Document 1 of 100

BEZANILLA & BEZANILLA REAL ESTATE DEVELOPMENT COMPANY

Author: Arias-Bolzmann, Leopoldo G; Cavada, Maria Jose D; Berroeta, Francisco A

ProQuest document link

Abstract:

Bezanilla & Bezanilla is a family company having two strategic business units. On the one hand, it has the Real Estate Company, and on the other it has the Construction Business. It is a company that has been active for many years in the local market of Viña del Mar as well as a leader in the development of buildings targeted at the upper and middle-upper socioeconomic segment. At the beginning of 2005, executives were appraising the introduction of marketing tools in the management of different activities carried out by the company. An important dilemma was how to maintain growth given the great competition in the real estate market of Viña del Mar, as well as add to the boom that the real estate market was experiencing. To this end, the executives were analyzing the possibility of creating a new real estate brand to manage the projects aimed towards a lower socioeconomic level. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

An effective analysis of the Bezanilla & Bezanilla case date must be placed within the frame of a type of proactive thinking. A way to open the session is to ask the students a question as to Which aspects had led B&B to occupy the position that it holds nowadays?, and vote on the decision of the dilemmas whether Should B&B introduce a new brand to embrace another segment of clients for apartments? Which marketing tools should B&B develop in order to manage the business? There will arise, on the side of the students, problems related to the two types of dilemmas (enter a new segment of clients in the center-eastern area of the city and establish a long-term marketing strategy). The analysis of current marketing operations resorted to by the company could lead to a more general discussion on the role played by these elements in the business success of a real estate company. As regards to the possibility of introducing a new brand with a view to embrace another segment of the market, there will be positions both in favor and against. At this stage, the instructor should ask the students to evaluate both options.

QUESTIONS AND ANALYSES

Opening Question

1. What situations in the environment have led the real estate industry, and concurrently B&B, to their current situation?

The year 2004 was auspicious for growth of the industry on account of the following aspects:

* A growth in the national economy was expected for the year 2004, in the order of a rate between 5% and 5.5%.

* The interest rates during the year 2004 were the lowest in Chilean history, with an inter-banking rate of 2.18% at November 11, 2004.

* Inflation was under control between a 2% and 3%.

* During the year 2004, more than 2 million dollars were invested in works of road infrastructure in the Fifth Region (Chile is divided into twelve regions or states and its capital, Santiago).

* Initiatives of the local government in the Fifth Region for the urban renewal of the center-eastern area of Viña del Mar.

* Another element accounting for the higher sale of apartments was that the price of the land had increased 14%, bringing as a consequence an increase in the price of dwellings of 17.6% between the years 1977 and 2003.

Analysis

2. What should B&B's course of action be to take advantage of the boom in the real estate sector, which was taking place at a local, as well as at a national level?

The following alternatives reflect what Bezanilla could do to take advantage of the real estate boom:

* Continue developing projects for the upper and upper-middle segment of clients in the Fifth Region.

* Explore the market in the capital city of Chile (Metropolitan Region), undertaking real estate projects centered on the upper and upper-middle clients.

* In line with the strategic vision of the Chairman of B&B, real estate projects could be undertaken in areas of tourist interest in the country, centered on the upper and upper-middle socioeconomic segment.

* Diversify the portfolio of projects, investing in office buildings, hotels and medical office buildings located in the different areas of Viña del Mar.

* Invest in projects of condominiums of houses in the Fifth region, addressing the upper and upper-middle socioeconomic segment.

* Undertake projects for the construction of buildings in the center-eastern area of Viña del Mar, centered on the middle and middle-lower socioeconomic segments.

* Alternatives a, b and c seem to be feasible alternatives to be carried out by the company.

Explanations

Explanation: This alternative is already under way with projects in the area of Reñaca, 5 Norte and Nueva Libertad (see photograph on page 2 of the case).

Explanation: This option was being planned for the next years, in order to obtain a presence of the brand in the upper and upper-middle market in Santiago. On obtaining this brand recognition, the chairman of the company expected to attract new clients from Santiago to the projects undertaken in Viña del Mar.

Explanation. It is a feasible alternative to the extent that local real estate partners are detected; these partners should contribute their know-how, regarding the likes and preferences of the tourists, their relationship with the local suppliers and thencapacity for the implementation of the project.

Alternatives d and e are difficult options to be carried out, due to the characteristics of the company and the setting:

Explanation: in what respect the market for offices in the Fifth region, this was a stagnated market showing no signs of recovery. The last office building developed by the company was "El Coraceros, which encountered difficulties for its total sales. However, in the area of Reñaca and Bosques de Montemar, there are no offices for medical and dental offices, which could represent a business opportunity for the company.

With respect to hotels and medical offices, these are a type of construction where the company did not feel qualified to develop them, as they estimated that they did not have enough know-how. A possible solution to this aspect could well be a strategic alliance with a company specialized in this type of construction.

Explanation: the market for the sale of houses was very unstable in the Fifth Region, presenting a greater variability than the market for apartments.

Explanation: this alternative will be explained later in the answers to questions 2 and 3. Should B&B enter the real estate market of the central-eastern area of the city? Justify your answer.

Students may answer either in the affirmative or positive; therefore both cases will be analyzed.

Case 1 If the answer is positive, the arguments are as follows:

* Because of the incentives from the municipal government for the urban renewal of the center-eastern area of the city.

* Because of the recent investments in road infrastructure to prevent congestion and offer a better quality of life in the center of the city.

* To make the company grow within a new socioeconomic segment of clients.

* To prevent real estate companies from Santiago and also Viña del Mar (Inmobiliaria Sol Naciente), from capturing the market of clients from the middle socioeconomic group in the region.

* To diversify the portfolio of investments, in a manner such as to lessen risk.

Case 2 If this answer is negative, the arguments are as follows:

* Requirements of new sources of financing, which may increase the risk of the business.

* On entering another type of market of clients, the company could well lose the position attained with the brand Bezanilla in the upper and upper-middle segment of clients. The latter could affect in like manner the image of the brand, since it is possible to generate confusion in the perceptions, both of old clients as well as of potential clients.

* There is possibility of damage to the organizational structure since it has been developed on the basis of a culture of a family company. If Bezanilla grows, the organizational structure will require changes for which the company seems not be prepared as yet.

4. Which should be B&B's entry mode to the market of the center-eastern area of Viña del Mar, which is constituted mainly by the middle socioeconomic segment?

The possible ways of entry for Bezanilla are as follows:

* Acquisition of another real estate company.

* Strategic alliance or joint venture with another real estate company from either the capital city of Santiago or from Viña del Mar.

* Own investment maintaining the name Bezanilla.

* Own investment under another name.

Acquisition of Another Building Company

Arguments in favor:

*The name of another brand is acquired and if it is well positioned in a market targeted to the middle socioeconomic segment, it would be beneficial for the company.

* On acquiring another company, also acquired is the human capital and the know-how with respect to developing buildings aimed at the middle socioeconomic segment.

* The portfolio of clients of the company bought-out is also acquired.

Arguments against:

* Strong investment required to buy-out another firm, which involves a high risk.

* Possible clash between the organizational cultures.

Strategic alliance or joint venture with another building company either local or from Santiago

Arguments in favor:

* Lower investment required than in the case of a buy-out.

* A better performance of both companies can be attained.

* The risk of undertaking the project is shared.

* In the case of a joint venture, resulting from the synergy of two companies, another juridical person is created, and hence a lower risk of damaging the brand image of both companies.

Arguments against:

* Possible clash between the organizational cultures.

*If the allied company is not 100% reliable, there is the risk of possible frauds.

* Conflict of interests.

* Possible problems relative to the distribution of profits.

* Difficulty to maintain the brand.

Own investment maintaining the name of Bezanilla

Arguments in favor:

* The company ensures that all capital assets are part of the ownership of B&B.

* Power of decision over the projects to be undertaken.

* Good perception from the new segment of consumers thanks to the brand equity.

Arguments against:

* Possibility of damage to the company's brand, which is already established in the segment of upper and upper-middle clients.

* If the company enters with the name Bezanilla to another market segment, there is always the possibility of destroying the positioning of the brand attained over so many years.

* High risk, due to the lack of knowledge of the new market.

* High financial risk.

Own investment under another name

Arguments in favor:

* The company ensures that all capital assets are part of the ownership of B&B.

* Power of decision over the projects to be undertaken.

* Entry to a new market without risking the brand equity already established in the segment of upper and upper-middle clients.

Arguments against:

* High risk, due to the lack of knowledge of the new market.

* High financial risk.

* Lack of Know-how in this type of buildings, which call for another type of finishing and materials.

5. Which Pricing Policy may be applied at B&B for selling the apartments?

Analysis prior to the answer:

The demand for the products shows one or another inclination in the face of elasticity effects and the variables that determine it. This must assume that the provision is based on the development of strategies, resources, and budgeting of the company, that is, on a logical and coherent marketing plan.

Bear in mind that above conditions assume that:

Total Demand: Size and income of the target market = Potential of the market

Target Market: Current level of the combined effort of B&B marketing and the industry

Factors exerting an influence on price setting

Production Costs + Margin

Internal Factors: Computation of Break-even Point

Return on Equity Invested

Price Setting

Elasticity Demand/Prices

External Factors: Value as Perceived by the Client Competition

Current Situation

* Prices of apartments range between 156,000 and 300,000 US dollars and a penthouse between 450,000 and 550,000 US dollars.

* The company did not have a strategic pricing tool and only applied the usual tool of Cost-plus-Margin, which did not generate any differentiation with respect to competitors.

* The price increases when the demand for sale of apartments before actual construction begins increased.

* The price decreases according to the number of apartments left unsold, but without using any previously defined price discount policy.

Proposed Situation:

* Perform an analysis of the data base of clients in order to determine the profile of the company's clients. Upon obtaining this information, it will be possible to establish in a better manner a pricing strategy in accordance to the profile and willingness to pay of the clients.

Perform price discrimination by:

Timing: At which moment of the construction of the building the apartment is bought. It is worth stressing that B&B begins its constructions after having sold a 15% of the apartments (pre-sold before the construction begins).

* At this stage we suggest carrying out a strategy of discounts depending on the time of the sale.

* Pre-sale before the construction begins: make discounts higher than those at the following stages.

* Sales while construction is under way: the discounts at this stage will be higher than when the project has reached its completion, but lower than those pre-sold before the construction begins.

* Sales after project has reached its completion: The discounts at this stage are the lowest which are granted throughout the life cycle of the building.

* Exceptional cases: If with the discount at the end of the project it has not been possible to sell all the apartments, the discount must be increased, in order not to have unused capital. Another is the case of the client who pays cash down; in this case a specific discount should be made.

By amount of purchase: Depending on the amount of the purchase in conjunction with the timing at which the asset is acquired, different types of discounts may be applied.

6. What aspects should B&B consider to give higher value to the clients and so continue charging a Premium price in the upper and upper-middle market of clients?

The following aspects should be considered for the creation of value aimed at the client:

Service: "The differentiation between the offer of the different companies tends to migrate to the service that attends the products and the treatment which the client receives".

Facilitating aspects: The sales room represents the image of the company at the different sales points, for which reason it cannot be overlooked. In order that the client has a good perception, there should be facilitating elements such as:

Parking

Adequate ventilation system

Audiovisual equipment with virtual samples of the building and apartment.

Bathrooms.

Waiting room.

Specific schedule for attention to the client.

Environmental music.

Physical evidence.

Socializing elements: These are aspects which help to the interaction between clientemployee and employee -client.

* The sales staff may use some type of clothing that identifies it with the company, I so as to suggest to the client which is their role and also to reinforce the image of the company's brand.

* Another aspect could be the waiting room, where the clients may interact in order to share information.

* Should it be necessary and the client so demands it, have a specialized tour conducted by the engineer in charge of the work, in order to solve technical doubts.

* Another socializing element would be to offer the client coffee and cookies in order to relax the setting.

Differentiating aspects: They are aspects which make the company stand out with regards to its competitors and point to the market segment which the service is intended for.

The company could do the following:

* Create a club of apartment and office owners of B&B, in order to have more information on the profile of its clients.

* Have a guided tour conducted by the engineer in charge of the construction (should it be required).

* B&B has a unique post-sale service. This service consists in providing assistance to the owners of apartments in the face of any problem that may occur in their dwellings.

Quality: B&B's uses specialized suppliers of high quality, which are paid a Premium price to obtain the best quality in their buildings. This is an aspect that should be stressed in its publicity (brochures, catalogues, pop), as it is a differentiating aspect from the competition.

7. In what respects to the materials used, these are of first quality and differentiate the product, positioning it as the best in the segment which it is aimed at (marble. Bolivian Mara wood, premium bathroom appliances, etc)?

Subcontracting top calculators and engineers in order to attain the best performance in the construction of the building.

Delight: Due to the increasing competition and the real estate boom in the Fifth Region, one way to attract clients and at the same time to be able to differentiate the product, is to generate sales promotions aimed at the client, such as, for instance, "buy an apartment and participate in a sweepstake to obtain the complete decoration and furnishing for the apartment. " The important thing in this promotion is who will be responsible for decorating or furnishing the apartment, as this is a very valued aspect by the client. This promotion can be carried before, during or after the completion of the construction of the building.

Convenience: This aspect is valued more and more by the clients, due to the lack of time and willingness to seek for information.

Some elements that adjust to this change in the market are:

* Location of the building: the building must be near commercial centers, schools, transportation availability, entertainment centers, and, whenever possible, have a privileged sight.

* B&B apartments ensure a greater ratio space/living area, that is, they have fewer rooms per square meter than the main competitors. For instance, in a 100 square meter apartment the competition offers 4 bedrooms, whereas B&B only offers 3.

* B&B could offer a service for expediting the paperwork related to financing.

* The company should send personalized information wherever the client deems convenient (home, office, etc.).

Experience: B&B should, in its dealings with its clients, emphasize that it is a family company and that it:

* Has a favorable tradition and history in the real estate market in the Fifth Region.

* Has a sound reputation among the different stakeholders.

* Has successful projects built.

Innovation: The capacity of the company to adopt new technologies or ways of doing things is rewarded by the market. It is for this reason that B&B has innovated in the following aspects:

* Better use of interior spaces, due to new architectonic techniques.

* New construction techniques.

* Set up lockers and changing space on the ground floor of the building for residents' servants, in order to use the space available in the apartments as best as possible (Edificio Pontevedra, 5 Norte).

* Install elevated look-outs to enjoy the view (Edificio Las Palmas de Reñaca).

* The company could use recycling techniques, in order to lower rates (this information is not in the case, but the teacher may mention to encourage creativity in the responses from the students).

Design: An aspect which generates value for the client is the external and internal design of the product. B&B has implemented the following design elements:

* Landscaping.

* New trends in architectonic design.

* Lay-out of the apartment (use of internal space in the apartment).

Exposure of the brand: In order to generate a perception of long-term quality for the brand, it is recommended to use the following communicational media:

* Sponsor events (tennis, gold, polo, as they are sports for the elite).

* Use blown-up posters and panels. Even though, the company has these elements, they are somewhat deteriorated and outdated.

* Advertisements in magazines targeted to the upper and upper-middle socioeconomic segment, such as Tell Magazine, decoration magazines, etc.

8. How do you think that the positioning attained by B&B has exerted an influence in creating value for the brand?

In order to attain a clear positioning, it is necessary to make some strategic decisions and answer questions such as the following:

What: Here the objectives that the company wishes to attain are structured. The strategic objectives of B&B are to develop projects that satisfy the expectations of quality and service required by the market.

Where: This aspect is related with the strategy of market segmentation. Where does B&B wishes to compete? In the segment of consumers belonging to the upper and uppermiddle socioeconomic group of Viña del Mar and of Santiago?

How to compete: B&B is a family company with a great tradition in the market of the Fifth Region which emphasizes the quality of the product and improving the service to the client. Besides these aspects, B&B has always wanted to have a position of leadership in the real estate industry.

When to compete: Timing is critical for the company to know when the right moment to enter the market is. B&B was the first real estate company that addressed a high socioeconomic segment of consumers in the Fifth Region.

The positioning of B&B has exerted an influence on its brand equity due to the following aspects:

* It has been able to generate a clear perception regarding the differentiating traits (tradition, quality, and service) in the mind-set of the consumer.

* It has been consistent with the target segment set by the company. There has always been a relationship between positioning and what the business strategy of the company is (pricing, market share, and costs).

* Over the years, there has existed, a stability in what regards positioning, which generates a great credibility for the company in its value proposal. Due to the latter, it appears that clients know well what to expect or obtain, when they buy a B&B apartment.

* The projects carried out have always been in accordance with the value proposal which the company offers its clients.

* It has allowed B&B to be at the top of mind of its target market segment of clients. Even nowadays, the offspring of former clients, still buy B&B apartments.

* It has strengthened the brand in a manner such that it has created the possibility of generating extensions to the brand.

Subject: Real estate; Competition; Market strategy; Business growth; Brands; Case studies

Location: Chile

Company / organization: Name: Bezanilla & Bezanilla Inmobiliara SA; NAICS: 236115, 531120

Classification: 7000: Marketing; 8360: Real estate; 9173: Latin America; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Issue: 2

Pages: 1-14

Number of pages: 14

Publication year: 2010

Publication date: 2010

Year: 2010

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: 521243120

Document URL: http://search.proquest.com/docview/521243120?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 2 of 100

ALABAMA POWER RESPONSE TO KATRINA: MANAGING A SEVERE SERVICE SUPPLY CHAIN DISRUPTION

Author: Skipper, Joseph B; Hanna, Joe B; Gibson, Brian J

ProQuest document link

Abstract:

Part A of the case is designed to provide students with a multi-faceted situation with the focus being on requiring students to identify, analyze, and prioritize the key issues, their relative importance, and how to address each issue to minimize the impact of the disruption on business continuity and performance levels. Part B complements Part A by providing the student with an in-depth discussion of how the company featured in the case identified, analyzed, and prioritized the key issues they faced during and immediately after hurricane Katrina. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

The best way to administer this case is to divide the case into Part A and Part B. Part A is distributed first, with students asked to respond to the questions provided at the conclusion of Part A. Then, once Part A is complete, Part B can be distributed and the students asked to respond to the questions for Part B.

Part B contains some of the "answers" to Part A and/or details how Alabama Power responded to the challenges associated with a severe service disruption. Below are suggested short answers and/or areas to begin class discussions of the case.

CASE DISCUSSION QUESTION (PART A)

1. What actions can an organization take to prepare for potential disruption?

The point of this question is to drive discussion of the activities that organizations typically take in preparation for a disruption. This might first entail a discussion of different types of disruptions (causes) followed by actions taken to prepare for those specific events. As discussion continues, the point should be made that many of the seemingly independent actions brought up are probably very much related. Managing risk or planning for a contingency incorporates these independent actions under a single umbrella.

2. How do seemingly local, or regional, events impact the larger supply chain network (or even the entire economy) as a whole?

This question is designed to encourage the student to thinking about the 'so what' part of the equation. While everyone may be empathetic with the victims of a natural disaster or other business disruptions, it is often difficult to completely understand the impact on your own organization. This discussion should focus on what impact a Katrina type event will have on other organizations in the short, medium, and long range. Potential short term disruptions within the supply chain might include port closures, highway infrastructure damage, and loss of containerized freight or empty containers. Mid-term impacts might include loss of suppliers or other business partners. Finally, long term impacts might include the loss of organizational capabilities that are not easily replaced (manufacturing facilities', etc..)

3. What are the key differences between those companies who can react quickly and effectively to a situation and those that can not?

Based on the discussion generated in question 1 and 2, what actions, policies, or processes differentiate companies that can and cannot react quickly? This discussion should include active participation in listing the actual activities that would logically make a difference. One discussion area might include asking whether the listed actions are appropriate for all organizations in every situation.

While there is not one "correct" answer, the following is an example of how a student might appropriately respond.

Alabama Power delivers a universal product, much like the oil and gas industry, and must be able to respond quickly to disasters. Frequently, Alabama Power must deal with minor disasters due to storms, damaging winds, etc., on an ongoing basis. Companies that do not have the masses as its customers may not see a cost benefit in having a disaster recovery plan in place. Hence, when a disaster does strike, the lack of training is evident by non-proficiency exhibited in the actions or tasks related to emergency preparedness. In other words, practice makes perfect and first responders, as well as other team members, take actions similar to those actions taken in drill scenarios.

Another aspect of a company having the ability to respond effectively to an emergency is the financial status of the company. During disasters, individuals and groups are more willing to give of themselves, whether it is via their time, know-how, or donations. Companies with large cash reserves may already have the needed resources on hand to deal with the emergency - or at the very least, the ability to rapidly acquire the necessary material needed for restoration purposes.

Management at Alabama Power attributed the quick power restoration to Southern Company being vertically integrated, i.e. the company performing the 3 functions of generation, transmission, and the distribution of electricity to its customers.

Management also indicated that the recovery plan had decision-makers who understood their responsibilities, but incorporated enough flexibility and decentralization to allow decisions to be made at the disaster areas. Another key was communication. With the help of Southern Link - a Southern Company - communication was maintained, thus allowing coordination between parties responding to specific disasters.

4. Given the enormous task ahead and the limited information available, provide thoughts on how to approach a recovery plan.

This should include a prioritized list of key accomplishments for restoring power, as well as a list of company needs required to accomplish the restoration.

List of key accomplishments:

Safety - top priority

Electricity availability -power substations and generating plants on-line and capable of supplying power to their customers.

Power restoration - short-term is to maximize use to restore power to structures that are not severely damaged.

Rebuilding - long-term is to have the damaged or destroyed areas rebuilt and the infrastructure [water, electricity, and gas] restored.

List of company needs:

Communication - Southern Link mobile phones; involves interfacing with local & federal authorities as well as other companies, in the assistance of restoration efforts.

Resources on hand -poles, lines, transformers; transport to affected areas.

Manpower - overtime hours required.

Staging areas - inventory that may be used in other affected areas.

One example of an answer might read something like the following:

Like most everything else in life, pre-planning up front helps alleviate problems down the road. However, regardless of forethought put into disaster prevention or disaster recover, one essential key element would be top on the list. The top priority is maintaining the safety of the public and the employees engaged in restoration efforts. Communication ranks second. Without adequate communication, resources and manpower will be used haphazardly, rather than optimally. A satellite-based communication system is superior to land-towers for acquiring an incoming signal. In most instances, communication towers will be damaged or destroyed in the storm.

Next on the list, is determining what equipment is salvageable. If equipment cannot be salvaged, then it must be replaced with new parts. This is the short-term outlook- i.e. restoring power to the existing structures that were not destroyed by Katrina. A long -term approach is the rebuilding of the areas affected by Katrina and re-establishing the infrastructure of these towns and cities.

Last on the list will be the allocation of resources and the staging of resources needed to bring power back on-line. This will be a major labor-intensive undertaking involving overtime to return the electricity to its customers in the minimal amount of time. Teamwork is of paramount importance as well. Items needed for restoration efforts include electric line poles, lines, and transformers.

As for management, they will need to be kept abreast of the developments as they occur, to help ensure a timely completion of activities. Additionally, they must be empathetic to the workers and families affected by the storm. Along those lines of cooperation, Alabama Power must also interact with other companies, local and federal agencies, knowing that the rebuilding is an all-hands evolution.

5. Discuss how Alabama Power's dedication to quality and their philosophy of continuous process improvement could be utilized upon completion of the response to Katrina to enhance future efforts.

The impact of Hurricane Katrina will have long-term impacts. Many businesses have taken a year to recover from losses while other businesses may never fully recover. Natural disasters of this type cause massive business disruptions, regardless of industry. In the case of Alabama Power, the company was able to successfully manage restoration efforts and restore power in minimal time given the extreme circumstances they faced. This is due, in large part, to the continuous dedication of the company to contingency planning efforts conducted through implementation of a continuous process improvement philosophy. By focusing their efforts on awareness, prevention, remediation, and knowledge management, Alabama Power was able to recover quickly and efficiently from the mass devastation created by Hurricane Katrina. In the aftermath of the company's response to the disaster, they can review what portions of the plan were executed smoothly and which parts of the plan need to be revised for better disaster preparedness and improved disaster response the next time Alabama Power faces a similar tragedy.

In short, Southern Company is a "learning" type of organization. Employees are encouraged and expected to conduct post-job briefs after evolutions, in order to incorporate lessons learned into future activities. This is a part of the company's continuous improvement process, which is designed for getting employees to strive for better methods and to seek ways to become more efficient. Many items are documented and stored in a database that can be used for lessons learned. Such examples would include safety concerns, near misses, injuries, suggestions for improvements, revisions to existing procedures to enhance the existing version, etc. Management frequently performs observations of subordinates to help ensure quality is maintained in the work ethic and culture. By employing a continuous improvement process, the firm will always learn from any situation requiring implementation of the plan. Those parts of the plan that were not as effective as originally anticipated can be re-examined and the process re-engineered for improved results in the future.

CASE DISCUSSION QUESTION RESPONSE: PART B

1. Given what Alabama Power has experienced (Part A), and how they responded (Part B) identify any additional issues and potential tools that management may be able to use to help them achieve continuous improvement in their contingency planning process.

In a recent company-based publication, Barry Inman writes an article titled "Katrina provides real-life experience, but what's next?". He goes on to quote one of the members on the Southern Company Security Council during a meeting in December 2005. Some of the excerpts that include the application of lessons learned to that of real-life experiences due to the Hurricane Katrina' s aftermath, are as follows:

"Hurricane Katrina represented the first time in Southern Company 's history that electric operations and business infrastructure were disrupted at the same time. "

The council learned plenty of positives from Katrina. Among them were the teamwork across the core functions; all those functions being engaged in the thick of the response; every incident response team member being fully committed to the cause; and a healthy exchange of information forming the basis for important decisions that helped thousands, such as the purchase of trailer homes and the distribution of payroll cash advances for displaced employees in Mississippi.

"Katrina taught us that the weather can wreak just as much havoc on our business infrastructure as a terrorist attack. "

"In 2006 we will focus more on building relationships with other critical infrastructure providers that rely heavily on electricity, such as gas pipelines, hospitals and telecommunications companies, " he said. "We will also spend more time on employee communications and what employees need to do in times of emergencies. "

Additionally, employees are encouraged to call the 1 -866-600-NEWS number for the latest information, such as clarifying the roles and expectations of participating state and federal agencies, and making better use of communication tools such as SouthernLINC Wireless phones and satellite phones.

This part of the case is merely designed to provide the student with an opportunity to practice problem-solving on their own by identifying additional key issues and potential tools to use to enhance Alabama Power's continuous improvement process when applied to contingency planning efforts. The above bullet points serve to identify key areas that are of interest to the management team of Alabama Power.

Subject: Electric utilities; Contingency planning; Hurricanes; Risk management; Emergency preparedness; Case studies

Location: United States--US

Company / organization: Name: Alabama Power Co; NAICS: 221122

Classification: 9190: United States; 8340: Electric, water & gas utilities; 9130: Experimental/theoretical; 3300: Risk management

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Issue: 2

Pages: 15-21

Number of pages: 7

Publication year: 2010

Publication date: 2010

Year: 2010

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: 521202184

Document URL: http://search.proquest.com/docview/521202184?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 3 of 100

THE DEVELOPMENT OF A FLEET VEHICLE REPLACEMENT POLICY FOR A FEDERAL GOVERNMENT CONTRACTOR

Author: Maheshwari, Sharad; Credle, Sid Howard

ProQuest document link

Abstract:

The case is a simple but realistic application of business statistics models in the area of operations management and managerial accounting. It is an ideal case at the undergraduate level where students need practical application of statistical concepts. It superimposes generally difficult subject matter of statistics with easy to understand concepts of the operating cost of a small vehicle fleet. It will allow students to integrate simple regression, expected value and probability distribution concepts into vehicle replacement modeling. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Replacement Policy

In this section a vehicle replacement policy (of the most simple type) is suggested for a maintenance operation's fleet. The process considers relevant vehicle age, maintenance cost, opportunity cost of downtime, depreciation, salvage value and the cost of capital. It presents a simple method of determining which vehicle should be replaced.

Basic Cost Calculations

Table 5 indicates the calculation of major maintenance cost by vehicle age. These calculations show that vehicle maintenance costs increases with the age of the vehicle. A slight decline in 1983 and 1986 is due to sample size. There are 23 vehicles from 1989, one from 1983 and two from 1 986. Table 6 indicates the average number of major breakdowns by the vehicle age. This makes age the most important variable in determining both the number of major breakdowns and the associated repair costs.

Cost Considerations in the Replacement Model

As indicated in the assumptions of the case, several cost considerations are excluded. The replacement policy needs not consider insurance, fuel, taxation, and or parking/garaging, supervision and other incidental cost associated with vehicle maintenance. In this case many of the excluded costs are not charged on the contractors accounts, but paid by the contractor/federal government directly. Thus, this policy will consider only initial purchase cost, cost of capital, major maintenance cost, opportunity cost, and opportunity cost due to catastrophic failure. Note that the all costs are calculated based on the age of the vehicle at the end of three year from now. A threeyear period is used as the time period to compare old and new vehicle as new vehicles are amortized over three years by the contractor.

The replacement model could be further expanded by calculating yearly cost over useful life of each vehicle and then calculating the present value of each cash-flow. However, it is required that the model can be used for quick assessment, therefore, tedious yearly assessments are not considered. As another option an instructor can decide the level of complexity desired based on the course level and learning objective.

Replacement Model:

The replacement model is to compare the cost of maintaining a current fleet vehicle versus the total cost of buying and owing a new vehicle. When the cost of maintaining a current fleet vehicle is more than the cost of owning a new one then the current fleet vehicle should be replaced, i.e.,

Cost of maintaining current fleet vehicle over next three years > = Cost of buying and maintaining a new vehicle over next three years. (1)

Where,

Current cost of maintaining a current fleet vehicle over three years = Expected sum of major maintenance cost over three years + Expected sum of opportunity cost over three years + Expected opportunity lost due to catastrophic failure -Present value of salvage value of vehicle three years from now (2)

Current cost of buying and maintaining a new vehicle over next three years= Purchase cost of vehicle + Cost of capital + Expected sum of major maintenance cost over three years + Expected sum of opportunity cost over three years + Expected opportunity lost due to catastrophic failure - Present value of salvage value of vehicle three years from now (3)

Calculation of Costs

As shown before, the age of vehicle is one of the most important factors in determining the expected cost of maintenance due to major breakdowns. Table 4 provided data for total major maintenance cost over the three year period. The linear regression model can also be used to determine expected total maintenance cost over three years, where the vehicle's age is treated as the independent variable. The vehicle age can be calculated from the year of make of the vehicle and the year of assessment (2007.) The regression equation is given below. The R-squared value is not very high for the model (55%) due to sample characteristics; however the regression model is highly significant (probability [asymptotically =] 0)

Expected of sum of major maintenance cost over three year = (-$120.30+ $102.80 * Age of the vehicle) (4)

The expected opportunity lost cost due to major breakdowns can also be calculated based on the age of the vehicle. Table 4 has provided data for total number of major breakdowns over three year period. It is also indicated that that every major breakdown reduces productivity of two repairmen by 50% for 8 hours. That is the opportunity lost cost of each breakdown is:

Opportunity lost cost per breakdown = 50%* 2 repairman *8 hours *$40/hour/repairman = $320 (5)

Another linear regression can be used to determine the expected number of breakdowns per three year period. Again, the vehicle age is treated as the independent variable. The regression equation is given below. The R-squared value is not very high for the model (60%) due to characteristics of the sample however; regression model is highly significant (Probability = 0.)

Expected of number of failures in three year = -0.297 + 0.362 * Age of the vehicle

Expected opportunity lost cost over next three years = $320 * (-0.297 + 0.362 * Age of the vehicle) = (-$95.04 + $115.84 * Age of vehicle) (6)

The opportunity cost due to catastrophic failure can be calculated based on the probability of a catastrophic failure. A catastrophic failure is defined as vehicle being unserviceable after the failure. It is given that age of vehicles follows a normal distribution with a mean of 16 years and a standard deviation of 1 .5 years N (16, 1 .5)} . The cumulative probability of catastrophic failure will rise with the age. The probability can be calculated using Z table or Excel function NORMDIST(x, mean, Standard deviation, cum).

Opportunity lost cost due to catastrophic failure = Cum. probability of failure *$1,000 = $1,000 * NORMDIST(AGE,l 6,1. 5,1) (7)

Furthermore, an investment into a new vehicle will use company's capital for replacement of an existing asset. Once used to buy a vehicle this capital is unavailable to the company. Hence, there will be an opportunity loss as capital is consumed for replacement purposes. A cost of capital and discount rate are provided as 10% per year. It is stated that a vehicle is depreciated over three years using straight line method. The net present value of cost of capital will be 17%, where cost of capital is calculated based on the book value of the vehicle. The cost of capital factor of 17% is calculated using Excel net present value formula, NPV(r, cost of capital each year for three years), i.e.,NPV(10%,$l*10%,($l-$l/3)*10%,($l-$2/3)*10%).

Cost of Capital =17%* Purchase cost of the vehicle (8)

The replacement model will be as follows once equations 4, 5, 7 and 8 are substituted in the equations 1 and 2.

[(-$120.30+$102.80 * Age of the current vehicle) + (-$95.04 + $115.84 * Age of current vehicle) + $l,000*NORMDIST(Age of current vehicle,! 6,1. 5,1)- Present value of salvage value of current vehicle three years from now) ]> =

[Purchase cost + . 1 7*Purchase cost + (-$120.30+$1 02. 80 * Age of the new vehicle) + (-$95.04 + $115.84 * Age of new vehicle) + $l,000*NORMDIST(Age of new vehicle, 16, 1.5, 1)- (Present value of salvage value of new vehicle three years from now)]

That can be simplified as:

[$218.64 * Ageofthecurrentvehicle + $1,000*NORMDIST (Age of current vehicle, 16,1.5,1)- Present value of salvage value of current vehicle three years from now)J> =

[1.17* Purchase cost + $21 8. 64 *Age of the new vehicle + $1, 000 *NORMDIST(Age of new vehicle, 16, 1.5, 1)- (Present value of salvage value of new vehicle three years from now)] (9)

The present value of the salvage price of the vehicle can be obtained from sources like "Kelly Blue-Book (KBB)." Simply using the resell value of the car from KBB based on current vehicle age plus three year will eliminate any discounting requirement. The equation (9) can be automated in the EXCEL or other similar tool without much difficulty

Subject: Motor vehicle fleets; Decision making; Maintenance management; Case studies; Government contracts

Location: United States--US

Classification: 8370: Construction & engineering industry; 5130: Maintenance management; 9190: United States; 9550: Public sector; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Issue: 2

Pages: 109-114

Number of pages: 6

Publication year: 2010

Publication date: 2010

Year: 2010

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: 521200636

Document URL: http://search.proquest.com/docview/521200636?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 4 of 100

SECOND-DRAFT OF A BUSINESS PLAN: WHAT SHOULD IT CONTAIN?

Author: Morrisette, Shelley; Hatfield, Louise

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Abstract:

Tom Jacobs is apart-time entrepreneurship "prof" at HACC (Hagerstown Area Community College) and as such he must "judge and advise" student-entrepreneurs' ideas and business plans. This is the second time he has read and edited a business plan by four students in his New Venture Creation class. The problem is that this business plan is not clear or well thought-out in several areas - making feedback difficult. Professor Jacobs likes this business plan because it involves a real service - the sport of Paintball. The students have done a very good job of taking the feedback from the first edit and vastly improving the business plan. Still there are glaring problems with the second-draft of the plan and Tom must provide enough constructive advice and specific edits for the students to move this plan forward to the final-draft which is due in two weeks. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

One of the most important outcomes of any Entrepreneurship class (undergraduate or MBA) is for students to thoroughly understand the business plan process. To accomplish this goal most instructors require students to create a business plan - either in groups or individually. Generally these plans are worth 30 to 60 percent of the final grade, so they are very important to students and sometimes extremely frustrating. The biggest reason for this student frustration seems to be the enormity and unfamiliarity of the task. Let's not forget, most students have never written a business plan and at first blush it appears to be a limitless task. Consequently, panic generally sets in for the first two weeks - followed by denial, acceptance, and finally traction.

This case has been prepared to help students create and complete a successful business plan. It is the second of two cases that help students become aware of what they must accomplish at certain milestones during the semester. Most students just see "perfect" completed business plans and generally do not realize that a business plan is a PROCESS. This PROCESS takes lots of time and rewrites. One of the biggest hurdles of the business plan process is receiving and utilizing feedback on work. Students must present enough work for evaluation and feedback. They must provide the reviewer with this material so that he/she can help the student complete a quality plan. For example, we generally require students to turn-in the first-drafts of their plans in Week 10. We read them and offer extensive feedback and return them to the students by Week 1 1 . We will then re-read and provide a light edit for the plans in Week 13 and point out obvious problems (NOTE: ANOTHER CASE ACCOMPANIES THIS CASE. IT HAS BEEN CREATED TO OUTLINE WHAT IS NEEDED IN A FIRST-DRAFT OF A BUSINESS PLAN - "FIRST-DRAFT OF A BUSINESS PLAN: WHAT SHOULD IT CONTAIN"). Final plans are due in Week 15. We find that this process works best for several reasons - it gives students the ability to recover from problems and mistakes, the business plans are always better with less student angst, and it eliminates most bad surprises.

The biggest hurdle with this process is the first-draft edit in Week 10. This milestone becomes the critical point in the process. We find that most students who can turn-in a plan that is at least 80% complete and have at least a "B" opportunity will be successful. Students whose firstdrafts are either vague outlines or minimal plans generally do not recover for several reasons. First, as reviewers, we cannot edit and give quality feedback on something that is not there. Second, the probability of someone completing a good business plan without some feedback is pretty slim. Third, if students have not worked on the project for the first ten weeks the chances of them finishing it in the final four weeks are not good. The second-draft edit is important because it helps students get over the final hurdle. We usually assign this case in Week 1 1 - right after the firstdraft edits have been returned. This case reminds students that they only have two weeks to make edits and improvements. If students can make real progress they stand a very good chance of making an "A" or "B" on this project. If they do not make progress it usually spells doom for the project - because they have missed their last chance for feedback on their plans.

This case is an actual second-draft from a four-member group of undergraduate students. The draft is not perfect, but it allowed us to highlight problems to the students and for them to recover. This second-draft is pretty good. The financials are solid. Yet, there are numerous mistakes and shortcomings with this business plan. What is important to note is that the students have at least "arrived" at the point where they can expect feedback. This group was able to take our feedback and re-work the plan and do well in the class.

Students love to trash this case and the "authors". We can assure you that students will find lots of "stupid things" with the case - poor writing and grammar, unreasonable assumptions, a vague opportunity, repeating words and ideas, no marketing research, and bad analysis. It is fine to discuss and highlight these shortcomings, but the point to make with students is that they will be expected to deliver a second-draft at least as far along as this case in two weeks. Students tend to become a little more subdued at this news, because although this case has a long way to go, it has most of the critical parts and structure of a business plan. Below we will highlight "some" of the obvious problems with the case (in no particular order). We are sure that you and your students will find many other problems to discuss, but remember it is only a second-draft and the students accomplished the task at hand.

There are four BIG issues and numerous smaller problems with this business plan. It is imperative that the students address the four major issues and then begin the process of handling the smaller problems. The four major issues are:

The lack of "real" marketing research.

The validity of the financial plan.

The lack of detail in the competitive analysis.

The risks and assumptions of the business plan.

While we do not expect students to commission and pay for a marketing research project to support their business plans, we do expect a deeper effort than provided by this group to determine market potential for their business. What the students have done is take national data provided by the Sporting Goods and Manufacturers Association and proj ect those percentages to the counties that will be served by the Paintball Palace. Next, they have projected this potential customer data to determine the number of unique visits the company can expect. Finally, the data on unique visits is utilized to determine revenues.

This "back of the envelope" method of market sizing is a good way to get a general idea of what the market potential of a new business might be, but a savvy investor would require additional supporting information before being satisfied with market potential and sales projections. Therefore, it is imperative that the students provide more backup data to support the market sizing and revenue numbers. If this were an actual business plan, we would recommend that the entrepreneur hire a research company to conduct a telephone survey of potential customers in the area. Another method would be to research paintball equipment sales in the area.

Because these students do not have the money or time to hire an outside company to research local demand for a paintball facility, we suggested that they do some survey research of local high schools and colleges. Additionally, we told them to call local sporting goods stores to interview owners and managers on paintball equipment sales. They collected this data and included it in the final business plan. This data tended to support higher demand in this area for a paintball facility than their projected Census Bureau numbers. And this points out the real problem with the "back of the envelope" method used by many business plan writers. Using national data to project local demand hides many nuances. For example, the local area has a large college population, yet is very rural. This means that these students are looking for activities and paintball could be a great possibility for this group. With this additional information the students were able to justify an increase in demand, revenues and profits for the company.

The second major issue with this business plan is the financing route taken by the students. They clearly state that $470,000 is needed to launch the company. The financiáis indicate that this much capital is needed to keep the company afloat. The students then state that each partner will contribute $30,000 or a total of $120,000. This is a reasonable assumption - the students could raise this capital from friends, family, and fools. The real problem lies with the suppliers financing (i.e., providing a loan) for the remaining $350,000. The students' state that the National Paintball Supply, Bauer Compressors, and an "unknown Astro-turf company will provide the debt financing. This is a real stretch. We doubt the validity of this assumption and suggested that the students provide a more reasonable financing method. They eventually decided to offer equity in the company for financing and provide an additional $80,000 in personal capital. This financing plan seemed much more reasonable and it freed up a great deal of cash because interest payments were eliminated. The downside was the students had to give-up part of the company. They decided to offer equity to angel investors, who would require input and substantial ownership rights. The students were made aware of the oldest phrase in the business handbook - "there is no such thing as a free lunch".

The third major issue was the competitive analysis section of the business plan. While the plan did provide a chart of direct competitors in the area, it did not discuss these competitors in detail. This is a huge mistake. All potential investors in a company want all the details on direct competitors. This chart is nice but inadequate. The students were instructed to provide much greater detail on these competitors. Additionally, the group was instructed to provide information and analysis on indirect competitors such as skiing, hunting, hiking, and other such recreational facilities. Analysis of all direct and indirect competitors provides a much better picture of the recreational facility market in this local area. The students were able to complete this analysis without too much angst and the plan was greatly improved. Luckily there was not a great deal of competition, which added support for a paintball facility.

The final major problem was the incomplete analysis of the risks and assumptions of this business plan. All investors want a fair, balanced, detailed, and complete statement of risks and business assumptions. The limited listing provided by the students was just inadequate. To be fair, they had placed many of their assumptions in their financial statements, but they needed to be placed in the text as well and discussed in detail. The students were able to fix this issue in a matter of days.

The basic structure of this business plan is very good. It is a "canned" structure taken from Jeffrey Timmon's text. There are three or four other "canned" business plan outlines and all of them are excellent. The financials are excellent. The students used a software package created by the Kaufman Foundation called "The New Business Mentor". There are many other software packages for business plan financials. Most are excellent. The remaining problems with this business plan are mostly minor, but still need to be addressed. Below we will list the comments made on the edited business plan:

The writing needs to be pumped up, increased, and improved. It is bland in many sections. Make it more confident, aggressive, and optimistic. Tell the truth, but sell the truth. It seems that the sections were written by different students. That is ok, but you need ONE person to edit the complete plan and give it a one-writer voice. Additionally, the flow of the plan needs to be improved.

Make sure all of the metric questions are clearly answered (i.e., the questions in the introduction of the case).

The financials must be changed because the financing and demand have changed.

Stress the lack of recreational facilities in this area. Also include this in your Industry section.

Tell us why paintball is so popular - we do not get-it and we are typical of a potential investor - old and ignorant.

How big can this get in five years? I have no idea?

How did you derive your service price? It seems that you just looked at what the competition is charging. It needs more analysis and support.

Tell us about your vision for the company.

Is your team a strong team? Why? We are not sold.

That was it for the second edit. The students were shell-shocked. They felt that they had a near perfect "A" plan. But they recovered quickly and because they had specific direction were able to complete the plan in the remaining two weeks. The biggest problem was the additional required marketing research. Most of the other problems were easily handled. The group received a "92" on the final draft. It was a very good group effort. The students worked very hard and the final plan looked very professional.

Subject: Business plans; Entrepreneurship education; Business schools; Feedback; Case studies

Location: United States--US

Classification: 8306: Schools and educational services; 9190: United States; 2310: Planning; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Issue: 2

Pages: 121-126

Number of pages: 6

Publication year: 2010

Publication date: 2010

Year: 2010

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: Graphs Tables

ProQuest document ID: 521245859

Document URL: http://search.proquest.com/docview/521245859?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 5 of 100

The Evolution Of Disability Among Surveys In Spain

Author: Meseguer-Santamaría, Leticia; Vargas-Vargas, Manuel, PhD; Jiménez, José Mondéjar, PhD

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Abstract:

The definition of the word disability is controversial, due to his complexity and multidimensionality. The successive disability models and their empirical measurement in the diverse health national surveys vary greatly. The International Classification of Functioning, Disability, and Health (World Health Organization, 2001), known as the ICF, sees disability as the outcome of interactions between the features of the individual and the physical, social, and attitudinal world. This approach has the dual advantage of stressing the social context in which individuals are enabled or excluded while not ruling out the roles of bodies and medicine. In this paper, we analyze the evolution of the measurement of disability among three health national surveys in Spain. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

This paper presents a comparative analysis of three surveys of disability in Spain. We study the evolution of the terms, their different meanings or how they have incorporated other, adapting to prevailing social demands. It attempts to give an overview of disability in Spain, assuming they are surveys with different designs, as shown Portal Mayores (2009). Other comparative analysis can be found in the works Jimenez and Huete (2003), Abellán and Puja (2004) and the developed by the National Institute of Statistics (INE) in its Report on the Survey on Disabilities, Impairments and Health Status (2002).

In the past 25 years, statistical information on disability in Spain has provided a great change, culminating with the appearance of specific surveys, developed by the INE in collaboration with different organizations. The aim is to meet the new demand for quantitative data for analysis of the disability, the persons concerned, and society in general.

This evolution is part of an overall change in the conception of persons with disabilities. Both at the policy, legislative and social level, is fundamental the proactive role of these people, because they have the right and duty to participate actively in a society for everyone.

Thus, in this context, the Survey on Disabilities, Impairments and Handicaps Encuesta sobre Discapacidades, Deficiencias y Minusvalías, EDDM-1986), Survey on Disabilities, Impairments and Health Status (Encuesta sobre Discapacidad, Deficiencia y Estado de Salud, EDDES- 1999), and Survey on Disability, Personal Autonomy and Dependency Situations (Encuesta sobre Discapacidad, Autonomía personal y Situaciones de Dependencia, EDAD-2008), are very important tools to study the situation and needs of people with disabilities.

SURVEYS

Survey on Disabilities, Impairments and Handicaps (EDDM-1986).

Based on the International Classification of Impairments, Disabilities and Handicaps (ICIDH) developed by the World Health Organization (WHO) in 1980, the INE, in collaboration with the INSERSO, developed in 1986 the first specific survey on disability in Spain: the Survey on Disabilities, Impairments and Handicaps (EDDM-1986). Whit it, the INE estimated the number of people with disabilities in Spain, including variables on the subject of the survey as gender or age, and others on the economic livelihood of the family, such as educational level, economic activity, etc.

It is the first step in a more specific analysis of this group, but it still lacks important elements, which are incorporated successively over time, as the involvement of this collective in developing the survey itself, or the inclusion of many more social aspects: use of health services, leisure, suffered discrimination or abuse, etc.

The above classification distinguishes between impairment, disability and handicap. The first definition refers to the individual permanent limitations due to loss or abnormalities of the organizational structure (physiological, psychological or anatomical); is an organic level. Disabilities refer to the restrictions or inability to perform certain daily activities considered normal; is an individual level. And finally, the handicaps relate to the disadvantages arising as a consequence of having an impairment or a disability and how to adapt the individual to his environment; reaching therefore a social dimension. The following table shows the distribution of the observable manifestations in practice:

The main limitations of the ICEDH model are its excessive individualistic and one-dimensional approach, the low involvement of society and the environment, as well as it predominantly negative character based on deficiencies.

Survey on Disabilities, Impairments and Health Status (EDDES-1999)

The ICEDH has been and is under continuous review at international level. Today, it remains a living definition, which attempts to adapt to the society but keeping a few pillars in their definitions for the comparability of different points in time and the study of the evolution of disability. Excellent discussion and analysis can be found in the works of Egea and Sarabia (2001) and Jiménez, Gonzalez and Martin (2002).

In 1999, the INE, the Institute of Migration and Social Services (Instituto de Migraciones y Servicios Sociales, IMSERSO) and the Foundation of the National Organization of Blind from Spain Organización Nacional de Ciegos de España, ONCE), developed the Survey of Disability, Impairment and Health Status (EDDES-1999). Here, disability is defined as "any restriction or significant distress, due to a deficiency, on a person to perform daily activities such as mobility, take care of yourself, see, hear, interact with others, etc.". People with disabilities were defined by asking directly if they had a particular disability. This new survey seeks to respond to a society more aware of the importance of this collective, being aware of its importance in a pluralistic community.

The information is gathered primarily from the perspective of the person and not just the deficiency, introducing aspects as the need to assist in carrying out daily activities, or relative caregivers of persons with disabilities, the use of social and health services. The survey includes a health module that was on different aspects (such as self-assessment of the state health, time constraints of daily activities, accidents in the home, entertainment, prevalence of chronic diseases, lifestyle habits, and economic, educational and work) aimed to improve the integration of people with disabilities in education and the workplace. A deeper study can be found in Jiménez and Huete (2003).

Survey on Disability, Personal Autonomy and Dependency Situations (EDAD-2008).

As discussed above, the ICIDH has undergone major changes throughout its history. Thus, in 2001, the WHO published the International Classification of Functioning, Disability and Health (ICF). As recorded in the report on methodology of the Survey on Disability, Personal Autonomy and Dependency Situations (2008), disability means "the term for impairments, disabilities (now limitations on activity) and handicap (now participation restrictions), and introduce another crucial difference from the previous ICIDH: ICF expands the concept of health to incorporate environmental factors (physical environment, social and attitudinal in which people live and conduct their lives.)

The part of the ICF about functioning and disability has two components:

* Functions of body systems and body structures. Bodily functions are the physiological functions of body systems. The body structures are anatomical parts of it. The deficiencies are problems in these functions or structures.

* Activities and participation. Activity is the execution of a task by an individual. Participation is the act of engaging in a life situation. Activity limitation is the difficulty at individual-level in the performance / conduct of an activity. Restriction on participation is the difficulty you may have a person involved in a situation from a social perspective."

Society is changing, and it should be for everyone, with the participation of all people. It requires the adaptation of society itself to facilitating and encouraging the active participation of its members. It develops plans and programs that integrate people with disabilities in social, cultural, health, economic, entertainment, politics, business, etc.; and, generally, in all areas of life and all levels of decision. It promotes measures about accessibility, prevention of discrimination, access to decision positions, education, jobs, economic aid, leisure activities, etc. They also change gender stereotypes and roles assigned to each one, driven by changes in society, as the full incorporation of women to work (female employment rates in the fourth quarter of 2009 in Spain were 53.27% and 66.34% for men), or the different family models that appear and increase its relative importance over other more traditional.

Thus, in 2008, a working group is established to develop the Survey of Disability, Personal Autonomy and Dependency Situations (EDAD-08). It comprises the INE, IMSERSO, the Directorate General for Coordination of Sectoral Policies on Disability, the ONCE Foundation, the Spanish Committee of Representatives of People with Disabilities (CERMI) and the Spanish Confederation of Organizations for People with Intellectual Disability (FEAPS).

The EDAD-2008 expands its field of action to study the population living in households and in collective centers, which in its preparation are two stages, the first directed to households (EDAD-hogares), and the second one aimed at mental hospitals and nursing homes, senior centers, or fewer than 65 with disabilities, etc. In the EDAD-hogares, persons are asked if they have limitations to the performance of daily activities, unlike what was done in the EDDES, by directly asking about disabilities. This modification is intended to measure the difficulties that may occur on participation and social activity. As for the structure of disabilities, there are no major differences, extending disability groups from 36 to 44. The following table establishes the correspondence between EDDES and EDAD:

COMPARATIVE ANALYSIS

Being aware of the differences described in previous paragraphs, the next table shows the numbers of people with disabilities in Spanish society. Fixing our attention on the last two surveys, which are closer to the definition of disability, we see that the weight of the disabled population to the total decreases in both, the female and the male.

When analyzing the prevalence of disability by gender, we must note that in all three surveys, women are above men by about three percentage points. Therefore, women are more than half of people with disabilities, exactly 59.78% in the EDAD-2008, a figure that has increased over time (56.51% in the EDDM-86, and 58.25% in the EDDES-1999). In total, the rate of people with disabilities is 8.55% and, in the female sector, reached 10.10%.

Regarding the influence of age on disability, the next figures detail their prevalence in the three years analyzed. In the last two surveys, we see that is at age 70 when there is sudden change of slope: before that age, the prevalence does not reach the 20% and from it, it shoots up to 70% or more. In women, this inflection occurs earlier, around age 65.

The analysis of this sequence shows that, in general, to 50 years the prevalence of disability is slightly higher among men, and from this age, it is women who have the highest rates, widening the gap with increasing age. It should also be noted that over time, comparing the surveys for the years 1999 and 2008, this difference from the age of 50 is increasing.

Finally, there are important differences between the EDDES-1999 and EDAD-2008 in the disability groups. Following the adjustment provided by the INE, explained above, we can draw the following table and graphs.

We note that women are significantly more difficulties in mobility and for daily activities, and that in general, except in the group related to the vision, have higher percentages. Both differences are exacerbated among the EDDES-1999 and EDAD-2008.

CONCLUSIONS

* In recent decades, people with disabilities have increased its number in absolute terms, but has declined your rate over the total population. According to the EDAD-2008, in Spain people with disabilities are more than 3.8 million (8.55% of total population), compared to 3,528,221 in the EDDES-1999 (9% the total population).

* They are more women than men with disabilities. Nearly 60% of the people with disabilities are women according to EDAD-2008, a percentage that has increased in recent decades (56.51% in the EDDM-1986 and 58.25% in the EDDES-1999).

* As age increases, the proportion of people with disabilities increases, resulting in an important turning around 67 years, and until that age the prevalence of disability does not reach 20 percent, and from it rises to more than 70%. The data from EDDES-1999 and EDAD-2008 support this finding.

* Until age 50, men show a higher prevalence of disability; then, women are the highest values. Comparing EDDES-1999 and EDAD-2008, we see that this pattern is repeated, but the differences between men and women aged 50 have increased in this decade.

* In general, women have a higher prevalence on every disability group, except in vision.

* The structure of disabilities by group remains the same between EDDES-1999 to EDAD-2008, increasing the differences by gender.

Subject: Studies; Disability; Dependence; Classification; Comparative analysis; Gender differences; Social conditions & trends

Location: Spain

Classification: 1220: Social trends & culture; 9130: Experiment/theoretical treatment; 9175: Western Europe

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 7

Supplement: Spanish Edition

Pages: 1-7

Number of pages: 7

Publication year: 2010

Publication date: 2010

Year: 2010

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: Business Case

Document feature: Tables Graphs Diagrams References

ProQuest document ID: 847386606

Document URL: http://search.proquest.com/docview/847386606?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2010

Last updated: 2011-07-12

Database: ABI/INFORM Complete

Document 6 of 100

Specialty Food And Beverage: A Case Study Of Small Business Management

Author: Doyle, Barry; Bell, Art; Smith, Dayle

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Abstract:

Specialty Food and Beverage is facing growing pains from its rapid expansion over the last decade and more. The case provides a summary of the challenges faced by the company in the areas of supply chain management, marketing plans, the creation of economic value, and the development of a long term strategy for profitable growth. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Late one afternoon in March 2009, Tim Casey, owner of Specialty Foods and Beverage (SF), purveyor of fine teas, sat down and composed a memo to his senior staff. SF had had superior growth over the last sixteen years; this growth had caused "growing pains" in the organization structure and operations of the firm. In the "early days" Tim made all the major decisions for the company; revenues in the very early years were shy of the $1 million mark, and most of the decisions seemed quite straightforward.

Now that revenues were nearing the $25 million mark, Tim was finding that decisions and operational procedures that worked well in the past were inadequate. SF's line of product offerings had risen sharply, the supply chain had become much more complicated and relationships with customers more difficult to manage. In addition, several high quality competitors had entered the market in recent years. Although profitability was still good, SF could no longer afford to operate inefficiently. The specialty tea market was now crowded with competitors, with all of them attempting to grab a portion of SFs hefty market share.

Tim had decided: the senior staff were going to meet in two weeks for a three day retreat to sort out some of the challenges facing SF. All aspects of the company were to be examined.

SPECIALTY FOOD AND BEVERAGE

Specialty Foods and Beverage (SF) is a privately held small tea company that imports tea (and some other tea-related food and beverage products) from several suppliers abroad and markets these products to both wholesale and retail customers, primarily in the USA. The company was founded in 1989 by Sam Westgood, Sheila Westgood, and Bob Jonas. The idea had been hatched some years earlier when they had met with some friends and discussed the lack of high quality tea in the United States. Sensing an unmet demand, they resolved to develop a tea to meet the needs of consumers desiring high quality tea. They managed to acquire some "angel" funding and soon developed a devoted following of their brand. They developed unique packaging, including a striking set of graphics and slogans, and they were off and running.

As marketers, the founders were extraordinarily successful. Unfortunately, they were less successful as business operators. They sold the business to Tim Casey in 1992. Under Tim's ownership, more effective business practices were put in place. More effort was spent attracting wholesale business instead of direct appeals to retail customers. The wholesale market constitutes about 85% of their business.

OPERATIONS

The Supply Chain

Our examination of the supply chain process for SF begins with the sourcing of raw materials (primarily tea) in several Asian countries - China, India, Taiwan, Japan, and Sri Lanka. A relatively small portion of the goods are imported directly from these countries by SF; the majority of the goods are imported from Twinhof (TH), located in a suburb of London. This company processes the teas according to proprietary specifications for SF. SF is a relatively small customer of TH; as such, SF only produces specialized blends in batches about twice a year. More frequent production runs are considered economically infeasible by SF, as each run requires TH to adjust the settings on the production equipment to the proper specifications. There is substantial time and cost associated with this set up process, effectively limiting the number of runs per year. At present, TH only ships to SF in containersize lots; each container holds about 10,000 kilos of tea.

Purchase orders are generated from the production facilities just outside Indianapolis, Indiana. The chief of purchasing also functions as the controller of the company; although product purchases rarely vary in quality, there are times when a particular specialized ingrethent for the tea blend is unavailable. In these cases, substitute ingredients need to be identified; this will occasionally result in production delays. Further, any changes in the production formula need to be cleared with the head of Sales & Marketing. This division is based in Los Angeles, however, since California accounts for the largest concentration of sales.

TH requires a three-month lead time from SF to deliver the orders. This lead time is established as: 1) two months to acquire/process the tea from the source, and 2) one month transit time to SF. In the current arrangement, some of the "favorites" (high volume tea) are produced and shipped on a regular schedule. Other products are ordered and shipped on an irregular basis. The shipments arrive in Indianapolis in large sealed bags. Upon arrival at the plant, the tea is packaged into retail-sized containers, which are then held until shipped to a retailer (and, in some cases, directly to the consumer). Typically, about two months worth of sales are held as inventory. However, this average inventory size masks several problems associated with inventory management. Order volume is not only seasonal, but also irregular. Although many of the retailers with which SF does business order tea on a relatively predictable basis, some of the large customers order infrequently, and these large orders (often in excess of $200,000 per order) are not wholly predictable.

The processing plant is able to pack approximately $100,000 worth of tea per day (about 20,000 lbs). Although SF usually has sufficient quantities of packaged product available for shipment, they are sometimes caught "short" on large orders. In some cases, the delay caused by the limited processing capacity results in SF needing to air freight orders to these customers. Management of SF feels this to be necessary since the potential loss of business to these large customers would be disastrous.

Customer Orders

As noted above, large orders (from me biggest customers) are made directly to headquarters in Indianapolis. However, most of the orders are smaller, and are made by members of sales representative organizations hired by SF. SF is too small a company to have their own nationwide sales force. Regional sales organizations are hired to "service" the accounts; the size of the accounts varies widely. Some are as small as $l,000/year (annual sales). The sales representatives ("reps") receive 10% of the amount sold; payment is made to the reps upon receipt of funds by SF. The volume of sales order may be described as moderately predictable. Like any consumer product, though, there is a substantial degree of uncertainty in the order patterns, particularly in the peak order months of July through October.

Orders are sent by fax, phone and via the firm's website. The firm would prefer to have all orders sent electronically but many of the sales reps continue to use the phone or fax. When SF' s sales managers push the reps to use the website, some complain the process is "complicated". Many of these reps have been in the business for fifteen or more years and are reluctant to change their method of doing business. SF management suspects many find using the phone or fax simpler and are unwilling to make the investment in learning the web technology.

SF feels that some sales are "left on the table" since the sales representative organizations are of varying efficiency. Anecdotal evidence suggests that some retailers order product from competitors if the sales representatives do not make timely visits to the store. In effect, if shelf inventory disappears and no sales representative appears to take an order, the retailer will simply fill the shelf space with other items (usually from a competitor). In most cases, the retailer has limited loyalty to the SF brand. The extent of lost sales from lack of attention is unknown, but believed to be substantial.

A further complication to SF order flow and inventory management is the reluctance of most retailers to keep much inventory in house. This often results in calls from retailers, either directly or through the sales representatives, to send a shipment "yesterday". These orders are frequent, and tend to be small. They are also irregular in their timing.

Payments

Payment terms for SF's customers are net 30. In theory, the thirty-day time period starts at the time that an order is shipped from Indianapolis. Typically, the invoice is mailed or faxed to the customer; a copy of the invoice is also sent with the physical shipment. In practice, the average collection period averages 52 days.

Some smaller companies with weaker credit histories have different payment requirements. Some pay with credit cards; others must pay in cash prior to delivery. These accounts represent less than 5% of total revenues, however.

The Growth Strategy

The Marketing team, at the request of Casey, began a systematic study of the marketing practices of the firm. In the past year and a half, the number of tea varieties ("stock keeping units", or SKUs) sold to retailers has nearly doubled. The company has always introduced new blends on a periodic basis, especially in anticipation of the winter holiday season. Last year, a line of green teas that appealed to a more health conscious public was very successful.

However, other new product launches were less successful. A new line linked to a successful healthy snack proved to be a "bust". Wholesale customers were also concerned about the number of SKUs that the company requested them to carry. In many cases, some of the newer products were not selling well, and they were collecting dust on the shelves. This problem is especially acute in smaller retail outlets that are not well serviced by the sales rep groups. This situation is a "lose-lose" for all concerned; SF is foregoing sales that could be generated with a better selling product, and the retail outlet has idle shelf space. In the longer run, the retail outlet is likely to eliminate some shelf space allocated to SF.

A second issue involved the long-standing policy of selling only to "quality" commercial customers. The owner and VP of Sales periodically received requests from "mass" retailers such as Safeway, Target, Costco, and Walmart to carry their product. Acquiring these new customers would boost sales substantially but profit margins would erode as these large customers would require discount pricing. Further, SF is concerned that selling through these outlets would erode the brand image.

FINANCE ISSUES

In the early years of SFs operations, product pricing appeared to have little effect on demand. The typical customer was willing to pay a higher price for the perceived higher quality. In recent years a number of competitors have entered the market and, though many current SF customers remain intensely loyal, this has caused more pricing pressure from retailers. With increases in materials costs, this has inevitably resulted in a reduction in profit margins. Although pricing decisions are generally associated with marketing, such decisions inevitably impact profitability. Both Tim Casey and the controller have a strong desire to maintain substantial gross profit margins.

Other potential financial decisions loom as well. There have been some proposals to perform more blending on site in the Indiana headquarters and reduce the dependence on their London supplier. Of course, this would require substantial capital expenditures as well as hiring capable staff. Further, some of the blending formulas, though developed jointly between TH and SF, were "owned" by TH. Formula recipes could be closely mimicked through a reverse engineering process, but this process would be costly and time consuming.

MEETING OF THE MANAGEMENT TEAM

The owner of the company met with the management team to discuss ways in which the company could operate more efficiently. The team was assigned the task of generating a list of problem areas; Tim Casey, the owner, directed his staff to "put all the issues on the table". At the end of the three day meeting the following were identified:

1. Lost sales due to poor customer servicing. Though there are a number of relevant factors, the motivation of external sales force members seems to be a prominent issue. They are not employees of the company, and it is likely that many of their small customers are simply not worth the effort. There is also a question as to whether the separation of production (Indianapolis) and sales and marketing (Los Angeles) is a problem.

2. Inventory inefficiencies; in particular, the large average levels as well as very high levels just prior to the peak sales months of July through October. Further, there are still occasional "stock outs" on some orders. This occurs primarily when one of the larger customers presents a large order for a particular tea flavor.

3. Collection time: although credit terms are a uniform "net 30" for all customers, actual receipt of payment varies widely. The current collections systems is primarily "paper based"; the Accounts Receivable personnel attach a paper copy of the invoice to the actual shipment, and send a duplicate copy to the customer via regular mail. The customer then sends the invoice to their Accounts Payable department, at which point the "30-day clock" starts, from the perspective of the customer.

4. The Sales/Marketing manager expressed her concern that the Purchaser/Controller would occasionally purchase cheaper ingredients than those listed on the labels. He maintained he did this only when the desired ingredients were unavailable or unusually highly priced due to temporary supply problems. She maintains that such substitutions may impair quality, and damage the company's reputation. As SF is perceived as a seller of a high quality product, she argues that the "reputational loss" in value of the brand would be substantial if competitors (or, worse, the press) were to discover the substitutions. Privately, she is concerned that the Controller/Purchaser has incentives to focus primarily on reducing Cost of Goods sold, and is not looking at the "bigger picture".

5. Heavy Reliance on TH: TH supplies about 80% of their finished tea. Several members of the management team expressed concern about this reliance. Prices were already rising due to exchange rate changes, and both the quality control manager and sales manager were quietly expressing concerns about the quality of shipped product.

6. Product Portfolio: How many products should SF sell? A relatively small number of blends accounted for a majority of sales (a version of the "80/20" rule). Yet the owner felt that growth required an expansion of the product line.

POSSIBLE RESPONSES/CONCERNS

The committee of senior staff for SF developed the following list of concerns and possible responses to them; they felt that the solution to many of the problems identified above requires the assistance of a consultant.

1. Distribution channels. Product distribution to date has either been "in house" or through the network of independent sales representatives. One possible change is hiring "distributors" to service customers. Distributors typically require a 20% discount on the wholesale price, and act as dealers (as opposed to the broker function provided by the independent sales representatives). The distributors visit stores more regularly, physically stock shelves themselves, and hold sufficient inventory to maintain the shelves. Further, several of the retail chains to whom SF sells regularly use distributors to stock their shelves, and prefer that form of service.

2. The owner is reluctant to hire distributors for two major reasons: first, and most importantly, is the 10% "lost" margin associated with the distributors. Second, once the distributors acquire the merchandise, SF has no real control over the distribution of it. He is concerned that it may appear in such "low-end" outlets as Walmart or Albertson's. Such placement may jeopardize SFs relationship with their current premium customers. Another possibility is the hiring of additional in-house sales staff, though that is impractical for servicing many of their small customers.

3. A more integrated supply chain. Management agreed this was probably a good idea, but they lack the expertise to develop and manage such a system. The plant manager, Felicity Hammon, expressed her concern about the company's reliance of TH for most of the tea. She noted their costs have been rising substantially, mostly due to the appreciation of the British pound relative to the dollar.

4. Inventory control. In addition to the distribution problems noted above, the current system of infrequent "batch" shipments from England seems inefficient. Management would like to consider a way to solve this problem.

5. Financial payment system. Some members of the team feel that such a system could speed A/R collections from the current 52 days. Others question whether it would be "worth it".

6. Sales/Marketing. Was it time for a substantive review of the entire marketing plan?

CONCLUSION

Management would like some preliminary recommendations from your consulting group on some actions they might take to increase production and financial efficiency. Appendix 1 provides some basic financial data.

Subject: Specialty products; Small business; Supply chain management; Marketing; Food; Beverage industry; Case studies

Location: United States--US

Classification: 9190: United States; 8610: Food processing industry; 7000: Marketing; 5160: Transportation management; 9520: Small business; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 1

Pages: 1-9

Number of pages: 9

Publication year: 2010

Publication date: Jan/Feb 2010

Year: 2010

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: Business Case, Feature

Document feature: Tables

ProQuest document ID: 214857755

Document URL: http://search.proquest.com/docview/214857755?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Jan/Feb 2010

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 7 of 100

Overbooking And Overselling: Between A Legal Trade Mechanism And A Crime Of Fraud

Author: Ochaíta, Silvia Valmaña, PhD

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Abstract:

The different operators, both transport and hotel, are used to perform a number of practices which, by its importance have been aim of regulation of international and national legislators. Economic interests from both parties companies and the customers, enhance the need to make more flexible traditional contracts of sale by establishing mechanisms for the resign of the contract by the customer, with greater or lesser penalties, and, in the other hand, the possibility that the number of booked seats or rooms would be greater than the initially available. However, the boundaries between licit, illicit operations and criminal behavior occur occasionally blurred. The purpose of this work is to establish some guidelines to define clearly the border between legal, illegal, or criminal conduct, and the response that law gives in each case. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

The tourism is a phenomenon that has come developing throughout both last centuries. The journeys that came relating throughout History usually had an administrative or religious character. From the 19th century, due to the conditions created by the Industrial Revolution, the tourism begins to have the modern concept that subsists nowadays. Its importance in the economic and social sphere is unquestionable, to the point to give rise to an agency of the United Nations, the Word Tourism Organization (UNWTO), which indicates in relation to its object that "Over the decades, tourism has experienced continued growth and deepening diversification to become one of the fastest growing economic sectors in the world. Modern tourism is closely linked to development and encompasses a growing number of new destinations. These dynamics have turned tourism into a key driver for socio-economic progress".

Nevertheless, such development has taken associated, in the last decades, the increasing demand of these services by the consumers, whom the appearance of certain mechanisms on the part of the tending tourist companies has favored to optimize its resources and capacities, as much in the scope of the transport like in the hotel establishments.

The difference between the allowed practices and the prohibited ones, when no fraudulent, is not always clear. A first review for differences of others will be to determine with clarity the concepts of double selling, overbooking and overselling, and this way to analyze if the different commercial practices are located in some of the referred categories or if, on the contrary, the limits have exceeded the same ones and we are in the land of the criminal excellent conducts. First, we can define the double selling like the fact that a subject one sells a same thing to different purchasers. But in spite of the apparent simplicity of this definition, we are talking about a complex legal reality that, sometimes, can be confused with other figures that take prepared diverse legal consequences.

The double selling takes shelter in the Civil Code like an abnormal assumption in which the preference of the purchasers is regulated in sequence to establish the transmission of the property in a situation in which the vendor acts of opposite form to the good faith. The article 1473 of the Civil Code establishes that "if a same thing had been sold to different purchasers, the property of the thing will transfer the person who first has taken possession from her with good faith, if personal property. If real estate, the property will belong to the purchaser who before has registered it in the Registry. When there is not inscription, the property will belong to that is first in the possession of good faith; and, lacking this one, to that presents title of older date, whenever there is good faith". Secondly, it agrees to emphasize that we are in front of the legal treatment of the double selling in the civil field, referred the objects that are in its scope (properties), and with the necessary requirements that gives the double selling the legal consequences that the Civil Code attributes to such double selling. This rule is referred not much to the vendor who has made the double selling but the purchaser of good faith, and that necessarily he will have to see frustrated his expectations of acquisition. These legal consequences for the vendor require, on a hand, by the satisfaction of the purchaser's rights, that cannot acquire the property doubly sold, and that would be governed by the general rules of compensation of the damage (CANO, 2005), independently of the enthusiastic debates on acquisition. Another thing will be the criminal consequences that can be derived from the double selling (BAJO, 2004).

The Criminal Law studies the double selling between the cases of fraud (HUERTA, 1980), establishing a clear dividing line between the civil malice and the mens rea in the criminal scope, within the category of the criminalized civil contracts that as much attention have received in the Spanish jurisprudence (CASTLÑEIRA, M.T./CORCOY, M./SILVA, J.M., 1985). But next to these elements, the sphere of our study talks about the tourist sector, sector this whose development has taken place recently. The modernity of the tourist phenomenon has taken prepared a new regulation that, sometimes, presents a special difficulty to make compatible the application of figures designed for the reality of another time. In this sense, we can indicate that the Civil Code regulation of the double selling bases on the continuous reference to the double selling of properties. In the tourist sector, on the contrary, which "is sold" in most of the cases is not another thing that a service, and therefore we were with one first difficulty that appears insurmountable, to solve the own similar assumptions of this sector, beyond general a interpretative criterion that, on the other hand, is well known in the Civil Law, as is the principle Prior Tempore, Potior lure.

THE CRIMINAL TREATMENT OF THE DOUBLE SELLING IN THE TOURIST SECTOR.

The incrimination of the double selling in the Criminal Code appears in the Reformation of 1983, when in the 2nd paragraph of the article 531, the Criminal Code went to incorporate, between the improper fraud, the conduct of who "transfer two or the more times" a property or who "burden it or rent it after to have transferred". The Criminal Code observes the double selling like a specific assumption of fraud in the article 251.2. This rule is making reference clearly, as in the Civil Law, to the double selling of properties, furniture or buildings, but not the services. It's more clear in the scope of the Criminal Law, in which the exigency of the legality principle acquires a strict interpretation of the legal rules, with express interdiction of the analogy in the article 4 of the Criminal Code, when it establishes that "the criminal laws will not be applied specifically to cases different from the included ones in them".

Without the possibility of applying the only express reference to the double selling in the Spanish criminal ordering, we will have to go to the general category of the fraud crime to find the answer in front of the most serious cases of fraud, according to settles down in the article 248.1 of the Criminal Code: "Commit fraud who, with profit mind, will use enough deceit to produce error in another one, inducing it to make a disposition act in own or other people's damage".

In order to the systematization of the cases of double selling or similar, in which a criminal fraud within the own operations of the tourist sector can take place, we can differentiate two great categories in which these criminal consequences can occur more commonly. We are talking about to the cases of "double selling" of the advantage in turn of tourist buildings, colloquially known like time-sharing, and the cases of "double selling" in contracts of reserve of made tourist seats between entrepreneurs (VALMAÑA, M./VALMAÑA, S., 2010). In both cases, we were within which it is known with the name of contracts or criminalized legal businesses, of great variety of content, but which it stops to enter the type of fraud must have specific characteristics. That is to say:

* The division of the criminal malice (mens rea) and the civil malice, in the crimes against the patrimony settle down in the typicity, so that only if the agent behavior is considered inside the criminal rule of the fraud crime, is possible to punish action, not supposing it to criminalize all contractual breach, because the Legal Ordering establishes ways to restore the empire of the Law when it is violated by purely civil vices (SCS, November, the 17th, 1997).

* The malice must be preexisting, this is, and the perpetrator of the crime ab initio has intention to breach the contract, simulating an appearance of hiring with the only intention to take advantage of the fulfillment of the victim (Vide, as most important Supreme Court Sentences in this matter: SCS, June, the 20th , 1998; SCS, March, the 16th , 1995; SCS, February, the 26th , 2001; SCS, December, the 11th , 2000; and SCS, January, the 20th , 2004).

* They must occur the rest of the elements that characterize to the fraud: the sufficient deceit; the error of the victim, causally linked to the deceit, and that takes place in spite of diligence of the victim; and finally, the patrimonial disposition that causes an economic damage to the victim or to other people.

The double selling in the advantage in turn of tourist buildings

The jurisprudence on the cases of fraud in the time-sharing has been plentiful, although it is certain that with the appearance of a formal regulation of these contracts (Vide Spanish Time-Sharing Law 42/1998, December, the 15th; European Union Directive 2008/122/CE, January, the 14th; Resolution of July, the 4th, 2002, European Parliament) the criminal jurisdiction has seen reduced its scope of action, like, on the other hand, must be. Nevertheless, the similar cases of fraud to the double selling in the field of the time-sharing of tourist buildings have not had a great jurisprudential development, as either a specific attention on the part of the Spanish criminal doctrine. On one hand, these cases usually have a great technical complexity, affect a great amount of subjects and the time from the beginning of the investigating activity of the fraud to its conclusion with a sentence signs is, without a doubt, very expanded. Thus, frequently the judicial reality of some cases with a great media repercussion barely passed the phase of attribution of the competence for the instruction, whereas in the Supreme Court we were some sentence on matters that we could describe as minors, by the number of affected, and on facts previous to the take effect of the Law of Time-Sharing. Among these sentences, it deserves to emphasize the Supreme Court Sentence (SCS, in advance) 166/2006 February, the 22nd, by which the representative of mercantile Holitime Internacional SA, and to the administrator of Destination Bleu Soleil SL, are condemned by coming to formalize diverse deprived contracts of transaction with different people, in which Destination Bleu Soleil sold to the victims stocks of Holitime International, acquiring the purchasers a participation of the real estate property of Holitime International, SA, and consequently the right to occupation and the use and enjoys these real estate by a determined time, as well as to being to comprise of the program of interchange of rights of use of tourist residence supported by the company Interval International (on the operation of the interchange of timeshare, vide the Web Page of Interval International). It's unnecessary to say that the expectations of the purchasers about the contracts fulfillment were absolutely seen failed. The summary of the facts is the following one: the contact with the buying potentials through an aggressive commercial strategy made in the street of a denominated "stratch-and-win game" with assured prize that they would have to gather in the premises of the administrator of Destination Bleu Soleil SL. There, through diverse explanations, the clients were persuaded for the sign of contracts, sometimes at that same moment. The certain thing is none of the compames has any property title of any building, and "Mercantil Holitime International, SA was not associate to the Program of International Holidays Interchange, Interval International España, SA, The unique relationship with this famous Program was in 1994, when one of defendants applied for the affiliation to the Program of Interval Interchange of the tourist complexes Los Jazmines and Hotel Residence Carlton Playa, in Denia, granting the provisional affiliation sending in a next future a legal report signed by a lawyer in which were developed the aspects relative to the nature of the rights of timesharing to transmit as well as referring to the legal structure of the complexes whose affiliation was asked for. This provisional affiliation was notified to him to the defendant by a letter of date 1-26-1995, in which it was indicated that to obtain the total affiliation to Interval, he would have to provide greater information on the complexes, including the mentioned legal report. The defendant did not send to Interval the required information or the legal report, reason why the complexes the Jazmines and Residence Hotel Carlton Playa cannot offer the condition of individual partner of Interval International to the purchasers of weeks in such establishment, nor have been registered totally in the alluded Program of Interchanges. Eleven deprived contracts were formalized, and the amount of money obtained with them was completely incorporated to the patrimony of the defendants. The victims have not been able to use and to enjoy the legitimate right acquired by virtue of the contract of stock trading, nor that has returned to him of the amount which they gave in such concept.

The contracts of reserve of tourist seats made between entrepreneurs

We have seen a paradigmatic case of fraud on the selling of hotel seats to individuals, and now is the moment to occupy, at least briefly, on selling a greater number of tourist seats. Of course, we mean the original contract, made between entrepreneurs. The Sentence of the Provincial Court of Zaragoza, ?. 113/2002, April the 19th, is a very good example of this: "the defendant pretended to have more hotel seats which in fact he had, which induced to error to New line and gave rise to the hiring of the reserves, and, in addition, the few seats which had Diego M. was sold to several clients. It fulfilled the contract with the plaintiff during the low season, but in the summer, with the evidence of a great affluence of tourists, he could not fulfill his obligation. Nevertheless, he extended in annexed to the contract, July, the 3rd, 1997, that aggravates the conduct of the defendant, because he pretended possibilities of business in the month of July what induced to New Line to the extension of the pact with a payment of seven million pesetas more; possibilities that did not respond to the reality because there were an overselling of residential seats with several clients, which constitutes a fraud crime. . .".

As we can observe, the requirements that must concur in a legal business to have the fraud consideration, as criminalized civil contract, are also fulfilled in this case.

In this moment it is necessary to remember that the fraud requires as essential element the concurrence of the deceit that must be sufficient, just as precedent or concurrent with the act of disposition of the victim, which constitutes the consequence or effect of the deceptive action. The deceit has been widely analyzed by the jurisprudential doctrine, identifying it as a type of scheme, maneuvers or machination, mendacity, fabrication, invention or artifice, which determines the patrimonial advantage in damage of other person, and thus it has understood extensive the legal concept to "any lack of truth or whatever simulation", that determines the victim to give a thing, money or benefit, that in another way, had not made (SCS 1 .27.2000). The deceit must be enough to produce error in others (SCS. 5.29.2002) what means that it is sufficient in a double sense: first to go beyond the frontiers of the civil illicit and to penetrate in the criminal scope; and secondly, that the action must be adequate, important, and appropriated to produce the mistake. AU this question means that, to be a criminal fraud, is not enough a poor, fantastic or inaccessible mistake or misunderstanding or a blatant, because it's unfit to move the will of the people, according to the social and cultural atmosphere in which they are (SCS 2.2.2002). At this point it is convenient to remember the theory of the criminalized legal businesses and the distinction between civil and malice. The Supreme Court Sentence n. 17, 1 197 indicates that: "the dividing line between the criminal malice and the civil malice in the crimes against the patrimony, locates the typicity solely, so that if the conduct of the agent is included in criminal rule of the fraud crime, not supposing it to criminalize all contractual breach, because the legal ordering establishes remedies to restore the empire of the Law when there is a violation by purely civil vices. . .".

CONCLUSION

It is important to remember that the Criminal Law is inspired by a basic single principle, the minimal intervention principle, which configures it as the last ratio to safeguard the social order. Such principle takes aim at the necessity to establish the less invasive way to correct the deviations of the due behavior. This is the reason for a smaller scope of Criminal Law, in general, and in particular in this matter. Overbooking and overselling belong to the civil sphere, and normally they stay in this field. Only in the most serious cases, if they could be described as a fraud crime, the Criminal Law will be applicable.

Subject: Studies; Regulation; Tourism; Economic development; Fraud

Location: Spain

Classification: 9175: Western Europe; 1120: Economic policy & planning; 8350: Transportation & travel industry; 4310: Regulation; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 7

Supplement: Spanish Edition

Pages: 9-13

Number of pages: 5

Publication year: 2010

Publication date: 2010

Year: 2010

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: Business Case

Document feature: References

ProQuest document ID: 847386618

Document URL: http://search.proquest.com/docview/847386618?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2010

Last updated: 2011-07-12

Database: ABI/INFORM Complete

Document 8 of 100

Taking It To The Streets: Moving Scent Research Out Of The Lab

Author: Henke, Lucy L; Fontenot, Gwen; Wallace, Frank

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Abstract:

With a recent surge of interest in the impact of scent on consumers, the trade press and the popular press have been at odds with the academic community regarding the effectiveness of scent in influencing purchase decisions. Academic research has provided scant confirmation of the beliefs, widely accepted throughout industry, that the use of scent has vast power to influence purchase decisions. The bulk of the academic literature has addressed effects other than purchase, and has taken place in the lab, sometimes in "simulated stores." Most retailers, however, are more concerned with actual sales performance in real stores than with theories about cognitive processes and mediating variables associated with smell and consumer decision making. The growing disparity between popular wisdom and research findings has lead researchers to call for greater collaboration with practitioners and more studies conducted in the field, in a variety of store types, rather than the lab. Shifting research from the controlled lab environment to the field, with its myriad of uncontrollable factors, however, presents special challenges to the researcher which, if ignored, may threaten to invalidate findings regardless of their apparent significance. Following is one account of the difficulties connected with attempting to close the gap between the field and the lab, with implications for researchers and retailers, and recommendations for future research. [PUBLICATION ABSTRACT]

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INTRODUCTION AND OVERVIEW

In recent years there has been somewhat of a surge of interest in the impact of scent on human behavior, and specifically on consumer decisions, among members of both industry and the academic community. In 2008, the Scent Marketing Institute hosted the first International ScentWorld Conference and Expo in New York City, attracting over 200 authors, researchers, scent manufacturers and marketing directors from organizations representing businesses, as well as a few academic institutions, from 20 different countries as far flung as Australia, South Africa, Austria, and Thailand. The conference featured columnists from The New York Times and was covered by local New York popular press and the trade press. Ad Age's online publication carried videos of interviews with various conference participants during the week of the meeting. The conference was tagged a success and the Second Annual conference promises to boast even greater attendance.

Among practitioners, much is assumed about the impact of scent on consumers. Scent is thought to engage consumers and facilitate branding by creating associations with emotions that motivate brand attachment. Some companies have applied for scent trademarks, so certain are they that scent is a crucial part of the overall branding experience. Other companies have created sophisticated devices that detect individuals' faces within range of target products, estimate the gender of the individual, and dispense fragrances which are considered to be gender-appropriate. Evidence of the impact of scent in the purchase environment for many members of industry, however, occurs in the form of anecdotal data, casual in-house observations, proprietary research of unknown quality, and advice from professional consultants, when the conclusions drawn may be unwarranted. In fact, in one academic review of the studies involving scent, researchers labeled as "myth" the belief that odors operate subliminally to affect emotion and to influence sales. They reported that "[ejvidence is stacked against the proposition that the simple presence of an odor affects a retail customer's behavior" (Bone and Ellen, 1999).

Research on scent in the academic community has been deliberate, thus slow to develop, and has provided scant confirmation of the beliefs widely accepted throughout industry. While scent-related research has occurred in the past decade, it represents more a skimming of the surface from a wide variety of perspectives than a plumbing of the depths in any one area, perhaps a characteristic of any new research topic.

Consumer behavior researchers have begun to examine the topic from a wide variety of angles. At the recent annual conference of the Association for Consumer Research, for example, some researchers reported on their investigations into the way that scent is encoded into memory (Elder and Krishna, 2008; Krishna, Lwin, Morrin, and Wirtz, 2008), while others discussed the way that the human brain responds to various scents as shown by functional Magnetic Resonance Imaging (fMRI) (Reimann, Aholt, Neuhaus, Schilke, Teichert, and Weber, 2008). Meanwhile, research from a social psychological perspective investigates the ways that individuals retain articles of clothing of absent loved ones in order to be comforted by the scent (Shoup, Streeter, and McBurney, 2008).

LITERATURE REVIEW

Academic research involving scent and its interaction with perceptions, attitudes, beliefs, and behaviors has focused on two different types of scent: scent that corresponds to central attributes of specific objects, and ambient scent, which is scent that is present in the environment but does not emanate from, or correspond to, a particular object. Delivery systems of the two types of scent differ as well. Scent connected with specific objects is normally delivered locally, while ambient scent wafts throughout the environment under study. In some situations, such as in specialty stores, ambient scent appears to converge with product-specific scent. The Hershey Store in Times Square in New York, for example, drenches the atmosphere with the scent of chocolate.

The academic research has examined the impact of the mere presence of a scent, of the intensity of the scent, of the scent's perceived pleasantness, and of the scent's congruity with the object under study. Outcome variables which have been investigated include mood, cognitive elaboration (the depth of processing of words or images), affective response (such as liking or disliking the product or environment), evaluative judgments (such as judgments of the quality of the product or comfort level of the environment), purchase intentions, and other perceptual measures such as perception of time spent, or other behavioral measures such as actual time spent, information search, or choice of brands.

Research findings demonstrate that a pleasant ambient scent in a store can increase the consumer's actual time spent in the store (Knasko, 1989; Teerling, Nixdorf, and Koster, 1992) or give a shopper the impression that he or she has spent less time in the store than has actually been spent (Spangenberg, Crowley, and Henderson, 1996). Other studies have reported that ambient scent perceived to be pleasant can result in enhanced judgment of the image of the store in which the scent occurs, in enhanced evaluation of the products in the store, and an increase in consumer intention to visit the store (Mattila and Wirtz, 2001; Morrin and Ratneshwar, 2000; Spangenberg et al., 1996).

Whether actual or perceived time in the store, store image, product evaluation, and intention to visit the store translate to an increase in purchase behavior is unclear from the conflicting findings in the literature. Some studies report that ambient scent results in increased sales (Teerling et al., 1992), in increased spending on slot machines (Hirsch, 1995), or in impulse buying when the scent is paired with certain types of music (Mattila and Wirz, 2001). Other studies have found that ambient scent does not result in increased sales, in the number of items purchased, or in the total amount spent (Knasko, 1989; Schifferstein and Blok, 2002).

While there are many more studies investigating the influence of scent than those listed here, the majority of them have focused on effects other than purchase. In addition, most of the scent research has taken place in the lab, sometimes in "simulated stores," the methodological problems of which have been outlined in previous research (Stayman and Hagerty, 1985). Most retailers, however, are more concerned with actual sales performance in real stores than with theories about cognitive processes and mediating variables associated with smell and consumer decision making. Despite the fact that over a decade ago a study in the Journal of Marketing recommended that researchers attempt to collaborate more with practitioners by conducting research in the field rather than in the lab and by studying the effects of scent in a variety of store types (Spangenberg, et al., 1996), the gap between practitioners and academic researchers continues to grow. Since that time there has been no significant increase in the number of studies addressing the effect of scent on purchase under realistic conditions.

Shifting research from the controlled lab environment to the field, with its myriad of uncontrollable factors, however, presents special challenges to the researcher which, if ignored, may threaten to invalidate findings regardless of their apparent significance. Following is one account of the difficulties connected with attempting to close the gap between the field and the lab.

CASE STUDY: OBSTACLES ENCOUNTERED IN FIELD-TESTING THE IMPACT OF SCENT

In a medium-sized southern city, researchers obtained permission from a local supermarket to conduct scent research. The supermarket, part of a national chain, allowed researchers to place scent dispensers at key points throughout the store over several months, allowed student interviewers to monitor the behavior of shoppers and to conduct post-purchase interviews, and allowed researchers to have access to purchase data. Scents of coffee, flowers, body wash, barbecue, and cinnamon buns were dispensed on a rotating basis, and shoppers were asked about what they had purchased (including the brands and products related to the scents), whether they had intended to purchase those products and brands, and whether they noticed any scents in the store.

Customer-related obstacles

Aside from the usual considerations such as different shopping patterns on different days of the week, several customer-related issues and potential obstacles surfaced.

For example, during the time that the scent of cinnamon buns was used in the study, many customers commented favorably on the scent, searched for the source of the scent, purchased packages of cinnamon buns, and, in post-purchase interviews, reported that the scent played a major role in their purchase decision.

One customer, on the other hand, reported that the aroma of cinnamon buns motivated a purchase of sugarfree cookies. The customer returned to the display table of cinnamon buns several times, picked up packages to smell them, then moved to a display of sugar-free cookies and purchased a package. Asked about the choice by an interviewer, the customer remarked that she was diabetic and unable to consume sugar, but that the smell of the cinnamon buns motivated her purchase of the cookies.

Allergies to aromas are also a potential problem in studies of ambient scent or product-specific scent, but in the case study under review, none of the customers reported allergic reactions to the aromas in the store. Parents' having to resist the requests of children, to buy the chocolate or sweets they smell, is also a potential problem that was fortunately not encountered in the present study.

In-store scent technology-related obstacles

Several store-related problems had to be overcome in order to dispense the scents properly. The presence of central air conditioning, the type and placement of the product displays, and the location of electrical outlets presented problems.

The store's central air conditioning system ran fairly consistently over the several-week study period. Researchers spent considerable time gauging the strength and direction of the air flow to determine how best to allow the scent to ride the airwaves to a destination in the vicinity of the target products and brands. When the thermostat-driven air reached designated temperatures and air flow temporarily ceased, however, scents may not have been dispensed to target areas as planned.

In the present study, electric fans were to be used to dispense fragrance to key areas, but not every area of the store had electrical outlets. Where it was not possible to use fans, researchers resorted, therefore, to a backup plan using battery-operated dispensers instead. Unfortunately, because the batteries were not long-lasting, researchers had to replace them at least once a day. Where fans could be used, they often had to be placed far from the target products and brands, which caused the fragrances to be less intense once they reached their destination.

For a body wash scent, the product display posed a problem. The body wash containers were placed on spring-loaded shelves which allowed no room for the fragrance dispensers. Called upon to be resourceful, researchers emptied the nearest usable shelf space and placed the scent holders as close to the target product as possible.

In-store competing aromas

Researchers encountered several unanticipated problems involving competing aromas in the store. Mondays were "Cheap Chicken Day" in me supermarket being used in me study, where chicken was cooked all day long. Researchers were forced so suspend the scent study on Mondays.

A second problem involved the store's French bread, baked fresh daily in the store. The bread was placed in standing metal shelves and rolled onto the floor, often near me chocolate display where fragrance was being dispensed. The smell of the fresh bread overwhelmed the scent of the chocolate.

Finally, there were days during which unpleasant odors emanated from the fish counter. When target scents could be placed a sufficient distance from the fish counter, the scent posed no problem. There were, however, vain attempts to dispense a barbecue scent at the adjoining meat counter, but the fish odor was too strong to overcome.

In-store personnel-related obstacles

At one point, one of the floor managers began searching tìirough me products in the chocolate display, picking up and examining a bag at a time. She remarked that one of the bags must have been broken, because she could smell the chocolate, and was determined to find the broken bag.

A second personnel-related incident involved the bakery manager, who became angry with the research program because he could not keep up with the demand for the cinnamon buns.

Scent technology obstacles

Scent wafers for many of the dispensing machines required replacement every other day. As noted above, fragrance dispensers in many cases also required that batteries be replaced at least every day. Embedded strips with motion sensors can reduce the need for battery replacement, if target products are in less heavily trafficked areas.

One of the scents used in the study, the scent for the body wash product, was a poor match for the brand. The scent could not be easily identified, and tfre researchers found that it did not correspond to me brand it was intended to promote.

Countermeasures by competitors

While many of the in-store obstacles may be overcome, actions of competing brands may not be as easy to control or respond to. A portion of the study, for example, tested the effectiveness of a coffee scent on shopper interest in and purchase of coffee. At times the scent was attributed to a particular brand which had agreed to participate in the study. Well into the study, unfortunately, the targeted brand's major competitor initiated a promotion of its own, dropping prices across their product line.

Other external variables

Various holidays and special events had close connections with some of the products represented by scents being used in the study. One would expect that sales of chocolates and flowers may be higher on Valentine's Day and Mother's Day, regardless of scents being dispensed in the store. On Father's Day, as well as the days during which the local University's participation in major sporting events was televised, the sale of meat and French bread intended for family barbecues was high.

A second external variable forced the researchers to abandon one of their intended tests of the effectiveness of the scent of roses. Distributors did not deliver roses to the supermarket until three weeks after Valentine's Day.

Caveat

Finally, repeated attempts to test various scents in a single retail location, and difficulty in directing scent to the target product, increased the potential for consumers who were regular shoppers at the store to "catch on" to the purpose of the study and to behave like "good subjects," responding in ways they thought the researchers wanted them to respond. Contamination caused by these demand characteristics is difficult to avoid when only one location is used over an extended length of time.

SUMMARY

The obstacles cited above provide several illustrations of the problems inherent in all field studies: lack of control of the independent variables and interference of extraneous variables, both of which threaten to invalidate the findings of the study. Applied specifically to the current investigation of the impact of product-specific scent on shopping behavior in a retail environment, the problems took many forms.

In the present case study, lack of control of the independent variable occurred in the form of inconsistency in delivery of the scent, inconsistency of the intensity of the scent, and inconsistency of the scent's match to the target product. The inconsistencies were related to problems with the delivery systems themselves, the configuration of electrical outlets in the store, the operation of the store's thermostat-controlled air conditioning system, and problems with the amount of space available in the product display areas.

Extraneous variables which interfered with the study included competing scents attributable to other products in the store, medical conditions of customers, lack of understanding or cooperation among store employees, heavy price discounts and promotions by competitors of the brands under study, holidays or special events traditionally connected with increased sales of products under study, and product unavailability due to inefficiencies in distribution.

IMPLICATIONS FOR RESEARCHERS

Previous research confirms that problems encountered in the present case may influence research results. When the aroma is not congruent with the targeted product, for example, shoppers have been shown to spend less time processing information about products and to be less likely to exhibit variety seeking behavior than when the scent is congruent with the product category (Mitchell, Kahn, and Knasko, 1995; Peck and Childers, 2008). Therefore, researchers must attempt to design their studies to prevent invalidation of results. Depending on the number of independent variables, extraneous variables, and outcome variables under study, researchers can implement a type of factorial design or Latin Square design. Ideally, researchers can obtain permission from matching retail outlets, such as individual stores that are part of a supermarket chain, for simultaneous use, and rotate treatment conditions to identify the effect on outcome variables.

Naturally, field studies investigating the impact of scent will be more time-consuming and more expensive to conduct than lab studies, but the advantages of the field experiment are the ability to generalize results to other settings and the chance to realistically predict outcomes in future applications.

IMPLICATIONS FOR RETAILERS

Retailers who wish to conduct stuthes or to use ambient or product-related scent can benefit from an understanding of the obstacles they are likely to face, as outlined in the present study. They run the risk of alienating consumers (who, for example, may smell cinnamon buns, but be unable to find them), alienating employees (who cannot keep up with the demand for cinnamon buns) and alienating suppliers (who, for example, sell ginger snaps and cannot compete with the appealing scent of cinnamon buns). Retailers should consider educating their employees regarding the appropriate response to the research program or to the use of scent, so as to assist in the application of scent without revealing its use to consumers, to avoid confusion and anger among employees as well as demand characteristics among consumers. Retailers will need to decide whether they are interested in affecting sales of a product category or of a specific brand. If there is interest in influencing brand choice, the retailers may need to negotiate with suppliers regarding whose scent will be featured for what period of time.

Ideally, future stuthes of the impact of ambient and product-specific scent would allow comparison of findings from the lab and the field, providing greater utility for retailers.

Subject: Perfumes; Consumer spending; Decision analysis; Case studies

Location: United States--US

Classification: 9130: Experiment/theoretical treatment; 8642: Cosmetics industry; 1110: Economic conditions & forecasts; 2600: Management science/operations research; 9190: United States

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 1

Pages: 11-17

Number of pages: 7

Publication year: 2010

Publication date: Jan/Feb 2010

Year: 2010

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: Business Case, Feature

Document feature: References

ProQuest document ID: 214857478

Document URL: http://search.proquest.com/docview/214857478?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Jan/Feb 2010

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 9 of 100

Visitor Profile Of Cuenca Religious Music Week

Author: Mondéjar-Jiménez, Juan-Antonio, PhD; Cordente-Rodríguez, María; Gázquez-Abad, Juan-Carlos, PhD; Pérez-Calderón, Esteban, PhD; Milanés-Montero, Patricia, PhD

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Abstract:

Religious Music Week in Cuenca is the fourth oldest music festival in Spain, involved in orchestras, choirs and performers of international stature and prestige that interpret various compositions of sacred music. Religious Music Week in Cuenca is declared a Fiesta of International Tourist Interest, since its inception in 1962, has always retained a strong personality as a result of high musical expertise; it is wonderful geographical location and the enormous wealth of heritage that surrounds it. This festival is writing a new chapter in the annals of religious music. Their long tradition has set the standard in Spain, which allows comparison with other festivals in Europe. In the present study is to characterize the profile of the visitor from the 48th through a questionnaire administered to attendees of the event, in the same show basic characteristics of visitors, taking a special interest in the economic impact is Cuenca city for the celebration of this event. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Religious Music Week in Cuenca is the fourth oldest music festival of Spain. It is a benchmark among religious music festivals, as its long tradition has set the standard in Spain, and allows it to compare with the other European festivals.

Religious Music Week in Cuenca is declared a Feast of International Tourist Interest; since its inception in 1962, has always maintained a strong personality as result of high musical expertise, its wonderful geographical location and the enormous heritage wealth that surrounds it. Also, it is a member of the European Festivals Association (EFA) since 1986, with over 100 performing arts festivals from 38 countries.

In 2009 there was the celebration of the 48th edition of the Religious Music Week in the city of Cuenca, held from April 4 to April 12, 2009 (Easter Sunday), coinciding with the celebrations of the Easter Week, declared of Cultural Interest.

While the concerts, held a conference on "Literature, mystic, music", dealting mystical literature and its impact on music, with special attention to the work of San Juan de la Cruz. Furthermore, this edition had the premiere of two commissioned works, the recovery of musical heritage (with the restoration of the Gospel Organ of the Cathedral of Cuenca and the presentation of catalog music collection of the Library of the Monastery of Uclés) and the celebration of the anniversaries of Georg Friedrich Haendel (250th anniversary of his death, 1685-1759) and Franz Joseph Haydn (200th anniversary of his death, 1732-1809).

The concerts were held in ten emblematic sites in Cuenca, as the Cathedral, the Auditorium Theatre, Antonio Pérez Foundation and the Church of La Merced. These spaces in the city of Cuenca, declared World Heritage Site, provide architectural beauty at the intense religious spirit.

The main aim of this study is to determine the impact of the Religious Music Week in the city of Cuenca, in order to develop marketing and communication strategies appropriate to the profile of the attendees. The specific objectives of this project are:

* Knowing the profile of attending at the Religious Music Week in Cuenca.

* To analyze spending by attendees in the city.

* Studying attendees' satisfaction with the festival, to know the weaknesses and try to fix for future editions.

* Knowing the economic impact of this festival on Cuenca.

METHODOLOGY

Data Collection and Sampling Design

To achieve the objectives, information was gathered on their own attending the Religious Music Week in Cuenca. Obtaining the information was carried out by direct interviews to those attending the concerts, chosen at random, trying to cover the widest possible range. The data collection work was done in 13 of the 25 concerts scheduled, at different times of the concerts: at the entrance, at breaks and out of them.

As result, 180 questionnaires were obtained, with whom, and for around 10,000 attendees, a sample size of 180 provides results with an initial error of ± 7.39%, providing a confidence level of 95% for an estimated variable with two categories equally likely (p = q = 0.5). Table 1 lists the most important characteristics of the sample design and data collection.

RESULTS

Socio-Demographic Analysis

The attendee' profile at the Religious Music Week in Cuenca, has the following main features (Table 2):

* Almost equal distribution between women and men, 5 1 .67% and 48.33% respectively.

* Middle age (the most common age group is 45 to 54 years, 35%) and married status (57.78%) with university education (79.44%) and are worker ( 57.22%).

* The visitor profile is almost exclusively national, 94.44%.

The origin of the participants in the Religious Music Week is, primarily, the provinces of Cuenca (34.44%), Madrid (23.89%) and Barcelona (6. 11%).

The average monthly income of attendees is above euro 2,000, being the most common stretch for 50% of the participants surveyed. The observed trend is that the higher the income, the higher the percentage assistants who are in that income level.

Descriptive Analysis of attendance Religious Music Week in Cuenca

* Experience in the Religious Music Week

Around 65% of the attendees have attended prior to the Religious Music Week in Cuenca, compared with 35% attending for the first time. Of previous attendees, the average of previous experience is 10 editions. And it highlights the fact that 4.35% has attended all the editions. This finding demonstrates the existence of a high fidelity by the attendees.

* Attendance at Religious Music Week

The 87.22% attend the concerts organized by the Religious Music Week together, compared with 12.22% attend alone. International attendees always come together.

The average number of concerts to attend is expected is 5.41 per person. However, only 16.11% of the participants has full pass.

* Expected length of stay

Given that 33.89% of the participants surveyed live in Cuenca, the average stay of foreigners was 3.02 days, a relatively large number, where the percentage of most frequent stays is four or more days (30,56%) and the least common is to stay for only one day (7.78%). This extended stay is made possible by the coincidence of the celebration of the Religious Music Week with the Easter Week, which allows participants to have more holidays.

* Type of accommodation

In reference to the type of accommodation, the majority, 52.38%, elected a hotel accommodation, being four-star hotels the most demanded category, followed by three and two stars. The second type of accommodation chosen is hostel or pension with a 25.71% and, thirdly, is accommodated in the homes of friends or relatives (8.57%).

* Reason or person who encouraged him to come

The main reason that encouraged him to attend the Religious Music Week in Cuenca was previous experience (29.44%), reinforcing the idea of high fidelity of those attending the festival, followed by the mass media ( 26.11%), recommendations from friends/family (25%) and, in fourth place, with 10%, for working (critical journalists, musicians, etc.).

It is remarkable that only a 1.67% attends the Religious Music Week drawn mainly by the visit to the city of Cuenca.

* Principal activity in the stay in Cuenca

The main activity developed by participants during their stay in Cuenca is, mostly, from attendance Religious Music Week (79.23% of cases), and, secondly, a visit to the city of Cuenca (10.77% of the attendees).

* Celebration Date

Regarding the timing of the Religious Music Week, the 57.78% would attend regardless of the date of signing, symbol of his fidelity to the event. While, 21.67% would attend only if it coincides with the date of Easter Week and 20% attend only if performed on holidays.

* Opinion about the Religious Music Week in Cuenca

The average opinion that the assistance granted to the Religious Music Week in Cuenca, is 8.59 over 10 points, an extremely high califfication. This assessment varies depending on experience: the average score is higher when they have previously attended the Religious Music Week in Cuenca, when they do the first time.

Expenditure Structure

* Overall Budget

Analyzing the overall budget for attending the Religious Music Week throughout their stay in Cuenca, and considering all the cost items (transport, accommodation, meals, tickets, etc.), we obtain an average budget of euro 301.15; as the average length of stay was 3.02 days, it suppose high daily expenditure of euro 99.72 per day and per person.

On the other hand, if we analyze the overall budget distinguishing the origin of attendees, the budget amounts to euro 362.71 for foreigners and euro 171.43 for those living in Cuenca. Also, international attendees have an average overall budget (euro 480) higher than Spaniard (euro 290.24).

* Daily expenditure by service

In general, analyzing the distribution of daily expenditure per attendee in different services, we obtain, in a majority of the sections, the lower spending on the scale and, even, the option of anything stated in many cases the highest frequency.

The most significant expenditure of attendees at the Religious Music Week is restaúrente and attendance at concerts. The less important expenditure items are the purchase of gifts, entertainment and accommodation.

* Admission Fee

The price of tickets for concerts isolated between 20 and 40 euros, except for the three concerts scheduled in the program of the conference "Literature, Mystic, Music", priced at 5 euros.

The 72.78% of the participants considered that this is the right price, compared to 19.44% believed that the price is excessive, being the best price more common option among foreigners than among Spaniards. It is remarkable that the 1.67% reported that the price is low and the quality of the concerts is very high for the price paid by the entrance. These assistants are characterized by having revenues in excess of euro 2,000 and university studies. Also, the 1 1.1 1% of attendees has received an invitation.

Influence of the Religious Music Week in the assistant

The celebration of the Religious Music Week in Cuenca has a major impact on the audience: the 97.78% of the participants would return to attend the next edition, 100% of respondents would recommend the festival to other acquaintances, relatives or friends, and 76.67% of the participants associated the city of Cuenca with the celebration of the Religious Music Week. Also, 100% of respondents would recommend Cuenca as tourist destination.

ANALYSIS OF ECONOMIC IMPACT

For economic impact means the effect on production, income and employment associated with investments and current expenditure made by the various agents involved in a particular cultural event, on a certain geographical area in a given period of time. According to Seaman (2003) economic impacts are divided into three groups: direct impacts, indirect and induced.

Direct Impacts

Are the costs incurred by the business or cultural institution, holiday or sports to host the event analyzed in different terms (wages, purchases, rentals, program implementation, etc.) in the geographic area of reference and a time period determined.

The direct impact of the Religious Music Week is formed mainly by spending of the Cultural Foundation governing this festival held in lighting, decor, staging, assembly, installation, insurance, leasing, etc., to host the event. The total expenditure amounts to euro 1,137,600.

Much of this spending affects local businesses, but no detail can be detailed as their distribution is unknown. While included: artistic expenses (entertainment and training), technical production costs (rent, electricity, sound, stage), hotel and travel expenses, promotion and advertising costs, administrative expenses and management and infrastructure maintenance costs (cleaning).

Indirect Impacts

It is the spending by visitors or attendees as result of consumption of cultural products, holiday or sports. In the case of the Religious Music Week, are attributable to spending by visitors tourists in accommodation, catering, transportation, shopping, etc. The estimate was obtained from a survey of attendees of the concerts, collecting information on three variables:

* The number of attendees.

The information on the number of attendees can be approximated by the number of localities, which for the 48th edition was in 9796 locations. On this figure applies a coefficient of repetition to reduce duplication of visitors who have come several times to acts of cultural programmation. As result of the survey, we find that the expected average number of concerts is 5.41 per person. Thus, we can estimate a total of 1,81 1 attendees.

* Average expenditure per attendee.

Analysing the survey, we find that the global average budget available for the entire stay for foreigners is euro 362.71 per person and euro 171.43 for attendees living in Cuenca.

Of the 1811 estimated participants, 34.44% reside in Cuenca and 65.56% are from other provinces and countries. With these figures and the estimated overall budget for each group, gives a figure of total estimated expenditure for stay by total attendance of euro 537,509, in every sectors of expenditure (accommodation, restaurants, tickets, entertainment, shopping and other expenses). Of which euro 116,636 relate to the collection through ticket sales, and euro 420,873 is the fundraising of the event gives local companies engaged in hotel, restaurant, retail, leisure and other facilities.

* The intention to visit.

We seek to assess how the Religious Music Week influence in the intention to visit Cuenca. To do this, the respondent must indicate on the questionnaire, the principal activities during his stay in Cuenca, choosing one of the following options:

- Religious Music Week: 79,23%

- Easter Week: 2,31%

- Visit family or friends: 2,3 1 %

- Other: 16.15%, 10.77% where the main activity is a visit to Cuenca.

It is also necessary to consider the previous experience with the festival, for 65% of respondents showing satisfaction with this musical event.

Induced Impacts

Are the implications arising from the amount of money derived by direct and indirect impacts, and that spread or expanded for the rest of the economic system, within and outside the space reference. This effect is called multiplier effect. It also impacts on the local economy, through notoriety achieved by municipality in the media, in the dissemination of his image, recognition and promotion of the city.

The distribution of the induced effects, on output and employment, between different economic sectors would be determined by budget allocation, which is unknown in detail, not possible to quantify these effects

CONCLUSIONS

From the collected information in this study, the main conclusions and recommendations can be summarized as follows:

1. Strong consolidation achieved by the Religious Music Week in Cuenca, in the national and international music scheme. He has done forty-eight editions with great success and has capacity for loyalty to the attendees but also to attract new audiences. Thus, 97.78% of the participants said they would return next year to the Religious Music Week in Cuenca and nearly 77% of the participants, associate the city of Cuenca with the celebration of this festival.

2. They are very loyal audience, with high experience in the festival, with significant participation in this edition and with an expected average attendance of 5.41 concerts per person.

3. Only the 16.1 1% of the participants have full pass, which highlights the need for adjust the full pass not for the space of celebration, but for days; then, perhaps, the distribution of the full pass during the week of the festival, will lead to the attendee more difficult to fit their free time.

4. Attendees value the festival with an average rating of 8.59 over 10, being higher for those who have attended previously. This is a clear sign of improvement over time, as participants tend to make comparisons over the years prior to assessing the current edition.

5. The most frequent profile among attendees is characterized by middle-aged individuals (45-54 years), mainly with university studies and Spaniard, and with an average monthly income over 2,000 euro.

6. The average attendees stay is three days, compared with 9 days of the event; a high number, perhaps possible to match your celebration with Easter Week. However, 60% of the participants said they would attend no matter what was the timing, and 20% attend only if performed on holidays. These data reflect a certain independence from the festival over Easter Week for 80% of the participants.

7. The average budget of the attendees for the whole stay, considering all costs (transportation, acommodation, meals, tickets, etc.), is euro 301.15. However, the global budget data change considerably if we look separately at the participants living in Cuenca and the foreigners, because of different needs during your stay: thus, the attendee who lives in Cuenca, has an overall budget for the festival of euro 171.43 per person, while the figure for the foreigners is euro 362.71.

8. International attendees have an average overall budget higher than Spanish participants, 480 euro and euro 290.24 respectively, but the first represent only 5.56% of total attendees. So, it is necessary and interesting to make further promotion of the festival activities abroad, to attract international attendees.

9. The most significant expenditure for attendees of the Religious Music Week is in restoration and attendance at concerts. And the less important expenditure items are the purchase of gifts and souvenirs / trade, other costs, leisure and acommodation, items of interest to promote among the participants.

10. The economic impact of the Religious Music Week is estimated at not less than euro 1,675,109 (direct and indirect), of which 32.09% related to the tourist attraction that causes the festival (indirect effects) and other direct expenditure made by the Cultural Foundation in the implementation of the festival (direct effect). Even if you take into account the induced effects, which have been mentioned in a qualitative way, the final impact would exceed this figure.

Religious Music Week in Cuenca has become a strong tourist attraction for Cuenca, which has led to significant economic effects and has generated a substantial change in the pattern of tourism behavior of visitors. These results largely justify the investment and enhancing the conduct of such events, since there is no doubt that progress is a factor of tourism competitiveness.

Subject: Tourist attractions; Special events; Economic impact; Music festivals; Religious music; Data collection; Consumer spending

Location: Cuenca Spain

Classification: 8307: Arts, entertainment & recreation; 1110: Economic conditions & forecasts; 9175: Western Europe

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 7

Supplement: Spanish Edition

Pages: 15-21

Number of pages: 7

Publication year: 2010

Publication date: 2010

Year: 2010

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: Business Case

Document feature: References Tables

ProQuest document ID: 847386625

Document URL: http://search.proquest.com/docview/847386625?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2010

Last updated: 2011-07-12

Database: ABI/INFORM Complete

Document 10 of 100

An Application Of The Rational Unified Process® For Requirements Analysis

Author: Townsend, William

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Abstract:

The Rational Unified Process® (RUP) is an effective implementation technique for object oriented systems development. The RUP® approach allows for flexible process modification and a customization of artifacts to meet the needs of the particular situation. Marriott International developed a variation of this process as its standard for its SDLC. This process was implemented in the requirements analysis and design phases of a software project for the Ritz-Carlton subsidiary. A context-level treatment of the RUP® metamodel produced use cases and a supplementary specification that lead to the systems analysis model development by an external vendor. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

In the fall of 2006, Donna Rolland3 wondered to herself if the gift card program development she was managing would ever be completed. She was responsible for completing the feasibility analysis of implementing a store value gift card solution for the Ritz-Carlton subsidiary of Marriott International. Marriott had used an automated stored value solution for its gift cards for many years; however, perceptions of differences in functional requirements had kept Ritz-Carlton from adopting Marriott's solution. As a result, Ritz-Carlton had kept a manual, paper based gift card program in place that was no longer consistent with its image as a highly sophisticated brand.

BACKGOUND

The first Ritz-Carlton hotel was established in Boston in 1927 (Ritz-Carlton, 2008). It was regarded as a private club for the very wealthy. Before booking reservations, guests were checked to see if they were in the Social Register or Who's Who. Dress codes were enforced for all guests, and the restaurants were also stringent with regard to whom they admitted. Women were not allowed to lunch alone in The Café and unescorted women were not allowed to enter The Ritz Bar until 1970. The hotel's motto is "At The Ritz-Carlton Hotel Company, we are Ladies and Gentlemen serving Ladies and Gentlemen." Since 1927, the Ritz-Carlton brand had extended to 68 hotels worldwide with 36 in the U.S. and 32 others in 24 countries. Worldwide it employs over 38,000.

The focus on superior levels of customer satisfaction in its high-end brand has continued at Ritz-Carlton. This concentration has resulted in its being awarded the Malcolm Baldrige National Quality Award twice. However, it has also sensitized the Ritz-Carlton management to any change in service delivery that might impact that quality standard. As a result, acceptance of change came slowly and reluctantly.

In 1995, Marriott acquired the Ritz-Carlton chain (Marriott, 2008). Gift cards had become a significant revenue stream for Marriott International. The gift certificate product represents a $30 million revenue stream. Automating this process with a stored value card solution provides added control while permitting a wider marketing capability. The project would establish the requirements necessary for Ritz-Carlton to implement a stored value card solution and allow for the evaluation of vendor product offerings and costs.

The hotel and resort chain had implemented an automated system allowing for credit card type gift cards to be sold and redeemed for most of its hotel brands. The cards were widely available for purchase at hotel properties, retail outlets and online, and redeemable for rooms and services at Marriott locations worldwide. The automated gift cards provided Marriott daily sales, redemption and liability reporting for the product line by property. Detailed tracking of specific sales or redemptions could be provided for audit purposes. The Marriott gift cards could be redeemed for products and services at all of the 15 brands in me Marriott International group, except for me Ritz-Carlton hotel chain.

Donna Rolland worked on the original Project Request and Project Development Plan mat were developed in the fall of 2006. These documents outlined me business case and budget for me Ritz-Carlton gift card program. These plans also specified me resources and schedule available to execute me requirements specification process. The most important aspect of these plans was meir specification of the stakeholder groups necessary for successful completion of me specification. These stakeholders were solicited for their participation. The participants became organized as a Requirements Steering Committee mat was actively involved in contributing functional and subject matter expertise and in reviewing the various process artifacts. Table 1 describes me stakeholder groups represented on the Requirements Steering Committee.

THE RUP® PROCESS

The Rational Unified Process® (RUP) was originally developed by Rational Software in the 1990's. The process, now owned by IBM, is derived from several object-oriented software techniques, including Booch and Rumbaugh (IBM, 2009). It also incorporates me Boehm spiral iterative model techniques. It is designed to provide a "best practices" development framework for customization by software development organizations that can be a systematic and replicable process with several artifacts. RUP® maintains the customizable flexibility required to fit a variety of organizational and topical contexts. The principle constructs are roles, work products and tasks. The underlying model utilizes me Unified Modeling Language (UML) to represent the structure of me process (Leffingwell & Widrig, 2000; Canton, 2001, 2003; Kroll & Krachten, 2004). UML was developed to unify various object-oriented process implementations into a single standardized representation technique (Jacobsen, 1992: Booch, et. al., 2005). Between 1989 and 1994 more man 50 modeling approaches were developed for implementing object-oriented techniques. The Object Management Group adopted UML as a graphical language standard in 1997 (Booch, 1999). The RUP® technique expands upon me characteristics of UML to unify a set of processes artifacts mat assure consistency, reusability and process replicability. Figure 1 describes me requirements management process.

The RUP® The RUP® model is conducive to active incorporation of user requirements. The context level diagram provides an effective way to visualize requirements from the perspective of the actors upon that system (Jacobson, et. al., 1999). Inception and elaboration phases are followed by construction and transition phases

REQUIREMENTS PROCESS IMPLEMENTATION

The requirements process implemented for the Ritz-Carlton gift card program followed the RUP® process closely. Initial artifacts involved producing the context level diagram that would be included in subsequent project documents. This diagram provided a visual confirmation to the stakeholders of the conceptual framework for the effort and an identification of the actors and use cases that will be specified in subsequent artifacts. The context diagram is shown in Figure 2.

Stakeholder participation occurred at several points during this project. Stakeholder requests were solicited during the requirements gadiering and definition steps. The stakeholders were also involved in the review and revision process for the artifacts documenting those requests.

One of the principles of me RUP® architecture is the separation of concerns (Balmelli, et. al., 2006). This allows designers to deal with each set of stakeholder concerns independently. This was an important concern in the design of the Ritz-Carlton gift card requirements architecture. It was significant to me acceptance of the analysis for full consideration of all requirements constituencies.

Like most organizations that use the RUP® process, it was not adopted by Marriott as an "as-is" process. Rather, they were treated as a set of "best practices" which were modified to suit the Marriott environment and specific software development projects. Most often this resulted in the elimination of process elements and some artifacts to streamline the process.

The current state definition diagram, developed as part of the RUP®, reflected a paper-based process for the generation and redemption of gift certificates. The certificates are sold at Ritz-Carlton hotel, restaurant and online locations and redeemed at Ritz-Carlton hotel, restaurant, retail, spa and golf locations. These certificates are not automated nor can balances be verified in real time. Tracking of gift certificates is limited to the sequence number assignment of a certificate to a specific property prior to its sale. No pre-established denomination is set.

A management consulting firm performed a preliminary requirements analysis and market survey. This firm surveyed the marketplace and identified 10 potential solution vendors. Each of these vendors was interviewed to establish the conformity to a preliminary set of technical and functional requirements and establish pricing structures. This preliminary set of screening requirements was general and categorical in nature and did not reflect formal requirements, but rather categories of requirements.

The set of requirements used in the survey were:

Technical Requirements

* Real time reporting

* Scalability

* Connectivity between remote locations and discrete centers within location such as restaurants, spas

* Platform-hardware, operating system, DBMS, Compatible with current system

* Architecture-open APIs and the latest XML, Java or web services

* Capacity-current and future volume/growth

* Security

* Ease of Use-UI acceptable for remote users

* Support- adequate and maintenance available?

* License- reasonable costs for current and predicted volume growth, support requirements and future software upgrades

* POS systems integration beyond Micros

* Web integration and development

* Message formats and protocols

* Dynamic currency conversion

* Redeem and reload cards online

* Reporting: online reports, transaction history, reconciliation, and compensation information along with activation, redemption and expiration data.

* Conversion of old gift cards

* Software web-based or server based

Functional requirements

* Gift Card Purchase and Activation

* Balance Inquiry

* Redemption

* Currency conversion

* Card Loading - this section is exclusive to Gift Cards

* Error Handling

* Functional Architecture

* Flexibility and Agility

The requirements list used in the market survey were not a complete nor formally vetted list, but rather a subset of requirements that were used to identify potential vendors that had analogous products. The product of the market search was used for source identification purposes and not as a screening process for specific requirements.

A series of meetings with stakeholder groups were conducted to elicit requirements and to refine their specification. The project team then met to flesh out the implications of each requirement without evaluating how it is to be implemented. The project team men made an initial prioritization of the requirements into "Mandatory", "Preferred" and "Non-essential" categories and reviewed diese with the sponsoring organization. A second set of meetings was men held with the stakeholder groups to assure die completeness of the requirements list and review the priority categorizations and underlying logic for initial classifications. Revisions were then performed to the requirements and priorities and a requirements traceability matrix begun to track each through the development process.

As a result of the requirements collection process and a definition of the roles of all of die actors in the system, use cases were developed. A use case is a sequence of events that describes die collaboration between the system and external actors to accomplish me goals of the system (Jacobsen, et. al., 1999; Balmelli, et. al., 2006;). The use case is a way to specify the behavior of the system and external entities in response to a specific set of stimuli. The use cases for the Ritz-Carlton gift card program involved me activities conducted by die various internal and external actors upon the proposed system. Business analysts familiar with the use case format and UML, constructed draft use cases. These artifacts were reviewed and revised with die review and input of the Steering Committee.

In addition to die functional requirements contained in die use cases, non-function, technical and architectural requirements needed to be memorialized in a system specification or supplemental specification. The Ritz-Carlton Gift Card program solution requirements reflecting the constraints of the Ritz-Carlton technical and applications architecture were captured in a Supplementary Specification. The Supplementary Specification also captured training needs, security, network interoperability and other parametric restrictions on possible solutions. These restrictions include me currenüy scheduled deployment of new systems and applications and die retirement of some existing architectural elements.

The formulation of the requirements did not presume a specific stored value card vendor solution. While the seamless implementation of any possible solution is important, the requirements will be driven by business, operational and administrative needs mat may be met by a variety of vendors in various ways. The evaluation of those potential solutions will be performed in a subsequent project phase.

REQUIREMENTS PROCESS RESULTS

The use of the RUP® process provided a smooth and effective requirements specification and documentation process mat was conducted on a tight schedule and with limited resources. Marriott used a modified RUP® process tailored to its highly distributed software development environment. Sharepoint was used extensively to share and maintain process artifacts both within the project team and with external reviewers.

The Ritz-Carlton Gift Card System was conceived to work with existing hardware and software applications in order to provide an additional capability to already existing systems. Functional and non-functional requirements were captured from the stakeholders and crafted together into a set of documents mat presented a clear and unequivocal set of specification for a vendor response. This set of specifications offered the possibility of vendor solutions that are specific and detailed enough for technical and cost responses.

Eleven use cases were produced, each covering die common functional activities of a set of actors. The use cases captured die functional requirements for the system. Each use case identified me primary and secondary actors involved, assumptions, triggering evens and post conditions. The basic flow of events covered in the use case was described, along with alternative flows, exception flows and extension points. The use case also contained a provision of me relevant business rules, GUI specification and otiier related information.

In addition, a supplementary specification was produced to capture the various non-functional system requirements for integration and interaction with existing systems, architecture and standards.

CONCLUSION

The Rational Unified Process serves as a replicable development system with process artifacts that allow for the communication and transfer of the development process between organizations. It is an effective process for system specification and translation of those specifications to third party developers.

The requirements process generated 62 requirements, 39 must haves, 15 desired and 8 postponed. Each of the 62 requirements identified were preserved and traced throughout the process through the use of a requirements traceability matrix in the Requirements Management Plan (RMP). This is an accepted implementation of RUP® traceability technique (Spence & Probasco, 1998). This artifact tracked the status evolution of each requirement and its incorporation into each of the documents leading to the systems design phase.

The process also produced a number of other artifacts:

* A Current State/Future State Process Diagram

* A Requirements Evaluation Matrix

* A Stakeholder Inventory

* Stakeholder Requests

* Use Case Specifications

* A Supplementary Specification containing non-functional requirements specifications.

A total of 11 use cases were generated encompassing all of the functional requirements in the "must have" and "desire" scope. The Supplementary Specification contained requirements and specifications for performance, security standards, network interoperability, usability, availability, technical architecture, training and support.

The use of the RUP® technique served as an effective and comprehensive method to conduct a requirements process. The formality and artifacts produced did a great deal to overcome reluctance in the stakeholder communities to accept the process results. It also served as the basis for transmittal of the requirements architecture to solution vendors for the systems analysis and design stages of the program. Finally, the process details allow for the effective management and acceptance testing formulations for products generated by this program.

NOTES

Subject: Systems development; Object oriented programming; Models; Hotels & motels; Case studies

Location: United States--US

Company / organization: Name: Ritz-Carlton Hotel Co; NAICS: 721110

Classification: 9130: Experiment/theoretical treatment; 9190: United States; 8380: Hotels & restaurants; 5240: Software & systems

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 1

Pages: 19-26

Number of pages: 8

Publication year: 2010

Publication date: Jan/Feb 2010

Year: 2010

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: Business Case, Feature

Document feature: Diagrams References

ProQuest document ID: 214857590

Document URL: http://search.proquest.com/docview/214857590?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Jan/Feb 2010

Last updated: 2014-04-21

Database: ABI/INFORM Complete

Document 11 of 100

The Spanish Legal System For Protecting The Estates Of Disabled People (Critical Analysis Of Law 41/2003 Of 18 November)1

Author: Cariñana, María Ángeles Zurilla

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Abstract:

This paper is intended to offer a critical analysis of Law 41/2003 on the Protection of Disabled Persons' Estates. The law introduces institutions not previously regulated in the Spanish legal system: protected estate, support contracts and self-guardianship. This ground-breaking law in Europe also provides major reforms in the rules on inheritance, significantly affecting the statutory legacy system regulated by the Spanish Civil Code. Rising life expectancy, more prevalent degenerative diseases and the need to provide for disabled people's future needs on the death of their parents or guardians are key factors justifying the regulation of these concepts. This study analyzes the new provisions, highlighting their most interesting aspects and the difficulties involved in implementing them. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Pursuant to article 49 of the Spanish Constitution, many mechanisms seek to provide for the special situation of disabled people. Today it is a reality that many disabled people survive their progenitors due to improved healthcare and other factors, as is the emergence of new forms of disability such as brain and bone-marrow injuries due to road accidents or Alzheimer's disease, which make it advisable for disabled people to receive financial assistance not only by the State or the family but also from their own estate, allowing their future to be safeguarded by providing for other sources to cover their expenses. Law 41/2003 of 18 November on the Protection of Disabled Persons' Estates serves this purpose by regulating new mechanisms for protecting the disabled, focussing on one specific sphere: property.

The law seeks to achieve these aims by means of three concepts: protected estate, support contracts and self-guardianship. It also provides major changes in the Spanish inheritance rules, significantly affecting the system of statutory portions regulated by the Spanish Civil Code, in provisions that have some notable technical deficiecies.

Before studying the new provisions it is worth mentioning some of the main features of Law 41/2003, as follows:

* The introduction for the first time in the sphere of private law of the concept of mental or physical disabiity.

* A distinction between the disabled (people lacking full capacity) and those declared incapable by a court. Disability is conceived as a broader situation than that of incapacity. Disability is a de facto situation requiring no formal constitutive declaration, as it suffices for it to be accredited by a duly issued certificate. Accordingly the protection offered by the law goes beyond the strict sphere of incapacity, provided for in the events specified in article 200 of the Civil Code.

* New provisions, ground-breaking in Europe, on disabled persons' protected estates.

* The introduction of the concept of self-guardianship.

* An amendment of the system of statutory portions, making changes in the inheritance rules.

In the following sections we will analyze the new legal concepts and their most notable features.

DISABLED PERSONS' PROTECTED ESTATES

Article 1 of Law 41/2003 states that one of its basic aims is to encourage contributions of assets and rights to disabled people's estates, free of charge, and to establish suitable mechanisms to ensure that such property and rights, along with their fruits, products and yields, are assigned to meeting the owner's living needs. Such property and rights will form disabled people's specially protected estates.

The key features of a protected estate are as follows:

* It is a separate estate, in that the property and rights making it up are separated from the rest of the ownerbeneficiary's personal estate. But the lawmakers' intention of establishing a separation between a disabled person's protected estate and the rest of his/her personal property is not realized in the law. Accordingly, according to the principle of unlimited personal liability, enshrined in article 1911 of the Spanish Civil Code, the owner of a protected estate now has two estates with interconnected liability.

* It is an earmarked estate. Its purpose is to meet its owner's living needs.

* It is an estate subject to administrative supervision or specific private control, either by the disabled person him/herself, by the family or by a non-profit institution.

* To encourage the establishment of protected estates the law adopts a number of tax measures involving the grant of tax benefits through changes to personal income tax and corporate tax - a tax not regulated in the same way all over Spain (Chapter III). No provisions are made, however, as to inheritance and gift tax. Nor is anything provided to reduce notarial and registration fees, as would have been desirable.

In personam aspects

There are two in personam figures: the beneficiary and the settlor. The beneficiary of the protected estate is the disabled person in whose interest it is settled. For the purposes of the law, a disabled person is deemed to be a person affected by a mental impairment of 33% or more or a physical or sensorial impairment of 65% or more (article 2). As it may occur that those declared incapable by a court have neither of these degrees of disability, the lawmakers may be criticized for not directly including such incapacitated subjects as beneficiaries of protected estates, without the need to obtain a declaration of disability to the degrees specified by the law. The protected estate must have a single beneficiary; it would have been desirable for the law to provide for the possibility of a single protected estate having two beneficiaries, especially in the case of families with two or more disabled siblings and lacking sufficient resources to fund two protected estates. A protected estate may be settled by the following persons:

* The disabled beneficiary him/herself, provided that he/she has sufficient capacity to act

* His/her parents, guardians or trustees where the disabled person lacks sufficient capacity to act

* The de facto guardian of a mentally disabled person may settle on him/her a protected estate with any property that his/her parents or guardians may have left as an inheritance or that may be receivable through pensions provided by them.

* Any person with a legitimate interest may propose to the disabled person, if he/she has sufficient capacity, or otherwise to his/her parents, guardians or trustees, the settlement of a protected estate, while at the same time offering a suitable contribution of property or rights for the purpose. In the event of an unjustified refusal by the parents or guardians, the proposer may apply to the prosecution service, which will call on the appropriate judge to take steps in the disabled person's interests (article 3).

In rem aspects

he in rem aspect of the protected estate is a contribution that may consist either of actual property or of property rights. It will also draw on the fruits, products and yields of such property, as specified in article 1.1 of the law. The property contributed must be of sufficient quantity to meet the disabled person's needs (which may be very hard for the notary to quantify) and must be of a transferable nature. In accordance with the object of a protected estate, i.e. of meeting the owner's living needs, Law 1/2009 of 25 March, reforming Law 41/2003 on the Protection of Disabled Persons' Estates, adds a point to the second paragraph of the latter law's article 5 according to which cash expenses and expendable goods consumed from the protected estate will not be regarded as disposals where the object is to meet the beneficiary's living needs.

The initial contributions may be subsequently added to either by the settlor or settlors or by third parties. Such contributions must always be free of charge (subject to the rules for gifts) and may not be made on deferred terms.

The protected estate may also be added to by deferred legacies or bequests to the estate, with the peculiarity that they shall always be deemed to be made subject to inventory.

Formal aspects

A protected estate may be settled in two ways: in a public document or by court order (in the event of unjustified refusal by the parents or guardians).

The public document must contain at least an inventory of the property and rights initially forming the protected estate, a statement of the administration and auditing rules, and any other provisions considered appropriate in respect of the estate's administration or preservation. Notaries will immediately notify the public prosecutor in the district of the disabled person's domicile of the settlement and content of a protected estate authorized by them, using an advanced electronic signature. They will likewise serve notice of notarial documents relating to contributions of any kind made subsequent to the settlement (article 3, as formulated in Law 1/2009 of 25 March, reforming Law 41/2003 on the Protection of Disabled Persons' Estates).

The protected estate may, as we said above, receive contributions subsequent to the initial settlement, which will be subject to these same formalities. The requirement for subsequent contributions of property or rights of any kind also to be made in a public document may be criticized, for despite the tax exemptions, the cost of notarial fees (or legal costs and expenses, where applicable) may be an obstacle to the growth of such estates.

Law 41/2003 provides a number of measures for publicity through public registers, for the purpose of giving legal certainty to the disabled person and to the protected estate itself. These are as follows (article 8, as formulated in Law 1/2009 of 25 March, reforming Law 41/2003 on the Protection of Disabled Persons' Estates):

* Publicity through the Civil Status Register, recording the legal representation granted to the trustee (this registration is provided for only in the event that the trustee of the protected property is not the beneficiary or his/her parent, guardian or trustee).

* Publicity through the Property Register, recording the nature of property or rights in rem registered as part of the protected estate.

* Publicity through other registers. Article 8 paragraph 2 point 2 provides that entries of the same kind will be made in the respective registers as regards any other property liable to be registered. In the case of holdings in investment funds or collective investment institutions, or shares or stakes in trading companies that are part of the protected estate, the notary or the judge will notify the fund manager or company of their new status.

* In all events, public registration must be effected as provided by the regulations, with full respect for the rights to personal and family privacy and legislation on the protection of personal data.

Administration of the protected estate

Where the settlor is the protected estate's beneficiary, its administration will be subject to the rules specified in the public settlement document. In other cases, the administrative rules specified in that document must provide the requirement for judicial authorization in the same events in which it is required by the guardian in relation to the protected person's property, in accordance with the provisions of articles 271 and 272 of the Civil Code or, if applicable, according to the applicable provisions of civil, provincial or special law. Such authorization will not be required where the beneficiary has sufficient capacity to act. In no event may persons who cannot be guardians be trustees.

The trustee will be regarded as the beneficiary's legal representative, where he/she is not the beneficiary him/herself, for all acts by which the property and rights forming the protected estate are administered, and no involvement of the parents or guardian will be required in order for these to be valid and effective (article 5).

Provisions on liability for debts in the administration of protected estates are lacking. It would have been appropriate, as an exception to the principle of unlimited liability specified in article 1911 of the Civil Code, to have provided for a separation of liabilities as a means of strengthening the estate's integrity in respect of potential actions by the beneficiary and the trustee.

The protected estate is subject to supervision by the prosecution service, which may call on the corresponding judge to act on the incapable person's behalf, including for the trustee's replacement, a change in the administration rules, special auditing measures, the adoption of safeguards, the dissolution of the protected estate or any other similar measures (article 7).

The trustee must render accounts to the prosecution service when so required, and in all events once a year. As an external body to support and advise the prosecution service, a Commission for the Protection Disabled Persons' Estates is established, attached to the Ministry of Education, Social Policy and Sport (article 7.3; a paragraph introduced by Law 1/2009 of 25 March, reforming Law 41/2003 on the Protection of Disabled Persons' Estates).

Dissolution

The protected estate will be dissolved when the beneficiary dies or is declared dead or where he/she ceases to be a disabled person in accordance with article 2.2 of the law.

In the former event the protected estate will be deemed to be part of the person's legacy.

In the latter event the beneficiary will remain the owner of the property and rights forming the estate in accordance with the applicable provisions of the Civil Code (article 6).

SELF-GUARDIANSHIP

This concept is introduced by Law 41/2003 with the amendment of two articles of the Civil Code: 223 and 234. The former article entitles legally competent persons to take what measures they consider appropriate in anticipation of their own incapacity. Such measures may refer to the appointment of the person that they wish in due course to perform the functions of guardian or trustee; the ruling out of persons that they do not wish to be their legal guardians; instructions as to the healthcare that they wish to receive; a refusal of certain treatments; the settlement of a protected estate, etc. In order to give precedence to the wishes expressed in the document establishing the self-guardianship, article 234 of the Civil Code is amended so as to change the order of preference established therein for persons called upon to become guardians. In the new order, the first person liable to be appointed guardian is the person designated by the person concerned. After him/her the persons called upon are the spouse living with the protected person, the parents, any persons designated by them in their wills, and descendente, relatives in ascending line or siblings appointed by the judge.

The guardian appointment made by the person concerned must be effected in a notarized will or public document and should be officially notified by the notary responsible for the Civil Status Register. In order for these provisions to be known, the judge is obliged as part of incapacity proceedings to procure the corresponding certificate from the Civil Status Register or the Central Register of Wills. In any event, though the reform is premised on respect for the subject's independent freewill, and provision for self-guardianship is binding for the judge, the judge may, in keeping with the incapacitated person's interests, provide other measures, pursuant to a reasoned court order.

In addition to these provisions on self-guardianship, Law 41/2003 amends article 1732 of the Civil Code to allow in certain cases the continuance of a contract of mandate after the granter has become incapable, namely where the granter him/herself has specified that the contract of mandate should continue in the event of his/her incapacity, and where the mandate is conferred in case of the granter 's incapacity, appraised as provided in the Code. In such causes the mandate may be terminated pursuant to a court order issued when the guardianship is established or subsequently at the guardian's request. It would have been desirable for the lawmakers to introduce measures for coordination and harmonization between the provisions on self-guardianship and on precautionary powers of attorney.

Law 41/2003 makes a major amendment to article 757 of the Civil Procedure Law by allowing the presumed incapax to request a declaration of his/her own incapacity, a measure which may be especially useful in the case of degenerative diseases.

SUPPORT CONTRACTS

Law 41/2003 gives a positive turn to the framework for an aleatory contract well known in legal doctrine: the life annuity contract. Article 12 gives content to articles 1791 to 1797 of the Civil Code by respecifying such contracts, now known as support contracts. These are defined as contracts by which one of the parties undertakes to provide housing, maintenance and assistance to a person throughout his/her life, in exchange for a transfer of capital in any form of property or rights. Their scope is broader than that of the life annuity contract regulated by the Civil Code's articles 1802 et seq.

This is an in personam contract whose term is determined by the life of the receiver of the support. The extent and quality of support will be as specified in the contract, and unless otherwise agreed will not depend on any changing circumstances in the provider's estate and needs or in those of the recipient's estate.

The new provisions' most notable peculiarity is that a default on the support obligation will entitle the recipient to choose between demanding the contract's enforcement or termination, with the application in either case of the bilateral or reciprocal obligations. If the recipient opts to terminate the contract (an option not permitted with a life annuity contract), the person obliged to provide support must immediately restore the property that he/she received under the contract. The judge may determine that such restoration to the recipient should be totally or partially deferred, for the time and with the guarantees specified. The termination should leave the recipient with a remainder that is at least enough to set up a similar pension for the rest of his/her life.

This concept is especially useful where it the parents of the disabled person who transmit capital to the provider in the form of moveable or immovable property, for the benefit of a disabled child.

INHERITANCE RULES

Law 41/2003 makes major changes to inheritance law, seeking to improve protection for the disabled. These are as follows:

A new grounds of disqualification from succession is specified, namely that of improper conduct, with a section 7 being added to article 756 of the Civil Code. This disqualifies from succession those entitled to inherit from the disabled person who did not provide him/her with due assistance, defined as that regulated by articles 142 et seq. of the Civil Code. The technical construction of this precept is faulty in that it does not specify which persons entitled to inherit are being referred to. It is apparent from the explanatory preamble to Law 41/2003 that these persons are the ab intestato heirs. Note that these heirs (children and descendents, parents and relatives in ascending line, spouse, collateral relatives up to the fourth degree and the State) are not the same persons obliged to provide support under article 142 (spouses, relatives in ascending line and descendents; siblings owe only assistance necessary to life, where required for reasons not attributable to the recipient). So the amended article 756 disqualifies persons who are not obliged to provide support under article 142 of the Civil Code from inheritance on grounds of improper conduct. It would have been desirable for the provision to specify which persons are referred to and the content and scope of their obligations in each case, as they are not the same, for example, in the case of the spouse, descendents and relatives in the ascending line as in that of siblings.

The system of statutory portions provided in the Civil Code is significantly modified, as the new formulation of article 782 allows the testator to assign to a substitute trustee the statutory portion of his/her legacy due to a judicially incapacitated child or descendent. It is striking that the testator may impose conditions on the statutory portion of his/her legacy due to his/her children or descendents, and even disinherit them without reason in favour of a disabled descendent, while his/her ability to dispose of the remaining two-thirds of the legacy is not affected, and in relation to this portion the interests of the disabled incapax seem not to count. It would be advisable for the Spanish lawmakers to make a reform of the current inheritance system, allowing greater freedom in willmaking.

Finally a second paragraph is added to article 1041 of the Civil Code, seeking to exclude from legacy calculations any expenses incurred by parents and relatives in ascending line to cover the special needs of their disabled children or descendents.

CONCLUSIONS

The progressive penetration of women in the labour market (who were traditionally responsible for caring for the elderly and disabled), the changed model of the family, the crisis in the welfare state and insufficient public resources mean that disabled people now require more protection, so it is welcome that the Spanish lawmakers, in amendments to current legal texts and in Law 41/2003, should have provided new mechanisms for protecting disabled people so as anticipate the situation in which they may find themselves when their closest relatives are no longer present or able to look after them.

The concept of a disabled person's protected estate may be useful in protecting disabled people, though it is regulated deficiently. The most notable defects include the fact that such an estate may be settled only on disabled people who have been recognized as suffering the degree of disability specified by the law (33% or 65%), so there is no possibility of settling an estate on non-disabled incapable people or those not affected by the legally specified degree of disability.

Also lacking in the law is a regulation of liability for debts in the administration of the estate. In the tax sphere, it would have been desirable for the changes to company tax and personal income tax to have been accompanied by changes in inheritance and gift tax. Given that a protected estate is normally funded by contributions made free of charge, such changes would have encouraged the settlement of protected estates.

With regard to self-guardianship and precautionary powers of attorney, greater coordination and harmonization between the regulations of the two concepts would be desirable.

The changes to the inheritance rules for the benefit of disabled people include notable technical deficiencies which it would be advisable to correct (especially as regards improper conduct and statutory portions).

Subject: Studies; Regulatory reform; Disabled people; Beneficiaries; Protection

Location: Spain

Classification: 8210: Life & health insurance; 4310: Regulation; 9130: Experiment/theoretical treatment; 9175: Western Europe

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 7

Supplement: Spanish Edition

Pages: 23-30

Number of pages: 8

Publication year: 2010

Publication date: 2010

Year: 2010

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: Business Case

Document feature: References

ProQuest document ID: 847386600

Document URL: http://search.proquest.com/docview/847386600?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2010

Last updated: 2011-07-12

Database: ABI/INFORM Complete

Document 12 of 100

The Wine Vault And Bistro: A Case Study

Author: St James, Melissa

ProQuest document link

Abstract:

This case study details the creation and evolution of an entrepreneurial effort started by a 7 year old girl and continued by her entire family. What began as a young girl's way to earn money without selling her toys has evolved into a successful restaurant and wine bar called The Wine Vault & Bistro, tucked away in the South Mission Hills neighborhood of San Diego, CA. This case has been prepared as the basis for classroom discussion and is not intended to illustrate either effective or ineffective business practices. Sample discussion questions are included at the conclusion of the case itself. [PUBLICATION ABSTRACT]

Full text:

A SMALL BEGINNING

In the early 1990s, in a down economy, Erica Gluck, at the age of 7, decided she needed to earn her own money. Her favorite food at the time was pasta and so she decided, logically, that everyone would enjoy this delicious, nutritious food. With the help of her parents, Erica purchased homemade pasta from a nearby pasta shop and proceeded to the local farmers market. She sold each and every bag of pasta that weekend and a business was born.

Erica's pasta business evolved to include pesto, olive oils and breads and the family began a fulltime involvement. There was even Pasta Press, publishing pasta cookbooks. Eventually, Erica's younger sister Katie began a side business called Katie's Koop, selling fresh eggs alongside the pasta and accessories of her sister. Erica's parents, Mary and Chris, devoted all their time to the business and the family truly learned what togetherness meant. . .while working hard and supporting the entire family doing something they loved.

What began as a weekend endeavor with an investment of under $200 (including inventory and a tablecloth!) became the support for a family of four. The children learned a strong work ethic and the family learned to follow their dreams. In 2003, after nearly 10 years in business, the Glucks sold the location and relationships for a sum in the mid-five figures and looked forward to pursuing new dreams.

GROWTH AND EVOLUTION

During the final 2 years of the pasta and egg business (2001-2003), the family patriarch, Chris Gluck, began following one of his interests, a love of wine. The farmers' market business allowed Chris to indulge this hobby without fearing for the economic health of his family. Through a relationship with a San Diego wine store, The Wine Bank, Chris parlayed an email newsletter into the next family business.

Approaching the Wine Bank with an idea, Chris started small and grew. Amassing a Est some 1000 strong from signup sheets at the local farmers markets where the family was conducting business, Chris earned $30 for putting out a weekly email newsletter for the Wine Bank, featuring four wines each week. Chris tasted each wine himself, building his knowledge base by 16 wines a month. This free education was a vital contribution to Chris in building his knowledge of a vast variety of wines, and at no cost to himself.

After only 4 months, Chris held his first event at the Wine Bank; he called it "Big Reds and BBQ." Chris chose the wines and a local San Diego BBQ joint catered the food. With a prix fixe of about $40 for dinner and wine, the event drew some 30 people and a new entrepreneurial endeavor was afoot.

Within three years the events were drawing 250 people over 5 nights... and exhausting the owner of the Wine Bank! Chris secured a new venue, The Gathering, in Mission Hills, a neighborhood in San Diego not far from downtown. Buying wine under The Gatiiering' s license, Chris ran his new tastings in a slightly different format, with a profit now being made on the wine sales. Through word of mouth, and no advertising, the events continued to grow in size and eventually the Glucks knew it was time for a home of their own.

THE WINE VAULT & BISTRO

While strolling one morning in their own neighborhood, the Glucks noticed a location with potential. Upon approaching the owner, problems became apparent but the Glucks held out, eventually buying the lease from the owner for a low six figure sum, with a couple of key caveats. The lease would remain at the same rate and the length of the lease would not change (the terms included a 5 year option, another 5 year option and tiien a 10 year option). The property was leased as is and Chris and Mary would also have to be able to secure a beer and wine license for the location. In July of 2004 the deal was closed and the real work began. It would be over a year and a half before opening day of The Wine Vault and Bistro.

During renovations obstacles were encountered that threatened to halt the endeavor, including the discovery that a great deal of foundation work was needed in order to proceed. Mary and Chris had no idea that a very unusual situation would work in meir favor - a rain delay... in San Diego, CA. During the lease negotiations, a deal had been struck that allowed for no rent (and an extension on the lease) in the event of a rain delay during the foundation repairs and renovations. The upside? Mary and Chris were able to work on the interior of the location during the rain delay.. .all the while enjoying free rent.

Mary Gluck, trained as an Interior Designer, has created an unusually stark but yet inviting space for the Wine Vault & Bistro (See Exhibit 1 for photos). The wine serves as the art, lining the walls in nooks and on shelves. The walls are white, the tables clean, natural wood, the accessories stainless steel. A typical wine bar is dark and cellar-like, the Wine Vault & Bistro stands out because it is different; it is clean, uncluttered and inviting. The dining room features a warm fireplace and the patio has a large fire pit in the center.

On October 26, 2005 the Wine Vault officially opened its doors. Widiin a year it was being called "the most intriguing new restaurant of the year" by San Diego Home/Garden Lifestyles magazine (See Exhibit 1 for a list of media mentions and selected articles). The Wine Vault not only captured the attention of San Diego diners but it has been profitable from the start, relying solely on word of mouth rather than advertising.

THE WINE VAULT & BISTRO'S PHILOSOPHY

Mary and Chris Gluck, inspired by their children's entrepreneurial success, had launched their business and were now following their own dreams. The Wine Vault is a full-fledged restaurant and wine bar, with a retail wine selection. The Glucks wanted a restaurant they themselves would want to frequent and their personal philosophies are evident in many aspects of the business. What they ended up creating has been called "personal and eccentric" by San Diego Home/Garden Lifestyles Magazine (see Exhibit 1).

Relationships are important to the Glucks and their business success depends on creating and fostering relationships with several parties; wine makers and representatives, Wine Vault employees and die customers. Each party has its own needs and desires, along with expectations.

Winemakers and Winery Representatives

The wines Chris and Mary feature at the Wine Vault come from many regions and wineries and often vary greatly from event to event. Wines are sold in California by representatives or distributors and Chris has established relationships with not only these middlemen but with the winery owners themselves. Vintners and winery owners often co-host the events at the Wine Vault, offering winery history and anecdotes from their own experiences and lending a human face to the brands. This contact allows the wine makers to know how their wines are being received and how the Wine Vault is representing them. It also allows the wine makers direct contact with customers who might not otiierwise visit a winery on their own. The reputation Chris and Mary have among the wine makers leads to a remarkable ability to offer unusual wines and exclusives. The wine makers generally speak at the dinners and they invariably relate how the appeal and charm of the owners drew them in and keeps them coming back, some from as far as Australia, on a regular basis to share new vintages and new stories.

Wine Vault Employees

Mary Gluck has a focused philosophy when it comes to Wine Vault employees... her mission is to assist them in following their dreams. She tends to hire college educated workers who have dreams of their own to nurture and she allows them the flexibility to pursue those dreams while earning a near fulltime salary working part-time hours. Many employees stay for several years while attending university, while others stay as long as necessary to make the next move toward their personal goals. Employees are knowledgeable and friendly yet professional. Katie, the youngest daughter, worked many nights serving customers for a period of time before leaving for a local university but still returns to take the reins when her parents take buying or educational winery tours/trips and during her summer breaks. It's Katie who likes to say that the "employees are family at the Wine Vault & Bistro."

The Customers

Finally, the customers are key to the Wine Vault's success. One of the most interesting facts about the Wine Vault is that it employs no advertising. This, coupled with the nearly hidden location, make it apparent that customers almost have to know someone who has visited the Wine Vault before they can discover it themselves. This makes for a familial feel when visiting the Wine Vault. It is like a large group of old friends simply dining and enjoying the evening.

Although Mary describes me typical Wine Vault customer as between 40 and 50 years old, she offers a Wednesday night Single's Night, serving less expensive wines, that attracts a decidedly younger crowd. These nights were originally instituted to fill a normally slow night at the venue and the side effect is that these folks now spread the word as well. On any given night the crowd ranges in age from 21 (of course!) to 60+, mingling and enjoying themselves in spite of, or more likely because of, the diversity. The Wine Vault & Bistro "regularly serves everyone from multimillionaires to school teachers." According to 944 Magazine (November 2007).

Customers attending a Wine Vault event find themselves greeted personally by either Mary or Chris (often with a hug) and seated in a beautifully simple dining room or outside in the covered patio near a large fire pit. The tables seat from 2 to 12 diners and one is sometimes seated with strangers. . .who might become friends by the end of the night. As expected, many customers become regulars and attend several events monthly. Others choose special events based on either the winery being featured or the delectable menu created by Chris. Mary comments that she likes to seat customers with those who might be liked-minded. For instance, if she knows one small group is from the Pacific Beach neighborhood in San Diego, she might seat tiiem with another group from that area. If she knows your profession she might introduce you to and seat you with someone in the same or a compatible field. The hands on approach of the owners makes for a friendly atmosphere and makes customers feel at home.

Near the end of each night Mary makes the rounds of the restaurant, clipboard in hand, to allow customers to sign up for the emails Chris so lovingly puts together on a regular basis. The email for any given event includes detailed descriptions of the wines and the menu for me event, parking advice, contact information and a healmy dose of Chris's personality. The web site for the Wine Vault & Bistro is similar in appearance to the location itself; clean, clear and simple yet friendly. The calendar allows customers to click on any date and see the menu and event offered for that evening. Another personal touch is that Chris or Mary try to return all emails and phone calls personally and promptly, confirming reservations, or clarifying information.

THE STRUCTURE OF THE WINE VAULT & BISTRO'S OFFERINGS

The Wine Vault & Bistro is all about pairing great wines with great food in a comfortable atmosphere. The menu can run from local smoked meats or braised beef cheeks to exotic mushrooms or edamame hummus. The daily or weekly menus vary depending on the winery and the wines featured but the wine pairings are always truly remarkable.

The seasonal Bistro menu is available most every night but menu items may change often and the wine events vary from day to day, albeit within a model. For example:

* Saturday nights are devoted to a Chefs 5-course Tasting Menu, paired with wines (see Exhibit 2)

* Friday nights are devoted to Prix Fixe Menu + Wine Flights (see Exhibit 3)

* Tuesdays, Wednesdays and Thursdays are often the Winemaker dinners with visiting winery owners and representatives (see Exhibit 4), or

* Informal, self-serve wine flights with the Bistro Menu available (see Exhibit 5).

This last example, the self serve option, is unique in that the customer takes the wine flight ticket directly to the bar and the bartender checks off each wine as the customer "orders" it. This is a self paced adventure, rather than the more structured winemaker dinners where the customer is seated and the wines are served to them at the table. It also gives customers a chance to mingle at the bar and to meet other customers throughout the night.

One of the best features of the Wine Vault & Bistro offerings is that Chris and Mary have perfected the model and present a reasonable price structure. The Bistro Menu, available most nights except during the winemaker events, offers starters such as pomme frites and bacon-wrapped stuffed dates from around $6.00, and entrees reasonably priced starting at around $11.00. A prix fixe dinner menu is usually $20 for three courses and winemaker dinners start at around $49.50. Wine flights, offered with the prix fixe, range from $10-20.00 for 3-5 wines.

Reservations are required for the wine maker events, and are encouraged for other nights simply due to the restaurant's popularity. Wine maker dinners require a credit card to hold the reservations and the card is charged prior to the event, although there is a 72 hour cancellation policy. Sales tax and an 18% gratuity are added to all prepaid checks. Bottled wines can be purchased off the shelf after any event, and these are often limited releases and are offered at less than the customer could find at the winery itself or elsewhere.

SUMMARY

Mary Gluck describes the success of The Wine Vault as hinging on four aspects: ambiance, food, wine and staff. Each of these is unique in its contribution yet each draws from the others to create a truly successful business. The entrepreneurial adventure of their two young girls has grown, somewhat organically, into a thriving business for Mary and Chris Gluck. The Wine Vault & Bistro still conducts no advertising.

CASE QUESTIONS FOR DISCUSSION

1. After reading the case and examining Exhibit 1: Media Mentions, describe the positioning of the Wine Vault & Bistro. How might a change to a more aggressive marketing/advertising strategy affect the image of the Wine Vault & Bistro?

2. Considering the philosophy of the owners, the nature of the clientele and the positioning of the business, should the Glucks stick to their current business strategy or should they change it?

3. Should the Glucks consider expanding their operation through either franchising or simply opening another location themselves? How would this affect their overall operation and image?

Subject: Women owned businesses; Entrepreneurs; Business growth; Wines; Restaurants; Case studies

Location: United States--US

Company / organization: Name: Wine Vault & Bistro; NAICS: 445310, 722110

Classification: 9521: Minority- & women-owned businesses; 9190: United States; 8380: Hotels & restaurants; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 1

Pages: 27-38

Number of pages: 12

Publication year: 2010

Publication date: Jan/Feb 2010

Year: 2010

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: Business Case, Feature

Document feature: Photographs

ProQuest document ID: 214858996

Document URL: http://search.proquest.com/docview/214858996?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Jan/Feb 2010

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 13 of 100

Application Of Social Web Tools To The Internationalization Of Retail Companies1

Author: Mollá-Descals, Alejandro, PhD; Gómez-Borja, Miguel-Ángel, PhD; Lorenzo-Romero, Carlota, PhD; Mondéjar-Jiménez, Juan-Antonio, PhD

ProQuest document link

Abstract:

The emergence and development of what is called the Social Web or Web 2.0 is marked by the appearance and development of new communication tools and applications such as blogs, chats, forums, social networks, etc., and interaction between users. As well as giving consumers emotional and practical benefits, these applications represent great communication opportunities for companies in a globalized context. For this reason, businessmen are increasingly using Social Web tools as instruments to get information and market knowledge, as well as for communication in an internationalization context. Taking the opportunities the use of Social Web tools in a global context represent for retail business as its starting point, this study analyzes the possibilities offered by different tools in the context of the internationalization process of retail distribution businesses, and the uses retailers involved in internationalization processes are currently putting them to. In order to do this, a study is being made by direct observation of the applications and social contents on their web sites, and exploration and monitoring of their presence in other social spaces (blogs, social networks, microblogging, etc.). [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

The emergence of the Social Web has been characterized by the appearance and development of new tools allowing users to get information and communicate with each other. These applications give users emotional and practical benefits, and have enormous potential in terms of their use in companies' sales policies and strategies in their relationship with the market.

Direct connection of the retail business with end users allows them to offer them and interact with them through dynamic, personalized web spaces which, as well as informing them, allows them to interact with other users, collect and give opinions, develop individualized products, find sales points by geolocation, join specialized virtual communities, etc.

In addition, most tools and applications produced are developed with a worldwide philosophy, in the sense that they represent interaction platforms which exist in a very similar form in different countries and cultures. Interaction through these spaces and use of these tools gives companies in general and retailers in particular two big advantages. First, the information generated by users in general terms and that generated by the company in particular allows more direct, precise knowledge of consumers and customers and facilitates adaptation to new cultural environments. Secondly, communication generated through these applications is much more direct and specific, also allowing the consumer to be included in the generation process and, when this occurs, adaptation of the product supplied to the, new multicultural environments in which the company works.

The analysis carried out in this study will give us information on the social orientation of some retail compames involved in internationalization processes, and will allow reflections on the possibilities and uses of these tools and their future applications.

With this aim, a study is being carried out involving direct observation of the web sites of these companies in terms of use of Web 2.0 applications, as well as monitoring of their presence in different social spaces. The study's results and suggestions contributed are hugely relevant for the retail trade sector, because the interaction of users with the retailer through an attractive, dynamic web site allows a large amount of information about consumers to be obtained, facilitating adaptation to users by means of the same tools and having a positive influence on their possible purchasing, return visits and recommendations to other users.

THE SOCIAL WEB AND RETAIL TRADE

What is the Social Web?

So we begin with a new term which has become a fashionable expression: Web 2.0 or the Social Web. The term Web 2.0 was coined in 2005 by Tim O'Reilly (O'Reilly, 2005), who described it as a new form of web collaboration, a platform "taking advantage of the collective intelligence." Various definitions have been proposed based on this idea. Hoegg, Martignoni, Meckel and Stanoevska-Slabeva (2006) define it as "the philosophy of maximizing the collective mutual intelligence and added value of each participant in the formal, dynamic exchange of information creation." Others focus on more social aspects (Beer and Burrows, 2007) or stress technical aspects or applications (Facca and Lanzi, 2004; Anderson, 2007). Finally, Nielsen (2007) proposes four components which incorporate all the characteristics of Web 2.0: a) "Rich" Internet Applications (RIA); b) Virtual communities, social networks and user-generated content; c) mashups (the use of the services of other web sites as a platform for the development or improvement of a particular virtual space and d) Internet advertising and the Social Web.

The Social Web could thus give a new impetus to the business sector in general and retail distribution in particular, in some cases mitigating the negative aspects that could be caused by commercialization of goods and services over the Net. In fact, the effects it has on retail business can be classified in three dimensions (Jain ana Ganesh, 2007a): content, collaboration and commercialization (Table 1).

Content parameters are related with tools and techniques which seek to offer the user a better, richer information environment. For example, RIAs (Rich Internet Applications) such as FLEX allow presentation formats of greater quality and a more attractive interface to be offered, improving consumers' experience on the web site. The same occurs with the use of RSS channels, podcasts, videocasts or mashups.

Collaboration parameters refers to applications which allow direct interaction between the business and consumers, as well as active participation between consumers and other agents on the web site, to get information about its goods and services.

Finally, commercialization parameters are related with the functions to provide consumers with support when it comes to choosing products. For example, a buying "wizard" or complementary support service through voice or chat tools.

Internet and the Social Web and the retailer's internationalization

Grewal and Levy (2007) stress the importance of the analysis of the impact of Internet on retailers' relationship with consumers, emphasizing especially the new forms of interaction with both the company and other users. They also highlight the fact that in a globalized context, research is necessary to understand the keys to success in internationalization process. In their article about emerging research areas in distribution, the same authors (Grewal and Levy, 2009) repeated that it was necessary to carry out research on the role of Internet and ecommerce in retail distribution.

Grewal, Iyer and Levy (2004) noted that "no other innovation has received as much attention from retailers, manufacturers, consumers and the general public as has been given to online retail sales. In fact, no other kind of competition threatens more to disrupt traditional retail trade than e-commerce."

All the statistics indicate an extraordinary growth in retail sales via Internet in recent years. The estimations of different sources (e-marketer, Forrester Research, red.es, etc.) show that the European online retail market is growing at an annual rate of about 37%, while the more mature online market of the United States is growing at a slower rate (Dellner, 2007, internetretail.com). According to Forrester Research (2007), the number of European online purchases will grow to 174 million, with a net average expenditure of 1,500 Euros. With these figures, European e-commerce could reach 263 billion Euros in 2011, taking into account the sale of travel, clothes, complements and electronic products, all above 10 billion Euros a year.

In this context, according to Forrester Research (2008), the main trends and challenges of virtual retailers are related with Web 2.0 concepts such as collaborative merchandising or comparison shopping. Large, worldwide retailers such as Amazon, Bestbuy, Zappos, etc. base a large part of their success on the inclusion of Social Web tools in their e-commerce spaces.

To assess the impact and potential effects of 2.0 concepts and tools, the conceptual framework of Grewal et al. (2004) can be used as the starting point to analyze the phenomena of retail sales via Internet and, in consequence, its expansion and internationalization to the rest of the world. The question is whether Web 2.0, as the technological and conceptual framework, can stimulate benefits and reduce the limitations to the growth of electronic commerce. While some of these elements which facilitate or limit online sales do not depend on Web 2.0 functionalities, its appearance could have an important effect on them. Table 2 shows these elements proposed by these authors.

Some of the elements that facilitate online purchasing are strengthened by the appearance of the Web 2.0. Consumers can have access to applications with information of greater quality (e.g. using RIA) or can communicate greater confidence (e.g. opinions of expert users), the information can be processed and edited more easily (e.g. buyers and information aggregators). At the same time, online stores have developed additional tools and resources to offer a better buying experience and integrate the consumer himself in the configuration and adaptation of the offer to his tastes and needs.

In addition, Web 2.0 tools can reduce the risks and uncertainty of buying online. Its main advantage is the new, interactive, social dimension which characterizes it. This interaction, both with the staff of the online retail sales point and with other consumers, can increase confidence (e.g. electronic agents and virtual communities) and improve customer service (e.g. chats or VoIP applications).

METHODOLOGY: CURRENT STATUS OF THE STUDY

At the moment, the field work is being carried out through a study involving observation of the web spaces of retail distribution compames, analysing the use these companies make of Web 2.0 applications (podcasts, RSS, mashups, RIA, P2P, wikis, product personalization, etc.), and monitoring their presence in different social spaces (blogs, social networks, microblogging, etc.). For this purpose, analysis of the content of different Web 2.0 tools on each web site, the place where the tools are positioned within each site, and the accessibility they offer to the user, among other things, is being carried out. The sample chosen comes from the SABI database, using the retail distribution sector provided by that database as first discrimination filter, deaggregating the sector by sectors, and as the second filter, identifying those which use e-commerce as a means of internationalization by web observation of their sales strategy.

CONCLUSIONS AND FUTURE CONTRIBUTIONS

As has been shown, Web 2.0 functionalities applied to the retail trade sector have notable potential for achieving increased demand, internationalization over the Net. Improvement in both the overall value of the company (through strengthening physical interactions and online retail sales via e-commerce) and of its specific benefits (reaching and keeping customers) can be achieved by the combination of different 2.0 tools. So the creation of a dynamic, interactive atmosphere at the retail point of sale becomes an increasingly competitive element, and future success and survival will to a large extent depend on retailers who understand and focus their sales strategy on satisfying ever more demanding, sophisticated, interactive and social future consumers. We think the results and suggestions provided by the study we obtain in the end could be relevant to the sector of retail business which is internationalizing over the Net, because a user's visit to an attractive, interactive, Social Web site has a positive effect on the possibility of making a purchase, making a return visit and recommending that online store to other people.

Subject: Studies; Social networks; Globalization; Opportunity; Impact analysis; Electronic commerce; Retail sales

Classification: 5250: Telecommunications systems & Internet communications; 8390: Retailing industry; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 7

Supplement: Spanish Edition

Pages: 31-35

Number of pages: 5

Publication year: 2010

Publication date: 2010

Year: 2010

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: Business Case

Document feature: Tables References

ProQuest document ID: 847386622

Document URL: http://search.proquest.com/docview/847386622?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2010

Last updated: 2011-07-12

Database: ABI/INFORM Complete

Document 14 of 100

The Use Of The Money In The Deposits Banking. Some Questions Of Roman Law Within The Framework Of The Present Financial Crisis

Author: Ochaíta, Alicia Valmaña, PhD

ProQuest document link

Abstract:

The use of the deposited money has become a practice generalized in the present bank although it finds its origin in the Average Age. The necessity to maintain a required cash reserve of the 100% or on the contrary, with fractional reserve, continues nowadays being discussed by economists and jurists mainly in circumstances of financial crisis in which, after putting in circulation high amount of money, the cyclical retraction has taken place. In Rome, that also knew this kind of crisis, the money deposits were recognized; in them, the faculty of use derived from the own delivery of the simply counted money that it determined the transfer of ownership of it to the depositary. Nevertheless, the obligation of the depositary to give back the thing in the moment when it was required by the depositor, served as a barrier to the possibility of an effective use of this amount for the own business of the depositary. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

The varied and complicated commercial relations that currently take place within the banking scope, have caused in the last years a flow of extraordinary current money. The banks have put into the hands of the general consumer an amount of money hardly conceivable years ago, amount of money destined fundamentally to the personal and of families consumption; it has been the reality of the financial crisis the one that has shown how, independently of the more or less concrete reasons that they have caused it, the banking activity had, probably, transferred some limits.

The reasons of the crisis are different, and the particular conditions of each country cause that different reliefs appear in each one of them; however, some of them, are not new. From an external point of view to the banking organization, the individual/customer goes fundamentally to a bank by some of these three reasons: by trust, by necessity, or "gamble" with his money. Each one of those basic, primary reasons, corresponds with three also basic contracts in all banking business: banking deposits of money, credits, portfolio managements or, simply, investment. Independently of which, since we have indicated, the reasons of the financial crisis are more complex, it is reasonable to think about the necessity of a balance of these three elements so that the so call commercial bank can operate with guarantees for its clients.

However, historically this situation is not new. The Bank, after the definitive end of the Roman cycle with the death of the emperor Justinian in 565, and passed the years of the dark High Middle Age, mainly begins its resurgence in the Low Middle Age taking the banking business an extraordinary relevance centered in the commercial cities of the western Mediterranean arc and, indeed, becoming the general practice of the use of the money of the deposits for the accomplishment of other banking businesses, fundamentally loans to new clients (Huerta, p. 59ff, in an extraordinary work of reference to know the economic profiles relatives to the "irregular" deposit and the economic theories to this end, which emphasizes the theory of the 100% required cash reserve from, that the author defends; idem, the English translation, Huerta, 2005); it is born thus, the call bank with fractional reserve that supposes for some authors the true origin of the modern bank. (Usher, 1943, cit. in Huerta, 2006, pág. 53ff).

The key, therefore, is in the use of the money of the deposits conducted by the clients and the possibility of this use will depend, as logical, of the legal nature of the contract that underlies in each one of the relations established with the clients. In this sense, everybody knows the existence of similar contractual figures and how difficult is, in front of new commercial practices, to fit the economic fact in the normative fact. In our case, the handing over of an amount of money to a banker responds, in most of the occasions, to a safekeeping purpose which does of the figure, a deposit; nevertheless, the delivery of the money without sealing, simply counted, determines the transfer of ownership of the currencies with the obligation to give back to the client tantundem, which approximates the figure to the mutuum or loan.

Other many similarities and differences not less important between both contracts, approach or move away the delivery of counted money without sealing to a banker, on the part of a client, to one or another figure, and from the Roman time the discussion has settled down between the consideration of these businesses like mutua or deposits. The same discussion around the deposits banking has arrived until the present time: its legal qualification and the justification of the same one, as much from the civil optics (Lacruz, 1995), like mercantile (with current references of the Spanish jurisprudence, Valmaña M., 2007).

The fundamental question is in establishing to what extent the non fulfillment of certain characteristics of a contract does not determine its immediate perversion, and in this case it would be necessary to verify if it has fit in another contractual figure or not. However, a legal ordering can recognize the existence of irregular figures respect to its contract of reference; the irregularity appears like a natural solution to the non concurrence of some of the elements of a contract, allowing its improvement and regulation by the corresponding legal rules. The irregularity is the border line that allows us to maintain within the typical structure, in certain occasions, in certain contracts.

PECUNIA NUMERATA AC DEPOSITA (Counted Money and deposited)

The texts of the Roman jurisprudence gathered in the Digest of Justinian show to us how the jurists solved controversial legal questions, some real ones, in other cases, invented. Some of these texts gather solutions to problematic questions within a contract described previously, like for example, who assumes the risk of the loss of the thing -periculum- in a sale; in others, which treats, is to know in front of what contractual figure we are: what is difficult, is the qualification of the assumption in fact, object of the analysis. They are cases, for example, in which the doubt is if we are in front of a sale or a renting, a deposit or a mandate, a deposit or a mutuum. In these situations, any components of the analyzed assumption in fact shares and, as well, they are different of more than a contractual figure, reason why they do not have a easy fitting in one of the possible contracts; this happens, evidently, in contracts that show border lines not very noticeable with others, in certain circumstances.

In other words, the fact that the sale and the renting can differ without problems at theoretical level, does not prevent that it be difficult to describe the facts in which we are confronted, in certain circumstances -for example, D. 18, 1, 651; Gaius, Institutiones, III, 145, 146, and 147 -.For that reason sometimes, the difficult thing is not to interpret the rule, but the facts.

In other occasions the process of qualification of facts can demand an interpretation of the normative assumption. This is the case that occupied to Roman jurists when it was understood that the assumptions relative to the delivery of money without sealing for the tantundem given back, escaped of the notissimos términos of the deposit (Papiniano en D. 16, 3, 24; the expression was a success in the following centuries, Azo, Summa Codicis, III, p.22). That issue would come to be equivalent from the normative fact that we are speaking, since in the Roman Law does not exist a regulating (written) rule of the deposit contract, in strict sense.

Some texts of the classic jurists offer doubts about the recognition of a figure that exceeded the very wellknow limits of a deposit and which was a common banking practice within the deposit contract. In some cases this is due to the compilers in the justinianea age, whose accept without doubt the "irregular" deposit, changed and altered the sense of the texts (interpolations) with the aim to insist on the acceptance of interests' agreement, fundamentally. Excluded the "nothingness" legal that would hit against the aim of the classic jurists who raise their cases under the prism of "legal évaluable relations", the consideration of these relations as mutuum also offers difficulties and would exceed, as well its very well-know limits - those of the mutuum- so that, quid est enim aliud commendare, quam deponere? (D. 16, 3, 24, id. Ulpiano in D. 50, 16, 186, "commendare nihil aliud est quam deponere". With this interpretation of commendare, it is doing, evidently, something more than a literal interpretation of a term that appears in the letter that Lucio Ticio writes to Sempronio which appears in D. 16, 3, 24; with the letter is doing a clear reference to which has been the intention of the parts at the time of establishing the legal relation at issue, which is reaffirmed with the following expressions relative to the return "immediately, when and where you want" - quando voles et ubi voles, confestim tibi numerabo- that hit against the mutuum concept. Vide amply, with argumentation and bibliography, Valmaña, 1996, pág. 69ff).

At the classic time the discussion turns around two questions: in the first place, the contrast between "ready money" or "cash" - numerare or adnumeratio-, referred to generic expressions like numus, penes, pecunia- opposite to "sealed money" - sacculum vel argentum signatum, pecunia clausa vel obsignata- and the consequent possibility to use, or not, of the money and, secondly, the use of the money from a permission ab initio or ex intervallo (subsequent) concurrent in a deposit. Both questions move away this legal relation of the contract of "ordinary" deposit and their approach it figures like the mutuum, which has caused an intense discussion in the romanistic doctrine. Mainly, -and without exhaustiveness spirit- it could be said that there is a theory that considers irregular deposit not accepted by the classic jurists (Longo, 1906); a intermediate theory: some jurist would have accept the figure, and others not (Segrè, 1907) (Vigneron, 1984) (Litewsky, 1974 y 1975) and a theory that accepts in general cases, the consideration of the irregular deposit as deposit (Adams, 1962) (Klami, 1969), besides the other I will mention ahead.

a) The first indicated question is also the one that, chronological, serves as discussion the Roman jurists. The ordinary deposit was thought for non fungible goods; nevertheless, the activity to deposit money - fungible good by excellence - was, without any doubt, very frequent. For this reason, the money had to remain "non fungiblilized" through artificial ways as it would be to seal it or to lock up it in closed boxes perfectly identified and, therefore, distinguishable. From this point of view, the fact to have to make non fungible the thing object of deposit to fit within the regime of the ordinary or regular deposit, implied an added activity, a plus opposed to the irregular deposit in which the money was given simply counted, so that equal amount was given back.

In this sense, we found a group of text of Roman jurists - some of pre-classic age- in which the delivery of fungible goods is accepted as object of contracts that were conceived for non fungibles goods, in such a way that the obligation to give back the idem, the same given good, falls to give place the obligation to give back the tantundem.

The testimony of Alieno Varo, jurist of the republic time, in its well-known text on the vessel of Saufeyo, gathered in D. 19, 2, 31, speaks to us about the possibility of a locano operis "irregular" -rerum locatarum duo genera ese [...Jut aut idem redderetur, [...], aut eiusdem generis redderetur-. The raised case is the one of the transport by sea of different amounts of wheat, fungible merchandise, that to each other are confused, and ofthat are different owners -In navem Saufeii cum complures frumentum confunderant-. The problem that considers the jurist is the fulfillment of the obligation of return of the wheat by the ship owner, being the ship casualty lost with part of the load, once he had given back to a part -Saufeius uni ex his frumentum reddiderat de communi, et navis perierat-; the solution of the jurist is that he gave back correctly -recte datum- since he was forced to give back equal amount - tantundem-. This possibility is extended to the deposits in relation to the obligation of restitution of the given goods -Idem iuris esse in deposito-.

The justification of this decision is in the transfer of ownership of the fungible goods to Saufeyo, by the fact to give them without identifying, without sealing -frumentum confunderant; pecuniam numeratam neque clausam, neque obsignatam, sed adnumeraret-. This is the fundamental question in the consideration of the deposit of money by part of the Roman jurisprudence, also the classic one. The fact of the delivery of simply counted money, without sealing, causes a series of legal consequences, inevitably logic: the transfer of ownership of the money to the depositary and, consequently, the faculty of use of the money, which remains integrated as a faculty of the ownership right on the good and, as any faculty, could be materialized or not. The obligation of return, in these cases, is fulfilled with the delivery of equal amount of currencies -or even, the same ones in case they stayed without been mixed with others (Coppa-Zuccari, 1901, pág. 25)-.

For that reason the depositary who uses the given money simply counted -pecunia numerata- does not commit furtum usus, the same way Saufeyo cannot either be condemned by the action of withdrawal of load by the amounts not given -quaesitum est, an ceteripro sua parte frumenti cum nauta agere possunt oneris aversi actione-, because he acted correctly when giving one part of the wheat mixed in the common mass, since the wheat had become his property - secundum quae videri triticum factum Saufeii, et recte datum-.

The text of Alieno Varo makes reference to two classes of res locatae (Longo, 1906, p. 139) that it extends to the two ways in which we can have the res deposita, so that, the fundamental question is the nature of the given thing that produces the consequences whose before we alluded, but that, at any moment, affects the nature of the celebrated legal contract, that the jurist understands like a locatio at any moment or as a deposit and what, of course, is an only contract, an only legal relation (Valmaña, 1996, p. 49). To such an extent the rules of the renting contract - or of the deposit- remain that, to some authors, lost all the load, Saufeyo would have been released of all liability because there was no negligence in the loss of the good (Bonifacio, 1948, p. 108, n.54).

Other texts touch upon to the idea of the transferring of ownership with the delivery of fungible things (Valmaña, 1996, p. 22ff. in relation to Gayo III, 147, Pomponio in D. 34, 2, 34 and Javoleno in D. 18, 1, 65), but is the text of Alieno the one that, with greater clarity, gathers the original concept that from the deposit of money the Roman jurists had: si quispecuniam numeratam ita deposuisset, ut ñeque clausam, ñeque obsignatam traderet, sed adnumeraret, nihil aliud eum debere, apud quem deposita esset, nisi tantundem pecuniae solvere.

This conception of the money deposit seems already assumed by the classic jurists. Thus, Papiniano, in the gathered text already mentioned in D. 16, 3, 24, speaks to us of a delivery of one hundred currencies that the slave of Sempronio, Stico, counting them, entrusts Lucio Ticio who is obliged himself to give back them when and where Sempronio wants, immediately -Centum numos, quos hac die commendasti mihi annumerante servo Sticho adore, esse apud me [...] quae quando voles, et ubi voles confestim tibi numerabo-. Appears again the idea of counted money as much in the delivery (annumerante) like in the return (numerabo); also, the facilities given for the return of the money indicate the own activity of bankers (vide Demóstenes contro Afobo, when speaks about a banker who had put an announcement in his establishment assuring that he would give back the deposited money even at night; extensively, Valmaña, 1996, p. 7 Iff) and that, of course, would go against an interpretation of the assumption in fact like a pure deposit in which idem is given back (Segrè, 1907, p. 223).

Jurists like Papiniano or Paulo, on the base of the recognition of pecunia numerata ac deposita as deposits - although irregular, as it would be denominated later- would have been asked themselves, taking a step forward in relation to the pre classical jurisprudence, about one of the fundamental problems: if, from these relations, it was possible to demand the payment of interests - Quaeritur propter usurarum incrementum (D. 16, 3, 24) or Quaero, an usurae peti possunt (D. 16, 3, 26, 1)-.

Their answer was to accept only the interests post mor am, that is to say, since the moment at which the return of tantundem has not taken place, once it has been required to him. Before incurring on delay, does not seem to be accepted a pactum in continenti of interests that comprised itself into the own contract of deposit (Brasiello, 1956, p. 502 and amply, Valmaña, 1996, p. 77). Nevertheless, the same fact of asking themselves if is possible to demand interests in the deposits of counted money, implies that it was a current question to the classic jurisprudence; some authors even maintain that some jurists - Paulo- could have accepted the payment of interests through actio depositi, at least on the base of the officium of the judge, who would have considered the agreement on the interests like matter derived from the good faith (Gordon, 1982, p. 379ff); however, also in principle, in the case of the money deposit the depositary lends a benefit to the depositor, until the extent of offering to have the money available quando voles, et ubi voles. The use of the money by the depositary is something inherent to datio rei: since the money is deposited without sealing, its use derives from the datio rei, necessarily, like an integrating element of the same, with no need of a special permission of use, or to provide any compensation.

For this reason we found a greater number of justinianeas interpolations in these texts, focused fundamentally to recognize legal consequences that, at classic time, had not been admitted, as the pacts of interests adhered to money deposits, to emphasize the influence of the will of the parts, or the conception of the use of the money as subjective element and not only as objective element derived from datio rei -as it happened at the classic time-, with the consequent assumption of the idea of benefit of the depositary, valuable economically.

b). We said pages back that the second question in relation to the discussion on this subject is about the cases of use of the money from a permission ab initio or ex intervallo in a deposit. The fundamental texts in this question are those of the jurist Ulpiano; the assumptions of a permission of initial use appear gathered in D. 12, 1, 10 and D. 16, 3, 1, 34, and the permission of use ex intervallo and the effects that they have on a deposit contract, in D. 12, 1, 9,9.

The permission of use ab initio -Quodsi ab initio, cum deponerem, uti tibi, si voles, permisero [...] o Si pecuniam apud te ab initio hac lege deposita sit, ut, si voluisses, uteretis [...J -does not transform the original contract of deposit into the one of mutuum, but that the legal action to protect the contract only changes in case the precedent and optional condition was verified - creditam non ese, antequam mota sit, quoniam debitum iri non est certum o priusquam utaris, depositi tenebris -. This verification is only possible by the external act of the breaking of seals, acceding materially to the currencies (Brasiello, 1956, p. 486). As we can see, Ulpiano starts in these two texts of an assumption of ordinary deposit, this is, of sealed deposit; the difference, in relation to their legal effects, with a deposit - irregular- of money is that, in this one, the use of money is something that naturally derives from the delivery of the simply counted money, reason why used or not the amount, the effects of the contract will occur in any case, because the fundamental element in the irregular deposit is not the use, but the obligation to give back tantundem (accompanied of the safekeeping purpose that supposes its cause). In the assumptions of Ulpiano - ordinary deposit-, the effective use is the transcendental element that causes the change from an action to another one, the moment in the depositary confirms his "adhesion" to the new contract.

In the cases of or a posteriori o ex intervallo permission -deposui apud te decern, postea permiso tibi utiUlpiano also starts of an assumption of deposit of sealed money -for that the use of the expression antequam moveantur that alludes to the removal of seals-. In fact, assumption and solution are very similar to that we have seen in relation to the initial permission, with the difference of, now, the parts, depositor and depositary, are which seem to conclude a pact whose content is the possibility of using the money. This reason would be the one that would take to jurists like Nerva and Próculo to advance at the time of celebration of the pact the possibility of exercising the condictio -legal action to defend the contract of mutuum- without having to wait for the effective use; the spirit of the depositary would have changed, into Marcelo's opinion, since from the text seems to be deduced that the permission of use has been authorized to depositary's requirement -animo enim coepit possidere [...] qui mutuam rogavit-.

The change from deposit -ordinary- to loan takes place by the relevance that takes the faculty of use that comes directly from the will of the parts (Bonifacio, 1948, p. 130); however, as we have already said, in the deposit -irregular- of money lacks this faculty of use emanated of the will of the parts: the use occurs as a tangential circumstance emanated of the transfer of ownership that takes place with the delivery of the simply counted money in a contract celebrated, not with the purpose of granting to the depositary the use, but the safekeeping of the thing that allows the return of the same amount of money (Bonifacio, 1948, p. 129).

Consequently, if the use is something derived naturally from the delivery of the counted money in which the transfer of the ownership has taken place, can the depositary use the money as he wants? Papiniano, in the assumption gathered in D. 16, 3, 25, 1, talks about the problem of a depositary that, having received money without sealing, with the obligation to give back solely the tantundem -Qui pecuniam apud se non obsignatam, ut tantundem redderet-, uses it in his own businesses or his own benefit -ad usos proprios convertit -. Although some authors see different interpolations in the text, I understand that the jurist would have tried to highlight the consequences of the unfulfilment of the obligation of return of tantundem, caused by the use of the money in his own businesses. This use is the one that puts to him in the situation of unfulfilment and for that reason, from being placed in delay, must pay the corresponding interest -post moram in usuras quoque iudicio depositi condemnandus est-.

The main obligation of the depositary is the return of tantundem and, although the use of the money derives from his present condition of owner of it, the possibility always present that the depositor demands the return of the given money at any time, places him in a situation of most special danger of unfulfilment of the main obligation - return- if he had used this money ad usos proprios. The situation in case of unfulfilment would be worst even more for the depositary because, being the deposit a contract of good faith, the iudex always could value the elements that surround to the unfulfilment, to increase the sentence, in addition to the claimableness of the interests post moram, that we just have seen.

The texts that we have seen until now, and others more whose analysis exceeds the intention this study, reflect the preoccupation of the Roman jurisprudence by an intense banking activity in which the legal relations between nummularii or argentarli and clients was more and more varied and complex, and to that the Roman Law had to give answer within the existing contractual structures (extensively, Torrent, 2007, p. 140ff). The preoccupation was not exaggerated. The texts reflect that the banking activity not always was developed of correct form and the classic jurists gather assumptions of bankruptcies of bankers (D. 16, 3, 7, 2 and D. 42, 5, 24, 2, for example); the trust that a banker woke up in his clients was the fundamental base so that certain contracts were celebrated: deposit always was a contract based on fides, and when the contract is "professionalized" with depositary/bankers the trust goes beyond the personal relation between the parts, being generated & fidem publicum, that has a certain social function (Pérez, 2000, p. 365). This is the reason that the depositors are considered in the Roman Law like creditors privileged in the cases of bankruptcy of a banker -In bonis mensularii vendundis post privilegia potiorem eorum causam esse placuit, qui pecunias apud mensam fidem publicum secuti deposuerunt (D. 42, 5, 24, 2)-, (amply, Pérez, El privilegio de los depositantes sobre el patrimonio del banquero en Derecho Romano Clásico, 2000, p. 805ff).

The bankruptcies of the bankers supposed the unfulfilment of the obligation to give back tantundem in the "irregular" deposits and their liability was demanded through actio depositi. The deposited trust in them for the safekeeping of their goods had been betrayed -remember the reference of Ulpiano in D. 42, 5, 24, 2 to fidem publicam or the one that appears in a rescriptum of Diocleciano (C. 4, 34, 8) relative to the obligation to fulfill the trust order that the depositary had accepted de implenda suspecta fidem-. Also they suppose the unfulfilment of the sealed deposits, unless remains identified the small bags of money -nummi exstantes- in which case, because not having produced transmission of the ownership, in no case can be confused with the goods of the banker, reason why the action for claim the ownership is the appropriate, as much if they are still under the detentación of banker (D. 42, 5, 24, 2), whatever if this one, committing afurtus usus, gave it in mutuum to a third (C. 4, 34, 8).

The liability by the unfulfilment in a contract of ordinary deposit approached, from the end of the classic age to the one of the deposit -irregular- of money, canalizing themselves both, probably, through the actio depositi, that allowed a high margin of sentence that each iudex decided to impose, in each case, by virtue of the good faith, next to the possibility of demand interests; actio furti would have fallen in front of actio depositi (Brasiello, 1956, p. 496, n.l) and from there, perhaps, the nonreference to the same one in D. 42, 5, 24, 2 and C. 4, 34, 8.

The aim of the classic jurisprudence in fitting these relations within the existing contractual figures disappears in the postclassic age, in which "the tendency of the postclassic vulgarism that looks at the problems from the economic perspective, without too much concerning the respect for the legal categories" (Diaz, 1987, p.62). The declivity of the banking activity from this time also would cause this distance of the legal perspective.

CONCLUSION

The use of the money is a natural consequence of the transmission of the ownership of the currencies that the depositor has given simply counted; nevertheless, the obligation of return of tantundem at any moment, even in some deposits quando voles et ubi voles, confestim, forced the depositary to maintain the amounts always available not to fall in risk of a unfilfilment that would take joined the demand of interests post moram.

Subject: Bank deposits; Economic crisis; Cash management; Banking law; Studies; Economic theory

Location: Rome Italy

Classification: 9130: Experiment/theoretical treatment; 1130: Economic theory; 8100: Financial services industry; 4320: Legislation; 3100: Capital & debt management; 9175: Western Europe

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 7

Supplement: Spanish Edition

Pages: 37-43

Number of pages: 7

Publication year: 2010

Publication date: 2010

Year: 2010

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: Business Case

Document feature: References

ProQuest document ID: 847386672

Document URL: http://search.proquest.com/docview/847386672?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2010

Last updated: 2011-07-12

Database: ABI/INFORM Complete

Document 15 of 100

Using Standard Work Tools For Process Improvement

Author: Labach, Elaine J

ProQuest document link

Abstract:

The purpose of this paper is to describe the application of Kaizen tools toward process improvement. The key tools described are those dedicated toward standard work, which is a prescribed sequence of tasks which are balanced to achieve a level production schedule. Data from an actual Kaizen event in a Sewing Panel area serves as examples of the tools. Specific tools highlighted include Takt Time, Time Observation Sheet, Cycle Time Bar Chart, Standard Work Layout Diagram, Spaghetti Diagram, 6-S Audit Sheet and Standard Work Combination Sheet. The concept of a Cell Documentation Board is also presented to document and monitor standard work, and includes a Production Control Board and a Key Points Sheet. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

The Japanese term of Kaizen has been defined as Kai (to pull apart) and Zen (to put back together in harmony) and is a lean process improvement approach (Bradley and Willett, 2004; Melnyk et al, 1998; Sheridan, 1997 and Vasilash, 1997). Kaizen events are rapid (typically completed in 3-5 days) and low cost (implements low cost approaches to process improvement). Benefits of successful Kaizen application has been reported to include increases in productivity (300-400%), increases in inventory turns (1000%), reduction in defects (95%) and lead time (95%) (Cuscela, 1998; Sheridan, 1997). Through the involvement of cross functional teams, team members are educated in using the tools as well as experience the process of Kaizen. Kaizen focuses on quality improvement and elimination of waste in every form. By targeting wastes, Kaizen improves safety, quality, speed and method of processing by reducing: (1) injuries; (2) defects and processing waste; (3) overproduction, inventory or duplication and (4) transportation, motion, idle and wait time.

Proponents of Kaizen who have used it successfully as a lean approach report that it accomplishes process improvement with the best of human spirit. Through use of a disciplined, problem solving approach, blaming, faulting, scape-goating and finger pointing are de-emphasized. Kaizen encourages team members who have a healthy dissatisfaction with the way things are and gives them a process for defining and implementing improvements.

STANDARD WORK

Introduction

Standard work is a prescribed sequence of production steps or activities that are assigned to a single operator which are balanced to the takt time. Takt time is the net available time per shift (in seconds) divided by customer demand per shift (in units). The takt time serves as the pulse, or pace of production. Given that demand is leveled, takt time is the key to JIT (Just-in-Time) manufacturing since it spreads customer demand evenly across the time available.

The purpose of standard work is to minimize and control the variation in output, quality, WJP (Work in Process) inventory levels and cost. As previously mentioned, takt time is an important element of standard work. Cycle times, work sequence and standard WIP levels are also important elements. By defining these to balance the work to takt time, performance measures of the process are optimized.

Prerequisites for standard work include: one piece flow cell; repeating work sequences; management/supervisor commitment; and a disciplined approach to tracking and addressing performance, especially mat which deviates from prescribed levels.

We will look at examples of standard work taken from a sewing operation that makes panels for a finished product. The goals of this 5-day Kaizen event were as follows:

1. Develop a one-piece flow cell for making panels and reduce WIP by 20%.

2. Increase productivity (as measured by pieces/man-hour) by 30%.

3. Identify safety hazards and improve die 6-S assessment (target score isl00%).

Takt Time

For this particular example, the work needs to be accomplished in an eight-hour work day, with 30 minutes of break time and 10 minutes allowed for clean up. For each shift, 325 pieces of work must be completed to meet the customer demand, or the production schedule. The takt time calculation, which defines die number of seconds to allocate to each piece, is shown in Table 1 below.

Standard Work Tools

The typical tools of standard work incorporate pace (Takt Time), work sequence (people) and standard work in process (pieces) and include the following:

* Time Observation Sheet (before and after improvements)

* Cycle Time Bar Chart (before and after improvements)

* Standard Work Layout Sheet (before and after improvements)

* Spaghetti Diagram (before improvement)

* 6-S Audit Sheet (before and after improvements)

* Standard Work Combination Sheet

* Production Control Board

* Key Points Sheet

Time Observation Sheet

Once the goals have been established and the team members have been trained, the first tool utilized is the Time Observation Sheet. Team members are assigned to collect typical times of various tasks associated with the Label station of the process in order to baseline its performance. Each operator is timed for 5 cycles to identify an average cycle time. Figure 1 shows an example time observation sheet completed for operator one. The average cycle time to complete the labeling operation is 49 seconds (lower right hand corner of Figure 1).

Cycle Time Bar Chart

Once individual cycle times are collected for each operator, a cycle time bar chart can be constructed (see Figure 2). This chart indicates not only how far each operator's cycle time differs from the takt time, but it also shows non-value activities being performed by the operators. By taking the sum of all operator's cycle times and dividing by the takt time, it shows a minimum staffing of three operators is needed (there are currently five operators).

Standard Work Layout and Spaghetti Diagrams

Two other typical tools of Standard Work include the Layout and Spaghetti Diagrams. Figure 3 shows the layout of the sewing area before improvements have been made. Note mat die material comes to the flange machine via carts, and once attached, travels down the conveyor to two inspection stations where a quality check is made. WIP is shown by dark circles and potential safety risks are shown by dark crosses.

The arrows in Figure 3 indicate the movement needed by the operators to move material between the various operations. All work sequences need to be represented and staffing levels confirmed. Work sequences can then be drawn for each person.

Spaghetti diagrams isolate operator movements that occur to complete their tasks. By following the operator's movements with a pen on the layout sheet, Figure 4 shows the spaghetti diagram of the operator's movement. It shows repetitive movements as material is placed on the cart and moved to the flange operation. More repetitive movements are shown moving materials off the conveyor into the inspection stations. Spaghetti diagrams are useful in identifying how to change the layout of an area to minimize walking and other non-value activities.

By using the information in Figures 2-4, a new layout can be designed minimizing non-value activities while maintaining takt time (Figure 5). After the new layout is designed, another time observation chart is completed for cycle times necessary to maintain one-piece flow, minimize WTP and ensure takt time is met. Total crew was reduced by 3, increasing productivity by 45%. Also, WIP inventory has been reduced by 50%.

6-S Audit Sheet

An assessment called the 6-S Audit Sheet is useful to identify improvement opportunities that relate to:

* Sorting (getting rid of the unneeded)

* Straightening (organizing the area)

* Scrubbing (cleaning, seeing, solving)

* Safety (identify/solve risks)

* Standardizing (documenting who does what)

* Sustaining (daily self discipline)

A copy of the before 6-S Audit Sheet is shown in Figure 6. The goal is to score 25 "yes" responses, or 100% score. The before score indicates only 5 "yes" answers, or 20%. By redesigning the area and posting standard work information on the documentation board, the 6-S Audit score was increased to 84%, or an improvement of 320% from baseline.

Standard Work Combination Sheet

The Standard Work Combination Sheet is intended to clearly document the assignments of each person by listing the tasks in the work sequence. It lists the unattended machine run and walk times. An example is shown in Figure 7. This sheet documents the work sequence and can be used to monitor performance and train new personnel.

Goals Achieved

Table 2 shows the final results of the Kaizen event compared to baseline and target, Additional improvements were also made in parts travel and employee walking distance.

SUSTAINING THE GAINS

Documenting Standard Work

Documenting and posting standard work is often one of the last exercises a Kaizen team will implement. In addition, all employees along with the supervisor(s) of the area need to be trained in standard work. Supervisors should periodically assess how well standard work is being followed as well as coach employees through any obstacles that prevent standard work from being consistently followed. The use of a Production Control Board is a good tool to monitor and document issues as discovered (see Figure 8).

Another sheet to post permanently in the production area is a Key Points Sheet. This sheet highlights important aspects of work sequence so that standard work can be consistently maintained. For example, one key point for the Sewing Panel Area may be to "Place panel in flange machine making certain that dimple is in front (facing towards you)" to begin flange operation. Note: Make certain air pressure is set to 60 psi."

Cell Documentation Board

A board should be placed in the improved work area that posts the "after improvement" standard work sheets. These should include at a minimum:

* Standard Work Layout Diagram

* Production Control Board

* Standard Work Combination Sheet (one for each operator)

In addition, the Key Points Sheet should be placed near each work station so operators can easily refer to it as needed.

Summary

The use of kaizen events has increased significantly in recent years (Bane, 2002), with its success only being limited by knowledge of the tools and organizational commitment to sustaining the gains. This paper seeks to add to the knowledge stream by providing examples of Kaizen standard work tools aimed at process improvement.

Subject: Total quality; Quality standards; Production controls; Case studies

Classification: 9130: Experiment/theoretical treatment; 5320: Quality control

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 1

Pages: 39-47

Number of pages: 9

Publication year: 2010

Publication date: Jan/Feb 2010

Year: 2010

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: Business Case, Feature

Document feature: Tables Graphs Diagrams References

ProQuest document ID: 214859523

Document URL: http://search.proquest.com/docview/214859523?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Jan/Feb 2010

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 16 of 100

Impact Of Ingráfica Festival In The City Of Cuenca (Spain)

Author: Vargas-Vargas, Manuel, PhD; Mondéjar-Jiménez, José, PhD; Meseguer-Santamaría, Leticia; Yubero-Martínez, Santiago, PhD; Larrañaga-Rubio, Elisa, PhD

ProQuest document link

Abstract:

Ingráfica, International Festival of Contemporary Engraving City of Cuenca, is an international platform to support the creation, promotion and dissemination of contemporary printmaking and other forms of multiple art. Its purpose is to reflect on the engraving as an artistic discipline of XXI century, acting as a meeting point and consultation between the professionals and concerned citizens recorded in going in this artistic discipline and its variants. Ingráfica is the only non-commercial event with the world of graphic, which is held annually in Spain. The main aim of this paper is to determine the impact of Ingráfica in the city of Cuenca, with a view to taking appropriate strategies to the profile of the attendees. It also wants to know the satisfaction of visitors with different activities of Ingráfica. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Ingráfica is a project designed and organized by Hablar en Arte, cultural non-profit association dedicated to the promotion, development, research, protection and dissemination of activities related to the visual arts, performing and visual. The festival is sponsored by the Council of Cuenca and has the support of the Consorcio of the city, which includes the central government, the regional government (Junta de Comunidades de Castilla-La Mancha), the Diputación Provincial de Cuenca and the City Council. In the 2009 edition are also sponsoring the festival, the University of Castilla-La Mancha, the Romanian Cultural Institute, the Austrian Cultural Forum, the Polish Institute in Madrid and the Italian Institute of Culture in Madrid. Partners are the Social and Cultural Work of CCM, the Instituto Cervantes and the Chamber of Commerce Polish-Spanish.

Ingráfica is one of cultural events designed to boost the aspirations of Cuenca to get the Capital of Culture in 2016, with the intent to promote the vision of a city committed to the culture for the outside. The fact that the festival (Ingráfica on Open) is integrated into the Triennial of Engraving of Krakow, one of the most prestigious events recorded in Europe and the agreements reached Ingráfica to raise awareness abroad of the hand of the Institute Cervantes, are contributing to the name of Cuenca heard for much of the world.

The specific aims of this paper are, in line with other similar work (Devesa, 2006; Herrero, 2004; Perles, 2006):

* To know the brand image Ingráfica.

* To know the Ingráfica visitor profile.

* To study the visitor' satisfaction with the visits to exhibitions and activities of Ingráfica, getting to know the weaknesses and try to fix in future editions.

From the viewpoint of planning and touristic destination management should pay special attention to the maintenance and conservation of natural resources representing the tourism (Lopez Bonilla and Lopez Bonilla, 2007), yet must agglutinate management tools that enable adequate provision of resources (Mondéjar, Mondéjar, Sevilla and Cordente, 2009), which neatly channeled different policies to support the tourism sector and, especially, in this sense, the traditional cyclical behavior of the touristic sector can be seasonally adjusted by the emergence of new tourist products, which create significant market segments for the sector, such as the celebration of different events (Mondéjar, Mondéjar and Sevilla, 2009).

METHODOLOGY

To achieve the stated objectives, this research has been designed to know details about the degree of knowledge of Ingráfica, the valuation of its image, participation in scheduled activities and the assessment of thenquality. The information is obtained by personal interviews with visitors attending exhibitions and activities, selected randomly and trying to get a representative sample.

As result, 195 questionnaires were obtained, with whom, for a number attendees around 10,000, a sample size of 195 individuals would provide an initial error of ± 6.9%, with a confidence level of 95% for a variable with two categories equally likely (p = q = 0.5). We show that the Festival Ingráfica, often a blend of museums and prestigious rooms in our city, although, as is clear from the data, a large majority of respondents know the festival. Table 1 shows the most important characteristics of the sample design and data collection fieldwork of this study.

RESULTS

The Ingráfica attendee profile has the following significant features (see Table 2):

More than 80% (81.8%) of people knew Ingráfica, but only 63.6% recognized his brand image. In general, the score of the logo is positive in all aspects evaluated. In the comparison between the opinions of those who previously knew Ingráfica and the unknown, the former have a more consolidated scoring (5.21). This is the only significant difference found between the two groups (t = 2.25, p <, 027). As shown in Figure 1, looking at the brand image, taking into account the sex of respondents, the score of women is slightly higher than men.

If we analyze the experience by gender, more women attend for the first time. However, this relationship is not statistically significant. The analysis of the experience by age shows that after 25 years, as age increases, the greater the percentage already attended the previous edition. Those attending for the first time are more young people, mostly between 25 and 44. This relationship is significant at 95%.

As shown in Figure 2, the main reason to visit Ingráfica is in the answer category 'other', with 43.6%. Then, we disaggregate this option. From the analysis of data, it appears that the main reason that motivated the visit to Ingráfica was the recommendation of friends and relatives (29.1%), followed, secondly, by information in mass media (15.5%). Internet, with almost 12%, is placed as a source of information suitable for dissemination. Also prominently is the assistance of those who were visiting Cuenca during the weekend in which the information was collected.

The opinion of the assistants on Ingráfica is quite positive, reaching a score of 7.54 over 10 points. The most common ratings are distributed among those who scored 7 (26.4%), 8 points (20%) and 9 points to 14.5% of the attendees. 4.5% pays less than 5 points to Ingráfica (a score which represents only 8 persons). If we analyze the score of Ingráfica according to sociodemographic variables and experience (see Table 3), although there are slight variations among the participants, none reached statistical significance.

CONCLUSIONS

From the information collected in this study, the main conclusions and recommendations of this research can be summarized in the following points:

1. The most frequent profile among Ingráfica attendees is an individual between 25 and 44 years old, with university education and defined cultural interests.

2. The study indicates that Ingráfica is on a firm path of consolidation, demonstrating a high capacity for loyalty to the attendees. Thus, 97.6% of those attending the two editions of the festival said he would return next year. They also say they would return for the 2010 edition the 82.6% of those who have attended for the first time Ingráfica in 2009. Thus, this festival consolidates as a platform of Spanish contemporary printmaking.

3. Following on the previous line, 37.3% of the participants in 2009 had attended the festival last year.

4. In relation to its relevance as a platform of art, 21.8% of the attendees of this year have moved to Cuenca to attend Ingráfica. This fact makes clear how these activities can be an additional tourist attraction to be the main reason for the visit to the city of more than one-fifth of the respondents.

5. Attendees at this edition of Ingráfica appreciate the festival with an average rating of 7.54 over 10, showing their satisfaction with the assistance. The obtained a score above 7 is ratified in the various segments studied by different classification questions provided in the questionnaire.

6. All activities in Ingráfica reach an average score above 7. The highest score they receive exposures.

7. The valuation of festival brand is positive. The weakest areas relate to her self-identity and brand building.

8. The assessment of brand image has been very positive. Without being a specialist public in such valuations, in general, and despite the confusion of many respondents with other logos, has managed to create brand image: one action that it would consolidate its should be the inclusion in every festival activities.

9. The overall satisfaction of attendees to the celebration of the festival and the environment in which it occurs is high, which implies that 94% of attendees would recommend to family and friends attending Ingráfica and, similarly, invited to visit Cuenca as a tourist destination.

10. Over 80% of the participants believe that an advertising effort would increase the number of visitors. Although the recommendation of the interest of the festival has been the main reason they have attended for the first time Ingráfica (29.1%), the broadcast media and the Internet has also proved effective.

11. Undoubtedly, considering the obtained results, is necessary to continue Ingráfica experience. We cannot forget that this is only the second year of the festival.

12. Wider diffusion of programs and activities (exhibitions, tours, etc.) can lead to greater citizen participation. Although this year adding a number of works at bus stops, murals and other, many people have not been able to associate them in the city, so the public assistance of the City of Cuenca itself is well below that of other similar events.

Subject: Festivals; Customer satisfaction; Tourism; Economic impact; Brand loyalty

Location: Cuenca Spain

Classification: 7100: Market research; 1110: Economic conditions & forecasts; 2400: Public relations; 8307: Arts, entertainment & recreation; 9175: Western Europe

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 7

Supplement: Spanish Edition

Pages: 45-49

Number of pages: 5

Publication year: 2010

Publication date: 2010

Year: 2010

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: Business Case

Document feature: Tables Diagrams Graphs References

ProQuest document ID: 847386596

Document URL: http://search.proquest.com/docview/847386596?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2010

Last updated: 2011-07-12

Database: ABI/INFORM Complete

Document 17 of 100

Maintaining Relationships With Supply Chain Partners: A Case Study

Author: Quigley, Charles J; Bingham, Frank G

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Abstract:

This case study describes efforts of a market leader in the communication infrastructure industry to assess the relationships they have developed with their global supply chain partners. Changes in the industry have resulted in geographic shifts of existing and potential supply chain suppliers and customers. In an effort to determine if commitment to customer service has resulted in increased customer satisfaction and loyalty, research was conducted to assess their performance. The results of this research were compared to previous research to determine if their service program has successfully differentiated them from their competitors. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

An emerging concern associated with outsourcing is the ability to effectively manage complex global supplier relationships (Sanders, et al., 2007). Complicating an organization's ability to effectively manage their supply chain are complications of global sourcing. A product may be designed in one country, manufactured in another, and parts/components sourced in yet another (Van Pham, 2006). Increasingly, U.S. firms are turning to suppliers of products and services located in low-cost countries (LCC) that offer an attractive alternative to the higher cost suppliers from more developed economies (Rumsock, Russell, and Thomchick, 2007). However, evidence indicates there is much diversity in sourcing and supply chain performance among differing LCC regions and nations. This complicates the task of effectively managing buyer-seller relationships.

To maintain and improve a firm's future competitive advantage in global competition, it must develop and enhance management knowledge of differing regions and nations of supply to optimize strategic value (Rumsock, Russell, and Thomchick, 2007). As part of the supplier relationship management process, there is a need to develop more advanced working relationships or alliances (Knemeyer, Corsi and Murphy, 2003; Moberg and Speh, 2003; Lambert, Knemeyer, and Gardner, 2004). This involves a commitment over an extended time period to work together for the mutual benefit of all parties, sharing relevant information along with the risks and rewards of the relationship (Engle, 2007).

There are a number of factors that have been hypothesized to influence the relative importance of price in supply chain relationships. Among these factors is the stage of the product(s) in the life cycle, nationality of the organization(s), and competitive intensity within the industry. A product, early in its life cycle is perceived by existing and potential customers to be differentiated from competitive offerings. As demand within the market grows, the challenge for the supplying firm is to gear up supply to meet these demands. The seller controls price and the customer becomes a price-taker. As the product matures, it loses the perception of being differentiated and evolves into commodity status. Price control shifts, the customer now uses price to play one supplier off against another and the supplier becomes the price-taker. To counter the growing power of the buyer, the seller attempts to differentiate their offering by shifting focus from the product to other elements, including service. As the product moves through the life cycle, moving from unique to differentiated to commodity status, the nature of the relationship between buyers and sellers also shifts.

THE ISSUES

Frank Corly, Senior Vice President of Sales and Marketing for COMMCO and the manager of the organization's largest strategic business unit (SBU) prepared for his meeting with Alan Land, Manager of Customer Services, Michael Bhada, Manager of Quality Assurance and Carol Brigman, Manager of Information Services, to discuss the results of a recently completed survey of their supply chain partners. Also attending this meeting would be David Brown, President of COMMCO and Valarie Montross, Vice President of Finance. Frank was reviewing the results of the survey that had been provided by a research firm hired to conduct the survey. This was the same firm the company used to conduct several past customer surveys.

Frank realized the results would be used to assess the success of the company's strategic initiatives to differentiate its offerings from those of the competitors. Although sales had increased over the last 12 month period from the prior 12 month perìod, profit margins had not moved. He was hoping to use the survey results to maintain the commitment of the CEO toward the customer service initiatives they had introduced over the past year.

COMMCO is a multinational manufacturer and marketer of an array of commercial products used in the communication industry. COMMCO has been in business for over 50 years, employing approximately 5000 people worldwide. They provide materials for commercial, industrial and military applications. The company offers contract manufacturing and product design services, and provides product coating, lamination, extrusion, printing, slitting and weaving at its ISO 9001:2000-certified plants. Corly believes that a major reason for their continuing success is the ability to develop and maintain long-term relationships with their customers. They also believe that their commitment to satisfying customers by providing quality products, supported by excellent service, is the cornerstone of their competitive advantage. However, over the last several years they have seen their profit margins erode, sales stagnate, and competitors grow more aggressive. Competitors from Europe and Asia have been able to match the quality of COMMCO's products and have undercut their prices. Responding to these competitive pressures, they embarked on an aggressive growth program to expand their customer base into Asian markets. They intended to leverage their self-perceived outstanding service to customers to recapture market leadership and justify their premium pricing.

THE SURVEY

Discussions were initially held to conceptualize the process for gathering information that would allow the firm to assess the results of its customer service initiatives. Frank included Alan Land, Carol Brigman, Mark Arrington, Controller of International Operations, and the regional sales managers for Europe and Asia in mese discussions. While traditional financial benchmarks would be necessary, Frank argued that customer perceptions of COMMCO's performance and their competitor's performance would also be important. These measures would allow them to determine what COMMCO was doing well and also what they were not doing well.

They decided diat a survey of their customers was the best way to get the information they required. Further discussion resulted in a consensus of opinion concerning the objectives of the survey. They decided the survey should:

* Identify the attributes, or criteria, customers use to evaluate their suppliers, including COMMCO

* Determine the relative importance customers attach to the criteria used to evaluate suppliers

* Assess the performance of COMMCO on these criteria

* Compare COMMCO's performance to that of its closest competitor(s).

DEPTH INTERVIEWS

Interviews with managers and field sales representatives focused on identifying key attributes that were believed to be instrumental in a customer's evaluation of their suppliers. The general question that was asked was: What attributes do customers use to evaluate the performance of key suppliers? Both managers and field sales representatives agreed on the set of attributes they believed were important. These attributes were grouped into seven areas: transaction fulfillment, complaint resolution, price, customer contact, availability/delivery/quality, technical support, and overall relationship. These attributes were similar to attributes that were indentified and included in previous customer surveys, which were undertaken every other year by the Customer Service Department.

SURVEY INSTRUMENT

Based on the results of the depth interviews, a survey instrument was developed. This instrument, which included measures (characteristics) of the responding firm, asked the respondent to assess the importance of criteria used to evaluate their suppliers. Respondents were then asked to evaluate the performance of COMMCO and the performance of the closest competitor (identified by the respondents). The survey was developed and tested to insure that the wording of questions was not confusing and that the scales used to measure responses were appropriate.

SURVEY ADMINISTRATION

The survey was mailed to individuals at customer organizations that were identified by field sales representatives. A letter from the Vice President of Sales and Marketing was included, which explained the purpose of the survey and assured the respondents of anonymity. Enclosed with the survey was a return envelope to be returned to the independent external research firm contracted to conduct the survey. An electronic copy of the survey was created and provided, as an option to the customer.

SURVEY FINDINGS

Table 1 in the Appendix describes the respondents to the current survey and three prior customer surveys conducted in 2002, 2004, and 2006. The response rate for the current survey was 1 1%. The response rate for the electronic version is unknown; however the completion rate was 65%. Response rates for prior studies were 16% in 2006, 34% in 2004, and an estimated 8% in 2002.

IMPORTANCE OF ATTRIBUTES

The importance that customers attached to the criteria they used to evaluate existing suppliers is provided in Figure 1. This figure shows the mean scores of respondents in the current survey for each criterion. Table 2 in the Appendix provides the importance of criteria reported in prior studies.

DIMENSIONS USED TO EVALUATE SUPPLIERS

To determine if the seventeen criteria that respondents evaluated in terms of their importance in supplier selection represented a smaller number of underlying dimensions upon which suppliers are evaluated, the research firm performed a factor analysis. The results of this analysis are presented in Table 3. This table identifies the dimensions that account for most of the variation in evaluations among and between the respondents. The criteria for each dimension are listed by its relative importance.

COMMCO'S PERFORMANCE

Customers were asked whether they agreed or disagreed with multiple statements concerning COMMCO' s performance. Figure 2 presents the customers' mean assessment (agree or disagree) with these performance statements.

COMMCO'S PERFORMANCE RELATIVE TO THEm PRIMARY COMPETITOR

Customers were asked to assess the performance of COMMCO compared to the performance of the firm the customer believed to be their closest competitor. Figure 3 presents the customers' average assessment of COMMCO's performance compared to their nearest competitor.

CUSTOMER SURVEY IMPLICATIONS

The results of the survey provided Frank with much information concerning how customers assess the performance of suppliers and how well COMMCO performed. He was unsure, however, whether the information from the surveys would be viewed as validating their efforts to increase the organization's commitment to customer service as a differentiating factor to justify charging higher prices. He knew that he would have to provide the executives with substantial evidence on the success of the service program to maintain their support, especially in view of the pressure on the organization's profit margin.

CASE QUESTIONS

1. What does Figure 1 indicate about the criteria that customers use to evaluate their suppliers?

2. How do the results of this survey compare to past customer surveys COMMCO commissioned? Can they directly be compared?

3. Do the results of the factor analysis influence how Frank should interpret Figure 1?

4. What do figures 2 and 3 indicate about the performance of COMMCO?

5. What information contained in the survey results could Frank use to support his desire to continue the customer service initiatives?

6. Frank was concerned with the reaction of new customers in Asian and European markets. Can their responses be interpreted from these results?

7. Is there information that would make the Chief Executive reticent to extend the service commitment?

8. Does the information provided by the survey indicate areas COMMCO should be concerned about in the future?

Subject: Supply chains; Outsourcing; Vendor supplier relations; Performance evaluation; Communications equipment; Case studies

Location: United States--US

Classification: 9130: Experiment/theoretical treatment; 2400: Public relations; 5120: Purchasing; 9190: United States; 8650: Electrical & electronics industries

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 1

Pages: 49-57

Number of pages: 9

Publication year: 2010

Publication date: Jan/Feb 2010

Year: 2010

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: Business Case, Feature

Document feature: Graphs Tables References

ProQuest document ID: 214854278

Document URL: http://search.proquest.com/docview/214854278?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Jan/Feb 2010

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 18 of 100

Rental Housing: Divorce Or Annulment Of The Parties

Author: Martínez, Pilar Domínguez, PD

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Abstract:

The purpose of increasing the supply in the market lettings Spanish accompanied by greater legal certainty to the parties and protection of tenants has been delivered with the new Law 19/2009, of November 23 amending the rules of urban leases. We analyze the possibility of refusal to extend legal, as long as is contemplated in the contract, when the landlord needs to occupy the house for your spouse in the event of a divorce decree or marriage annulment. This course requires a parallel analysis with the system of judicial allocation of use of the rented family home in cases of separation, annulment and divorce of the tenant. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Urban leasing legislation, too protectionist for the tenant in respect of the need for family housing reform has been justified operated by Law 19/2009 in order to achieve a balance between the benefits of the parties, just when it comes to protecting the need for family housing in this case the lessor, which favors the other hand increasing the supply of rental housing. Therefore, the present Law refers in its explanatory memorandum to the low occupancy rates for rental (11%) of the housing market compared to 40% of the EU average. Indeed, apart from establishing certain energy efficiency measures, the target of the new law was to enhance the rental housing market, first, strengthening the procedural position of landlords against defaulting tenants, speeding up processes eviction in the event of default on lease and on the other, providing the landlord's refusal to extend based on the need for family housing.

The amended paragraph 3 of Article 9 of Law 29/1994, of 24 November, Urban Leases, read as follows: "There shall be no mandatory extension of the contract when, at the time of celebration, stated in the same, express the need for the landlord to occupy the rented premises before the expiry of five years to spend on permanent home for themselves or their families in the first degree of consanguinity or adoption or your spouse in the event of a divorce decree or marriage annulment.

The purpose of promoting the rental of dwellings are set in relation to the need for family housing by providing the landlord can recover the property if needed, not only for him, as happened to this reform, but also for their immediate family members degree by consanguinity or adoption; that first grade is given only on the straight line and never in the collateral, such as children and parents of the lessor, or your spouse in the event of a divorce decree or marriage annulment.

The protection of the family home and the tenant's housing need is reflected in the very definition of rental housing that does the same Urban Leases Act. Rental housing is considered a lease that falls on a residential building whose primary target is to satisfy the continuing need for housing for tenants. The rental housing will not lose this status even if the tenant does not have leased the property in its permanent home, provided that inhabit it are not legally separated spouse or de facto or dependent children. In short, housing has to be familiar.

When the house has the attribute "family" refers not to a single subject but all the individuals who constitute the family. The family as a cell and basic institution of society, is also worthy of special protection by the laws. First, Article art. 39.1 of the EC states that "public authorities ensure social, economic and legal status of family." The constitutional protection of the family home is twofold, since it derives not only from its own nature, (right to decent and adequate housing (art. 47 of the EC), but also the destination it serves. (Right to use family). The Supreme Court is described as "family property, no assets, serving the group that settles it, whoever owns them." This protection explains that over time standards have been published have set up special arrangements for the family home that distinguishes the regime applicable to other goods that will lead to a limitation of the property law when it falls on an asset that also affect a primary necessity (art. 47 EC) is based on marriage. In addition to government regulations protecting the right to decent housing and adequate family housing is a priority.

The legal system protects the family home as a normal part of marriage, as in times of crisis, through the protection of the right of the family to use. In normal situation of marriage, the articles 1320. 1357.2 and 1406.4 of the Civil Code. In times of crisis, Article 96 of that Law.For its part, the Urban Leases Act on special rules for leased family housing in Article 12 extends protection to de facto unions, Article 15 as regards the attribution of the use of rented family housing in the cases lessee's marital crisis and finally Article 9.3 amended by Law 19/2009 object of study.

METHODOLOGY

The reform of the rule comes in response to issues raised by the requirement that the claim of the dwelling by the landlord would be just to himself by a need to own, now extends that possibility need for housing for parents or children, by blood or adoption, and also for the spouse in the event of a divorce decree or annulment, provided that the sentence that constitutes these situations becomes final. The temporal scope of application of the rule is the period of mandatory renewal of the contract, ie the first five years. It is conspicuous by its omission of the situation of need arises in the event of termination facts of married life or when definitive measures are taken in a process of marital separation.

Likewise, the provision does not apply where the situation of need arises after the adoption of provisional measures in proceedings for annulment or divorce by requiring final decision to include the definitive measures It would be desirable to extend the standard case referred to in the second degree relatives (grandchildren and brothers of the lessor) common situations that the rule does not address.

We also extend the course to common situations that occur in circumstances of force majeure occurring or foreseen at the time of conclusion of the contract (divorce, separation, marriage, serious illness, unemployment, etc) to amend the personal status of the lessor or family when you need a home.

This would equate the level of protection of the family of the landlord to the same extent that they are the relatives of the tenant in the LAU. The new standard applies only to the spouse without reference to cases of "permanent living similar emotional relationship to the spouse, regardless of their sexual orientation, as do other provisions of that law in effect when housing family is used on a lease, in cases of abandonment and neglect by the owner, Article 12 of the LAU provides specific protection for the other spouse or cohabitant of the tenant as long as the latter, has been living together two years before the withdrawal or abandonment, except they would have had common ancestry in the event of the lease holder spouse without consent of the other. In case of withdrawal, the owner spouse may take over the other's position, the former owner to have withdrawn. The landlord has the option of requiring the spouse elector, who, not responding to the request within fifteen days, forfeit their right of subrogation as well as being obliged to pay the unpaid rent until the expiry of the contract.

In the case of abandonment of the family home, without the express waiver by the owner, the lease could continue for the spouse of the owner if they live with him, which shall assume the position of the former tenant, provided the within one month after the occurrence of abandonment, the landlord receives written notification of the spouse who chooses to lease, manifesting itself in this regard.

On the other hand, the Urban Leases Act in order to solve the problems of judicial allocation of the use of the rented premises devoted Article 15 to cases of separation, annulment and divorce of the tenant, stating that "the tenant spouse may continue in the use of the rented premises when he is assigned in accordance with Articles 90 and 96 CC. "It provides for allocation of use of the house to the spouse not the lease holder. In addition there must be an allocation in the sentence that has terminated the process of annulment, separation or divorce. In this case, the spouse did not use the beneficial owner must notify the landlord will continue in the use of the home.

Notification is mandatory, thus, from knowledge by the landlord of that fact, she intends to take any action against the holder lettings, should also act against the user, should be considered part so that a maneuver is intended to infringe the rights conferred on him the sentence, for example, if the landlord seeks eviction for nonpayment of rent. However, the absence of such notification does not entitle the landlord to terminate the contract.

CONCLUSIONS

Protecting the right to use the rented premises for the spouse of the lessee contractor in cases of annulment, separation or divorce must correspond with the protection that the landlord does the new rule refers to the need of the landlord to your spouse when has ceased to be, then the sentence must be firm, and cannot share the same house stating why you are leased.

It is true that in the case of Article 15 of the Act, we face the family home for protection but the purpose of the reform of Article 9.3 tends to equal protection of the right to use a house for the family that still exists after marital crisis as it is in this case the lessor. The enlargement of the grounds for refusal of the extension housing needs of the spouse is justified in the case that the use of the family home was attributed to the owner spouse as established by Article 96 of the Civil Code.

It is clear that what generates the need is the judicial allocation of the use, of course, can occur "even in marital separation." It must be said that the need must come from the lessor sentence imposed by fall in the marriage process, after determining the allocation of the use of the family home, would be a need to occupy the rented premises by the spouse of the lessor. The need for the spouse will be determined by the fact that, due to the extent agreed upon in court proceedings concerning the allocation of the use of the family home, must leave it and not have another dwelling which would be used to permanently satisfy their need housing. Nevertheless it could be justified exclusion from the course of separation by the possibility of reconciliation which marred the situation would prevail because in that case the protection of the tenant to meet a need for permanent housing.

On the other hand, the allusion to the process of annulment and divorce strongly suggest a marriage crisis, which has stopped the obligation to live together than to spouses imposed by art. 68 of the Civil Code, which seems to leave out the assumption of exclusion of mandatory renewal cases that force the marriage, the spouse of the lessor need for work or as a second. Anyway, it must be said that this is insufficient reform remains the same dubious evidence of the claim process of need.

It highlights one of the problems of the rental market for landlords: the mandatory renewal of five years. Furthermore, it is curious that the Explanatory Memorandum indicates that this need to be expressed in the contract "to prevent fraud and preserve the necessary legal certainty," when it can be expected that such a clause is contained in most of the contracts hereafter be concluded.

Likewise, referring to a final ruling, does not appear to the legal precept that the need of the spouse of the lessor arising out of the adoption of the measure on the allocation of the use of the family home in so-called interim measures before the petition or in the provisional measures resulting from admission of the application (sections 771 and 773 of the Civil Procedure Act in relation to art. 103.2. nd Civil Code), because they are agreed by order against which no appeal, while the wording of the provision refers only to measures agreed by a final sentence.

In effect, this article refers only to the so-called definitive measures are agreed in the ruling that puts an end to contentious legal proceedings for annulment or divorce (art. 774 of the Civil Procedure Act in relation to art. 96 of the Code Civil) or which are agreed in the Settlement Agreement approved in Case after a procedure called divorce by mutual consent or by one of them with the consent of the other [art. 777 of the Civil Procedure Act in relation to art. 90 c) Civil Code] and only when the judgments become final because they are likely to appeal.

Although the allocation of the use of the family home is in the sentence or execution of the same (final action), this does not also do in the interim measures (Article 103 of CC) and the previous calls or of provisional (Article 104 of CC) that will last until they are replaced by the final (art. 771 and ff LEC).

In principle, one might think that the use of the family home owner would be the spouse, but the legislature intended that the owner must also not be eligible to continue residing in it. This is because the family home on the family's interests take precedence over individuals of each spouse, as they married, the spouse is not set up expectations holder on the house where both partners also agreed fixed the marital home.

This line has been said by the doctrine that the legislature intended not so much the allocation of rights to use the family home to one spouse, because he already had, such as deprivation of the right to another. Thus through the reform of the Law 19/2009 is to protect the lessor or the lessor's spouse has not been the winner of the use of the family home in a divorce decree or marriage annulment.

If in the case of the family home owned by one spouse only, according to Article 96.3 of the Civil Code, when no children are interested in determining if the spouse has an interest holder in need of protection to decide the allocation at the same exceptional the use of the family home, on equal terms because it is normal to stay with the spouse who is entitled use of them. Similarly, the housing needs of the spouse of the lessor in cases of final decision of annulment or divorce must prevail to the family housing needs of the tenant to justify the refusal of extension.

Subject: Studies; Rentals; Housing; Annulment; Divorce; Lessors; Regulatory reform

Location: Spain

Classification: 4310: Regulation; 8360: Real estate; 9175: Western Europe; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 7

Supplement: Spanish Edition

Pages: 51-54

Number of pages: 4

Publication year: 2010

Publication date: 2010

Year: 2010

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: Business Case

Document feature: References

ProQuest document ID: 847386678

Document URL: http://search.proquest.com/docview/847386678?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2010

Last updated: 2011-07-12

Database: ABI/INFORM Complete

Document 19 of 100

Segmenting The Web 2.0 Market: Behavioural And Usage Patterns Of Social Web Consumers1

Author: Lorenzo-Romero, Carlota, PhD; Constantinides, Efthymios, PhD; Alarcón-del-Amo, María-del-Carmen, PhD

ProQuest document link

Abstract:

The evolution of the commercial Internet to the current phase, commonly called Web 2.0 (or Social Web) has firmly positioned the web not only as a commercial but also as a social communication platform: an online environment facilitating peer-to-peer interaction, socialization, co-operation and information exchange. Internet users are not any more passive consumers of information but are actively involved in online creation, editing, and dissemination of content. They form virtual communities and interact with each other making use of a variety of interactive applications like social-networking sites, online forums, blogs, and wikis. This new social environment entails new challenges and opportunities for marketers, practitioners and behavioural researchers encompassing an appealing and untapped research area. In this empirical study we develop a classification of Web 2.0 users. Segments are identified on the basis of socio-demographic features, involvement, usage of the Internet, online purchase behaviour, personality characteristics, and the degree of use of Social Web sites. We analyze the differences between user segments, their trust levels and satisfaction and conclude that the degree of online experience is one of the most important antecedents of trust and satisfaction with Web 2.0 applications. The study identifies issues of further research and ways that can help field marketers to better map and understand their online markets in order to utilize effectively the Internet and particularly of the Web 2.0 domain as part of their marketing strategy. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION AND OBJECTIVES

The emergence of Web 2.0 (or Social Web) has brought about a new virtual technological revolution; next to the typical capacities of the Web as sales channel and information instrument the Social Web presents users with new opportunities in the form of applications facilitating many innovative forms of interaction and communication. The most common and well-known Web 2.0 applications include the web logs (or blogs), chat sites, forums, online communities, file exchange sites and social networks. These applications are based on active user participation and provide consumers with emotional and practical benefits (Jaffray, 2007). As Riegner (2007) explains, user participation has far reaching commercial implications: consumers exercise great and increasing influence on product offerings and on the strategies used to sell them. All these possibilities have led to an increasing professional and academic interest in the study of the Social Web as part of the marketing strategy and as a new interaction environment between consumers and business (Li, 2007b).

In this study, we are focusing on marketing aspects of this new virtual social context, with three main research objectives:

* To establish a classification of Web 2.0 users (or 2.0 users), according to their patterns of participation in social applications. Most studies available are originating from commercial circles and limited academic research has been done regarding Web 2.0 users, their characteristics and their profiles.

* To define and describe the profiles of 2.0 users in a comprehensive way; this is done by combining a variety of parameters: socio-demographic aspects (gender and age), the frequency and duration of Internet access, access locations, online purchasing habits, participation in auctions (buying or selling), average expenditure in Internet purchases, Web 2.0 pages visited (differentiating blogs, social tools, file-sharing sites and other Web 2.0 applications) and the individual's character in terms of level of extroversion.

* Finally, as two important foundations of the social web are trust and mutual confidence, we analyze the differences between the different types of 2.0 users on the basis of trust in the Internet and the level of satisfaction with it.

With the above objectives in mind a survey was conducted intended to identify profiles of Internet users based on their usage patterns and also allow us to analyze the relation between users' trust and satisfaction with the Internet and their predisposition to use Web 2.0 tools.

The study includes a literature review presenting the main research findings about Web 2.0, specifically focused on principles, foundations, philosophy the profiles of the 2.0 users. The third section covers the methodology followed in designing and carrying out this research. The last section presents the main results obtained, the main conclusions and the future research issues. The segmentation methodology followed for segmenting Web 2.0 markets in this study is much more extensive and comprehensive than previous ones. In this sense the proposed taxonomy presents academics with new insights in the complex behaviour of the Social Web public and practitioners with useful knowledge for integrating this domain into their marketing strategy.

CONCEPTUAL BACKGROUND

Web 2.0: Scope and basic concepts

It is difficult to get a uniform definition or find consensus about what the term Web 2.0 means in the literature; this because it is a relatively new term encompassing a variety of online applications and services based on a common philosophy and principles. O'Reilly (2005) defines Web 2.0 as a range of services such as blogs, wikis, folksonomies and social-networking, based on communities of users who exchange information often and easily. Anderson (2007) groups these services together and explains that they help to create a more social Web in which everyone is able to add and alter content. Constantinides and Fountain (2008) isolate the three elements of the Web 2.0 (Applications, Social Effects and Enabling Technologies) and define it as a collection of online, interactive, open-source applications allowing the exchange of knowledge and user experiences; users accumulate knowledge and market power increasing their influence on social processes and businesses. According to the same authors the Web 2.0 allows the creation of informal networks facilitating the flow of ideas and knowledge in the form of customer-generated new content. Ribes (2007) defines the Web 2.0 as the Internet tools and services based on databases and in which Internet users can create and edit content. Cobo and Pardo (2007) propose a taxonomy of Web 2.0 applications and tools identifying four main application categories: Social Networking (i.e. Tools and applications for designing and creating websites to facilitate and promote social interchange spaces and communities); User Generated Content (Applications that allow users to generate information in virtual environments using tools for upload and download contents and for writing, disseminating and bartering information); Intelligent Information Organization (Tools, applications and resources that facilitate the arrangement, labelling, organization and arrangement of the information); and Mushups (Applications that allow the combination of resources and applications from different websites to offer an added value service).

The difference between traditional web sites and Web 2.0 sites lies in the fact that in the former individuals or organizations can merely present information about themselves and their activities in an one-way, downwards communication pattern (Arroyo, 2007) while in the interactive Web 2.0 the communication becomes two-way: downwards and upwards. O'Reilly (2005) states that network effects are obvious in this environment since a true Web 2.0 application becomes more valuable the more people use it. The key is the size of the users group and the search for balance between personal interests and public assets. Rheingold (2002) suggests that technology convergence has profound social repercussions; this because people use tools allowing them to adopt new forms of interaction, coordination and cooperation. These new forms facilitate the exchange of collective knowledge and the accumulation of a social capital, generated when social networking, trust, reciprocity, standards and values are shared encouraging people to collaborate and cooperate (Rheingold, 2005). O'Reilly (2005) defines this as the "architecture of participation" which underlines the need for Web 2.0 web sites allowing user participation, so that the architecture of participation is built around individuals, not around the technology.

The Web 2.0 user profiles

The Internet user profile has changed considerably with the emergence of Web 2.0. During the 90s the average online customer used the Internet as a mere tool to help solve day-to-day problems requiring information; with the emergence of Web 2.0, users are increasingly participants in content creation. Ortega (2007) refers to a "2.0 generation", "2.0 profile", "2.0 attitude" or even a "2.0 personality". The user's attitude is what distinguishes a 2.0 user from an Internet user. In this sense, this author defines four kinds of user interaction: passive, participative, cooperative and collaborative. According to the author the Web 2.0 users provide content, share it with peers and collaborate online. Web 2.0 sites become spaces of sociability where discussion, opinion sharing and mutual collaboration are encouraged. The social approval arising from this mutual collaboration feeds the egocentric temptation which Rheingold (2002), Rosen (2005), and Rizzolatti and Sinigaglia (2006) call "egoboost", "egocasting" or "mirror neurons", a feeling of satisfaction the 2.0 user obtains from participation and collaboration with others.

Riegner (2007) defines five segments of Web 2.0 users according to the volume of web content they create and the volume of their online purchases, calling them "Online Insiders", "Social Clickers", "Content Kings", "Everyday Pros" and "Fast Trackers". "Online Insiders" are very active in the edition of web contents, interested in finding new products, passing on their experiences and in general make online purchases frequently. "Social Clickers" are young consumers, making online communications habitually, as much as the previous group, but are more reticent about making online purchases. The third segment, the "Content Kings," are young Internet users with great experience in peer-to-peer (P2P) file transfer, posting comments on forums and chat sites and having personal web sites. "Everyday Pros" habitually make online purchases, even to the extent of having an influence on product design, but do not participate in blogs or personal web sites. Finally, "Fast Trackers" are those who spend more time in receiving information and communicating than in creating or editing content; these could be considered as rather passive users.

From the practitioners quarters Forrester Research has developed a segmentation methodology called Social Technographics. The method is based on identification of social media use and attitude patterns. According to the use and attitudes to social media tools, they propose a segmentation of six levels of participation in social technologies. The Forrester taxonomy ranges between two extreme positions. On one side, the "creators" represent active participants who publish blogs, create and maintain websites and upload content. They are predominantly young - teenagers create more than other group - and there is not any gender difference. Lower in the ladder we find three other groups called "critics", "collectors" and "joiners". They participate by incorporating content expressing their interactive behaviour by using different tools. On the lower levels of the ladder the "spectators" can be considered as passive users, and the "inactives" do not participate at all in social web applications. These last two groups tend to be older, mainly female and not self perceived as natural leaders (Li, 2007a). Although the nature and size of the different groups probably will be different across cultures and countries, the idea of classifying consumers according their use of social media is an appealing one. This continuum from active to passive regardless of the tag used to label the group seems to be a prevailing approach across this incipient research domain.

Trust and satisfaction with the Internet

The basic principles underpinning the Web 2.0 are related to the ideas of sharing, continuous improvement, the role of the user as the main source of information and the harnessing of collective intelligence; these principles combined with trust have led to the emergence of a 2.0 attitude while technology is becoming of secondary importance. The attitude of users has changed; from mere consumers of information, they have become content generators. This change is due to the development of the principles enhancing trust and taking advantage of the collective intelligence. Ample trust in fellow users means trusting their opinions and information they provide online and trusting the way they use Web 2.0 services. It is the idea underlying many projects such as the Wikipedia. If there is no trust, existence of spaces based on user participation does not make sense (Margaix, 2007).

Trust has been considered a key factor in the success of relationships between companies in the context of industrial marketing (Hakansson, 1982) and together with commitment and satisfaction is one of the basic foundations on which relationship marketing is based (Delgado and Munuera, 2002). Trust is considered as a factor favouring the continuity of a relationship (e.g. Anderson and Barton, 1989; Anderson and Narus, 1990; Berry, 1995; Bignè and Blesa, 2003; Dwyer et al., 1987; Morgan and Hunt, 1994) which is why the individual's trust is a key factor in the adoption of Internet as a sales channel (Hoffman et al., 1999). In fact, the low rates of conversion from Internet users to buyers (Culnan and Armstrong, 1999) seem to be related with the low levels of trust existing (Korgaonkar and Wolin, 1999; Jarvenpaa et al., 2000; Luo, 2002). Some researchers underline that greater familiarity with use of web sites increases the trust in it (Gefen, 2000; Walczuch et al., 2001) decreasing fear of technology and moderating effects related to the consumer's personality background.

Next to trust, satisfaction is essential for the maintenance of online relationships. The notion of satisfaction involves both fulfilment of expectations placed in a web site and a positive emotional state based on the results obtained from maintenance of the relationship with that site (Ganesan, 1994).

METHODOLOGY

The literature suggests that the more someone is involved and familiar with Web 2.0 interactive tools and applications the more he will trust and will be satisfied with the virtual medium. Starting from this general premise, the intention of this study is to develop a classification of user types according to their level of participation in Web 2.0 tools and visits to Web 2.0 pages, define the profiles according to socio-demographic characteristics and personality, and then determine any differences between segments in trust in and satisfaction with Internet.

The method followed was to carry out a survey of Internet users that are familiar with the Internet environment. The survey was carried out in May 2008. The final sample is composed by 386 Spanish Internet users. In order to that various subgroups of the target population are proportionally represented in the sample, a nonprobability method by quota sampling was used.

The questionnaire included questions about the use of Web 2.0 tools and applications (both general and specific applications) and questions about more general behavioural dimensions such as use rates or online shopping behaviour patterns. Finally, scales to measure satisfaction and trust with the Internet were also developed.

RESULTS

The analytical process followed in our research consisted of a number of stages. First, in order to determine the types of Web 2.0 users, we carried out a conglomerate analysis using as criterion the level of participation in Web 2.0 tools. In this stage we also analyzed the existence of significant differences between the clusters with regard to profile of socio-demographic characteristics, use of the web and online purchase habits, personality and visits to Web 2.0 sites, in order to define the profile of 2.0 users. This stage was meant to achieve the objectives 1 and 2 identified earlier. In order to achieve the third and final objective, we carried out an analysis of the validity and reliability of the scales used to measure the user's trust level and satisfaction with the Internet. The purpose of this analysis was to identify any significant differences between the clusters obtained and their levels of trust and satisfaction.

Typology of Web 2.0 users

The cluster analysis was intended to group the different individuals of our sample into groups according to their level of participation in the different Web 2.0 tools. This analysis identified three, well differentiated segments which we have identified as "embryonic," "amateur" and "expert" 2.0 users.

* The "embryonic" 2.0 user limits his / her social online activity to file sending and file creation. They are usually female, age over 40, with a very low frequency of access (a few times a month) and do not make any online purchase of products or services.

* The "amateur" 2.0 user is characterized by participation in online forums and the frequent posting of opinions, comments, products reviews etc. "Amateurs" tend to be female, between 26 and 39, with an Internet access frequency of several times a week from home and daily from work. They usually spend between 10 and 30 hours a week in Internet. During the last year, they made fewer than 10 online purchases of products or services spending between 300 and 600 Euros; they have also sold something through an auction site during the last year.

* The "expert" 2.0 user has the most interactive online profile, sending messages over distribution lists, adding content to wikis, posting in his blogs or commenting in other blogs and also designing/customizing products or services according to his interests and taste. "Experts" are usually male, under 25, with a frequency of Internet access from home of several times a day. The average time spent browsing the Internet is over 30 hours a week. They are also characterized by having made more than 10 online purchases during the last year with an average annual expenditure on online purchases higher than 600 Euros. They also frequently buy and sell products through auction sites.

Comparison of the "expert" and "amateur" 2.0 user groups with the "embryonic," reveals significant differences - to a significance level of 5% - to the numbers of Web 2.0 sites visited. Differences of a lower significance level - specifically 10% - were also found between "expert" and "amateur" users; the higher the number of Web 2.0 site visits made the higher the Internet experience. Grouping the Web 2.0 sites visited into blogs, social tools (social networking sites, markers, mobile and access commumties, content recommendations, news, wikis, etc.), sites for file sharing (podcasts, sharing photos or videos, etc.) and other Web 2.0 applications (online applications, map-based applications, customized start pages, specialized 2.0 search engines, aggregators, RSS readers, etc.), we see that there are significant differences in the number of pages visited by "expert" 2.0 and "embryonic" users. However, if we compare them with "amateur" users, these differences are only significant in the case of file sharing and applications included in the category "other Web 2.0 applications". In addition, comparison of "amateur" and "embryonic" users shows that there are differences in the kind of Web 2.0 sites which include other applications.

Finally, using the personality scale of Goldberg (1992) to determine the individual's extroversionintroversion level, significant differences were found in the personality of "expert" and "embryonic" Web 2.0 users, the former being much more extrovert than the latter.

Trust and satisfaction of the Web 2.0 users

In this section, we examine whether there are differences in the levels of trust and satisfaction between the different types of Web 2.0 users. For this purpose, first we look at the validity and reliability of the trust and satisfaction scales and then carry out a variance analysis to determine whether significant differences exist between the different user groups.

Validity and reliability analysis of the trust and satisfaction scales

The validity of a scale means that the measurement instrument used quantifies the factor we want to measure and not other factors. In this case we consider the three classic dimensions of validity: content validity, convergent validity and discriminant validity.

The content validity of the scale is a result of suitable, preliminary review of the literature. To ensure this type of validity, an in-depth review of the different scales proposed for the constructs was carried out (Table 1).

Different confirmation analyses were then carried out in order to refine the trust and satisfaction scales, and assess their validity and reliability levels. Definitive refinement was based on the methodology of "Development of Structural Models" (Hah et al., 2006). This technique consists of eliminating items which do not match any of the three criteria proposed by Jòreskog and Sörbom (1993): The weak convergence criterion (Steenkamp and Van Trijp, 1991) means removing indicators which do not have significant factorial regression coefficients; the strong convergence criterion (Steenkamp and Van Trijp, 1991) means removing insubstantial indicators, i.e., those with standardized coefficients of less than 0.5 (Hildebrant, 1987); finally, Jöreskog and Sörbom (1993) propose removal of indicators which contribute least to explanation of the model.

The above mentioned content validity analysis allowed us to make an initial proposal of scales. Specifically, the scale used to measure trust was made up of 15 items and the satisfaction scale of 7 items. However, performance of the refinement analysis described gave us a model with a trust scale consisting of three variables and a satisfaction scale consisting of four measurements on a five-point Likert scale (Table 2).

To compare the convergent validity of the proposed scales, the items must be significant and strongly correlated with the latent variables they are measuring. Hair et al. (2006) recommend that all factor loadings should be significant and the average of the item-to-factor loadings should be higher than 0.7. As seen in Table 3 all parameters of both scales are significant and the mean variable load is greater than 0.7, therefore they have convergent validity.

To test the discriminant validity of the scales, we used two procedures, the confidence interval test and the extracted variance test. Table 4 shows how the scales have discriminant validity. First, none of the 95 per cent confidence intervals of the individual elements of the latent factor correlation matrix contained a value of 1.0 (Anderson and Gerbing, 1988). Second, the shared variance between pairs of constructs was always less than the corresponding Average Variance Extracted (AVE; Fornell and Larcker, 1981).

Reliability of the constructs is presented in Table 3 and demonstrates high-internal consistency of the constructs. In each case, Cronbach's alpha and the composite reliability index (CRI) exceeded Nunnally and Bernstein's (1994) recommendation of 0.70. AVE was also calculated for each construct, resulting for which values equal to or greater than 0.5 are recommended (Forner and Larcker, 1981); this minimum is usually very conservative and the literature is full of examples of accepted scales with lower AVEs. The AVE requirement is met for the satisfaction scale while the trust scale nearly meets it - given that, as we have said, scales with AVE below 0.5 are usually accepted it. This finding provides evidence supporting the reliability of the indicators.

On the basis of the above criteria that scales used in the study which measure the individual's trust and satisfaction with the Internet provide sufficient evidence of reliability, convergent and discriminant validity. In addition the model's fit is good as it complies with all requirements i.e., it does not have a significant ?2, so the null hypothesis that the estimated variance matrix coincides with the sample is rejected; the SRMR (Standardized RMR) also indicates that the model's fit is good, its value being below 0.05, and the CFI (Comparative Fit Index) and NNFI (Non normed fit index) are over 0.9.

Differences in trust and satisfaction between different Web 2.0 users' profiles

To find out whether there are significant differences between the different groups with regard to the trust they said they had in Internet, we performed an Analysis of the Variance (ANOVA) (Tables 3 and 4).

With regard to trust (Table 5), Tukey's Honestly Significant Differences test (HSD) shows that there are no differences significant at 5% between the averages of the different types of 2.0 user for any item on the scale. However, for the item "web sites are characterized by their openness and transparency in offering services to users," the average difference between the answers of "amateur" and "expert" users is significant to 10%, "expert" users having more trust than "amateur" ones.

With regard to the satisfaction of the different user groups, for the variable "the experience of using Internet is satisfactory" there is a difference with a significance of more than 5% between "amateur" and "embryonic" 2.0 users, the higher degree of satisfaction being that of "amateur" users (Table 6).

The results obtained from the study confirmed that findings referring to the earlier Internet environment (Web 1.0) still apply in the new Web 2.0 environment. Earlier studies conclude that greater familiarity with the use of web sites results in higher confidence in them (Gefen, 2000; Walczuch et al, 2001); the level of use of the Net determines how easily or how difficult a consumer can establish and maintain a relationship of trust with a web site. The lacks of physical contact and malicious actions (hacking, scams, and viruses) are elements reducing trust (Constantimdes, 2004). These actions avert people with low levels of experience and trust in engaging in online activity. For all these reasons, customary use of web sites should be encouraged to increase awareness and skills of people in their use. In addition, satisfaction with the Internet is essential to build up long term relationships online. Satisfaction requires meeting the expectations people have when using a web site and a positive emotional state based on the results obtained from maintenance of the relationship with that site (Ganesan, 1994). For all these reasons, it is not surprising that "expert" Web 2.0 users have greater trust than "amateurs" and that the later are in turn more satisfied with the online medium than the "embryonic" Web 2.0 users.

CONCLUSIONS, LIMITATIONS AND FUTURE RESEARCH LINES

Web 2.0 can be defined as "all Internet services and tools which are based on a database which Internet users can modify, whether in terms of content (adding, deleting or editing information or relating information with existing information), its presentation, or both" (Ribes, 2007). The Web 2.0 environment has become a platform of personal communication, networking and interaction with numerous user communities and a wide range of services, such as social networking sites, blogs, online forums, wikis and folksonomies. These applications offer online users an easy access and direct participation in the virtual environment.

Internet users may use 2.0 tools with various degrees of intensity depending on how such tools are used. A 2.0 user can simply visit Web 2.0 sites but can also contribute, disseminate, share and collaborate (Ortega, 2007).

In this study, we have developed a typology of Web 2.0 users based on the differences between them in terms of usage, trust and satisfaction with the Web 2.0 environment. The three segments of Web 2.0 users obtained were classified into "embryonic," "amateur" and "expert".

"Embryonic" Web 2.0 users are characterized by exclusively using the Internet for file sending/creation, being usually female, aged over 40. The frequency of Internet use is much lower than the other two user segments while "Embryonic" users do not make online purchases. "Amateur" Web 2.0 users are not passive users; they take part in forums, post opinions, comments, and products reviews online. The majority is female, between 26 and 39, with an Internet access frequency greater than that of "embryonic" users. They sporadically make online purchases and make use of auction sites.

"Expert" Web 2.0 users have the most interactive profile from all segments. Their activities include publishing blogs and posting comments in other blogs, sending messages over distribution lists, adding content to wikis, designing or customizing products / services according to their needs and interests. The majority is male, under 25 years old, with a frequency of Internet access from home greater than that of the other user types: they are several times a day or even the whole day online. They make often online purchases spending more than 600 Euro per year and often they buy and sell through auction sites.

A general conclusion of the study is that the degree of experience with the Internet is directly related to the number of visits to Web 2.0 sites made. In addition, we have verified that there are significant differences in the personalities of each user type, the "expert" users being characterized by a higher level of extroversion than the "embryonic" users.

The results obtained by the study with regard to the levels of trust and satisfaction of the different Web 2.0 users are in line with findings of earlier studies, showing that greater familiarity with Web is accompanied by higher trust in and satisfaction with Internet, "expert" users having more trust and satisfaction than "amateur" ones and "amateur" users being more satisfied and trust to Internet applications than "embryonic" users.

Regarding the practical implications of the study there are quite a few to mention. Field marketers considering including Web 2.0 applications in their (online) communication mix must be first of all aware of the maturity of their potential customers as to the use of the Internet and particular their attitudes towards Web 2.0 applications.

Segmenting their market across the lines of the proposed segmentation presents marketers with a good picture of the segment profiles and gives them useful information in order to estimate their size and market potential in terms of online purchasing. Plotting the segment profiles, potential with the company's target market provides practitioners with a sound basis for deciding whether certain Web 2.0 strategies are potentially effective or not. For example a producer of products targeting female customers would be not very successful in involving his target group in Web 2.0 induced interaction (for example engaging customers in product reviews or co-creation) since customers who participate in such activities are mainly males. Similarly if a producer's target market includes mainly "Embryonic" types as customers then most probably there is little to learn about customer experiences, complains or product problems by following the customer voice in blogs or online forums; these segment is not active in providing content in such Web 2.0 sites.

The second practical implication is the conclusion that online marketers should be aware of the need to provide an online experience of high quality as a way to help customers to build trust for their brand or product but most importantly help customers in building trust and satisfaction towards the company's Internet presence. The more people trust and the more satisfied they are when interacting or transacting with "traditional" Web 1 .0 types of web sites the more the likelihood that they will increase their use of Web 2.0 applications and become more mature Internet users. Such a development would increase the options of online marketers in improving communication and contacts with their target groups by engaging Social Media as part of their communication toolbox. The more the Web 2.0 based media become mainstream (and all indications are that they are about to reach this stage) the more important role they will be able to play as part of the marketing strategy.

The main limitation of the study is the fact that it was conducted among residents of one country and therefore one should be cautious with the generalization of the findings. Cross-cultural studies with similar methodologies in other countries could provide a more complete picture of the European. Another direction regarding future research work in the domain of online trust and satisfaction should be the inclusion of other user intrinsic constructs such as the perceived risk, perceived benefits and ease of use in order to examine their effect on the use of Web 2.0 applications. Such research will contribute to the development and empirical analysis of a causal model which provides a more accurate vision of the influence relationships between the variables under study and a better picture of the customer behaviour in Web 2.0 mediated environments.

Subject: Studies; Social networks; User behavior; Opportunity; Customer satisfaction; Market segmentation; Trust

Classification: 2400: Public relations; 7100: Market research; 8331: Internet services industry; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 7

Supplement: Spanish Edition

Pages: 55-66

Number of pages: 12

Publication year: 2010

Publication date: 2010

Year: 2010

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: Business Case

Document feature: Tables References

ProQuest document ID: 847386619

Document URL: http://search.proquest.com/docview/847386619?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2010

Last updated: 2011-07-12

Database: ABI/INFORM Complete

Document 20 of 100

It Isn't What I Thought It Would Be: The Hesburger Case

Author: Patten, Ronald J; Seristo, Hannu

ProQuest document link

Abstract:

A person's initial exposure to another country can be an unnerving experience. This case provides such an exposure and gives substantial information about the country being visited. In addition, a specific business practice is experienced and compared with a similar, but not identical experience in the home country. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

An entrepreneur decides to explore a possible extension of his business by visiting another country with the thought of offering that location to his clients. His experiences provide both insight as well as frustration.

AN OPPORTUNITY

Sigmund Abernathy operates a travel agency in Ottawa, Ontario, in Canada. Being an imaginative entrepreneur, he is constantly looking for new ways to gain customers. Recently, his thoughts had turned to Finland.

Since Canada is a northern country, Sigmund reasoned that Canadians would be comfortable traveling to other northern countries. Further, since some of his customers had enjoyed traveling to and in Alaska, in the United States, he thought they would enjoy traveling in Finland as well. After all, Alaska and Finland tend to both be located a reasonably similar distance from the equator.

Before going any further with his idea, Sigmund decided to do some research about Finland. Here is what he found: Finland is a country of only 5 million people who speak a rather strange language, Finnish. The country is quite wealthy, ranking 12th in the world in terms of GDP per capita measured in Purchasing Power Parity terms. The main exports are electronics, mostly related to mobile telephony, that make about 25 per cent of exports - not surprising for the home country of Nokia. Another 20 per cent of exports is made of paper and other wood based materials and goods, building on the vast forest resources of the country, which is large in area (80% of the size of Ontario), boasting 1 88 thousand lakes. Along with other Nordic countries, Denmark, Sweden, and Norway, Finland is one of the so-called welfare states; measured in the Gini index, the income distribution in Finland is the 9th most even in the world, Canada ranks 28th and the United States 74th. Seeing this from another perspective, the low-skill workers in the country are among the best paid and thus the most expensive in the world, whereas the highest educated employees like researchers for the electronics industry are relatively low paid. Finland is also one of the highest taxed countries in the world: tax revenues are 44 per cent of the GDP when the corresponding figure for Canada is 33 and for the U.S. 27 per cent. The structure of the income distribution and the high level of taxes has made Finland a self-service society where, somewhat paradoxically, the unemployment level is high, currently about 9 per cent.

Having gathered all of this information, Sigmund spent considerable time studying it. Finally, he believed he had a reasonable understanding of what Finland must be like.

He decided to test his idea by making a trip to Finland himself. Rather than signal his intention to Finnish hotels and tour companies, he decided to make the trip independently. Many of his customers prefer independent travel rather than organized tours and they enjoy sampling a variety of hotels, bed and breakfasts, and restaurants. Additionally, by traveling independently, the customers could set their own itinerary as to places to visit, timing of the visit, duration of the visit, etc.

With his possible strategy set in his mind, Sigmund flew from Ottawa to New York and caught a Finnair flight to Helsinki. Once at the Helsinki- Vantaa Airport in Helsinki, he noticed that a variety of car rental companies were doing business. "This is wonderful", he thought, "because Canadians like to shop for the best deal." He decided to rent from Avis for an attractive weekend rate of 99 euros plus unlimited mileage. One of the provisions of the rental agreement required him to return the automobile with a full tank of gasoline (petrol).

As Sigmund drove around Southern Finland, he was impressed with the beauty of the numerous lakes and the vast forests. In fact, he was so impressed that he drove the automobile for more kilometers than he had originally planned. He was amazed at how well his rental car, a Nissan Miera, handled the roads. Further, he was pleased at how many kilometers he had driven. However, he noticed the fuel gauge showed the tank was about 1/3 full. Consequentiy, he had to find a place where he could add gasoline to the tank.

While searching for a gasoline station where he could purchase fuel for the automobile, Sigmund began to think about a calculation he would make. Kilometers driven divided by liters placed in the tank should yield the kilometers driven per liter of gasoline consumed. Fortunately, botii Canada and Finland used the liter measurement so his potential customers should be very comfortable with that aspect of their Finnish holiday experience. While thinking of gasoline consumption he could not help but gulp when he saw the posted price of gasoline - 1.37 euro per liter for grade 95E. "Renting a gas-guzzling SUV in this country is for sure not to be recommended", he thought. Maybe I should calculate the cost per kilometer driven so mat my customers will be fully informed as to what to expect, he thought. While mulling over this question in his mind, he arrived at the gas station.

Sigmund had noticed some gas pumps outside a Hesburger outlet. Hesburger is a Finnish chain that operates altogether 220 fast food outlets mostly in Finland and some in die neighboring countries.. "Wonderful," he thought, "I can put gasoline in the tank and, while I am stopped, I can have something to eat and drink. It is wonderful that die Finnish hamburger companies also own gasoline stations. Now, I can depend on the reputation of me hamburger company to treat me fairly and to charge a reasonable price for the gasoline"

Driving up to me gasoline pumps, he noticed the word "Automatia" "Oh" he thought, "this must be just luce our automatic gasoline pumps in Canada". However, he noticed there was one slot for credit cards and another for cash. He tried his Visa, Mastercard, American Express, and Diners credit cards, but for some reason each one was rejected. Being a resourceful Canadian, he decided to put cash in the machine. He noticed that the machine would only accept 5, 10, 20, and 50 euro notes. Now, came the question, how much should he put in the machine?

No problem, thought Sigmund. In Canada, we receive change either from the machine or from the people working within the adjoining shop. He assumed the Hesburger food outlet was the shop involved with the petrol pumps since the name Hesburger was displayed overhead in each place. "IfI put too much money in the machine I will receive change" he said to himself. So, he put a 50 Euro note into the machine.

Following the instructions that appeared on the machine, all of which were printed in English, he began putting gasoline into the car. At 38.77euro, the pump stopped and it appeared the tank was full. Knowing you could squeeze the handle for a few more drops, he managed to put 39.18euro in the tank. Replacing the cap on the gas tank, he went to the machine to get his change. To his surprise, he found that there was no place on the machine from which to receive change. Undaunted, he strode confidently into the Hesburger food shop to receive his change.

Explaining his situation to the worker at the counter, Sigmund was met with a surprised look. The worker stated what she perceived to be the situation. "You put a 50euro note in the machine, you put 39.186 worth of petrol in the car's tank, and the tank is now full." "Yes", said Sigmund, " that is the situation exactly". Sigmund was not certain, but he thought he detected a slight look of amusement on the face of the counter worker. The worker excused herself and walked out of sight. "Probably getting my change" thought Sigmund. To his astonishment, when the worker returned, she indicated nothing could be done. "What" Sigmund sputtered, "but the company received more money than I received gasoline in return". The worker only nodded her head and shrugged her shoulders.

Sigmund was beside himself. His experience had made him so angry that he could not think clearly. He even forgot why he had come to Finland in the first place. AU he could think about was what had happened to him at the gasoline stop. He even forgot to order something to eat and drink from the Hesburger shop.

As Sigmund drove back toward the airport from which he had rented the car, his mind began to regain some clarity. "Gee", he thought, "how many kilometers did I drive and how many liters of gasoline did I purchase when I filled the tank? When I get back to Canada I will do some searching on the Internet to see what Nissan says is a reasonable expectation for mileage when driving the Miera". Unfortunately, his mind then switched back to the gasoline purchase experience and he forgot about the mileage calculation.

The more he thought about it, the more upset he became once again. "Why in Canada, that clerk at the hamburger stand would have tried very hard to get my change for me. After all, she is working for the same company that sells the gasoline. What kind of service do these Finns provide? Maybe I should call one of my professor friends at the Ivey School of Business in Canada and suggest that they come over to Finland to teach these people something about service".

As Sigmund returned the automobile to the rental agency, he went to the Tax Free window at the airport to begin the process of receiving his VAT refund. Although that situation should have given him some pleasure, since it reduced the cost of some of the goods he had purchased in Finland, his mind kept returning to the gasoline purchase incident.

CONCLUSION

Often, a person's initial experience in a country will color that person's perception of the entire country. As a novice international traveler, one must guard against such tendencies.

TEACHING NOTES

This case can be used in the early portion of an International Business course where the instructor is interested in discussing the differences between cultures. The case will have the greatest potential impact on those students who have never visited another country. There is ample opportunity to discuss expectations on the part of a person visiting another country for the first time. To what extent should someone carry experiences from their home country to another country? Here, the instructor can initiate a discussion into the rationale or reason behind certain behavior patterns and how the mores and folkways of a society are carried from generation to generation. An assignment may be given in which the students are asked to conduct research in an effort to discover what are the behavioral expectations underlying employment in Finland. Once having discovered the behavioral expectations in Finland, the students may be asked to contrast their discovery with the behavioral expectations in their home country. They can be asked as to whether their discovery can lead to generalizations about expected behavior in other countries. In the case of Finland, a relevant factor is that the Finnish culture differs from that in North America, for instance when it comes to service provision. First of all, seriousness of a person is highly appreciated in the Finnish society, it is associated with wisdom and dependability. But seriousness, which shows as very little talk and no smiles, should not be taken as impoliteness, even if it appears as such particularly to those who are used to North American friendliness (whether sincere or artificial) in services. Moreover, the egalitarianism in the Finnish society is very strong, i.e. "no person is better than the other one", leading sometimes to a low level of services in terms of friendliness. This is supported also by the studies by Hofstede, showing a low "Power Distance" in Finland. Perhaps it is partly this egalitarian view that has turned Finland into a self-service society.

In an Economics course or an Operations Management course, the case may be used to initiate a discussion about relative labor costs in different countries. This discussion, in turn, may lead to a further discussion about how the labor cost structure leads to patterns of behavior for the workers in that country. The case can be a starting point for discussion about income distribution and its effect on worker behavior. In Finland the high cost of blue collar labor and the very high level of taxation has led to a situation where all those services where a human component is significant are very expensive and often automated as far as possible. So, firms try to minimize the number of personnel. An example ofthat is the fact that in Helsinki, the capítol with more than half a million inhabitants, there are perhaps only three cafes where customers are served to the table - all the rest are self-service facilities. Even with this high level of self-service, Finland is a high-cost country where goods and services are significantly higher than in the other European Union countries on average.

For those instructors looking for a case with possible use in an Accounting course, a suggested topic for discussion is the separate entity assumption - does Hesburger own both the hamburger stand and the gas station or are they owned by separate entities that happen to be operating at the same location? In this case the answer is the latter. Another possible discussion topic is Sigmund's expenditure for the gasoline. If the expenditure is considered material, it requires the expense to be separately disclosed. This leads to a discussion as to whether this is a special event that is either unusual or reoccurring or whether it is an extraordinary event that is both unusual and nonrecurring. The answer will have an impact on the financial statement disclosure for the entity that owns and operates the gas station. This provides a relatively simple introduction to the topic of disclosure in the income statement. That discussion can be expanded to include earnings per share calculations and their disclosures. In essence, a relatively simple incident can provide a launching point for an in-depth discussion if such is desired by the instructor. In addition to discussing special events and extraordinary events and the implications of each type on financial statement disclosure, the instructor may initiate a discussion of the subject of materiality and how it may be applied to this situation. Gross profit and the ratios that can be calculated using that element, fit neatly into this case. The gasoline station company has a boost in its gross profit since it obtains revenue in this situation with no accompanying increase in cost of goods sold. The instructor now has a springboard from which to launch into a discussion of variable costs and contribution margin if one is so inclined.

Those instructors teaching Business Law may use the case to discuss Sigmund's possible recourse and how it may vary from country to country. This can lead to a further discussion of comparative Business Law.

The case, although reasonably straight-forward, has its greatest potential as a launching pad for in-depth discussion on a number of topics. Those suggested in this teaching note are merely suggestions and by no means constitute an exhaustive listing.

Subject: Entrepreneurs; Geographic profiles; Travel; Case studies

Location: Canada, Finland

Classification: 9172: Canada; 9175: Western Europe; 9520: Small business; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 1

Pages: 59-62

Number of pages: 4

Publication year: 2010

Publication date: Jan/Feb 2010

Year: 2010

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: Business Case, Feature

ProQuest document ID: 214859440

Document URL: http://search.proquest.com/docview/214859440?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Jan/Feb 2010

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 21 of 100

Sunbeam Corporation: A Forensic Analysis

Author: Hatfield, Patricia; Webb, Shelly

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Abstract:

The members of the Board of Directors at Sunbeam were completely bewildered. Al Dunlap, Sunbeam's highly successful but controversial CEO was threatening to resign after almost two years of leading Sunbeam successfully out of a slump that had threatened the long-term viability of the company. Al Dunlap didn't mince words. He angrily told the board, "We can't fight a battle on two fronts. Either we get the support we should have or Russ [chief financial officer] and I are prepared to go...Just pay us." The directors had always stood solidly behind their hardnosed, cost-cutting leader and had been rewarded handsomely for their allegiance. The directors were taken aback. Why would they stop now? What was going on? Was it possible that one of the lead investors had conspired against the success of Sunbeam? A sense of panic set in but the board members assured Al Dunlap that he had their full support. [PUBLICATION ABSTRACT]

Full text:

COMPANY BACKGROUND

Sunbeam was formed in 1897 as the Chicago Flexible Shaft Company. The company originally manufactured mechanical horse clippers. By 1910 the company introduced the iron as its first electrical home appliance. Later other appliances such as mixers, toasters and coffeemakers were introduced. Sunbeam came to be known as a recognized designer, manufacturer and marketer of innovative consumer products aimed at improving lifestyle. In 1946, the company changed its name to Sunbeam Corporation. In 1960, Sunbeam acquired Oster which allowed Sunbeam to expand into other home products such as hair dryers and health and beauty appliances. The company later added electric blankets, mattresses, humidifiers, vaporizers and thermostats, among other innovations. Sunbeam soon became the leading manufacturer of electric appliances. In 1981, Sunbeam was acquired by Allegheny International (AI); and although Sunbeam was AI's most profitable unit, poor management caused Sunbeam to experience major financial difficulties, and the company was eventually forced into bankruptcy in 1988.

In 1990, Michael Price, manager of Mutual Shares, corporate turnaround executive Paul Kazarian, and hedge fund manager Michael Steinhardt purchased the bankrupt Sunbeam. Under their leadership, Sunbeam went public as Sunbeam-Oster in 1992. Despite these obstacles, the board at Sunbeam felt mat a profitable future was ahead, and they just had to search for someone to lead them in the right direction. Kazarian, who then became CEO, and Price retained 44% ownership in the company. The years following were tumultuous ones for Sunbeam. Executives at Sunbeam grew increasingly agitated at Kazarian's no risk policies. Kazarian was reportedly hesitant to manufacture too much inventory in the event items would not sell making it difficult to fill retailer's orders. More importantly, he was hesitant to invest in the development of new products, processes or facilities. This was particularly troubling to the board since Sunbeam's longevity was dependent on its abilities to create innovative products for consumers at the lowest possible cost. In January 1993, Kazarian was forced out of the company due to his erratic behavior and abrasive management style. His departure resulted in a number of lawsuits which led to a buyout giving Steinhardt and Price a 57% stake in Sunbeam.2 In August 1993, Roger Schipke, a former GE executive was hired to lead Sunbeam but was asked to resign in early 1996.

Al Dunlap, a corporate turnaround artist, was recruited in 1996 by Michael Price, a 20% stockholder, to turn the fledgling company around and boost its languishing stock price. Dunlap and his team agreed to lead the company through a massive restructuring that resulted in record earnings in 1997 and a stock price increase from $12 in July 1996 to a high in March 1998 of $52. However, there were a few bumps along the way. First, Al Dunlap and Ronald Perelman, one of Sunbeam's largest stockholders, had never seen eye to eye. The media became involved and questioned Al Dunlap's leadership. After calling a meeting with the board, Dunlap addressed the situation by accusing financier Ronald Perelman of engaging in a media conspiracy to drive the price of Sunbeam stock down so that Mr. Perelman could buy a larger proportion of Sunbeam shares at a lower price.

Roger Schipke

Roger Schipke, spent 29 years working in the appliance division at General Electric with his last 8 years serving as vice-president of the division. Schipke knew the industry well and managed to increase the division's sales. Schipke later left GE and became CEO of Ryland Group Inc., a home construction and mortgage finance company. However, Schipke was recruited to Sunbeam by Charles Thayer, a board member of Sunbeam who also served as the interim CEO after Kazarian's departure. Thayer had worked with Schipke in the past and realized that his GE background provided him with the industry expertise necessary to move Sunbeam forward. Schipke accepted the position of CEO in August 1993. Quickly, he recognized the need to cut costs and increase brand recognition. Some cost cutting efforts had occurred before he arrived. Square footage of the production facilities had been cut nearly 20%. Ten of the 33 facilities were closed and the corporate staff had been cut by more than 70%. 4 Schipke was pleased with these cuts but still planned further facilities cuts. His long-term strategy was to increase profits by introducing new, innovative, higher margin products and expand product offerings through acquisitions. He planned to increase international sales, particularly in Mexico and South America. Schipke also expected to cut costs at Sunbeam by building a large plant facility in Hattiesburg, Mississippi which would allow them to streamline research, production and distribution efforts in a central location thereby cutting operating expenses dramatically. Finally, he planned to spend $45 million per year on brand support.5

It appeared that, in the beginning, Wall Street approved of Schipke's strategies and leadership. Schipke worked hard to bring in outside executives to inject new ideas in the company. These efforts resulted in an increase in new product offerings and Sunbeam was successfully downsized and its management restructured. Revenues had increased by 10% and the stock price by 22%. His plan to open the operational facility in Hattiesburg was well in progress and due to open its doors in 1995.

However, in December 1995 the financiáis were not as rosy as expected. Sunbeam's stock price had dropped to just over $15 per share. Schipke explained in his letter to the shareholders in the 1995 annual report that the disappointing results were due to factors out of his control. Sunbeam had experienced price increases for raw materials and commodities that could not be passed along to the consumer given the competitive retail environment. A severe recession in Mexico along with the devaluation of the peso didn't allow Sunbeam to achieve the sales in Mexico that they had earlier projected. Delays in the opening and utilization of the "state of the art" manufacturing and distribution center did not allow Sunbeam to achieve the economies it had expected in order to improve margins. Schipke offered plans to restore growth in the coming year which included: cost savings from the opening and utilization of the Hattiesburg manufacturing and distribution center which would open in 1996, improved sales and margin growth through selective acquisitions and the introduction of new products, and improving manufacturing efficiencies and quality through vendor certification programs and the implementation of electronic design and prototyping technology.

Despite Schipke's continuing efforts to improve Sunbeam's position, the board felt that improvements were not occurring fast enough, and Sunbeam's stock price continued to fall. Thus, the board elected to fire Schipke and he exited the firm in April 1996. A search ensued for a new CEO to lead Sunbeam in a fiercely competitive, low margin industry. The board of directors hired Al Dunlap, commonly referred to as "Chainsaw Al" or "Rambo in Pinstripes."

Albert J. Dunlap

Al Dunlap had a reputation of quick corporate turnarounds resulting in dramatic increases in share value. His management philosophy was based on the premise that maximization of shareholder wealth should be the primary goal of the firm. His strategy was to cut costs at all levels of the organization and return the corporate focus to its core products while searching for a buyer for the newly-organized company. He was not a long term CEO. His strategy was to take a "sick" company and turn it around within the year, look for a buyer and then exit. He demanded that his compensation come primarily in the form of the company's stock in order to align his interest with that of the shareholders. Al Dunlap's intimidating personality was opposite of what the board had encountered with Schipke. Schipke was known to be altruistic and soft spoken. Dunlap's personality was abrasive with frequent episodes of shameless self-promotion. Dunlap often referred to himself as a superstar "...much like Michael Jordan in basketball and Bruce Springsteen in rock 'n roll.6" Dunlap didn't mince words; his focus was to say what he meant and get the job done regardless of jobs lost or egos hurt. "If you want a friend, get a dog" was a common mantra quoted by Dunlap and Wall Street loved him.6

Wall Street appreciated Dunlap's no-nonsense approach to management as reflected in the rise of the company's stock price immediately after Dunlap was hired. Furthermore, his track record confirmed an impressive number of victories. His most recent success had been Scott Paper. By eliminating all excesses including assets and personnel, Scott Paper's value rose from $2.5 billion in 1993 to $9 billion in 1995. Kimberly Clark purchased Scott Paper in December 1995, and Al Dunlap walked away with $100 million. Only $1 million of this payment was salaried. Stock sales and options made up $80 million of the compensation and $20 million came from a noncompete agreement that Dunlap signed with Kimberly-Clark.8 Dunlap had succeeded in other turn-arounds including Sterling Pulp and Paper, American Can, Lily-Tulip, Crown-Zellerbach, Australian National Industries and Consolidated Press Holdings. Mr. Dunlap was so confident in his potential for success that he insisted that both he and his management team be compensated in the form of stocks and options. Furthermore, he made a $3 million investment in Sunbeam with his own money his first day on the job with an additional $2 million personal investment about 8 months later. He argued that if he and his team were not able to turn the company around, then they shouldn't be compensated.

Despite Al Dunlap's obvious commitment to Sunbeam, he still had his share of critics. His perceived lack of compassion to workers displaced as a result of his restructuring and his extreme and abrupt style of management were highly controversial. He was often under fire from a number of reporters and executives that were highly critical of his approaches which lacked consideration of corporate stakeholders other than the stockholder.

Mr. Dunlap assumed management of Sunbeam Corporation in July 1996 just before the release of his book, Mean Business: How I Save Bad Companies and Make Good Companies Great. Dunlap's first day on the job was characterized by the belittling of the board of directors and berating them for their part in the downfall of Sunbeam. He expressed how it was their good fortune that he was hired at Sunbeam just in time to save a firm that was surely headed for bankruptcy. After the first meeting of the board, he promptly fired James Clegg, Sunbeam's chief operating officer while many other board members and senior ranked managers became casualties shortly thereafter. Dunlap quickly brought in his own management team that had worked with him in previous turnarounds to create what he called the "Sunbeam Dream Team." With his familiar team at hand, they studied the industry and were quick to hammer out a restructuring plan for the organization.

The Small Appliance Industry

The small appliance industry was highly competitive. However, Sunbeam successfully led the market in a number of home products including heating pads, electric blankets, bathroom scales, gas grills and hair clippers. Competitors such as Black and Decker Corp., Hamilton Beach/Proctor-Silex, Inc., Newell/Braun/Gillette, Rival and others all fought for consumer dollars in a stagnant market. Barriers to entry were very low and it was easy to reverse engineer the greatest and latest product introduced by a competitor. As the industry grew increasingly competitive, margins were squeezed. Forecasting the industry squeeze, General Electric exited the small appliance industry in the 1980s leaving a little more breathing room for the companies that remained. Large retailers like WalMart, K-Mart and Sears had become the major purchasers of small appliances. Their market share wielded enough power to effectively control supplier pricing and margins. The only alternative to remaining competitive was to find new growth by both penetrating new markets and developing new products. Black and Decker had one of the best timelines for new product launches at 16-18 months. Sunbeam traditionally took about 2 years to bring new products to market.3 Searching for growth, several U.S. companies had tried penetrating European markets only to find that European companies had a strong hold on the market and styles. Furthermore, tastes were vastly different than those in the U.S.

SUNBEAM'S FINANCIALS 1996-1998

In three short months, the restructuring plan was released in Sunbeam's 8-K filing with the SEC on November 12, 1996, and a summarized plan was also released in Dunlap's letter to the shareholders in Sunbeam Corporation's 1996 annual report (The letter is shown in "Exhibit 1"). Al Dunlap had been very vocal about tie fact that there was nothing he could do to save Sunbeam in 1996; it was a lost year. However, 1997 could be a turnaround year. In order to position the company so that he could implement his strategies in 1997, Dunlap took a one time pretax charge of $300 million, of which $75 million would be paid in cash as severance due to job cuts and costs associated with plant closings. The remainder would be recorded as write-downs as a result of plant closings and divestitures. He carefully disclosed the breakdown of the pretax charge in the financial notes of die 1996 annual report (This financial footnote as well as some other selected disclosures are given in "Exhibit 2").

1996

Al Dunlap had been very vocal about the fact that there was nothing he could do to save Sunbeam in 1996. He accused Roger Schipke of nearly destroying Sunbeam and, according to Dunlap, the 1996 results were a reflection of Schipke's inept management (The financial results for Sunbeam from 1993 - 1997 can be found in "Exhibit 3"). Dunlap explained mat 1996 was a lost year, and die implementation of his restructuring plan would yield favorable results beginning in first quarter 1997. Dunlap was counting on 1997 to be the year to fully implement his restructuring plan and turn Sunbeam around.

1997

As Dunlap had promised, 1997 proved to be a great year for Sunbeam. The stock price climbed as high as nearly $50 per share. Sales and net income had reached record levels by me fourth quarter. The stock price was die highest in the industry, selling at 2-3 times its competitors. Sunbeam realized an overall sales increase for the year of 22% with earnings higher than analyst expectations. In a press release, Dunlap explained that the increase in earnings was partially due to the introduction of 35 new U.S. products and 54 new international products. International sales were up 34% for the year and domestic sales benefitted from the opening of 22 factory outlet stores. Dunlap was also pleased to announce mat in the 4th quarter, they had achieved 20% operating margins with a 17% overall operating margin for the year.9 Dunlap was even more optimistic in his 1998 forecasts. He expected Sunbeam to have another record year achieved by continuing with their global expansion and introduction of new and innovative product lines.

1998

At the end of the first quarter 1998, Al Dunlap had just completed the acquisition of Coleman, First Alert and Mr. Coffee and found that Sunbeam's earnings results fell short of expectations. In fact, that quarter's earnings were actually a little below the first quarter of 1997. Al Dunlap publicly expressed his disappointment. He explained that his attention had been temporarily diverted from Sunbeam as he completed die transactions required for the three acquisitions. He explained that with the acquisitions in place, the product lines and the synergies that Sunbeam would enjoy witìi its newly acquired companies would guarantee that Sunbeam was well poised for the future. He stated that 1998 would be a transition year mat would allow them to implement their remaining strategies so that 1999 would be Sunbeam's best year yet.

BACK TO SUNBEAM'S BOARDROOM

Al Dunlap was threatening to resign if he did not get the full support of the board. There had been some unfavorable media coverage regarding the quality of his earnings figures. It was not uncommon for Dunlap to be under fire by the media, and the board was very familiar with Dunlap's inability to gracefully accept or ignore criticism. He frequently received personal threats. He had always felt it necessary to travel wim bodyguards and he wore a bullet proof vest much of the time.

The board had been aware of the coverage and had no reason to suspect that any of the allegations were true. They had always trusted his judgment and his strategies had taken Sunbeam from a $12 stock just before he joined Sunbeam in 1996 to values as high as $54 per share in March 1998. To address the earnings quality concerns, the Board consulted with the firm's accounting auditors to inquire whether Sunbeam's financiáis were in compliance with accounting standards. The board received the assurance they had expected from the auditors; Sunbeam was in full compliance. Now the board had to figure out what was going on. They began to wonder if Al Dunlap was correct in accusing Ronald Perelman of conspiring against him to bring down the stock price. Why would he do such a thing? Perelman was already one of the largest shareholders of Sunbeam. Could he be out to get more? Could he be conspiring to have Dunlap removed? Dunlap and Perelman had always had a contentious relationship at best. Nevertheless, Al Dunlap had given his ultimatum, and the board had to act quickly. They could back Al Dunlap 100% or let him go.

Subject: Corporate governance; Ratio analysis; Financial statement analysis; Corporate histories; Chief executive officers; Case studies

Location: United States--US

People: Dunlap, Al

Company / organization: Name: Sunbeam Corp; NAICS: 335211

Classification: 2110: Board of directors; 3100: Capital & debt management; 9110: Company specific; 9190: United States

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 1

Pages: 63-74

Number of pages: 12

Publication year: 2010

Publication date: Jan/Feb 2010

Year: 2010

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: Business Case, Feature

Document feature: References Tables

ProQuest document ID: 214859259

Document URL: http://search.proquest.com/docview/214859259?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Jan/Feb 2010

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 22 of 100

The PBA vs Piscataway: A Case Study Statistics In The Workplace

Author: Epstein, Sheldon; Rotenstein, Aliza; Dickman, Bernard; Wilamowsky, Yonah

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Abstract:

The State of New Jersey Public Relations Employment Commission recently rendered a decision in a dispute over the Piscataway Police Department's procedure for promoting individuals to the rank of sergeant. One important component of the case was how to properly interpret the results of a 1999 sergeant's promotion exam. This paper gives a brief history of the promotional process and offers the data and statistical analysis submitted by both the Plaintiff (Patrolmen's Benevolent Association- PBA) and the Police Administration. The case provides an excellent tutorial for beginners and practitioners on how to properly apply some elementary, but powerful, statistical concepts. [PUBLICATION ABSTRACT]

Full text:

CASE BACKGROUND

In 1999, promotion to the position of sergeant in the Piscataway Police Department was based on a written test, an oral interview and seniority. The written test was given first and was conducted by an outside agency chosen by the Police Administration. Only applicants passing the written exam with a grade of 70 or more (out of a possible 100 points) were permitted to continue on to the oral interview. The oral interview was conducted and scored in-house by the Piscataway Police Administration and each interviewee was assigned a grade between 0 and 100. The written and oral exam scores were then weighted at 50% each and added to the applicant's number of years of seniority (up to a maximum of 10) to yield a final grade. The anticipated available sergeant positions were to be filled from the applicants list in descending order of final scores.

PLAINTIFF'S STATISTICAL CASE

Table 1 gives the actual results, in descending order of scores, from the 1999 sergeant's exam, in which eight positions were available and 23 applicants passed the written exam. The Piscataway PBA alleged that the oral test scores were manipulated by the Piscataway Police Administration, knowing the results of the written exam, in order to ensure a final ordering of candidates that was to the Administration's liking.

To demonstrate the "manipulation" of the numbers, the Plaintiff expanded Table 1 by adding three columns, ranking all 23 applicants who passed the written test, in each of the individual areas of written scores, oral scores and seniority. Table 2 lists these ranking results. A brief filed by the PBA then asserted: (see Table 1)

"The rankings are separated into 2 groups of eight candidates and a group of 7 candidates. The first group of 8 candidates represents the initial individuals who were promoted. What is clear by simply "eyeballing" the results is that there is a correlative relationship between the "Oral" ranking . . . and the "Final" ranking. . . The "Oral" ranking, which had a weighted value of 50%, was within one to three points of the final promotional outcomes. Statistically revealing is that, for the most part, the other groups also had a correlation between the oral ranking and the respective candidates' final ranking."

The Plaintiff pointed out that a similar relationship between final ranking and written ranking is absent and concluded:

"One can aver that how well a candidate scores on the "Oral" category is significantly more important in determining their "Final" rank. This phenomenon reeks of manipulation and impropriety given the fact that both components are weighted at 50%."

To quantitatively buttress the "eyeballing" argument, the PBA offered Table 3, which lists Coefficients of Correlation (CC) for each of the different segments of data previously identified:

Using these numbers, the Plaintiff concluded:

* The CC between the ranking of the first eight candidates, with respect to the oral test and their final ranking, is 0.79, while the CC between the ranking of the same eight candidates, with respect to the written test and their final ranking, is a lower 0.47. This demonstrates that, although both the oral and written exams were ostensibly given the same weight of 0.5, the oral exam had a considerably greater effect in determining who was being promoted to sergeant.

* The CCs between the rankings of the second and third groups of candidates, with respect to the oral test and their final rankings, are somewhat negative, while the CCs between the rankings of the same two groups of candidates, with respect to the written test and their final rankings, are highly positive.

DEFENDANT'S PERSPECTIVE

The Defendant rejected the PBA's methodology and inferences on the following grounds:

* In presenting its case, the PBA offered no motivation for changing the results of the different examinations from actual test scores to rankings. In fact, changing from numerical scores to rankings loses significant information. For example, with respect to Seniority (Table 2), Applicants 1 and 12 are ranked 1st and 19th, respectively, although their Seniority is almost identical (i.e. 10 vs. 9.75 years). Conversely, Applicants 12 and 6 are ranked 19th and 21st, but are actually much further apart (i.e. 9.75 vs. 7.75). Converting numbers to ranks changes the dynamics of the system. Table 4 easily demonstrates this by applying the weighting scheme of Table 1 to the rankings, rather than the numerical scores, to calculate an aggregate value for each candidate:

Note that the final ordering in this situation (i.e. based on weighted rank in ascending order) is not the same as the one derived in Table 1 . Applicant 12, for example, dropped from 12th to 20th, primarily based on a ranking of 19 for Seniority, even though he lagged in this category from the top candidate by only 0.25 units of service. When using the actual numbers, the 0.25 difference is diluted and plays only a minimal role. In a statistical analysis, the use of actual numbers is always preferable to the use of rankings. The former allows us to gauge how much better one candidate is than another. The latter does not.

* The correlation formula used to develop Table 3 is meant for actual numerical data, not for ranked data. Table 5 gives the corrected CCs based on the numerical data.

Note the 0.79 CC for oral ranking, with respect to final ranking, has been reduced to 0.69 and the 0.47 for written ranking has been increased to 0.53 so that the 0.32 difference in CCs has been cut in half to 0.16.

* The PBA offered no rationale for decomposing the 23 Applicants into 3 groups (8, 8 and 7 respectively) rather than 2 groups of 8 and 15 respectively (i.e. those promoted and those not promoted). In conducting a statistical analysis, large groups of data are preferable to smaller ones. This case perfectly illustrates the point. Had the analysis been done with only two groups, the CCs for Candidates 9 through 23 in Table 3 would appear as seen in Table 6:

Note that combining 9 through 23 into a single group, changes the two negative values for the oral tests in Table 5 to a single positive value of +0.56 in Table 6. In addition, the CCs for the written tests have dropped sharply. In fact, the CC for oral only slightly exceeds that for written among the applicants who were not promoted. Again, the volatility of CCs with respect to the amount of data used (i.e. the switching of CCs from negative to positive values as the number of items in the data set goes from 7 and 8 to 15) clearly illustrates why small subsets of data should not be used. In this case, when all of the data is analyzed together, the differences that allegedly point to "manipulation" disappear.

* The PBA's underlying assumption that it "reeks of discrimination " if it can be shown that the score on the oral test is more important in determining which candidates finish at the top of the list is wrong. Assuming the written and oral tests are both administered fairly and are weighted at 50% each, it can easily be shown that the more important factor in determining the people who finish at the top of the list of candidates will appear to be the oral exam. The key to this analysis is that only candidates receiving a grade of at least 70 on the written exam are eligible for promotion. The same is not true for the oral exam; i.e. candidates failing the oral test (score under 70) are still eligible for promotion. Table 7 lists the Means, Standard Deviations and Ranges for each column of Table 1.

For example, in Table 7, the Mean Seniority for all 23 candidates is 9.6, with a SD of 1.1. These values reflect die fact mat the overwhelming majority of the candidates had Seniority values only a little higher or lower than 9.6. For the written exam, the Mean for all of the candidates is 80.8, the SD is 5.7 and tiie grades Range from a low of 72 to a high of 90 (i.e. 18 points). While this set of numbers is not as compact as die Seniority numbers, the distance from the Mean grade to the highest or lowest grade is only about 9 points. In contrast, the oral exam grades are the most dispersed of all with a Mean Grade of 69.7, a SD of 12.2 and a Range of grades from 51.8 to 91.2 (i.e. 39.4 points). Since:

* The difference between the highest and lowest grades on the oral exam is so much greater than the difference between the highest and lowest grades on the written exam, and

* Everyone entered with almost the same Seniority. Anyone scoring at the upper end on the oral exam is guaranteed to do considerably better than anyone scoring at the lower end. For example, any candidate who outscores another by more than 18 points on the oral exam is almost assured of placing ahead of the other candidate overall, regardless of what grade either received on the written exam (i.e. since the spread between the highest and lowest written exam grade is only 18 points).

The lack of correlation noted by the PBA is, tiius, a consequence of me exclusion of people who faded the oral exam. The fact that the written exam, in this circumstance, appears not to have a significant effect on promotion reflects a more generally understood (and by many misunderstood) result in statistics. Consider, for example, me following analogy given by the sociologist Steven Goldberg: What is the role mat weight plays in the performance of NFL offensive tackles? The heaviest offensive tackle is not necessarily the best. Indeed, the correlation between weight and performance among NFL offensive tackles is probably quite low. But they all weigh more than 300 pounds.1 In the same way, the fact that all applicants must have a score of at least 70 on the written test may result in a low correlation between written test scores and promotion. This does not imply that the written test score is not important in determining promotion.

* The consistency of the data and the reasonableness of the selection of the eight people who were actually promoted can be seen in Table 8. Table 8 differs from Table 1 in that all candidates who "failed" the oral exam (i.e. received a grade of under 70) were deleted. Note that of all of the original applicants, only 10 passed both the written and oral tests, and only two were not promoted: one had the lowest passing score on the written exam and the other had die lowest passing score on the oral exam.

Finally, recalculating the CCs of Table 3 for all 10 candidates who passed both the written and oral exams yields Table 9:

Thus, the initial major CC discrepancy reported by the PBA for the written and oral exams has been reduced from 0.28 (0.79 to 0.47) to less than 0.06 (0.71 to 0.65).

CONCLUSION

Based on these and other considerations, the Arbitrator found in favor of the Defendant. Excerpts from the Arbitrator's decision can be found in the Appendix.

Subject: Associations; Police; Employee promotions; Correlation analysis; Title searches; Case studies

Location: United States--US, Piscataway New Jersey

Company / organization: Name: Patrolmens Benevolent Association-New York City NY; NAICS: 813910; Name: Police Department-Piscataway NJ; NAICS: 922120

Classification: 9190: United States; 9540: Non-profit institutions; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 1

Pages: 75-81

Number of pages: 7

Publication year: 2010

Publication date: Jan/Feb 2010

Year: 2010

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: Business Case, Feature

Document feature: Tables

ProQuest document ID: 214848841

Document URL: http://search.proquest.com/docview/214848841?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Jan/Feb 2010

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 23 of 100

A Framework For Discussing Ethics In Principles Of Accounting

Author: David, Jeanne M; Wirtz, Patrick T

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Abstract:

The main focus of the discussion in this paper is on the principles or introductory level of accounting and is applicable for all students in the class, but much of its content is equally applicable to upper level accounting classes and our accounting majors. Early and Kelly (2004) and Clikeman (2003) support the value of ethics education in heightening a student's moral reasoning skills. "The goals of ethics education are creating an awareness of ethical dilemmas and providing methods of resolution." (Haas 2005) [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Ethics education continues to play an important part in accounting education. Its role has only increased in the years subsequent to the accounting debacles of Enron, Arthur Andersen, and other firms. As accounting educators, we are responsible for educating the next generation of accounting professionals. More so, as accounting educators, we have the opportunity to touch upon and help to build the ethical decision making skills of many of the business students who pass through our classes. We should strive to ensure that those leaving our institutions will bring with them the highest ethical and moral standards. Only in striving for this, can we move toward reestablishing the dignity once afforded to our profession.

The main focus of the discussion in this paper is on the principles or introductory level of accounting and is applicable for all students in the class, but much of its content is equally applicable to upper level accounting classes and our accounting majors. Early and Kelly (2004) and Clikeman (2003) support the value of ethics education in heightening a student's moral reasoning skills. "The goals of ethics education are creating an awareness of ethical dilemmas and providing methods of resolution." (Haas 2005) Furthermore, Armstrong (1993) argues, and the authors agree, that ethics should ideally be taught with a sandwich approach. This involves introducing the students to a course in ethics, preferably through a liberal arts class, then incorporating ethical issues into the business and accounting classes, and following up with another ethics class specifically focusing on business. The first general ethics class will provide the students with a framework for recognizing ethical dilemmas and the tools for making good ethical choices. It is important that the students then use these tools in a variety of business settings, most specifically for our profession, in accounting decision making. Going one step even further, Mastracchio (2005) suggests that accounting education should include a liberal arts ethics class, a business ethics class, and finally an accounting ethics class.

In discussing ethics in accounting, the issue of fraud cannot be overlooked. Fraud often occurs when the three components of the well-known fraud triangle are present: pressure, opportunity to engage in fraud, and the ability to rationalize one's behavior. In addition, Albrecht proposed that there are nine additional factors that contribute to creating the "perfect fraud storm" including unachievable expectations of Wall Street analysts, greed, moral decay, and inadequate education about ethics and fraud (Birchfield 2004). Although fraud and other illegal acts are certainly of concern, students must be advanced beyond the point of simply 'following the rules' to 'making good ethical decisions'. Pincus (2000) advocates moving students from a simple rule-based accounting approach to one that is principles-based.

ETHICS IN THE PRINCIPLES OF ACCOUNTING CLASSES

If early accounting classes ntinimize the ethical focus or treat the subject with a tunnel-vision approach, business and our accounting students will tend to follow this thinking in later classes and beyond. They may not utilize the tools that they acquired in a general etiiics program. Further, if the instructor does not challenge them to think out of the box, mey will provide only simplified responses to "ethical problems" presented to them throughout the texts. Even if students have not been exposed to ethical decision making prior to taking introductory accounting, there are many ways the instructor can heighten their ability to recognize and successfully deal with ethical dilemmas. Doucet (1994) discusses the merits of virtue ethics and the importance of expertise, courage and integrity components in ethical decision making.

SUPPLEMENTARY MATERIALS

There are a multitude of materials available for the instructor to bring to the introductory accounting student. These materials range from videos and current news articles, vignettes and cases developed for the class, supplementary reading materials, and questionnaires that will help students evaluate meir own educai and moral standings. Thomas (2004) provides a detailed bibliography of materials suitable for use in a variety of accounting classes. Some of the bibliographic data is segregated by topic, such as integrity and professionalism, taxation, or management accounting. For example, Esmond-Kiger (2004) suggests having students write a series of three selfreflective essays which will "enhance the etiiical awareness and sensitivity of students." Although students are not asked to make ethical decisions, they explicitly consider how actual examples from the press might impact their own lives and the profession. They evaluate their own values rankings, and consider how these might have evolved over the term as mey become more exposed to mese issues. Jennings (2004) provides her suggestion for required student readings including both the new and classical materials. She also distinguishes between the stakeholder model, social responsibility model and the moral code model approaches to ethics. Haywood, McMullen, and Wygal (2004) provide materials for a "bingo" game focusing on promoting adherence to a code of professional conduct. Thengame centers on the codes of the AICPA, the IMA, and the IIA, and altiiough probably best suited for an upper-level accounting course, it would certainly be amenable to an introductory level class. KMPG has a program entitled "The Ethical Compass" which is available for use in classes. "It consists of videos, case studies, and role plays designed to get students engaged in a thought process about the kinds of educai choices they will have to make when presented with very specific scenarios in the workplace." (McCann 2007)

A decade or two ago, it was not uncommon to find principles of accounting textbooks that did not specifically address ethical problems. In the early chapters, professional organizations would be introduced, such as me AICPA, G??, and/or IIA, and authors would indicate that mese organizations had their own code of professional ethics. We assumed that those interested in the accounting profession had and would maintain high professional ethical standards. As there was more discussion about explicitly including ethics within the study of accounting, textbook authors have been exemplary in incorporating ethical decision making issues into most all chapters of their books. Now, it is the exception rather than the rule, if a chapter's assignment section contains nodiing on ethics.

CONSIDER THE ETHICAL ISSUE AT A NUMBER OF LEVELS

Given the expanded level of ethics coverage in the typical accounting textbook, instructors should have no difficulty bringing ethics discussions to the classroom. Often, however, without further expanding on the discussion questions provided, those discussions can be very short and dry and decline to a level of "Is it GAAP or not?" Especially at this introductory level when students are just learning the rules, it becomes too easy to let the issues degenerate to a GAAP issue or a legal issue. Without causing the students to refocus the discussion, they leave with the impression that accounting is simply "walking the line". As long as things are within the rules, it is okay. This is the type of thinking that can lead future young professionals into making poor choices. It may very well be an appropriate attitude for taxation compliance questions, but it may be a very poor posture to take for a full disclosure issue.

So, at what level do we challenge our students to think?

* There are legal issues. Is something allowable according to the law or not? Consider the state or country of origin. Copyrights and patents are protected under U.S. law, but that protection may not be granted to the firm elsewhere in the global economy.

* There are basic accounting principles, U.S. GAAP or other appropriate model, that should be followed. Principles of accounting students are learning these "rules" and may feel some difficulty in responding to ethical situations presented in the text because they are not sure that they understand these rules yet. Once they understand these rules, then the "answer" to the ethical issue should be clean and simple. Unfortunately, most instructors are well aware that this is an oversimplification and the real world is simply not that way.

* Professionalism in accounting is another level of analysis. Here, the student can be asked to consider the integrity, objectivity, confidentiality, and/or independence. Auditing courses will usually cover many of these issues, but students should be encouraged to start thinking about these things very early in their academic careers. The non-accounting, business students in the class will come to see the higher expectations surrounding the field of accounting. Introductory accounting students will see that accounting is more than just following the "rules".

* Another level is the social responsibility model. Jennings (2004) describes this model as educating students in "the importance of environmentalism, diversity, human rights, and philanthropy." Product liability issues and pollution can be viewed from a broader perspective rather than considering simply if the "t's" have been crossed and the "i's" have been dotted. The student focus is drawn away from whether the legal minimums have been met.

* The stakeholder model requires students to identify various stakeholders or groups of stakeholders. Stakeholder groups may include owners, employees, or customers, to name a few. In some cases, it will be advantageous to consider subsets of these stakeholder groups. Often, individual employees or members of management should be considered. Some stakeholder groups may be more or less important to the individual issue at hand, but having the students identify these groups will be the first step in reflecting on their relevance to the problem. In analyzing the situation, the student would evaluate the impact of the decision on these various groups. Many of the ethics problems presented in introductory level texts ask the students to identify the stakeholders.

* Further analysis will move the student into the depths. The true ethicist will argue that determining the legality of an action, or its correctness according to a set of rules is not ethical decision making. Ethical decision making occurs when there is an ethical dilemma underlying the issue. A dilemma exists when the student must choose between actions which may benefit some but harm others or actions which may harm or benefit multiple groups but to varying extents. Ethical theories such as distributive justice, rights and duties, or virtue ethics can help guide the decision.

EXPLOITING THE TEXTBOOK ETHICS PROBLEMS

What can the instructor do at the simplest level to move the students toward thinking more ethically? How can we help prepare our students to be better ethical and moral decision makers? Often, simply expanding on the ethics problems already provided by the textbook authors can provide a rich basis for discussing ethical issues with the students. Two examples will be used to illustrate additional questions that may be posed to the class to enrich the ethics problem/issue provided in the text. The textbooks and problems used in these illustrations were not selected for any particular reason, and are not intended to critique the work of those authors. In fact, we found a rich variety of ethical problems throughout the introductory level accounting textbooks.

Illustration 1:

Python.com owes $6 million on notes payable that will come due for payment in $1.5 million annual installments. The company has used its cash to advertise heavily in the competitive dotcom business environment. The result is that cash is scarce, and Python.com has prepared its balance sheet at December 3 1 , 20X4, and it reports the following.

What is wrong with the way Python.com reported its liabilities? Why did Python.com report its liabilities this way? What is unethical about this way of reporting these liabilities? Who can be harmed? (Horngren, Harrison, Jr., and Bamber 2005, p. 614-615)

From the GAAP perspective, Python.com has misclassified its current and long term liabilities. Discourage the simple answer: GAAP has not been followed; Python.com does not want to look like it may liquidity problem; it is not ethical for the accountant to fail to apply GAAP; finally, readers of the statement do not get the proper picture of Pythonxom's financial position. Consider other potential questions:

* Legally, could there be potential ramifications for the accountant who has not followed GAAP in this case?

* What if the firm did not present a classified balance sheet and did not segregate its current and long term liabilities?

* What is the accountant's responsibility for disclosing both good and bad information? Is the accountant's integrity compromised in any way by using the above presentation?

* Is the information, presented as it is, objective? Does it fairly represent the financial position of the firm? How would your answer change if the balance sheet is not classified into current and long term accounts?

* How will each stakeholder or stakeholder group be impacted by this disclosure? Consider the holder of the note itself? Pythonxom's other creditors? New potential creditors? Pythonxom's shareholders? Its management? New potential investors in its stock?

* What is the accountant's responsibility to the public to present information objectively?

* Does this presentation disadvantage some group or groups to the benefit of others?

Illustration 2:

BYP8-10 The controller of Zapatos Corporation believes that the company's yearly allowance for doubtful accounts should be 2% of net credit sales. The president of Zapatos Corporation, nervous that the stockholders' might expect the company to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 4%. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Zapatos Corporation.

Instructions

(a) Who are the stakeholders in this case?

(b) Does the president's request pose an ethical dilemma for the controller?

(c) Should the controller be concerned with Zapatos Corporation's growth rate in estimating the allowance? Explain your answer. (Kimmel, Weygandt, and Kieso 2004, p. 409)

Move beyond identifying the stakeholders and the viewpoints of the president and the controller.

* How will reporting only the 2% allowance, and resulting 10% growth rate, be viewed by the market? What potential impact may this have on the current stock price? What would the 4% allowance do?

* What if the firm fails to maintain the 10% growth rate next period and had reported only the 2% allowance. How will this be viewed by the market? How would the firm look if they had reported the 4% allowance and then failed to maintain the 10% growth rate?

* What are some alternative courses of action that the controller might take in this situation? What are the potential consequences of each of these actions?

* If the controller decides that proper full and fair disclosure is achieved by reporting the 2%, in contrast to the president's directive, how should the controller approach this disagreement with the president? What might you suggest that would promote a peaceful resolution to the issue without "giving in" to the president?

* Consider the relative wealth of both a current shareholder, and one who invests subsequent to this report. How will wealth shift between the parties if Zapatos reports the 2% allowance? The 4% allowance?

* Move to the broader question of whether the controller should be concerned with the growth rate in estimating the allowance. Should this be a general practice for all firms, and potentially considered in establishing GAAP?

* What is the impact to society in general if recognizing bad debts was conditioned upon its impact to the bottom lines of the income statement and/or balance sheet?

* What would happen if all accounting estimates were determined substantially or at least in part based upon their impact on the overall financial picture of the firm? Would this lead to income smoothing?

The first illustration provided an example of a simple misapplication of GAAP in classifying liabilities as current and long term and the second illustration was more subjective in nature, touching on the issue of estimating the allowance for doubtful accounts. Yet both provide the background for a rich discussion of ethical issues.

EXPANDING THE DISCUSSION

It is not necessary to touch on all areas for each ethical discussion in a particular class, but rather to provide students with a variety of approaches for viewing the dilemma at hand. In some situations, we can look at the legal issues and the accounting principles involved. Other times, professionalism and the implications for society might be at issue. We can challenge our students to consider the underlying assumptions and to view the situation from different perspectives. Role plays can be used in class. Online discussion boards can facilitate a continuing discussion and allow the instructor to intercede with alternative scenarios. Students must be challenged to suggest multiple potential solutions and then to evaluate the implications of these courses of action. We can expand their span of vision by requiring that they explicitly deliberate anticipated consequences to various stakeholders.

CONCLUDING REMARKS

Students taking principles of accounting may not yet possess the expertise needed to always make good ethical choices when accounting issues are involved. As they continue on in their accounting education, this expertise will develop. It is precisely because of the lack of refined accounting skills that they should all the more be challenged to make good ethical decisions involving accounting issues. Ethics is far more than just walking that straight line and not crossing over to the wrong side. Ethics is far more than simply keeping things legal and following GAAP or GAAS as the case may be. Doucet and Ruland (1994) discuss the merits of virtue ethics and the importance of expertise, courage and integrity components in ethical decision making. They state that virtue expertise, virtue courage and virtue integrity are all necessary components. Perhaps this is the other side of the fraud triangle that had gained such popularity.

Since beginning accounting students are weak in the area of expertise, by emphasizing courage and integrity in their decision making, we will move them beyond just looking at the rules. As they gain proficiency in accounting, we must continually challenge them to examine their decisions in light of all three components. We must not let them slide down the trough of simply following rules of accounting without considering the principles at hand and the ethics involved. If we do not progress in educating our students in the area of ethics and accounting, it is our profession that will suffer. "The more knowledge we have, the less we are likely to let outside influences control our choices. It gives us the freedom to make decisions based on our personal convictions and sense of integrity and ethics." (Business & Finance Magazine 2007) We can empower our students with that knowledge and courage needed to make good ethical choices as they move through their journey from education into the workforce. We can give them a view of our world that looks beyond the "me" to see the good that they can accomplish for their families, their firms, their society and ultimately, their world.

Subject: Professional ethics; University students; GAAP; Case studies

Location: United States--US

Classification: 9130: Experiment/theoretical treatment; 4120: Accounting policies & procedures; 2410: Social responsibility; 8306: Schools and educational services; 9190: United States

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 1

Pages: 83-88

Number of pages: 6

Publication year: 2010

Publication date: Jan/Feb 2010

Year: 2010

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: Business Case, Feature

Document feature: References

ProQuest document ID: 214849112

Document URL: http://search.proquest.com/docview/214849112?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Jan/Feb 2010

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 24 of 100

The Relationship Between Knowledge Management Practices And Innovation Level In Organizations: Case Study Of Sub-Companies Of Selected Corporations In The City Of Esfahan

Author: Allameh, Sayyed Mohsen; Abbas, Saba Khadem

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Abstract:

The purpose of this paper is to examine the relationship between knowledge management practices and innovation levels in organizations. Through a questionnaire, required data were gathered in sub-companies of three corporations in the city of Esfahan. Seventy-four questionnaires were given to top and middle managers of these companies and 36 were returned (49.65% response rate). Correlation analysis was used to check the relationship between the variables. The researchers found a strong, positive and significant relationship between knowledge management practices and innovation levels in these companies. The result is related to a small number of companies in Esfahan. It is not easy to generalize the result of the current study to other contexts. Knowledge management is one of the hottest issues among academicians, but it is still difficult to justify managers about its importance in organizations. This study tries to provide some empirical evidence in order to support the role of knowledge management in enhancing innovation. There is not sufficient empirical evidence to prove the role of knowledge management practices in the search of innovation. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

A problem with linking organizational forms to economic performance is that it is difficult to develop valid and reliable indicators, both for organizational forms and for economic performance. One way to overcome this problem is to link innovation, learning, and knowledge creation with each other (Lundvall & Nilsen, 2007).

Defining knowledge management is not a simple issue. It is not a technology, although technology should be exploited as an enabler. It is not a directive, although strategic leadership is imperative to successful knowledge management. It is not a business strategy, although one aligned with the tenets of knowledge management must exist. It requires a culture that promotes faith in collectively sharing and thinking; but culture alone will not render a vital knowledge management practice. Perhaps it is the lack of a singular definition that has delayed the more widescale deployment of knowledge management. Put succinctly, Frappaolo (2006) writes:

"Knowledge management is the leveraging of collective wisdom to increase responsiveness and innovation."

As mentioned in this definition, increasing innovation can be one of the major outcomes of effective knowledge management. It is especially important because innovation of products, processes, and structures has been assessed as a critical component in the success of new-age firms. The new products and services resulting from the interaction of knowledge and technology bring profound changes in the way businesses operate and compete in the new economy (Handzic, 2004).

Innovation has been demonstrated to be a key value creator for organizations, in both times of cost cutting and in times of growth. As such, it stands out as one excellent objective of management activity, in general, and knowledge management specifically (Ruggles & little, 1997).

Typically, innovative organizations focus on both new knowledge and knowledge processes. They constantly engage and motivate people, creating overall enabling context for knowledge creation. These organizations take a strategic view of knowledge, formulate knowledge visions, tear down knowledge barriers, develop new corporate values and trust, catalyze and coordinate knowledge creation, manage various contexts involved, develop conversational culture, and globalize local knowledge (Nanaka and Nishiguchi, 2001).

In this paper, the authors try to revisit the work of Jenny Darroch (2005). She tried to examine the role of effective knowledge management in two ways. First, the suggestion that effective knowledge management supports the conversion of all other resources into capabilities was examined. She minds that since capabilities underpin the long run survival of a firm, firms with effective knowledge management behaviors and practices are likely to make better use of resources and so will exhibit superior outcomes, such as more innovation and superior financial performance. Second, her paper examined the direct contribution of effective knowledge management to two outcomes of interest: innovation and performance. She found a relationship between knowledge management practices and innovation to support the view that a firm with a capability in knowledge management is also likely to be more innovative.

In this paper, superior financial performance - as an outcome for knowledge management - is not considered, but innovation - the other possible outcome of effective knowledge management - is the key variable that the authors try to consider knowledge management practices as its major enhancers. On the other hand, they try to repeat Darroch' s exarnination in a very different context. To do so, quite a small population, including three corporations, is selected. These corporations are Samangostar, Tukafoolad and Qaem Reza. They include several sub-companies and act nationally and internationally, but their head offices are located in Esfahan.

LITERATURE REVIEW

The importance of knowledge management for organizational performance has been widely recognized and acknowledged in management literature. In general, knowledge management is assumed to create value for organizations by applying their accumulated knowledge to their products and services outputs. These ensure organizational survival or advancement. Knowledge management can impact organizational performance in a number of different ways (Von Krogh et al., 2000). Innovation is one of the major outcomes of knowledge management.

Swan et al. (1999) formulated two distinct perspectives on knowledge management for innovation; namely, the cognitive and community models. The community model is formulated as a critique of the predominant cognitive perspective within the technology-driven research field. The cognitive model denotes a perspective where valuable knowledge is conceived as being captured and codified (Sorensen & Lundh-Snis, 2001). Table 1 summarizes the main characteristics of the cognitive and community models:

The following three models from literature are presented, which try to describe the link between knowledge management and innovation.

GREENHOUSE METAPHOR

Ruggles and Little (1997) developed a model to describe the link between knowledge management and innovation. In this model, they take advantage of a metaphor, which is explained as follows:

The environment in which new ideas are created can be seen as a greenhouse or garden. Within this greenhouse, gardeners (i.e., managers) try to create conditions that will least inhibit the growth of a prize-winning (high value) flower. That is, greenhouse gardeners can change the light, moisture, food mixture, etc. in the hope of beneficial results, but they cannot actually make the plants grow. Similarly, management has the ability to influence certain factors; i.e. capital resources, physical surroundings, and employee skill levels, for example, but the actual creation of new ideas is uncontrollable.

In this model, me "soil" and the "food" is composed primarily of 1) disseminated organizational knowledge, 2) personal knowledge and experience, 3) capital resources, such as tools, equipment, etc., all of which feed the people. People are me seeds from which new concepts sprout and are therefore the central ingrethent of the innovation process.

While the gardener can provide an ample pot, rich soil, and plentiful food, water, and sunlight, development hinges upon the absorptive capacity of me seed. Similarly, the absorptive capacity of the people involved determines the ability to apply knowledge, capital resources, etc. to a given problem. Learning is the process by which people absorb mese resources.

After an idea has been sufficiently developed, it can be taken to market and implemented. This implementation step is what transforms an idea into an innovation. Diffusion occurs when new products and services begin flowing deeper within their initial markets or to areas different from the one(s) in which they were originally introduced. For instance, a new process for order fulfillment, established in one segment of an organization, may become used in many other segments over time, sometimes purposefully, though often randomly. Diffusion occurs in a botanical sense when plants scatter their seeds or spread their pollen, leading to the potential spreading of their genome. This process can be actively encouraged, although there is no guarantee that a diffused innovation will take hold in its new market area, just as there is no guarantee that pollen transferred from one flower to another will actually cause fertilization. However, a certain amount of diffusion can occur inadvertently without any intervention on the part of management.

The final element of this model is feedback. This is not actually a stage, but a continuous cycle by which lessons learned from experience enter back into the innovation process. This kind of feedback is represented both by the gardener who, based on his prior horticultural experience, grows heartier plants by using more effective fertilizers and creating more conducive greenhouse environments, and by the genetic evolution of the seeds and seed types over time. Organizations interested in generating, developing, implementing, and diffusing valuable new ideas need to encourage and leverage such feedback.

THE RICE MODEL

There are four areas in an organization which cover all of the different ways in which an organization can use knowledge to be successful. These areas are responsiveness, innovation, competency and efficiency. Responsiveness concerns how the company takes in vital information from its surroundings: its customers, competitors, suppliers, and others who affect and are affected by the company's performance. Innovation concerns how the company uses ideas and information to change what it does and how it does it. Competency concerns the skills people and teams need to deliver products and services. Efficiency concerns how well the processes for product and service work.

If the company is in business in which being able to consistently deliver the same high-quality products and services at a competitive price is the path to success, it should focus on "applying" knowledge to improve the competency of people and the efficiency of the processes. On the other hand, if the company is in business in which developing and delivering new products and services that reshape markets, or create entirely new ones, lead to success, it should focus on "generating" knowledge by hearing what the marketplace is saying and enabling its employees to communicate with each other, using that knowledge to innovate. Figure 1 shows the described model.

Most companies, of course, must use both kinds of knowledge management to thrive. They have current products and services to maintain in the marketplace and they are developing the next generation of offerings to build a position in tomorrow's marketplace (Foley Curley & Kivowitz, 2001)

HIERARCHICAL PROCESS MODEL OF KNOWLEDGE MANAGEMENT FOR INNOVATION

Tranfield et al. (2006) proposed a model to show knowledge management capabilities for enhancing innovation. They are interested in looking at innovation as a staged process within the firm. Thus, these researchers identified three distinct phases of activity from the literature, which they have termed discovery, realization and nurture.

Discovery emphasizes the need to scan and search environments (internal and external) and to pick up and process signals about potential innovation. The realization phase is concerned with issues surrounding how the organization can successfully implement the innovation, growing it from an idea through various stages of development to final launch as a new product or service in the external marketplace, or a new process or method within the organization. The suggested hierarchy can be seen in Figure 2.

Searching includes the passive and active means by which potential knowledge sources are scanned for items of interest. Capturing contains the means by which knowledge search outcomes are internalized within the organization. Articulating involves means by which captured knowledge is given clear expression. Contextualizing consist of the means by which articulated knowledge is placed in particular organizational contexts. Appling includes the means by which contextualized knowledge is applied to organizational challenge. Evaluating contains the means by which the efficacy of knowledge applications is assessed. Supporting involves the means by which knowledge applications are sustained over time. Re-innovating consists of the means by which knowledge and experience are re-applied elsewhere within the organization.

HYPOTHESIS DEVELOPMENT

As Darroch did in her study, the following major hypotheses were assumed:

H1. There is a relationship between knowledge management practices with each other.

H2. There is a relationship between knowledge management practices and innovation.

In order to examine the mentioned links, the following sub-hypotheses were also assumed:

H1.1 There is a relationship between knowledge acquisition and knowledge dissemination.

H1.2 There is a relationship between knowledge acquisition and responsiveness to knowledge.

H1.3 There is a relationship between knowledge dissemination and responsiveness to knowledge.

H2.1 There is a relationship between knowledge acquisition and innovation.

H2.2 There is a relationship between knowledge dissemination and innovation.

H2.3 There is a relationship between responsiveness to knowledge and innovation.

Figure 3 provides an illustration of the links between the mentioned variables in this paper:

RESEARCH DESIGN

Data

The researchers have used a Persian translation of a questionnaire designed by Darroch to examine the same relationship between knowledge management practices and innovation in a group of organizations based in New Zealand and Australia.

Related data were collected through a questionnaire from a sample of sub-companies in Esfahan. The sample was selected randomly. Cronbach alpha was calculated to prove the reliability of the applied questionnaire (91.46%), but the validity is not examined because Darroch had still done it before. Seventy-four questionnaires were distributed, but only 36 were useable. The mentioned questionnaire includes two sections. The first section contains a letter which explains the purpose of the research and thanks the respondents for their collaboration. The respondents should also answer a number of general questions in this part. The second and main section includes 22 questions which were asked to gather the required data in order to examine the assumed links in this research.

Definition of Variables

Knowledge Management Orientation

Darroch(2003) developed three scales to measure behaviors and practices for each of the components of knowledge management: knowledge acquisition, knowledge dissemination and responsiveness to knowledge. Knowledge acquisition is captured by seven factors: 1) valuing employees attitudes and opinions and encouraging employees to up-skill, 2) having a well-developed financial reporting system, 3) being market focused by actively obtaining customer and industry information, 4) being sensitive to information about changes in the marketplace, 5) employing and retaining a large number of people trained in science, engineering or math, 6) working in partnership with international customers, and 7) getting information from market surveys. Five factors describe the knowledge dissemination construct: 1) readily disseminating market information around the organization, 2) disseminating knowledge on the job, 3) using techniques (such as quality circles, case notes, mentoring and coaching to disseminate knowledge), 4) using technology (such as teleconferencing, videoconferencing and groupware) to facilitate communication, and 5) preferring written communication to disseminate knowledge. Lastly, responsiveness to knowledge was described by the following three factors: 1) responding to knowledge about customers, competitors and technology, 2) being flexible and opportunistic by readily changing products, processes and strategies, and 3) having a well-developed marketing function.

Innovation

The original Booz Allen Hamilton (1982) typology of innovation is used in this paper. Here, innovations are categorized as new to the world, new products to the firm, additions to existing product lines, improvements or revisions to existing product lines, cost reductions to existing products, or repositioning of existing products. New to the world innovations are typically characterized as radical innovations, while the other categories are incremental innovations.

RESULTS AND DISCUSSION

Tables 2-4 provide the result of the correlation analysis which is done in this research. Tables 2 and 4 use summated scores for each knowledge management component and innovation type while Table 3 provides more detail by showing six types of innovation. Table 2 shows correlation coefficients between the three knowledge management practices which are significant with 99% confidence.

Therefore, based on the correlation analysis, it can be claimed:

* There is a strong, positive and significant relationship between knowledge acquisition and knowledge dissemination.

* There is a strong, positive and significant relationship between knowledge acquisition and responsiveness to knowledge.

* There is a strong, positive and significant relationship between knowledge dissemination and responsiveness to knowledge.

And finally:

"There is a strong, positive and significant relationship between knowledge management practices with each other. "

Table 3 provides correlation coefficients between the three practices of knowledge management and six types of innovation separately.

As it is shown in Table 3, the relationship between radical innovation and knowledge management practices is stronger than the relationship between such practices and other types of innovation. It means that the result is not consistent with the findings of Darroch's research. Her findings sound much more logical because "when a firm develops a new product or service for which it lacks the scientific or business expertise, a capability in knowledge management may not be helpful. By contrast, firms developing incremental innovations (and so are working within the boundaries of existing scientific and business expertise) tend to have well developed knowledge management behaviors and practices".

This paper tries to consider the relationship between knowledge management practices and innovation as a single variable (without examining the link between the mentioned practices and the various types of innovation). Therefore, the single value of innovation is calculated by using the mean value.

Table 4 represents correlation coefficients between the three knowledge management practices and innovation that are significant with 99% confidences, which indicates a relatively strong and positive relationship between knowledge management practices and innovation.

Therefore, based on the correlation analysis, it can also be claimed:

* There is a strong, positive and significant relationship between knowledge acquisition and innovation.

* There is a strong, positive and significant relationship between knowledge dissemination and innovation.

* There is a strong, positive and significant relationship between responsiveness to knowledge and innovation.

Since there is a strong correlation between knowledge management practices with each other, it is reasonable to deal with knowledge management as a single variable too. Therefore, by calculation an average value, it is possible to investigate the relationship between knowledge management and innovation as the major variables in this research. By doing so, the correlation coefficient between knowledge management and innovation is calculated as 0.717, which denotes a strong, positive relationship between the two variables. This value is also significant with 0.99% confidence. Therefore, it can be said, "There is a strong, positive and significant relationship between knowledge management practices and innovation in organizations."

RESEARCH LIMITATIONS

Like many other similar studies in the field of management, the findings of this research face a serious challenge, which is the limitation of generalization. It means that while a few sub-companies with unique circumstances were sampled for the study, the results can be generalized as different types of organizations. Therefore, while making judgments on the results of the study, a very prudent attitude should be taken.

IMPLICATIONS FOR THE OTHER RESEARCHERS

In this research, a very small sample was investigated. Therefore, as mentioned above, it can be a big challenge to generalize the findings to other cases with different conditions. Thus, the following are recommended to other researchers in order to get better results:

* Try to produce and localize a relevant questionnaire on your own (as the applied questionnaire in this research was a Persian translation of Darroch's questionnaire).

* Try to involve a larger number of managers from various companies that are active in different environments and industries.

IMPLICATIONS FOR MANAGERS

Based on the findings of this research, it is highly recommended to:

* Foster each of the three mentioned practices in order to improve the other practices at the same time (as the results indicate a positive relationship between knowledge management practices with each other).

* Foster knowledge management practices in order to enhance innovation (as the results denote, a positive relationship between knowledge management practices and innovation). For doing so, based on the 16 knowledge management items that are considered by the applied questionnaire, the following are recommended to the managers:

1. Value employees' attitudes and opinions

2. Establish well developed financial reporting systems

3. Be sensitive to information about changes in the marketplace

4. Develop science and technology human capital profile

5. Work in partnership with international customers

6. Get information from market surveys

7. Disseminate market information throughout the organization

8. Disseminate knowledge on the job

9. Use specific techniques to disseminate knowledge

10. Use technology to disseminate knowledge

11. Prefer written communication

12. Respond to customers

13. Develop well-developed marketing function

14. Respond to technology

15. Respond to competitors

16. Be flexible and opportunistic

Subject: Knowledge management; Innovations; Questionnaires; Correlation analysis; Case studies

Location: Esfahan Iran

Classification: 9130: Experiment/theoretical treatment; 9178: Middle East

Publication title: Journal of Business Case Studies

Volume: 6

Issue: 1

Pages: 89-97

Number of pages: 9

Publication year: 2010

Publication date: Jan/Feb 2010

Year: 2010

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: Business Case, Feature

Document feature: Tables Diagrams References

ProQuest document ID: 214859796

Document URL: http://search.proquest.com/docview/214859796?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Jan/Feb 2010

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 25 of 100

THE TROPICAL FISH FARM: TRANSITIONING FROM HOBBY TO BUSINESS

Author: Fields, Jon G; Finch, James E

ProQuest document link

Abstract:

All too many people with particular skills or talents decide to start their own businesses only to fail because they focus on using those skills in their business rather than on building and developing the business itself. This case traces the transition of one person's leisure interest in tropical fish to the development of a successful business in direct competition with large established domestic producers and international importers. Since many students have had aquariums or known friends that have had them, the case is easy for them to relate to on a personal level. As the case unfolds, the hobbyist expands and progresses through a series of expansion phases that soon involves several retail and wholesale buyers. The decision presented to the students is whether to expand into a major player within the region and, if so, which of three expansion alternatives should be pursued. [PUBLICATION ABSTRACT]

Full text:

THE TROPICAL FISH FARM

Diane Henderson enjoyed animals and shared that enjoyment with her family. Two years ago, she purchased a 30 gallon fish aquarium and some young gold fish, bottom feeders, angelfish, and a few others, for her daughter. Several months later, Diane noticed some small, brownishcolored 'bumps' on one of the aquatic plant leaves. When her husband came home they identified the 200-300 pinhead-sized bumps as fish eggs. Based on their behavior, they determined that the eggs belonged to the angelfish. Within a few hours, however, the eggs were 'gone.'

Diane began doing some research on the Internet to learn how to home-raise baby angelfish. Raising angelfish from babies was not a new idea to her. When she and her husband were attending college, one of their neighbors had a whole bedroom of their apartment filled with dozens of aquariums occupied with breeding pairs of angelfish and babies in various stages of growth. They earned enough profit from the sale of the young fish to local pet stores to pay the rent and utilities for their three bedroom apartment.

Diane read about the ideal water conditions for raising healthy angelfish from egg to fry (young fish). She learned about the types of food they needed during the early days and weeks after hatching, and other fish care information. Soon the pair of angelfish produced another batch of eggs. Since they were no longer competing with other fish, these eggs didn't 'disappear.' The parents swam over the near- vertical stone slate that held the eggs, 'fanning' them every few minutes to keep them clean. They took turns sucking the eggs into their mouths and spitting them back onto the slate. Later, Diane learned that angelfish have special mucus glands inside their mouths that clean and recoat the eggs to protect them from bacteria and fungus. The sticky mucus also allowed the eggs to stick to the slate and not fall to the bottom of the tank and get lost.

After ten day the eggs began to wiggle and the fry were swimming freely three days later. Within six weeks the fish tank was filled with 150 dime-sized and nickel-sized angelfish. During this time the parents had produced two more batches of eggs, but the adults and the baby fish quickly added them to their diets. The fry also began to nibble on their parents' fins. In two more weeks they would be the size of a quarter and would become permanently stunted from over crowding in the tank. The parent fish, not able to escape from their young, would probably not survive.

Diane lived in a town of about 78,000 people that had two independent pet stores plus two large discount department stores that sold tropical fish. She called the owners of the independent stores to see if they would be willing to buy the young angelfish and what they would be willing to pay. They were eager to buy the fish and would pay $ 1 .50-2.50 each, depending on their sizes. The large discount stores turned her down, indicating that company policy did not permit them to buy fish from local suppliers. A department manager explained that fish purchased from 'hobbyists' are sometimes not raised in well-managed conditions. Fish raised in these conditions are more prone to disease that can spread to the other fish tanks that share a common water circulation system within the store. Infected fish sold to consumers may contaminate home aquariums as well. The risk, liability, and warranty problems associated with buying from small, local producers prompted the discount stores to adopt policies that allowed them to buy fish only from reputable, bonded wholesalers.

Diane asked the owners of the independent pet stores why they would agree to buy from her rather than their established wholesalers. They explained that young fish raised in local water acclimated to local fish tank water better than fish from other locations raised in water with different characteristics. Since the owners had a hands-on orientation, they could inspect and rej ect deliveries from local producers if problems were suspected, unlike fish shipped to them in boxes from wholesalers. The store owners also said that local producers, mainly hobbyists, sometimes offered varieties of angelfish that the wholesalers did not carry. She also learned that the vast majority of tropical fish sold throughout the U.S. are raised in open ponds in Florida or imported from Hong Kong. Fish shipped from these distant locations were heavily sedated to relax them and to reduce stress, and routinely spent 72 hours in the shipping bags and boxes. Locally produced fish were in shipping bags for 24 hours or less and required less sedation. This reduced the stress on the fish and resulted in a much higher survival rates within the store and after customers took them home. Diane sold 1 10 dime-sized fish @ $1.50 each and 45 nickel-sized fish @ $2.00 for a total of $255. The store owner commented on how much he appreciated not having to pay the usual shipping and handling costs that cut into his profits.

Additional conversations with this and other store owners revealed that it was customary for buyers to pay a shipping fee of $25 to $30 per box that may contain 25 to 1 50 fish depending on the species and size. To cover her transportation expenses, Diane began assessing these changes as well. However, to offset this cost, she gave each customer a few 'free' fish (3-5 per box delivered) that the store owner could sell at the full retail price of $4.50 to $6.00 each, so they could recoup the delivery cost. The store owners were thrilled with Diane' s offer and appreciated her efforts to help them to maximize their profits. They said that no other supplier had ever done that for them! This small gesture that actually cost Diane very little, created a sense of trust, loyalty, and comfort between Diane and her customers. Diane's relationship style of selling, being an effective listener, and responding to what she heard in a meaningful way, was really paying off for both her and her customers. To make sure they never forgot what she was doing for them, on her invoices, she always listed the number and retail value of free fish they received, just below the shipping charge.

The first sale of young fish was none too soon since the adult fish were once again cleaning the slate to prepare it for another batch of eggs. Surprised at the frequency that eggs were being produced, Diane did some additional research. She learned that a healthy pair of angelfish of good stock and under proper conditions could produce 300-800 eggs every 10-15 days, all year round, with only a few 'rest' periods! This volume and frequency of production could only be achieved if the slates on which the eggs were laid were removed and placed into special hatching tanks. These tanks contained mild chemical solutions that protected the eggs from bacteria, and special air bubble systems that substituted for the parents' fanning of the eggs. If the eggs were not removed from the parents' tanks, the parents may not produce another successful batch for forty days or more, and there was a risk that the parents would eat their own eggs or fry before they were ready for sale.

As the months went by, other pairs of angelfish began laying eggs and additional aquariums were added to accommodate them and baby fish in various stages of growth. These tanks were not purchased with money, but were 'bartered' with the local pet stores. The store owners agreed to barter them at their wholesale purchase price so Diane would be able to increase her production for them more quickly. In exchange for each $60 worth offish she delivered, Diane would receive an aquarium with a retail value of $100. Diane's actual cost for the bartered fish was about $42 and the retailer could sell the fish for $200.

Having completed her undergraduate business degree one year earlier, Diane began to wonder if her hobby could be expanded to produce a small but consistent profit. Considering her current level of production, one option was to service only independent pet stores within the surrounding area. This would require deliveries to multiple locations, relatively small orders of two to four dozen fish per order, but a higher price per fish than selling to fish wholesalers. Another option would be to expand and serve both the local stores and wholesalers. Diane knew that wholesalers would buy larger quantities offish, but she also knew that they would pay a lower price per fish. For the time being, providing wholesalers with sufficient numbers didn't seem to be a realistic option.

Diane began to contact pet stores in the surrounding cities and towns. Sometimes she would call ahead for appointments, and sometimes she would stop in unannounced. Either way, she arrived with a shipping bag containing two dozen, nickel-sized or quarter-sized angelfish and offered them to the owners as free samples of her product. The quality of the fish was evaluated and discussions quickly convinced them that Diane was more than an on-again, off-again hobbyist with questionable quality and reliability. Soon the total demand for her fish was much greater than she could provide.

Diane contacted inter-city delivery companies to determine whether they could pick up her fish at her location and deliver them to her customers. Some did not have licenses to carry livestock, and those that did, could not guarantee that the oxygen-enriched bagged and boxed fish could be processed through the system and delivered before oxygen would be depleted. They also could not provide the appropriate temperature controls during the extreme summer and winter seasons. Not wanting to take these risks and disappointing her customers, Diane continued to deliver fish to each store. She used these visits to learn more about the tropical fish business and angelfish in particular. She gained insights that solved some problems and avoided others. The scattered locations of the pet stores, however, and the relatively small quantities per order, resulted in high delivery costs that cut deeply into the potential profit. Her profit was only about $300 per month. Diane needed to find a way to increase her production and to decrease her delivery expenses. She decided to do more reading to become more familiar with the industry and to get more ideas.

Diane's research revealed that tens of millions of saltwater and fresh water tropical fish were sold in the United States each year to household, corporate offices, waiting rooms, zoos, and aquariums. Of the 1 13 million households in the U.S., 63%, or 71 million households had pets. Fourteen million households had 142 million freshwater fish. Through research and conversations with her retail customers, Diane learned that the large producers used a dual distribution system. The bulk of the producers' fish were sold and flown to wholesalers across the country. Plastic shipping bags were filled 1/3 with water and 2/3 pure oxygen and a sedative to relax the fish. The wholesalers took fish out of the shipping bags and placed them into holding tanks. When retailers ordered fish from the wholesalers, the fish were subjected to the bagging procedure a second time and then drop shipped at the retailers' locations. Large retailers near major airports, however, purchased fish directly from the producers and sent their employees to pick them up at the airports.

Diane wanted to be a part of that larger industry. She knew that to succeed in the competitive, commodity-oriented marketplace, she needed to produce a product that was better and different than the established suppliers. To make sure that her fish had good genetics and physical characteristics, Diane purchased young breeding stock from a reputable and nationally known supplier in New York State. The cost for the twenty young, high quality fish ranged between $20 and $30 each for a total cost of $500. The new stock consisted of a variety of angelfish including black and yellow marble, gold standard, gold pearl scale, silver, zebra, blue blushing, koi-colored (orange, black & white) and others. These varieties also featured standard fins, lace fins, veil, and super veil fins. The special color and fin varieties were not offered by the large producers because they were too difficult to raise and did not tolerate the shipping processes well. It would be another six months, however, before the young fish would reach maturity, pair off, and began to lay eggs.

After six months, their daughter's bedroom could no longer accommodate all of the aquariums, and they began to take up space in the living room, dining room, and hallways. Later, the operation was shifted to the basement . . . first in one room, then a second, a third, and eventually a fourth room. Diane's hobby began to produce enough revenue to pay for the investment in food, equipment, utilities, and delivery expenses, and have some profit left over. Besides that, the activity was just plain fun. Like any livestock, however, the daily attention required did not allow for a 'day off.'

Diane located a tropical fish wholesaler in a city approximately 200 miles to the south, and two more in a city 250 miles to the east, each of which served multiple, and sometimes overlapping, markets. She contacted the closest of the three wholesalers and setup an appointment. She prepared for the sales call by looking at the wholesaler's website and the websites of several other fish wholesalers. She also took pictures of the special varieties of the breeding stock that she was raising. On the day of the appointment she bagged an assortment of her young fish and presented them to the owners as a free sample. She also offered copies of the invoices from the breeding stock supplier in New York to support her claim of quality genetics.

The wholesaler said that he had done business with 'hobbyists' in the past but had been frustrated by inconsistent quality and quantities. Diane's invoices for the breeding stock eased the wholesaler' s concern about quality, and her business expansion plans convinced him that she wasn't the typical hobbyist. He decided to give Diane a chance to prove herself and with some residual reluctance, agreed to purchase 200 dime and nickel-sized angelfish at 350 each when they became available - the price he paid for angelfish purchased from his suppliers in Florida and Hong Kong. Since retailers paid a much higher price per fish than the wholesaler, Diane gave order fulfillment priority to those she could service as she drove to and from the wholesaler' s location. She sold only her 'excess' fish to the wholesaler. She began this 'route' two weeks later. All of her customers paid her invoice upon delivery.

The day after making her delivery Diane followed up and called each customer to ask about the fish they had received. The wholesaler indicated that he was surprised that not a single fish had died. The wholesaler' s comment surprised her so she asked more about it. He informed her that fish from the Florida and Hong Kong breeders were a highly perishable product. Fish from those suppliers were shipped by air, were heavily sedated, and routinely had a 25% mortality rate upon delivery. More of these fish died after being placed into the holding tanks, and even more died after being sold to retail customers. She also learned that during the extreme times of the year, winter and summer, that it was not uncommon to have 80% mortality rates in some bags offish! The counting of dead fish being bought and sold and processing and tracking the credits was a time consuming, frustrating, and expensive effort. The problems inherent in this production and distribution system also produced frequent complaints from the wholesaler's retail customers and reduced their satisfaction and loyalty. The low, 350 price charged by the producers and the high markup to $1 .50 to $2.75 per fish to the retailers helped to off-set some of the wholesaler's cost and inconvenience.

Initially, Diane's deliveries to the wholesaler were every three weeks ... first 200, then 400, then 500 fish per order. The wholesaler was delighted with the consistent quality of the fish. A bonus was that Diane sorted and bagged the fish by color, size, and fin type. This allowed him to offer, fill, and price specific orders from retailers rather than, receiving and selling 'mixed assortments' as he had done in the past. And the mortality rate, if it wasn't zero, was at most only one or two fish per shipment - the lowest mortality rate from any supplier from whom he purchased. This eliminated the need to count dead fish and the tracking and processing of credits. The increased quality and the variety of angelfish that he now offered to his retail customers also increased their level of satisfaction and loyalty.

Finally convinced that Diane was a serious and reliable supplier, he offered to buy 100%) of her angelfish up to 2,000 per week during the offseason (summer) and up to 3,000 per week the rest of the year. But Diane believed that the quality and variety of her fish justified higher prices than those purchased from the Florida and Hong Kong suppliers. As part of her negotiation strategy, Diane prepared a profit comparison sheet that showed that the wholesaler could actually make more profit even when paying her a higher price for high-quality fish (see Table 1). The wholesaler accepted her explanation and agreed to pay $.75 for dime and nickel-sized fish and $ 1 .25 for quarter sized fish. He would also pay an additional 250 for the specialty angelfish - those that had veil or super veil fins and the pearl scale, koi-colored, and blushing varieties. This pricing agreement effectively raised Diane' s price per fish by more than 200%>. But the quantity of 3,000 fish per week was more than ten times that of her current production.

Only ten months had passed since Diane made her first sale. Soon the young breeding stock would be mature enough to pair off and would need separate, 1 5-20 gallon tanks to begin producing eggs. As luck would have it, the owner of one of the local pet stores experienced an emergency that required her to liquidate her business. Among the items being auctioned off were thirty-six 24gallon fish tanks and four 55 gallon tanks, the shelf racks that stacked the tanks 3-high, as well as the water pumps, heaters, filters, and related equipment. Diane was able to buy approximately $4,000 (new cost value) of equipment for only $800. She and her husband dismantled the equipment, took it home, sterilized the tanks, and set them up in the basement of their house. Very soon, the tanks were all filled with breeding pairs or young fish in various stages of growth. Production soon increased to 500 salable-sized fish per week, and the 20 breeding pairs were producing more eggs and fry than the 1,200 gallons offish tanks could accommodate. If the tanks were cleaned each day and with sufficient water exchanges, each gallon of water could support 10 - 12 quarter-sized fish.

Diane needed to obtain more fish tanks to grow out the fry, but she was reluctant to investment in new equipment. Now that her retail customers were receiving adequate quantities of fish, they were not eager to barter the additional tanks, and Diane didn't want to press the issue. During one of her deliveries she shared her dilemma with her wholesaler customer. Eager to help to her expand, he offered to barter some tanks that he had left over from when he owned a retail store. Diane gained three 75 gallon tanks and one 125 gallon tank with a combined retail value of $2,000 for a trade out of only 1,000 quarter-sized fish of various types and sizes. Within days, the new tanks were in place, over crowded tanks were thinned out, and they were alive with hundreds of young fish. But the breeding pairs, now numbering thirty, were producing more eggs and young fish than the grow-out tanks could accommodate, and Diane was still producing fewer fish than the total of her customers were requesting. If she could deliver more fish each time she completed her 400 mile round trip delivery route, her efficiency and profits would increase dramatically. She had to find a way to expand her production without investing in new, expensive equipment, but how?

One day when she was making a delivery to a retail customer, Diane told the owner of her dilemma. He told her that, before he purchased the pet store, he raised tropical fish for sale, but used plastic, acid-free storage containers purchased from local hardware stores as growing tanks. By putting one container inside another, the 40 gallon containers could be filled with 32 gallons of water without bursting. The cost for the double-tanks was only $16 compared to the $125 retail price for similar-sized glass tanks. The cost for the heaters, filters, and overflow adaptors remained constant at $22 per tank. Within weeks, 28 of the plastic tanks were set up and fully operational. There was no more room for additional tanks now that every room in the basement was full. She now had more than 2,200 gallons of fish tanks in the system and production was soon up to its maximum capacity of 2,000 fish per week. Approximately 75% of these were the common varieties and 25%o were the special varieties. After deducting transportation costs, utility costs, fish food, and other supplies, Diane was making a profit of $2,000 per month from her home-based business that had started out as a hobby. She was happy and so were her customers, and she was successfully competing with established competitors from Florida and Hong Kong.

Last month Diane's wholesaler informed her that he was purchasing one of the two wholesale companies located in the city 250 miles to the east of Diane's location. That business was larger than his existing business. The two businesses combined would give the wholesaler a nonexclusive distribution area of 20 states and included independent pet stores, retail department store chains, and the nation's largest pet store chain. He asked Diane if she could increase her production to 8,000 angelfish per week. He even offered to receive all of her fish at his closest facility and to transport those needed at the other location with his own vehicles that were traveling back and forth between the two. Conversations included the possibility of breeding and producing other varieties of tropical fish if Diane would be willing to expand to accommodate his needs. Since the basement of her house was filled to capacity, the only way she could expand further would be to move into a separate building. The new and larger setup would require more sophisticated and automated equipment. It would also require the rent or purchase of a building and hiring full-time employees.

Diane also considered less conventional alternatives to meet her expansion needs. The recent consolidation of farms within the dairy industry had produced a surplus of used stainless steel milk tanks used to cool and store raw milk on the farms before it was picked up by bulk transport trucks. Tanks ranged in size from 500 to 800 gallons each and were accumulating around area farm supply businesses. Diane thought these tanks would be ideal for raising young fish to saleable size and considered buying several at a price of 500 per gallon capacity. She could set up 8,000 gallons of these tanks in an industrial building six blocks from her home, but there would be no space to expand further. She estimated that she could produce up to 10,000 additional angelfish per week at an average price of $ 1 each. The commercial water treatment and circulation systems would cost about $20,000. The rent would be $1,500 per month, utility costs were estimated $500 per month, and she would need to hire two full-time employees. She would also have to buy a larger, temperature-controlled delivery vehicle at a cost of $35,000. While the facility would be nearby, she would have to travel back and forth between the part of the business that would still be located in her basement and the rented facility.

The changes in the dairy industry had also left many rural cheese factories closed and vacant. Diane located a vacant factory four miles away that still contained the stainless steel cheese vats and plumbing systems. She felt the facilities would be ideal for conversion into a tropical fish breeding and hatching facility, using the cheese vats as indoor 'ponds.' The water treatment, filtering, oxygenating, circulation, and heating systems would require an investment of $75,000. She would also need to buy the delivery vehicle.

The factory was located in a remote area and was not easily converted into other useable space. To demolish the facility to make way for a new building would be very expensive, and since the location was generally undesirable, the prospects for a new business at that location were minimal. Diane thought she might be able to buy the vacant factory from the large corporation that had purchased and closed it four years earlier, for a fraction of the cost otherwise necessary for her to buy and equip another facility. There would be ample space to move the current setup out of her basement and into the factory. Diane could produce several varieties of tropical fish and approximately 30,000 fish per week at an average price of 500. She would have to hire four full-time employees when the facility reached capacity in about eighteen months. She was temped to offer a low-ball price to buy the factory, but didn't know how much to offer, or what her maximum offer should be. She was uncertain whether or not she wanted to accept the additional risk and responsibility for such an enterprise. To help guide her decisions, Diane prepared Table 2.

In only two years, Diane's not-for-profit hobby had grown into a profitable home-based business with the potential of becoming a player in the tropical fish industry within the region. She now had three choices before her. She could remain at her current size within the confines of her basement, she could rent the building a few blocks away, or she could purchase and move into the cheese factory. At this time, she is considering her options from financial, risk, and lifestyle perspectives.

QUESTIONS:

I. What did Diane do well as she transformed her hobby into a business? Comment on her research and each of the 4 Ps of the marketing mix.

II. What were Diane's most important guiding principles that ensured her early success?

III. Which of the marketing concepts and guiding principles identified in questions #1 and #2 are universal to all other types of products, services, and businesses?

IV. Complete the shaded portions of the spreadsheet below. Should Diane make an offer to purchase the cheese factory? If so, what should she offer, and what should be her maximum offer? Justify your answers.

V. a) List the pros and cons of each of the three expansion options Diane is facing (no expansion, rental option, purchase option). Consider such things and profit potential, risk, and lifestyle, b) Considering the pros and cons you've identified, choose and defend the one option you would recommend.

Subject: Aquaculture; Customer relations; Entrepreneurs; Case studies; Startups; Business models

Location: United States--US

Classification: 9520: Small business; 2310: Planning; 9190: United States; 8400: Agriculture industry; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Supplement: Special Issue Number 1

Pages: 1-12

Number of pages: 12

Publication year: 2010

Publication date: 2010

Year: 2010

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

ProQuest document ID: 845495949

Document URL: http://search.proquest.com/docview/845495949?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 26 of 100

PROJECT MANAGEMENT: USING EARNED VALUE ANALYSIS (EVA) TO MONITOR A PROJECT'S PROGRESS

Author: Maheshwari, Sharad; Credle, Sid Howard

ProQuest document link

Abstract:

A small federal government contractor, Environmental Services, is located in the Virginia Beach area of Virginia. It has incurred losses on some of its projects due to poor cost controls and schedule overruns. The company executes 10 to 30 small to medium-size projects at any given point of time. The company is growing and wishes to find a way to cut its losses due to cost and/or schedule overruns. These overruns occur due to several internal and external factor s. The internal factors include the loss of key personnel, improper supervision, the lack of technical skills, poor understanding of the scope of projects, etc. External factors such as vendor delays, quality of supplies, unclear designs, weather and similar factors may also cause a project activity to miss an established deadline or to cost more than the estimated budget. The company largely relies on the experience of the project managers to make a decision based on their assessment whenever a problem arises. Currently, there is no system in the company to keep track of the impact of cost and schedule overruns on a given project. The company recognizes profit or loss once projects are completed and final performance analysis is performed. The company gave the task of establishing procedures and developing an ongoing monitor/control system to an outside consultant. The consultant reviewed several old projects and presented an analysis to the company. It was suggested that the company establish a proper mechanism for recording cost and budget details during the life of each project. Furthermore, itwas suggested that the company use an Earned Value Analysis (EVA) tool to monitor the cost and schedule overruns and adjust project tasks, schedules and resources accordingly. [PUBLICATION ABSTRACT]

Full text:

BACKGROUND INFORMATION

Environmental Services is a general contracting company based in Virginia Beach, Virginia. The company performs general contracting work mainly in the area of construction and facility maintenance. The company executes approximately 10-30 projects at any given time and each project is managed by a project manager (PM). Most federal government contracts are awarded to the company on a fixed cost basis. Also, most Environmental Services' projects are awarded on a "design-bid-build" basis. That is, the company bids on the projects after the design has been completed by the federal government or other governmental agency. Environmental Services is not involved either directly or indirectly in any design aspects of the project.

The general contracting organizations like Environmental Services that work on fixed cost "design-bid-build" proj ects can only be profitable by completing proj ects on time and within budget. However, in construction projects, cost and/or schedule overruns could occur due to a variety of internal and/or external factors. These overruns can quickly wipe out profit margins and may result in a loss. Project losses generally are the result of problems of a few activities in a project which may impact other activities and hence, the entire project may be impacted negatively. It is not possible to avoid all schedule or cost overruns (such as those due to inclement weather), but proper project monitoring can reduce the impact of these overruns.

ANALYSIS OF PROJECT MANAGEMENT PROBLEMS

There are two main categories of factors that can create risk in a construction project during its monitoring and controlling phase. These categories are internal and external factors. Internal factors include scheduling conflicts, lack of subcontractor supervision, insufficient labor and/or supervisor training, improper match between labor skills and the tasks assigned, and changes in key personnel. It is important that the project management recognizes a problem and takes corrective action in a timely manner. For example, scheduling conflicts could be resolved by rescheduling (if time permits), supporting an activity with additional labor, or resource leveling. The lack of subcontractor supervision or improper supervision could be resolved with the proper training of management or by providing support to the subcontractor as needed. Similarly, when there is a change in the key personnel, management needs to find an effective replacement quickly. Tools like EVA provide necessary information to management regarding the project status while requiring proper documentation of proj ect parameters at select time intervals or other milestones. These tools and techniques (like EVA) are used at the monitoring and controlling stage of a project life cycle, hence, should not to be confused with project scheduling techniques like PERT, CPM, etc. which are used at the planning stages of a project life cycle.

External factors could be more serious since contractors have little or no control over these factors. Problems may arise due to delay by an external organization or due to natural causes like rain, snow, wind, etc. External organizations may include subcontractors, suppliers, and project owners. Subcontractors' internal problems can have a direct impact on a project. For example, labor disputes at a subcontractor's business may force a company to miss completion dates, potentially delaying a project. Suppliers could have similar problems as subcontractors. Delays in material supply can also cause significant cost and schedule overruns. Project managers should have the ability to spot these problems early and to take corrective action. Providing extra labor or financing to fix the subcontractor problem could avoid bigger delays and losses to the entire project. Furthermore, project owners can also increase general risk by changing task requirements (scope creep). The change in one task could result in a much larger cumulative impact of the project cost and time. These changes should be carefully evaluated and budgeted. A proper application of EVA could also be very helpful in determining the expected variances caused by additional requirements, the correction of design flaws, or misinterpretation of the requirements; thus the contractor can have better estimates for negotiating additional terms and budgets.

Natural causes like excessive rain, snow, extreme temperatures, severe storms, etc. can also cause large delays in projects, as well as increase project costs. These are uncontrollable events; nevertheless these events require a contractor's response. Again, EVA can help management in determining the cost and schedule variances as the result of natural events. Consequently, management can take proper remedial action to reduce the impact of the delay caused by natural events.

FACTORS TO CONSIDER IN EVA

An application of EVA assumes that a detailed project plan has been created. In fact, most project grantors will require some kind of project plan to be submitted as a part of the bid approval process. Additionally, EVA will also require detailed cost estimates, methods of assessment of completion of a part or full activity, and time interval for assessment of activities. The following table (Table 1) shows a list of necessary items and processes for the proper application of EVA.

TECHNIQUES FOR PERFORMANCE ESTIMATION

It is not difficult to estimate the cost or time associated with a task during construction operations but the process of estimating cost and time continuously can be time consuming. However, there are several methods that allow quick practical estimations, such as the milestone method, percent complete, 50/50%, or 0/100%, etc. This company uses the percentage of completion method as it is required by some of the government agencies for which Environmental Services has the construction contacts. In the percentage of completion method, at a given interval the proj ect manager estimates each ongoing task and estimates how much or what percentage of the work has been completed. The proj ect manager will record the percentage of work completed as well as dollar amount spent on any ongoing activity. A few tasks may require additional management time to determine what percentage of the task is completed. Cost and time variances are calculated based on actual percentage completed.

APPLYING EVA TO MONITORING A PROJECT

The project in this case involved a federal government contract to build a special ceremony center on a military base. This was one of many independent projects Environmental Services was handling at that time. The project manager for this project was Mr. Krish Patel. This project exceeded time budgeted, and the company ended up incurring substantial losses on the project. The estimated losses were approximately 5% of overall budget. The losses were higher due to the time sensitive nature of the project. The consultants analyzed the project and showed that if EVA had been used the company could have cut its losses substantially or remained profitable on the project.

The specifications of the project's ceremony center were prepared by the design team that was independently hired by the military. The total project time was seven months (November 1 to May 31). However, to facilitate an on-time start of the contract, the award was made two months in advance to account for the lead time of delivery of construction supplies. Any delay to the project would be subject to penalty due to a pre-specified contract clause. Therefore, careful planning by the management was important for the on-time delivery of this project. Tables 2 and 3 provide the estimated timeline and budget for six maj or construction tasks. For simplicity, other proj ect activity constraints are ignored, including any activity-dependent requirements.

PROBLEMS

At the end of September, prior to starting the project, a severe thunderstorm disrupted the construction site. More than two weeks of work time was lost due to the flooding of the site. This loss of time could not be made up by an extension of the project time. The building had a major event scheduled at the end of construction.

By the end of December, another problem surfaced related to the quality of work performed by a subcontractor. The wood/roof subcontractor failed to meet the standards set in the military contract. About 50% of the work completed in December by this subcontractor had to be redone.

In January, Mr. Patel realized that the subcontractor for interior work was having problems in procuring cabinets and other specialty items. A meeting with the subcontractor revealed that the company was having problems with labor and finances. Mr. Patel did not take action in December, as this was an outside contractor and Krish Patel was not yet sure of the problem. Furthermore, the subcontractor indicated that the problem would be resolved in the near future. At this time, hiring a new contractor was not an option.

CASE DISCUSSION QUESTIONS

If you were an assistant to project manager, Mr. Krish Patel, how would you help Mr. Patel in monitoring the project using EVA? Data regarding the variance for November, December, and January are provided below in Tables 4-9.

ACKNOWLEDGMENTS:

Funding support for this work was provided by the US Department of Transportation, Entrepreneurial Training & Technical Assistance Program grant. We are grateful to Dr. Prabhu Aggarwal, College of William and Mary for his critical insights at the initial stage of this project.

Subject: Project management; Construction industry; Cost control; Value analysis; Government contracts; Case studies

Location: United States--US

Classification: 9550: Public sector; 8370: Construction & engineering industry; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Supplement: Special Issue Number 1

Pages: 13-22

Number of pages: 10

Publication year: 2010

Publication date: 2010

Year: 2010

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: 845495945

Document URL: http://search.proquest.com/docview/845495945?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 27 of 100

THIEL MACHINERY: THE CASE OF THE DISAPPEARING LIFO

Author: Jesswein, Kurt R

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Abstract:

Thiel Machinery, a successfully growing machinery company, is grappling with the potential impact of losing the ability of using LIFO inventory costing methods on its current and future funding sources. The student is placed in the role of a recently-hired assistant to the president and founder of the company. The student is charged with providing an analysis and summary report of the likely implications for the company's current financing situation and its upcoming stock issue. [PUBLICATION ABSTRACT]

Full text:

THIEL MACHINERY

Despite the recent economic downturn, Thiel Machinery has continued to be a turn-of-thecentury bright spot in the economy. From humble beginnings only a short ten years ago, the company has seen continual growth. John Minnie, the founder and president, is excited about how far he has come and is looking forward to expand his operations in the near future.

The company to date has been extremely profitable. Despite the company's successes, John has found it necessary to borrow a significant amount of long-term and short-term funds from his local bank, First Security, to meet his growing financing needs.

First Security has been an avid provider of funds given the long-term relationship that John Minnie and his family has had with the bank over many decades, and because of the growth potential of the company itself. For example, Thiel Machinery has consistently and easily met all of the loan covenants that First Security has had in place.

However, John's vision is even greater. Although he is appreciative of the financing he has received in the past from First Security, he does not believe the bank can provide the extensive amount of financing that he believes will be necessary to expand the company' s operations and meet the growing demand for his high quality and high value product line. So besides maintaining the relationship with First Security, John is also examining the possibility of going public and issuing common stock to fund his expansion plans.

Potential Fly in the Ointment

Despite his current successes, John has become aware of a potential problem that might affect both his current financing arrangement and the possibility of raising new funds through the issuance of common stock. John' nephew, Leonard Minnie, has been studying accounting and finance at State University, and has learned that there is a move to shift U.S. Generally Accepted Accounting Principles (GAAP) to the more globally-accepted International Financial Reporting Standards (IFRS).

Among the multitude of potential changes to the company' financial statements that might be expected from a switch to IFRS, the one that John is most concerned about is the abolition of using the LIFO (last-in, first-out) inventory costing system that his company has been using. The use of LIFO is common among small- to medium-sized machinery companies. For example, Leonard Minnie, while working with Compustat data on a research paper at school, discovered that of the 102 companies in the same industry sector as Thiel Machinery, 44 used LIFO inventory valuation. This was an extremely high percentage given that only around 3 00 of the 8,000 companies in the Compustat database used LIFO.

Wen using LIFO, companies assign the most recent costs of acquiring inventory to the inventory sold during the period, with the remaining older costs assigned to the valuti on of the remaining unsold inventory. In periods of rising prices this usually has the effect of reducing profits. Thiel Machinery has used LIFO because, among other things, the reduced amount of profits meant the company paid significantly less in taxes, which has allowed it to reinvest a higher proportion of cash back into the business. This tradeoff, reporting lower accounting profits in exchange for paying lower taxes, is due to a tax regulation commonly referred to as the LIFO conformity rule. Unlike other aspects of accounting such as fixed-asset depreciation, the tax code states that companies using LIFO must use it for both financial reporting and tax reporting. This differs, for example, with depreciation, in which many companies employ straight-line depreciation in their financial reporting and hence disclose higher profit margins, but then use accelerated depreciation for tax reporting and hence pay lower amounts of tax.

If the switch to IFRS caused LIFO to be abolished, Thiel Machinery could potentially face a variety of distinct yet interrelated problems. First, the company is required by First Security to maintain adequate financial ratios, most notably an Altman Z-score of greater than 3 .0, and the loss of LIFO might negatively affect the calculation of this measure. Second, the company would be required to make tax payments to cover the amounts previously deferred by using LIFO, reducing the amount of free cash available for its operations. Third, the reduction in cash flows from paying more in taxes could potentially reduce the value of the company's equity and the price of any new common stock that the company was considering to issue. This would provide the company with less cash than it had anticipated from the stock issue.

The Altman Z-score is calculated as a weighted sum of five individual ratios: working capital to total assets (X^sub 1^); retained earnings to total assets (X^sub 2^); EBIT, or earnings before interest and taxes, to total assets (X^sub 3^); market value of equity to book value of liabilities (X^sub 4^); and sales to total assets (X^sub 5^), using the following formula: Z = 1.2X^sub 1^ + 1.4X^sub 2^ + 3.3X^sub 3^ + 0.6X^sub 4^ + 0.999X^sub 5^. Z-scores above 3.0 are typically associated with companies that are not expected to suffer significant financial difficulties and bankruptcy and Thiel Machinery has consistently maintained a Z-score above this threshold, per the loan covenant with First Security.

Oe complication with the Z-score calculation for Thiel Machinery is that it is a privately-held company and therefore does not have a readily determinable market price for its common equity. Because of this, John Minnie, working with his lenders at First Security, has been estimating the market value of its equity using a variation of the free cash flow valuation model. This model first estimates the present value of the company's future expected free cash flows through the use of a constant-growth perpetuity formula. It then subtracts the amounts owed to its debt holders with the remaining amount assumed to be the market value of the equity. To demonstrate, John Minnie estimated that in 2008, Thiel' s free cash flows (that is, the amount of cash available for future investments after paying for required investments in fixed assets and working capital) was $25.0 million. Assuming a constant growth rate of three percent per year, and discounting the future cash flows at ten percent (based on an estimate of the required rate of return of similar publicly -traded companies), the present value of the company's free cash flows was estimated to be $367.9 million. Note that the constantly-growing perpetuity formula is written as [(FCF x (1 + g)) ÷ (r - g)] with FCF being the free cash flow of $25.0 million, g representing the growth rate of three percent, and r representing the discount rate often percent. Subtracting te $125. million of outstanding short-term and long-term debt leaves $242.8 million as the estimated market value of the company's equity. This amount would then be used to calculate the X4 variable in the Z-score model.

However, with the probable loss of the use of LIFO, the company' financial statements could be significantly altered, in which case the Z-scre might also change. To estimate the impact on the Z-score, pro forma estimates of the key variables used in the model must be made. Companies using LIFO are required to report an estimate of how much their inventory is undervalued relative to the FIFO (first-in, first-out) method. This figure is known as the LIFO reserve account. The LIFO reserve (Thiel reported a value of $42. 8 million in 2008) would then be added to the inventory value reported on the balance sheet, consequently increasing the value of the company's inventory, total current assets, and total assets.

Te company would similarly need to estimate a liability for the taxes that had been deferred through the use of LIFO but which would now need to be paid. Given the company' current tax rate of 3 5 percent, this would be approximately $ 1 5 million, although this amount would likely not need to be repaid all at once. For example, the U.S. Treasury Department's 2010 Green Book summarizing the current government budget proposals explains that companies like Thiel would be allowed eight years to repay these taxes. Thus, assuming equal amounts paid per year, one-eighth of the tax liability would be considered a current liability with the remaining amount a long-term liability. Lastly, to complete the balance sheet adjustments, the remaining amount of the LIFO reserve not accounted for as tax liabilities would be considered net after-tax profits with that amount added to retained earnings.

Besides the balance sheet adjustments, it would be necessary to make adjustments t the company' income statement. For example, increases in the LIFO reserve account during a reporting period can be interpreted as the amount by which the company's cost of goods sold was overstated, and consequently the operating profits were understated, during the period. Hence, the operating profits (earnings before interest and taxes, or EBIT) for the period would need to be adjusted upward by the growth in the LIFO reserve for the year (or adjusted downward by any reduction in the LIFO reserve). Adjusting for the change in LIFO reserve would also affect the reported net profits and associated increase in retained earnings after reducing the amount of change by the change in taxes to be paid on the increase (at a 35 percent tax rate in this situation). Thiel Machinery reported that its LIFO reserve was valued at $42.8 million at the end of 2008, up from $34.2 million the year before. Consequently, the cost of goods sold for the company would need to be adjusted downward, and the EBIT upward by $8.6 million. In addition, the net income for the company would be adjusted upward by approximately $5.6 million after accounting for the tax rate of 35 percent.

Your task

You have recently been hired by John Minnie to help him assess the financial implications of having to abandon his use of LIFO. He has asked you for a review of his Altman z-score calculation. This assessment should first be based on the company' current financial statement data, including the assumptions necessary for estimating the value of the company' equity. The financial statements wuld then need to be adjusted to reflect the pro forma situation of not having LIFO available (that is, incorporating the value of the LIFO reserve and the change in the value during the most recent period) with the Altman Z-score recalculated to reflect those adjustments. Note that because of the increased amount of taxes to be paid, the company' free cash flows would fall by an amount equal to the LIFO reserve amount multiplied by the tax rate (35 percent) and then divided by eight to reflect the expected implementation of this rule as outlined in the U.S. Treasury Department' Green Book. This reduction in free cash flows would subsequently reduce the value of the firm as estimated by the free cash flow valuation model, which, in turn, would reduce the market value of the company' equity, further affecting the Altman Z-score calculation. This potential reduction in the market value of the equity also has possible implications for the company's expected public offering of stock, a significant issue given the company ' s belief in needing this new source of financing to fund future growth.

You should write a short report or memorandum to Mr. Minnie in which you describ your calculations and analysis and provide a summary of the potential implications. This should include an analysis of the company' current Altman Z-score, a summary of the free cash flow model for estimating the value of the company' equity, an explanation of the necessary adjustments to the financial statements should LIFO no longer be allowed, an analysis of the recalculated Altman Zscore based on the adjusted financial statement figures, and a discussion of the potential problems for the proposed stock offering given the possibility of lower valuations being made for the company because of the reduction in free cash flows from having to make larger tax payments.

Subject: Machinery industry; LIFO; International Financial Reporting Standards; Case studies; Organizational change

Location: United States--US

Company / organization: Name: Thiel Machinery Trading GmbH; NAICS: 333298

Classification: 4120: Accounting policies & procedures; 9190: United States; 8670: Machinery industry; 2320: Organizational structure; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Supplement: Special Issue Number 1

Pages: 23-27

Number of pages: 5

Publication year: 2010

Publication date: 2010

Year: 2010

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: 845495953

Document URL: http://search.proquest.com/docview/845495953?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 28 of 100

ENTERING THE ICE CREAM BUSINESS: A CASE STUDY OF KLEINPETER FARMS DAIRY

Author: Cater, John James; Chadwick, Ken

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Abstract:

Jeff Kleinpeter, fourth generation CEO of Kleinpeter Farms Dairy, has boldly led his family's business into a new product/market area, specifically the production and distribution of ice cream. For nearly one hundred years, Kleinpeter Farms Dairy has served the south Louisiana area as the leading milk processor and distributor, but now the company has invested millions of dollars in a new, but related product. Jeff seeks to build on the loyalty and goodwill generated among consumers because of Kleinpeter's excellent reputation for high quality milk products in the south Louisiana area. Kleinpeter appeals to local customers through cross-branding other Louisiana products, such as Ponchatoula strawberries, Bergeron pecans, and Elmer's Gold Brick Eggs. After the new product is launched, the company experiences challenges in marketing, operations, and human resource management. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Stepping into a quiet corner down the hallway from the buzzing noise of the auction, Jeff Kleinpeter smiled as he spoke into his cell phone, "Sue Anne, we are in the ice cream business. "There is no turning back now. We just spent $58,000 on one piece of equipment."

"Jeff you know that I trust your judgment, but this is a bit over the top, don't you think? Are you sure about this?" Sue Anne questioned in reply as any CFO worth their salt would do.

"I know that this is going to be a huge investment for us. We discussed this at length with dad before flying out here to Dallas. Joe May, our ice cream plant consultant, is here with us and he assures me that this is a great deal for us," answered Jeff. "From the time I received a notice in the mail that a huge ice cream company here was closing down; I thought that this might be our chance to buy ice cream making equipment at bargain basement prices."

"Why did they close down?" asked Sue Anne.

"They said their biggest account had pulled out overnight. It was 60 percent of their business. That was it - they had to shut down," Jeff replied.

"I am glad that Joe is there for the technical advice. We know about milk and the dairy business, but ice cream is new for us. You are sure about this now, Jeff?" asked Sue Anne again.

"In the auction, we bid the $58,000 on the ice cream freezer itself- the thing that pumps the air in and has the blades that turn to make the ice cream. It has three barrels and makes 1200 gallons of ice cream per hour. Additionally, we bought six fine pieces of equipment for about 10 cents on the dollar. It is beautiful, brand new equipment - state of the art. Don't worry; Joe is advising us on the technical aspects of fillers and shrink- wrappers."

GROWING THE COMPANY: THE NEED FOR ICE CREAM

With the purchase of the ice cream equipment in Dallas, Jeff had started the family business on a great adventure, maybe the biggest risk taken in 95 years at Kleinpeter Farms Dairy. The idea was not new with Jeff. For years, the Kleinpeters had thought about and talked about ways to grow their company and entering the ice cream business in particular had been considered many times before, but this time was different. Jeff remembered a recent conversation with his father, Ben Kleinpeter, just before Jeff flew to Dallas to look at the ice cream equipment.

"I love ice cream and I have wanted to get into the ice cream business. People have asked me about it for years, but I always thought it would cost too much," said Ben.

"I think this time we can make some super purchases on the right equipment to get into the ice cream business," replied Jeff.

"In many ways, the production of ice cream would be a natural fit for our company. We all know that we need an outlet to sell or use the surplus cream from our milk production," mused Ben. "Yes, consumers are demanding more low-fat or skim milk. We have always removed the cream from our milk, but now we have to do this even more so. The days of high demand for Golden Guernsey rich, thick creamy milk are past. I don't think the trend toward low-fat products will change." Jeff added. "We do sell some butter and whipping cream and half-and-half, but not enough to invest heavily in plant and equipment."

"There are other alternatives, Jeff. We could increase our revenues with other products besides milk and ice cream," Ben conjectured.

"Yes, Dad, you are right. We do bottle juice and water. We buy the water from Kentwood, which is natural spring water. We would have to do things like reverse osmosis with our water in order to use it, not that our water is bad. Plus, they buy the plastic bottles from us to put the water in. We have a reciprocating relationship," said Jeff. "Another option would be to invest more heavily in the production of cheese."

"Yes, I have thought ofthat as well, but which one is going to solve our problem the best? Which one will use the most cream?" questioned Ben.

"Producing ice cream will require more cream than producing cheese. That is one issue, but the other thing is which one might be the most profitable. With our weather in Louisiana, we have only two seasons - hot and hotter," Jeff replied. "Do you think people will buy more cheese here in Louisiana or ice cream?"

"Do people buy more cheese or ice cream here? I think it would be ice cream," answered Ben. "Cheese sells here in Louisiana, but I think that it is mostly the broad market for generic cheese. I mean the cheese that goes on pizza and so forth. There are lots of unnatural ingrethents there. We have built the Kleinpeter brand name by producing high quality, great tasting milk. Our strategy is to make a better product, not to be the low-price leader. Our philosophy is to provide a natural product with no artificial ingrethents like rBGH (a growth hormone that induces cows to produce more milk)."

"How many competitors are there in the cheese business versus the ice cream business? We would be the only ice cream producer locally in Louisiana," stated Jeff.

"We have been selling a tanker load of excess cream every week, six thousand gallons. We pay a premium price to the dairy farmers for their milk, but then we sell this excess cream on the spot market at a loss, which is not good," Ben declared.

"What can we do with the excess cream? Well, we need a value-added product. This has been going on for years. Grandfather used to sell cream to people in New Orleans and ship it via the railroad to the restaurants. So, I have been thinking about this. How could we add value to this and start making money instead of losing money? Ice cream! It has 12 percent butterfat, which is pretty high," Jeff said enthusiastically.

FAMILY AND COMPANY HISTORY

During the second half of the eighteenth century, Spain, which owned the Louisiana territory at the time, attempted to contain the encroachment of Great Britain and France. The government of Spain issued a call for settlers, particularly Roman Catholics, to come and cultivate the land. In return for this pioneering work, the Spanish government offered generous land grants. Answering this call, Johann George Kleinpeter settled in Baton Rouge, Louisiana in 1774. Johann' s family and eleven other Catholic families made the arduous trip from Maryland, coming by raft down the Ohio and Mississippi rivers. Often, they traveled at night through dangerous territory. Once they arrived in Louisiana, the Kleinpeters received a large land grant, including much of the acreage currently belonging to Louisiana State University. Developing deep roots, generations of Kleinpeters have remained in Baton Rouge. Some family members owned general stores, while others farmed the land, growing crops such as sugar cane or tending cows for dairy purposes.

Dairy farmers must milk their cows every day and they need to process that milk very quickly. Therefore, local milk processing businesses sprang up across the United States. In 1913, Sebastian Kleinpeter and his son, Leon Richard Kleinpeter, opened Kleinpeter Farms Dairy to meet the milk processing needs of dairy farmers in Baton Rouge and southern Louisiana. Like their dairy farming neighbors, the Kleinpeters also had a small herd of "woods" cows. The "creamery" or milk processing operation is still thriving today as the largest independent dairy in Louisiana.

Sebastian and Leon Kleinpeter learned from LSU agricultural professors that Guernsey cows produce milk of superior taste, so they decided to augment their herd of cows in late 19 13 by purchasing two boxcars full of Guernsey cows from Wisconsin and bringing them by train to Baton Rouge. The experiment worked and the Kleinpeters began to specialize in Guernsey milk. This remains one of the keys to the Kleinpeters' success even today, as Kleinpeter milk is well known for its exceptional taste.

Upon the death of Sebastian Kleinpeter in 1929, Leon Kleinpeter continued to manage the creamery business. Leon and his wife, Mary Lillian, had eleven children, of these; five sons and one daughter worked extensively in the milk processing operation. Mary Lillian worked as a bookkeeper for the company for many years. Leon divided the responsibilities of the business among his children. Leon, Jr. became president, Thomas was in charge of the farm, Vincent was the corporation secretary, Michael was the plant manager, Ben was in charge of sales and delivery, and Betty served as bookkeeper following her mother? This sibling partnership managed the family business from the late 1940' s until 1987.

Leon passed away in 1984, leaving the business in the hands of his children. At this point, young Ben Kleinpeter, who had spent most of his career in sales, made the bold financial decision to buy out his brothers' interest in Kleinpeter Farms Dairy. In 1987, Ben obtained a bank loan and purchased the business, paying his brothers with the proceeds. In this manner, Ben gained complete leadership of the company and steered it away from possible family entanglements.

Through a combination of hard work to increase sales and belt-tightening on expenses, Ben Kleinpeter was able to pay off the bank loan in four years. Although Ben was successful in retiring the bank loan, the amount of work and complexity of the business was almost overwhelming. Ben' s sons Kenny, Ben, Jr., and Steve and daughters Mary Alice and Sue Anne worked with their father in the business. The youngest son, Jeff, entered the family firm in 1987. To help bridge the gap left by the retirement of his four brothers, Ben hired Tom Zicarelli, from outside of the family, as general manager, in 1989. Tom's assignment consisted of operating the business and training the next generation of Kleinpeters to manage the firm. Unfortunately, Ben, Jr. passed away in 1994. Mary Alice left the business in 1995. Then, Kenny left the business to pursue his interest in music in 1998, and Steve also left in January 2003. This left Sue Anne and Jeff as the principal family member managers.

CURRENT OPERATIONS

Tom Zicarelli served as president of the company and provided excellent training and advice until his death in 2003 . Today, Jeff Kleinpeter has taken the reigns as president of the company and Sue Anne Kleinpeter Cox is the secretary-treasurer and CFO. They form the fourth generation of Kleinpeters to run the operation and now lead a team of 1 85 employees. Ben has retired and passed his stock on to his children. Jeff and Sue Anne own the voting stock, while the other siblings hold non-voting stock. In essence, this leaves the corporation in control of the family members actually managing the business. The non-voting stockholders share in annual dividends and in the proceeds were the business to be sold. The current line of Kleinpeter products include milk, orange juice, butter, oleo, eggs, cottage cheese, yogurt, coffee, tea, punch and containers made for both Kleinpeter and other companies, a service that was added in 2005. Milk accounts for roughly eighty percent of company sales as Kleinpeter Farms Dairy processes 60,000 gallons per day.

The company distributes the milk and other products to approximately 3,000 stores, restaurants, and institutional facilities within a 150-mile radius of Baton Rouge (Riegel, 2009). Recently, following the Interstate 10 corridor, Kleinpeter connected with retail outlets as far west as Lake Charles, LA and as far east as Biloxi, MS. Enjoying a close relationship with Rouse's Supermarkets, Kleinpeter has benefited from the south Louisiana grocer' s purchase of twenty former A&P Sav-A-Center Supermarkets in the New Orleans and southeastern Louisiana region. Rouse's operates sixteen of those stores and affords ample shelf space for Kleinpeter products. At present, supermarket sales account for approximately seventy percent of Kleinpeter's overall business. Additionally, the company sells to restaurants, nursing homes, hospitals, schools, offshore catering, food services, and manufacturers.

BEGINNING ICE CREAM OPERATIONS

After flying back to Baton Rouge, Jeff immediately began the process of building an ice cream plant, "I called the architects, the builders, and the contractors that we knew here in Baton Rouge and said, 'We have to build an ice cream plant.' This was in July and I wanted to have the building ready by December 3 1 in order to recoup money on the Geaux Zone financing and tax credit incentives." Amazingly, Kleinpeter was able to accomplish this ambitious goal. "The contractors worked their tails off. The equipment people got us all the other things that we needed - the piping, the compressors, and a huge generator that can run this whole facility in case we lose power during a hurricane. We did it in four and a half months," Jeff explained. The CEO's energy and enthusiasm, along with solid local ties to builders, contractors, and government agencies, enabled the company to build the ice cream plant in record time. The total investment for the project came to $5.5 million. The Kleinpeter ice cream was first sold in Baton Rouge area supermarkets on January 28, 2008. Building on their established relationships, Kleinpeter began their ice cream sales with the half-gallon size, which is targeted for supermarket customers. Soon after, the company developed a pint size and mini-cup size. According to Jeff Kleinpeter, "The pints are a convenience store item. The majority of the sales of pints are in convenience stores. We are shopping right now for 30 or 40 chest-height display case freezers to put in convenience stores. It is part of what you have to do sell the ice cream." The mini-cup size is primarily targeted for children.

LOUISIANA FLAVORS

Jeff led the marketing research for the company to determine which ice cream flavors consumers in Louisiana preferred. Results showed that the best selling flavors are vanilla, chocolate, and then strawberry. Vanilla leads all flavors with sixty percent of the market. So, Jeff started with the top three and then began to add other flavors. According to Jeff, "We started with vanilla, went to chocolate, and then to strawberry, made with Ponchatoula strawberries." Perhaps, the Ponchatoula strawberry flavor served as inspiration to produce other ice cream flavors with the Louisiana local flair. "Then, we went to butter pecan, made with Bergeron's pecans from New Roads, a third generation family business," explained Jeff. "We went to pralines and cream, made with Aunt Sallie's pralines from New Orleans and Bergeron's pecans, Louisiana cane sugar, and Kleinpeter milk and butter, rBGH free (no artificial growth hormones are given to the cows). Then, we went to no-sugar vanilla and no-sugar chocolate. Then, we went to sweet potato pie, made with Bruce Food's sweet potatoes from New Iberia, a fourth generation family business. Then, we did the Community Coffee flavor -café aulait. These are all Louisiana flavors. Then, we did the Gold Brick Egg flavor. Elmer' s Gold Brick Egg was started in New Orleans and has been in business for 140 years and is now in Ponchatoula. The people at Gold Brick are thrilled because 95 percent of their sales occur in just two and a half months. Now, they can start selling their product in the summer time." One year after the introduction of ice cream at Kleinpeter, sales of the confection comprise eight percent of total company sales.

Kleinpeter Farms Dairy now produces all of the top selling flavors of ice cream and has worked its way down the list to the smaller selling flavors. For instance, while vanilla is sixty percent of the market, no-sugar vanilla is only about 1.5 percent of the market. "We followed the market until we got down below three percent. Now, we are free to do whatever we want. What has been effective has been using Louisiana ingrethents and Louisiana companies that we all know and love. The biggest hit has been Gold Brick Egg. It keeps selling out and we haven't been able to make enough to get it in all the stores," states Jeff. To date, Kleinpeter is the only producer of Gold Brick Egg ice cream and sweet potato pie ice cream in the world. Jeff exudes enthusiasm for the new products, "In the food section of the paper (Baton Rouge Advocate) last Thursday, the food editors voted Gold Brick Egg their most favorite flavor. It could be bigger than pralines and cream and the third most popular flavor. Gold Brick Egg now has a dark chocolate Heavenly Hash, which may be our next flavor. What is next? Perhaps, bananas foster flavor, made with Aunt Sallie's bananas foster pralines or banana split or banana pudding. We are looking at a blueberry flavor, made with Louisiana blueberries, or Ruston peach."

EXTERNAL CHALLENGES

While Kleinpeter has begun selling ice cream in south Louisiana, there are some external challenges that have affected the company. It has not been all peaches and cream. The first major element in the external environment is the country's economic recession. Kleinpeter built their ice cream plant as the nation stumbled into a recession. "I watch our sales closely every day, comparing this year to last year. Every month our sales have increased. Restaurant sales have slowed, but our grocery sales have increased. To maintain our market share and try to keep customers from switching to store brands of milk and ice cream, we have run some advertising campaigns to raise the awareness of our brand."

Recently, Kleinpeter has run two very interesting advertising campaigns - one featuring Ben and Jeff as a father and son in a family business and another that shows the Kleinpeter cows as employees of the company. The family business ads appeal to families with children, a prime target market for Kleinpeter. Consumers love the employee cow ads, which have also been adapted to ice cream. Jeff explains, "A group of our employees come to me with an idea. The screen splits and there are three cows coming up to me. Since our milk is so good, why don't we make ice cream? So, we listened to them. It shows me in the lab experimenting with chocolate. In another commercial spot, we talk about using local ingrethents. Now, we are proud to introduce Kleinpeter ice cream. We show the ice cream. We thank you and the employees thank you. We show three cows."

The second maj or element in the external environment for Kleinpeter Farms Dairy is intense competition in both the milk and ice cream arenas. While the only competitor that sells both products in the south Louisiana market area is Borden's, there is plenty of rivalry for grocery store shelf space. In addition to store brands such as Great Value and Rouse's, milk competitors include Barbe' s, Brown's Dairy, Horizon Organic, Lactaid, LaIa Foods, and Silk Soy Milk. Kleinpeter is not the cheapest milk on the shelf, typically pricing at about one dollar to two dollars higher per gallon than the low price leaders, but still addressing the broad market. In terms of strategy, Kleinpeter relies on superior tasting; rBGH free, locally produced milk to create a competitive advantage (Barney, 1991). This competitive advantage allows the company to command a higher price for its products, using the generic strategy of product differentiation (Porter, 1980).

In the ice cream arena, the leading competitor is Blue Bell, which is a regional company operating in twelve states with plants in Texas, Alabama, and Mississippi. Perceived as a strong marketing company with a good product, Blue Bell leads the market in south Louisiana with as much as seventy percent of the business. According to Porter's five forces model, Kleinpeter, as a new entrant in this product market must find a way to compete successfully with entrenched competitors (Porter, 1979). Following the same strategy as their milk, Jeff Kleinpeter states, "In order to differentiate ourselves, we have to make ice cream as good or better and give it more value. Our ice cream is rBGH free. We market the fact that we are a Louisiana product and that we are buying other Louisiana products to put in our ice cream, which is called cross branding. People here in Louisiana like to use local products." Other ice cream competitors in the broad or general market include store brands, Brown' s Velvet, Blue Bunny, Kemp' s, Edy ' s, and Breyer' s. Ben & Jerry' s and Haagen Dazs, while certainly well known, compete in the super premium category of ice cream. These companies make a product with 14 percent butterfat and are priced approximately two times higher than Kleinpeter.

OPERATIONAL CHALLENGES

The cool morning mist was just beginning to rise, revealing dark green grass heavy with dew. In the distance, the gentle moans of cows fresh from milking and returning to the pasture could be heard above the smooth roar of rubber car tires on Airline Highway and the bump and rattle sounds of delivery trucks bouncing out of the gates at Kleinpeter Farms Dairy. Inside the unpretentious, but serviceable company headquarters, Jeff met his sister, Sue Anne Kleinpeter Cox, at the door to Jeff s office and greeted her warmly with a firm handshake and a sunny smile. "It' s good to see you, Sue Anne. Thanks for dropping by this morning; I would like to discuss a few things with you concerning our ice cream operations."

"Jeff, you know I am always willing to listen and offer my opinion, but it seems to me that things are going well with the ice cream," replied Sue Anne.

"Well, they are, Sue Anne. We planned things out fairly well. We knew that we would have to add some employees and some trucks to deliver the ice cream. We have added about twenty employees and we have bought six new trucks in the first year since introducing ice cream. We are up to about 110 units including trailers, dry vans, and trucks. As you know, the ice cream truck has to be -20 degrees and the milk has to be 35 degrees. It is a whole different truck. This is raising some challenges for us because ice cream does not have the same delivery requirements as milk," said Jeff. "For big stores, we deliver milk every day, but ice cream can be delivered every other day. We do need to check the display of ice cream every day. Our turnover in ice cream is not as fast as it is for our milk. I wish it were. Even if a truck driver had ice cream on his truck, he would only deliver it every third day or so. Now, on an ice cream truck, the driver has 75 accounts as compared to about 20 accounts for milk. It is a different delivery program."

"We realized from the beginning that we could get some synergy between milk and ice cream production through the use of our excess cream, but we still need to combine the delivery operations because we are one small business, not some sort of inefficient conglomerate," remarked Sue Anne.

"I hope we will get to the point where we have to go to all the stores for ice cream every day, but even our competitors do not do that," Jeff stated. "I have seen companies that have both milk and ice cream. They wound up having separate representatives for their milk and their ice cream."

"We certainly do not want that situation here at Kleinpeter," agreed Sue Anne.

"I did not think that we did either. So, I told the reps, 'When you go into a store, you check both the milk and the ice cream.' Doesn't that make sense instead of two guys walking into a store with one checking ice cream and the other checking milk?" questioned Jeff.

"We do have separate sales managers for milk and ice cream," remarked Sue Anne. "One rep having two bosses is not a really good thing."

"That is why it is a challenge for those two sales managers to be really close. They are right next to each other in the same office, sharing thoughts on how to direct the reps," Jeff replied.

"There are always growing pains when we expand our business. It sounds like we have an unusual organizational structure going here," Sue Anne offered.

"With a new ice cream division, you may have to share and work together because the new division is not big enough to support an entire team," Jeff added.

"Jeff, we have some human resource and organizational structure issues here. Meanwhile, we are expanding with an entirely new product line in the ice cream, developing completely innovative new flavors of ice cream, and entering new geographic market areas both to the west in Lake Charles and to the east with the new Rouse's stores and into Mississippi. Are we spreading ourselves too thin to cover all this growth?" asked Sue Anne.

Subject: Strategic management; Family owned businesses; Product development; Dairy industry; Ice cream; Case studies

Location: United States--US

Company / organization: Name: Kleinpeter Farms Dairy; NAICS: 112120, 311511

Classification: 9190: United States; 9130: Experimental/theoretical; 8400: Agriculture industry; 7500: Product planning & development; 9520: Small business

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Supplement: Special Issue Number 1

Pages: 29-38

Number of pages: 10

Publication year: 2010

Publication date: 2010

Year: 2010

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: 845495982

Document URL: http://search.proquest.com/docview/845495982?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 29 of 100

MACPHERSON MANUFACTURING COMPANY: STRATEGIC OPERATIONS PLANNING

Author: LaPoint, Patricia; Haggard, Carrol

ProQuest document link

Abstract:

As Brian MacPherson gazed from his corner-office window he reflected on the changes to his family's business. The historic building, one of Boston's most distinctive landmarks, was built in 1857 by his great, great, great grandfather, Cyrus MacPherson. Cyrus MacPherson had made his presence known in every aspect of the early company's business. He could be seen on the production floor examining sewing machine parts, giving orders to his operators on how to set up the equipment, and holding the reins of a horse-driven cart to distribute sewing machines to his customers. The elder MacPherson was a demanding tyrant with an unyielding perseverance to insure that the family business grew and survived for future generations of MacPherson's. Today, MacPherson produces six models, a basic model and five specialty models. While the growth potential for each model varies, all of the models require significant promotional efforts. In some cases, models need to be redesigned in order to become more competitive.

Full text:

INTRODUCTION

Brian MacPherson gazed from his corner-office window overlooking the Charles River and reflected on the changes to his family's business. The historic red-bricked building built in 1857 by his great, great, great grandfather, Cyrus MacPherson , was one of Boston's most distinctive landmarks. Currently, the building houses the corporate headquarters of MacPherson Manufacturing Company, one of the major sewing machine manufacturers in the country and the center of the company's manufacturing operations. Cyrus MacPherson , an immigrant Scotsman, made his presence known in every aspect of the early company's business. He could be seen on the production floor examining sewing machine parts, giving orders to his operators on how to set up the equipment, and holding the reins of a horse-driven cart to distribute sewing machines to his customers in the hot summers and cold winters of New England. The elder MacPherson was a demanding tyrant with an unyielding perseverance to insure that the family business grew and survived for future generations of MacPherson ' s. As Brian reflected on his heritage, he knew that he must continue this family tradition for the generations of MacPherson ' s to come. However, he also knew that the 21 st century environment was significantly different than that the Cyrus' day.

The Global Industry

For the first half of the 20 th century, sewing machine sales were steadily increasing in the United States; the latter half of the 20 th century, sales remained relatively flat. However, the reverse of this trend in the second half of the 20 th century for overseas markets saw a significant increase in sales specifically in the Asian-Pacific region. Led by a strong growth in Japan and subsequently China in 1998, the exports of Japanese and Chinese sewing machines superseded that of the United States.

The major competitor in the United States market is Singer; in the overseas markets, the major competitors are: Asia-Pacific - Brother, Janome, Juki, Jaguar, and Taizhou Jema; Europe - SVP Worldwide marketing the Singer, Husqvarna Viking, and Pfaff brands; Necchi, Elna, and VSM in Italy, Switzerland, and Sweden respectively. SVP Worldwide is the global leader in all product categories.

Historically, global price increases range from 3%-5% on the high end products and 5%- 1 0% on the low-end products. T hese global prices increases are due to the increases in costs for energy, raw materials, packaging, transportation, labor and currency exchange fluctuations.

SVP Worldwide, the global leader of sewing machine sales reports on their website "tightening credit markets and consumer postponement have combined to cause a ripple effect that has reached the global sewing machine industry. Typically, the sewing, quilting, and embroidery markets have been relatively immune to recessionary periods, however, it is not the case with this current recession and is possibly the beginning of a protracted period of substantial contraction" (SVP Worldwide, 2008).

However, according to Consumersearch (2009, May) "sewing is making a comeback, owing to the reality show hit "Project Runway" and the trend toward DIY crafting. The economy may also be influencing more people to try sewing and mending their clothing."

Sales and Marketing

For the past 10 years, the sales of MacPherson' s sewing machines averaged about 1 00,000 units per year [See Table I]. The distribution of company sales in the United States and overseas markets currently is 80% and 20% respectively. The product line mix consists of 6 different products: Model A (basic model, lower cost, less product features); 3 specialty models (B, C, and D); and Products E and F (both are the most expensive and have the most features). Models A, B, C, and D are expected to be most popular and have the highest demand. Models E and F, on the other hand, are expected to have limited demand. While the growth potential for each model varies, all of the models require significant promotional efforts. In some cases, models need to be redesigned in order to become more competitive.

Model A [Basic Model]: standard line, starter model, best seller at 30% current domestic sales; potential for growth if promoted sufficiently to highlight its distinctiveness in overseas markets specifically the home market; limited growth in domestic market; promotion should focus on creating an awareness of the product to penetrate the overseas markets; potential for significant growth possible.

Model B [specialty model]: good seller; needs promotion and redesign to become more competitive; currently 28% of sales; potential for significant growth.

Model C [specialty model]: relatively new product (5 years); requires a substantial marketing effort by a more experienced marketing manager to achieve product awareness; currently 1 1% of sales; potential growth possible.

Model D [specialty model]: a version of the basic model for a niche segment of the specialized commercial markets; possible expansion but would require significantly more resources; 25% of current sales.

Model E [specialty model]: one of the oldest products in the portfolio; perceived as outdated and stodgy; receives very little attention by sales personnel; redesign could make this product more attractive to customers; this model is often used as a "hook" that draws customers who may then switch to Models B or C for actual purchase; 3% of current sales; potential for some growth.

Model F [specialty line]: little marketing activity; high cost to manufacture; limited growth in domestic market only; considered by some top managers as a "staple line;" 2% of current sales; considered the most vulnerable of the 6 products.

Production

All production occurs in a single location in western Massachusetts. The rated capacity of this plant is 95%; Models A, B, and D operate at 75-80% of capacity, Model C is operating at 3035% of capacity, while Models E and F operate at 15-20% of their capacity. Rated production capacity for each product is based on the 200 9 sales data. Each product has its own dedicated production assembly line. The only compatibility of production capability with minor equipment changes is p roduction 1 ines A, E, and F. All other production lines (B, C, and D) are unique in the production of their respective products. The manager of the "E" production line is a long-term employee. The "F" production line is headed by a new employee who shows signs of bringing new ideas and methods to the slate of methods used in the past. Growth in the "F" production line is the manager's goal, and efforts are being made to increase domestic sales and some promotional activities have already taken place. It is possible, however, that a capital investment of $50,000$100,000 for changeover parts and employee retraining could enable the consolidation of some of the 6 lines. If some of the lines were consolidated, the challenge to production management would be developing feasible production schedules both aggregate and short-term and managing inventory levels and costs.

To changeover or set up a production line it takes 10 workers per line. The compensation for the production workers is $16 per hour and benefits are a factor of 1.3. Each line changeover takes approximately 2 hours to complete. Inventory holding costs average $.60 per unit.

As Brian finished his reflection of the storied history of the MacPherson clan and the company intimately associated with his family, he began to turn his attention to the future of the company. Brian pondered whether MacPherson Ma nufacturing Company should change to meet the challenges of the 21 st century, and if so, how? He knew that he would have to make difficult decisions as to whether the company should produce all 6 models in the future or eliminate some products and if so which one(s)?

Subject: Manufacturers; Strategic planning; Operations management; Family owned businesses; Production capacity; Case studies

Location: United States--US

Company / organization: Name: MacPherson Manufacturing Co; NAICS: 339991

Classification: 5310: Production planning & control; 2310: Planning; 9190: United States; 8600: Manufacturing industries not elsewhere classified; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Supplement: Special Issue Number 1

Pages: 55-59

Number of pages: 5

Publication year: 2010

Publication date: 2010

Year: 2010

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: 845495970

Document URL: http://search.proquest.com/docview/845495970?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 30 of 100

GENE LIFE S.A. - PARIS

Author: Morris, Tom; Pavett, Cynthia

ProQuest document link

Abstract:

John Williams, armed with an undergraduate degree in biochemistry, an MBA, several years of managerial experience and proficiency in French, was appointed as the Directuer Général of a French medical products company in Paris. The company, Les Medical Equip Direct (LMED), had just entered a partnership with Gene Life, a U.S. firm that had developed an affordable genetic test for type II diabetes. The test kit was tailored to be used by both physicians' offices and hospitals. LMED had a well-developed sales force throughout France and it also afforded Gene Life an entrée to the French market. While John received language training prior to his departure, Gene Life did not provide pre-departure education on either the French culture or its labor laws. Upon arrival in Paris, John was under pressure to not only reduce what Gene Life considered excessive overhead, but also to quickly get the sales personnel adequately trained to competently sell the test kit. Since genetically based products were a totally new to LMED, training was critical. The time pressures faced by Williams mandated the cooperation and motivation of both the office and sales staff. His first several months in the Paris office were not as successful as he had hoped. His MBA from a prestigious American university had not prepared him for the difficulties in managing a work force in a foreign culture. He must now determine how best to manage in order to successfully lead a new-product launch in an unfamiliar culture. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

"April in Paris... chestnuts in blossom... holiday tables under the sun". ..or so the song goes. But on that cold, rainy April evening, it was just plain miserable. That would also accurately describe the mood of John Williams, an American expatriate who had been living and working in Paris for just over three months. He still struggled with the language and the unfathomable bureaucracy. Worse yet, he was totally frustrated by his lack of ability to make anything positive happen at work. As he walked along the Seine on his way home from a disastrous few days at the office, he wondered how he was ever going to get the cooperation and commitment he needed to successfully market Gene Life's latest product.

Gene Life Corporation

It was only a short time ago that a group of genetic scientists from the Boston area formed a privately held company to focus on medical applications of genetic sequencing. All of the company founders were research physicians who had been associated with large universities in and around Boston. Since most of the founders were preeminent in their fields, obtaining venture capital was not difficult. The group was particularly interested in developing a genetic test for type II diabetes. This interest was based not only on their expertise but also the results of market surveys sponsored by the American Medical Association. It was clear that physicians were extremely interested in purchasing a potential test that could help in the diagnosis of type II diabetes. But, there was a limit on how much they were willing to pay. Unfortunately, Gene Life's first iteration of a user-friendly test kit could not be sold for any less than $3,500. Given the feedback from early marking attempts, physicians and hospitals considered the cost prohibitive. A year later, the research team discovered an innovative method to produce a test kit that could be sold to for around $500. After extensive testing, which produced very accurate diagnostic results, Gene Life started marketing the kit to physicians and hospitals in the United States. It was an immediate success, and the former small research company was immediately thrust into the competitive world of pharmaceutical manufacturing, marketing and sales. They brought in state of the art manufacturing specialists, built an extremely efficient manufacturing facility to keep costs low. This supported their cost leader marketing strategy and discouraged competition. The venture capital partner conducted an extensive marketing survey and concluded that it was in the best interest of all parties to take the company public. The IPO was managed by the Bank of Boston and resulted in $52 million in new equity ownership capital. Gene Life could now afford to bring their product to the international market.

John Williams' Background

Because of his unusual background, John Williams was brought in to Gene Life shortly after its inception. Right after high school, John decided not to go to college but rather worked for a construction company that immediately sent him to rural Quebec to build oil pipe lines. He eventually attained the position of crew chief where he managed up to thirty French-speaking Canadians as well as Polish-immigrant workers. However, he wanted more out of life and returned to the U.S. to attend Boston University. After graduating with a degree in biochemistry, John took a job with a large pharmaceuticals company. Three years of tedious, slow moving research led him to the conclusion that he was really more interested in the business aspects of the industry than the science. Hence, he left the job and earned his MBA at Harvard University. Upon completion of his degree, he ran into one of his undergraduate professors at a coffee shop in Fanuli Hall. Dr. Morton, who was one of the founding members of Gene Life, talked extensively about the company, its product and its difficulty in finding a competent manager who both understood genetic science and had the ability to effectively manage people.

When John mentioned his newly acquired MBA from Harvard, Dr. Morton thought that perhaps he could be a good fit for the newly created position of marketing manager for Gene Life. After all, he understood the technology, had solid leadership experience; and then there was his Harvard MBA that gave him instant business credibility. Shortly thereafter, Dr Morton contacted John with a j ob offer. From his perspective, John was anxious to put his MBA to work, and bringing an exciting new product to market seemed like a perfect entry into the new world of business. After a few days of thought, he accepted the offer.

Now, John was responsible for developing the marketing model that targeted physicians as the ultimate consumer for the diabetes test kits. He immediately hired an extensive network of sales people that were needed to market the kit, and managed them directly. Typically, sales people not only visit physicians in their offices but also attend medical conferences and medical equipment shows. It was critical that John select the right people who knew each local market, the product and their customers. And, he had done just that. Within a short period of time, sales were booming. The first two years yielded over $10 million in revenues, followed by a leap to $18 million the following year. The most recent year resulted in $34 million in sales with a 19%) bottom line. John attributed this success not only to the quality of the product but also to his management style. Every two weeks, John met with his regional sales managers to share information and set mutually-agreedupon goals. Before every meeting, he sent out e-mails asking for agenda items since it was important to discuss issues of interest to his people. He started every meeting by asking the group about the challenges or problems they faced. As he had learned at Harvard, a good leader solicits solutions - not just problems. Hence, he always threw the problem back to the group where lively discussion ensued and creative solutions were generated. John led by example since he expected the regional sales managers to hold the same type of bi-monthly meetings with their subordinates. His participative management style met with great success.

THE PARIS OPERATION

After the early success of the test kit in the U.S., Dr. Morton, the current CEO, asked John to start a dialogue with the Paris-based Les Medical Equip Direct (LMED) a privately held company. Les Medical Equip Direct had an extensive network of sales people throughout France and had been very successful in selling what were becoming obsolete products. Dr. Morton had collaborated on a major research project with LMED' s owner Dr. Adii about ten years ago. After that, the two had maintained a close friendship. Hence, Dr. Adii was very open to an arrangement that might bring a cutting-edge product into LMED' s dated product line. After exploring various partnership alternatives, Dr. Adii agreed to accept $5.5 million in Gene Life equity in exchange for all LMED shares. Thus, LMED became a wholly owned subsidiary of Gene Life, and Dr. Adii remained on as its CEO. However, it was clear to all involved that LMED' s current Directeur Général wanted nothing to do with distributing the test kits. He knew nothing about genetic-based testing, disliked working with Americans and was well past retirement age. Thankfully, the Directeur Général tendered his resignation shortly after the agreement was signed. Dr. Morton and Dr. Adii agreed that John's expertise along with his French language skills would be invaluable in the Paris operation and he was offered the j ob . After all, LMED' s sales organization was structured similar to that of Gene Life. Specifically, France was divided into regions and each regional manager reported directly to the Directeur Général. Like Gene Life, LMED marketed their products to individual doctors as well as hospitals. Given the rapid success of the test kit in the U.S., both Dr. Morton and Dr. Adii agreed that they wanted to start selling it France within three months. Needless to say, LMED had no difficulty getting the test kit approved by the French authorities. All that was needed at this point, was to get the sales teams educated and into the doctors' offices.

John's Arrival in Paris

The opportunity to manage the French office seemed so perfect for John. It was located in Paris, which he considered to be one of the most beautiful and desirable cities in the world. Whenever he and his wife traveled, they always chose Paris as the gateway city to Europe. Upon arriving, he could not contain his excitement. What a great city! The art, music, history, architecture, grand boulevards, cafes, restaurants, all combined to make this his dream location. He just knew that this assignment as the new Directeur Général was sure to be an exciting and rewarding experience in a city that he loved!

While settling in, John contacted Michel DeVos, and old classmate from Harvard and current Directeur Général of a French electronics company in Belgium. Michel was a native Belgian, worked for a French company and understood the French culture very well. Michel advised John to take care to learn the language, review his French history, and get up to date on French cuisine and wine. However, he made no mention of the differences in managing the French staff. John had a lot of confidence in his ability to succeed. After all, he had traveled extensively, had managed a group of French-speaking construction workers in Quebec and had worked with an extremely diverse group of sales people in the U.S. Based upon his product knowledge and success as a U.S. manager, he knew he would have no difficulty getting the test kit to market in three to six months.

The Office Reality

John's problems began immediately when attempting to converse with the marketing and sales people at his new office. John had spent months in intensive training, refreshing his admittedly rusty French language skills that he learned in Quebec. When his training was complete, his instructors assured him that he would have no trouble making himself understood anywhere in France. Well, technically they were correct. Everyone understood John just fine, and in fact thought he was quite articulate. The problem was that he could not understand them! They seemed to be speaking a French dialect that he could not grasp. When he traveled outside of Paris in any direction, he understood people perfectly. But the Parisians seemed to speak very rapidly, use a lot of slang, and cut the endings off of all the words. It seemed like a different language. This was particularly disappointing because his Berlitz instructors in the U.S. were Parisians and made no effort to explain the difference between the classic French and the Parisian dialect. He ultimately had to hire a local language instructor to help him learn to understand "Parisian." As it turns out, even other French citizens have some difficulty understanding the Parisians. It seems that the Parisians regard any other non-Parisian people with some distain, refusing to respond to them unless their dialect is "correct". John found some relief in this, as he originally thought that the French were rude to him simply because of his Canadian French accent. Fortunately, or unfortunately as the case may be, he felt that the French appeared to be equally rude to any non-Parisian.

John was aware of the hierarchical nature of French society. He understood that the very top positions in industry, government and society went to the graduates of the "Grandes Ecoles" (the great schools) of France, and that the various levels of education received from other educational programs ordered the other industry positions. Fortunately, his Harvard MBA gave him instant credibility and everyone equated his status with the very highest level of French universities. The hierarchy went generally as follows:

Promotion from one level to another was very unusual. Once qualifications are obtained, there was little opportunity to improve one' s career at a later time, as part time continuing education was not available. There was however, a strong sense of honor associated with each rank, and individuals at each level are bound by this shared code of honor. After all, "Honor is due to each according to their rank" (French proverb). Within each organizational level, a distinct "pecking order" exists based on the "intellectual nobility" of each position. Those positions, which require some conceptual or independent thinking, are considered nobler than those that do not. The job of management is to somehow maintain a clear chain of command while using the sense of honor as a tool to channel energies and increase efficiency in each hierarchical level. But one always maintains the hierarchy and its order.

Technical Product Training

In the U.S., the technical training was first provided to the regional managers who were then put in small groups to generate training techniques and materials for their sales personnel. The regional managers, in turn, trained their sales personnel. John was proud of the way he structured the training seminars. Moreover, he had received accolades for his ability to solicit creative training suggestions from his U.S. regional managers. He hoped to have the same success and level of commitment from the French. All of the French regional managers had been sent an e-mail message requesting their presence at the training session in Paris. The message went out two weeks before the scheduled session and John had made it very clear that attendance was not optional. To facilitate the manager's preparation for the meeting, John promised to send out a packet of training materials in paper (not electronic) format.

Prior to his arrival in Paris, John made a point of having all training materials translated into French. He had Gene Life's U.S. publisher print all materials in both French and English. Very artfully, the publisher placed both Gene Life's and LMED' s logos on every page. Since the printed materials arrived after John had sent out the e-mail invitation, he needed to get them in the mail and to each of the regional managers as quickly as possible. All ten boxes of printed materials were sitting in his office when he arrived at work on Monday - less than 2 weeks before the training.

Monique, whose title was Secretary to the Directeur Général, smiled as John passed her desk. She made a flippant comment about the clutter in his office. John had noticed that Monique seemed to have a lot of spare time between telephone calls and devoted hours to manicuring her nails each day. Shortly after Monique' s comment, François, the Paris-based regional sales manager, greeted him with a laugh and an inquiry about the boxes. John explained their contents and the need to expedite the material's delivery. He recognized it was a big job and beyond the two clerks in the mailroom.

"I'll just ask Monique to lend a hand and get these things mailed out," said John.

After all, the mailing was a simple matter of unpacking the boxes, placing the materials in envelopes, producing mailing labels and taking the envelopes to the mailroom.

"Oh, I do not think so," replied François, "She is the Secretary of the Directeur Général and she does not unpack boxes or send things out in the mail."

"Well, I'm the Directeur Général", said John, "so I guess I'll just ask her to help out. This doesn't seem like such a big deal to me."

John had called Monique into his small, but comfortable office overlooking the Seine and the hills of Montmarte beyond.

"Monique, it seems that we need to get our training materials out to the regional sales managers today, regardless of how long it takes. I wonder if you would mind helping me out on this project."

"Do you mean unpacking boxes and putting things in envelopes?" asked Monique incredulously.

"Right." replied John.

"I am the Secretary of the Directeur Général, and I don't do clerical mailings." she exclaimed firmly.

"Well, I'm the Directeur Général and I'd like you to help me out." directed John.

Monique' s wide-eyed expression collapsed immediately into tears as she picked up her purse, purposefully walked out the office, and slammed the door. John did not know what to do, but Patrice lent him several clerks from the accounting department who helped stuff envelopes and print labels. They, however, departed at 4:00 even though the task was not finished. John managed to get all the training packets in the mail and woefully departed around midnight.

The next day, Monique did not show up at the office. Several days later however, a representative visited John from the Ministry of Labor. It seemed that Monique had applied for unemployment compensation because she had been forced to quit her job due to "an unreasonable request for demeaning work outside her profession." After a brief discussion, the representative from the Ministry concurred with Monique and stated very clearly that the Ministry would award her 90% of her regular salary for the next year, or as long as it took for her to find another professional position of her liking. Naturally, John's company would be responsible for the payments

Clearly, John had violated the nobility and honor of the Secretary of the Directeur Général by asking her to perform the task of a lowly clerk. François had understood this perfectly, but John did not heed his warning. The only thing he could do was to chalk it up to a learning experience via trial and error.

Training Day

The atmosphere in the ballroom at the Hilton Arc de Triomphe Paris, where the training was to take place, was electric. The round tables were decorated with both company' s logos, flowers and the latest medical journals. LMED regional managers were happily greeting each other with kisses and hugs and were abuzz with chatter about the prospect of selling the new genetic text kits for type II diabetes. As John surreptitiously listened to various conversations of people milling around the opulent breakfast buffet, he heard several complain about the lack of lead-time between receiving the invitation and the training date. "Wow", thought John, "two weeks is not short!"

The first part of the training session consisted of a joint speech given by Drs. Adii and Morton. They expressed their excitement about working together, briefly described the test kit and appealed to the audience for their commitment to selling the new product. In France, like the U. S., they reminded the regional managers, it is the personal relationship between the physician and the sales person that can make or break a product's success. Additionally, they commented, a belief in the product is critical.

John then took over the training session with a series of lectures on the test kit attributes and some of the science behind its development. He delivered a very structured lecture that was supported by the training materials previously mailed to each participant. Upon conclusion of this second segment, the group took a break and John was surrounded by sales managers who excitedly asked questions and praised John's talk.

After the break, John informed the managers that they were going to work with their fellow managers at their table to develop a training strategy and agenda for their regions. John purposely did not provide many guidelines for the group work since he wanted to elicit their creative ideas. He provided each table with a flip chart and pens and told them that they would have to report their findings to the entire group within an hour. Much to his chagrin, total silence ensued. John did not know what to do or how to get the people at the tables to start talking to each other. He found François among the participants and elicited his help to go from table to table asking people to start writing down their ideas for training their salespeople. After an hour of muted conversation amongst the groups, John was still hopeful that some creative ideas would be proffered. Unfortunately, this was not the case. Most spokespersons from the teams offered suggestions like: reproduce the materials we got today and send them to our people, set up a web site that has copies of the materials we received in the mail, have Dr. Adii come and talk to our people, and so on. All John could do at the end of the day was to tell the group that he would summarize their ideas and let them know how to proceed with the training of their sales force. He honestly got absolutely no good ideas from the teams. It seemed as if they did not try at all!

John felt totally disappointed and really pressured. There were time deadlines. The local sales force had to be trained and in the doctors' offices no later than three weeks from today. Gene Life and LMED had already purchased advertising in all of the prestigious French and International Medical and Practitioner journals. The sales calls had to be made concurrent with the appearance of the advertising. John reflected on his prior success as a manager in the United States. He had always maintained a casual management style, allowed a lot of freedom with his subordinates, encouraged new ideas, and it had served him well. He reasoned that since the French value independent thinking, they would respond well to a participative management system and would value a new sense of empowerment. Obviously, this was not the case. All he kept thinking was, "How can I get commitment from not only the regional managers but also from my own office staff?"

JOHN'S DILEMMA

From all of his past experience as well as his education, John knew that the best ideas for organizational improvement often came not from top-level management but from people performing the actual jobs. In the past, he had gotten so many wonderful training ideas from U.S. sales people. In addition, at the office in Boston, suggestions from the staff resulted in significant reductions in overhead expenses.

Something needed to be done immediately. In desperation, John again called his trusted old friend from graduate school, Michel DeVos. He shared his concern and frustration, and asked Michel for some help. Michel agreed to come to Paris the following day, and asked John to arrange a dinner meeting at Taillevent, his favorite Parisian restaurant.

Michel spoke fluent French (not Parisian French) and understood the French culture very well . After all, it was one of the two official languages of Belgium that shared the French and Dutch cultures. Michel was also familiar with the American managerial culture, as he had spent two years at an American company after his graduation from Harvard. As they spoke, Michel outlined his view of the American and French managerial culture on the back of his dinner napkin. He described the French managerial characteristics and how they were different from the American style of management.

"Management systems must reflect the cultural expectations of all the members of the organization." he said. "In the U.S. you manage in a way that fits the American managerial culture, and in France you must meet the expectations of the French managerial culture. The respective management systems aren't right or wrong, they're just different."

After dinner, John took a second look at the notes that Michel had scribbled on the large dinner napkin. He then sat at his computer and transcribed the notes into an organized table that made sense to him. The results of his transcription are contained in Table 1.

John reflected on his newly discovered knowledge of the French culture. The French have always been a very hierarchical society. The typical management style in a French company was a top-down authoritarian style, with subordinates following directions. They were not expected to participate in planning or decision-making. The French system of social democracy supported this hierarchical society, and featured similar top down government controls. From the Presidents DeGuall in the 1 960' s to Chirac in the 2000' s the French have been led by a socialist agenda. In the early 1980' s Mitterand nationalized the banks and stemmed the flow of French currency out of the country by limiting the number of French Francs that could be carried or sent abroad. The French had grown accustomed to the government-subsidized economy that extracted a heavy burden of taxes from the people and re-distributed the income to the needy. When Nicholas Sarkozy was elected President in 2007 he tried to get the French more competitive by increasing work hours, reducing social welfare benefits, but the French populace was not moved. French universities began teaching classes in English, but the basic social climate remains the same. To bring the French to a globally competitive view is no more possible than "telling a dog that they are now a cat" . For the most part, President Chirac's "ancient regime" remains unchanged.

As John walked home from his office on that cold, rainy April evening he thought about everything that had transpired in the last few days. He now recognized that he was not going to be able to convert his staff to American style participative players. He needed to modify his management style to accommodate the culture. The question was how? How does he manage in a way that is consistent with the cultural expectations, and get things done?

His route along the quai brought him past the Isle St. Louis, where he looked ahead through the cool mist at the magnificent Cathedral de Notre Dame. He was awed by the ghostly apparition, but was too frustrated to completely enjoy it. In his frustration he exclaimed aloud, "What should I do now?"

Subject: Management styles; Cultural differences; Pharmaceutical industry; Training; Case studies

Location: United States--US, France

Classification: 6200: Training & development; 8641: Pharmaceuticals industry; 1220: Social trends & culture; 9175: Western Europe; 9190: United States; 2200: Managerial skills; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Supplement: Special Issue Number 1

Pages: 61-71

Number of pages: 11

Publication year: 2010

Publication date: 2010

Year: 2010

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: 845495943

Document URL: http://search.proquest.com/docview/845495943?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 31 of 100

CASHLESS AT PAYDAY: FINANCIAL AND ETHICAL DILEMMAS OF CASH ADVANCES

Author: Macy, Anne

ProQuest document link

Abstract:

This case examines the process, costs and alternatives of payday loans. Payday loans are cash advances against the next paycheck. Payday loans constitute a $45 billion business and cater to individuals who are temporarily short on cash, such as college students. Many college students do not understand the true cost of payday loans while others believe it is their only option. The customer must have a checking account and a steady job. Typically, the individual does not have access to a credit card or other means for a cash advance. Students, in the role of Steve, examine the payday loan taken by Scott, Steve's brother. Steve also investigates the industry to learn how payday loans work along with an examination of the viability and cost of alternative sources of cash. During the evaluation process, students calculate the annual percentage rate of the loan and of alternative sources for the money. Furthermore, students discuss the ethical issues regarding payday loans and other alternative sources of quick cash including bank fees and credit cards. [PUBLICATION ABSTRACT]

Full text:

THE FOOTBALL GAME

The phone rings. Steve fumbles for the phone. He is greeted by a gruff voice. It is his brother Scott. Scott wants to know where the pizza is. Steve mumbles back that he is still asleep. Scott tells him that he as already missed the kickoff. Steve didn't realize it was so late. He drags himself out of bed. Steve quickly dresses, calls for carry out, and gets on his way. He makes it to Scott's house by the second quarter. The two brothers sit on the couch and discuss the team's chances for the playoffs. The first half ends well. There are no injuries.

During the game, Scott tells Steve that the transmission on his car is not working again. It is going to cost over $300 to get it fixed. Scott asks Steve if he would be willing to drive him to and from work for the next week or two.

QUICK CASH

Steve picks up his brother after work. Scott gives Steve directions to a payday loan store. Steve has never been here so he follows Scott inside. Scott tells the clerk that he needs $400. He gives the clerk his pay stub and employer' s phone number. The clerk disappears into the back room. He reappears a minute later and tells Scott that he can have the $400. He needs to write a check for $480. The payday loan store will cash his check in fourteen days. The clerk hands Scott the $400.

Once in the car, Steve asks Scott about the loan. He remarks that eighty dollars seems like a lot of interest. Plus, the amount is more than the $300 Scott needs for the car. Scott replies that he thinks the car will cost more to fix and that he needs some cash for gas and food. Scott knows that it is expensive but it is better than an overdraft on his checking account. The money in the checking account needs to go for his utility and telephone bills. Besides, he doesn't have anywhere else to turn. He tried to go to the bank but they were not helpful and made him feel uncomfortable. He has already borrowed money from his friends and their mom and can't ask for more. Scott already owns Steve a $100. Steve wonders aloud if their mom would give Scott a little bit more. Scott replies that he already owes her $1,000 from when he had to go to the emergency room last year. Scott tells Steve that he knows the payday loan is expensive but he doesn't have any other option.

After dropping off Scott, Steve decides to investigate whether his brother has any options or not.

BANKING ON CASH

Steve stops off at the bank to see what the options are. He knows Mrs. Talbot from when they lived on the same street. He asks if she can give him some alternatives to a payday loan. Steve questions whether a payday loan is less expensive than an overdraft on a checking account.

Mrs. Talbot invites Steve into her office so they can talk more privately. She doesn't like to talk about overdrafts and payday loans in the bank lobby. She begins to go over the costs of an overdraft. An overdraft has several costs. First, there is the explicit cost from the bank. This bank charges $30 per overdraft, which is the average nationwide charge. Mrs. Talbot points out that many banks will lower the cost of the first overdraft to $20 but raise the cost on subsequent overdrafts to $35 each. The lower cost on the first draft is because some people just make errors and this a way to not offend a normally good customer.

The merchant will also charge an overdraft amount. It varies widely among merchants but most fall into the range of $25 to $35. If the merchant turns the overdraft over to a collection agency, they also charge a fee, usually around $35.

Steve is surprised to learn that the fees are charged no matter the amount of the overdraft. It doesn't matter if the debit is for $15 or $115, the fees are the same. Mrs. Talbot also reveals that most banks clear charges based on size. Thus, the largest debit is cleared first followed by the second largest and all the way down to the smallest. For a person who overdrafts, this can cause fees to increase because the person may overdraft on more than one debit. For example, a customer has $100 in his account and he has two debits, one for $15 and one for $125. The bank will clear the $125 debit first. Because the account does not have enough to cover the larger debit, the account is overdraft on both debits. If the bank had instead posted the smaller debit first, the customer would only have an overdraft on the larger debit. The $15 debit will cost over $50 in fees and more likely $60 in fees.

Mrs. Talbot said that it is not unusual for someone to not realize that they are low on their account and overdraft several times in one day. Now that people use debit cards, it is a $30 charge for each swipe. A person might be out and get a soda at McDonald's for a $1 and get a $30 charge for that swipe. Later the individual might get some food, another $30 charge. This will go on all day until the person checks the account balance. Thus, some people will run errands and end up with several hundred dollars in overdraft charges for that one day. The bank won't remove them or consolidate them. It can really add up.

Steve is shocked at how the penalties for a mistake and asks about overdraft protection, which he has on his checking account. Overdraft protection means that the bank pays the merchant for the customer but the bank still charges the customer the insufficient funds charge. In addition, banks will charge a daily amount until the funds are replaced. The usual daily amount is $5. The benefit is that the customer avoids the merchant charge and basically has a few extra days to come up with the amount. Plus, he avoids the stigma of insufficient funds with the merchant. However, he still owes the bank the charges.

Mrs. Talbot points out that some people became lazy with the overdraft protection and overused it. Most banks have a limit of overdraft protection, usually around $300 to $500, so a person can run into that limit as well. If the customer goes over the limit, the customer has to pay the fees to the merchants on those overdrafts.

Because so many customers have insufficient funds, banks have added other alternatives. The alternatives only exist for customers who have the funds to pay off the overdraft or who have an established banking relationship. For a $5 transfer fee, a customer can link the checking account to a savings account. When there is an overdraft, the bank just pulls the money out of the savings account and puts it in the checking account.

Customers with good credit can get a line of credit approved. When there is an insufficient charge, the bank covers the amount with a draw on the line of credit. A link to a line of credit usually costs around $15 for the annual fee and interest of 12%. The line of credit can be used throughout the year for the same $15 fee, not a $15 fee each time it is used. Plus, there are no overdraft charges. The customer pays off the line when he has the money. Mrs. Talbot says that many small businesses use this as do families where several people are using the same account and may not be aware of each other's payments.

For those customers with a credit card from the bank, the bank can pay the insufficient charge with a cash advance on the credit card. The usual cost is $3 plus the interest cost at 1 8% for the cash advance and the insufficient funds charges are avoided. The minimum total fee for the cash advance is $15.

He thanks Mrs. Talbot for her help. While he is surprised at all the fees associated with insufficient funds but it is an alternative to a payday loan. Some of the other choices from the bank might be cheaper. Steve uses that bank because it has free checking. But now he wonders how free it really is.

CASH AND CREDIT

As Steve heads home, he sees a billboard for a credit card. He wonders if a credit card would be a better choice. At his house, he hunts around for his last credit card bill. He could get a cash advance at 22% a year annual percentage rate. He also notices that if his payment is late, like it might be for Scott, he is charged a late fee on top of the interest. For $400, the late fee is $50.

Then it dawns on Steve. Why doesn't his brother just use the credit card to pay the bills? The rate must be lower. Steve quickly calls Scott and asks about using a credit card. Steve tells Scott that the credit card rates start at 15%) and 22% on a cash advance and go up. It is still expensive but a lot cheaper than the payday loan.

Scott informs Steve that he doesn't have a credit card. He did have one but he got behind in the payments he almost had to declare bankruptcy. He was finally able to pay if off by working a couple of extra jobs and living at home for a year. After that experience, Scott decided to stay on an all cash basis. If he declared bankruptcy, he could lose his job as security at the government facility. He didn't want to lose that job because of the health care benefits.

Scott asks Steve if he would be willing to put the charge on his credit card. Steve hesitates but declines. If Steve really is having this much of a cash flow problem, he wonders how he will be repaid. Besides, Steve has to pay tuition and fees along with buying books for the upcoming semester. He doesn't have any extra money.

CREDIT UNIONS

After Steve drops off Scott at his job the next day, Steve notices that there is a credit union across the street from the government facility where Scott works. Steve decides to stop by and see what alternatives it has for Scott.

Steve asks to see a new customer representative. He inquires if it is possible to get a small loan. The representative replies that it depends upon your credit rating. Steve asks if there are any options for people without a good rating as he explains the situation.

The credit union officer points out that credit unions operate a lot like banks. However, because it is a cooperative agreement among the members instead of a for-profit venture like a bank, the credit union can offer lower rates on loans than banks. The loans are good alternatives to using a credit card. However, the person has to have the ability to pay back the loan. Credit unions do not have the resources to have large loan write offs.

While the credit union doesn't seem to be a good choice for Scott right now, the officer does point out that if Scott were able to get save $400 dollars, the credit union could loan him that amount. Because the loan is fully collateralized, the rate is can be about two percent less than a credit card rate. The more collateral and better credit rating the customer has, the lower the rate will be. The customer makes a monthly payment and the loan is usually for several months to a year. The loan is for people who have an income but can't always meet their bills.

Because of the increase in payday lending, some credit unions are not offering their own version of a payday loan but at a lower interest rate and with 50 days to repay.

VISIT TO SCHOOL

Steve stops by his advisor's office to finalize his schedule. He tells the professor about his brother' s situation and about all of the places Steve has visited trying to find options for his brother.

After reassuring the professor that he wouldn't lend his brother the money, Steve was surprised to learn that his advisor knew all about payday loans. The professor is on a university committee that looks at the financial stresses on its students. Many students quit school because of financial pressures. It is not uncommon for undergraduate students to have a credit card balance and overdraft on their checking account in addition to having car and education loans. Now that a payday loan store has opened across the street from the student union, the university is worried that even more students will get into financial distress.

The professor shares some statistics that he has gathered from the Center for Responsible Lending (2008). Payday loans are a $45 billion business. The average loan ranges from $300 to $400 dollars and the average loan is rolled over four times. Actually, sixty percent of loans go to borrowers who will do more than twelve loans in a year while twenty-four percent of loans are to borrowers who will do over twenty loans in a year. It is not uncommon for a payday loan to have an annual percentage rate of over 1000%).

Steve is astonished at these figures. He asks how a person can pay off the loan. The professor responds that this is why so many are rolled over. If the borrower doesn't roll the loan over, the payday loan store turns the check over to the district attorney's office to collect because the person passed a bad check. The customer has to pay the insufficient funds fees on top of the interest and fees for the payday loan.

Because repayment is such a problem, the payday loans store are now having customers give the store the right to draft from the bank account directly. There are no checks. The payday loan store drafts the amount out at the end of the loan, which has increased the loan stores loan recovery rate. Because the store wants you to be debt, it encourages its customers to continually roll over the loans, with added fees. If the person isn't able to even make the interest payment, usually about $20 per $100 borrowed, the interest is added into the payday loan. Thus, the amount of the loan is continually increasing. The borrowers can be pulled into a spiral of debt.

The professor asks Steve if he can remember his time value of money from finance. Steve smiles and hesitates. The professor asks what happens to the amount that the borrower owes if the loan amount increases, the repayment period is short and compounding on the loan increases. Steve replies that the debt and interest owed increase and would continue to increase until the loan is paid. The professor answers that this is the business model of payday loan stores. Many payday loans stores are now targeting those people with steady checks from the government such as senior citizens. It is not uncommon to see payday loan stores right across the street from a retirement village. Some stores are even getting the elderly to give the right to draft the Social Security check each month to the store.

The professor asks Steve if he can tell him where many of the payday loan stores are. Steve replies that they are in the lower socioeconomic areas of town and near the factories. They tend to be in strip malls on major roads. Near the university, there is the payday loan store by the student union, one by the dorms and another by the group of apartment complexes just off of campus.

The professor is nodding his head. Payday loan stores are also called cash advance stores. They are located near where people live and work who are more likely to run out of cash and need some quickly. It doesn't take much capital for a store. The lease and operating costs for the small square footage in a strip mall runs about $50,000 on average nationwide. If the store starts with loanable funds of $50,000, the total initial investment is $100,000 (Lauder, 2008). If the store charges $20 per $100 loaned, it doesn't take long to earn a profit.

The loans are so expensive that the U.S. government has limited the annual interest rate that can be charged to members of the military to 36%). States have even limited the interest rate and many payday loan stores have left those states. The top rate varies by state but Arkansas, New Hampshire, Oregon, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, new York, North Carolina, Ohio, Pennsylvania, Vermont, West Virginia and the District of Columbia have all sent two-digit interest rate caps. The typical cap is between 28% and 36%) for the annual percentage rate.

The professor points out that for many of the borrowers, they needed cash quickly and didn't have the credit rating to get a short-term loan. Thus, they had to turn to something more expensive. Two other alternatives are pawn shops and car title lenders. With pawn shops, the person has to have something of value while with car title lenders, the person must give up the car. For people needing cash advance, they have already sold everything that has value and they need their car for work so they can try to pay off the loan. Payday loan stores are used after all other avenues have been exhausted. Friends and family won't loan any more money.

Steve asks why the government doesn't do anything about it. The professor points out that many states have put in interest rate caps. However, there is a belief that the people who get into debt and have problems are in this situation because of poor decisions and poor money management skills. This might be the case or it might be that the people have had a bad run of luck. Additionally, because the amount of the loan is usually only a few hundred dollars, many middleclass people have a hard time believing that someone would go into debt over that amount. It just seems too small for them. However, since the payday loan industry is over $45 billion in size, there certainly is a demand for quick cash.

The professor encourages Steve to check his credit history and make sure that he is doing everything he can for a good rating. Steve asks what he can do to get a good score. While there are various credit scoring companies and each have their own method, the average weightings are as follows:

1. 35% based on payment history

2. 30% based on amounts owed and the balance to credit limit ratio

3. 15% based on length of credit history

4. 10%) based on type of credit used

5. 10%) based on new credit

Steve leaves the professor's office feeling a bit worried. He seems to have more questions than answers. Payday loans are so expensive but does his brother have a better option?

Subject: Payday loans; Fees & charges; College students; Credit unions; Case studies; Business ethics

Location: United States--US

Classification: 9190: United States; 8120: Retail banking services; 8306: Schools and educational services; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Supplement: Special Issue Number 1

Pages: 73-79

Number of pages: 7

Publication year: 2010

Publication date: 2010

Year: 2010

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: 845495952

Document URL: http://search.proquest.com/docview/845495952?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 32 of 100

ACTIVE INSURANCE, INC.

Author: Leaptrott, John; McDonald, J Michael; McCartney, William

ProQuest document link

Abstract:

Jeff Ryan, owner of Active Insurance, Inc., faces an important decision concerning the future growth of his business. Ward Stevens, the owner of Ward Stevens Insurance agency, is considering retirement has talked to several individuals, including Jeff, about acquiring his company. Jeff has discussed the possible acquisition with his accountant and together they have several concerns about the potential transaction. Jeff's primary concern is the difference in the business models used by the two companies. Jeff started Active Insurance ten years ago and the agency has grown steadily to the point that it currently employs fifteen agents. Jeff has worked hard to make Active Insurance a customer-oriented firm and has established policies that make it easy for customers to visit his office and to access products and services. Additionally, Jeff uses agency management software and has implemented several innovative personnel policies that he believes are key to his success. Jeff is committed to training and development and is proud of the fact that he has taken a progressive approach to managing his business. In contrast, the Stevens agency is a more traditional, slow changing company. The company is well established, with eighteen agents who operate with a great deal of autonomy. However, the agency has not grown materially for a number of years. Mr. Stevens has not updated his operational or personnel practices since he started the firm and does not get involved in the day-to-day functions of the agency. Customer service, employee training and outside financial advisors all receive low priority from Mr. Stevens. His management philosophy is "if it isn't broke, don't fix it". So Jeff has to decide. Does he make the acquisition and deal with the operational and cultural differences in the two firms or does he forget the acquisition and focus on internal growth? [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

As he drove back to his office, Jeff Ryan was thinking about the meeting he just had with Duane Early, his C. P. A. and trusted business advisor. In the meeting they discussed Jeffs efforts to negotiate the purchase of Ward Stevens Insurance, Inc., an independent insurance agency located about an hour away. Mr. Stevens was seriously considering retirement and was talking with several other independent insurance agency owners about acquiring his agency. Jeff had started Active Insurance, Inc. in Dragitville ten years ago and led its growth to its current position as one of the leading independent insurance agencies in the area. Active Insurance currently employed fifteen agents and had grown at an annual rate of 10-20%) per year over the last five years.

Jeff Ryan had begun his career as an agent of a major full line property and casualty insurer immediately after graduation from college. He soon realized that, while serving the consumer marketplace was a significant market segment for many properly and casualty agents, serving the commercial marketplace was also a very lucrative opportunity that most agents chose to pursue. However, his former employer specialized in providing insurance to consumers, but did not provide insurance to businesses. This meant their agents had to work through large insurance brokers that were not affiliated with the company in order to provide commercial insurance coverage. Since Jeff had the opportunity to work with many large insurance brokerages in the course of writing commercial insurance policies, he was able to observe the strengths and weaknesses of these companies firsthand. The lessons learned from this early experience would later form the basis of his business model for Active Insurance, Inc.

THE BUSINESS MODEL

One of the elements of Jeff s business model was to provide excellent customer service. While excellent customer service can be provided in many ways, Jeff chose first to focus on making it as easy as possible for customers to do business with the agency. Although the agency was located in a modest office building a few blocks off a major roadway, the area was very accessible by several other major roads. This location made it extremely convenient for their clients to visit the agency's office. In addition, the office location provided ample parking and easy access for customers with disabilities.

Realizing that many customers work during regular business hours, he scheduled agents to be available in the office during the early evening and on Saturdays. He felt this action was particularly necessary to properly serve new customers. Rather than simply issuing an individual policy over the phone in response to an initial phone call by a new customer to one of the agency administrative staff, the agency required that every new customer schedule an appointment and meet with an agent in person. Agents could submit their availability in advance for these meetings and would be assigned new accounts by the clerical staff on a rotating basis based on availability. The agent would use a new client checklist developed by the agency as a tool to review the risks and policy coverage during this initial meeting. The agent received a sales commission for any policies the new customer decided to buy and was responsible for servicing this customer after the meeting. The servicing agent also received commissions on policy renewals. Past experience had shown that many customers were unaware of insurance coverage options, discounts for multiple policies and the existence of other insurable risks. Jeff received considerable positive feedback from customers regarding these business practices. In addition, he attributed the agency's higher than average customer retention rate to the strength of the agent-customer relationships that began during those initial meetings.

This continuing relationship with the agent was nurtured by providing the customer with the e-mail addresses of their assigned agent so that they could communicate with the agent at a time convenient for them to do so. Customers could also request insurance documents be sent by both regular mail and as an e-mail attachment. This gave the customers the ability to store these attachments electronically so that the documents could be immediately accessed by multiple computers at numerous locations if necessary. As technology evolved, Jeff strove to refine the company website to make it as customer friendly as possible. The company website currently provided information on all the insurance carriers it represents, a biography of all of the agents, a brief history of the agency, a description of new customer procedures.

PERSONNEL MANAGEMENT

Jeff felt that the selection and training of agents was another key component of achieving superior customer service. For many years life insurance companies had used pre-employment testing to identify those job candidates that were most likely to succeed. He himself had to take a battery of tests prior to being hired as an agent early in his career. He recently enlisted the assistance of a human resource manager, employed at a company his agency insured, to administer commonly available general mental ability and integrity tests to his agents. The test results were then compared to the results to the amount of their commission income for the last fiscal year and their rate of commission growth for the last three years. The comparison showed a positive relationship between general mental ability and the integrity trait of conscientiousness with both income and income growth. As a result, all new agent job candidates were now required to take both tests as a screening method before they could proceed to the interview phase of the selection process. During the final phase of the selection process, each candidate participated in a structured interview conducted by Jeff and his two most senior agents. In this interview the three panelists asked each candidate the same questions that were designed to assess the level of conscientiousness, relevant industry experience and the degree to which each candidate possessed the personality traits of agreeableness and emotional stability. Once a candidate was hired to be an agent, they were considered probationary for a ninety day period. They were required to accompany each non-probationary agent on at least one sales call or initial client interview. Once this initial training was completed, Jeff would then accompany the new agent on a sufficient number of sales calls or new client interviews to insure that the new agent understood the agency procedures and the underlying differentiation strategy that formed the basis of those procedures.

Jeff required all agents to sign non-compete agreements prior to being employed. These agreements provided that if agents left employment with the agency and continued serving customers of the agency the agents agreed to repay fifty percent of the commissions they had previously earned serving those customers. As a practical matter, customers often preferred to continue their relationship with an agent regardless of their agency affiliation and this arrangement partially compensated Jeff for the agency's expenses related to acquiring the customer and costs incurred in servicing the customer over the course of the relationship.

Active Insurance, Inc. utilized comprehensive insurance agency management software to track customer insurance coverage. This software package tracked forthcoming policy expiration dates, new policy productivity and rates of policy renewal for each agent and volume by each underwriting insurance company as well as other pertinent data. Agents were compensated based on a commission splitting arrangement under which the portion of the commission earned by the agent rapidly increased as their commission volume increased. The variable commission splitting arrangement provided a substantial incentive for agents to reach high levels of performance. The variable commission structure also helped the agency better cover the overhead costs attributable to agents that produced substantially less commission income and more quickly recover the recruitment and training costs of new agents. Jeff routinely conducted biweekly sales meeting where he shared new information regarding the underwriting insurance carriers, productivity information for each agent in the form of year-to-date charts and provided agents a chance to share their positive and negative experiences since the prior meeting. The agency encouraged agents to attend training sessions offered by both insurance companies and other industry sources and reimbursed them for their expenses incurred in this training.

Another component of customer service was putting a high priority on making all communications with the customer as efficient and professional as possible. All incoming calls were answered by the receptionist and not subjected to a voicemail system. Jeff realized that the persons who created the first impressions of agency were the receptionists and the customer service representatives (CSR). Rather than making the receptionist's job an entry-level position, he chose to designate that position as the top clerical position. The entry level of the clerical hierarchy was the assistant customer service representative. The next level was that of CSR with the best individual performer being given the position of receptionist. This resulted in the customer interacting with an extremely knowledgeable person who could efficiently assess how the customer could best be served and then rout them to the appropriate person in the agency. Candidates seeking to join the clerical staff were subjected to the same screening tests as agents. The structured interview was conducted with a panel consisting of Jeff, a senior CSR and a senior agent. Each newly hired assistant CSR spent a few days with each senior CSR before receiving his or her permanent assignment.

The agency utilized general accounting software that allowed the agency's in house bookkeeper to journalize routine accounting transactions and submit the transaction files by E-mail to the agency' s local CPA firm that then made whatever general ledger adjustments were necessary and prepared quarterly financial statements. Once the statements were prepared Jeff would meet with Duane Early, the partner in the CPA firm in charge of providing services to the agency. Duane also provided advice to Jeff regarding his other business interests and prepared Jeffs personal income tax return. Jeffs relationship with Duane began during Jeffs planning activities in anticipation of starting the agency. Jeff had sought referrals from his banker, attorney and other agency owners he had met at continuing education events. He sought a CPA that had already developed expertise in dealing with insurance agencies and Duane was one of three CPAs that had been recommended by most of the referral sources. Jeff met with all three CPAs and felt that Duane provided the best fit for his agency based on his ideas for providing useful information related to typical decisions that would need to be made in growing the agency.

While Jeff had initially thought that Duane' s firm should prepare audited financial statements in accordance with generally accepted accounting principles (GAAP), Duane explained that ethical requirements precluded his firm from providing both management advice and auditing services. He instead recommended that, in order to save accounting fees, Jeff should request compilation statements that were prepared on the tax basis. The preparation of these types of financial statements was permissible as an other comprehensive basis of accounting (OCBOA) financial statement. Duane' s firm could provide management advice and prepare these types of statements as long as the accountant's report accompanying the statements disclosed that the accounting firm was not independent with respect to the insurance agency. Because Jeff personally guaranteed the repayment of the insurance agency's operating line with the bank, the bank was willing to accept an OCBOA compilation statement and did not require a reviewed or audited statement prepared in accordance with GAAP.

Jeff also consulted with Duane prior to making major financial or strategic decisions. Additionally, if the decision were related to the normal operations of the agency Jeff would also hold one or more meetings with his senior agents to discuss the decision, and evaluate alternative approaches. Jeff felt this consultation process generally resulted in better decisions because he would receive additional information or be exposed to other perspectives that had not occurred to him. He was very proud of the progressive manner in which he had defined the competitive strategy of his agency and configured the various elements of his agency to execute that strategy. This configuration included implementation of a personnel recruitment program designed to identify individuals that would likely be successful in pursuit of that strategy and a training program designed to improve the necessary related skills of both new and existing employees. He had also established comprehensive control procedures for assessing the agency' s performance. Jeff felt that by configuring the organization in this manner, the operations of the agency were well designed to facilitate the development of a long-term relationship with the customer.

WARD STEPHENS INSURANCE5 INC.

Ward Stevens Insurance, Inc. was well established in its marketplace. It had been operating for over thirty years. However, the customer base, while substantial, had not increased materially for a number of years. The agency employed 1 8 agents, slightly larger than the 1 5 agents employed by Active Insurance. Most of the agents employed by Ward Stephens had been with the agency for between 15 and 25 years. This was in contrast to the 5 to 10 years average for the agents of the Active Insurance, Inc. The Stevens agency agents acted with great autonomy. Mr. Stephens rarely held sales meetings and generally did not get involved with the day-to-day functions of the agency. He viewed his role as a "goodwill ambassador" to the community, a role that resulted in people being introduced to the agency and, in some cases, resulted in them becoming customers.

The agency was still located in its original location. While the location was close to most residential areas in the early days of the agency' s operations, subsequent relocation of the population to outlying areas and industrial development of the area immediately surrounding the agency had resulted in it being somewhat inconvenient to access. As a result, few customers chose to actually visit the agency, preferring to conduct business by phone. The agency regularly employed recent high school graduates at minimum wage to serve as receptionists for the few customers that chose to visit the agency and utilized a standard voice mail automated phone system to route incoming calls.

Agents would be involved in helping their customers with their insurance needs. However, new customers that were not already being served by an agent were routed to a CSR that would get their information and issue them a policy. The agency would not pay agent commissions on these customer policies. Because Mr. Stephens and many of the senior agents were comfortable with the longstanding procedures of the agency, the agency still transmitted renewal notices and policy information solely by regular mail and had only minimally used the Internet in their business operations. The agency had an informational website that included information about the history of the agency, location, hours of operation and contact phone numbers for the agents. E-mail addresses for individual agents were not disclosed.

All personnel hiring and firing was done solely by Mr. Stephens. The process had not changed since the agency started. He would have one of the clerical staff put a help wanted ad in the local newspaper. After the closing date stated in the ad he would sift through the responses and bring the individual he thought was the best fit for the position in for an interview. If the interview were satisfactory he would hire the individual. He was somewhat traditional in his attitude towards training. He noted that nobody had to train him and that the "sink or swim" method should be applied to new hires. He was fairly happy with his agents over the years, which he in part attributed to his personnel management skills. When it came to managing people he was satisfied with his "system" and believed in the old adage "if it isn't broken, don't fix it."

Mr. Stephens employed a bookkeeper that had been with the agency for 20 years. Although her accounting capabilities were somewhat limited, she was a very loyal and dedicated employee that took a genuine personal interest in her coworkers. She could be counted on to organize agency events and to help out in whatever way she could. Her primary function was to calculate the payroll every two weeks and to manage the agency checkbooks. She would bring the checkbooks to the agency's CPA firm at the end of the year and the firm would prepare the tax return. Mr. Stephens did not see the benefit in having the firm prepare financial statements at either the year-end or an interim basis. If the agency's checkbook balances were adequate and he was able to take what he considered to be a sufficient salary he assumed that the agency was operating correctly. He was somewhat uncomfortable in dealing with accounting matters and felt that the fees charged by accounting firms were quite high. Consequently, he usually only met with the accountants when he brought in the information needed in the preparation of his personal tax return.

While Ward Stephens Insurance, Ine was not nearly as progressive in their management policies as Active Insurance, Inc., the agency had achieved a reasonable degree of success. Mr. Stephens had mixed emotions about selling the agency. The last thirty years had been very rewarding to him and to most of his agents. He had quietly put out a few feelers with up and coming agencies such as Active Insurance and had met a handful of prospective buyers in addition to Jeff. He wondered if someone actually did agree to his price and terms whether he could he actually sell the agency. He knew he wasn't getting any younger and he would like to retire and move to Florida while he was young enough to enjoy the outdoor activities. He just didn't know if this was the right time to do so.

ANALYZING THE PURCHASE DECISION

As Jeff entered Duane Early's conference room to discuss whether or not to purchase the Ward Stephen's agency, he was looking forward to receiving Duane' s assistance in helping him reach an objective rather than intuitive or emotionally driven decision. Jeff frequently discussed important agency decisions with Duane. On most occasions, Duane' s expertise in accounting and financing complemented Jeff s management and marketing expertise and resulted in a well thought out decision. On other occasions, merely having to explain the decision to Duane helped Jeff organize his thoughts and facilitated his decision-making process. The discussion began with Duane' s request for a report on Jeffs most recent meeting with Mr. Stephens:

Duane: Jeff, tell me about your last meeting with Mr. Stephens.

Jeff: Well, as his target retirement date approaches, he is anxious to complete the purchase of his agency. He is really pressing me for a decision.

Duane: One of the reasons you chose our accounting firm was our experience with independent insurance agency clients. From my perspective you have done an excellent job of differentiating your agency from the others by employing very progressive management practices. The Stephens agency is a bit old fashioned. Are you sure it would be a good fit for your agency?

Jeff: That is a really difficult question. As you know I would be paying the market value of the agency based on their current commission income levels. I am convinced that by employing my progressive management procedures in that old fashioned firm I could substantially increase commission income in the short term.

Duane: I am sure those kinds of changes would be welcomed by the customers, but I am not sure the culture ofthat agency can handle that degree of change. How do you think commission income will be affected if you do buy the agency and have to replace most of the personnel? I would expect that a lot of the customers have pretty strong business relationships with individual agents that have developed over the years. Did you know if the agents signed a non-compete agreement when they were hired?

Jeff: Mr. Stephens doesn't believe in having his agents sign non-compete agreements. He didn't require them in the early years of operation, and more recently did not want to have some of his agents subject to one while others were not.

Duane: Jeff, you know this is a potential problem. Without a non-compete agreement in place what is to prevent the agents from starting their own agency and taking their customers with them?

Jeff: Well, I am hoping that when they experience a more progressive management method they will recognize that it will lead to more productivity and more income and wish to remain at the agency. Duane, you seem less than enthusiastic about this acquisition. Are you saying that I should back off from this purchase?

Duane: Jeff, It is your decision, but my assessment of this proposed transaction is that you will be paying for an agency based on an expected future stream of income that is far from certain. There are significant cultural differences between your agency and the agency you are trying to acquire. You will most likely have to engage in a process of deculturation at the new agency that will result in significant turnover. This turnover most certainly will lead to a loss of revenue. You will personally have to spend a great deal of your time and effort managing the transition at the new agency which will result in less of your time being available to manage your established agency. This could very well jeopardize the performance level of your agency for quite a while. I suggest that if you wish to acquire another agency, it should be one that is much more compatible with your current operations.

Jeff: Duane, I guess I'm surprised that you are so skeptical. Although I am very enthusiastic about this acquisition maybe I need to think it over little more. Thanks for your input. I may need to meet with you again very soon.

Later that afternoon, Jeff watched the line of dark, stormy, turbulent rain clouds approaching from the west. In a way, they reflected his uncertain mood. He carefully recalled Duane' s conclusions regarding the acquisition and wondered whether the differences between the two agency's cultures were indeed too great to overcome. While Ward Stevens Insurance, Ine was not nearly as progressive in their management policies as Active Insurance, Inc., they still had achieved a reasonable degree of success. As with many companies, the management practices that are used are to a certain extent the function of the generation of individuals that employ them. Jeff did realize that many organizations staffed and managed by older, long-term employees would be less innovative than newly formed organizations staffed and managed by younger individuals. However, the younger organization usually lacked the depth of industry knowledge and experience possessed by the older organization. Could the two organizational cultures be combined in a manner to form a new culture that would be better than the two that currently exist?

He pondered his options. Should he trust his ability to overcome the differences between the two agencies, or should he start looking for another acquisition target? Maybe he should simply be satisfied with the internal growth rate his agency had already achieved, concentrate on internal growth and forget acquisitions altogether. He fretfully concluded that making these types of decisions is never easy.

Subject: Strategic management; Business models; Insurance companies; Acquisitions & mergers; Human resource management; Case studies

Location: United States--US

Classification: 6100: Human resource planning; 2330: Acquisitions & mergers; 8200: Insurance Industry; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Supplement: Special Issue Number 1

Pages: 85-93

Number of pages: 9

Publication year: 2010

Publication date: 2010

Year: 2010

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: 845495948

Document URL: http://search.proquest.com/docview/845495948?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 33 of 100

ACCOUNTING FOR BUSINESS COMBINATIONS AND THE CONVERGENCE OF INTERNATIONAL FINANCIAL REPORTING STANDARDS WITH U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: A CASE STUDY

Author: James, Marianne L

ProQuest document link

Abstract:

Financial reporting in the U.S. is changing dramatically. Consistent with the Securities and Exchange Commission's proposed "Roadmap" (SEC, 2008), the U.S. likely will join the more than 100 nations worldwide that currently utilize International Financial Reporting Standards (IFRS), and require the use of IFRS in the U.S. Because of the globally widespreaduse of IFRS, multinational entities with subsidiaries that prepare IFRS-based financial statements already have to be knowledgeable about IFRS as well as the current differences between U.S. GAAP and IFRS. Fortunately, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are working together to bring about convergence between the two sets of accounting standards. Recently, FASB and the IASB issued new and revised several existing standards that eliminate many differences between U.S. GAAP and IFRS with respect to business combinations and consolidated financial statements. However, some significant differences persist. Until the SEC makes a final decision regarding the mandatory use of IFRS, and during the proposed multi-year transition period, current and future accounting professionals must continue to keep abreast of changes in U.S. GAAP, be knowledgeable about differences between U.S. GAAP and IFRS, and, at the same time, prepare for the likely transition to IFRS. In addition, company executives should be cognizant of developments that may affect their strategic decisions as the U.S. moves toward a likely adoption of IFRS during the next five years. This case focuses on the effect of changes in financial reporting for business combinations. Changes as w ell as continuing differences between U.S. GAAP and IFRS are explored. Secondarily, strategic decisions arising from the changes and the likely future adoption of IFRS are addressed. This case, which can be utilized in Advanced Accounting on either the graduate or undergraduate level can enhance students' analytical, technical, critical thinking, research, and communication skills. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Financial accounting and reporting in the U.S. is changing rapidly. During the past six months, the Financial Accounting Standards Board, the primary accounting standard setter in the U.S., issued twelve (12) new standards and launched its on-line "Accounting Standards Codification," which organizes existing GAAP into 90 topics (FASB, 2009). At the same time, a significantly more dramatic change is on the horizon for accounting professionals, company executives, and financial statement users.

Consistent with the SECs 2008 proposal entitled, "Roadmap for the Potential Use of Financial Statements Prepared in Accordance With International Financial Reporting Standards by U.S. Issuers," (Roadmap) in approximately five years, public companies likely will have to utilize IFRS, instead of U.S. GAAP (SEC, 2008). In fact, some large global U.S. -based entities are permitted to early-adopt IFRS starting in 2009. The SEC expects to reach a final decision regarding the mandatory adoption of IFRS in 201 1 (SEC, 2008).

If the U.S. indeed adopts IFRS as the required standard for financial accounting and reporting, the U.S. will join the more than 100 nations worldwide that currently permit or mandate the use of IFRS. For example, starting with the 2005 reporting period, all European public companies listed on any European stock exchange must prepare IFRS-based financial statements. Other nations, such as Canada, are planning to adopt IFRS in the near future.

Currently, U.S. GAAP and IFRS are not identical. However, since signing their Memorandum of Understanding, commonly referred to as the "Norwalk Agreement," in 2002, FASB and the IASB have been working together to develop a set of high-quality globally acceptable financial accounting standards and to bring about convergence of U.S. GAAP and IFRS. Since the Norwalk Agreement was signed, many new and revised standards issued by FASB and the IASB have served the purpose of eliminating existing differences. However, while many differences have been eliminated, others persist.

Accounting for and reporting by global entities is quite complex. U.S., as well as international accounting rules require that a parent company consolidates its subsidiaries' financial statements with the parent company's financial statements. Recent standards issued by the IASB and FASB have eliminated many differences between U.S. GAAP and IFRS in accounting for business combinations and financial reporting for consolidated entities. However, some significant differences continue to exist.

KLUGEN CORPORATION

Irma Kuhn, CPA, CMA holds the position of Chief Financial Officer (CFO) of Klugen Corporation, a global telecommunications company. Klugen is a consolidated entity headquartered in the U.S. with four majority-owned European subsidiaries. The company has expanded primarily by acquiring majority interest in European companies and holds between 51% and 70% of the outstanding voting stock of its subsidiaries. Three of these subsidiaries were acquired in stages and consolidated once the company achieved majority ownership.

Consistent with current accounting rules, Klugen consolidates all four of its subsidiaries. In addition, Klugen also holds financial interests in several unconsolidated entities and accounts for those as investments.

Klugen' s European subsidiaries currently prepare their financial statements consistent with International Financial Reporting Standards (IFRS), which are promulgated by the International Accounting Standards Board (IASB). Klugen, the parent company, issues consolidated financial statements, which include the results of its majority-owned subsidiaries in conformity with U.S. GAAP. Preparation of Klugen' s consolidated financial statements requires that Irma and her staff convert the subsidiaries' IFRS-based financial statements into U. S. GAAP priorto consolidating the numbers. This process is quite complex and requires many of the accounting departments' resources.

Irma is well aware of efforts between the FASB and the IASB to bring about convergence between U. S . GAAP and IFRS . She expects that consistent with the SEC ' s "Roadmap," (SEC, 2008) within the next five years, U.S. public companies likely will have to apply IFRS, rather than U.S. GAAP. Irma welcomes this development and believes that in the long-run, use of IFRS by the parent company as well as its subsidiaries will preserve and strengthen the company's global financial competitiveness. In addition, she believes that it will simplify the accounting and consolidation process significantly and, in the long-run, reduce financial reporting costs. She is aware, however, that in the short-run many challenges, such as conversion of the accounting and IT systems and extensive staff training will increase costs. Knowing that the SEC s Roadmap proposes a phased-in adoption by public companies between 2014 and 2016, Irma plans to recommend adoption of IFRS at the earliest permitted time.

As the person who ultimately is responsible for financial reporting, Irma is very knowledgeable about current and proposed changes in U.S. GAAP as well as IFRS. She knows that the IASB and FASB have issued new and revised standards applicable to business combinations that affect the company's consolidated financial statements. After in depths analysis of the new and revised standards, she determined that many of the past differences between U.S. GAAP and IFRS where eliminated when the FASB issues FAS 141 R "Business Combinations" and FAS 160 "Noncontrolling interest in consolidated financial statements" (FASB, 2007) and the IASB revised IFRS 3 "Business Combinations" and IAS 27 "Consolidated and Separate Financial Statements" (IASB, 2008). She also realizes that some significant differences still persist. Klugen Corporation has properly adopted FAS 141R and FAS 160 (now codified in sections 805 and 810 of FASB's 2009 Standards Codification) for the 2009 fiscal period and its forthcoming annual report will reflect those changes.

Irma regularly conducts in-house seminars to instruct her accounting staff regarding new developments in financial reporting. In fact, her seminars meet the Continuing Professional Education (CPE) sponsor requirements set forth by the National Association of State Boards of Accountancy (NASBA) and the Quality Assurance Service (QAS), which is required by State Boards of Accountancy and other licencing organizations for the renewal of CPA, CMA and other professional certifications.

Irma' s CPE seminars entitled "Financial Reporting Updates" are always well received by her staff. During the past six months, Irma already has held several seminars to inform her staff regarding IFRS. Those who attended all her seminars are already familiar with the SECs Roadmap that proposes adoption of IFRS starting in 2014, and also know about some of the most significant differences between U.S. GAAP and IFRS.

Since in about five (5) months, Klugen Corporation will issue its consolidated financial statements, which will, for the first time, incorporate FAS 160 and FAS 141R, Irma decides to schedule a seminar on "Business Combinations - Consolidated Financial Statements" for October 15, 2009. The following is a brief agenda for Irma' s Seminar:

Business Combinations - Consolidated Financial Statements - Financial Reporting Update

October 15, 2009 - Agenda

1 . Review of fundamental concepts of business combinations and consolidated financial statements

2. Changes to U.S. GAAP (FAS 141R and FAS 160)

3. Significant continuing differences between U.S. GAAP and IFRS

4. Developments with potential impact on future fiscal periods

5. Questions

The seminar will be highly beneficial for staff members who are currently involved or planning to become involved in critical aspects of financial reporting and also for those who want to develop their knowledge of IFRS. During the seminar, Irma distributes several handouts, including the company's prior year income statement and balance sheet for reference.

The Seminar

Agenda Item 1 Fundamental Concepts of Business Combinations - Consolidated Financial Statements

During the first part of the seminar, Irma reviews several fundamental concepts relating to accounting for business combinations. She emphasizes that these concepts are common to both U.S. GAAP and IFRS.

Fundamental Concepts common to both U.S. GAAP and IFRS

* The parent company issues consolidated financial statements that include the results for all subsidiaries that the company controls.

* Control is usually assumed when the parent holds a controlling financial interest (generally, more than 50% ownership of the outstanding voting common stock.

* Consolidated financial statements include 100% of the subsidiaries' assets, liabilities, revenue, expense, gains, and losses, even if the subsidiary is only partially owned.

* Subsidiaries' previously unrecognized assets are identified at time of business combination and are recognized in the consolidated financial statements.

* Goodwill is recognized on the consolidated balance sheet if the acquisition cost exceeds the fair value of the subsidiaries' identifiable net assets.

* Goodwill is not amortized, but periodically tested for impairment.

* Non-controlling interest (formerly called minority interest) is recognized on the consolidated balance sheet.

Agenda Item 2 Changes in U.S. GAAP

Irma discusses the most important changes in accounting and financial reporting for consolidated entities consistent with FAS 14 IR and FAS 160. She prepares a handout for the seminar participants, consisting of a comparative table that contrast the new rules (effective for the 2009 financial statements) with the prior rules.

Agenda Item 3 Significant Continuing Differences Between U.S. GAAP and IFRS

Irma highlights continuing significant differences between U.S. GAAP and IFRS. This information is particularly important for those staff members who are involved in the consolidation process and those who wish to prepare for the future adoption of IFRS. The following table represents a handout based on Irma' s PowerPoint presentation:

Agenda Item 4 Developments with Potential Impact on Future Fiscal Periods

Irma briefly mentions other developments in the consolidation area. She mentions that in June 2009, FASB issued FAS 166, "Accounting for Transfers of Financial Assets," and FAS 167, "Amendments to FASB Interpretation No. 46R" (FASB, 2009). FAS 166 eliminates the concept of qualifying special purpose entities (SPE); FAS 167 deals with the consolidation aspects of this elimination. Specifically, companies with formerly classified qualifying SPEs must now assess these entities for possible consolidation.

FAS 167 focuses on control and the primary beneficiary of the SPE in determining whether a company, such as Klugen Corp., must consolidate its SPE. A primary beneficiary is (1) able to direct activities of the SPE and is required to absorb significant gains and losses. A company is assumed to have control if (1) it has the power to direct activities, (2) has the most significant impact on the entity's performance, and (3) is required to absorb losses, and benefit from gains (FAS 167, par. 14A-G). Irma reminds her staff that currently Klugen Corporation does not have investments in qualifying SPE' s; thus, the new standards will not affect the company.

Irma also mentions that in December 2008, the IASB issued Exposure Draft 10 (ED 10) "Consolidated Financial Statements," (IASB, 2008), which proposes a single definition of control that is very similar to the FAS 1 67 definition. Once this exposure draft is finalized, convergence between U.S. GAAP and IFRS likely will be further enhanced. Irma promises to keep her staff informed about developments in that area.

Agenda Item 5 Questions

At the end of the seminar, many questions arise from the staff and some from the CEO, who attended the second half of the seminar. Irma answers as many questions as possible and promises to prepare a short question/answer briefing sheet for all those who were present at the seminar. During the seminar she summarizes the following questions as shown in the Assignments section.

ASSIGNMENTS

Answer the questions specifically assigned by your instructor.

U.S. GAAP Questions

1 . How will adoption of the new accounting standards (FAS 141R and FAS 160) affect Klugen Corporation's financial statements in the forthcoming reporting period?

2. Utilizing the 2008 numbers, prepare (1) a partial income statement starting at income from operations and (2) the equity section of the balance sheet consistent with the requirements of FAS 141R and FAS 160 (FASB Accounting Standards Codification sections 805 and 810).

3. How will adoption of FAS 141R and FAS 160 affect Klugen Corporation's financial statements in the long-run?

4. What key financial ratios will be affected by the adoption of FAS 141R and FAS 160? What will be the likely effect?

5. What additional estimates have to be made consistent with the new accounting standards?

6. Could any of the recent and forthcoming changes affect the company ' s acquisition strategies and potentially its growth?

7. What were FASB's primary reasons for issuing FAS 141R and FAS 160? (Research question)

8. What are qualifying SPEs? Do they exist under IFRS? What is the effect of FAS 166 eliminating the concept of qualifying SPEs on the convergence of accounting standards?

9. FASB and IASB recently issued an updated Memorandum of Understanding. Retrieve the updated memorandum and identify several issues that the two standard setting boards are jointly focusing on to facilitate convergence. (Research Question)

IFRS Questions

1 . From the consolidation perspective, what would be the likely overall effect of adopting IFRS on the company's financial statements?

2. What potential effect would arise if Klugen were to select the option under IFRS 3 to value non-controlling interest at the proportionate share of its subsidiaries' net identifiable assets?

3 . Do you believe that an impairment of goodwill would be more likely under IFRS or under U.S. GAAP? Why, or why not?

4. What challenges would arise for the accounting staff if the company adopts IFRS? Do you believe that he company is making progress toward meeting some of these challenges?

5. What opportunities would arise for the accounting staff if the company adopts IFRS?

6. What other (non-staff related) factors should Klugen Corporation consider prior to adopting IFRS? Differentiate between advantages and disadvantages.

7. Two of Klugen's non-consolidated entities regularly grant stock options to its employees. How could this affect Klugen's accounting for these entities under IFRS?

8. As indicated in the case, Irma previously highlighted some other significant differences between IFRS and U.S. GAAP. Research the issue and find three (3) differences other than those related to business combinations. You may want to consider accounting for inventory, extraordinary items, property, plant and equipment, and research and development.

9. Assume that the SEC provides a choice in the timing of the adoption of IFRS. What ethical issues could arise for the CFO in deciding whether to adopt IFRS at the earliest possible, or at a later required date? (Research question)

10. Review comment letters received by the SEC regarding its Roadmap. List two concerns mentioned by those offering comments. (Research question)

Subject: Accounting; International Financial Reporting Standards; GAAP; Case studies; Organizational change; Standardization

Location: United States--US

Classification: 9190: United States; 4120: Accounting policies & procedures; 2320: Organizational structure; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Supplement: Special Issue Number 1

Pages: 95-108

Number of pages: 14

Publication year: 2010

Publication date: 2010

Year: 2010

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: 845495985

Document URL: http://search.proquest.com/docview/845495985?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 34 of 100

THE SHOPPES AT RIVERSIDE

Author: Carter, Fonda L; Heriot, Kirk

ProQuest document link

Abstract:

The primary focus of the case is a purchase decision. The information given to the students to utilize in formulating their decision includes store sales by month for each of the last three years as well as operating expenses. From the information given, the students are asked to construct proforma cash flows for the year 2007 by month based on their assumptions regarding sales and occupancy levels. They are also asked to research other product lines the potential buyers could add to the store to complement the present merchandise presently being sold by dealers. Although the store does collect rental income, there is a cap on percentage rents at 10% of sales which in turn limits the total revenues of the store. The students are given some ideas on lines of business to research within the questions of the case. They may have others they would also like to research. A second phase of the case analysis would be to break the case into group assignments and have each group research and prepare presentation on such topics as (1) the various type of advertising options and the related costs applicable to small retail businesses in order to develop and implement a marketing plan; (2) the type of business formation available to small businesses (i.e. Corporation, Sub-S Corporation, Partnership, LLP; (3) additional product lines to add to increase revenues of the business; and (4) the advantages and disadvantages of developing a website and selling "on-line" with this type of business. As a result of the individual and group projects, classroom discussions could be held based on the findings of the groups as well as other current issues faced by small businesses. The advantage of this case is that it presents students with a real-life purchase decision and presents relevant topics for in-class discussions. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Laura Lewis, Patricia Robbins, and Mary Farley were eating lunch at a local delicatessen. The ladies were excited about a recent business opportunity that was presented to them by Lucy Taylor, the owner of The Shoppes at Riverside. Lucy wanted to sell her business to someone that would take over her vision for an art and antique store in the uptown Columbus, Georgia area.

Laura: "So what do ya'll think?"

Patricia; "I'm pretty excited about it. I think we can do this."

Mary: "I don't want to jump into this purchase without considering all the facts."

Laura: "Mary what do you mean? Lucy has given us all of the fact as she has given us a copy of a letter (originally written to the local real estate company handling the new lease) outlining all the employees and their pay rates; all of the operating expenses for the store; and the sales by month for the last three years. It all looks good to me."

Mary: "Yes, I am wearing my accountant' s hat. We need to evaluate not only the business, but also other issues as well. For example, which one of us is going to manager the business on a day to day basis? I can't do this because I have a full time job. I have the expertise in accounting and finance to advise the business and prepare all the accounting records but that would have to be the extent of my involvement."

Laura: "Patricia and I neither one work. We would be available to manage the store on a day to day basis. Besides, Helen Mitchell, the manager of the store states she wants to stay on with the new owner. We would only have to oversee her. Patricia and I could split the duties. I could handle the employees and their work schedules and Patricia could handle the issues with the vendors".

Mary: "I think there may be other issues as well. Even though the purchase price is minimal, there is the opportunity cost of our time and effort that could be utilized elsewhere. Let's take a couple of days and think about it and evaluate all the advantages and disadvantages. I will prepare a cash flow analysis for the year 2007. We can meet again in a week to make a decision."

CASE HISTORY

The Shoppes at Riverside was originally opened in 1998 by two partners (Lucy Taylor and Sally Owens) in an older brick storefront in downtown in Columbus, Georgia. Columbus, Georgia is located on the Chattahoochee River (separating the city from the Alabama state line) approximately 150 miles southwest of Atlanta. It is the third largest city in Georgia and has a population in the metropolitan area of approximately 250,000 people.

The first building occupied by the store was approximately 3,000 square feet. The original intent of the business was to offer space to art and antique dealers for the sale of their merchandise. The purpose of opening the business was two-fold. The primary purpose was to offer upscale merchandise in Columbus as there were no other businesses that offered quality art and antiques. The second purpose was for it to be a secondary source of additional income for the two owners. The store opened with approximately twenty vendors. The store leased "booths" to these vendors ranging from 100 sq. feet to 200 sq. feet each. Rent was charged based on the size of the booth and ranged from $ 1 50 to $250 per vendor per month. The owners of the store also charged each vendor 10% of each sale as a commission and 2.5% for credit card sales to cover credit card fees. The owners were responsible for collection and remittance of sales taxes, credit card processing, and employment of sales assistants. While the original intent was to have only art and antique vendors, in order to lease all of the space, the owners added vendors that merchandised clothing, j ewelry and gifts. Vendors were required to complete an application for space and were highly scrutinized to insure a high level of quality merchandise. In fact, the owners knew the majority of the vendors personally. The store also included a "tea room" that served a light lunch. Although no income statements were available for review, the owners stated that business was profitable at this location. Occupancy of the rented booths remained nearly 100% at all times.

In 2003, one of the partners, Lucy Taylor purchased two larger historic buildings in the next block with a separate partner (John Thomas as an investment. Each building housed three floors each with approximately 5,500 square feet on each floor. A floor on each building is located below the street level. The other two floors were above street level and both run parallel to a city street and both buildings take up a side of an entire block. The buildings were renovated from their original use as a clothing factory. The historic buildings' outside façade is attractive old brick. Since the lease at the previous location was up for renewal at the same time, Lucy and Sally then decided to move The Shoppes at Riverside into one of these old buildings. They spent approximately $30,000 in renovating the second floor (street level) of Building One. Renovation included subdividing the 5,500 square feet into booths for individual vendor spaces, adding a counter front/cash register station at the front of the store, installing a security system, installing phone lines, installing wiring/lights in each booth, and a kitchen area in the back of the store. The two bathrooms also had to be updated to comply with the city building code.

At the new location, the owners were able to add more vendors. This building space allowed for 28 booth rentals and 14 wall spaces for rent (see Table Two for a breakdown). Some artists were interested only in renting wall space located between individual booths. At this location, the owners stated the business was profitable for several years. The actual statements were not available for review. In 2005, Sally Owens decided to leave the business and Lucy Taylor bought out her interest. Over the next few years, the store experienced a decline in sales. According to Lucy, one of the main reasons was major construction work that was taking place in the downtown area where the store was located. Each city street underwent substantial work on the sewer lines causing problems in traffic flow. The construction project was projected to last a period of over two years. Even though only one street was under construction at a time, it was a nightmare trying to maneuver around the "construction of the moment". Many shoppers that had frequented downtown shops went to the north area of town. The construction was scheduled to be completed by the end of 2007.

In early 2007, Lucy Taylor and John Thomas decided to sell the two historic buildings to the foundation of a local college. The college had been establishing a downtown campus for the art and music departments. The two historic buildings were located on the block between two new structures the college owned. Adjacent to the two historic buildings was a large parking lot which was deemed a prime location for parking for the college's downtown campus. In the fall of 2007, Lucy Taylor also decided to sell The Shoppes at Riverside. She did not need any secondary income from the shops and basically used the ownership as a hobby. She was willing to sell all of the equipment, including cash registers, security system, sound system and inventory (a few books and wrapping products) for a nominal amount. Her main goal was to have someone take over the business that would continue her vision for an art and antiques store.

POTENTIAL PURCHASERS

Three of the present vendors (Patricia Robbins, Laura Lewis and Mary Farley) of The Shoppes at Riverside were approached by the owner, as well as the president of the Uptown Business Association, to see if they would be interested in purchasing the business. The potential purchasers were very familiar with the business but none of them had actual retail experience other than their present booth ownership. Patricia Robbins and Mary Farley owned a booth together featuring furniture and home accessories. Laura Lewis owned a booth with another individual . AU three were good friends. Patricia Robbins and Laura Lewis were college graduates but at the present time did not work by choice. However, since they did not work they would have the time to spend on a day to day basis with the on-sight management of the business. Mary was a CPA but was currently teaching accounting at a local college. Her contribution would be financial advice as well as all of the bookkeeping duties of the business, including payroll taxes and returns; sales taxes and returns; and any other business related matters. Their initial purchase price would be minimal ($1). Lucy, the present owner, along with the management of the local college foundation and the management of the Uptown Business Association were looking for someone to purchase the business and retain its current retail focus.

The purchase price would include two computers; computer retail software (specifically written for the consignment store); build-outs for the booths including electrical outlets for each, a large front counter for the cash register with a laser printer; a kitchen area with a free-standing ice maker, a refrigerator, a microwave, sink, and built in cabinets; two bathrooms; all wrapping products (tissue paper, ribbon, cellophane bags, and shopping bags); a small inventory of books; an installed security system; and a sound system. The present owner basically wanted to walk away from the business and leave everything.

The owner has made available information to the potential purchasers in order to make their decision. A summary of the relevant information is given below.

STORE LOCATION

The store is located in approximately 5,500 square feet of space. It is an open building with walls separating the facility into individual booths. The walls between the booths run approximately 80% of the height of the ceiling leaving an open, airy feeling to the store. It is located across the street from the City of Columbus Center for Performing Arts, a Marriott Hotel, and the local convention center. While more retail businesses have located in the north end of town, local retail business in the uptown area has begun to grow again with the scheduled completion of the construction on the major streets. A local uptown business association has also started a more concentrated marketing effort for the "Uptown Area" (previously referred to as downtown Columbus). One of the adj acent buildings to the new store location also houses the local Convention and Trade Bureau and the floor below the store houses a Quiznos restaurant.

While the store is not located in the "booming" north end of town, there is potential for retail development. There are several major employers in the uptown/downtown area. One is a major credit card processor with approximately 3,000 employees in their uptown campus. It is located seven blocks away on the other side of the uptown area. Another employer is a bank holding company with approximately 500 employees located only three blocks away. A little further away but still within a close driving distance is the home office of large insurance company. There is also the local government center (two blocks away) as well as many smaller businesses, primarily law offices. One of the challenges of the new owners would be to target market to these companies and promote awareness of the store.

STORE INCOME

The store has several sources of income. There are direct store sales primarily from inventory of books (cook books and art related books) owned by the store itself. There is additional income from vendors in the form of rent and commissions. Each vendor pays three types of fees. A fee for the booth rental (the rental rates for the available booth and wall spaces are shown in Table Two); a percentage rent or 10%> of each sale as a commission; and a fee twice a year for advertising. The fee for advertising is $100 for a booth renters and $50 for wall renters and is due on March 1 and October 1 each year. At the present time, the majority of the booth and wall spaces are rented. However, there are a few vacancies. The present owner stated she has not tried to rent these vacant spaces as she is not sure that she will continue the business if she cannot fine a purchaser. She does have a waiting list for individuals wanting to lease space. Vendors are required to sign a six-month lease and pay the first and last months' rent payment upon signing the lease. They are to give thirty days written notice to terminate the lease after the initial six-month period.

Rent Expense

The building the store occupies is currently being managed by a local real estate company on behalf of the foundation. With new ownership, the monthly rental will be $4,322 and a three year lease will be required. This rental rate is below local rental rates per square foot in the area. The rental payment includes the utilities for water and repairs for major maintenance costs. The lessee is responsible for minor repairs.

Utilities

Monthly electricity cost runs from $800-$ 1000 per month. It is typically higher in the summer months. The building is all electric and there are no other utility costs.

Employees

The store hours are from 10:00am to 5:30pm on Monday thru Friday and from 10:00am to 4:00 pm on Saturdays. The store is closed on Sundays. Two employees are needed during these hours and they usually arrive 15 minutes before the store is opened and leave 15 minutes after the closing time. They do not take a lunch hour but are allowed to take a break and eat lunch in the back kitchen area. During the holidays, additional employees may be needed. One employee acts as a manager and works four days (Monday - Thursday) a week and is paid $10 an hour. The manager has worked at the store for five years and would like to continue with the new ownership if possible. A second employee works two days during the week and is paid $8 an hour. Two additional employees work one day a week and are paid $7 an hour. The rest of the hours are completed by part-time employees paid $6.50 per hour. Employees are paid bi-weekly for the week ending the previous Saturday. The first payroll in the year 2007 is January 11th. The employees receive no benefits other than the payroll taxes required by law.

Insurance

Insurance has been averaging $2200 a year and includes general liability and workmen's compensation. It does not include any insurance on the items owned by the vendors but does include property insurance on the items owned by the company.

Janitorial Service

The store provides janitorial service for the common area, kitchen area and bathrooms. The cleaning crew comes once a week and the charge has been running $75 per week. Vendors are responsible for cleaning their own booths.

Advertising

Lucy Taylor, the current owner has an advertising contract with the local newspaper. This contract is $240 a month and includes three advertisements per week in a local newspaper. An annual contract has to be signed to obtain this rate. Some advertising is also done in two local magazines. Both magazines are bi-monthly and average $350 for a 1A page ad space. Lucy stated she tried television advertising but it was too expensive in the current market. Lucy stated that the most effective advertising seemed to be direct mail. She currently has a list of approximately 1,200 customers. The cost to print and mail a basic two-color postcard averages around $600. She usually sends out a postcard twice a year. While some of the cost of the advertising is supplemented by the required fee, the cost of advertising in the past has been over and above that paid by the vendors. At the current time, there is no utilization of Internet advertising. The store does have a basic website that contains only two pages of information.

Telephone

The cost of telephone service averages around $3 50 a month and includes a two-line business phone and a separate line for a fax machine. Currently no Internet listing is utilized and there is no Internet connection. To add Internet to the present computers, it would add $60 a month and to add an Internet advertisement on Yellowpages.com, it would add approximately $95 a month.

Other operating expenses

Other operating expenses include store supplies (cleaning supplies, printer paper, bathroom supplies, etc. . . ) and average up to $200 a month. Wrapping products (gift bags, tissue, and ribbon) are frequently used as the store offers "free gift wrapping" as a customer service. The wrapping products along with the bags used in each sale average 2%> of sales.

Taxes

As stated previously, the store pays employment taxes on employees consisting of FICA at 7.65%; State Unemployment taxes on the first $8,000 of earnings at 2.7%; and Federal Unemployment taxes on the first $7,000 in earnings at .8%. Other taxes and fees include an annual fee for a business license ($100) and a fee for gross receipts (or .03%) of each sale). The store collects and remits the state and local 7%o sales taxes on all sales.

THE PURCHASE DECISION

The three individuals (Laura Lewis, Patricia Robbins and Mary Farley) need to evaluate the information given to them by Lucy and decide if they want to "purchase" the business. If they decide to purchase the business, they would also be required to sign a three-year lease on the building. An investment of cash would also be required for operating expenses and they would need to set up a credit card or line of credit with a bank. If the business is purchased, they also want to evaluate adding a line of business to increase direct income to the store owners. It would be essential for the new line of business not to compete with merchandise currently sold by the present vendors. Some of the types of businesses considered would be a stationery /personalized gift business or a lunch time restaurant. Other decisions to be made if the group decides to purchase the business would be the type of business organization to form with the three individual owners and how the management duties would be divided between them.

QUESTIONS

1. Table One presents monthly sales data for the last three years. Table Two presents the rented booth spaces and their rates. Based on the sales data, the rental data, and the operating expenses outlined in the case, construct a monthly projection of cash flows by month for the year 2007. It is up to the individual or group to be conservative in the occupancy percentages and sales, use averages or be aggressive in the proj ections. Based on the completed cash flow analysis, make a recommendation to the three potential purchasers as to whether they should purchase the business. Include in your presentation, both the advantages and disadvantages (identified from reading the case) of purchasing the business.

2. If the three individuals decide to purchase the business, what would be the best type of organization to form? Prepare a presentation to include the advantages and disadvantages of a standard partnership, an LLP, a C corporation and a Subchapter S corporation.

3. One of the lines of business the potential owners are considering is a "Personalization Station" center including custom printed stationery; on-site printing of invitations; customer ordered stationery and invitations sold to dealers printed by the stationery companies; wedding invitations and embossed stationery; monogramming for towels, handbags, and other miscellaneous items (the actual monogramming would be out-sourced); personalized jewelry and other miscellaneous personalized items. The new owners could utilize the space in one of the larger vacant booths to display the merchandise. There is currently only one retailer in the area offering an extensive amount of personalized merchandise and it is in the north end of town. The potential purchasers believe this to be a viable line of business as they are of the opinion that personalized merchandise is very popular in the southern United States. Research the internet and visit some retailers in your area and interview them on the start up costs for such a business. Develop a presentation to the new owners on the advantages and disadvantages of staring this new line of business.

4. Another type of business the new owners might consider is a lunch time restaurant or a "tea room" as was located in the previous location. A lunch time menu could be a draw for bringing in the type of clientele shopping for art, antiques and upscale gift merchandise. There is a small space that could be utilized for approximately five to six café type tables and chairs that could seat four diners each. The kitchen is not equipped as a commercial kitchen (as required by regulations) and would have to be renovated. Another idea would be to have a local restaurant deliver the food for the day. Interview a local restaurant owner and research other sources to determine the startup costs for opening a small restaurant. Evaluate the advantages and disadvantages and make a proposal to the potential purchasers.

5 . At the current time, the business does not have any type of on-line presence other than a two page website. The potential purchasers are interested in developing a more informational website and possibly include information on each vendor. Develop a basic plan for designing the website and the information that should be included. Include in your plan, the anticipated cost for the website design. An additional consideration is the ability to update the website on a regular basis. The cost of the plan should include the cost for updates. Another selling strategy that could be presented to the potential purchasers is the feasibility of selling some of the original artwork and antique furniture on-line. This could be accomplished either through the company's own website or through a website service such as godaddy.com. Research the options available and the advantages and disadvantages of selling such merchandise on-line.

6. Research the type of advertising available to small retail stores in your area. From the information on advertising options available in your area, develop an advertising budget and make a recommendation for allocation of the advertising dollars between newspaper, local magazines (if any), television (local network and cable), radio, billboards, internet and direct mail for The Shoppes at Riverside.

AUTHORS' NOTE

The names in this case have been disguised.

Subject: Retail stores; Retail sales; Cash flow; Advantages; Case studies

Location: United States--US

Classification: 9190: United States; 8390: Retailing industry; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Supplement: Special Issue Number 1

Pages: 109-120

Number of pages: 12

Publication year: 2010

Publication date: 2010

Year: 2010

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: 845496562

Document URL: http://search.proquest.com/docview/845496562?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 35 of 100

STOLEN DATA AND FRAUD: THE HANNAFORD BROTHERS DATA BREACH

Author: Clapper, Danial L

ProQuest document link

Abstract:

Hannaford Brothers Company is a regional grocery company with stores throughout eastern United States. On March 17, 2008 Hannaford Brothers announced that it had been the victim of a malware attack it characterized as "new and sophisticated" which resulted in over 4.2 million credit and debit card numbers being compromised. In every one of its close to 300 grocery stores in Maine, Vermont, New Hampshire, Massachusetts, New York and Florida the malware had intercepted credit and debit card data after the customers swiped their card at the checkout counters. This stolen credit card data was fraudulently used in at least 1,800 cases in the U.S. as well as Mexico, Bulgaria and Italy. On March 19, 2008 an attorney in Maine filed a class-action lawsuit against Hannaford Brothers. Other lawsuits followed shortly. This case explores one of the most notorious data breaches of 2008 - a year which according to one report had more records compromised than the preceding four years combined. Students will learn how the data was stolen, how criminals used the stolen data to commit fraud, the security standards in place to protect data and the results of the lawsuits against Hannaford Brothers. [PUBLICATION ABSTRACT]

Full text:

THE DATA THEFT

The first indication that Hannaford Brothers had a problem came on February 27, 2008 when they were notified by First Data - which handles transactions for Discover and American Express ~ about a high number of fraudulent charges on credit cards which had previously been used at Hannaford stores (Wickenheiser, 2008). Although Hannaford Brothers had never before been the victim of a data breach, they were now in the middle of an ongoing theft of customer information that would be one of the most publicized of 2008 and ultimately lead to millions of their customers' credit card data being stolen. After being alerted by First Data, Hannaford Brothers notified the Secret Service and assembled a team of over thirty computer forensic experts to find the source of the data leak. At this point Hannaford Brothers had not notified the public and did not know how the data was being stolen. As they were trying to determine how the theft was occurring one thing was very clear: they had to figure it out quickly. The longer they took, the more customer data was being stolen. They had to find out what data was being stolen, how the thieves were stealing it and they had to do it fast.

Since credit card fraud was what alerted them to their ongoing data theft, the store' s payment system was examined as a source of the data theft. Each of the Hannaford Brothers and affiliate stores had the same Point of Sale (POS) system architecture. Next to each cashier in the store was a POS terminal with a card reader. When the cashier had rung up all of the items in the order, if the customer wished to pay with a credit or debit card the customer's card would be swiped and their authorization data would travel from the POS terminal to an in-store server and then out to their transaction processor which would authorize the credit card for the purchase. Each store had one server and multiple POS terminals with card readers.

After more than a week of round-the-clock work the Hannaford Brothers forensic team determined that criminals somehow had managed to insert a malware program onto every one of the Hannaford Brothers in-store servers. They had managed to do this for all of the close to three hundred stores distributed throughout the northeast and Florida. The malware program was able to grab the data as it was being sent from the POS terminals to the in-store server as part of the authorization process and then add the data to a cache of stolen data. The malware would then regularly connect with an overseas Internet Service Provider (ISP) and send the most recent batch of stolen customer data out of the United States. This data theft was occurring despite the fact that Hannaford Brothers had a security firm to monitor its network security and their stores used a modern POS system that should have been secure (in fact, Hannaford Brothers had been featured in a 2005 Computerworld article as an example of a retailer aggressively updating and modernizing their POS system (Hoffman, 2005)).

There were a number of other reasons that Hannaford Brothers described this attack as "new and sophisticated". The first of these is the operating system of the computer the malware ran on. Most of the computers in the world use a Microsoft Operating system, but the malware that stole the data from Hannaford Brothers was designed to run on a computer running the Linux operating system. Although Linux is widely used as a server operating system (OS), only a small percentage of non-server machines run Linux and thus there has been little financial incentive for malware writers to create malware for Linux. This has led some to the conclusion that this malware was custom written and designed specifically for the Hannaford Brothers payment system. The uniqueness of this malware is also reflected in how difficult it was to find and indentify by the computer forensic team: it took a thirty person team of Secret Service and other computer forensic experts - working around-the-clock ~ over a week to find this malware program.

Another unusual aspect of this malware is that the criminals were able to place it on over three hundred servers distributed from Maine to Florida. Speculation about how this was done ranges from an inside job, to malware that moved from one server to the next until it was on all of the servers. But neither Hannaford Brothers nor the Secret Service has publicly detailed how this was achieved and it is possible that neither know. Another unusual aspect of this data breach is that the data was stolen in-transit during the authorization process. A more typical approach used by criminals is to target databases containing credit card data "at rest", i.e., stored in a database - possibly during the daily batching process step. A Gartner report states that the Hannaford Brothers data breach was the first publicized case of sensitive card authorization data being stolen in transit (Litan, March 20, 2008)

Whether at-rest or in-transit, the payment card industry is very concerned about customer data being stolen. To enhance cardholder data security the Payment Card Industry Security Standards Council created the PCI Data Security Standard (PCI DSS). This standard is organized around a number of principles each with one or more requirements. The principles are: Build and Maintain a Secure Network; Protect Cardholder Data; Maintain a Vulnerability Management Program; Implement Strong Access Control Measures; Regularly Monitor and Test Networks; Maintain an Information Security Policy (PCI Security Standards Council, 2008). Under the Protect Cardholder principle there are two requirements: Requirement 3 : Protect stored cardholder data and Requirement 4: Encrypt transmission of cardholder data across open, public networks. Since the malware at Hannaford Brothers stole the data in-transit it would appear that this requirement was not met, but public networks refers to external networks such as the Internet. Since the malware was on the server in each of the stores it was able to grab the data in-transit within the private store network. This data (while it was on the private store network) was not required to be encrypted to be in compliance with requirement 4. Hannaford Brothers was in PCI compliance at the time of the data breach and ironically its compliance was re-certified on February 27, 2008 ~ the same day they were originally notified of fraud problems (Kaplan, Hannaford tells regulators how breach happened, 2008).

By March 8, 2008 the company was confident that it had identified the malware that caused the data breach. It replaced all of the system hardware and rechecked the software (Hench, 2008). From a forensic analysis of their customer transactions Hannaford Brothers determined that over 4.2 million customer purchases from December 7, 2007 to March 8, 2008 may have been compromised. But what information precisely had been stolen? To understand the types of fraud that Hannaford' s customers faced it was vital to determine the exact data that was stolen - that would determine the types of fraud that criminals could commit with the data.

THE STOLEN DATA

Credit cards contain two different types of storage: visible data on the surface of the card itself (either printed or embossed) and data stored in the magnetic stripe on the back of the card which can only be read by a card reader. The most important data stored on the card itself is the credit card number (Primary Account Number or PAN), which is typically embossed on the card and the CCV2 which is usually printed on the back of the card. The CCV2 is used to help prevent fraud in "Card -not-Present" transactions ~ such a purchase on the web - by helping to verify that the customer actually has physical possession of the credit card and not just a stolen credit card number (Visa U.S.A. Inc., 2007).

Hannaford Brothers is a retail grocer so the cards used were in a "Card Present" situation. In this situation the card is "swiped" as the customer pays for the purchase. In this setting, only magnetic stripe data is used for the transaction. As the card is swiped the Point of Sale (POS) terminal's card reader obtains the data it needs from the magnetic strip on the back of the card. The information stored on the magnetic strip is called "Track Data". When the card is swiped the data needed to authorize the purchase is read from the tracks.

In theory there can be as many as three separate tracks, but typically only the first or second tracks are used for a credit card transaction. The key data contained in the tracks are: Track 1 data: Primary Account Number (PAN) - this should be the same as the number that is embossed on the card; Customer Name; and Expiration Date. Track 2 data: Primary Account Number (PAN) - this should be the same as the number that is embossed on the card; and Expiration Date; The tracks may contain additional data, but this is the key data needed for transactions and which must be protected (Wikipedia, Viewed: June 22, 2009).

The simple act of making a purchase with a credit card results in a complicated process involving a surprising number of different entities. The most important entities are: Cardholder, Merchant, Merchant Bank (also called an Acquiring Bank or Acquirer), Card Issuer (also called an Issuer or Issuer Bank) and Card Association. The Cardholder is the authorized person attempting to use the credit card to make a purchase. The Merchant is the business (authorized to accept the credit card) who wishes to sell the item(s) to the cardholder. The Merchant Bank or Acquiring Bank is the financial institution who the merchant contracted with to accept credit card payments. The Card Issuer is the financial institution that provided the actual credit card to the card holder. The Card Association is Visa, Mastercard, Discover, etc. . . (Visa U.S.A. Inc., 2007).

The complete process of using a credit card for a purchase is a four step process involving all of these entities that consists of the following: Authorization, Batching, Clearing and Settlement, and Funding. Authorization is the step where the issuer verifies to the merchant that they should accept the credit card for this transaction. In a retail setting like Hannaford Brothers (Card-Present) the authorization process begins when the customer or cashier swipes the credit card and ends when the cashier gets authorization approval and the customer can finish the purchase. In the Batching step all the customer transactions for the day are stored until usually the end of the day when they are submitted for clearing and settlement. During the clearing and settlement step the issuers pay the acquiring bank for the transactions. Finally, in the Funding step the acquiring bank pays the merchant for the transactions. From authorization to the merchant receiving the funds usually takes about three days (Bank of America, 2008).

The Hannaford Brothers forensic examination revealed precisely the data that was stolen during the data breach: Track 2 data from the cards used by the customers during their purchase. Given that the data was stolen during the authorization step, this makes sense because the key data needed for authorization is just the PAN and the amount of the purchase. No other data on the customer cards - either Track 1 or data printed or embossed on the card - was stolen during the data breach. Once Hannaford Brothers knew the exact data that was stolen during the data breach they could begin planning for the type of fraud that was most likely to be used by criminals to profit from the stolen data.

THE FRAUD

The ultimate goal of criminals is to use stolen credit card data to commit fraud. The precise nature of the fraud likely to be committed depends on the specific data stolen. If only credit card numbers (PANs) are stolen, the thieves are limited to credit card fraud and more precisely, CardPresent credit card fraud. A typical scenario for this would be for the criminals to create counterfeit credit cards for each of the stolen credit card numbers and then use these cards in retail stores to purchase merchandise that would later be re-sold to criminal fences or to unsuspecting people on websites such as eBay and Craigslist. If, on the other hand, the stolen data also includes Personal Identifying Information (PII) such as the customer's name, then the fraud possibilities greatly expand from simple credit card fraud to Identity Theft.

The broad definition of Identity Theft was given in the Fair and Accurate Credit Transactions Act of 2003 as: "A fraud committed or attempted using the identifying information of another per sonwithout authority". A finer and more useful breakdown of Identity Theft yields the following two categories: Account Takeover and True Name identity theft. In Account Takeover the criminal uses the victim's personal information to take over existing accounts - often changing the mailing address of the accounts so that for a time the victim is unaware of the charges made to their accounts. In the True Name form of identity theft the thief uses the victim's personal information to open new accounts of which the victim is unaware. Because all billing would be sent to a different address and the victim is unaware of the existence of these new accounts, they represent a significantly greater risk to the victim than the account takeover form of identity theft.

HANNAFORD BROTHERS PUBLIC RESPONSE

By March 8, 2008 Hannaford Brothers are confident that they understand the source of the data breach, the specific data stolen and the types of fraud likely to be committed with the stolen data. On March 10, 2008 they send a list of the compromised customer credit card numbers to the major credit card associations. On March 13, 2008 these credit card associations provide a list of compromised credit card numbers to their member banks - without naming Hannaford Brothers as the source of the data breach. Then on March 17, 2008 after being asked about this incident by Massachusetts officials, Hannaford Brothers general counsel Emily Dickinson delivers a letter to Massachusetts Attorney General Martha Coakley and the Massachusetts Office of Consumer Affairs and Business Regulation disclosing the data breach and some of the details surrounding it. The letter was not released to the public but Hannaford Brothers notified the public with a press release and information pages on their website. Hannaford Brothers executives as well as Visa and Mastercard declined comment, but Carol Eleazer, vice president of marketing, acts as a liaison with the press. (Pereira, Corporate News: Data Theft Carried Out On Network Thought Secure, 2008; Naraine, 2008; Kerber, Hannaford case exposes holes in law, some say, 2008);

THE LAWSUITS

Within days of Hannaford publicly disclosing their data breach a number of class action suits were filed on behalf of their compromised customers. These multiple cases were consolidated into one case that was heard in the U.S. District Court in Portland Maine. A key question in the case was what should be the consequences to a company that allows its customer confidential information to be stolen? For at least 1,800 of its customers this theft resulted in the customer's credit cards being used fraudulently. While the rest of the over four million customer's credit cards were not used for fraud they had to bear the time and inconvenience of receiving new credit cards and checking to make sure their cards had not been used fraudulently. The lawsuit sought damages for this loss of time and money.

The plaintiffs also sought additional damages because they contended that Hannaford Brothers knew about the breach for at least three weeks before notifying its customers, thus knowingly exposing its customers during that time frame to stolen credit card numbers and fraud (Maxwell, Judge to decide if Hannaford data breach should go to trial, 2009).

THE AFTERMATH

On May 12, 2009 the federal judge hearing the Maine District case dismissed all but one of the claims against Hannaford Brothers. Judge D. Brock Hornby ruled that the only claims that could continue were customers who were not reimbursed by their banks for the fraudulent charges - which turned out to be only one customer. The judge ruled that merely being inconvenienced by the data breach (either by having to work with the credit card company to cancel fraudulent charges or by spending time monitoring the card for fraud) did not meet the legal definition of injury that would allow them to have a legal claim against the defendant. The judge wrote that "There is no way to value and recompense the time and effort that consumers spent in reconstituting their bill-paying arrangements or talking to bank representatives to explain what charges were fraudulent. Those are the ordinary frustrations and inconveniences that everyone confronts in daily life with or without fraud or negligence. Maine law requires that there be a way to attach a monetary value to a claimed loss. These fail that requirement. " (Maxwell, Judge tosses all but one Hannaford data breach claim, 2009)

Although it appears that Hannaford Brothers has avoided a long, costly class action suit from its compromised customers, the cost associated with the data breach are still very significant. Although they are confident they found the malware program that caused the data breach, to be safe they replaced all of the computer hardware. Although some of the forensic team who worked for over a week to uncover the malware were Secret Service experts, others were outside industry people who presumably had to be paid by Hannaford Brothers. Finally, to insure that a data breach of this type doesn't happen again Hannaford Brothers announced that it planned to spend millions of dollars on new technology to upgrade its IT security infrastructure (Vijayan, Paying breach bill may not buy Hannaford full data protection, 2008). On reviewing the intended security upgrades, industry experts said that the changes will exceed the PCI DSS security standards (Kaplan, After breach, Hannaford details IT security remodel, 2008).

DISCUSSION QUESTIONS

1. What data is stored on a credit card?

2. Which credit card data is used in Card-Present transactions? Which data is used in Card-NotPresent transactions?

3. Why is some of the data printed on the card and some of it stored in the magnetic stripe?

4.. Describe the credit card authorization process and the entities involved.

5. How does the type of data stolen determine the types of fraud it can be used for?

6. What type of fraud could the stolen Hannaford Brothers data be used for?

7. How was the data stolen in the Hannaford Brothers data breach?

8. Hannaford Brothers described the cause of their data breach as a "new and novel" approach. Why?

9. Describe the PCI standard requirements that are most relevant to the Hannaford Brothers breach. Was Hannaford Brothers in compliance with these requirements?

10. In their public statements about the data breach, why did Hannaford Brother emphasize than no personal identifying information had been compromised?

11. Although Hannaford Brothers compromised payment card data for over four million customers, the Maine district course judge dismissed the class action suit before it could go to trial. Why?

12. Did Hannaford Brothers negligence lead to the data breach? Why or why not?

Subject: Data integrity; Grocery stores; Credit card fraud; Computer viruses; Point of sale; Case studies

Location: United States--US

Company / organization: Name: Hannaford Brothers Co; NAICS: 424410, 445110, 446110

Classification: 5140: Security management; 5240: Software & systems; 9190: United States; 8390: Retailing industry

Publication title: Journal of the International Academy for Case Studies

Volume: 16

Supplement: Special Issue Number 1

Pages: 121-130

Number of pages: 10

Publication year: 2010

Publication date: 2010

Year: 2010

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: 845495972

Document URL: http://search.proquest.com/docview/845495972?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2010

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 36 of 100

STEVE SHARPE: A STOCK REPORT

Author: Dukes, William P; Peng, Zhuoming (Joe); Tanner, Margaret M

ProQuest document link

Abstract:

This case pertains to the valuation approach for a common stock being considered for purchase by a student in a Student-Managed Fund (SMF) class at a university. The fundamental factors of analysis pertaining to the profile of the company include the firm's products/services, the nature of the demand for the products and the managerial comparisons for sales. In addition, earnings per share, return on sales, return on assets and return on equity are considered. The emphasis of the case relates to recognition of risk, as it pertains to the common stock of the firm, estimations of the required rate of return, calculation of the "present value factor" which permits analysts to determine the present value of annualized return data projected into a specific future period. A price of the common stock projected into the future can be discounted to compare its present value with the current market price to determine whether the stock is undervalued or overvalued.

Full text:

(ProQuest: ... denotes formulae omitted.)

QUESTIONS

Question 1: Using the regression output contained in Tables 1 and 2,

a. Determine the beta estimate from two sources. Show how.

b. How much of the variability in Big-T is answered by the market. Show how.

c. Calculate and show work to obtain the covariance.

d. Calculate the total risk for Big-T.

Solution 1:

(a) The beta estimate...

The beta estimate shown in Table2 2 is 0.9979. A matter of rounding causes the difference.

(b) The relationship between the company returns and the S&P 500 returns shows that the variability of the company returns is answered by the R2 of 0.898 or 89.80%. Thus, the unanswered variability is R^sup 2^ -1 = 0.898-1 = 0.102 , or 10.20%.

(c) The covariance is calculated by multiplying the correlation of the two securities by each of the standard deviations of the two securities involved.

The Covariance ^sub (Big-T,TheSáP500)^= 0.9481 × 0.0474 × 0.0451 = 0.0020267 as shown in Assignment 1(a) above.

(d) Total risk is the variance of the return on Big-T. The Variance ^sub Big-T^= 0.04742 = 0.0022467

Question 2: Using data provided in the case and as shown above, calculate the required rate of return using the Ibbotson's approach as illustrated.

Solution 2:

...

For the "purest" who would rather use theory than what practitioners use, the equity risk premium would be estimatedas, ... where the T-bill rate is an historical average given by Ibbotson.

The current three-month T-Bill rate is about 0.17%, retrieved from /www. ustreas.gov/ojfices/ domesticfinance/debt. The required return for the theorist would be, 0.0017 + 0 .55x(0.0781) = 0.044655 or 4.47%. When interest rates are normal and not manipulated for economic purposes, the two approaches are close. It is not too likely that a flat yield curve would permit the same required return to be estimated. For purposes of this case, the required return of 7.20% will be used.

Question 3: (a) Calculate N, the number of years, from August 31, 2010 through the end of Year 2015. (b) Calculate the present value factor assuming the present date is August 31, 2010.

Solution 3: The present value factor is used to discount a price or value from some point in the future (a precise date) back to the day of the calculation. Today's date is assumed to be August 31, 2010. The remaining time in the year is 122 days (September 30 + October 31+ November 30 + December 31).

(a). N (Time to the end of Year 2015).

The time remained in Year 2010 is...

The period from August 31, 2010 to the end of Year 2015 is, 5 + 0.3342466 = 5.3342466 (years).

(b). Present Value Factor Calculation. The present value factor is obtained by compounding the required rate of return for the period toward the end of 2015, (l + 7.20%f =1.072^sup 53342466^ =1.44899348 . The future value of the stock at the end of 2015 can be discounted back to August 31, 2010 by dividing it by this present value factor of 1.44899348. Alternatively, if you prefer to multiply rather than divide, the multiplier is .... Whether one divides the future value of the stock by 1.44899348 or multiplies it by 0.69013423, the present value of the stock is the same.

Question 4: Using the dividend growth model, find the present value of the price determined by using the 7th year expected dividend.

Solution 4: Dividend Growth Model

The purpose of the model is to estimate a price (value) at the end of Year 2015 by means of capitalizing the 7th year's dividend. First, we estimate the future stock price at the end of 2015. We grow the 2009 dividend of $0.60 at the 14% annual growth rate until the end of 2016. This resultant estimated future dividend will be used as Dl . Dx , the 7th year dividend, is estimated as,

D^sub 1^ = $0.60x (1 + 14%)^sup 7^ = $0.60 ? 2.50226879 = $1.50136127 * $1.50 .

The next step is to capitalize $1.50 at a Value Line estimate of the average dividend yield of 0.8%, - : $ 187.67 . We then use the present value factor estimated earlier. As indicated in the teaching notes of Assignment 3, you have the option of dividing $187.67 by 1.44899348 or multiplying it by the multiplier of 0.69013423. Either way, the stock price today is estimated to be $129.52, ... . Since Big-T is currently selling for about $54.00, it is considered to be undervalued by a significant amount.

Question 5: Calculate the annualized HPY estimate for Big-T. Use all data available in the case and as given. (Hint: use the HPR, sum of the dividends expected between August 3 1, 2010 and the end of 201 5, and assume the present stock price on August 31, 2010 of $54.00.)

Solution 5: Holding Period Return: The holding period return for the whole period of six years from August 31, 2010 to December 31, 2015 is the heart of the case. The steps, one at a time, should help clarify the process.

1. Compute earnings per share projected to the end of 2015

EPS^sub 2015^ = $3.37 x(1 + 14%)^sup 6^ =$3.37x2. 19497262 = $7.39705779 «$7.40

2. Project year-end 2015 stock price.

P^sub 2015^ = EP^sub 2015^ × Projected P/E = $7.39705779 ? 20 * $148.00

3. Sum all the expected dividends in the interim.

4. Compute the HPR for the whole period from August 3 1, 2010 to December 3 1, 2015.

The HPR for the whole period = ($148.00 + $5.72032)/ $54.00 = 2.84667259

5. Annualize the HPR.

There will be 5.3342466 years until the end of Year 2015, i.e., JV=5. 3 342466.

Theannualized HPR = (whole period HPR1)^sup 1/N^ =(2.84667259)^sup 1/53342466^ = 1.2166725

6. Compute the annualized HPY.

The annualized HPY = The annualized HPR -1 = 1.2166725-1 = 0.21 66725 * 2 1 .67% .

Compared to the required return of 7.2%, the expected annualized HPY of 21.67%) is much higher so that Big-T is considered undervalued. Greater confidence is provided when the dividend growth model confirms the undervalued position of the P/E Model.

Both approaches show the security to be undervalued. It is possible that the two approaches could give differing answers. If you are a Gordon fan, you may select the capitalized dividend as your choice. Practitioners would probably prefer the EPS or P/E approach. In either case, both calculations should be made. Agreement provides more confidence in the valuation.

ACKNOWLEDGEMENT

We are grateful to an anonymous reviewer for his/her useful suggestions. All errors are our responsibility.

Subject: Common stock; Valuation; Rates of return; Risk; Case studies; Colleges & universities

Location: United States--US

Classification: 3400: Investment analysis & personal finance; 9190: United States; 9130: Experiment/theoretical treatment

Publication title: Review of Business & Finance Case Studies

Volume: 1

Issue: 1

Pages: 10-13

Number of pages: 4

Publication year: 2010

Publication date: 2010

Year: 2010

Publisher: Institute for Business & Finance Research

Place of publication: Hilo

Country of publication: United States

Publication subject: Business And Economics--Banking And Finance

ISSN: 21503338

Source type: Scholarly Journals

Language of publication: English

Document type: Business Case, Feature

Document feature: Equations Tables References

ProQuest document ID: 1238686805

Document URL: http://search.proquest.com/docview/1238686805?accountid=38610

Copyright: Copyright Institute for Business & Finance Research 2010

Last updated: 2013-09-25

Database: ABI/INFORM Complete

Document 37 of 100

VARIETY ENTERPRISES CORPORATION: CAPITAL BUDGETING DECISION

Author: Meric, Ilhan; Dunne, Kathleen; Li, Sherry F; Meric, Gulser

ProQuest document link

Abstract:

The capital budgeting decision is one of the most important financial decisions in business firms. In this case, Variety Enterprises Corporation (VEC) is considering whether to invest in a new production system. To determine if the project is profitable, VEC must first determine the weighted average cost of capital to finance the project. The simple payback period, discounted payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR) techniques are used to study the profitability of the project. MIRR is a relatively new capital budgeting technique, which assumes that the reinvestment rate of the project's intermediary cashflows is the firm's cost of capital. The stand-alone risk of the project is evaluated with the sensitivity analysis and scenario analysis techniques assuming that manufacturing the new product would not affect the current market risk of the company. The case gives students an opportunity to use the theoretical profitability and risk analysis techniques explained in standard finance textbooks in a real-world setting. The case is best suited for MBA and Master of Accounting students and is expected to take approximately three to four hours to complete. The case may also be appropriate for undergraduate senior finance majors. [PUBLICATION ABSTRACT]

Full text: _TVM:UNDEFINED_

Subject: Manufacturing; Capital budgeting; Cost of capital; Profitability; Case studies

Classification: 3100: Capital & debt management; 8600: Manufacturing industries not elsewhere classified; 9130: Experiment/theoretical treatment

Publication title: Review of Business & Finance Case Studies

Volume: 1

Issue: 1

Pages: 21-25

Number of pages: 5

Publication year: 2010

Publication date: 2010

Year: 2010

Publisher: Institute for Business & Finance Research

Place of publication: Hilo

Country of publication: United States

Publication subject: Business And Economics--Banking And Finance

ISSN: 21503338

Source type: Scholarly Journals

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables References

ProQuest document ID: 1238686802

Document URL: http://search.proquest.com/docview/1238686802?accountid=38610

Copyright: Copyright Institute for Business & Finance Research 2010

Last updated: 2013-09-25

Database: ABI/INFORM Complete

Document 38 of 100

WHERE SHOULD GENERAL MOTORS GO FROM HERE?

Author: Maniam, Balasundram; Bexley, James B; McFarlane, Jolene Bon-Jorno

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Abstract:

General Motors was once the pinnacle for industrial accomplishment, leading the automobile industry in market share for over 70 years. Early business strategies paved the way for this success, including; organizational structuring, marketing, and utilizing efficient production through economies of scale and scope. Over time, GM became comfortable and complacent in their market leader position. They did not heed the changes taking place in the automobile market, the overall economy and consumers. As a result, their technology became outdated and their manufacturing practices overly complex and unconcerned with quality, all while costs increased and profits dwindled. General Motors continued to spiral downward until their final collapse in 2008-2009. The company ended up in bankruptcy, but has made plans to reform and revive their business. This case is suitable for undergraduate or graduate business students. The case should require about one hour of outside preparation and one hour of class discussion. [PUBLICATION ABSTRACT]

Full text:

CASE INFORMATION

General Motors Company was founded on September 16, 1908 in Flint, Michigan. The business was originally established as a holding company for thirteen car firms and ten parts-andaccessories manufacturers. William (Billy) Durant formed General Motors Company out of merger. He was a well known entrepreneur in the early 1900's who envisioned consolidating several autonomous auto and parts companies into one large firm to achieve economies of scale while satisfying the growing consumer demand for automobiles (Johnson, 1978).

Although Durant was a brilliant capitalist, he had no interest in systematic management. The GM holding company was comprised of decentralized, independent manufacturers with very little top level coordination (Marchand, 1991). Each unit had its own administration and handled operations separately. Durant had knowledge of economies of scale and he wished to utilize resources, but he became too focused on the operations of each company within GM. There was no central policy making or administrative system to direct the activities of each unit toward a common goal (Johnson, 1978). Durant ignored the need for internal reform and did not seem concerned for the corporation as a whole, As a result, by 1922 GM was worth less than the sum of its individual parts (Marchand, 1991).

The auto industry and market experienced a steady increase from the early 1900's to 1920. The Inventory Crisis of 1920 caught Durant off guard. In the economic downturn, demand for autos decreased sharply leading to severe losses (Norton, 1997). Because his family had a large investment interest in GM, Pierre du Pont and his allies stepped in to save the corporation. In the process, the business was reorganized and Durant was forced out of leadership (Marchand, 1991).

Reorganization

As a part of the reorganization, Alfred Sloan became the eventual President and CEO of General Motors. Sloan worked to reform the corporation, and the changes he implemented led to improved performance and propelled GM to become a model for the multidivisional corporation and one of the largest and most successful enterprises of the twentieth century (Norton, 1997).

One of the first changes implemented by Sloan in the 1920's, was restructuring the management and coordination of the firm. Sloan kept the operating divisions semiautonomous, appointing decentralized managers for each unit; however, he also established a firm level management team. This top level management was able to focus on policy making, coordination of divisions, and overall performance without becoming bogged down with the details of each unit's day-to-day operations. This new model not only established a much needed structure, but also empowered and held accountable the managers of each division. GM referred to this form of corporate structure as "centralized control with decentralized responsibility" (Johnson, 1978).

Being a holding company for multiple divisions of automobiles, General Motors produced many brands and styles of vehicles. Two developments that can be traced back to the Sloan years are market segmentation and production coordination/sharing among the GM divisions. In order to segment and fully exploit the auto market, GM created the idea of "a car for every purse and purpose" (Raff, 1991). The corporation produced a variety of different cars which they hoped would appeal to all types of customers (Friedlaender, Winston, Wang, 1983). The independent divisions formed an automobile progression or ladder of success. The lowest and cheapest brand, Chevy, was targeted toward the first time buyer market or those individuals seeking an entry level vehicle; whereas the Cadillac division was a high end, luxury automobile line. The design was for customers to work their way through the ranks, purchasing a different GM automobile throughout their lives. The purse and purpose design kept the different GM divisions from directly competing for the same customers and helped to maximize profits (Raff, 1991).

Producing a mass number of vehicles also presented an opportunity for the company to utilize economies of scale and scope, and that is exactly what GM did (Friedlaender, Winston, Wang, 1983). The divisions produced different brands and models of vehicles but they were able to standardize common parts that were used across multiple lines. The sharing of parts in companies such as Chevy, Pontiac, and Oldsmobile reduced the cost of production and offered GM a competitive advantage (Raff, 1991).

Sloan was also credited with establishing the annual model and styling changes of GM vehicles. This was an important business innovation in the 1900' s interwar period. The annual model change was planned obsolescence, and encouraged customers to continue buying new models. Companies such as Ford were heavy on the manufacturing side of production and did not change their body styles frequently. GM made the model changes possible by keeping the main engines and mechanics the same and replacing cheaper parts, such as jigs and fixtures. This made the model changes less expensive and helped capitalize on consumer's desire for more modern and fashionable vehicles (Raff, 1991).

To finalize their popularity and growth, General Motors launched an intensive marketing campaign in the 1920's. When Sloan took over, the general public did not know much about the company. Over the next two years, a $600,000 marketing blitz designed by Bruce Barton introduced the company through radio and print ads. Due to its massive size, GM's marketing was focused on fighting the cold corporate stereotype and portraying itself as a warm, welcoming family. Each division was presented and showcased separately as part of the GM family portrait. The size of GM became a positive characteristic because it signified strength and assurance. Sloan and Barton's marketing of GM became a hallmark of success and created internal cohesion of the divisions and a positive public image (Marchand, 1991).

Age of Change

Beginning in the 1930's, General Motors was the industry leader in sales for over 70 years. This feat was achieved through the production, management, and marketing instituted in the early founding of the company. As General Motors grew and matured as a company, the automobile industry continued to progress, the economy suffered fluctuations, and customer preferences shifted. Apparent challenges, weaknesses, and vulnerabilities became evident within the company.

The automobile industry is characterized by large fixed costs. The manufacturing facilities, inventory, and labor required to produce vehicles make up the major capital expenditures. Launch of a new car from the design, prototype, testing, evaluation, and manufacturing can take from three to four years. Fixed costs combined with this long planning horizon make new vehicle production risky and can have a variable affect on the company's stock (Friedlaender, Winston, & Wang, 1983).

Labor, in the form of wages, insurance and retirement compensation, make up a significant portion of GM' s cost structure. There has been a long history of labor unions in the automobile industry and the majority of workers in the U.S. are traditionally a part of labor unions. Union workers become part of an organization that utilizes collective bargaining to negotiate contractual terms of employment, regarding pay and working conditions. Unions and collective bargaining were, and still are, of great importance to the survival of American industrial corporations because without labor, companies would lose great sums of money very quickly (Harbison, 1950). When the market suffers and costs need to be cut, labor is first the feel the effects. Reduced employment and layoffs are directly linked to a downturn in production (Meyer & Quadango, 1990).

The retirement benefits paid to General Motors workers were a lucrative part of the collective bargaining package and represent a significant cost to the firm. The automobile industry led the way for retirement benefits in the U.S. and the private pensions became known for their liberal early retirement provisions. The private pension retirement policies tended to focus on length of service rather than a worker's age. GM's notable arrangement of the 1970's known as "30 and out" allowed workers to retire at any age and receive benefits as long as they had served for 30 years (Meyer & Quadango, 1990).

As the automobile industry matured, the relative value of information diminished and General Motors' competitive advantage weakened (Norton, 1997). Strategies implemented in the 1920's weren't relevant post World War II. Customer preferences changed as more options became available. Competition, advanced technology, and economic pressures affected the industry.

The multidivisional structure that characterized the success of GM had its disadvantages. First, the decentralized units had a lot of freedom to decide how to employ their own resources and the tiered management structure limited communication (Johnson, 1978). The top level management became isolated and not well informed with each division (Schwartz, 1991).

General Motors became a powerhouse in the automobile market, but then displayed lackluster innovation. The company experienced a loss of creativity with little technological advancement. The annual model change and laddered divisions converged and people took notice that the cars began to look the same. The parts sharing strategy used to reduce costs also backfired because customers were not willing to buy a more expensive Oldsmobile made with less expensive Chevy parts. In its stagnation, GM made poor choices and instead of admitting setbacks they justified and remained committed to bad decisions. A great example is the introduction of the Corvair. This vehicle was produced despite well known and documented problems (Schwartz, 1991).

Competition: Japan

Other countries also produced automobiles and employed production and management strategies of their own. In Japan, the production process was superior and labor costs were lower. So much so that the company cost of a small car was $2,000 less per unit than an American equivalent (Lieberman, Lau, & Williams, 1990). Japanese had a strict commitment to quality with their philosophy of "kaizen" or continuous improvement. When imports of their vehicles began to rise, they knew their competition would carry an import tax. They brought their production to the U.S. in what came to be known as transplants (Florida & Kenney, 1991).

Japanese automakers came to America and built transplant organizations in locations rather than in the traditional industrial area of Detroit. They chose these particular locations to avoid union employment. The manufacturing facilities they ran were modeled after their sister plants back in Japan. They hired individuals who showed initiative, loyalty, and ability to work in teams. They provided wages and bonuses based on seniority, job performance, and team work. There were few job classifications and status distinctions compared to the American automobile industry. Employees were organized into work teams with shop floor leaders, where they would rotate tasks while planning and carrying out a production job from start to finish (Florida & Kenney, 1991).

The Japanese gained significant market share through the type and quality of automobiles they produced. When oil prices began to rise in the late twentieth century, the smaller and more fuel efficient Japanese cars became popular demand. The reliability of the automobiles was demonstrated by infrequent need for repair. A study by Barber and Darrough found that the majority of automobile recalls in the U.S. were made by American automakers. From 1973 to 1992, GM in particular lost more than $2.9 billion or 14% of its real market value due to recall announcements (1996).

Bankruptcy

On Monday, June 1, 2009 General Motors filed for Chapter 11 bankruptcy. The company claimed $82 billion in assets and $172.8 billion in debt, making the filing the fourth largest in U.S. history. Chapter 1 1 bankruptcy refers to the eleventh chapter of the United States Bankruptcy Code. Chapter 1 1 bankruptcy is also called reorganization bankruptcy and is typically filed when a business finds itself in financial turmoil but feels there is a viable company that can be reorganized and succeed (Moulton & Thomas, 1993).

Chapter 1 1 bankruptcy is a costly process, both in terms of time and money. There are direct, measurable costs as well as indirect, lingering costs. The direct costs of Chapter 1 1 bankruptcy include professional fees, court costs, document preparation, and communication costs. In large organizations, the direct costs of bankruptcy are estimated to be three percent of the debtor's liabilities (Moulton & Thomas, 1993).

There is a social stigma associated with bankruptcy that can affect a company's public image, consumer appeal, and future success (Moulton & Thomas, 1993). Amongst society, a feeling of resentment can build toward a business as citizens feel burdened to pay for the company's failures. Top level management often bears the brunt of this stigma and resentment and turnover is expected. The full disclosure of company records and documents is another regrettable requirement of bankruptcy and can result in loss of a company's proprietary advantage (Payne & Hogg, 1994).

Government Intervention

In 2008, the U.S. economy suffered a significant downturn and oil prices hit an all time high of $150 per barrel. American automakers turned to Washington, D.C. for help with their struggles. General Motors and then CEO Rick Wagoner were given nearly $20 million dollars and a March 2009 deadline to restructure the organization. On March 30, 2009 GM was still deep in debt and had yet to produce a successful viability plan to lawmakers. Rick Wagoner was removed as the head of the company and replaced with Fritz Henderson. Chapter 1 1 bankruptcy filings were soon to follow as the company could not survive without government support.

The day GM filed for bankruptcy, company share price plunged to its lowest value ever, 27 cents. General Motors was delisted from the stock exchange and the U.S. Treasury became 60 percent owner along with the Canadian government and the United Auto Workers trust. The new General Motors has become a much smaller organization. The business kept only four automobile divisions, Chevrolet, Cadillac, Buick, and GMC. Other planned reductions included; the number of manufacturing plants to decrease from 47 to 34, employment cut from 91,000 to 64,000, and 2,600 dealerships closed across the country. The company debt was slashed to $48 billion.

QUESTIONS

1. What caused the decline and loss of the competitive edge at General Motors?

2. What were the weaknesses in General Motor's model?

3. How will the bankruptcy and restructuring help the company to survive and thrive?

4. What can General Motors do to improve their sales?

5. What part did management style and focus have on General Motors decline?

Subject: Automobile industry; Turnaround management; Corporate reorganization; Case studies

Location: United States--US

Company / organization: Name: General Motors Corp; NAICS: 333415, 336111, 336399

Classification: 2310: Planning; 8680: Transportation equipment industry; 9190: United States; 9130: Experimental/theoretical

Publication title: Review of Business & Finance Case Studies

Volume: 1

Issue: 1

Pages: 27-32

Number of pages: 6

Publication year: 2010

Publication date: 2010

Year: 2010

Publisher: Institute for Business & Finance Research

Place of publication: Hilo

Country of publication: United States

Publication subject: Business And Economics--Banking And Finance

ISSN: 21503338

Source type: Scholarly Journals

Language of publication: English

Document type: Business Case, Feature

Document feature: References

ProQuest document ID: 1268718594

Document URL: http://search.proquest.com/docview/1268718594?accountid=38610

Copyright: Copyright Institute for Business & Finance Research 2010

Last updated: 2013-09-25

Database: ABI/INFORM Complete

Document 39 of 100

OPTIMAL EQUIPMENT INVESTMENTS FOR NORTHERN PLAINS GRAIN FARMS

Author: Jalbert, Terrance; Jalbert, Mercedes; Briley, James E

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Abstract:

This case presents a teaching tool which requires students to identify an optimal equipment plan for a northern plains small grain farm. Students are presented with information from a farm owner regarding farm size, available labor, farming techniques used and other relevant issues. Students are required to analyze this information to identify the equipment necessary to operate the farm. Students must balance equipment costs and labor issues. They must develop a plan that remains within a predetermined budget. Students use online resources to identify specific equipment along with their appropriate prices. Students are also invited to make general recommendations and comments. This case is suitable for an agricultural economics, agribusiness, or agronomy class. The case is appropriate for use at the senior, or masters level. In some instances, the case may be valuable for Ph.D. students. Students should have some familiarity with farm equipment and the equipment needs of small grain farms before being assigned the case. Students might be assigned to work individually or in teams on the project. Individuals or groups may be required to present their research to the class for discussion and comment. Completion of the case should require 5-10 hours outside of class. Classroom discussion should be about two hours. [PUBLICATION ABSTRACT]

Full text:

CASE INFORMATION

David Cobbelston recently retired from farming and moved to the city near his farm. As with many retiring farmers, he managed his equipment to be near the end of its useful life at the time he retired. He recently held a farm auction to sell the machinery from his operations. However, he is planning to retain ownership of the 4,000 acres of land and rent it to other farmers. Today, he approached is son John to inquire about his interest in renting the land. John has wanted to operate the family farm since he was a young child and is excited by the prospect. He would like to quit his job as an account executive for Pitney Bowes to take over the farming operation. As the spring planting season is approaching, David has given John only two weeks to make a commitment.

John needs to investigate financing, potential profitability, his family's willingness to relocate and many other issues to make an informed decision. While John is familiar with farming operations there are certain economic elements he will not have time to fully explore in the two weeks before he must make a decision. One concern is how much money he will need to spend on machinery. He knows his budget will be limited because of funding availability. He has approached you, Bill, an agribusiness major at the local university to assist him. He has asked you to develop a machinery plan for the farm. You, are glad to undertake the project, as you think you will learn something, and the consulting fee will pay for your spring break trip. You have taken many classes on agribusiness, finance and other management issues and grew up on a grain farm, so you feel well qualified to handle the task.

You realize that in order to develop the machinery plan, you will need some additional information about the farming operations. You schedule a meeting with John for 8:00 the following morning to gather information. At the meeting, John and David begin by telling you the farm has 4,000 tillable acres. The land is mostly located within a seven mile radius of the farm headquarters with 1,280 acres located ten miles from the headquarters.

The farm has been used exclusively for small grain production. Recently, David had been growing spring wheat, durum, feed barley and safflower. The advantage of this combination is the crops require the same equipment and have somewhat different seasons. This spreads the work out over a longer period of time and allows for more efficient equipment use. Moreover, this combination provides and element of diversification from crop disasters and crop price variations. The land is capable of growing a number of other crops including flax, rye, oats, triticale, winter wheat, sunflower, canola, millet, crambe and spelt. Malting barley is occasionally grown in the area.

In recent years, David has grown about 480 acres each of feed barley and safflower. He has grown about 640 acres of durum and the remaining land has been planted to spring wheat. Crops are typically rotated to different fields in subsequent years to reduce weed and disease problems. John plans to continue growing the same crops in about the same quantities. The land is continuous cropped, so every acre of land is planted every year. The most common method of farming in the area is no-till and John wishes to utilize this approach.

The farm is located 17 miles from a small farming community, Nickinson, with a population of 600 people. It is about 45 miles from a regional center, Avelock, with a population of 25,000 people. A good supply of parts for John Deere and Case IH equipment is available in Nickinson, and parts for most other makes of equipment are available in Avelock. Grain markets where the farm's production is sold are located about 25 miles from the farm.

The farm headquarters has a house and large workshop. There are also two steel buildings that can be used for grain storage or machinery storage. The farm has 200,000 bushel of grain storage all located at the farm headquarters. The grain storage is connected by a series of electric powered elevators, that were not sold at the farm auction. In addition, the equipment for a 3,500 bushel, bin drying system remains in place. A 500 bushel grain pit allows for fast unloading of trucks. All other farm equipment, including the shop equipment, was sold at the auction. John tells you a large capacity 66 foot or longer auger will be required for loading grain into the bins. A 40 foot unloading auger and bin sweep are required to remove grain from the bins and steel buildings. Electricity is available at the bin site.

John and his wife Kathy plan to work the farm together. While Kathy is interested in living and working on the farm, she is not interested in the business of farming. John has agreed to manage the business elements of the farm. Both are willing and able equipment operators. In addition, they have a son, Joe, who is 16 years old. Joe helped his grandfather on the farm the past two summers and is capable of operating most farm machinery. He is excited about the prospect of helping his father. David indicated he would be willing to help John during peak planting and harvesting seasons. Outside labor is available in the area but is expensive during peak planting and harvesting seasons. John tells you that he would like to have enough equipment so that seeding and harvesting can each be completed in about 25 working days. He wishes to operate the farm without hiring outside labor. John and Kathy are both handy in the repair shop. They are capable of handing small to medium sized repairs, including welding and so forth. Neither are capable of handling highly technical projects such as engine overhauls.

John and David describe the production element of the fanning process as follows. The production year begins about March 1 . The first step is to acquire the necessary planting supplies and move them to the farm. This is generally done with grain trucks and takes about one week. Supplies include seed, dry fertilizer, fuel, and various chemicals. The farm has ample space to store all the supplies needed during the planting process with the exception of fuel. The fuel tanks were sold at the farm auction.

After the supplies have been purchased, seeding begins. The seeding process starts by spreading bulk fertilizer on the fields. Normally, dry fertilizer is spread in a fertilizer spreader. Fertilizer spreaders are pulled with a smaller tractor, having perhaps 70-100 horsepower. Some seeding equipment has the ability to combine fertilizer application with the seeding process. In these cases, the spreading application is not required. Depending on the amount of weeds that start in the spring, a pre-plant spraying to burn down weeds may be necessary.

Seeding begins as early as mid March and can extend into June, depending upon weather conditions. Generally, crops which are planted earlier produce higher yields. Seeding starts by trucking seed and fertilizer to the seeder. The seed and fertilizer are transferred from the truck to the seeder. The seeder proceeds to plant the field. Seeders operate at about 5.5 to 6 miles per hour. It takes 80-100 tractor horsepower for each 10 feet of seeder used. The operator must spend a certain amount of time adjusting settings on the seeder for optimal planting, refilling the seeder, and moving the seeder from field to field. A seeder can be operated a maximum of about 10-12 hours per day. Barley is usually seeded first, followed by wheat and durum. Safflower is seeded last.

Wheat, barley and durum are susceptible to broadleaf and grassy weeds. Spraying for broadleaf weeds occurs about two to three weeks after the grain has emerged from the ground. Spraying must optimally be completed in a two to three week window. Sprayers typically operate at about 10-15 miles per hour. Pull type, self propelled or pickup mounted sprayers would be suitable for the task. The amount of time that sprayers can be utilized is limited on any given day because of wind and other weather conditions. Wind can cause chemicals to drift to nearby fields resulting in undesirable damage. On average spraying can occur for 3-4 hours per day. A second spraying is sometimes necessary in the same time period to control wild oats. A pre harvest burn down occasionally necessary. Spraying requires the application of about 3-6 gallons of water per acre in addition to the chemicals. Sprayers range in size from 300-1,200 gallons. Returning to the farm headquarters requires about 1.5 hours to refill the tank. Refilling can be completed much faster with a nurse tank that makes water available immediately at the field.

Barley harvest begins in late July or early August. Wheat and durum harvest immediately follow. While wheat and durum are harvested about the same time, they must be handled and stored separately. Safflower is usually harvested in October. The grain is straight harvested so windrowing equipment is not necessary.

Combines can operate about 8-10 hours per day. Modern era combines operate at 6-8 miles per hour. As the combine harvests, the resulting grain is transferred to tucks for transportation to the grain storage facility. Barley will ordinarily yield about 70-100 bushel per acre, spring wheat and durum between 30 and 60 bushel per acre. Safflower commonly yields 1,000-1,500 pounds per acre. A single axle truck will hold about 300 bushel of wheat, a tandem axle truck, 550 bushel, and a semi with trailer about 1,000 bushel. Safflower and other crops produce similar volumes. It takes on average 15 minutes for the trucks to get from the fields to the storage facility, with the trip from the most distant field being about 30 minutes. Return trips take about the same amount of time. Unloading at the storage facility takes an additional 10-15 minutes with a ten inch auger.

In the weeks following harvest, it is sometimes necessary to spray the land to kill any late emerging weeds. It is also necessary to mow road ditches bordering the land to minimize snow drift problems. This usually occurs in October after the first hard frost.

Grain can remain in the storage facility for several years without problems. However, more commonly grain is removed from the storage facility and sold in the local market sometime between October and February. Other activities during the winter months include repairing and refurbishing farm machinery, taking a vacation, tax planning, general planning and government program planning for the following year. This completes the crop cycle.

John tells you he has limited funds available to purchase machinery. He hopes to accumulate enough machinery to operate the farm with $110,000. He is well aware this implies the equipment will be older model used pieces. He could potentially raise some additional capital for machinery purchases if necessary. He has asked you to prepare a plan with several different funding levels to help make his decision. Specifically he would like recommendations for each a $110,000, $220,000, $330,000 budget. In addition, he would like a budget that includes late model versions of major equipment pieces. Finally, he would like a budget that includes only new equipment.

With this information you are tasked with developing a machinery plan for the farm. You consult your agribusiness professor who suggests you conduct research on machinery needs and prices using online resources. He recommends you consider information from the following websites to develop your plan: www.tractorhouse.com, www.machinerytrader.com, www.fastline.com, www.agdealer.com, www.ironsearch.com, www.machinerypete.com, www.grainfarmer.com, www.usedfarmequipment.com, www.equipmentlocator.com and www.truckpaper.com.

QUESTIONS

1. Determine the size and amount of machinery needed to operate this farm. Using internet resources, identify specific pieces of machinery that meet the needs of the farm and collectively remain within the $1 10,000 equipment budget. Please print pictures and include them with your completed case study to show the recommended equipment.

2. Do you have any cautionary notes for John regarding this plan?

3. If another $20,000 of budget becomes available, which piece(s) of equipment should be upgraded, or which additional piece of machinery should be purchased.

4. Now suppose John indicates that Joe is not likely to be available to work in the summers because he wants to spend time in Hawaii learning to surf. Thus seeding and harvesting will need to be completed without his assistance. Nevertheless, John wishes to avoid hiring outside helpers. How does this change the machinery plan? You do not need to completely redesign your machinery plan, but should identify areas where change is necessary.

5. Now suppose David suggests he may move permanently to Europe. If he did, he would not be available to help as originally indicated. If neither Joe or David are available to help during peak seasons, what adjustments need to be made? Again assume no outside labor is hired. You do not need to completely redesign your machinery plan, but should identify areas where change is necessary.

6. Return to the original farming plan, excluding the additional land suggested in question six and with both Joe and David available to work. John has been contemplating the addition of corn and sunflower production into the mix of crops grown on the farm. A retired neighbor has asked if he would like to rent 640 acres of his land for that purpose. The neighbor suggests the possibility of about 320 acres of each corn and sunflowers. John is aware that this would require him to acquire row crop farming equipment. An advantage of growing sunflowers and corn is that these crops follow a slightly different season and would not interfere with other work. How much would it cost for John to add the necessary equipment for this purpose? Please provide pictures of the recommended equipment.

7. Return to the original farming plan, excluding the additional land suggested in question six and with both Joe and David available to work. Suppose John discovers that his investments have performed much better than he was aware. Instead of having $1 10,000 to spend on machinery, he has $220,000 to spend on machinery. Develop a new machinery plan taking this new information into account. Please provide pictures of the recommended equipment.

8. Continuing with the original farming plan, how would you change the machinery plan if $330,000 were available to purchase machinery. Please provide pictures of the recommended equipment.

9. Based on the original farming plan, consider a situation where the major pieces of equipment are must be less than six years old. Develop a machinery plan that includes these modern equipment purchases. Please provide pictures of the recommended equipment.

10. Finally, based on the original farming situation, develop a machinery plan that involves the purchase of all new equipment. Please provide pictures of the recommended equipment.

11. Given your computations above, how much money do you recommend that John spends on Machinery, $1 10,000, $220,000, or $330,000, or some other amount.

12. Do you have any final comments or suggestions for John?

Subject: Farms; Capital investments; Farm machinery; Case studies

Location: United States--US

Classification: 9190: United States; 3100: Capital & debt management; 8400: Agriculture industry; 9130: Experiment/theoretical treatment

Publication title: Review of Business & Finance Case Studies

Volume: 1

Issue: 1

Pages: 45-49

Number of pages: 5

Publication year: 2010

Publication date: 2010

Year: 2010

Publisher: Institute for Business & Finance Research

Place of publication: Hilo

Country of publication: United States

Publication subject: Business And Economics--Banking And Finance

ISSN: 21503338

Source type: Scholarly Journals

Language of publication: English

Document type: Business Case, Feature

ProQuest document ID: 1238688059

Document URL: http://search.proquest.com/docview/1238688059?accountid=38610

Copyright: Copyright Institute for Business & Finance Research 2010

Last updated: 2013-09-25

Database: ABI/INFORM Complete

Document 40 of 100

OPTIMAL EQUIPMENT PLANNING FOR NORTHERN PLAINS GRAIN FARMS

Author: Jalbert, Terrance; Jalbert, Mercedes; Briley, James E

ProQuest document link

Abstract:

This case presents a teaching tool which requires students to identify an optimal equipment plan for a northern plains small grain farm. Students are presented with information from a farm owner regarding farm size, available labor, farming techniques used and other relevant issues. Students are required to analyze this information to identify the equipment necessary to operate the farm. Students must balance equipment costs and labor issues. They must develop a plan that remains within a predetermined budget. Students use online resources to identify specific equipment along with their appropriate prices. Students are also invited to make general recommendations and comments. This case is suitable for an agricultural economics, agribusiness, or agronomy class. The case is appropriate for use at the senior, or masters level. In some instances, the case may be valuable for Ph.D. students. Students should have some familiarity with farm equipment and the equipment needs of small grain farms before being assigned the case. Students might be assigned to work individually or in teams on the project. Individuals or groups may be required to present their research to the class for discussion and comment. Completion of the case should require 5-10 hours outside of class. Classroom discussion should be about two hours. [PUBLICATION ABSTRACT]

Full text:

GENERAL COMMENTS

This case represents a considerable challenge for students. It requires them to properly equip an entire farm. Moreover, students are faced with a very constrained budget. In the first analysis, students are limited to spending $1 10,000. A single new combine can cost in excess of $300,000. Thus equipping an entire farm with the many different pieces of equipment required for $110,000 is difficult at best. Nevertheless, this is the type of challenge faced by many new and established farmers. Clearly, in the constrained budget analyses, the farm will need to be equipped with older model equipment. As the farm is of considerable size, students should be looking at purchases of large equipment. Students are also required to develop machinery plans for other budget amounts. While students should provide pictures with their case solution, pictures are not included here to conserve space.

The following provides a sample machinery plan. The case is open ended, so student solutions may differ markedly from what is presented here. The plan developed here is based on machinery and pricing available in May 2010. Prices reported are based on advertised prices without consideration of any negotiated discounts or transportation charges. Professors who wish to develop a shorter assignment might require students to complete a plan for a single budget amount rather than for several candidate budgets.

QUESTIONS

Question 1: Determine the size and amount of machinery needed to operate this farm. Using internet resources, identify specific pieces of machinery that meet the needs of the farm and collectively remain within the $110,000 equipment budget. Please print pictures and include them with your completed case study to show the recommended equipment.

Solution 1: Several calculations are needed to determine the size of equipment needed to operate this farm. As the owner has indicated a limited equipment budget, it may be necessary to select some pieces of equipment that are on the smaller side of what is necessary. Each major equipment item is addressed in turn.

John has indicated he would like have the capacity to complete the seeding operation in about 25 days. Seeders operate at 5.5 to 6 miles per hour and typically operate 10-12 hours per day. Common large capacity seeding equipment are 30, 45 and 60 foot widths. The first step is to determine how many acres each of these machines can complete in one day. One acre of land is 43,560 square feet. This translates into an area 8.25 feet wide by one mile long. Thus, when traveling one mile, a 30 foot seeder will cover 30/8.25 = 3.636 acres. Traveling at a speed of 5.5 miles per hour, the machine can cover 3.636 X 5.5 = 20.00 acres per hour. Thus, in a ten hour day, the machines is capable of covering 200 acres. A certain amount of time must be allocated for setting, refilling and moving the machine. This equals approximately 25 percent of the machine's potential. Thus the machine will cover about 200 X 0.75 = 150 acres per day. Over a period of 25 days, the machine will cover 3,750 acres. Using similar calculations, a 45 foot machine would cover about 5,625 acres and a 60 foot machine 7,500 acres. While the 30 foot seeder is slightly smaller than John has requested, it more closely meets his needs than a 45 foot seeder. The specific recommendation is for a 1989, Case IH, model 8500. The cost of these machines is about $9,500. The Case IH, model 8500 seeder cannot deep place large amounts of nitrogen fertilizer. Because of this limitation, you will also need a fertilizer spreader to distribute nitrogen prior to seeding. You recommend a Willmar S200 spreader for 2,600.

The size of the primary tractor required depends on the size of the seeder purchased. In order to pull a 30 foot seeder, a tractor with 240 to 300 horsepower is required. By selecting a tractor that has closer to 300 horsepower, higher speeds can be achieved thereby overcoming some lack of seeder size. The recommendation is for a 1979 International 4586. These tractors are quality machines with 300 horsepower that can be purchased for a low price. The recommended machine costs $ 10,000.

An 80-100 horsepower tractor is needed for utility operations, such as moving snow and dirt, lifting objects, spreading fertilizer and operating pull type sprayers and power take off (PTO) driven grain augers. The tractor should have a loader, 3 point hitch and power take off. The recommendation is for a 1978 White, 2-135 tractor with loader, 3 point hitch and PTO available for $8,000. While this is more power than needed for utility operations, it has several valuable added capabilities, including the ability to handle sizeable row crop equipment should John elect to grow those crops in the future.

Spraying equipment is a particularly important piece of machinery because the window for completing spraying operations is narrow and can be disrupted by a variety of weather conditions. Sprayers come in widths from 40 to 120 foot. They typically operate at about 10-15 miles per but are only able to work about 3-4 hours per day. To determine the amount of machinery needed, you note that different crops need to be sprayed at different times. The primary limitation is spraying barley, spring wheat and durum. These crops represent the bulk of the farming operations, and spraying would occurs at about the same time for each. These crops are planted on 3,520 acres.

An 120 foot sprayer could cover about 120/8.25 X lOmph =141 acres per hour. In a four hour period the sprayer could cover about 564 acres. Refill and move time can be substantial depending upon the water source location. Commonly a nurse tank is used to facilitate rapid refilling. Including refill and move time, coverage for a 120 foot sprayer is estimated to average 100 acres per hour, or 400 acres per average day. Given the sensitivity of spraying to time of application and weather conditions and the fact that additional spraying equipment is relatively inexpensive, a 50 foot pickup sprayer is recommended to supplement the 120 foot sprayer. This smaller sprayer will be more nimble and able to negotiate smaller areas and spaces with tight turns. The second sprayer will allow coverage of an additional 200 acres per day. Used pickup sprayers are available in many makes and models for about $3,500. The recommended pull-type sprayer is a 1994, 110 foot Summers SuperSprayer costing $4,500. In addition, a 2000 gallon home manufactured nurse tank is recommended at a cost of $2,000.

Due to the no-till nature of the farming operation, tillage equipment will have limited value. Nevertheless, a disk would be beneficial for preparing troublesome weedy spots. An older version International Model 490, 28 foot disk will be sufficient for any tillage required. These disks are available for about $3,000.

Harvest represents a major step in farming operations. Harvest requires several pieces of machinery and is the most labor intensive part of the production process. Combines are the heart of the harvest operation and represent a significant investment. Given John's financial limitations, older equipment will need to be purchased. Nevertheless, given the substantial size of the farm, the equipment needs to be large. Two 24 foot machines from the mid 1980's would meet the requirement. Combined these machines should cover about 200 acres per day, thereby falling within the 25 day harvest window. Two 1983 Gleaner, N-7 Combines that are in good condition for their age and include 30 foot headers are recommended at a cost of $14,000 each. The added capacity of the 30 foot headers over the 24 foot headers will increase the harvest speed by about 25 acres per day per machine.

Trucks are needed to transport grain from fields to the storage facility during harvest and again from the storage facility to grain markets after harvest. Trucks are also used to transport seed and fertilizer to the seeder. As the trucks will drive relatively few miles each year older tandem axle, lift-tag trucks should be suitable for the task. Specifically, the recommendation is for three 1973, C70, gasoline powered, Chevrolet trucks each costing $6,500. Having two 30 foot combines and three 550 bushel trucks may present some limitations, particularly when working on fields further from the headquarters. The combines may have to stop working from time to time because of tucking capacity. Two grain augers, one for loading into bins and the other for loading out of bins are required. For loading into bins, the recommendation is a ten inch diameter, 66 foot in length, Feterl auger with an electric motor available for $3,000. For loading out of the bins, the recommendation is for an eight inch diameter, 40 foot in length, Westfield grain auger with an electric motor that costs 2,500. A used Wheatheart bin sweep should be purchased for about $500.

A service pickup is needed to transport fuel to the field, and carry a supply of repair tools. The recommendation is for a 1989, Ford F-250 costing $2,500. In order to mow ditches, a mower or windrower is necessary. The recommendation is for a 1975, Versatile 400, self propelled, windrower. Nice versions of this older machine are available for about $2,500.

Some shop equipment is required. The recommendation is to spend extra money on shop equipment because of the equipment's age. The recommendation is for a $500 wire welder, 500 cutting torch, and $500 air compressor. Various other tools and shop equipment costing an additional $2,000 will be required. It is necessary to have fuel storage tanks on the farm to meet daily fuel needs. Two used 500 gallon tanks costing $500 each should be suitable. Finally, $2,000 of expenditures on miscellaneous items should be anticipated.

The recommended equipment purchases are presented in Table 1 . The total cost of the equipment selected is $108,100, which is within the $1 10,000 limit.

Question 2: Do you have any cautionary notes for John regarding this plan?

Solution 2: The most notable issue in this plan is the equipment age. The equipment recommended is mostly about thirty years old. This presents certain issues with break downs and parts availability. These issues could impact the amount of work that can be accomplished and long term cost of the equipment. John should be aware of this and should spend time during each winter working on equipment. Specifically, each piece of equipment should be carefully evaluated in terms of its ability to adequately work another season. If the machines are capable of working another season, the equipment should be carefully maintained and repaired during the winter months, so it is fully prepared for the growing season. If the equipment is not suitable for another season, it should be traded for better equipment. Further, John should set aside an amount of money for machinery replacement in the event a break down occurs that is not economically feasible to repair. For example, if the engine in the International 4586 were to fail, repair would not be sensible. Rather, it would be advisable to replace the equipment. Being financially prepared for this eventuality is vital.

Question 3: If another $20,000 of budget becomes available, which piece(s) of equipment should be upgraded, or which additional piece of machinery should be purchased.

Solution 3: There are several candidate upgrades. Perhaps the first would be to purchase a larger tractor. Adding $15,000 to the tractor purchase price would allow John to acquire a tractor in the 400 horsepower range. Candidate tractors include an International 4786 and John Deere 8850. With the extra power, John could pull a 45' seeder rather than a 30' seeder. Older model 30' and 45' seeders are priced approximately the same. So the larger seeder does not imply additional cost. Thus an additional expenditure of $15,000 would increase seeding capacity considerably. It may also be advisable to increase trucking capacity. There are two primary ways this could be done: purchasing additional or larger trucks or purchasing a grain cart. Given only $5,000 of available funds after the tractor purchase, it may be best to replace one truck with a semi and trailer.

Question 4: Now suppose John indicates that Joe is not likely to be available to work in the summers because he wants to spend time in Hawaii learning to surf. Thus seeding and harvesting will need to be completed without his assistance. Nevertheless, John wishes to avoid hiring outside helpers. How does this change the machinery plan? You do not need to completely redesign your machinery plan, but should identify areas where change is necessary.

Solution 4: The absence of Joe creates interesting challenges. Seeding and spraying should remain manageable without Joe. Harvest is more severely impacted. Without Joe, the harvest must be completed with only three people. This implies two combine operators and one truck operator. In this case, John should consider purchasing at least one larger truck. A Semi truck and trailer, while somewhat more expensive, would be an advisable investment. In addition, a larger unloading auger would be advisable. Changing the ten inch auger for a 12 or 13 inch auger would speed truck unloading considerably.

Question 5: Now suppose David suggests he may move permanently to Europe. If he did, he would not be available to help as originally indicated. If neither Joe or David are available to help during peak seasons, what adjustments need to be made? Again assume no outside labor is hired. You do not need to completely redesign your machinery plan, but should identify areas where change is necessary.

Solution 5: This change has a significant impact on the farming operations. It will still be possible to manage seeding and spraying with some careful planning. However, significant changes to the harvest operations will be necessary. Moreover, making these changes while remaining within a $1 10,000 budget is a significant challenge. In this case, John should not purchase two combines. One newer combine with additional capacity should be purchased instead. A 1996 Gleaner R-72 combine for $34,000 is recommended. This change increases the overall budget by $6,000. In addition, trading one tandem axle truck for a semi truck with trailer would be valuable. This change increases the budget by $8,500. These changes would increase the budget to $124,500, modestly above the $1 10,000 target. There are two other methods that John could use adjust his operations. First, he could move some land away from spring wheat and durum production. Planting crops like oats and winter wheat would help extend the planting and harvest seasons allowing the work to be completed in a timely fashion. John should also consider hiring some of the harvesting done by custom harvesters, thereby taking some pressure off himself and Kathy.

In the event that additional funding were to become available, John might consider purchasing a class VII, Vili or IX combine. While much more expensive, these combines can accommodate 36' and larger headers and travel faster in the field. Such a combine would include machines like a Case IH 2588 or Case IH 9120. In addition, two tandem axle trucks should be replaced with semi trucks.

Question 6: Return to the original farming plan, excluding the additional land suggested in question six and with both Joe and David available to work. John has been contemplating the addition of corn and sunflower production into the mix of crops grown on the farm. A retired neighbor has asked if he would like to rent 640 acres of his land for that purpose. The neighbor suggests the possibility of about 320 acres of each corn and sunflowers. John is aware that this would require him to acquire row crop farming equipment. An advantage of growing sunflowers and com is that these crops follow a slightly different season and would not interfere with other work. How much would it cost for John to add the necessary equipment for this purpose? Please provide pictures of the recommended equipment.

Solution 6: Farming an additional 640 acres of row crops can be accommodated with a modest additional machinery investment. Three additional pieces of equipment are required: a row crop planter, a row crop cultivator and row crop headers for the combines. Fortunately, the White 2-135 tractor recommended earlier has 135 horsepower, a three point hitch and PTO. As such it should be able to work with a 12 row planter or cultivator. The recommendation is for a 1984, 12 row CASE IH 800 planter at a cost of $5,000. In addition a 1980, John Deere RM 230 12 row cultivator costing $2,000 should be purchased. The header recommendation is for 2, N-830 Headers for the N-7 combines costing $3,000 each. Thus the total additional direct equipment cost necessary to add the additional 640 acres is $13,000.

Question 7: Return to the original farming plan, excluding the additional land suggested in question six and with both Joe and David available to work. Suppose John discovers that his investments have performed much better than he was aware. Instead of having $1 10,000 to spend on machinery, he has $220,000 to spend on machinery. Develop a new machinery plan taking this new information into account. Please provide pictures of the recommended equipment.

Solution 7: In general, availability of additional funds will not affect the amount of equipment purchased. In some instances it will affect the size of equipment purchased. The additional funds will primarily be used to improve equipment quality. The improvements will be primarily in the seeding and harvesting areas.

The first change should be to purchase a better main tractor and seeder. An upgrade to a well conditioned 1988, John Deere 8850 tractor is recommended. This tractor is newer and will have about 70 additional horsepower over the International 4586. Top quality versions of these tractors with recent overhauls, newer tires and nice paint are readily available for $30,000. This change will improve reliability and will allow the switch from a 30 foot to a 45 foot seeder. The seeder should also be upgraded from an International 8500 to a newer model. A 1999, John Deere 1850, 45 foot, seeder is recommended at a cost of $50,000. Purchase of a more advanced seeder will increase capacity and reliability. It should also increase the quality of crops grown due to more accurate seed and fertilizer placement. The newer seeder eliminates the need for a fertilizer spreader, thereby providing a significant efficiency enhancement.

The combines should be upgraded to 1996, Gleaner R-72's. These combines with header cost about $34,000 each. The newer combines should provide an added element of reliability and capacity. An upgrade should also occur in the truck area. One of the Chevrolet trucks should be replaced with a semi truck. Thus, the operation will have two tandem axle trucks and a semi truck. A 1989 Peterbilt, 377 semi truck costing $6,500 and a 1977, 40 foot Timpte grain trailer costing $8,500 are recommended for a combined cost of $15,000. An upgrade for the service truck is recommended, increasing the cost from $2,500 to $5,000. Finally, two additional fuel storage tanks costing a total of $1,000 is recommended. Table 2 provides a summary of the suggested purchases with a $220,000 budget. The total cost of the recommended equipment is $219,000.

Question 8: Continuing with the original farming situation, how would you change the machinery plan if $330,000 were available to purchase machinery. Please provide pictures of the recommended equipment.

Solution 8: Once again, the availability of additional funds would generally involve quality improvement as opposed to purchasing additional equipment. The bulk of the purchases will be made in the seeding and harvesting areas.

In this instance a major upgrade to the primary farm tractor is recommended. A 1998 John Deere, 9400 tractor is recommended. The John Deere 9400 will have 50 more horsepower than the John Deere 8850 and cost about $90,000. This purchase implies a significant improvement in reliability and capacity. Further improvements are recommended in the harvesting area. The first recommendation is the purchase of a grain cart which allows for faster unloading of combines and overall improved harvesting capacity. The specific recommendation is for a Killbros 1200 grain cart, capable of transporting about 700 bushel of grain. The price of a used version of this cart is about $10,000. A second semi and trailer is also recommended with a combined cost of $15,000. Improvements to the tandem axle trucks are recommended. Tandem axle, lift-tag trucks have some difficulty operating on slippery surfaces which can be encountered in winter grain hauling and in fields. Changing these trucks to twin-screw trucks would be a noticeable improvement. Moreover, the gas engines in standard tandem axle trucks represent a fire concern during the harvest season. The recommendation is to replace these trucks with diesel engine, twin-screw, 1980 Chevrolet Bruin trucks that cost about $12,000 each. Additional improvements to the service truck are suggested bringing the total cost of the truck to $10,000. The recommended purchases are summarized in Table 3. The total cost of this equipment set is $326,000, just under the $330,000 limit.

Question 9: Based on the original farming plan, consider a situation where the major pieces of equipment must be less than six years old. Develop a machinery plan that includes these modern equipment purchases. Please provide pictures of the recommended equipment.

Solution 9: In order to bring the major pieces of equipment to less than six years old, the budget will increase substantially. The first change should be to purchase a 2008 John Deere 9530 tractor costing $200,000. The seeder will be upgraded to a 48' Bourgault model 3310 costing $190,000. This large capacity seeder will increase seeding capacity markedly. The two sprayers noted earlier should be replaced with a self propelled John Deere 4920 sprayer. These large capacity modern day sprayers are able to spray faster and more precisely than their earlier counterparts. An improvement in the water nurse tank is also recommended bringing the cost of this piece to $6,800. Two 2006 Case IH 2388 combines with 30 foot headers are recommended at a cost of $155,000 each. An improvement in the unloading auger is recommended to a 13 inch diameter 71 foot length auger costing $12,000. Finally, additional improvements are recommended for the service truck bringing the cost to $15,000. The purchases are summarized in Table 4. The total cost of this equipment combination is $968,800.

Question 10: Finally, based on the original farming situation, develop a machinery plan that involves the purchase of all new equipment. Please provide pictures of the recommended equipment.

Solution 10: The purchase of all new equipment increases the total machinery cost considerably. New equipment is selected for each piece and is similar, or slightly larger in size to that recommended in Question 9. The one deviation is the Versatile 400 windrower for cutting road ditch grass is replaced with a new mower.

The recommended purchases are presented in Table 5. The total machinery cost in this case is $2,135,800. It is interesting to note the difference in cost between the machinery purchased in this example versus the previous example. For example, the cost of the sprayer doubles in price. The cost of the same model tractor is $90,000 more for a new model versus a one year old slightly used version. Moreover, in this example some purchases involve spending large amounts of money on equipment that, while necessary, does not receive a great deal of use. For example, each semi trucks would drive less than 10,000 miles per year. Yet the combined investment in semi trucks and trailers is $340,000. The same applies for the Kenworth grain trucks and Krause disk.

Question 11: How much money do you recommend that John spend on Machinery, $1 10,000, $220,000, $330,000 or some other amount. Why?

Solution 11: It is not entirely clear how much money should be spent. It depends on cash availability, personal preferences, risk tolerance, willingness to repair machinery, debt load of the farm as well as tax and profitability issues. The optimal equipment plan depends in large part upon the amount of money available for the entire farm operation. If the purchase of additional equipment jeopardizes funding availability for other needs, it may be better to utilize older equipment until newer equipment is affordable. On the other hand, if sufficient funding is available for other needs, additional purchases of farm equipment might be advisable.

John should carefully consider farm profitability in making the purchases. The cost of carrying large amounts of equipment must be absorbed into farm operating costs. If excessive money is spent on equipment, the operation may not be profitable.

The $1 10,000 budget is certainly a lower limit for this farm. There would be significant reliability issues, and some capacity issues associated with this machinery level. Significant improvements in reliability and capacity are achieved by increasing spending to $220,000 or $330,000. While spending $968,800 or even $2. 1 million may be appealing on some levels, the necessity of these machinery levels is highly questionable for a start-up farmer. The advice is to wait with making these sort of purchases until the farming results demonstrate their affordability. Moreover, carrying cost of these machinery levels would severely limit profitability and could endanger the farm's viability. These higher levels of machinery purchases may be sensible if John was able to do custom work for other farmers to offset the costs. However, the availability of custom work is never certain, so there is considerable risk in this strategy.

Overall, if at all possible, John is advised to move from the $1 10,000 level of purchases to $220,000. The gain in reliability, capacity, and reduced maintenance costs make the additional purchases worthwhile. While less critical, a move to the $330,000 level would also be advantageous. Equipment levels above the $330,000 level are not recommended for John.

Question 12: Do you have any final comments or suggestions for John.

Solution 12: Yes. Prices reported here are based on equipment dealer, and private sale prices. It is not uncommon for equipment auction prices to be considerably lower than dealer prices. John might consider attending auction sales in an attempt to purchase the required machines at a lower price, or improve the quality of machines purchased while staying within the established budget.

ACKNOWLEDGMENTS

Terranee Jalbert acknowledges his father, Dennis Jalbert, with whom he spent many hours discussing the pricing and merits of various farm machinery. The authors thank Brandon Jalbert for providing information on current farming issues. Any remaining errors are the responsibility of the authors.

Subject: Farms; Equipment financing; Case studies

Location: United States--US

Classification: 3100: Capital & debt management; 8400: Agriculture industry; 9130: Experiment/theoretical treatment; 9190: United States

Publication title: Review of Business & Finance Case Studies

Volume: 1

Issue: 1

Pages: 50-59

Number of pages: 10

Publication year: 2010

Publication date: 2010

Year: 2010

Publisher: Institute for Business & Finance Research

Place of publication: Hilo

Country of publication: United States

Publication subject: Business And Economics--Banking And Finance

ISSN: 21503338

Source type: Scholarly Journals

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables References

ProQuest document ID: 1238688056

Document URL: http://search.proquest.com/docview/1238688056?accountid=38610

Copyright: Copyright Institute for Business & Finance Research 2010

Last updated: 2013-09-25

Database: ABI/INFORM Complete

Document 41 of 100

THE STUDENT MANAGED FUND: A CASE STUDY OF PORTFOLIO PROPERTIES: TEACHING NOTES

Author: Peng, Zhuoming (Joe); Dukes, William P

ProQuest document link

Abstract:

This case provides students with an in-depth look at various risk measurements in portfolio management. The primary issues examined in this case are: 1. Review pertinent concepts of describing and summarizing a bath of numerical data in the context of identifying portfolio properties. Although these concepts have been covered in basic statistics courses, it is important enough to go over again so that students may be better prepared for discussions regarding various risk measurements in portfolio management. 2. A distinction between use of geometric and arithmetic return data. 3. How risk is measured in investments, and what some of the measures of risk are used. In particular, it is recommended that a spreadsheet model be used to compute these various risk measurements. Differentiate between different types of risk; namely, total risk, systematic risk, and nonsystematic risk. 4. Demonstrate that the true betas tend to move toward 1.0 over time.

Full text:

(ProQuest: ... denotes formulae omitted.)

QUESTIONS

Question 1: Recall from your introductory business statistics course that three major properties that describe a batch of numerical data are (1) Central Tendency, (2) Dispersion, and (3) Shape. To describe the shape of a batch of data we need only compare the mean and the median. If these two measures are equal, we may generally consider the data to be symmetrical, i.e., zero-skewed. On the other hand, if the mean exceeds the median, the data may generally be described as positive or right-skewed. If the mean is exceeded by the median, those data can generally be called negative or left-skewed. With information presented in Exhibit 1, does either the SMF data or that of S&P 500 appear to be zero-skewed? Justify your answers.

Solution 1: It is indicated by the pertinent information given in Exhibit 1 that the distribution of both return series is left-skewed. The reason is that the mean is smaller than the median for both series.

Question 2: Recall from your introductory business statistics course that when the distribution of a data set is skewed, the mean and standard deviation is not an adequate summary of the data. In this case, the five-number summary is a more complete summary of the data. Divide the original data into two subsets, one from September 1997 to December 2001 and another one from January 2002 to April 2006, respectively. Prepare a five-number summary for each of the two data sub-sets, and briefly describe your findings. Does either the SMF data or that of S&P 500 appear to be zero-skewed in either sub-period?

Solution 2: The five-number summary along with the mean and the standard deviation estimates for each data sub-set is given below.

Since the mean is smaller than the median, both series are left-skewed in the first sub-period.

Since the mean is smaller than the median, both series are left-skewed in the second sub-period, too.

Question 3: (a) Discuss the differences between the arithmetic mean and the geometric mean for each series. Relate your discussion to the difference in the standard deviations, (b) Compare the coefficient of variation of each series. By this relative measure of risk, does the data leave an impression concerning the relative risk of the SMF fund in comparison with the risk of S&P 500?

Solution 3: The values of the arithmetic means, the geometric means, and the standard deviations are obtained using the pertinent formulas and functions in the Excel spreadsheet model. However, the builtin function of a geometric mean in Excel, "=GEOMEAN (number I, number2, ...)", cannot be performed directly on the holding period yield (HPY) series. It is routine to construct the corresponding holding period return (HPR) series (or sometimes called the return relatives) in Excel and compute the geometric mean from its definition or apply the geometric mean function to the HPR series. The geometric mean is equal to,

The Geometric Mean = (return relative 1 × return relative 2 × ... × return relativen)^sup 1/ n^ - 1 .

The formula for computing the coefficient of variations is:

The Standard Deviation...

(a) If the rates of return vary over time, the geometric mean of the return series will always be lower than its arithmetic mean. The larger the standard deviation, the larger the difference. Only if the rates of return are the same in each period, will the geometric mean equal the arithmetic mean. Otherwise, the geometric mean should be smaller than the arithmetic mean.

(b) The coefficient of the variation (CV) equals the ratio of the standard deviation over the arithmetic mean, and it measures the risk per unit of return. The CV of the SMF fund is much larger because its average return is lower while it has more volatility in its return series. Using this relative measure of risk, the returns of the SMF fund appear to be much more volatile than the returns of the S&P 500, the proxy for the market portfolio in the case.

Question 4: The data needed for answering this question is provided in the student-version of the Excel file accompanied with this case. Use Excel with the data provided to compute the covariance estimate between the two return series from September 1997 to April 2006. (Hint: The covariance estimate should be 0.002026.) Discuss the relationship between the covariance and the correlation coefficient. Compute the corresponding estimate of the correlation coefficient. Is your answer the same as the one shown in Exhibit 2?

Solution 4:

The standard deviation estimates are available from Exhibit 1 and the correlation estimate is obtained from Exhibit 2. The covariance estimate is obtained from the instructor-version of the Excel file. In class, using the monthly HPYs of the SMF and the S&P 500, students are shown step-by-step procedures in Excel of how to compute the covariance estimate from its definition. The definition of a covariance between two random variables X and Y is,

...

Alternatively, the covariance between two random variables can be computed as the correlation between the two random variables times the product of their standard deviations. The correlation coefficient rescales (or standardizes) the covariance to facilitate comparison with corresponding values for other pairs of random variables; correlation coefficients always lie between -1 and +1. The correlation estimate in Exhibit 2 is obtained from an Excel output. If students compute the correlation estimate from the covariance and the standard deviations listed in the case, the answer is 0.9477. Ignore the rounding error, and these two estimates are the same. In class, it is demonstrated that in the single-index regression model, the positive square root of the R2, the coefficient of determination of the regression, is the absolute value of the correlation estimate, and it takes the sign of the beta (slope) estimate. The SMF fund's returns are highly correlated with the returns of the market and it explains why its beta estimate is very close to one.

With more advanced students, they are asked to verify the covariance estimate using Excel with the data provided in the student- version of the file.

Question 5: Use the pertinent information in Exhibits 1 and 2. (a) What is the total risk estimate of the SMF fund? (b) What is its market (or systematic) risk? Use this measure of risk to discuss the riskiness of the SMF fund relative to that of the S&P 500. Is your answer different from that of Part (b) in Question 3? (c) What is its unique (or unsystematic) risk?

Solution 5:

The variance estimates are available from Exhibit 1. The covariance estimate is obtained from the instructor- version of the Excel file.

...

Using the Excel spreadsheet, students are shown that the beta estimate obtained from the single-index regression is exactly the same as the one computed from the formula,

...

The variance estimate and the covariance estimate displayed in the case are rounded values; therefore, students are reminded that if one computes the beta value using these rounded values, i.e., 0.002026/0.00203 1 = 0.9975 then his/her answer will not be the same as the one computed from the Excel spreadsheet which contains more accurate inputs.

a) In class, the Excel spreadsheet is used to demonstrate computation of different types of risks.

The Total Risk = σ^sup 2^^sub SMF^ =0.002250 (obtained from Exhibit 1). Alternatively, Total Risk = Total Systematic Risk + Total Unsystematic Risk.

...

The SMF' s total systematic risk is estimated to be 0.002022, as shown above, and its unsystematic risk, σ^sup 2^^sub ε^ = σ^sup 2^^sub SMF^ - β^sup 2^^sub SMF^ × σ^sup 2^^sub market^, is estimated at 0.000228.

b) As shown in 5a) above, the total systematic risk of the SMF's return is estimated to be 0.002022. Thus, it is quite close to the total risk estimate of the S&P 500 in the amount of 0.002031. The difference is inconsequential. However, in 3b) the comparison relates to the coefficient of variation and now the comparison is with total systematic risk only.

c) The total unsystematic risk, the variance of the error term, is estimated to be 0.000228. Use of the spreadsheet would provide more accurate data.

Question 6: (Optional) The beta value of the SMF is obtained from running the single-index market model, and it is available in Exhibit 2 along with other selected outputs of the regression. Run the singleindex market model in Excel, and the data needed for this regression is provided in the student-version of the Excel file accompanied with this case. Verify that the beta value shown in Exhibit 2 is the same as the slope estimate obtained from your regression model.

Solution 6: With more advanced students, the class is shown how to run a simple regression in Excel. Then, the students are asked to run a regression using the data provide in the student- version of the Excel file accompanied with the case. In turn, they are asked to verify that the beta estimate given in Exhibit 2 is the same as the one from their own regression results.

Question 7: Refer to Exhibits 1 and 2. (a) Construct an equally weighted portfolio (that is, each of the two portfolios, the SMF fund and the S&P 500, is weighted by 50 percent), and compute the resultant portfolio's average return and its standard deviation, (b) Compute the weighted-average standard deviation, that is, 0.50 ? the standard deviation of the SMF fund + 0.50 ? the standard deviation of the S&P 500. (c) What is the difference between the portfolio's standard deviation from Part (a) and the weighted-average standard deviation from Part (b)? What explains this difference?

Solution 7:

a) The portfolio's expected return is obtained as follows,

b)

E(R^sub p^) = 0.50x0.30% + 0.50x0.59% = 0.45%

c) The portfolio's standard deviation is obtained as follows,

....

The weighted-average standard deviation of this equally weighted portfolio is obtained as follows,

σ^sub weighted-average^. = 0.50 × 4.74% + 0.50 × 4.5 1% = 4.63% .

By forming a portfolio, the portfolio's expected return is a linear combination of individual asset's average (expected) returns. Through this assignment, it demonstrates that the portfolio mean return is seen to be simply the weighted average of returns on individual securities, where the weights are the percentage invested in those securities. However, the portfolio variance is not the weighted average of the variances of individual securities. Rather, the portfolio variance is the sum of the variances of the individual securities multiplied by the square of their weights plus a third term, which includes the covariance. The covariance is an extremely important concept because it is the appropriate measure of the contribution of a single asset to portfolio risk. The real importance of the covariance is the correlation coefficient component. If the correlation is positive, the risk is increased by the covariance term, but, if the correlation is negative, it will reduce the risk, with no change in the return.

Question 8: The following tables contain beta estimates of the SMF fund in the two sub-periods, respectively.

Exhibit 3: Output from the Single-index Regression Model: September 1997 to December 2001 Data

Exhibit 4: Output from the Single-index Regression Model: January 2002 to April 2006 Data

Compare these two beta estimates. What could explain the difference?

Solution 8: A statement was made pertaining to the issue of regression tendency. Blume (1975) showed that beta estimates in the single-index regression model tend to move toward the mean over time. The tendency for betas to regress toward its mean value implies that a security (or portfolio) with either an extremely high (β^sub i^> 1) or low (β,<1) beta value during one estimation period will tend to have a less extreme beta value in the next estimation period. We use the two beta estimates of the SMF fund shown in this assignment to demonstrate this issue.

With more advanced students, a request is made to verify the beta estimates by running two separate single-index market model regressions with the data provided in the student- version of the Excel file.

ACKNOWLEDGEMENT

We are grateful to two anonymous reviewers for their useful suggestions. All errors are our responsibility.

Subject: Funds; Portfolio management; Risk assessment; Case studies

Location: United States--US

Classification: 9190: United States; 3400: Investment analysis & personal finance; 9130: Experiment/theoretical treatment

Publication title: Review of Business & Finance Case Studies

Volume: 1

Issue: 1

Pages: 66-72

Number of pages: 7

Publication year: 2010

Publication date: 2010

Year: 2010

Publisher: Institute for Business & Finance Research

Place of publication: Hilo

Country of publication: United States

Publication subject: Business And Economics--Banking And Finance

ISSN: 21503338

Source type: Scholarly Journals

Language of publication: English

Document type: Business Case, Feature

Document feature: References Tables Equations

ProQuest document ID: 1238688057

Document URL: http://search.proquest.com/docview/1238688057?accountid=38610

Copyright: Copyright Institute for Business & Finance Research 2010

Last updated: 2013-09-25

Database: ABI/INFORM Complete

Document 42 of 100

ONE HUNDRED YEARS IN PRISON FOR $126 MILLION FRAUD: TEACHING NOTES

Author: Dunne, Kathleen; Sanchez, Maria H

ProQuest document link

Abstract:

This case examines the multimillion dollar Ponzi scheme perpetuated by Edward Okun. Okun was convicted in 2009 of 23 counts including wire fraud, money laundering, bulk cash smuggling and other offenses. In this case, students will learn about fraud, money laundering, federal currency reporting requirements, aspects of tax law, and ethics. This case is suitable for either undergraduate or graduate students. It can be used in an Introduction to Business, an Ethics, or a Fraud course. Students typically require 2-3 hours outside of class to complete the case. Approximately one hour of class time is needed to go over the case. This case can help students develop both written and verbal skills. [PUBLICATION ABSTRACT]

Full text:

GENERAL COMMENTS

This case describes a real world fraud that went undetected by authorities for several years. By completing this case study, students can go beyond textbook learning and gain real insight into the ethical and legal issues associated with Ponzi schemes. Students will also learn about federal currency reporting requirements and certain aspects of the tax law. The case can help students develop both written and oral communication skills. This case is appropriate for an Ethics course, Introduction to Business course or a Fraud course. It can be used in an undergraduate or graduate level course. We typically assign the case as an individual project, allow one week for the students to complete the case questions, and spend one class period discussing the solutions on the day the case questions are due. It has been our experience that students find the case to be interesting, and lively classroom discussions often ensue. On average, each student's solutions take about 20 minutes to grade.

QUESTIONS

Question 1: Are qualified intermediaries legitimate businesses?

Solution 1: Most qualified intermediaries are legitimate businesses that act as safe keepers of funds so that investors can defer capital gains taxes when purchasing a similar type of property. Section 1031 of the tax code allows investors to legally defer this gain. Investors can only defer the gain if the proceeds from the sale of the property go directly into a QI. The QI then is responsible for keeping the funds until another property is purchased by the investor. At that time, the QI transfers the funds directly to the closing agent for the sale. A QI should help the investor make sure that the transaction complies with Section 1031 of the tax code.

Question 2: Okun tried to avoid federal currency reporting requirements by instructing his employee to cash two checks: one for $5,200 and one for $9,800, so as to stay under the $10,000 cash reporting requirements and then ship the $15,000 cash to his personal yacht in the Bahamas. Briefly describe the federal currency reporting requirements and briefly describe the purpose of these requirements.

Solution 2: The Bank Secrecy Act was passed in 1970. To comply with this act, financial institutions that engage in a currency transaction in excess of $10,000 must file a Currency Transaction Report (CTR) with the IRS. If Okun's employee had cashed one check for $15,000, this would have necessitated a CTR report from the bank. According to the IRS website, more than 15 million CTRs were filed in 2008. Financial institutions are also required to file a report when there is suspicious activity. If the bank knew or suspected that the employee was structuring transactions in order to avoid CTR reporting, then this would be considered suspicious activity and would trigger a report as well. The purpose is to detect and prevent money laundering, tax evasion, and other criminal activities. Reporting requirements are described in detail at www.irs.gov.

Question 3: What is money laundering?

Solution 3: Money laundering means to conceal the source of funds. It is usually done so that the money then can be used without incurring any legal penalties. It is estimated that between $300 billion and $1 trillion is laundered each year (Crumbley et al., 2009).

Question 4: What is a Ponzi scheme?

Solution 4: The Securities and Exchange Commission describes a Ponzi scheme as "an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity."(from http://www.sec.gov/answers/ponzi.htm)

Ponzi schemes tend to unravel or collapse at some point because there are no new investors, so money runs out and the original investors cannot get their money.

Question 5: How does the Okun case compare to other cases in the news lately?

Solution 5: This question gives the instructor an excellent opportunity to discuss current stories that are in the news. Students will also likely bring up Charles Ponzi from the 1920's, for whom the Ponzi scheme was named. Charles Ponzi did not invent the Ponzi scheme, but his was the first to be well known in the United States.

The most famous Ponzi scheme in recent history was perpetuated by Bernie Madoff. Madoff s multibillion dollar Ponzi scheme impacted thousands of investors, many of whom lost their life savings. The Madoff case is especially interesting because he was able to dupe not only individual investors, but also institutional investors and regulatory authorities for years. An important difference between the Madoff fraud and the Okun fraud is that with Madoff, the victims were investing their money and they knew that there was some level of risk. With Okun, clients were merely placing their funds in QIs for safekeeping, and it was assumed to be risk free.

Question 6: What is the government doing to combat financial fraud?

Solution 6: In November 2009, President Barak Obama signed an executive order which established a Financial Fraud Enforcement Task Force. The purpose of the task force is to investigate and prosecute financial crimes, recover ill-gotten gains, and to punish the perpetuators. The task force is comprised of members of the federal government and includes members from the Department of Justice, the FBI, the Department of the Treasury, the Department of Homeland Security, HUD, the IRS, the Secret Service, the SEC, and numerous other organizations.

According to the SEC website, in 2009 the SEC filed 60 enforcement actions involving Ponzi schemes or Ponzi-like payments.

Question 7: What are the ethical issues in this case?

Solution 7: Student answers to this question will vary and it is an excellent chance for lively classroom discussion. The number of victims in the Okun Ponzi scheme is estimated at 577. These victims placed their money in a qualified intermediary with the expectation that it would be there for them when they purchased their next property. Many victims lost their life savings. Okun' s sentencing memorandum stated "Okun' s criminal acts drove many individuals to economic collapse or near collapse, and caused especially significant noneconomic, emotional damage on many of his victims" (Green, 2009c). The sentencing judge said the "toll of human loss and suffering Mr. Okun's unbridled greed produced is enormous" (O'Dell, 2009b).

Another item to consider is that many of the victims who put their money in one of Okun's QIs were unable to purchase a replacement property because their money was gone. Capital gains taxes may be due if no replacement property was purchased (Vuong, 2009).

Victims may recover some of their money through bankruptcy court, but these victims have spent a lot of time and money on legal fees, they have suffered emotionally, and have had to delay retirement. And for what? So that Okun could buy another yacht, another jet, more jewelry, etc? It can be interesting to ask the students if they think it was worth the three years of living the high life in exchange for a 100 year prison sentence.

Subject: Investors; Fraud; Pyramid operations; Money laundering; Case studies; Business ethics

People: Okun, Edward

Classification: 4330: Litigation; 8130: Investment services; 9190: United States; 9130: Experimental/theoretical; 2410: Social responsibility

Publication title: Review of Business & Finance Case Studies

Volume: 1

Issue: 1

Pages: 77-80

Number of pages: 4

Publication year: 2010

Publication date: 2010

Year: 2010

Publisher: Institute for Business & Finance Research

Place of publication: Hilo

Country of publication: United States

Publication subject: Business And Economics--Banking And Finance

ISSN: 21503338

Source type: Scholarly Journals

Language of publication: English

Document type: Business Case, Feature

Document feature: References

ProQuest document ID: 1238686814

Document URL: http://search.proquest.com/docview/1238686814?accountid=38610

Copyright: Copyright Institute for Business & Finance Research 2010

Last updated: 2013-09-25

Database: ABI/INFORM Complete

Document 43 of 100

Internationalizing The Business Curriculum: A South Korean Case Study

Author: Self, Robin; Self, Donald R

ProQuest document link

Abstract:

Accrediting agencies for Colleges and Schools of Business such as the Association to Advance Collegiate Schools of Business International (AACSB) and the Association of Collegiate Business Schools and Programs (ACBSP) require that business programs incorporate both an international dimension and an active learning component in developing their business curriculum. One avenue business schools can use to accomplish both of these goals is to provide abbreviated study abroad programs for students and faculty. Rather than spending an entire semester abroad (which many smaller schools cannot afford to do financially), one approach is to take 10 - 15 students and spend 7 - 10 days in a country. This paper presents one case study using this approach - An 8 day Study Abroad Trip to South Korea - and discusses the following areas: logistics, pre-trip preparation, trip activities, and post-trip activities. While this case study focuses on South Korea, it provides a model for international study abroad that helps business schools meet accreditation standards and internationalize their curriculum. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Accrediting agencies for Colleges and Schools of Business such as the Association to Advance Collegiate Schools of Business International (AACSB) and the Association of Collegiate Business Schools and Programs (ACBSP) require that business programs incorporate both an international dimension and an active learning component in developing their business curriculum.

First, the international dimension is addressed by the AACSB' s Standard 15 (Management of Curricula) which includes the importance of "multicultural and diversity understanding" and understanding "the domestic and global economic environment of organizations" (AACSB International Eligibility Procedures and Accreditation Standards for Business Accreditation, 2008, p. 15). Standard 6.1.3 (Common Professional Component) of the ACBSP standards includes the "global dimension of business" and includes the importance of globalization in its mission statement: "ACBSP focuses on providing leadership to develop global alliances for improving business curricula throughout the world" (ACBSP Standards and Criteria for Demonstrating Excellence in Baccalaureate/Graduate Degree Schools and programs, 2008, p. 39).

The second area of significance concerns incorporating active learning and problem solving skills. Standard 13 of the AACSB standards focuses on "actively engaging students in the learning process" and "engaging in collaborative learning experiences" (p. 14). Standard 6.1.4 of the ACBSP addresses curriculum design "to focus on students' active learning for the development of problem solving skills" (p. 46).

One avenue business schools can use to accomplish both of these goals is to provide abbreviated study abroad programs for students and faculty. Because smaller schools may have fewer funds, rather than spending an entire semester abroad, one approach is to take 10-15 students and spend 7-10 days in a country. This paper presents one case study using this approach - An 8 day Study Abroad Trip to South Korea - and is divided into the following sections: logistics, pre-trip preparation, trip activities and post-trip activities. While this case study focuses on South Korea, it provides a model for international study abroad that helps business schools meet accreditation standards and internationalize their curriculum.

LOGISTICS

Logistics concerns trip funding, site selection, scheduling and transportation, passport and visa requirements, vaccines and health risks, institutional requirements, and cell phones.

Funding

Of major concern to most colleges and universities is funding for an international study abroad trip. Funding typically takes the form of university sponsored funding through internal faculty development grants, tuition, and other institutional specific sources. Outside funding, such as Title ?? grants, is also available for institutions meeting certain criteria, such as being an Historically Black College or University. Business schools may also partner with different academic areas (foreign languages, art or literature) or the business community in order to qualify for more specific funding opportunities. The U. S. Department of Education offers grant opportunities for international curriculum development through Title VI. Specific funding sources are identified below:

* Title VI Higher Education Act: Under Title VI of the Higher Education Act, IEGPS (International Education and Graduate Programs Service) in the office of Postsecondary Education supports ten programs, both for individuals and for institutions of higher education. While the National Resource Centers (NRCs), Foreign Language and Area Studies Fellowships (FLAS), and International Research and Studies (IRS) are the central programs in Title VI, Title VI also supports seven distinct yet interrelated programs. These include the Undergraduate International Studies and Foreign Language Program (UISFL); The Business and International Education Program (BIE); Centers for International Business Education (CIBS); Language Resource Centers (LRCs); American Overseas Research Centers (AORCs); the Institute for International Public Policy (HPP); and the Technological Innovation and Cooperation for Foreign Information Access Program (TICFIA). Links to detailed information about these programs and the application process can be found at http://www.ed.gov/about/offices/list/ope/iegps/ (Title VI, 2008).

* Title VI A: Undergraduate International Studies and Foreign Language Program (UISFL): This program provides funds to institutions of higher education, a combination of such institutions, or partnerships between nonprofit education organizations and institutions of higher education to plan, develop and carry out programs to strengthen and improve undergraduate instruction in international studies and foreign languages.

* Title VI B: Business and International Education Program (BIE). This program provides matching grants to colleges and universities to internationalize the business curriculum and to promote links between academic institutions and the American business community. There are two requirements: You must improve the academic teaching of the business curriculum and conduct outreach activities that expand the capacity of the business community to engage in international economic activities. While Centers for International Business Education (CIBES) tend to be located at major universities, BIE funds usually enhance internationalization of business education and area businesses at smaller four-year institutions, community and two year colleges. BIE grantee institutions host a joint Web site at http://www/.docp.wright/edu/bie/ (Title VI, 2008).

Santa Fe Community College, the University of Pittsburg, and California College of International Education have all received Title VI B grants and have information about the grants on the following websites: http:inst.sfcc.edu/%7Eied/, htto://www.business.pitt.edu/ibc/academics/curriculum-developmentgrantphp. http://ccieworld.org/curriculum.htm.

* NAFSA' s Cooperative Grant Program (COOP) from the Bureau of Educational and Cultural Affairs of the U. S. Department of State funds enrichment programming which encourages interaction and promotes better understanding between international students, their American peers, faculty and communities as well as programming which enhances the experience of American education abroad students. (See NAFSA's website Cooperative Grant Program which funds the Incentive Grant, and the mini grants Webmaster(5),nafsa.org).

* FIPSE (Fund for Improvement of Postsecondary Education): FIPSE accepts proposals for international education and has four specific international programs: U.S. Brazil Higher Education Consortia Program, European Union-United States Atlantis Program, Program for North American Mobility in Higher Education (focuses on creating an alliance of two American, two Canadian and two Mexican universities), and the U.S. -Russia Program. See http://www.ed.gov/about/offices/list/ope/fipse/index.httnl for program information (FIPSE Home Page, 2009).

* Fulbright Hays Groups Abroad Program: Under the Fulbright Hays Act, the International Education and Graduate Programs Service provides a variety of grants to individuals and institutions of higher education for projects in modern foreign languages and area studies. Contact Lungching Chiao (lungching.chiao(a),ed. gov) for "Group Projects Abroad."

See "Funding Sources for International Business" by Steven Loughrin Sacco for additional insights at www.cudenver.edu/International/CIBER/Documents/Funding.

Site Selection

When selecting a country to visit, two factors should be considered. First, do you or the institution have local contacts at the host country to facilitate local arrangements? Second, what are the linkages of your institution, community, state or region to the host country which would facilitate incorporating both cultures into the classroom curriculum? These could be cultural, manufacturing, etc. For example, South Korea was selected for our study abroad program because of linkages with a South Korean University, government official, and business ties (Hyundai and Kia have manufacturing plants located in the University's region, which draw in Tier 1, 2 and 3 suppliers as well).

Scheduling and Transportation

Typically one individual at the institution sponsoring the trip will be responsible for all arrangements including air travel, hotel accommodations in the country, travel throughout the country, and transportation to and from the airport. Most arrangements can be made through the internet and are typically straight forward. This process is greatly facilitated if the institution has a host facilitator to handle accommodations, tours, etc., in the host country. This individual can serve as translator, local coordinator and contact person.

Passport and Visa Requirements

Depending upon your student population, many students may not have traveled outside of the United States and will need to apply for a passport. The U.S. State Department of Passport Office offers downloadable application forms and passport information at their website: http://travel.state.gov/passport/index.html. Make sure students apply for passports at least 6-8 weeks prior to the travel study departure date. If this is not possible, passports can be expedited for an additional fee (The current total passport fee for persons aged 16 and older is $97). Although Korea does not require visas from United States citizens you can check your host country's entry requirements for travel study at http://travel.state.gov/travel/tips/brochures/brochures_1229.html.

Vaccines and Health Risks

Although vaccines were not necessary for Korea, you need to find out if there are any required or recommended vaccines for your host country. Faculty can check the Centers for Disease Control (CDC) website at www.cdc.gov.travel for required vaccines. If needed, allow for 3 months lead time, prior to departure, for travelers to get the necessary vaccines for Hepatitis A, B, Yellow Fever, Diphtheria, Typhoid Fever, Malaria, etc. You can also research information about your host country at the CDCs website (SIUE Travel Abroad, 2009).

Institutional Requirements

All educational institutions will have requirements for international travel (for both students and faculty) that will vary by institution. Check with your administration to secure the appropriate forms and specific requirements. For example, many colleges and universities require that all travel study participants must purchase the ISIC (International Student Identity Card) which provides overseas accident and medical insurance, and emergency medical evacuation coverage through Travel Guard Insurance. The cost of the ISIC card is $22. The ISIC can be purchased online at www.mvisic.com. Your institution may also require that you register with the U.S. Department of State Travel Registration, a free service provided by the U. S. government to U.S. citizens who are traveling to a foreign country. The online registration process lets you record information about upcoming travel abroad that the State Department can use in case of an emergency to locate U. S. citizens. Go to https://travehegistration.state.gov/ibrs/ to register (SIUE Travel Abroad, 2009).

Cell phones

This generation of students likes to stay connected, regardless of their location. Students need to check with their cell phone carrier to make sure their phone has the capability to send/receive internal calls/text in the host country. Students should also find out the rates for phone and texting prior to leaving the country. Outside of the United States and a handful of countries, international cell phone carriers operate on a unified standard called GSM (Global Services for Mobile). This GSM standard requires a GSM mobile phone and a SIM (Subscriber Identity Module) card. The SIM card is part of a removable smart card ICC (Integrated Circuit Card) that allows your phone to connect with a local wireless carrier in the country you are visiting. If you want an international cell phone service, you will need a phone that is GSM compatible and SIM-unlocked. An often described global phone, travel mobile, travel phone or world phone is merely a GSM mobile phone that operates on the 900, 1800 and 1900 frequencies. If the world phone is unlocked it will work with any prepaid SIM card in Europe.

Southern Illinois University Edwardsville has information checklists available on their website for faculty preparing to take students abroad, and for student checklists as well. The Student Checklist includes the following information: general travel information, health and safety abroad, health insurance, country specific information, passports and visas, money matters, information about the U.S. State Department, and foreign embassies. Please see htto://www.siue.edu/international/octravel/Checldist.shtml for additional information. Other institutions offering additional insight and specifics include The University of Kansas (htm://www.kumc.edu/international/travel_checklist.html). and Capital University (http://oldsite.capital.edu/facultvstaff7intemational-travel.html).

PRE-TRIP ACTIVITIES

To ensure the best educational experience possible, prior to the trip, students should be exposed to the host country's culture, basic business etiquette, language, and the economy. This can be accomplished through pairing with other academic units on campus (languages, communication departments, etc.), through workshops with business and community leaders who have expertise in the host country's practices, and from utilizing international faculty members' expertise.

Culture

Elements of the host culture that students should be aware of include the following: geography, people, government, and history. The following information presents a summary of what students learned about Korea prior to the trip.

* Geography: South Korea covers 98,480 square kilometers (slightly larger than Indiana). The terrain is partially forested mountain ranges separated by deep, narrow valleys with cultivated plains along the coasts, particularly in the west and south. Seoul is the capital with 10.3 million people (2005). Other major cities include Busan (3.7 million), Daegu (2.5 million), Incheon (2.6 million) and Ulsan (1 million) (South Korea, 2008). Students were exposed to the relationship between the geography of South Korea and the development and growth of Korean industries.

* People: With a population in 2008 of 48,379,392 people, Korea is one of the most ethnically and linguistically homogenous nations in the world. Except for a small Chinese community (roughly 20,000), virtually all Koreans share a common culture and linguistic heritage. The language is Korean and English is widely taught in junior high and high school. The religions in Korea consist of Christianity, Buddhism, Shamanism, Confucianism, and Chondogyo (South Korea, 2008)

* Government: Korea is a republic with power shared among the president, the legislature and the courts. They were liberated August 15, 194,5 and the constitution was last revised in 1987. There are nine provinces and seven administratively separate cities (Seoul, Busan, Incheon, Daegu, Gwangju, Daejeon, Ulsan). The central government budget expenditures for 2007 were $256.6 billion (South Korea, 2008).

* Abbreviated History: The myth of Korea's foundation by the god-king Tangun in BC 2333 typifies the homogeneity and self-sufficiency valued by the Korean people. Korea had many invasions by its larger neighbors in its 2,000 years of recorded history. In 1910, Japan began a 35-year period of colonial rule over Korea. As a result of Japan's attempts to supplant the Korean language and aspects of Korean culture, memories of Japanese annexation still cause animosity and resentment among many, particularly older Koreans. On August 15, 1948, the Republic of Korea was established (South Korea, 2008).

Business Etiquette

Important elements of the host country's business etiquette include the following: Greetings and Introductions, Gift-Giving, Business Card Exchange, Business Meetings, Business Conversation, Social Interaction, Drinking Etiquette, and Table Manners.

While the following list is not exhaustive, this is a sampling of what students were exposed to concerning Korean etiquette:

* Greetings & Introductions: You should usually address your Korean counterpart by his job position/title and last name. When two Koreans have the same last name, they may distinguish each other by their initials. In that case, insert their initials before their last name. For example, Manager F. G. Park and Manager R. T Park.

When meeting a man, it is customary to greet with a handshake. If you want to add more respect to your shake, bring the left hand over your counterpart's right hand. You may also combine the handshake with a bow. Women will be expected to greet with a handshake, too (Bammel, 2003 a)

* Gift Giving: Gifts are always appreciated. Consider taking a small momento that represents your hometown to your hosts. While the gift should not be overly expensive, it should not be cheap.

Don't be surprised if your hosts have a Korean gift for you. If the gift is wrapped, don't open it until you leave. If the gift is unwrapped, make sure to express expression and ask questions about the gift to show interest (whether you like it or not).

Gifts should be given with the right hand or both hands and received the same way. Treat the gift with reverence and care and don't set the gift on the floor - leave it on the table or put it in your briefcase/bag (Bammel, 2003b).

* Business Card Exchange: Cards are exchanged at the beginning of the meeting so make sure you have enough to give one to everyone. Take more business cards with you than you would on a trip within the United States. Be sure to stand up when exchanging cards with those of higher rank.

Facing your counterpart, bow slightly and hand your card (with the Korean-language side up) either with your right hand or both hands. Do the same when receiving a card (Bammel, 2003c).

* Business Meetings: Casual Western attire is still uncommon in the Korean business place. Dress appropriately for the occasion when meeting your counterparts on business.

Seating protocol during business meetings will be determined by the status of participants. Wait to be directed to the appropriate seat rather than just sitting down. As a general rule, the highest ranking person on the host's side will sit at the head of the table. As a rale, those of higher status sit closest to the highest ranking individual (Bammel, 2003d).

* Business Conversation: Koreans may ask you questions that may make you uncomfortable, such as asking your age, or marital status. Some questions you would consider rude in your home culture are not considered impolite in Korea. Koreans enjoy talking about their country and famous locations. You are not expected to greet people that you don't know. Whereas North Americans are likely to say hello to strangers in the office, Koreans may ignore almost anyone they don't know (Bammel, 2003e).

* Social Interaction. If you go to dinner, "going Dutch" is not normal in Korea. If you are the customer, you will likely be in for a free evening of entertainment. If you are the vendor, expect to pick up the bill.

Koreans are unlikely to invite you into their homes. It is normal for dinner meetings to be held in restaurants. Tipping is not customary in Korea and you do not have to do it (Bammel, 2003f).

* Drinking Etiquette. Many Koreans like to drink alcohol during and after dinner. If you don't drink, at least accept the beverage and look like you are sipping. If drinking is out of the question, explain that for health or religions reasons you are not able to accept the beverage.

Always request a cup or glass rather than drinking from a bottle. Recognize that metal cups are for water.

Never pour your own drink. Instead, take the initiative and pour your counterpart's beverage. Make the bottle available for the other person to pour your drink (Bammel, 2003g).

* Table Manners: Meals are usually eaten with chopsticks and a spoon (used for eating rice). The best way to learn what is appropriate is to watch your host.

When eating with your hosts, try to taste a little of each food. Many popular restaurants involve sitting on the floor around a low table. If you aren't sure whether you can handle this comfortably, be sure to tell your hosts in advance so they can request an ordinary table (Bammel, 2003, h).

Language

Students should learn the basic greetings and common phrases of the host country. If the foreign language department on campus is not able to offer workshops or instruction, students can refer to guide books and tapes to familiarize themselves with the necessary expressions.

Economy

When studying the host country's economy, students should be familiar with the following information: GDP, GDP growth rate, per capita GNI, consumer price index, natural resources, industries, trade, currency, and composition of work force.

Students learned the following information about the Korean economy:

* South Korea has been experiencing economic growth since the late 1960s

* South Korea's GDP (purchasing power parity in 2007): $1,201 trillion

* GDP growth rate: 2004, 4.7%; 2005, 4.2%; 2006, 5.1%, 2007, 5.0%

* Per capita GNI (2007): $20,045

* Consumer price index: 2004, 3.6%; 2005, 2.8%; 2006, 2.2%; 2007, 2.5%

* Natural resources: coal, tungsten, graphite, molybdenum, lead, hydropower potential

* Agriculture, including forestry and fisheries: Products - rice, vegetables, fruit, root crops, barley, cattle, pigs, chickens, milk, eggs, fish. Arable land - 16.5% of land area

* Industry: Types - electronics and electrical products, telecommunications, motor vehicles, shipbuilding, mining and manufacturing, petrochemicals, industrial machinery, steel

* Trade (2007): Exports - $379 billion f.o.b.: electronic products (semiconductors, cellular phones and equipment, computers), automobiles, machinery and equipment, steel, ships, petrochemicals. Imports - $349.6 billion f.o.b.: crude oil, food, machinery and transportation equipment, chemicals and chemical products, base metals and articles. Major markets (2007) - China (25.7%), U.S. (12.3%), Japan (6.8%), Hong Kong (4.5%). Major suppliers (2007) - China (16.7%), Japan (16.4%), U.S. (10.5%), Saudi Arabia (6.3%), U.A.E. (4.2%)

* The work force is comprised of 24.22 million individuals (75.2% services, 17.3% industry, 7.5% agriculture)

* Currency: The currency is the won (South Korea, 2008).

TRIP ACTIVITIES

The trip took place in March and the format consisted of flying into Incheon, and traveling to Seoul, Pohang, Ulsan, Kori, Gyeongju, Seoul, and back to the airport at Incheon by van. Each of the businesses and cultural activities will be described after the itinerary.

Itinerary:

* Day 1 : Flew into Incheon Korea arriving in the early evening and were transported to the hotel in Seoul.

* Day 2: Visited KEPCO (Korean Electric Power Company), lunch at the "Korean Chinese" restaurant, visited Gyeongbokgung Palace, visited Changgyeonggung Palace and Botanical Gardens, went to Insadong Street for tea, Korea House Restaurant for dinner, back to the hotel.

* Day 3: Seoul to Pohang on mini van, lunch at Silk Road Restaurant in the service center at Geumgangwnch, toured manufacturing facility at POSCO Steel Mill at Pohang, took the van to Ulsan, dinner at the hotel in Ulsan. Slept on traditional mat on heated floor.

* Day 4: Toured Hyundai Automotive, toured Hyundai Heavy Industries, then the hotel for lunch, toured Kori Nuclear Power Plant, took the van to Gyeongju, dinner at SuSuk Jung, checked into the hotel at Gyeongju.

* Day 5: Breakfast at the hotel in Gyeongju, Sonje Art Museum, Bulguksa Temple, drove up mountain to Seokguram Grotto, Korean Village (crafts, potter), lunch at Lee Jo in Gyeongju, Flying Cloud Tomb in Gyeongju, van to Seoul, back to the hotel in Seoul.

* Day 6: KEPCO, Korean Development Bank, lunch at club, Korean National Museum, Electronics Mart, back to hotel.

* Day 7: Up early to go to Incheon to return to the United States.

Description of Businesses Visited:

* KEPCO: The only electric utility provider in Korea, KEPCO is an integrated electric utility company that is engaged in the transmission and distribution of electricity in Korea. As of December 31, 2007, the company and its generation subsidiaries owned approximately 88.3% of the total electricity generating capacity in Korea (excluding plants generating electricity primarily for private or emergency use). During the year ended December 31, 2007, KEPCO sold 369 billion kilowatt-hours of electricity. Of the 386 billion kilowatt-hours of electricity KEPCO purchased in 2007, 37.9% was generated by Korea Hydro & Nuclear Power Co., Ltd., its wholly owned nuclear and hydroelectric power generation subsidiary. The Company also wholly owns its five non-nuclear generation subsidiaries: Korea South-East Power Co., Ltd (KOSEP), Korea Midland Power Co., Ltd. (KOMIPO), Korea Western Power Co., Ltd. (KOWEPO), Korea Southern Power Co., Ltd. (KOSPO) and Korea East-West Power Co., Ltd. (EWP) (KEPCO Financial Summary, 2007).

* POSCO Steel Mill: Founded in 1968, POSCO began production in 1972, becoming the first modern steel plant in South Korea. POSCO's products include hot rolled steel, steel plate, wire rod, cold rolled steel, electrical steel and stainless steel. Of major interest is the role POSCO played in the economic development of Korea in the 1960s and 1970s; Korea's economy flourished with the growth of POSCO. By 1998, POSCO led the world in production of crude steel and was at the top of the world steel industry. POSCO was privatized in 2000 and is expanding its production base in overseas countries such as Vietnam and India, building integrated steel mills (POSCO, 2009).

* Hyundai Motor Company: Established in 1967, Hyundai Motor Company is South Korea's largest and the world's fifth largest automaker in terms of units sold per year. With headquarters in Seoul, Hyundai operates the world's largest integrated automobile manufacturing facility in Ulsan, Korea, which can produce 1 .6 million units annually (Hyundai Motor Company, 2009)

* Hyundai Heavy Industries. ,Headquartered in Ulsan, South Korea, HHI is the world's largest shipbuilder and is a major builder of Flotaing Production Storage and Offloadoing vessels, and is one of the fastest growing companies in construction equipment. HHI produces tankers, bulk carriers, containerships, and gas and chemical carriers (Hyundai Heavy Industries, 2009).

* Kori Nuclear Power Plant: Kori Nuclear Power Plant is a South Korean nuclear power plant located in Goti, a suburban village of Busan. Owned and operated by KEPCO, the first reactor began operations in 1978, and there are plans to build two more reactors on site: Shin-Kori reactors (Kori Nuclear Power Plant, 2008).

* Korea Development Bank: According to Governor Min, "Founded in 1954, KDB has fulfilled its role as a state-owned bank by spearheading the nation's industrial and economic development for over five decades. The Bank has driven remarkable growth throughout the course of industrialization in Korea (Governor's Message, http://www.kdb.co.kr). Governor Min contends that the bank made a significant contribution to the country's recovery from the Asian financial crisis by leading in the restructuring ailing companies, and has recently expanded their operations to encourage innovative SMEs and venture compames, assisting balanced national development and expanding future growth. The government plans to privatize KDB to transform into a global investment bank under a Corporate and Investment Bank structure (KDB, 2008).

Cultural Attractions Visited:

* Gveongbokgung Palace: Located in located in northern Seoul, Gyeongbokgung Palace was the main and largest palace of the Joseon Dynasty and one of the five grand palaces built by the Joseon Dynasty. It was in 1395, three years after the Joseon Dynasty was founded by Yi Seong-gye, when the construction of the main royal palace was completed and the capital of the newly founded dynasty moved from Gaeseong to Seoul. The palace was named Gyeongbokgung, the "Palace Greatly Blessed by Heaven." The government ministry district and main buildings of Gyeongbokgung Palace formed the heart of the capital city of Seoul and represented the sovereignty of the Joseon Dynasty. After being razed by the Japanese during the Hideyoshi invasions of 1591-1598, Gyeongbokgung Palace was left derelict for the next 250 years and was reconstructed in 1868 by the order of the Price Regent (Gyeongbokgung Palace, 2009).

* Changgyeonggung Palace and Botanical Gardens. Changgyeonggung Palace in Seoul was originally built by King Sejong as a residence for his father, Taejong, and was called Suganggung Palace. It was renovated and enlarged in 1483 by King Seongjong to be used as a residence for three dowager queens, at which time the name was changed to Changgyeonggung. It was also called Donggung, or East Palace along with Changdeokgung, which stood on the other side of the wall. (These two palaces played complementary roles.) During the colonial period, the Japanese renamed it Changgyeongwon, demoting it from a gung (palace) to a won (park), in an attempt to diminish the authority of the Korean royal family, and built a zoo, a botanical garden, and the royal Yi Household Museum on the site. In 1983, the zoo and botanical garden were moved, and the palace was renamed Changgyeonggung (Changgyeonggung Palace and Botanical Gardens, 2009).

* Insa-dong Street, Seoul Korea. Insadong Street is a major tourist street near the Anguk Subway or Metro station in Seoul Korea. The street is lined with traditional Korean vocalizations in the street, proper Korean meals, traditional tea houses, and traditional Korean fine crafts, all in one place (Insa-dong Street, 2008).

* Korea House Restaurant. This restaurant in Seoul features traditional Korean food and offers traditional Korean music and dancing after dinner.

* Gyeongju. Korea. This city is known as the "museum without wall" and houses numerous historical sites and relics and is one of the most important ancient cities of the world. The city has many royal tombs, museums, temples, monuments and houses a large collection of relics from the Silla period in the Gyeongju National Museum (Gyeongju, 2009).

* Seokguram Grotto. Located on Mt. Tohamsan in Gyeongju-si, as part of the Bulguksa temple complex and is the representative stone temple of Korea. The grotto overlooks the Sea of Japan and rests 750 meters above sea level and exemplifies some of the best Buddhist sculptures in the world (Seokguram Grotto, 2009).

* Artsonie Museum. Situated in the Gyeongju Bonum complex in Gyeongju, this is a private contemporary art museum which organizes exhibitions showing major contemporary artworks from its collection. The Artsonje Museum collection consists of 450 pieces including sculptures, paintings, and photographs from Europe and the United States from the 1960's and major Korean Modern art from the 1970's (http://www.artsonje.org/gye/eng/e_about.asp).

* Cheonmachong Tomb. Gyeongju houses 23 large tombs in the Daereung-won Tumuli Park, one of the most famous of which is the Cheonmachong Tomb (Flying Cloud Tomb). The inside of this tomb houses 1 1,526 remains and crowns of an unknown king from the Silla Kingdom, demonstrating the lavish lifestyle of the king (http://asiaenglish.visitkorea.or.kr).

* National Museum of Korea. In Seoul, the National Museum of Korea is the flagship museum of Korean history and art in South Korea and is the cultural organization that represents Korea. The museum contains over 150,000 pieces in its collection with 11,000 on display at one time. Divided into three floors, the left of the museum is supposed to represent the past while the right side of the museum represents the future. Different sections of the museum include the Archaeological Gallery, the Historical Gallery, Fine Arts Gallery I and II, Asian Arts Gallery, and the Donation Gallery (National Museum of Korea http://www.museum.go.kr/eng/).

POST TRIP ACTIVITIES

This section covers incorporating class applications of concepts experienced during the trip. While possible classroom applications cover all business disciplines, this paper will focus on the following Management applications: Geert Hofstede's (2003, 2001, 1991) framework for assessing national cultures, vertical integration, joint ventures with local partners, core competencies, Hamal & Prahalad's Core Competencies Matrix, value chain activities/management, Porter's Diamond of National Advantage, and Organizational Behavior and Human Resource Management implications. The most extensive example used will be that of Geert Hofstede's National Cultural Dimensions.

Geert Hofstede's National Cultural Dimensions.

Geert Hofstede's (2003, 2001, 1991) framework for assessing cultures is one of the most widely cited approaches for helping managers understand differences between national cultures. In his research he found that managers and employees vary on five dimensions of national culture: (1) individualism vs. collectivism, (2) power distance, (3) uncertainty avoidance, (4) achievement versus nurturing, and (5) long-term and short-term orientation. Each dimension will be described below, followed by a comparison of the scores of South Korea and the United States.

"Individualism vs. Collectivism" concerns the extent to which people in a country prefer to act as individuals or as members of groups. Individualism is the degree to which people tend to act as individuals while collectivism is characterized by a social framework in which people prefer to act as members of groups. According to Hofstede, (2003) "on the individualist side we find societies in which ties between individuals are loose: everyone is expected to look after him/herself and his/her immediate family. On the collectivist side, we find societies in which people from birth onwards are integrated into strong cohesive in-groups, often extended families which continue protecting them in exchange for unquestioning loyalty" (p. 2-3).

South Korea has a low Individualism (IDV) score of 18, indicating that the society is collectivist as compared to individualist. Hofstede contends that this is manifested in a close long-term commitment to the member group, such as a family, extended family, or extended relationships. Loyalty in a collectivist culture is of utmost importance and over-rides most other societal rules and regulations. This culture promotes strong relationships where everyone takes responsibility for fellow members of their group. Conversely, the United States is one of only 7 countries in the Hofstede research that has Individualism as their highest dimension: 91. "The high Individualism ranking indicates a society with a more individualist attitude and relatively loose bonds with others. The populace is more self-reliant and looks out for themselves and their close family members (Hofstede, 2003, p. 2 -3).

The second dimension, "power distance," is a measure of the extent to which society accepts the fact that power in organizations is distributed unequally. High power distance societies tend to accept inequalities while low power distance societies play down inequities. South Korea has a Power Distance score of 60 while the United States has a score of 40 (world average = 55). "This indicates that the United States has greater equality between societal levels, including government, organizations, and even within families. This orientation reinforces a cooperative interaction across power levels and creates a more stable cultural environment" (Hofstede, 2003, p. 2).

"Uncertainty avoidance," the third dimension, is the degree to which people tolerate risk and prefer structured over unstructured situations. Low uncertainty avoidance societies are comfortable with risks while high uncertainty avoidance societies feel threatened by uncertainty and ambiguity. The United States had a score of 46, Korea had a score of 85 and the world average was 64. The United States' low ranking indicates "a society that has fewer rales and does not attempt to control all outcomes and results. It also has a greater level of tolerance for a variety of ideas, thoughts, and beliefs" (Hofstede, 2003, p. 3) Of the five dimensions, South Korea's highest score is in "uncertainty avoidance" indicating the society's low level of tolerance for uncertainty. In an effort to minimize or reduce this level of uncertainty, strict rales, laws, policies, and regulations are adopted and implemented. The ultimate goal of this population is to control everything in order to eliminate or avoid the unexpected. As a result of this high Uncertainty Avoidance characteristic, the society does not readily accept change and is very risk adverse.

The fourth dimension, "Masculinity vs. Femininity" refers to the distribution of roles between the two genders. Women's values differ less among societies than men's values. Men's values contain a dimension ranging from very assertive and competitive to modest and caring. The assertive pole is termed masculine while the modest pole is termed feminine. The United States had a ranking of 62, compared to Korea's ranking of 39 and the world average was 50. According to Hofstede (2003), "this indicates the country experiences a higher degree of gender differentiation of roles. The male dominates a significant portion of the society and power structure. This situation generates a female population that becomes more assertive and competitive, with women shifting toward the male role model and away from their female role" (p. 3). "The women in feminine countries have the same modest, caring values as the men; in the masculine countries they are somewhat assertive and competitive, but not as much as the men, so that these countries show a gap between men's values and women's values" (Hofstede, 2003, p. 3).

"Long term and short term orientation," the fifth dimension, refers to a country's orientation toward life and work. Countries with a long-term orientation look to the future and value thrift and persistence. Countries with a short term orientation, such as the United States with a score of 29, have respect for tradition, fulfilling social obligations, and protecting one's face. The short term orientation for the United States is the lowest Dimension for the U.S. (29) compared to the world average of 45, and a South Korean score of 70. The long term orientation of South Koreans indicates values of thrift and perseverance (Hofstede, 2003, p. 3)

Figure 1 presents Hofstede's 5 dimensionai model comparing the scores of South Korea and the United States. Students then discuss implications for South Korean companies opening up manufacturing facilities in the United States and vice versa.

The Korean Electric Power Company (KEPCO) is an excellent example to use to explain the following concepts: Vertical integration, joint ventures with local partners, Hamal & Prahalad's Core Competencies Matrix, and value chain activities/management.

Vertical Integration

The vertical integration strategy involves an organization growing by gaining control of its inputs (backward), its outputs (forward), or both. In backward vertical integration, the organization gains control of its inputs or resources by becoming its own supplier. In forward vertical integration, the organization gains control of its outputs (products or services) by becoming its own distributor. This is a growth strategy because an organization is expanding its operations and activities by becoming a source of supply or a source of distribution (Coulter, 2008).

Joint Ventures

In a joint venture, two or more separate organizations form a separate independent organization for strategic purposes. Joint ventures are often used when the partners do not want to or cannot legally join together permanently; instead, the partners create a separate entity to do their business activity together. This is a popular partnering method in international growth because it minimizes the financial and political-legal constraints that go with mergers-acquisitions and internal development (Coulter, 2008).

Core Competencies

These are the skills and abilities by which resources are deployed through an organization's activities and processes to achieve a competitive advantage in ways that others cannot imitate or obtain (Johnson, Scholes, & Whittington, 2008).

Hamal & Prahalad's Core Competencies Matrix

In many companies the corporate identify is built around the concept of strategic business units and not around core competencies. Hamel and Prahalad feel that this is not a good reflection of an organization and that a strong end focus should be supplemented by an equally important view of the organization's core competencies. Therefore, in their book "Competing for the Future," they designed a matrix to help in setting specific acquisition and deployment goals, based on the organization's core competencies (Hamel-Prahalad Matrix, 2006). Figure 2 presents the matrix and provides a visual example of how KEPCO's competencies can be used as examples for entering new markets and developing new competencies.

Value Chain Management

This is "the process of managing the sequence of activities and information along the entire value chain. In contrast to supply chain management, which is internally oriented and focuses on efficient flow of incoming materials (resources) to the organization, value chain management is externally oriented and focuses on both incoming materials and outgoing products and services" (Robbins & Coulter, 2009, p. 430). KEPCO illustrates all of the primary activities (R&D, Production, Marketing & Sales, Service) and the support activities (firm infastructure, human resource management, technology development, procurement) of the value chain.

Porter's Diamond of National Advantage

For any strategy, internationalization needs to be based on possession of some sustainable competitive advantage. A foreign entrant must have significant competitive advantages to overcome the disadvantages as they relate to the home market (superior market knowledge, established relationships with local customers, strong supply chains, etc.). The internalization context raises specific national sources of advantages that can be substantial and hard to imitate. Micheal Porter's (1990) "Diamond of National Advantage" helps explain why some nations tend to produce firms with sustained competitive advantages in some industries more than others. The four factors in this theory are (1) factor conditions, (2) home demand conditions, (3) related and supporting industries, and (4) firm strategy, industry structure, and rivalry. The combination of the steel industry (POSCO Steel Mill), Hyundai Automotive, and Hyundai Heavy Industries provide an excellent example of these four factors for Porter's Diamond.

Organizational Behavior and Human Resource Management Implications

Employee recruitment and selection, training processes, performance appraisal, seniority and job security are all issues that can be explored in the classroom when discussing the differences between traditional Korean practices and those of the United States.

SUMMARY

This paper provides an approach that smaller colleges and universities can use to meet accreditation standards to internationalize their curriculum and incorporate active learning into the curriculum. While South Korea was used as the example, the approach is applicable to other countries as well.

Subject: Business education; Curriculum development; Study abroad; Accreditation; Case studies

Location: South Korea

Classification: 9130: Experiment/theoretical treatment; 8306: Schools and educational services; 9179: Asia & the Pacific

Publication title: American Journal of Business Education

Volume: 2

Issue: 9

Pages: 1-14

Number of pages: 14

Publication year: 2009

Publication date: Dec 2009

Year: 2009

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Education--Teaching Methods And Curriculum, Business And Economics

ISSN: 1942-2504

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Graphs References

ProQuest document ID: 195901478

Document URL: http://search.proquest.com/docview/195901478?accountid=38610

Copyright: Copyright Clute Institute for Academic Research Dec 2009

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 44 of 100

SUBPRIME MORTGAGES: A CASE PROVIDING THE PERSPECTIVES OF A HOME BUYER AND A CDO TRADER

Author: Tucker, Michael

ProQuest document link

Abstract:

A couple buys a new home in 2006 in the Atlanta suburbs where prices have been rising. Lacking a down payment but with passable credit they purchase the home with a subprime mortgage that has the added complication of negative amortization on a six month interest only mortgage. When the mortgage resets at a rate pegged to the constant maturity T-BiIl rate, the payments are much greater and they have difficulty making them. Their mortgage is one of many rolled up into Collateralized Debt Obligations (CDOs) created by investment banks. An investment company trading in CDOs has been making money using highly leveraged positions on what have been investment grade securities. When interest payments suddenly cease, the investment company is faced with a liquidity crisis. The case returns to the couple holding the subprime mortgage as they confront foreclosure with the added possibility of having to pay taxes on the difference between the sale price of their home and the amount they owe. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Suggested Questions and Answers

There are two sets of questions provided. The first set is directed toward undergraduate finance students and leads them through the analysis in a step-by-step fashion. The second set of questions is more open ended and is better used for graduate students or more advanced undergraduates at the instructor's discretion. Instructors employing the second set of questions may refer to the discussion of the first set for guidance while allowing for more free ranging approaches that students may arrive at on their own.

Additional tables are provided below to be distributed at the discretion of the instructor. All information in the tables is available within the case with the exception of the revision in the tax law passed on December 20, 2007 eliminating the tax on forgiven mortgage debt. That information appears in the first set of questions and is ancillary to the case though it makes an interesting sidebar for discussion.

Useful Dates

Mortgage closing date 1/15/2006

First payment 2/15/2006

Reset mortgage date 8/15/2006

Bank contacted about renegotiation offer after 2 payments made at reset rate and 6 missed payments. 4/15/2007

Useful Figures

Home Price 300,000

Points to be paid as a percentage of sale price 2&

Legal fees 1,000

Other fees 1,000

Commission to be paid as a percentage of sale price 3.00%

Interest only rate for 6 months beginning with first payment on 2/1/06 2.00%

Negative amortization based on differential of ARM at closing and interest only payment

ARM at time of closing 5.17%

Reset mortgage rate above constant maturity T-BiIl rate 3.50%

Constant maturity T-BiIl rate to be used for mortgage reset 8/15/06 5.27%

Term of 8/15/06 ARM reset 29.5 years

Bank ARM rate offer above T-bill rate on 4/15/07 2.50%

Useful Figures

T-bill rate on 4/15/07 4.97%

New term of 4/15/07 mortgage 30 years

Wilkes' marginal tax rate 25.00%

Question Set 1

1. What is the monthly payment for the initial six months on the 30 year 2% interest only mortgage? Be sure to add in all additional costs rolled into the mortgage as described in the case.

The mortgage for 317,000 consists of the items as shown below:

Home Price 300,000

Points at 2% 6,000

Legal Fees 1,000

Other Fees 1,000

Commission at 3% 9,000

Total Mortgage 317,000

For interest only at 2% the monthly payment is (0.02/12)*3 17000 = 528.33

2. What would the monthly payment be for the mortgage at the ARM rate of 5.17% that prevailed at the closing of the loan?

1734.81

3. According to the terms of the mortgage the difference between the introductory rate and the current ARM rate (5.17%) is added to the principal increasing the principal on the mortgage (negative amortization). What is the new principal when the loan resets in six months?

(1734.81 - 528.33)*6 + 3 17,000 = 324,238.87

4. Under the reset terms, the ARM benchmark is the constant maturity Treasury bill rate which is 5.27% at the time of reset. Considering that the term has been reduced by six months (29 1A years remaining), what is the new mortgage payment?

2564.40

5. How does the new mortgage payment added to monthly expenses, noted by Mary Wilkes in Table 1, compare with pre-tax monthly income? Is this sustainable?

Adding the mortgage payments brings the total to $6,626.40 which is $376.40 above the $6,250 monthly pre-tax income ($75,000/12)

6. What rate of return did Whitewater Investments and Kent receive on the $100 million invested in the $1 billion CDO he describes?

7. Given the 15:1 leverage on the $1.3 billion in CDOs, how short is WI of making the interest payment to the insurance company this month? Would you recommend taking any action at this point?

8. If Kent sells the performing CDOs for 89 cents on the dollar and the non performing CDOs for 60 cents, how much are the losses to principal on the deal for WI exclusive of the interest payment not collected? Should WI do this if it means bankruptcy?

Performing Loans 845,000,000

Sold for $0.89 on the Dollar 752,050,000

Loss 92,950,000

Remaining Bad Cdos 455,000,000.00

Sold for $0.60 on the Dollar 273,000,000

Loss 182,000,000

Total Loss 274,950,000

Net Cash Inflow 1,025,050,000

Total Losses (Includes Cash Shortage from Prior Question) 275,551,250.00

Liquidating the portfolio at this point could reduce the severity of the bankruptcy since all indications are that the market for CDOs will worsen. IfWI could go into the market and short CDOs, there could be an outside chance of recouping some of the huge losses, but it is unlikely that there would be much profit margin on shorting CDOs at this time. It is also very unlikely WI could sell the nonperforming CDOs for 60 cents on the dollar making this situation even worse than it appears.

9. Does the proximity of foreclosed and/or vacant houses reduce the value of occupied homes?

Vacant and/or foreclosed homes do reduce home values in the immediate vicinity and perhaps further away since the stock of housing overall rises which depresses prices. Abandoned homes may deteriorate, be invaded by drug dealers and other undesirables which raises costs to municipalities. Municipalities, Buffalo for one, have pursued absentee owners of foreclosed houses in court demanding they maintain the houses.

10. Assume the Wilkes elect to make one payment at the new ARM rate of 2.5% above the CMT (4.97% in early April 2007). They will be making that payment on a new principal consisting of the principal as of their last payment plus all missed payments (six months). The loan is also rewritten so that it is reset to 30 years. What is their new payment? Note: they made two payments at the first reset rate that reduced principal with the last of those two payment made on September 15, 2006.

New payment of newly constituted mortgage is $2,365.01, a lower payment reflecting the lower interest rate of 7.47%. The principal on which that payment is calculated is $339,234.34, which is obtained by adding the sum of the six missed payments to the outstanding principal at the time of the last and second payment made to the reset ARM: (323847.94+6*2564.40).

11. Assume foreclosure proceeds and the Wilkes are removed from their home. The house is sold on December 1, 2007. At that time all payments they have missed are added to the loan and their gain is calculated as debt forgiven based on the sale foreclosure sale price of $195,000. What will their tax bui be if they are in the 25% tax bracket? How much in taxes do they save if the house is sold instead on January 1, 2008? In December 2007, President Bush signed a tax bill that eliminated the capital gains tax on the differential between foreclosed home sales and outstanding loans. Consider the impact of the new tax bill effecting mortgage debt if the Wilkes' home is not sold until January 1, 2008.

If sold on Jan 1,2008

loan 1/1/08 358,299.58

tax avoided 40,824.90

12. What do you think of the ethics of the Wilkes' decision to make one payment on the new loan and then default, living in the house as long as they legally can? Did Gallagher behave ethically?

Their behavior is unethical. They could have or should have known the terms of the mortgage. The debt is their responsibility. They took a risk by accepting the interest only mortgage. There may be some responsibility for their not understanding the mortgage that could be attributed to Gallagher, but they did have the documentation and the ability to ask someone what it all meant.

Gallagher provided the information that the mortgage lender required. He did not act in the best interest of the customer and in so doing acted unethically. A FICO credit check is insufficient to determine if an applicant can afford a mortgage. Certified income documents and tax returns are more useful tools for determining if a buyer can afford to make loan payments. Income qualifications were the norm until the housing market overheated. Gallagher failed his borrower clients but he did meet the lender's requirements. The lender was eager to loan, securitize the loan and sell it thinking all responsibility would be removed at that point. The lender was also at fault in not requiring more complete financial information. The ability to turn around and sell securitized loans prompted lower credit standards. The resulting CDO meltdown is directly tied to overestimating the credit reliability of underlying mortgages. This could be seen as a regulatory problem that may be rectified after the fact by legislation. Those in favor of the market working itself out would counter that this is what is occurring. Market workouts injure borrowers, investors, and confidence.

13. Does it create a moral hazard to bail out some borrowers with offers of reduced payments?

By bailing out some borrowers, lenders effectively reward those who do not pay. The argument that the mortgage documents are too complicated is not valid unless deliberate fraud is committed by the lender in presenting the terms of the loan. In the case of Bill and Mary the terms were clear, but they were both focused on the buying the house, not on their financial obligations. Henry Gallagher qualified them for the loan with a simple credit check that did not verify their income was capable of supporting the payments on the mortgage. Since he did not ask for income documentation and was not required to do so by the lender, he would not have even been aware of what percentage of their income would have to go toward the loan, taxes and insurance.

Alternative Question Set

1. Consider yourself a financial counselor to the Wilkes prior to their taking out the first mortgage. What would your recommendations be? Then consider what your advice would be if you were retained as an advisor at the other crucial decision points assuming they already had taken out the loan. If you were privy to the pending mortgage debt forgiveness bill in 2007, would that have changed your advice about what to do about the new offer from the lender in April 2007?

2. Comment on the ethics of the people the Wilkes dealt with from the realtor to the mortgage broker. Were the Wilkes always ethical?

3 . As an outside consultant to Whitewater what would you have recommended for investment strategies at the time of the initial investments in CDOs? Was this too profitable a situation to miss out on? Are there exit strategies that might pertain when market bubbles form?

Responses to alternative questions:

1. Consider yourself a financial counselor to the Wilkes prior to their taking out the first mortgage. What would your recommendations be? Then consider what your advice would be if you were retained as an advisor at the other crucial decision points assuming they already had taken out the loan. If you were privy to the pending mortgage debt forgiveness bill in 2007, would that have changed your advice about what to do about the new offer from the lender in April 2007?

The calculations made in the first set of questions (1 to 5) or something similar would be useful a financial consultant to refer to. Wilkes ability to carry a mortgage payment at the full ARM rate available in January 2006 could be shown to be infeasible. They would need to set their sights on less expensive housing. The negative amortization built into the teaser rate that is so appealing needs a clearer explanation by an advisor as they are shown. The greater ballooned principal and higher rate make for an impossible payment situation.

One option is to default at the first reset point, August 2006. The mortgage is underwater at this point. Alternatively they could try to sell but in the case that appears to be a poor option. Selling at a loss would provide an exit. As an advisor you can see that the calculations worked out in question 10 show that there is little savings to be had on the reduced ARM interest mortgage offered by the lender in April 2007 after they've missed six payments.

Do the Wilkes have leverage with the bank to cut a better deal? While that is possible it would depend on local conditions. Those conditions appear dire in the immediate new housing development. If the lender is also involved with other houses in the development they may be more willing to help keep the Wilkes in their home with a sweeter offer though with their current income level and other obligations it's a stretch to imagine what could be worked out.

The possibility of a major tax liability from any consequent sale of the foreclosed house below the value of the mortgage is very real. Assuming you know of the pending bill to eliminate this tax, would it be ethical to advise the Wilkes to accept the new ARM offered in April 2007, make a payment or two, and then stop in the hopes that they can hold out long enough until the bill passes? Their incremental costs for any payments made would not be the entire house payment but would instead be the difference between the payments and a comparable rental. Offsetting that would be the probability of avoiding a large tax burden that they would not be able to pay as shown in the calculations in question 1.

2. Comment on the ethics of the people the Wilkes dealt with from the realtor to the mortgage broker. Were the Wilkes always ethical?

Responses to questions 11 and 12 cover the ethics of all parties involved in the mortgage. There are other players that are not mentioned in the case that could be added to the discussion. Bond rating agencies are paid by bond issuers setting up an upward ratings bias. They also have to rely on the explanation of the nature of the underlying instrument provided by the issuer. Since CDOs were complex instruments based on probabilities and correlations, which in turn were based on assumptions there was ample room for both confusion and obfuscation. Were regulators remiss for not having foreseen the problems that could ensue with securitization? Regulations in place at the time were insufficient to deal with complex securitization. The CDOs were also expanding home ownership. This would be a good opportunity to juxtapose the free market philosophy of Friedman with more constrained and regulated viewpoints.

3. As an outside consultant to Whitewater what would you have recommended for investment strategies at the time of the initial investments in CDOs? Was this too profitable a situation to miss out on? Are there exit strategies that might pertain when market bubbles form?

Did Whitewater fail in its fiduciary responsibility by not more closely examining the structure of the CDOs? Did Whitewater engage in excessive leverage? Whitewater probably did not have the ability to dig more deeply into individual CDOs but could have pursued a closer understanding of the pitfalls of these relatively new instruments. An advisor might have stressed the high risk subprime borrowers backing the CDOs. Subprime mortgage borrowers do not have much of a track record which adds uncertainty. Uncertainty is risky, which partially explains the premium returns that were available.

CDO value and risk diminution was built on the assumption of ever rising house prices. Housing demand at the time was being supported by bringing in the bottom of the market, subprime borrowers, with questionable loan practices (FICO, instead of checking income qualifications).

This could have been seen as the market peak and a warning to exit. Having just seen the tech bubble burst only a few years earlier, sophisticated investors such as Whitewater should have been more cautious. Housing affordability was signaling pricing problems. The Wilkes' ability to obtain a loan is indicative ofhow a couple that could not afford a mortgage was able to obtain one.

An investment strategy that skirts intrinsic value is dangerous. The housing bubble was not that different from investors overpaying for IPOs on the basis of the ability to sell the shares to the next buyer at a higher price. Housing prices had been rising nonstop for some years. It was the rising prices that supported the mortgages, the subprime borrowers and the "investment grade" CDOs. Lenders were willing to support Whitewater's CDO leverage initially under what looked like a low-risk situation.

The abrupt reversal as is typical with inflated markets when demand falters could have been predicted. An advisor might have suggested participating initially but watching housing demand and affordability closely. This amounts to market timing and is a difficult strategy to pull off in all situations. A prudent approach would have limited investment with more modest leverage and more clarity on what market changes would move the value of CDOs. Calculations of Whitewater's positions shown in questions 7-9 pertain to determining the profit they would miss if they did not participate as well as how seriously they were damaged by leverage in the final analysis.

Subject: Subprime lending; Mortgages; Collateralized debt obligations; Home ownership; Mortgage rates; Case studies

Location: United States--US

Classification: 9190: United States; 3400: Investment analysis & personal finance; 8120: Retail banking services; 9130: Experiment/theoretical treatment

Publication title: Journal of the International Academy for Case Studies

Volume: 15

Issue: 8

Pages: 1-11

Number of pages: 11

Publication year: 2009

Publication date: 2009

Year: 2009

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: 216287348

Document URL: http://search.proquest.com/docview/216287348?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2009

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 45 of 100

SUBS BY DESIGN: THE CASE OF A FAMILY BUSINESS IN TRANSITION

Author: Fuller, Barbara K

ProQuest document link

Abstract:

Ryan Smith, laid off from his position as plant manager for a textiles firm, begins a new career as the franchise owner of a group of sandwich shops doing business as Smith Enterprises. The case covers Smith's startup of Subs by Design with the help of his family and the trials and tribulations of growing a family business. Startup financing came from some unique sources including from a fellow franchisee in a nearby territory. Smith Enterprises is now looking forward to operating 12 stores which include two stores currently under construction. However, recently Smith was presented with an interesting offer from the franchisor for a prospective store in a potential hot growth area. The case ends with Smith who is now 70 looking at his retirement and planning for the succession of the business. He has to decide how to divide his estate and what to do with the business as it moves to a second generation of ownership.

Full text:

INSTRUCTORS' NOTES

The specific teaching objectives

1. To explore the issues associated with family businesses that significantly alter the way businesses are organized and function in the marketplace. See references by Ang (1991) and McMahon & Davies (1994) for more information on how large and small firms operate differently because of special issues.

2. To identify the different stages of organizational growth and explain the nature of the transition to different stages as they relate to the Subs by Design.

3. To develop a profit and loss statement for the purpose of evaluating the feasibility of opening a franchise in a new location.

4. To evaluate various financial and legal strategies for passing a business on to the next generation.

Recommendations for Teaching Approaches

Teaching the case revolves around the growth of a family-based franchise business. Decisions about how large and how fast to grow a business are dependent on the capabilities and skill of the owner. Paramount to the overall success of the firm is the matching of company's capabilities with the opportunities presented over time. Subs by Design owner, Ryan Smith, in the past was concerned with only his capabilities, but now must consider the fact that he will soon be retiring and the next generations will be taking over the business. The opportunity presented by Subs by Design for a new store in Rock Crest Village is a focal point of the case. A typical question to open with is, "If you were Ryan Smith, what would your recommendation be in terms of growth for Smith Enterprises, should Ryan accept the proposal by Subs by Design for a new location in Rock Crest Village or turn down the offer allowing another franchisee to accept the offer?" Proponents of accepting the franchisor's proposal will cite the profit potential especially at the $10,000 net sales level, the ability to keep competition at bay, and accommodating the franchisors request to open an additional store in the territory. Those opposed will refer to the lack of profits at $7,000 net sales, the high level of competitions and lack of organizational structure. This will allow you to take the discussion to an analysis of the Weekly Profit and Loss Statement in appendix A of the case and in questions 1 and 2 in the instructor's note.

The case discussion can end by looking into the future of the business with students proposing and supporting different options for Ryan to retire from the business. Ryan has options to sell the business, to do an initial public offering, to bring in outside management, to offer an employee buyout, or to utilize a number of family succession planning options. The discussion should eventually get around to the fact that he has a son and daughter who have worked in the business and are interested in continued ownership in Smith Enterprises. However, there are issues associated with the division of stock in the company and management succession. Suggested questions to start the discussion include: How much ownership do Ryan's children expect in the business? When does Ryan plan to retire, and how much value does he need from the business to maintain him and Vicki during their retirement years? How involved should Ryan be in the business from now until his death? What financial and legal strategies should Ryan use for passing on his business to his children?

SUGGESTED ASSIGNMENT QUESTIONS

NOTE: An entrepreneur is a jack of all trades. Much like the entrepreneur, this case covers many decision areas that a business owner may face as the firm grows and is turned over to the next generation. The case had been constructed to give instructors multiple options. Students can be given the entire case to develop or the instructor can develop specific course or topic objectives and use only specific applications. The questions have been organized by content area to help instructors see the variety of directions available for class discussion.

Feasibility Analysis for a New Store Location: A Financial Focus

1. Develop a weekly profit and loss statement for the Rock Crest Village location based on the normal projection of $10,000 per week in sales? Based on your financial analysis would you recommend that Ryan open a Sub by Design store in Rock Crest Village or allow another franchisee to open a store in that location? Justify your answer.

2. If, because of the stiff competition in Rock Crest Village, the franchisee was only able to produce $7,000 in sales, how would this affect the profitability of this location? How would this affect your analysis and recommendation for opening a Subs by Design store at the Rock Crest Village location?

Based on his analysis of the weekly profit and loss statement outlined above, Ryan decided the costs were too high at the Rock Crest Village location. His gut told him that sales would be closer to $7,000 than $10,000. He tried to negotiate with the landlord for better terms, but could not strike a deal that he felt was reasonable. The profit and loss statement at $7,000 in net sales was not profitable. According to Ryan, the most important part of the profit and loss statement is the bottom line. Net profits need to be in the 10 to 20% range. To reach these numbers the rent cost should be around 6 to 7 % of net sales. Other issues that concerned Ryan were the stiff competition and the ability of the current organizational structure to handle additional stores.

The store was offered to another franchisee with the territory just north of Ryan's geographic area. The franchisee did open a store in the Rock Crest Village location. The store has now been open for over a year with sales of around $7,000 per week. Rock Crest Village has grown and become a very successful development. However, the competition for customers is quite aggressive and few retailers are making their perceived profit margins.

Business Management Issues

3. How has the leadership style of Subs-By-Design changes over the 20 years it has been in business? Relate the change in leadership style to the business growth cycle and be sure to discuss the differing management styles of father and son.

The type of leadership seen in an organization most often matches a firm's stage of growth. Research indicates that the most directive and autocratic styles are seen with firms that are in Stages 1 or Stage 2 of their development whereas a more nondirective leadership style such as consultative or participative are used in Stage 3. During the first two stages the business requires more nurturing environment and therefore a more directive style of leadership, such as the benevolent-autocratic style described in the case by Ryan. Ryan was responsible for all of the major decisions in the organization both strategic and operational. As the firm grows into a Stage 3 organization is becoming more professionalized and Greg's leadership style shows a more interactive and participative leadership style. He is beginning to give up some control, has delegated some tasks and is convinced that more middle management is need if the organization is to grow beyond its current size. There is additional information in the following question along with some references for additional reading if needed on the relationship of business growth cycles to leadership style.

Growth Challenges

4. What are the growth challenges Smith Enterprises faces as it moves from its current 10 store franchise base to what could be as many as 20 franchises in the next few years? Put together a time line that outlines your recommendations for growth and what that means to the management structure at Smith Enterprises.

A good source for looking at growth within companies is Eric Flamholtz and Yvonne Randle's book, Growing Pains: Transitioning from and Entrepreneurship to a Professionally Managed Company. Class discussion should focus on management systems needed for each stage of growth. First have students identify where Smith Enterprises fits into the stages of growth and then evaluate how effective the business has been at each stage and how it is poised to move into the next stage. Flamholtz and Rändle (2007) identify four stages of growth from inception to maturity: Stage 1 - New Venture, Stage 2 - Expansion, Stage 3 - Professionalism, and Stage 4 - Consolidation. Smith Enterprises is in the second stage of growth. Many of the issues of Stage 1 and startup were identified and resolved by the franchisor. The market niche and core products and services were already established. However, Smith Enterprises established it own operational systems. In the beginning, these systems were rather informal and totally run by Ryan. The company culture was established through Ryan's daily interactions with family and employees. He wanted things done quickly and liked to see things done his way. For Ryan the business was a source of personal pleasure which he expressed as "I love to get up in the morning and go to work." Ryan brought much to the business in terms of his past management experience and his keen eye for accounting and financial systems. Although he had worked for corporations all of his life, in the back of his mind he had always thought about owning his own business. He overcame his fear when faced with a career obstacle at the age of 50. The rights Ryan purchased from the franchisor made the transition into business ownership much easier than a normal startup. However, as Ryan moves into Stage 2 of the growth process, he will increasingly need to rely on his own capabilities and experiences, as well as Greg's leadership strengths. The business has grown slowly, but deliberately.

As Smith Enterprises moves into Stage 2 the management systems are still relatively informal. Store level management is in place and consists of people inside and outside of the family, but no regional or middle management structure had been developed to allow the company to grow much beyond its current level. Greg does mention that a couple of store managers may be at the Stage where they are ready to take on more responsibility at the regional level. However, no operational systems have been established at the corporate level to accommodate this growth.

Issues that may complicate the picture are the role Bree and Brad may play in the business upon the death of Ryan. Also decisions made by Ryan and Greg as to how large they want the business to become in the future may greatly influence which systems should be put into place. Ryan indicated that Greg can handle 1 0 stores as easily as he handled four, but what about 20 stores. Ryan contends that now that they have the format in place they can manage 100 stores just as easily as 10. But is this really true? Do they really have the structure in place to move to Stage 3? What management systems would need to be developed to move to the next Stage? How would Greg's rather laid back management style fit with the growth of the more formalized systems and controls required as the business grows? When there is change in one dimension or element of a business, it affects the alignment of other elements of the organization. As a company grows, the management structure demands that new task be accomplished and often with new and different people. The entrepreneur is pressured to manage in a different way, usually outside his comfort zone. In fact, many entrepreneurs choose to operate lifestyle businesses that provide just enough salary and size without adding the risk and complexity required by larger companies. Flexibility and control are often traded off for size and maximization of wealth. Which direction will Smith Enterprise take? Growth decisions will depend on Greg's ability to transition to a more structured hierarchical managerial style and his comfort level. Greg talks about his 40 birthday in 6 years, and tends to see this as a major juncture in his life. Where will Smith Enterprises be in 6 years?

Ryan's Retirement and Succession Management

5. How would you access the triangular relationship between Greg, Bree and Brad that eventually results in Brad leaving to pursue a career in real estate? What is the significant of Ryan's gift to Bree and Brad when they leave the business? Was he too generous or not generous enough? Should this gift affect Ryan's will in any way? If so, how? Discuss the reasoning behind your answer.

First hires in a family-owned business usually include members of the extended family which we see in this case. Early on Ryan relies heavy on the support of his family, especially Bree. She provides him with encouragement and works diligently during startup and for the first ten years of the business. In addition she brings her husband into the business to work with her father. Since he comes in from outside the family, this would be a good place to talk about how outsiders fit into the family structure. How are they treated and what types of issues arise when outsiders are included in the operations of a family business.

Most of the literature indicates that much of the culture of the family crosses over into the operation of the business, and therefore, the behavior of individuals across these two boundaries is often very similar. If fathers are strict with their children at home they will continue that strict behavior in the work environment. If that strictness is felt by the children it is multiplied by those outside the family such as son-in-laws.

The gift to Bree and Brad was to thank Bree and Brad for the more than ten years they had worked for the company. At the time they received the two stores, Smith Enterprise had opened 10 stores, and these two stores were worth $1.2 million. Ryan gave them the stores so Brad would have time to get his real estate business started. Ryan admitted that he had allowed Brad and Greg to compete for the presidency of Smith Enterprises. Ryan's comments on the competition he encouraged between Brad and Greg.

Ryan: "On the one hand it was hard, I let Brad and Greg compete, but on the other side when Brad decided to leave I gave him and Bree the two stores so they would have income while establishing their new venture. Bree and Brad helped me build the business when the Subs by Design franchise was new and unknown. In the past two years, Brad has become very successful in the real estate business and is moving on with his new career."

Ryan is aware that although his tactics allowed the strongest leader to take over Smith Enterprises, it also created some tension among family members. Bree and Greg get along as most sisters and brothers, but there are still tense moments when discussing certain subjects. Greg feels like the person in the middle and although he has proved himself as a talented leader with a good business sense, he would prefer to have a better relationship with his sister and Brad. At this point in time Ryan's "Will" is still in process however; most likely the assets of Smith Enterprise will go to Greg with the rest of the family assets going to Bree. Other family assets are well over a million dollars.

This is a good place to talk with students about the fair versus equal distribution of assets. Pushing family members back together in a business after the tension caused in earlier times does not see appropriate. However, giving the business to Greg does create some inequity in the distribution of family assets. Students can debate various options available to Ryan as to the division of his estate. Most students will favor equal distribution of assets. They need to list the pro and cons of such a decision as it relates to the future of the business.

6. How should Ryan plan for his retirement? What are the options available to Ryan in harvesting or managing the succession of his business? Which option would be the best based on the information you have from the case? Justify your answer. Should Ryan get a business valuation? Why or why not? What other professional help does he need in planning his retirement from the business?

Ryan can choose among many options available to founders who are ready to retire. He has options to sell the business, to do an initial public offering, to bring in outside management, to offer an employee buyout, or to utilize a number of family succession planning options. Since his children have been involved in the operation of the business his best option would be to develop a family succession plan. However, with family issues that have evolved through the growth process, Ryan has some serious decision to make to assure that his children are treated fairly and the business is given the best chance of survival.

Succession planning is quite complicated. Many legal and tax issues are associated the process. First Ryan will need to look at what type of help or expertise he will need in developing his succession plan. This may include several professional advisors. The IRS for tax purposes will want a valuation for the business. An estate-planning lawyer will be needed to help with deciding which method is best for Ryan to use for the stock transfer and how management succession will occur in the business. He can make recommendations and create the formal documents. Together with his financial advisor and accountant Ryan can make decision that will most closely match his values and comfort level. There are many succession options available and each have financial, tax, and control issues associated with them. First the IRS allows individuals to pass $1 million in tax free gifts, plus $12,000 a year. A second option, a family limited partnership allows owners to transfer up to 99 percent of a business while retaining control. Other options self-canceling installment notes and private annuities allows the younger generation to pay the older one a series of payments plus interest for a set period of time or until the owner's death in the case of the selfcanceling note or for the seller's lifetime in the case of the private annuity. With a grantorretained annuity trust ownership is transferred to an irrevocable trust which the owner can access for a specified period of time after which the equity is transferred to the heirs. An intentionally defective grantor trust allows one to sell the business to a trust in your family's name in return for a long-term installment note. Ryan has started the gifting process and is looking at a family limited partnership.

EPILOGUE

Rock Crest Village Site:

Ryans gut feeling was right. The new location in Rock Crest produced less than $7000 in sales volume after it opened. The current owner is currently looking for a buyer. Ryan may be interested if he is able to negotiate a lower cost structure with the landlord.

Succession Issues:

Ryan is in the process of working with his CPA, estate attorney, and business appraiser to develop his will. At the time of this writing, most of the decisions about the division of his estate have been decided. The business in its entirety will be passes on to Greg who has gradually been taking over the leadership role in the company. Most of the rest of his property, which is a sizable estate, will go to Bree.

Subject: Family owned businesses; Startups; Succession planning; Franchises; Case studies

Location: United States--US

Classification: 9190: United States; 2310: Planning; 9520: Small business; 9130: Experiment/theoretical treatment

Publication title: Journal of the International Academy for Case Studies

Volume: 15

Issue: 8

Pages: 13-22

Number of pages: 10

Publication year: 2009

Publication date: 2009

Year: 2009

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: 216301196

Document URL: http://search.proquest.com/docview/216301196?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2009

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 46 of 100

KING OF THE HILL: COMPETING FOR FOREIGN DIRECT INVESTMENT IN 'DIXIE'

Author: Borstorff, Patricia C; Collum, Taleah H; Newton, Stan

ProQuest document link

Abstract:

This case is designed to illustrate the concepts of foreign direction investment, job creation, state incentives as a factor in FDI, and the unique features that a foreign investor wants from a state. The case can be used in its entirety or in part as appropriate. For example, one could investigate recruiting methods used by U.S. states in the pursuit of FDI and the results ofthat pursuit. Or one could investigate the facets of employment, such as a non-union environment, educational development, and tax policies, that are particularly attractive to foreign investors. Or one could compare the incentive packages offered by various southern states and determine the return on their investment. Countries are faced with numerous challenges as they compete for the same Foreign Direct Investment (FDI) dollars. FDI is increasing as the world evolves into a global marketplace for industry. The U.S. government continually adjusts its policies and tax procedures in order to be a viable player in the world market. The southern U.S. has become more aggressive in recruiting foreign investment by providing incentives to attract industries and communicating the unique advantages they offer to foreign companies interested in a U.S. presence. Many southern states, including Alabama, have been successful in improving their economies and providing new employment opportunities by offering the incentives required to attract FDI and industries to the area. This case can be used as a template for professors in other states. We have included a reference page to assist others in modeling a case based on what is done here. The figures for FDI initially are reported for the U.S. The Bureau of Economic Analysis (www.bea.gov) offers information for each geographical area. Each state has a web site as well as a Development Office. Much of our information came from the ones for Alabama. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case helps students appreciate the global reach of business today. In all states, there is foreign direct investment and state development offices to assist in attracting FDI. 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. We also provided an extensive reference section to assist the teacher (and the students if you want to provide it to them). Students are adept at finding information on the Internet and enjoy the success that this case brings.

Discussion Questions

We suggest to first look at Alabama and its participation in trade. The students should answer the following questions:

1. What percent of FDI to the US is in the southern states?

The southeastern states of Alabama, Florida, Georgia, Kentucky, North Carolina, and Virginia occupied 20.3% of the nations FDI in 2003. Alabama made up 7.1% of FDI in 2003. Its increase rate in FDI - gross book value, 75%, was higher than that of the southeast and the U.S., respectively 40% and 65%.

2. What caused this increase in FDI to the southern area?

Some reasons for the increase in FDI were: multi-modal transportation and distribution infrastructures, a capable workforce at competitive salaries, excellent training system, the lowest electricity costs, a low cost of living, a public-private partnership, and the lowest state income and property taxes and incentive programs. For example, Alabama provided tremendous incentives and tax breaks for inducing the automotive investments. Alabama gave incentives package to Mercedes-Benz (1993) of $253 million including: training workers, clearing and improving site, upgrading utilities, and buying 2,500 expensive vehicles. They paid Mercedes Benz $ 1 50,000 per job created. Compare this to the presumed frontrunner at that time, North Carolina, which offered $100 million.

3. What tax incentives does Alabama offer companies in FDI?

Alabama has statutory tax incentives that are favorable for all companies such as income tax breaks. Corporations pay Alabama income tax based on their net taxable income derived only from business conducted within the state and a fifteen year carry forward of net operating losses. Property taxes are significantly lower than most states with the limit of state mileage rates on both real and personal property at 6.5 mills (www.ado.state.al.us). Business property is taxed on 20% of its fair market value with an exemption of all tangible personal property being warehoused in the state for shipment to a destination outside the state. Alabama has favorable sales and use taxes for raw materials used by manufacturers. A business privilege tax is capped at $ 1 5,000 except for financial institutions and insurance companies (www.ado.state.al.us).

For qualifying companies in Alabama, an impressive incentive to locate businesses within the state is the annual income tax capital credit of five percent of the total capital costs of a qualifying project for twenty years. In contrast, other cities and counties may offer abatements for non-educational state, county, and city property taxes for a period of only ten years. For manufacturing use, abatements are approved for non-educational county and city sales and use taxes on construction materials and equipment (www.ado.state.al.us).

4. What part does unionization sentiment in a state have on FDI decisions?

Human resources (HR) are an important contributor to most firms' decisions regarding FDI. HR includes such areas as wage levels, unionization, labor politics, and skills of the workforce. U.S. and European multinational companies' decisions regarding investment abroad are strongly influenced by comparative location advantages prejudiced by the differences in union penetration, collective bargaining contexts and government workplace regulations. German-owned DaimlerChrysler Corporation, in its Alabama operations, has been aggressive in its efforts to rid itself of union representation by Bridgestone/Firestone who is Japanese owned. DaimlerChrysler wishes to operate as a union-free enterprise. Foreign multinational companies strive to minimize the likelihood of their company being unionized by location decisions regarding where to invest within the U.S. Foreign-owned manufacturers are more negatively influenced by union penetration rates than U.S. manufacturers in making location investment decisions.

5. Why do countries engage in foreign direct investment (FDI) in Alabama and other southern states? What unique things does Alabama offer? See www.ado.state.al.us

The Southern U.S. has been very aggressive in recruiting international companies. Economic development is one of the first job priorities of southern politicians. Tennessee, Alabama, Georgia, Kentucky, South Carolina and Texas have been eager to grow their manufacturing bases and have welcomed foreign automakers with numerous incentives, many industrial sites, a skilled work force and a non-union environment. Alabama possesses many natural resources that make it attractive to foreign multinational corporations, among these are attractive climate, accessible ports and rivers, excellent infrastructure including a good transportation system, and reserves of natural gas, coal, and marble.

For business relocation purposes, Alabama attracts businesses with benefits by having a pro-business culture and lower resource costs than many other states. Often, it is the work ethic of local citizens that is cited as the key to Alabama's success in attracting global companies and the subsequent growth of these companies (Chemical Market Reporter, 2004). In addition to the booming automotive industry in Alabama, the state is a significant base for the U.S. chemical industry. This industry including the plastics sector accounted for 25,300 Alabama workers in 2003. The chemical industry has prospered in Alabama due to several factors: the low cost of conducting business locally, a bipartisan probusiness environment within the government, a readily available skilled workforce, and low utility costs (Chemical Market Reporter, 2004).

Foreign investors have invested an enormous amount of FDI in the automobile manufacturing business in the southern United States. The following companies have manufacturing plants located in the south: Nissan operates plants in Mississippi and Tennessee, Toyota has operations in Kentucky and Texas, and Hyundai, Honda, and Mercedes have manufacturing plants within Alabama.

6. What is the impact of Alabama Investment Development Training (AIDT)?

Alabama Industrial Development Training (AIDT) is among the most highly rated workforce-training program in the U.S. (Expansion Management, 2003). They provide stateof-the-art industrial training and support services for new and expanding industries. AIDT has several training centers located statewide. For example, the AIDT center in Lincoln, Alabama, continually assists the Honda Manufacturing plant located nearby with employee training and support as they expand their processes. They provide mobile training units, an experienced staff paid by AIDT and on-site production facilities at no cost to the business client. AIDT often works in partnership with the local community colleges in their training center areas to coordinate customized training for their clients.

7. What is the Alabama Technology Network and what is its influence on FDI?

Alabama currently has twelve Alabama Technology Network (ATN) Training Centers located throughout the state that works with business and industry to increase the competitiveness of Alabama companies through a network of service providers. This network merged under the umbrella of the Alabama Department of Postsecondary Education in 2005, in order to fully partner with the Alabama College system to enhance workforcetraining capabilities. During Training for Business and Industry Network (TBIN) meetings within the state, I observed Alabama Postsecondary Chancellor Roy Johnson reveal his plans to increase the number of ATN center locations in the state within the next two years as part of his workforce development plan in order to meet the increased technology training needs of the future Alabama workforce.

ATN' s administer the Manufacturing Extension Partnership (MEP), which provides a network of increased services to manufacturers. ATN' s assist businesses that have lost jobs or are forced to revamp their processes due to foreign competition. They offer applications for the Federal Incumbent Worker Grants that enable manufacturers to retrain their employees with a fifty percent match of grant funds for training costs.

8. What was the incentive package Alabama gave Honda?

Alabama gave Honda $ 1 58.3 million, including: buying the land and preparing the site for construction, training the plant's employees, and $55.6 million in tax breaks. Additional incentives in 2002 for $450 million expansion included: $45. 1 million from the state for employee training, and road, sewer and water improvements; $33.1 million from the state and local area for various tax breaks, which will be allocated over a 20-year period; and $ 11.5 million from the city of Talladega and Talladega County for site preparation, and sewer and water improvements.

9. What was the incentive package Alabama gave Hyundai?

The incentive package given by the state of Alabama to Hyundai (2002) included: $252.8 million, including; $76.7 million in tax breaks, $61.8 million in training grants and $34 million in land purchase assistance, road and bridge development, and water and sewer improvements.

10. What are the aggregate benefits of FDI to Alabama?

The benefits of FDI (aggregate automotive industry in Alabama) include: Job creation 44,834 (2005), as compared to 31,197 (2003); 124,190 direct and indirect jobs. Alabama wages are: Motor vehicle manufacturing: $ 1 ,274/weekly (~$64,000/annually). All manufacturing industries are: $725/weekly (~$36,000/annually). All industries are: $620/weekly (~3 1,000/annually). Also there was Employment growth (due in part to other expanding industries such as the aerospace sector) 3.5% unemployment rate (2005); as compared to 5.3% (2004). Additionally, there was State sales taxes (paid by auto industry workers in 2003) of $101 million (state); $46 million (sales). Finally, over 160 Hyundai, Honda, and Mercedes suppliers have located within the state

11. What makes Alabama and its infrastructure attractive to foreign investors?

Alabama has a lot to offer foreign investors. The following shows the depth of commitment to attract FDI:

* World-wide connectivity through the statewide multi-modal transportation/distribution infrastructure with an easily accessible interstate and fourlane highway network connects every major city and most other communities throughout the state, motor freight terminals, rail systems, port and barge transportation, and international air service.

* A capable workforce is available at competitive wages.

* Alabama Industrial Development Training recruits, assesses and trains qualified potential employees at no cost to the industry and based on company criteria.

* A variety of advanced engineering, technology, research, and development facilities and programs are located at various universities and colleges throughout the State.

* Ranked nationally among the lowest electricity costs for industrial users (Morgan Quitno's State Rankings 2003) and a net exporter of electricity, Alabama's three major electric utilities provide dependable, low-cost power.

* Water resources are approximately 20 times greater than present usage. One-twelfth of all the ocean-flowing water in the U.S. travels through Alabama.

* Alabama's forestland covers more acres than the size of Connecticut, Delaware, Maryland, Massachusetts, New Hampshire and Rhode Island combined.

* A low cost of living complements an enviable quality of life in areas such as recreation, entertainment and cultural diversity.

* The Alabama Technology Network (ATN), a public/private partnership of the University of Alabama System, Auburn University, the Economic Development Partnership of Alabama and selected two-year technical colleges, provides worker training and technology transfer to industry in Alabama. ATN works to enhance the competitiveness of companies, strengthen the industrial base and improve the effectiveness of the work force through a coordinated network of education, training and technical assistance providers.

* Official U.S. Customs Ports-of-Entry are located at Birmingham, Mobile, and Huntsville International Airports.

* NASA's Marshall Space Flight Center is a regional transfer hub for government/industry teams who travel to industrial sites. In Alabama, an estimated 1,170 jobs were created or saved over an 1 8 -month period through its programs and 41 new products were created.

* Auburn University's Industrial Extension Service helps small and medium-sized manufacturers solve technical and business problems, provides work force training and disseminates advanced technology.

* University of Alabama Birmingham's (UAB) office for the Advancement of Developing Industries is the state's advanced technology business incubator and is nationally recognized as a technology transfer organization.

* The state income and property taxes are among the lowest found anywhere in the United States. In addition, Alabama offers statutory incentive programs such as a corporate income tax credit for qualifying companies. This includes the cost of land, buildings, machinery and equipment. The program provides an annual corporate income tax credit of five percent of the total capital cost of the project for 20 years. Assuming a total cost of $20 million in building and equipment, the abatement provides up to $ 1 million in credit against Alabama corporate income taxes each year for a term of 20 years.

* Alabama provides industrial site preparation grants to assist new and expanding manufacturers.

* The Alabama Enterprise Zone program provides a package of business development incentives, which offers businesses some of the most favorable arrangements in the country.

* One-half (1/2) of the U.S. population lives within a 500-mile radius and over twothirds (2/3) lives within 750 miles.

Subject: Foreign investment; Automobile industry; Tax incentives; Job creation; Case studies

Location: United States--US, Alabama

Classification: 1120: Economic policy & planning; 8680: Transportation equipment industry; 9130: Experiment/theoretical treatment; 9190: United States; 1300: International trade & foreign investment

Publication title: Journal of the International Academy for Case Studies

Volume: 15

Issue: 8

Pages: 23-30

Number of pages: 8

Publication year: 2009

Publication date: 2009

Year: 2009

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: 216285477

Document URL: http://search.proquest.com/docview/216285477?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2009

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 47 of 100

BELGROVE FARMS INC.

Author: Tontz, Richard; Rymsza, Leonard; Marcal, Leah

ProQuest document link

Abstract:

Students are faced with a factual setting that presents practical business and ethical issues. The client, Belgrove Farms, is considering changing production from standard yellow corn to genetically modified corn. The farm has four sub-divisions that vary in production of the new product. Cost data is provided by an existing proposal. Future pricing of the genetically modified corn is uncertain. Using the concept of comparative advantage, the student must choose the appropriate allocation of production among the four sub-divisions, and calculate the anticipated change in profits. Students must also consider the nature of a family firm and any strategic or ethical issues associated with the proposed change in production. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case is designed for use in an upper-division, inter-disciplinary business course. The purpose of the course is to enable students to utilize knowledge they have gained in the lowerdivision business core. In addition, the course aims to improve students' communication and teamwork skills. Student teams prepare the answers to questions presented in the case with coaching from faculty. The faculty coaching is intended to provide answers to team questions. All teams submit a formal written business report containing an analysis of the issues presented in the case. One team of students formally presents their case solution to the class. A second team of students acts as a "discussion team" by asking the presenting team for further explanation or clarification of their recommendations. Following the discussion team's exchange with the presenters, the entire class is welcome to participate in an active question and answer session.

Although the case is designed to be used in an upper-division, inter-disciplinary business course, the case can be easily modified for use as an in-class or take-home assignment in an introductory microeconomics course.

DISCUSSION QUESTIONS AND ANSWERS

General note: the firm is considering changing production to a new product, genetically modified (GM) yellow corn. The letter from Kevin Thorp (Exhibit 1) suggests a total switch in production from all AA yellow corn to all GM yellow corn. The production summary data (Exhibit 2) reveals differing relative capabilities of producing either AA yellow corn or GM yellow corn among the farm's four sub-divisions. One objective of the case is to help students understand that analyzing the sub-divisions as separate resources, and determining the profit-maximizing output from each sub-division can increase the farm's total profitability. Another objective of the case is to help students understand that the contribution margin (CM) for AA yellow corn per sub-division is the appropriate measure of the opportunity cost of producing GM yellow corn.

Q.1. Belgrove Farms has four sub-divisions (four different farms it has previously acquired). Since the farms have different relative productive abilities (AA yellow corn vs. GM yellow corn), and production can be shifted by farm, consideration must be given to the best combination of outputs to maximize the economic profit.

a. Calculate the output of each farm for AA yellow corn or GM yellow corn. From this data, calculate the economic cost of AA yellow corn in terms of GM yellow corn (ratio) and the economic cost of GM yellow corn in terms of AA yellow corn (ratio)

[ i.e., 1 AA = _?_ GM; or IGM = _?_ AA.]

Using the data from Exhibit 2, Table 1 shows the relative outputs of AA yellow corn or GM yellow corn for each farm. To calculate the physical opportunity cost for each farm, simplify the AA yellow corn to GM yellow corn ratios. For example, the Brookhurst Farm can produce either 20,000 bushels of AA yellow corn or 22,000 bushels ofGM yellow corn. (Equation: 20,000 AA = 22,000 GM.) Dividing both sides of the equation by 20,000 results in 1 AA =1.1 GM. Thus, the physical opportunity cost of each bushel of AA yellow corn is 1 . 1 bushels of GM yellow corn. Dividing both sides of the equation by 22,000 results in 1 GM = 0.91 AA. In this instance, the physical opportunity cost of each bushel of GM yellow corn is 0.91 bushels of AA yellow corn. The physical opportunity costs for each bushel of AA yellow corn and GM yellow corn for the remaining farms are determined in exactly the same manner.

b. Our marketing division has put together a projection of expected selling prices (see Exhibit 5). Apparently there are some consumer issues about the new corn. These issues may affect the expected selling price of GM yellow corn. Evaluation of some alternative prices for GM yellow corn may be in order.

The expected selling prices are stated in the price forecast portion of Exhibit 5.

AA yellow corn (domestic): $5.00/bushel

GM yellow corn (domestic): either Scenario #1, $5.50/bushel or Scenario #2, $4.70/bushel.

c. Combine the relative output ratios from Q.1.a. with the selling prices from Q.l.b. to determine an optimal output table at each selling price of GM yellow corn. (Remember opportunity cost and comparative advantage analysis from economics, and contribution margin from accounting?)

The relevant comparison to make in deciding which crop to produce on each farm is to compare the contribution margin of a product with the opportunity cost. The contribution margin (CM) is the sale price of the product minus the expected production cost/bushel.

CM = Sale price per bushel - Expected production cost per bushel. The expected production cost (EPC) per bushel is stated in the cost analysis portion of Exhibit 1. The contribution margin describes how much each unit of output contributes to profit.

The opportunity cost of any choice is the forgone value of the next best alternative. If the production capacity of AA yellow corn on each farm were equivalent to the production capacity of GM yellow corn, the decision of which corn to produce is easy to make. If a farm can produce the same amount of corn, AA yellow corn or GM yellow corn, then the corn that produces the highest contribution margin will be the corn that will be produced on the farm. However, in light of Exhibit 2, it is evident that the production capabilities of AA yellow corn vs. GM yellow corn are not equivalent. The difference in production capabilities was the focus of the ratios that were determined in Question 1 .a. Thus, in this case, the opportunity cost of growing AA yellow corn is the contribution margin of GM yellow corn times the number of bushels of GM yellow corn given-up for each bushel of AA yellow corn.

CM = sale price - EPC.

AA yellow corn CM = $2.30 = ($5.00 - $2.70)

Scenario #1 : GM yellow corn CM^sub 1^ = $2.25 = ($5.50 - $3.25)

Scenario #2: GM yellow corn CM^sub 2^ = $1.45 = ($4.70 - $3.25)

Determine output by comparing the dollar contribution margin with the dollar opportunity cost of production. This can be done for either column in Table 1: (1AA = ? GM or IGM = ? AA).

For example, Brookhurst Farm under scenario # 1 :

Consider planting AA yellow corn. For Brookhurst Farm, the opportunity cost of each bushel of AA yellow corn is $2.48 (1.1 GM yellow corn x $2.25). Planting AA yellow corn would not contribute the most to profit since the gain is $2.30/bushel and the opportunity cost is $2.48/bushel

Consider planting GM yellow corn. The GM yellow corn contribution margin is $2.25/bushel; the opportunity cost is $2.09/bushel (0.91 AA yellow corn ? $2.30). Profit will be maximized by planting GM yellow corn on the Brookhurst Farm since the gain of $2.25 is greater than the opportunity cost of $2.09.

For further illustration, consider Gatos Peligo under scenario #1 :

Consider planting AA yellow corn. For Gatos Peligo, the opportunity cost of each bushel of AA yellow corn is $3.38 (1.5 GM yellow corn x $2.25). Planting AA yellow corn would not contribute the most to profit since the gain is $2.30/bushel and the opportunity cost is $3.38/bushel.

Consider planting GM yellow corn. The GM yellow corn contribution margin is $2.25/bushel; the opportunity cost is $1.53/bushel (0.67 AA yellow corn ? $2.30). Profit will be maximized by planting GM yellow corn on the Gatos Peligo farm since the gain of $2.25 is greater than the opportunity cost of $1.53.

Following similar reasoning for the remaining farms will produce results as seen in Tables 2 and 3 below.

The underlined numbers in Tables 2 and 3 indicate which product should be produced on each farm.

Notice at the lower price for GM yellow corn, only Sally's Place should produce GM yellow corn.

Accounting Analysis of the Two Scenarios:

Students may alternatively calculate the total contribution margin from each farm and allocate production by picking the highest total CM per farm.

Scenario #1 analyzes how to use the farms if GM yellow corn sells for $5.50 per bushel. Scenario #2 analyzes how to use the farms if GM yellow corn sells for $4.70 per bushel.

Scenario #1: Compares total CM of AA yellow com to CM of GM yellow corn at a selling price of $5.50 per bushel for GM yellow corn.

The accounting analysis confirms that if GM yellow corn sells for $5.50 per bushel, AA yellow corn would only be grown on the Fordum Estates farm; the remaining farms would grow GM yellow corn.

Scenario #2: Compares total CM of AA yellow corn to CM of GM yellow corn at a selling price of $4.70 per bushel for GM yellow corn.

This accounting analysis confirms that if GM yellow corn sells for $4.70 per bushel, then only Sally's Place should produce GM yellow corn.

Q. 2. Using the client's production cost data (Exhibit 1), demonstrate the change in profits expected from the above production recommendation for the alternative potential selling prices of GM yellow corn.

1. Sales: Multiply the total output of each product by the price.

A. AA:(290,000 x $5.00) = $1,450,000.

B. GM Scenario #1: (22,000 + 90,000 + 320,000) x $5.50 + 50,000 x $5.00 = $2,626,000.

C. GM Scenario #2: (20,000 + 50,000 + 60,000) x $5.00 + 320,000 x $4.70 = $2,154,000

2. Cost of production: Multiply the total output of each product by the per bushel cost.

A. AA: (290,000 x $2.70) = $783,000.

B. GM Scenario #1: (22,000 + 90,000 + 320,000) x $3.25 + 50,000 x $2.70 = $1,539,000.

C. GM Scenario #2: (20,000 + 50,000 + 60,000) x $2.70 + 320,000 ? $3.25 = $1,391,000

Based upon the income from continuing operations before taxes as stated in Table 6, the production mix under scenario #1 will result in increasing profits by $420,000 ($668,095 - $248,095). The production mix under scenario #2 will result in increasing profits by $96,000 ($344,095 - $248,095).

Q. 3. Assuming the probabilities of alternative prices for GM yellow corn are as stated in Exhibit 5, calculate the expected change in profits from adopting our recommendation. (This is important since it can be used to justify our consulting fees.)

20xx expected profits: If there are alternative future scenarios, the expected profit is calculated as the sum of the probability of a scenario multiplied by the expected profits in that scenario.

In this case, the probabilities are 60% likely scenario #1 (GM yellow corn price = $5.50) and 40% likely scenario #2 (GM yellow corn price = $4.70). The expected profit is therefore: (0.60 x $668,095) + (0.40 x 344,095) = $538,495.

The percentage increase in expected profit is [($538,495 - $248,095) / $248,095] = 117%

Q. 4. Okay, that's the economic analysis, but consider the nature of a family business and any strategic and ethical issues that might be important, and check with me. We want to make the right recommendation for the client.

This is an open-ended question. The instructor may invite the students to consider the nature of a family business, and the long run strategic and ethical implications of adopting the proposed new production of GM yellow corn.

Family business: A family business is subject to a number of unique potential problems. Family relationships may not translate easily into successful working relationships. Employment of family members may alter a successful management hierarchy. In this case, Kevin Thorp is a young business school graduate who is recommending a complete change of product. Robert Belgrove (his uncle) is the CEO with a more conservative viewpoint. Students may discuss the general problem in family businesses associated with the intergenerational differences in business philosophy and risk taking.

Strategic thinking: There are a number of ways to approach the issues of strategy that arise in the case. One approach is the Liedtka model. This model consists of five elements of strategic thinking - a system perspective; intent-focused; intelligent opportunism; thinking in time; and hypothesis-driven. The primary focus of strategic thinking is concerned with a creative and divergent thought process. Strategic thinking looks to the future. In this case, the students could analyze the five elements of strategic thinking in an attempt to develop strategies to deal with economic liabilities that may arise in the future.

Ethical considerations: Students may also evaluate the ethical issues related to the process of genetic modification. There are numerous approaches that are used to determine if one's actions are ethical. The most common of these approaches is the Stakeholder/Utilitarian Theory (maximize the net benefits to society as a whole, i.e., the greatest good to the greatest number). Other theories include the Rights Theory (respecting and protecting individual rights); Justice Theory (fair distribution of benefits and burdens); Categorical Imperative Theory (looking at the results if everyone acted in the same manner); and the Front Page Test (reaction if the decision is reported on the front page of the local newspaper). To answer this question, instructors must provide students with a framework wherein they can analyze Belgrove' s decision from an ethical standpoint. Obviously the instructor will prefer that the ethical discussion include the approaches discussed in his or her course.

Changing to genetically modified products may also involve some additional risks for the firm. Students might mention:

1. Product liability risk: If the new product causes problems for the buyers, then the firm may face product liability lawsuits.

2. Brand name damage: Consumers may be unsure which product they are receiving if the firm produces any GM yellow corn. If there is concern about GM products or if real problems arise, the firm's brand name may be associated with the GM problems, leading to less demand for the firm's products.

3. Changing government regulations: Public concern may lead to changes in government regulations of the production and sale of the GM products. This may affect future costs or revenues.

4. Other costs may in fact change as two products, AA yellow corn and GM yellow corn, are produced. Two products create more complexity which may drive up administrative costs.

Subject: Comparative advantage; Agricultural production; Resource allocation; Corporate planning; Family owned businesses; Case studies

Location: United States--US

Classification: 9190: United States; 2310: Planning; 8400: Agriculture industry; 9130: Experiment/theoretical treatment; 9520: Small business

Publication title: Journal of the International Academy for Case Studies

Volume: 15

Issue: 8

Pages: 31-42

Number of pages: 12

Publication year: 2009

Publication date: 2009

Year: 2009

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: Equations Tables

ProQuest document ID: 216285375

Document URL: http://search.proquest.com/docview/216285375?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2009

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 48 of 100

THE MISSING INVENTORY AT ZENITH INTERNATIONAL TRUCKS, INC.

Author: Armandi, Barry; Sherman, Herbert; Rowley, Daniel J; Dinur, Advar

ProQuest document link

Abstract:

Derived from observation and field interviews, this case centers on Bob Harris, the new Assistant Controller of Zenith's parent company, United Truck Corporation, and Dave Manning, the Service Manager of the Yonkers facility. Bob Harris had been brought into Zenith by United Truck Corporation1 because the old operation, Magnum International Trucks, was losing money and United wanted the renamed firm (Zenith) attractive enough for a sale to another International dealership. Dave Manning first came to Bob Harris' attention when Dave was paid a bonus incentive for the month yet the Yonkers Service Department only contributed $2,484.42 to the firm's profit margin. Bob spoke with Dave and explained that Dave's bonus would in the future be based upon the facility's profits rather than gross sales. This would avoid the impact of heavy sales at the end of the month and returns the following week. Dave remained silent on this topic. The second time Dave Manning was confronted by Bob Harris was when there was a short fall in inventory at the Yonkers facility based upon a misplaced transmission. Bob confronted Dave in-person with this discrepancy and therein Dave resigned. Students are left wondering what actions should or would Bob Harris take in light of this missing inventory and Dave's obvious attempts to avoid be held accountable for said items. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

In an article in Entrepreneur, the author noted that nothing has changed in the post Enron era. "Lying and dishonesty simply have become a much more accepted part of business - and of American life. ... Greed still rules the day." (Kurlantzick, 2003, p. 7 1) Yet the lack of legal, no less moral, behavior extends not only to an individual's own materialism and avarice but has become so rampant as to have created "an engrained tolerance of [others'] lying and bad behavior." (Ibid) We have come to not only expect illegal and immoral business behavior, but to in fact accept it.

Learning Objectives

The overall purpose of this case is to have students examine two critical and interrelated issues; the uncovering of a potential white collar crime and the role of investigative accounting. This case in particular has practical value to students since many of them may find that they as general employees, supervisors, or managerial accountants may encounter similar situations. Students are asked to probe beyond personalities and the immediacy of the moment and examine the underlying nuances of the posed problem.

Specific learning objectives are as follows:

* for students to understand the legal and moral obligations of uncovering possible white-collar crimes.

* for students to recommend actions that the Assistant Controller should take in light of Dave Manning's resignation relative to Dave Manning.

* for students to make recommendations about the firm's inventory control system.

Teaching Strategies

Preparing the Student Prior to Case Analysis

There are several approaches, none of which are mutually exclusive, that an instructor may employ in terms of utilizing this case. It is strongly recommended that regardless of the specific methodology employed, that students prior to reading this case be exposed to some material on inventory control systems and corporate theft. (See Reference secton.) This will provide students with the proper perspective and allow them to acknowledge some of the legal, ethical, and managerial issues embedded in the case.

This conceptual framework may be delivered prior to assigning the case by using at least one (1) of the follow methods:

* a short lecture and/or discussion session on the above noted topics.

* a reading assignment prior to reading the case that covers several of the topics mentioned.

* a short student presentation on each topic.

* a guest lecturer on one of the topics.

Traditional Case Method

In the traditional case method, the student assumes the role of a manager or consultant and therein takes a generalist approach to analyzing and solving the problems of an organization. This approach requires students to utilize all of their prior learning in other subject areas as well as the field of management. This case, in particular, will also require students to draw upon their knowledge of leadership, structure, culture and systems thinking. It is strongly suggested that students prepare for the case prior to class discussion, using the following recommendations: allow adequate time in preparing the case, read the case at least twice, focus on the key strategic issues, adopt the appropriate time frame, and/or draw on all your knowledge of business. (Pearce and Robinson, 2000)

The instructor's role in case analysis is one of a facilitator. The instructor helps to keep the class focused on the key issues; creates a classroom environment that encourages classroom discussion and creativity, bridges "theory to practice" by referring back to key concepts learned in this or prior courses, and challenges students' analyses in order to stimulate further learning and discussion. There are several variations of the aforementioned approach including written assignments, oral presentations, team assignments, structured case competitions, and supplemental fieldwork. Regardless of the variation employed, it is recommended that the students' work be evaluated and graded as partial fulfillment of the course's requirements.

Research/Web Assignment

This is certainly not the first situation ever reported dealing with potential employee theft and therefore students should be able to search the web to find similar circumstances and cases dealing with employee theft, in particular stealing inventory from the firm. Have students research this topic in general and in particular theft in the automotive industry. The following web sites and articles may be of particular assistance:

"Dealing with Employee Theft" http://www.findarticles.eom/p/articles/mi_ml038/is_n3_v32/ ai_7739141.

"Theft http ://en.wikipedia.org/wiki/Theft.

Paul H. Carr (1988). Extra eyes mind the store while owner's away. San Antonio Business Journal.(Oct 31) 2 (41); See 1. 1.

SUGGESTED QUESTIONS AND ANSWERS

The following questions may be employed by the instructor either as guidelines for the instructor for case analysis and/or as questions to be distributed to the class in conjunction with the case. This methodology provides the instructor some latitude in terms of how much direction he or she wishes to provide the student and therein allows the instructor to modify the difficulty of the case to fit his or her class's needs. The questions are divided by topics.

1. Describe the legal aspects of theft, and conspiracy to commit a crime (the RICO act).

The purpose of this question is to provide students appropriate background to the case by allowing students the opportunity to determine the legal definitions of theft and conspiracy.

Theft and RICO are categorized as white collar crimes and "both state and federal legislation enumerate the activities that constitute white-collar criminal offenses. The Commerce Clause of the U.S. Constitution gives the federal government the authority to regulate white-collar crime, and a number of federal agencies (see sidebar), including the FBI, the Internal Revenue Service, the Secret Service, U.S. Customs, the Environmental Protection Agency, and the Securities and Exchange Commission, participate in the enforcement of federal white-collar crime legislation. In addition, most states employ their own agencies to enforce white-collar crime laws at the state level." (Anonymous (n.d.). White 'c 'collar crime ...)

Theft. Generally, a person commits the crime of theft of property if he or she:

* Knowingly obtains or exerts unauthorized control over the property of another, with intent to deprive the owner of his or her property;

* Knowingly obtains by deception control over the property of another, with intent to deprive the owner of his or her property; or

* Knowingly obtains or exerts control over property in the custody of a law enforcement agency which was explicitly represented to the person by an agent of the law enforcement agency as being stolen.

Without proof of intent to deprive, no criminal act has occurred. There must be an element of dishonesty which may be revealed from the words or actions of the perpetrator. In California, the Supreme Court has held that proof that a defendant intended to take property only temporarily, but for so extended a period of time as to deprive the owner of a major portion of its value or enjoyment, satisfies the intent element of a theft prosecution in California.

A person commits the crime of theft of services if:

* He intentionally obtains services known by him to be available only for compensation by deception, threat, false token or other means to avoid payment for the services; or

* Having control over the disposition of services of others to which he is not entitled, he knowingly diverts those services to his own benefit or to the benefit of another not entitled to such services.

Theft is often classified into degrees of misdemeanors or felonies carrying varied penalties according to the value of the item stolen. State laws vary, so local laws should be consulted for the specific requirements in your area.

Relevant legal forms include:

* Jury Instruction - 3 .2 Civil Theft Jury Instruction - Theft Of Government Money Or Property Jury Instruction - Theft Or Embezzlement By Bank Employee Jury Instruction - Theft From Interstate Shipment Jury Instruction - Theft Of Mail Matter Jury Instruction - Theft Or Receipt Of Stolen Mail Matter Jury Instruction - Theft Of Mail Matter By Postal Service Employee AOC-CR- 142; Warrant for Arrest - Felonious Financial Transaction Card Theft/Financial Transaction Card Fraud (Felony/Misdemeanor) - Revised 8-97 AOC-CR- 152; Indictment - Financial Transaction Card Theft/Financial Transaction Card Fraud Certificate of Identity Theft: Judicial Finding of Factual Innocence Casualties, Disasters, and Thefts Sample Letter - Hotel Room Theft." (Anonymous (n.d.). Theft law and legal definition.)

* Theft is also know as larceny. "Illegal taking and carrying away of personal property belonging to another with the purpose of depriving the owner of its possession.

* The wrongful and fraudulent taking and carrying away by one person of the mere personal goods of another from any place, with a felonious intent to convert them to the taker's use and make them his property without the consent of the owner.

* To constitute larceny several ingrethents are necessary. The intent of the party must be felonious; he must intend to appropriate the property of another to his own use. If the accused have taken the goods under a claim of right, however unfounded, he has not committed a larceny.

* There must be a taking from the possession, actual or implied, of the owner; hence if a man should find goods and appropriate them to his own use, he is not a thief on this account.

* There must be a taking against the will of the owner and this may be in some cases where he appears to consent; e.g., if a man suspects another of an intent to steal his property, and in order to try him, leaves it in his way and he takes it, he is guilty of larceny. The taking must be in the county where the criminal is to be tried. But when the taking has been in the county or state and the thief is caught with the stolen property in another county than that where the theft was committed, he may be tried in the county where arrested with the goods, as by construction of law, there is a fresh taking in every county in which the thief carries the stolen property.

* ... Larceny is divided in some states into grand and petit larceny depending upon the value of the property stolen." (Anonymous (n.d.). Larceny. The 'Lectric Library's Lexicon On)

* Conspiracy to commit a crime (the RICO act). "The RICO Act was passed by the United States Congress to enable persons financially injured by a pattern of criminal activity to seek redress through the state or federal courts. The RICO Act applies to a wide variety of crimes. Originally, the breadth of the RICO Act was intended to give law enforcement, and private persons, broad power to fight organized crime, whether "organized crime" was traditional mobsters, members of a drug ring, or gangsters. The RICO Act has over time, however, resulted in unforeseen applications.

* For example, corporations have been sued under the RICO Act for allegedly distributing false advertisements; lawyers, bankers, accountants, and other professionals, have been sued under the RICO Act for allegedly assisting clients in organizing, or assisting in the organization of, schemes to defraud; spouses have been sued for allegedly concealing the value of marital assets in divorce proceedings; and, civil protest groups have been sued for intimidating and extorting the customers of the industries that the protest aimed to disrupt. Although Congress may not have intended these more unusual applications of the RICO Act, they can be legitimate uses of the RICO Act.

If you have been injured by a violation of the RICO Act, you may sue the person who allegedly violated the Act and, if successful, recover a monetary award equivalent to three times the value of the property you lost or that was stolen from you, plus the legal costs and fees you incurred to bring the lawsuit." http://www.lectlaw.com/def/al42.htm, September 29, 2003.)

2. How might theft (larceny) and conspiracy to commit a crime apply to this case situation?

This question deals with the application of the legal definitions found in question 1 with the case situation. Students are asked to examine the facts of the case and see if there is clear cut evidence of larceny and a conspiracy to commit a crime.

Students may note that there seems to be enough evidence to warrant a further investigation for possible larceny by Dave Manning or others working in the Yonkers facility since auto parts that were signed for by Dave Manning were not in inventory. The key to this question is that the explanation for the missing inventory may be due to several mitigating factors not explored in the case including a poor inventory control system (the parts are somewhere in the shop but we do not know where), a poor job control system (we used this part already but have not deleted it from our inventory), and theft by others besides Dave Manning. Dave's resignation, however, is quite suspicious and students might believe that "if there is smoke, there is fire." Again, nothing in the case would point to Dave Manning's theft of goods.

Conspiracy may be far more difficult to prove although students should certainly wonder how the Yonkers operation continued to lose money and why goods were unaccounted for by the accounting department at the Yonkers facility. For example, students might feel that June in accounting was covering for Dave but felt the need to report a large discrepancy to Bob Harris since the smaller ones could easily be covered up as accounting errors which Bob did not seem overly eager to investigate. Or, students might hypothesize that Dave and/or others in the facility working together (or even with outsiders) in order to steal parts. Again, other factors may serve as alternative explanations including that Dave was acting alone based upon his reaction to the change in the bonus system.

3. What are the legal and moral obligations for uncovering white-collar crimes such as larceny?

This question asks student to perform two separate analyses: one, to determine the firm's legal responsibilities relative to uncovering white collar crimes; two, to determine the firm's moral responsibilities as well.

From a legal perspective, students may indicate that once a crime is suspected of being committed, that is a crime has been reported by an employee to an appropriate officer or manager of the firm, that an investigation is warranted to determine if in fact a crime had in fact been committed. Lack of proper due diligence might be construed as aiding and abetting a potential felon and therein becoming an accessory after-the-fact.

An accessory to a crime after the fact. An accessory is one "who is not the chief actor in the perpetration of the offence, nor present at its performance, but is some way concerned therein, either before or after the fact committed. ... An accessory after the fact, is one who knowing a felony to have been committed, receives, relieves, comforts, or assists the felon." (http://www.lectlaw.com/def/al42.htm, September 29, 2003 .) "Accessories after the fact are in general punishable with imprisonment (with or without hard labor) for a period not exceeding two years, but in the case of murder punishable by penal servitude for life, or not less than three years, or by imprisonment (with or without hard labor) to the extent of two years." (http://www.191 lency.org/A/AC/ACCESSORY.htm, September 29, 2003.

Three points need to be met under this law:

* Must have knowledge that a felony has been committed.

* Must aid or assist the felon in some way.

* The purpose of the aid must be to help the felon escape from the authorities. (http://www.lawnerds.eom/testyourself/crimmal_rules.html#Accessory, September 29,2003.)

Using agency theory, students would indicate that managers, as representatives of the stockholders and/or owners, have both a moral and contractual obligation to investigate any alleged white collar crimes committed in the firm. They might also extend this argument to society in general, arguing that it is a citizen's moral obligation to report a crime and to assist law enforcement officiais to enforce the law. (Anonymous (n.d.). "Agency theory framework".)

4. If you were Bob Harris, what short term actions would you take in light of Dave Manning's resignation and the missing inventory?

This question focuses students on the key decision point of the case - what should you do when you question someone about missing inventory and he tenders his resignation? By being placed in Bob Harrison's position, students are therein requested to develop a solution strategy, one that will deal with the short term problem of accounting for the missing inventory.

The students should recognize in this question several mitigating factors that may muddy their analyses:

* Dave Manning has not been accused of stealing any inventory and there is currently no evidence directly linking the missing inventory to Dave Manning.

* The missing transmission had not been located.

* It has been noted that historically there has always been some inventory missing, but never an item of this magnitude or cost.

* Dave Manning's reasons for resigning were never enumerated (including the change in the bonus system).

Students may therefore recommend several short-term actions to be taken, some simultaneously. These actions may include:

* Investigating the missing transmission beyond merely tracking the paper trail. This would include interviewing all of the parties who had direct contact with the transmission besides Dave Manning (i.e. the person Dave would normally hand the transmission over to, mechanics who may have used the transmission) and checking the work orders to see if there were any repair jobs that would have used a similar transmission. A determination should therefore be made as to the possible whereabouts of the transmission, including whether or not it could have been stolen.

* Having an exit interview and debriefing session with Dave Manning. The purpose of this interview would be to provide Dave Manning the opportunity to explain why he suddenly decided to leave and to specifically have him address the issue of the missing transmission. He should also be informed at this meeting that an investigation is being conducted to locate the missing transmission and that his assistance would be greatly appreciated. Many students may perceive this action as superfluous since they might assume that Dave is "guilty until proven innocent."

If the results of this investigation indicate that the missing transmission was stolen by Dave Manning this may lead to a further investigation of the entire missing inventory. The firm may also contact Dave Manning indicating the findings of their investigation with a request that he return the item in question or pay the firm the equivalent value of the item. The firm may also opt to report the findings of their investigation to a local and/or federal prosecuting attorney (file a complaint) in order to start a criminal investigation into the matter.

5. What longer term recommendations would you have for Bob Harris relative to missing inventory?

This question asks students to address the underlying problem of this case, the firm having a poorly designed and/or implemented inventory control system (tied into their accounting system) which therein made it easier for employees to possibly pilfer inventory.

Students should respond to this question by first defining inventory control or inventory management. Inventory Management is an enterprise-wide discipline concerned with the identification and tracking of raw materials and information from acquisition through usage (including waste). The information system might work as follows:

Many students would also suggest using inventory control software. "Inventory control software is the central hub for any inventory-centric business. This type of software keeps track of all information about the items your company builds, buys or sells. Inventory control software also makes the management of pricing and maintaining stock levels much easier and more organized.

6. Why Do You Need Inventory Control Software?

No matter what size your company is, you need to accurately track inventory and sales to maximize your profitability. Maintaining profitable and competitive stock levels used to be an art, but with inventory control software it becomes an exact science.