduct and how;

4. identify alternative courses of action to solve business problems and ethical dilemmas, in particular as defined by the IMA Statement of Ethical Professional Practice; and

5. reason and select an appropriate solution that demonstrates consideration of ethical conduct beyond personal considerations.

The case was written for use with upper-level undergraduate students who have been exposed to both ethics and behavior implications of management and business systems. It could also be used in introductory or principles courses in a discussion environment to introduce students to some of these issues, particularly with respect to performance measurement and incentives. The proposed solution is targeted to upper-level students. Although designed for upper-level student populations, students may not have been exposed to the ethical considerations of the accounting profession or may have only considered these with respect to public accounting. For this reason, background discussions of the nature of a profession and of the values expected for members in the management accounting profession are recommended.

THE CASE PRESENTED TO STUDENTS

The Case Situation

Ryan sat at his desk reviewing the latest budget supporting schedules. He had only recently been hired as the Chief Accountant and was determined to learn all the details of this manufacturing firm. The firm was relatively small and straight forward; it manufactured a single product and wholesaled it to retail outlets, which in turn sold it to end consumers.

Ryan raised his head in response to the raps on his office door frame. He recognized Sid, the Vice President of Sales, and waved him in through the already open door.

"Hi Sid. What can I do for you?" Ryan queried.

Sid responded. "I have a problem, but I also think I have a solution. Can I talk to you about it?"

"Sure." said Ryan.

Sid began. "Ryan, you know what the economy has been like. It's getting harder to keep sales up, let alone increase sales. Our competitors are under-pricing us and unless I can give the retailer some price discount, I'm not sure I will be able to meet our sales projection. Now, I'm not an accountant and I'm not sure I understand all the details, but, let me try to explain my understanding of the situation. You said in a recent budget meeting that we have to have a positive contribution margin, that is, the selling price has to be greater than the variable costs of production. Otherwise, we will not be generating any profits to offset our fixed production costs. As I understand it, the contribution margin from each unit we sell gradually eats away at the fixed costs until we have sold enough units to completely cover our fixed costs. You called that the 'break-even point'. From that point on, the contribution margin from each unit sold adds to profits. Do I have that correct?"

Ryan responded. "In a nutshell, you've got the concept right."

Sid continued. "Ok. Here's the problem. Based on your briefing in the budget meeting, the CEO said that we MUST have a contribution margin of $2.00 per unit in order to achieve our desired pre-tax profit of $85,000, and I have to sell 200,000 units. I'm not sure I can sell 200,000 units. And if I can't pay good commissions to my salespeople I stand a chance of losing some of my best salespeople. Here's Figure 1 (appendix), the handout you gave us at the budget meeting. It shows that because variable costs are $4.00, to get a contribution margin of $2.00, we have to sell each unit for $6.00. The problem is that we are being undercut by our competitors. They are giving discounts to the retailers and selling their versions of our product for less than $6.00."

Sid added. "I can't reduce our price unless we can reduce our variable costs or our fixed costs. If we reduce our variable costs, then a $2.00 contribution margin can be achieved at a lower selling price. If we can reduce our fixed costs, then we can reach our desired pre-tax profit with a lower selling price."

"But," Ryan interjected, "if you remember from the budget meeting, I also said that in the short-term we can't appreciably change our cost structure. That's a long-term solution."

"I know. I know." said Sid. "But, I've been thinking about this. Right now, as was shown in your Figure 1, maintenance on the machines is budgeted as a variable cost of 60¢ per unit and the maintenance is repeatedly scheduled after a fixed number of units of our product are manufactured. Quality testing on a sample of our products is also budgeted as a variable cost of 10¢ per unit. Shoot! We've been making this product so long that virtually every unit is ok. Take my word for it, only a very small number of units ever fails quality testing that results in the machines having to be re-tuned. According to your numbers, if we produce and sell 200,000 units, total maintenance costs will be $120,000 and total quality testing costs will be $20,000."

"Those numbers are correct." said Ryan.

Sid continued. "What if you turned maintenance and quality testing into fixed costs and took them out of variable costs? The budgets for those two departments wouldn't change; they would just become fixed costs. We won't schedule maintenance after a fixed number of units are manufactured, we would simply schedule maintenance after a unit of time has passed, for example every two weeks. Same with quality testing. Instead of testing one in every 50 units, we would just take a fixed sample of units every week and quality test them. In this way the budgets of those two departments would be fixed and not based on the level of production."

Sid got even more animated. "Here look at what I prepared. In this hypothetical illustration, that I labeled Figure 2 (Appendix), I think I have the solution. By moving maintenance and quality testing to the fixed costs, we lower the variable costs per unit from $4.00 down to $3.30. This means that I can offer discounts to the retail outlets and sell our product to them for $5.30. We can still satisfy the CEO because the contribution margin stays at $2.00 per unit. Sure the break-even point goes up, but because of the lower selling price, I can actually sell more units ... I project as much as 275,000 units. At this number of units being sold, the overall pre-tax profits will increase to $95,000. This will also increase sales commissions to my salespeople and I can keep them from leaving. THIS IS A WIN, WIN SITUATION!"

Ryan raised a question. "What about the managers of maintenance and quality testing? Might they not raise a stink?"

Sid retorted. "Don't worry about them. I've been here longer than you and I know them both very well. Their overall budget remains the same and I can talk them into it, especially when I tell them that the Chief Accountant agrees with the plan. Besides, it will actually reduce their workload to keep a fixed schedule rather than having to schedule their work around how many units we produce. I'll take care of it. All you have to do is rearrange the numbers and reduce variable costs."

"But," Ryan interjected, "what about the factory? Won't the Vice President of Manufacturing need to know that more units are going to have to be made? After all he needs to order more materials and make work schedules. Shouldn't I make a new cost budget, like Figure 2, for everyone?"

"Not a problem." said Sid. "I will let the VP of Manufacturing know that I expect more sales and he will have to make another 75,000 units. He will be more than excited about that. We won't need a new cost budget, because we aren't changing anyone's budget except for manufacturing. And they always respond to additional orders whenever my people sell more. In fact, they expect things like that to happen. If I were you I wouldn't worry about changing and distributing the budget. Besides, the CEO is really going to be pleasantly surprised when at yearend we show him the great results we got."

The Case Requirements

If you were Ryan, what should you do? In framing your analysis, address the following six requirements.

1. What are the underlying ethical issues implied by what the VP of Sales is asking the Chief Accountant to do?

2. Who are the stakeholders that will be affected by how Ryan responds to the VP of Sales proposal? Describe how the request might affect each of the stakeholders? What is Ryan's responsibility to each stakeholder? When answering this question, think about the people and organizational positions specifically identified in the case and think beyond those to people or organizations not specifically mentioned.

3. Put yourself in Ryan's position. Just like Ryan, you do not know much about this firm. What would you research about how this organization is "run"? Are the budgets and measures of success appropriate within this firm? What would you need to find out about the ethical culture of the firm, the procedures, the policies, and the management decision making relationships that you would have to know in order to make a good decision about the VP of Sales' request?

4. Identify and discuss the standards from the IMA's Statement of Ethical Professional Practice1 that apply to this case and which Ryan should consider in deciding how to handle the VP of Sales' request.

5. Identify the Chief Accountant's alternative options for responding to the VP of Sales' proposal. Discuss the possible consequences and the organizational factors and professional standards applicable to each option. When answering this question, consider that Ryan could do any one of many different things, such as, agree, disagree, remain unsure of how he should respond to the proposal, etc. How should Ryan proceed under each alternative option? The case is not explicit about what corporate guidance exists to resolve ethical dilemmas, so you may have to consider hypothetical alternatives.

6. Which of the options would you recommend to the Chief Accountant? Explain your reasoning for selecting that option. Discuss your recommended course of action with respect to resolving the ethical dilemma and the effect on the Chief Accountant. You should clearly outline and discuss your recommendation for Ryan's course of action. The course of action should go beyond the limited and specific actions indicated by the IMA's Statement of Ethical Professional Practice and should consider: (1) preserving good working relations within the organization; (2) how to improve the organization; (3) how to reduce ethical dilemmas in the future, and; (4) how to improve Ryan's image within the organization by how he handles this issue.

CASE TEACHING NOTES FOR FACULTY

Accounting Profession and Values

To understand the importance of codes of conduct and their role in the profession, it is crucial to first understand the nature of a profession. A profession is formed on the basis of: (1) a generally accepted complex body of knowledge; (2) standards for admission; and (3) an enforceable code of ethics. The general public relies on the specialized attributes of professionals and trusts that they will perform their duties in the public interest, first and foremost, followed by the profession, the organization for which they work, and finally, to themselves. In June 2005, the International Federation of Accountants (IFAC) issued The Code of Ethics for Professional Accountants, which defined an accountant's duty to act in the public interest:

"A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Therefore, a professional accountant's responsibility is not exclusively to satisfy the needs of an individual client or employer. In acting in the public interest, a professional accountant should observe and comply with the ethical requirements of this code."2

As a crucial element of a profession, a code of ethics guides professionals to protect the quality and reputation of the profession and maintains the public trust. The IFAC Code further states that while professional accountants have a responsibility to further the legitimate aims of their employing organizations, they also have the absolute duty to comply with the fundamental principles of the Code. The IMA's Statement of Ethical Professional Practice is consistent with the IFAC Code and is also principle-based. The IMA's Statement of Ethical Professional Practice is based on four overarching principles (honesty, fairness, objectivity and responsibility) that define the values of management accounting and a set of standards, to which management accountants must comply.

* Honesty. Honesty is a facet of moral character that is evidenced by such things as integrity, truthfulness, and straightforwardness and the absence of behavior such as lying, cheating, or theft. Integrity refers to honesty and truthfulness as the motivation for your actions.

* Fairness. Fairness refers to the absence of bias. In accounting, this means fairness in presentation that requires neutrality in the preparation of information and reports. The information will not be biased in favor of one group or position over another.

* Objectivity. Objectivity means freedom from subjective valuation of transactions or events in business. Measures should have supporting evidence that is verifiable and free from opinion; it involves impartiality and intellectual honesty.

* Responsibility. An accountant is ethically responsibility to those who rely on his/her work. An accountant is responsibility to the general public, his/her profession, company management, investors, creditors, outside regulatory bodies, and anyone who relies on the information he or she presents. Responsibility for management accountants also focuses on providing financial information useful in evaluating efficiency and effectiveness of managers or department heads, on the basis of financial performance directly under their control.

These are the values by which management accountants agree to abide. The standards contained in the Statement of Ethical Professional Practice are guidelines that control behavior, to help management accountants "operationalize" the values upon which the statement is based.

Suggested Solution to Case Question 1

Case question 1 stated: "What are the underlying ethical issues implied by what the VP of Sales is asking the Chief Accountant to do?" Students should recognize that the VP of Sales is attempting to take advantage of the Chief Accountant's lack of experience with the organization. He is focused on meeting his personal goals and those of his department. While he appears to propose actions that benefit the company and the stakeholders, he is essentially asking the Chief Accountant to make changes to how costs are accounted for. Neither man is authorized to make these changes which could have far-reaching negative effects on the organization. The VP of Sales has not fully considered the organizational consequences and the Chief Accountant's professional reputation.

Suggested Solution to Case Question 2

Case question 2 stated: "Who are the stakeholders that will be affected by how Ryan responds to the VP of Sales proposal? Describe how the request might affect each of the stakeholders? What is Ryan's responsibility to each stakeholder? When answering this question, think about the people and organizational positions specifically identified in the case and think beyond those to people or organizations not specifically mentioned." Students should structure their response according to the stakeholder's position and responsibilities and from the perspective of encouraging others to comply with the same ethical principles that apply to professional accountants. At a minimum, they should discuss the VP of Sales, the maintenance and quality control managers, the VP of Manufacturing, and the CEO. A complete response would include customers, other employees, and stockholders as other affected stakeholders.

* VP of Sales. Ryan should recognize that the VP of Sales' proposal is motivated by selfinterest that will result in sub-unit optimization as opposed to system-wide improvements. The VP of Sales feels pressure to meet sales goals and retain his top salespeople. Ryan should consider whether the loss of salespeople is a real threat, the underlying causes, and what pressures exist in the market. He should examine practices within the firm that may inadvertently pressure Sid to manipulate costs to achieve his objectives. Considering these issues can help Ryan structure a response that is both ethical and effective at addressing the issue and that may encourage Sid to find more ethical solutions to problems in the future.

* Maintenance Department Manager. This manager is responsible to keep equipment operating within specification to avoid work outages and defective units. He is responsible to meet this objective within budget. Increased production will further burden the machines, his staff, and cost more. Making the proposed change will ease maintenance scheduling and his costs won't change, but it may jeopardize his primary objectives. Ryan must consider how the department's performance is measured to ensure that the department manager has the proper incentives to act ethically. He should encourage the manager to fully disclose the effect of the proposed change on the defect rate, and the life and reliability of the equipment.

* Quality Control Manager. This manager is responsible to assess and report the quality control results. He should determine what preventive and appraisal measures and systems are needed to satisfy the firm's quality objectives. These include the nature and timing of maintenance and inspections. Making the proposed change may hinder him from achieving his objectives. The company's reputation and market share may suffer. Ryan must understand that any changes to policies that affect quality should include substantial input from this manager. Ryan should also examine how the manager's performance is measured to ensure that the manager's incentives are aligned with the company's quality objectives.

* VP of Manufacturing. This manager is responsible for timely production within company specifications. He must schedule and supply inputs to production (material and labor) and use other capital to meet production targets. He needs accurate projections, trained workers, and reliable equipment. Ryan must recognize that his decision impacts all of these things. Ryan's failure to obtain this manager's input, to provide updated budgets, and to change policies that impact the manager's ability to do his job have operational and ethical impacts.

* CEO. The CEO is ultimately responsible for the firm's performance including financial performance, operational performance, and corporate moral and legal conduct. The CEO sets the tone for ethical conduct by defining it, acting ethically, and providing the proper incentives for employees to act ethically. There were "clues" in the case narrative that implied some practices that would not motivate ethical behavior. Students should briefly discuss these issues. First, the CEO defined contribution margin per unit as a required objective. That objective, in and of itself, was the primary motivation for the VP of Sales to suggest the change. Had the objective been the profit itself, then the VP would not have focused on restructuring costs and may have devised a way to achieve the profit objective in a more ethical manner. Second, if each manager is focused on his own departmental budget to the detriment of the company performance, it implies that the incentive system is misaligned. Third, if managers are used to activity that differs significantly from budget, then the budgets are not accurate and there may be budgetary slack issues. Fourth, if the quality control and maintenance managers are only concerned about their budgets and not about the actual defect rate as the VP of Sales indicates, then the firm may not be measuring and rewarding employees for the operational measures that drive the desired results. If Ryan considers these issues and the effect of the culture on employee conduct, it would help him assess the motives and responses of the managers to the problem.

* Other Stakeholders. If the proposed change is made, customers will pay less but the chance of defective products increases. Increased production demands may result in delivery delays, which will reduce customer satisfaction. If Ryan supports the change, he must know that there is a chance of increased quality issues. Other employees in the firm may also be adversely impacted by declining customer satisfaction, increasing defective units, and increasing long-term costs related to greater demands and less maintenance on equipment. Finally, stockholders may gain in the short-term but lose out in the long-term.

Suggested Solution to Case Question 3

Case question 3 stated: "Put yourself in Ryan's position. Just like Ryan, you do not know much about this firm. What would you research about how this organization is "run"? Are the budgets and measures of success appropriate within this firm? What would you need to find out about the ethical culture of the firm, the procedures, the policies, and the management decision making relationships that you would have to know in order to make a good decision about the VP of Sales' request?" Ryan's position as Chief Accountant includes ethical responsibilities to both his employer and the accounting profession. Students should address both perspectives. Some students may also identify personal ethical considerations. From the organizational perspective, Ryan is obligated to comply with established procedures and protect the firm's overall interests. First, since Ryan is new to the company, he should investigate if the firm has a code of conduct. Reviewing the conduct code will help him assess the culture and guide him toward the best course of action. Second, Ryan needs to research the firm's procedures regarding maintenance and quality control. Sid's proposal requires changes to operational procedures for maintenance and quality control. The changes may increase quality issues and impact the firm's future image and market share. Third, Ryan should research procedures regarding budgeting. The VP of Sales says Ryan does not need to prepare a new budget because manufacturing expects and responds to increases in production. This implies a problem with budgetary slack. The VP of Sales tells Ryan that maintenance and quality control will not care if the change is made as long as their budgets don't change. This implies a suboptimal focus on departmental costs, reflecting an exclusive financial measure with inattention to other nonfinancial performance measures (e.g., defects and returns). Ryan should also determine what his obligation is with respect to preparation of budgets. Is it the firm's practice to update budgets to reflect changes? Fourth, Ryan needs to research the reporting structure and working relationships between departments in determining how to respond. At a minimum, he should find out with whom he should consult and communicate in both the consideration and resolution of the problem.

A well-thought-out response will also discuss focusing on contribution margin per unit and how that focus provides an incentive for inappropriate conduct to achieve organizational objectives. In achieving organizational objectives, Ryan should also be concerned with how those objectives are achieved and the related consequences thereof.

Suggested Solution to Case Question 4

Case question 4 stated: "Identify and discuss the standards from the IMA's Statement of Ethical Professional Practice that apply to this case and which Ryan should consider in deciding how to handle the VP of Sales' request." Professionally, Ryan should consider his obligation as a professional accountant to be honest, fair, objective, and responsible and to encourage others in the organization to do the same. Specific standards are:

* Competence. Ryan should consider two competence standards. First, his obligation is to provide decision support information and recommendations that are accurate, clear, concise, and timely. If he agrees to Sid's proposal, his decision to change the classification of quality and maintenance costs to fixed may not be a true reflection of these costs. The proposal to change the costs to periodic as opposed to production-based is suggested because a small number of units fail quality testing because machines need to be retuned and the company has made the product for a very long time. However, the small number of failures could be the result of quality testing and machine maintenance, not in spite of it. In addition, the VP of Sales cites failures related to machinery, but not the level of failures overall, which could be much higher. Other failures could result from non-machine-related issues, such as human error and material defects. How long the firm has made the product is not relevant. It presumes that the labor force is experienced and that there is a relationship between the longevity of production and the quantity and quality of material supply. In fact, increased sales and production could cause more errors as workers become overstressed and greater demands are placed on supply. Thus, the assumptions used to justify the change are faulty. If Ryan supports the change, he would not be supplying information that is accurate or clear with respect to the nature of these costs. Second, Ryan must recognize and communicate his own professional limitations and constraints that could keep him from making a responsible judgment. Ryan lacks the technical competence to make a decision about how often maintenance and testing should be required. Also, he is new to the firm and is not familiar with the production process, the number of defective units, the causes for the past defects, or the potential impact such a change could have. At the very least, he should consult with the managers of maintenance and quality testing to gain their perspective on this issue and review previous testing results. He is obligated to communicate the issue, the request, and any proposed responses to his superior since he cannot responsibly address the issue.

* Integrity. Ryan is obligated to communicate with all parties impacted by the problem and/or the proposed solution. The VP of Sales proposes a solution that benefits sales more than any other department or the firm as a whole and that may actually be to the firm's detriment. Under Sid's proposal, sales revenue increases 21.5%, pre-tax profits increase 11.8%, and sales commissions increase a whopping 37.5%. Sid would accomplish both of his objectives to make his sales goal and to retain his top salespeople by giving them higher commissions. However, maintenance and quality control managers may suffer as quality falls, and manufacturing must respond to unanticipated increased demand. If Ryan relies on Sid to communicate with the other departments and managers, he violates the standard that requires him to regularly communicate to avoid the appearance of a conflict of interest. By supporting Sid's proposal, he supports a proposal that particularly benefits one individual over the firm, which certainly gives the appearance of a conflict of interest.

* Credibility. By rearranging the numbers and not creating a replacement cost budget, Ryan violates the credibility standard by not disclosing relevant information to others in the organization. Making maintenance and quality control costs fixed costs may not be a fair and objective portrayal of the costs. Ryan should request a budget meeting to discuss Sid's proposal so that all affected parties could have input into the decision. Ryan should also create a new budget after the meeting, if it is decided to alter any aspect of the budget.

Suggested Solution to Case Question 5

Case question 5 stated: "Identify the Chief Accountant's alternative options for responding to the VP of Sales' proposal. Discuss the possible consequences and the organizational factors and professional standards applicable to each option. When answering this question, consider that Ryan could do any one of many different things, such as, agree, disagree, remain unsure of how he should respond to the proposal, etc. How should Ryan proceed under each alternative option? The case is not explicit about what corporate guidance exists to resolve ethical dilemmas, so you may have to consider hypothetical alternatives." Ryan could disagree with the plan, he could unilaterally agree to the plan, he could consider the plan in consultation with all internal stakeholders, or he could suggest an alternative plan. If Ryan agrees with the plan and does what the VP of Sales requests, he should be able to defend his actions to his superiors and to other affected stakeholders. This option could result in Ryan losing his position, especially if he does not consult with his superiors. If Ryan disagrees with the plan, he needs to discuss his decision with the VP of Sales to minimize harm to their professional relationship. He needs to explain his reasoning in a professional manner to educate the VP of Sales on ethical behavior in the accounting profession. If Ryan develops an alternative plan to help the VP of Sales accomplish his objectives while properly accounting for costs, this would allow Ryan to develop a good relationship with the VP of Sales and show his value to the company as a competent accountant and a team player. This option would require Ryan to talk with his superiors and other stakeholders, especially given his short time with the company.

If he determines that the request is unethical and is unsure how to proceed, he should first consult the company's policy on resolution of ethical conflicts. If no policy exists, Ryan should discuss the issue with his immediate supervisor. He could also confidentially discuss the issue with an impartial advisor (IMA Ethics Counselor or attorney) to better understand his options.

Suggested Solution to Case Question 6

Case Question 6 stated: "Which of the options would you recommend to the Chief Accountant? Explain your reasoning for selecting that option. Discuss your recommended course of action with respect to resolving the ethical dilemma and the effect on the Chief Accountant. You should clearly outline and discuss your recommendation for Ryan's course of action. The course of action should go beyond the limited and specific actions indicated by the IMA's Statement of Ethical Professional Practice and should consider: (1) preserving good working relations within the organization; (2) how to improve the organization; (3) how to reduce ethical dilemmas in the future, and; (4) how to improve Ryan's image within the organization by how he handles this issue." While student responses will vary, responses should clearly demonstrate the student's ability to apply a professional code of conduct and an understanding of the operational impacts of the decision. The student's response should expand beyond his or her personal and even professional considerations to encompass organizational issues that affect ethical judgment and behavior. One reasonable response appears below.

"I would not do what the VP of sales proposed. Instead, I would work with him to find other, more ethical solutions to the problem. I would involve other managers and my immediate superior or at least fully communicate as things transpired. This would protect me personally by ensuring that I do not violate firm policies or offend people with whom I must work. I would not unnecessarily disclose the VP of sale's proposal. I would first discuss it with him to explain why I do not agree with it, why I feel it is unethical, and finish with a willingness to help solve the problem. This would show him that the proposal was unethical, why, and help him think about ethical ways to solve the problem. This shouldn't make an enemy of him if the discussion is tactful and I empathize with him about the pressures he faces in his job. This decision is consistent with my professional ethical principles. Also, it protects the firm by considering all aspects of the issue and reducing negative impacts on the company. I would focus on the objective of obtaining profit and retaining key personnel (rather than meeting a contribution margin per unit goal). This requires discussing information related to the market, pricing, competitors, employee morale, quality initiatives, and results. I would focus on differentiating the product, real or imagined, and/or ways to reduce costs from efficiencies rather than manipulation of numbers. Finally, I would review the performance measurement system used by the firm to achieve strategic objectives and review ethical codes of conduct and policies employed by the firm to motivate desired behavior. Possible consequences of my actions could be positive or negative. Poor handing by me could make an enemy of the VP of Sales. I could get a negative performance appraisal if my immediate superior feels that I handled the situation poorly, or if I inadvertently insulted him when discussing the firm's policies and incentives that led to the problem. Conversely, I could be praised for my accurate assessment of the underlying causes of the problem, a long-term solution, and improvements to the firm's ethical culture."

SUGGESTIONS FOR GRADING

Testing the Case with Students

This case was assigned with no background or case discussion in three sections of a cost accounting course for accounting majors. Two forms of assessment were used: (1) self-reported learning assessment (student surveys responses); and (2) independent learning assessment (faculty review of the written assignments using a grading rubric). Students assessed the case as a useful learning experience3, but results from the faculty reviewers were disappointing. Student comments shed some insight into the poor results; students overwhelmingly asked for a pre-case discussion, emphasizing issues outside the IMA's Statement of Ethical Professional Practice that should be considered in their ethical analyses. They wanted more depth and structure in the case requirements. Their concerns centered primarily on management issues, behavior, and culture and the interrelationship between these types of organizational issues and ethical principles. The faculty reviewers confirmed student comments by showing that the learning objective related to ethical considerations from an organizational perspective got the lowest assessment scores. Although student scores were low, students evaluated this learning objective very high after classroom discussion of the case. The case questions were then revised to provide more structure (revision 1) and a pre-case discussion was introduced along with some question clarifications (revision 2). The discussion included two parts: (1) accounting as a profession and the importance of a code of conduct/ethics in a professional context; and (2) organizational style and culture and their impact on behavior in organizations4. The revised case was assigned to four sections of undergraduate cost accounting (two sections for revision 1 and two sections for revision 2). Student surveys were distributed after the discussion of the case in class. Students responded to six statements derived from the case learning objectives; allowable responses ranged from 1 (the student strongly disagreed with the statement) to 5 (the student strongly agreed with the statement). Student responses were blind and students were told that their responses would be anonymous and used only to evaluate the case's effectiveness as an instructional resource. Mean student responses for all survey statements fell between 3.76 (agree) and 4.05 (strongly agree). The student survey statements along with mean student responses for each survey statement are presented in Figure 3 (Appendix).

In addition to student surveys, case writing assignments submitted by students were assessed using a simple expectations rubric derived from the case's learning objectives. The assessment rubric scale ranged from 1 (the student's response did not meet faculty expectations) to 5 (the student's response markedly exceeded faculty expectations). Two independent instructors assessed the assignments and scoring discrepancies were discussed and reconciled. Mean student scores for all expectations fell between 2.94 (met expectations) and 3.96 (exceeded expectations). Assessment expectations along with mean student scores for each expectation are presented in Figure 3. The scores for the revised case improved markedly over the prior scores (these results are not shown in Figure 3) indicating that the changes to the case were effective.

Suggested Grading Guidance and Grading Rubric

Based on the testing described above, faculty grading guidance was refined. Figure 4 (Appendix) suggests grading guidance for the six case questions. The grading scale ranges through the scale 1 = "student's response does not meet faculty expectations", 3 = "student's response meets faculty expectations", 5 = "student's response exceeds faculty expectations". Undefined intermediary scores of "2" and "4" allow faculty to assign grades between the defined categories. Figure 5 (Appendix) presents a grading rubric that can be completed by the faculty member for each student's response to the case. The grading guidance shown previously in Figure 4 is incorporated into the grading rubric and requires the faculty member to enter only check marks into the rubric. In the final boxes of Figure 5, the faculty member would multiply the number of check marks by the scoring weight and sum the results to obtain an overall numeric score. The faculty member is free to alter the point ranges suggested in the rubric for the student's final alphabetic score.

Subject: Decision making; Business ethics; Management accounting; Operations research; Case studies

Classification: 2600: Management science/operations research; 4120: Accounting policies & procedures; 2410: Social responsibility; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 4

Pages: 1-20

Number of pages: 20

Publication year: 2011

Publication date: Oct 2011

Year: 2011

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 Tables

ProQuest document ID: 888056204

Document URL: http://search.proquest.com/docview/888056204?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Oct 2011

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 39 of 100

Infrastructure investment and the impact of special assessments under shifting population demographics

Author: Stansel, Dean; Finch, J Howard; Weeks, H Shelton

ProQuest document link

Abstract:

This case examines the issues surrounding the expansion of utility services for a Florida city. Students are required to examine alternative financing options available and the economic impact and hardship that citizens from different regions of the city will potentially bear under alternative solutions. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

This case places students into one of three groups, the citizens in favor of special assessment, the citizens opposed to special assessment, and the city council members listening to both sides and trying to weigh the issues. Case analysis requires examination of the alternative financing options available and the economic impact and hardship that citizens from different regions of the city will potentially bear under alternative solutions.

LEARNING OUTCOMES

By participating in the various roles of the respective stakeholders in this case, students will become familiar with utilities financing alternatives, tax burdens associated with respective taxing options, impact on property value from infrastructure development, and shifting demographic influences on utility supply and demand. The teaching notes include a discussion of the actual decision reached by the city council and its economic implications, along with an alternative strategy to teaching the case that involves a fourth group of stakeholders in the decision.

BACKGROUND

This case involves a city's alternative financing options for new utility production facilities. Florida law mandates that when water usage exceeds 75% of existing production capacity, a municipality must initiate new production facilities (Libaretore, 2009a). The key issue here involves how the new production facilities are financed.

The city of Cape Coral, in Southwest Florida, encompasses approximately 110 square miles (Wikipedia 2010). Originally conceived in the 1960's as a snowbird and retirement community, some critics have said that the city has suffered through the years from a lack of a comprehensive development plan. The "Cape," as it is known locally, was originally plotted around a system of man-made canals designed to provide residential access to the Caloosahatchee River and the Gulf of Mexico. The vast majority of land is residential, and the original development centered in the southwest region, which borders the river. Through the years, additional development has been haphazard and often ill-conceived.

In 2000, Cape Coral's population was around 100,000. The next six years saw tremendous growth, primarily residential; swell the city to over 150,000 residents. New construction extended to the north and east, areas that lacked access to city water and sewer utilities. During 2006, the city was cited by the state of Florida for insufficient production capacity to meet projected water demand (Libaretore, 2009a). At the time, the city's population was projected to reach over 190,000 by 2010. In anticipation of the expected increased demand, and as required by law, the city began expanding water and sewer production facilities. With nearly half of the city not connected to city utilities, the plan was to expand access to city utilities to help pay for the new production facilities. The cost of the expansion of city access was estimated to be $281 million (Libaretore, 2009b). The question facing city officials was how to pay for the utilities expansion program.

FINANCING ALTERNATIVES

Impact fees and special assessments have become an increasingly important source of revenue since the local tax revolt of the late 1970's. (For a discussion of impact fees, see Brueckner, 1997, and Ihlandfeldt and Shaughnessy, 2004.) These revenue sources often can provide a way of circumventing the restrictions of the tax and expenditure limitations (TELs) imposed by voters in many areas. (Jung et al., 2009) However, the imposition of special assessments often creates a cash-flow problem for property owners. The financial benefits the property owners receive from the improvements that the assessments finance are not fully captured until the property is sold, yet the payment of the assessment is due before then. Shoup (1980) proposes "deferred special assessments" as a way to avoid that cash flow problem. Under such a plan, residents would have the option of deferring payment of the special assessments (along with accumulated interest) until the property was resold. However, this would make it more difficult (or at least more time consuming) for local government to raise the revenue needed to pay for the new infrastructure.

The primary alternatives that the Cape Coral city council considered were unilateral assessments and/or rate increases for all citizens across the city and targeted special assessments and/or rate increases for those citizens in the northern portion of the city (only) who would benefit directly from the new plant (Liberatore, 2009c). In the months leading up to the vote on the issue the city council heard numerous arguments from citizens with respect to these various alternative approaches for financing the utilities expansion. The community was essentially divided into two groups: 1) those in favor of a special assessment only for property owners in the northern portion of the city who owned lots that were directly impacted by the expansion of utility services, and 2) those who favored covering the expenses by increasing rates across all property owners in the city (including those who already had access to city utilities). Not surprisingly, property owners facing the prospect of a special assessment favored paying for the expansion with higher rates across the community. In contrast, the owners of properties that fell outside the special assessment region felt that the burden of paying for the expansion should be borne exclusively by those who would benefit directly.

DECLINING ECONOMIC CLIMATE

The situation was greatly complicated by the state of the local economy. Cape Coral had been experiencing dramatic population growth and appreciation in property values, and was often listed among the most overpriced markets by the popular press based on metrics that examined the relationship between the median priced home and median family income (Christie 2006). However, at the time of the vote the local economy, which was based largely on real estate construction, had stalled and property values were declining rapidly (Goodman 2010). The city was experiencing record levels of foreclosure activity as many property owners simply walked away from homes they had purchased during the recent market boom.

DISCUSSION QUESTIONS

1. To pay for the new utility production facilities, should the city council impose a unilateral rate increase on all city properties, or a special assessment only on those properties impacted by the new capacity?

2. Will the new utilities production facilities enhance market value for all city properties, or only those which will be directly impacted?

3. How will the political careers of sitting city council members be affected by their decision regarding how to finance the new utility production facilities?

Subject: Public utilities; Economic impact; Cities; Federal funding; Infrastructure; Case studies

Location: Florida, United States--US

Classification: 1110: Economic conditions & forecasts; 9190: United States; 8340: Electric, water & gas utilities; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 4

Pages: 1-6

Number of pages: 6

Publication year: 2011

Publication date: Oct 2011

Year: 2011

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: 888056205

Document URL: http://search.proquest.com/docview/888056205?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Oct 2011

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 40 of 100

Bella's: a case study in organizational behavior

Author: Medlin, Bobby

ProQuest document link

Abstract:

The primary subject matter of this case involves the job satisfaction and employee engagement of a company's workforce. The case depicts a new general manager's concern that the constructs listed above have reached such low levels that critical organizational outcomes are being negatively impacted. The case also involves a career planning decision made by the principal character in the case. It is designed to be taught in one class hour and is expected to take approximately three hours of student preparation time. Students are provided with a management scenario describing a general manager's concern that her workers' levels of job satisfaction and employee engagement have deteriorated to dangerous levels. Students are provided with survey instruments used to measure each of the constructs plus results from the employee surveys. In addition, information regarding organizational and individual outcomes is provided. Students are asked to analyze the data, draw conclusions about the results, and offer and support recommendations to the general manager regarding ways to improve the satisfaction and engagement of the company's workforce. Students are also provided information regarding the principal character's decision to accept the General Manager's position in the firm. Students are asked to evaluate this decision. [PUBLICATION ABSTRACT]

Full text:

CASE DESCRIPTION/SYNOPSIS

The primary subject matter of this case involves the job satisfaction and employee engagement of a company's workforce. The case depicts a new general manager's concern that the constructs listed above have reached such low levels that critical organizational outcomes are being negatively impacted. The case also involves a career planning decision made by the principal character in the case. It is designed to be taught in one class hour and is expected to take approximately three hours of student preparation time.

Students are provided with a management scenario describing a general manager's concern that her workers' levels of job satisfaction and employee engagement have deteriorated to dangerous levels. Students are provided with survey instruments used to measure each of the constructs plus results from the employee surveys. In addition, information regarding organizational and individual outcomes is provided. Students are asked to analyze the data, draw conclusions about the results, and offer and support recommendations to the general manager regarding ways to improve the satisfaction and engagement of the company's workforce. Students are also provided information regarding the principal character's decision to accept the General Manager's position in the firm. Students are asked to evaluate this decision.

THE COMPANY

Bella's is a full service day spa and hair salon featuring a wide variety of spa treatments including full body massages, body scrubs and wraps, European facials, specialty manicures and pedicures, skin treatments, waxing, and complete varieties of cuts, conditioning treatments and chemical services for the hair. Exclusive lines of hair and body products are also available. Bella's also features a retail department which specializes in unique custom jewelry. Bella's flagship store and headquarters are in a city with a population of approximately 250,000 people in the southern United States. It also has spas/salons in four other smaller cities (all with populations over 40,000) in the same state. Last year, Bella averaged approximately 25 employees per store; annual sales last year were approximately $3,000,000, a decrease of 12% from the previous year. The company lost money last year for the first time since its initial year of operation. The management of Bella's considers the firm to be a one-of-a-kind establishment serving a wide segment of the population. The success and growth of Bella's has far exceeded all Illa Fitzgerald's (the founder and owner of the business) original expectations.

COMPANY HISTORY

The company was founded twelve years ago by Illa Fitzgerald, a former beautician/massage therapist who had worked in the salon industry since finishing cosmetology school at age 21. She used an SB A loan, investment dollars from five family members, and her personal life savings to fulfill her dream-owning her own spa/salon. Her vision was to create a unique company that offered a complete array of products and services aimed at creating and maintaining healthy minds, bodies, and spirits. Bella's is now more than a decade old, and Illa takes great pride in knowing that her company has come very close to completely fulfilling her vision.

Illa fully recognized from the very beginning that her business/managerial experience was very limited. She was also fully aware that managing the day to day operations of her business had very limited appeal to her anyway. Therefore, her first critical decision was made three months before the salon opened-the decision to hire Lynne Gibson as general manager of Bella's.

Lynne Gibson had served as the general manager of Bella's since its inception. Prior to taking this position, Lynne had worked at a major women's clothing retailer, initially as a management trainee and finally as a regional manager. Before Bella's, Lynne and Illa, while not close friends, were certainly acquaintances who had gotten to know each other professionally. Illa had shared her dream with Lynne and had often told her "you know when I do this thing, I want you to come run it for me." Lynne never really gave it much thought, but when Illa made a formal offer, Lynne decided it would be a good move, professionally and personally. She had been very successful in retailing-but the long hours plus the weekend demands had begun to take a toll on her personal life. A single mother of two, Lynne decided that this change would be a new challenge, and it would also enable her to be more successful in balancing family and career. From day one, Lynne basically was involved in or actually made all the managerial decisions at Bella's. Though Illa was certainly the lead player in strategic decisions, Lynne was the ultimate decision maker for anything operational. Bella's began with six employees: Illa, Lynne, three hair stylists, and one massage therapist. All were friends or acquaintances of the owner. Very little recruiting took place in the initial hires beyond Illa convincing each to come be a part of her new business. A salary was offered with a promise of "as we grow and become more and more successful, I'll make sure you're rewarded for your contribution."

A year ago, Lynn Gibson decided to leave Bella's to pursue her Master's degree in education. As one who was not only resistant to and often paralyzed by change, this greatly troubled Illa-so she managed to convince Lynn to remain as a consultant to the company while working on her degree. Lynn's new role was to offer input and advice on any and all issues of Illa's choosing. Prior to this point, the basic structure of Bella's was: Lynne was the general manager of Bella's Incorporated; she also served as the store manager of its flagship location. Within her store, a Retail Manager and a Service Manger reported directly to Lynne. Additionally, the Store Managers at each of the other four Bella locations reported directly to Lynne. Within each store, individual store managers were the only employees serving in a supervisory position with each being responsible for all daily operational issues of his/her salon. All other responsibilities/decisions for individual locations are Lynne's. This includes all purchasing, marketing, financial, and human resource decisions. Individual store managers did have the opportunity to offer informal input into hiring decisions for his/her store. The salon managers' salaries averaged approximately $32,000 annually. Three had college degrees, and they averaged four years experience. Each began as a part-time sales clerk/receptionist either at Bella's or at another salon. Bella's offered a benefits package that was fairly standard for an organization of its size. This included health insurance (of which the employees shared in the cost of the premiums with Illa's and Lynne's being paid totally by the firm) and retirement (in which Bella's made modest contributions).

THE CURRENT SITUATION

Kris Jenkins started her job as the new general manager of Bella's a month ago today. Her career began as a hairdresser after finishing cosmetology school. Ten years later, Kris had completed her Business degree and was the store manager of a national hair salon that was located in a mall in a midsize southern city. Her ultimate goal was to own her own salon-but she did not feel that she was yet prepared either financially or from an experience standpoint. Though she had learned many valuable lessons-particularly in dealing with employees-while managing the firm in the mall, she recognized that her experience with executive decision making was very limited. Therefore she was hoping to make a career move that would enable her to have direct input regarding all top management decisions of a salon. That was the primary reason that she decided to take the General Manager's position at Bella's. Plus, her career goals were almost identical to those of Bella's owner 12 years ago. Illa had achieved exactly what Kris aspired to achieve. Also, her background was essentially the same as Illa's. Kris had discovered a new role model. What could be better? The opportunity looked ideal.

As Kris sat at her desk this morning, things didn't appear nearly as ideal. She kept replaying three events in her mind:

1. After the offer but before accepting the position, Kris had spent a weekend with the previous general manager of ten years, Lynne Gibson (who now served as a consultant to the organization), discussing a wide array of topics regarding the company. Bella's numbers had deteriorated dramatically in the past year. Profits were down; absenteeism was up; turnover, while not dramatic, was higher than it had been in the past five years. And while no formal performance appraisals had been done in the past year, Lynne provided her assessment of the performance of all Bella's key people. It was clear that Lynne felt each was performing significantly below their capabilities, significantly below previous levels of performance. Following these discussions, a number of things stood out to Kris. First of all, Lynne was very reluctant to criticize Bella's employees. But between promises of secrecy and reading between the lines, it became quite evident that Lynne had serious concerns-and it seemed to Kris that Lynne's biggest fear centered around Illa. As their discussions continued, it became quite clear that Lynne doubted Illa's ability to provide Kris the autonomy needed to effectively manage Bella's. This appeared to stem primarily from two things: 1. Illa's unexpected interference with only limited information about the issues or problems, and 2. Illa's tendency to regularly monopolize the manager's time on trivial or personal matters thus keeping the manager from focusing on the needs of the salon.

2. After the weekend with Lynne-but again before accepting the position-Kris spent three days at the Bella's. She had stayed at the spa from opening to closing to visit with all the employees. While the conversations had been pleasant, it seemed pretty apparent that many, if not all, seemed reluctant to be totally honest. Though none had directly denigrated the company or the owner, body language and incomplete or evasive answers had concerned Kris at the time. She couldn't help but worry that the majority of Bella's employees simply did not feel good about their jobs or the company.

3. Though she had spent a great deal of time with Illa, the afternoon that she formally accepted the job was critical in Kris's ultimate decision to accept the position. Due to numerous concerns that became evident while spending time with Lynne and the employees, Kris was leaning heavily toward declining the job offer. However, after respectfully discussing these concerns with Illa, Kris began to change her mind. Illa addressed each issue giving the impression that she recognized the problem and was willing do whatever it took to correct and improve both company and employee performance-including stepping away and giving Kris autonomy to make all operational decisions at Bella's. Illa was very persuasive, and Kris decided to reconsider her decision to decline the position. At the end of the day, she told Illa she would take the position. Kris was excited-she knew this would be a wonderful career move-but also worried. Could she really turn Bella's around? And would she have the freedom to do so?

"Enough reflection," Kris said out loud. "It's time to get busy." She had in front of her the results of the employee survey she had conducted over the past two weeks. The survey was an attempt to measure the level of job satisfaction and employee engagement of her employees. It was similar to the survey that had been used in her previous job. Kris had been involved in implementing changes at her previous salon based on results of these surveys- changes that had been quite effective in terms of improving outcomes. She was optimistic that some insights in these two areas might lead to the same thing occurring at Bella's. (See Appendix One, Employee Survey Instrument; See Appendix Two, Employee Survey Results). On the promise of anonymity, no names were attached to any surveys; however, the aggregate outcomes, while there were some positives, were quite troubling. What did they all mean? What messages were being sent? And, most importantly given this information, what should she do now?

INSTRUCTIONS TO STUDENTS

1. Given your understanding of job satisfaction and employee engagement, discuss/describe why each is important in organizational settings? (Note: in addition to your text and class discussions, additional resources that might be useful are listed following the questions.)

2. Discuss/offer insights regarding the results of the employee survey. As you study the results, what stands out? What conclusions can you draw?

3. Offer general suggestions/recommendations to Kris Jenkins regarding how to improve the job satisfaction and employee engagement of Bella's workforce. Be sure to distinguish among jobs when making these suggestions and recommendations.

4. Evaluate Kris Jenkins' decision to accept the general manager's position. Given the information available, did she make the right decision? Why or why not?

Subject: Organizational behavior; Job satisfaction; Employee involvement; Strategic management; Case studies

Classification: 2310: Planning; 2500: Organizational behavior; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 4

Pages: 1-11

Number of pages: 11

Publication year: 2011

Publication date: Oct 2011

Year: 2011

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 Tables

ProQuest document ID: 888056207

Document URL: http://search.proquest.com/docview/888056207?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Oct 2011

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 41 of 100

Coming of age for a consulting company: An entrepreneurial transition case study

Author: Koprowski, Wayne; Razaki, Khalid A

ProQuest document link

Abstract:

Brumagim [2010] developed an entrepreneurship case (The Best Backgammon, Inc. case) that can be used for assessment of learning (AOL) to support AACSB international accreditation. The case developed in this paper is also in the area of entrepreneurship and is also an AOL component, but looks at a completely different business environment (management consulting versus manufacturing) and decision context (entrepreneurial transition versus startup issues). The case involves two principals in a private consulting firm who are considering various strategic alternatives, including whether to take their company "public". Students have to analyze and evaluate strategic alternatives available to the firm, and specifically, the advantages and disadvantages of becoming a publicly traded company. Students have to decide the best course of action and to provide their reasons. The case is based on a real-world situation of a small, but successful, private consulting firm that has reached a point where a strategic assessment of the firm's future is appropriate. It is designed so that students can gain exposure to a real-life situation. The student evaluation is based on extensiveness of literature search, creativity in developing different transition strategies, coherent and logical argumentation, and clarity and professionalism in style of writing. Extensive Teaching Notes and Assessment Rubrics for student evaluation are provided. The case can be used as the entrepreneurship component of a senior level capstone course in business strategy or in an MBA entrepreneurship strategy course. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Brumagim [2010] developed an entrepreneurship case (The Best Backgammon, Inc. case) that can be used for assessment of learning (AOL) to support AACSB international accreditation. The case developed in this paper is also in the area of entrepreneurship and is also an AOL component, but looks at a completely different business environment (management consulting versus manufacturing) and decision context (entrepreneurial transition versus startup issues).

The case involves two principals in a private consulting firm who are considering various strategic alternatives, including whether to take their company "public". Students have to analyze and evaluate strategic alternatives available to the firm, and specifically, the advantages and disadvantages of becoming a publicly traded company. Students have to decide the best course of action and to provide their reasons. The case is framed in terms of a small, but successful, private consulting firm that has reached a point where a strategic assessment of the firm's future is appropriate. The case is designed so that students can gain exposure to a real-life situation faced by small private companies which have achieved a certain level of growth and success.

The student evaluation is based on extensiveness of literature search, creativity in developing different transition strategies, coherent and logical argumentation, and clarity and professionalism in style of writing. Extensive Teaching Notes and Assessment Rubrics for Entrepreneurship Evaluation [Table 5] and Quality of Writing [Table 6] for student evaluation are provided in the Appendices. The case can be used as the entrepreneurship component of a senior level capstone course in business strategy or in an MBA entrepreneurship strategy course.

Serafina Invicelli, age 38, and Horatio Brutus, age 55, are the principals in the successful management consulting business Invictus Solutions, which they started together ten years ago. Together they have grown their business from a start-up to a well-respected consulting business headquartered in Chicago with offices in Boston, Dallas, Washington, D.C., New York, Los Angeles and San Francisco. The firm employs approximately 300 billable consultants and has a support staff of about 100 employees. Revenues for the last fiscal year ended December 2008 were slightly over $165 million. All of their office space is leased and not owned. So far, the firm has been capitalized primarily by the two principals.

Serafina is a PhD in Economics and Horatio is an attorney and also has an MBA. Serafina has established a reputation as an economics and statistics expert while Horatio has leveraged years of experience as a corporate executive into a successful management consulting practice. Their particular niche client market is small to mid-sized businesses that are looking for reasonably priced management assistance in dealing with a variety of business issues as well as plans for improving their businesses. Clients also include various government agencies.

At their 10th anniversary celebration, Serafina and Horatio were asked about their plans for the future. They did not have a ready, well conceived plan to answer the question, but realized that it was crucial that they think critically about their own and the firm's future. Being consultants by training, they started collecting facts and developing possible alternatives for the future of the firm.

As the two principals reflect on ten years of being in the consulting business, they are considering different strategic alternatives for their firm. They have developed a list of various widely divergent choices that are available to them. These are: (1) Maintain the status quo and grow at the natural growth rate; (2) Enhance the growth rate through principal-financed expansion; (3) Enhance the growth rate through substantial bank lending; (4) Enhance the growth rate by admitting one or a very small number of professional partners who enlarge the capital base; (5) Merge with a similar size or larger consulting company; or (6) become a publicly-traded company and cash out if the Initial Public Offering (IPO) is successful. They realize that there are different risks and rewards associated with different strategies.

CONSULTING INDUSTRY OVERVIEW

Consulting industry history

Serafina and Horatio discovered that recent trends in the consulting industry indicate a shift from private firms to publicly traded firms. Formerly, management consulting was an industry dominated by private partnerships. However, since 2003, only 29 of the largest 75 consulting firms are still private. As of 2004, 17 of the top 20 consulting firms are now publicly traded [Adams & Zani, 2005]. The ranks of the largest management consulting companies by revenues according to Careers in Business Research (August 2009) are as stated in Table 1 (Appendix).

Management consulting firms began to proliferate after World War II as the United States transitioned into a peace-time economy. Management consulting has grown, with growth rates in the industry exceeding 20% in the 1980s and 1990s. In 2010, total global revenues for management consulting exceeded $345 billion while domestic consulting revenues were approximately $160.5 billion [Plunkett Research, 2011].

Scope of consulting industry

Consulting practices cover the entire gamut of business issues and there are as many different types of consultants as there are business issues that need to be addressed, including information technology, healthcare, general management and strategy. Consulting firms offer expertise, experience and knowledge that their clients lack. Generally, there are three types of consulting firms:

* The traditional business consulting firms which offer a wide array of consulting services to a wide range of clients. Companies in this sector include firms such as McKenzie and Company, Booze, Allen and Hamilton and The Boston Consulting Group;

* The specialized or boutique firms. Examples include Watson Wyatt (human resources and compensation) and Hewitt and Associates (benefits);

* The technology consulting firms: Accenture Ltd. is probably the most prominent and it derives the majority of its revenues from technology consulting. (Accenture is not a pure-play tech consulting company)

The consulting industry consists of firms of all sizes, from self-employed, one-person, work-from-home practices, to the large multi-practice, global companies. The industry is comprised of educated, experienced professionals with about 74% having a bachelor's degree [Bureau of Labor Statistics, 2008-09].The consulting business, not unlike other industries, has gone global with many of the large consulting firms maintaining offices in Europe and Asia.

Where do consultants come from?

Consultants come to the profession from several different routes. Some are refugee managers and executives who have been terminated from their employment. Then there are the "entrepreneurs", which may also include "retirees," who decide to leverage their years of experience and expertise into part-time work. Others are academics who possess great theoretical knowledge which they desire to leverage into economic advantage. Finally, in years in which consulting positions are considered desirable by newly minted MB As, the profession attracts recent graduates. Since start-up costs and barriers to entry are relatively low, the consulting business is a very competitive one [Reh, 2011]. "There has been an explosion of smaller shops. It has become easier for small firms to navigate the marketplace due to better electronic tools, availability of relevant datasets and the general escape of qualified professionals from the 'grind' to be found in larger firms" ( Careers in Consulting, http://www.careers-in-business.com/consulting/mcfacts.htm ) [2011].

Consulting industry culture and work attributes

Critics of high-fee consulting services say that a consultant will borrow your watch to tell you the time and send you a bill. The consulting business is a "personal service business." Generally speaking, clients hire a person, not the firm. Once a consultant-client relationship is established, consultants become a valuable commodity with respect to generating revenue or managing costs for the firm. Consultants are sometimes characterized as either revenue generators or producers, although the most successful consultants are both. The "revenue generators", also called "rain-makers," are skilled at client development, i.e. finding clients who are willing to retain the firm. The "producers" actually perform the client work and are generally not rewarded as well as the rain-makers are. Compensation arrangements in firms can become complicated affairs in terms of rewarding consultants [Peterson, 2010].

The work environment in consulting firms can be very demanding. More often than not, individual consultants have little or no control over their workday. Client demands and schedules take precedence. It is not unusual for consultants to travel extensively on client engagements, which can last several months. This is especially true in the larger, multi-practice firms. Accenture, the world's largest consulting firm, has positions that go from zero to 100% travel depending on the specific consulting position (careers.accenture.com). "Consultants can work long hours. The firm expects them to provide clients with 'no excuse' customer service. In addition, many consultants travel to and live at the site of the client company, although they generally return home every weekend" ( http://www.arts.cornell.edu/career/careers in management consulting.pdf ) [2011].

As a consultant progresses within a firm, he/she assumes responsibility for "client development," i.e. attracting new clients to the firm. Many individuals are neither comfortable nor particularly adept at developing a "book of business," i.e. clients. Consultants who routinely find themselves either "on the bench," i.e. not engaged in client projects, or who cannot generate clients find themselves at risk of being terminated. Between disenchantment and burn-out, the "glamour" of consulting soon loses its appeal. Annual employee turnover of 12.5%, or higher, is possible ( http://www.consulting-news.com/article display.aspy?P=adp&id=2079 ) [2005].

Professional service organizations are unique in that their "assets," the individual consultants, can literally walk out the door with their clients, potentially damaging the firm severely since lost clients are lost revenues if there is no non-compete agreement. Consulting firms, like other professional service organizations, remain constantly exposed to sudden and possibly dramatic adverse changes to their business. Therefore, a certain "critical mass" can insulate firms from drastic changes. In other words, smaller companies tend to be more vulnerable to adverse changes [Peterson, 2010].

Consulting industry trends

A research study conducted by Plunkett Research [2011], Plunkett reported the following:

Globalization.

Much of the recent growth in the industry has come from increased global demand for consulting services. Consultants are retained because they possess expertise, experience and skills not currently available in developing countries such as China, India and Brazil. The major consulting companies maintain offices in Europe, Asia, and South America. However, the boom in consulting outside the U.S. diminished in 2008 as a result of the global economic downturn. This trend seems to be reversing itself because "With their fees under pressure and merger and acquisition activity still sluggish, management consulting firms are turning to emerging markets like China and India for growth" (www.consultingcase101.com) [2010].

Information Technology.

Information technology (IT) consulting is one of the fastest growing segments within the consulting industry. Services in this segment include hardware systems design and implementation, software design and website design and operation. This segment also increasingly includes the outsourcing of IT services to consulting firms by clients ( www.accenture.com ).

Current Outlook.

The consulting industry is not immune to the slowdown in the world economy. Both the private sector and government have cut their spending budgets. The end result is that competition in the consulting industry will become more intense. And while there are some positive signs that a mild recovery is underway, especially with the government stimulus package, the large traditional consultancies may face increased competition from smaller, niche firms. Therefore, size and name recognition could provide a competitive advantage [Plunkett, 2011].

INVICTUS SOLUTIONS BACKGROUND

Invictus Solutions Practice Areas

Invictus Solutions falls into the category of a traditional consulting firm consisting of a number of practices within the firm, which provides a variety of professional services to its clients. The firm assists client companies in understanding regulations, evaluating and implementing compliance programs, and analyzing the potential financial risks of management programs. The firm helps clients in evaluating and implementing appropriate business solutions with respect to business problems. The firm's practice areas mirror very closely those of one of its competitors, Navigant Consulting, Inc. which are detailed below (www.navigantconsulting.com). [2011]

Risk management and compliance:

The services range from conducting a company-wide risk assessment for the purpose of recommending audit improvements and compliance programs, to conducting individual investigations. Specific services include:

Regulatory compliance reviews

Recommending corporate governance programs

Economics and statistical services:

Specific services include:

Evaluation of strategies for settling versus litigating claims

Statistical data analysis

Business valuations

Identifying and monitoring performance metrics

Corporate fraud investigations:

Invictus Consulting has earned a reputation as experienced business investigation consultants. It has experience and expertise in preventing, detecting and investigating risks or threats to various aspects of a business. Specific services include:

Special investigations

Management and employee fraud

Training on fraud awareness and prevention

Financial and accounting services:

The firm has expertise and strong project management experience analyzing financial processes, financial reporting and internal controls. It does not, and cannot, provide independent accounting services. Services include:

SEC reporting and disclosures

Strategic and operations planning

Company Clients:

Invictus Solutions has a variety of clients in such diverse industries as banking and finance, various retail businesses, real estate development, energy, pharmaceutical, industrial equipment, telecommunications, and consumer products as well as various agencies of the U.S. government. Many clients are repeat clients who have employed the firm previously. The firm continually attempts to sell/market its other consulting services to its current clients as a way of growing its business (known as "cross selling" or "cross-servicing"). Generally, the firm acquires new clients by word of mouth, since, as a private company, the firm does not have the same visibility as compared to some of its well-known competitors like Navigant Consulting.

While the two principals have performed a significant amount of new client development, they continue to emphasize the importance and necessity of client development to the more senior consultants in the firm. This responsibility is essential not only for individual advancement and growth, but also for the long-term survival of the firm.

Company Competition

Depending on the particular practice area, Invictus Solutions has any number of competing consulting firms offering similar services. Navigant Consulting, Inc., a New York Stock Exchange (NYSE) company (symbol NCI), is the firm's closest competitor. The practice area offerings are very similar. Another competitor is Huron Consulting (symbol HURN) (www.huronconsultinggroup.com). Huron Consulting is also a NYSE company.

While both Navigant and Huron compete with Invictus Solutions in a number of practice areas, their service offerings are broader. For example, in addition to the practice areas mentioned for Invictus Solutions, both Navigant and Huron offer services in Accounting and Finance, Disputes, Government Contracting and E-Discovery. Huron also offers consulting services in Restructuring and Turnarounds, Transactions (Due Diligence Investigations), Strategy and Operations.

Company Culture

Serafina and Horatio have intentionally created a professional, yet casual, non-threatening atmosphere within their organization. Horatio commented on his firm's culture:

"I like to believe the consultants at Invictus Solutions find a professional, stimulating yet comfortable work place. We encourage our consultants to devote non-billable time to non-project related learning. Also, we have tried hard to create an environment where all of us have the opportunity to enjoy a healthy work/life balance. If our consultants can find that balance, Serafina and I continue to believe that ultimately, they will be more productive and happy employees."

Both of them are concerned about what effect "going public" might have upon the carefully nurtured culture they have created for their firm since publicly traded firms are subjected to unrelenting demands for continually improving performance, which results in more outside scrutiny.

Company Financials

The firm has grown and has performed well as a private company. Selected financial information for the past three years is set forth in Table 2 (Appendix).

STRATEGIC ALTERNATIVES

As Serafina Invicelli and Horatio Brutus contemplate their firm's future, they begin to investigate the reasons why so many consulting firms have decided to "go public" and evaluate whether an IPO is a viable strategic alternative for their firm. The IPO of Goldman Sachs, the venerable Wall Street investment banking firm, is illustrative, albeit exceptional and in no way comparable to the small/medium size Invictus Solutions. Goldman Sachs raised $3.6 billion of capital in its 1999 IPO. After going public, according to the Goldman Sachs 2000 and 2008 annual reports, the company grew from $25 billion in revenues in 1999 to $46 billion in 2007. On the IPO date, the 221 senior partners at Goldman Sachs held shares worth $63 million per partner.

More instructive to Serafina and Horatio, however, was the 1996 IPO of the Metzler Group, a small private consulting company, which, after a series of acquisitions, eventually became Navigant Consulting, Inc. The 1996 IPO raised $37 million. As Table 3 (Appendix) shows, following the IPO, Metzler embarked on a series of acquisitions growing from $149 million in revenues in 1996 to $244.6 million in 2000 Also, their growth rate was much higher than Invictus Solutions which is growing less than 10 percent.

They also researched the New York Stock Exchange (NYSE) Listing Application, the NYSE Listed Company Manual, as well as the Securities and Exchange Commission rules and regulations pertaining to publicly traded companies, specifically disclosure and reporting requirements [SEC]. They recognize that becoming a publicly traded company will require new compliance obligations. The firm will need to retain attorneys and outside public accountants to assist them in complying with the various rules and regulations.

For example, as a result of the excesses which came to light in the early 2000-2002 time period, Congress enacted the Sarbanes-Oxley Act ("Act,"), which addresses corporate compliance and governance issues. The Act imposes additional requirements on publicly traded firms, such as personal certification by the chief executive officer and chief financial officer regarding the accuracy of financial statements; internal control systems; a "whistleblower" procedure monitored by an independent audit committee. Serafina and Horatio have enjoyed growing their business and have immense pride in their success and accomplishments as business owners. In addition, they particularly take pleasure from the status associated with being the firm's owners. While the administrative aspects of operating their firm tends to be tedious and trivial at times, they, nevertheless, like the ability to have an influence on their firm and enjoy being able to set the firm's direction. However, they realize that a review of strategic alternatives is both timely and appropriate. Although Invictus Solutions are focusing primarily on an IPO, they are also willing to consider other strategic options.

CASE ENDING QUESTIONS:

1. List and evaluate the various advantages and disadvantages of becoming a publicly traded company.

2. What other alternatives should the principals consider? List and evaluate the advantages and disadvantages of each of these alternatives?

3. Evaluate the legal implications of "going public".

4. Decide on the best course of action for the firm, i.e. stay private, take the firm public (IPO), or another alternative. Give reasons to support your decision.

TEACHING NOTES

The teaching notes consist of Learning Objectives, detailed discussion of relevant issues, and Student Evaluation Rubrics.

LEARNING OBJECTIVES

The instructor should give homework assignments and conduct class discussions to focus on the following concepts and points regarding critical attributes of the different forms of ownership of a service business and their respective complications and financial and psychological costs-benefits:

* List and evaluate the various advantages and disadvantages of becoming a publicly traded company.

* What other alternatives should the principals consider? List and evaluate the advantages and disadvantages of each of these alternatives?

* Evaluate the legal implications of "going public."

* Decide on the best course of action for the firm, i.e. stay private, take the firm public (IPO), or another alternative. Give reasons to support your decision.

Issue 1. List and evaluate the various advantages and disadvantages of becoming a publicly traded company.

Students should be able to identify the following three advantages of being a publicly-traded company.

A. Access to Equity Markets

Unlike a private company, which has limited opportunities for raising capital (primarily the owners' personal capital investments), publicly-traded companies can tap the financial markets for their capital requirements. Justifications for going public include the ability to finance acquisitions, capital to finance growth and stock to fund expansion.

The 1996 Metzler Group IPO raised $37 million. Following the IPO, Metzler (which later changed its name to Navigant Consulting, Inc.) embarked on a series of acquisitions, which continued until 2000 when the company was forced to retrench due to poor performance. However, the company grew from $149 million in revenues in 1996 to $244.6 million in 2000. A portion of most of these acquisitions was financed with Metzler (Navigant) stock, which financing option would not be available to a private firm like Invictus Solutions Consulting.

Stock is commonly used to finance a portion of an acquisition (NOTE: The instructor could ask students why stock is used to fund an acquisition). Not only does issuing stock lessen the cash outlay for the acquired company, stock also offers sellers the promise of increasing wealth if the stock, which is received as a part of the purchase price, appreciates in value. A typical purchase price formula would consist of cash, stock (equity in the acquiring company) and an "earn-out" bonus, i.e. pay for achieving specified performance goals. The percentage of each portion of the formula and the amount of each is a subject of negotiation between the buyer and seller.

B. Equity Ownership

A major inducement for any owners wishing to take their firm public is the opportunity for a large payday upon the sale of their stock holdings in the new publicly traded company, as well as the continuing possibility of significant wealth appreciation through equity ownership. Once again, the Goldman Sachs IPO is an example of the potential riches associated with an IPO. On the day that Goldman Sachs went public, the 221 senior partners at Goldman Sachs held shares worth an eye-popping $63 million per partner [Goldman Sachs, 2000].

Equity is also used as a form of compensation for employees, which can be an inducement to either join a company, or remain with a company. Stock has the benefit of allowing employees to own a part of the company, to participate as an owner, as well as an incentive to perform well and be productive. Equity ownership also, theoretically, aligns the interests of the employees of a company with those of its shareholders (goal congruence), since employees have a vested interest in ensuring the company performs well, which ideally is reflected in a higher stock price.

Equity is also used as a form of compensation for employees, which can be an inducement to either join a company, or remain with a company. Stock has the benefit of allowing employees to own a part of the company, to participate as an owner, as well as an incentive to perform well and be productive. Equity ownership also, theoretically, aligns the interests of the employees of a company with those of its shareholders (goal congruence), since employees have a vested interest in ensuring the company performs well, which ideally is reflected in a higher stock price.

C. Size

Size matters in professional services organizations (NOTE: the instructor might ask "why" size is important in a professional services organization like consulting). Big is not necessarily always better. But in a professional services organization like consulting, the larger the firm, the less likely it is that the loss of any one or two "rainmakers" will have an adverse affect on the firm. For example, in a firm with sales of $100 million, the loss of a consultant who is responsible for generating $10 million in revenue dramatically affects the firm. However, if the firm's revenues were $500 million, the departure of a rainmaker will have a less serious impact.

Issue 2. Evaluate the legal implications of "going public.

Students should be able to identify the following five disadvantages of being a publicly-traded company:

A. Legal Implications - Transparency

The legal implications of becoming a publicly traded company are significant. Publicly traded companies exist in a "fishbowl." The federal securities regulations require elaborate disclosures about all aspects of publicly traded companies, including personal information about the executive officers and directors. Even prior to the corporate scandals which came to light in the early 2000-2001 time period (Enron, WorldCom, Tyco), publicly traded companies were required to make disclosures concerning financial results, compensation arrangements and personal information about their officers and directors. The idea behind these required disclosures is "transparency," i.e. the extent to which investors have ready access to corporate personnel and financial information about the company.

For example, the Securities and Exchange Commission (SEC) has promulgated elaborate disclosure rules in connection with the content of proxy statements sent to shareholders when soliciting their votes on various corporate matters [Schedule 14A, 17 CFR 240.14a-101]. Item 402 of Regulation S-K requires disclosure of director and executive officer compensation such as salary, bonuses, stock ownership, stock option awards, severance arrangements ("golden parachutes") and perquisites (company offered benefits like cars, club memberships etc.). The regulations also require biographical information about the directors and officers (Items 103, 401 and 404(1) and (b) of Regulation S-K). The idea being that investors are entitled to know in detail information about the individuals charged with operating a company in order to make an informed investment decision. In a private company, the principals maintain a certain anonymity and privacy. Financial results are shared only with the owners. The firm is not subject to outside scrutiny since there is no public disclosure of firm results, personal information or compensation. Compensation is confidential whereas in a publicly traded company, compensation arrangements of senior executives are not only very public, but also quite detailed. Because of the very public nature of officer and director compensation disclosures in a publicly traded company, security and safety issues are a legitimate concern.

In addition, each stock exchange has its own rules concerning listed companies. For example, Section 303A, entitled "Corporate Responsibility," of the New York Stock Exchange (NYSE) Listed Company Manual provides that the board of directors must consist of a majority of outside directors (Section 303A.01); elaborate rules concerning Audit and Compensation Committees are contained in Section 303A.05 and .06; development of corporate governance guidelines, i.e. director qualifications and responsibilities are in Section 303A.09; Section 303A.12 provides for CEO certification that the CEO is unaware of NYSE violations [NYSE, 2009]. Section 204 entitled "Notice to and Filings with the Exchange" requires notice to the NYSE for any number of business occurrences including changes in capital, changes in directors or executive officers, or changes in auditors.

B. Legal Implications - Cost

Going public is not an inexpensive undertaking. There are significant upfront costs associated with an IPO, such as listing on an exchange, preparation of a registration statement and prospectus, printing and legal fees, outside independent accountant expenses. For example, the minimum listing application fee for the NYSE is $37,500 plus $.0048 per share for a $75 million offering; $0.00375 per share for an offering between $75 million and $300 million and $0.0019 per share for an offering over $300 million. (The maximum listing fee is capped at $250,000) [NYSE, 2009]. Various authors have calculated the costs for going public. Draho [1998] in his book entitled "The IPO Decision: Why and How Companies Go Public" stated that the "direct costs ... of a typical $100 million IPO with 10 million shares listed on NASDAQ would involve direct costs between $8.4 million and $8.8 million" (these costs include attorney's fees, accounting fees, underwriter spread (profit), printing costs, SEC fees, state fees, transfer agent and miscellaneous fees). Ritter [1998] estimated total direct costs of an IPO in the range of 16.96% for IPO's of $10 million or less to 5.72% for IPO's of $500 million or more, where the costs are a percentage of the offer price of the stock. He calculated that the average total direct costs are 11% of total proceeds from the IPO. Lastly, Entrepreneur Magazine [2005] in an article entitled "Going Public" estimated IPO costs of "no less than 25%" of the company's stock offering. In addition, publicly traded firms have significant ongoing expenses. While there have always been expenses associated directly with being a publicly traded company, such as legal and accounting fees and annual membership fees for an exchange listing (for example, the minimum annual listing fee for the NYSE is $38,000), costs have increased since the passage of the Sarbanes-Oxley Act of 2001 (Act). The Act was passed by Congress as a direct result of the numerous corporate abuses that came to light during 2000-2002. Even more transparency was the order of the day. The Act requires compliance on a number of levels including enhanced accounting procedures and policies, routine audits, increased internal controls and adoption of corporate governance programs to mention a few. The additional cost of compliance is not insignificant. Estimates of first-year compliance costs range from $4.6 million for large companies ($5 billion in sales) to $2 million for medium to small companies. The average cost of compliance with the Act is estimated at $2.9 million [Hartman, 2007]. (NOTE: It might be interesting to ask students to guess what the annual costs of compliance are).

C. Equity Downsides

(i) While equity is a powerful incentive and motivator, there is a "dark" side to equity: investors can experience tremendous losses, occasionally due to conditions or circumstances which are beyond a company's control. For instance, poor results for a market leader may adversely affect stock prices in other companies within the same sector or industry. Invictus Solutions will have to consider the possible negative effects on morale should the company's stock fail to increase in value, or worse, suffer declines in value. In the first 10 months of 2008, the S&P stock index lost 34% and the DOW Jones Industrial Average dropped 29.7% (the S&P fell 16.8% and the Dow Jones fell 14.1% in the month of October 2008 alone) [Steverman, 2008].

(ii) When there is too much focus on increasing the stock price, two unwelcome side effects are possible. The first is short-term thinking (managerial myopic decision making). There may be decisions required for the long-term viability of the company, which may result in lower short-term earnings. Lower earnings can adversely affect the stock price. For example, a company may need to invest capital in research and new product development, or to upgrade/modernize facilities. Since budgeting for the future can have short-term negative financial consequences, it may adversely affect a company's stock price leading to a temptation to defer costly, but necessary, expenditures.

The second "unwelcome" consequence of too much focus on a company's stock is the temptation to take shortcuts in order to inflate stock price. Examples abound. Students could cite Enron and WorldCom as instances where senior management's excessive preoccupation with increasing stock values led to abuses. (It has been reported that Bernie Ebbers, the former CEO of WorldCom, would check the company's stock price several times a day). f

D. Investor Expectations *

Unlike a privately held company, publicly-traded companies face considerable pressure for results from outside sources. These include shareholders who invest in a company expecting a return, sometimes unrealistic, on their investment; fund managers whose compensation is tied to the performance of the companies in their portfolio; and financial analysts who follow the company. Since most shareholders (over 60%) are now institutions such as mutual funds, insurance companies, pension funds and hedge funds, there is reduced loyalty to a particular company in favor of expected returns (although large pension funds which have a long-term perspective do focus on the quality of management) [American Bar Association, 2009]. Large institutional investors like the California Public Employees' Retirement System (CALPERS) can and do exert pressure on management. They can also influence changes in management and board membership. Going public would entail constant pressure for financial results. As one CEO stated, "there's no fourth quarter when you're the CEO." In other words, the attitude of new investors is "what have you done for me lately." There is always some investor who just purchased a company's stock and is not interested in past successes (NOTE: The instructor could ask students what their attitude would be if they recently purchased stock in a well-managed, high performing company and the company's performance does not meet their expectations).

E. Culture

(NOTE: The instructor might ask students to define "culture").

Culture is a set of beliefs, values and customs of a group. While it is an intangible, its importance and significance to an organization cannot be underestimated.

As the principals of Invictus Solutions evaluate the IPO option, one of their major considerations will be to evaluate the impact of becoming a "public" company on the culture of their firm. They learned through their research that in firms that went public, less time was being spent on learning and career development because of the pressure to generate billable hours to satisfy investor expectations. Career development is an area that Serafina and Horatio actively promoted.

Moreover, the two principals are concerned about breaching the "psychological contract" between their firm and its employees. Many of the firm's consultants were recruited directly from college with an expectation of working in a small private firm where the external pressures for results are absent, or at least reduced, and where there is the prospect of becoming a partner or equity owner who shares in the profits. There is a "psychological contract" formed during the recruiting process, i.e. an expectation by prospective employees that the firm will continue to "honor" its contract by maintaining the firm's culture. In addition, not all consultants fit well in a large, results-dominated organization and prefer a more flexible environment with less outside pressure. Going public would alter the firm's culture possibly disappointing some employees, and/or causing morale problems.

Issue 3. Identify and evaluate the advantages and disadvantages of the following three strategic alternatives:

A. Status Quo

(NOTE: The instructor might ask students what they believe the most obvious strategic alternative is).

The most obvious alternative for the firm is to stay a private consulting firm, i.e. maintain the status quo, and simply continue operations as they have in the past. There are several advantages to this option:

(i) Less outside pressure and scrutiny. There would be no need for elaborate SEC disclosures about the firm's performance, personal information about its officers/directors and their compensation. Moreover, there would not be the same constant pressure for continually improving financial results. Additionally, the owners would not only maintain anonymity and privacy, but also would have more independence, control and flexibility in operating their firm.

(ii) No compliance costs. By remaining a privately held company, the firm would not incur the additional expenses associated with compliance requirements, i.e. outside public accountants, legal fees for various disclosure issues, stock exchange fees, printing and shareholder meeting costs.

(iii) The firm could retain its culture. Consulting firms grow by adding billable consultants. One source of new consultants is college graduates. Some individuals prefer working for a small company where the culture fosters an atmosphere that is informal with less bureaucracy. By remaining a private firm, the owners can continue its carefully nurtured culture.

(iv) The principals can maintain their "status" as owners of the firm. While this is an intangible factor, its importance should not be underestimated. One of the authors has personally witnessed the adjustments that former owners of acquired firms struggle with after the acquisition. Once the euphoria of the big "payday" fades, real morale problems can arise.

There are several disadvantages to remaining private:

(i) Growth opportunities may be more limited As stated earlier, publicly traded companies can leverage their size, visibility and can use the capital markets to fuel growth. This option is often not available to private companies of a particular size.

(ii) Financing options may be more limited. Credit in the current economy is tight for non-gilt-edged firms because of the harsher lending standards of banks that have been decimated by the global economic crisis that began in 2008 [Razaki et al, 2010]. Banks have become more risk adverse. Up to this point, the two main principals of Invictus Solutions have financed the firm primarily through their own resources with some capital coming from other principals. However, there are limits as to how much continuing personal investment in the firm is prudent.

(iii) No equity cash-out. While there are certain restrictions generally imposed by the underwriters concerning how soon the principals can liquidate their stock holdings in a newly created publicly-traded company ("lock-up provisions"), there would be no large payday if the firm remains private. Also, there may not be equity upside potential or the ability to compensate consultants with equity.

B. Remain private but make acquisitions in order to grow.

Consulting firms, like other professional services organizations, can grow by either raising fees, getting more work from current clients (both ways referred to as "organic growth"), signing on new clients, or acquiring other firms. Of the first three mentioned ways to grow, the firm can only control raising its fees, which is always a delicate balance between meeting ever increasing expenses and yielding to the pressure from clients to hold the line on fees. Securing additional work from current clients and finding new clients is not guaranteed. Therefore, growth by acquisition becomes a serious consideration.

The advantages of an acquisition are:

(i) The firm can grow. A firm can raise fees, or sell more services to current clients. But with an acquisition, the firm acquires new clients and new billable consultants virtually instantaneously. The firm can also diversify into new practice areas overnight, thereby short-circuiting the tedious and time-consuming process of building a new "book of business" in a practice area from scratch.

(ii) The firm acquires new talent, experience, expertise and resources, which it can market to current and prospective clients.

(iii) If integrated properly, the new combined firm should experience certain operating efficiencies, i.e. more billable consultants generating revenue and profits with the same, or slightly increased number of support staff. Savings are possible since support functions like accounting and human resources can usually absorb new consultants with little or no additions to their staff.

The disadvantages of making an acquisition are:

(i) Acquisitions are risky. While financial projections (pro forma financial statements) can make a firm appear attractive as a potential target company, there are intangible considerations. Statistics show that the failure of most mergers and acquisitions lies somewhere between 40-80% [Anonymous]. Acquisitions that are outside the existing core competencies are more risky than those that are horizontally in the same specialty space. Research also suggests that a primary reason for such failures is "people issues." Every organization possesses a culture and personality and, when companies combine, there can be culture clashes: for example dress codes; how expense reports are handled; flexibility of office hours and the formality or informality in an office. Therefore, the post acquisition assimilation and integration of an acquired firm are critical to the eventual success of an acquisition.

(ii) Increased overhead expenses. As a condition of some acquisitions, especially of a privately held firm, the seller will require the buyer to hire all of its employees, including non-billable staff. Owners of small firms who are selling their company and "cashing-out" feel an obligation to their employees who have been loyal and want to return that loyalty. While this contingency is factored into the financial justification for the acquisition, it does limit the savings an acquirer can achieve from the acquisition. In addition, the seller may have office, and/or equipment leases, or other obligations which the buyer must assume.

(iii) Overvalue the target company. Acquisitions take on a life of their own. It is sometimes difficult for management to make a decision to "cut losses" and move on after investing a significant amount of time, resources and money pursuing a target company. So there is a tendency to push the acquisition through even when it stops making good financial or business sense. Closely associated with this disadvantage is assuming the debt of the target company, or taking on too much debt to make the acquisition.

C. Sell firm, i.e. be acquired by another company

The advantages of selling the firm are:

(i) Cash-out by owners. The potential exists for a large cash payment. Private acquisitions can be as financially rewarding as an IPO without all the legal consequences.

(ii) Equity. If the acquiring company is publicly traded and offers stock (equity) as part of the purchase price, the potential exists for additional wealth if the stock appreciates in value.

(iii) Shedding administrative and operational responsibilities. The day-to-day duties and responsibilities of running an organization can be time-consuming and frustrating. It is very likely that most, if not all, these responsibilities would be handed off to other individuals within the acquiring company.

The disadvantages of selling the firm are:

(i) All that glitters is not gold. It is not uncommon to pay the purchase price of an acquisition with a combination of cash, stock and an "earn-out." While the amounts and percentages of each portion of the formula are subject to negotiation, a typical purchase price formula might be one-third cash payable at closing (subject to tax, which obviously reduces the pay-out); one-third in some form of equity, if available, which the acquirer may require the recipients to hold for a period of time in order to insure key employees stay; and finally, one-third in the form of an "earn-out." An earn-out provision provides that payment is subject to the achievement of certain performance goals, i.e. revenue or profit growth goals, for example. An individual's failure to achieve such goals reduces the purchase price that the seller anticipated receiving for selling the company. In sum, there may be severe "buyers' remorse" after the deal once tax is paid, the stock received decreases in value and/or earn-out goals are not achieved.

(ii) Loss of status/prestige. This factor is extremely subjective and intangible. However, it should not be taken lightly. Serious morale issues can be encountered by former owners (principals) of acquired consulting firms who face difficult adjustments in merely being "one of the crowd". While generally, former owners negotiate a title and position with the acquiring company, the fact remains that after the acquisition they may be one of several hundred similarly situated consultants. An "A" student might recognize this morale issue.

(iii) Loss of influence/control. This disadvantage is closely related to the previous one. After being "in charge," previous owners may find it difficult to accept not being a policy maker or decision maker in terms of the firm's operations.

(iv) Assimilation. Consultants from the acquired firm will have to adapt to a new culture, one which may be very different from the atmosphere and environment of the acquired firm. While some consultants might actually welcome a more structured and focused workplace, others may feel uncomfortable. The "fit" within the new organization may prove to be difficult for some resulting in departures of competent and experienced billable consultants. A certain amount of attrition should be expected.

(v) Non-compete agreements. (NOTE: Ask students to define a non-compete and explain the purpose of a non-compete agreement. You can also ask their views on non¬competes, i.e. are they fair, what's a "reasonable" duration). Imagine paying several million dollars to purchase a business only to find that the previous owners have started a competing business. To prevent this possibility, it has become the norm to require that key employees of the acquired firm execute non-compete agreements as a condition of the closing. These agreements provide that the person signing the non-compete will not be allowed to compete, or work for a competing company for a certain period of time.

Issue 4. Decide on the best course of action for the firm, i.e. stay private, take the firm public (IPO), or another alternative. Give reasons to support your decision.

One alternative to "going public", and the most obvious alternative, is simply to remain a private firm. Given the steady, but unspectacular, growth of the Invictus Solutions, an IPO may not be attractive at this time. Generally, companies electing to go public have growth rates which exceed 10% annually, as shown in Table 4 (Appendix). A slight variation to remaining private is growing the company with acquisitions. Organic growth, i.e. increasing fees, acquiring new clients, or doing more work with existing clients, while less risky than acquisitions, will most likely not result in dramatic revenue growth. Growing the firm through acquisitions of other consulting companies has the potential of dramatically increasing revenue since consulting firms generate revenue from billable consultant hours. The more consultants there are, the greater the revenue. In addition to adding new consultants and clients, acquisitions can also add new service lines not currently offered.

There are risks to growth by acquisition. Probably the biggest risk in acquisitions is cultural fit, especially in people intensive organizations like consulting firms. Different styles, values and traditions are intangibles that often derail the most thoroughly researched and investigated acquisitions. At the end of the day, the acquired "assets" are people. Small business owners and employees transitioning into a larger organization often chafe at the sometimes impersonal and bureaucratic culture of the acquiring firm. Another alternative to the IPO is to sell the firm, i.e. be acquired or merged into another firm. As mentioned in the Teaching Notes, there are obvious advantages: cash-out, possibly less stress, fewer management/administrative responsibilities. From a business standpoint, there could be significant strategic synergies to be achieved by selling out to another firm. Given the age differences of the two principals, there could be a difference of opinion about this alternative. However, there is sufficient merit in selling a viable, reasonably successful firm to warrant serious consideration by the two principals. While there is no "right," or "best" answer to the question of which strategic alternative is most attractive, an "A" student might suggest that Invictus Solutions remain private for the time being, while putting out "feelers" for a possible sale of the firm. There are certain advantages to this approach. The firm can continue to operate while positioning itself as an attractive acquisition candidate;

Invictus Solutions can take steps to grow the company, either organically or by acquisitions, to better position itself for an eventual IPO; and lastly The principals, having at least considered strategic alternatives, can take some time to evaluate and decide whether remaining a private firm remains the best possible choice. Being an independent firm is not without its benefits; status, control, continued employment and comfortable income.

ACKNOWLEDGEMENTS

The authors would like to acknowledge Mr. Alan Peterson for providing information and guidance in developing this case that is based on his personal experiences. Further, the authors wish to thank the Brennan School of Business at Dominican University for providing the student evaluation rubrics in Tables 5 and 6.

Subject: Consulting firms; Entrepreneurship; Decision making; Strategic management; Case studies

Classification: 2310: Planning; 9520: Small business; 8310: Consultants; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 4

Pages: 1-24

Number of pages: 24

Publication year: 2011

Publication date: Oct 2011

Year: 2011

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 Tables

ProQuest document ID: 888056208

Document URL: http://search.proquest.com/docview/888056208?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Oct 2011

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 42 of 100

Cortesia Coches: moving beyond borders

Author: Good, R T

ProQuest document link

Abstract:

Cortesia Coches: moving beyond borders is a case focusing on and integrating cross-cultural management and human resource development concepts with a firm in the third stage of internationalization. The case encourages the examination of roles, perspectives and strategies for differing operational staffing options related to the sourcing of unit leadership talent and the resulting cross-cultural preparation and experience of managers in the firm. The firm is internationalizing its operation through acquisition. The case examines the influences of national and corporate cultural elements and engages learners on the success implications and human resource development counter-measures possible to mitigate negative impact on employees, the firm and the communities in which the company operates. The case has two parts. The first is appropriate for an hour-long class through case set up, team analysis and facilitated discussion on varying merits of international staff sourcing options. The second involves out of class team activities to develop and prepare a proposal presentation as an HR consulting practice. The case is appropriate for upper level undergraduate students and first year graduate students who already have familiarization with foundational knowledge of HR functions and wish to deepen their understanding of these areas through application in an international case context. The events on which this case is based are real but with identifiers altered. The case is presented with student materials, instructor notes and an evaluation rubric. [PUBLICATION ABSTRACT]

Full text:

CASE STUDY - CORTESIA COCHES: MOVING BEYOND BORDERS

As the chair of the board for Cortesia Coches brought the gavel down with a loud sense of finality, Juanita Fernandes was struck by the excitement of the decision just made. Underneath the board table she clinched her left fist in private affirmation to herself. As she looked about the table to the rest of her executive team, who were all looking toward her with smiles beaming, she knew it was a moment to celebrate their hard work, a major company milestone and her first major achievement as President and CEO for Cortesia Coches. They would have that well-earned celebration.

However, the enormity of the task was not lost on President Fernandes. Making the decision to take the company international would be easy compared to the task of being successful in that endeavor. While she was familiar with international operations from her previous experience as VP of operations for a regional hotel chain, she knew her team was not. She could rely on the 30-year history of her company in the car rental business but would need to augment this industry experience with international expertise to inform a cross-border expansion of company operations.

And she would need to move fast! The board had just approved her recommendation to acquire Belizean Auto Rentals in a timely leveraged buy-out. Getting up to speed with operations and generating positive cash flow would be critical to maintaining the company's financial stability. President Fernandes knew that not all members of the board welcomed being put in this vulnerable position. There was a commitment by several members of the board to monitor developments closely.

Company Background: Cortesia Coches, Inc. (Courtesy Cars) operates 13 car rental sites throughout the Yucatan Peninsula of Mexico. Juan Carlos Gonzales, a local political leader and businessman, started the company in 1980 and sold it in 1995 to an investment group. Holdings included an inventory of 60 vehicles, company operations and valuable rental sites located in tourist centers. The growth of his entrepreneurial venture coincided with a coordinated move by the federal government of Mexico and regional governments within the Yucatan to establish a tourist destination. Infrastructure was developed to draw tourists toward the pristine beaches of the Gulf of Mexico as well as the nearby historical ruins of Mayan civilization - a match perfect for a car rental business where road travel between sites is required. Since the sale, Cortesia has expanded along with tourism throughout the region under the leadership of two different CEOs. Until 2005, Gonzales' successor was aggressive with expansion, sometimes at the detriment of company financial stability, establishing a corporate headquarters, adding five sites (some owned and some rented property), creating a call center nurturing repeat business and growing the fleet to 180 vehicles. However, he had difficult relations with the board due to poor cash flow planning. The next CEO halted expansion and restored fiscal stability during his short tenure, regaining trust of the board but losing faith with his staff before having to step aside. A fiscally driven hard-nose, he did not recognize human capital value or the subsequent impact that lack of appreciation would have on customer relations and sales.

Cortesia's current CEO, Juanita Fernandes, was brought onboard in 2007 to move the company to its next level of operation. She formerly served as a vice president of operations for a mid-size hotel chain operating in Mexico and is quite familiar with the tourism industry generally. Since joining Cortesia, she has successfully added another four rental sites to the nine she inherited and increased Cortesia's brand recognition and profit margin through a strategydriven, team-based corporate culture focused on quality customer service. Fernandes enjoys the support of her executive team and was featured on the June 2010 cover of the Yucatan's leading tourism industry publication, Yucatan Gold. She spent much of her article interview lauding the accomplishments of her leadership team with statements like, "No one of us can create the success that together we generate every day. That's the secret of Cortesia, a unified focus on quality customer service - while cars are what we rent, our customers return because of experiences with our people." Cortesia enjoys a high rate of repeat rentals and referrals now, key benchmarks in the industry.

Last month Fernandes announced her decision to take the company international with the purchase of a car rental agency operating in the neighboring country of Belize. Belize, like the Yucatan, is rich with great beach recreation and Mayan history but currently lacks the recognition enjoyed by the Yucatan from U.S. travelers, a primary market. Belizean Auto Rentals (BAR) operates seven properties with a similar market focus and placement as Cortesia. It seemed a well matched acquisition for Cortesia and may position the company for entry into the steadily growing Belizean travel market.

Fernandes's announcement of the BAR acquisition foreshadowed her long-term vision. When making the announcement of the acquisition she was clear on her intent for Cortesia to become a regional player in the car rental business. "Expanding our service area is not only a strategic move for Cortesia, it is what our clients demand," Fernandes stated, "and with more service territory we can offer our clients the exceptional service they've come to expect, a frequent user program to retain their business and a market position to increase our bargain power with respect to growing our fleet." While Fernandes did not specify future acquisition or expansion targets, she has directed her leadership team to include in the strategic planning process, now underway as a result of the action taken by the board, a review of the potential for growth in the Central American and Caribbean regions.

The Situation: Following the board meeting, you and your team of HR consultants have been contracted by Fernandes's office to provide tactical direction and support for this initial international move for blending the cultures and company practices of the acquired Belizean company. Fernandes knows that success for the long-range vision for the company is contingent on success with this initial venture. A lot is at stake! Moreover, investors are watching this move closely since they are concerned with maintenance of Cortesia's brand value and financial stability. Fernandes also understands that an international expansion is not simply replicating current operations in a new country; international expansion involves careful planning and appropriate investment, but she is not quite clear on how to balance the demands of a differing national and cultural setting with the preservation of organizational values and practices. Fortunately, this is the expertise of your firm!

Opening Task: Cortesia's expansion into Belize has excited the site management team, especially with the recognition that Fernandes has built considerable good will and trust through reinforcement of promotional opportunities and careful succession planning. Site managers oversee operations at various Cortesia locations where customers pick-up and return vehicles. Because of advancement opportunities, a majority of the site managers indicate a desire to play a role in the international expansion, but all confess to knowing little about the diverse cultures and languages of Belize beyond their own. Fernandes has a short turn-around period of four weeks for the management staffing, rebranding and operational retooling of the former BAR sites before the tourist season kicks into high gear. Further, it is critical that a positive cash flow is generated quickly to offset the debt service on the newly acquired fleet. She wants Cortesia to be ready with a management presence in Belize soon!

Based on what you and your HR consultancy team know at this point, you are being asked to recommend a strategy for sourcing general managers for the newly acquired sites. As company loyalty at BAR was not high and the impending sale of the company was leaked well in advance, over 75% of the staff and five site managers left for employment elsewhere. The remaining two managers were simply unable to secure employment before the change. You are being asked to recommend a selection strategy for establishing new leadership for each site - site managers - by advising if Cortesia should engage parent country nationals (PCNs), host country nationals (HCNs) or third country nationals (TCNs). In this case, PCNs would be from Mexico, HCNs would be from Belize while TCNs would be from any other country. You and your team are asked to prepare a short three-minute position statement on the advantages and disadvantages for each RELEVANT TO THIS SITUATION as well as your recommendation for action. Be prepared to present your position in class.

The remainder of the assignment is to be completed outside of class with your team. As directed by the instructor, you will prepare a presentation as a consulting agency pitching your ideas on the best approach for each of the following needs.

* Task #1: After considering your presentation, Cortesia's senior management has determined that investor concerns on quality control of the brand are paramount and that PCNs selected from internal candidates will be considered, especially in light of the promotional policy advanced by Fernandes. Additionally, given the need to act quickly to fill the positions, the recruitment and selection of candidates has been outsourced by Cortesia to your firm. You are asked to prepare a recruitment advertisement for the site manager position that echoes the company ethos and reflects the main and location specific tasks, duties and responsibilities (TDRs) as well as the knowledge, skills and abilities (KSAs) for the job. Your advertisement should be constructed so that it can be sent to current managers at the varying sites through email distribution. You will present your recruitment advertisement as part of a final proposal presentation.

* Task #2: Assume your advertisement was effective and generated considerable interest with 10 current site managers at Cortesia submitting letters of interest for the 7 vacancies. Cortesia's management team knows candidates quite well but it is important to Fernandes that the process be viewed as fair and objective so that rejected candidates maintain a commitment to the company. In the interest to ensure quality selection and placement, Cortesia has contracted your firm to design a selection process through which all candidates are to be considered for placement at the Belizean sites. While Cortesia has no constraints on selection costs, time remains a key issue so the selection time frame must be kept to a minimum when bringing managers in from varying sites. Using what you know about Cortesia and the role for the site manager position, design a selection process for Cortesia to use in the effort to fill site manager vacancies in Belize. You will present your selection process as part of a final proposal presentation.

* Task #3: Since managers will be living in a national setting different from the parent company with it's own currency, compensation standards and legal requirements, you are asked to develop a compensation proposal for site managers comparable to that of the company but adjusted to the difference in living standards. The average annual salary for site managers in Mexico is 325,000 Mexican Pesos plus spot bonuses. While information on Belizean compensation rates demonstrate that base compensation is slightly more than that paid by Cortesia, bonuses are not common and have not been provided as part of the BAR compensation system. Determine your recommendation(s) for a total compensation package for site managers based on the company average for working and living in Belize. You may include non-financial benefits. You will present your compensation plan as part of a final proposal presentation.

* Task #4: Cortesia plans to be operational with new PCN site managers in place for the start of the new tourist season in approximately one month. Since each expatriate manager will be from existing company operations but Cortesia has no previous international experience, it will be necessary for training to address cross-cultural matters but not operational matters. Given the short time frame and training content with which Cortesia is unfamiliar, Fernandes's office needs the expertise of your firm to design and conduct a training program to prepare these managers for their new role. They have specified that training should be composed of two parts: pre-departure training and continuing development in Belize. Further, they have specified that since the national language of Belize is not Spanish, introductory language instruction must also be a part of the preparation program. Design a training program that addresses the objectives and specifications of Cortesia and be sure to address who (assumptions about learners), what (content of training), when (timing and frequency), where (location of training), how (format of training) and why (training objectives and outcomes) for each respective part. You must also include in your plan how the training program will be evaluated. You will present your training plan as part of a final proposal presentation.

* Task #5: Fernandes's team at Cortesia has learned that the success rate of expatriate placements is quite low and that the company could fail to receive sufficient return on investment for the costs associated with training and relocation of site managers. She wishes to minimize this risk and has asked your firm to prepare recommendations on resources Cortesia should seek to support expatriate site managers in Belize. Your recommendations can include reference to outside resources of which Cortesia and the expatriate site managers can take advantage to support sustained commitment to the international assignment. It is hoped that a good system can be established for replication as Cortesia continues international expansion. You will present your expatriate support plan as part of a final proposal presentation.

* Final Proposal Presentation: As President Fernandes recognizes the enormity of the task she gives your team, she also knows that she made a wise choice in outsourcing these human resource needs. This frees her and her team to focus on other objectives related to the acquisition, rebranding of BAR and repositioning the company as a regional player. However, she reminds your team that people have always been the key to her organization, for which linking of the human capital contributions to firm success is very much a part of the organizational culture she cultivates. On this she makes clear there can be no mistake; she expects excellence from you and your team.

Your HR consultancy team is asked to present your recommendations in a presentation to Cortesia's leadership team. Your team should have an identity as well as a consistent professional presentation styling with all team members represented so Cortesia can see with whom they will be partnering. The presentation should demonstrate the expertise of the consultancy team without over-reliance on narrative information - more presentation, less reading - as Cortesia will need to take quick decision-making action in assigning the project. And on that note, the project is quite lucrative but your HR consultancy is not the only firm vying for the contract. So, do your best!

TEACHING NOTES - CORTESIA COCHES: MOVING BEYOND BORDERS

This case is designed to give students with a foundational knowledge of human resource functional areas an opportunity to employ and expand their knowledge of these areas as would be necessary in a firm's first stage internationalization effort. In so doing, students apply both human resource and cross-cultural theory to an applied situation. Moreover, this case will expose students to the unique challenges of managing cross-border expansion. As students will work in teams in the development of a proposal presentation based on their role as an independent consulting practice, they will have the opportunity to discover cross-national and cross-cultural differences, consider the implications of varying decision options as well as formulate and defend a short-term tactical approach based on a long-term strategic direction.

Course Application

This case is appropriate for an introductory human resource course in a business curriculum at both the undergraduate and graduate levels after a foundational understanding of functional human resource areas has been established. Additionally, this case is appropriate for an international human resource course.

Learning Objectives/Outcomes

In completing this case, students will:

* gain practice in interpreting foundational HR concepts into an international context;

* understand the primary differentiators with respect to sourcing employees as parent country nationals, host country nationals or third country nationals;

* make choices and defend actions based on both tactical objectives as well as strategic direction as they impact a firm's corporate culture and organizational identity; and

* demonstrate competence in team role contribution with respect to effective information gathering, decision-making, task planning and proposal presentation.

Teaching Resources

The case, Cortesia Coches, is a comprehensive introductory case focusing on the international dimensions of several HR functional areas. It does not cover all HR functions. However, it does provide students with practice in interpreting the internationalization dimensions in the areas of strategic HR, recruitment and selection, training and development, compensation and benefits as well as expatriate support services. The case is composed of company background, situational challenge and six tasks. At case introduction students are provided with the background and situation. After identification of case teams, each team should be given time, estimated to be 20 minutes, to discuss and determine a position statement with respect to the use of parent country nationals, host country nationals or third country nationals in the context of the introductory material of the case. After presentation and instructor-facilitated discussion on the merits of the teams' position statements, teams are assigned five tasks to complete in preparation for a forthcoming class presentation. Presentation outcomes and specifics are left to the discretion of the instructor. Estimated time will vary based on the size of the class.

Students may already be familiar with the terms parent (or home) country nationals (PCNs), host country national (HCNs) and third country nationals (TCNs). Either way, it may be helpful to review these definitions as well as the term expatriate as the opening task is assigned (Noe, Hollenbeck, Gerhart & Wright, 2010). For the opening task, students working in teams are to review what they understand about the pros and cons of staffing with each respective sourcing type for international placements (PCNs, HCNs or TCNs) and then consider their application with this case context in rendering a sourcing recommendation for unit leadership of the newly acquired properties. As teams report out, sample comments on the pros and cons might include:

* PCNs

* Pros

* Familiarity with company culture, policies and operations

* Experience with company leadership

* Experience with brand

* Cons

* Potential difficulties with host culture, laws and customs

* High cost of training and maintaining expatriate employees

* Family adjustment considerations

* HCNs

* Pros

* Familiarity with home country culture, laws and customs

* Lower cost of hiring and transition

* Possible in-country cultural experience with vendors and customers

* Cons

* Potential difficulties with parent company culture, policies, leadership and operations

* Communication challenges in dealing with parent company

* Potential lack of opportunity for promotion in parent company enterprise

* TCNs

* Pros

* More objectivity to cultural differences between parent and host country operations

* More globally minded career individuals

* May offer cost containment depending upon home nationality of TCNs

* Cons

* May encounter difficulties with host country acceptance

* May have high cost implications with transition and support

In debriefing, the instructor may wish to focus the discussion toward Cortesia's long range goals and facilitate a discussion on the merits of establishing a global staffing philosophy (DeNisi & Griffin, 2011). Helping students understand the differences between an ethnocentric, polycentric and geocentric philosophic approach to staffing will introduce students to the strategic decision considerations between short-term objectives (i.e. staffing newly acquired sites within four weeks) and long-term directions (i.e. developing a framework for replication in continued expansion throughout the Central American and Caribbean regions).

The case presents with an ethnocentric decision by leadership at Cortesia Coches in the execution of the remaining tasks. While the aforementioned debriefing may result in a conclusion that a polycentric or geocentric staffing philosophy is preferable given the long-term goals, in fact many organizations in a third stage internationalization effort will elect, as the leadership does in the case of Cortesia Coches, to follow an ethnocentric approach (Gomez- Mejia, Balkin & Cardy, 2010). A discussion may be beneficial as to the merits of this choice including incorporation of a successful corporate culture into a subsidiary culture that seems less than ideal for the transition, exercise of close control over the subsidiary to accomplish swift export of company operations, utilization of familiarity by managers with technical and operational functions in addition to company policies, procedures and brand preservation.

The remaining tasks for this case are to be completed in student teams as homework for an in-class presentation at a later time. Of course, instructors should modify as needed.

* Task #1: As the opportunity for ad distribution is via the company email system in pursuit of internal candidates, student teams should recognize the value of crafting an enticing recruitment ad that is not limited by space or cost. Teams should recognize that current site managers are probably already familiar with general tasks, duties and responsibilities (TDRs) for a property manager (which can be found from a search on the O*Net system with which students should already be familiar) since they currently hold similar positions within the company. However, the TDRs can be nuanced and presented in the ad from the perspective of the cross-cultural context. Likewise, teams should include the knowledge, skills and abilities (KSAs) required for a site manager in the ad but, particularly, should identify additional cross-cultural competencies within the ad that may be necessary for expatriate success. Exceptional work will reflect an investigation into the country specific differences between cultural and structural operations in Mexico as compared to Belize with reflection of that investigation into the TDRs and KSAs for the site manager advertisement.

* Task #2: Teams will draw on a range of selection methods based on prior familiarization from the study of human resource staffing and a diversity of approaches should be welcomed. However, teams should make strong linkages between the advertisement developed in task 1 around the TDRs and KSAs such that there is a clear and valid connection between the selection criteria and selection predictors/tools. Careful attention should be given to the KSAs and selection methods related to cross-cultural competencies. Exceptional responses will include criteria and predictors addressing cultural adjustment, cross-cultural communication (including language), cultural intelligence (including empathy), and personal/family preferences. Further, exceptional work will highlight the cross-cultural selection application by country as applied between Mexico and Belize.

* Task #3: Teams will respond with an analysis of the currency conversion and their justification for compensation levels based on cost of living differences. Further, teams may include a justification for additional compensation structures related to align with parent company norms or host country practices (e.g. bonuses) and compensation adjustments for relocation, family support and travel. Exceptional responses will have investigated compensation and benefit differences between the two countries and make adjustments to reflect keeping the employee financially whole (possibilities include tax equalization and differences of mandated benefits between the countries).

* Task #4: Teams will also draw on a wide range of options in considering the predeparture training as well as continuing development once placed on site in Belize. Teams should focus on cross-cultural and cross-national training, avoiding the need to train in this case on operational TDRs with which site managers should already be familiar given their previous positions in the company, except where the international aspects are identified. Team responses should include assessment, the variables related to training (who, what, when, where, how and why as outlined in the case) as well as evaluation, with exceptional responses recognizing Kirkpatrick's levels of evaluation in cross-cultural success (Mathis and Jackson, 2008). Further, exceptional responses will address training for cognitive, emotional and behavioral cross-cultural dimensions as well as illustrate specific examples for each in the context of transfer between the Yucatan region of Mexico and Belize. Finally, exceptional responses should take into account the training objectives for expatriate success not only in company activities but also with integration into the broader community and nation of Belize.

* Task #5: Teams will respond with a creative range of support ideas for expatriate employees of Cortesia Coches. Responses should clearly identify the potential problem as well as the reason the support structure can mitigate the problem. Exceptional responses will include reference to outside resources for expatriate support, particularly within the country of Belize. Finally, exceptional responses will anticipate a return of the expatriate to the parent company home and identify the need for repatriation services as an important provision.

* Proposal Presentations: As the case assigns to the team the role of consultancy practice with the expectation that the practice develop a presentation responding to the last five tasks, teams are encouraged to think creatively in making their pitch. However, professionalism is also expected and instructors are encouraged to set out specifications for presentations as consistent with their expectations for the class.

Final Debriefing

Although there has been outlined for each task a number of items that may be included in answering each task within the presentations, it should be noted that there is no one correct answer. As is the case with consultancy proposals, wide variation may be demonstrated between the presentations. One substantive benefit of the proposal presentations is that teams, and their respective members, learn from the work of their peers. What is important is that teams employ critical thinking skills in constructing their presentations such that all choices are well reasoned. Exceptional presentations will stand out through movement beyond human resource foundational knowledge toward incorporating the results of additional research related to context including cross national and cross cultural differences between the Mexican Yucatan and Belize. Moreover, some teams may recognize a third cultural consideration by including the most significant market group for the company, travelers who are citizens of the USA.

Evaluation

To support evaluation with respect to the five tasks and presentation, an evaluation rubric for the case has been developed as indicated in the appendix. The rubric allows for a standard basis of evaluation on each task and overall presentation. Additionally, the rubric provides opportunities to acknowledge investigative research related to the task beyond the foundational human resource management content. Additional points are awarded for inclusion of crosscultural material and for culture/nation specific material.

Subject: Globalization; Cross border transactions; Human resource management; Strategic management; Case studies

Classification: 2310: Planning; 6100: Human resource planning; 2330: Acquisitions & mergers; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 4

Pages: 1-11

Number of pages: 11

Publication year: 2011

Publication date: Oct 2011

Year: 2011

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 Tables

ProQuest document ID: 888056209

Document URL: http://search.proquest.com/docview/888056209?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Oct 2011

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 43 of 100

Goofing off is in the eye of the beholder: A case of trust, culture, and change

Author: Pryor, Mildred Golden; Toombs, Leslie A; Taneja, Sonia; Odom, Randy

ProQuest document link

Abstract:

Bailey is the quality manager employed by Golden XYZ Factory. Over the past two years, she has worked to implement a quality management initiative and institutionalize quality as part of the company's culture. At the time of this case, the quality initiative has begun to take root, excitement is building throughout the organization, and employees are sending her suggestions for improvement in their respective job areas. While Bailey is pleased about the employees' building excitement, she is concerned about the willingness of the top leadership team to trust the employees to implement these initiatives. The leadership team members have received training in several areas including: (1) quality theories and tools; (2) leadership; (3) empowerment; and (4) change management. However, there still seems to be a lack of trust in the non-management employees' decision-making capabilities. One example of the lack of trust is the incident in the case where the Vice President of Production, Albert Jones, called a staff meeting because of his perception that when production employees are talking together during work, they are goofing off. He is not willing to believe that they could be discussing various improvement opportunities for the firm, and he demands that they be given demerits. This trust issue is blocking progress in implementing the employees' quality improvement suggestions. Bailey is worried that without the ability to harness the enthusiasm and make the suggested improvements, the non-management employees will lose their improvement momentum and things will return to "business as usual". [PUBLICATION ABSTRACT]

Full text:

THE CASE: INTRODUCTION

This case raises several issues that must be managed correctly in order to facilitate change through employee involvement in process improvement and other change initiatives. These issues are relevant for management and non-management employees. This case is energizing for students and teachers alike as they debate issues of "goofing off," trust, organizational culture, change management, empowerment, process improvement, and other related issues.

Case Objectives

A major teaching objective of this case is to facilitate the discussion of the importance of trust between management and non-management employees. Organizational trust has been established as a key driver of firm effectiveness and ultimate performance. Trust becomes even more important during periods of organizational change, including process improvement initiatives. Through the discussion of this primary trust objective, students will also address several underlying issues including: (1) Organizational structure, culture, and loyalty, (2) The change management process, and (3) Empowerment and process improvement.

Courses and Levels

This case is appropriate for use in the organizational behavior course at both the undergraduate and graduate level. It can also be used in principles of management courses, undergraduate or graduate quality management courses, and graduate organizational transformation courses.

THE CASE: BACKGROUND

The quality initiative had been in place at Golden XYZ Factory for about two years. In fact, Bailey Davis had been hired to help plan and implement a quality initiative, first at one plant, then in all plants. She had pulled together an informal team, a vertical and horizontal microcosm of employees from throughout the facility, to develop the quality plan. They presented the plan to the executive leadership team, and all the vice presidents agreed with the plan. Unfortunately, their agreement with the plan did not change the culture of the plant which was definitely "old school," with a lack of trust between most management and non-management employees. Many improvements had been made by hourly employees, engineers, et al. Even though Bailey presented the improvements, along with savings, to the leadership team, some vice presidents were still suspicious of non-management employees, particularly hourly employees.

INFORMATION ON KEY PLAYERS

Larry Smith, who had hired Bailey Davis, had come up through the ranks. He had been an engineer, an engineering manager, director, and vice president. Now he was Corporate Vice President and Plant Manager. Larry had an MBA from a local university. There were six vice presidents of functional areas, Engineering, Human Resources, Production, Financial Operations, Quality, and Marketing. Albert Jones, Vice President of Production, had also come up through the ranks, serving as supervisor, manager, and director before he was made Vice President of Production. Many years ago, he had completed two years of college. Bailey Davis, Director of Production, had a Ph.D. in Production Management, with two minors, Quantitative Methods and Organizational Behavior. She had 10 years teaching experience in the College of Business at a local university. See Chart 1 for reporting details.

CASE SCENARIO

As Albert Jones, Vice President of Production at Golden XYZ Factory, walked through the plant, he noticed two people leaning against the wall talking with each other. They were laughing and talking with excitement in their voices. It was not break time, and it was obvious to Albert that the employees were goofing off. He would make sure to give them demerits. Why could they not just do their jobs? He went back to his office and called a staff meeting. When employees were goofing off, it was their manager's fault. He was steaming mad when his staff members came in and sat down around the conference table. They were laughing and talking too. Things were different since Bailey Davis, the new production manager, came on board. Everyone seemed to relax more and worry less about work.

"Can we get down to the reason I asked for a staff meeting? A couple of employees were leaning against the wall laughing and talking for 10 minutes, and it was not break time. I don't want to see that happen again. I want them both to have demerits. If it does happen again, I want them fired." Bailey spoke up and said, "Now, Albert, how do you know they weren't talking about work? After all we have been encouraging the workers to come up with ideas for improving our processes." Albert responded angrily, "They weren't talking about work. They were goofing off. I've been here 20 years. I know when people are goofing off. As a matter of fact, Bailey, you are not serious enough about work either." Bailey responded, "Sorry chief, I'll try to frown more. Hey let's get back to work guys. Let's see if we can catch some more people goofing off!"

Bailey rushed to out to production to see who had caused Albert's fury. Two workers, Jake and Tommy seemed to be working at the same work station as Bailey asked, "What's up?" Jake replied, "The work is faster and easier if we both work at this station and then move around to the other side and work at that station. Plus work is more fun when we can talk about it. It gets boring just standing alone and doing work" Bailey asked, "Did you see Albert this morning?" Tommy said, "Yes, but he seemed angry so we did not talk to him." Bailey said, "Next time, go over and talk with him and tell him your ideas." Jake and Tommy both replied, "Not me." Jake went on to say, "Albert is from the old school. He does not want us to even talk to each other, much less talk to him about changing how work gets done." Bailey replied, "Albert will come around. Just keep doing what you are doing - working together to make continuous improvement a part of your daily work. I'll run interference with Albert."

The Next Steps

Bailey had told Jake and Tommy, "Albert will come around. Just keep doing what you are doing - working together to make continuous improvement a part of your daily work. I'll run interference with Albert." However, Bailey was not nearly as confident as she had tried to sound. She knew this was not just a problem with Albert's attitude, but with many of the people in management positions. All the vice presidents, directors, managers, and supervisors had integrated quality into their respective strategic and operational plans, and they completed several types of training: (1) Quality Theories and Tools; (2) Leadership; (3) Empowerment; and (4) Change Management. However, there was something missing. Many of them did not seem to trust the non-management employees (i.e., engineers, production associates, et al) to make the decisions that were necessary for them to be efficient and effective in completing their work.

Bailey did not know what the next steps should be. If she reported the trust problem to Larry, the Corporate Vice President and Plant Manager, he would lean hard on his vice presidents. However, she did not know if that would make a difference. She needed some way to make Larry, his staff members, et al aware of the positive results the workers were achieving out on the production floor and in other areas throughout the plant. The newsletter had not worked. Postings on the intranet had not worked. She did not know if anyone read them. She contemplated having members of each team present their results to the leadership team, but she did not want the leadership team members to get involved in the day-to-day improvement activities, particularly in terms of requiring lots of signatures before improvements could be made. She thought perhaps Larry should host team-of-the-quarter and team-of-the-year competitions for which vice presidents, directors and managers would select outstanding teams from their areas.

The next Thursday Bailey proposed both actions to the leadership team (1) having the teams present their results to the leadership team and (2) having team of the quarter and team of the year competitions. The responses were as she had feared. Comments from the vice presidents included: (1) We don't have time to meet with all these people or have team competitions; (2) We need to be concentrating on real work; (3) This is "mickey mouse, kindergarten" stuff; (4) This is what we get by hiring a Ph.D. - you just don't understand what it takes to run a business. After the vice presidents left the room, Larry said, "Don't worry, Bailey. You know that change takes time. They'll come around. You just make the improvements happen. I'll run interference with the vice presidents." To Bailey, this sounded too much like her own statements to Jake and Tommy.

Bailey thought perhaps she and Larry were setting up the non-management folks for big disappointments in the future if something pretty drastic wasn't done soon. Bailey did not know what to do next since every suggestion she made to the leadership team seemed to be rejected or postponed. Fortunately, the decision about the next step was made for her. When Larry sent out the agenda for his next leadership team meeting, one of the agenda items was a presentation by a machine shop team that had significantly improved quality and cycle time as well as cost. Also, there was an email from Larry asking the vice presidents to submit their best teams for the previous quarter and to prepare for a team-of-the-year banquet where all the best teams for the year would be honored with plaques and monetary awards.

The Challenge

Bailey met with each vice president and each of their direct reports to determine how she and her quality engineers could assist with their process improvement efforts and the selection of the best improvement teams in their respective areas. Previously, the improvement initiative had primarily been deployed in Production and Engineering. Now process improvement concepts and tools would be utilized in all areas. While she appreciated Larry's rapid utilization of her suggestions, she knew the potential negative repercussions of mandated requirements as opposed to team consensus. Several vice presidents were not friendly, and one was angry when Bailey met with them. However, the directors who reported to the vice presidents seemed to be energized and excited about involving their people in process improvement. Also, Bailey began receiving emails from employees in Engineering, Finance, Human Resources, and other areas throughout the facility. The emails were suggestions for improvement. The scenario had changed dramatically. Now the challenge was how to harness the energy for improving since she had neither the resources nor the authority to make the suggested improvements.

Bailey looked out of her office window and realized that it was getting late. She had spent the last couple of hours reviewing the non-management employee emails regarding improvement suggestions and thinking about how much everyone in the firm had to lose if this initiative was not successfully absorbed into the company's culture. There would be fingerpointing at the leadership level, and the non-management employees would probably walk away from the experience thinking the quality initiative was just another "flavor of the month" for top management.

Bailey knew that if employees were disappointed too many times, their morale and organizational loyalty would suffer. She was truly committed to the concept of quality management, and she believed that successful implementation of this initiative at Golden XYZ Factory would position the company to be more competitive in the industry. She took a deep breath as she packed her briefcase. As she walked to her car, she thought: "I am not ready to give up yet! The quality fires are burning because there are pockets of excellence within the company, and we will find a way to grow that passion and improve the culture, no matter what it takes."

Case Questions

Using scholarly journal articles and your textbook, please answer the following questions (Include in text APA citations for your answers and an APA style reference page at the end of your case analysis):

1. Discuss change management theories and apply them to the organization in this case.

2. Discuss the role of a change agent in helping the change initiative to be successful.

3. Discuss the concept of trust and apply to the organization in this case.

4. Discuss the issues regarding empowerment and process improvement as they relate to this case. How would you solve them?

5. Suggest additional training that could be beneficial to members of the "old guard" (i.e., status quo or traditional managers) in terms of leadership development and changing the culture of the organization.

TEACHING NOTES/INSTRUCTOR'S MANUAL

While a case analysis and solutions are presented, teachers and students will be able to present many other relevant solutions and substantiate their answers through scholarly journal citations.

Case Analysis

The top management team at Golden XYZ Factory has invested resources for the development and implementation of a quality management initiative. For this initiative to succeed and the firm to receive a return on investment of the resources invested, the quality initiative has to become institutionalized into the corporate culture. Several steps have been taken to ensure that this happens. For example, the top management team has received training to support this movement. In addition, all the vice presidents, directors, managers, and supervisors have integrated quality into their respective strategic and operational plans. Thus, the infrastructure for success was in place. However, the critical missing piece is trust in the non-management employees' ability to handle empowerment, including decision making about, and implementation of, improvement changes in their respective work areas. The Production Vice President's tirade about employees goofing off is a symptom of this underlying problem.

Bailey is faced with trying to find ways to keep momentum for the quality initiative going, while not setting the non-management employees up for disappointment and disillusionment. The Corporate Vice President and Plant Manager, Larry Hammond, has encouraged Bailey to keep moving forward - his closing remark to her is that "change takes time".

The following discussion questions and answers can be used to facilitate classroom discussion of the case. In addition, students can be assigned to role play the case prior to the discussion of the questions.

Suggested Answers to Case Questions

1. Discuss change management theories, and apply them to the organization in this case.

One of the most commonly discussed change management theory in undergraduate organizational behavior textbooks is by Kurt Lewin (1938). He believed that change was a three-step process (unfreeze, change, freeze). In the application of Lewin's theory, students may propose that the existing culture hasn't really successfully moved beyond the unfreeze part of the process. Although the top management team has received training and has incorporated quality goals into the planning process, the true resistance to change by some of the leadership team has not been dismantled. Change has happened in some areas of the firm as evidenced by the e-mails proposing quality improvement opportunities. Also there have been quantifiable successes which are evidence of change. Lewin notes that during the change period there is much confusion as the transition is in process. Albert is aware that the existing culture is being modified; however, his existing mindset regarding what productive employees' behaviors "look like" has not been dismantled. Freeze cannot happen until all members of the leadership team have a crystallized view of the new culture and their comfort level with this new culture is at the level of their level of comfort with the old culture. They must reach the point where they truly believe that quality is the company's way of doing business. See Lewin, K. (1938). The Conceptual Representation and the Measurement of Psychological Forces, Durham, NC: Duke University Press. Selected other change management theories which may be discussed include:

a. Kübler-Ross model, commonly known as the five stages of grief, is also used to show emotional states (i.e., denial, anger, bargaining, depression, and acceptance) that employees encounter as they are confronted with change. (See Kuber-Ross, E. 1969. On Death and Dying. New York: Collier Books) In this case Albert is in the first two stages of the model - he doesn't believe employees can be having a meaningful work related discussion while they are working and his anger at this occurrence has resulted in him demanding they be given demerits. On the other hand, the two production employees have accepted the quality culture and are actively engaged in the process.

b. Formula for Change (Gleicher's Formula) is a model which can be used to assess the relative strengths affecting the likely success or failure of organizational change initiatives. See Beckhard, R. (1969). Organization Development: Strategies and Models, Reading, Massachusetts: Addison-Wesley).

c. Dynamic conservatism by Donald Schön, who proposed that the inherent nature of organizations is to be conservative. As part of this conservatism, organizational leaders tend to protect their organizations from constant change. Schön recognized that the pace of change organizations face will continue to move more quickly and the firm will need to embrace learning about the need for these changes in an ongoing manner. This is a forerunner to the "learning organization" concept. See Schön, D. (1973). Beyond the Stable State. Public and private learning in a changing society. Penguin.

2. Discuss the role of a change agent in helping the change initiative to be successful.

Change agents must carry out a variety of activities when planning and implementing changes. Some of those activities include: (1) assessing, and helping create, readiness for change; (2) creating a vision, i.e., a valued outcome or a desired future state, that builds on an organization's core values; (3) developing political support for the changes; (4) designing a roadmap for, and managing the organizational transition from, the current state to the desired future state; and (5) providing (or acquiring) resources needed for change such as a support system for change agents, development of leadership competencies, reinforcing the new behaviors needed to implement the changes; and (6) assisting organizational leaders in staying the course. See Cummings, T.G. and Worley, C.G. (2009). Organization Development and Change. United States: Thomson/South-Western.

Change initiatives, including process improvement initiatives, require that change agents understand organizational development theories and tools. In addition, change agents must understand how to put their knowledge into practice. See Hutton, C., & Liefooghe, A. (2011). Mind the gap: Revisioning organization development as pragmatic reconstruction. The Journal of Applied Behavioral Science, 47(1):76-97 and Miller, J. (2011, April). How to achieve lasting change. Training Journal, 58-62. Also, change agents must understand organizational development theories and tools from the perspectives of a myriad of approaches and methods developed over many decades. These approaches include strategic, process, behavioral, and many other theories. See Van Nistelrooij, A. & Sminia, H. (2010). Organization development: What's actually happening? Journal of Change Management 10(4): 407-420.

3. Discuss the concept of trust and apply to the organization in this case.

Trust is a concept which has been widely researched in the management literature. Students can examine trust from a variety of perspectives in this case.

a. One area from motivation theory which can be applied is McGregor's Theory X and Theory Y Management styles. This shows that a manager's underlying beliefs regarding the motivation of their employees drives how they treat the employees. For example a Theory X manager believes that employees inherently dislike work and must be managed closely. Albert could have shades of the Theory X manager in his leadership style. On the other hand, a Theory Y manager believes that employees are self-motivated and want to participate in the decision making process at work. For empowerment and the quality initiative at Golden XYZ Factory to work, this has to be underlying belief of the leadership team. See McGregor, D. (1960). The Human Side of Enterprise. New York: McGraw Hill. Yoon and Ringquist (2011) caution that ". . . trust . . . (is) a product of the measurable . . . factors that build trust, that is, characteristics and behaviors that signal trustworthiness" (pp. 55-56). So Albert should have known from the process improvements that the production employees were making that he could trust them to do their work and that their conversations were relevant to their work.

b. Models for building trust can also be introduced into the discussion and students can provide suggestions regarding this process for Larry and his leadership team. The following resources provide background information to assist students with this question (there are many other sources in addition to these):

Barker, R.T. & Camarata, M.R. (1998). The role of communication in creating and maintaining a learning organization: Preconditions, indicators, and disciplines. Journal of Business Communication, 35(4): 643-663.

Blanchard, K. (2010, November). Rebuild trust. Leadership Excellence, 27(11), 14.

Butler, J. K., Jr. (1991). Toward understanding and measuring conditions of trust: Evolution of conditions of trust inventory. Journal of Management, 17, 643-663.

Gladis, S. (2010, November). The trusted leader. T + D, 64(11): 14.

Jones, G. R. & George, J. M. (1998). The experience and evolution of trust: Implications for cooperation and teamwork. Academy of Management Review, 23, 531-548.

Korsgaard, M. A., Brodt, S. E., & Whitener, E. M. (2002). Trust in the face of conflict: The role of managerial trustworthy behavior and organizational context. Journal of Applied Psychology, 87(2): 312-319.

Yoon Jik, C., & Ringquist, E. J. (2011). Managerial trustworthiness and organizational outcomes. Journal of Public Administration Research & Theory, 21(1): 53-86.

4. Discuss the issues regarding empowerment and process improvement as they relate to this case. How would you solve them?

In quality management theory and training, employees are a key element of the implementation of building in quality on the front end of the production process rather than inspecting quality in after production has occurred. In other words, employees are supposed to make decisions during ongoing operations regarding the quality of the output being produced. If an employee determines that the correct level of quality is not being achieved, he/she should be empowered to shut the production process down and make the changes necessary to fix the problem. Also, as part of the quality philosophy of continuous improvement, employees should be encouraged and empowered to look for ways to improve operations in their respective areas. One underlying component of this practice of empowerment is employee training in quality tools such as statistical process control. Of course, all change initiatives, including process improvement initiatives should be integrated into the development and execution of strategic and tactical plans. Pryor, Anderson, Toombs, and Humphreys (2007) indicate that strategic implementation should one of the core competencies for any organization, and they suggest a strategic leadership model that will increase an organization's potential for success.

In the current case, Albert and some of the other management people are not willing to allow employees to be truly empowered. As discussed in the answer to question one relating to change management, these managers how not successfully transformed their thinking regarding what the new organization and the trained non-management employees look like. For example, in the case what Albert sees as goofing off is really two production employees engaging in meaningful discussion regarding ways to improve their processes. For this quality initiative to be successful, employees must be trained appropriately in quality management and then be given empowerment to do their jobs. In addition, they must be rewarded for their successes, and not punished when the improvement initiatives don't yield appropriate results. Selected resources are:

Block, P. (1993). Stewardship: Choosing Service over Self Interest, San Francisco: Berrett Koehler Publishers.

Pryor, M.G., Anderson, D., Toombs, L., and Humphreys, J. (2007). Strategic implementation as a core competency: The 5P's Model. Journal of Management Research, 7(1):3-17.

Pryor, M. G., Humphreys, J. H., & Taneja, S. (2008, September/October). Freeing Prisoners of Work. Industrial Management, 50(5), Pages 21-24.

5. Suggest additional training that could be beneficial to members of the "old guard" (i.e., status quo or traditional managers) in terms of leadership development and changing the culture of the organization.

Leadership training is necessary so that management people will understand the type of leadership that is required to transform an organization. In fact, they will need to learn what changes they personally need to make in order to transform their organization and its culture. The following article may be helpful:

Humphreys, J.H., & Einstein, W.O. (2003). Nothing new under the sun: Transformational leadership from a historical perspective. Management Decision, 41(1): 85-95.)

Additional Materials/Suggestions for Classroom Case Discussion

Faculty using this case can also use the scenario to launch a discussion of the organization of work from a historical perspective. Starting with the Scientific Management Era and Frederick Taylor's approach of specialization to the use of cross-functional teams in the workplace today, the issues underlying this case such as trust and empowerment emerge at various stages. For example with work specialization came the challenges of boredom and reduced quality. Job enlargement, job enrichment, job rotation, and work groups emerged as solutions to the boredom issue. As work groups grew, empowerment of these groups contributed to the emergence of true work teams charged with the management of their performance. The instructor may want to start this discussion with a review of the classic article: Roy, D. F. (1959). Banana time: Job satisfaction and informal interaction. Human Organization, 18: 158- 168. In this article Roy shows how employees made a game of their work as they tried to find meaning in their jobs.

EPILOGUE

Initially, Albert, Vice President of Production, had caused Bailey much concern because of his attitude toward, and lack of trust of, non-management employees, particularly hourly employees. However, as more and more Production processes were streamlined, Albert and the other supervisory people in Production became major supporters of the Quality initiative. Slowly but surely, vice presidents of all functional areas became supporters of the Quality initiative. However, the Vice President of Engineering was transitioned out of his position because of his disregard for the Quality initiative, and it was his successor who encouraged the engineers and their supervisors to play a leadership role in the Quality improvement initiative. Bailey reported to vice presidents of different functional areas and assisted them in their improvement efforts.

Subject: Corporate culture; Organizational change; Quality control; Trust; Employee involvement; Case studies

Classification: 6100: Human resource planning; 5320: Quality control; 2310: Planning; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 4

Pages: 1-12

Number of pages: 12

Publication year: 2011

Publication date: Oct 2011

Year: 2011

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: 888056210

Document URL: http://search.proquest.com/docview/888056210?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Oct 2011

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 44 of 100

General Motors' Bankruptcy: The Impact on Griffin Motors

Author: Butler, Daniel D; Colley, Mary Catherine; Fuller, Timothy S

ProQuest document link

Abstract:

General Motors faced severe economic problems in 2008 and 2009. To improve their corporate viability GM took Federal bailout funds as loans. They were further assisted when the US government took an equity position in the company. Consequently, GM took drastic actions including eliminating brands and dealers. GM franchisees were forced to make early loan payments, some losing their franchise. This case focuses on a local car dealer (Griffin Motors) and the decisions that need to be made in response to GM's actions. These include the importance of having exit strategies as well as legal and ethical issues impacting the financial well-being of numerous constituents. This teaching case is based on events as they occurred with GM and a dealer in the Southeast United States. This teaching case is based on facts as they occurred with GM and a dealer in the Southeast United States. The names, company data and circumstances are factual although they have been modified to construct helpful learning goals. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Automotive giant General Motors (GM) was in big trouble in 2009 (US Vehicle Sales, 2004-2009). In the midst of the worst recession in over 50 years, US auto industry sales had dropped almost 40% between 2004 and 2009 (See Appendix Table 1). More consumers were keeping their vehicles longer partly due to overall unemployment rates rising from 6% to 9.5% during that same epoch ("Consumers Keep," 2008; "Labor Force," 2011). In the 1950s, GM enjoyed a 46% share of the North American auto market. By February 2009, GM's market share sputtered and stalled to less than 19% (See Appendix Table 2). General Motors (GM) was merely surviving in a tough market. The company was stressed for cash, faced diminished market share, and their products were not selling as well as competitors.

Commercial financial markets were no longer willing to lend to GM. Consequently, GM looked to the US Federal Government for a bailout. First came the Federal loans in late 2008, then as the economy continued its downward spiral on June 1, 2009 GM declared bankruptcy claiming slightly over $82 billion in assets and nearly $173 billion in debt ("Humbled GM Files," 2009; "GM: What Went," 2009). GM cited "high production costs, the collapse of both credit markets and consumer spending" as reasons for their bankruptcy" (Fortson & Rushe, 2009).

An important component of GM's corporate structure was their partial ownership of the General Motors Acceptance Corporation (GMAC). GMAC was General Motor's financial lending arm providing retail auto financing and leasing, dealer lines of credit for vehicle inventory, equipment and facilities, and commercial insurance (Dash & Bajaj, 2008). Historically, GMAC had been "the one stop" financial source where franchise car dealers obtained financing necessary to obtain automobiles from GM. In return for their financial support, the US government obtained controlling interest in both GM and GMAC in 2009. As such, the US government dictated internal company policy forcing corporate changes and budgetary cuts in exchange for these funds. As part of the bankruptcy proceedings, a judge allowed GM to void contractual obligations to dealers under state franchise laws to speed the elimination of thousands of GM showrooms across North America (Vlasic and Bunkley, 2009). This resulted in twenty eight Alabama dealers along with another 2000 dealers in North America receiving franchise termination letters of one type or another (Clifford, 2010a). GM cited the bankruptcy court ruling for this action as well as to allow GMAC to force changes in their dealer financing practices. These dealers were told to close by October 2010 (Clifford 2010b). Seven hundred dealers would be partially shutdown. As part of the GM restructuring process, the company determined it would eliminate some of its least competitive brands (i.e. Pontiac, Saturn, Saab). A partial shutdown meant that some franchise dealers' brands would be discontinued while they would still retain the right to sell other GM brands (i.e., Chevrolet, Cadillac GM, Buick) ("GM To Discontinue," 2009; Vlasic and Bunkley, 2009). A shut down contract (i.e., a requirement to close down the business and / or quit selling a given brand) with fulfillment by October 2009 would provide dealers a payment incentive of $116,000 from GM corporate ("Bulletin To," 2009; GM's Dealer, 2009; T.Griffin, personal communication, May 20, 2010).

HISTORY OF A GRIFFIN MOTORS

Mr. Tom Griffin was the second generation owner of Griffin Motors - (GMC/Buick/Pontiac) which opened in Alabama in the 1970s. He began working for John Track, the original owner and his eventual father-in-law, in 1993. With 14 years of dealer experience, Mr. Griffin purchased the dealership from John Track in 2007 for three million dollars. The dealership was located on the corner of an older business district in a small town. The town boasted a population of approximately 27,000 inhabitants within a Metropolitan Statistical Area of 135,000 people. Although Griffin Motors had a defined exclusive geographic franchise territory, five GM competitors were located within a forty mile radius. The closest dealer was six miles away in a larger, faster growing town. Ten major new car dealers (e.g., Chrysler, Ford, Honda, Hyundai, Mazda, Toyota) and 22 used car dealers were located within 30 miles of Griffin Motors ("Annual Estimates," 2009; T.Griffin, personal communication, March 16, 2010).

Unlike other franchise models, the GM franchise Mr. Griffin purchased from his fatherin- law did not have a franchise initiation fee nor required royalty payment on revenues. Traditionally auto franchise agreements had two components (Starling 2010). One was the requirement of the franchisee to invest and maintain an infrastructure financed outside of the purview of the auto manufacturing company (i.e., GM). The infrastructure was composed of land, dealer show rooms, service shops, offices, etc. The second required the franchisee to purchase vehicle inventory and parts as well as participate in corporate directed promotional strategy in the region. This second requirement created two revenue streams for GM. Profit margins were obtained on vehicles and parts sold by GM with additional margins obtained by mandating the franchisee finance these products through GMAC (Dash and Bajaj, 2008). In this way, General Motors did not share in the infrastructure risk placed on the shoulders of their car dealers (T.Griffin, personal communication, March 16, 2010).

About the time Mr. Griffin obtained full ownership, the 7000 square foot showroom and additional service building were over 35 years old and in need of updating. Mr. Griffin was unfortunate in his timing of this business venture. He purchased the dealership when real estate values were at top of the bubble. The infrastructure was appraised at 1.7 million dollars in 2007 falling to 1.4 million dollars in 2009. This included 7.6 acres of land, a service shop, and a show room. Mr. Griffin exclusively stocked and sold a target volume of GM authorized motor vehicle brands and parts on the new car lot. These were the GMC, Buick and Pontiac brands. Approximately 80% of his vehicle revenue came from new GM vehicles. He could sell other brands on the used car side of the business accounting for 20% of vehicle revenue. As with most dealers, 60% of gross profits came from the vehicle business, 40% coming from parts and service. The deal with his father-in-law for Griffin Motors was to be an ongoing concern. Mr. Griffin had estimated that it would take ten years to payback the $3,000,000 he borrowed to purchase the dealership in addition to his invested savings. Mr. Griffin did not put much thought into an exit strategy when he presented his business plan to Southern Bank in 2007. Two years after purchasing the dealership, Mr. Griffin received his termination letter from GM; a complete shutdown was ordered (T.Griffin, personal communication, May 20, 2010).

While speaking with John at a breakfast meeting, Tom was upset that neither he nor any other dealers were notified of the criterion GM had for selecting dealerships for closure (Alphen 2010; Duggen 2010). It was not made clear whether the reasons for Griffin's termination were the condition of the physical infrastructure, location, cash position, dealer profitability, or levels of customer service provided ("Bulletin To," 2009; T.Griffin, personal communication, May 20, 2010).

While attending a regional meeting of GM dealers, Mr. Griffin learned that many dealers' loans and lines of credit had been called pressuring them to repay GMAC loans early ("GM's Dealer," 2009). At the same time the financial credit crunch hit GM, the overall US Financial markets were making credit harder to obtain. Many of Mr. Griffin's peers were upset with their bankers. They had reduced dealer credit limits from ten to thirty percent below original agreements. Tom read an article implying that on a national basis, 55% of the 1,100 franchisees sent complete shutdown termination letters were going to file for their right to arbitrate and appeal their contract cancellation (Clifford, 2010c; T. Griffin, personal communication, May 20, 2010).

In April of 2010, a lawsuit was filed against GM by the Canada Auto Dealers Association. It requested that GM release the metrics used to determine which dealers were targeted for termination (Alphen, 2010). GM failed to respond or release these metrics, saying they could not do so while arbitration was pending. A few weeks after receiving his termination letter, Tom Griffin thought to himself, "No one ever told me, nor any other terminated dealers, the decision criterion or the individual dealer score that determined our fate. This just doesn't seem right" (Clifford, 2010a; T. Griffin, personal communication, March 16, 2010).

Mr. Griffin was strongly opposed to the decision that his dealership should be closed. From a business perspective, Mr. Griffin paid his bills on time to GM and GMAC. Although his sales were down, so was the overall car market. His dealership had longevity in the market and he was still running a successful business (See Appendix Table 3). He wondered why he was being singled out to close.

Until 2007, a growing sustainable market contributed to Griffin Motor's historical success. It was comprised mostly of loyal GM customers 55 years of age and older, the majority nearing retirement living within a 50-mile radius of the dealership. Some of Griffin's customers had been with the dealer over 30 years, some were second generation customers, and approximately 80% were repeat customers. Mr. Griffin believed this to represent an average customer life of five years with a lifetime value of approximately $3000 per customer (T.Griffin, personal communication, March 16, 2010). Although a trip to a larger city may have resulted in larger selections, customers like Brian Prentice noted they, "purchased locally because of the convenience of the service options available at Griffin Motors."

Mr. Griffin believed that the financial pressure put on GM dealers to pay back loans early in addition to cash flow and attrition problems would close the doors of many dealerships. Mr. Griffin couldn't get it out his head, "When GM filed for bankruptcy, the bankruptcy laws allowed GM to make the final judgment. This allowed GM total control over their franchisees without accountability and oversight concerning their business resolutions" ("GM's Dealer," 2009).

THE DOWNWARD SPIRAL

Prior to receiving the letter from GM, car sales revenue began to decline for the Griffin Motors in the Fall 2007 and Winter 2008. Along with a decline in new car sales of almost 40% by 2009, came an increase in expenses and business adjustments (See Appendix Table 3). Mr. Griffin had already made a tough decision in April 2008 to lay off employees thus reducing his operating expenses 18%. In the car business, compensation for most sales staff is based on a commission. By the summer of 2008, the market had begun to stabilize, but by August, GM's financial status had further deteriorated. In January of 2009, Mr. Griffin further reduced his workforce. He cut another 20% of his operating expenses by laying off salesmen, office staff, and under-utilized service personnel. Springtime is traditionally a major selling season for automobiles. However the Spring of 2009 proved to be the worst time for all car dealers with statistics showing April sales to be 65% of those the year prior (T.Griffin, personal communication, March 16, 2010). With the economy in rough shape, GM sending their termination letter, cutbacks already being made, Mr. Griffin asked his father-in-law for advice. "Should I close the doors or fight to stay open?"

WIND DOWN AGREEMENT MANDATES

In order to comply with GM's criteria for closing, dealers received letters explaining the sequence of events they must follow to receive buyout compensation of $116,000. GM required dealers to ensure that all signs revealing or implying that the place of business was previously a GM dealership had to be removed. To ensure compliance, dealers were required to send before and after photos. Other items that had to be changed were letterhead, signage, and advertisements. Dealers were required to provide proof that the former dealership was current on all state sales tax and that the dealership legally changed the name of the business. Mr. Griffin understood that all GM car inventory must to be sold or transferred to another dealer before the business closed its doors ("Bulletin To," 2009; T. Griffin, personal communication May 20, 2010). Once the wind down agreement was in place, any car that was not sold was to be transferred to other dealerships. What seemed to be most unfair and illogical to Mr. Griffin was the stipulation that, "the dealers surrender their customer database to GM headquarters." Tom Griffin and John Track spent many years building and nurturing relationships, building a clientele and servicing their customers. They knew what the lifetime value of each name on that database represented to whoever controlled it. The thought of being forced to turn over years of hard work that resulted in many loyal customers and repeat buyers was causing Mr. Griffin to lose sleep ("Bulletin To," 2009; T.Griffin, personal communication, May 20, 2010).

COSTS OF FIGHTING THE TERMINATION

Given the upcoming deadline, Mr. Griffin pondered his option to fight the termination, but felt the odds were not in his favor for several reasons. It would cost $50,000 to $75,000 to hire a lawyer. The court venue mandated by the bankruptcy courts required him and the attorney to travel to New York for court dates (Krisher, 2010; T.Griffin, personal communication, May 20, 2010). Several obstacles stood in the way of the dealers who received termination letters and wanted to be reinstated. Even if a dealer was reinstated or won in arbitration, the wind down agreement money had to be returned to GM. To stay open the dealership had to follow GM's new criteria ("Bulletin To," 2009). These criteria included potential drastic changes such as moving the dealership to a GM approved location. Congress stated that arbitration had to be completed by mid-June, an approximate window of four months. In addition to having to pay off this loan, he believed he would need to sell the land and building, as well as purchase another site for his dealership to sell GM products. To keep his dealership under these rules, Mr. Griffin believed he would need a capital outlay of approximately $4.5 million dollars for a new location and infrastructure. Adding this to his outstanding note of approximately $2.4 million dollars left Mr. Griffin feeling anxious. According to his rough optimistic calculations this would mean a new payback period of 15 years not taking into consideration the discounted value of future cash flows. For Mr. Griffin to be successful, both he and GM would need to work themselves out of the hole they had dug for the overall brand image and vehicle product quality (T.Griffin, personal communication, May 20, 2010).

Researching a situation similar at the Chrysler Corporation, Mr. Griffin found the court upheld Chrysler's treatment of its dealers, the venues, the mandates, etc. (Bauer, 2009). Mr. Griffin understood that once a dealership received its termination letter from GM, it also lost its line of credit with GMAC. This line of credit was used to buy new vehicles for the dealership. Once this line of credit was shut down, the dealership would have to reapply, which would more than likely be a way for GMAC to continue to add pressure to the dealership to shut down. This was the future that Mr. Griffin faced ("GM's Dealer," 2009; T.Griffin, personal communication, May 20, 2010).

ACCELERATED COURSE IN CLOSING A BUSINESS

Never having to close a business before, Mr. Griffin didn't really know what to do. The idea of an exit strategy was not something he thought about when he purchased the business. To receive compensation from GM, he had four months to officially shut the doors. In June 2009 there were still 40 new cars in stock. Issues he had not thought about were his other contractual obligations. Griffin Motors had some 50 contracts including soft drink venders, uniform service, utilities, insurance, and advertising. Many vendors required a 60-day notice to discontinue services. However, Griffin had 12 multiyear contracts to deal with if he was to close his business. He had to decide on whether he could, in good conscience put the remaining 28 people on his staff out of work. Mr. Griffin felt he could bounce back, but eight of his employees had been with him over 20 years - three mechanics, one parts employee, one detail cleanup employee, and three salespeople. Mr. Griffin believed if he acquiesced to GM, losing the dealership, he would have his personal retirement set back 15 years. Mr. Griffin was very active in the town council. He knew closing Griffin would result in the city losing $70,000 per year in sales tax. Over $1.1 million per year in company and employee spending would be taken out of a small town with a ripple effect across its economy (T.Griffin, personal communication, May 20, 2010)

Other concerns were healthcare, quarterly sales tax filings, and 401(k) plans. Many employees had worked at the dealership so long they were not familiar with Consolidated Omnibus Budget Reconciliation Act (COBRA) insurance. COBRA is health insurance for terminated employees or those who lose coverage because of reduced work hours that are entitled to buy group coverage for themselves and their families for limited periods of time through their current health insurance provider. Not only were quarterly sales tax filings still required for shutdown, fees had to be paid on any 401(k) plans that had not been closed, even if they were to be transferred and there was no money in them (T.Griffin, personal communication, May 20, 2010).

Although there was loyalty to the GM brand, given all the rumors in the marketplace, many of his former GM customers had begun seeking other locations to have their cars serviced. Once loyal GM purchasers, many customers Mr. Griffin ran into in civic meetings told him directly, "Tom, I have lost faith in GM, not you. Most likely I will visit other dealers for my next purchase."

LEGAL ACTIONS

Tom Griffin read with interest the updates on legal actions against GM by dealers. He read a report noting that, "in March 2010 GM reinstated 661 dealerships to avoid arbitration. That still left approximately 400 GM dealerships with options for legal action" (Clifford, 201c). On May 17, 2010, Mr. Lariche, a GM dealer in Detroit, won the first publicly known arbitration decision and his dealership was reinstated. The dealer, Mr. Lariche, was shocked to learn that although his sales were constantly in the top 100 of all dealers nationally, he still received a termination letter from GM (Duggan, 2010).

Lariche's retail sales index - a score of 100 being the best - was stated by GM to be less than 70. This low score was the reason given for termination. According to Lariche, his index was a 97, far above the minimum score of 70. Other reasons given by GM for sending Lariche a termination letter were working capital, assets, and profitability, all of which Lariche successfully argued against (Duggan, 2010). Another dispute from GM was that Lariche's dealership needed to move to a more desirable location as well as spend more on advertising (Duggan, 2010).

Reviewing these reports, his financial data and reading the current Wall Street Journal did not make Mr. Griffin's decision any easier. The local real estate market was down, banks weren't lending, except for what was left of his retirement savings, Mr. Griffin's capital was tied up in the dealership. To stay on as a GM dealer, he would have to follow their rules. He figured he had a 55% chance of winning in arbitration (T.Griffin, personal communication, May 20, 2010).

QUESTIONS FOR DISCUSSION

Define moral, ethical, legal? Was it moral and ethical for General Motors to change the terms of their contracts with Griffin Motors? Explain the pros and cons of running a franchise business. Why is it important to develop exit strategies when initially starting a business? What should Mr. Griffin do? Why?

TEACHING NOTE

This note is for aiding classroom instructors in the use of this case. It provides questions and analysis intended to present alternative approaches to deepening student's comprehension of business issues and to motivate classroom discussion.

GENERAL MOTORS BANKRUPTCY: THE IMPACT ON GRIFFIN MOTORS

SUMMARY OF CASE

The core of the debate is whether it was ethical for the courts to allow General Motors to change the terms of their contracts with franchisees, benefiting GM, while putting 10% to 20% of their franchisees out of business. The protagonist's dilemma in the case lies in whether to accept the offer from General Motors of a $161,000 buyout, ethical or not. To take the offer assures Griffin Motors of being out of the General Motors dealership business by October 2009. To fight the buyout in arbitration has a high probability of success. Yet, winning the case may require a significant and unsustainable level of debt operating under General Motors new franchise requirements in a declining car market. Issues relating to how a business goes about shutting down provide background issues.

TARGET AUDIENCE AND USE

The case may be used in undergraduate level entrepreneurship, management, marketing, accounting or finance courses. It is a good fit for MBA introductory marketing or entrepreneurship courses. It has enough data for some analysis, yet may be used to cover general discussion areas. The case works well by having student teams take the side of General Motors or Griffin Motors regarding the ethical and moral actions required of each entity. The case is best employed in an open forum / class discussion context or in group settings for oral discussion. It may used as an individual written assignment. This is a factual case using real companies supplying the protagonists with disguised names. Data has been modified due to nondisclosure agreements.

LEARNING OBJECTIVES

To develop an understanding of the distinction between what is legal and what is ethical in business. To develop a better understanding of the risks associated with running an auto franchise business. To understand the effects of the national economy a on local business. To understand the importance of contingency planning and exit strategies in business plans. To understand the details of closing a business.

SUGGESTED QUESTIONS FOR DISCUSSION

Define moral, ethical, legal? Was it moral and ethical for General Motors to change the terms of their contract Griffin Motors? Explain the pros and cons of running a franchise business. Why is important to develop exit strategies when initially starting a business? What should Mr. Griffin do? Why?

CASE DISCUSSION PROCESS

Board Plan #1:

What is the current situation: S W O T?

Board Plan # 2

What is the current situation: PEST?

Political - The US government / legal system allowed GM to go into bankruptcy. US government deemed some companies and institutions more important than smaller companies. The government supported them with financial help while other companies were left on their own.

Economic - US unemployment is rising. Access to capital and credit is difficult for both business and consumer markets. The auto industry is in a downward trend. At the company level, employees are being terminated.

Social - At the Griffin dealer level, employees are being let go, what will they do for employment? Closing the business will greatly impact small town financially.

Technological - not an issue in this case.

Board Plan #3

Is it ethical for the government to support GM at the expense of smaller businesses?

Definitions to frame the discussion

See http://www.merriam-webster.com/dictionary/

Moral - standards of behavior relating to the principles of right and wrong. These are standards deemed reasonable by the majority in the society in which they originate.

Ethical - conforming to moral principles (Ferrell, et al 2010).

Law - rule of conduct or action established by customer or laid down and enforced by a governing body.

Legal - according to the law.

Ethics is composed of two areas (Velasquez et al. 1987). Ethics refers to well-founded standards of right and wrong that prescribe what humans ought to do, usually in terms of rights, obligations, benefits to society, fairness, or specific virtues. Ethical standards include those that enjoin virtues of honesty, compassion, loyalty, and rights such as the right to life, the right to freedom from injury, and the right to privacy. Such standards are adequate standards of ethics because they are supported by consistent and well-founded reasons.

Secondly, ethics refers to the study and development of one's ethical standards. Feelings, laws, and social norms can deviate from what is ethical. It is necessary to examine standards to ensure that they are reasonable and well-founded. Ethics also means the continuous effort of studying our moral beliefs and our moral conduct, and striving to ensure that we, and the institutions we help to shape, live up to standards that are reasonable and solidly-based (Fraedrich and Guerts, 1990; Velasques, et al. 1987).

Components of Business Ethics

Utilitarianism or consequentialism is a general term for any view that holds that actions and policies should be evaluated on the basis of the benefits and costs they will impose on society (Velasques, 2002). In any situation, the "right" action or policy is the one that will product the greatest net benefits or the lowest net costs (when all alternatives have only net costs). The end justifies the means as long as positive consequences exceed negative or immoral consequences. The negative consequences of GM going out of business completely and its effect on the overall US economy were deemed by the courts at the most prudent outcome

Students will argue

Negative: GM should not have been allowed to alter dealer franchise contracts. The argument is that it is unethical. It is not right to have the power to change the business model without the agreement of the franchisee / Griffin Motors.

Positive: It was "ethical utilitarianism principles" in action. GM benefits overall society more than it the costs it imposed on the displaced individual dealers. The ends justifies (and outweighs) the means (the cost to individuals).

Board Plan #4

What are the risks of running an auto franchise business?

This is an area most students do not consider in terms of wholesaling and retailing. What impact does a manufacturer / service provide overall brand image have on the retail entity selling that product? An auto franchisee is at the mercy of the major franchisor. A large portion of their revenue comes from new car sales and support. Listing the negatives and positives students better understand the issues of engaging in a franchise business.

See: (Zimmerer and Scarbourough 2005; pp116-130).

Board Plan # 5

The Importance of an exit strategy

Contingency and succession is suggested as an important component of original business plans. This is one of the least addressed components. As with most entrepreneurs, Mr. Griffin assumed his business would keep growing at its historic pace. Exit strategies and contingency planning required periodic reviews of the competitive and economic environment (Allen, 2009).

A suggested format may have been for Mr. Griffin to identify potential risks, select a probability of occurrence, calculate the cost of the loss to the business, assign importance weights to the loss to the business, finally calculating the risk to the business (Allen, 2009).

Board Plan # 6

What should Mr. Griffin do?

See Appendix Figure 1

There is no best answer given the uncertainty in the market and the entrepreneurial nature of car dealers. It is suggested that the professor allow the options to be considered. Leaving the students to ponder what they would do. Statistically, Mr. Griffin has a 100% chance of taking the buyout losing $839,000. Students should note the overall US economy, numerous vehicle competitors in close geographic proximity, GM continuing to lose market share with their product line and Mr. Griffin's desire not to want to have a loan of approximately $6.9 million dollars with an expected payback of 15 years.

Statistically, Mr. Griffin has: 1) a 27.5% chance of being able to maintain his current business and, 2) a 27.5% chance of winning arbitration resulting in him having to purchase new infrastructure at a new location of GM's choice. Mr. Griffin has a 45% chance of losing the arbitration, paying $75,000 in attorney fees and having to close his GM franchise for a net loss of $914,000. Astute students may suggest Mr. Griffin say goodbye to GM and deal in used cars only. He has the infrastructure. However, there are 22 competitors in that product space. He would still have a service component of his business that traditionally accounted for 40% of his revenue. Twelve percent of his revenue came from used cars (60% * 20%) (See Appendix, Figure 2).

PROLOG

Mr. Griffin took the buyout, the facilities sit vacant one year later with no interested buyers in a depressed economic location. Mr. Griffin took a job at a Ford Dealership as an assistant manager. He is still paying on the outstanding bank note for Griffin Motors.

POTENTIAL TRIGGER QUESTIONS FOR OPENING AND ADVANCING THE CASE

What impact did the 2008-2010 recession years have on the automotive industry, GM and Griffin Motors? Did GM act in a business ethical manner? Why, why not? Why was the measurement process and metric criteria fair / not fair? What impact will closing Griffin Motors have on the local community? Is the wind down compensation amount offered adequate? Why, why not? Is the timeframe to make decisions and complete the wind down adequate? Why, why not? Is the response from GM on metrics used to facilitate dealer franchise termination adequate? What can Griffin Motors do in the short run to keep their margins in the black? What must Griffin Motors do to terminate employees legally and financially?

Subject: Automobile industry; Bankruptcy; Bailouts; Impact analysis; Automobile dealers; Case studies

Location: United States--US

Company / organization: Name: General Motors Corp; NAICS: 333415, 336111, 336399; Name: Griffin Motor Co; NAICS: 441110

Classification: 8390: Retailing industry; 3100: Capital & debt management; 8680: Transportation equipment industry; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of Business Cases and Applications

Volume: 4

Pages: 1-19

Number of pages: 19

Publication year: 2011

Publication date: Oct 2011

Year: 2011

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 Diagrams Charts

ProQuest document ID: 888056212

Document URL: http://search.proquest.com/docview/888056212?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Oct 2011

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 45 of 100

MODISC: teaching distribution fundamentals through an experiential model of distribution channel choice

Author: Kamath, Shyam; Agrawal, Jagdish; Kolhede, Eric; Lee, Yung Jae

ProQuest document link

Abstract:

Learning about distribution in the MBA/EMBA marketing class is often done through conceptual models and exercises. Experiential, group-based interactive pedagogies are seldom used, especially in a real-world, "hands on" context. This article details a flexible financial Model of Distribution Channel Choice (MODISC) that has been used in MBA/EMBA classes in which program participants simulate distribution channel choices for real-world, overseas clients. This paper describes the various building blocks of the model that takes the interdependency of the marketing mix (4 Ps) into account and shows how the model was implemented in EXCEL for a processed food products company. It also provides evidence of the impact of the distribution studies on student learning.

Full text:

(ProQuest: ... denotes formula omitted.)

Introduction

Experiential action learning has now become an accepted and desired goal for many leading MBA/EMBA programs worldwide (Argyris, 1982, 1993a, 1993b; Revans, 1982, 1983; Schon, 1983, 1987; Lewis & March, 1987; Keys, 1994; Boyatzis, 1994; Boyatzis & Kolb, 1997; Kolb & Kolb, 2005). It has also received confirmation in the marketing education literature (Young, 2002; Seitz and Razzouk, 2002; Razzouk, Seitz and Rizkallah, 2003; Helms, Mayo and Baxter, 2003; Hunt and Laverie, 2004; Peterson and Albertson, 2006; Wooldridge, 2006; Laverie, Mahdavaram & McDonald, 2008). While experiential action learning methods have been used in teaching marketing principles (Wood and Suter, 2004; Wooldridge, 2006); marketing research (Bridges, 1999; Bove, 2009); customer management and quality systems (Newman and Hermans, 2008); pricing (Smith Ducoffe and Tucker, 2004; Haytko, 2006; Marshall and Pearson, 2007); promotion (Helms, Mayo and Baxter, 2003); and marketing ethics (Hunt and Laverie, 2004), there have been relatively few attempts at doing this for the "place" or distribution function in the marketing mix. This paper is intended to remedy this situation by describing the development of an integrated flexible model for distribution choice used with over 150 undergraduate/MBA students in marketing classes and over 200 EMBA program participants since 2001. The model integrates all the elements of the marketing mix to assist global firms in making real-world distribution choices.

The choice of distribution channel is a complicated decision involving every aspect of the marketing mix. This paper outlines a flexible, generalizable financial Model of Distribution Channel Choice (MODISC) that takes into account the interdependency of the various elements of the marketing mix (four Ps). Developed using MS EXCEL, the model allows the marketing decision-maker to simulate the profitability of alternative scenarios of distribution channel configurations under various assumptions. The paper also describes how the model is implemented using an example of modeling the distribution choice for a consumer good (processed food products) manufacturer in Latin America.

The article is divided in to the following sections. The next section provides a literature review on the experiential models of distribution in the marketing education literature and surveys the models of distribution choice in the marketing literature, as well as an overview of decision science models of supply chain model choice from the production and operations literature. This survey places the model described in this paper in proper context regarding its contributions as briefly discussed in the third section. The fourth section provides a brief overview of the elements of the model and how they are inter-connected. The fifth section summarizes the results of the application of the MODISC model to the distribution channel choice problem of a Brazilian manufacturer selling processed food products in the United States. A final section concludes the article and shows the learning outcome of EMBA program participants who worked on realworld consulting projects using the MODISC model.

Literature Review

There is a limited marketing education literature that addresses using experiential action learning methods or even integrated conceptual models to teach the elements of distribution systems development and distribution channel selection. Pearson, Lawrence and Hickman (2007) provide a method for selecting foreign distribution partners using the Analytical Hierarchy Process (AHP) along with a computer-based decision support system, Expert Choice. They show that student learning is enhanced by use of the classroom exercise and speculate on other possible uses of Expert Choice in the marketing classroom. However, by focusing on the foreign distribution partner choice question, this paper does not develop a model that enhances the students' understanding of the intricacies of distribution channel choices and the integration of the channel choice decision with the other elements of the marketing mix and strategic considerations. The authors emphasize that this is a classroom exercise with no attempt to extend this to experiential action learning projects with real-world clients.

Richey, Skinner and Autry (2007) build a conceptual model of retailer to consumer and retailer to supply chain partner interactions in order to develop a new approach to teaching retailing from an inter-firm relationships perspective. While providing a very useful conceptual model with well-defined inter-connections, the authors nevertheless do not detail the issues of distribution channel choice and the complex interactions that are involved with the marketing mix in making such choices. There is also no attempt to use experiential action learning. Our paper attempts to fill this gap by analyzing the distribution channel choice issue in the same holistic and interconnected manner.

Other pedagogical contributions discuss learning about retailing through the experiential running of a student store to implement concepts learned in lectures (Seitz and Razzouk, 2002); or running a micro business to teach marketing principles including retailing (Peterson and Albertson, 2006) or making supply chain management relevant for marketing majors (Ellinger, 2007). While each contribution is valuable in extending new learning methods to teach marketing concepts, the approach adopted in this paper extends these insights to "hands-on" experiential learning projects with real-world clients in an integrated, holistic manner.

We now briefly discuss the general marketing channels literature and how our paper further develops the insights and ideas therein. The recent marketing literature on distribution channels and supply chain management has brought greater awareness of the complexity of marketing channels and the importance of this element of a marketing program in realizing organizational goals and delivering value to customers (Svensson, 2005). As suggested by Gundlach et al., (2006) the channel structure decision, compared to other elements of the marketing mix, is particularly complex because of the difficulty of assessing its impact on other members of the supply chain. Thus, as observed by Coelho et al., (2003), the long term ramifications of selecting a channel of distribution involve significant costs.

Both single channel and multiple channel distribution systems have been considered in the literature. Regarding single channel systems, the literature points to common benefits and disadvantages associated with the basic options of a vertically integrated direct channel versus an indirect channel in which an independent middleman is employed. For example, Coelho et al., (2003) note key benefits of a direct channel including a higher level of personal customer contact and less management complexity in terms of avoiding tasks of managing relationships with channel intermediaries and possible channel conflict. Conversely, by utilizing an indirect channel, the firm can obtain such benefits as more extensive market coverage with lower capital investment and greater flexibility in response to market changes.

The most recent literature has focused on several interrelated topics, including the following:

* a departure from more traditional single channel systems to the use and management of multiple channels structures

* management of conflict in multiple distribution channels

* the emergence of internet channels of distribution

* the integration of channels of distribution with the disciplines of logistics and purchasing within the overall framework of Supply Chain Management (SCM)

Early contributions to the distribution planning oriented SCM literature focused on using mixed integer programming models to simulate production plant locations, distribution center locations and customer location/service dimensions and the dynamics between these variables. These studies include those of Geoffrion and Graves (1974), Cohen and Lee (1985), Hodder and Dincer (1986), Cohen and Moon (1991), and Frankel et al. (2008).

Goetschalckx et al. (2002) show the gains achieved by integrating the design of strategic global supply chain networks with the decisions associated with the production- distribution allocations and transfer prices. The authors demonstrate savings opportunities created by designing the system with an integrated methodology using two case studies.

More recently, Alptekinoglu and Tang (2005) developed a model of a two-stage multi-channel distribution system composed of multiple distribution depots and multiple sales locations. The model considers stochastic, correlated demand occurring at the sales locations. The main contribution of their model is that it captures the 'demand pooling' effect on a distribution network, thus able to realize significant inventory related cost reduction. The authors present an integer programming model that provides near-optimal solution. However, it focuses only on minimizing cost, rather than maximizing total profit due to deterministic assumptions about the distribution network and exogenous demand distribution.

While the literature is filled with models of production-distribution choice, absent from this research is a readily understandable and workable model of distribution channel choice in common situations for marketing students and MBA/EMBA participants in which the costs of using such channels, demand requirements and supply considerations are known or can be modeled in terms of different scenarios. We provide a review of the contributions of the MODISC model toward understanding distribution systems in the section below to effectively address these issues in practical manner to embed learning for marketing students and professionals.

Contributions of the MODISC Model

According to the above review and to the best of our knowledge, there is a gap in the literature for arriving at distribution channel choice where distribution channel selections are explicit decision variables, both in the general marketing and marketing education literature. There is also a lack of experiential learning models of distribution choice that can help marketing and other graduate/executive students learn about distribution choices in a real-world context. The model presented in this paper fills these gaps.

We create an interconnected set of EXCEL worksheets in which the assumptions of the model such as channel margins, product-mix, product prices, capital and operating costs, inflation, sales volume, discount rates can be developed from real-world situations and changed to compare different distribution channel alternatives on the basis of the NPV or IRR criterion. Such an approach provides a very flexible and realistic framework in which the benefits and costs of various distribution channels in any industry can be modeled and the optimal distribution channel identified.

Our MODISC model contributes to research in the field in several ways. First, the model takes into account the interplay between the activities of distribution, logistics and purchasing. By doing this, it provides the marketing student and professional a holistic, practical tool to understand, model and implement difficult issues about distribution choice. As suggested by Gundlach et al. (2006), distribution models should reflect the integration of these activities rather than treating each in isolation.

Second, although multi-channel distribution structures are becoming increasingly utilized, models that thoroughly analyze the economic consequences of a single channel option have an important role. Coelho et al. (2003) note, for example, that it is important to study the factors affecting the determination of an appropriate number of channels in a multiple channel strategy, and this analysis cannot be done adequately without understanding the economic impact of a particular single channel structure. Furthermore, much of the literature points to the greater profitability observed in single channel structures, e.g., Coelho et al. (2003). The MODISC model offers an important avenue for carefully assessing the profitability of single channel options while it can be modified to account for multiple channel options.

Third, previous research, e.g., Vidal and Goetschalckx (1997), Goetschalckx et al. (2002) and Coelho et al. (2003), indicates that profit performance is inversely related with the number of channels used due to such factors as higher capital investment and operating costs, and the greater complexity of managing multiple channels which results in a greater likelihood of channel conflict and reduced customer service. However, declines in profit performance can be mitigated by replacing an existing channel with a lower cost one. This is why careful assessment of a particular channel option is necessary, and the MODISC model offers a comprehensive approach for doing so.

Finally, while most of the empirical research on distribution channels focuses on a particular consumer or industrial product, the MODISC model can be applied to a wide variety of product types. In addition, it is the only pedagogical model to the best of our knowledge that enables students and practitioners to understand, model and implement distribution channel choices.

A key consideration in developing the MODISC model was to use a commonly used financial performance measure to analyze alternative channel choice decisions. By using a NPV based framework, we are able to translate the complex decision process of choosing among multiple channels of distribution into a simple spreadsheet based exercise. This makes the model accessible to the large group of decision makers who may have difficulty in understanding the complex optimization models. In addition, by combining alternatives, the MODISC model can also flexibly incorporate the evaluation of the use of multiple distribution channels simultaneously. Furthermore, our framework enables the modeling of a variety of distribution channel configurations within real-world contexts.

The Optimization Model of Distribution Choice (MODISC)

This section discusses the elements and modeling approach of the general financial Model of Distribution Choice (MODISC) that we have developed to assist marketers and managers in choosing the optimal distribution channel for their products or services.

The MODISC Model is predicated on a simple NPV maximization framework but with an inter-connected series of decision variables. The basic NPV model is:

... over all distribution channels

where: NCIt = net cash inflows in period t,

NCOt = net cash outflows in period t, and

r = discount rate.

In order to present the inter-connected components of the MODISC model, we represent the basic structure of the model in Figure 1(Appendix).

First of all, the MODISC model is based on our understanding the various configurations of a distribution channel alternatives in terms of whether they are one-step or multiple-step distribution channels (we show a particular example for the processed food market below in the implementation example). Once the channel configuration is specified, we model the input variables in interconnected EXCEL spreadsheets (see INPUT side of Figure 1). The first spreadsheet inputs the FOB ex-foreign country or U.S. retail prices for different volumes per a separate supply price estimation model developed by the producer/supplier (these can be based on a volume-based price schedule). A key input sheet is the "Intermediary Markups" worksheet. This provides the mark-ups for each intermediary in the channel so that applicable mark-ups can be "turned" on or off depending upon the channel configuration being used. Sensitivity analysis of the whole system can be done by using different values for the FOB/retail prices and mark-ups that are entered into the spreadsheet.

An important consideration in distribution channel modeling is the trade-off between the cost of adding more channels and the increased sales that the added intermediaries can generate. There are two ways in which this can be incorporated in the model. The first is in terms of the demand and hence the revenue forecasts that are inputted in to the main cash flow worksheet. Alternatively, the model accounts for the provision for scaling up sales and hence revenues by incorporating sales and productivity factors for each intermediary in the channel configurations so that "switching" on a particular channel configuration automatically scales up the sales/revenue numbers in the cash inflow section of the main worksheet.

It is critical as to what sales/import quantities are inputted in to the main DCF worksheet. Separate interlinked worksheets (not detailed in Figure 1 to keep the explanation simple) provide details of the number of SKUs, their dimensions, the product mix assumptions, their conversion into cases, number of cases per container and hence the SKUs per container including calculations for separate floor-loading and palletloading. The incorporation of these details permits shipping and warehousing quantity dimensions to be determined. However, the exact sales quantities provided by the manufacturer's/supplier's forecasts are inputted from the sales/import quantities worksheet to the main DCF worksheet. These quantities are then matched to the prices assumed in the product mix for the volumes selected.

In order to keep the spreadsheets simple and clear to understand, separate interconnected worksheets for shipping and warehousing costs are developed based on the contracted unit costs of shipping and warehousing of the product shipments under different assumptions of public versus private warehousing and floor loading or pallet loading in the warehouses. These estimates are based on the specific costs in different geographical regions of the country in which the product is being sold. Separate worksheets provide costs of using different types of sales forces (e.g. own versus contracted) with the capital cost estimates for warehousing, transportation and sales offices.

A final input to the model is the incorporation of differential inflation rates on the revenues and costs in the model. A final key element is the choice of a discount rate which is directly entered into the main DCF spreadsheet.

The main worksheet in the MODISC model where all the interlinked spreadsheet calculations described above come together is the DCF worksheet, modeling the product mix, quantities, prices and revenues on the cash inflow side and the intermediary, shipping, warehousing, sales office, sales force and other transportation and return costs on the cash outflow side. This is set up in a standard "capital budgeting" format in which the NPV of using a particular channel configuration alternative or combination of alternatives can be modeled.

As shown in Figure 1, on the OUTPUT side, the MODISC model produces 5-10 year forecasts of discounted cash flows that the decision maker can use to calculate the net cash flows (and free cash flows) that result from using a particular distribution channel or combination of distribution channels. Of course, the NPV, IRR and discounted payback period are key outputs that the decision-maker can use to select the channel configuration or combination. The model can also be used to arrive at the appropriate retail price based on sensitivity analysis on the inputs parameters. Alternatively, for a given retail price, the optimal FOB/CIF price can be estimated.

Implementation of MODISC - An Application to the U.S. Processed Foods and Beverage Industry

First, we provide a brief background about the contexts in which the MODISC model was developed and implemented for marketing students and MBA/EMBA program participants. The model was first developed to help marketing students enrolled in Asian International Marketing (AIM) and European International Marketing (EIM) classes in the undergraduate/graduate programs and to EMBA students required to complete a Global Business Strategic Consulting (GLOBUSTRAT) project in their EMBA program at a large west coast university. It was later incorporated in to the consulting program for a global MBA at the same university where all program participants were required to complete a comprehensive (usually marketing focused) consulting project for an overseas client where they had to develop the models to achieve the client's objectives (very often a country market entry study). The details of these programs are discussed in a number of papers (Kamath and MacNab, 1998; Kamath, Agrawal and Krickx, 2008; and Kamath, Krickx and Agrawal, 2009).

The MODISC model was developed as an integrated pedagogical and decisionlearning tool where enrolled participants worked experientially on a comprehensive business problem over an extended period of time (4-12 months depending on the program) to develop distribution channel choices for their overseas client among other project objectives. Working with a team of faculty advisers for the duration of the project, program participants first developed the objectives and scope of the projects through prequalification and project finalization visits to their overseas clients. The program participants then developed the primary and secondary research strategies required to meet the client objectives by developing a series of research questions/hypotheses. Participants then collected the primary and secondary data through secondary and field research (in consultation with their clients) to model the strategic issues and marketing mix considerations, especially the distribution channel choices and impacts for final presentation to their clients. Such a process allowed them to apply their marketing knowledge in a practical real-world context with all the data and modeling difficulties that such a real-world project entails (see below for outcomes). We describe the MODISC model component of this larger exercise as follows.

In order to simultaneously demonstrate the building blocks of the MODISC model and its application to a real-world distribution channel choice situation, we present the model in the context of a Brazilian manufacturer of processed foods entering the U.S. market to distribute its products for consumer purchase and consumption. However, it should be noted that the model can also be applied to other goods that require similar distribution channel selection decision.

There are five basic channels of distribution in the U.S. Processed Foods and Beverage Industry. These are shown in Figure 2 (Appendix).

We discuss the distribution channel choices of a Brazilian processed food manufacturer who wishes to sell its products in the United States. Through the use of the MODISC financial model, the marketing student gains a better understanding of how different channels of distribution impact the Brazilian manufacturer's cash flows and which of the distribution channels requires investments or upfront costs. The model allows students to conduct sensitivity analysis on the NPV/IRR calculations under various assumptions on input parameters.

The following Figure 3 (Appendix) from the MS EXCEL financial model illustrates the data input sheet for monthly orders or demand projections for the product mix of four processed food items (referred to here as Muky, Xuky, Glatin and Cake Mix but generalizable to as many products as there are in the product portfolio of the company assessing the distribution choices).

Row 4 and columns B, C and I are all open to receive data input. The central fields from D9 to H18 are calculations produced from the input. In this sheet, the Brazilian processed food product exporter is able to choose the distribution channel by inputting "y" or "n" in each respective field in the top row that includes all the distribution channel participants. A monthly shipment quantity based on demand projections is specified by the number of containers of each product in the blue area of the product input as well as the destination port (Miami or Los Angeles, or both) through which the products are shipped from Brazil. The data in the D9 to H18 for each product are obtained from a linked data sheet that provides for the use of pallets, the number of cartons, the cubic foot volume required (hence the container size) and the total number of units of each product required by the demand projection. Target margins can be specified for each product so that product prices reflect this (these margins can be set to zero to provide calculations that reflect the base NPV/IRR obtained without adding the manufacturer's margin). Figure 4 (Appendix) demonstrates the revenue calculations for the MODISC model in the main calculation spreadsheet. It is to be noted that all the data inputted in to the model comes from extensive secondary and primary research through client interviews, focus groups, channel participant interviews, mall intercept surveys, distribution channel surveys and other primary research methods. Both revenue and cost data is similarly collected.

Revenues are derived by making the following assumptions:

1. Beginning with 2 containers of each product (Muky, Xuky, Gelatin, and Cake Mix) for the first quarter, thereafter increasing by one container of each product for each of the following quarters. These projections are based on the company's demand forecast.

2. Number of units is derived by calculating the number of units in a carton of each product.

3. Products are shipped inbound by volume rather than on pallets in 40ft. containers. This maximizes the quantity of each product shipped in a container.

4. Depending on which channels of distribution are utilized, revenues will increase or decrease accordingly. The assumption in this particular spreadsheet is that a food broker should increase revenues by 10% of direct sales to retailer, a food importer should increase revenues by 15%, and a food distributor should increase revenues by 20%. These adjustments are reflected in the "number of containers by product-channel adjusted" section in the financial model. Any other assumption based on the specific distribution channel productivity and company experience can be incorporated here.

5. Retail prices are based on the median retail price of competitors of similar products as the Brazilian manufacturer ($4.54 for Muky, $3.64 for Xuky, $2.40 for Cake Mix, and $.79 for Gelatin). The model seamlessly incorporates any other price assumptions and recalculates the revenue automatically, allowing the MODISC user to analyze the sensitivity of the results to various price assumptions.

6. Retail prices are adjusted for inflation annually at a rate of 2%.

Figure 5 (Appendix) from the financial model illustrates costs/cash flows. Costs are derived using the following assumptions which can be changed to suit the MODISC user's specific situation. Further details regarding the manner in which cost components can be derived are available upon request.

1. Shipping costs from the San Francisco do Sul port in Brazil to Miami are calculated separately and linked to the relevant cell here. The shipping cost calculation spreadsheet is directly linked to the main cash flow calculation worksheet discussed above and any changes in shipping cost components are automatically updated on the main cash flow worksheet.

2. Warehousing costs based on public warehousing using floor-loading (unpalletized shipments) are calculated separately and linked to the relevant cell in the costs spreadsheet.

3. Office and Staff costs are detailed in a separate inter-linked EXCEL worksheet based on actual cost calculations and directly appear in the relevant cell in this portion of the main EXCEL cash flow spreadsheet.

4. National branding costs are derived from the addition of costs totaling 2.5% of sales in advertising in addition to the costs of office and staff. Of course, any other assumption can be incorporated in a flexible manner.

5. Distribution channel margins are inputted based on expected margins for each channel as a total of sales revenues. Distribution channel participant margins can be obtained either through interviews, surveys or reviews of best practice in the industry. They can be changed to verify the sensitivity of the NPV/IRR to different margin levels.

6. Returns are assumed to be 1% of overall sales in the spreadsheet example but can be flexibly assumed to be something else or zero.

Net Present Value (NPV) is arrived at by calculating the net present value of all cash flows for 5 years discounted at a rate of 6% reflecting the interest rate at the time of the study, assuming funds are borrowed in the U.S.

Having illustrated how revenues, costs, and cash flows are derived and the various assumptions made, Figure 6 (Appendix) illustrates the cash flows and NPV calculation for Alternative 3, the 3 Step distribution channel through the food broker and distributor to the retailer.

The following points may be noted about Figure 6:

1. Cash flows are positive throughout the 5 years with a cumulative Net Cash Flow of $12,517,174.09.

2. This distribution alternative results in a Net Present Value of $7,549,761.38 (which turns out to be less than selling directly via a distributor -Alternative 1).

In addition to the quantitative assessment using the MODISC model, it is also important to analyze the qualitative advantages and disadvantages of each distribution alternative. It may be pointed out here that the MODISC quantitative analysis allows us to also think qualitatively about these aspects. This is done separately each time the MODISC model is used.

The usefulness of the MODISC model is that it provides a direct comparison in quantitative cash flow terms of the various distribution alternatives under consideration. To illustrate this usefulness, the following figures present a summary of the distribution alternatives based on Net Present Value of Cumulative Net Cash Flows.

Figure 7 (Appendix) summarizes the NPV of cumulative cash flows of all the five distribution alternatives. It indicates that alternative 5 - selling directly to a private label retailer has the largest net present value of cumulative cash flows over a 5 year period. It can be seen that the Alternative 5, the private label alternative provides the best alternative in terms of NPV due to the high volume and low costs that more than compensate for the lower prices.

The usefulness of the MODISC model is further enhanced by the ease with which one can conduct a sensitivity analysis of the model by changing the model assumptions for any of the parameters in the model such as the number and type(s) of intermediaries employed. Examples of changing model assumptions can be provided upon request.

Learning Outcomes

With regard to the learning outcomes that the MODISC modeling approach provides to enrolled students and program participants, the overall impact was measured by impartial third party surveys of the program participants who used this experiential decision learning tool as part of a substantive experiential learning project with realworld clients. These are briefly described below.

The program in which the MODISC model consulting project was embedded was compared to all and six selected peer EMBA programs without such a project that reported to the EMBA Council on a number of professional development outcomes for each of the 2004, 2005 and 2006 academic years. The results are summarized in Figure 8 (Appendix). It can be seen that while the MODISC-embedded program scored substantially higher than the all program average and at the top of the six peer program averages on almost all the outcomes evaluated, the MODISC-embedded program was rated significantly higher as compared to other programs on the key aspects of Critical Thinking, Business Discipline Integration and Improving Decision-Making. This demonstrates the effectiveness and efficacy of using an experiential, integrated and flexible decision-making model like MODISC in helping program participants and executives understand distribution channel (and other discipline) decision-making in realworld contexts.

Feedback from program participants, both verbal and written, confirms the analytical fruitfulness of using the MODISC model and the experiential consulting strategies. Internal surveys and the surveys conducted by the independent EMBA Council discussed above consistently indicated that the experiential learning program embodies in MODISC is seen as the most valuable aspect of the EMBA program in overall terms and especially in terms of learning outcomes. The projects received the highest scores in the program (average scores of 9.3 to 9.5 on a ten point scale for Quality of Team Projects and Appropriate Use of Team Building and Learning).

Conclusions

In this paper, a flexible financial simulation model has been presented that is useful in analyzing distribution choices often faced by marketing managers in a variety of industries. Using the commonly available EXCEL spreadsheet package, the integrated model captures the revenue, cost and strategic decision choice aspects of distribution channel choice. The model represents a very easily accessible alternative to the models available in the distribution and supply chain literature for line and staff marketing managers in evaluating the distribution choice alternatives.

The major conclusions that emerge from the use of the MODISC model in a variety of distribution contexts are the following:

* The profitability of any particular channel is a trade-off between the number of steps in the channel and the total demand that can be met through the use of that channel.

* Using multiple channels may have a positive impact on sales as more channels create greater potential to meet additional consumer demand that may not be met through one channel alone.

* The use of multiple channels may however make it more difficult to coordinate the marketing effort in terms of providing a consistent level of service across channels.

* The marketer can employ concurrent channels in higher growth markets, thus allowing more room for sales for all channel parties. This is to be traded off against the possibility of greater channel conflict.

* The greater the number of steps in a given distribution alternative, the greater margins that need to be paid for that particular channel alternative.

* Warehousing/distribution center costs have a disproportionate impact on the attractiveness of a given channel than any other element of cost, implying that the required contribution margin in most applications of the MODISC model increases with the capital investment involved.

* Using the MODISC model provides students with an effective learning tool which scores high on critical learning, integrating different business disciplines and improving decision-making as compared to comparable and peer EMBA programs that do not use such an experiential learning tool.

Thus, it can be seen that the MODISC model provides a useful framework for modeling distribution choice. Its flexibility in accommodating incremental, avoidable costs and incremental revenues of choosing a particular distribution channel alternative provides an accessible and flexible modeling tool for capturing the profitability and hence desirability of alternative distribution choices.

In conclusion, the MODISC model provides a comprehensive and flexible model of distribution choice that allows marketing students and MBA/EMBA program participants to understand the complexities of the distribution channel choice decision in a comprehensive and holistic manner through a real-world experiential exercise with an overseas client using information and data that is collected from the client and other market actors. Even without the experiential context, the model can still be used by marketing and MBA/EMBA students to understand the distribution decision.

Subject: Teaching methods; Distribution channels; MBA programs & graduates; Marketing; Consumer goods; Case studies

Location: Latin America

Classification: 9173: Latin America; 8600: Manufacturing industries not elsewhere classified; 7400: Distribution; 8306: Schools and educational services; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 4

Pages: 1-24

Number of pages: 24

Publication year: 2011

Publication date: Oct 2011

Year: 2011

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: Equations References Charts Illustrations Graphs

ProQuest document ID: 888056214

Document URL: http://search.proquest.com/docview/888056214?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Oct 2011

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 46 of 100

The people cried - a case of compassionate, transformational leadership

Author: Pryor, Mildred Golden; Oyler, Jennifer; Humphreys, John H; Toombs, Leslie A

ProQuest document link

Abstract:

The case involves leadership and management concepts that relate to strategic and tactical decision making and actions. Specifically, Ross, a new executive vice president and plant manager, initiates organizational transformation through empowerment of employees and use of their ideas to improve key performance indicators. The initiatives are very successful, and the employees are committed to improvement and to their new leader whom they trust and admire. However, when the plant loses a major contract, corporate executives ask for reduction in headcount which, in the past, has meant layoffs of hourly employees. This time, the reductions are from the top down (vice presidents, down through supervisors), and areas are restructured to accommodate the reductions in headcount. When corporate executives ask for a second round of layoffs, Ross resigns. As he gives his farewell address at the end of each shift of work, the people have tears in their eyes. They note that many management people have left the plant either voluntarily or involuntarily, but this is the first time that the people cried. [PUBLICATION ABSTRACT]

Full text:

THE CASE: INTRODUCTION

This case raises issues relating to leadership, decision making, organizational culture, key performance indicators, organizational transformation, alignment of corporate and plant management philosophies, and the requirement for a strategic leadership/management model (such as the 5P's Model) to assist in the alignment of key organizational elements and execution of the strategic and tactical plans.

Case Objectives

The teaching objectives of this case are: (1) to assist students in strengthening their leadership and management skills; (2) to enhance students' capabilities to analyze the decisions and actions of managers, to determine their strategic and tactical impact, and to offer suggestions for future decisions and actions; (3) to explain the impact of organizational culture on employee behavior and performance results; (4) to demonstrate the difficulties managers encounter during efforts to transform organizations; (5) to address the need for empowerment and accountability for results in the management of organizations; and (6) to address the need for horizontal and vertical alignment of top management teams.

Courses and Levels

This case is appropriate for use in management courses at the undergraduate and graduate level. It could be used in Strategy, Organizational Behavior, Managerial Skills, Principles of Management, Quality Management, and Organizational Transformation courses.

THE CASE: BACKGROUND

A new plant manager has introduced a plant improvement initiative and hired a vice president of improvement initiatives to assist him. They have involved management and nonmanagement employees throughout the plant, and the initiative is working. As the teaming occurs, those involved are caring more about each other and their work. They are streamlining processes and improving relationships as they learn theories and tools related to their work and to the improvement initiative. Then the plant loses a major contract, and corporate starts asking for layoffs and re-structuring.

INFORMATION ON KEY PLAYERS

Key players are depicted on Chart 1 and include Ross, Executive Vice President & Plant Manager, and Laura, Vice President of Improvement Initiatives.

CASE SCENARIO

The people in the plant believed every word he said to them. They wanted to believe him, this executive vice president and plant manager, Ross, who came to them from New York by way of Florida. (The organizational chart is depicted in Chart 1.) Ross went straight to the shop floor. He walked among them. He became a part of them. He brought mahogany row to the machine shop. It was an unlikely alliance. For years, there had been layoffs, strikes, and all the distrust that came with them. But Ross seemed different. Also, there was a new vice president named Laura on the plant manager's staff. She walked through the plant with Ross. She and Ross ate in the cafeteria with the union employees. She had an easy laughter that made everyone relax. No one knew exactly what Laura did, but her title was Vice President of Improvement Initiatives. Together she and Ross made the plant seem a special place to work, a place where the workers could actually challenge existing processes and offer innovative ideas.

There was now a comfortable look in the workers' eyes as Ross said to them: "You know, management does not know crap about the things you do out here in the machine shop. You run this place. Your ideas are the only ones that matter to me!" Glen, a machinist said, "Well, let's get on with it then. If you want this place to operate better, we can do that. But it won't work if we try to do it alone. You go back to your office, and your words mean nothing out here - not to us, not to our bosses."

There was a deafening silence. Then everyone laughed uneasily as they looked to see Ross' reaction. Suddenly, he burst into laughter and said, "Why would I want to be up there looking at reports that tell me what might be happening down here? I'd rather come down here and talk with y'all and know for sure what's happening."

That's how it began in October, 1985 - two teams of hourly guys in the machine shop focused on improving the processes by which they did their work. They had found a soul mate, someone who cared about them and wanted to work with them, to be on their teams. Managers, directors, and supervisors observed this strange scenario cautiously, but Clyde, Vice President of Production, and Randy, Vice President of Quality, seemed energized by this sudden interest in people on the production floor. For the first time, a plant manager wanted the production people to give him ideas about how the plant should operate and to offer suggestions for improvement.

Ross and Laura pulled the machine shop people together after hours (paid them overtime) and asked: "What problems exist for you? Ross personally began writing their answers on a flip chart. After a little time had passed, he asked: "What can management do to help you solve these problems?" See Chart 2 for the answers to Ross' questions.

Ross asked the Machine Shop employees (management and non-management) what things they cared about passionately at work. Their responses were: safety, job security, product quality (so we don't have to do rework), co-workers, getting our work done fast so our bosses will leave us alone, and being respected. This time the Production Director over the Machine Shop wrote the responses on the flip chart. Ross and the members of his leadership team used these responses and others obtained in similar scenarios throughout the factory to revise the organization's core values.

He suggested to Production directors, managers and supervisors that all processes in every shop should have key performance indicators. He asked them to think about the core values, the things they care about and to ask themselves questions, such as "If we care about safety, how will we behave, and how will we measure our safety results? If we care about quality, how will we behave, and how will we measure our quality results? Who will track results?"

Ross involved vice presidents, directors, and people in the Training Department in teaching management and non-management employees about process ownership, management and improvement; leadership; empowerment; change management; quality theories and tools; and many other performance excellence concepts. He sent people to Quality courses taught by Dr. W. Edwards Deming and Dr. Joseph Juran and to other external courses such as Quality Function Deployment and Taguchi Methods. Also, he brought experts to the plant to teach a variety of subjects such as Managing Agreement (The Abilene Paradox - Dr. Jerry Harvey), Leadership (The Leadership Challenge - Jim Kouzes and Barry Posner), and Innovation (Col. Rolf Smith).

For five years, everyone in the plant was involved in documenting, managing, and continuously improving the processes which they owned. Customers and suppliers were also involved in the improvement initiatives. For the first time in the history of the plant, the hourly union employees were involved in the development and execution of strategic and tactical plans. The stock price soared. Everything seemed so perfect.

Then the plant lost a bid for a major contract. Corporate asked Ross to lay off 20% of the people at the plant. Such a reduction in force had historically been from the bottom up. Ross was almost in tears as he discussed the situation with the members of his leadership team. Laura sat quietly as the vice presidents commented that this always happens. Sandy, the Vice President of Engineering said emphatically, "That's the reason you can't involve hourly people in strategic planning and suggestions for improvement. It just sets them up for disappointment in, and distrust of, management." Sam, Vice President of Finance, and Dan, Vice President of Marketing agreed.

As Vice President of Improvement Initiatives, Laura had always played a "behind the scenes" role. She had led the team that designed the improvement initiative system, and the intent was that Ross would be the formal leader of the system. Laura would be Ross' confidante and internal consultant, his executive coach. Therefore, after the meeting was over, Laura stayed to talk with Ross. She said, "Why do we have to lay off people from the bottom up?" She suggested, "Why don't we lay off people (or let them retire) from the top down? We have 12 vice presidents. Let's merge areas and have 7 vice presidents. We have 75 directors. Let's merge areas and have 25 directors. We have 150 managers. Let's merge areas and have 50 managers. We have 500 supervisors. Let's merge areas and have 100 supervisors. Let's keep all the hourly people and cross train them. Let's keep all the engineers and let them help us figure out how to get the next big contract." Ross' response was, "Laura, you are one of the 12 vice presidents. You know that this will not be easy." Laura replied, "Yes, but the hourly guys will know we care about them when some of us leave."

Ross, the Plant Manager and Earl, the Vice President of Human Resources (with input from Laura) executed the organizational restructuring in order to meet the Corporate-mandated goal of 20% reduction in employees and still retain the plant's continuous improvement strategy. To support the organizational restructuring, an "early out" program was developed that would allow people to retire early or simply leave to find another position.

Within six months, Corporate asked for another 20% reduction in headcount. With his attorney by his side, Ross flew to corporate headquarters and met with the CEO and his top executive team to ask for a delay in this headcount reduction until the next contract was acquired. When the CEO would not relent, Ross told him that it was a matter of integrity for him to stand up for people who had actually saved the plant during the contract loss. He then resigned as executive vice president and plant manager and let his attorney negotiate his settlement. When that was done, Ross called Laura first and told her to prepare her own exit strategy since he was no longer her boss because he had refused to lay off any more people. He asked Laura to call an all-plant meeting for the end of each shift for the next day.

At each of the shift meetings, Ross tried his best to convey hope for the future. He told the people that they had made a huge positive difference in the plant operations and that they should continue to operate the same way in the future. On each shift, as Laura looked around at the people, they all had tears in their eyes. No one said a word. Obviously, word had gotten out at the plant that Ross had resigned. Over the years, many people had left this plant. Some had resigned. Some had been laid off or fired. This was the first time that the people cried.

Using scholarly journal articles, please answer the following questions (Include in text APA citations to substantiate your answers and an APA style reference page at the end of your case analysis):

1. Discuss various leadership/management styles (e.g., transactional, transformational, charismatic, authentic, etc.).

2. List and discuss at least 5 management concepts and theories that can be used in the analysis of this case.

3. Discuss the lack of alignment of corporate and plant management philosophies.

4. Based on Ross' actions, what type of manager is he? Justify your answer.

5. Based on Laura's actions, what type of manager is she? Justify your answer.

6. What did Ross do right? Justify your answer.

7. What mistakes did Ross make? Explain your answer.

8. What did Laura do right? Justify your answer.

9. What mistakes did Laura make? Explain your answer.

10. What other information do you need to better analyze this case?

TEACHING NOTES/INSTRUCTORS MANUAL

Case Analysis and Suggested Answers to Questions

1. Discuss types of management and leadership.

Whetton and Cameron (2010) emphasize that "Managers cannot be successful without being good leaders, and leaders cannot be successful without being good managers" (p. 17). They describe management as hierarchy skills, such as managing stress and self-awareness and marketing skills, such as motivating and managing conflict. They note that leadership includes clan skills, such as communication and team building and adhocracy skills such as leading change and innovation. Management is applicable in times of stability and leadership during times of change (Whetton &Cameron, 2010).

Management style refers to characteristics consistently applied to the decision-making process (Poon, Evangelista, & Albaum, 2005). Vidic (2007) points out that most styles involve two components: task leadership (characterized by the establishment of expectations in the pursuit of goal attainment) and relationship leadership (i.e., leader-follower relationships). Vidic (2007) lists four leadership techniques: (1) delegation; (2) participation, i.e., involving followers in the decision-making process; (3) selling, i.e., explaining and persuading followers; and (4) telling, or providing specific instructions and close supervision. Management styles all include varying degrees of task and relationship behaviors that are manifested in a combination of actions (delegation, participation, selling, telling). Some of the distinguishing traits of a particular style may overlap with those of another.

Charismatic Leadership

Charismatic leadership refers to a leader's ability to influence and transform others' values, beliefs, needs, preferences and performance (Michaelis, Stegmaier, & Sonntag, 2009). "Charismatic leadership theory focuses on emotions and values, acknowledges the importance of symbolic behavior and the role of the leader in making events meaningful for followers" (Michaelis, et al., 2009, p. 401). Choi (2006) states that "A charismatic leader's envisioning behavior influences followers' need for achievement, and the leader's empathic behavior stimulates followers' need for affiliation" (p. 24).

Charismatic leaders are highly influential and inspire commitment and trust through the effective use of vision, mission, and trust (Humphreys, 2005). Followers tend to identify with charismatic leaders and are receptive to evaluating and changing the status quo. They are also more likely to focus on positive rather than negative aspects of change. In addition to their interactions with others, charismatic leaders tend to risk their personal well-being for the sake of the vision as they display intuition and timing in striving for achievements and subscribe to nontraditional problem-solving approaches (Whetton & Cameron, 2010). Charismatic leadership supports organizational change because it inspires the commitment of employees. Charisma is often a part of various types of leadership including transformational leadership.

Transformational Leadership

Going beyond short-term goals, transformational leadership strives to improve higher intrinsic needs (Bass, 1985; Bass, 1990; Bass & Avolio, 1993; Judge & Piccolo, 2004; Tichy & Ulrich, 1984). Initiated and named by Burns (1978), transformational leadership was refined by Bass (1985). It was Bass (1985, 1990) who noted that transformational leaders look beyond their own personal self-interests and take actions that are in the best interest of their followers and their respective organizations. Burns (1978) emphasized that transformational leadership "occurs when one or more persons engage with others in such a way that leaders and followers raise one another to higher levels of motivation and morality" (p. 20). He goes on to say that "transforming leadership ultimately becomes moral in that it raises the level of human conduct and ethical aspiration of both leader and led, and thus it has a transforming effect on both" (Burns, 1978, p. 20). Since transformational leaders act out of their personal value systems, they are able to unite their followers and influence their respective beliefs and actions (Bass, 1990; Burns, 1978; Humphreys & Einstein, 2003). It is out of their personal value systems that they exercise compassion for others, including followers and customers, and help others develop into compassionate, transformational leaders (Boyatzis, Smith, & Blaize, 2006).

Humphreys (2005) notes that transformational leadership is evidenced when leaders and followers are "engaged in such a way as to enhance the enthusiasm and morality of one another such that the goals of each become fused in the best interest of the organization" (p. 1411). Bass (1985) indicated that behaviors associated with transformational leadership are: (1) charisma, (2) inspiration, (3) intellectual stimulation, and (4) individual consideration. Avolio, Waldman, and Yammarino (1991) re-stated the four elements as the 4 I's of transformation leadership, i.e., idealized influence, inspirational motivation, intellectual stimulation, and individualized consideration. Van Eeden, Cilliers, & van Deventer (2008) emphasize that "the leader . . . designs appropriate strategies to develop individual followers to achieve higher levels of motivation, potential, and performance" (p. 255). Such development strategies help ensure long term organizational success and survival (Fulmer, Gibbs, & Goldsmith, 2000). Because transformational leadership works to improve an organization, it is especially important in times of needed change and growth (Vidic, 2007).

Servant Leadership

Related to the transformational style of leadership is servant leadership which places followers' well-being over the interests of the leader and utilizes a sharing of power. Servant leaders are concerned with individuals' self-esteem and self worth (Humphreys, 2005). In order to achieve organizational goals, servant leaders lead by example, serving as caring role models to others as a way to accomplish goals and support followers' development (Block, 1993; Vidic, 2007). Humphreys (2005), Spears & Lawrence (2004) and Vidic (2007) list ten characteristics of servant leaders as developed by Spears (1994):

* Listening to needs of others as a necessary aspect of personal growth

* Empathy to understand followers and build trust and acceptance

* Healing as a means to integrate "wholeness" and trust within an organization

* Awareness of self, others, and organizational goals

* Persuasion instead of coercion

* Conceptualization of the larger organizational "picture"

* Foresight, or developing intuition about the future via understanding of the past

* Stewardship, recognizing that a leader should serve others and the organization

* Commitment to growth of the organization and of followers, and

* Building community to create a sense of organizational inclusion among followers.

There are commonalities in some of the characteristics of transformational and servant leadership. According the Humphreys (2005), the primary distinction is that servant leaders are more focused on the emotional needs of followers rather than the good of the organization, and transformational leaders are motivated chiefly by the well-being of the organization before that of followers. Whereas transformational leaders' initiatives utilize the 4 I's to stimulate proactive innovation in a dynamic environment, servant leaders' initiatives focus on sharing leadership, valuing and developing people, and preserving a more stable environment (Humphreys, 2005).

Authentic Leadership

Integral to both transformational and servant leadership is the concept of authentic leadership. Ilies, Morgeson, & Nahrgang (2005) state that "authentic leaders are deeply aware of their values and beliefs, they are self-confident, genuine, reliable and trustworthy, and they focus on building followers' strengths, broadening their thinking and creating a positive and engaging organizational context" (p. 374). Their self-awareness and trust in their own values, motives, and feelings are critical to understanding personal strengths and weaknesses, which leads to higher emotional intelligence and objectivity to create greater leadership effectiveness. Also important to authentic leadership is unbiased processing, i.e., leaders process information honestly, especially self-relevant information. The fundamental attribute of authentic leadership is integrity so that people's actions are in alignment with their values, and actions are not taken which are contrary to one's morals. Finally, authentic leadership requires striving for openness and trust in relationships (Ilies, et al., 2005). Barnard (1938, 1940) as discussed by Novicevic, Davis, Dorn, Buckley, and Brown (2005) indicated that authentic leadership has a technical aspect which involves the capability of leaders to perform their duties and a moral aspect which involves dependability, human conduct, and foresight related to purpose.

Transactional Leadership

The transactional leadership style is referred to as a social exchange process in which leaders give something to followers in exchange for something the leader wants. According to van Eeden, et al. (2008), "The leader clarifies what the followers need to do as their part of a transaction (successfully complete the task) to receive a reward or avoidance of punishment (satisfaction of the followers' needs) that is contingent on the fulfillment of the transaction (satisfying the leader's needs)" (p. 255). Transactional leadership focuses on making sure the group stays on task. As a result, it is supportive of the status quo (Vidic, 2007).

Transactional leadership encompasses three dimensions known as (1) contingent reward, (2) management by exception - active, and (3) management by exception - passive. Contingent reward involves the use of praise and rewards dependent on the followers' achievement of expectations (Vidic, 2007, Judge & Piccolo, 2004). Active management by exception implies that the leader proactively monitors behaviors and mitigates problems before the follower behavior results in negative results. With passive management by exception, leaders take action after the behavior has occurred (Judge & Piccolo, 2004).

Transactional leadership is useful in keeping the status quo, so it often results in a culture of low risk. Also, it is used in situations where failure would be catastrophic (Vidic, 2007). Transactional leaders value structure and are more task-oriented than people oriented, which can negatively affects a leader's ability to employ inspirational motivation (van Eeden, et. al., 2008).

Laissez-Faire Leadership

The avoidance of leadership is laissez-faire leadership which differs from passive management by exception only in that it does not take require taking any action at all (Judge & Piccolo, 2004). Leaders avoid all responsibility, avoid setting goals, hesitate in making decisions or taking action, do not clarify expectations, and are absent when needed to become involved (van Eeden, et al., 2008, Judge & Piccolo, 2004). This form of non-leadership is not well studied but is expected to be ineffective (Vidic, 2007). At the same time, it may allow for followers to self-manage (van Eeden, et. al., 2008).

Autocratic Leadership

The most dictatorial leadership style is the autocratic style. De Hoogh and Den Hartog (2009) note that autocratic leaders limit followers' input and autonomy, show little respect for followers' opinions and values, and tend to dominate and exert will to impose their ideas. This has the effect of decreasing followers' self-determination and sense of control. In addition, autocratic leaders have limited consideration for others and provide limited or no support for their followers (De Hoogh & Den Hartog, 2009). As a result, followers are presumed to feel little sense of empowerment or inspiration and may work only to avoid reprimands of their bosses. Like laissez-faire leadership, this style of management is presumed to be largely ineffective.

2. List and discuss at least 5 management concepts and theories that can be used in the analysis of this case.

Core Values

Throughout the case, core values are a recurring theme. Pryor, et al. (2007, 1998) and Pryor, et al. (2007) indicate that core values relay (1) what is important to the organization as well as (2) what organizational leaders care about passionately. Core values serve as the foundation for organizational culture and operating guidelines (Pryor, et al., 2007). Ferguson and Milliman (2008) suggest that there are two types of core values that work together in various degrees of balance. Organizational level values relate to output and processes (e.g., the customer is always right, a tenet aimed to guide all employee behavior). Psychological values are those components that address morality and aspirations (e.g., doing the right thing or compassion).

The study of organizational core values presents an interesting phenomenon. Various authors (Ferguson & Milliman, 2008; Van Rekom, van Riel, & Wierenga, 2006) indicate that while core values drive people's actions and motivations, the subjective nature of how they are internalized by each person may lead to differing results. Also, Van Rekom, et al. (2006) emphasize that "Values expressed through ideology need not to be the same as those substantiated in behavior. Employees may subscribe to a value, but may not know why they should stick to it and may not really know to live up to it" (p. 176). Employee input was valued by some members of the organization (Ross, Earl, Laura, and Randy) but not by others. When the economic landscape required layoffs, Sandy, the Vice President of Engineering was unequivocal in his conclusion that it was a poor decision to include employees' input as a major change component. The contrast of these two behaviors leads one to believe that the organization's approach to change initiatives is not adequately supported. The resulting differences of opinion about the espoused core value of employee involvement may have been insufficiently communicated and thereby allowed subjectivity. Also, the lack of strategic and tactical alignment at the executive team level may have been a reason that this core value was insufficiently affirmed by some managers.

Empowerment and Participative Management

The plant's process improvement strategy was further strengthened through employee empowerment. Ross' engagement of all levels of employees seemed to bring new employee energy and enthusiasm. They were no longer "prisoners of work" as the employees felt free to engage in improvement strategies and most importantly, take ownership of their work (Pryor, Humphreys, & Taneja, 2008). When this happens "work is energizing" as members "ensure their own success through helping ensure their organization's long-term viability" (Pryor, et al., 2008, p. 24). Lok, Hung, Walsh, Wang, & Crawford's (2005) study reported that employee involvement is a key indicator of process improvement success.

Empowerment was an important theme throughout this case and was at the heart of the events surrounding the organization's change and the morale of its members. Yukl and Becker (2006) describe empowerment as a psychological condition in which members believe that they have the ability to develop their own work opportunities, be involved in decision-making, and perform meaningful work. The way in which the case's members achieved empowerment was through Ross' use of participative management (Greiner, 1973). Participation occurs when collaboration or influence is shared among members of an organization who are otherwise considered unequal (Kim, 2002).

Various authors (Greiner, 1973; Kim, 2002; Salahuddin, 2010; Yukl and Becker, 2006) note the relationship between participative management, empowerment, and positive results. According to Salahuddin (2010), "Participative leadership leads to quality decisions, consensus and acceptance, understanding of the decision by those responsible for implementing it, development of decision-making skills throughout the organization, enhanced motivation, job satisfaction, resolution of conflict, and team development" (p. 2). When Ross met with his production teams, sought and used their input, and let them drive the processes for change, he was utilizing participative management. Critical components such as worker feedback, task identity, and autonomy allowed workers to experience meaningfulness of their work, responsibility of work outcomes, and knowledge of work results. Worker feedback, task identity, and autonomy directly affect employee empowerment (Yukl & Becker, 2006).

Organizational Change

When Ross first came to the shop, he was met with skepticism which could reinforce the idea that people are resistant to change. However, this is not necessarily true. Van Dijk and van Dick (2009) indicate that resistance is generally to what people perceive to be probable negative consequences as a result of change. This is consistent with the case since layoffs and strikes had resulted from previous management changes. Further, van Dijk and van Dick (2009) propose that another key reason that employees resist change is because of self preservation based on management styles and communication and interaction with their managers. At first individuals and members of teams embraced the process changes because Ross demonstrated his value of their input and ideas and let them drive the change. Next, Ross and Laura did not accept the corporate executives' proposed organizational change because (1) There were potentially significant negative effects and (2) they were not involved in the decision-making process. Otherwise, they may have better understood the reasons for the layoffs, and they may have been able to influence the outcome. Charismatic leadership (Choi, 2006) and transformational leadership (Bass, 1990) are leadership styles are useful during periods of organizational change.

Organizational Restructuring

Corporate executives requested that Ross lay off 20% of workers at his plant. As an alternative, Laura proposed restructuring the number of areas, reducing upper and middle management, redefining job roles, and cross-training workers to meet plant objectives. When deciding on a restructuring strategy, firms should incorporate transaction cost economics into the decision-making strategy. This refers to assigning values to the different outcomes that could result from a given decision in order to compare them (Kulkarni & Fiet, 2007). The objective is to identify restructuring alternatives that will provide the greatest profitability and efficiency while eliminating waste and bureaucracy (Kulkarni & Fiet, 2007).

From information in the case, it seems that corporate executives did not use transaction cost economics or analyze the possible benefits of Laura's suggestions. Also, there was no discussion of the cost of layoffs of employees which can be significant. Layoffs often negatively impact morale so that workers experience much less organizational commitment, productivity, and positive workplace attitudes (Probst, 2004). Finally, corporate executives did not address issues of bureaucracy and waste, and they did not explore additional opportunities to consolidate regions and flatten/trim the management structure.

Trust

Another important concept in the case is trust, specifically trust in managers and their credibility (Douglas, 2010; Jones & George, 1998; Korsgaard, Brodt & Whitener, 2002; Kouzes & Posner, 2003; Michaelis, et al., 2009; Yoon & Ringquist, 2011). Trust in management exists when organizational members are willing to be vulnerable to them (Michaelis, et al., 2009). When Ross first came to the plant, the employees distrusted him because of their previous experiences with plant managers. Instead, they found a leader who was willing to be vulnerable to them by trusting them to be key drivers of processes. This reciprocal relationship fostered a mutual trust that resulted in much success in terms of process and quality improvement. The reason that trust had such a positive impact on the plant's output is that team members understood management's (Ross') good intentions; they were provided the opportunity to protect their self-interests; and they were afforded a sense of control (Michaelis, et al., 2009).

When the organizational members trusted management, they responded positively to Ross' promises of autonomy and involvement in decision-making and provided hard work and commitment. This type of relationship results in teams that have higher commitments to change, which contributes to innovative behavior and organizational success (Michaelis, et al., 2009).

Teamwork

Critical to the plant's change initiative success was the utilization of teamwork. When Ross first sought to understand the underlying issues at the plant, he worked with both management and non-management people. He included vice presidents, directors, managers, supervisors; members of the training department, machine shop and other production employees, and other employees throughout the plant. Customers and suppliers were also involved. Integration of the different groups into the decision-making and improvement efforts was an important tactic as the diversity of each group's experiences and knowledge contributed to a wider variety of quality ideas and alternatives (Cannella, Park, & Lee, 2008). Further, obtaining the input of the different stakeholders intuitively makes sense from pragmatic process and empowerment standpoints. Cannella, et al. (2008) indicated that inclusion of the departmental managers was also effective as they "are likely to 'have a good perception of where the knowledge is and how to tap into it" (p. 769). Similar to the interaction between managers and employees, when team members trust each other, they are more likely to be motivated, productive, and experience positive performance (de Jong & Elfring, 2010).

Motivation

There are many elements to motivation, and some have already been discussed (e.g., participative management and empowerment, trust in management, and teamwork. To further examine motivation, one can apply Herzberg's (1959, 1987) need theory of hygiene and growth needs. In the workplace, hygiene needs comprise of conditions of the job such as wages, rewards, company policies, and interpersonal relationships. Growth needs are more intrinsic and include such elements as responsibility, recognition and feedback, knowledge and training, and information (Lundberg, Gudmundson, & Andersson, 2009).

The case does not present enough information to ascertain how workers' hygiene needs in the form of wages and rewards were met. However, members seemed to be positively affected by the teamwork and interpersonal relationships at the plant. They were negatively affected by company policies regarding layoffs. Addressing employees' growth needs positively motivated the workers. Their responsibility in continuous improvement initiatives, involvement in training, and acquisition of inter-department knowledge seemed to relate to the intrinsic requirements of Herzberg's (1959, 1987) model.

Process and Quality Improvement

Process improvement is an integral element in this case because of its positive impact on member relationships. The plant had a business process management (BPM) initiative which Lok, et al. (2005) described as "the active and disciplined approach to the measurement and review of an organization's end-to-end processes with the aim of improving operational effectiveness" (p. 1358). Processes are separated into core and support processes and examined, e.g., when the team recorded their problems and areas for improvement. As part of BPM, continuous improvement measures are taken and changes in business processes are documented in an effort to achieve incremental organizational performance improvements (Lok, et al., 2005). The plant engaged in continuous improvement through its continual documentation, management and improvement of processes by its internal and external customer and suppliers.

Deming (1986) is revered as a pioneer of quality theory that involves improvements in processes, quality, productivity and costs. Increases in quality and productivity and decreases in costs improve an organization's ability to capture the market, stay in business, and provide more jobs. Wayhan, Khumawala, & Balderson (2010a,b) found that the principles of Total Quality Management have an impact on financial performance, but only when coupled with a variety of other organizational capabilities. It would appear that the apparent success of the plant's continuous improvement measures would inevitably result in greater efficiencies that would drive the plant's competitiveness up in the marketplace. However, the plant lost the bid, suggesting otherwise.

3. Discuss the lack of alignment of corporate and plant management philosophies.

The plant had experienced a long history of layoffs, strikes, distrust, and adversarial relationships between labor and management. One key difference in the philosophies of plant management and corporate executives was the extent to which they valued employees. Corporate executives were willing to eliminate 20% of the plant's employees with no input as to whether it was the correct rightsizing strategy or how it would affect employee commitment and morale as well as output and performance. It is presumed that their decision was based on solely achieving an overhead reduction goal with little regard for consequences. The management style of corporate executives seems to be autocratic (De Hoogh & Den Hartog, 2009) or "director" style, i.e., high assertiveness, low responsiveness (Douglas, 1998).

In contrast, Ross valued employees and was highly collaborative. His management style was charismatic and transformational (Bass, 1990; Burns, 1978; Humphreys, 2001; Humphreys & Einstein, 2003) with an overriding style of "expresser" (Douglas, 1998). Plant employees worked for empowerment, intellectual stimulation, innovative risk-taking, and process improvements. The difference in the way the two entities valued worker contributions is best illustrated by the VP of Engineering's declaration that one should not involve hourly people in planning because they eventually will be disappointed. Ross' response might be, "Why do you assume you have to disappoint them? They are our most valuable resources!"

4. Based on Ross' actions, what type of manager is he? Justify your answer.

Ross' management style is charismatic and transformational. He is charismatic because he values the different interactions between team members affords the group. Also, he inspired individuals and team members and motivated them through his vision of a fundamental, grassroots process improvement strategy. He also went against his own self-interests for the sake of his vision (that the business and strategy be driven by the knowledge workers) when he resigned instead of laying off more of his team members.

Ross is a transformational leader who values collaboration, growth for his team (through training and inter-department planning/process improvement), and leader-follower trust and commitment. He was a risk-taker, big picture person who was committed to engaging and empowering individuals and team members to create innovative improvements. Despite his selfsacrifice, Ross' overriding management style is more transformational than servant leadership because his motivation was concerned primarily with achieving organizational objectives, not simply valuing and serving his workers.

5. Based on Laura's actions, what type of manager is she? Justify your answer.

Laura is a servant leader whose philosophy and values were guided by service to the hourly workers. Morality and a sense of right versus wrong drove her motivation. She was also a transformational leader who offered innovative ideas to restructure the entire company through consolidation of divisions, streamlining upper and middle management, redefining job roles, and cross training. Considering corporate management's past actions and current proposals, Laura's ideas were innovative and risky. Both Laura and Ross were authentic leaders who were true to their commitments and values. Laura volunteered her termination for the good of the workers, and Ross did resign in protest. Conflicts between self-interest and those of the organization may arise for a leader, and the reconciliation of this tension is fundamental to authenticity (Novicevic, et al., 2005).

6. What did Ross do right? Justify your answer.

Ross did many things right. The most significant was his personal interaction with, and empowerment and encouragement of, employees which resulted in efficiencies and increased profitability. His actions were in congruence with his values which created credibility with his team. As a result, he inspired and motivated them to be creative and own their processes. Ross maintained his integrity, and he trusted his team and they trusted him. That is why they cried when he resigned. From the beginning, Ross identified with the machine shop workers and built trust between them as a team and between them and management. Ross included all levels of workers in plant decisions. He showed them respect, gave consideration to their ideas, and made them feel like each person had value. Ross was very charismatic. He avoided negative backlash while making serious changes at the plant. Ross challenged everyone at the plant to improve their processes, and because he had previously earned their trust, they did this willingly. He fostered an atmosphere of continuous improvement and gave them tools needed for success. He provided training in process ownership, leadership, empowerment, change management, and quality theories and tools. When the plant lost the contract and corporate ordered him to reduce employees by 20%, he was open to ideas about how to most effectively achieve the reduction. Ross was a participative leader who kept people informed even when it was bad news.

7. What mistakes did Ross make? Explain your answer.

Ross' mistake was how he handled the final wave of layoffs. While his actions were admirable from an integrity standpoint, they did not change anything. His resignation created a "no win" scenario in which neither he nor the employees won. His team was now without a leader whom they trusted and revered, and the organization was at risk without his leadership and management capabilities. Finally, the 20% reduction was still likely to happen, so even with his resignation, he did not achieve his objective of saving his employees' jobs. Armed with data to highlight the folly of layoffs from an organizational performance standpoint, Ross should have employed a negotiating strategy. He should have presented an alternative plan or offered to revisit the existing plan if certain goals could not be met. If Ross' negotiating strategy was not successful, at least he may have learned the reasons why an immediate layoff was necessary (i.e., no one will have a job if the firm cannot operate profitably.)

While Ross was admired and respected within his plant, he did not spend enough time fostering a positive relationship with corporate executives. Management includes dealing with senior management (Higgs, 2006/2007), top management team interdependence (Barrick & Bradley, 2007), and executive team alignment (McKnight, 2009). If Ross had a better relationship with corporate executives, perhaps they would not have called for the second reduction so quickly. The second request for the reduction in employees is where Ross lost the most credit. He spent five years establishing trust with his plant employees. Yet, in one day, he abandoned them. When Ross went to corporate to seek an extension on the reduction, he appears to have had honorable intentions, but when corporate said no, he just quit. Then he told Laura to prepare her own exit, which was not appropriate and not good leadership. Ross had established trust, and he was very respected by the workers and managers at his plant. He should have returned to the plant and stayed on as Plant Manager. He should have implemented the reductions and helped the plant recover from what would have been a tragedy for it.

8. What did Laura do right? Justify your answer.

Laura's ideas to cross-train, redefine roles, and restructure the organization were positive contributions. If her ideas had been implemented, the organization may have discovered new operational efficiencies, eliminated waste, and streamlined hierarchal bureaucracy. When Laura learned of the second round of employee reductions, instead of accepting the status quo, she offered an alternative plan that could have cost Laura her job.

Laura exhibits characteristics of a strategic, authentic, transformational leader. Her actions were compatible with the 5P's model which includes five elements, Purpose, Principles, Processes, People, and Performance (Pryor, White & Toombs, 2007, 1998; Pryor, Anderson, Toombs & Humphreys, 2007). She focused on the organization's Purpose, i.e., "the elements that constitute the strategic intention of the organization" (Pryor, et al., 2007, 1998; Pryor, et al., 2007). Laura's intent was to meet the requirement of the reduction without negatively impacting engineers and production workers as well as the organization's strategic and tactical plans. Laura also wanted to support the organization's Principles, i.e., "the guiding philosophies, assumptions, or attitudes about how the organization should operate and conduct business" (Pryor, et al., 2007, 1998; Pryor, et al., 2007). She suggested a Process, or steps designed to get the desired output. Her plan was to merge areas to reduce the number of vice presidents, directors, and supervisors. By retaining workers and implementing cross training, she was supporting the organization's Purpose, Principles, People and Processes to achieve the desired Performance. Laura seemed to understand the need for a strategic leadership model such as the 5P's Model (Pryor, et al., 2007, 1998; Pryor, et al., 2007) which requires the strategic and tactical use of Purpose, Principles, Processes, People and Performance as well as their alignment with each other.

9. What mistakes did Laura make? Explain your answer.

When the request came for the first reduction in employees, Laura only shared her ideas with Ross. If she had shared her ideas about how to handle the reduction with the entire leadership team, they could have brainstormed together and perhaps developed a better solution. By not doing so, not all of the other members of the leadership team were given an opportunity to impact the future of the plant. However, Laura had served as an internal consultant for Ross, so it is understandable that she would want to offer the suggestion to him first.

10. What other information do you need to better analyze this case?

More information is needed about the strategic and tactical planning model being used by corporate and the plant. If such a model is not being used, this could be a major cause of many of the problems that corporate and the plant are experiencing. Also, to better analyze this case, more specifics are needed about corporate core values and culture. Knowing what corporate executives espouse as core values would be useful in determining the decisions and actions necessary to best align the plant's philosophies with those of corporate. The marketplace conditions, industry specifics, and macroeconomic environment for this organization would have been useful because they would potentially have implications for trends, future growth, plant structure, and needed changes.

Subject: Leadership; Strategic management; Decision making; Layoffs; Case studies

Classification: 6100: Human resource planning; 2310: Planning; 2200: Managerial skills; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 4

Pages: 1-20

Number of pages: 20

Publication year: 2011

Publication date: Oct 2011

Year: 2011

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: Charts Tables References

ProQuest document ID: 888056215

Document URL: http://search.proquest.com/docview/888056215?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Oct 2011

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 47 of 100

Merchant's bank (in organization): a case study

Author: Bexley, James B; Maniam, Bala

ProQuest document link

Abstract:

This case relates to a group of organizers attempting to charter a bank. It takes into account the capital issues, competitive issues, and demographic issues that impact the likelihood that the regulatory authorities will allow the charter of the bank. The case is set in a college town that is one of the fastest growing metropolitan statistical areas of the nation. Even during the current economic downturn, the market has had only nominal downturns. Students are asked to determine if the market can support a new bank, to evaluate the proposed capital, and to determine the type charter to seek. Additionally, they need to type of planning and market effort that should be used to ensure that the community will accept the new bank. They will need to evaluate the age groups to target and the strategies to employ. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Frank Thompson and the business associates he has identified believe that the banking industry as a financial intermediary can be run in a more efficient manner than traditional methods of bank management. This means developing core competencies and focusing on these skills since the financial services industry is becoming increasingly competitive. Banks are branching into non-banking related activities and other financial firms are trying to get into banking. These financial conglomerates will survive and some will even thrive. But somewhere in the middle of this new wave providing quality service has lost its luster for a large number of banks.

Thompson has convinced a group of investor friends that the Amherst market is ripe for a community bank that can give the personalize customer service that is missing from most banks in the Franklin County market. The name Merchant's Bank has been selected to reflect the market that it proposes to serve. Entry into this rapidly growing market has the potential to be an extremely successful, and at the same time, has some possible risks.

Merchant's Bank will be organized by ten leading community members. Each will own pro-rata shares of the bank's capital stock varying as to the amount of contribution. Additional stock will be sold to interested management who have an entrepreneurial spirit, a willingness to work, and a desire to be a part of a business with great potential. The organizational strategy is to align the goals of the owners with the management and employees. Allowing the front line bank officers to own shares in the bank is expected to keep them focused on the task at hand, building a successful and profitable community bank.

PROPOSED GEOGRAPHIC LOCATION

The metropolitan statistical area ("MSA") of Amherst is situated in the center of an area between two of the state's largest cities. Approximately 70% of the state's population is located within a 200-mile radius of Amherst.

The proposed location of Merchant's Bank is adjacent to a newly developed shopping center in Amherst at the intersection of two major thoroughfares. This location is attractive and lends itself to high traffic and excellent commercial access for several reasons. The past 10 years have seen the majority of growth in Amherst focused in the area near the location for the bank. New retail establishments have realized the ease of access offered by the two major highways and the potential to attract customers passing through who would probably not venture into the downtown areas.

This proposed site is very well located within the target market area providing convenient access to members of the community. The target location is in a fast growing business area and near upscale housing developments. Other businesses have apparently taken notice of the growth opportunities in the area. The Physician's Center and Amherst's major hospital is located one mile from the proposed bank site. Also, under construction is a 600 unit apartment complex. This complex is targeted at young professionals. Along with the commercial buildings, the development of a new golf course and upscale residential community is currently underway. Each of these new developments shows the vitality of the proposed site for the bank.

PHYSICAL FACILITIES

Merchant's Bank would lease 6,000 square feet of space in a three-story building located on a major thoroughfare. If the bank is successful in obtaining its charter, it would open in a modular building for six months while the build out is completed in the permanent building. One of the keys to anticipated success will be the ability to operate with minimal overhead. Most of the processing duties and back office work will be out-sourced to a third party. The bank will have a web site but will not initially employ Internet banking capabilities. The bank will employ a low cost/high service brand of banking. Many consumers are no longer constrained by physical banking barriers.

MARKET ANALYSIS

The market area for Franklin Bank has experienced high growth, low unemployment, and an economic vibrancy surpassing state and national averages for the past 10 years. Population figures for the Amherst area indicate a strong growth in baseline population. . State University has an enrollment of almost 45,000 full time students. These numbers have ranged from 41,000-45,000 over the last 4 or 5 years. The current population of the Amherst area has been estimated at about 150,320. This is an annualized increase of 2.38% since 1996. A growth rate of about 1.90% is expected through 2011. (See Exhibits I, II, III, and IV.)

Unemployment rates in Amherst are among the lowest in the nation. the Amherst MSA reported unemployment of 6.2% during August 2010. This ranks 3rd among MSAs nationally and 1st in the state. The national average was 9.8% in August.

Median household income of $24,483 for Amherst is relatively low when compared to other MSAs. This can be largely attributed to the large population of students in the area relative to the total population. Although the entire student population of 44,000 is not factored into this average, a large percentage of the students are. Many of these students work significant hours that would thus be reflected in this median family income number. The large amounts of disposable incomes from the students from various sources such as parents also are not reflected in these numbers. This has a very positive impact on this economy and will be discussed in greater lengths later in the analysis. The state median household income is $32,643 and the national average is $27,203.

The single-family residential development and construction segments are a large part of the Amherst economic market. Low interest rates and favorable market conditions have led to a sustained growth in this industry throughout the area, while nationally there has been a substantial decline in construction. Although the numbers of residential building permits have decreased the absolute dollar values of those permits have remained strong. This amount has increased at an average annual rate of 11.89% since 1995 while the trailing 12 months of August 2010 data show a decrease of 5.09%. Despite the evident slow down in new home construction this year, the overall numbers remain quite strong. the median home price in the market is $111,500, well below the national average of $133,300.

Retail and commercial activity remain a large part of this growing economic market. Total retail sales in this area have averaged 7.24% annual growth since 1990 while the total sales in all industries have averaged a 7.68% annual gain. The trend throughout the 2000s has been less reliance on retail trade as a percentage of total sales in Amherst. This shows an increasing diversification in the local marketplace. The area has also become an economic hub for retail, commercial, healthcare, and financial activities. Residents from the surrounding counties contribute to the vitality of these industries. Approximately one mile south of the proposed location is Oak Mall. Built in the late 1980s the mall is comprised of approximately 100 retail stores.

Much of the local economy is influenced by State University. Along with the current enrollment of around 45,000 students the University is also the area's largest employer with 27,710 employees. As previously mentioned although the large population of college students has an adverse impact on the per capita income in the area they also bring a large amount of disposable income into the local economy. The majority of the college students are supported by aid from parents, loans, or financial aid. Much of this money is spent in various retail establishments and also supports the local real estate market. The direct impact of the students, staff, and faculty is tremendous.

COMPETITIVE ENVIRONMENT

The local competitive environment consists of eight commercial banks and four savings/thrift institutions with a total of 37 branches in Franklin County which are shown in Exhibit I. Other financial institutions such as credit unions and brokerage businesses are also competitive within the market area. Thompson feels that Amherst's Bank's most direct competition will be the three locally chartered community banks due to the similarities in operating styles and performance. The community banks have captured roughly 45-50% of the local market. An analysis of these three banks as of 4/30/10 shows total loans of $600 million and total deposits of $820 million for a combined loan to deposit ratio of approximately 73%. Thompson expects his new bank to reach a loan to deposit ratio of approximately 60 - 75% after the first two years of operation.

Net interest margins for the three banks range from 3.3% to 4.5%. First Bank leads the two competitors in return on assets and return on equity at 1.4% and 18% respectively. Second National appears to be the most conservative bank with risk weighted capital of 18% and loan to deposits of 52%. In addition, net charge-offs have been negative over the last two years, as the bank has collected more than they have charged off during these periods. Overall it appears that First Bank leverages their assets tighter than their competitors and thus earns a better return to overall profit.

The competition in this market is very intense. Not only do banks have to compete with other banks, they must also compete with other non-bank financial intermediaries such as traditional brokerage firms, internet brokerage and banking, insurance companies, and numerous other sources of competition that banks have traditionally not had to consider as competitors. Merchant's Bank cannot compete head to head with each of the institutions that are in this marketplace. The ability to differentiate business strategies and provide customers superior service will have a great impact in a community the size of Amherst.

PLANNED STRATEGIES

Thompson and his associates expect 75% of its business for Merchant's Bank will be from the residents and businesses within the ten mile radius of the proposed location during the first five years of operation. Although the defined market area constitutes a relatively small geographic area, the population and economy are significant. According to the 2010 census over 100,000 people reside within the ten mile area around the proposed location. The organizers and the bank's marketing strategies will ensure the success in securing necessary funding of depository accounts.

The organizers have diverse business interests as lifelong citizens of the community. The individuals will initially contact businesses and individuals seeking to start depository relationships. Each of the ten organizers has set a goal of attracting $1,000,000 in deposits during the first full year of operation. Another source of deposits will be the bank officers that will join the bank from competitors. They will have access to current customers at existing banks if they are inclined to move these relationships and follow the officers to the new bank.. Several successful officers have agreed to join the new bank with the prospect of gaining partial ownership in the new entity. Interest in this type of employee ownership has been very well received. Merchant's Bank's goal will be to allow these officers to spend most of their time soliciting new business within the community and retaining current customers by providing individualized high personal service. This will go along with the plan for outsourcing as many duties as will be economically possible. The bank wants its employees concentrating on what they do best, interacting with customers and helping them fill all of their business and consumer needs. Attempting to hire the best customer service representatives in the community will advance this goal. Regular bonuses and rewards will be given to employees who exhibit exemplary customer service.

BANK SERVICES

The bank will offer a full range of banking services, except for those services associated with a trust department and internet banking. The bank will have an automated teller machine (ATM) on the premises, which will be a part of a major ATM network.

It is anticipated that the management of the bank will conduct surveys, meet with community groups and initiate other investigations to identify specifically which types of credit and deposit services are most needed in the community to be served. Although the emphasis of the bank's marketing program is expected to target the local residential and commercial market, the bank does expect to provide a full range of credit and deposit services, such as the following:

Demand deposits

Time and savings deposits

Certificates of deposit

Installment loans

Commercial loans

Real estate loans

Construction loans

Drive-in services with expanded hours

Bank by mail

Remote capture

Night depository

Cashier checks

Safety deposit boxes

LENDING AND INVESTMENT STRATEGIES

The loan policy drafted by organizers addresses the needs of both the local business and consumer environments. It represents management's general direction as to the scope and allocation of the bank's resources. The policies' main objectives are to provide a functional foundation for sound portfolio management while seeking to invest in assets that are profitable in nature yet provide prudent protection to the shareholders and depositors. The loan portfolio should strive to seek diversity among the types of loans in relation to the total loan portfolio. Initially, the bank will receive assistance from the Bankers Bank who will provide loan participations until the bank is a self-supporting entity. This organization will also allow large loans originations because they will buy or broker loans. After this initial start-up period, most of the future loan portfolio will originate through relationship banking with the customer base by offering a full spectrum of loan products.

The target asset-liability mix proposed by the organizer includes a 60 - 75% loan to deposit ratio, 90% earning asset ratio, and rate sensitive ratio between 0.8 and 1.2.

PROPOSED CAPITAL STRATEGIES

The organizers and proposed shareholders strongly believe that $6 million is more than an adequate amount of capital to support a new bank charter in the Bryan/College Station Market. Thompson and the other organizers met with government regulators recently and were informed that bank regulators have become more concerned about start-up banks being able to support their five year growth and cover possible loan losses. Jon Jackson talked to a banker in a large population market who told him that they were requiring a minimum of $20 million in capital in large metropolitan areas. The organizers had heard that communities their size could "get by" with approximately $6 to $8 million in capital. Now they are not sure if they have adequate capital

FIVE YEAR PLAN

At the end of a five year period, the bank expects to have cumulative net income of $2,031,390, total assets of $76,681,466, total deposits of $68,000,000, total loans of $63,060,000, and total equity capital of $8,181,391. (See Exhibit VI for key ratios and data.)

QUESTIONS TO BE ANSWERED

1. Can the anticipated market area support a new bank?

2. Is the amount of capital proposed by the organizers adequate?

3. What regulatory approval is needed to start up a new bank?

4. What type charter should they pursue?

5. What type of planning and market effort should be used to ensure that the community will accept the new bank?

6. What age groups should the bank seek to target?

7. Discuss the strategies proposed by the bank, and indicate your opinion concerning the likelihood of that they can be successfully implemented.

8. Should the regulatory authorities approve a charter for Merchant's Bank group?

9. What specific strategy does the group of organizers believe will set their bank apart from the competition?

10. When will the bank be profitable from a net income standpoint and also from a cumulative net income standpoint?

11. What three industries should the bank target from a market standpoint?

Subject: Merchant banks; Charters; Impact analysis; Economic crisis; Market shares; Metropolitan statistical areas; Case studies

Classification: 1110: Economic conditions & forecasts; 8100: Financial services industry; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 4

Pages: 1-12

Number of pages: 12

Publication year: 2011

Publication date: Oct 2011

Year: 2011

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: 888056218

Document URL: http://search.proquest.com/docview/888056218?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Oct 2011

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 48 of 100

Entrepreneurship, Competitive Advantages, and the Growth of the Firm: The Case of Taiwan's Radio Control Model Corporation - Thunder Tiger

Author: Chiang, Charlie; Yan, Ho-don

ProQuest document link

Abstract:

The growth of the firm is the fundamental strength for a nation's economic growth. By incorporating the theory of entrepreneurship with strategic management, this paper uses an analytical framework to explain the growth of the firm. While the study of entrepreneurship is about exploiting opportunity and ultimately manifesting into firm creation, and strategic management focuses on how to lead an existing firm to grow by creating competitive advantages, the integration of these two lines of research merits our understanding on topic of the growth of the firm. In a dynamic and ever-changing economy where opportunities and competitive strategies change constantly, entrepreneurship learning is essential for the firm to accumulate dynamic capabilities and to create sustainable competitiveness. We apply this framework to study the growth of a Taiwanese firm manufacturing radio control models, Thunder Tiger Corporation, and its founder Aling Lai. Since every firm is different, this analytical framework helps advance our knowledge of various factors initiating firm creation and the disparate ways for a fledgling business to grow into a global corporation. We also demonstrate how those competitive strategies - such as relentless R&D, taking advantages of vertical integration and horizontal diversification, and global deployment and marketing - enable Thunder Tiger Corporation to maintain sustainable competitive advantages. [PUBLICATION ABSTRACT]

Full text:

1. Introduction

Most studies on economic success are based on a neoclassical economics model and rely on emphasizing the quantitatively proportional input-output ratio and data-aggregated and macroeconomic-focused analysis (World Bank, 1993; Barro, 1998; Bosworth and Collins, 2003). Under neoclassical economics, the functions inside the firm and the firm's action or reaction in the market are treated as a "black box." As Baumol (1968) argued, the neoclassical economics model overlooks the importance of the role of clever ruses, ingenious schemes, and brilliant innovations, of charisma, or of any of the other characteristics for which an outstanding entrepreneurship is made. Indeed, as expounded by Porter (2004), macro-based views of economic activities are necessary, but not sufficient, for creating wealth. Wealth is actually created at the microeconomic level of the economy, rooted in the sophistication of actual companies as well as in the quality of the microeconomic business in which a nation's firms compete.

Whilst entrepreneurship has been deemed as an important factor that contributes to firm creation and economic growth, there is no unified theory about entrepreneurship. As noted by Shane and Venkataraman (2000), the phenomenon of entrepreneurship lacks a conceptual framework, although entrepreneurship has become a broad concept under which a hodgepodge of research is housed. Various perspectives of entrepreneurship have been stipulated, and among them, Langlois (2005) succinctly distinguished that Kirzner (1973) is about discovery, Knight (1921) is about evaluation, and Schumpeter (1934) is about exploitation. In most empirical studies, the manifestation of entrepreneurial activity is demonstrated in the vibrancy of firm creation, which not only benefits economic dynamism, but also merits job creation (Wennekers and Thurik, 1999; Klapper et al., 2007; GEM, 2010).

Although establishing a firm is the first step for entrepreneurs to achieve their goals, sustaining the firm's survival or growth is another challenge. The field of strategic management has contributed towards studying how an existing firm grows by creating its competitive advantages (Porter, 1980).1 Unlike neoclassical economics, the entrepreneurial firm is no longer a place where factors of production are combined only; it is also a place where capabilities are built and modified (Dulbecco and Garrouste, 1999). A firm's competitive advantages depend on its qualitative capabilities, such as knowledge, experience, skills, etc., instead of on its quantitative resources, such as the number of various inputs (Penrose, 1959; Richardson, 1972; Porter, 1980; Nelson and Winter, 1982; Teece, Pisano, and Shuen, 1997).

Taiwan's conspicuous economic performance since WWII has been praised as a "miracle" (World Bank, 1993). Most studies explaining this island's economic success are from the macroeconomic perspective, such as outward orientation, high savings and investment rates, macroeconomic discipline, and other sound public policies (World Bank, 1993; Glick and Moreno, 1997; Kuo, 1999; Mai and Shih, 2001). With 97% of local firms being smalland medium-sized enterprises (SMEs; SMEA, 2008), Taiwan is a society full of entrepreneurial spirit, and there is no dearth of discussion on Taiwan's economic success based on the microeconomic aspect. Many studies are dedicated towards Taiwan's high-tech industries, particularly the electronic industries (Kraemer et al., 1996; Ernst, 1998; Saxenian, 2001; Hsu and Saxenian, 2006). Among them, most are high-profile corporations, which not only obtain overwhelming government support, but also win most of the limelight. In addition, some research studies focus on strategic management to show how a firm creates its competitive advantages (Shih, 1996; 2004), while a few study factors affecting firm formation (Wang, 2005). Among those extant studies, the role of entrepreneurship has been hoisted, yet how it functions to facilitate firm creation is rarely elaborated.

This paper attempts to incorporate two fields of studies-namely, entrepreneurship and strategic management-to offer a complete perspective to explain the growth of the firm, and applies those fields to study one Taiwanese firm manufacturing radio control models, Thunder Tiger Corporation. Three features distinguish this paper from extant case studies on the growth of the firm in general and, in particular, for Taiwan's industries. First, we incorporate different aspects of entrepreneurship to examine how they function, such as discovering opportunity, organizing a firm, and coordinating limited resources. In addition, we study how a firm gains competitive advantage through various competitive strategies. The incorporation of these two fields of studies advances our knowledge on the growth of the firm. Second, due to the uniqueness of each firm, we focus on studying the case of one firm. Although our case study is on a rarely acknowledged industry, radio control (R/C) models, and focuses on one specific firm, Thunder Tiger Corporation, this not only helps demonstrate the specific processes of how an entrepreneur flourishes and how a firm is founded, but also throws light on the importance of the role of entrepreneurship and specific competitive strategies adopted. Third, the case study of Thunder Tiger and its founder Aling Lai demonstrates another growing path of the firm: practicing Original Brand Manufacturing (OBM) in the first place. For latecomer economies to catch up, it is not necessary to go through the usual growth path from Original Equipment Manufacturing (OEM), to Original Design Manufacturing (ODM), and then to OBM, as other successful Taiwanese companies have done, such as Giant, Acer, etc.2

The rest of this paper is arranged as follows. Section 2 explains different perspectives of entrepreneurship and how each functions to facilitate the formation of the firm. Equally emphasized, we stress the importance of strategic management for the firm in order to maintain its competitive advantages. To complete our analytical framework to study the growth of the firm, we then consider that in a dynamic and ever-changing economic environment, entrepreneurial learning is important for accumulating dynamic capabilities. Section 3 introduces the evolution of Thunder Tiger under the helm of Aling Lai and focuses entrepreneurial activities on firm creation and how an entrepreneur accumulates capabilities from learning. Section 4 analyzes competitive strategies that Thunder Tiger has adopted on the pathway of its growth. Section 5 concludes.

2. Entrepreneurship, Competitive Strategies and the Growth of the Firm

The development of the theory of entrepreneurship deals with issues such as identifying opportunity, mobilizing resources, and organizing the institution (Knight, 1921; Kirzner, 1973; Gartner, 1988; Shane and Venkataraman, 2000). In practice, the manifestation of entrepreneurial spirits is in firm creation, but it is one thing to found a firm and quite another to keep the firm growing. Research studies in strategic management have emphasized how to strengthen an existing firm to maintain competitive advantages by accumulating capabilities (Porter, 1990; Teece, Pisano, and Shuen, 1997; Penrose, 1959; Nelson and Winter, 1982). Integrating these two lines of studies-entrepreneurship as opportunity-seeking and strategic management as advantage seeking, as expounded by Ireland. Hitt, and Sirmon (2003)-advances our understanding on the growth of the firm.

2.1 How Entrepreneurship Functions?

While there continues to be a lack of consensus regarding what constitutes entrepreneurship theory and since no generally accepted theory of entrepreneurship has emerged, three perspectives of entrepreneurship are referred to most often: discovering opportunity, coordinating resources, and organizing institutions. On the growth path of a firm, these three perspectives of entrepreneurship are needed and each perspective is interrelated with the others.3

A. Entrepreneurship by Discovering an Opportunity. Kirzner (1979) proposed that entrepreneurship is "alertness to hitherto undiscovered opportunity." While the equilibrium theory championed by neoclassical economics assumes away the existence of entrepreneurial opportunities, an economy under disequilibrium demonstrates that opportunities abound (Shane and Venkataraman, 2000; Eckhardt and Shane, 2003).4 Entrepreneurial opportunities are situations in which new goods, services, raw materials, markets, and organizing methods can be introduced through the formation of new means, ends, or means-ends relationships.

Eckhardt and Shane (2003) explicated that entrepreneurial discovery is the perception of a new means-ends framework to incorporate information, incompletely or partially neglected by prices, that has the potential to be incorporated into prices and thereby can efficiently guide the resource allocation decisions of others. In a dynamic economy, profit opportunities are usually transient and subject to a life cycle (Eckhardt and Shane, 2003). Profitable opportunities become exhausted by competition. New innovations trigger disequilibrium by closing the existing opportunities and opening up new ones (Schumpeter, 1934). It is this creative destruction that pushes a firm to grow and an economy to move forward.

B. Entrepreneurship as Coordinating Resources. Living in a world of uncertainty, an economic problem is a knowledge problem, as Hayek (1945) cogently argued. With dispersed knowledge, coordination is necessary for the function of a market economy. The critical task of entrepreneurs lies in effectively managing uncertainty (Shane, 2003; Sull, 2004). In order to move the disequilibrium toward equilibrium, where the efficient usage of resources can be warranted, genuine discovery and entrepreneurial coordination are indispensible.

Entrepreneurship is important to the functioning of a market economy. The entrepreneur is attracted to a suboptimal equilibrium, seeing embedded in it an opportunity to provide a new solution, product, service, or process (Kirzner, 1979; Martin and Osberg, 2007). Through the entrepreneur who coordinates supply and demand when discovering a profit opportunity, and through his profit-seeking process, an economy can move toward equilibrium, which proves to be a more efficient and effective resource allocation (Kirzner, 1973). Coordination can be either from the macroeconomic point of view or a firm's level (Klein, 1997).5 To reach the efficiency goal, each firm's actions need to dovetail well with others in order to reach market efficiency. At the same time, each firm needs to do its part of the work in coordinating physical capital and human capital within the firm well enough to create wealth and capabilities.

C. Entrepreneurship as Organizing an Institution. The phenomenon of entrepreneurship, as argued by Gartner (1989), is the process by which new organizations are created. Entrepreneurs need to organize institutions to implement their judgments for the principal purposes of profit and growth. As noted by Knight (1921), the presence of uncertainty transforms society into an "enterprise organization." Reducing uncertainty by transforming it into a measurable risk through grouping constitutes a strong incentive to extend the scale of a firm's operation. In a similar vein, Langlois (2007) argued that the firm exists as the solution to a coordination problem in a world of change and uncertainty. Accordingly, firms exist, because entrepreneurs need them to prove the results of implementing judgments and reducing uncertainty.

Depending upon the internal and external environments it may confront, a firm could be organized into various forms to exploit or explore profit opportunities, or to avoid unnecessary transaction costs. These forms of an organization can be either vertical integration or horizontal diversification as the firm grows. For the case of vertical integration, Williamson (1985) argued that it helps preserve the continuity of complex contracting relationships. Transactions accompanied by investment-durable, transaction-specific assets might experience "lock-in" effects. With high asset specificity, vertical integration becomes the choice for the firm. Chandler (1990) noted that horizontal diversification is favorable when the economies of joint production, or scope, have brought about a significant cost advantage, which comes from making a number of products in the same production unit from much of the same raw and semi-finished materials and through the same intermediate processes.

2.2 Competitive Strategies

The field of strategic management focuses on what strategies an existing firm can use to accumulate capabilities, hence to gain competitive advantages (Porter, 1996). The accumulation of capabilities needs resources, which comprise three distinct subgroups: tangible assets, intangible assets, and capabilities.6 It is the specific resources or costly-to-copy inputs in the operations of production and distribution that a firm has or seeks to have which enable the firm to grow in a competitive market (Barney, 1991; Conner, 1991; Peteraf, 1993; Alvarez and Busentiz, 2001). In the following, we show two contrasting pairs of strategies that help maintain competitive advantages of the firm on the pathway of growth.

A. Imitation vs. Innovation. The strategy taken by a firm in practice can be as a market leader or as a second mover. For the former, the firm relies more on innovation, while the latter mostly resorts to imitation. Although innovation is the engine for the growth of the firm, with relative lower capabilities, this is not a competitive strategy for firms in developing countries, particularly at their early stage of development. A significant competitive advantage can be gained by employing imitation techniques. Rather than seeking new product innovation, which requires costly research development, innovation, marketing, and branding capabilities, accompanied by a higher risk of product failure, imitation helps benefit from the experience of pioneers (Bolton, 1993; Kim and Nelson, 2000). The best manifestation of an imitation strategy is the OEM, which has been employed by many latecomer economies to take advantage of backwardness, as stipulated by Lin (2004). By contrast, the other business model is OBM, which pays more attention on servicing each individual customer and is able to lead the trend of the market. OBM firms need to devote more energy on exploratory activities and must intend to innovate and invent new "combinations" of products, materials, technology, or organization. Therefore, it is imperative to invest more on R&D. In order to keep a leading position, how to manage global marketing strategies is also essential for OBM firms (Kapferer, 2004).

B. Vertical Integration vs. Horizontal Diversification. The formation of vertical integration can be ascribed to transaction cost.7 Klein, Crawford, Alchian (1978) and Williamson (1979) argued that anticipated opportunistic behavior stemming from asset specificity (assets in place cannot be reassigned to other uses), low transaction frequency, and uncertainty associated with the transactions in question leads to inefficiency. If these inefficiencies are too costly, then it may result in the integration of vertically related firms into a single company (Milgrom and Roberts, 1988). Put differently, the transaction costs in the dealings between suppliers and customers can induce vertical integration. Williamson (1985) specifically presented that to avoid the hold-up problem and to improve production and management efficiency, the organization of vertical integration will be created. Except for vertical integration, diversifying production can be beneficial for the growth of the firm as well. As noted by Chandler (1990), the economies of joint production, or scope, bring about a significant cost advantage, which comes from making a number of products in the same production unit from much of the same raw and semi-finished materials and through the same intermediate processes. The increase in the number of products made simultaneously in the same factory reduces the unit costs of each brand product.

2.3 Entrepreneurship Learning, Dynamic Capabilities, and the Growth of the Firm

Incorporating entrepreneurship with strategic management provides a complete perspective to explain how a new venture is created and how to ensure the firm grows by gaining competitive advantages. However, in a dynamic and ever-changing economy, information and knowledge change quickly. Profitable opportunities, efficient resource coordination, and effective organizational structures alter as the competing environment changes. As a result, learning is important and it is learning that leads to the production of knowledge, which is imperative for the firm to quickly adapt into a new environment and to assure sustainable competitive advantages. Ultimately, entrepreneurship, as contended by Minniti and Bygrave (2001), is a learning process.

Learning is a process involving repetition and experimentation that increases the entrepreneur's confidence in certain actions and improves the content of his stock of knowledge (Minniti and Bygrave, 2001). In other words, it is learning, not knowledge itself, which is essential (Dixon, 1994; Smilor, 1997). Under the general circumstance, critical events, whether a positive or negative experience (such as notable successes and failures), can stimulate entrepreneurial learning (Cope, 2005). Through learning and the accumulation of a firm's capabilities, as the firm grows, the competitive strategies will change as well. As emphasized by Teece, Pisano, and Shuen (1997), the strategic management of a firm is to achieve dynamic capability, which is defined as the firm needing to have the ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments.

Figure 1 shows the relationship of the analytical framework used in this paper, which incorporates various perspectives of entrepreneurship and competitive strategies, to explain the growth of the firm. In a dynamic economy, knowledge is ephemeral and it constantly needs to be revised and updated. The dynamic capabilities can be warranted with entrepreneurial learning, which produces knowledge through interaction on various entrepreneurial activities and competitive advantages adopted. In the following, our case study applies this analytical framework on the growth path of Thunder Tiger Corporation.

3. The Evolution of Thunder Tiger Corporation and the Radio Control Model Industry

The growth of Thunder Tiger is closely linked to its founder, Aling Lai. With a mere elementary school background, Aling Lai established a little shop in 1974 with only NT$20,000 (US$500, at an exchange rate of NT$40 per US$) to fulfill his dream as a model-airplane hobbyist. From his efforts of more than 30 years, Thunder Tiger has since become the third biggest firm producing radio control models in the world (see Table 1). The Thunder Tiger brand has been marketed in more than 40 countries in the world to over one million hobbyists.

Thunder Tiger Corporation was officially established in 1979.8 Aling Lai with his elder brother and sister raised about NT$3.8 million (US$95,000) in funds to establish the firm and located it in Taichung Industry Park. The main products include airplanes, cars, boats, helicopters, specialized engines, and parts. In 1997, Thunder Tiger Corporation went public with paid-in capital of NT$775 million (US$23.5 million at an exchange rate of NT$33 per US$). In 2005, the firm began trading over-the-counter and was permitted to open market transactions in 2007. It is the only radio control model firm whose stock has gone public in the world to date.9

3.1 Radio Control Model Industry

The manufacturing of radio control models is classified as a leisure industry, which is the segment of the economy covering mainly entertainment, recreation, and tourism-related products and services. The very inception of a radio control model was in 1893, when Nicola Tesla demonstrated a small boat that obeyed commands controlled by Tesla, interpreting the verbal requests and sending appropriate frequencies to tuned circuits in the boat at Madison Square Garden. Archibald Low was the first person to use radio control successfully on an aircraft in 1917. Being able to apply radio control technology on a bomb to target the enemies' ships during World War II enhanced its development. The invention of the integrated circuit in the 1970s made electronics products small, light, and cheap. In the 1990s, miniaturized equipment became widely available, allowing for radio control of the smallest models, and by the 2000s, radio control was commonplace even for the control of inexpensive toys.10

Except for the benefits from advancing into the electronic age, a plethora of new materials has changed the face of the radio control model industry. Particularly, the introduction of the plastic model kit (an outgrowth of WWII) had far-flung effects on the hobby and the industry (Butsch, 1984). Plastics, easily shaped and molded, could be made into hundreds of other things. Both radio control and plastic are easily applied to various models like cars, boats, airplanes, helicopters, submarines, etc. Manufacturers usually make a series of models to win consumers and gain market share, and the hobbyists are fond of making their choice from numerous different models. Hence, the life cycle of radio control models is usually short. For a firm to remain in the competitive market, R&D is imperative.

The global market, as shown in Table 1, is mainly occupied by Japanese firms. Seven Japanese companies are in the global top 10. Kyosho was number one with total sales of US$96 million (5.35% market share) in 2005, while Thunder Tiger Corporation was in third place, with a market share of 2.62%.11 Associated (Ae) Inc. is the largest producer in the U.S. although it is 7th place in the world.12 Table 1 shows that none of the top three radio control model companies has a market share of over 6%, indicating that radio control models encompass a very competitive market full of many small firms with various brands. Table 2 shows the demand side of the market for radio control models. America's hobbyists have 35% of the global market, second goes to Asia at 27%, and Europe at 22%.

3.2 Aling Lai and Thunder Tiger Corporation

According to the Taiwan Toy Manufacturers Association, Taiwan has 59 R/C model corporations and Thunder Tiger Corporation is Taiwan's biggest radio control model producer with various product items. Except for parts and accessories (including engines) occupying almost half of total sales, Table 3 shows that radio control cars are its main item of total sales, followed by helicopters, airplanes, and boats. Thunder Tiger Corporation is mainly export-oriented, with a mere 3% of its products sold in Taiwan's market. As Table 4 shows, up to 2005, disparate from global market distribution, the major market of Thunder Tiger Corporation is in Europe, with a market share of 62%, followed by 27% in America. As the business expanded, in 1997, Aling Lai bought out Ace R/C, Inc. and initiated his first step to implement global deployment. In 2004, after purchasing German Triox Company, Thunder Tiger Europe (TTE) was born. The acquisition of Associated Electronic (Ae), Inc. in 2005 allowed Thunder Tiger Corporation to consolidate its Northern America position.

A. Burgeoning of an Airplane Aficionado. Aling Lai was born in 1952 when Taiwan was recovering from colonial Japanese occupation after WWII. With his parents and their other 11 children, he lived nearby Ching-Chuan-Kang (CCK) air force base, which the United States Air Force (USAF) used as a support installation during the Cold War. One of his happier activities during childhood was to watch the airplanes flying through the sky and to hear their thundering noise. Although unable to pilot an airplane, his fondness for them could not be easily restrained. He bought model airplanes and with them he recreated himself by taking them apart, testing, fumbling, and re-assembling-so-called "reverse engineering." When walking into the office of Aling Lai, it is hard not to notice a big picture hanging on the wall. The man in the picture is Brother Lemio, who enlightened Aling Lai to appreciate the fun of radio control airplanes. Lemio, then at Taichung Viator High School (established by the Catholic Church in 1955), led Aling Lai into the world of model airplanes. Aling Lai recalled "there were few people playing with model airplanes at that time. Lemio constantly brought in new information which helped me a lot." Aling Lai's enthusiasm with model airplanes rendered him frequently to attend model airplane races and he won many prizes. The seed for establishing Thunder Tiger Corporation was sown.

B. Transferring a Hobby into a Business. Turning a hobby into a business can be a great idea since one of the most important characteristics an entrepreneur can have and the one that most often results in its success is passion. However, as most successful firms show, it takes many ingredients to organize a firm and to mobilize resources to exploit profit, and the growth of the firm counts on more than just hobby. In 1974, no sooner was Aling Lai discharged from Taiwan's three-year compulsory military service that he organized an aircraft-aficionado club and hosted members' activities. This club proved to be his first encounter with Taiwan's radio control toy market. Noticing that the club members paid expensive prices to buy imported model parts, Aling Lai was alerted to the profit opportunity of serving these members. A model shop (named Thunder Tiger Science Model Shop) was launched with a loan of NT$20,000 (US$500) from his elder sisters. Aling Lai started his store on Daiyai Road in Taichung City, considering that American soldiers who were stationed in Ching-Chuan-Kang (CCK) air force base would stop by frequently. Aling Lai was aware that these customers would be his potential clients, and with Taiwan's statecontrolled environment under martial law, those model airplane hobbyists of American soldiers were also valuable sources for new technologies and market information.

At that time, Taiwan's per capita income was about US$1,000, and with a 150% tariff, the price of a model helicopter was equal to the average annual income of one family. Aling Lai immediately learned that selling luxurious goods in the small town was almost impossible. However, he noticed that the model airplane fellows oftentimes complained about the high prices of imported parts. Aling Lai began to inspect and study those model airplane parts and found that those parts were not hard to produce in Taiwan. He asked factories nearby to produce some simple parts to sell. To maintain a low cost to start up, Aling Lai managed his store as a one-man shop, engaging as a store clerk at day and fabricating the parts at night. Aling Lai successfully reproduced model airplanes at a lower cost. Gradually, the production lines expanded to include radio control airplanes, cars, ships, etc. Before 1979, the year Thunder Tiger Corporation was founded officially, Aling Lai had experienced how to locate a shop, collect information, establish a network, and organize a firm to produce.

C. Branding Thunder Tiger. Distinct from the growth path of other Taiwanese enterprises, which started from practicing OEM and then moved toward practicing ODM, or OBM, after accumulating enough experience and technology, Aling Lai was aware of the impor tance of branding for the radio control industry. He was quite confident about his innovation ability, and although practicing ODM was all fine, from the first day of Thunder Tiger Corporation being founded, OBM was always his main goal. A critical event occurred in 1993 and Aling Lai learned an expensive lesson, which urged him to exclusively produce his own brand.

One of his foreign buyers delegated Thunder Tiger Corporation to design a model, but took the model to other Taiwanese producers to fabricate at reduced prices. After losing NT$7 million (US$265,000 at an exchange rate of NT$26.4 per US$), Aling Lai decided to stop subcontracting and concentrated on producing an own brand. This strategy was vindicated, as Thunder Tiger Corporation's business began to grow exponentially, while his competitors, which continued doing OEM, were driven out of the market as competition from China's open policy started to gain momentum. With incessant efforts on innovation, Thunder Tiger Corporation won the Taiwan Superior Brand Annual Award in 2004 held by the Taiwan External Trade Development Council.13

4. Sustainable Competitive Advantages and the Growth of Thunder Tiger Corporation

During the 1970s and 1980s, there were surges of OEM practice in Taiwan's various industries. With its low entry barrier and by taking advantage of relatively low labor costs, OEM is an expedient way to integrate into the global production chain, through which firms involved not only gain profits by accessing new technology and managerial skill, but also avoid a large amount of expenditure on R&D and the liabilities of being foreign to global marketing. However, when the profit wears thin after fierce competition, enterprises not upgrading their products or innovating new products will be outcompeted of the market. Since the late 1980s, due to the maturity of the OEM practice in most industries of Taiwan, the movement of branding Taiwan gained the attention of many firms and became one of the government's newest policies (Amsden and Chu, 2003; Chu, 2009).14 Witnessing the changing environment in Taiwan and the global market, Thunder Tiger Corporation adopted various strategies, such as relentless R&D, vertical coordination and horizontal diversification, and penetrating global markets on the pathway to its growth in order to maintain competitive advantages.

4.1 Relentless R&D

Thunder Tiger Corporation started with producing internal combustion engines, and then went on to develop and produce various lines of model cars and airplanes. At the end of the 1980s, Thunder Tiger Corporation launched its Super Combo series, such as Almost Ready to Fly (ARF) and Ready to Fly (RTF), which revolutionized the radio control model industry. The RTF planes come as pre-assembled kits that usually only require wing attachment or other basic assembly. Almost ready-to-fly (or ARF) kits are similar to RTF kits, although they usually require more assembly and, in some cases, basic construction. The popularity of the Super Combo series forced other competitors to follow. ARF and RTF, with their timesaving advantage, attracted the most hobbyists. The Super Combo series were very well received by consumers and replaced KIT cars and airplanes to become the mainstream of the consumer market.

Although Thunder Tiger Corporation is known for manufacturing model airplane engines, most output values come from model racing cars and other spare parts, which occupy almost 80% (as shown in Table 3). While Thunder Tiger benefits from producing these items, it explores new technologies and new products as well. As noted by Nelson (1994), "simply producing a given set of products with a given set of processes will not enable a firm to survive for long. To be successful for any length of time, a firm must innovate." It is through continuous innovations that the firm can maintain its sustainable competitive advantage.

With a short life cycle and hobbyists' desire for a variety of R/C models, Thunder Tiger Corporation is aware of the importance of knowing current market trends and the integration of new technologies. The R&D team at Thunder Tiger Corporation makes up 17% of all employees (120 persons), with the firm investing 6% of annual revenue in R&D. With such an exceptional R&D team, Thunder Tiger Corporation is well equipped to advance its innovation. For instance, for the past six years (2002-2007), 14 of Thunder Tiger products were awarded with "Taiwan Symbol of Excellence," held annually by the Ministry of Economic Affairs in Taiwan to enhance products made in Taiwan and to boost Taiwan's competitiveness and image in international markets. Not only has Thunder Tiger Corporation strenuously delved into innovation, it also integrates intellectual wisdom and international talent efforts into developing a full and complete line of the highest quality products. In order to develop new products, Thunder Tiger Corporation has cooperated with famous design companies in the world, such as with Kazuhiro Mihara for engines, Shigetada Taya for helicopters, and Franco Sabatini for racing cars.15

4.2 Economies of Scope and Vertical Coordination

Being successful in fabricating model airplane engines, the other spare parts (such as fuselages, electronic parts, servos, and even the radio controller, etc.) are now duly fabricated by Thunder Tiger Corporation. As argued by Chandler (1990), cost advantage comes from joint production. Not long afterwards, race cars, trucks, motorcycles, helicopters, vessels, and even submarines made by Thunder Tiger Corporation showed up on the racks of toy shops all over the world. The increase in the number of products made simultaneously in the same factory reduced the unit costs of each brand product.

Aside from exploiting the economies of scale, Thunder Tiger Corporation also took up the advantage of vertical integration (Williamson, 1985). Two reasons pushed Aling Lai to integrate the production lines and distribution channels. First, Aling Lai's business began with a retail shop and then turned into a manufacturer. While distributors and retail shops mostly carry different brands or types of toys, each supplier has no mandate to dictate to retailers how to display or promote various products in the shops. Unsatisfied with distributors that fail to meet his marketing requirement, Aling Lai was eager to set up his own distribution system. Second, Aling Lai found that distributors in America, which had cooperated with Thunder Tiger Corporation for decades, had an anachronous marketing strategy and could not keep up with the growth of Thunder Tiger Corporation.

In 1997, Thunder Tiger Corporation bought out U.S. Ace R/C, Inc., an R/C manufacturer, by paying US$600,000. With its strong customer base, Ace R/C, Inc. was later divided into two parts: one transformed into Ace Hobby Distributors, and the other is the production line Ace R/C, which moved to mainland China. Through Ace R/C, its 50-year old image, 1,700 agents, and customers' information in the U.S., Thunder Tiger Corporation started to possess an extensive sales network in North America. Ace Hobby Distributors, Inc. was then reduced to 1,200 distributors. In order to get close to the mass consumer market and collect market information, the distribution center in Kansas (Missouri) moved and was transferred to the marketing center in California.

4.3 Global Deployment and Marketing

One of the prominent consequences of globalization is that competition accentuates overwhelmingly. Furrer et al. (2004) argued that firms can use product and geographical diversification to build and extend their resource bases, develop organizational capabilities, and create distinctive competencies. Firms can gain a competitive advantage through greater economies of scale and scope, greater product and brand differentiation, the creation of entry barriers, and enhanced market power.

Based on the principle of division of labor and considering the competitive advantages of geographical location, Thunder Tiger Corporation put the managing headquarters in Taiwan in charge of administration and invention, with the production center in mainland China (one factory was built in Yu-Yao of Tse-Chiang Province). This factory was located in the Far East Industry Park, with its function as supporting low-cost and urgent orders. The marketing center is located in Los Angeles, U.S., and is mainly under the control of Thunder Tiger's subsidiary, Ace.

Striving to promote its own brand, Thunder Tiger established its U.S. subsidiary and product service center in May 1994. Ever since the formation of this product service center, in order to promote its brand name, Thunder Tiger Corporation has provided appropriate after-market service with three-year product warranties for customers in North America. This unique marketing strategy demonstrates the reliability of the products of Thunder Tiger Corporation and has won a great response from hobbyists. In 2004, after purchasing German Triox Company, Thunder Tiger Europe (TTE) was born. The European branch was established in Germany to replace the dealer system it used to rely upon. With its own control of the European company, Thunder Tiger Corporation has more room to maneuver in the European market.

An important milestone was in 2005 when Thunder Tiger Corporation acquired the world number one brand of radio control cars, Associated Electrics (Ae), Inc, which had been the most important partner and was the largest ODM customer, with 45% of its radio control models manufactured by Thunder Tiger since 2000. Ae, Inc. owned three worldknown brands-"Team Associated", "Factory Team", and "Reedy"-and was adept at high-skilled model design, R&D, material programming, etc. Combining the three brands created by Thunder Tiger Corporation, "Thunder Tiger", "Ace R/C", and "MRP," these six brands in the world have enabled Thunder Tiger to satisfy different market requirements. Each brand targets different customers. "Thunder Tiger" is the basic brand that carries across different items, "Ace R/C" focuses on remote control, and "MRP" targets regular clients by offering affordable items. For the three brands taken over from Ae, Inc., "Team Associated" produces professional radio control cars, and "Factory Team" and "Reedy" offer higher-end products extended from "Team Associate."

Since 2003, Thunder Tiger Corporation has aligned with the French Lagardère Group, a conglomerate famous for its media business. By tying up the model parts as a collection (mini Renault F1 and WRC) with the magazine, it has won enormous recognition. In order to assemble a collection of radio control car models, such as Renault F1 or WRC (World Rally Championship), each partner needs to buy from 50 to 100 issues. This selling strategy not only reduces the one-time purchase cost for the buyers, but also extends the selling distribution from retail stores to newspaper vendors and to the regular hobbyist. For instance, in 2003 Thunder Tiger Corporation sold the collection (parts package) of Ducati Motorbike, SSR Car, and SSK 1/10 Truck to Lagardère Group, a French conglomerate led by Arnaud Lagardère and operating in more than 40 countries, and its businesses include books, presses, logistics, audio, high-technology, etc. Due to the low unit price and wide distribution points, the total sales reached NT$281.04 million (US$8.4 million). Taking advantage of the network from the Lagardère Group, Thunder Tiger Corporation is able to sell its products to Salvat (for Spanish-speaking hobbyists), Hachette Fascicoli (for Italianspeaking hobbyists), and Hachette Parworks (for English-speaking hobbyist).

5. Concluding Remarks

Entrepreneurship has been praised as the engine for firm creation and economic growth. Although various perspectives of entrepreneurship have been discussed, such as opportunity discovery, resource mobilization, and firm organization, the ultimate manifestation of entrepreneurial spirit is new venture creations. To found a firm is one thing, but it is rather different to lead a firm to grow. The research field in strategic management contributes to how an existing firm grows by creating its competitive advantages. In this paper we establish an analytical framework to study the creation of a firm and its pathway for growth by incorporating the theory of entrepreneurship with strategic management, in which the former focuses on opportunity seeking and the latter on advantage seeking. Considering that in a dynamic and ever-changing economy, information and knowledge change quickly, learning is therefore important; it is learning that leads to the production of knowledge, which makes it imperative for the firm to quickly adapt into a new environment and to assure itself of sustainable competitive advantages. Within this framework, these two fields of research are connected with entrepreneurial learning for creating dynamic capabilities to gain sustainable competitive advantages and to lead the firm to grow.

We applied this framework to a Taiwanese firm manufacturing radio control models, Thunder Tiger Corporation, and demonstrated the evolution of entrepreneurial activity, such as how an entrepreneur burgeons, how a firm is founded, and how it maintains its competitive advantages. Since every firm is different, we believe that a case study on one corporation by demonstrating its entrepreneurial initiation and strategies adopted on its pathway of growth offers a complete perspective to explain the growth of the firm. Thunder Tiger Corporation, with Aling Lai as the founder of the firm and still current CEO, is particularly useful for this case study. The story of Aling Lai helps shed light on how an entrepreneur firm develops from a fledging business start-up to a global enterprise through various competitive strategies on its pathway of growth.

Three features are worth remarking from this particular case study. First, except for casting the important role of entrepreneurship and how it functions to facilitate a firm's competitiveness, we additionally have proposed two strategies that a firm might take on its pathway of growth: imitation or innovation, and vertical integration or horizontal diversification. In a dynamic economy in which each firm constantly faces competition, we emphasize that it is through learning to adapt to changing markets that an entrepreneurial firm can maintain its continuous competitive advantages and create perpetual wealth. Second, a case study on the rarely acknowledged industry of radio control models, and specifically Thunder Tiger Corporation, not only helps demonstrate the process of how an entrepreneur burgeons and how a firm is founded, but also throws light on the importance of the role of entrepreneurship, which can be identified in various industries that are not selected cases of the champion industries, such as the well-touted high-tech industries. Third, for latecomer economies to catch up, the presupposed trajectory usually goes from initial periods of imitation or routinized production, such as the practice of OEM, to then accumulating sufficient capabilities so that the firm can move into the territory of R&D-based enterprises, namely OBM. The case of Thunder Tiger Corporation and its founder Aling Lai demonstrates that there is not just one path for climbing up the growth ladder. Due to the characteristics of leisure industry products, which are subject to a short life cycle and emphasize a variety to express personal differences, Aling Lai established his own brand when he founded Thunder Tiger Corporation. With the growing challenge from ongoing globalization, Thunder Tiger Corporation has galvanized its continuous competitive advantage through practicing relentless R&D, taking advantage of economies of scope and vertical coordination, and implementing global deployment and marketing.

Subject: Competitive advantage; Strategic management; Entrepreneurship; Radio broadcasting; Statistical analysis; Radio control cars; Model airplanes; Business growth; Corporate profiles; Corporate histories; Case studies

Location: Taiwan

Company / organization: Name: Thunder Tiger; NAICS: 339932

Classification: 8650: Electrical & electronics industries; 9130: Experiment/theoretical treatment; 2310: Planning; 9520: Small business; 9179: Asia & the Pacific

Publication title: Journal of Small Business and Entrepreneurship

Volume: 24

Issue: 4

Pages: 513-530,603-604

Number of pages: 20

Publication year: 2011

Publication date: 2011

Year: 2011

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: Feature, Business Case

Document feature: Tables References Charts

ProQuest document ID: 923419782

Document URL: http://search.proquest.com/docview/923419782?accountid=38610

Copyright: Copyright Journal of Small Business and Entrepreneurship 2011

Last updated: 2013-10-01

Database: ABI/INFORM Complete

Document 49 of 100

Credit Rationing in the Bank Credit Market: The Case of Tunisian SMEs

Author: Fhima, Fredj; Bouabidi, Mohamed

ProQuest document link

Abstract:

This study examines whether or not there is a credit rationing for Tunisian small- and medium-sized enterprises in the bank credit market. We propose a novel and more explicit measure of the credit rationing level. On the basis of a new panel data set of Tunisian SMEs, the results of the estimation show that the problem of credit rationing is present in the Tunisian bank credit market. The most exposed to this problem are the smaller firms, which are generally more informationally opaque and are lacking guarantees. The public status of Tunisian banks has not helped to solve this problem. [PUBLICATION ABSTRACT]

Full text:

1. Introduction

Small- and medium-sized enterprises (SMEs) make up the backbone of Tunisian enterprises, i.e., more than 90% (Fhima, Adair, and Ammous, 2009)1. Their role in the economic development and in the emerging private sector is substantial (Adair and Fhima, 2009). In order to ensure their continuity and realize growth, SMEs need to get the necessary financial resources. Both in the developing and developed world, SMEs have been found to have less access to external financing and to be more constrained in their operation and, subsequently, their growth (Berger and Udell, 1998; Galindo and Schiantarelli, 2003)2. When external financing is needed, Tunisian SMEs have to rely mainly on bank financing since collecting money on the public capital market is not an option (Fhima, Adair, and Ammous, 2009). This dependence on bank credit could have negative consequences for these enterprises, if they cannot-or can no longer-get the necessary credit needed to keep their firm going or to invest in new projects in order to grow and survive.

The availability of external financing for SMEs is a topic of significant research interest to academics and an important issue to policymakers around the globe (Berger and Udell, 2006: 2). This study is an attempt to contribute to the understanding of the question of bank financing for Tunisian SMEs by empirically investigating the existence and origins of SMEs credit rationing in the Tunisian bank credit market as well as the main means likely to mitigate it. Via a rationing quantitative measure of credit rationing, we start with the OLS technique to test the possible existence of this problem; then, in order to know more explicitly the rationing level, we advance another measure that takes three values (levels) and we use a qualitative model. The estimations are based on 2557 observations over the years 2005-2006.

Results show that the problem of credit rationing exists for SMEs in the Tunisian bank credit market. The decision to ration credit is in particular affected by the firm size and the lack of collateral. Additionally, results show that the smallest firms-the more informationally opaque and lacking sufficient guarantees-are more exposed to the rationing problem, especially for medium- and long-term debts.

Compared to the study of Bouabidi and Rajhi (2008), this study presents two improvements: first, it introduces a new database, larger and more representative, that provides more complete statistics on the credit rationing for SMEs in the Tunisian bank credit market. Second, the new qualitative model formulated gives a more explicit measure of the credit rationing level and constitutes a clear improvement over prior research in this area.

The remaining part of the paper is organized as follows. Section 2 provides a brief overview of the credit rationing theory and the SMEs' exposure to this problem. Section 3 formulates the credit rationing model and the measure of variables. Section 4 reports and interprets the estimation results. Finally, section 5 concludes the paper and outlines some possible future research paths.

2. Theoretical Backgrounds

2.1. Credit Rationing: General Considerations

Non-price credit rationing has received considerable attention in the literature. Several ground-breaking papers on the subject include Hodgman (1960), Miller (1962), Freimer and Gordon (1965), Jaffee and Modigliani (1969), Smith (1972), and Azzi and Cox (1976). These works, in spite of their importance in the development of credit rationing theory, do not take into account the complicated lender/borrower relationship, in particular the recurrent problem of incomplete or/and asymmetric information. In the majority of cases, the firm knows the anticipated risk-income of the project better than the bank.

Jaffee and Russell (1976), and Stiglitz and Weiss (1981) were the first to introduce imperfect information (asymmetric and/or incomplete) in the credit decision analysis. They argue that the credit rationing decision occurs when banks, because of credit market imperfect information, are not able ex-ante to perfectly identify their customer's characteristics, and therefore cannot fix correctly the interest rate adjusted to risk. According to Jaffee and Stiglitz (1990), once the anticipated return rate does not increase monotonously with interest rate, credit rationing takes place. Two reasons make the relationship between the interest rate and the lender's anticipated return non-monotonously increasing: a rise in the credit cost can discourage the least risky borrowers because their returns, in case of successful projects, are below those of the risky borrowers, and thus will decrease the average return for the lender (adverse selection). In the same way, an increase in the credit cost can lead to the selection of the most risky projects of an entrepreneur (moral hazard).

An interest rate increase in response to credit demand excess will have two opposing effects on the bank's expected return. The first is a direct effect: a higher interest rate for a given population of borrowers will lead to a higher bank's expected return. The second is an indirect effect: a change in the risk level of the borrowers' population reduces the bank's expected return. A greater proportion of the bank's loans will be invested in risky projects. Beyond a certain level, the indirect negative effect of an increase in the interest rate becomes greater than the direct positive effect. Thus, the bank's expected return becomes quadratic: a rise in the interest rate first increases the expected profit, but a further increase in the interest rate decreases the profit. There is therefore a certain interest rate level r*, from which the increase of this rate does not generate a proportional rise in the lender's return, because no bank will fix an interest rate above r*. The standard argument of (walrassien) market equilibrium does not function anymore.

Moreover, the credit rationing decision can result from ex-post asymmetric information when lenders incur expensive cost due to the verification of the project's output. Expensive verification costs occur because lenders and borrowers do not have the same information concerning the financed projects' risks. Currently, the borrower is the only agent capable of knowing his project incomes without supplementary expenses. In this situation, the firm will have an interest to declare weak incomes in order to make the complete repayment of the debt impossible, even if the real income is important (Williamson, 1986; 1987).

Overall, the more the information asymmetry is high, the more the risk of moral hazard, the risk of adverse selection and the cost of control are important, and thus the more the credit rationing probability is important.

2.2. The Exposure of SMEs to Credit Rationing

Numerous studies have empirically examined the various implications of the theoretical credit rationing model of Stiglitz and Weiss (1981) and tried to validate if some firms (or some classes of firms with similar characteristics) are rationed or not (Cowling and Sugden, 1993; Holtz-Eakin, Joulfaian, and Rosen, 1994; Cieply and Paranque, 1998; Winker, 1999)3. In spite of the difference between the credit rationing definition and the hypotheses to test empirically, results suggest that SMEs often meet some difficulties when getting credit. SMEs are characterized by the core role of an owner-manager, generally deprived of experience and risk taker (Osteryoung, Best, and Nast, 1992; McMahon and Stanger, 1994), a weak productive structure inertia, and therefore a great flexibility (Levy and Powell, 1998; Sak and Taymaz, 2004), and a less effective information system (Ang, 1991; Carey et al., 1993); hence, a difficulty to forecast, and therefore an information asymmetry, and a major difficulty for the enterprise and the financial institution to correctly evaluate the risks. This asymmetry is especially remarkable for family-owned/operated SMEs characterized by a porous border between personal credit and professional credit (Donckels and Aerts, 1993). Therefore, the firm repayment capacity is difficult to estimate.

These specificities can exacerbate agency problems since monitoring and/or searching for (contractual) solutions becomes very expensive. For a financial institution, management of a small loan amount generates rather high administrative costs due to fixed charges, whereas economies of scale related to fixed transaction costs (e.g., information collection, pricing, and loan follow-up) should be positive (Berger and Udell, 2006; Cull et al., 2006). Furthermore, credit institutions impute new and small enterprises as being high risk, besides their specific vulnerability to market fluctuations (Almeida, Campello, and Weisbach, 2002; Gertler and Gilchrist, 1994).

SMEs are not only exposed to credit rationing but are also deprived of a strategic bargaining power that large firms enjoy (Levratto, 1994). Lenders are always in a powerful position when it comes to dealing with small firms. Stiglitz and Weiss (1981) sustain the existence of an inverse relationship between the enterprise size and its rationing level (risk). Jaffee and Russell (1976) explained this situation by the inability that the lender would have to really appreciate the risk related to the small and medium dimension, which would imply credit rationing.

3. Model Specification

3.1. Hypothesis Formulation

In order to identify our hypotheses, we reclassify the main ideas of the conceptual overview into three groups of results: results relative to the rationing causes, results relative to its effects, and results drifting from the proposed means of resolution.

3.1.1. Reasons for the Rationing

Adverse selection: It appears when the bank, because of imperfect information and, therefore, the impossibility to distinguish 'good' borrowers from 'bad' ones, proceeds to an assessment based on an average. Borrowers who accept to pay high interest rates are the riskiest. As the interest rates increase, entrepreneurs with low output projects (and weak risk) leave the market and give way to entrepreneurs with riskier projects (and high output) who accept credit even at higher costs. Therefore, with an increase in the interest rates, the risk of those who borrow increases, the loan's repayment probability decreases, and then the bank's anticipated profit decreases.

Moral hazard: This explains the fact that when two investment projects are characterized by identical profit levels but that their respective degrees of risk differ, often, the adopted project will be the riskiest one when the interest rate increases. True for a rational entrepreneur, this proposition can be extended comfortably to the case of n borrowers that, in their objective of keeping a sufficient profit spread, are ready to incur important risks when banks raise debtor conditions (Stiglitz and Weiss, 1981; Burke and Hanley, 2000).

Ex-post asymmetric information: Besides the two main evoked reasons of rationing, Williamson (1986; 1987) foresees the existence of a third shape relative to the risk of not communicating to the bank the incomes generated by the project financed-partially or totally-by bank credit. The borrowers can be dishonest or incited to be dishonest. In this case, they report to the bank results lower than the real results so as to not respect their commitments. This risk is called ex-post moral hazard. This situation occurs when the non-repayment procures a gain superior to the loss generated by bankruptcy costs-the pecuniary or non-pecuniary penalties (setting in bankruptcy) or by the reputation loss. To palliate this risk, the bank goes about expensive research in order to know the real incomes achieved by the enterprise.

From these different reasons we can say that higher asymmetric information leads to a higher risk of credit rationing. Given their specific characteristics, small enterprises are thought to be more informationally opaque. Our first hypothesis is:

Hypothesis 1: The smaller (The larger) the firm, the harder (the easier) it is to get bank credit.

3.1.2. Rationing Effects

Partial financing of profitable projects: Banks respond only partially to the demands for credit; the borrower receives an amount lower than was asked for. This is, in fact, the rationing in the sense of Jaffee and Russell (1976) and Gale and Hellwig (1985).

Refusal of financing profitable projects: Banks refuse to grant credit to some borrowers that are ex-ante the same to those having gotten the requested credit (Stiglitz and Weiss, 1981).

Given that SMEs are thought to be informationally opaque, and that long-term debts are riskier than short-term debts, and that SMEs are surrounded by a more important information asymmetry4, we hypothesize:

Hypothesis 2: The smaller (the larger) the firm, the harder (the easier) it is to get long- and medium-term credit.

3.1.3. Means of Resolution

Given the negative effects of credit rationing on the reel sector and the economy as a whole, several means are proposed to solve this problem, at least partially.

Guarantee (collateral): According to Stiglitz and Weiss (1981), under the hypothesis of risk-aversion entrepreneurs, and Wette (1983), under the hypothesis of risk-neutral entrepreneurs, collateral is a double-edged weapon. Collateral can reduce the risk and increase the bank income; it is the positive incentive effect (Stiglitz and Weiss, 1981: 404). But, an excessive demand for collateral substitutes the rich individuals (of which a large proportion are more risk takers) to the poorest individuals (the more risk averse), and thus, damages the bank's anticipated income; it is then the negative effect of adverse selection. Stiglitz and Weiss (1981) proved that, overall, the negative effect more than compensates the positive one.

However, several articles have suggested that credit rationing disappears with collateral requirements (Besanko and Thakor, 1987; Bester, 1985). The argument is that the bank could offer a set of self-selecting contracts (Rothschild and Stiglitz, 1971; Bester, 1985) that would fully reveal the risk character of each borrower. Auto-selective contracts incite borrowers to self-select themselves in different groups. Bester (1985) argues that less risky borrowers are ready to pawn more collateral to reduce the interest rate than higher risk borrowers, and that self-selection produces equilibrium without credit rationing.

Hypothesis 3: The larger (the smaller) the initial contribution of the entrepreneur, the stronger (the weaker) the possibility of getting bank credit.

Hypothesis 4: The weaker (the stronger) the guarantee, the stronger (the weaker) is the risk of credit rationing.

Bank-enterprise (B-E) relationship: Ennew and Binks (1995), Haubrich (1989), and Harhoff and Korting (1998), have tested the B-E relationship's effect on the constraints and obstacles to SMEs' financing. They show that essentially a long-term relationship improves the credit availability, reduces the demand for collateral and allows banks to better select customers. Thus, bank can punish the deceivers without punishing the luckless.

Contrary to these results, Greenbaum, Kanatas and Venezia (1989), and Sharpe (1990) show that the B-E relationship allows banks to take advantage of this relationship by increasing the interest rate.

Nevertheless, Petersen and Rajan (1995), and De Bodt, Lobez and Statnik (1999) show that the interest rate is much more a function of the activity sector than of the specific risk. Cole (1998) showed that this effect is limited to the first year. However, Petersen and Rajan (1994; 1995), and Elsas and Krahnen (1998) did not find any relationship between duration and interest rate. These conflicting results lead to the following controversial hypotheses:

Hypothesis 5: The longer (the shorter) the B-E relationship, the higher (the lower) is the cost of financing.

Hypothesis 6: The longer (the shorter) the B-E relationship, the weaker (the stronger) is the demand for guarantee.

There are also other means thought to solve (or at least mitigate) the credit rationing problem, such as the effect of debt repayment priority (Longhofer and Santos, 2000) and the backing of contract terms (Keasy and Watson, 1991). In spite of their importance, we will not insist on these two means because our database makes it impossible to measure their effects.

Besides these private means, public authorities can intervene in order to facilitate SMEs' access to bank credit by several means, such as:

- Favoured credits: According to Latruffe and Fraser (2002), small operators are more sensitive to interest rates. Thus, if intervention aims to support small operators with weak guarantees, the bonus of credits appears the most suitable measure.

- Loan guarantees: According to the same authors, big entrepreneurs are more sensitive to guarantees. Thus, a loan guarantee is more suitable to big operators.

Our following hypothesis:

Hypothesis 7: The more (the less) the public banks are important; the more (the less) the rationing is weak. The stronger (the weaker) the control of public banks, the weaker (the stronger) is the rationing.

- Concession of direct subsidies: Ghatak and Nien-Huei (2002) have studied the problem of rationing by taking into account the interaction between labor and capital markets and the demand variation according to salary; they recommend that, instead of helping the poor through a critical wealth level (i.e., to sustain them to reach this level) to become entrepreneurs, the governmental policies must have as an objective the change of the critical wealth level to be eligible to access credit.

- Creation of specific financing establishments: This intervention can be possible by stimulating supply via the creation of specific financing establishments (such as leasing, credit guarantee scheme, etc.) that aim to help solve the problem of SMEs' access to the bank credit market.

3.2. Measuring Variables

3.2.1. Endogenous Variable

According to Fazzari, Hubbard and Petersen (1998), a rationed enterprise is characterized by a weak profit distribution, or a high retention rate. De Bodt, Lobez, and Statnik (1999), a rationed firm is the one that has a significant amount of fiscal and social debts in its liabilities.

As Fazzari, Hubbard and Petersen (1998), we choose the retention rate (expressed in the variable RETENTIONRATE) to estimate the rationing level.

3.2.2. Explanatory Variables

Firm size (expressed by the variable FIRMSIZE) can be approximated by different measures, of which the most commonly used are: 'number of employees', 'total assets', and 'turnover' (Bouabidi and Rajhi, 2008). According to our available information, and in order to reduce the risk of correlation between the explanatory variables, we estimate the variable FIRMSIZE using the logarithm of turnover.

Equity finance: Expressed in the variable EQUITYFINANCE, is an indicator, at least for some theoretical contributions, of the good quality of the enterprise5. The EQUITYFINANCE variable is defined as: Equity/(Equity + Liabilities).

Minimal wealth level: Expressed in the variable MINWEALTHLEVEL, can be defined by the entrepreneur's contribution, represented by the capital or the operator's account. MINWEALTHLEVE variable = Capital/(Equity + Liabilities).

Firm quality: Expressed in the variable FIRMQUALITY, is equal to 1 if the firm's profitability is lower than 5%; 2 if the firm's profitability is between 5% and 15%; and 3 if the firm's profitability is higher than 15%.

Intangible assets: Expressed in the variable INTANGIBLEASSETS, are defined as: intangible non-current assets/non-current assets value.

Financial cost: Expressed in the variable FINANCIALCOST, is defined as: financial expenses/total of the debt.

Debt maturity: The best measure of debt maturity is its duration, but we have neither the exact maturity of each debt nor its corresponding interest rate. For this reason, we use directly the ratio of long- and medium-term debts on total debts, expressed in the variable DEBTMATURITY. Its values are between 0 and 1. A value that tends towards 0 means the firm is financed by short-term debt, while a value approaching 1 means the firm is financed by long-term debt.

Guarantee: Our available information makes it impossible to know if the bank requires some guarantees or not. However, we can consider the existence of a positive relationship between bank credit and tangible assets as an indication of this requirement. Guarantee (expressed in the variable GUARANTEE) can be therefore measured as: non-current tangible and financial assets/total assets.

3.2.3. Checking for Multicollinearity between Explanatory Variables

In order to avoid the multicollinearity problem between explanatory variables and its effect on the regression results, namely coefficient instability and the inflation of their standard errors, we calculate first the correlation matrix using Eviews (Table 1). Referring to Table 1, there is no strong correlation between explanatory variables, nevertheless there are two notable coefficients that merit more investigation: DEBTMATURITY-GUARANTEE (0.483777) and DEBTMATURITY-FINANCIALCOST (-0.354479), but this correlation cannot be tested with Eviews. In order to dissipate suspicions, we calculate the variance inflation factor (VIF) using STATA (Table 2). As a rule, a variable with a VIF greater than 10, or the inverse of its VIF (1/VIF) is lower than 0.1, needs further investigation. Table 2 shows that all explanatory variables VIF's are lower than 10 (lower than 2 in fact; according to Table 1 and Table 2); there is no multicollinearity problem between explanatory variables.

4. Estimation and Empirical Results

4.1. Methodology and Data Set Description

4.1.1 Methodology

Our aim is to study the rationing level for Tunisian SMEs as well as the main means likely to mitigate it. Our methodology sums up as follows:

* Via a rationing quantitative measure (RETENTIONRATE), we first used the OLS technique to test the possible existence of the aforesaid problem. It consists in regressing the (endogenous) variable on the (explanatory) variables, as proxies of the means of resolution of credit rationing and the control variables.

* This measure, in spite of its importance, does not usually reflect the existence of the rationing problem. A high retention rate does not mean inevitably a strong rationing. A high growth enterprise needs bank credit as well as self-financing. At this level, we propose another more explicit measure (RATIONINGLEVEL) in order to better quantify the rationing level. This variable takes on the value 2 if the enterprise does not have any debt in its liability, a greatly rationed enterprise. It takes on the value 1 if the enterprise has only short-term debt, an averagely (or partially) rationed enterprise. Finally, if the enterprise possesses debts of different maturities, the variable takes on the value 0-the enterprise is not rationed.

We use the OLS technique for the rationing quantitative measure (RETENTIONRATE), and the multinomial probit model for the qualitative measure (RATIONINGLEVEL).

4.1.2. Data Set Description

Tunisian SME Definition

In Tunisia, there is no unique official definition for small- and medium-sized enterprises, and there are no clear criteria that allow us to classify each firm category. For example, according to the FONAPRAM6, small enterprises are those with a total investment cost (working funds included) of less than 50000 TND. The FOPRODI7 defines small- and medium-sized enterprises as those having a total investment of less than 3 million TND. According to the CMF8, an SME is an enterprise that has a total of fixed assets less than TND and a staff number of less than 300.

Nevertheless, a consensus in the academic area seems to exist saying that all enterprises that employ between 10 and 100 employees are SMEs. Enterprises that employ less than 10 employees are considered micro-enterprises that can belong to the formal or the informal sector; it depends on institutional framework stability, more or less controlled, and is not strictly limited in the absence of a strict border between the two sectors.

Tunisian SME Population

According to Table 3, the main characteristics of Tunisian firms are:

* 99% of them are small, and 75% are individual firms. There are less than 50 listed firms, half of them are banks and insurance companies. This reflects the important role of bank financing and the intensive demand for bank credit;

* 80% are less than 14 years old, and 1% are more than 30 years old. This means that the majority of Tunisian SMEs are young;

* 11% are joint stock firms and mixed firms (limited responsibility firms), and 88% have natural person status. Natural person status and partnerships are the most frequent legal forms, which means that the responsibility of entrepreneurs is unlimited and they are more exposed to default risk;

* 45.3% belongs to the commercial sector and 13.5% belong to the industrial sector. Almost half of the firms are commercial, and given that 99% of firms are small, the majority of them are small retailers and corner grocers that have little chance to get bank credit.

Description of the Sample

The sample data covers the years 2005 and 2006 where numbers for the firm population differ slightly from the year 2004, but it is unlikely that the structure and repartition will have changed significantly.

The database for our estimation is summarized in Table 4 of the appendix. According to the retained definition and according to the data from the National Institute of Statistics (INS), our sample represents approximately 17% of the SME population in 2005, and 10% in 2006.

For each observation we have financial statements (balance sheet and statement income) and the activity sector. The age, the region, and the entrepreneur's identity were not available. In fact, financial statements of unlisted companies are not public and are considered confidential. So, we used a private database that could not provide qualitative information, such as the entrepreneur's identity, address, age, and legal structure.

4.2. Modeling and Results Analyses

4.2.1. Basic Model and OLS Results

Our basic model is the following:

RETENTIONRATEi = β0 + β1FIRMSIZEi + β2EQUITYFINANCEi + β3MINWEALTHLEVELi + β4FIRMQUALITYi + β5INTANGIBLEASSETSi + β6FINANCIALCOSTi + β7DEBTMATURITYi + β8GUARANTEEi + εi

The regression results of this model using the OLS technique are summarized in Table 5 of the appendix. Results show that the model is significant overall; Fisher statistic = 16.06081 (Prob (F-statistic) = 0.0000). There is a relationship between the retention rate, RETENTIONRATE, which measures the rationing degree, and the means of resolution and the control variables. Three of the (eight) explanatory variables have statistically nonzero coefficients for α = 1% (EQUITYFINANCE (-0.242425 and Prob. = 0.000), FIRMQUALITY (-0.139104 and Prob. = 0.000), and FIRMSIZE (-0.076415 and Prob. = 0.000)). One of them is significant for α = 10% (MINWEALTHLEVEL (0.140492 and Prob. = 0.0523)). Also, R-squared is weak (12.18%).

EQUITYFINANCE has a nonzero coefficient and is negative. This means that the lower the level of the equity fund, the higher is the retention rate. Therefore, the weaker the level of the equity fund, the stronger is the risk of rationing. This can have several explanations:

* While referring to the pecking order theory (Myers and Majluf, 1984; Schnabel, 1992), a weak equity funds level is a signal of a bad quality enterprise and of an entrepreneur that refuses to be strongly involved in his business. Therefore, banks (looking for good quality borrowers) refuse to grant credit, and the enterprise will be rationed.

* A weak equity funds level means also that because of a lack of wealth or/and moral hazard risk, the entrepreneur's initial contribution is weak and does not reach the minimal level above which the enterprise becomes bankable (Repullo and Suarez, 1999).

FIRMSIZE has a nonzero coefficient and is negative; that means that the smaller the firm, the stronger is its exposure to the rationing problem. This result confirms our first and fourth hypothesis (H1 and H4).

FIRMQUALITY has a nonzero coefficient and is negative, i.e., the lower the quality of the firm; the higher the retention rate. This can be explained by the fact that the onedimensional measure of the quality (profitability level) used in this paper is also adopted by the banking institutions that ask for the last three financial statements to make a decision regarding the supply of credit. That does not permit the use of a bidimensional measure, (risk-return measure).

FINANCIALCOST, GUARANTEE, INTANGIBLEASSETS, and MINWEALTHLEVEL are not significant even for α = 10%.

Despite the fact that it is overall meaningful (R-squared = 12.18%), our basic model does not permit to test the validity of some key variables such as GUARANTEE. These poor results can be explained by the choice of the rationing measure; a high retention rate does not mean inevitably a high level of rationing. A firm in a strong growth phase needs bank credit as well as self-financing. In addition, the pecking order theory, in its two versions (Myers and Majluf, 1984; Schnabel, 1992), classifies equity funds (reinvested profits) as the main financing sources of the firm. In the same way, for enterprises with a deficit, this measure is equal to zero even though the firm is not indebted.

4.2.2. Multinomial Probit Model and Results

In the basic model, we replace the dependent variable RETENTIONRATE by a qualitative variable, RATIONINGLEVEL, which takes on three possible values. The constant is also deleted because Eviews does not distinguish it from limit points:

RATIONINGLEVELi = β1FIRMSIZEi + β2EQUITYFINANCEi + β3MINWEALTHLEVELi + β4FIRMQUALITYi + β5INTANGIBLEASSETSi + β6FINANCIALCOSTi + β7DEBTMATURITYi + β8GUARANTEEi + εi

Regressions cover the years 2005 and 2006 (see Tables 6, 7 and 8 of the appendix).

LR statistic shows that the model is globally satisfactory for these two years: LR = 665.9433, (Prob. (LR = 0.000000)) for 2005, and 374.1782 (Prob. (LR = 0.000000)) for 2006.

Note that the estimated coefficient values have no importance for the interpretation. We are only interested in the coefficient signs and the z-statistic that replaces the Student test in the models of quantitative variables. Further, interpretation must be in terms of probabilities. For example, the existence of a nonzero positive coefficient means that the variable results in a strong probability of having the highest mode of the endogenous variable (i.e., a higher level of rationing). Table 9 gives results that will serve us for the interpretation.

Except FIRMQUALITY, all others coefficients have the same sign (in 2005 and 2006). Relationships between explanatory variables and endogenous variable remained stable during the two years.

The first limit point is statistically nonzero even for α = 1%. The financial behavior of non-indebted SMEs is different from those of indebted ones. The second limit point, distinguishing enterprises with short-term debt from those with short-, medium- and longterm debts, is significant for α = 5% in 2005 and α = 10% in 2006. It reflects a difference between the two groups. The criteria of granting short-term loans are different from those for granting medium- and long-term debts. Banks accept sometimes to give short-term financing (working financing) and refuse medium- and long-term financing (investment financing). It is a special form of partial rationing-"maturity rationing."

4.2.3. Hypotheses Tests

H1: The size measure, FIRMSIZE, has a statistically nonzero coefficient, even for α = 1%, and is negative. That is, the smaller the firm, the higher is the probability to have the highest mode of the endogenous variable (RATIONINGLEVEL = 2); or the higher is the probability of an enterprise being completely rationed (without any debt). This result confirms the first hypothesis stating that the smaller firms are more rationed because of their higher information asymmetry.

H2: The debt maturity measure, DEBTMATURITY, has a statistically non-significant coefficient in the first model, and is negative. This means that the more rationed firms are less likely to get medium- and long-term financing. Furthermore, the size measure, FIRMSIZE, shows, as we have just said, that the smaller the firm, the higher is the probability of an enterprise being completely rationed (without any debt). Moreover, the second limit point, distinguishing enterprises with short-term debt from those having short-, medium- and long-term debts, is significant for α = 5% in 2005 and α = 10% in 2006, which means that criteria of granting short-term financing differ from those of medium- and long-term financing. All these results confirm the second hypothesis-it is hard for smaller firms to get bank credit, and it is harder to get medium- and long-term credit.

H3: MINWEALTHLEVEL does not have a significant coefficient for α = 5% in 2005. Contrary to what was expected, the coefficient is positive, i.e., the entrepreneur's initial contribution increases the risk of rationing. This anecdotal result can be explained by the bad proxy used to measure this variable in the absence of another better possible measure. Nevertheless, this positive relationship can be explained as a reticence of entrepreneurs, in particular not strongly financially constrained ones, to bank credit because of the abusive financing conditions. Our third hypothesis is not validated.

H4: GUARANTEE has a nonzero coefficient, even for α = 1%, and is negative. Firms lacking tangible assets are more exposed to rationing problems. Even for listed firms, Tunisian banks demand guarantees (especially real estate) to grant credits. Their shortcoming reduces the chance of getting credit, especially medium- and long-term credit. This confirms our fourth hypothesis.

H5: FINANCIALCOST has a statistically nonzero coefficient, even for α = 1%, and is positive. For the completely rationed SMEs, there are no debts and, therefore, there are no financial costs. As for the averagely (or partially) rationed SMEs, they are not only short-term financed, but their financial cost is higher than the one of firms having different credit terms. That is, interest rate is essentially explained by information asymmetry (by the risk). Partially rationed firms, firms getting only short-term credit, have the highest financing costs. This means that, most firms rationed, are not only partially rationed, but also pay higher interest rates when they can get short-term credit. Knowing that asymmetric information is the main cause of credit rationing and that this later can be progressively reduced through the bank-firm relationship, we can say that short bank-firm relationships, with more asymmetric information shared between the two parties, produce high financial costs, and vice versa; this confirms H5.

H6: We do not have a direct measure of bank-firm relationship because of the confidential nature of information; therefore, we could not directly contact firms and get, at the same time, financial statements and personnel information. Nevertheless, the negative relationship between guarantee and the risk of credit rationing does not sustain this hypothesis. The bank-firm relationship is not able to replace guarantees and, even if it has a positive effect, it cannot compensate the positive effect of guarantees. Furthermore, the firm quality, approximated by FIRMQUALITY (and EQUITYFINANCE), does not have a significant positive effect on credit rationing, which means that either the bank-firm relationship is too short and banks still cannot distinguish good firms from the bad ones; or the most profitable SMEs choose deliberately not to ask for credit and to avoid as much as possible the very costly bank credits, especially the short-term ones; or the quality of the firm and the relationship are second best and are not of strong importance. In the two cases, the sixth hypothesis is not confirmed.

H7: The existence of credit rationing problems, confirmed by the quantitative and qualitative measures, proves that the control of public banks in the Tunisian banking system (Fhima, Adair, and Ammous, 2009) does not help solve the SMEs rationing problem. Our seventh hypothesis is then not confirmed.

Conclusions

This paper examined whether or not there is a credit rationing for SMEs in the Tunisian bank credit market. The estimation was based on 2557 observations over the years 2005- 2006 from a new database of small- and medium-sized enterprises. The new adopted measure of the credit rationing level is a clear improvement in the credit rationing research field. It is a qualitative measure taking on the value 2 if the enterprise does not have any debt in its liability, a greatly rationed enterprise; the value 1 if the enterprise has only shortterm debt, an averagely rationed enterprise; and the value 0, if the enterprise possesses debts of different maturities, a non-rationed enterprise.

The majority of the predicted results are confirmed by the empirical estimation. The problem of credit rationing is present in the Tunisian bank credit market. The most exposed to rationing are the smaller firms that are generally more informationally opaque and lacking guarantees. The control of public banks in the Tunisian banking system has not helped to solve (or at least mitigate) this problem.

The role of SMEs in the Tunisian economy is growing continuously: they account for the large share of Tunisian enterprises, and, since the signature of the Euro Mediterranean agreement with the European Union (1995), SMEs have become the emerging private sector (Adair and Fhima, 2009). The presence of credit rationing can thus be of great practical importance when shrinking bank credit supply reduces the financial resources of these enterprises and prevent the execution of positive Net Present Value investment projects. The Tunisian government must find ways to facilitate SMEs access to bank credit by accelerating the adopted program of banking sector reforms, and by encouraging the creation and expansion of specific financial institutions that can help to solve, even for a short while, the problem of SMEs access to bank financing.

Moreover, much more studies, particularly using time-series variation and microeconomic data, are needed to explore in more detail the problem of SMEs credit rationing in the Tunisian bank credit market. In this context, it seems especially relevant to use recently developed techniques for estimating models in disequilibrium to specify and estimate a disequilibrium model of the credit market. The application of this technique makes it possible to identify and compute the proportions of credit-rationed firms and the non-credit-rationed ones, and thus to compare the differences in the investment and financing behavior of the two groups of firms. One can focus on the role of substitutes (mainly the cash flow) in the investment decision of the two groups of firms (Whited, 1992; Bond and Meghir, 1994), and their capital structures, which should be significantly different (Schnabel, 1992).

Subject: Small & medium sized enterprises-SME; Bond markets; Banking industry; Case studies

Location: Tunisia

Classification: 8100: Financial services industry; 9130: Experiment/theoretical treatment; 9520: Small business; 9177: Africa

Publication title: Journal of Small Business and Entrepreneurship

Volume: 24

Issue: 4

Pages: 583-603

Number of pages: 21

Publication year: 2011

Publication date: 2011

Year: 2011

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: Feature, Business Case

Document feature: Equations References

ProQuest document ID: 923419743

Document URL: http://search.proquest.com/docview/923419743?accountid=38610

Copyright: Copyright Journal of Small Business and Entrepreneurship 2011

Last updated: 2013-10-01

Database: ABI/INFORM Complete

Document 50 of 100

Visioning Information Technology at Cirque du Soleil

Author: Croteau, Anne-Marie; Rivard, Suzanne; Talbot, Jean

ProQuest document link

Abstract:

The case describes Information Technology at Cirque du Soleil in 2000, when a new Chief Information Officer was hired. The main challenge of the CIO was to find out how IT could best serve the Cirque. She was convinced that to meet this challenge, she had to develop an IT strategic vision that would be accepted by the top management of Cirque du Soleil, to deploy a highly professional IT group and increase the credibility of IT among the firm's leaders. [PUB ABSTRACT]

Full text:

Danielle Savoie, recently appointed Chief Information Officer (CIO) at Cirque du Soleil, was delighted. She had just met with the firm's Executive Committee to present the very first information technology (IT) strategic plan in the history of Cirque. The plan presented a coherent and organized vision of IT use at Cirque. The Executive Committee had reacted very positively to her recommendations, although the members of the committee were not accustomed to discussing issues as technical as IT. At Cirque du Soleil, IT was deemed a significant but not always necessary cost. Indeed, it was sometimes perceived as a useless expense. Danielle Savoie's main challenge now was to discover how IT could best serve Cirque. She was convinced that in order to meet this challenge, she had to develop an IT strategic vision that would be accepted by Cirque's top management, deploy a highly professional IT group and enhance the credibility of IT among the leaders of the firm.

Before being hired by Cirque du Soleil in April 2000, Danielle Savoie was the Vice-President of Strategic IT projects at Desjardins, a credit union and one of Quebec's largest financial institutions. Obviously, the transition from a financial institution to one of the world's most innovative and creative enterprises represented a major challenge, yet Ms. Savoie also considered it a very interesting one. Her mandate as the first CIO at Cirque du Soleil was clear: she had to find an effective way for IT to support growth at Cirque. She had given herself three months to assess the current IT situation. It was at the end of this three-month period that she presented her strategic plan to Cirque's Executive Committee.

Cirque du Soleil - A Fantastic Journey1

In 1984, a group of street entertainers established in Baie St-Paul, a small municipality located east of Quebec City, convinced the Quebec government to subsidize the development of a show that would be presented as part of the festivities surrounding the 450th anniversary of the arrival of Jacques Cartier in Canada. The show was titled Cirque du Soleil, and the group was founded by Daniel Gauthier and Guy Laliberté. The intention behind the show was to reinvent the concept of the circus. Until then, most circuses were based on the traditional model created by Barnum & Bailey and Ringling Brothers in the 1880s in the American Far West. The type of entertainment offered by these companies had barely evolved over the years, and their shows generally incorporated a variety of acrobatic acts, clowns and animals.

The first show presented by Cirque du Soleil was dramatically different from the traditional circus: it featured no animals, spectacular costumes, a modern original musical score, more sophisticated characters than the traditional clowns, and astonishing lighting. It combined the spectacular side of traditional circus, like acrobats and a big top, with the more dramatic and sophisticated elements of theatre.

Audiences and critics alike were immediately conquered. Success was instantaneous. Cirque du Soleil succeeded in redefining the circus experience for the audience by capturing the imagination of the public. The show was presented in 10 cities in Quebec. In 1984, 73 people worked for Cirque du Soleil. This first show established the foundations and the concept. During the years that followed, Cirque grew very quickly. By 2000, Cirque du Soleil had evolved from its modest beginnings to become a complex organization with operations in several cities and shows on the road around the world. In 2000, Cirque du Soleil had three permanent or resident shows: Mystère, which had been presented at Treasure Island in Las Vegas since 1993, Ô, presented at the Bellagio in Las Vegas since October 1998, and La Nouba, presented at the Walt Disney World Resort since December 1998. At the time, Cirque also had five touring shows, which moved every two months.

The firm inaugurated its international headquarters (IHQ) in Montreal in 1997. The headquarters were also known as "the Studio." It was at the Studio that all the activities related to show creation and production took place, as well as support activities such as casting, training studios, and costume and accessory creation. Support activities such as marketing, logistics and human resource management, as well as information technology, were also centralized in Montreal.

In 2000, Guy Laliberté became the sole owner and Chief Executive Officer of Cirque du Soleil. At this time, Cirque had regional offices in Las Vegas, Orlando, Amsterdam and Singapore, for a worldwide total of close to 2,000 employees. An office in charge of managing the permanent shows in Las Vegas and Orlando was established in Las Vegas. It was responsible for supporting each show by overseeing operations, finance, human resources, marketing and IT. Three regional offices supervised the touring shows; the regional offices had structures similar to that of the Las Vegas office. All shows touring in America were supported by the Montreal regional office, while the shows that were presented in Europe were supported by the Amsterdam regional office and the shows presented in the Asia-Pacific area were supported by the Singapore office.

Mission of Cirque du Soleil - Invoke, Provoke, Evoke

The mission of Cirque du Soleil is to invoke the imagination, provoke the senses and evoke the emotions of people around the world.1 Experts have described Cirque du Soleil's strategy as being the "simultaneous pursuit of both differentiation and low cost."2 By "reinventing the circus," Cirque du Soleil has been able to develop a cost structure that is significantly lower than that of traditional circuses. First, Cirque's shows do not use animals. At the time of the creation of Cirque du Soleil, this was most unusual, and it immediately set Cirque apart as a special class of circus. The decision not to use animals also helped lower Cirque's cost structure compared to traditional circuses. Indeed, circus animals are costly to shelter, transport, feed, and maintain in good health. Second, most traditional circus shows feature three rings where performers present their acts concurrently. This approach not only diverts the attention of spectators, it also raises the cost of a performance. Cirque du Soleil opted for a single ring that would captivate the audience's attention.

Reinventing the circus also involved crossing boundaries and bringing some of the drama, artistry and sophistication of theatre into the circus acts. A Cirque du Soleil show is not a series of unrelated acts, as is often the case with traditional circus shows. Rather, the audience is offered a theatrical performance featuring acrobats, gymnasts and clowns rather than actors. Indeed, as early as 1985, Cirque's shows were created and directed by gifted theatre directors. Among the key conditions that have allowed Cirque du Soleil to sustain its differentiation advantage is its ability to find and nurture key talents, including acrobats, athletes, dancers, singers, musicians, clowns, writers and actors.

Cirque du Soleil - A Unique Business

At Cirque du Soleil, a touring show is a very complex matter. As Danielle Savoie describes it:

When we raise our big top, in some field out in the middle of nowhere, what we're actually building is a village, and it needs electricity, phones, water, offices, Internet and, of course, a computer network. A tour is a little village travelling from city to city; a village that is practically self-sufficient, with its own kitchen, its own workshop for maintenance and repairs, its box office, and its heating and air conditioning system. It's a village of about 150 people, and it needs the very best technology to meet their needs, which range from basic bandwidth requirements to ticket sales, payroll and phone systems. And this is a village that moves every six or seven weeks, which means that it has to be constantly torn down and set up again.

Everything has to be precise and methodical. Every part, hose, wire, piece of rigging and bolt has its place to make everything supremely efficient. So, if you think assembling IKEA furniture is complicated, imagine what it's like setting up and tearing down a big top that seats 2,500. Imagine the logistics when over 55 trailer-loads of equipment have to be hauled from place to place, and at each site, everything has to be in working order within 30 hours, not to mention the technical documentation that's needed to support this whole logistics effort, because we're not talking about moving into vacant office space, we're talking about empty land or parking lots."

At Cirque du Soleil, casting is a key process. Indeed, the quality of the shows relies heavily on the availability of excellent artists, acrobats, jugglers, athletes, singers, etc. As Danielle Savoie describes it:

Casting's talent scouts are always on the move, travelling to the ends of the earth. The Casting director [who was there when Danielle Savoie arrived at Cirque] described the essence of her work as maintaining a pool of artists for the eight shows that Cirque had then and the many events, and recruiting artists for new shows in the future. She and her team roamed the planet auditioning for a soprano who radiated childlike energy for Quidam, or an artist with gestures guaranteed to get laughs. Or they might be headed for a Polynesian temple in search of a fire dancer for the show Ô. And wherever they are, around the globe, they needed to record all the information they were collecting on each artist quickly, and save video references for each of them.

Not only is casting a delicate and involved activity, but once a performer is hired, he or she has to go through a series of steps before actually participating in a show. One of those steps is the make-up lessons that ensure that performers can apply their own make-up for the various roles they play in a given show. At the time, make-up for each part of every show was documented with 35-mm photos and forms listing the products used and the procedure to follow, all of which was kept in big binders that the make-up artists had to cart around with them on their numerous trips to the various Cirque sites. Not only were the binders heavy, but there was always the risk that documents could be lost along the way or forgotten somewhere. After the make-up lessons, the performer had to go to the costume workshop for measurements. A total of 50 measurements were taken at different points on the performer's body. These very precise data were required to customize the performer's costume pattern, which had to be perfectly fitted to his or her measurements. Cirque has several thousand intricate costume patterns. Information about costumes and measurements was being stored in Excel files and in various unconnected applications. After the performer's measurements were taken, a plaster cast of his or her head had to be made, in three copies. The casts are used to make the masks, wigs, and hats that the performer wears during shows. Three copies were required because sometimes a hat, a mask and a wig were made simultaneously for the same performer. Keeping track of the plaster heads and their model's identity was very challenging.

At the time, even though efforts were being made to keep the information about potential talents in a very organized fashion, all the information about artists was kept in paper folders of various colours, with each colour representing a different discipline. One can imagine the piles of files, video recordings, pictures and so on that the casting director had to carry around the globe and send to the International Headquarters.

Information Technology at Cirque du Soleil in 2000

Danielle Savoie's nomination followed a decision by Cirque's top management to acquire SAP to support the firm's basic business processes: human resources, logistics, and finance. The implementation of such a complex technology required a re-examination of how IT was managed and operated. Cirque needed to implement more organized and professional IT management than it had at the time.

Upon her arrival at Cirque du Soleil, Danielle Savoie introduced herself to the general managers and to the key players involved in each of the areas related to show production: Creation, Cirque Image, Finance, Merchandising, Resources, Marketing, Legal, Production, SAP, Planning and Public Affairs. She then devoted her first weeks on the job to meeting the people in charge of the various creative and administrative units in order to establish her diagnosis. This allowed her to develop an understanding of the uniqueness of Cirque's business.

She realized that each touring show had its own unique IT infrastructure; Danielle Savoie has described the touring shows as being distinct little islands.1 Yet, according to Ms. Savoie, the installation of the IT infrastructure of a show was a critical step. At the time, the technician in charge of installing the touring show's IT hardware had to be on site several days before the other members of the tour in order to ensure that the IT infrastructure was ready when they arrived. This installation could take quite a long time, since the technician had to unpack the servers and reinstall them each time, then connect the workstations and phone equipment for all administrative activities - including the many ticket windows of the box office trailer (nine for Quidam, which was touring in North America at the time) and the cash registers (28 for Quidam). The installation was quite cumbersome, involving the use of copper cables, among other things.

Some of the main features of Cirque's IT environment in 2000 were:

* Servers: several hardware platforms, most of which were clones assembled on the spot. The majority of the servers ran on Windows NT 4.0, with some servers operating with Novell Netware;

* Network: a variety of equipment using various standards, such as Ethernet 10, Ethernet 100, and Ethernet Giga, shared or wireless in certain sites;

* Desktops: a variety of equipment from at least 10 different suppliers;

* Operating systems: various versions of Windows (95, 98, 98SE, NT 3.51, NT 4.0, 2000) with various levels of corrective measures (Service Packs);

* MS Office Suite in several different versions (95, 97, 98, 2000);

* Applications: more than 800 applications and software packages were installed, many of them supporting the same function - personal preferences often being the deciding factor. The applications were most varied and rather unconventional, given the nature of Cirque du Soleil's activities. For instance, one such application tracked the performers' medical records. This type of application was deemed extremely important, given the fact that the performers are a critical resource at Cirque du Soleil;

* Data sharing: most applications were standalone. The various shows operated as independent businesses rather than parts of single organization. Collaboration between employees across different business units was difficult.

The IT situation was plagued with several difficulties: the demands made on maintenance support were very high; users had to change their work methods and adapt to each workstation or workplace where they happened to be, and this had a significant impact on their effectiveness; it was extremely difficult to deploy applications that worked on all the workstations and in all regional contexts; the infrastructure was unstable; and it took a considerable amount of time to solve any technical problems that arose.

After spending several weeks learning about Cirque, Danielle Savoie came to several conclusions. The IT group was small, and its role was essentially one of support. Cirque had no development team, nor did it have any standards or procedures governing the use of IT. The management of IT was highly decentralized, each unit acting independently of the others, without any coordination. This situation is typical of a small business that has grown rapidly and devoted all its resources to the development of its core business. The deficit in IT credibility seemed to be due to: a poor ability to deliver the desired IT solutions with the required degree of depth, reliability and operational uptime availability; insufficient leverage of user investment in terms of efforts and funds caused by a lack of project management, weak integration of IT solutions and incoherent technology; a lack of vision with respect to IT direction in the organization, the delivery of business solutions, infrastructure acquisition and investments and technology transfer. In a nutshell, it was clear that in its current state, Cirque's IT could not support its growth. A complete overhaul of IT management was needed.

Information Technology Strategic Plan

The plan developed by Danielle Savoie during the three months following her arrival at Cirque read as follows: "Establish IT solution requirements to support and enable respective business visions for Cirque du Soleil service and products & work functions requiring significant IT support during the next two to three years."1

Danielle Savoie's observations led her to conclude that in 2000, the nature of the business landscape at Cirque du Soleil required a range of IT enabling solutions and technologies that would depend on each other and that needed to be open so that they could interact accordingly. In addition, the IT solutions implemented at Cirque would have to be linked to those of their business partners so that business plans and agreements could develop smoothly. It therefore appeared unrealistic to develop an IT strategic plan based on the adoption of a single set of technologies, such as SAP, for all IT business solutions. SAP had already been implemented to support the basic business processes. One strategic approach would have been to protect all available options to integrate IT solutions with SAP, as opposed to adopting, by default, SAP as a unique integration channel. Another strategic approach would have been to ensure that IT integration capabilities would be agile and flexible to support growth and rapid responses to quickly changing, unpredictable market conditions.

It was stated that the critical success factor of the IT strategy would be the ability of IT integration capabilities to provide seamless connections between a diversity of IT solutions based on a significant range of technologies.

Lion's Den1

After assessing the IT situation at Cirque du Soleil, it became clear to Danielle Savoie what needed to be done. She had three major objectives: (1) develop a strategic IT vision that would be accepted by Cirque's top management; (2) deploy a highly professional IT group that would have the required resources; and (3) improve the credibility of the IT group among the leaders of the firm. Most importantly, she had to promote the IT strategic plan to the Executive Committee. The Committee was chaired by Guy Laliberté, cofounder and owner of Cirque du Soleil, also known as "the Producer."

During the Executive Committee meeting in July, Ms. Savoie used the analogy of a sailboat to illustrate the role of IT within the organization, knowing that Guy Laliberté adored sailing. During her presentation, she showed a slide representing a sailboat. That simple picture had quite an impact. She explained that the sails were the IT applications that could be fully deployed - or not - depending on the intensity of the winds or the business needs. The boat's hull was a representation of the IT infrastructure. She explained that without a solid hull, the boat would sink, which is the same for the business if it is not effectively and efficiently supported by the right IT infrastructure. The "helmsperson" holding the tiller was her, governing IT, and the person standing in the front of the sailboat, providing direction, was Guy Laliberté.

When she left the meeting room, Danielle Savoie was well aware that she had just begun the difficult task of carrying out her IT strategic plan. Her next concern was to set up the proper governance mechanisms that would help her achieve the IT strategic plan. For her, the structure of governance was "the set of mechanisms for decision making, the roles and the responsibilities necessary to make it possible to align IT with the business objectives of the company and to maximize the added-value of IT."

Subject: Information technology; Entertainment industry; High technology; Strategic planning; Chief information officers; Case studies

Location: Canada

Company / organization: Name: Cirque du Soleil; NAICS: 711190

Classification: 9172: Canada; 2130: Executives; 5220: Information technology management; 2310: Planning; 8307: Arts, entertainment & recreation; 9130: Experimental/theoretical

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

Volume: 9

Issue: 3

Pages: 1-7

Number of pages: 7

Publication year: 2011

Publication date: Sep 2011

Year: 2011

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: 914456426

Document URL: http://search.proquest.com/docview/914456426?accountid=38610

Copyright: Copyright HEC Montréal Sep 2011

Last updated: 2013-09-26

Database: ABI/INFORM Complete

Document 51 of 100

Transfers of business planning and bounded emotionality: a follow-up case study

Author: Hytti, Ulla; Stenholm, Pekka; Peura, Kirsi

ProQuest document link

Abstract:

Purpose - Existing research focuses on the role of planning in successful transfers of family business. From a bounded emotionality perspective, this paper aims to investigate the transfer of business processes and the underlying reasons for delayed or unplanned transfers despite the feasible succession plans. Design/methodology/approach - A follow-up case study in six small family firms was carried out between 2001 and 2008. The research material was collected primarily in interviews with firm representatives in 2001 and 2008. Further information was obtained through participant observation, and background data on the firms were also used. Findings - The analysis enhances understanding of business-transfer processes in the context of subjective limitations and relational feelings. Any divergence from the original conditions in the transfer plan may delay the process but the delays are tolerated by putting the transfer on hold in the daily activities and focusing on business routines instead. The results emphasise how individuals' goals and values change over time, and how decisions are weighed up from various identity positions questioning the basic assumptions and decisions set out in the plan. Despite the delays, however, transfers of business or the firm are not easily abandoned. Research limitations/implications - The results suggest that linear, goal-oriented planning may not be sufficient for executing successful transfers, but further longitudinal research is needed to corroborate these qualitative findings. Originality/value - The paper makes use of the bounded emotionality approach, which allows the analysis of both the rational and emotional aspects involved, and helps to explain delays or unplanned transfers.

Full text:

Introduction

The transfer of business is currently a topical issue all over Europe. The economies are heavily dependent on the capability of entrepreneurs and their families to carry out successful transfers of business processes. The worst-case scenario would be the disappearance of 1,000s of companies, together with 100,000s of jobs and the skills and know-how developed throughout the years. Training, consulting and other forms of support have been developed in order to assist firms in planning for and successfully carrying out transfers of business processes ([17] European Commission, 2002).

Despite the focus on planning in both research and policy-making ([26] Ibrahim et al. , 2001; [15] Dyck et al. , 2002; [32] Lansberg, 2002; [33] Le Breton-Miller et al. , 2004; [31] Lambrecht, 2005; [27] Ip and Jacobs, 2006), there is a lack of longitudinal research investigating the execution of the transfer plans. We conducted a follow-up case study of six small firms, examining their business transfer processes. They all took part in a transfer-of-business programme in 2001-2002, and created a transfer plan with a view to carrying it out in the years to come. According to our follow-up in 2008, the transfer had been finalised in two cases, but not in the way that was originally planned. In the remaining four cases the transfers were more or less stalled. This paper investigates the transfer of business processes with a view to enhancing understanding of the underlying reasons for delayed or unplanned transfers despite their succession plans. In order to investigate both the rational and emotional elements involved in the process, we took the "bounded emotionality" ([39] Mumby and Putnam, 1992) approach as our theoretical framework, which has recently been suggested to be appropriate in the study of entrepreneurial behaviour ([29] Jayasinghe et al. , 2008, p. 243).

The study begins with an overview of the research on transfers of business, the particular challenges identified and the role of planning in supporting these processes. We then discuss bounded emotionality and the related advantages it offers in the small-firm context, and especially in the analysis of transfers of business processes in small family firms[1] . The methodology section comes next, followed by the case descriptions and a cross-case analysis. The concluding section summarises the findings and draws conclusions and implications for further research and policy development.

Succession and the transfer of business planning

The reasons of business transfers may vary from the poor firm performance to the aging of the incumbent. In family firms the continuity of family ownership may be emphasised over other aspects. In any case, it is necessary to come to an agreement on how and when the succession will take place ([21] Friedman and Singh, 1989; [30] Kets de Vries, 1993; [32] Lansberg, 2002). However, too early succession may be as harmful for the firm continuation and performance as staying too long and retaining all the decision-making power ([48] Stavrou, 1999; [14] De Massis et al. , 2008).

An outsider is usually favoured in CEO successions ([8] Cannella and Lubatkin, 1993). In family firms the drive is usually more deliberated and based on feelings. Thus, the willingness of the successor to engage in leadership is an important factor in the transfer ([53] Venter et al. , 2005). The willingness is dependent on the personal needs, goals, and abilities of the potential successor. In the worst case the assumed successors lack both the capabilities and the motivation needed for the takeover ([38] Morris et al. , 1996), and this is often discovered too late in the process. The willingness may also be external and if the job markets are unfavourable or unpredictable, successor are more willing to consider the transfer. ([49] Stavrou and Swiercz, 1998; [6] Brockhaus, 2004; [14] De Massis et al. , 2008).

It is considered necessary to include all relevant parties in the discussions because some of the decisions may directly affect their life as well as the firm's future. In practice, however, the leadership succession may involve an emotionally charged power struggle between the board, incumbent and successors. ([12] Ciampa and Watkins, 1999). Similarly, it affects the firm's other interest groups ([5] Barnes and Hershon, 1976; [33] Le Breton-Miller et al. , 2004; [14] De Massis et al. , 2008). Hence, openness towards stockholders, customers, employees and suppliers, and the timely issuing of information are considered crucial in the successful transfer of business processes ([4] Barach et al. , 1988; [21] Friedman and Singh, 1989; [9] Carlock and Ward, 2001).

Existing literature on transfers of business focuses on the planning of the succession process as one of the most powerful ways of ensuring successful transfer and the performance and continuity of the firm ([52] Trow, 1961; [15] Dyck et al. , 2002; [33] Le Breton-Miller et al. , 2004; [31] Lambrecht, 2005; [27] Ip and Jacobs, 2006). If planned properly and well in advance, all relevant parties to the transfer will have enough time to withdraw from or grow into the business, as well as to interact among themselves and address the questions related to the transfer ([11] Churchill and Hatten, 1987; [23] Handler, 1990; [38] Morris et al. , 1996; [6] Brockhaus, 2004; [53] Venter et al. , 2005).

Despite the advantages, however, it may be difficult to initiate the planning because relevant parties may avoid it in case it leads to a loss of harmony or privacy ([54] Wang et al. , 2004). These suggest that even the most careful planning process and feasible plan will not secure the actual transfer of business. There are varying internal (e.g. emotional) and external (e.g. changes in the business environment) aspects which may hinder the transfer. In this study we will address these insecurities.

Bounded emotionality and transfers of business

Herbert [46] Simon (1976) introduced the concept of "bounded rationality" to explain how the optimal choice or solution to a problem may be limited or restricted if the individuals concerned have incomplete information, or limited capability for processing it and consequently for exploring various options before taking the decision. Consequently, arriving at optimal choices is rare. In the context of business transfers, planning could be considered a tool for gaining information as well as for processing the different alternatives, and through the interaction of family and other stakeholders for making the optimal decision. It is also assumed that it is possible to identify the views, goals and aspirations of all the participants, and to incorporate them into an optimal plan to be followed for further action. ([29] Jayasinghe et al. , 2008) Hence, succession planning, while acknowledging soft issues such as discussions between family members, assumes the normative premise of rationality as "intentional, reasoned, goal-directed" activity. Thus, the idea of "bounded rationality" takes rationality as a cognitive and information-processing challenge:

The process of making choices, aligning choices with values and goals, and translating means to ends are cognitive activities divorced from inspiration and sentiments ([39] Mumby and Putnam, 1992, p. 470).

According to recent research, however, entrepreneurship should be interpreted as an activity embedded in its historical, economic and societal context ([22] Gartner, 2001; [51] Steyart and Katz, 2004; [25] Hytti, 2005). In this case the entrepreneur also has several non-economic and non-rational goals and aspirations ([57] Zafirovski, 1999; [41] Ogbor, 2000). This led [39] Mumby and Putnam (1992) to criticise bounded rationality for its emphasis on mental processes and its devaluation of physical and emotional experiences, as well as for the isolation and suppression of the emotional/physical self from the decision-making process. Furthermore, it treats emotions such as feelings and affective responses as a weak or handicapped extension to reason, or tools with which to achieve efficiency, profit and productivity. As an alternative they offer the concept of bounded emotionality, which includes the following assumptions (see also [35] Martin et al. , 2000, [29] Jayasinghe et al. , 2008):

- Intersubjective limitations. Emotional limitations are brought into relationships as individuals are constrained by their commitment or responsiveness to others. Their preferred modes of emotional expression are made possible by intimate knowledge of the other. Emotions are bounded voluntarily to protect the interpersonal relationships, or sometimes even to serve the firm's purposes.

- Tolerance of ambiguity. In the first place, contradictory feelings, positions and demands coexist. Second, individuals are capable of invoking rules and systems that help in reducing uncertainty, which would facilitate structures that recognise divergent and even contradictory positions among those involved.

- Heterarchy of goals and values. Individuals' goals and values may change according to their preferences and the context, and contextual relations govern in the socially fluid order of these goals. Individuals seek a balance between the differing values, goals and relationships. The value set and preferences between them may be different in the firm context.

- Integrated self-identity. Individuals comprise overlapping identities, producing and reproducing multiple patterns of reactions in different contexts without clarity or consistency over time. A sense of community is vital to the maintenance of integrated self-identities.

Furthermore, for an individual in a small family business the business, work, and personal issues overlap and decisions are taken in the context of this overlap ([13] Culkin and Smith, 2000). Rationality is not bad per se , but the relationship between rationality and emotionality should be reconsidered: the knowledge-producing capacity of emotions should be recognised, for example ([39] Mumby and Putnam, 1992). This is not to argue, however, that everyone involved in small or family businesses is totally emotional or irrational in terms of decision-making. We rather suggest that the fusion of rational and emotional thinking is such that the one cannot exist without the other (see [10] Carr, 2001). The bounded-emotionality approach assumes that neither rationality nor emotion dominates, but both flow together in the same mould ([19] Fineman, 2000). Thus, individuals are perceived as socially situated agents, and the relationships between private and public spheres should be included in the analysis of entrepreneurial ventures ([29] Jayasinghe et al. , 2008).

The research on family business succession acknowledges the role of emotions. The family and the business are considered so entangled that emotions are unavoidable ([45] Sharma et al. , 1997). In order to manage these emotional situations family-firm consultants suggest particular practices ([3] Baker and Wiseman, 1998), such as appreciating emotions in firm valuation, for example ([2] Astrachan and Jaskiewicz, 2008), and the inclusion of the extended family in the discussions (e.g. [34] Levinson, 1971; [30] Kets de Vries, 1993; [20] Fox et al. , 1996; [32] Lansberg, 2002; [14] De Massis et al. , 2008). However, it is suggested that discussions within the family and in the business, and the development of a transfer-of-business plan, would eliminate the role of emotionality and result in linear, unemotional and goal-oriented action. In the context of the bounded emotionality approach we question this.

Methodology: the longitudinal multiple case study

The multiple-case method and the research material

Given the choice of the multiple, comparative case method ([56] Yin, 1989), the selection of cases was of critical importance ([16] Eriksson and Kovalainen, 2008). Depending on the logic and purpose there are various strategies guiding the selection process; whether the researchers target cases with unique or typical characteristics, with small or great variation, whether the cases are selected on an event or theoretical basis, or if there is a sequential selection process, or a combination of these ([40] Neergaard, 2007). For the purposes of this research, we made an a priori selection of six firms participating in a development programme concentrated on business transfers:

- The cases selected represent family business succession cases of small Finnish manufacturing firms, and in this sense the cases are fairly homogeneous. However, in order to illustrate that neither "family" nor "succession" is a static concept in one case the successors are non-family members whom the incumbent "adopts" as his heirs. In another case the aim of the family business succession is to facilitate the selling of the firm to a third party instead of maintaining family ownership.

- These six firms were seen as "top" performers within the development programme. They participated actively and developed the succession plan. They were also eager to share their views with the researchers. Hence, we believed that these cases would provide good learning opportunity of the succession process ([47] Stake, 1994).

The research material consisted of:

- Interviews with firm representatives (both successors and incumbents) at the beginning (2001) and end of the programme (2002), in 2003 (for three firms), and follow-up interviews in 2008.

- Background data (e.g., balance-sheet data) collected in 2001 and updated in 2008.

- Participant observation of the firms during the programme in 2001-2002, and further informal discussions afterwards up until 2008.

The interviews were semi-structured. The goal in the initial ones was to establish the particular firm-specific issues involved in the transfer. The succession plans of each firm were documented at the end of the programme. The aim in the follow-up interviews was to learn from the succession processes, potential challenges and how they were solved in order to identify key issues in the process. It became a surprise to us that the processes had been stalled. Hence, we needed to make sense of this finding, which is the focus of this paper. The interviews were transcribed verbatim and direct quotes from the interviews are applied in illustrating the research findings. We adopted a holistic, process approach to the analysis, the aim being to identify the different challenges involved in the transfer process, including financial, legislative, management and family issues. The cases highlight the multiple perspectives to the succession process of the different family stakeholders ([42] Perren and Ram, 2004).

A description of the programme

A "Transfer of business and development programme" was developed in order to assist SMEs in matters related to transferring a business. The idea was to tutor and support both incumbents and successors in legislative and taxation issues but also on emotional aspects ([28] Jaffe, 1998). The expected outcome was that they would find a way of discussing succession issues, draw up a plan in preparation for business transfer, and gain new insights into the business activities (so-called double-loop learning, introduced by [1] Argyris and Schön (1996); [44] Senge (1990)).

All the participants created a plan for their business transfer, which was shared with the researchers at the end of the programme. The programme ran over 11 months during 2001-2002 and was organised around contact training sessions, workgroup meetings, guided in-family/firm discussions, firm-specific consulting sessions and business-development assignments. There were 28 firms taking part, organised in two regions in Finland. The basic characteristics and demographics of the selected six cases are presented in Table I [Figure omitted. See Article Image.].

Bounded emotionality in business transfers: empirical evidence

Presentation of the cases

The transfer processes of the six case firms are presented in the Table II [Figure omitted. See Article Image.]. In one firm (Case E) the transfer of ownership was finalised in 2002 with a view to selling the firm to a third party. However, this sale was not completed in 2008, although the owning family believed it would take place soon. In another firm (Case B) the transfer was finalised, but not as planned. In the other cases, the transfer was not completed as planned (Cases A, C, D, and F). In addition to succession plans, current status of the transfer, and the main actors engaged in the process, we assessed case by case the most prevalent conditions influencing the transfer process. These conditions are described closer in the case descriptions.

Case descriptions

In Case A the business succession started as early as in the 1980s when the successors were still minors in order to take advantage of the contemporary taxation law. During the programme no major problems had been experienced or were foreseen. The transfer of the business was planned to take place during the next six years, which seemed somewhere in the distant future. The successors had been working in the firm for some years, and they were eager to take over. Consequently, they were sometimes frustrated about not being given enough responsibility despite their motivation. However, the roles were shared so that the incumbents could be replaced at any time if and when necessary. Still, the father had the main responsibility for certain tasks and he was also the preferred contact for some of the old customers. The incumbents hoped that their children would not have to pay too much for the remaining 10 per cent of the firm. They were therefore looking for a solution convenient for all parties and the business. However, the parents were reluctant to leave the company for good:

We will come here to see how things are run. We will come here. It will not be easy to leave for good. We've done this for thirty years already (Father).

In 2008, however, the finalisation of the business succession was postponed until further notice, mainly because the son was unsure whether the family business was his future after all. The other family members were not aware of his doubts until a year ago but could find explanations for it:

The reason for my brother's uncertainty is his young age and on the other hand the couple of poor years that our business suffered. That affected [delayed] the transfer of the remaining 10 per cent share (Daughter).

In addition, the daughter, who was hoping to continue in the business, is now also being forced to reconsider her alternatives as she might be left alone in the firm. On the other hand, the future of the business looks bright.

In Case B the founder had no suitable successors, but he was reluctant to see his life's work go down the drain after his retirement. Consequently, he employed two trainees directly from vocational school with a view to preparing them to continue the business in a few years. In effect, this process started in the early 2000s, the idea being to complete the transfer in three to six years. The owner thought he would be able to guide and motivate his successors within this time frame. The successors purchased 50 per cent of the firm in 2003 and were given their own responsibilities. The founder remained in the firm as the CEO and continued with the coaching and practical training based on his extensive business and life experience:

The boys have to understand that their girl friends might not necessarily understand what it takes to be in the business. They might not understand the financial as well as personal investments involved. But I've said to the boys: "Remember - the business stays but the girlfriends might change" (Founder).

However, there was a sudden turn of events just one year after the process began. One of the successors had got married, but divorced later because his spouse did not approve of his late working hours. He then left the business. The other potential successor was very motivated by the venture, but later decided to start his own business. His family had a strong role in this since they had started to question the incumbent's intentions in the transfer. Finally the firm went through a fast and furious split up, the business was sold to a third party and the incumbent retired in 2007.

In Case C the family members comprised three generations. The ownership was originally divided among the grandparents, the mother and her sister, the idea being to transfer the whole ownership to the third generation. The initial succession plan was very tightly scheduled. However, as soon as the process was underway the future of the firm started to seem uncertain (30 per cent decrease in turnover and increasing competition). The first stage of the succession was completed in 2001 after the grandfather died. In 2004, the mother owned 50 per cent of the firm and the son and daughter shared the remaining 50 per cent. The family had several plans, one of which was to separate the real estate from the production. However, this was never realised due to the unfavourable taxation law.

At the end of 2008 the remaining 50 per cent of the ownership had not been transferred, and there were no plans to do so:

There is no particular plan regarding the remaining stock transfers (50 per cent), because we are waiting for the state authorities' decisions. On the other hand there has not been any time to plan, because we are so busy (Daughter).

In 2008, the mother was 62 years old and had no immediate plans to retire. She was responsible for human resource management and helped her children with other functions. The father retired in 2005 and handed the management reins over to their son. Their daughter is responsible for the financial management. Although the succession process is stalled, there have been other developments: new production lines have been introduced and younger employees have been taken on.

Case D concerned a succession process initiated in 2001 by the father. He had already retired but was still working in the business with his wife (CEO). The successors, their son and daughter, criticised their parents for planning their future without asking their opinion. The father expected the succession process to be completed within three years:

We were upset with our parents for making too tight a succession plan without even discussing with us and because there were not any concrete prior discussions ... (Son).

The daughter in particular, who had never worked outside the family business, was very uncertain about complying with her father's wishes. The successors felt increasing pressure, but understood their father's intentions since he had recently had a stroke and had gone through a bypass operation. In 2001 the ownership was divided among the mother (46 per cent), the father (40 per cent) and the mother's father (16 per cent). The first real steps in the succession process were taken in 2004 when the successors both received 16 per cent of the shares just before their grandfather passed away.

In 2008 there was no discussion on how to progress with the succession. The mother (aged 63) still owns the majority of the shares and works as CEO. The father, now 73, is officially retired but still works in the firm. The family members have been semi-actively following the changes in the legislation. However, they do not consider legislative issues the underlying reason for the slow progress. The daughter works as a key-account manager, but she is still wavering between the family firm and untapped potential outside the family business. The son, who is responsible for production and R&D, feels confident that the business will offer him the same challenges and opportunities as any other firm. According to the family members the succession will take place sometime in the future. The key actor is still the father, who is expected to be the initiator of the eventual transfer. At the follow-up he was in good health and happy to be involved in the business.

Case E is a family business that was established in 1978. The original intention was that the son would continue in the firm. However, he and his sister worked in a different industry and had never even considered working in the family firm. It was their mother's idea to transfer the ownership to her children although she knew that they might not want to work in the firm. In 2001 the family stated that a suitable schedule for the succession would be from eight to 13 years. However, the plans were expedited in 2002 and the parents' shares were transferred to the children. A major motivator for the mother was that the successors would feel free to sell the firm because of their lack of emotional attachment to it:

This company has been like a third child for me. I thought that for heaven's sake, I would never be able to sell this company. But they would. So I made it clear that they could do it, if they wanted and that would be the perfect time for me to step aside (Mother).

She expected its value to increase, and it was therefore considered to be in the successors' interest to complete the transfer of ownership in 2002. Since then the mother has continued to manage and develop the firm.

In 2008 the firm came to a crossroads. A potential buyer approached the mother and negotiations for selling the firm started. In terms of timing a sale would suit all of the family members. If the sale had taken place the previous year the children would have lost the tax exemptions related to family-business succession (a five-year quarantine period before re-selling). According to the mother, it was 80 per cent likely that the firm would be sold during the year 2008.

In Case F the founder of the firm - the father of three daughters - has dominated the family business for several decades. The first stage of the succession was completed already in the 1960s when the daughters were minors, and each of them was given nearly 25 per cent of the shares. One of them later worked in the firm as deputy managing director, trying to balance her own visions and her father's strong will. Other siblings are board members. The father has not shown any interest in the succession and has safeguarded his power through ownership: he has absolute voting rights even though he has officially retired. In 2000, one of the successors and her husband, who was also employed in the firm at the time, considered taking over the firm. After a difficult and disunited period the couple decided to give up the plan. The mother tried again to initiate a process of business-succession planning in 2001, but again without success. The father stated that he would not relinquish ownership as long as he was alive. The daughters therefore had no other option than to adjust and face the reality:

We have no saying in this matter. It is all up to our father, and I have no desire to try to persuade him. And after all, I am not the only child. There might be a day in the future, when we must do something about this situation (Daughter).

They felt that working was therapeutic for their father, even if it meant that they had to distance themselves from the firm for the sake of their own sanity. Although the family dynamics are explosive, a balance has been found, and the firm performs well.

In 2008, the successors are grateful to their father for allowing them to execute development projects in the firm. They are not forcing the succession, and trust their father as long as he is physically and mentally strong. At the same time, they all agree that they should now be prepared for the succession before their father dies. They feel it would be better to plan now when they are united and have a "common enemy". They are all afraid that they would not be able to find a mutually satisfactory solution when their dominating father was no longer around.

Cross-case analysis

The results from our case studies suggest that transfers of business processes are fragile and can easily be interrupted or stalled. All the firms had their plans and after the training programme had a feasible schedule for transferring the business. The process was stalled despite the agreed schedule and plans except in only two cases: Case B in which the firm was sold to an external partner as a "normal" transaction because the initial plan to select and coach young men as "heirs" fell through, and Case E in which the firm will be sold to a third party in the near future. Hence, it is clear that planning does not guarantee that the transfer of the business process will be carried out accordingly.

In line with the bounded emotionality approach, the cases demonstrate a fusion of the rational and emotional aspects in business transfers, which could help to explain the reasons for the delayed or unplanned transfers. Progression of the business succession process necessitates that the different dimensions in the private spheres of both the incumbents and successors and public sphere of the business converge. The cases indicate how even a small change or divergence in these spheres may cause the transfer business to stall (Figure 1 [Figure omitted. See Article Image.]).

It seems that certain elements are more easily tackled within the rational realm, such as the transfer of ownership as such if it does not mean transferring power and control. The timing of ownership transfer may be imposed from outside, such as when steps are taken to exploit fiscal benefits and avoid negative fiscal consequences for any of the parties (successors, incumbents, the firm). In these cases the transfer may be set in motion when the potential successors are very young, and hence they may not be consulted. If the goal is to expand the family firm in the coming years the transfer is timed to take place in advance, before firm's value increases, in order to minimise the costs for the successors. Hence, prospective or anticipated changes in the legal and fiscal environment also stall the ongoing process if the changes are expected to negatively affect the parties involved.

Planning might, in fact, trigger the thinking processes of the successors or incumbents in terms of whether they really want to take over or leave the firm. This may be disappointing and even frustrating for the other family members, at least in the short term. The family members involved had multiple goals and values regarding the different aspects of the transfer, which would also change over time. Decisions made at one point will not necessarily be carried through, but may be re-evaluated and even reversed. For example, the incumbent's severe illness may make the succession the first priority, but if he recovers and business continues as usual, other issues become more important and the transfer is put on hold. Similarly, the motivation of successors may change over time, sending the transfer of business into a new trajectory: financial difficulties may make the successors reconsider their future, for example. Hence, priorities, goals and values change over the years and they are dependent on the given context. The willingness of successors to take over and of incumbents to step aside may be intertwined to their other lives and goals. For example, one of the successors, an MBA graduate, did not consider the family business the only alternative, and thought that there may be other more lucrative career opportunities. Moreover, in the family firm the transfer is viewed from a parental and a business perspective. Hence, the goal is to minimise the financial burden on the successors, but also to receive decent compensation from the firm which, again, may hinder the succession.

Even if the successors hesitate or even leave the firm temporarily, the sense of community within the family-business context narrows down the options. When the potential successors are known, some discussion has taken place and plans have been made, the option of selling the firm to an external partner is not easily brought up. Vice versa, even if the parents do not withdraw from the firm as planned, the successors have made a commitment to continue with it when they do, even if it means waiting until that parent decides to retire. Even if the successors are impatiently hoping for their parents to retire and finalise the transfer, they remain loyal to them and to their siblings, and strive to avoid conflicts. They expect their parents to initiate the process, for example, and do not force the issue. If one of the successors starts reconsidering his or her future in the business, the other family members await their decision patiently. By focusing on the daily routines and their work in the firm, rather than on the transfer, they manage the ambiguity. Due to the tolerance of those involved and their concentration on the job at hand all the businesses are prospering, making development plans, and initiating new investments in a situation that might appear unsatisfactory from the outside (the succession is not going as planned).

Discussion, limitations, future research implications

The mainstream literature on business successions focuses on the role of planning as a powerful tool in assuring the successful transfer and continuity of the business ([26] Ibrahim et al. , 2001; [32] Lansberg, 2002; [15] Dyck et al. , 2002; [33] Le Breton-Miller et al. , 2004; [31] Lambrecht, 2005; [27] Ip and Jacobs, 2006). Our revisiting of the cases in the follow-up study made it evident that the many challenges concerning transfers of business highlighted in previous research are by no means exaggerated. Even the firms that "did what they were told" by policy-makers and business advisers, in other words initiated the succession process based on a feasible plan, sought the help of external advisors and participated the training programme, did not complete the transfers as planned. Adopting a bounded emotionality perspective, this paper investigated the transfer of business processes and interpreted the underlying reasons for delayed or unplanned transfers despite the feasibility of the plans. The results enhance understanding of these processes in the context of subjective limitations and relational feelings ([39] Mumby and Putnam, 1992; [29] Jayasinghe et al. , 2008). Hence, the transfer of business is not a linear and rational process, which in our perspective limits the potential of transfer planning in this context. Our results show that even if processes are well planned and scheduled their implementation may still be bounded by the emotions involved. They give a new insight into a more cyclical rather than linear phenomenon through the theoretical lens applied.

To make sense of the delays we emphasise that the transfer plan is compiled in a certain situation that reflects the conditions in the personal spheres of incumbents and successors and the business sphere at the given time. Any divergence within these spheres over time is sufficient to delay the transfer process. While the planning was done under certain assumptions about the willingness of the family members either to take over or to withdraw from the business, it must be noted that individual goals and values change according to preferences and the context. In this sense reaching agreement between the incumbent and successor ([15] Dyck et al. , 2002) is not a sufficient condition for the transfer if changes take place and the agreement is not renewed. Neither the business nor the lives of the family members are static: the context changes and the individuals also balance their different goals.

The sense of having time was a common element for the cases. We argue that time is a double-end sword in these processes. Time is needed to plan and prepare for the process ([15] Dyck et al. , 2002) but time also allows more changes to take place, which may then stall the process.

However, the transfer processes as such are not abandoned and the businesses continue to prosper. The commitment of family members, and their responsiveness to others, place emotional limitations on the relationships even if in rational terms they would be advised otherwise. For example, loyalty to other family members reduces the willingness to enter into discussions that might cause anxiety or distress and bring conflict into the family firm. From the rational point-of-view a stalled transfer may appear to be an interfering element between the family members and the business. However, the family members seem to tolerate the ambiguity and even their conflicting roles - in particular between incumbents and successors. They cope by focusing on the business and the day-to-day routines. Finally, neither the incumbents nor the successors are merely members of the family business: they have overlapping identities that may produce different patterns of reactions in different contexts without any particular consistency over time. For example, as the founder the incumbent may have different expectations concerning the value of the business than in his role as a father, but both make sense through these different identity positions. Hence, we argue that bounded emotionality is a relevant approach to analysing and understanding the transfer of business processes ([39] Mumby and Putnam, 1992; [35] Martin et al. , 2000; [29] Jayasinghe et al. , 2008).

However, we do not argue that transfers of business processes are completely emotional, but rather suggest a fusion of the rational and the emotional ([19] Fineman, 2000; [10] Carr, 2001). For example, it seems completely rational not to provoke any major family disputes by focusing strongly on the succession. If most of the incumbents have not yet reached the official retirement age, the successors might find it rational to wait until their parents do so. Similarly, especially in transfers of ownership, there are elements of economic and financial rationality: the transfer is made so as to capitalise on certain fiscal exemptions. Ownership may also be transferred in order to avoid the personal emotional strain of having to sell the firm. If planning is not a sufficient condition for eliminating the emotional from the transfer of business and assuring completion as planned, the question remains whether transfer planning is a completely futile exercise. Furthermore, if the businesses seem to prosper in any case, what does it matter if the transfer does not go according to plan? In our view, planning and participating in the training programme do provide certain advantages: developing a plan within this context might facilitate the launch of negotiations within the family in the first place ([54] Wang et al. , 2004). Although it seems rare for the plan and the timelines for the transfer to be followed to the letter, planning could still be a useful tool for voicing individual concerns from both within and outside the firm. Even if the plan is not executed, certain steps should still be taken, such as sharing the responsibility and tacit knowledge so that individuals can replace one another and thereby minimise the risks. A basic understanding of the issues involved and the steps to be taken will prepare the successors mentally for the transfer, which could then be made in case of the incumbent's sudden illness or death. This is also one reason for research interest in the execution of transfer plans. Although the firms concerned may be able to function and operate successfully for the time being, failing to complete the transfer process will leave it and its stakeholders vulnerable to unexpected events that offer limited decision-making capacity.

Practical implications

Increased understanding of the transfer of business processes is essential in terms of ensuring the continuity of viable businesses in general. We suggest that such transfer should be cyclical rather than linear, and it should leave room for revisiting and reflection on the changes in both the context and the family members' goals and aspirations. Our results confirm the relevance of issues raised in previous studies concerning the critical elements involved: the need for time seems to be a crucial part of the process ([18] FEE, 2000; [6] Brockhaus, 2004). There should be time for successors to consider and reconsider their decisions, and for the incumbents to find alternative solutions if their original plans fall through. The process should include discussions between incumbents and successors, and also involve the extended family ([34] Levinson, 1971; [20] Fox et al. , 1996; [15] Dyck et al. , 2002; [14] De Massis et al. , 2008). Business coaching, rather than training, may be a more appropriate tool for assisting firms to execute their plans. Situation and time contingent business coaching focusing both on the private and public sphere conditions could be helpful in assisting the transfer processes in order to suit firm-specific needs and to ensure execution ([43] Porter, 2000). Finally, the timing of and clear communication in the succession seem to be crucial, as [15] Dyck et al. (2002) found out. Our findings also suggest that changes in the legislative and fiscal environment should be considered very carefully. We would therefore advocate certain caution in carrying out fiscal and legislative reforms. Confusion about the outcomes or a delay in legislative reform may also contribute to the slowing down of ongoing family-business succession, which is clearly not the intention.

Limitations

Longitudinal case study research generates a lot of data for analysis, which becomes an arduous task to analyse especially if following a large number of cases. Furthermore, reporting the complexity in a simple and short but convincing way is difficult. Hence, it is necessary to select the cases and report only the most important elements from the cases. ([42] Perren and Ram, 2004) We chose only to follow-up the "best performers" within the programme and cannot report on the progress made in the other firms. Finally, the case study research lends itself to analytical generalisation ([16] Eriksson and Kovalainen, 2008) but the extent to which our research results can be extended to other transfer processed needs to be corroborated by further research.

Further longitudinal research is needed on the relationship between the plan and the actual transfer of business. Clearly, the six year follow-up process adopted for this study is not sufficiently long to study the process from the plan into the actual completion or failure of the transfer. Additionally, it would be interesting to study the succession processes in firms that do not engage in any form of formal planning. Both successful and unsuccessful processes should be investigated. More research is needed on what actually triggers the final decision-making whether the succession will be completed or abandoned for good and what is the role of time in this process. Is it actually the lack of time due to death or illness or limited duration of a tax exemption for example that pushes the decision?

Furthermore, we argue that there is not only one process but several simultaneous processes taking place. On the business side, the transfer of ownership on one hand and of power and control on the other hand should be further investigated including the ways they are connected. We recommend that the transfers of business processes should be investigated from the perspective of different stakeholders, not only the incumbents and successors but also the extended family and other stakeholders in order to better understand the dynamics and forces present in the process.

We further suggest that a bounded emotionality approach may be beneficial in the study of small firms ([29] Jayasinghe et al. , 2008), and family firms in particular, in contexts other than that of business transfer. The approach is helpful for understanding the decision-making at the fusion of the rational and emotional elements, which will further advance research on small and family firms.

Subject: Decision making; Succession planning; Case studies; Entrepreneurs

Location: Europe

Classification: 9130: Experimental/theoretical; 9175: Western Europe; 9520: Small business

Publication title: International Journal of Entrepreneurial Behaviour & Research

Volume: 17

Issue: 5

Pages: 561-580

Publication year: 2011

Publication date: 2011

Year: 2011

Publisher: Emerald Group Publishing, Limited

Place of publication: Bradford

Country of publication: United Kingdom

Publication subject: Business And Economics--Small Business

ISSN: 13552554

Source type: Scholarly Journals

Language of publication: English

Document type: Business Case, Feature

DOI: http://dx.doi.org/10.1108/13552551111158853

ProQuest document ID: 888254632

Document URL: http://search.proquest.com/docview/888254632?accountid=38610

Copyright: Copyright Emerald Group Publishing Limited 2011

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 52 of 100

The A-VEDAM Model For Approaching Vehicle Exterior Design

Author: Asami, Hiroki; Owada, Hideaki; Murata, Yuka; Takebuchi, Shouhei; Amasaka, Kakuro

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Abstract:

The exterior design of a vehicle is an important subjective factor in customer purchase decisions today, and it is critical that designs match customer lifestyles. This paper introduces A-VEDAM (Amasakalab's Vehicle Exterior design Approach Model), a model for approaching exterior design in a way that harmonizes the external form (profile) and color of the vehicle to meet the demands of the coming years. The development of the A-VEDAM focuses on the fact that more young women are getting driver's licenses and purchasing cars. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Despite reports that young people are reducing their use of vehicles, there is an extremely high level of latent need among young women who are increasingly getting driver's licenses and purchasing vehicles. This paper provides a model for approaching the process of creating new auto designs that will fulfill these latent needs.

Even as customer needs in general become increasingly diverse, the preferences of young women are thought to be particularly varied and difficult to pinpoint. Today's women place priority on vehicle color when purchasing a vehicle, and it has been shown that these color choices have strong links to clothing and fashion.

The authors have thus concluded that creating the vehicle designs that women want requires matching women's preferences in terms of Ufestyle and fashion (clothing). In other words, it is essential to generate a sense of "customer delight". Previous approaches have placed priority on the form of the vehicle design, with color treated as an afterthought. However, it is the harmony between the shape and the color of the vehicle that can give customers that feeling of delight.

A crowd-watching study was done based on these conclusions, and it was found that the vehicles that are attractive to people living both in urban and suburban areas are those that seem stylish or offer a sense of luxury. These results were used to create a subjective values chart grouping preferences into different categories based on "image words".

Colors were then selected by pairing tones that evoked the sense of these four image words with fashion designs that typified an "elegant" look. Next, in order to bridge the gap between customer evaluations and actual vehicle designs, 3D-C AD software was used to generate vehicle designs that gave a unified sense of form and color.

BACKGROUND AND PRIOR RESEARCH

Businesses that continue to grow in today's world are those that carry out quality management from a customer-first perspective, aggressively work to pinpoint customer desires, and reflect these approaches in their product development processes. However, even among successful businesses, the approach that product planners and designers take to capturing the mindset of their customers and reflecting it in actual products (in other words, their method of generating the ideas that guide the design process) is typically an unspoken one based largely on personal skill and experience. As a result, whether or not the designers did quality work depends on the strength of sales in the market, and procedures that can be used for later work are not given sufficient attention. Under this system, it is easy for the emphasis to be placed on an unspoken procedure.

Under this system, success is a result of good luck (or failure of bad luck), and the current approach to business processes depends on every individual's unique way of doing their work and the "rules of thumb" that they follow. This precarious situation creates a dilemma for companies that wish to increase their chances of success in the future. A new strategic product design method - a method that creates desires and supports the generation of ideas during strategic product development - must therefore be developed to revamp the business processes extending from product planning to design. These processes must be incorporated into a "designing" stage, and their effectiveness demonstrated.

Much prior research has focused on the proportions and form of vehicle bodies or on proposing design concepts. However, in order to ensure that future vehicle development truly takes direct customer feedback into consideration, designers must work to match customer lifestyles. To this end, the authors have chosen to focus on young women, whose needs are thought to be particularly varied and difficult to pinpoint even as customer needs in general become increasingly diverse. What today's women place priority on when purchasing a vehicle is the color, and it has been shown that these color choices have strong links to clothing and fashion.

The authors have thus concluded that creating the vehicle designs that women want requires matching women's preferences in terms of lifestyle and fashion (clothing). In other words, it is essential to generate a sense of "customer delight". Previous approaches have placed priority on the form of the vehicle design, with color treated as an afterthought. However, this study proposes that it is the harmony between the shape and the color of the vehicle that can give customers that feeling of delight. A shape and design framework consisting of three factors (profile, shape/form, and surface) was identified. Interviews revealed that the profile of a vehicle was what attracted attention instantly or from far away, so this is the design aspect that was highlighted.

NECESSITY OF FORM NUMERIC REPRESENTATION BY CAD

In order to visualize the degree of influence to sensitivity of the customer due to the change of the form, digitalization of the form is indispensable. CAD (Computer Aided Design) the software is utilized in this research (1) as an expethent in order to solve the digitalization of the form. As the advantage of using the CAD software, "Digitalization of the form (parametrization)" it can do with the invocation of the CAD software whose numerical definition of form is possible.

Because such as front side rear, it is verification possible from all angles, sensitivity of the customer to collate, it is possible, We can list the fact that among other things those where CAD is used as the tool which expresses the form the case of the modeling become main current even with design process of present condition. Furthermore, in this research "CATIA V5" is used as CAD software.

OVERVIEW OF THE A-VEDAM MODEL FOR APPROACHING VEHICLE EXTERIOR DESIGN

As mentioned above, customer delight is achieved through a harmony of form and color. There are several major research issues that arise in the process of promoting our major theme; namely, creating a method to support the generation of vehicle design ideas that evoke a subjective response in customers.

The A-VEDAM model for approaching auto exterior design shown in Figure 1 was developed in an attempt to resolve these issues. In step 1, a target is selected for crowd watching and interviews, and the importance of the profiles and colors preferred by women is identified. In step 2, a subjective survey sheet is created to identify women's preferences, and given groups of customers divided by preference. Then, collage boards are made outlining the lifestyles of each group. In order to identify exterior designs that match the lifestyles indicated, a color analysis is carried out in step 3 while a profile analysis is simultaneously carried out in step 4.

Subjective survey sheets with color samples are created in step 3, and the results are used to pinpoint those colors that evoke the image words. In step 4, measurement data from the vehicle models used in the survey is compared to identify the body proportions that correspond to the image words.

APPLICATION

Step 1: Market Surveys

Interview surveys conducted at retail shops revealed that women in particular place high priority on harmony between form and color as well as the overall coordination of the design. It was also found that many women consider vehicles to be an expression of fashion tastes.

Observational surveys were also conducted in both an urban (the Ginza district of Tokyo) and suburban (the Tsurumai area in Aichi Prefecture) to identify which vehicles seemed attractive and left an impression on passersby when they drove by. The survey indicated that attractive cars were those that intuitively seemed stylish and also had a sense of luxury.

This certainly seemed to parallel fashion, so a goal was set to create an exterior design that harmonized color and form.

Step 2: Collecting and Analyzing Women's Preferences

Creating a Subjective Survey Sheet

The first task was to create a subjective survey sheet to identify the preferences of the target customers (women).

The subjective survey sheet consisted of five sections:

1 . nine items assessing the person's interest in cars

2. nine items assessing preference for design images

3. eleven items assessing the respondent's lifestyle in terms of vehicle use

4. interests and hobbies

5. favorite magazines

Items in the first three sections used a seven-point rating scale, while the last two sections were free response. This survey was aimed at women in their twenties, and answers were obtained from a total of 67 women.

Using Collage Boards to Specify Preferences

A cluster analysis was performed on the data collected in 5.2.1 to sort the preferences into groups. The types of clothes, handbags, mobile phones, magazines, and watches preferred by those in each group were arranged on into collages and attached to boards. Each board was then given a descriptive name.

This allowed preferences to be grouped into five categories - girlish, elegant, casual, trendy and boyish - like those shown in Figure 2. As shown in Table 1, each board is given a single image word that best captures the style shown. Respondents then selected domestic and foreign vehicles from those seen during the crowd-watching phase that they subjectively thought matched the clothing on each collage board.

No vehicles matched the "elegant" preference category. A principle component analysis performed in order to pinpoint the kinds of vehicles that would appeal to those in this category revealed that members of this group wanted a car that was luxurious, stylish, high-end, and chic. To target customers in the "elegant" category, a car that exemplified these characteristics needed to be developed.

Step 3: Color Analysis

In order to investigate the relationship between the image words preferred by young women in the "elegant" category and color, subjective color survey sheets were prepared and respondents were asked to report their impressions. A total of 60 colors were selected using a combined assortment of three factors: brightness, saturation, and hue. These 60 colors were sorted into six groups to create six different subjective color survey sheets shown in Figure 3.

Each respondent was asked to select one of the six sheets at random, so that each person rated ten colors on a seven-point scale according to how much the color seemed luxurious, stylish, high-end, or chic. PANTONE color samples were used for the survey.

A principle component analysis was conducted on the results to identify how colors scored on two axes: luxurious/stylish and high-end/chic. The matrix chart in Figure 4 was created with a "luxury" and "high-end" axis to plot the scores from the seven-point scale. Another matrix chart was created with "stylish" and "chic" on the axes.

As a result, the colors that best evoked the image words associated with a preference for "elegance" were determined. These are shown in Figure 5.

Step 4: Profile Analysis

Our approach to analyzing the profile design was first to identify the relationship between the exterior profiles of existing vehicles and image words using an exterior survey. Actual dimensional data for these vehicles was collected, and the results were used to arrive at a profile design that would satisfy a preference for elegance. Seven models currently sold in Japan were used: the Vitz, bB, Passo, Cube, March, Fit, and Demio.

Survey respondents were shown pictures of the front, side, and rear of these seven vehicles, and asked to rate them on a seven-point scale according to how well they seemed to cpture each of the four image words(luxurious, stylish, high-end, and chic). Various measurement data was then collected from body measurement drawings. Each of the measurements was divided by the total width of the vehicle to generate proportional data that could be used for direct comparison regardless of the size of the vehicle.

Images of each vehicle were evaluated along with the proportional data, revealing how the proportion modifications to the front, side, and rear of the vehicles affected the qualities expressed by the four image words. A summary of these findings is shown in Table 2.

VERIFICATION

Based on the information gathered in this study, a vehicle was designed using 3D-CAD that captured the luxurious, stylish, high-end, and chic qualities preferred by those with "elegant" tastes (figure omitted). When those in the "elegant" group were again polled about the design model, they indeed found that the image left an impression on them. In this way, the effectiveness of the A-VEDAM was verified.

CONCLUSION

Even as customer needs in general become increasingly diverse, the preferences of young women are thought to be particularly varied and difficult to pinpoint. Today's women place priority on color when purchasing a vehicle, and it has been shown that these color choices have strong links to clothing and fashion. The authors have thus concluded that creating the vehicle designs that women want requires matching women's preferences in terms of lifestyle and fashion (clothing). In other words, it is essential to generate a sense of "customer delight".

A collage board was then put together to capture the elegant tastes of the target group. A sujective survey sheet was created, and it was determined that this group prioritized vehicles that presented a luxurious, stylish, highend, and chic image. Colors were selected that would evoke these qualities and match the fashion choices of those with elegant tastes. Next, in order to generate a design that would match these colors, an analysis of vehicle proportions was done to figure out how actual vehicles could be made to align more closely with the four image words preferred by those with elegant tastes.

Next, in order to bridge the gap between customer evaluations and actual vehicle designs, 3D-CAD software was used to generate vehicle designs that fit well with the colors. In other words, a vehicle design with integrated form and color was achieved.

Subject: Lifestyles; Women; Consumer attitudes; Vehicles; Product design; Case studies

Classification: 8680: Transportation equipment industry; 7100: Market research; 1220: Social trends & culture; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Case Studies

Volume: 7

Issue: 5

Pages: 1-8

Number of pages: 8

Publication year: 2011

Publication date: Sep/Oct 2011

Year: 2011

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

ISSN: 1555-3353

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Diagrams Illustrations Tables Graphs References

ProQuest document ID: 893661812

Document URL: http://search.proquest.com/docview/893661812?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Sep/Oct 2011

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 53 of 100

Using Accounting Information For Financial Planning And Forecasting: An Application Of The Sustainable Growth Model Using Coca-Cola

Author: Gardner, John C; McGowan, Carl B; Moeller, Susan E

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Abstract:

The purpose of this paper is to provide a case example to teach students how to estimate a company's sustainable growth by using an extension of the DuPont System of financial analysis on Coca-Cola Corporation. The DuPont system is based on a company's return on equity that is decomposed into three components: net profit margin, total asset turnover, and the equity multiplier. The extended DuPont system of financial analysis multiplies return on equity by the earnings retention rate to calculate sustainable growth. Sustainable growth is the highest level of growth in sales that a company can achieve using internally generated funds only. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Sustainable growth is the maximum rate at which a company can increase sales while maintaining the target or optimal leverage ratio without any additional external equity financing. The sustainable growth model assumes that total owners' equity for a company can only increase when retained earnings increase. The impact of this limitation on sales growth can be derived from the fundamental equation of accounting which states that assets must be equal to liabilities plus owners' equity.

Assets = Liabilities + Equity [1]

As a result of this assumption requiring that assets equal liabilities plus owners' equity, any changes in assets must be equal to changes in liabilities plus changes in owners' equity.

ΔAssets = ΔLiabilities + ΔEquity [2]

Further, the sustainable growth model assumes that any change in equity can only result from a change in retained earnings. Therefore, the firm cannot sell additional owners' equity.

ΔAssets = ΔLiabilities + ΔRetained Earnings [3]

This means the company's future increase in assets is equal to the future increase in retained earnings plus the additional debt that is supported by the additional owners' equity as determined by the equity multiplier. The equity multiplier is equal to total assets divided by owners' equity.

ΔTotal Assets = (ARetained Earnings) (Equity Multiplier) [4]

An increase in total revenue must be accompanied by a proportionate increase in total assets. Since any increase in total revenue is limited by the increase in total assets, growth in total revenue is limited by the increase in retained earnings. Total asset turnover is equal to sales divided by total assets.

ΔTotal Revenue = (ΔTotal Assets) (Total Asset Turnover) [5]

The net income required to achieve the target return on equity is determined by total revenue times the net profit margin. Net profit margin is equal to net income divided by total revenue.

ΔNet Income = (ΔTotal Revenue) (Net Profit Margin) [6]

Earnings retention is equal to retained earnings divided by net income.

Earnings Retention = Retained Earnings/Net Income [7]

Sustainable growth is equal to return on equity times the earnings retention rate of the company.

Sustainable Growth = (Return on Equity) (Earnings Retention) [8]

COMPUTING SUSTAINABLE GROWTH1

The DuPont system of financial analysis is based on the return on equity model that disaggregates return on equity into three components: net profit margin, total asset turnover, and the equity multiplier. Figure 1 provides a detailed view of sustainable growth which can be used to demonstrate the interconnectedness of the financial accounts used to compute sustainable growth. The net profit margin ratio allows the financial analyst to forecast the income statement and the components of the income statement, both revenue and expenses. To achieve the target ROE requires the firm to determine the net income required to achieve the target ROE. Total revenue is predicted from the required net income based on the net profit margin ratio. Total asset turnover allows the financial analyst to forecast the left-hand side of the balance sheet: assets. The firm uses the total revenue projection to predict total asset requirements. Based on the firm's operating leverage, corporate managers can determine the ratio of current assets to total assets and the composition of assets. The equity multiplier allows the financial analyst to forecast the right-hand side of the balance sheet since liabilities and owners' equity must equal total assets. The corporation must issue debt so that the leverage ratio remains constant. From the DuPont system of financial analysis, the company is able to develop pro forma financial statements, particularly, the income statement and the balance sheet.

The DuPont system of financial analysis fulfills three functions. First, the DuPont system allows the firm to project future operations through Has pro forma financial statements developed as a budget or financial plan. The second function performed by the DuPont system is as a control mechanism. As the firm progresses through the year, the firm can use the pro forma financial statements to monitor performance. If the firm's operating performance deviates from the budget, the firm can take corrective action. If the deviation is negative, managers can correct the problem or adjust their forecasts. If the deviation is positive, managers can analyze and potentially enhance the positive change. The third function of the DuPont system is in the post-performance audit function. After the planning year ends, the firm can compare actual operating performance with planned operating performance to determine the deviation from the plan. In the long-term, effective performance budgeting should result in the deviation from the budget being near zero. Otherwise, the firm will be under-budgeting or overbudgeting.

Return on equity analysis provides a system for planning and for analyzing a company's performance. The net profit margin allows the analyst to develop apro forma income statement, as in Figure 2. The top box of Figure 2 shows an abbreviated income statement where net income is equal to revenues minus expenses. Given a target ROE, the financial manager can determine the net income needed to achieve the target ROE. From the target ROE, the financial manager can determine the revenue level necessary to achieve the net income target. The middle box of Figure 2 shows how the financial manager can use the total asset turnover ratio to project the total asset level necessary to generate the projected revenue level. Given a level of projected revenue, the financial manager can project the level of total assets needed to produce the projected level of revenues. The total asset requirement to project the pro forma levels of all of the asset accounts. The fundamental equation of accounting is that assets equal liabilities plus owners equity. The bottom box of Figure 2 shows how the financial manager uses the equity multiplier ratio can be used to project the pro forma financial needs and the financial structure of the company. Total liabilities and equity must be equal to the projected total asset requirements.

This model is called the DuPont system of financial analysis and the extended DuPont System is used to compute sustainable growth2. Sustainable growth, G, is equal to ROE times the retention rate which is one minus the payout ratio.

G = ROE (RR)

= (Net Income/Owners Equity)( 1 -Dividends/Net Income) [9]

Sustainable growth is the maximum growth rate that the firm can achieve without additional external financing beyond what is justified by the growth in retained earnings. The sustainable growth model assumes that the firm will maintain the target capital structure. The target capital structure will be the capital structure that minimizes the weighted average cost of capital for the firm that maximizes the value of the firm.

ANALYSIS OF ROE AND SUSTAINABLE GROWTH FOR COCA-COLA

Table 1 contains the data and ratios for the DuPont system financial analysis of return on equity and the analysis of sustainable growth for Coca-Cola based on the annual data for the years from 2000 to 2007. The first five lines from total revenue to dividends contain the raw data needed to compute the ratios used in the DuPont system of financial analysis and for the sustainable growth rate. Over the period from 2000 to 2007, total revenue for Coca-Cola increased from $17,354 billion to $28,857 billion. Total revenue for Coca-Cola increased every year over the sample period. Net income rose from $2,177 billion to $5,981 billion dollars and increased every year. Total assets rose from $21,623 to $43,269 but did not increase every year, i.e. total assets declined in both 2001 and 2005. Total owners' equity rose from $9,513 billion in 2000 to $3,149 in 2007. Total owners' equity rose every year. Dividends rose from $1,685 in 2000 to $3,149 in 2007. Dividends rose every year.

The next four lines in Table 1 contain net profit margin, NPM, total asset turnover, TAT, the equity multiplier, EM, and the earnings retention rate, RR, which are the ratios needed to compute return on equity, ROE, and sustainable growth, G. ROE is computed by two methods. The first line of ROE is computed by dividing net income by total owners' equity. The second line of ROE is computed by multiplying NPM by TAT by EM. If the two computations for ROE are the same, then the analysis is correct and is verified. The last line in Table 1 is the value of sustainable growth, G, and is calculated by multiplying sustainable growth by the dividend retention rate.

The net profit margin rises from 12.54 percent in 2000 to 20.73 percent in 2007. The highest NPM is 22.63 percent in 2003 and the lowest NPM is in 2000. The average NPM is 19.60 percent. The total asset turnover is 0.80 in 2000 and falls to 0.6915 in 2004 before rising to 0.80 in 2006 and falling to 0.6669 in 2007. The average TAT is 0.7696. TAT is the most volatile of the three variables affecting ROE. The equity multiplier is 2.27 in 2000 and falls to 1.77 in 2006 and rises to 1.99 in 2007. The average EM is 2.0064. ROE is as low as 0.228 in 2000 and as high as 0.4260 in 2001 but is approximately 0.30 over the remaining sample period and averages 0.2999 for the entire analysis period.

The dividend retention rate averages 0.4343 over the entire analysis period with a low value of 0.2288 in 2000 and a high value of 0.5488 in 2001. Sustainable growth is lowest in 2000 at 5.17 percent and highest in 2001 at 23.38 percent. Average sustainable growth is 13.43 percent and varies between 12.8 percent and 15.48 percent from 2003 to 2007.

Graph 1 shows the variables needed to compute ROE: NPM, TAT, and EM. Graph 1 shows that NPM and EM are relatively stable but that TAT declines over the analysis period. Thus, except for 2001, ROE is relatively stable averaging 13.43 percent. Graph 2 shows sustainable growth for Coca-Cola and ROE and RR which are used to compute G. The retention rate and sustainable growth rate are stable from 2003 to 2007.

SUMMARY AND CONCLUSIONS

Sustainable growth is the maximum rate at which a company can grow while maintaining the target or optimal financial leverage rate without additional external equity financing. Assets can only increase by the amount of retained earnings in the firm plus the additional debt that can be supported by the additional equity. In this paper, we demonstrate how to compute sustainable growth for Coca-Cola for the period from 2000 to 2007 and discuss the impact of the different variables on sustainable growth for Coca-Cola.

This paper uses actual financial data for Coca-Cola Corporation to do the financial analysis. As a class project, students are required to collect data for Coca-Cola, enter the data into an Excel spreadsheet, and analyze the data including graphing the data. If students are required to resent their results in a Power Point presentation, this case analysis meets several course objectives and program goals for a student majoring in accounting or finance: collecting data, entering data into a spreadsheet, manipulating the data to compute financial ratios, graphing the data, and doing a Power Point based oral presentation. Additionally, the student can be required to write a short paper on the results.

Subject: Financial analysis; Soft drink industry; Sustainability; Return on equity; Case studies

Location: United States--US

Company / organization: Name: Coca-Cola Co; NAICS: 312111

Classification: 9190: United States; 9130: Experiment/theoretical treatment; 8610: Food processing industry; 3100: Capital & debt management

Publication title: Journal of Business Case Studies

Volume: 7

Issue: 5

Pages: 9-15

Number of pages: 7

Publication year: 2011

Publication date: Sep/Oct 2011

Year: 2011

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

ISSN: 1555-3353

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Equations Diagrams Graphs Tables References

ProQuest document ID: 893661815

Document URL: http://search.proquest.com/docview/893661815?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Sep/Oct 2011

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 54 of 100

Global Supply Chain Management: Is Sustainability A Priority?

Author: Ueltschy, Linda C

ProQuest document link

Abstract:

Agrigalore is an international agribusiness headquartered in the U. S. Midwest. Increased competition in the soybean sector has spurred Agrigalore to consider producing in Brazil, yet concerns over destruction of the rainforest and sustainability need to be factored into management's decision. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Agrigalore is an international producer and marketer of food and agricultural products headquartered in the Midwest of the United States, having been in business for more than a hundred years. Agrigalore is committed to helping customers succeed through collaboration and innovation, sharing its knowledge and experience to help meet economic, environmental and social challenges.

In the area of agriculture, Agrigalore produces, buys, processes and distributes grain and other commodities to makers of food and animal nutrition products, as well as provides products to crop and livestock producers. In the food sector, Agrigalore supplies high-quality ingrethents to food and beverage manufactures.

Agrigalore has enjoyed increases in sales and profits for the past seven years with over $35 billion in sales and revenues in the fiscal year 2010. However, one area where increased competition is starting to take its toll is in the soybean sector. Although the United States is still projected to be the world leader in soybean production for 2009-2010 at 88.2 million tons (Ashbridge, 2010), Brazil is gaining ground in the world market, as is Argentina.

The trend has had its effect on the market share held by Agrigalore in the soybean market. Agrigalore is considering whether it should acquire land and begin producing in Brazil itself, which would give it more access to the large Brazilian market, as well as enable it to produce in a climate which can grow two soybean crops per year.

John Xavier, V.P. of Global Supply Chain Operations, has been asked to prepare his suggestions to be discussed at the executive team meeting next month. He is sitting down to examine the market and the opportunities and challenges of producing in Brazil in order to decide the best way for Agrigalore to grow and protect its market share in the soybean industry.

WORLD SOYBEAN MARKET

Thanks to China's soaring demand for soya products, soybeans are the most imported agricultural commodity in the world in terms of value and quantity" (Workman, 2007, p.1). Soybean production worldwide, according to the 2009-2010 projection, is expected to total 247.2 million tons. Of this, the United States remains the leading producer with 88.2 million tons expected, but Brazil and Argentina are gaining ground. Brazil's soybean production is expected to be 62 million tons and Argentina's at 52 million tons, which is a significant increase over the 26 million tons produced in 2009 (Ashbridge, 2010). The majority of the soybean exports went to China, the largest consuming nation at 2 billion bushels this year; this equates to 60 percent of the entire U.S. crop.

SOYBEAN PRODUCTION IN BRAZIL

There has been an increased domestic demand for soybeans, which has limited, to a certain extent, the amount of soybeans available for exports. Nonetheless, Brazil's average annual growth rate of soybean production over the past four decades is 14 percent average annual increase, compared to 5 percent annual growth rate in the U.S. over the same time period. Additionally, droughts in Argentina and Paraguay have helped shift market share to Brazil Oilseeds, 2009). Industry experts expect Brazil to overtake the United States as the world's largest soybean producer within the next five years. As of 2005, it had already overtaken the U.S. as the world's largest soybean exporter, with China being its top export destination (Workman, 2007).

"GREEN" RESPONSE TO INCREASED SOYBEAN PRODUCTION IN BRAZIL

Between June, 2000 and June, 2008, more than 150,000 square kilometers of rainforest were cleared in the Brazilian Amazon. The reasons for this can, in part, be traced to drastic changes in Brazil's agriculture over the past three decades. Population growth and increased demand for food and bio-fuels have expanded the boundaries of planted land. Additionally, surging demand from China and other emerging economies has caused a worldwide boom over the last few years, which has helped trigger a land rush that precipitated the conversion of natural forest for farms, plantations, and ranches (mongabay.com, 2009), this has resulted in escalating real estate values. International environmental groups, such as Greenpeace, are lobbying against possible infrastructure improvements, which they view will promote deforestation in an ecologically-sensitive area. Rainforests are home to as many as two-thirds of all living species and the Amazon rainforest is considered one of the world's richest collections of biological diversity. In response to pressure from environmental groups like Greenpeace, the Brazilian soy industry has agreed to extend a moratorium on soy production in newly deforested areas in the rainforest which began in 2006 (mongabay.com, 2009).

ACTIONS OF THE BRAZILIAN GOVERNMENT

Brazil, by far the largest country in area in Latin America, and also the most populous, with 204 million residents, has achieved high economic growth. Even in the current global recession, Brazil's GDP is expected to grow 4.5 percent World Fact Book, 2010). Nonetheless, a problem facing Brazil is very uneven distribution of population and wealth. Brazil is said to have the greatest disparity between rich and poor in the world. Some of the poor live in "favelas," or poor sections of metropolitan areas, but many are indigenous people or subsistence farmers who live in the country's Northeast and Northern regions and that continue to migrate in large numbers to the highly populated cities. In fact, the vast majority of Brazilians live in cities located within 600 kms of the Atlantic shore, with 45 percent living in just three Southeastern states: Säo Paulo, Rio de Janeiro and Minas Gerais.

In an effort to develop more of its country, feed its people and help its poor, the Brazilian government has taken several actions. In 1956, it built a planned city, Brasilia, which became the official national capital in 1960. The leaders of Brazil believed that by relocating the capital, congestion in Rio de Janeiro would be alleviated and the new capital would promote development in the then unpopulated Cerrado (Tropical Savanna). The master plan for Brasilia was to have approximately 800,000 inhabitants, so its population of 2.6 million in 2010 far exceeds the goal. However, the Southeastern states on the Atlantic Coast remain more crowded than ever.

A program to improve social and productive integration for western Amazonia is the Free Trade Zone or Zona Franca de Manaus. It has attracted more than 600 companies, including many of the world's largest enterprises. However, the lack of paved roads connecting it to the east, west or south of the country remains a problem and one of the main constraints inhibiting greater expansion of the FTZ of Manaus.

Congressional initiatives in Brazil have encouraged poor farmers to settle on forest lands. In Brazil, each squatter acquires the right to continue using a piece of land by living on it and "using it" for at least one year and a day. After five years, the squatter acquires title to the land and can even sell it. Up until the mid-1990's, the government allowed the squatter to gain title to an amount of land up to three times the amount of forest cleared. Between 1995 and 1998, the government granted land in the Amazon to approximately 150,000 families. In June, 2009, Brazilian President Lula signed a law granting 67.4 hectares of land in the rainforest to more than 1 million illegal settlers (Butler, 2009). Thus, these actions have helped to engage more Brazilian citizens in agriculture, which helps to feed the poor and the nation, and to develop more of the country, but has also contributed to more deforestation of the Amazon jungle.

An interesting phenomenon is that Brazilian deforestation is positively correlated to the economic health of the country (Butler, 2009); when pasturelands are expanded and more land devoted to agricultures, growth in the GDP occurs and exports increase. According to environmentalists, favorable taxation policies enacted by the government, combined with the government subsidized agriculture, encourage the destruction of the rainforest. Their contention is that low taxes on income derived from agriculture and low tax rates on pastureland makes deforestation profitable. However, Brazil still accounts for 74 percent of land protected globally in conservation areas established since 2003, according to a study published in Biological Conservation (2009). Additionally, Brazil started paying small fanners $50/month in 2009 to plant trees in deforested parts of the Amazon. Last, responding to allegations that major Brazilian cattle producers are responsible for illegal clearing of the Amazon rainforest, Brazil's Development Bank, as of 2009, now requires producers to trace the origin of the beef back to the ranch where it was produced to ensure that the beef did not come from illegally forested land. Thus, the Brazilian government has tried to balance its actions in terms of need for economic growth and environmental concerns.

INFRASTRUCTURE NEEDS AND CHALLENGES

Brazilian infrastructure projects may require as much as $85 billion in financing over the next decade, which is luring investors, foreign and domestic, as the country prepares for the World Cup in 2014 and the Olympics in 2016 (Moura, 2010). Brazil will become the fifth nation to host the World Cup twice and will be home to the first World Cup held in South America since 1978. In addition to stadium upgrades, millions will be spent on basic infrastructure needs such as highways, subways and railroads to get the country ready to accommodate and transport guests. This will also be true of infrastructure needs pertaining to the 2016 Olympics in Rio de Janeiro.

Perhaps the fact that Manaus is one of 12 host cities for the 2016 Olympics in Brazil will be an impetus for infrastructure improvement in the Amazon, an area in dire need of upgrades to the highway system. Roads, specifically paved roads, are needed to provide access to logging and mining sites, to allow farmers to bring their products to market, and to enable those living in the Amazon region to be able to receive needed products and services and to travel to other parts of the country. More paved highways are particularly critical as a means of gathering production from the farms for processing in facilities located in river ports or near railway terminals.

One of the most ambitious infrastructure plans was in the 1970's when Brazil planned the TransAmazonian Highway, also known as BR-230, a 2000-mile highway that would bisect the Amazon forest, opening lands to peasants, and the development of its timber and mineral resources to maintain economic growth. However, this highway was plagued from the start with the sediments of the Amazon, rendering the highway unstable and subject to floods, so its positive impact was minimized, giving the environmentalists ammunition to use in their arguments. More recently, the discussion has turned to another highway in the Amazon, BR- 163. BR- 163 was originally built between 1973 and 1974 and is unpaved in large part and often impassable. In 2000, plans to pave BR-163 surfaced as a means to provide an effective route for transport of products and people. Immediately, the international environmental groups rallied their forces to block its paving, saying it would cause more fires in the rain forest and signal disaster in the Amazon due to the development it would enable. The Brazilian government spent money to start paving BR-163, but yielded to the pressure of the environmental groups and agreed to only clear enough of the rainforest to actually build the highway. Unfortunately, this led to the demise of the paving of BR-163. By the time the highway was not even halfway paved, the rainforest had already buried the paved portion.

BR-163 is still not paved, and largely impassible, as well as many other roads in the rainforest. However, a new push is underway to provide a viable export corridor for soybeans from the rainforests. Reconstructing the highway is part of an evolving series of plans for massive infrastructure expansion. The governor of Mato Grosso since 2003 is Brazil's largest soybean producer and a major force in inducing the federal government to pave the road. With the paving of BR-163, soybeans would only have to travel half the current distance to reach the port of Paranguá, even though it is a very congested port. Historically soybeans have been produced in the Southern region of Brazil, but the expansion of the agricultural frontier to the Central- West region has created the need for a second export corridor using the waterway network of the Amazon region and the port of Santarem, although Greenpeace strongly opposes this.

In relation to other areas of infrastructure, Brazil has 28,857 km of railways, which ranks tenth in the world. Having 50,000 km of waterways puts Brazil in third place in the world in terms of usable waterways, with seven world class ports in strategic locations to its credit. Brazil has an excellent telecommunication system, ranking fifth in the world in cell phone usage and sixth in terms of land lines available. It has an extensive microwave radio relay system and an impressive domestic satellite system. It ranks fifth in the world both in terms of internet hosts and internet usage, with growth noted in both (Brazil: World Factbook, 2010). Brazil offers excellent storage facilities, but grain storage facilities are in short supply. Brazilian agribusiness officials are worried that Brazil is running out of soybean storage and that this problem could be a chronic obstacle to further expansion and growth (Rocher and Campos, 2010).

CONSIDERATIONS FOR JOHN XAVIER

1. Should Agrigalore try to acquire land in Brazil to take advantage of the favorable climate which allows two crops per year? Should Agrigalore try to partner with an existing Brazilian soybean producer in a joint venture? Should Agrigalore try to buy out an existing Brazilian soybean producer? What are me pros and cons of each entry mode?

2. What should John consider regarding distribution decisions related to each entry mode? What trade-offs would need to be evaluated? What costs should be considered in the design of Agrigalore's Brazilian distribution network (i.e., environmental costs, investment costs, costs to reputation)?

3. What possible role will the Brazilian government have in Agrigalore's success or failure if it decides to produce in Brazil?

4. Are there ethical considerations to be considered? Do the arguments of the international environmental groups have any validity? Since Agrigalore tries to share its knowledge and experience to meet economic, environmental and social challenges, how does this play into its business decision? Would its entry into Brazil help the economic growth of the country and improve the lives of the poor farmers? Are the environmental issues surrounding the rainforest so crucial that Agrigalore should not consider producing in Brazil? Are there ways Agrigalore could support sustainability and still produce in Brazil?

5. Should international organizations have any say in Brazil's decisions as to how it develops its country? Are there any international organizations that have enough power to pressure or force their ideas on Brazil? What kind of power would enable them to do this?

What should John Xavier' s recommendations be to the executive team and why?2

ACKNOWLEDGEMENT

Humberto Florez, President of Technology & Aerospace, DHL Supply Chain and a native of Brazil, contributed insights to this case.

Subject: Agribusiness; Soybeans; Sustainability; Supply chains; Agricultural production; Case studies

Location: Brazil, United States--US

Company / organization: Name: Agrigalore; NAICS: 111110

Classification: 9190: United States; 9173: Latin America; 8400: Agriculture industry; 5160: Transportation management

Publication title: Journal of Business Case Studies

Volume: 7

Issue: 5

Pages: 17-22

Number of pages: 6

Publication year: 2011

Publication date: Sep/Oct 2011

Year: 2011

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

ISSN: 1555-3353

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Graphs Maps References

ProQuest document ID: 893661723

Document URL: http://search.proquest.com/docview/893661723?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Sep/Oct 2011

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 55 of 100

The Dynamics And Protection Of Local Culture Under Globalization On Lanta Island In Southern Thailand

Author: Ukrit, Arporn; Arunotai, Narumon; Doungchan, Piboon

ProQuest document link

Abstract:

This study aims to study how Lanta Islanders in southern Thailand can maintain their traditions and culture under globalization. The researchers conducted in-depth interviews with 30 islanders on Lanta Island and used content analysis to analyze the resulting data. The researchers found that, after the tourism boom and globalization came to Lanta Island, many foreign travelers have visited the island, causing local people to change their own way of life to support tourism. However, with government support, the local culture is still alive. The local people have maintained their culture in many ways, such as transmitting their culture to their children and mixing with Thai. We conclude that the Lanta Islanders still maintain their traditions and culture while learning about the world outside the island by adapting themselves in various ways to develop a mixed culture to live under globalization. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Globalization is the homogenization of economies around the world (Somboon, 2008); as Reiser and Davies (1994) state, globalization is meant to universalize. Globalization has spread to every region of the world and, in some cases, has affected the local culture. Scholte (2005: 17) explains that, according to some definitions, globalization is similar to Westernization or Americanization. This explains how modern social structures such as capitalism, rationalism, industrialization, etc., have been spread throughout the world. This phenomenon can destroy community decisions and local cultures.

Lanta Island is located on Thailand's West Coast in the Andaman Sea. The island has a lot of local traditions and mixed culture, originally inhabited by Sea Gypsies, fishermen from the west coast of Thailand. Sea Gypsies originated from the Nicobar or Andaman Islands, lived on their boats, and were feared as pirates. Many years ago, after Lanta Island was opened for tourism under a government policy that aimed to increase economic growth, many people from around the world began to visit, and foreigners, especially from western countries, brought culture and transferred it to the local people on Lanta Island. The island now has a wide variety of foreign residents as well. It now has a mixed culture and a long history; however, in recent years, and many local people have adapted to life under globalization, such as changing from traditional jobs to working for large companies, and many aspects of the local way of life are changing.

The village of Ban Sang Ga U on Lanta Island is a Sea Gypsy village of this Sea Gypsy. Their lifestyle has already changed to adapt to the modern world, but they still retain their own language, traditions, and ceremonies. Their belief in the supernatural and traditional spiritual worship is still influential in the community, as seen in their traditional "Loy-Rua" (Floating Boat) ceremony. The village men build a symbolic boat and place wooden statues of themselves in it, along with nail parings, hair, and popped rice. In performing this ritual, they ask for forgiveness from the sea gods for any offences they have made to the sea. It is believed that all evil is carried away in the symbolic boat (LantaHotel.com, 2010).

Before we made the decision to study the adaptation of local culture, we spent a great deal of time in 20062007 surveying and conducting in-depth interviews with some of the inhabitants of Lanta Island. We found that many native islanders are changing their way of life, such as by moving away from making handicrafts and engaging more in small business ventures relating to the tourism industry in order to support foreign travelers, especially Westerners. Furthermore, many travelers have brought new cultures to the island, and the native people are open-minded about adapting themselves to these cultures. This is how capitalism came to the island, as well as management with economic, night life, and so on. However, after travelers came to Lanta Island and the local people began forming businesses to support them, several issues arose, such as concerns about the loss of traditional cultural practices and the shift toward a more modern society. While Lanta Islanders still strive to protect their traditions and culture, they maintain that it is difficult to do under globalization.

As we mentioned above, studying the cultural adaptation of Lanta Islanders is an interesting issue because they live under globalization but still carry on with their old culture. Thus, the question of this study is how the native Lanta Islanders can live with their old culture under globalization.

OBJECTIVE

To study how the Lanta Islanders can maintain their traditions and culture under globalization.

METHODOLOGY