Document 1 of 100

CARPET CAPITAL CULTURE CLASH

Author: Helms, Marilyn M; Weber, Judith E

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Abstract:

Teaching culture to business students is important, but often challenging. The authors developed this case study to describe the cultural issues and challenges encountered between an Anglo and Latino workforce in the US. This case is different from traditional cases that discuss culture in a new or "foreign" environment because this case is a domestic-based cultural case. This case profiles Dalton, GA home of the world's carpet and flooring producers. The industry, struggling for labor, actively recruited an able workforce from Mexico and Latin America to augment its local, Anglo workforce. Yet after years of working side-by-side, the Americans are puzzled over the behavior of a large group of Mexican workers in their midst. Specific situations outline the various encounters and behaviors that seem puzzling to both the Anglo and Latino employees. When viewed in the cultural context of the US, these exhibited behaviors violate cultural and social norms as well as common business practices.

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

There are three significant learning objective dimensions to the case:

1. It allows students to clearly identify cultural challenges that arise with an international workforce, providing a general level of sensitivity to culture and an indepth cognitive understanding which should foster their ability to act effectively in similar situations.

2. It features actual examples of challenges for students to assess.

3. It highlights the unique situation of the growing number of companies in the U.S. and abroad that face challenges of merging multiple cultures in a high performing work group.

Learning Objectives

The learning objectives of this case are:

1. To introduce students to the concept of culture and how cultural differences manifest in workplace behaviors, even within the U.S.

2. To conduct an assessment of why such challenges exist and the use outside Internet and/or library research on the topic.

3. To understand the critical role of education on the part of all ethnic groups.

4. To create policies, procedures, and programs to address and to continue to educate workers on cultural differences.

Level Appropriateness

This case is appropriate for the following undergraduate-level classes:

* International business, particularly in the coverage of cultural differences

* Human resources, focusing on ways to manage and indoctrinate international employees to the company culture and/or the predominant culture of the area

* International management, focusing on ways to manage employees from a number of cultural backgrounds and ways to enforce policies and procedures that may not be well understood by the parties involved

Format Appropriateness

This case is appropriate for the following formats:

* case discussion at the end of a chapter in a textbook to reinforce international business/culture chapter concepts

* class discussion of the issues involved in managing a multi-national workforce

* homework case for international business

* team assignment for short written or oral presentation to research trends and customs for both Anglo and Latino cultures

TEACHING CULTURAL AWARENESS

While experts disagree about the best ways to prepare managers and students to operate in another culture or even learn about another culture, this task remains a major concern confronting corporations. Park and Harrison (1993) found that within the corporate setting, the application of cross-cultural training is practically non-existent and even cite the high percentage of U.S. expatriates that are reassigned to other cultures without any training and often fail in their assignments.

While teaching culture to business students has been well documented as a needed part of the business curriculum, it is often challenging to find the best way to approach the internationalization. Even with the language training often required of business majors, most lack cultural knowledge in actual business settings (Hong, 1999). Many student lack international experience and thus the professor must rely on textbooks, cases, and outside materials to help students become effective business practitioners in an intercultural or international framework. Harrison (1992) in a study of cross-cultural management training found a combination of role play (experiential) and a cognitive program was the best approach while Jacobson (1996) in his study of learning culture found cultural knowledge is best understood in terms of situated cognition.

Peralta and Kleiner (1994) specifically recognized the challenges in managing the Mexican employees in early 1994 and explained management is not easy and the art of management is further complicated when trying to effectively manage individuals from other cultures. They agree the immigrant work force migrating to the U.S. presents a special dilemma. They stress because of the different needs and problems brought on with such a diverse work force, managers need to understand their culturally different workforce in order to effectively manage their plants.

Mallinger and Rossy (2003) agree while teaching culture is intrinsically rewarding, the complexity can create a challenge for faculty. Bird, Osland, Mendenhall, and Schneider (1999) agree international management textbooks treat the coverage of culture as simple and superficial and agree it often bears little resemblance to the complexity most managers will confront in domestic and/or international situations. Most textbooks, the authors agree, cover Hofstede's (1980) workrelated values dimensions on which cultures can be differentiated and only a few texts provide a limited analysis of culture and the challenges of working across cultures. Sokuvitz and George (2003) suggest strategies including case studies that professors can use to augment the teaching of culture. To address these deficiencies, the authors developed this case study to introduce students to cultural challenges involved in working with Latino employees in the U.S.

END OF CASE QUESTIONS

1. List examples of cultural misunderstandings you have encountered. Why did they exist?

Student examples will vary. If students are not diverse or have not traveled significantly abroad, consider inviting a foreign faculty member or foreign national as a classroom guest to share their experiences.

If possible, invite a Peace Corps representative or other individual (Rotary International Scholar, missionary, international business owner, etc.) with specific training on the issue and experience of living in a foreign land to class to discuss the acculturation process and international business differences. If there are multinational students in class, draw parallels and discuss similar issues they have faced both at home and abroad.

2. Research the history and culture of Mexico. Assess the probable reasons for the unusual behaviors Sam Haws' human resources directors observed.

Sanitation.

Sanitation issues differ in Latin America. Typically sewer systems can't handle paper products, particularly in the smaller cities and farms. Ironically, while ancient Mexican city of Teotihuacan boasted water and sewer lines (at least that's the guess of today's archeologists) from 600 A.D., modern Mexico is having major sanitation problems and this is a key issue as an OECD (Organization for Economic Cooperation and Development) country. The Mexican populations are from largely rural, agrarian communities. Sanitary sewers are primitive and their infrastructures frequently become clogged and overflow when toilet paper is introduced into the system. In Mexico's smaller communities, toilet paper is disposed of in trash cans located inside the restrooms stalls. Lacking such disposal containers in U.S. facilities and with no knowledge of the U.S. sewer system, the Mexicans place their used waste paper on the restroom floor when they don't see a trash can. They are just acting normally according to their culture and exhibiting classical ethnocentric behavior. Would U.S. visitors to small Mexican community flush their waste paper; of course, because that's how they do it at home. Is it any wonder that some of the approximately 40,000 Mexicans, residing in the Dalton area, who move to Dalton for decent manufacturing jobs, have problems using our plumbing system? Wouldn't a Hispanic person think an Anglo visitor to their town as "nasty" too if they clogged their toilets and sewer system with paper?

Group and Team Behavior.

The period between A.D. 900 and 1521 is named "postclassical Mesoamerica", for the replacement of kingdoms by tribal councils in Mexico, but continuing warfare and ritual sacrifice. Many of the Chichimec-Toltec tribes migrated south and established settlements, like the cultural center Thule. An important tribe was the Mexica, or Aztecs, who left Aztlan ("place of heroes") and founded their new cities with impressive buildings and temples and developed cultural centers, like Tenochtitlan, which became today ' s Mexico City, the largest metropolitan area in the world.

Throughout these times ritual sacrifices took place in entire Mesoamerica. For rain, for better crops, for triumph in warfare thousands of people were sacrificed, including children. Ball games also developed, played first by individuals, later by teams, representing their tribes and the loser ending up as sacrifice. These pre-Hispanic ball games were played with a rubber ball in a rectangular court and became a spectator sport, reminding us on today's soccer games and their fans. The tribal culture, the ball-playing in teams all had a significant effect on the group culture, we can observe at the workforce in the carpet factories. The workers in these modern environments still hold onto old customs, preferring to be "team-players" and not "leaders". In their group-based culture, family is the first priority. Friends are extremely important. Mexicans visit in large groups, prefer to act as a group, and work better in groups.

Ogden (2005) agrees unifying factors in the Hispanic market are group orientation, respect for authority, class distinction, faith, and belief in both fate and family. However these values often change in second and subsequent generations of living in the U.S. culture. Mexicans emphasize quality of life and enjoyment and there are group oriented. They place emphasis on groups and group goals, which is often in opposition to the highly individualistic U.S. culture. Hispanics see Anglos as individualistic, selfish and to some degree hypocritical because they espouse self denial (from their largely Protestant faith) and often act just the opposite with their materialistic purchases and seeming lack of attention to their family.

Perceptions of Time.

The underlying common denominator for all the different tribes and cultures in Mexican history was agriculture, hence the interest in mathematics and astronomy, the worship of the rain god. It is also a common thread in the culture of modern Mexico that the perception and importance of time is vastly different from the industrialized, "Western" countries and the United States, where "time is of the essence". It will take time for the newcomers in the region's factories to adjust to this faster rhythm of production life, while the pace of work and life is growing faster for all of us. Most of the immigrant labor from Mexico who comes to the U.S. is from small Mexican towns where little work is available; they are historically lower-skilled. Most of their motivation is economic and the few jobs available in the smaller towns of their homeland are farming, working in small stores, tending a bar, caring for animals or making products at home to sell in the streets (Peralta and Kleiner, 1994). The Hispanic worker's conception of time and punctuality is different. Many Mexican workers in this country are former rural workers accustomed to rising and retiring with the sun. Clock time and punctuality are learned behaviors along with the seriousness of absenteeism. In some cultures, including Central and South America, it is even considered improper or rude to be on time. This is in extreme contrast to the Anglo culture and particularly the assembly-line culture that demands all employees be on-time before their work can begin.

Gender Roles.

DeForest (1988) agrees women have a special place in the Hispanic culture and in Mexico; Mother's Day is a national holiday. The wife is the boss at home and it is freely accepted that she managers the children and often holds a firm rein on her husband.

Why marriage and family are more important than success, career, and "making money" for many of the first generation of Mexican immigrants, might have to do with the teachings of the church, which also prefers keeping women at the home, instead of throwing them into the "rat race". Women in the Mexican culture are associated with home and family. Girls participate in the "quincan?era" or 15th year celebration and according to the largely Catholic culture; these 15 year olds are preparing for marriage and child rearing duties. Also in Mexico few girls can afford or are encouraged to participate in higher education. Thus the lagging enrollment of women in the local college can be explained. As future and subsequent generations live in America, the number of women entering college and supervisory positions will increase. Latino males, however, are not traditionally used to working with or working for female managers.

Mexicans have more traditional gender roles and most are well defined. The husband tends to be dominant and focuses on decisions regarding major household purchases. Because Latinos are slower to acculturate than other immigrant groups, they tend to retain their original gender roles (Valencia, 1989 and Valdes and Seoane, 1995).

Translation without Information.

In the business environment, orientation in area companies is conducted by the human resources department. Bi-lingual employee explained the two week vacation period as a job perquisite but didn't explain to workers they had to fill out vacation authorization forms and get management approval for their selected two weeks. Workers just assumed they could take the two weeks anytime and didn't inform anyone. While the employees speak Spanish there may still be a language barrier, even with correctly translated materials. Research also points out that Mexicans often think their stay in the U.S. is temporary and to earn money and they may not bother to learn English or understand business practices and norms. Also many lack the educational backgrounds that would make learning a new language easy. Their heavy work schedule and possible undocumented status may make participation in language classes difficult (Paralta and Kleiner, 1994). While local translators in the workplace may know Spanish, if they were born in the US, these translators will not understand the cultural differences. Hispanics too feel skeptical about translators because they are usually "Chicanos" or individuals with Hispanic parents but born in the U.S. Chicanos are usually ignorant about the Hispanic culture because they prefer to be seen as "Americans."

Work Policies and Work Ethic.

Working long hours and embracing overtime is due to their poor economic conditions in Mexico and desire to pursue both the American dream and to send funds home to family in Mexico and to better their situation. Americans tend to be defined by their work or job. Mexicans believe their job is only apart of their lives and are more fatalistic and don't often set goals. This is a concept that must be taught. Traditions die hard.

DeForest (1981) points out that management of Mexican workers is difficult because of personnel policies that have been established by management to mirror their own perceptions and values. Anglo managers often think of a job in terms of the chance it offers to use one's talents and skills and as an opportunity for advancement. Mexicans, however, in large part regard this practice as unusual since their main concerns are pay, fringe benefits the supervisor and mainly having a job, any job. Upward mobility is valued but believed not to be attainable. The Mexican thinks of getting ahead in personal terms rather than in career terms. The social and familial culture stresses cooperation and competition. Mexicans, in general, are reluctant to supervise peers.

Respect for Authority.

Mexicans are not taught to question authority as Americans are. Authority figures, including teachers and managers, are more respected and Mexicans believe authority should tell them what to do and they take orders from them. Eye contact is also a big difference between the two cultures. In America, we've been taught someone who doesn't maintain eye contact is shifty or deceptive but in other cultures, looking someone in the eye, particularly when it is someone of authority, is disrespectful.

Distrust of Banks.

Some immigrants distrust banks because of the history of currency devaluations in their homelands. Others simply dislike an officious manner that smacks too much of the U.S. government, or worse, a U.S. immigration agent. Too many Mexican consumers think that if they go to the bank and suggest or disclose that they are in the U.S. illegally, they will be reported to immigration authorities, says Mr. Garcia, the Dallas Mexican Consul. "The people don't understand what happens behind the window," he says. "They think that if the employees discover they are undocumented, they will be taken and deported."

3. Gather fact s on the number of Hispanics in America. What trends to the data predict?

The U.S. Census defined Hispanics as people who originate from Spanish-speaking countries or regions and estimates the group to be the nation's largest race or ethnic minority at 39.1 million which is 13.7 percent of the U.S. total population not including Puerto Rico. By the year 2050, the projected Hispanic population of the U.S. will be 102.6 million or 24% of the nation's total population on that date. Nearly 67 million Hispanic people would have been added to the U.S.'s population between 2000 and 2050, according to this projection (http://print.infoplease.com/spot/hhmcensusl.html). In fact, some 40% of the Hispanic population in the U.S. was foreign-born in 2002 and 52% of this group entered the U.S. between 1990 and 2002. Latinos are not a homogeneous culture and all the population working in the area are not Mexican.

Out of the 6.1 billion of the world's population, there are 175 million people, who reside in a country not of their birth. Ever since the 1970s, when a new, "borderless economy" was advocated for economic integration of the earth, a migration of the world's populace took shape in unexpected and ever growing size. In several developed countries with an aging population and decline of the productive workforce is taking place, while worry, even opposition of the citizens is getting more pronounced about immigration's increasing social costs and its threat to the original culture. These opposing issues: the need for more workers, yet fear of the social and cultural costs of immigration are further complicated in the United States. In this country, a true "melting pot" of all the varieties of mankind, the earlier immigrants were eager to assimilate, to become Americans, with all the duties and privileges - and never look back. "The current wave of immigration to the US today is an endless stream, much of it illegal, which the US never had before. And it is overwhelmingly Hispanic, and within that overwhelmingly Mexican" (Huntington, 2001).

Hispanics are the largest minority group in the United States, making up 13.5 percent of the U.S. population. In addition, the Latino population's high fertility and immigration rates make this the fastest growing racial/ethnic group in the country. Latinos are also relatively young and the median age is 26.1 compared to 35.0 for the general population. Latino poverty rates are also severe with 31% living below the poverty line as compared to 13.5% of the general population (Martinez-Ebers, Fraga, Lopez, and Vega, 2000).

3.Develop proposals to effectively deal with the situations presented. Assume the role of the HR director as your plan your implementation. What programs would you develop for Latinos? What programs would you recommend for your Anglo workforce? Include an implementation plan and time-frame for this cultural change.

Although Hispanic workers are increasing in great number, many American managers have learned seemingly little about how to manage such a work force for the best results. As a consequence many companies have not educated middle management and shop floor managers about how to manage employees of Hispanic culture and psychology (DeForest, 1988).

Effectively managing others is a difficult task and this if further complicated when trying to manage individuals from other cultures. Programs on understanding cultural differences for employees are needed to explain differences in the various issues presented here (time, role of men and women, supervision and authority, etc.). All employees and managers need to attend the training and it should be offered to all new employees. Anglo workers and managers in particularly may need an advanced course on culture. Latino workers may need additional information on various U.S. customs and workplace norms. A consultant with experience in linking multiple cultures can assist as well. The training programs should begin immediately and continue until changes are seen on the shop-floor. The programs should be on-going as long as improvements in awareness and workplace functioning is seen. With high worker turnover or employment growth, the training should be repeated for new groups joining the workforce.

Have students develop potential training programs along with policy issues for workplace rules and standards of conduct. Use signs and posters with both or multiple languages to explain proper conduct, how to request and schedule a vacation, or proper waste paper disposal. Add trash cans to restroom stalls with signs in Spanish.

Develop as part of the employee handbook, modules on business culture, corporate culture, and daily workplace norms. Have a bi-lingual employee from Mexico review or create the materials to ensure accuracy and ease of understanding. Institute an ambassador or liaison to explain problems/issues to new employees as well as to existing employees. This employee can identify problems experienced by all cultures employed and bring issues and solutions/training programs to top management.

5. Is the Mexican workforce in Dalton, Georgia a diaspora, meaning homogeneous ethnic minority groups of migrant origins residing and acting in host countries but maintaining strong sentimental and material links with their countries of origin or homeland, typically maintaining their own language and culture?

Initially it appears the workforce maintained all their unique cultural norms and migrated to the area to follow the carpet industry jobs. It appears, however, that with the workers buying homes and staying in the area, they are no longer totally a diaspora but are slowly adapting to the U.S. culture while still maintaining features of their own culture and heritage. The second and subsequent generations of immigrants appear to be adapting more to the new culture and the process of acculturation is faster.

CLOSING STATEMENT

Remind students to be sensitive and cautious to the feelings of individuals from other cultures as the class discussion and case analysis progresses. This case, while sensitive, is a good mechanism to raise this important issue to students and has proved to be efficacious in the various classes in which it has been pilot tested.

Subject: Hispanic Americans; Carpet industry; Workplace diversity; Cultural differences; Work ethic; Employment policies; Case studies

Location: United States--US

Classification: 1220: Social trends & culture; 6100: Human resource planning; 8620: Textile & apparel industries; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 8

Source details: INSTRUCTORS' EDITION

Pages: 1-13

Number of pages: 13

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216300270

Document URL: http://search.proquest.com/docview/216300270?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 2 of 100

ODYSSEY HEALTHCARE: A DEPARTMENT OF JUSTICE INVESTIGATION RELATED TO THE FALSE CLAIMS ACT

Author: Newbold, John; Sullivan, Laura

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Abstract:

Richard Burnham had major legal and public relations issues on his hands. He had stepped down as CEO of his for-profit hospice firm, Odyssey Healthcare, less than a year previously, in January of 2004. His cofounder, David Gasmire, had assumed his responsibilities, while he stayed on as Chairman of Odyssey's Board of Directors. Now, less than a year later, a Department of Justice investigation was threatening the viability of his company. In October of 2004, Odyssey Healthcare senior management informed investors and analysts that the firm was under investigation by the Department of Justice for violations of the False Claims Act, with respect to the company's practices for patient admissions, patient retention and billing practices. Immediate action was required. The first thing Burnham needed to do was find out what had given rise to the DOJ investigation. Even if some "rogue" employees had disregarded the firm's Code of Ethics and engaged in illegal activities, could his firm really be held responsible for these actions? Going forward, what steps should the company take to create a more ethical corporate culture and maintain more compliant operations in order to avoid future investigations from the Department of Justice? [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case provides a unique context for business ethics and legal issues, since Odyssey Healthcare, Inc. is a for-profit hospice operating in an industry still dominated by non-profit entities. The case brings to the fore the aspects of the False Claims Act, which is the tool of choice when the federal government is investigating the fraudulent billing of a business entity. The fact that the subject matter involves the hospice industry makes the implications of the discussion more vivid and poignant.

It is recommended to first discuss the business model of Odyssey and other health care providers and the resulting business and marketing strategies deployed. Odyssey and others were aggressive in promoting rapid growth and achieving economies of scale. They were also creative in the manner in which they targeting potential patients, sometimes going after cancer patients, sometimes not, depending on the situation at each site. One key conclusion: Due to its tremendous rate of growth, Odyssey struggled to adequately track and control its operations.

The most compelling discussion will likely revolve around the question of whether or not Odyssey Healthcare, Inc. was indeed guilty of fraudulent behavior with respect to inappropriate billing of Medicare. The instructor may wish to set up this issue by asking students to describe a typical trip to the doctor's office and trying to identify areas where fraudulent behavior could occur. For example: Did you actually visit the doctor at all? Did the doctor use all of the equipment he claimed he did? Did the doctor prescribe all of the medicine that was claimed? This will give the students some idea of the myriad of areas where false claims can be made. Next, the discussion can be turned to the specifics of the forms of hospice care. Where is it possible for false claims to be made in regard to hospice care?

The second segment of the discussion should then turn to the False Claims Act itself. It would be beneficial to talk about the unique nature of the qui tarn provision of the False Claims Act. The qui tam provision provides an incentive for private citizens to report wrongdoing to the federal government. This can lead to a fruitful discussion of whether or not the government is promoting a "squealer society". It may be useful to discuss what other approaches, if any, are available to the government to help them identify and prosecute fraudulent behavior? At this point, key aspects of the False Claims Act can be examined relative to the business practices of Odyssey. There is a discussion question with a table summarizing some key points in this regard.

Finally, this case can serve as a springboard for a discussion of what companies can do to foster a more ethical corporate culture and maintain compliant operations. Schein' s framework for establishing a corporate culture can be utilized to discuss what Odyssey was and was not doing to promote a cultural environment that might preclude the need for a Department of Justice investigation. In regard to operational issues, the final discussion question, dealing with some of the particular requirements of the Corporate Integrity Agreement between Odyssey and the Department of Justice, provides specific steps that can be taken to help ensure compliance with government regulations.

Discussion Questions

1. What circumstances have led to this DOJ investigation?

At the outset, it should be emphasized that Odyssey Healthcare, Inc. and its management have not been found guilty of anything. The Department of Justice is involved in an investigation, but the case is yet to be determined. However, Odyssey is already paying a price, as the DOJ investigation, in conjunction with the Barron' s article, has caused the marketplace to lose faith in Odyssey and the firm has slipped significantly in market value. Thus, one can appreciate that even the look of impropriety can prove costly.

There are several factors that may have led to the DOJ investigation, most of which are related to Odyssey's aggressive growth strategies:

* The growth has outstripped Odyssey's ability to manage its widespread operations effectively,

* Its acquisitions of previously non-profit hospice operations may have led to current or recently-released employees who do not appreciate or agree with some of the processes Odyssey utilized for recruitment and care, and

* The culture of the firm may have been more dominated by the financial goals of continued revenue growth and bottom-line performance which, when combined with loose management of operations, gave certain employees the incentive to engage in fraudulent activities.

The DOJ investigation was instigated by two separate qui tam actions (to be explained in the next section). These complaints were likely filed by current or former employees of Odyssey, or perhaps a recent patient or patient's family member. It is certainly possible that an employee of a recently-acquired non-profit hospice did not quite agree with some of the Odyssey business processes and guidelines. By virtue of the federal government's decision to take up these claims, one is led to believe there is some merit to them.

2. Why would the Department of Justice send a letter to Odyssey with such little information regarding the offense?

The Department of Justice, like any investigating agency, wants to ensure that they obtain as much information as possible from the entity being investigated. When a simple one-page letter is sent, the party under investigation may provide additional information regarding offenses that the DOJ was not even aware of. This is why it is extremely important that any responses be carefully drafted and reviewed by Odyssey's legal staff.

One of the more challenging aspects of this question is the fact that Odyssey has not been fully informed of the nature of the claims in the qui tam complaints. This is due to the fact that the qui tam complaints are sealed (secret) to provide the federal government time to conduct their own investigations without the alleged violator being tipped off to their investigation. Thus, when the government approached Odyssey with the notification of their investigation, they were not specific, as they were trying to preclude employees of Odyssey destroying or otherwise ridding themselves of incriminating files, evidence, etc.

3. What types of misconduct would come under the purview of the False Claims Act?

It is important to note that we do not know specifically what charges the Department of Justice was investigating with respect to Odyssey. The following table summarizes some of the areas of the False Claims Act which may have been brought to bear upon the activities of Odyssey. It is based upon what the case tells us about Odyssey ' s activities and the areas covered under the False Claims Act.

The most alarming revelations of possible wrong-doing under the False Claims Act can be found under the section dealing with the Barron's article. Here we see specific charges of "providing a level of care and services below the standards set forth under government guidelines" and questions regarding the guidelines used for admission. The article cites the relatively high average length of stay of Odyssey's patients as evidence of lax standards in regard to the "six months to live" guideline.

4. If the investigation turns up some form of misconduct, can Odyssey be held responsible for the behavior of a few rogue employees?

The False Claims Act is leveraged very broadly to include essentially all business activities carried out by Odyssey or third parties acting on Odyssey ' s behalf. Perhaps of most concern to senior management at Odyssey was the broad interpretation of the term "knowingly". Under the False Claims Act, a person knowingly engages in misconduct if he/she acted with the actual knowledge, reckless disregard, or deliberate ignorance of the information underlying the misconduct (Vogel 1996). Thus, if a lower level employee of the organization has engaged in some type of inappropriate behavior, the organization is not relieved of liability just because senior management was unaware of the employee's activities.

5. What business measures should Odyssey take to avoid this type of investigation?

While improvements can be made to the technology used to process and validate claims, and new processes can be instituted to help prevent fraudulent behavior, the main deterrent to inappropriate behavior from top to bottom of the corporation lies with the corporate culture.

Odyssey should work to create a culture of patient caring that supersedes the culture of the profit-driven company. This culture should be supported by business processes that measure critical aspects of patient care. Once this culture is well-established, Odyssey should work to promote their image as incorporating this culture, in order to build up goodwill in the case of any additional allegations to come in the future.

The strategic plan of the corporation should reflect a greater focus on patient care. Thus, performance metrics, by which the company measures its effectiveness, would change from a stock market, prof it-maximization orientation to a customer-satisfaction driven orientation. In addition, long-term investment in patient care should not be validated on return-on-investment standards, but instead on patient quality-of-life issues.

Finally, caregivers in these facilities would not be evaluated not the impact their actions on a company's cost structure, but instead on the experience and care that they can bring to bear on their patient's needs (Cruise 2002).

Odyssey can establish a more ethical climate by identifying common values and beliefs so that employees are better able to recognize them on hold themselves and coworkers responsible for them. Employees should have a visceral understanding of cheating of any kind on patient recruitment, care and billing is not condoned by the firm under any circumstances. Hopefully, they can be shown how detrimental a DOJ investigation, a class action suit, or a negative piece of investigative journalism can be to the firm.

6. What, if anything, could Odyssey do to promote a corporate culture where the ethical issues were better balanced with its business objectives?

In his book on organizational culture and leadership, Edgar Schein outlines a framework of major management tools by which corporate leaders can influence the culture of their organizations (Schein 2004). The following table outlines these management tools, and indicates whether or not the case provides enough information to attempt to assess Odyssey's use of each tool. The shaded areas of the table indicate areas where some conclusions may be drawn about Odyssey's shaping of its corporate culture.

Thus, five of the twelve major tools can be assessed for the case. The table below summarizes information from the case relative to the five tools as outlined by Schein and where information is available.

Odyssey Healthcare appeared to have many of the necessary elements in place to ensure the culture of an ethical company. They had a senior executive in charge of compliance. They possessed a formal code of business conduct and ethics. And they administered internal audits of ethical behavior. However, given its position as one of the leading for-profit hospice operations in the country, one may easily argue that Odyssey did not go far enough. Perhaps senior management could have taken a more active role in promoting an ethical culture. Perhaps the firm could have engaged in more training emphasizing ethical behavior. Perhaps organizational incentives related to patient care should have been implemented to balance out the recruitment incentives. On balance, it appears that Odyssey may not have gone far enough to promote an ethical culture inside their organization.

7. What types of specific operational practices under the following categories should Odyssey put in place to avoid any further investigation by the United States Department of Justice?

a. Training

b. Written Standards or Policies

c. Disclosure Program

d. Internal Compliance Audits

(Note: the following answers were gleaned from the Settlement and Corporate Integrity Agreement between Office of Inspector General of Department of Health and Human Services and Odyssey Healthcare, Inc., July 6, 2006)

a. Training

In Odyssey's settlement agreement with the Department of Justice, Odyssey agreed to establish corporate compliance training programs. Further, not only was initial training required but also annual "refresher training" for employees. In addition, for employees that dealt specifically with the compliance and reporting portion of the business, an additional four hours of training was required. The specific training required that the employee learn about federal health care program requirements, proper requirements regarding documentation of medical records, applicable reimbursement statutes and regulations and the legal sanctions for violations of the Federal health care program requirements.

Employees that completed the relevant required training were to receive a written or electronic certification upon successful completion. The training certifications were to be kept on file with Odyssey.

Odyssey's training program and trainer certification were to be reviewed and updated annually. Any changes in the Federal laws or significant issues uncovered during internal annual audits were to be included in the annual "refresher training."

b. Written Standards or Policies

Per Odyssey's agreement with the Department of Justice, it was required to create a Code of Conduct. The code was to cover the following:

1. Odyssey's commitment to full compliance with all applicable legal health care statutes. In addition, its dedication to submit accurate claims that were in compliance with the relevant Federal statutes.

2. Corporate policies and procedures.

3. Reporting of any suspected violations of any Federal statutes.

4. Consequences to employees if they failed to comply with any Federal statutes and/or corporate policies and procedures.

5. A disclosure program. This program was to allow employees to report suspected violations in a confidential manner.

The Code of Conduct was to be updated periodically. The revised code was to be distributed to employees within thirty days of the completion of the revision.

Further, Odyssey was required to create a Policy and Procedures manual. The manual was to include subjects included in the Code of Conduct, as well as compliance program guidance for hospice and an internal billing review protocol. The billing protocol included a plan for admissions and long length of stay reviews. Odyssey was required to update its policy and procedures manual at least annually. A more frequent review could be done if Odyssey deemed it necessary.

c. Disclosure Program

Odyssey's Disclosure Program was to allow for an employee to disclose any issues he or she may find regarding compliance to any federal statute and/or policy or procedure. The key to the disclosure program was that it was non-retaliatory and allowed for the anonymous communication of violations.

Once the Compliance Officer had received notification of a potential violation, the Office was to make a good faith investigation to determine the legitimacy of the allegations. The Compliance Officer was required to maintain a compliance log. The log documented all complaints and the status of each compliant.

d. Internal Compliance Audits

Odyssey was required to have a full-time Compliance Officer who was charged with developing Odyssey's policies and procedures. In addition, it was the Compliance Officer who ensured compliance with all relevant federal statutes. The Compliance Officer was required to make quarterly reports regarding the above mentioned policies and procedures to the Compliance Committee and the Board of Directors. The Compliance Officer did not report to the General Counsel or the Chief Financial Officer in order to ensure that the position had sufficient autonomy.

A Health Care Compliance Committee was created so that all federal statutes were adhered to and the internal policies and procedures were followed.

EPILOGUE

In February 2006, Odyssey announced that they had reached an agreement in principal with the Department of Justice to settle its civil investigation, agreeing to pay the federal government a sum of $13 million, but admitting no wrongdoing or liability.

Odyssey has maintained its strategy of aggressive growth. Odyssey has implemented a new IT system to help with internal controls and reporting.

In October of 2005, Odyssey named a new President and CEO to replace the departed David Gasmire. His name is Robert A. Lefton. Mr. Lefton joined Odyssey from Select Medical Corporation, a privately-held operator of acute care hospitals. Mr. Lefton is expected to spearhead Odyssey's operational initiatives as well as contribute to the partnering efforts of the firm. Richard Burnham retained his position as Chairman of the Board.

In January 2006, Odyssey announced the creation of a new position: Senior Vice President of Strategy and Development. Mr. Woodrin Grossman, a former member of Odyssey's Board of Directors, was named to the post. Prior to serving on Odyssey's board, Mr. Grossman was Chairman of PricewaterhouseCoopers Global Healthcare Practice.

Subject: Case studies; Hospice care; Health care delivery; Medical malpractice; Investigations; Professional ethics; Compliance

Location: United States--US

Company / organization: Name: Odyssey HealthCare Inc; NAICS: 621610, 624120

Classification: 2410: Social responsibility; 4330: Litigation; 8320: Health care industry; 9130: Experimental/theoretical; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 8

Source details: INSTRUCTORS' EDITION

Pages: 15-25

Number of pages: 11

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216285883

Document URL: http://search.proquest.com/docview/216285883?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 3 of 100

THE MID-CITY CONVENTION AND VISITOR'S BUREAU (CVB)

Author: Ristig, Kyle

ProQuest document link

Abstract:

The Mid-City Convention and Visitor's Bureau (CVB) is faced with low employee morale, relatively fixed current funding, a lethargic, patronage-style board of directors, an uninformed public, and the requirement to deal with a state legislature and disgruntled voters to increase its revenue. The manager of the CVB believes additional revenue is necessary to increase marketing efforts in order to bring in more conventions and tourists. To increase revenue, the manager of the CVB would like to raise the current room tax, which is the CVB's primary source of revenue, or institute a restaurant tax. Both the room tax increase and restaurant tax plans are opposed by associations that represent hotel/motel and restaurant owners and operators. In addition, passage of either of the taxes will require significant political maneuvering to implement. The manager of the Mid-City CVB is faced with a catch-22 situation: CVB revenue cannot increase without conventions and tourists, yet current funding levels will apparently not allow additional marketing to the conventions and tourists they are attempting to reach. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching

For instructor lead discussion, students could put themselves in the place of the manager of the Mid-City CVB. The instructor may then lead the class in a discussion of what issues the "manager" should address and their relative importance. Issues to be considered include: the need for cooperation between the CVB and the Chamber of Commerce in order to combine efforts to bring industry and subsequent business travelers to the area; the need for cooperation between the CVB and the hotel/motel and restaurant associations to gain their support in promoting the area and possibly gain further funding; the need for cooperation between the CVB and area industries to promote business travelers and gain their help in securing convention business; the need to address low morale among the CVB staff; the need for an improved image among the residents of Mid-City ; and the need for an improved method of securing knowledgeable and active members for the CVB board of directors.

Similarly, students may engage in group discussions and/or role playing using the characters described in the case. While the instructor is concerned with the outcome of the discussions, he or she may also want to observe the group dynamics during the discussion phase. The instructor should encourage students to fully "engage" the roles that they have assumed, including that of apathetic board members. At the conclusion of the role play, the board can "vote" on an action. Questions the instructor may want to explore during or at the conclusion of the role play include:

Regarding a new tax, what position(s) does mayor Gann, CVB board president Barnes, and CVB manager Fulco take?

How receptive are the HMA and RA representatives (Bartholemew and Jones) to the arguments of the mayor, the CVB president and CVB manager?

What role has Martin Hall assumed in the discussion?

Is the CVB board able to reach a consensus on this issue? If not, what would be required to reach a consensus ?

Did any member offer insight regarding the CVB and Chamber of Commerce relationship, and possible cooperative marketing efforts?

The case could also be used as a homework assignment. If utilized in this manner, students should be instructed to read the case thoroughly, then list and provide analyses of the issues/questions affecting the CVB. The students should then provide viable solutions to the listed issues/questions.

ISSUES/QUESTIONS

Room Tax Versus Restaurant Tax

What are the advantages and disadvantages of the room tax versus a restaurant tax? The advantage of the room tax is that it is not likely to directly affect the residents of Mid-City. As a result, they are more likely to support passage of a room tax. Also, the room tax is directly related to at least one of the goals of the CVB, which is to promote tourism and conventions. By using a room tax, the Mid-City CVB has an incentive to promote overnight guests at area hotels. A disadvantage though, is that even though the CVB has shown the ability to "live within their means," a room tax puts the CVB finances at risk should the tourism or convention business drop unexpectedly. While implementation of a restaurant tax will provide more revenue than the room tax, since all patrons will be taxed, it may be more difficult for Mid-City residents to fully support the tax.

Convincing the hoteliers the Room Tax Should be Increased

Convincing the Mid-City HMA of the advantage of an increase in the room tax could present a challenge. Prior to addressing the tax issue with the HMA, the Mid-City CVB should develop a firm plan for the marketing of Mid-City. This would include a detailed analysis of the target market(s), how those markets will be reached, expected costs, and returns. Dialogue between the Mid-City Chamber of Commerce and CVB should be initiated and explored with the intent of developing cooperative agreements beneficial to both agencies, and, most importantly, Mid-City. This action should demonstrate the CVB's intent and willingness to utilize all resources available to the Mid-City CVB. The CVB manager should provide information and assurances to the HMA that the tax will be used for the promotion of Mid-City and emphasize the fact that each dollar spent in marketing the Mid-City area returns $75 in tourist expenditures. A portion of those tourist expenditures would be spent by overnight tourists resulting in increased hotel/motel revenue.

Convincing the Restaurateurs a Restaurant Tax Should be Implemented

Advantages of the restaurant tax are that everyone pays (it is not targeted to a particular traveler such as day trips versus overnight) and it is projected to provide more revenue than the room tax. A disadvantage is that the residents of Mid-City as well as visitors will be taxed, which could adversely impact local restaurants (higher cost means residents may not eat out as much). It is also questionable that Mid-City residents will approve a new tax in light of their recent vote against the bond proposal for more parks and a zoo. Convincing the Mid-City RA and the citizens of Mid-City to support the restaurant tax presents a challenge for the CVB. As with the hotel/motel tax, the restaurant association and residents will need to be assured of the value of a restaurant tax and the Mid-City Chamber of Commerce should be consulted regarding this effort. Arguments for the tax include the increased revenue stream for the CVB over the hotel/motel tax and the significant payout for dollars spent marketing Mid-City.

Mid-City CVB's Measure of Effectiveness

The Mid-City CVB's current measures of effectiveness (convention bookings and tourist inquiries) are too vague. What other measures might be more appropriate? To measure the impact of the tourist activity, the CVB could measure tourist-hotel-nights and day-tourists. Tourist-hotelnights will measure the number of tourists and the number of nights that each spends in a Mid-City area hotel or motel. Day-tourists data could be captured through regular surveying of the top tourist attractions in the area and businesses that serve travelers. To measure convention activity, the CVB could capture data as convention-delegate-nights. Convention-delegate-nights indicates the number of convention delegates in area hotels and motels and the number of nights they stayed in the area.

Working With the Mid-City Voters

The CVB must first gain the support of the affected (RA and/or HMA) association and the cooperation of the Mid-City Chamber of Commerce. Once that support has been attained, the CVB, the affected association, and the chamber of commerce should undertake an educational mission to inform the Mid-City residents of the benefits of the proposed tax. While the backing of the affected association is crucial, the Mid-City chamber of commerce can provide additional leverage in working with local businesses to support the passage of the tax.

Working With the State Legislature

With the support of the affected association (RA and/or HMA), chamber of commerce, and approval of the voters of Mid-City, these actions will likely garner the support of the local state legislators. It is unlikely that the local legislators will oppose actions supported by their constituents and the affected association. With the affected legislators "on board," approval by the entire state legislature is virtually certain.

Lack of Recognition in the Local Community/Methods of Promoting the Mid-City CVB

A low-cost public awareness campaign should be mounted by the Mid-City CVB. This could include the sponsorship of a booth at the various festivals to make attendees aware of the work of the CVB. This could also include durable signage that could be used repeatedly at all local events. The CVB could also appeal to local television and radio stations to gain air time for public service announcements publicizing their work and encouraging Mid-City residents to promote tourism as well as patronize local events.

Lack of Interest and Expertise Among the Member s of the Board

Job descriptions must be developed for board members. Existing and potential members of the board must be made aware of the requirements for the job and be willing to adhere to those requirements. The mayor must abandon the patronage methodology of selecting members and base the selection on a potential member's qualifications and willingness to work for the betterment of the CVB and Mid-City. The tradition of appointing a member of the hotel/motel and restaurant associations should be formalized, thereby recognizing the groups' importance to the CVB and its' efforts.

Low Morale Among the Mid-City CVB Employees

With increased interest and participation of the CVB board members, it is likely that the CVB employees will find renewed interest in their work. Recognition of the Mid-City CVB' s work by the hotel/motel association and/or the restaurant association as well as the positive affirmation by the voters would likely improve the morale of the CVB employees. The CVB employees should be surveyed to determine their concerns and areas for improvement. Consultants and/or nearby university faculty may be available to assist in these efforts.

Subject: Convention centers; Revenue; Tax increases; Market strategy; Funding; Case studies

Location: United States--US

Classification: 4210: Institutional taxation; 8380: Hotels & restaurants; 7000: Marketing; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 8

Source details: INSTRUCTORS' EDITION

Pages: 27-31

Number of pages: 5

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216289832

Document URL: http://search.proquest.com/docview/216289832?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 4 of 100

AUNTIE ANNE'S PRETZELS: A KNOTTY PROBLEM

Author: Robinson, Sherry; Finley, John T

ProQuest document link

Abstract:

Auntie Anne's is a family owned and operated snack eatery business that holds a strong commitment to customer satisfaction. The company focuses on product quality, strong support to its franchisees, and a commitment to relationships that will help in the long-term growth of the franchise system. Auntie Anne's success can be seen in its growth from a farmers' market stand to the expanded franchise system it offers today. Founder Anne Beiler started the business as a means to fund charitable work, and now Anne is considering selling the business in order to focus on her charitable projects. In addition, there has been an expansion of Auntie Anne's to include a new café format as well as the furthering of the charitable aspect of the business. This case study will examine Auntie Anne's past and possibilities for the future from a corporate and franchisee perspective. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case covers the strategic direction of the company, as the owners consider expanding in a different direction through the development of Auntie Anne's Café as well as the growth of the existing franchised Auntie Anne' s brand. Underlying the case context are the Beilers' personal goals. From the beginning, they started the business in order to fund their alternate goal of funding charitable work. This case presents the entrepreneurs, Anne and Jonas Beiler, at a time in their lives where they are deciding whether they have reached their ultimate goal, and should lay aside the means they had used to reach the desired end.

As this case deals with a franchise retail outlet to which many students may relate, the instructor should strategically segue into the case with a basic overview of the existence of the franchise operations as not only a contributor to the American economy but also as a possible source of inspiration for a potential entrepreneur in the classroom. By focusing on the franchise from inception to its expansive presence today, the instructor can highlight the meaning and processes of a franchise, the target markets, small business operations and a basic SWOT analysis.

Within the small business or management course, the instructor can use this case to shed light on the changes that Auntie Anne's experienced throughout its history. This chronology can be used to contemplate the history of other similar franchises. The realm of small family owned restaurant-turned-franchise can be presented as the backbone to a network of evolving eateries lending themselves to the ever-changing consumer preferences landscape. Auntie Anne' s response to these changes can be brought to the attention of the students to highlight the need for change in competitive markets. The case can also be a catalyst to a lively conversation about the concept of chain restaurants and their proliferation during the last 3 or 4 decades.

It stands to reason that the average U.S. consumer is familiar with a great deal of chain restaurants (franchises) but not savvy on the developments that have led up to their existence in terms of individual company history, competition and the need for change. This case can enable the student, possibly a stakeholder to some degree in this or other food service franchises, to actively engage in the change and dynamics faced by a franchise operation. For deeper study into franchises, especially those in the soft pretzel sector, students can search the internet for the most recent information on Auntie Anne's competitors.

This Auntie Anne' s case can also be used to demonstrate relevant costs in joining a franchise rather than starting a new independent business. While students can easily research other pretzel companies to compare costs, the following are examples of additional costs that are frequently not revealed until later in the application process, but present significant expenses.

SUGGESTED CASE QUESTIONS

1. From both the franchisor and franchisee perspectives, what due diligence could be conducted to reach a mutually beneficial franchising agreement?

The due diligence investigation of a potential investment serves to confirm the fundamental material facts in regards to a sale. This refers to the care a rational party should take before entering into an agreement or a transaction with another party. Due diligence analysis usually yields a go or no-go decision with regards to a purchase of an asset, or in this case a franchise commitment (franchisor <-> franchisee). This process should entail a thorough study of financial records in addition to anything else material to the sale. Sellers (franchisors) should also perform a due diligence analysis on the buyer (franchisee). Factors to be reviewed include the franchisee's ability to purchase, as well as other items that will affect the franchisor after the sale has been completed. Due diligence serves the purpose of preventing unnecessary harm to either party involved in a transaction.

Beiler moved up the learning curve quickly with regards to franchising. She seemed to develop a keen acumen for the key criteria for potential franchisor/franchisee investment decisions. Beiler realized the importance of national or international advertising, training, and other support services are commonly made available by the franchisor. As franchising tends to be longer term than a licensing agreement, greater due diligence by both franchisor and franchisee is advised. Aprospective franchisee has an array of franchises and industries from which to choose. Table 1, "Franchise comparison" compares several criteria among Auntie Anne's, a direct competitor Wetzel' s Pretzels, and the family restaurant Ponderosa Steakhouse. This can serve as a quantitative point of comparison in the due diligence process. Qualitative factors tend to be subjective judgments based on nonquantifiable information. Examples include perceived strength of brand, management expertise, firm reputation, and industry cycles.

2. What are the potential risks of the following actions?

Anne Beiler selling her company to cousin Sam Beiler:

Although Sam does have experience and perceived commitment to Auntie Anne's, different olwnership can bring about unforeseen changes. Anne Beiler had specific goals with the creation of the company, to include philanthropic objectives. Whether Sam Beiler follows through with those goals will depend on his desires, the profitability of the firm and the industry itself. Sam has been part of the Auntie Anne's family since 1989 when he became one of the company's first franchisees. Since then he has concentrated on opening 137 foreign stores and overseeing 37 company owned units. If the company is sold, it is likely that he will take it in a new direction. Sam has stated that he would like to open about 40 pretzel stores a year - is this too aggressive? Will losses result from this?

Creating the new Auntie Anne's Café concept:

Sam also plans to introduce the Auntie Anne's Café slowly to see if it will be profitable. This maneuver represents risk since the Auntie Anne' s brand name is associated with pretzels and the Café concept will introduce other products. The marketing costs to inform the public could outweigh the benefits in terms of revenues generated by the new idea.

3. Conduct a SWOT analysis for the Auntie Anne's concept (from both franchisee and franchisor perspectives).

The strength of the franchisor is its size and potential to quickly expand due to the mobility of the franchising business model. Additionally, since the localized risk is assumed by the franchisee, a franchisor can more easily absorb the negative effects of a failed venture due to the initial investment by the franchisee. A weakness of a franchisor is that intellectual property is vulnerable and ideas can be used by franchisees to become a competitor. Opportunities include quick expansion and a turnkey process which leads to a competitive advantage in many local markets. Independent businesses (non-franchise) are threatened by the spread of franchises. Threats include unfavorable legislation, processes required in certain states, as well as the possibility of franchisees stealing ideas and becoming competitors.

From the franchisee perspective, a strength is that an entrepreneur can have quick access to a proven brand and business model yet employ his/her enterprising spirit by entering into a franchising agreement quickly and with a lower capital requirement than would be the case if starting right from the beginning. The franchisee usually has access to marketing, training, ongoing support and an established supplier or distribution network. On the other hand, the established suppliers may not be the least expensive or most efficient. The franchisee has minimal leeway in this area in most franchise contracts. This is typically due to quality concerns. A weakness for the franchisee is a loss of control that the entrepreneur starting from scratch retains in a business venture. The franchisee is required to follow a certain protocol determined by the franchisor. Among different opportunities figure the potential for good return on investment, a solid brand name, and training opportunities. Threats include competition and risks with snack food location employee turnover. Additionally, strong brand can hinder expansion into other products.

4. Would you go to an Auntie Anne's Café? Why or why not?

This question is posed as an open ended discussion. A recommended approach for this query would be to suggest that the students ascertain whether there is an Auntie Anne' s in their area (or a similar franchise) and to visit and possibly even partake in the fare. It would also be useful to do basic website perusal of http://www.auntieannes.com/ to learn more about the operation - does the website inspire consumption? Is it easy to locate a store? What are the products offered (beyond pretzels)?

5. How have Anne Beiler's personal goals affected the business?

Anne's personal goal has long been to provide funding to a counseling center. As a true entrepreneur, she pursued growth and profit through innovation. However, she viewed her business as a means to an end, rather than an end in itself. Having sold the business, she is free to concentrate on building up the counseling center, a not-for-profit business.

EPILOGUE

Anne Beiler sold Auntie Anne's to cousin Sam Beiler, who intended to expand the franchise with Auntie Anne's Cafes. His experience as franchisee since 1989 and as CEO since April 2001 proved to be critical. Anne and her husband are devoting more time to their charitable work.

The new Café concept unfortunately has suffered from the brand strength of Auntie Anne ' s - the association of Auntie Anne' s with the pretzel. One of Sam Beiler' s objectives is to redefine the brand of Auntie Anne's. In October, 2006, Auntie Anne's "closed four of its five restaurants [...] saying they drew customers wanting the company's renowned soft pretzels, not the café's broader menu" (Mekeel, 2006). The "return on investment in the cafés could not justify a national growth plan" (Burns, 2006).

Subject: Case studies; Fast food industry; Customer satisfaction; Business growth; Strategic management; Charities; Franchises

Location: United States--US

Company / organization: Name: Auntie Annes Inc; NAICS: 445291, 533110

Classification: 8380: Hotels & restaurants; 2310: Planning; 9130: Experimental/theoretical; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 8

Source details: INSTRUCTORS' EDITION

Pages: 33-39

Number of pages: 7

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216310878

Document URL: http://search.proquest.com/docview/216310878?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 5 of 100

PROPERTY RIGHTS IN CYBERIA A STUDY OF "INTENT" AND "BAD FAITH"

Author: McNamara, Brian; Ropp, Donavan; Lowenstein, Henry

ProQuest document link

Abstract:

The pioneering journey of this Case Study explores new and exciting adventures of virtual property rights in the world of Cyberspace. The objectives is to investigate on the merits the facts of this spirited Case Study and determine current relevant issues relating to Online/Internet oriented Cyberlaw principles that are directly applicable to contemporary practical business approaches and will help reveal and solve some of the mysteries of Cyberjustice trends. Key material factors are addressed specifically through uniquely fashioned commercial events enumerated within the Case Study during an exhaustive fictitious 30 day period. The second feature of this Case Study is in teaching specific On-line business and legal research skills. All student preparation is Internet based. "Student Instructions" include an exhaustive section pertaining to On-line research. Students use a combination of "Student Instructions" that follow the Case Study, evaluation of the fictitious 30 day period of facts presented in the Case Study, and On-line research in the learning process.

Full text:

INSTRUCTORS' NOTES

Case Study Objectives

1. To investigate the facts of this Case Study and determine relevant legal principles for On-line Cyberlaw issues that are appropriate and applicable topractical business approaches in supporting intellectual property rights solutions and that help reveal and solve some of the mysteries of Cyberjustice.

2. Formulate finalisation of the case issue/issues through understanding the basic operative facts enumerated in the case and by applying legal principles most suitably related to the stated facts that will essentially establish the rule of law for each identified issue.

3. Reasoning and analysis of why there is application of the law in resolving the original dispute as presented by the stated facts.

4. State the outcome in a definitive style that establishes the results of the decision making process.

5. Establishing opportunities to develop business relationship skills that are applicable to team and group projects.

6. Improving skills for conducting legal research On-line.

Case Study Concepts and General Teaching Instructions

A suggested approach in meeting the objectives of this Case Study is to develop a series of sequential "issues" from the operational/material facts. The facts start with descriptive comments in identifying "Old Ivy University" and "International Olympic University." These specific facts may be pertinent to the "dated" facts that follow and are identified as "Additional Facts." Each paragraph under this section is identified by a calendar date. Generally, each date presented has at least one issue buried within the facts of each such paragraph. The issues being developed relate to Internet Domain Name problems, and specifically to Cyber squatting and subtopics of Cyber squatting. There are also several secondary issues that will be addressed in class that will supplement many of the primary issues, such as intellectual property, Constitutional Law, and criminal law. Student preparation should include following the "Student Instructions" by (i) reading the full text of the facts for the purpose of developing issues of this case Study; (ii) reviewing the "vocabulary;" (ii) being familiar with the suggested "organizations and laws" as listed; (iii) reading/briefing of the "cases" as listed; and (iv) developing issues for discussion during class time.

The flexibility of this Case Study is designed for several possible approaches in the student preparation stage and the class presentation/participation stage. First, the entire class may be assigned to research, present, and participate as a whole, each student being responsible for all issues of the case. This approach requires more out-of-class preparation time for students. Another approach is assigning groups/teams and/or individual students a specific issue or topic (or dated paragraph) from the case Study. This requires more coordination and planning on the part of the instructor. A final approach is to formulate this Case Study into a seminar or special session format that may be suitable for a more in depth analysis and study.

Another feature of this case study is the challenge of conducting legal research On-line. The exercises are designed to improve On-line research familiarity and skills as to: (i) finding and using of legal dictionaries to understand the "jargon" and specific meanings for key words and phrases; (ii) finding and reviewing U.S. government agencies, especially as to specific delegated authority pertaining to the subject matter of the issues; (iii) finding and reviewing pertinent U.S. statutory and regulatory laws relating to the issues; and (iv) finding federal and state court decision citations that are directly related to the issues. Legal research, in this instance, is the basic process of identifying and retrieving material information that is necessary to analyze and support the specific relevant "issues" throughout this Case Study.

An additional attribute of the Case Study is the prospect of expanding the facts to include a number of other issues relating to other topics within the course. Essentially, the instructor could develop factual extensions that would include issues involving contracts, torts, property, etc., that parallel any text in a "Legal Environment of Law" or "Business Law" class. Students would be familiar with the original facts as presented within this Case Study (the parties, locations, time elements, etc.), and, as such, would easily transition the existing story line to include a factual basis for addressing additional issues. This approach was not part of this paper, but is a topic for a future article.

The overall approach of this Case Study is to provide a forum for discussing all sides of an issue, that is, the various and possible conflicting beliefs, expectations, and alternatives derived through classroom interaction. Yes, there will be agreements and disagreements as to conclusions, but the process promotes developing and supporting rational resolutions on the part of each participant. A key ingredient to the Case Study exercise is in providing a process of reaching conclusions. This is a problem solving pursuit.

We believe that this Socratic type method of analysis supports applications of critical thinking and problem solving techniques that strengthen decision-making skills and competencies, especially in formulating possible courses of action and in facilitating student mastery of such concepts. In keeping with the spirit of the process, the following issues of this case study are systematically listed by calendar date and identified in italics, followed by a discussion of ideas and perceptions that support the basic elements of the identified issues.

The specific design, in this instance, is to promote responsive interaction within the classroom and to possibly or hopefully expand and develop outcomes and solutions that are rationally beyond the scope and reasoning of the stated answers suggested below. This integrative process expands complex concepts into formulated solutions. Have fun.

CASE STUDY ISSUES

Introduction

There are several approaches in writing legal issues from a set of given facts. The issue writing function is generally more art than science. Sometimes, a short factual wording or restatement of a happening will include all the elements needed to describe the issue. At other times concepts of a law need to be used or a combination of facts and concepts. The "Student Instructions," listed above, gives a good review of legal issue construction.

A continual theme throughout this Case Study is the possible infringement of trademarks via Section 43 of the Trademark Act and its various revisions (15USC1125), including the Federal Trademark Dilution Act of 1996. Of particular importance to the facts of this Case Study is the action of Dilution by Tarnishment where IOU continually infringes OIU' s many famous trademarks by manipulating the marks through various stages of Internet state-of-the-art techniques to the benefit of IOU and to the detriment of OIU, and IOU use of numerous trademark names and symbols that are the same or similar to OIU trademarks. In both instances, these actions on the part of IOU create a likelihood of injury to OIU's reputation.

A second continuing theme throughout this Case Study would pertain to numerous actions that would violate provisions of various U.S. Federal Trade Commission (FTC) statutes, regulations and rules. Included in this category would be the many actions of Dr. Phast that allude to "unfair methods of competition" and "unfair and deceptive acts or practices in or affecting commerce" (United States Code: Title 15, Chapter 2, Subchapter 1, Section 45). A second area of FTC concern would relate to "deceptive advertising" practices (United State Code: Title 15, Chapter 2, Subchapter 1, Section 53.

There are also instances where these FTC provisions run parallel and/or supplement infringement of trademarks and other intellectual property rights issues. Additionally, in the context of this Case Study there are always U.S. Constitutional issues and defenses of Freedom of Speech, Due Process of Law, etc. The complexities are numerous. While some of the above identified themes will be addressed where it is prudent or critical to the facts presented, the main issues pertain to principles of contemporary Internet law as it has been developing during the last decade.

Introduction to Case Study

"Old Ivy University" and "International Olympic University"

The first two sections of the Case Study give detailed backgrounds and descriptions of the two universities and their presidents. The purpose of these facts is to introduce the primary parties of this Case Study. There are certainly hints as to character, trust, reputation, standards, practices, etc., of both parties (possibly good class discussion material for introducing the Case Study). Developing perspectives from this information will be useful in addressing and clarifying the myriad of facts presented and alluded to in the following "Additional Facts" section of this Case Study. There are several issues related to trademark law that should be identified:

a. [Trademark Slogans] Is "Let's Win the Big One" a phrase that could be a legitimately protected trademark as the specific "slogan " for Old Ivy University? Yes. A trademark "slogan" is protected because it functions as a "mark." Generally speaking, a trademark slogan can be almost any phrase that is short and it does not need to be clever or novel. The question in this Case Study is "does the slogan develop enough of a secondary meaning to immediately identify with OP Ivy?" Even if the slogan were considered a "weak mark," continuous use of it for five years would be presumed to have acquired a secondary meaning and will be eligible for placement on the federal principal trademark register. "Reach out and touch someone," "This Bud's for you," and "Don't leave home without it" are good examples of legitimate slogans. The courts declared that "You've Got Mail" is too generic and not protected. What about "It's Hot" by Paris Hilton?

b. [Trademark & Confusion] Does the "International Olympic University's" symbol (a golden goat with the letters "IOU" emanating from its head) infringe on the prior registered trademark symbol of "Old Ivy University " (a golden goat with the letters "OIU" emanating from its crown)? Yes. The phrase "likelihood of confusion" is key to all trademark conflicts. A "likelihood" means that confusion is probable: not necessarily that it has happened, or that it will happen, but that it is more likely than not that a reasonable customer (or fan) will be confused. In this situation, the two golden goats with similar letters (OIU and IOU) emanating from both goats" head area would probably be confusing even though one set of letters came from the crown and the other directly from the head.

c. [Trademark Dilution] Is a trademark dilution action a timely claim for Old Ivy University to file against the independent business of "Old Ivy - Let's Win Used Cars?" No. The fact is that "Old Ivy University" did not previously claim that the name of the used car business would weaken the distinctiveness, value, and reputation of the "Old Ivy" name for over a 15 year period even though the junior user (the used car business) relied on similar marketing channels within the geographic area as Old Ivy University. The dilemma is that Old Ivy University created a "constructive weaver" that essentially acts as a laches device that bars OP Ivy from equity or legal action because it neglected to act upon its rights for an unreasonable length of time. Such inaction appears as though the alleged infringement has not harmed OP Ivy very much. This is known as "sleeping on your rights," and a court is less likely to give the senior user (Ol' Ivy) any relief if it has not taken action to protect its rights despite another's use of the same or similar trademark for a long period of time. It should also be noted that under federal registration provisions of the Lanham Act (31U.S.C111) the mark can qualify for "incontestable" status if it stays on the principal register for five years.

Additional Facts

September 2005 through October

The events during this time period are mainly transitional, addressing drastic changes in business activity, adding staff and position, and identifying demographics of its potential customer base. Again, developing perspectives from this information will be useful in addressing and clarifying the myriad of facts presented and alluded to in this section, "Additional Facts." There is certainly the fact that IOU is attracting a high volume of E-mails from international locations, and there may be a hint as to why. This is the ideal time to introduce and discuss IOU's intent up to October time frame, and, later, to compare its intent at various phases throughout the remainder of this Case Study.

November 1 & 2, 2005 [Metatags]

a. Is the use of third party senior trademarks in metatag s permitted if the use does not mislead or confuse consumers? Yes. Metatags are hidden html codes in Webpages that ostensibly describe content to signal search engines. Its primary use is to assist search engines to index and summarize sites. For example, a car dealer (Ford) would be permitted to use a famous automobile trademark (Ford) in its metatags if the dealer sold this brand of automobiles (Ford) without infringing the famous trademark (Ford). Not so with IOU. It appears that the metatags are being used for no legitimate purpose and are in fact placed on the IOU page to draw OIU customers unsuspectingly to the IOU Web site. The burden-of-proof otherwise would be for IOU to prove. This practice is arguably fraudulent because these intentionally misdescriptive search terms cause search engines to more prominently display these Web sites when users are looking for other sites, causing users to suffer initial confusion. Such misuse of metatags may cause consumer confusion or dilution that infringes a trademark owner's rights.

November 3, 2005

a. [Cyber squatting] Are the actions of Dr. Rob M. Phast in registering domain names that are the same as, or confusingly similar to, the trademarks of OIU considered cybersquatting (also known as "stealth" squatting) events that the Anticybersquatting Consumer Reform Act (ACRA) addresses as being actions considered to be in bad faith with intent to extort profits? Yes. The Internet Corporation for Assigned Names and Numbers (ICANN) principles parallel many of the concepts of the ACRA and the above issue. The sequence goes (i) the domain name is identical or confusingly similar; (ii) the registrant has no rights or legitimate interests in respect of the domain name; and (iii) the domain has been registered and is being used in bad faith. The major form of cybersquatting usually takes the form of attempting to extort payments from the legitimate owners (OIU). This may not have been the original intent of Dr. Phast, but it certainly was a diversion of his by November 27th and 29th (SEE below). The intent factor in this instance was that Dr. Phast applied for multiple domain-names registration that are known to be identical or confusingly similar to others.

b. [Typosquatting] From the facts given for this date, are there indications that Dr. Phast was intentionally including possible "typosquatting" terms for registration? Yes. Typosquatting involves registering names that are minor typographical variations on trademark and brand names. The expectation is that surfers will encounter the 'typo' site when they mis-key the desired domain name (eg. www.netcsape.com, telsra.com, microsotf.com, altavsita.com, altavisto.com or amazom.com). For this date note the following registered names: "iou.runners.edu," "oivy.edu," "oivyrunners.edu," and "oivyuniversity.edu." Note the slight misrepresentations or spellings of each. Typosquatting is actually a subcategory of cybersquatting and is addressed similarly for ICANN and ACRA purposes.

November 4, 2005 [Cyberpiracy]

Do the actions of Dr. Phast and his brother of registering domain names similar or identical to OIU trademarks for the purpose of diverting Web traffic from those sites to the specific IOU site constitute a violation of ACRA and ICANN principles as discussed above (November 3, 2005)? Yes. Cyberpiracy involves the same behavior as cybersquatting, but with the intent of diverting traffic to an infringing site. The key factor is that it is a "bad faith" diversion of Internet traffic for financial gain. Here, Dr. Phast gained a benefit by confusing surfers, who may believe that the address is operated by OIU and not IOU. The "intent" and "bad faith" factors are similar to cybersquatting as described above. As to cyberlaw and domain name disputes, federal and state courts generally have followed the principles set forth by ACRA and ICANN.

SEE "November 12, 2005" below for the issue and discussion from the perspective of "pagejacking." Compare and contrast.

November 5, 2005 [Keywording & Cyber stuffing]

Is Dr. Phast's practice of submitting OIU's trademarks as keywords through numerous search engine groups for IOU's various Web sites enough to cause initial customer confusion ? Yes. There can be very subtle legitimate uses in some instances of keywords that relate to a competitor, but this is not the situation with Dr. Phast. His subscribing words to the search engine groups were blatantly that of his competitor's name and trademarks and constitute an infringement, especially taken in context with the many other actions of Dr. Phast and his brother. The bad faith principles of ICANN and ACRA (see above) are alive and well in this instance. With the combineduse of metatags (see "Nov. 1 & 2" above) and keywording, Dr. Phast is entering into the practice of cyberstuffing, an action to fool search engines by including as many infringing keywords as possible on his pages in an attempt to ensure that his Web page will come up in the first five or ten listed by a search engine. This practice, in the context of Dr. Phast's overall actions can only strengthen evidentiary facts as to the bad faith intent of Dr. Phast.

November 6 & 7, 2005 [Linking]

Is the practice of building hypertext links from one site to another site without permission or licensing from the original linked site a violation of the linked site's rights or generally against principles of civil law? No. One of the most fundamental elements of the Internet is linking to other sites. The culture of the Internet expects linking to flourish unhindered by property rights claims by the linked site's owner. A U.S. district court found there was no copyright infringement by use of a link, because linking did not copy the page. The general answer is based on the theory that going online creates an implied license for anyone with a computer to view the Web site. Hence a surface link to a home page does not generally require permission. Conversely, it is argued that site owners wishing to block access to unauthorized or unknown outsiders may simply use password protection, cookie technology, or some other authentication scheme to exclude unwanted downloads. The facts of the case Study indicate the linking of benign generic information on the regional attributes of university life in the Oxford-Cambridge area. No infringement or violation involving intentional bad faith here.

November 8, 9, & 10, 2005 [Framing]

Is the practice of displaying the content of another Web site inside your own Web site with a frame or window where the user never leaves the framer's site and the frame conceals the identity of the original site safe from actions involving infringement of copyrights and trademarks? No. The practice is a step beyond linking. Framing raises the linking site's value by free-riding on the linked site's value. It deals with the control by the framer in manipulating the other sites content on its own framed page. Linking does not create the same type of confusion as framing, which gives the viewer the impression that the framed information is connected to the framing site. A framer may even appropriate a competitor's content and hide it, so that an unsuspecting user is transported to the appropriator' s site even though he or she cannot see the appropriated material. This is a violation of trademark and copyright law.

November 11, 2005

[No issue in the sense that OIU does not have a cause of action against IOU. The six businesses advertisers do have a potential cause of action against IOU. Each advertiser pays IOU one cent a hit which is really a fraud on the businesses because IOU uses techniques of mousetrapping, pagejacking, and others that will count each hit several times. The negative covenant (implied) in the contract between IOU and an advertiser would suggest that each advertiser would receive one cent for each individual that entered the contracted for site. Generally, this is aU.S. Federal Trade Commission situation with help from the U.S. Department of Justice, Antitrust Division. see the third paragraph of the Introduction of case Study Issues above.] There are additional federal fraud charges regulated by the Federal Communications Commission, the Patriot Act, etc. that may also be available.

November 12, 2005 [Pagejacking, Metatags, Cyberpiracy & Redirects]

Is the action by Dr. Phast in copying the entirety of the OIU Web Home Page, including the imbedded text messages and metatags, and inserting a "redirect" command imbedded in the copycat OIU site that would immediately reroute the user to www.iou.edu, a legitimate approach in attracting potential customers to the IOU site? No. Here, following surfer search engine results that would list a variety of related sites, including the bogus copycat site developed by Dr. Phast, the surfers assume from the listings that the Dr. Phast site contains the legitimate information they are seeking and click on the listing. The selection by the surfer of the so-called OIU site immediately reroutes or redirects the OIU surfer to the IOU Home Page and away from the Web pages they were intending to visit. This "pagejacking" technique is prohibited under the Federal Trade Commission Act that prohibits unfair or deceptive practices affecting commerce.

see "November 4th, 2005" above for the issue and discussion from the perspective of "cyberpiracy." Compare and contrast.

November 13, 2005 [Mousetrapping & Pagejacking]

Is the action by Dr. Phast to incapacitate the "back" and "close" buttons on the IOU site that would continuously return the surfer to the original copycat OIU site or other registered Domain Name sites in a seemingly unavoidable endless loop considered an unfair and deceptive practice by the Federal Trade Commission? Yes. The technique described here ("mousetrapping) is actually a follow-on to the "pagejacking" process described above under November 12, 2005. After the deception of alluring the surfer to the IOU site, the mousetrapping technique, under the control of IOU, prevents the surfer from leaving the IOU or similarly controlled sites of IOU. Again pagejacking and mousetrapping is prohibited under the Federal Trade Commission Act, which prohibits unfair or deceptive practices affecting commerce since these techniques involve the improper diversion of consumers away from Web pages they were intending to visit. Though there has been very limited enforcement of these violations, in September 1999, the Commission filed suit in federal court and obtained a preliminary order stopping these activities and suspending the Internet domain names of the defendants. Since then, the Court has entered default judgments against two defendants and a stipulated permanent injunction against a third, baring them from future law violations. A fourth defendant has evaded law enforcement authorities in Portugal.

November 14 & 15, 2005 [Cybergripers & Domain Protest Sites]

Is the proper registration of www.oldivyuniversitysucks.edu an abuse of the ICANN principles when registered by a direct competitor against the commercial interests of the named competitor and as a perceived benefit of the registrant? Yes. This issue of "Cybergripers and Domain Protest Sites" is not decisive for all situations. There are always questions of free speech (maybe a U.S. Constitutional issue) and the right of parody for starters. Some sites may approach being scandously and disgustingly abusive and blatantly responsible for statements that are libelous. There may be claims of infringement of trademarks and copyrights and confusion of the surfer. It has been suggested by a few socalled experts that a new organization, The Dot Sucks Foundation, be created as a special zone outside trademark restrains "to enable citizens to improve civil society." Generally, these cases are addressed on a case-by-case basis. At this point, ICANN actions, arbitration, and courts have tended to favor the corporate plaintiff. In this case Study, it appears with a certainty that IOU, a competitor, had no legitimate interest in the domain names and that it registered the names in bad faith to directly injure its competition. The intent and bad faith are strengthened by adding the metatags.

SEE "November 26, 2005" relating to additional discussion on First Amendment Freedom of Speech.

SEE "November 1 & 2, 2005" relating to the issue of metatags.

November 16, 2005

SEE "November 14 & 15, 2005" relating to the issue of "Cybergripers and Domain Protest Sites."

SEE "November 5, 2005" relating to the issue of keywording.

November 17, 2005

a. SEE "November 13, 2005 relating to the issue of mouseclicking.

b. [Issue of this date related to facts of November 19th] [E-mail Bombing, Spoofing, Cybertresspassing] Is there a legitimate common law cause of action against IOU as to its participation in a scheme of sending 100,000 daily E-mails to OIU that essentially overwhelmed OIU's computer equipment to be inoperable?. Yes. The operative facts in this instance are that OIU was responsible for E-mail "bombing" (sending large amounts of data, such as numerous E-mails, in an effort to consume additional system and computer network resources of OIU) 100,000 daily "spoofed" (disguising an e-mail to make it appear it was mailed from an address different from the one from which it was actually mailed without the permission of the user of the actual "spoofed" address) that was the major factor in rendering OIU's computer equipment inoperable. Legal precedents are as follows. The legal action here for "bombing" is intentional "trespass to chattel" (personal property). OIU's possessory interest was invaded by IOU that caused harm to OIU's personal property or diminution of its quality, condition, or value as a result of OIU' s actions. Damages and injunctive relief have been awarded. For "spoofing," The U.S. Federal Trade Commission has relied on "unfair and deceptive practices" under section 5 of the FTC Act and with violating section 521 (15U.S.C.section 6821). Though the facts are somewhat different in this instance, there is a probability that the principles and concepts of "unfair and deceptive practices" would be addressed. In these instances, there has been injunctive relief. [Note that the issue of "spamming" is not addressed because there are no causes of action by OIU to file against IOU.]

November 18, 19, 20, 21, 22, & 23, 2005 [Dilution by Tarnishment]

Do the facts and outcomes of the evidence presented (in the listed dates) bring forth a probably cause of action for infringement of trademark specifically by dilution by tarnishment that would allow both equitable remedies and damages? Yes. The basic reasoning for "dilution by tarnishment" is found under "Introduction," second paragraph above. There is enough information to indicate that IOU willfully intended to trade on the recognition of the OIU trademarks. Additionally, there is more than likely enough information that IOU intended to harm the reputation of OIU. As to damages, there is enough intent and bad faith (scienter) on the part of IOU through its various planned infringement actions to warrant assessment of actual and likely damage to the distinctiveness or reputation of the various OIU trademarks. These identified paragraphs are mostly evidentiary as to existing and potential dilution of trademark when all the activities of IOU became known to OIU. Making a list of negative outcomes from this case Study would be a good start. Integrating IOU' s actions with these negative outcomes at the end of the case Study will give insight as to the possible impact and potential damages encountered by OIU.

November 26, 2005 [Freedom of Speech & Due Process of Law]

a. Under facts of this case Study, do " First Amendment Freedom of Speech" and "Due Process of Law" provisions of the U.S. Constitution protect IOU from OIU requests for equitable relief or damages. No. The U.S. Constitution protects free speech against government censorship unless the censorship is very closely related to a compelling governmental purpose, such as the prevention of fraud, defamation, riots, or subversive activities. Though political speech is given the greatest protection, commercial speech is also protected by the First Amendment. The content of commercial speech receives a somewhat lower level of constitutional protection, balanced against the need for truthfulness (and control of confusion) in the marketplace. Because some types of speech fall outside of the protection of the First Amendment, the government may regulate and even completely ban such content as unfair methods of competition, deceptive advertising, infringement of copyrights and trademarks, and defamatory speech. As previously discussed, the blatant actions of IOU for infringement and unfair method of competition would go beyond the limits of protecting free speech.

As to Article 8, section 1, clause 7 of the U.S. Constitution, Congress has explicit power of legislation in the areas of patents and trademarks. The application of this provision has been the Lanham Act and its various amendments (generally granting certain intellectual property monopolies, helping the public not to be confused, and protecting the reputation of a holders) and the establishment of the U.S. Patent and Trademark Office. As to cyberlaw and the Internet, and especially domain names, the courts have been at least mildly reluctant to rule on infringements of trademark owners' rights, but have basically followed the principles of the ICANN "intent" and "bad faith" approach discussed previously. There are also the various exemptions under section 102 of the Lanham Act, some which apply to trademarks.

As to the Due Process of Law provision of the U.S. Constitution, at this point IOU has not been denied and there certainly has been no taking of "life, liberty, or property" from IOU.

November 27, 2005

SEE "November 3, 2005" for issue pertaining to cybersquatting. In this instance Dr. Phast has completed another element beyond the November 27, 2005, of the sequence by attempting to extort payments from the legitimate trademark owner, OIU.

November 29, 2005

SEE "November 27, 2005" relating to cyber squatting issues.

November 30, 2005:

Are the various actions of Dr. Goode on this date of the type that might be chargeable as a federal criminal felony count of extortion against Dr. Goode? Yes. Here, there is a definite twist to our factual scenario. All of the sudden Dr. Goode has created her own personal entry into the criminal justice system, totally unaware of her actions to do so, and the potential of disaster to her own cause. The problem is that Dr. Goode used a legal white paper that was designed for internal OIU use as a management tool for making decisions. The mistake is that Dr. Goode used a minor part of the information from the document to directly "threaten" Dr. Phast and his brother with "fear" of an actual immediate serious criminal prosecution under the "force" of what appears to be an official color of right to do so if the brothers do not comply with her exacting wishes (a definite final "take-it-or-leave-it proposition) under section 1 of the Sherman Act. Such direct threats of force and fear of immediate serious criminal prosecution are definite factors in considering whether or not the action of Dr. Goode would be considered "extortion" and punishable with a fine and/or up to 20 years in prison via the Hobbs Act.

Though there is a number of state and federal statutes that could illustrate this issue, The Hobbs Act (U.S. Code: Title 18, Part 1, Chapter 95, section 1951 entitled "Interference with commerce by threats or violence) addresses the situation well. The U.S. Supreme Court has declared that Congressional intent of the Hobbs Act is expansive enough to include such intangible views that are induced by wrongful use of actual or threatened forces or fears that would include wrongful unfettered access under color of official right to deprive respondents exclusive control of their rights whether they are direct or indirect, actual or potential, beneficial or adverse. The words in the previous paragraph that are either italicized or in "quotation marks" fit the model requirements of the Hobbs Act as to requirements for "extortion." Dr. Goode was, in effect, attempting to by-pass the criminal justice system on her own (sort of a vigilante approach) in interfering and depriving the brothers of their "due process" rights of defending an apparent crime. The essence of this is that the government handles crimes in their entirety for society. The Hobbs Act has been strengthened recently to meet the challenges of a technology age through inclusion of applications addressed by The Patriot Act, various wire and data fraud statutes, etc.

The question at this point is how Dr. Goode should have conducted herself on the eventful day of November 30, 2005, to protect herself from such apparent criminal acts as discussed above? The legitimate approach was to couch her threats to Dr. Phast and his brother in terms of "civil" liabilities only. It is permissible to threaten a civil law suit if demands are not completed. This is part of the negotiation process. The Sherman Act, as amended by the clayton Act and the FTC Act of 1914, also includes civil liability approaches with treble damages. If she were still looking at the criminal approach, she still makes the demands as before and documents said demand in detail, but withhold the threats of criminal prosecution. If the demands are not completed to her satisfaction, she could go to the FBI with the documentation and request a review for possible prosecution. Decisions would made as to criminal viability by the FBI, Department of Justice (FBI actually an agency within the DOJ), or other government officials, as appropriate. There are other approaches possible that will not be discussed, such as various intentional torts, including the intentional inflection of emotional distress, quasi-contracts, constructive bailments/trusts, etc.

In closing, the many indiscretions of Dr. Phast, as listed throughout the dates prior to November 30, 2005, were discussed and resolved from a civil law perspective using various statutes, case law interpretations, and even international conventions to resolve the issues. The introduction of criminal law approaches for this last date is timely from the perspective that the business community and society are relying on it as never before because of such features of today's fast changing events and the likes of Enron, World Com, etc., and the beat goes on.

CONCLUSION

The world of Cyberlaw is quickly maturing. In Cyberspace we are dealing with Cybercrimes and defining Cy berjuri s diction within the Cybercommunity, and some are resolving civil disputes through CyberSettle.com. There is concern with Cyberterriorism, Cyberstalkers, Cybertrespass, and Cybervandalism. In daily transactions there are Cybernotarys, Cyberbills, Cyberchecks, CyberCash, CyberGold, and a growing business population becoming Cybergroupies. With all this tumultuous change taking place on an almost daily basis, the transition has been outstandingly orderly as to developing methods of resolving disputes. Existing Common Law principles, U.S. Constitutional concepts, statutes, and administrative laws have integrated well, for the most part, within the new evolving CyberWorld, as elaborated and experienced throughout this case Study. Examples, such as the Sherman Antitrust Act of 1890 (through amendments and case law), are very applicable today and integrate very naturally into the Cyberlssues of the day. The key is to stay informed, continue learning, and advancing our knowledge as we travel through the many CyberAd venture s of this intriguing CyberJourney.

Subject: Intellectual property; Business ethics; Commercial law; Internet crime; Property rights; Case studies

Location: United States--US

Classification: 9130: Experiment/theoretical treatment; 2410: Social responsibility; 5250: Telecommunications systems & Internet communications; 4300: Law; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 8

Source details: INSTRUCTORS' EDITION

Pages: 41-57

Number of pages: 17

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216275807

Document URL: http://search.proquest.com/docview/216275807?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 6 of 100

DEEP SOUTH FOREST PRODUCTS: MANAGEMENT UNFAIR LABOR PRACTICES DURING UNION DECERTIFICATION?

Author: Schnake, Mel; Williams, Robert J

ProQuest document link

Abstract:

A firm and its employees' labor union(s) often share a tense and adversarial relationship. From time to time, employees may decide that the bargaining advantages provided by their union no longer secures them the wages and benefits they seek, and they may seek to have the union decertified as their bargaining agent. This case examines this scenario, and demonstrates how a firm's management can legally express its views to its employees regarding the pros and cons of a union decertification. This case is an effective teaching tool for students in a labor relations course, a human resources course, and can also be used in the introductory management principles course. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Learning Objectives

The twin learning objectives of this case are:

1. Briefly describe to students the process by which a union may be decertified and lose its recognition as the bargaining agent for a firm's employees.

2. Demonstrate to students the difference between legal and illegal activity involving a firm and its employees' union as specified under provisions of the National Labor Relations Act.

QUESTIONS

1 Under section 8 of the NLRA, to what extent can a firm express its views to its employees regarding a labor union and its activities?

A firm's management can legally express its views about a labor union in either written, printed, or visual form, if such expression contains no threat of reprisal or force or promise of benefit.

2. The UFCW union alleges that the August 28-30 speeches constitute an illegal act, in that Jim Green promised that he would "notforget the employees hardwork, " and the company would "not cut wages or take away any fringe benefits if the employees voted the union out. " Do you think these statements constitute an illegal act? Why or why not?

Green's pledge not to forget the employees' hard work does not mention employee wages or benefits. Also, this statement occurs in the context of an apology for past racial discrimination. It does not promise any reward if employees reject the union. Further, the statement that the company would not cut wages or take away benefits refers to existing wages and benefits. This is not a promise of new wages or benefits. Thus, these statements are legal within the provisions of the NLRA.

3. Would your answer to Question 2 be different if Jim Green had promised to increase employees' fringe benefits if the employees voted the union out?

Yes, a promise of higher wages and benefits if the employees rejected the union would constitute an illegal act.

4. Would you consider the statements in the company newsletter, the Tall Pines, to constitute an unfair labor practice? Why or why not?

The statements do not contain any promise of benefits. On the contrary, the newsletter states, "I can't make any promises because that would be illegal. " Also, the newsletter does not contain a threat of force. Thus, the statements in the newsletter do not constitute an illegal act.

5. Jim Green, in his No Cut Guarantee to employees, made some guarantees to employees. Were his guarantees illegal?

The guarantees do not contain any threats or promises of benefits to employees. Thus, the guarantees are legal and do not constitute an unfair labor practice.

6. Do you think this statement by Jim Green constituted an unfair labor practice? "Many people have asked how they can get out of the union. Well if you have any questions about how to do that it's covered by the checkoff authorization on the last page of your contract - page 55, which requires you to give the company written noticed of stopping your dues. Or you can just see Personnel. "

This statement does not encourage employees to resign from the union or to revoke their dues checkoff authorizations. Under section 8c of the NLRA, an employer may lawfully furnish accurate information in response to employees' questions if it does so without making threats or promises of benefits. That is what occurred in this situation.

7. Do you think the 8% across the board wage increase on November 22 was legal? Why or why not?

The wage increase went into effect the day after the collective-bargaining agreement had expired. Deep South had withdrawn its recognition of the Union, and had no legal responsibility to bargain with it. Thus, the wage increase was lawful.

EPILOGUE

On October 12, 2004, A hearing was held before an administrative law judge involving the complaints filed by the UFCW against Deep South Forest Products. On January 15, 2005, the judge rendered his opinion as to whether Deep South had committed any unfair labor practices and had violated any provisions of the NLRA. The judge ruled that Deep South had not engaged in conduct in violation of the Act, as alleged. The judge issued an order that the complaint filed by the UFCW be dismissed in its entirety.

Subject: Case studies; Decertification; Labor unions; Collective bargaining; Forest products industry

Location: United States--US

Company / organization: Name: Deep South Forest Products; NAICS: 321912; Name: United Food & Commercial Workers Union; NAICS: 813930

Classification: 8630: Lumber & wood products industries; 6300: Labor relations; 9130: Experimental/theoretical; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 8

Source details: INSTRUCTORS' EDITION

Pages: 59-61

Number of pages: 3

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216278250

Document URL: http://search.proquest.com/docview/216278250?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 7 of 100

SUMMIT ENTERPRISES

Author: Schneider, Arnold

ProQuest document link

Abstract:

The case involves the application of transfer pricing, divisional performance analysis, cost estimation, and cost-volume-profit analysis. The setting is a diversified corporation with one division requesting services from another division. The objective of the case is for students to think about appropriate transfer prices and the use of ROI for service-oriented divisions, as well as to have students provide solutions for break-even points, operating leverage, and high-low cost estimates. Students often have trouble seeing how seemingly disparate topics in cost/managerial accounting relate to one another and this case offers an illustration of how a variety of topics are woven into one scenario. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

The case involves the application of several managerial accounting issues relating to two divisions within a diversified corporation. The central context has one division requesting services from the other division. The case integrates topics pertaining to transfer pricing, divisional performance analysis, cost estimation, and cost-volume-prof it analysis.

The case is appropriate for both undergraduate and graduate cost/managerial accounting courses. Students should have had prior exposure to all of the topics mentioned in the previous paragraph, so if the case is covered in an introductory cost/managerial accounting course, it would probably need to wait until near the end of the course.

The case begins by describing two divisions within a diversified corporation. Next, there is a discussion of how one of the divisions can take advantage of a new venture. The case concludes with a plan of how this division wishes to involve the other division in the venture.

Some of the assignment questions require numerical computations while others are discussion-oriented. None of the numerical computations are lengthy. Students are first asked to address cost-volume-prof it issues, namely break-even point determination and the application of operating leverage. The remaining requirements, with the exception of one task to estimate costs using the high-low method, involve analysis of proposed transfer prices and divisional profit and ROI.

DISCUSSION QUESTIONS

1. How many hour s does the Norwich Division need to work in order to break even? How many hours need to be worked for Norwich to attain its target ROI of 35 percent?

Norwich's break-even point is obtained as follows:

fixed costs / contribution margin per hour = $860,000 / ($60 - $40) = 43,000 hours

The hours needed to achieve the target ROI is determined as follows:

(fixed costs + target profit) / contribution margin per hour = [$860,000 + .35(900,00O)] / ($60 - $40) = 58,750 hours

2. Presuming that the hours needed to achieve the target ROI of 35 percent is full capacity, calculate Norwich's operating leverage (i.e., contribution margin divided by pretax income) and use that to determine its expected percentage increase in pretax income for 2006.

The 2006 revenue is expected to be $3,525,000 ($60 ? 58,750 hours). Since this represents a 13 percent increase over 2005, the 2005 revenues were $3,119,469 ($3,525,000/1.13). Dividing $3,119,469 by the $60 hourly rate yields 51,991 hours worked in 2005. This is used to determine the operating leverage, as follows:

[($60 - $40)(51,991)] / [($60 - $40)(51,991) - $860,000] = 5.78

Multiplying the 5.78 operating leverage by the 13 percent expected increase in revenues yields an expected 75 percent increase in pretax income for 2006.

3. If you were Dan White, would you agree to Shelley Greenberg's request to supply heating installation at the requested rate of $45 per hour?

Dan White would not be likely to agree to the $45 rate. Since the Norwich Division is operating at full capacity and can receive a rate of $60 per hour, White would be forfeiting revenue (and contribution margin) of $15 per hour by agreeing to Shelley Greenberg's request.

White's decision to reject Greenberg's proposal is reinforced by the corporate policy of evaluating performance using ROI. The reduction in revenue and contribution margin will decrease Norwich Division's ROI.

4. Using the high-low method of cost estimation, determine the estimated "other incremental costs" per pool for the new pools. Presume that these are variable costs.

The estimated "other incremental costs" per pool for the new pools is determined as follows:

($107 million - $98 million) / (3,040 - 2,740) = $30,000 per pool

5. Discuss how Summit Enterprises would benefit from the deal with the hotel chain. Pr ovide support by computing the in cremental profit to Summit from the introductory order of six pools. (Hint: Use Exhibit 1 to determine the time required for Norwich to install the heating system in each new pool.)

Each of the new pools would require Norwich to work 125 hours ($5,625/$45 or $7,500/$60, from Exhibit 1). The introductory order would benefit Summit Enterprises in the short-run to the tune of $27,000, which represents the incremental profit from the introductory order, as follows:

Over the longer run, there should be even greater benefits to Summit from this introductory order. The hotel chain has indicated an interest in purchasing 40 to 50 additional pools during the coming two years. The per pool profits on these would be even greater than for the first six. Moreover, this deal with the hotel chain should give Chittenden the visibility and opportunity for launching sales of the new pool. Chittenden's excess capacity can be utilized to earn additional profit.

6. Evaluate the reasonableness of the proposed transfer price of $45 per hour. Should Summit Enterprises institute a general policy on transfer prices?

The $45 per hour transfer price is not reasonable. It would not be fair to Norwich Division, since it is operating at full capacity and would stand to lose $15 per hour. Moreover, Chittenden could pay the full $60 rate and still show a profit on the introductory order. From Exhibit 1, a transfer price of $60 per hour would result in a profit of $4,500, as follows:

At a rate of $45 per hour, Chittenden would show a profit of $6,375 per pool (as computed in question 5). Just because Chittenden's normal profit margin has been reduced by this introductory offer does not mean that other divisions should also be expected share in the reduced profits. Greenberg has no real justification for insisting on a $45 per hour transfer price because they should undertake the introductory offer even at $60 per hour and will earn a profit.

It would be advisable for Summit to set up a transfer pricing policy for the future. Now that there is some demand for inter-divisional services, there are bound to be situations when Norwich has excess capacity but the $60 market price would pose a barrier to the transfer of services that should benefit Summit.

7. Suppose that Norwich was not operating at full capacity and could service Chittenden without affecting other revenues. How would your answer to part (6) change?

If Norwich was not operating at full capacity and could service Chittenden without affecting other revenues, then any transfer price above the variable cost of $40 would benefit Norwich. So, in that case, $45 would be a reasonable transfer price.

8. (a) Discuss the use of ROI for a service-oriented division like Norwich.

Service-oriented divisions like Norwich typically do not have the amount of invested capital that a manufacturing division would have. Rather, a service division is labor intensive, and these "people assets" are not reflected in the balance sheet. Hence, a service division's ROI may not be comparable to that of a manufacturing division. So, while a 33 percent ROI might be impressive in most settings, it may not be all that great for a division like Norwich, which has invested capital in vehicles, tools, and other equipment, but not in manufacturing facilities.

(b) Compute the projected 2006 return on revenues for Norwich.

To highlight the point made in part (a), note that Norwich's annual profit is projected at $315,000 (.35 x $900,000). As a percentage of the $3,525,000 revenues ($60/hr. x 58,750 hours), this amounts to a profit margin (i.e., return on revenues) of 8.9 percent compared to its projected ROI of 35 percent.

Subject: Transfer pricing; Performance evaluation; Cost estimates; Cost volume profit analysis; Management accounting; Return on investment; Case studies

Location: United States--US

Classification: 9530: Diversified companies; 4120: Accounting policies & procedures; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 8

Source details: INSTRUCTORS' EDITION

Pages: 63-67

Number of pages: 5

Publication year: 2008

Publication date: 2008

Year: 2008

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

ProQuest document ID: 216275916

Document URL: http://search.proquest.com/docview/216275916?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 8 of 100

URBAN OUTREACH MINISTRIES' ORGANIC GARDENS: DEVELOPING A SUSTAINABLE, TRIPLE-BOTTOM-LINE BUSINESS FOR A NONPROFIT SOCIAL ENTERPRISE

Author: Stephenson, Harriet; Brock, Matt; Loughead, Michele

ProQuest document link

Abstract:

Nonprofits or for-profits with an explicitly responsible social agenda, from microenterprise to highly scaleable operations, are increasingly venturing into new territory-how to do social good, make money, and be responsible to relevant stakeholder groups, especially the people, profit, planet of the triple bottom line. This case study can give useful insights to potential clients and consultants inside and outside the classroom who have been previously assumed to not be affected by triple-bottom-line/sustainability issues. In this post-Enron era, these issues are seen as a basis for strategic competitive advantage that will help maximize a profit or social agenda. These issues will be increasingly relevant to doing business in the 21st century. The executive director of the nonprofit Urban Outreach Ministries engaged a team of consultants to do a business plan for an organic garden that would be environmentally friendly, provide jobs, and job training for Urban Outreach's target immigrant population. In addition, it would generate profits, which could help support other Urban Outreach activities and its outreach. A preliminary feasibility study showed a profit the first year if the $200,000 startup and land costs would be donated. What should the executive director do with the study results? What are the critical factors for long-term success in an entrepreneurial startup within an organization? Social responsibility, triple bottom line, sustainability, ethics, values, and environmental consciousness are issues increasingly vital to business and nonprofits in this post-Enron era. What else needs to be measured? How does one compare/weigh social return on investment? [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Discussion Questions

1. A homework assignment at the same time case is assigned would be to define and give examples of social enterprise, double bottom line, sustainability, triple bottom line, and social responsibility. Use the Star bucks triple-bottom-line mission statement (http://www.starbucks.com/aboutus/environment.asp) to frame Organic Gardens' mission statement.

Note to Instructor: A mini-lecture, "Background Notes on Corporate Social Citizenship, Social Responsibility, Triple Bottom Line, Social Enterprise, Sustainability," is helpful for background information for the instructor or the students. It was developed for "Is It Time to Unleash a Social Enterprise Internet Business on the Global Multibillion Dollar Wedding Industry? A Case Study" and would be in the most recent "Instructors Notes" edition. This could also be secured from the lead author. This is a relatively new emphasis within schools of business and is possibly somewhat new territory for some.

Social enterprise: Practitioners usually mean nonprofit earned income activities. Increasingly, consulting firms are applying social enterprise to both for-profit and nonprofit organizations, which suggests a double-bottom-line perspective. Business schools view social enterprise as a continuum from prof it-oriented businesses engaged in socially beneficial activities as an explicit priority of the Ben and Jerry type who must make profit goals ; on through to nonprofit organizations which engage in mission supporting commercial activity that generates funds for a sustainable or even profit making operation, which can be used to support mission (run and taxed as for-profit operation); to mission supporting commercial activity that supports the mission in process of generating the revenue and the "profits" from which go to support the mission goals and operate under nonprofit rubric. The Harvard Business School Business Plan Competition has a Social Enterprise track, which includes nonprofit or for-profit business plans for entrepreneurs with an explicitly social agenda.

The bottom-line, double-bottom-line, triple-bottom-line, social enterprise, socially responsible organization, and sustainable business have different meanings to different groups. The differences impede global best practices efforts, defining what should be included as the body of knowledge and practice in the discipline whatever it is. In academia, it is not uncommon to see double bottom line, triple bottom line, social enterprise, socially responsible, ethical, and sustainable to be used somewhat interchangeably.

Sustainability in 7987 United Nations Report is defined as development that meets the "needs of the present without compromising the ability of future generations to meet their own needs." It recognizes the interdependence of society, the economy, and the environment.

According to Chris Laszlo in The Sustainable Company, Island Press, 2003, this is all a part of the redefining corporate responsibility. "It originates with changing social expectation as expressed by consumers, employers, investors, business partners, local communities, and environmental activities." One would add the Enron type issues that fill the paper today. Laszlo notes the underlying logic of what he feels is a market-driven phenomenon-"if you want your business to succeed, here is a new set of performance standards you have to meet" (p. 17). This is reflected also by incidence of international reporting standards.

International reporting standards such as the Global Reporting Initiative GRI 2000 (revised 2002) and socially responsible investing guides of stakeholder performanceINNOVEST-Planetary Ethics.

Sustainable business practices in the United States have usually started with environmental issues for big business-it is a broader concept that deals with assessing stakeholder impacts/values relative to some absolute standard and relative standard. It is easier to talk about measuring shareholder value, but business in the United States has not been that oriented to measuring value in terms of impact on other stakeholders.

Bob Willard in The Sustainability Advantage-Seven Bottom Line Benefits of a Triple Bottom Line notes: "The return on investment from aggressively improving company-wide sustainable development knowledge and initiatives can make other traditional investment opportunities seem trivial. Whatever company captures these benefits soonest will have a significant competitive edge." This leads to easier hiring of the best talent, higher retention of top talent, increasing staff/employee/team productivity, energy savings, reduced expenses, reduced risk-easier access to donor/investors-"The benefits are there for the taking."

Triple bottom line refers to identifying relevant stakeholders, including the shareholders, and assessing the negative or positive impacts that will occur. The stakeholders are often broken out in people, profit, and planet designations. The consulting class at XYZ University operates on a triple-bottom-line approach for a for profit or nonprofit based on identifying the relevant stakeholders-regardless of size of business or nonprofit, the type of value or cost to each as a result of this existing or proposed operation, and determining a weighted importance-at least a rank ordering of stakeholders.

The authors recommend stating mission statements much as Starbucks does. The Starbucks mission statement serves as a helpful model to spell out the values that will be important to use as guidelines in evaluating a plan such as the organic farm. Starbucks has a clearly delineated triple-bottom-Iine mission statement which was sent to the executive director of Urban Outreach Ministries in the transmittal package.

The Organic Gardens mission statement as recommended by the student consultants in the Mission and Defining Principles is already a triple bottom line as it includes people, profit, and planet.

2. How to determine if this is a good business plan? What makes a good business plan?

A. Answering this can be done by assigning roles to pairs of students. Task is to evaluate this feasibility study from vantage point of different stakeholders. Have students prepare 2-minute critique and present to class. This allows for discussion of who are the stakeholders and shareholders. How do needs differ? Business plans are used to secure funding, as part of strategic planning process, to recruit, to help track a business, for PR to donors, for supplies, investors, creditors ... Stakeholders/shareholders might include:

* Clients-those who are being trained-learning the skills and being employed. Are these good skills to have? Can clients make living wage? Will clients feel good about products and process?

* Banker's perspective-can Urban Outreach pay back the money? Is this low risk?

* Potential investor perspective-good return on money. Social investor's return might be that investor values being able to create jobs and enhance the community.

* Marc, the executive director-will this increase the viability of his organization? Will it help grow the number of clients? Marc is an entrepreneur. Developing Organic Gardens will motivate him. It might keep him involved at probably lower salary than he could get someplace else (someplace which might not be as exciting, challenging).

* Potential angel-an investor might find this very appealing to help create jobs and make the community better off.

* Donors-good cause that can enhance public image. Enables donors to sponsor projects that enhance community. Organic Gardens would increase numbers of people served and meet social needs which system cannot/is not otherwise meeting.

* Social investor-good cause that social investor can believe in. The target market population has potentially high unemployment rate. The need for Organic Gardens as job creator and training opportunity is critical issue. It will be self-sustaining and even more than break-even. Social return is important and should be more fully developed in the plan.

* Owners-Marc had indicated he wanted employee ownership in future. Does this plan deal with that? Are there development and growth opportunities or just more work?

* Board of directors-Does the mission of the proposed garden directly help secure the mission of Urban Outreach Ministries? Is this an efficient use of limited resources? If Urban Outreach has to tap donors for $200,000, would that prevent Board fromraising enough funds for Urban Outreach Ministries? The board of directors helps educate public, create good will to develop more donors, and provides access to foundations. Does this help keep the executive director? There is no indication of the board's support for this kind of project.

* Local grocery stores-fresh source for organic products. This would provide healthy alternatives to local retailers. Buy locally is often an appealing advertising campaign.

* Customers-willing to pay for normally hard to find produce, worms, and compost. Customers would be willing to pay more, which should contribute to profitability.

* Local partners-partnering opportunities at various levels. For example, a local Starbucks that would be across the street from the garden might offer to train baristas from same population. The Starbucks could feature fresh produce in luncheon salads. Could provide space for monthly lectures on "organic gardening in the city," "organic gardening in window pots." Expertise borrowed-ask local Starbucks managers to be on Urban Outreach Ministries' board or serve as informal advisor.

* Employees-they will be able to benefit with more nutritionally healthy food. This may also encourage Urban Outreach Ministries to see how it incorporates South Baldwin Health and Fitness into employee benefits. Healthy employees reduce insurance costs. There are potentially lower costs of absenteeism due to illness and increase motivation and commitment. Organic Gardens provides growth opportunities . . . new experiences.

* Student consultants-& good growth experience for students and urban organic garden scene. Gives students an inside view on how an organization operates making them better prepared to serve on boards and help solve community problems. There is an opportunity to network.

B. "Generic assessment of business plans"- This could be given to the two-person teams that were utilized in part A or divide class into teams of 3-5 or assign individually for discussion in class. Attached is a generic business plan evaluation. How important is each factor? This generic evaluation has one set of weights, which is currently beingused for a business plan competition. This generic assessment does not include the triple-bottom-line issues.

C. Evaluation of triple-bottom-line issues. Do the criteria adequately reflect the needs of Organic Gardens? Ask students to critique the plan using the judging criteria presented in 2B. Do the criteria adequately reflect the triple bottom line of concern for people, profit, and planet? What could be added, if anything, to correct that? Authors purpose a separate triple-bottom-line section is recommended such as adding to the current criteria included in the "generic" evaluation form.

Triple-Bottom-Line/Sustainability Aspects of Plan

* Does it describe how benefits to people will be manifest-living wage, people valued?

* Does it describe how impact on and of environment is considered?

* Do operations of business/organization improve the local community?

* Do operations improve environment or at least not make it worse off?

* Does it acknowledge fiduciary responsibility to owners, society/relevant shareholders?

* Are relevant stakeholders identified and importance clarified?

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

The weighting is given a 30 here, but this would be good question for class.

Measurements as to the value of any plan ultimately must be based on criteria of the client/business owner and where the business/organization wants to be in the long run. The "conventional wisdom" for next 10 years will be to use the triple-bottom-line/sustainability guidelines as a basis for an effective strategy that will enhance the probability of maximizing the positive impact and minimizing the negative impact on the relevant stakeholders in long run.

D. Other options to be considered-are there other options which should be considered? Is Organic Gardens' option being considered in a vacuum? Are there other potential social enterprises that would have a bigger payoff and still meet needs of executive director and Urban Outreach? An organization has finite resources. The value of this proposal needs to consider the alternatives. The SWOT analyses need to be compared. That process should involve the management team as well so the process becomes a capacity building experience.

3. Put on your consultant hat. Are there red flags that you see?

* At this point, these studies are out of context. South Baldwin Fitness is in its own space. The garden is yet another venture.

* There is not much indication that the executive director will slow down long enough to do the critical capacity building and organization planning necessary to implement a successful social enterprise strategy for Urban Outreach Ministries.

* There may be tax and legal issues, which should be addressed. Does Organic Gardens fit adequately under the umbrella of Urban Outreach Ministries? Will it need incorporated as a separate entity?

* Probably need to talk about using "profits" to grow the garden-provide more of mission of the garden. The issue was not addressed adequately.

* If the proposed organization is a triple bottom line, is the board supportive of the project? Are employees/staff in support of idea?

* Executive director may be too entrepreneurial for Urban Outreach Ministries.

* There is no solid information that the garden would work. Interview other organic gardens. Are the productivity figures meaningful?

* What kind of contract is executive director on? What succession training is going on?

* Are there other sources of revenue, including fundraising, that would be better use of resources-greater return in long run?

* What is the opportunity cost of the Organic Gardens project? How receptive will the community be? Will it have same outcomes as predicted? What, if anything, will have to be given up to pursue the Organic Gardens project?

* the success rate of small business is so bad and actual profitability of most social enterprises is so questionable that Urban Outreach Ministries needs to realistically assess and weight the objectives/mission/need for the organic garden. Is it to be a major source of funding for other programs? That should be rethought.

* Consider sustainable operation as a financial goal. Is it realistic that property will always be donated? Board development of the financial model would be desirable. How that will be financed is unclear.

* Is it likely to be able to get $200,000 donated to make $38,000 profit? More clarification is needed on the costs and benefits.

* Organic garden may take years to get "organic" designation. What impact would that have on value of project?

* It is unclear as to the actual demand for organic garden. What are the trends nationally and locally?

4. What needs to be done now?

The answer to what needs to be done now is "almost everything." The executive director may want to clarify what the best use of resources is at this time. The executive director has been with organization less than a year and as executive director for about 8 months. This is time for some strategic planning, board building, and folding the two organizations together then reassessing how this might fit in. How is the South Baldwin Health and Fitness doing? What needs to be done with it, if anything? What would be the minimum expectations for an organic garden? How many should be created? What other quantified measures of success should be achieved for each garden? This model assumes donation of $200,000 startup and land costs. Is that a realistic model? The triple-bottom-line benefits are a part of the mission. There is no assurance that the executive director's board is as committed to those values as the executive director is. Those values are critical in creating the desired number of jobs, training the desired number of people, and providing the desired number of pounds of fresh local organic produce.

Are there other options which should be considered-other potential social enterprises that would have bigger pay off and still meet needs of executive director and Urban Outreach Ministries? Are there better funding sources than through entrepreneurial activity?

5. What is the need in the market for these urban organic gardens?

This is possibly the area that needs much more scrutiny. What is the need? How big is it? How long will it be an unmet need? Is Organic Gardens really going to be able to capitalize on that need? This is then another whole issue to deal with. There are currently over 900 community gardens in Vancouver, British Columbia, with a goal to increase to 3,000 by 2010. British Columbia is at a hobby level mostly. The international numbers are in the millions with roll of community gardens feeding, in some cases, entire cities (http://thetyee.ca/Life/2006/09/12/UrbanAgri culture).

The summary information included does not give a good answer to this question. This is an important question and issue. Further, it would be critical to be able to sell the range of benefits to potential investors, to the board, to the team. Even if the dollar need is not clear, there may be many other needs that can be met with an organic garden.

6. If you were a consultant to Marc, what advice would you give him on how he should proceed? What should he do with the feasibility study and why?

It is time for a strategic plan for Urban Outreach Ministries. Board development is needed. Urban Outreach is expanding on a fragile base and immature infrastructure. There is a need for capacity building. Where do we want to go with Urban Outreach Ministries? What role should the board have in this? What is needed on the board? What skills, abilities, knowledge, and contacts are needed? What are our critical measures of success for Urban Outreach Ministries? Who are our relevant stakeholders? What are our sources of funds and expenditures?

Subject: Case studies; Social entrepreneurship; Business plans; Religious organizations; Organic gardening; Nonprofit organizations

Location: United States--US

Company / organization: Name: Urban Outreach Ministries Inc; NAICS: 813110

Classification: 2310: Planning; 2410: Social responsibility; 9540: Non-profit institutions; 9130: Experimental/theoretical; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 8

Source details: INSTRUCTORS' EDITION

Pages: 69-78

Number of pages: 10

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216282437

Document URL: http://search.proquest.com/docview/216282437?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 9 of 100

VERMONT TEDDY BEAR COMPANY

Author: Shonesy, Linda B; Gulbro, Robert D; Kerner, James; Hemingway, Linda; Johnson, Jeff

ProQuest document link

Abstract:

The Vermont Teddy Bear Co is the largest hand-crafter of teddy bears in North America. Approximately 450,000 "Bear-Gram" gifts (teddy bears) will be delivered around the world this year. There are over 100 bears from which to choose for any occasion. The situation that has developed in 2005 is especially interesting for a company that is located in a state that demands appropriate conduct, following standards set by Ben & Jerry's. This company set a high standard for being socially responsible with their "Save-the-Rainforest" campaign. The company decided to market a bear called "Crazy for You" for the recent Valentine's Day holiday. They began selling the bears in January 2005 and were sold out by early February. The $69.95 brown bear comes with a straitjacket and commitment papers that read: "Can't Eat. Can't Sleep. My Heart's Racing. Diagnosis: Crazy for You."

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

Learning Objectives:

* Students will learn the importance of companies maintaining appropriate marketing strategies and will acquire awareness of the consequences of insensitive behavior.

* Students will understand the importance of businesses acting in a socially responsible manner.

Position in the Course:

This case may be used in a course to add to a discussion about social responsibility. The student should have exposure to the meaning of this term before the case is introduced.

Student Preparation:

Students should spend two to four hours reading the case and relating their reading to textbook topics, such as marketing strategies and social responsibility, as well as to assigned outside readings.

Related Theories:

Students may relate this case to the study of codes of ethics, ethical behaviors of business executives, and a study of companies who have violated social responsibilities.

Teaching Methods:

The instructor should serve as moderator of the class discussion about the case.

The instructor could divide the class into groups and have each group discuss the case separately and then come together to discuss as a class.

The instructor could assign the case to one group in the class for presentation.

EPILOGUE

Following the controversy surrounding the Valentine's Day "Crazy for You Bear," and the decision not to pull the bear from its 2005 Valentine's Day offerings, speculation began regarding the long-term effects on the company. On May 16, 2005, the company signed a merger agreement to be taken private by an investment group led by the Mustang Group, a Boston-based private equity investment group (http://ir.vybearcompany.com/index.php?id=185).

Elisabeth Robert, President and Chief Executive Officer of Vermont Teddy Bear stated, "This transaction brings significant value to our stockholders and enables Vermont Teddy Bear to continue to build upon our leading position in the industry. As a private company, we will no longer face the challenges of a small company trying to comply with increasingly complex public company requirements" (http://ir.vybearcompany.com/index.php?id=185).

The statement made by Ms. Robert may reflect the effects of a new law called the Section 4 of the Sarbanes-Oxley Act, which requires companies to assess the effectiveness of internal financial controls and have auditors verify the assessment. The higher costs of maintaining a public company could also have contributed to Vermont Teddy Bear's decision to become private, according to Lawrence Carrel (2005, May 17). On the other hand, the choice to be taken private so soon after the Valentine's Day problem could be interpreted as running from a mistake. We will probably never know the impact of the dilemma created by Ms. Robert, who agreed to discontinue production of the "Crazy for You Bear," but refused to discontinue sales of the questionable bears that were already produced until all were sold.

DISCUSSION QUESTIONS AND ANSWERS

1. Was the Vermont Teddy Bear Company wrong to continue selling the bears?

There may be differing views about this question. The student needs to provide support for his/her answer. Many will decide that the company should have stopped selling the bears immediately after the criticism began. The fact that they agreed to stop the production of this particular bear does not appear to be enough to show that the company recognized their mistake. The comments by the CEO Robert did not help as she sounded as if money was more important than good will. Other students may agree that the company was not wrong to continue to sell the bears remaining in inventory. They will see this not as a right or wrong issue, but as a business decision.

2. Did the company respond appropriately to the criticism from the public? What would you have done if faced with the problem?

The company responded quickly by allowing a round of interviews to those who requested one. They also held a meeting with the Vermont chapter of the National Alliance for the Mentally Ill and other local mental health advocates, to discuss the problem in early February, 2005. The company also removed the bear from the radio advertising campaign that was currently being run. Again, they did not stop selling the bear until the inventory was depleted, which may cause many students to argue that the company did not respond appropriately. For the second part of the question, the student will provide a personal response, which may include ideas such as admitting in a press release that they did not realize the problems that would be caused and that they did not intend to be insensitive. The spokesperson would agree to stop production immediately.

3. Has the company been criticized unfairly or are they insensitive as accused?

There may be differing views on the situation. However, the customer is always right. Companies in the past have been rewarded for prompt response to problem situations having followed the lead of Johnson and Johnson in the Tylenol situation. In that case, all products were recalled immediately. The Vermont Teddy Bear Company could have recalled the bears and modified the product to avoid being insensitive. That would have shown the public that the company cared and yet would have minimized the cost of lost sales.

4. How can this marketing mistake cost the company in the future?

Perceived insensitive behavior, whether true or not, can lead to serious problems and will be punished by all stakeholder groups.

a. Stockholders could sell off their stock, causing stock values to decline.

b. Employees could leave and the future applicant flow could decline, causing productivity to decline.

c. Customers could reduce their purchases of current and future products, causing a reduction in sales and profits.

d. Suppliers could place the company on a COD basis, making it more difficult to produce future products.

e. Creditors could raise the rates charged on credit or refuse to grant future lines of credit.

5. How does the situation with Vermont Teddy Bear relate to inappropriate conduct by other businesses during recent months?

Recent problems with other companies have forced some into bankruptcy, company officers have been sued and charged with fraud, and boards of directors have been chastised for allowing inappropriate behavior. Firestone and other firms that failed to recall defective products have had a great deal of negative publicity. Lost sales may be very costly to regain. A company may never overcome lost profits, even with major spending in marketing and public relations.

Subject: Case studies; Toy industry; Business ethics; Social responsibility; Advertising campaigns

Location: United States--US

Company / organization: Name: Vermont Teddy Bear Co Inc; NAICS: 339931

Classification: 7200: Advertising; 2410: Social responsibility; 9130: Experimental/theoretical; 8600: Manufacturing industries not elsewhere classified; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 8

Source details: INSTRUCTORS' EDITION

Pages: 79-83

Number of pages: 5

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216278368

Document URL: http://search.proquest.com/docview/216278368?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 10 of 100

ADAMS JEWELRY

Author: Khanfar, Nile; Loudon, David

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Abstract:

Jack Adams owns and manages an independent jewelry store in Florida. He is facing a number of issues concerning the store's competitive effectiveness in the local jewelry market. The immediate decision is whether he should move from his long-established store location. Although his store is not very up-to-date, it is in a high-traffic location and receives a lot of exposure. He caters to a middle class clientele, but fancies his business as a higher quality, upscale operation. Thus, there are issues of image and positioning in the local jewelry market among competitors. Other questions concern his lack of effective promotion activities and hours and days of operation. All of Jack's decisions relate to the issue of his customer service and marketing orientation. The case also incorporates global dimensions as it describes the nature of the diamond market. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case is designed for use in a variety of undergraduate business courses to help students learn about the operation of a typical small business organization. The case offers students an opportunity to evaluate the marketing philosophy and actions of a small retail jewelry store. It provides insights into the jewelry and diamond markets and describes the operations of a small local independent retailer in this sector. Students may critique the retailing approach and develop improved strategies for the small business. It is very suitable for a written report and/or oral presentation by students. It can also be used for examination purposes. The case lends itself to a variety of Small Business/Entrepreneurship courses, Marketing courses (such as Retailing and Services Marketing), and Business Strategy. Faculty and students should access one of the many diamond industry websites, such as www.gia.edu, for a comprehensive discussion of diamond characteristics, including cut, carat, color, clarity, and prices. This will aid class interaction on these matters. Faculty may want to cover the following elements in their discussion of the case.

DISCUSSION ISSUES

Planning

Ask students how effectively Jack Adams appears to plan for his store's future. Jewelers need to plan for selling seasons such as Mother's Day, Valentine's Day, and, most importantly, Christmas. Planning includes forecasting for the future based on current data received from the market. Unfortunately, Jack not only failed to plan for inventory but also failed to open Adams Jewelry during the busiest shopping day of the year, the Friday after Thanksgiving. Another weakness in Jack's planning was that he did not anticipate changes in the global diamond market. Jack should have detected the price increase trend in diamonds and gold. Rather than being reactive, he should have been proactive.

He could handle financial issues more effectively. This includes finding better and more flexible methods to finance new inventory purchased from wholesalers. As the case mentioned, customers were turned away and bought from other jewelry stores as a result of lack of inventory (especially larger diamond stones).

Jack should also evaluate his priorities. Is it more important to invest $15,000 to grow the firm and improve its effectiveness in numerous ways, or to finance changes in his personal situation, such as adding a room to his house or buying a new truck? The business is what pays for other bills, not the other way around.

Environmental Scanning

Ask students to critique Jack Adams' effectiveness with regard to environmental scanning. Have them provide specific examples where they feel the process was weak. It is important to scan the environment to gather information regarding potential threats and opportunities. Jack did not keep up with the competition and pay attention to who was entering and exiting the local market. Several stores emerged in Jack's city after he opened Adams Jewelry. These stores include Marvin's, Transitions, The Jewelry Place, Roland Samson, and several others in the regional mall. He should ask himself "Why are they entering the market and what are they doing right to grow that fast while I am not?" He should also try to find opportunities available in the market. An example includes visiting the stores in the mall and asking for their service and repair business. The case illustrated the lucrative nature of this service.

Another point that scanning will reveal is what style of jewelry and designs are selling in the market. People's tastes change over time. What worked for customers ten years ago may not work today. Therefore, carrying beautiful and desirable designs is as important as the high quality stone that is embodied in the design.

Customer Orientation and Service

Ask students to illustrate examples of good and bad service cited in the case and explain how that confirms the existence or lack of a customer orientation as part of the marketing concept. Although the staff is congenial with customers, Jack should seek training on personal selling. He should learn to start conversations with customers and not be so serious and introverted. He needs to establish greater rapport and share his expertise with customers, particularly given his valuable diamond knowledge. He should also learn how to deal more effectively with wholesalers. For example, Jack needlessly low-balled the part-time wholesaler who offered to sell him jewelry bought from pawn shops at 30% below wholesale value. Jack does not fully understand that wholesalers are not only suppliers but can assist him in his marketing. They can refer customers and, perhaps most importantly, offer their insights about the market to the retailer. Wholesalers are more in touch with the jewelry market in terms of supply and demand than are jewelers. Also, it is important to treat people fairly and recognize that the source of the merchandise and the price that was paid for it should have no bearing on the price that should be offered for it. The case mentioned that Jack offered the wholesaler a price equivalent to 50% below wholesale value for his merchandise just because he knew that the wholesaler's merchandise was bought from a pawn shop and the cost was assumed to be quite low. By doing so, Jack passed up an economic opportunity to make a higher return on the merchandise if he bought it. Instead, the wholesaler sold to another store for a more equitable price and probably will not consider Jack for future dealings.

Image and Positioning

Ask students to describe the image and positioning they believe exists for Adams Jewelry. Ask them to provide evidence to support these perceptions the market may have. Jack wants to position his products as medium- to high-quality. However, his customers are upper-lower to middle class; and his strategy has been to offer a low-cost approach for customers. Jack would like to attract more affluent customers to his store. There are two issues involved in the store's current image and positioning. First, due to the higher quality of the jewelry Jack wishes to buy and sell in his store, he will have to demand a higher price for them than usual. The problem is that his positioning strategy does not fit with his customer profile. His customers are looking for inexpensive items that they can afford and also want a flexible payment method. Second, factors such as Jack's comfortable attire at work (wearing shorts), the interior of the store (shabby carpet, discolored window drapes, and dated display fixtures), and Ralph's son (Barry) appearing behind the sales counter do not reflect a high-quality jewelry operation. If he wishes to position his products as high quality and wants to attract affluent customers then he must change his and his store's appearance.

Promotion

Have students evaluate the promotion philosophy of Adams Jewelry. Ask them to recommend a course of action that would build Jack's business while conserving his meager resources. Jack needs to pay very close attention to promoting his merchandise. He should have conducted a marketing audit to find out why his previous promotional activities did not work and why he does not sell more jewelry on his website. seemingly minor issues such as proofreading copy on his website may be significant stumbling blocks to attracting more upscale and educated customers.

The electronic sign purchase illustrates an important issue. His action shows that he does not carefully evaluate feedback and advice or recommendations from others who may have better jewelry marketing insights than he. He was advised to purchase a sign to place outside; instead he bought a less expensive (but rather ineffective) one and placed it inside. The issue of affordability was more important than promotional effectiveness.

Another important issue to mention is that Jack should scan competitors' ads in the local media, including newspapers, TV, radio, and also note event sponsorships by them. By doing so he will know the selection of inventory they carry and their special prices. He will also know if a newcomer in the market is having a grand opening and what prices, etc they are offering. Jack should also visit the competition. He needs to get out from behind his repair bench and see what the competition is doing. He apparently has little direct knowledge of his adversaries.

He should consider a low-cost, guerilla-style ad campaign that makes the most of his lack of dollars. He should focus on ways he can generate favorable word of mouth and buzz while not breaking the bank. However, many issues need to be resolved prior to doing anything. For instance, any advertising in an upscale manner will not be congruent with the current look of the store, Jack's casual attire, and his merchandise mix.

Jack might also want to consider having only a promotional website rather than one designed to also sell merchandise. Since the latter is greatly more complicated, he may simply want to switch the orientation to an Internet presence that favorably showcases his store, location, personnel, services provided (illustrating the fine quality of jewelry craftsmanship that is provided by the store), and perhaps quotes prices for standard work.

Location

Ask students to evaluate whether Adams Jewelry should make the move to a new location or stay put. Moving to a new location takes thorough planning and preparation. A careful examination of the current situation will probably reveal that Adams Jewelry' current location is better than the one to which he is planning to relocate. Saving a small amount of money in rent should not be an overriding concern. Given that the difference in rents amounts to the sale of one typical ring each month, the rent costs should not be the deciding issue. More important is the issue of the store's image and customer convenience. The current location can probably generate more money assuming that the factors contributing to the problem are resolved. If Jack were to move to aperceived "classier" location, will it make a big difference? His present location, once remodeled, could accomplish his goals. The limiting factor seems to be not so much the store's location, but Jack's marketing and business philosophy. If he were to continue wearing shorts to work, stick with his dated display cases, etc., a new location will not help greatly with the image and attracting a more upscale clientele. Also, the case alludes to a limited amount of store parking. If Jack and his mother occupy the two spots in front of the new store, where will customers park?

Subject: Case studies; Jewelry stores; Market positioning; Comparative advantage; Corporate image; Relocation of industry

Location: United States--US

Company / organization: Name: Adams Jewelry; NAICS: 448310

Classification: 2310: Planning; 7000: Marketing; 8390: Retailing industry; 9130: Experimental/theoretical; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 8

Source details: INSTRUCTORS' EDITION

Pages: 107-111

Number of pages: 5

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216282701

Document URL: http://search.proquest.com/docview/216282701?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 11 of 100

PATAGONIA: CLIMBING TO NEW HIGHS WITH A SMALLER CARBON FOOTPRINT

Author: Rarick, Charles A; Feldman, Lori S

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Abstract:

The California outdoor clothing and equipment company, Patagonia, has set a very high standard for firms seeking to be environmentally sensitive. The privately-held company has created a culture of reducing its impact on the environment through product design and manufacturing, energy usage, and waste management. The case explores the methods by which Patagonia reduces its "carbon footprint" and asks if other firms can follow its lead. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Teaching Objectives and Target Audience

This short and simple case seeks to begin a discussion of the desirability of developing an environmentally friendly approach to business. The case looks at the activities of one company and asks students to think about the possibility of this expanding this approach to other companies. The main objective of the case is to provide a backdrop for further discussions concerning the driving and restraining forces for the greening of global businesses. Students should be able to discuss reasons why firms resist adopting an environmentally friendly company position, in addition to promoting its universal adoption.

The case is best suited for an undergraduate audience. Courses that seem most appropriate for its use include basic management, marketing, international business, and an introduction to business course.

Teaching Approach and Strategy

This case can be used in a number of ways. The case can be assigned for a general class discussion in which the case is distributed for reading outside of class. The case is even short enough to be read in-class if necessary. The case could also be assigned as a group project. Since the case is heavily focused on the expression of opinion, it is not suitable for examination purposes. Evaluation of the analysis should be conducted on the basis of thoughtfulness and the extent of critical thought.

ANALYSIS

The case includes four discussion questions. Those questions and possible answers are provided below.

1. Is green business good business? Explain. Why aren't all companies green businesses?

Most students will feel that green business is good business, at least as it relates to issues of social responsibility. There may also be an argument for the potential of increased profitability generated through savings in energy consumption and recycling. While a case can be made that all companies have a social responsibility to reduce their impact on the environment, the argument that all companies will see financial benefits from doing so isn't necessarily a sound one. In many cases an environmental audit can uncover areas for improvement in environmental impact done with cost savings; however, in some cases the reduction will include additional costs. This is the reason not all companies are aggressively pursuing environmental friendly policies. In other cases, companies may not see the need or benefit of becoming a green company. If consumer awareness increases, this need/benefit may increase. Governmental regulation may also be a driving force of increased environmental action on the part of companies.

2. What is the difference between green marketing and green business?

Green marketing is focused on product design and communication of the "green" benefits of products. Green business is a broader term encompassing a change in the way a company does business throughout their organization.

Students should also present arguments about the impact of customer needs and satisfaction on the successful implementation of "green business" activities. Companies which myopically focus on the "greenness" of their products without consideration of their customer base or other external factors may fail. For instance, Phillips introduced the "Earthlight" in 1994 seeking to promote environmentally friendly light bulbs and reduce energy usage. The product failed miserably; it cost the consumer $15 per bulb compared to $0.75 per bulb for traditional incandescent bulbs and what's more the new bulb didn't fit in traditional lamps. Ottman, Stafford, and Hartman (2007) note that "the environmental positioning of the original EarthLight product appealed only to the deepest green of consumers..... In practice, green appeals aren't likely to attract mainstream consumers unless they also offer a desirable benefit such as cost savings or improved product performance." Phillips, cognizant of their earlier failure, later re-introduced the product with a new name - Marathon - a new design, and a new positioning strategy. The Marathon name was the focus of the marketing campaign emphasizing cost savings over the - much longer - life of the bulb. Ottman, et al (2007) note that "the new value proposition triggered sales growth of 12% in a flat market."

3. Can a corporation be environmentally sensitive and still be responsible to shareholders? Is this easier for a privately held company?

This question, on the surface, is related to the first question in that it explores the impact environmental policies have on financial performance. The question really looks beyond financial performance and addresses the issue of responsiveness to shareholders in a more multidimensional fashion. The viewpoint should be the long-term viability of the firm and this perspective should include issues of sustainability and survivability. As environmental issues become more salient, it is prudent for managers, including financial managers, to become more aware of the organization's impact on the environment and methods of reducing this impact. In the case, Patagonia, a family-owned company does not have to concern itself with shareholders, and in some ways has an easier time in implementing an environmental strategy. However, this should not be an excuse for management of public companies to avoid taking action on environmental issues for the reasons previously mentioned. The case of Nike, below, can be used to support the idea that publicly held companies can, and should, be environmentally responsible as part of their broader corporate responsibilities.

4. Do you think all businesses should follow Patagonia's lead in its environmental practices? Explain.

Since this case is primarily directed at an undergraduate audience, it is probable that many students will agree that all companies should follow, at least to a certain extent, the lead of Patagonia. Patagonia has a somewhat unique customer following and has carved a niche in its industry. Others who follow Patagonia's lead may not be able to duplicate its success. While students may provide dire consequences for inaction on the part of other companies, including the end of animal and/or plant life on earth, it is unlikely that many companies will match Patagonia's approach. The extent of the adoption environmental policies will depend somewhat on the industry, the firm's size, and the financial resources to make the organization greener as well as the level of consumer awareness created by the media and formal education. Patagonia's customers are particularly well educated and mostly well-off financially. From a Maslow' s hierarchy perspective, they can focus on such higher level concerns.

Nike is an excellent example of a company that has seemed to follow in Patagonia's footsteps by conducting business in a green manner and not just doing green marketing. Nike, states in its' 2005 and 2006 Corporate Responsibility Report "being half green, or somewhat responsible, is not good enough." Nike set several key environmental targets to be achieved by their fiscal year 2011: "I) all Nike footwear will meet or exceed standard set in their sustainability index, 2) all Nike brand facilities and business travel will be climate neutral, 3) seventeen percent reduction in footwear waste, and 4) thirty percent reduction in packaging and point of purchase waste." (Nike FY05-06 Corporate Responsibility Report) Nike's CEO, Mark Parker, notes that "today, corporate responsibility no longer exists on the periphery as a check on our business, but is assuming its rightful role as a source of innovation within our business." Clearly, Mr. Parker views green business, as a part of corporate responsibility, as being good business.

Indeed Patagonia serves as a model for eco-friendly business practices. Students should be encouraged to identify other environmentally friendly business practices that they have personally seen. For instance, IKEA no longer provides free plastic bags for consumers to take home their purchases. Customers may purchase a large reusable bag for $0.59 or simply load their purchases into their car (Environmental Leader, 2007). IKEA projects that the number of plastic bags used by their US customers will be reduced by at least 50% from 70 million to 35 million in the first year. Students will also be likely to identify fast food companies such as McDonalds who in 1991 switched to more environmentally friendly packaging from the Styrofoam that was previously used (Cummings, 1991). It should be noted that the switch to paper was driven by a letter writing campaign organized by environmental activists and teachers. They may also mention initiatives such as Starbucks' practice of reducing the price of a cup of coffee by 10 cents if the customer brings their own cup, thereby reducing cardboard in landfills (Starbucks, 2007).

Subject: Clothing industry; Case studies; Environmental impact; Green marketing; Carbon offsets

Location: United States--US

Company / organization: Name: Patagonia Inc; NAICS: 448140, 454111

Classification: 7000: Marketing; 1540: Pollution control; 9130: Experimental/theoretical; 8620: Textile & apparel industries; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 8

Source details: INSTRUCTORS' EDITION

Pages: 113-117

Number of pages: 5

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216285751

Document URL: http://search.proquest.com/docview/216285751?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 12 of 100

CAPE CHEMICAL: CASH MANAGEMENT

Author: Kunz, David; Dow, Benjamin L

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Abstract:

Cape Chemical is a regional distributor of liquid and dry chemicals. Growth has been steady since its beginning, but cash to pay employees and vendors in a timely manner has frequently been a problem. While the company ended its last year with a healthy cash balance, there were many occasions during the year that it was necessary to delay vendor payments or obtain short-term bank loans in order to keep the company operating. On one occasion when a major vendor threatened to stop shipments until all outstanding balances were current and the bank credit was fully used, company credit cards were used to obtain $20,000 to pay (satisfy) the vendor. In an effort to resolve the cash problems, the company has developed a projected income statement, balance sheet and cashflow statement for the next year of operation. Cape Chemical's bank officer suggested the company prepare a monthly cash budget as another cash management tool and as an additional test of the adequacy of the current $200,000 line of credit. [PUBLICATION ABSTRACT]

Full text:

CAPE CHEMICAL BACKGROUND

Cape Chemical is a relatively new, regional distributor of liquid and dry chemicals, headquartered in Cape Girardeau, Missouri. The company, founded by Ann Stewart, has been serving southeast Missouri, southern Illinois, northeast Arkansas, western Kentucky and northwest Tennessee for three years and has developed a reputation as a reliable supplier of industrial chemicals. Stewart's previous business experience provided her with a solid understanding of the chemical industry and the distribution process. As a general manager for a chemical manufacturer Stewart had Profit & Loss (P&L) responsibility, but until beginning Cape Chemical she had limited exposure to company accounting and finance decisions.

To improve management of the accounting and finance area, Stewart hired Kathy Ford, an accountant who had worked with the accounting firm that conducted Cape's first audit. Ford was hired near end of the second year of operation.

CHEMICAL DISTRIBUTION

A chemical distributor is a wholesaler. Operations may vary but a typical distributor purchases chemicals in large quantities (bulk - rail or truckloads) from a number of manufacturers. Bulk chemicals are stored in "tank farms", a number of tanks located in an area surrounded by dikes. Tanks can receive and ship materials from all modes of transportation. Packaged chemicals are stored in a warehouse. Other distributor activities include blending, repackaging, and shipping in smaller quantities (less than truckload, tote tanks, 55-gallon drums, and other smaller package sizes) to meet the needs of a variety of industrial users. In addition to the tank farm and warehouse, a distributor needs access to specialized delivery equipment (specialized truck transports, and tank rail cars) to meet the handling requirements of different chemicals. A distributor adds value by supplying its customers with the chemicals they need, in the quantities they desire, when they need them. This requires maintaining a sizable inventory and operating efficiently. Distributors usually operate on very small profit margins.

THE SITUATION

While the company ended its last year with a healthy cash balance, there were many occasions during the year that it was necessary to delay vendor payments or obtain short-term bank loans in order to keep the company operating. On one occasion when a major vendor threatened to stop shipments until all outstanding balances where current and the bank credit was fully used, Ann Stewart used her company credit cards to obtain $20,000 to pay (satisfy) the vendor.

During the first three years of operations, the company operated with a sales forecast and a few operating budgets but a complete set of pro forma statements were not prepared. In an effort to resolve the cash problems, Stewart, with the help of Ford, developed a projected income statement, balance sheet and cash flow statement for the next year of operation (tables one, two and three).

Ford thought the statements indicated the company's cash problems were solved. "Look Ann, if our forecasts are correct, and our forecast should be accurate, since our assumptions were based on historical data and current market conditions, we are in a very good financial position. We begin the year with a cash balance of $226,350 and our projections indicate an ending cash balance of $85,645, well above our target of a minimum balance of $20,000. The income statement projects our highest profit ever and while our ending cash balance is lower than our beginning cash balance, we will not have used any of the $200,000 bank line of credit. Our cash problems should be history." Stewart agreed the projected performance looks good, but she was still not ready to agree that cash problems were history.

When Stewart and Ford were reviewing the projections with Cape Chemical's bank officer, he suggested the company prepare a monthly cash budget as another cash management tool and as an additional test of the adequacy of the current $200,000 line of credit. Stewart liked the idea.

Later when Stewart and Ford discussed preparing a cash budget, Stewart indicated she had no experience in preparing or using a cash budget. Ford stated that she also had limited experience preparing and using a monthly cash budget but she thought it was similar to preparing forecasted financial statements. The big difference is that monthly rather than annual projections would be needed. The Ford stated the first step would be to prepare a list of monthly operating assumptions.

ASSUMPTIONS

The assumptions used to develop the pro forma financial statements were used by Stewart and Ford as a starting point. Historical information and current market conditions were also used in developing the cash budget assumptions.

1. A minimum $20,000 cash balance will be maintained.

2. The company has negotiated a $200,000 line of credit for short-term cash needs.

Cash Inflows

3. Ford stated that the primary cash inflow will be the collection of accounts receivables. Projected revenue for the year is $6,000,000 and monthly sales forecasts were provided by the marketing department.

4. Ford indicated that last year receivables were collected as follows:

Ford thought the new credit policy implemented by the new credit manager should allow an acceleration of collections in the coming year. The projected collection schedule for 2007 is:

Stewart suggested they use the 2007 collection assumptions for the cash budget. For example, 25% of January sales will be collected in January, 60% of January sales will be collected in February and 15% of January sales will be collected in March. Note: 15% of 2006 November sales and 60% of 2006 December sales will be collected in January and 15% of December 2006 sales will be collected during February. Ford stated there would a small amount of bad debts in 2007 but for planning purposes these would be ignored.

Cash Outflows

5. The purchase of inventory represents the largest cash outflow. Inventory is typically purchased two months prior to expected sales and is paid in the month of purchase. Example, inventory for January sales would be purchased in November and paid for in November. Inventory for February sales would be purchased and paid for in December, etc. Cost of Goods Sold in 2007 were 76% of sales, assume that 2008 cost of goods sold will also be 76% of sales.

6. Annual plant operating expenses were projected to total $688,500. Ford suggested that these expenses be distributed equally over the twelve months. She stated that in some cases this was probably an over simplification but a reasonable assumption. Stewart agreed. Example: One twelfth, or $4,375, of the annual manager salary and benefits of $52,500 will be distributed monthly.

7. Selling Expenses were projected at $301,500 for the year. Ford stated that most could be spread evenly over the twelve months. The exceptions would be Commissions and Promotion and Advertising. Commissions are paid in the month following the end of a quarter and will be allocated based on sales for the previous quarter. Example: ($30,000* first quarter sales/annual sales). The accounts payable on the 2006 year end balance sheet represents the fourth quarter 2006 commissions that will be paid in January of 2007. One fourth of the annual promotion and advertising expense will be spent during the first month of each quarter.

8. Annual general administrative expenses will be treated the same as plant operating expenses. These expenses will be distributed equally over the twelve months.

9. Annual interest expense is forecasted to total $90,000 and interest payments are made in the third month of each quarter. Again for simplicity purposes, Ford suggested the $90,000 be spread evenly over the four quarters.

10. Capital expenditures for the year include a $40,000 expansion to the warehouse and $20,000 for new drum filling equipment. The warehouse expansion is scheduled for April and the equipment acquisition for June. Assume the expenditures are paid for in the month of their installation. The depreciation expense associated with the projects is included in $180,000 projected for the year.

11. Income taxes are expected to total $34,740 and payments are made quarterly with the first payment of 2007 taxes to be made in April. The $34,740 will be spread evenly over the four quarters. The taxes payable on the year end 2006 balance sheet will be paid in January of 2007.

THE TASK

Prepare answers to the following questions:

1. Construct a monthly cash budget for Cape Chemical for the period January through December 2007. Assume that all cash flows occur on the 15th of each month. Is the current $200,000 line of credit sufficient to meet the needs of Cape Chemical during the year? Explain your answer.

2. The cash budget contains both cash inflows and cash outflows. Which do you feel are likely to be the most accurate? Explain your answer.

3. Stewart thought it would be beneficial to prepare an additional cash budget based on the 2006 collection schedule (a less optimistic assumption).

Will the $200,000 revolving credit agreement be sufficient? Explain your answer.

Note: Assume $39,000 of November and $195,600 of December revenue will be collected in January. Assume $48,900 of December revenues will be collected in February.

4. Why is depreciation expense not part of the cash budget?

5. The monthly cash budget prepared assumes that all cash flows occur on the 15th of each month. Suppose most of Cape Chemical's outflows are at the beginning of the month, while its collections are toward the end of each month. How would this fact alter the cash budget?

6. Temporary excess cash can be invested in marketable securities. What are the characteristics of marketable securities? If excess cash is projected to be continuing rather than temporary, are marketable securities the appropriate investment? Explain your answer.

7. Once again assume all cash flows occur on the 15th of each month. How large of a line of credit would you recommend Stewart and Ford arrange with the bank? Defend your answer.

8. Suppose the bank refused to grant a larger line of credit what options are available to the company?

Subject: Case studies; Cash management; Chemical products; Cash budgets; Cash flow

Location: United States--US

Company / organization: Name: Cape Chemical; NAICS: 424690

Classification: 8640: Chemical industry; 3100: Capital & debt management; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 7

Pages: 79-89

Number of pages: 11

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216299338

Document URL: http://search.proquest.com/docview/216299338?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 13 of 100

ARCTIC FREEZER PLANT

Author: Pesch, Michael J; Ahmad, Sohel; Nebosis, Timothy

ProQuest document link

Abstract:

The primary subject matter of this case concerns managing diversity issues in the workplace and the application of total quality management principles. Specifically, an appliance manufacturer is experiencing challenges involving Somali refugees who comprise a significant percentage of the plant's available labor pool. These challenges include quality and productivity problems caused by the Somali workers' lack of English skills and adherence to cultural and religious customs, as well as by the plant's own poor preparation to manage this group of employees. Imagine the challenge of being a manufacturing plant manager of a major employer in the community, faced with the need to satisfy rigorous customer requirements in the areas of quality, price, and delivery. You must fulfill these requirements with a local labor pool that has a limited supply of applicants and recently has become populated by refugee immigrants who speak little or no English.

Full text:

INSTRUCTORS' NOTES

Research Methods

This case is based on a real company, though officials at the company prefer that the real name of the company not be used in the case. Therefore, in the writing of this case, the company's name and several other descriptive characteristics have been disguised to protect the company and the individuals involved. Except for these company-identify ing characteristics, the facts relating to refugee immigration in Minnesota, the competitive environment of the appliance manufacturing industry, and the issues concerning the experience with hiring Somali refugees for the third shift are real. The authors collected data from contacts within the company, local leaders in the Somali community and social service agencies, newspaper articles, and public presentations by company officials.

Learning Objectives

To understand the complexities of managing workers from diverse backgrounds while staying focused on achieving the strategic objectives of the company.

1. To explore ways in which companies can be more effective in hiring and training workers from diverse backgrounds.

2. To utilize quality management tools to identify root problems that hinder the achievement of plant performance goals.

3. To examine the role of a company in a community context.

4. To better understand how multicultural issues must be carefully evaluated in deciding to transplant manufacturing operations to foreign countries.

Links to Theoretical Frameworks

There are several opportunities to incorporate total quality management ideas into the case discussion. These include discussing how quality improvement efforts pay off in terms of preventing internal failure costs (rework, scrap, and downtime) and external failure costs (unhappy customers, warranty costs, and cancelled orders). A discussion of the "Plan-Do-Check-Act" framework for quality improvement and the "Seven Tools for Quality Improvement" can also be applied to this case. For example, a cause and effect diagram can be used to help the class trace quality problems that the plant is currently experiencing (see below).

The case is rich with potential to discuss multiculturalism in the workplace. Key discussions can address questions such as: (a) Is it enough to hire trainers and consultants to conduct surveys and to deliver diversity training sessions to employees? (b) How can the culture of a company be changed to create an environment that is naturally self-sustaining in terms of being inviting to all employees? (c) Are the management challenges presented in the case rooted in a poorly-qualified Somali labor pool or management's failure to recognize that old approaches to new problems may not suffice, especially since Somalis are only one of many immigrant groups that have arrived and will continue to arrive in communities throughout the United States?

SUGGESTIONS FOR EFFECTIVELY TEACHING THE case

A significant problem with case discussions is that students often arrive to class not having read the case. The Arctic Freezer case is short enough that it can be read in class in about 15 minutes. Another approach is to give the students a written assignment that is due on the day the case is discussed. Either of these approaches would improve the class discussion.

Small group discussions are always a good way to get everyone to engage in the case discussion. One person in each group takes notes during the small group discussion. In the general class discussion, each group takes a turn by contributing one idea from its list. After each group has taken a turn, the process is repeated until all groups have exhausted their lists.

A human resource manager and an operations manager from a local company could be invited to class to give their perspectives on the case and discuss how their companies have dealt with diversity issues. The testimony of these credible "real world" individuals can help students appreciate better the issues of multiculturalism and corporate responsibility that the case raises versus having a professor "preach" to them on these topics.

Note on Legal Issues Pertaining to the case

While this case is not intended to be a business law case, the issues in the case do raise questions on the legal obligations of the employer to accommodate religious beliefs. On the subjects of religious discrimination and religious accommodation, an article by Anderson and Campbell (1), states:

... (E)mployers remain free to establish nondi s criminatory rules against conduct, such as religious proselytizing, that could be disruptive to the smooth operations of the workplace. Not only do American employers have a duty not to allow religious discrimination or harassment but they also face a legal obligation to accommodate the religious beliefs and practices of their employees. However, that obligation is not absolute or open-ended.

Anderson and Campbell compare religious accommodations to accommodations required of employers by the American with Disabilities Act (ADA). According to the authors, for both religious beliefs and disabilities the laws similarly state that employers must make "reasonable accommodations" that do not cause "undue hardship" to the employer. But the way "undue hardship" is interpreted is different:

According to the ADA, the "term 'undue hardship' means an action requiring significant difficulty or expense when considered in light of factors" such as the overall financial resources of the employer. In the context of accommodating an employee's religious beliefs and practices, however, the courts have given the phrase a significantly different meaning. Many types and levels of burden can constitute an undue hardship in the religious accommodation setting. Something that imposes more than a minimal cost on an employer is an undue hardship. A cost can be economic, such as lost business, or the cost of paying additional workers (or overtime to current employees). A cost can also be non-economic, such as compromising a neutral scheduling or job-assignment system (which would adversely affect other employees), impairing customer service or customer relations, compromising the integrity of a manufacturing process, or compromising the safety of the employee in question or other employees.

The insights provided by Anderson and Campbell demonstrate that, unlike ADA decision settings, employers have a great deal more latitude to decide how to handle requests for religious accommodations. Therefore, both the students and the instructor should understand that deciding what to do in the Artic Freezer case is not driven primarily by legal requirements.

ASSIGNMENT QUESTIONS, ANALYSIS, AND ANSWERS

1. What cultural and religious issues mentioned in the case impact the plant in terms of safety, productivity, recruitment, quality, delivery, and employee morale? Discuss the degree and nature of the impact.

This is a good "discussion starter." It gets the students to think of specific examples of how cultural characteristics in the Somali employees present special challenges to management. Examples of these include:

(a) Safety Issues: Loose clothing and long hair can become entangled in machinery. Water on the bathroom floor from washing creates a slippery floor. Illiteracy or lack of English skills can lead to a failure by Somalis to understand safety rules.

(b) Productivity Issues: Differences in work habits, lack of factory work experience, language problems in understanding the instructions from experienced workers, failure to take orders from female supervisors, and attempting to pray during the work shift can all negatively affect productivity.

(c) Recruitment Issues : Language problems can make it hard for recruiters to understand worker qualifications and skills. Translators are hard to find and incur additional interviewing costs. Social service agencies are critical to identifying and aiding recruitment of Somali applicants.

(d) Quality and Delivery Issues: In the case of the Somali workers, the effects of language barriers, lack of experience, and adherence to religious and cultural customs create a more complicated situation for achieving the plant's quality and delivery goals.

(e) Employee Morale Issues: Plant management faces the challenge of addressing the special situation posed by the Somali workers while treating all employees fairly. More problems can be created if the non-Somali workers perceive that management has given special concessions to the Somali workers, such as extra breaks for prayer. Management also needs to strive to stay positive in their interactions with the Somali workers so they will feel supported and want to improve their performance.

2. Discuss this case from a Total Quality Management (TQM) perspective. How can spending more on "prevention" activities such as training, workplace redesign, and language training reduce the total costs of quality in the Arctic plant?

The late W. Edwards Deming, a quality guru par excellence, famously blamed management for 85% of the quality problems in the organization. Adopting Deming's perspective, a TQM approach to the Arctic case starts and ends with making management responsible for organizational performance.

TQM identifies four categories of quality-related costs in the workplace:

1. Prevention costs are incurred for activities that prevent bad quality, including training, process design, preventive maintenance, and supplier certification.

2. Appraisal costs are incurred for activities that monitor quality, including inspection, testing, and quality audits.

3. Internal failure costs are incurred when defects are discovered and addressed before it reaches the final customer. Internal failure costs include scrap, rework, and lost production.

4. External failure costs are incurred when defective goods and services are discovered after they are received by the final customer. These include the costs of warranty, replacement, lost goodwill, and lost future business.

The TQM philosophy says that in a traditional organization that attempts to save money on training, maintenance, and investment in capable equipment, and relies heavily on inspection as the main way to prevent defects from reaching the end customer, external failure costs typically represents the largest percentage of total quality costs. By practicing a defect prevention approach, a TQM organization invests more in prevention activities and dramatically cuts the much large costs of internal and external failure costs, thereby reducing total quality costs in the organization.

A TQM approach can be used as a guide for what might be done in the Arctic case. For example, the less-prepared Somali employees incur significantly higher rates of internal failure costs of scrap, rework, and reduced productivity compared to traditional new employees. External failure costs include the impact on relations with Sears and other major wholesale customers when orders are delivered late and higher warranty costs if shipped products turn out to be defective.

Students should be encouraged to discuss how specific prevention measures might reduce the two types of failure costs Arctic is now experiencing. The benefits of additional investments in prevention activities have significant long-term benefit if employing Somalis results in acquiring loyal and (eventually) experienced employees. After all, manufacturing jobs are some of the best paying jobs available for refugee immigrants. Social benefits also accrue to the company when it can show how it has contributed to the community effort to welcome and assist the new immigrant arrivals in becoming independent and self-sufficient.

By using Total Quality Management (TQM) principles that emphasize prevention of poor quality, the case discussion can include how Arctic's management could develop a set of critical skills and qualifications that all workers must possess. For example, it is important that all workers respect and fulfill the work-related requests of managers and supervisors, regardless of gender. Perhaps the interview process for all job applicants can include a few questions that test for a gender-neutral orientation in the worker-supervisor relationship. In another example, perhaps Arctic management could work with interpreters to develop simple tests of literacy and/or the ability to learn and follow directions. These measures are prevention-oriented and would help avoid the costlier consequences of poor quality that currently threaten Arctic.

3. Using a fishbone (cause-and-effect) diagram, explain the factors that are contributing to late deliveries.

This question helps the class to understand the use of the fishbone diagram for determining the source of poor organizational performance. It is important to note that the causes for some late deliveries may not have anything to do with the new Somali workers. Here is a sample fishbone diagram that might be generated in a class discussion on the causes of late deliveries:

4. What should J im do? Given the circumstances, is three weeks enough time for the third shift to meet Jim's expectations for productivity improvements? Are the workers primarily responsible for the third shift's struggles? Suggest some short-term and long-term plans to address the issues raised, taking into account both the internal (organizational) and external (environmental) factors.

Jim faces a common problem to all managers: how to balance what's good for the plant in the short-term and what's good for the plant in the long-term. Jim worries that in the short-term the Somali workers are harming the plant's quality, delivery, and productivity performance, as well as the plant's relations with its customers. He also knows that in the long term, investing time and money in the newly hired Somali employees will likely pay off in securing a group of loyal and productive employees that will allow the plant to meet its performance goals.

In conducting the class discussion, the instructor should elicit from the class the ways in which the plant was not prepared for this new pool of Somali job applicants. Recruitment, screening, training, supervising, and general cultural awareness fell far short in providing the best chance of achieving success with the Somali hires. The case discussion should focus on:

(a) Improving the plant's relationships with the social service agencies that refer Somali job applicants to the plant.

(b) Finding ways to break through the communication barriers (hire more translators, conduct in-house English language classes, translate plant signs into Somali, etc.).

(c) Implementing a more sophisticated and rigorous training program.

(d) Assigning more supervisors and experienced workers to work alongside the Somalis.

(e) Bringing in an outside consultant to conduct management training sessions on Somali culture.

EPILOGUE

The third shift on the upright line was cancelled in late September, three weeks after it began. The reasons given were the poor productivity and delivery performance that showed little improvement over the time the third shift was in operation. After canceling the third shift, plant management added two extra hours of overtime to each of the first and second shifts on the upright line to absorb some of the product demand. Other orders were delayed or cancelled.

A new third shift upright line was launched the following February. This time, the third- shift workforce met the normal 3-week "ramp-up" timeline for new lines to meet plant performance standards. Recognizing the problems from their past experience, plant management implemented some new training and supervisory procedures, including:

1. Special work station simulations were constructed in the training center so newly hired workers could be trained in certain tasks prior to working on the real assembly line.

2. New hires were partnered with workers on the first or second shifts and were required to work 3-4 days under this arrangement, compared to the previous approach that allowed new workers to work as little as a single day with an experienced partner.

3. Plant management identified critical task "cells" that were comprised of one or more work stations on the upright assembly line that performed a major assembly function such as door assembly or compressor installation. The workers within these task cells were organized into teams, with a lead person assigned to provide oversight. The lead person was responsible for assigning employee breaks, getting more parts delivered to the work stations, and providing other support activities. Management hoped that these teams would help the line run with fewer delays and improved quality performance.

4. Three additional supervisors were reassigned from the first and second shifts to work on the third shift line during the start-up time, along with the two supervisors who were already assigned to the third shift.

5. Standard work instructions were translated into the Somali language.

Although all five measures were implemented, the first two measures (training on mock work stations and partnering with experienced workers for longer periods) proved to be the biggest contributors to the success of the second launching of the third line. Another likely contributing factor to the success of the second launch was a learning curve effect that carried over from the first launching, since about 90% of the 82 Somalis that were hired for the second launch were also part of the first launch.

Receiving special emphasis in the simulation and other training activities were the following critical operations :

1. Soldering. There were seven solder jobs on the line.

2. Leak Checking. Two operators use a complicated piece of equipment to make a critical go/no go quality check.

3. High Potential Test. One operator completes a test of the electrical system to check for proper grounding and good connections.

4. Final Inspection. This person checks for the right model number, correct literature, all included features are present, and that the unit is clean.

The analysis of the freezer line to identify these four operations that were deemed "critical" can be related to the "Seven Tools for Quality Improvement" that uses simple charts and data collection techniques (check sheets, fishbone diagrams, etc.) to identify the "significant few" operations that contribute to most of the quality and productivity problems. Pareto Analysis indicates that out of 130 workers on the third shift, only 11 are involved with "critical" operations. By focusing on these 11 "critical" work assignments to ensure proper training, tools, and techniques, the plant can avoid a large majority of quality and productivity problems.

Figure TNl shows schedule attainment performance for the second launch period for the third shift only and for the combined first and second shift. The third shift achieves almost 85 percent of its schedule goals in the first week of operation (Week 6) and comes close to matching the performance of the first and second shift by Weeks 9 and 10.

Figure TN2 shows productivity for all shifts on the upright line. Separate third shift productivity figures were not available from plant management. However, the third shift was launched in Week 6 and did not appear to affect overall line productivity, according to the chart. In Weeks 9 and 10, overall productivity of the line increases by one-half unit per labor hour.

While there is a relationship between schedule attainment and productivity, these performance measures are calculated separately and do not perfectly correlate. Schedule attainment reflects the number of units built versus the weekly production goal, both of which can vary. Productivity is the ratio of total labor hours to units produced. Since the third shift was phased in over the first three weeks, and did not utilize all 130 workers until the fourth week, this would largely explain why the shift would perform less well on schedule attainment (units produced) in the first three weeks, but still maintain high levels of productivity, since the units that were produced were produced by less than the full complement of workers.

Subject: Workplace diversity; Appliance industry; Productivity; Quality of service; Case studies

Location: Somalia

Classification: 9177: Africa; 9110: Company specific; 5320: Quality control; 2400: Public relations; 8650: Electrical & electronics industries; 6100: Human resource planning

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 6

Source details: INSTRUCTORS' EDITION

Pages: 1-11

Number of pages: 11

Publication year: 2008

Publication date: 2008

Year: 2008

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: Diagrams Graphs

ProQuest document ID: 216299778

Document URL: http://search.proquest.com/docview/216299778?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 14 of 100

MAGINET.COM: COMPETITION IN e-ENTERTAINMENT SERVICES

Author: Park, Seungwook; Modarres, Mohsen; Lee, Kookchul

ProQuest document link

Abstract:

MagiNet was launched in 1995 as an entrepreneurial subsidiary of Pacific Pay Video Co. The mission of MagiNet was to provide e-entertainment services in the Asia Pacific market. Soon after its establishment the company realized rapid growth and became a leading service provider of movie-on-demand, Internet television and information services to luxury hotels in Asia Pacific region. By 2002 MagiNet became leader in e-entertainment service and expanded both domestically and internationally. However, the strategic audit for the year ending 2003 indicated a gradual decline in total sales and a simultaneous increase in operating costs. The decline in the company's performance created a dilemma for Kevin Lee the CEO of the company. After much thought and consulting views, Lee decided that the implementation of drastic reorganization and changes in the strategic orientation of the company may be the only viable alternatives to improve the financial performance and long term survival of the company.

Full text:

INSTRUCTORS' NOTES

Teaching Objectives

MagiNet case can expose students to the following key concepts

* Examine the MagiNet's competitive advantage in the e-entertainment services.

* Evaluate which international (foreign) markets are most attractive for MagiNet.

* Discuss whether international expansion if a good growth strategy for MagiNet at this time.

* Assess whether MagiNet's core competence can be transferred to international markets.

* Assess the opportunities for MagiNet to transfer its core capabilities in related industries.

INFORMATION AVAILABLE IN CASE

External Environment

* Industry

* Information on hotel industry and tourism (Exhibits, 1, 2, & 3).

* General

* Country information (Exhibit 2).

Internal Environment

* General

* Functional strength and factors affecting MagiNet entering international market.

Performance

* Consolidated Income Statement (Exhibit 4).

* Consolidated Balance Sheet (Exhibit 5).

QUESTIONS TO GUIDE THE DISCUSSION

1. What factors should MagiNet consider for success in international growth strategy?

2. What is the source of MagiNet's competitive advantage?

3. What alternatives are available to MagiNet as company expands internationally.

CASE ANALYSIS

ENVIRONMENTAL ANALYSIS

A. General External Environment

1. What factors should MagiNet consider for success in international horizontal growth strategy?

1. Economic

The economic development for each country varies. However, MagiNet possesses the core capabilities which provide the company a competitive position in foreign markets. The global economic condition has a significant impact on tourism markets. For example, global terrorism could affect the tourism/hospitality industry; past events demonstrate the devastating repercussions of politically driven bombings.

2. Technological

Connectivity options in wireless devices are becoming popular and affordable. Most personal computers have the capability to integrate cell phones and PDA's. MagiNet' s hotel networks enable business travelers to use apaperless system of communication which makes MagiNet a more desirable service. MagiNet should consider changes in internet technology and connectivity options increase upgrade and switching costs. Moreover, technological changes require costly hardware upgrades.

3. Political-Legal

Governments in Asia-Pacific markets welcome investments and technological developments. MagiNet' s technology and services is part of economic growth in the region. Emerging economies in Asia-Pacific region are implementing fundamental changes in economic and political reforms that will eventually contribute to their growth in tourism industries. However, growing cyber terrorismhas pressured governmental bodies to impose strict regulations information technology and internet access.

4. Socio cultural

An important socio-cultural trend is the use of personal computers by business and leisure travelers. This creates significant opportunities for services provided by MagiNet.

B. Task Environment: Industry Analysis: Porter's Forces

1. Threat of new entrants

High initial costs and investment in both information technology and licensing agreements make the threat of new entrants moderate at best. The market tends to be saturated by the two major industry firms Rootnets Company and MagiNet. Rapid changes in Internet support technologies and new software requirements inhibit other competitors to enter the market.

2. Rivalry among existing firms

Rootnets Company is the largest major competitor to MagiNet in Asia-Pacific market. Both companies heavily rely on the tourism market. MagiNet's primary target customers are five-star hotels in Korea and other Pacific Rim countries. In 2000, Rootnets Company Gain a larger share of the market by offering a PC-based Internet service called Tourism & Business Information System (TBIS) which enabled the company to offer hotel guests all the conveniences of prior systems plus high-speed access to the internet. Rootnet also offered an on-line duty-free shop where hotel guests can purchase items without tariff and pick-up purchased items at the airport upon their departure.

3. Threat of substitutes

Substitutes tend to be information systems include Xbox or other gaming systems, in-house pay-per-view movies, wireless (WI-FI) internet access/connection, cell phone access business centers and other technological in-house conveniences individual corporations/hotels can offer guest at a fraction of the cost.

4. Bargaining power of buyers

The producers in the market are few. Buyers can select a producer and invest in technology required to deliver the services. Prior to selection the bargaining power of the buyer is high. However, after the selection of the producer high costs of technology specific to one producer, makes the switching costs high.

5. Bargaining power of suppliers

Suppliers have rather low bargaining power over MagiNet. The hardware can be outsourced with low cost manufacturer. However, software development is more expensive and requires high skill levels. Furthermore, discontinuous changes in Internet support technologies and software allow suppliers to charge high prices.

INTERNAL ANALYSIS

A. BUSINESS AND CORPORATE STRATEGIES

2. What is the source of MagiNet's competitive advantage?

a. Business Level

MagiNet realized that with differentiation strategy in e-entertainment services the unique attributes and characteristics of its products and services will provide value to its customers.

b. Corporate Level

MagiNet's corporate strategy is focused on multi-domestic strategy in product development and market expansion.

B. CORE COMPETENCIES: TANGIBLE RESOURCES

1. Marketing

MagiNet created commercial advertisements with an emphasis on travelers and business people with high purchasing power. MagiNet marketing strategy also supports global issues pertaining to the environment, medicine, relief aid and universal peace. This has promoted the company as a socially responsible company.

2. Finance

In 2002, MagiNet Company reported 78% of the market share in e-entertainment services with $6.62 million of sales. Corporate revenues for fiscal 2001 reached $4.5 billion with net income from operations totaling $926 million. The consolidated balance sheet and income statement provid information for a complete ratio analysis.

3. Research & Development

The company dedicated $ 1,000,000 to research and development in order for the firm to create its own hardware technology. MagiNet's commitment to R&D received recognition, in particular, in interactive Internet set-top box, a superior technological creation in the Korean market.

4. Human Resource Management

The company culture of teamwork emphasized strong values and ethics. MagiNet has expanded its size by employing more personnel domestically and internationally. Top managers were able to respond to environmental opportunities and threats in a timely fashion due to the established notion of teamwork throughout the company

5. Organizational Structure and Culture

The MagiNet.Com Company has a functional structure. However, the top managers of the company have arranged its structure to facilitate cross-functional management and teamwork within functions. Decision-making includes the input of all managers and technical staff. Each function works well with the other to best benefit the company. MagiNet used an open-book system, exposing its financial records to its employees. The open-book system encouraged employees to find ways to cut costs for the company as well as increase the harmony between employees and top management.

C. FUNCTIONAL CAPABILITIES: VALUE CHAIN

1. Operations

MagiNet was a first mover in Internet services and e-entertainment to nearly 500 luxury hotels in Asia Pacific. The operational efficiency enabled the company to bundled together a wide selection of products at a single price. This was an operational success as the company captured nearly 90% of five-star hotels in Seoul purchased MagiNet products and services. MagiNet's wide array of services consisted of: Interactive Video Service (IVS), which delivered movies to guests in luxury hotels on a demand basis 24 hours a day, as well as movie previews, advertisements and informational videos MagiNet's ability to combine movie on-demand, web, and TV services, as well as the creation of extensive databases enabled the firm to effectively manage customer relationships and create significant market campaigns

2. Information System

MagiNet established an effective network of information system to gather data from multiple markets. The information systems also enabled the company to market and explain their products and services to customers.

III. STRATEGY FORMULATION AND IMPLEMENTATION

3: What alternatives are available to MagiNet as company expands internationally. Global strategy? Or multi-domestic strategy? Application of MagiNet services in other related industries.

Maginet may have greater success in horizontal international growth strategy. The implementation of horizontal growth strategy requires MagiNet transform from a multinational corporation to a global company. The globalization strategy can create economies of scale at global level and reduce the cost of operations. The trade off for global strategy would be less of sensitivity to multinational perspective and understanding of the socio-cultural factors in each of the countries in the region MagiNet operates. The multidomestic strategy requires the company to be more sensitive to customer preferences in each of the countries it operates. For multi-domestic strategy MagiNet may have to implement a push marketing strategy by developing a program called "Feel at Home." This program should be developed to service customers in every country that MagiNet plans to offer its product. MagiNet should do extensive research on each country's most popular TV Programs and websites. The company should also create exclusive licensing contracts with TV programs and movies distributors in each country. By doing so MagiNet can develop its product to service specific country the company plans to enter. Travelers from other countries may be interested in services offered by MagiNet as they can access news, TV programs, and sports from their country as they stay in hotels. Luxury hotels can attaract business travelers and leisure travelers as hotels offer "feeling at home" programs. MagiNet should also persist with the corporate strategy of differentiation and maintaining low cost by outsourcing the manufacturing of the hardware technology.

Subject: Video industry; Video on demand; Financial performance; Corporate reorganization; Strategic planning; Case studies

Location: Asia

Company: MagiNet Corp

Classification: 9179: Asia & the Pacific; 9110: Company specific; 2310: Planning; 8307: Arts, entertainment & recreation

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 6

Source details: INSTRUCTORS' EDITION

Pages: 13-19

Number of pages: 7

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216283032

Document URL: http://search.proquest.com/docview/216283032?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 15 of 100

BIO-DIESEL PLANT LOCATION DECISION

Author: Metlen, Scott; Haines, Doug; McAlexander, Amanda

ProQuest document link

Abstract:

This case addresses biodiesel production plant location considerations. Bruce Nave had been using biodiesel in his own construction operation for over a year. With the advent of petroleum oil prices breaking seventy dollars per barrel, he saw an opportunity to start producing biodiesel on a commercial scale. Bruce knew that the success of his planned enterprise would depend in part on location, as each location would have different start up cost, cost of living, local laws, cost of doing business, availability and cost of inputs, and cost of shipping raw materials and finished product. Differences in these costs could quickly erode the slim contribution margins that commodity items generate. The case ends with Bruce wondering where he should locate his biodiesel production facility. The purpose of this case is to provide a decision scenario to students that will be managing supply chains, logistic functions of a firm, and/or are otherwise involved in strategic decisions relative to location of capacity.

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

With petroleum based diesel continuing to erode profits, Bruce Nave, president of Western Industrial Resources Corporation (WIRC), started using biodiesel in 2005 to help fuel the company's diesel engines. These engines provided power to 65 trucks and an assortment of welders, compressors, and earth moving equipment. Based on the successful use of biodiesel and the rising cost of petroleum diesel, he decided that producing biodiesel on a commercial scale was a viable business. Bruce decided to start a commercial bio-diesel operation named Wi BioFuels, Inc. Once Bruce made the decision to construct a bio-diesel production facility he had to decide where to locate that facility.

Location decisions significantly affect the profit margins and eventual success of a firm due to many variables. These variables may include availability and proximity of raw materials, appropriate labor, regulations and tax structure, proximity of customers, governmental incentives, proximity of competition, quality of life, proximity to information, cost and availability of utilities, real estate costs and availability, and construction costs (Stevenson, 2007).

Presented in the case that accompanies this teaching note is information that enables students to mimic the location decision making process that Bruce performed to make his decision. The case ends with Bruce wondering where he should locate the bio-diesel plant.

The purpose of this case is to facilitate discussion of location decisions and the impact that such decisions can have on firm profitability. Following are teaching objectives this case was designed to fulfill.

* To provide a situation that demonstrates the intractable nature of location decisions

* To provide information such that students can delineate significant factors that shape location decisions

* To provide the opportunity for students to model cost parameters of location factors to determine a quantitative location solution.

* To provide the opportunity to incorporate qualitative factors with the quantitative solution to determine the final location solution

Following are the corresponding learning objectives that students should be able to demonstrate.

* Explain and/or demonstrate the intractable nature of location decisions

* Delineate significant factors of a location scenario

* Analyze the quantitative and qualitative parameters of a location scenario

* Utilize the information from the data analyses to reach a location decision

* Communicate the location decision with all supporting evidence in a professional format

The material in this case is appropriate for upper division undergraduate or MBA level courses in Supply Chain Management, Logistics, Strategy, Channels and Distribution, and/or Operations Management that includes discussions dealing with plant location.

The information and situation detailed in the case reflects actual information encountered in an actual situation by actual people. The information and characteristics of the situation were obtained through interviews with the president of WIRC and Wi-BioFuels, Inc. and through secondary research concerning the possible locations, cost parameters, and the location decision literature.

Discussion of this case should incorporate a qualitative and quantitative location framework such as the frameworks presented by Vonderembse and White (2004) (Appendix 1). Students should carefully read the case to determine the important factors influencing the location decision. Then they should systematically perform a cost benefit analysis of each site. This analysis will produce a quantitative solution to the location decision that then needs to be tempered by the qualitative analysis that the students must also perform. The following are possible discussion questions.

1. What makes location decisions intractable?

2. What criteria should be used to determine the location of the facility?

3. What qualitative criteria should be used for this case and what weight should be given to these different criteria?

4. What tool/s should be used to inform the location decision and what is the outcome of using this/these tools?

5. Where should Bruce locate his plant and why?

Triangulation between several production and operations management books such as Stevenson (2007), Slack (2007), and Vonderembse (2004) can provide basic decision frameworks and a list of possible variables that affect location decisions. The framework and variables chosen, weight placed on each variable, and decision made by each student may and probably will differ. Following suggestions by Slack (2007), the following decision placed a high weight on the supply chain network possibilities associated with a given location. To determine levels of some qualitative variables for each site, students can utilize web sites and/or contact appropriate organizations such as port authorities. Following are possible answers to the discussion questions listed above.

1. What makes location decisions intractable?

Location decisions can be very intractable due to the different factors (see answer number 2) that affect the degree of current and future profitability that a given site can provide. These factors simultaneously affect different goals a company may be trying to achieve; some positively and some negatively. These effects may actually show that there are several locations equally desirable, even though for different reasons (Stevenson, 2007). For example, to minimize freight costs a company may want to locate their distribution warehouse in a central location relative to their weighted markets. An example of how different factors can offset each other is that a firm might find the ideal location relative to freight costs in an isolated area with no available infrastructure and/or cultural life. In trying to minimize total costs by locating in that place, the location may actually raise costs due to employee related qualitative issues such as general dissatisfaction resulting in high turnover, shirking, and/or sabotage. Therefore, it is possible that a quantitative analysis between location possibilities can be misleading and qualitative information needs to be used to differentiate between locations.

2. What factors/variables should decision makers use to determine the location of a facility?

Analyzing different locations and how well they will help the company reach their objectives is important because there generally is not going to be one simple perfect location, but there are usually several nearly equally acceptable options. As suggested by Stevenson (2007) in this case the availability and proximity of raw materials, appropriate labor, regulations and tax structure, proximity of customers and competition, governmental incentives, proximity of competition, quality of life, proximity to industry related information, cost and availability of utilities, real estate costs and availability, and construction costs are some different criteria that should be considered while going through the location decision process. Slack (2007) further explored supply chain effects that a location may have on firm results such as the network relationships within a supply chain.

Some examples presented by Stevenson (2007) include the importance of looking at the availability and proximity of raw materials, customers, and transportation costs. Locating in an area with available labor with the correct skill set will also help in recruiting human resources. If the correct labor is not available cost may be affected adversely, as the firm may have to pay overqualified people to do a job someone else can do for minimum wage or pay overqualified people minimum wage and have a discontented work force causing low productivity. Regulations and tax structure are going to have an effect on whether you can even have your plant in the area, how much extra taxes and fees will cost you, and if you can possibly receive incentives or be exempt from some fee structures.

In addition to factors that can be quantified, qualitative factors should also be explored when considering location. Stevenson (2007) suggests that education opportunity, shopping, recreation, transportation, religious worship options, available entertainment, quality of police, fire, and medical services, and size of a community make a community desirable for its workers. Satisfied workers can increase high quality production of a facility and these factors can affect employee satisfaction Stevenson (2007). Thus, these factors should also be analyzed for this case.

3. Relative to this case, what criteria (factors/variables) should be used for this case and what weight should be given to these different criteria?

Students should start with a complete list of factors important to location decisions developed through sources such as Slack et al (2007), Stevenson (2007), and Vonderembse and White (2004). Then, as they read through the case, they will find information to support key factors from their list of general factors found in their research. The weight that is placed on each factor should be first determined from the case; secondly, if the weight cannot be determined from the case, it should be determined and supported from each student's perspective. It should be noted that the answer supplied put the heaviest weight on the access to the farmers ' network, as a production facility with no or relatively expensive raw material will quickly go out of business. The total annual cost of production should be calculated and compared across sites. However, the most expensive site may be selected because of qualitative factors. Factors that students should be able to see as important from reading the case and conducting research are presented below. Students should be encouraged to carefully reduce the list to only the more relevant factors to make the analysis more manageable.

Quantitative

Market availability and cost of transportation

Raw input availability and cost of transportation and contracting

Variable costs, including permits, utilities, bonds, waste disposal, and property rent

Local tax rates

Qualitative

Employee Satisfaction

Real estate availability and cost

Hospital availability *

K-12 school rating

University education availability

Culture availability

Airport availability

Ethnic diversity*

Local tax rates

Plant functionality

Labor availability

Labor skill level*

Proximity to a university with biodiesel experts

Hospital availability*

Chemical treatment center*

Site availability*

Ethnic diversity*

Production growth possibilities *

Feedstock growth possibilities *

Local demand growth*

Airport availability

Local tax rates

Supplier network to ensure feedstock supply

* not included in this comparison

A danger of having too many qualitative criteria is that the importance weight of each variable becomes meaningless. A good rule to use when selecting both qualitative and quantitative variables for the final analysis is to make sure the variables are relevant to the specific decision and actually vary across the sites. If there is no variation between prospective sites for a given variable, state that it does not and do not include it in the weighted analysis between sites. In addition, students should use the 80/20 rule to minimize their list of qualitative variables that are weighted and used to help make a location decision. A student would start with a complete list and then eliminate when possible, communicating their assumptions and reasons for keeping or eliminating the various variables. For this case, availability of health care, facility site availability, and growth possibilities with respect to facility and feedstock did not vary across sites. Labor skill level was also discounted, as 4/5s of the required work force was blue collar. In addition, ethnic diversity was not included, as, historically, it has not been a factor in firm success in the northwest. Although local demand growth differed, it did not vary by much and if the percent of biodiesel in a petroleum and biodiesel mix were increased beyond 20%, there would be ample increased demand at all sites to justify growth.

As stated before, scores and weights for each qualitative factor will vary by student. However, it is important that each student supports the scores and weights they assign. The method used to create Table 7 of Appendix 1 was to assess the standing of each site for a given variable and give the site with the best rating for a given factor a ten, then adjust the others down from there. Weights for the factors were determined by logic. The highest weights were given to factors that directly affected the functionality of the facility with lesser weights given to the employee satisfaction factors, as these variables indirectly affect the success of a facility. The factor with the highest weight was having an established network with local farmers because when there is no raw material, there is no chance of success. This decision was based on the Slack et. al. (2007) suggestion that a well developed supply chain is an important strategic advantage. Table 6 shows that Richland is the lowest cost location. However, information presented in Table 7 shows that Clarkston is the best site. The information in Table 6 shows that the costs of operating in Clarkston would be 16% greater than operating in Richland. Analysis shows that the major cause of the difference is the established supplier network. Bruce's long term connections in the Palouse area assure a sufficient number of farmers can be convinced to adjust their traditional rotation crops to supply sufficient oil seed feedstock for Wi-BioFuels' plant. To determine the actual importance of such a network, the cost of shipping all inputs for the feedstock from the Palouse area to Richland was included in the cost analysis for the Richland site. Under that scenario, the Richland site is nearly 20% more expensive than Clarkston. This information would suggest that Clarkston is the most favorable site.

Supply chain management literature such as that found in Slack et. al. (2007) emphasizes the importance of supplier networks. However, the case only briefly mentions Bruce's connection to such a network. Thus, an instructor of this case may want to emphasize this point during case discussion.

4. What tool/s should be used to inform the location decision and what is the outcome of using this/these tools?

A major tool that could be used for the cost variables is linear programming, but with only three locations to decide from it is not necessary. A simple table can be constructed in excel that shows factor costs and total costs for each location. An additional table can display the results of weighting the qualitative factors after first scoring each qualitative factor for each possible site (see Appendix 1). In the following analysis, a 10 point scale was used with 1 being low and 10 high to score the different qualitative variables.

5. Where should Bruce locate his plant and why?

According to the following analysis with the given weights, Bruce should build his plant in Clarkston at the Port of Wilma. The total costs per year are lower than for Portland, but 16% higher than Richland. However, the qualitative weighting is much higher for Clarkston than for Richland. The difference in costs only amounts to $169,942.81 per year, favoring Richland over Clarkston. However, the major factor influencing the difference in the qualitative assessment is access to the farmers' network that will ensure feedstock availability. Such access is critical to maintaining the costs as depicted. Thus, the recommendation is that Clarkston be the site of the new biodiesel production facility.

Subject: Site selection; Biodiesel fuels; Petroleum refineries; Petroleum production; Case studies

Location: United States--US

Company / organization: Name: Wi Biofuels Inc; NAICS: 325998

Classification: 9190: United States; 9110: Company specific; 8510: Petroleum industry; 1510: Energy resources; 2310: Planning

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 6

Source details: INSTRUCTORS' EDITION

Pages: 21-33

Number of pages: 13

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216283159

Document URL: http://search.proquest.com/docview/216283159?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 16 of 100

THE EFFECTS OF PERFORMANCE MEASUREMENT ON A DELIVERY COMPANY: A CASE STUDY

Author: McElroy, Harry; Liddell, Wingham; Richman, Vincent V; Thompson, Karen J

ProQuest document link

Abstract:

The primary subject matter of this case concerns the challenges faced by a delivery company that uses technological tools to measure individual performance. Topics such as performance measurement, accuracy, employee motivation, and safety concerns are all explored in the case. The case examines how a delivery company uses incentives as a motivational technique to get drivers to work faster This technique seems to work early on for one driver until he hurts his ankle. This leads the reader to the next issue, safety, and how WDS handles a work environment in which injuries are common. The case explores the downsides of the drive to improve financial performance by increasing workloads and pushing productivity improvements. The unique problems of encouraging employee motivation in a unionized work environment arise at the end of this case. This case is designed to stimulate discussion about performance measurement, motivation, and safety issues in organizations.

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case was written for undergraduate and graduate students who are currently taking a human resource management, organizational behavior, organizational theory, or operations management course. Instructors of a human resource class could use this case to review decisionmaking issues regarding workplace safety, motivation, and performance measurement. Organizational behavior and organizational theory instructors can use this case to examine how the organizational hierarchy of a delivery company works and how different types of employees (managers vs. workers) interact with each other. Instructors can also use this case to engage students in discussions related to leadership, team building, motivation, and goal setting. The case can enhance student learning as to how these theories might be applied toward workers to make them motivated and perform their jobs more efficiently and safely.

The major objectives of this case are as follows:

1. To help students gain a better understanding of the effects that performance measurement can have on employee motivation.

2. To demonstrate to students the unanticipated consequences of instituting a performance measurement system.

3. To expose students to accidents that can occur in the workplace and the procedures which need to be followed when analyzing injury rates.

4. To provide a tool so students can examine the different types of management theory.

5. To prepare students to anticipate the inevitable changes that permeate the day-to-day operations (affecting both management and workers) of a company that has recently gone public.

6. To allow students to develop solutions to the major issues presented in the case study and to generate class discussion with the case study's questions.

7. To expose students to the possible benefits of using teams in the workplace.

Students are encouraged to research characteristics of the package delivery industry, theories of motivation, workplace safety, and incentive systems before reading the case. The instructor may use the following questions, generate another list, or ask students to formulate questions about the case for class discussion.

DISCUSSION QUESTIONS WITH ANSWERS

1. Describe the major issues presented in the vignette and prioritize the issues in terms of importance. How closely do they affect each other? Do you feel that any one issue is more important than the other? If yes, explain your answer.

The three major issues that are presented in this case are motivation, performance measurement, and safety. All of these issues presented are closely tied to each other. Safety and proper working methods are the most important issues for a business in an industry that has a large number of injuries annually, such as the delivery business. Workers will not be motivated to perform their duties to the fullest if there is a big chance of injury. It is important for an organization, such as WDS, to put just as much effort into raising safety awareness among its employees as it does in analyzing performance. The issues should be prioritized with safety first, performance measurement second, and motivation third. Unsafe working conditions cost businesses $50.8 billion in 2003 according to the Liberty Mutual Workplace Safety Index. See Table 1 for a listing of the leading causes of workplace injuries.

Performance measurement should be adjusted to promote safer working conditions. One way to do this would be to lower the amount of stops for each driver. By giving drivers shorter work days, the amount of time they have to spend delivering is reduced, thereby reducing injuries that are related to lifting and stepping into and out of their trucks. Managers should strive for a "no mandatory overtime" policy, so employees know exactly how much they are going to work every day.

Mike worries more about performance and achieving a bonus than his own safety and thus ends up hurting his ankle. It is important for supervisors and managers to recognize this and try to motivate employees to not get hurt. According to Maslow's hierarchy of needs and Alderfer's ERG theory, safety or security is one of the most basic needs that people have. WDS's management should strive to create safe working conditions. This will help workers feel better about their jobs, thus increasing their performance.

2. Is Theory X the best motivational approach for WDS to use in order to increase the performance of employees? Would it be possible for a low cost leader, such as WDS, to remain competitive with another motivational approach?

Theory X and Theory Y, developed by Douglas McGregor, are contrasting approaches to motivation that are often taught in management courses. Theory X is based on the belief that people do not like work and that in order to get them to work some kind of direct pressure must be exerted to achieve maximum performance. Theory Y managers have more positive views about workers' motivations.

"Under Theory X the four assumptions held by managers are:

1. Employees inherently dislike work and, whenever possible, will attempt to avoid it.

2. Since employees dislike work, they must be coerced, controlled, or threatened with punishment to achieve goals.

3. Employees will avoid responsibilities and seek formal direction whenever possible.

4. Most workers place security above all other factors associated with work and will display little ambition.

In contrast to these negative views about the nature of human beings, McGregor listed the four positive assumptions that he called Theory Y:

1. Employees can view work as being as natural as rest or play.

2. People will exercise self-direction and self-control if they are committed to the objectives.

3. The average person can learn to accept, even seek, responsibility.

4. The ability to make innovative decisions is widely dispersed throughout the population and is not necessarily the sole province of those in management positions" (Robbins, 2005, p. 172).

Since WDS is unionized and a low cost leader in the industry, the Theory X style management is used in the work environment. However, there are some parts of WDS's organizational structure that can benefit by incorporating parts of Theory Y, such as incorporating more of a team structure and taking suggestions from employees on how to improve production to increase performance. It would be difficult for WDS to remain competitive if it gave up its tight control over performance measurement. WDS should modify its current practice for measuring performance to lower the amount of overtime worked each day by drivers.

There are several ways that employees, both managers and hourly workers, can be motivated to achieve the goals set forth by WDS's board of directors and chief executive officer. One approach to motivation would be for WDS to pay closer attention to intrinsic and extrinsic factors. Frederick Herzberg has stated that there are two broad categories of factors that affect job attitudes and employee performance. "The growth or motivator factors that are intrinsic to the job are: achievement, recognition for achievement, the work itself, responsibility, and growth or advancement. The dissatisfaction-avoidance or hygiene factors that are extrinsic to the job include: company policy and administration, supervision, interpersonalrelationships, working conditions, salary, status, and security" (Herzberg, 1987, p. 117).

Managers at WDS are motivated to perform by stock options and salary (both hygiene factors) and also advancement, responsibility, and recognition (all motivator factors). Union workers (drivers and sorters) at WDS are motivated to perform primarily by hygiene factors such as: salary, overtime, performance bonuses, and health benefits. The primary incentive for both managers and union workers is money. Monetary incentives for managers come from stock options, and for union workers they come from overtime. However, there is a lack of social recognition for the drivers, sorters, and preloaders at WDS. Social recognition can play a very important role in increasing the workers' productivity. "Social recognition consists of personal attention, mostly conveyed verbally, through expressions of interest, approval, and appreciation for a job well done" (Stajkovic & Luthans, 2001, p. 582).

Many drivers felt that they were not recognized enough by managers at WDS. Their only recognition for performance came in the form of monetary incentives. A study done on incentive motivators by Stajkovic and Luthans (2001) revealed that by showing social recognition to employees, performance increased by 24%. This is a 13% greater improvement in performance than just a monetary incentive, which showed only an 11% performance improvement in the study. When workers in the study were given just routine pay for performance, their performance increased only 11% above normal output. Straight social recognition, with no monetary incentives, resulted in a 24% increase in employee output. "Our results show that [social recognition] can greatly improve performance and, unlike money, generate no direct financial costs" (Stajkovic & Luthans, 2001. p. 587)

Equity theory is another motivational theory that WDS should consider. The theory is based on the premise that "individuals compare their job inputs and outcomes with those of others and then respond to eliminate any inequities" (Robbins, 2005, p. 187). In this case, Mike is realizing that he is working harder than other drivers. Although he is getting compensated for his extra effort with overtime bonuses, the increased stress and potential for injury outweigh the benefits of these bonuses. The end result is that Mike feels that he is being treated inequitably. When workers feel underrewarded, they tend to feel angry (as Mike does), and they can be expected to respond in one of six ways. According to Robbins (2005), employees may change their inputs, change their outcomes, distort perceptions of themselves or others, choose different people to compare themselves to, or quit. WDS's current policies may result in Mike exerting less effort or quitting, either of which are undesirable options for the company. WDS will need to evaluate employees' perceptions of equity to discern how to motivate employees more effectively.

Vroom's expectancy theory can also shed some light on the motivational issues at WDS. Expectancy theory proposes that workers will exert higher levels of effort when they perceive that they are able to do so, when that effort will be rewarded, and when the rewards given are valued by that worker (Robbins, 2005). Mike's motivational issues can be explained well using this theory. First, he is continually asked to exert higher levels of effort to reach escalating performance goals. The overtime that he is expected to work increases repeatedly. Eventually, he does not believe that he can exert the level of effort needed to achieve the goals that have been set for him. second, WDS does reward higher levels of effort by the drivers. However, since the bar is continually being raised as to what is expected of employees, the rewards are becoming harder to reach. The result is frustration and anger. Third, the case exemplifies a situation in which the rewards offered to employees are becoming less valued over time. As rewards lose their appeal, they also lose their motivational effect.

3. How effective is WDS' s current productivity measuring system? What are some better ways that WDS could measure driver productivity instead of "ride alongs" ? How could teams be used effectively in this work environment?

The current productivity measuring system is very efficient for recording drivers' productivity throughout the day. However, the problem that Mike faces in the case is the increasing amount of overtime that he is given each day. WDS might find that a better way to measure a driver's productivity is by using a team of five drivers for a certain area and having them switch routes every week. This would provide WDS ' s industrial engineers with a better variance of the productivity levels that each route requires. By using a team structure, WDS would be able to incorporate some of the benefits of teams into an environment that is mostly managed in a Theory X style.

4. Could Mike's injury have been prevented if there was no incentive plan in place? As a manager, how would you go about raising safety awareness for the drivers of WDS? If you had to form a safety committee, how would it be structured based on the organizational structure of WDS?

There is no guarantee that Mike's injury could have been prevented if there was no bonus incentive system in place. The incentive system did increase the likelihood of an injury because Mike was working quickly to achieve a bonus. If there was no incentive plan in place it is unlikely Mike would have been hurrying so feverishly to deliver all the packages within a certain amount of time.

In order to raise safety awareness, a manager for WDS should set safety goals for both individual workers and all the workers in the Center. Measurements toward these goals could come from tracking the number of safe work days that an employee completes. If an employee works safely for a month without an injury, then he/she would have twenty safe work days (five days each week for four weeks). The incentive plan for safe work days completed by each worker should be realistic, but not too easy or too difficult. Having a reward for 500 safe work days would be too far out of reach and discouraging for many workers. However, having a goal for only twenty (one month) safe work days would be much more realistic. A "small wins" strategy should be used by managers to help motivate employees to work safer by providing them with small incentives for working safely. "Although each individual success may be relatively modest when considered alone, the multiple small gains eventually mount up, generating a sense of momentum that creates the impression of substantial movement towards a desired goal" (Whetten and Cameron, 2002, p. 125). Goals that are too difficult will be considered impossible to achieve and are likely to cause an employee to give up early and remain unmotivated. "Specific goals allow a team to achieve small wins and are invaluable to building commitment and overcoming the inevitable obstacles that get in the way of a long-term purpose" (Katzenbach and Smith, 1993, p. 115).

Referring to Exhibit 4 in the case, we can see that Mike's division is organized by different cities. A safety committee should be formed with members from each city and also at least one supervisor or manager. Members of the safety committee would then be able to better interact with fellow coworkers and supervisors. A safety communications board with pictures of the committee members and recent committee minutes should also be posted to help others identify the members and current safety issues.

There should also be a safety committee at the corporate level that oversees and gives guidance to ones at the lower division levels. The corporate level safety committee could work with insurance companies, such as Liberty Mutual, to help identify the leading causes of injuries and ways that they could be prevented. (Table 1 in the answer to Question #1 shows the ten leading causes for injuries on the job during 2003.) The lower divisions would report each month to the corporate level safety committee. By forming a safety committee, employees would have a team to work with to achieve safety goals. The committee would also be helpful for motivating fellow coworkers and potentially increasing performance. Workers would feel better about coming to work because they would feel safer about their jobs. "The essence of a team is common commitment. Without it, groups perform as individuals; with it, they become a powerful unit of collective performance" (Katzenbach and Smith, 1993, p. 118).

5. Using current theories of motivation, describe how WDS could motivate its employees instead of using monetary incentives? What would be a good way to motivate J oe given his perception that, "the harder you work for a bonus, the harder WDS will make you work"?

Reinforcement theory could be used to a greater extent at WDS. WDS could motivate employees by using external rewards such as trying to make employees feel like they are more of a team. A team structure among the drivers, similar to the one discussed in question three, would help to foster more of a shared leadership role. This would create a feeling among members of being more individually and mutually accountable for the performance of their team. WDS managers might also consider having a friendly competition among drivers that is based on bi-weekly performance. An example might be rewarding employees who go for two weeks with perfect attendance and who also achieve the highest efficiency for packages delivered within their planned work day.

Expectancy theory can be tapped to focus managers on employees' perceptions of the rewards offered. Rewards, such as a special employee parking spot or a dinner gift certificate, are other options for those employees who perform at high levels. Giving the employees a choice as to what their reward is would also be a good motivator because they are getting to pick how they are rewarded.

WDS can use Herzberg's two-factor theory to address motivational concerns. By upgrading the trucks so they have better parts, workers would feel better about doing their job. A new seat in Mike's truck could work as a motivator for him to work a little bit longer. Turnover, absenteeism, and lagging performance could be reduced by having managers at WDS show workers that they care about them and recognize their hard work. "If only a small percentage of the time and money that is now devoted to hygiene, however, were given to job enrichment efforts, the return in human satisfaction and economic gain would be one of the largest dividends that industry and society have ever reaped through their efforts at better personnel management" (Herzberg, 1987, p. 117).

WDS managers could consider using the job characteristics model for guidance. Managers could figure out how to enhance the work's meaningfulness, responsibility levels, and feedback. Hackman and Oldham's (1980) model suggests that motivation can be increased if the core job dimensions of skill variety, task identity, task significance, autonomy, and feedback are enhanced for employees. At WDS, increasing skill variety, autonomy, and feedback would be effective interventions.

Goal-setting theory also reminds us that good feedback is a very important motivator for employees. Feedbackhelps to clarify the expectations of both employees and managers. "In the past decade, increasing numbers of companies have been measuring customer loyalty, employee satisfaction, and other performance areas that are not financial but that they believe ultimately affect profitability. Doing so can offer several benefits" (Ittner and Larcker, 2003, p. 90). The money that is saved by using employee feedback should be used to reward the employees. A good example of the benefits of feedback comes from Toyota Motors in Japan. "Toyota's suggestion box is certainly not unique to Japan. Back in the early 1950's, the company's 45,000 employees turned in only a few hundred suggestions annually. Today, Toyota gets 900,000 proposals - 20 per employee on the average - per year, worth $230 million a year in savings. Even for a company the size of Toyota, that's not an insignificant sum" (Ohmae, 1982, p. 207).

Workers like Joe and Mike could benefit from increased recognition for the work they do at WDS. It is clear from the vignette that Joe feels that the managers at WDS don't really care about how hard he works. Giving drivers small amounts of company stock instead of a monetary bonus could also increase the morale of drivers; this way they would also be owners in the company they work for and share in the success of it.

EPILOGUE

Over the course of a year, WDS experienced a large increase in the number of drivers who received workers' compensation as a result of being injured on the job. Incentives were implemented to increase awareness among employees and to promote safety. A safety committee was also formed for each of the three shifts to help reduce injuries. The bonus system is still in place and WDS continues to do time studies every two years. The current union contract for the drivers will expire this summer and the teamsters are seeking strong language in the contract to address the overtime issue for employees. WDS has not commented on any change to the contract with regard to overtime hours worked per employee. They have mentioned that there will be an increase in the hourly pay rate to reflect cost of living increases.

Management teams continue to work with the drivers to reduce the amount of overtime hours worked. Mike has seen the daily amount of delivery stops for him slightly drop, and he is now able to get back to the building without rushing. Additional part-time workers have been promoted to full-time status, and this has helped to lower the amount of stops for the drivers. A suggestion box has also been placed near the time clock and a list of the suggestions is posted every week and reviewed. This list is printed out and then discussed with the drivers every Friday. The suggestions are then implemented if management and the drivers both agree on them. This has helped to promote better feedback between both the drivers and managers. Mike's coworker, Joe, is feeling better about the feedback he has been getting. He now has a better understanding of the reasons behind some of the management decisions that have been made.

Subject: Occupational safety; Case studies; Shipping industry; Performance evaluation; Human resources

Location: United States--US

Company / organization: Name: WDSGlobal; NAICS: 561422

Classification: 5340: Safety management; 6200: Training & development; 8350: Transportation & travel industry; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 6

Source details: INSTRUCTORS' EDITION

Pages: 35-45

Number of pages: 11

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216280224

Document URL: http://search.proquest.com/docview/216280224?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 17 of 100

THE GREEDY SEVEN

Author: Boyles, Wendi; Stark, Carl; Livingston, Toney

ProQuest document link

Abstract:

The case depicts a business school dean's attempt to raise the salaries of seven School of Business faculty members to the 25th percentile salary level of AACSB accredited institutions. This was an important step to retain valuable employees and ensure reaccredidation in 2007. The salary proposal created an uproar among the non-business faculty at the university. They felt the School of Business professors were already among the highest paid employees at the university. To make matters worse, this situation occurred during a financial crisis as many other employees were denied raises and several employees were laid off due to budget constraints. The problem is exacerbated by the lack of a clear pay policy and by serious constraints posed by the institution budget and state funding. The President of the university and the Board of Directors are faced with the enormous challenge of creating cohesiveness among the faculty despite their irreconcilable differences. Their actions and decisions will shape the fate of the School of Business and the overall university.

Full text:

INSTRUCTORS' NOTES

Recommendation for a General Teaching Approach

This case encourages students to critically analyze several management principles including conflict management, decision-making skills, and the equity theory in an applicable, real-world situation.

This case is structured for senior level management students and should take approximately two in-class hours to complete. Questions should be graded for the specificity of the answers provided. The instructor may choose to lead an in-class discussion after the assignments are completed so that different views can be observed. The instructor can then follow the discussion with appropriate answers.

Answers to Case Study Questions:

Based on your knowledge of the Pay Equity Theory and provided appendices, evaluate the Board's decision relative to the proposed salary increases for the seven School of Business faculty and administrators by answering the following four questions:

1. Using the equity theory, discuss and rationalize the non-business faculty members' and the School of Business "Non-Greedy Seven" professors' actions toward the salary adjustments for "The Greedy Seven".

J. Stacy Adam's equity theory helps us understand why there was a controversial concern over the salary increases for the School of Business. Equity theory is based on employees' perceptions of fairness relating to their job. Using the equity theory, several non-business faculty members compared his/her input (effort, experience, education, and competence) and output (salary, recognition, rewards) to those of the business faculty members. Since they perceived the ratio was unequal, an equity tension existed. Therefore, the non-business faculty members could either choose to reduce his/her effort or strive to increase his/her output to make the relationship ratio balance. In this case, two main points can be noted to help illustrate the perceived work ratio imbalance. First, the non-business faculty members felt that the business faculty members were already overcompensated. second, the non-business faculty members felt that it was unethical to give "The Greedy Seven" a raise when the university was experiencing a huge financial crisis. Therefore, the non-business faculty members expressed their concern to Dr. Foster and the Board of Trustees as a way to establish equilibrium among the contenders. There were also twelve School of Business professors who were not included in the "salary increase" proposal. If they believe that everyone in the School of Business has contributed an equal share in the success of the department and therefore feel that they should also receive a raise, the equity theory helps explain why they may be upset and express their feelings by working less or trying to get a raise as well in order to equalize their reference ratio.

2 During the current stage of conflict aftermath, what can the administration do to rebuild trust and reunite the academic areas to allow them to work together as a team?

First, the administration needs to recognize the various types of conflict that have occurred. Conflict is not always a negative aspect, but too much conflict can impair the organization. Functional conflict reduces groupthink, challenges members to think creatively, and helps members to work towards the goals of an organization or group. Dysfunctional conflict, on the other hand, can create tension among the group members and block the organization or group from reaching its goals. In this case, dysfunctional conflict was portrayed by a high level of tension and stress, reduced trust, and a hasty pronouncement to reverse Dr. Foster's decision. Interpersonal conflict also existed between several colleagues when they gossiped, name-called, and brought the issue to apersonal level. Once the administration understands the various types of conflict, they can begin to resolve the differences and repair the damage. The administration also needs to consider that the employees' perception, not necessarily reality, is used to determine the balance or imbalance of the reference ratio. Employees may know only part of the salary and workload information of other employees. They then assume and make their own judgments on the equality of their input/output equation. One possible resolution to reduce dysfunctional conflict and help rebuild trust is to improve communication throughout the university. It is essential to have open communication between the administrative team and its employees. Since the salary increases had been approved by Dr. Foster in January but not presented to the budget committee until March, the budget committee members may have felt unimportant in the decision-making process. After the budget meeting, there were a lot of rumors circulating the campus, which distorted the truth. Rather than using all objective information, some of the emotional appeals at the March Board of Trustees meeting were irrelevant personal opinions. Using the proper channels of communication and maintaining professionalism could have eliminated some of these problems.

The administration should also refocus everyone on the overall mission of the school rather than the individual departmental goals. While departmental goals are important, they should be secondary to the overall university mission, which will ensure that employees are focusing on the same goals. Another possible solution is to recognize that employees may perceive things differently. The administrators and school deans can help employees adapt any misunderstood perceptions to the realistic situation. A third potential solution would be to bring an independent mediator to the university. This mediator could listen to the arguments of the opposing sides and facilitate settlement of the conflict by hopefully finding a win-win solution.

3. Using the salary compensation tables in Appendix C, is the compensation plan of Turrentine internally and/or externally aligned?

As illustrated in table 1 of the salary compensation tables in Appendix C, Turrentine State University is internally aligned within the individual colleges, but is not internally aligned as a university. This can be noticed by comparing the various ranking positions within the university. Students should be reminded that these tables signify salary averages. Table 2 indicates that Turrentine is not externally aligned as shown by the lower salary averages than the AACSB average salaries. A more detailed analysis of the School of Business can be found in table 3. Students can calculate the difference of salaries among the "Greedy Seven" School of Business professors and the "Non-Greedy Seven" School of Business professors and recognize that the School of Business in not internally aligned.

4. Should the administration try to externally or internally align the compensation plan?

There is usually not a perfect solution because there are many factors to consider when making such a decision. Choosing either strategy will result in both positive and negative outcomes. If the administration of Turrentine decides to internally align the compensation plan, employees may feel satisfied because they are compensated for their education, experience, and overall value to the organization. Therefore, employees will feel that they are treated fairly and equally within the university. However, salaries may be higher or lower than those of similar universities, creating a compensation deviation for market-driven positions. If the salaries are considerably lower than those of other universities, it may produce high turnover as employees seek higher paying positions and could harm the university's ability to recruit qualified employees. If the administration of Turrentine decides to externally align the compensation plan, employees of market-driven positions may feel satisfied because they are fairly compensated compared to outside institutions. However, the compensation deviations between all of the employees of Turrentine would create tension and turmoil within the university (as illustrated in this case). This could also create a high turnover of employees and harm the university's ability to recruit qualified employees.

Within the School of Business, an internal alignment does not currently exist. As shown in table 3 of Appendix C, there are some lower ranking professors who have a higher salary than some upper ranking professors. This inequity was created when only seven faculty members from various ranks were chosen to receive a raise. These professors were selected based on their hard work and their number of recent publications to academic journals. Both of these criteria help enable the AACSB reaccredidation in the near future. If the other School of Business professors, who were not selected to receive a raise, understand the selection process, they may justify the situation and make an adjustment to their current reference ratio. If they do not understand the selection process or feel that they worked just as hard as the "selected few", a perceived imbalance would exist and could affect their productivity and morale. If the School of Business dean decides to internally align the department, many professors will feel satisfied as the ranking salaries would be in order. However, the professors who exert more time and energy into their position will not be satisfied because their reference ratio will not be equalized. This could also seriously affect the productivity and morale of the department because employees would not feel rewarded for their extra time and effort.

Subject: Business schools; Raises; College faculty; Wage & salary administration; Case studies

Location: United States--US

Classification: 9190: United States; 9110: Company specific; 6400: Employee benefits & compensation; 8306: Schools and educational services

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 6

Source details: INSTRUCTORS' EDITION

Pages: 47-51

Number of pages: 5

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216300524

Document URL: http://search.proquest.com/docview/216300524?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 18 of 100

ROLLING THE OATS

Author: Elkin, Graham

ProQuest document link

Abstract:

This case concerns the arrival of a CEO in a small private company and his need to take stock of the company, and with the information that is available, plan a systematic collection of data, review the position and develop a strategy for the future. The case also deals with the development of a small business and in a minor way with some organizational development issues. Stuart Hammer has just arrived as the CEO of Harraways and Sons Ltd, a small 100 year old family business. The main activity is the processing of oats into breakfast foods, and then distributing them directly and indirectly. It is a challenging environment in a difficult remote location. Stuart needed to rapidly assess the business and then plan for systematic data collection and work out how to preserve and grow the business. There is incomplete data, which is typically the case in small companies.

Full text:

INSTRUCTORS' NOTES

Recommended Teaching Approaches

This is a largely self contained case which can be used in a variety of ways. It can be the framework and impetus for a whole range of discussion and learning. There are three parts. Part one is about the arrival of an experienced (in other industry) new CEO. There is little in the way of support. He needs to rely on his own understanding of all businesses to gain an appreciation of how things are at Harraways.

Part Two chronicles his first three years as he sets out to collect data, plan the future and implement his plan. It is important not to give students Part Two until they have completed Part One, as it could be seen by some students as being the answer. Part Two will be very helpful to instructors if they read it in advance. Part Three is a minor part that brings the students up to date. Students wanting more information can access http://www.harraways.co.nz/ and browse the website. It shows the current project range and much interesting information .Instructors may find this interesting source of information crucial to bringing this case alive. Other sites of interest would be the main competitor who is now Nestle or health and nutrition sites. The Harraways site leads to a number of other sites to do with research and product development

The material is brief enough to be used as a small group or team task or task without previous preparation. This case can be analyzed by individual students but we suggest a format for all three parts of small group work, student presentations and instructor led integrating sessions. This method has the added advantage of developing student team leadership, membership and decision making skills. Other managerial skills: report writing, presentations, persuasive skills and analytical ability can be developed. Formal presentations can be useful in growing skills of public speaking and argument. These are all addition to the examination of content of the case.

Part one could be used as the basis for a final examination. Because this is a versatile case, for which different outcomes may be specified but the outcomes may vary with the background of students, we suggest that instructors allow discussion to develop each time the case is used and gradually build a portfolio of materials and resources that can be subsequently used.

One interesting issue that can be raised with Part One, Two or Three, is discussion of the wisdom of a manager with no industry experience being appointed to the CEO role. Whether management is generic and generalizable could form the basis of useful discussion

PART ONE: TEACHING NOTE

Teaching Objectives

Students will engage with the difficulty of insufficient information with which to begin activity. They will scan the company and the environment outside the company. They will plan the collection of data, the ordering of importance and timing. Students will decide and justify the action and the order of action proposed.

The Immediate Issues (The Process)

Students are expected to produce a plan of planning (i.e. initial response to Board). They might suggest a SWOT analysis and list the Strengths, Weaknesses, Opportunities and Threats. More advanced students might develop a sensitivity analysis of the items within the SWOT to explore how likely things are to happen

Students will come across the need to gain more information which will allow some learning about the incomplete nature of information and the often random information that is available. Students will develop a list of the things that would be helpful to know and how to go about finding them out.

Students can be encouraged to reflect on the problem of inadequate information in every part of their lives- but the necessity to make decisions despite that.

Underlying Issues (Content)

It is likely that students will suggest in response to Question Two, that value be added to Harraways through some of the following: product development; marketing and customer care and distribution. In addition issues of managerial leadership and control and organizational development may be raised.

Sales and operational planning, financial forecasting and management and establishing business Key Performance Indicators were all key drivers that needed to be implemented to manage the business.

Environmental Scanning may highlight the issues of: historical company trends, a changing market place. Current and potential customers, export opportunities, the use of the plant and what is made, (flour, stock food and oats). Internally rationalization and better financial information may aid or sustain profitability.

As a model for the external scan we suggest considering economic, political, technological and social factors are the basis.

The company needed to develop systems to increase its knowledge of customers, review trends and to assess overall market opportunities.

The company had to tap the experience and knowledge of all its employees to better manage the business. The changing of culture is firstly created from trust - Stuart needed to gain the trust and the respect of staff before this would begin to change. Staff needed to have more delegated responsibility to manage the process and be engaged and empowered...

Rationalisation is always an area a new CEO will address. The contribution of flour milling, oats and stock food may need addressing as does any improvement to administrative systems. What actually happened forms the basis of Part Two - reading this in advance will be helpful to instructors !

PARTTWO: TEACHING NOTE 2001-2003

Teaching Objectives

In addition to the objectives in Part one student will demonstrate the ability to understand the action that took place and speculate on the reasons. They will display knowledge of techniques whichhelp make good decisions including: developing and analyzing data; identifying problems and opportunities; identifying alternatives and choosing action and implementation. They will distinguish between the short and long term and the important and the urgent.

Students will be able to emphasize with managerial uncertainty, responsibility and the stress it can cause to individuals.

Student Learning

Students can be asked to contrast the suggestions they made for Part One with what Stuart did. Explanations can be asked for from students. The issue of priorities for action can be raised.

Discussion of the results of Stuart's activity should be encouraged. The development of a matrix for approaching a new company can be developed from what Stuart did and what was suggested by the students. Students will end up with a matrix or generic checklist to use in the real world. They already will be familiar with SWOT, environmental scanning and prioritizing activity.

Additional discussion can be introduced about organizational development and attempts to change culture, the sort of person Stuart is (maybe some values clarification based on what he appeared to care about) in some settings the nature of payment systems and other rewards for Stuart and the employees could be explored. Marketing and product development could be discussed.

PART THREE: TEACHING NOTE 2004-2006

Teaching Objectives.

In addition to the objectives in parts one and two, students will demonstrate: an understanding of the stages in small business development in particular the synergistic and iterative nature of growing a small business. They will continue to display the ability to think widely and come up with workable suggestions.

Student Learning

Students will have sense of completion by knowing what actually happened up to 2006. Students would be expected to develop a range of strategies for continuing with the business much as it is including: doing nothing new; growing incrementally in market share and in profit margin; product development and internal business improvement.

More adventurous solutions will include finding a complementary process or product, aggressively expanding the business through exporting, buying another business or starting a connected business (for example to try to protect the Intellectual property and develop overseas franchises) or a new completely different business.

The options need to include some way to exit the business by selling to a competitor. The discussion could include some fundamental exploration about why the individual directors are in business. Perhaps their purposes can be satisfied by selling a profitable business and investing the money elsewhere.

Overseas users are likely to underestimate the logistic difficulties in New Zealand. Oats only grow in the South. It is wise to process the oats locally to avoid the transportation of the 30% waste (the husk) from the process. Dunedin has low cost labour, easy communication and low cost land on which the plant is located.

Subject: Strategic planning; Small business; Organization development; Family owned businesses; Case studies; Milling industry

Location: United States--US

Company / organization: Name: Harraway & Sons Ltd; NAICS: 311230

Classification: 9190: United States; 9110: Company specific; 9520: Small business; 2310: Planning; 8610: Food processing industry

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 6

Source details: INSTRUCTORS' EDITION

Pages: 53-57

Number of pages: 5

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216299982

Document URL: http://search.proquest.com/docview/216299982?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 19 of 100

THE U.S. FLOORCOVERING INDUSTRY - 2006

Author: Helms, Marilyn M; Baxter, Joseph T

ProQuest document link

Abstract:

The primary subject matter of this case is a study of the US carpet and floorcovering industry. Secondary issues include consolidation of mature industries, global pressures, mergers Dalton, Georgia is the carpet capital of the world and is home to the area's leading floor covering and carpet producers. The old world industry attracted the interest of Warren Buffet prompting him to purchase Shaw Industries, Inc. in 2001. Shaw and their key competitor Mohawk Industries, Inc. has a rich history of growth through acquisitions. The industry giants have consolidated much of the formerly fragmented flooring industry they helped establish. Rising fuel prices, competition from low-price Asian imports and actions by competitors continue to challenge the industry. Small suppliers exiting the industry have caused raw material prices to rise. Changes also include a shifting product mix driven by consumer preferences toward laminate, wood and ceramic tile flooring and away from carpet and vinyl products.

Full text:

INSTRUCTORS' NOTES

Recommendation for Teaching Approaches

Dalton, Georgia has been recognized as the carpet capital of the world and is home to the area's leading floor covering and carpet producers. Mohawk and Shaw, the industry leaders have a rich history of growth through acquisitions and have consolidated much of the formerly fragmented flooring industry they helped established. Both are full-line flooring producers manufacturing carpet, rugs, ceramic tile, laminate flooring, hardwood flooring, vinyl, and other surfaces for both commercial and residential customers. Their products are sold through an extensive dealer network. While the industry experienced recent growth and on-going profitability, rising fuel prices, competition from low-price Asian imports and actions by competitors continue to challenge the industry. The case asks students how recent acquisition will change the industry and how the industry can continue to grow.

Decision Focus

Dalton, Georgia is the carpet capital of the world and is home to the area's leading floor covering and carpet producers. The old world industry attracted the interest of Warren Buffet prompting him to purchase Shaw Industries, Inc. in 2001. Shaw and their key competitor, Mohawk Industries, Inc. has a rich history of growth through acquisitions. The industry giants have consolidated much of the formerly fragmented flooring industry they helped establish. Each is a fullline flooring producer manufacturing carpet, rugs, ceramic tile, laminate flooring, wood flooring vinyl, and other surfaces for commercial and residential customers and both continue to battle for the number one position in the U.S. The industry has experienced recent fiscal growth from the U.S. housing market boom and higher product sales prices exceeding analysts' expectations. However, rising fuel prices, competition from low-price Asian imports and actions by competitors continue to challenge the industry. Small suppliers exiting the industry have caused raw material prices to rise. Changes also include a shifting product mix driven by consumer preferences toward laminate, wood and ceramic tile flooring and away from carpet and vinyl products. The rug segment continues to grow along with hard surface flooring. Even with wood or laminate floors, consumers decorate with area and scatter rugs. The industry is changing and the leaders must consider additional ways to grow. Interviews with industry analysts, trade associations, and consultants provide insights.

Main Features of the case

The authors analyzed the industry's situation and strategic alternatives to determine which growth avenues were best for the industry. The case provides insights into strategic and managerial issues and included detailed market and financial information on the industry and Mohawk, the only publicly-traded major player with separate industry data. The case study was developed from extensive use of secondary research from readings, articles, and reports from trade organizations on the carpet and floorcovering industry as well as interviews and personal experience working with the industry.

Learning Objectives

After studying and discussing the industry case study, students should attain the following learning:

* Recognize growth issues in a mature company and industry

* Describe strategies for vertical and horizontal integration

* Comprehend the benefits of industry consolidation

* Discuss the problems with merging companies

* Review how economic conditions and rising material costs affect industry strategies

* Profile an entrepreneurial-based industry and review the "cluster" effect of industry growth and location within a region

* Consider the impact outsourcing has on the ability to retain market share

* Practice balancing the interplay of strategic alternatives, financial outcomes, and the industry implications of possible continued mergers and acquisitions.

Potential Curriculum Uses

This case is suitable for an undergraduate strategic management course and can be used later in the course when material related to industry mergers and consolidation for mature industries is discussed. It also fits with a discussion of maturity strategies. It can also be used in an international economics or managerial economics course since it presents issues related to international mergers, fuel and other rising raw material costs (particularly oil which is akey component of carpet yarn and backing), outsourcing and expansion strategies, NAFTA and CAFTA discussions, and vertical integration. The case can be taught in a single session of approximately 1.5 hours, but a two-session sequence or a double session could delve deeper into industry structure, conduct, and performance. A longer time is also recommended if calculations and other details are computed. The case is also suitable for a take-home examination of the financial and market data with strategic issues. A team presentation is also possible as is a follow-up analysis of other industry players. An outside experiential activity can be to interview a carpet retailer in the area to learn about changing consumer preferences in the industry (i.e., shift to hard surface flooring, replacement cycle for flooring, absorption of energy costs, costs patterns and trends, etc.).

Class Assignment Questions and Answers

1. What are the pros and cons of the industry leader s maintaining their rapid acquisition rate of competitors and consolidation of the carpet industry?

2. Will the recent acquisitions guarantee Shaw and Mohawk a strong position for further expansion within the flooring category? Should they consider other growth avenues including joint ventures, partnerships, or internal growth?

While the purchase of Unilin does provide Mohawk a presence in Europe, particularly in laminated flooring, this is no guarantee of a strong position. It does extend the company's reach into Europe and adds more non-carpet flooring to their offerings. Belgium's location in Western Europe is also a good position for further expansion into continental Europe. Business is in Europe and Mohawk's acquisition strategy gives them knowledge of the culture and flooring buying habits of this market. Unilin is a strong brand name and has experience and a set of customers and suppliers in place. This acquisition is a fast entry strategy rather than starting a company. Hard surfaces not comprise over 30% of Mohawk's total revenues in 2004 up from 5% in 2001.

An "A" answer might include a discussion of international expansion. International expansion is complex and involves weighing the benefits of new markets vs. the loss of operational size and efficiency in the US.

Shaw Industries, Inc. also is positioned to have a larger access of fiber and backing materials and should be better able to squeeze more profits or at least reduce petroleumdependent raw material costs.

While all these choices represent ways to grow, their acquisitions have left few partners for joint ventures. Growth internally is possible and an on-going strategy. Their production output and number of employees steadily increases. The rivalry with Shaw Industries, Inc. has put continued pressure on the company for size. Joint ventures or partnerships might be appropriate for recycling. It is difficult for companies to recycle and reclaim used carpeting on their own (due to the capital costs to enter). Thus forming a recycling and distribution channel (for reverse supply chain logistics) might be appropriate. Design is another area of internal growth. Offering customer specialty and custom designs are appealing to customers who are growing more interested in "mass customization" choices.

An "A" solution will note that regardless of the growth avenue, market share growth is the goal. Market share growth encompasses a number of strategies. Further internal growth is through process improvements and leveraging knowledge across all lines supported by real-time information systems. Quick reaction time is also important for growth as is cost management.

For Mohawk and Shaw, the two leaders in the carpet and floorcovering industry, growth by acquisition has historically been the norm. Most mid-sized players have been acquired. They will probably not increase their horizontal presence by acquisition as they are already selling or manufacturing flooring in every hard and soft surface category. Mohawk's goal, according to the 2004 annual report, is to sell floorcovering and textiles for every use in the home and for every commercial application. Thus, other vertical acquisitions are possible moving backward toward the source of supply (raw materials, backing, and dyes) or forward toward retail outlets. Shaw, however, expanded into retail outlets five years ago and realized they were competing with their own retail customers. Further global expansion is also possible. With the rising fuel costs, it makes sense to have a manufacturing presence in Europe and Asia to reach these markets faster and cheaper. European buyers are concerned more about recycled content and one avenue for growth to make them appealing in the international market is to further adapt their manufacturing processes toward this goal. While they have environmental programs in place, the acquisition of other "green" companies could further this goal. Still other home or office textiles might also be acquisition targets (i.e., wall coverings, sheets, towels, etc.).

An "A" answer will note that growth by acquisition is important to gain market share, it offers immediate leadership and a strong position along with backward integration and represents a stronger point of control in the supply chain. Acquisition allows companies in general to broaden their product line and offering and consolidate fragmented markets. Acquisition is also a means to achieve a strategic goal. Acquisition offers a fast way to gain existing infrastructure including transportation and distribution centers. Purchasing sole source suppliers allows firms to have an uninterrupted source of raw materials.

Mohawk's acquisition of Lee's carpet moved the firm into a new line of modular carpet. It is a fast growing category in the carpet industry and is easy for do-it-yourself installers. Consumers like carpet tiles (for homes and offices) because only the soiled squares or wear areas need to be replaced - thus extending the life of the carpet flooring.

3. Are the top firms expanding too quickly? If so, what challenges face management?

Analysts seem positive about the acquisitions of the carpet industry and of Mohawk in particularly. With each acquisition, the stock price increases and each year (except 1996 and 2002) the company has made acquisitions. This is typical of companies in the lategrowth, early-maturity stage of the life cycle. Beginning in 1992 a series of strategic mergers and acquisitions redefined Mohawk and the entire floorcovering industry. As in any merger or acquisition, management faces challenges of assimilation of the various corporate cultures into one organization. There is an issue of changing or redefining management structure. Problems exist due to the nature of the various computer software packages and hardware. The programming staff is left to combine data and information. While the IT issues are beyond the scope and coverage of this case, they do represent an important point. This would represent an "A" answer. These students should note that the data flow, as in the communication flow, means they will either create one huge company and realign all the systems with the large company or leave the entitles as stand-alone strategic business units operating their own systems (with probably compromised efficiency).

4. How will smaller companies be able to carve out a lucrative niche in this industry? Do these firms represent a threat or an opportunity to Shaw and Mohawk and why?

While the small companies are neither a threat to Mohawk or Shaw, small companies can survive in this industry as a niche player. These smaller companies offer a limited line of specialized products. Firms like Niche, Inc. (athttp://www.nicheworld.com), forexample specialize in products like mats, wall coverings, custom carpet, and logo carpet for business and industry. Such players offer small runs or lot sizes and customized, one-of-a-kind designs that cost more but offer extreme choice options to the customer. As another competitor, J&J Industries, while not small, is a niche player in that they concentrate only on the commercial segment of the market. An "A" answer will mention possible niche strategies including niche-differentiation (specialized and customized products) as well as niche-low cost (serving small price sensitive customers).

5. What are the pros and cons of diversifying outside the floorcovering industry?

6. How will raw material and energy price increases (particularly oil) and the need to remain environmentally responsible continue to affect the industry in the future?

An "A" answer to this question should include additional analysis beyond the case itself to focus on current world events and the energy situation. oil shortages due to industrialization in Asia, particularly China, increased the demand for oil. The shortages and increased prices for both the raw material input and for distribution (trucking) will cause costs to increase, thereby lowering profits, or they will have to pass the costs along to the consumer. With economic uncertainty and consumer's budgets strained by their rising fuel costs (for automobiles, natural gas for heating and cooking, etc.), consumers may delay replacement purchases of flooring. New housing starts are starting to slow. Builders and specifiers (architects, designers, builders, etc.) may switch to lower-cost flooring options. Yet, consumers are demanding more hard-surf ace flooring. Thus there may be a shift from carpet (petroleum-based) to hard surfaces (wood or ceramic tile). Yet, the shipping costs to transport the flooring remain.

Raw material inputs for carpet production include nylon, polyester, and polypropylene resins and fibers and carpet backings used exclusively in the carpet and rug production. All these inputs are derivatives of petroleum.

7. Will sales of laminate and other hard surfaces continue to grow?

As with a growing number of consumer products, there is a demand for more choices and options. Carpeting, while offering a range of colors and textures, is a more mature product than the newer hard surfaces. Consumers are shifting to hard surfaces to offer more choices in flooring. While carpeting remains some 63% of market share for the industry, customers are demanding hard surfaces in kitchens, baths, and other high traffic areas. Hard surfaces have grown almost 21% (laminate) over a five year period (1998-2003). This trend suggests hard surfaces are growing in popularity. Several links, while unfounded, exist between carpet and allergies. Students with an "A" answer should also note some of the trends in laminate flooring. For example, laminates are seen as easier to clean by consumers and the number of cleaning products (Swifter duster and wet or dry disposable sheets that attract dust electrostatically) indicates the popularity of the category. While hard surfaces are growing, most customers continue to use area rugs.

8. What effect will low-cost imports, particularly from Asia, have on the industry?

Almost every consumer goods industry faces competition from Asia. However the shipping costs and transportation time from Asia offer some advantages to US carpet producers. Carpet is capital intensive but not labor intensive (as all the tufting, coating, and processing is fully automated and often vertically integrated in a seamless process). The less labor intensive industries are not as vulnerable to low-cost imports. More of the competition from imports has been at the high quality end of the carpet spectrum in silk Oriental handwoven rugs. An "A" answer should draw parallels to other textile industries, particularly the glut of Asian clothing that has entered the US market since import quotas were lifted.

Teaching Approach and Plan

It is recommended the class begin with an introduction to the industry and its history. The class can consider the questions above as an in-class assignment. Areview of major industry players is also recommended particularly to understand the parallel changes at Shaw, Inc. who has also grown through a number of acquisitions. Consolidation of the industry should be discussed as well as consolidation of the retail outlets (now largely limited to big-box home improvement retailers) as well.

Another teaching plan is to direct students to the Carpet and Rug Industry's website at: http://www.carpet-rug.com to read about the history of the carpet industry as well as highlight current trends in the industry. This is particularly important for students with limited experience in or knowledge of the industry.

Industry Analysis

A starting question for an industry analysis might be: "What are key events in the structure and growth of the floorcovering industry? Also how did the industry change from carpeting to floorcovering and what is the next revolution in the industry (Griner, 1988). Exhibit 1 summarizes the findings of a "Porter Five Forces Analysis" (Porter, 1980). An Industry Life Cycle Stage analysis is offered in Exhibit 2 (Porter, 1980; Oster, 1990; Grant, 1995 et seq.) Exhibit 3 illustrates the Industry Value Chain (Porter, 1985).

The floorcovering would be recognized by most analysts as an attractive industry when examined using the Porter's Five Forces framework. The purchase of Shaw Industries Inc. by Berkshire Hathaway attests to the hidden value of this "old world" industry by Warren Buffet, founder of Berkshire Hathaway. With the vertical integration of the industry, most firms are dependent on suppliers for nylon pellets and other petroleum-based raw materials but Mohawk, like other large manufacturers, extrude their own yarn. They purchase dye and use a large source of water for carpet dyeing. Entry barriers are high due to the size necessary to be competitive. With few manufacturers customers have a number of color and texture choices, but have little choice of manufacturer. Most manufacturers make a number of floorcovering products and most retail outlets sell the products of multiple manufacturers. Switching costs between companies by customers is low and few buy carpet based on brand name or manufacturer but rather rely on information provided by sales representatives in the retail outlets.

The relatively large market share of the two industry leaders (Mohawk and Shaw) is evident yet further mergers and acquisitions seem likely as the industry continues their consolidation. Small players that remain are likely niche players offering custom, one-of-a-kind, customized products for an up-scale customer or market. Other small players may also be low-end producers of entry-level floorcovering products.

The floorcovering industry, with a continual customer replacement cycle and a growth in housing starts in the US in recent years (2004-2005) with a slowing in 2006 has extended the growth of this industry. The industry seems to be experiencing a prolonged growth pattern due to mergers and the addition of new floorcovering products. The industry is very much linked to general economic conditions. Housing starts are a key leading economic indicator. When housing starts fall, the industry must either lower costs or shift their customer base to institutional, governmental, and other non-residential customers. These institutional customers, particularly schools and hotels, follow a cyclic and seasonal pattern for renovation schedules. Exhibit 3 portrays the Floorcovering Industry's Value Chain.

Retail carpet is a fragmented industry, requiring a high level of customer service to assist the end user in choosing colors, textures, and options. Carpet has not enjoyed a branded status and few outside the N. GA region know the Shaw or Mohawk name. Consumers are often more familiar with the coatings use to make carpet stain-free. Carpeting represents major consumer expenditure and requires much marketing and consumer education. The popularity of home redecorating has helped to advance frequent floorcovering changes. Educated customers can make a more informed choice. Marketing at the retail level requires a knowledgeable, well-trained sales force and coordination with installers since most carpet is not a do-it-yourself project. Because more people own homes and home size is increasing, floorcovering sales should continue to grow. Interest in home décor continues to rise. Ceramic tile, stone, wood, vinyl, and laminate products are growing due to increased consumer demand and will shift marketing efforts and expenditures.

Since Mohawk is the only publicly traded company with separate financial data, students can compute ratios using balance sheet and income statement data for the company. In addition students can develop a SWOT analysis for Mohawk. Exhibit 4 outlines the Strengths, Weaknesses, Opportunities, and Threats (SWOT) for Mohawk.

Subject: Carpet industry; Competition; Changes; Price increases; Case studies

Location: United States--US

Company / organization: Name: Mohawk Industries Inc; NAICS: 314110

Classification: 9190: United States; 8620: Textile & apparel industries; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 6

Source details: INSTRUCTORS' EDITION

Pages: 59-72

Number of pages: 14

Publication year: 2008

Publication date: 2008

Year: 2008

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables Diagrams References

ProQuest document ID: 216307249

Document URL: http://search.proquest.com/docview/216307249?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 20 of 100

DOTA'S SOFTWARE RE ENGINEERING GROUP: WHAT'S GOING ON IN YOUR DEPARTMENT, JIMMY?

Author: Luthar, Harsh K; Wilson, Shirley

ProQuest document link

Abstract:

The primary subject matter of this case concerns the critical Human Resource Management issues that arise in organizations. Specifically, the case focuses on the role played by legal and ethical concerns in formulating and implementing sound Human Resource Management policies for recruiting and selecting employees as well as creating a professional work environment. A related issue examined in this case explores the impact of globalization on human resource management practices of recruitment, selection, and retention. The importance for managers to engage in effective International Human Resource Management practices in the context of an outsourcing/offshoring strategy to countries like India is highlighted. This case describes events taking place at Digital Omega Tech Alpha (DOTA) Information Services. To continue expanding, DOTA opened an office in Delhi, India in 2002, and has been offshoring design and programming work to that office. However, the India office has been experiencing high turnover among employees and managers, and several major projects for important clients are stalled there.

Full text:

INSTRUCTORS' NOTES

Situation Overview

DOTA is a fictitious company and is based on a composite of cases and research in the area of human resource management as well as discussions with MBA students who are professional managers in a part-time evening MBA program.

This is an integrative case in Human Resource Management and includes a number of important issues faced by managers that pertain to making effective use of people in the workplace. The primary focus of the case is in helping management students understand the role played by legal and ethical considerations in formulating sound Human Resource (HR) policies for selection of employees and creating a professional work environment. A secondary emphasis is on recognizing the important role played by outsourcing and offshoring to countries like India and the HR issues associated with that strategy. Various Equal Employment Opportunity laws such as Title VII of the Civil Rights Act, American Disabilities Act, as well as Uniform Guidelines on Employee Selection Procedures issued by the EEOC and other federal agencies are salient to the case.

The case is appropriate for students who are at least in their junior year. Ideally, students should be in the middle or latter half of their HR course and have discussed equal employment opportunity laws as well as the impact of globalization on organizations to make the best use of the case. In order to fully benefit from the case and understand all the nuances, the students should be familiar with legal cases involving adverse impact, validation of selection instruments, reasonable accommodation for disability, and sexual harassment in the workplace. Some prior exposure to the trends of outsourcing and offshoring to other countries will help students understand the general background of the company and the challenges it is facing in international human resource management.

The case was carefully developed to ensure a comprehensive coverage of equal employment opportunity issues. It has been reviewed by undergraduate and graduate students as well as academic experts in the area of equal employment opportunity for clarity and readability. The case has been formally tested twice in HR classes by one of the co-authors with very positive results. The students invariably enjoy reading the case due to the inherent drama in the conversation between top managers and their differing perspectives on HR issues.

The case may be utilized in various ways to teach students about the application of HR concepts and laws to actual organizational problems. It can be used for in-class discussion or as an individual or group take home case that takes several weeks to complete.

For an in-class discussion, due to the complexity of HR issues raised, students should spend 4-5 hours reading and studying the case and making notes prior to the class discussion. At least two 50-minute class periods should be allocated to discussing the legal and ethical issues the case raises and the potential course of actions and strategies available to the President of DOTA.

A second approach to the case analysis could involve a substantial assignment over the second half of the semester requiring several weeks of work on the part of students. In this written case analysis, students would be required to analyze and evaluate DOTA's HR policies based on their knowledge of equal employment opportunity laws as well as the requirements of sound HR strategies. In the written case analysis, students should be required to give specific actionable recommendations to DOTA's President, Mike Thompson, and justify these based on their understanding of critical HR issues. This project could be completed by teams of 3-4 students or individual students. If the case analysis is given to students to complete individually, it should form a significant part of the semester grade (20-25 percent). Questions that Instructors can ask students to include in their written analysis are given at the end. Sample answers to these questions are provided as well in these notes. The Instructors can add other related questions as they see fit.

Case Overview

This case describes events taking place at Digital Omega Tech Alpha (DOTA) Information Services, which has been in business for about 17 years and employs around 90 people in its Providence, Rhode Island office. DOTA helps client organizations manage their information needs along the critical supply chain of their business. Specifically, DOTA designs and provides customized software solutions to handle the collection of the relevant data from important internal and external stakeholders (typically employees, customers, suppliers, partners, and even regulatory agencies) of its client organizations. This data is kept up-to-date for easy retrieval, analysis, presentation, and use for the decision makers in their client organization.

In order to continue expanding and taking on more clients, DOTA opened up an office in Delhi, India, in 2002, and has been offshoring important design and programming work. However, the Delhi office has experienced high turnover among employees and managers. With several projects for important clients stalled in the Delhi office, the President of the company, Mike Thompson, knows that the company needs to make its offshoring strategy more effective. However, top management has become distracted and troubled by an ongoing EEOC investigation into sexual harassment at DOTA's Providence office in Rhode Island.

Specific behaviors that have been called into question center on the males in the Software Engineering Department engaging in loose sexual jokes and humor, general horse playing involving playful touching, exhibiting nude posters of models, and asking the recently hired female engineers for dates. A recent e-mail was sent to the whole department by someone showing pornographic clip art and a movie animation showing a couple in the final stages of a romantic evening. Two of the Asian female engineers recently hired were very upset and took offense to that. When they complained to James Applebee, they were told that these were harmless and silly pranks to break the monotony of work and that the new women should adapt to the DOTA culture. Currently, three women are parties to a complaint with the EEOC.

The EEOC investigation has highlighted a number of serious internal problems at DOTA and is likely to expand into other areas of HR. DOTA is clearly facing legal and ethical questions relating to the company's human resource policies in the Providence office.

Given this background, the students as they read the case should be able to assess that the case essentially describes a crisis occurring in the Software Engineering Group of DOTA.

Mike Thompson, president of DOTA is learning from Lisa Connors, DOTA's Human Resources Director, that several women in the Software Engineering Group have filed charges of sexual harassment with the EEOC. Both Thompson and Connors question James Applebee, the senior manager of Software Services Department, about these charges.

LEGAL AND ETHICAL ISSUES

The following summary of conversation highlights the legal and ethical issues the students will have to analyze.

Connors is disturbed by Applebee' s response to the recent sexually graphic e-mail that was sent to everyone working in the Software Engineering Group. James Applebee states, "I thought it was funny and so do most others who work here but a couple of the Asian girls in the office have had their noses bent out of joint. We have had 11 woman software programmers join in the last 2 years and my boys are still not used to it. It's going to take some time Mikey to adjust. We hired these women so rapidly over the last year because Lisa here with HR has been on our backs to diversify. Now we have the usual problems!"

Students should be able to determine that Applebee's response is not consistent with sound human resource policy or the case law in sexual harassment. Students should be able to cite specific sexual harassment cases to support their position.

Additional specific details on what constitutes sound human resource policy which is supported by case law are given in answer to sample question number 2 which is, "Do you think DOTA would be found guilty of sexual harassment, if the case ever went to court.

Applebee, while acknowledging that there is some gender tension in the Software Engineering Group, dismisses the seriousness of the problem and maintains that there is no violation of any EEO laws. Applebee also points out that the behavior that is being questioned as inappropriate has been going on since the beginning of the company, and is part of the company culture. Applebee suggests to the HR director (Connors) that the women who are newcomers should be helped to adjust to the DOTA culture through an orientation program. Overall, Applebee seems to regard the culture of his department as being playful with no ill will or malice.

Students should be able to assess that simply because a behavior has been common in an organization does not mean that it complies with emerging norms in the workplace or the HR laws. In organizations today, there is an expectation on part of the employees, both male and female, that they will be treated professionally without regard to their gender. These expectations are supported by organizational policies which are based on EEOC guidelines. Today, organizations are required to have sexual harassment policies and to communicate these to all their employees. In addition, sound HR policy dictates that employees should be able to complain to a neutral party without having to go to their supervisor. In Burlington Industries v. Ellerth, the Supreme Court has said that an employer can only defeat liability in hostile environment cases, if the employer proves that it took reasonable care to prevent and correct sexually harassing behaviors and the victim unreasonably failed to take advantage of such procedures. Since social norms and case law on sexual harassment have evolved and continue to do so, behaviors that may not have been challenged 20 years ago may be viewed today as legally questionable. Students should be able to provide examples of this with specific cases including the ones given in the sample answers.

Lisa Connors points out the other concerns being raised by the EEOC of adverse impact against women. She questions the validity of Applebee's selection practices, which appear to put certain groups of people at a disadvantage. Applebee vigorously defends the aptitude exam given to all applicants in the Software Engineering Group and states that the test is job related and the success DOTA has enjoyed is due to the excellent selection process that screens out unqualified programmers.

Students should be able to analyze this issue in terms of Title VII of the Civil Rights Act and discuss the nature of adverse impact with reference to well known court cases. Students should demonstrate an understanding of concepts such as validity of selection instruments, business necessity defense, job relatedness of selection practices, and Uniform Guidelines on Employee Selection Procedures issued by the EEOC and other federal agencies. Students should be able to cite specific legal cases to justify their analysis. These cases along with the legal analysis of the issues can be found in the sample answer to question no. 3.

The suggestion by Connors that Applebee might be discriminating against disabled applicants is denied by Applebee. Applebee instead counters by giving an example of a hearingimpaired programmer hired by him a few years ago. Applebee points out that a recent applicant in the wheelchair was denied not because he was disabled but because he would not be able to perform the job. Applebee states that his focus is on making the company productive and not on rethinking the design of the building to accommodate every kind of disability.

The students should be able to assess this issue within the framework of the American Disabilities Act of 1990. The importance of job analysis in discovering essential functions of the job may be highlighted. Students should be able to discuss the responsibility a firm has to make reasonable accommodations to disabled employees as long as it does not cause the company undue financial hardship.

The suggestion by Connors that Applebee discriminated against an applicant because she was overweight infuriates James Applebee.

Students should be able to assess the complexity of the subject of discrimination against obese applicants as it raises both legal and ethical issues. Although ADA does not cover obesity, courts have included morbid obesity as well as disabling conditions that arise from obesity (heart disease, thyroid condition, diabetes, etc.) to come under the protection of federal laws. State and local laws are important to consider as well. Michigan is one of the states that prohibits discrimination due to weight of an individual (] Mich. Comp. Laws Ann. § 37.2102 (1985 & Supp. 1993). Students can do more research on this and include it in their analysis.

The conversation gets very hot and an acerbic exchange follows between Connors and Applebee. The meeting is concluded by president of DOTA, Mike Thompson. Thompson states that all the managers need to work as a team to tackle these challenges. Thompson suggests that Connors seek help from a neutral outside expert (his former HR professor) to help the company avoid additional lawsuits and problems with the EEOC.

Overall, the students should be able to clearly identify all the important legal and ethical issues that arise in the case, analyze these with reference to specific HR laws and court cases, and be able to make actionable recommendations based on knowledge of sound human resource policy. The following discussion questions will help students structure their analysis.

DISCUSSION QUESTIONS

1. Summarize the critical human resource issues and problems that exist at DOTA.

Currently, DOTA top management is clearly distracted from its main mission to serve its clients effectively. DOTA is having major problems with its offshoring strategy to Delhi, India and ideally should be focusing on making its International Human Resource Management more effective. Instead, top DOTA management is mired into internal squabbles at the Providence, Rhode Island home office while an EEOC investigation into company's HR practices appears to be expanding.

The problems at DOTA appear to be related to some of the senior managers such as James Applebee not understanding the requirements of EEO laws and their impact on the workplace. The fact that James Applebee is a long- term friend of the President of DOTA, Mike Thompson, and helped him start the company gives him a lot of leverage in what he does. However, what Applebee does may not be in the long- term interest of the company.

Applebee clearly knows the technical side of his business but underestimates the importance of people issues in the workplace. When a company is small and has less than 15 employees, many of the major federal EEO laws like Title VII of the Civil Rights Act do not apply to the business (even though state and local laws can still apply). This was true of DOTA in its first few years when there were only a few employees. However, DOTA has grown considerably since its inception 16 years ago and now has about 90 employees. Professionalizing the HR function should be a priority for top management. In a growing company that has gone beyond its initial entrepreneurial phase with the original small group of employees, paying attention to the workplace issues and ensuring that sound human resource practices and policies are in place is critical.

Ultimately, line managers like James Applebee must understand the nature of sound human resource management and the importance of complying with the EEO laws. This implies that they must consult and take the advice of staff managers who have specialized expertise in workplace and related HR issues very seriously.

Line managers make the most important HR decisions in organizations. They are the ones who hire, promote, discipline, and even fire employees. If line managers make the wrong decisions, the company can face lawsuits and get into serious trouble. Various issues that have been discussed in the case raise the strong possibility that there may be discrimination going on due to gender, disability, and even personal appearance or being overweight. DOTA is currently facing charges of sexual harassment in the Software Engineering Group and given the nonchalant attitude of James Applebee toward what is going on, the company may be headed into serious trouble. In addition, there appears to be adverse impact in selection due to gender and it is not clear if the selection instruments have gone through any validation. Further, issues have been raised about discrimination due to disability.

Given the current situation, DOTA may be in violation of a number of federal laws such as Title VII of the Civil Rights Act and the American Disabilities Act. In addition, DOTA may be in violation of state and local laws (referred to as Fair Employment Practices) which are often more stringent than federal laws. Without evidence that the aptitude test that has been used for over a decade for hiring is job related and valid, DOTA's selection practices would be hard to defend in court.

2. Do you think DOTA would be found guilty of sexual harassment, if the case ever went to court?

It is quite possible. Courts and the EEOC guidelines have defined sexual harassment as any unwelcome advances or conduct that creates an intimidating, hostile, or offensive working environment. This definition means that there are two types of sexual harassment:

A. Quid Pro Quo sexual harassment is when a person in a superior position in the organization makes a job opportunity (such as promotion or a salary increase) dependent upon the subordinate submitting to a sexual advance or proposition. This is a situation of "I'll do something for you, if you do this for me". This is clearly illegal and a violation of Title VII.

B. Hostile Environment sexual harassment occurs when employees are subjected to unwelcome advances, sexual jokes or banter, physical touching, being repeatedly asked for dates, exposure to nude posters, sexually graphic and/or harassing e-mails, or other such conduct of a humiliating nature, which makes work conditions intolerable. To sustain a finding of hostile environment sexual harassment, it is generally required that:

1. The harassment is unwelcome by the harassee.

2. The harassment is based on gender.

3. The harassment is sufficiently severe or pervasive to create an abusive working environment.

4. The harassment affects a term, condition, or privilege of employment.

5. The employer had actual or constructive knowledge of the sexually hostile working environment and took no adequate remedial action.

Given the above definitions, there is no evidence in the case that there is quid pro quo sexual harassment going on. However, under the current case law (see Meritors Savings Bank, 1986; Ellison v. Brady, 1991; Harris v. Forklift systems, 1991), DOTA is likely to be found guilty of creating and tolerating a sexually hostile work environment in its Software Engineering Group. Employers have been held liable for encouraging and/or being aware of and tolerating a sexually hostile work environment without trying to remedy it. That appears to be what is going on at DOTA. James Applebee, a senior manager, has been aware of the sexually harassing behaviors in his department. However, he interprets and views these acts as playful and funny. This perspective is unlikely to be shared by a judge or a jury if the case ever goes to trial. Due to Applebee's "soft" stand ("boys will be boys") on the graphic e-mail that has been sent around the Software Engineering Group, he is essentially allowing the culture in place at DOTA to perpetuate itself. The situation clearly requires intervention.

Employers can try to limit their liability from sexual harassment cases through an affirmative defense (see Faragher v. City of Boca Raton and Burlington Industries, Inc. v. Ellerth); by providing evidence that they took immediate and corrective action once they became aware of the situation. Given the current environment and culture at DOTA and the position expressed by Applebee, there is no evidence that such an affirmative defense would be available to DOTA. Mike Thompson, the President of DOTA, is now directly involved and knowledgeable about what is going on as well. If the president of DOTA does not initiate immediate corrective action, DOTA would only be getting deeper into trouble. The liability associated with sexual harassment cases can be quite substantial. In addition, the loss of reputation for the company in the region can have a negative impact on the relationship between the company and important stakeholders, which may include existing as well as potential new clients. Given the potential seriousness of the situation and liability considerations, Mike Thompson, the President of the company, should consult with a firm specializing in employment law cases.

3. The Software Engineering Group is at the heart of DOTA's success and James Applebee attributes this to the hiring of excellent programmers through the use of the aptitude test the company put in place over a decade ago. Is the use of this selection test by DOTA automatically in violation of Title VII? Analyze and discuss in depth with reference to court cases.

Tests can be designed by industrial psychologists to measure specific aptitudes, knowledge of the job, personality characteristics, intellectual abilities, physical stamina, and psychomotor functions and skills of an individual. While the information from these tests (if they are valid) can assist managers in deciding who would be the best employees, these tests are often subject to lawsuits because of the adverse impact they may have on women and/or minorities.

Adverse impact is seen to occur when a selection device or process, that is otherwise neutral, has a disproportionately negative impact on a protected group. As a rule of thumb, if the selection rate of a protected group is less than 80% than that of the majority group, adverse impact is taking place and there is a possibility that the selection practice is in violation of Title VII. If the use of such tests in an organization results in adverse impact on some protected group, the Supreme Court has stated (in Griggs v. Duke Power Company, 1971 ) that the burden falls on the employer to provide evidence that the test under question is job related or constitutes a business necessity. In the Albemarle Paper Company v. Moody case, the Supreme Court strengthened the Griggs decision by requiring employers to demonstrate that the tests used in selection that had adverse impact were indeed valid.

In order to be selected to work in the Software Engineering Group at DOTA, an applicant must score over 95% on a special aptitude test. Applebee admits that the test he uses screens out more women than men and thus has adverse impact. This is also clear from the number of women in the Software Engineering Group. The case specifies that there are 64 people in the Software Engineering Group of which 53 are males and 11 are females. While Applebee has much praise for the aptitude test being used to select programmers, he does not provide any evidence for the validity of the test that would stand up to the scrutiny of the court. Whether Applebee has such evidence or not will become a critical matter if DOTA is legally challenged on that issue.

In principle, there is nothing wrong with James Applebee wanting to use a good programming aptitude test to screen out poor performers. Many companies, in fact, do just that. Title VII does not prohibit the use of such tests in the selection process. The courts have supported the use of tests of both mental and physical abilities as long as these tests can be demonstrated to be job related. Applebee clearly feels that this is a good test and DOTA has successfully used it for over a decade. The real question is whether there is any evidence to support the test as being valid.

Since the Griggs and Albemarle court cases, validation of selection devices prior to their use with applicants is considered important. Otherwise, the employer is vulnerable to various types of class action lawsuits based on the potential for adverse impact. A test is considered valid if, based on the test results; one can predict the applicant's probability of success on the job. A valid test should accurately measure what it is designed to measure. Validity tells the employer if the characteristics or aptitudes or skills being measured by the test are related to job performance. It is the employer's responsibility to make sure that a test being used for screening applicants is valid and that documentation of its validation is available. Otherwise, the selection device cannot be defended legally or on the basis of sound human resource practices.

4. Should DOTA hire employees if they are not qualified programmers just to satisfy EEO laws? Does not Applebee have a point in stating that he has to keep his focus on the company objectives and not on the layout and design of the building to accommodate those in wheel chairs or those who are obese?

A company is never legally required by any federal, state, or local law to hire a person who is not qualified to do the job. What the EEO laws do is to force organizations to focus on relevant factors and qualifications in their selection process. Although Applebee feels that his focus should be on DOTA's productivity and not the layout and design of the building to accommodate those with disabilities, the courts would disagree with him. The American Disabilities Act requires companies to make "reasonable accommodation" to qualified disabled employees unless such accommodations results in undue financial hardship for the company. This needs to be seriously considered by DOTA.

It is important for organizations to identify essential functions of jobs through the job analysis process. If a disabled individual can perform the essential functions of a job and can demonstrates that he or she is qualified, the organization should attempt to accommodate within their financial means. Most accommodations typically cost little to the company and result in a win-win situation. DOTA is clearly a profitable company. This would make it difficult for DOTA management to argue that making minor adjustments (like lowering the shelves for those in wheel chairs, redesigning bigger bathrooms, and ensuring that the elevators are always available) constitutes a financial hardship on the company.

Although ADA does not cover obesity, Courts have included morbid obesity as well as disabling conditions that arise from obesity (heart disease, thyroid condition, diabetes, etc.) to come under the protection of federal laws. State and local laws are important to consider as well. Michigan is one of the states that prohibit discrimination due to weight of an individual (] Mich. Comp. Laws Ann. § 37.2102 (1985 & Supp. 1993). Even small and medium sized organizations in today's environment are expected to know the federal, state, and local laws that apply to it and comply with these.

The fact is that people want to and expect to be treated fairly in the workplace. Fair treatment is at the heart of many human resource issues like selection, performance appraisal, compensation and others. Employees expect to have equal access to job opportunities based on skill, education, and other objective criteria. If they encounter barriers to fair treatment and workplace opportunities based on race, gender, age, ethnicity, disability, or other irrelevant factors, they are likely to be unsatisfied. In today's competitive economy, an organization with serious human resource problems will face a variety of difficulties in its relations with its employees including lawsuits.

5. What type of leadership would be needed at DOTA to change the culture and effectively address the human resource issues that exist in the company? Are Thompson and Applebee effective leaders who are capable of changing the culture of DOTA? Discuss strategies that top management (particularly the President of DOTA, Mike Thompson) can employ to effect the cultural change.

U.S. workforce is becoming more diverse in terms of age, disability, race/ethnicity, religious orientation, sexual orientation, gender, and other characteristics. Effective leadership in today's organization means being able to motivate and mobilize employees from many diverse backgrounds. A leader must create a culture which supports, nurtures and utilizes employee differences to the organization's advantage. Therefore, an effective leader should exhibit the following traits of strong leaders : emotional intelligence, integrity, drive, motivation, self-confidence, intelligence, and knowledge of the business.

In the case of DOTA, the organization needs a strong leader who demonstrates these qualities and transformational leadership. Transformational leadership is needed here because the transformational leader is one who motivates followers to work for organizational goals instead of short-term, self-interest objectives like the ones exhibited in the Software Engineering Group. DOTA needs a leader with vision, who provides employees with the motivation to perform as well as the willingness to change behaviors and attitudes for the good of the whole organization while creating a supportive, nurturing culture. A transformational leader will be able to create an organizational culture where all employees feel valued and respected regardless of gender, race, age, or physical disability.

There are some limitations in the leadership capabilities of both Thompson and Applebee (evidenced by the fact that they have been slow to respond to diversity issues in their organization and now DOTA appears to be in trouble with the EEOC). Given the current situation, however, Thompson appears to be better suited of the two to provide the leadership needed to change the culture of DOTA to become more inclusive and supportive of diverse employees.

At the very least, Thompson recognizes a need for change. This problem recognition indicates that he possesses basic transformational leadership ability, which includes need assessment skills, communication abilities, and sensitivity to others. Leadership and assertiveness training would enable Thompson to further develop these skills and become a more effective leader.

One of Thompson's big problems is his long-term friendship with Applebee. He is reluctant to deal with his friend in a strong and assertive manner, possibly out of fear of offending him or even losing him. Perhaps due to this, Thompson has not been providing the company with a clear focus on EEO issues and even appears unaware of some of the things that have been going on. However, now it is imperative that as the President of DOTA he demonstrate strong leadership if the company is going to prosper and survive in today's multicultural environment.

Applebee, on the other hand, sees nothing wrong with the culture of DOTA. His main concern is for his department only, and not for the total organization. Therefore, he appears willing to allow an uncomfortable and even a hostile environment for some employees to exist as long as his unit continues to perform at a high level. In fact, comments like 'let's not blow it out of proportion' and 'boys will be boys' indicate that he is unlikely to change without outside intervention. Because Applebee is not inclined to take a leadership role in making the needed changes to create an inclusive culture at DOTA, it is essentially all up to Mike Thompson to move forward in a decisive way and do what needs to be done to turn DOTA around.

There are several strategies top management can use to change the culture of the company. First, the company could implement sensitivity training to help the employees understand and appreciate differences. If Thompson chooses this route, he should require all of his supervisors and top managers such as James Applebee to undergo this training first so they understand its importance. Cultural change requires the support of top management in order to be effective and Thompson now has to ensure that all the top managers understand the critical need for intervention at DOTA.

Additionally, Thompson may choose to bring in a high-level executive with experience in such situations to assist with this culture change and work with the company ' s top managers and supervisors. A chief operating officer or a comparable position would have the authority and stature to help effect culture change by mandating training, linking rewards to performance, and providing discipline for noncompliance, if needed. Strategically, by putting a new high-level executive in charge of a diversity initiative Thompson would be sending a strong and a clear message to all managers about the company's values, and where the company wants to go in the future.

EPILOGUE

Although this is a fictitious case designed to generate classroom discussion, students often wonder what actually happened at DOTA. Following is a conclusion to this case, which provides one course of action. Students may brainstorm other possible conclusions.

Mike Thompson, President of DOTA hired his former professor Dr. Rick Smith as a consultant to help navigate DOTA through this difficult time. After extensive discussions involving both Professor Rick Smith and Lisa Connors, Mike Thompson took a number of actions to address the situation. The following events were most relevant to the case.

1. In a private meeting with James Applebee, Mike Thompson asked James Applebee to take over as the manager of the India branch of DOTA immediately for one year. Thompson emphasized to Applebee that having a senior manager from DOTA in the India office at this time was essential and that Applebee with his extensive experience was the right manager for building that office. Given that many critical projects were stalled there, James Applebee agreed with this assessment and left for the assignment three weeks later.

2. Both Mike Thompson and Professor Rick Smith felt that it was advisable to bring in a professional who could look at the situation at DOTA from a fresh perspective. At the recommendation of Professor Smith, Ann Thorpe, a senior manager with over twenty years of experience in the applications of information technology to supply chain management was hired as the Chief Operations Officer of DOTA. She took over many of James Applebee's day- to- day supervisory responsibilities in the Software Engineering Department.

3. Ann Thorpe asked Lisa Connors to assist in a diversity and cultural change initiative throughout DOTA with a special emphasis on the Software Engineering Group.

4. Mandatory sexual harassment training was part of the diversity initiative and was offered jointly by Lisa Connors and Professor Rick Smith and some of his students.

5. Soon after the diversity initiative was launched, the sexual harassment charges based on hostile work environment were withdrawn by the three female engineers in the Software Engineering Department.

6. Professor Rick Smith was given the task of evaluating the HR policies including the validity of the aptitude exams that were being given to hire programmers for DOTA. The evaluation and recommendations were expected to take six months.

Subject: Employment policies; Outsourcing; Business ethics; Work environment; Case studies; Software engineering

Location: India

Classification: 9179: Asia & the Pacific; 8300: Other services; 9110: Company specific; 2410: Social responsibility; 5120: Purchasing; 6100: Human resource planning

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 6

Source details: INSTRUCTORS' EDITION

Pages: 73-87

Number of pages: 15

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216280365

Document URL: http://search.proquest.com/docview/216280365?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 21 of 100

TOM BROWN INC.: SURVIVING IN THE OIL AND GAS INDUSTRY

Author: Jackson, William T; Jackson, Mary Jo; Johnson, Larry A

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Abstract:

This case is a library, popular press and Internet case which examines Tom Brown Inc. The review of annual reports, trade journals, government documents and proposed and enacted regulations must be accomplished carefully. While most students have a general understanding of the oil and gas industry, few have the current knowledge to compare this industry against more traditional production operations. A review of these resources should lead students in determining the future of the company and the current CEO, Tom Brown.

Full text:

INSTRUCTOR'S NOTES

Company Mission

"Tom Brown, Inc. is an independent energy company engaged in the exploration for, and the development, acquisition, production, and marketing of natural gas, natural gas liquids, and crude oil primarily in the gas-prone basins of the North American Rocky Mountains and Texas. "

The corporate mission of TBI should be located by the students on the corporation's website. A review of the mission clearly demonstrates that the company has a well focused mission statement. Further investigation of TBFs direction within that document allows the identification of several internal goals and directions. Each of the below goals reinforces the company's desire to build value per share:

* Exploring undiscovered reserves

* Acquiring and exploiting oil and gas properties

*Enhancing value by optimizing production, actively marketing and processing natural gas and focusing on cost containment

* Aggressively managing and holding a dominant land position in its core areas

* Maintaining a strong balance sheet

Review of these goals should provide discussion on consistency with the mission. Knowledge of the actual results indicates, for the most part, that TBI has created a well developed direction for the company. Some discussion may arise regarding whether the above goals are truly goals or are they strategies the company is pursuing.

INDUSTRY ANALYSIS

Threats to Entry

The natural gas production industry sells a relatively undifferentiated commodity. There is no proprietary product difference or brand identity associated with natural gas. Many projects have fairly low capital requirements for domestic natural gas production. In addition, there are no switching costs for purchasers of natural gas.

One barrier that a new start-up would encounter could be access to distribution channels in certain gas rich areas-the Rocky Mountains for example. Not only is there a lack of pipeline capacity existing in the region, but individual gathering systems within that region also lack abundance. Individual operators can build gathering systems, but these systems make project economics much less attractive.

Perhaps the biggest deterrent for potential competitors within the natural gas industry is the fact that existing firms have absolute cost advantages with respect to the exploration and development of new reserves. Because the domestic natural gas market must now develop low quality reserves, competitors often lack the knowledge base to know which properties may have reserves and how exactly to go about developing those reserves.

Another component influencing the treat of new entrants is the expected retaliation of existing firms within the industry. Expected retaliation in the natural gas production industry only exists with respect to employment wars between companies. With the departure of many of the major oil companies from the U.S. exploration and development market, most firms are on a relatively equal platform in this regard.

Threats of Substitute Products

There are many other energy sources across the country that could be substituted for natural gas. These substitute forms of energy include coal, nuclear, hydro, heating oil, solar, and windgenerated. Considering that a firm's greatest concern with substitute products is their potential to set the price ceiling for your product. This consideration excludes solar, heating oil and wind-generated power as major concerns.

On the other hand, hydroelectricity is a very cheap form of energy that is definitely substituted for natural gas where possible. However, the total amount of power generated by this means is already at maximum capacity and accounts for only a small percentage of the nation's needs. The cleanest and cheapest form of energy generation in the world is that of nuclear power. Per megawatt of electricity produced, no other form of energy generation compares with respect to cost or amount of pollution generated. Due to the public's reaction to "nuclear" power plants, the nations move to this supply has been extremely limited in recent years with no new plants coming on line for several years.

Power of Buyers

Unlike many commodities, natural gas purchases are typically not at the discretion of the final end user. The price, as discussed in the case, is driven primarily on the basis of supply versus demand.

An element in the channel of distribution for this product does have a considerable influence on price in certain regions-the owners of the pipelines. When there is limited capacity with respect to the movement of the gas, the pipeline owners have considerable leverage and can charge a premium for its movement.

Power of Suppliers

In the oilfield, products and services are highly differentiated. There are such a large number of applications that must be catered to that a myriad of sub-sectors have arisen in the industry. Because each sub-sector contains only a handful of firms that are also differentiated within their peer groups, competition is low and these firms are able to charge a premium. Furthermore, limited knowledge with respect to the specialty products and services reduces the power of the exploration companies. To illustrate this point, below are a few of the specialty sub-sectors:

Drilling-drilling rigs that powers the drilling operations

Bits-bits that can cut and drill away rock

Mud-drilling fluids that provide pressure control

MWD-equipment that measures bottom-hole characteristics

Directional Drilling-hole guidance and directional drilling heads

Logging-measurement instruments of rock characteristics

Communication-relay information from remote rig locations

Casing and Liners-liners for the hole to ensure wellbore integrity

Cementing-cementing for pressure isolation and corrosion control

Down-hole tools-tools to correct remote problems

Wellheads-surface control equipment

Safety-various safety equipment items

These are only a few of the sub-sectors-there are numerous others.

There is one other supplier that may exert even more power over independent exploration and production companies. That supplier is land owners. Gas rich land masses are in short supply.

Rivalry of Existing Firms

In terms of the competitiveness of the industry, most experts would classify the industry as only relatively competitive. There is exceptional growth, few large players, fixed cost as a percentage of value added is low and exit barriers are generally low.

For students it will be difficult to accumulate a great deal of information relating to each of TBFs direct competitors. This is not a major concern for the analysis. A few of these firms include: Apache, EOG, Evergreen, Forest, Newfield and Pogo,

After analyzing the above five forces, students should come to the general conclusion that the industry is potentially very attractive. There are some protective barriers to entry, buyers are not powerful, there are limited substitute products, and the industry is relatively mild in terms of competition.

GENERAL ENVIRONMENT

The case provides numerous opportunities for the students to explore the influence of the general environment on firms. While good discussions can be generated regarding the influence of the social, global and technological forces, the areas that need the most attention from the students are natural, economic and legal and political issues.

Legal/Political:

Students should be prepared to recognize not only existing regulations, but also the potential for future re-regulation of the industry. Students should also be cognizant of the political climate relating to foreign producers. At a minimum, students should address the issues in the following paragraphs.

While forthcoming legislation and changes in governmental regulations are difficult to predict, firms operating in the natural gas industry need to be aware of proposed changes and steer their strategic plans to capitalize on legislative activity and minimize the negative impact of regulatory actions. Both the President and Congress see the need for a change in U.S. energy policy. The U.S.'s dependence on foreign oil has adverse economic and geopolitical consequences. Both government and industry view natural gas as an economic alternative to fuel oil and a clean fuel source for the generation of electricity.

A growing use of natural gas is in the generation of electricity. Coal, while being the most plentiful energy source in the U.S. and the primary fuel source for electric generation, has a number of environmental issues as it relates to air quality. Air quality regulatory activity has become more stringent and costly every year. Emissions from coal plants have been regulated since the Clean Air Act of 1992. The President has proposed an update of the Clean Air Act that would call for even more stringent requirements on the emissions of Nitrogen Oxide (NOx) and Sulfur Dioxide (SO2). Even without legislative reform, the EPA and the various states through the Clean Air Interstate Rule are likely to require lower emissions of NOx and SO2. Regulatory proposals are also in place for control of mercury emissions and well as fine particulate matter.

Pending legislation targets an increase in both domestic production as well as natural gas imports. A revision of the Energy Policy Act of 1992 is currently under consideration at the federal level. Legislative provisions being discussed include opening up the Alaskan North Slope to oil and natural gas exploration and the construction of a natural gas pipeline from Alaska to the lower fortyeight states. Proposed incentives include low interest loans and loan guarantees as well as accelerated depreciation for the pipeline owners. Proposed activities to promote additional exploration include royalty relief for oil and gas production in the deep waters of the Gulf of Mexico and the opening up of additional areas in the deep Gulf and off the Florida coast. Other areas for exploration are also being discussed including the Outer Continental Shelf and additional Federal Lands in the Rock Mountains. While these legislative activities will eventually put some downward pressure on natural gas prices, they also offer new opportunities for TBI.

Both the President and Congress view Liquefied Natural Gas (LNG) as a solution to the U.S. dwindling natural gas supply. However, the U.S. has limited importing and re-gasification facilities for LNG A number of companies have attempted to build LNG import stations but have not been successful due to environmental and safety concerns; especially, after the September 11 terrorist attacks. Currently, the approval and permitting of importing facilities are up to the individual states. Current provisions would move this approval and monitoring authority to the federal level. Approval of import facilities are proposed to fall under the jurisdiction of the Federal Energy Regulatory Commission (FERC) with safety issues to be addressed by the Department of Homeland security.

The California energy crisis and a general shortage of electricity in the U.S. have prompted a number of provisions to expand the use of nuclear and coal. No nuclear reactors have been constructed in the U.S. since the mid 1970' s. Current provisions include cost off-sets and tax credits for new nuclear plants. Coal, while environmentally unfriendly, is plentiful. Many see coal gasification as an environmentally friendly method of producing electricity. The Department of Energy is encouraged to foster the development of this technology and provide cost-offsets and tax credits to support its development.

Natural gas production from the Rocky Mountain States has been hampered by a lack of pipelines and storage facilities. Tariffs for natural gas transportation and storage fall under the jurisdiction of FERC. These tariffs fail to provide the economic incentives for new pipelines and storage facilities in the West. FERC is currently reviewing provisions to permit natural gas companies to provide storage facilities at market-based rates if FERC believes the company can not exert excessive market power.

Threats

* Increased environmental and safety regulations

* Increased social concern driving further pocketed legal roadblocks such as in Colorado

* Regulation restricting expansion due to potential environmental damages

Opportunities

* Increased regulation forcing larger companies out

* Legal restrictions being lifted in certain international markets

Economic

The case clearly demonstrates the influence of two major economic issues on the natural gas industry. Supply and demand is probably no more apparent in any other industry. Also the relationship of Economic Growth as measured by GDP is made very clear in this case.

Threats

* Unpredictable patterns of supply and demand

* Downturn in the economy

Opportunities

* Economic upturns

* Price increases bring new exploration

Natural

The very nature of the commodity presents both challenges and opportunities for the industry. While natural gas is a limited resource, there is still potentially a very large market to explore. The greatest concern students should identify is the diverse and isolated locations of many of the gas rich locations. In addition, gas consumption is increasing at a faster pace in the U.S. than in other areas rich in natural gas.

INTERNAL

Firms in the oil and gas industry have had very little written about there day-to-day operations in the popular press. This is also true regarding the leaders within those firms. While studying Tom Brown would be a case in itself, access to large amounts of information about him is limited. The same is true about the individual functional areas within the firm. Students will be limited primarily to looking at the raw numbers and drawing conclusions based upon these financial statements.

Financial Analysis

The analysis begins with the comparison of the firm's key performance ratios to those of its competitors. For this analysis, a random selection of independent natural gas producers with domestic operations was chosen as an industry peer group. Among those were Apache, EOG, Evergreen, Forest, Newfield, and Pogo.

Return on Revenue (ROR)-this performance ratio indicates the company's profit margin on every dollar of revenue. Lower ROR percentages indicate that the company is spending more money in the acquisition, development, or production of its reserves, or that current operations carry a high level of fixed costs compared to existing production rates. In either case, companies with lower ROR live with cost disadvantages compared to their peers. TBI was in the middle of the pact compared to its peers in this category.

Return on Assets (ROA)-this performance ratio indicates the company's ability to utilize its asset base to generate net income. Some companies may be extremely efficient at generating income from revenue (high ROR), but not utilize their full asset base to maximize those revenues (low ROA). Companies with the highest ROA are growing at the fastest rates as a direct result of differentiating their operations and establishing cost advantages withrespect to "finding costs." TBI was a leader in this area within its peer group. The increase natural gas prices realized between 1999 and 2001 enabled the firm to benefit from its strategic plays and large production base existing within the Rockies.

Return on Equity (ROE)-this performance ratio indicates the company ' s ability to deliver earnings to its stockholders. This ratio is directly dependent on the firm's ROA in combination with its capital structure and cost of debt. Given a ROA higher than the cost of debt, an increased capitalization ratio results in a higher ROE. Likewise, given a ROA less than the cost of debt, increased capitalization ratio results in lower ROE. ROE for TBI is at the bottom of its peer group. This is true for each of the years under study. This is especially alarming given that TBI increased its ROA performance. The obvious reason for the difference between ROA and ROE is the amount of leverage assumed by TBI versus its peers. This should have become obvious to the students as they studied Table 1 within the case.

Capitalization Ratio-this ratio is a measure of the firm's long-term debt compared to its total capital base. The capitalization ratio is a simple measurement of financial leverage. TBI carried a debt percentage significantly below that of its peers-10-15% versus 35-40%. While the impetus to do this is admirable (Tom Brown's individual aversion to the risk associated with debt), it is obvious that it places TBI at risk as a target for a takeover.

CRITICAL ISSUES

While numerous issues are facing the company, a few of these are explored below.

Critical Issue # 1

THREAT-the cyclical nature of the natural gas industry adds a large component of market risk into the equation, which can lead to decreased cash flows and the mistiming of projects.

WEAKNESSES-the company has historically assumed market risk in its business operations-opting not to hedge gas production. The combination of assuming the risk associated with developing unconventional gas sources (operational risk) as well as market risk has been detrimental to the company's prior financial performances.

Within TBI's operations, there is a major inconsistency between the business unit level strategy and functional level strategies. The business unit level strategy dictates that the company will achieve superior financial results by employing its technical staff and its land position to find and develop a production/reserve base at a cost significantly lower than its competitors. While the company has been successful in its attempts to realize this objective, the company's financial results have been sub-par in some areas. While mitigating risk and outperforming the market in terms of operational excellence, TBI has given back many of these gains by assuming a large degree of market risk in its operations. This was evident in 2002, as TBI production and reserves increased at acceptable levels, while net income plummeted to a negative $8.2 million. As can be inferred, TBI did not hedge any of its production prior to the start of the year.

Critical Issue #2

OPPORTUNITY-Major oil producers and some large independents are exiting the high-cost environment in North America in search of low-cost reserves found abroad. Therefore, existing domestic properties will continue to be sold to independents.

STRENGTH -TBI has a proven track record of successfully evaluating and subsequently negotiating the purchase of those properties. The company's current capital structure would allow for easy financing of such deals.

Over the past decade, TBI has been able to acquire properties at prices significantly lower than its finding costs. Many of the acquired properties have also led to very successful, low-cost development projects. Therefore, the availability of additional salesblock properties can only be beneficial.

Critical Issue #3

THREAT -With its large composition of gas reserves and strategic positioning, larger competitors may make hostile-takeover bids to acquire the TBFs reserves for a fraction of their real value.

WEAKNESS -TBI's capital structure, with its low levels of debt, invites an action. The company's historically low Return on Equity (due primarily to unfavorable leverage positions) might have the shares undervalued-further enticing potential acquirers.

Although short-term shareholder value may increase as a result of such a transaction, it probably would not be beneficial to stockholders in the long term. Because of the low capitalization ratio historically employed by the company, the Return of Equity has been artificially reduced. This reduction in ROE negatively impacts the price of the stock. Therefore, a hostile acquirer, instead of the previous shareholders, would benefit form this "hidden value". In addition, there is a very real possibility that the value of natural gas (and thus TBI shares) will significantly increase in the near future. A hostile takeover would strip existing shareholders of this future value.

Subject: Petroleum industry; Research & development--R & D; Strategic management; Comparative analysis; Case studies

Location: United States--US

Company / organization: Name: Tom Brown Inc; NAICS: 211111

Classification: 9190: United States; 2310: Planning; 8510: Petroleum industry; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 6

Source details: INSTRUCTORS' EDITION

Pages: 89-102

Number of pages: 14

Publication year: 2008

Publication date: 2008

Year: 2008

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: References Tables

ProQuest document ID: 216283459

Document URL: http://search.proquest.com/docview/216283459?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 22 of 100

SUNNY VIEW MEMORIAL HOSPITAL: A DAY IN THE LIFE OF A BUSY HOSPITAL PHARMACY MEDICATION ERRORS, MANAGERS, AND MISSING MEDICATIONS, OH MY!

Author: Wine, Jessica N; Khanfar, Nile M

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Abstract:

The incessant requests and ringing of the telephone exhaust the overworked pharmacists of Sunny View Memorial Hospital Centralized Pharmacy. To add to the chaos, the hospital pharmacy manager has been insisting that the pharmacists must work even harder to prevent the errors and medication problems that have been steadily increasing over the past weeks in the hospital. In a hectic work environment without effective guidance to reach any goals to decrease these errors is leading Sunny View Memorial Hospital down a path of destruction and failure. With an inefficient dictator-like pharmacy manager placing the blame on others and not taking control, medication orders pile up and life-threatening errors are occurring in the pharmacy and putting patients' lives at risk. This case, which focuses on the local and global implications of poor management in a hospital pharmacy setting provides insight into the utility of proper management techniques in the healthcare system to enhance patient safety.

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

Case Objectives

* Identify the symptoms of any problems at Sunny View Memorial Hospital.

* Diagnose the problem using management terms and definitions.

* Characterize the Hospital Pharmacy Manager's leadership technique based on his actions and availability to the hospital pharmacists.

* Use Hersey and Blanchard's theory to define leader and follower roles.

* Analyze possible solutions to solve the problems, keeping in mind management theories and goals.

* Examine the hospital workplace as a whole and identify problems overall.

Questions

1. Identify the symptoms of any problems at Sunny View Memorial Hospital.

Symptoms of problems found at Sunny View Memorial Hospital consist of the following:

* Medication errors are steadily increasing

* Dissatisfied and disgruntled employees

* Pharmacists working extremely long hours

Memos full of criticism

* The main goal of decreasing errors is not being reached

* Patients receiving double doses

* No upgrade in technology since the 90's

* global endangerment of patient wellbeing

* lack of organization

* lack of timeliness

* lack of modern technology

* understaffed pharmacy

* knowledgeable pharmacist unable to correct/verify orders correctly

* accurate records are not being kept

These symptoms mentioned above lead us to believe that there is a graver problem/situation at hand.

2. Diagnose the problem using management terms and definitions. The problem in this pharmacy is mismanagement.

A. Based on Fayol's Classical Management Theory it is essential to have five management functions and in this case this pharmacy is missing all of them.

* Planning: The pharmacy manager has not formulated or implemented an action plan that will allow the pharmacy operations department to meet the goals and objectives set by the hospital. The methods and resources needed in order to accomplish the current goals are unclear.

* Organizing: The pharmacy managers' current operational model is clearly haphazard. The pharmacists are overworked and are unable to utilize their clinical skills. It seems that the pharmacy operations are inefficient and dysfunctional. Until the pharmacy operations are streamlined or additional pharmacists are hired, the statistics of the hospital will continue to decline.

* Leading: The pharmacy manager has not been successful at setting clear directives for his department staff and therefore achieves results that are repeatedly unacceptable. He has not been able to align the vision, values, mission and or goals of the organization with that of his staff. Therefore, he is a poor manager and clearly lacks the traits of a leader.

* Controlling/Evaluation: The pharmacy manager has not assessed nor analyzed the reasons for the pharmacy's failures and is unwilling to collect feedback from the staff. He focuses his frustrations on blaming the pharmacists and maintains a closed door policy.

B. The Manager/Employee Relationship models a hierarchical style of the past. In today's world, this relationship should be a partnership where rewards are shared. Currently, there is no partnership between the manager and the pharmacists. The manager has failed to convey the energy, support, empowerment and good communication that are necessary for such a relationship. This has lead the very skilled pharmacists against the entire system where they are now unwilling to perform.

C. The manager also lacks basic managerial skills necessary to get to a proposed goal. The lack of conceptual skills and human skills:

* Conceptual Skills : the ability to analyze and diagnose a situation and find the cause and effect.

* Human Skills: the ability to understand, alter, lead, and control people's behavior.

3. Characterize the Hospital Pharmacy Manager's leadership technique based on his actions and availability to the hospital pharmacists.

Based on the pharmacy manager's actions and availability to the hospital pharmacists, the only way to characterize his leadership techniques is a little bit of each technique we have learned. We consider most of his actions in the method of Laissez Faire since he is greatly hands off or absent and he believes that things will work themselves out. His pharmacy staff is very educated and capable but without the proper resources and empowerment the pharmacists are failing. On the other hand, this manager also operates with a little of bureaucratic methods. He is all about "it's not my fault" and greatly avoids responsibility. He also displays a bit of authoritarian in his communication skills only being one way. The one thing he is NOT is participative.

4. Use Hersey and Blanchard's theory to define leader and follower roles.

Hershey and Blanchard' s theory states that employees vary in their level of maturity and readiness. Leaders should adjust their leadership style to match the development level of the employee (follower). Maturity is assessed in two parts: (i) psychological maturity and (ii) the ability and readiness of the employee.

At Sunny View Hospital, Pharmacy manager is high task focus and low relationship focus., he uses one-way communication and sees his followers as unable and unmotivated. Pharmacists are at R4, willing and able to change their work environment, but they are too over-worked to try. They also have no internal or external motivations.

5. Analyze possible solutions to solve the problems, keeping in mind management theories and goals.

To solve the problems of declining productivity and poor employee moral, the pharmacy manager might consider some or all of the following:

* Scientific management (Taylor) - focus on employees within his department and on ways to improve their productivity, e.g. The pharmacy manager should encourage two-way communication between the staff and himself. He can then utilize their feedback and input to formulate a strategic action plan to turn things around in order to achieve the goals within the four week time frame.

* According to Nelson and Economy (2003) today's managers also need to energize their employees. This can be achieved by getting their "buy in". This will inspire them to follow his action plan with a sense of urgency. He should also empower his staff by providing them with the necessary resources to get the job done. In addition to empowering his staff, he should support them while still being mindful to balance the needs of his department with the resources allocated by the organization. Communication is very important also. The manager should communicate effectively with his staff and gain their trust. Instead of a closed door policy he should convert to an open door policy.

* Administrative management (Fayol' s) - focuses on the organization (pharmacy) and the ways to make it efficient, e.g. The pharmacy manager should submit a proposal to the CEO requesting a budget increase for his department. This could facilitate more pharmacy staff, automated dispensing machines, shoots that deliver medications to nursing stations on different floors and other improvements. He could also request that a Pharmacy Supervisor position be offered. This will help to motivate his staff and also help the department to achieve its goals.

* Specific steps that can be taken in order to improve the pharmacy situation:

* Try to set a meeting with pharmacy manager to formally sit down and discuss the issues going on at the pharmacy, try to come up with possible solutions and get input from him on suggestions on how to solve the issues. For example, the need to implement policies and procedures for pharmacy operations.

* Since the pharmacists are obviously capable to do the task due to their extensive training and experience, at this point we do not know if they are willing or unwilling to try to work more efficiently. The pharmacy manager can turn the responsibilities of decision making and implementing to the pharmacists. The manager can also work with the pharmacists and share ideas as well as facilitate in the decision making process.

* Create goals to help reduce medication errors

* Try decentralizing the pharmacy

* Need specific tasks for Pharmacy employees: i.e.

* need one person in charge of screening calls only. This person is to log calls stating:

- Time call received

- Priority (high, med, low)

- Room #

- Patient name

- Medication needed/Issue

- Needed by (time)

* Need technicians to look at chart above and fill medications accurately. After filling the medication, the technician is to provide the medication order and filled prescription/medication order to the pharmacist(s) on duty.

* Need pharmacist: while the technician is filling the medication, the pharmacist can review the patients' chart and evaluate for drug interactions, dosages, contraindications, etc...

The pharmacist is to check the filled medication for accuracy before dispensing the medication.

* After the prescription/medication order is checked by the pharmacist, the technician is to place the filled prescription/medication order in the appropriate medication cart for the technician to deliver prior to the promised time. The nurse is also to check for accuracy with the 5 R's: Right patient, Right medication, Right dose, Right route, and Right administration time.

* Consider adding an automatic dispensing machine under the pharmacy's supervision which will allow the pharmacists to spend more time on clinical issues rather than filling prescriptions/medication orders.

* Need to consolidate the medical records with the pharmacy records to avoid duplicate administration. As in most metropolitan located hospitals, faxing the information directly into the system keeps duplications from happening.

6. Examine the hospital workplace as a whole and identify problems overall

The problems of Sunny View Hospital as a whole are that the hospital's organizational structure needs to be revised. It seems that there are high expectations of the pharmacy but not enough resources, assessment, planning, organization, and implementation. There is not enough pharmacy staff and the technology is lacking. The pharmacy manager has poor management skills and is unable to utilize the available resources. He does not recognize that the problem cannot be fixed if the pharmacists do not have the time to perform their jobs efficiently and effectively. It is his responsibility to manage the department.

Subject: Hospitals; Medical errors; Work environment; Case studies; Pharmacy

Location: United States--US

Classification: 6100: Human resource planning; 8320: Health care industry; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 6

Source details: INSTRUCTORS' EDITION

Pages: 103-109

Number of pages: 7

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216300092

Document URL: http://search.proquest.com/docview/216300092?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 23 of 100

CAPE CHEMICAL: CAPITAL BUDGETING ISSUES

Author: Kunz, David A; Dow, Benjamin L

ProQuest document link

Abstract:

Cape Chemical is a relatively new regional distributor of liquid and dry chemicals, headquartered in Cape Girardeau, Missouri. The company, founded by Ann Stewart, has been serving southeast Missouri, southern Illinois, northeast Arkansas, western Kentucky and northwest Tennessee for five years and has developed a reputation as a reliable supplier of industrial chemicals. Stewart's previous business experience provided her with a solid understanding of the chemical industry and the distribution process. As a general manager for a chemical manufacturer, Stewart had profit and loss (P&L) responsibility, but until beginning Cape Chemical, she had limited exposure to company accounting and finance decisions.

The company reported small losses during its early years of operation, but performance in recent years has been very good. Sales have grown at double-digit rates, new product lines have been added and profits have more than tripled. The growth has required the acquisition of additional land, equipment, expansion of storage capacity and more than tripling the size of the work force. Stewart has proven to be an expert marketer, and Cape Chemical has developed a reputation with its customers of providing quality products and superior service at competitive prices.

Despite its business success, Cape Chemical is still a "large" small business with Stewart making all important decisions. She recognized the need to develop a professional managerial staff, particularly in the area of finance. Recently, she hired Kate Clarkson as the company's first finance professional and placed her in charge of the company's accounting and finance activities. Cape Chemical's board of directors is composed of Stewart, her brother and the company's attorney. The board's existence satisfies state regulatory requirements for corporations but provides no input to business operations.

Full text:

BACKGROUND

Cape Chemical is a relatively new regional distributor of liquid and dry chemicals, headquartered in Cape Girardeau, Missouri. The company, founded by Ann Stewart, has been serving southeast Missouri, southern Illinois, northeast Arkansas, western Kentucky and northwest Tennessee for five years and has developed a reputation as a reliable supplier of industrial chemicals. Stewart's previous business experience provided her with a solid understanding of the chemical industry and the distribution process. As a general manager for a chemical manufacturer, Stewart had profit and loss (P&L) responsibility, but until beginning Cape Chemical, she had limited exposure to company accounting and finance decisions.

The company reported small losses during its early years of operation, but performance in recent years has been very good. Sales have grown at double-digit rates, new product lines have been added and profits have more than tripled. The growth has required the acquisition of additional land, equipment, expansion of storage capacity and more than tripling the size of the work force. Stewart has proven to be an expert marketer, and Cape Chemical has developed a reputation with its customers of providing quality products and superior service at competitive prices.

Despite its business success, Cape Chemical is still a "large" small business with Stewart making all important decisions. She recognized the need to develop a professional managerial staff, particularly in the area of finance. Recently, she hired Kate Clarkson as the company's first finance professional and placed her in charge of the company's accounting and finance activities. Cape Chemical's board of directors is composed of Stewart, her brother and the company's attorney. The board's existence satisfies state regulatory requirements for corporations but provides no input to business operations.

CHEMICAL DISTRIBUTION

A chemical distributor is a wholesaler. Operations may vary but a typical distributor purchases chemicals in large quantities (bulk - barge, rail or truckloads) from a number of manufacturers. They store bulk chemicals in "tank farms", a number of tanks surrounded by dikes to prevent pollution in the event of a tank failure. Tanks can receive and ship materials from all modes of transportation. Packaged chemicals are stored in a warehouse. Other distributor activities include blending, repackaging, and shipping in smaller quantities (less than truckload, tote tanks, 55-gallon drums, and other smaller package sizes) to meet the needs of a variety of industrial users.

THE SITUATION

The unexpected withdrawal of one of Cape Chemical's competitors from the region has provided the opportunity to increase its blended packaged goods sales. That's the good news. The bad news is Cape Chemical's blending equipment is operating at capacity, thus to take advantage of this opportunity, additional equipment must be obtained, requiring a major capital investment. It is estimated that Cape Chemical must increase its annual blending capacity by 800,000 gallons to meet expected demand for the next three years Annual capacity must increase by 1,400,000 gallons to meet projected demand beyond the next three years.

Stewart is considering two alternatives proposed by the company's engineer. The first is the acquisition and installation of used equipment that will provide the capacity to blend an additional 800,000 gallons annually. The used equipment will cost $105,000 to acquire and $15,000 to install. The equipment is projected to have an estimated life of three years. The second option is the acquisition and installation of new equipment with the capacity to blend 1,600,000 gallons annually. The new equipment would have a substantially higher cost of $360,000 to acquire and $60,000 to install, but have a higher capacity and an economic life of seven years. The new equipment is also more efficient thus the cost of blending is less than the blending cost of the used equipment. Stewart asked Clarkson to lead the evaluation process.

Stewart thinks the used equipment could be obtained without a new bank loan. The acquisition of the new equipment would require new bank borrowing.

The evaluation of each alternative will require an estimate of the financial benefits associated with each. The marketing and sales staff estimated incremental sales of blended package material will be 600,000 gallons the first year and increase by 15% each year thereafter. During the last year, the average selling price for blended material has been near $4.05 per gallon and material cost (not including a cost for blending the material) has been approximately $3.53. The marketing staff anticipates no significant change in either future selling prices or product costs; however they do estimate variable selling and administrative expenses associated with the increased blended material sales to be $.20 per gallon.

PROJECT EVALUATION PROCESS

The company has no formal process for evaluating capital expenditure projects. In the past Stewart had reviewed investment alternatives and made the decision based on her "informal" evaluation. Clarkson plans to develop a formal capital budgeting process using the Cash Payback Period, Discounted Cash Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR) and Modified Internal Rate of Return (MIRR) evaluation methods.

Weighted Average Cost of Capital (WACC)

Using input from an investment banking firm, Clarkson estimates the company's cost of equity to be 18%. Their bank has indicated a long-term bank loan can be arranged to finance the new equipment at an annual interest rate of 12% (before tax cost of debt). The bank would require the loan to be secured with the new equipment. The loan agreement would also include a number of restrictive covenants, including a limitation of dividends while the loans are outstanding. While long-term debt is not included in the firm's current capital structure, Clarkson believes a 30% debt, 70% equity capital mix would be appropriate for Cape Chemical. Last year, the company's federalplus-state income tax rate was 30%. Clarkson does not expect the income tax rate to change in the foreseeable future.

Used Equipment

The used equipment will cost $105,000 with another $15,000 required to install the equipment. The equipment is projected to have an economic life of three years with a salvage value of $9,000. The equipment will provide the capacity to blend an additional 800,000 gallons annually. The variable cost to blending cost is estimated to be $.20 per gallon. The equipment will be depreciated under the Modified Accelerate Cost Recovery System (MACRS) 3-year class. Under the current tax law, the depreciation allowances are 0.33, 0.45, 0.15, and 0.07 in years 1 through 4, respectively. The increased sales volume will require an additional investment in working capital of 2% of sales (to be on hand at the beginning of the year).

New Equipment

The acquisition of new equipment with the capacity to blend 1,600,000 gallons annually is the second alternative. The new equipment would cost $360,000 to acquire with an installation cost of $60,000 and have an economic life of seven years and a salvage value of $60,000. The new equipment can be operated more efficiently than the used equipment. The cost to blend a gallon of material is estimated to be $.17. The equipment will be depreciated under the MACRS 7-year class. Under the current tax law, the depreciation allowances are 0.14, 0.25, 0.17, 0.13, 0.09, 0.09, 0.09 and 0.04 in years 1 through 8, respectively. The increased sales volume will require an additional investment in working capital of 2% of sales (to be on hand at the beginning of the year).

REQUIREMENTS

Assume the role of a consultant, and assist Clarkson to answer the following questions.

1) Calculate Cape Chemical's weighted average cost of capital (WACC). Note: round to the nearest whole number. Discuss the theory used by Clarkson to determine Cape Chemical's optimum target capital structure (30% debt and 70% equity).

2) Since the used equipment will be financed with internal capital and the new equipment with a bank loan, should the same discount rate be used to evaluate each alternative? Explain.

3) Explain why an accurate WACC is important to a firm's long-term success.

4) Evaluate the strengths and weaknesses of the Cash Payback Period, Discounted Cash Payback Period, NPV, IRR and MIRR capital expenditure budgeting methods. Prepare a recommendation for Stewart regarding the capital budgeting method or methods to use in evaluating the expansion alternatives. Support your answer.

5) Calculate the Cash Payback Period, Discounted Cash Payback Period, NPV, IRR and MIRR for each alternative. For these calculations, assume a WACC of 15%. Based strictly on the results of these methods, should either option be selected? Why? Solution requires preparation of a spreadsheet.

6) Stewart is concerned that the projected annual sales growth rate of 15% for incremental blended material may be optimistic. Recalculate the Cash Payback Period, Discounted Cash Payback Period, NPV, IRR and MIRR for each alternative assuming the annual sales growth rates of 10% and 5%. Assume a WACC of 15%. Does the change in growth rate alter the recommendation made in question 5? Solution requires preparation of spreadsheets. Explain.

7) The projected cash flow benefits of both projects did not include the effects of inflation. Future cash flows were determined using a constant selling price and operating costs (real cash flows). The cash flows were then discounted using a WACC that included the impact of inflation (nominal WACC). Discuss the problem with using real cash flows and a nominal WACC when calculating a project's Discounted Payback Period, NPV, IRR and MIRR.

8) What other issues should Stewart and Clarkson considered before a final decision regarding the expansion alternatives is made?

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

Volume: 15

Issue: 2

Pages: 20-24

Number of pages: 5

Publication year: 2008

Publication date: 2008

Year: 2008

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412155

Document URL: http://search.proquest.com/docview/192412155?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-12

Database: ABI/INFORM Complete

Document 24 of 100

AMERITECH IN THE PHILIPPINES: FAILURE TO ADJUST TO FILIPINO CULTURAL NORMS?

Author: Rarick, Charles A; Angriawan, Arifin; Nickerson, Inge

ProQuest document link

Abstract:

AmeriTech was started in Lexington, Kentucky by a small group of former IBM employees who accepted a buyout package offered by the company when the Lexington division was reorganized in 1991. Originally, AmeriTech produced computer supplies such as ink cartages, cables, and other small computer supplies in a facility in North Carolina. The operation proved successful as the demand for such products rose globally, however, over time AmeriTech found itself less competitive in terms of cost over rivals from a number of Asian countries. In an effort to reduce labor costs, the founders moved their operations to Mactan Island near the city of Cebu in the Philippines. Instead of starting a Greenfield operation, AmeriTech was able to purchase an underperforming Korean firm that was operating in the economic zone of the island. AmeriTech purchased the facility and retained the entire workforce of the former Korean owned business. AmeriTech had hoped to continue its efficient and quality-oriented production techniques from North Carolina in the low wage environment of the Philippines.

Full text:

INTRODUCTION

AmeriTech was started in Lexington, Kentucky by a small group of former IBM employees who accepted a buyout package offered by the company when the Lexington division was reorganized in 1991. Originally, AmeriTech produced computer supplies such as ink cartages, cables, and other small computer supplies in a facility in North Carolina. The operation proved successful as the demand for such products rose globally, however, over time AmeriTech found itself less competitive in terms of cost over rivals from a number of Asian countries. In an effort to reduce labor costs, the founders moved their operations to Mactan Island near the city of Cebu in the Philippines. Instead of starting a Greenfield operation, AmeriTech was able to purchase an underperforming Korean firm that was operating in the economic zone of the island. AmeriTech purchased the facility and retained the entire workforce of the former Korean owned business. AmeriTech had hoped to continue its efficient and quality-oriented production techniques from North Carolina in the low wage environment of the Philippines.

THE PHILIPPINES

The Republic of the Philippines is a country in Southeast Asia consisting of over 7,000 islands (Figure 1). The capital is Manila, located on the island of Luzon. The Philippines was "discovered" by Ferdinand Magellan in 1521, who claimed the islands for Spain. The country was named after the Spanish King Philip (Felipe) and missionaries converted most of the population to Catholicism. The Philippines is unique in being the only Christian country in Asia. While Magellan met his death soon after arriving in the Philippines, the country was under Spanish control for a number of years. The Philippines came under the rule of the United States in 1898, when Admiral Dewey defeated the Spanish, and Spain ceded the islands under the Treaty of Paris. While Tagalog, or Filipino is the official language of the Philippines, English is widely spoken, especially among educated Filipinos.

In 1935 the Philippines became a self-governing commonwealth, and there continued to be a strong push by the Filipinos for complete independence. This independence movement was interrupted by World War II when the Japanese invaded the country. With the help of the American forces, the Filipinos defeated the Japanese and gained their independence in 1946. After a number of different administrations, strongman Ferdinand Marcos ruled the country for a number of years and maintained strong ties with the United States. With increasing discontentment of the Filipino people, a "people's revolution" occurred and Marcos was forced to leave the country. Political instability resulted for a time; however, democracy quickly retook a firm hold in the Philippines. Fidel Ramos became president of the Philippines in 1992, and he opened the economy to market forces and encouraged foreign investment, including the establishment of export processing zones (EPZ) and incentives for foreign firms to establish a presence in the Philippines.

AMERITECH IN THE PHILIPPINES

With an increasing wage rate in North Carolina and the incentives offered by the Philippines, AmeriTech made the decision to close its American facility and begin operating in the Mactan Economic Zone of the Philippines. The area is in the part of the Philippines called the Visayas. With a compatible operating facility being offered for sale, AmeriTech relocated with the hope of gaining a competitive advantage with lower labor costs and access to the emerging markets of Asia. The only employee from North Carolina that would be making the move to the Philippines was William "Bill" Dawson. Dawson was the son of a tobacco farmer in North Carolina, who while deemed by his teachers and peers to be highly intelligent, never attended college. He worked in a number of manufacturing jobs after high school, and through hard work and ability, gained a number of supervisory positions. He was hired by AmeriTech when the firm first began operating in North Carolina as a first line supervisor. Through an unusual series of personnel turnover and one death, he was promoted to plant manager in a few years after first being hired. Dawson instituted a number of quality improvement and inventory management techniques and gained the respect of his superiors. While Bill could be intimidating to some (he was a large, and somewhat heavy man, with a loud voice), he was generally well liked and respected by the employees at AmeriTech. Bill was known for being "firm, but fair." He was very informal with his employees and dressed in a casual, or some would say "sloppy" fashion. The employees appreciated the fact that he was just a "regular guy." Bill was looking forward to his new assignment, however, he feared he would miss watching his beloved North Carolina Tar Heels play basketball on television. While he had never been to the Philippines, he did have a favorable impression of the country from the stories his uncle, who served in World War II, had told him about the Philippines, and the courage of the Filipino fighters. Bill also learned that basketball is a favored sport in the Philippines and so "maybe the place wouldn't be so bad after all."

With an unusually easy transition, AmeriTech took control of the former Korean facility. While adjustments had to be made in the production process, and many of the workers could not be used during this time, AmeriTech generated goodwill by paying the employees their normal salaries during this startup period. The employees that were needed to work were paid their normal salaries plus a 50% bonus during this time. AmeriTech realized that there were going to be additional costs during the startup, including increased training in the "AmeriTech way." In general the employees welcomed the new owners, and many commented that they much preferred working for an American company than a Korean one. One new hire was Miguel Santos, a 26 year old MBA graduate of De la Salle University in Manila. Miguel was hired as an assistant to Bill, and someone to help Bill with any cultural difficulties he might experience in his assignment.

TENSIONS BEGIN

Miguel was born and raised in Manila and did not consider himself to be a Cebuano (someone from Cebu or the surrounding area). The employees in the plant were mostly Cebuanos and were at time untrusting of people from Metro Manila. They felt that they were too urban, too serious, and too self-centered for their tastes. Miguel was very deferential to Bill Dawson, refusing to call him by his first name and always referring to him as "Mr. Dawson," and sometimes, "Plant Manager Dawson." Miguel was not as cordial with the lower level employees at the plant, however, and at time had strained relations with employees. Miguel also was not very happy with the fact that he had to leave his family in Manila, and because of the distance, only see them every few months.

The productivity level of the plant remained low for a number of months and Bill had decided that it was time for a change. While he had expected that it might take some time for productivity to reach the levels achieved in North Carolina, he was beginning to feel as if without some intervention, things would not improve. Of particular concern to Bill was the amount of "wasted time" he observed in the plant. Employees would often take extended breaks, chat endlessly among themselves, and often engage in non-work activities while on company time, such as celebrating an employee's birthday. Miguel explained to Bill that it represented "pakikisama" and was quite common in Filipino culture. Bill seemed unconvinced, but proceeded with caution and allowed this to situation to continue, as he was in a phase of "employee relations building" with the employees. After a few more months productivity still had not improved, and Bill decided it was time to take action.

In North Carolina, Bill had learned that when employees were "schooled" in the ways of productivity, they improved their performance. The North Carolina plant also had an individual incentive plan which acted as a strong motivator. Bill reasoned that he should now begin to change the corporate culture of the plant. With the help of Miguel, he organized after-work training sessions and stressed the importance of reducing "wasted time" on the job. Most of the employees were females and many had not worked previously in a manufacturing environment. The training sessions were a bit frustrating to Bill as he could not get the employees to participate nor contribute their thoughts. He felt that if he allowed for employee input, he could win over the employees to his ideas for productivity improvement. The only employee who spoke frequently was a middle aged woman named Millet, who often joked and teased Bill during the training sessions. Bill had gotten the impression that Millet was romantically interested in him, and he was unhappy with the situation. After yet another training session in which little was achieved, so Bill thought, except the asking of personal questions from Millet, Bill decided to have her fired. He instructed Miguel to terminate her employment immediately. Miguel warned Bill that Millet was a productive employee who had worked for the previous company for many years, and that she was very well liked by her peers. Bill responded that he was tired of her teasing and personal questions and that "it was nobody's damn business if he is married or not." Miguel did as he was told and informed Millet she would not be returning to work tomorrow.

The mood of the employees, especially those in Millet's department, changed almost immediately. While it was common to hear cheery voices and laughter in the plant, in the days and weeks that followed, the plant was void of much humor. Employees seemed to be more formal and less warm to Bill, however, there was a slight improvement in productivity. This made Bill happy. He thought that, just maybe, he needed to use a firmer hand in dealing with the workers. He was a bit concerned that employee turnover had increased, but he reasoned that it was probably just employees who did not want to really work. Bill turned his thoughts to ways to introduce a monetary incentive program and to start a quality improvement program.

While Bill pondered such issues, Miguel informed him that another industrial plant was opening in Mactan and that he feared that AmeriTech might lose more employees. Bill was unconcerned, but finally agreed with Miguel that he would call a meeting and announce the incentive program he had been developing. The meeting was scheduled after work hours, and a number of employees did not attend. This angered Bill and he expressed his displeasure by calling out the names of the employees who were not present. He suggested to the gathered employees that maybe those missing employees would not be returning to work next week. The meeting went on, with the rather complex incentive program being explained. The basic idea was that employees would no longer be "entitled" to a salary, but that they could, if properly motivated, earn more money. Within a week, close to 20 percent ofthe workforce resigned.

TIME FOR CHANGE, AGAIN

With turnover becoming a problem, and the resulting disruption to production, Bill was under fire from his superiors to turn the situation around. Bill decided to have yet another meeting with his employees, but this time to pay them for attending. Bill expected 100% turnout for the meeting but instead, roughly half the employees attended. Bill was outraged and proceeded to lecture the employees present that the work culture of the company must change. After a very tense 10 minutes of hearing this, Miguel politely interrupted Bill with the suggestion that a break be taken and food delivered to the plant for the employees. This suggestion was not well received by Bill, who then proceeded to criticize Miguel for not understanding the importance of profitability. The meeting ended with a somber mood, as it had begun, and employees quietly left for home. Miguel was one of the first employees to leave the building.

The following day Miguel called in sick, complaining of stomach troubles. Bill decided that maybe he had been too hard on Miguel and the other employees. As he sat at his desk wondering how to proceed, the assistant director of human resources called him to tell him that the director of HR had resigned, for "medical reasons." The department had been busy attempting to fill the vacancies created by the turnover and Bill worried that he was losing the respect of his employees. Bill decided to host an event for all employees in nearby Cebu City, honoring the most dedicated and outstanding employees. When Miguel returned to work the following day, Bill informed him of his decision. Miguel seemed less than excited about the idea. When pressed for an explanation, Miguel admitted that a party was maybe a good idea, but that he, Bill, should not take a very active role in the event. Surprised by this recommendation, Bill pressed Miguel for answers. After much pressuring Miguel blurted out that the employees had a nickname for him - "baboy." Bill was told it meant pig in Tagalog. With this revelation Bill decided to cancel any plans for a party and to resume his normal style of management. He instructed Miguel to begin looking for a new HR director and to ramp up the recruitment of employee replacements.

Discussion Questions:

1. What mistakes, if any, did Bill make in his management of the plant?

2. Was it necessary for Bill to change, in any way, in his new assignment in the Philippines? Explain.

3. What is the significance of the nickname the employees gave to Bill?

4. If you were advising Bill, what would you suggest?

Sources: L. Francia. Passport Philippines, 1997, San Rafael, CA: World Trade Press; U.S. Department of State, Background Notes: Philippines, 2008; T. Gochenour. Considering Filipinos, 1990, Yarmouth, ME: Intercultural Press. Personal experiences of the author interacting with the Filipino business community and American Chamber of Commerce of the Philippines in 2007.

Note: This case is completely fictional and not intended to represent any real company or persons.

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

Volume: 15

Issue: 2

Pages: 41-45

Number of pages: 5

Publication year: 2008

Publication date: 2008

Year: 2008

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192411996

Document URL: http://search.proquest.com/docview/192411996?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-12

Database: ABI/INFORM Complete

Document 25 of 100

THE FUSION ENERGY EXPERIMENTAL TOKAMAK SITE NEGOTIATION

Author: Burruss, J R; Barkacs, Craig B; Barkacs, Linda L

ProQuest document link

Abstract:

The Fusion Energy Experimental Tokamak ("FEET") Site Negotiation simulation is a multi-party and coalition building negotiation exercise. Inspired by the real-world negotiations surrounding the International Thermonuclear Experimental Reactor (ITER), this fascinating multi-party negotiation simulation provides outstanding lessons in coalition building, difficulties in maintaining coalitions, intercultural communication, real world politics and, of course, negotiation skills. The real-world ITER negotiations had their roots in a 1984 proposal by the Soviet Union seeking a method to harness nuclear fusion as an energy source. Despite having had its genesis in 1984, the real-world negotiation involving ITER was not completed until June of 2005. FEET, while inspired by ITER, is nevertheless separate and distinct from ITER and, in fact, the outcome with the most possible points for ALL of the parties in the FEET simulation would be for the parties to agree to build two reactors.

Full text:

INSTRUCTORS' NOTES

Background

The Fusion Energy Experimental Tokamak ("FEET") Site Negotiation simulation is a multiparty and coalition building negotiation exercise. None of the six parties individually has the allocated resources to fund one FEET reactor, but collectively the six parties actually have the resources to fund two FEET reactors.

FEET is inspired by the real-world negotiation involving the International Thermonuclear Experimental Reactor ("ITER"), which involved the same six parties. ITER (pronounced "ee-ter", which is Latin for "the way") was suggested in 1984 by the former Soviet Union as a proposed method of harnessing nuclear fusion as an energy source. The concept behind ITER is to construct a gigantic vacuum vessel surrounded by super-conducting coils that magnetically confine hydrogen plasma in the shape of a doughnut. Once that is accomplished the temperature of the plasma will then be increased to the point of igniting fusion.

Despite having begun in 1986, the real-world negotiation involving ITER was not completed until June of 2005. (It is suggested that less time than that be used to conduct the FEET the simulation!) In real life, the ITER reactor costs were divided thus:

EU (host): 50%;

Other 5 parties: 10% each.

The foregoing distribution would correspond to the host in the FEET simulation paying $7.5 Billion and each of the other five participants paying $1.5 Billion. Interestingly, this real-life outcome is entirely possible in the fictional FEET case.

The proposed costs for the real-world ITER project are 10 billion Euro for the construction of ITER, its maintenance, and the research connected with it during its lifetime. It was at the June 2005 conference in Moscow that the six participating members of the ITER cooperation agreed on the funding contributions of 50% by the hosting member (the European Union) and 10% by each non-hosting member. Although Japan's contribution as a non-hosting member is only 10%, the EU agreed to grant it a special status so that Japan will provide for 20% of the research staff at Cadarache and be awarded 20% of the construction contracts, while the European Union staff and construction components contributions will be cut from 50 to 40%.

This real-world outcome - after such protracted discussions spanning almost 20 years - is provided for informational purpose only and is not at all suggestive of what should or should not happen when conducting the FEET simulation. FEET, while inspired by ITER, is nevertheless separate and distinct from ITER and, in fact, the outcome with the most possible points for ALL of the parties in the FEET simulation would be for the parties to agree to build two reactors.

Despite the parties' differing views regarding the various site locations, the parties are nevertheless motivated to come together by a common desire to generate enough funding to launch the FEET reactor project. As indicated, no one party has enough money in its budget to fund construction of a FEET reactor on its own, leaving 1) where to locate the FEET reactor, and 2) how to apportion the cost as the main points of contention.

Also as indicated, it is possible to fund two FEET reactors - there is $32 Billion at the table, $2 Billion more than is needed for two FEET reactors. If, however, any party withdraws from the negotiation there will only be enough money for one FEET reactor. In addition to each party's primary motivation to fund at least one FEET reactor, each party has a secondary motive: For Russia it is to procure funding for a second FEET reactor, for all others it is to advance their preference for the site location.

Each party's tertiary goal is to minimize cost (i.e., to reduce its financial contribution to FEET). While this cost reduction motive may lead some parties to withdraw from the negotiations and let other parties bear the full financial burden of FEET, this is balanced by the risk of triggering a cancellation of FEET (which requires $15 Billion to fund) and the lost opportunity to influence the site location of FEET (or in the case of Russia, the funding of a second FEET reactor).

Given that the best outcome for ALL parties is to agree to build two reactors, the scoring component in this simulation operates less as a pie-expansion or trade-off mechanism and more as an incentive to prioritize. In addition to the specific prioritizing function of getting at least one reactor funded (if not two), the scoring component also provides a modest incentive for the participants to assume various cultural and political roles during the simulation. A remarkable phenomenon to observe during the simulation is how the secondary cultural and political components (from a point value standpoint) can overtake what should be the dominant objective of agreeing to fund at least one reactor, let alone two reactors.

The take-aways from this exercise are many. A main objective is to expose the student to the many dimensions of multi-party negotiations. A multi-party negotiation is one in which a group of three or more individuals, each representing their own interests, attempt to resolve their actual and/or perceived differences (Thompson, 2004). In multi-party negotiations, issues of process abound as coalitions form and social interactions become more complex. Trade-offs are more difficult. There are problems of voting and majority rule, as well as communication breakdowns.

A coalition is formed when two or more individuals from the multi-party negotiation combine their resources to affect the outcome (Thompson, 2004). Coalitions are a vehicle for otherwise weak members to get a greater share of the resources. Ironically, the members of the coalition also compete with each other regarding allocation of any share the coalition obtains.

Another problem to be dealt with in multi-party negotiations is that it is more difficult to obtain trade-offs. Students should learn to achieve trade-offs in multi-party negotiations through circular logrolling and reciprocal trade-offs. In circular logrolling, each member must offer a concession on one issue and receive a concession from another member on a different issue. Reciprocal trade-offs are when two members of the larger group directly engage in trade-offs (Thompson, 2004).

A problem that tends to arise in multi-party negotiations is the desire of group members to simplify the negotiation by instituting voting and/or decision rules. These types of rules can result in less effective outcomes in terms of pie-expansion. For example, some of the group members may decide to institute majority rule. Such voting completely ignores individual preferences, regardless of how strong a member may feel about the particular issue being voted on (Thompson, 2004). Accordingly, there is no integrative trade-off among issues.

Another problem with majority rule is the condorcet paradox, in which who wins a majority rule election will change depending upon the order in which various alternatives are proposed (Thompson, 2004). An alternative presented later in the voting is more likely to survive. A negotiator well versed in the condorcet paradox could arrange to have his or her preferences voted on in the latter stages of sequential voting. Strategic voting may also occur. This is when a group member strategically misrepresents his or her preference so that a preferred option is more likely to be favored by the group. An example would be when a group member votes for his or her least preferred option to ensure that a potentially more competitive second choice option is eliminated.

Other groups may institute a unanimity rule. Though time-consuming, outcomes are often more efficient than with groups using the majority rule (Thompson, 2004). Members must consider ways to satisfy the interests of the other members of the group. This can result in more creative outcomes. Absent unanimity, parties may make consensus decisions. These require everyone to consent before an agreement becomes binding, however, unanimity may not exist. This is because while the parties must publicly agree to a particular settlement option, their private views may be in conflict. Multi-party negotiations that use consensus decision making often result in compromise, with the lowest common denominator becoming the agreed upon option (Thompson, 2004).

Finally, multi-party negotiations sometimes involve breakdowns in communication. Participants may fail to send a message that needs to be sent, an inaccurate message may be sent, or a message may be sent but not received. All parties need to listen to one another and any misunderstandings need to be cleared up immediately. Sometimes, in an effort to prevent miscommunication, parties may break up into smaller groups and privately caucus. This is unfortunate because if the parties are able to maintain communication with the larger group there is a greater likelihood of increased profitability and more equal distribution among the group members (Thompson, 2004).

Multi-party negotiations, like other negotiations, may fall prey to typical miscommunications. People hear what they want to hear, interpret things in ways that are favorable to them, and ignore information that does not support their position. Moreover, most people are not very skilled in seeing the other party's perspective. When one party has information that the other party is unaware of, that party nonetheless acts as if the other party is aware of the information. This is known as the curse of knowledge (Thompson, 2004).

The goal of this negotiation exercise is for the parties to experience a multi-party negotiation, analyze what happened during the exercise, and through the debrief with the instructor understand what happened. More importantly, by recognizing classic errors in negotiation performance, process, and communication, it is hoped that the student will leave with a better understanding of how to increase one's likelihood of success in multi-party negotiations.

Running the Simulation and Scoring the Results

With six parties to the negotiation, it is recommended that each party be represented by one or two people (two seems to work very well). If only one party is represented by a second negotiator, it works well for the E.U. to be that party so, for example, one E.U. representative could serve as chair and would abstain from making (or seconding) motions or voting, while the other could serve as a voting, motion-making member. [NOTE: Such a distinction in the E.U. roles if there are seven participants is merely a suggestion.] If only 5 participants are available, remove Russia (say, for example, that Russia withdrew from the negotiations.) For 8 or more, consider assigning multiple negotiators for each party, but each party must still be restricted to a single vote and should not second its own motions.

Each party is provided with 1) a specific Role sheet, 2) a specific Negotiation Style sheet 3) an identical General Information sheet, and 4) the same Rules of Order sheet. (As an aside, the Rules of Order sheet provides a nice summary of, or in some cases, a brief introduction to basic rules surrounding how formal meetings are often run.)

The simulation is designed to take place over three "days". The facilitator is free to determine how long each "day" is to last, but a "day" should be a minimum of 15 minutes - and considerably longer if time allows. While the meetings are in session, the parties are not free to leave the table and privately caucus. After the first and second "day", the parties should be given a timed break (5 to 10 minutes) during which they can 1) withdraw from the negotiation, 2) refuse to speak to anyone, or 3) privately caucus. To the extent private caucusing takes place, this could be a fertile topic of discussion during the debriefing session. More specifically, it should be interesting to hear various perspectives on how or whether any private caucusing that occurred advanced or impeded the negotiation.

At the outset of the simulation, certain patterns are likely to occur. Japan and Korea form a natural coalition. The U.S. and the E.U. take positions for Spain and France, respectively. China is opposed to Japan, but otherwise uncommitted. Wanting two FEET reactors, Russia is neutral with respect to the site selected for a second FEET reactor, but demands that the first FEET reactor be in Russia. Each party has a very poor BATNA (Best Alternative to a Negotiated Agreement), and is eager to reach an agreement.

[NOTE on BATNA: A negotiator must determine his/her Best Alternative to a Negotiated Agreement. This is so important that it has been made into an acronym. A BATNA is the point at which a negotiator is prepared to walk away from the negotiation table. A negotiator should be willing to accept any set of terms superior to their BATNA. Moreover, a negotiator should reject any set of terms that are worse than their BATNA (Fisher, et al. (1991), Thompson, 2004).]

The Biggest Possible Pie: The highest possible score (exclusive of cultural points) is achieved when all parties agree to fund FEET reactors in both Japan and France, and to apportion the cost so that the leftover $2 Billion is kept by Russia, China, and Korea. This is an unlikely outcome, however.

Biggest Reasonable Pie: After three days of coalition building, Japan and Korea convince the U.S. to join together to fund a FEET reactor in Japan. China and Russia join with the E.U. to a second FEET reactor, thus increasing their scores.

U.S. Power Play: The U.S. joins the Japanese coalition. The U.S. persuades China to join the Japanese coalition, thus blocking the French site. China is better off since they can now obtain a higher financial contribution score. Russia and E.U. join because they can make minimal financial contributions and improve their scores.

For large groups of people, it is also recommended that each party have assigned to it at least one person acting as a formal observer. Any such formal observer should be given 1) all of the information provided to the specific party being observed, and 2) a Score Sheet (see "Scoring Guide," earlier in this paper) with the understanding that all observers are expected to score the party he or she is assigned to and to contribute significantly to the debriefing process. Such a format has the virtue of actively engaging those who are not directly negotiating in the simulation.

Observers should use the score sheet that follows (provided separately to each observer) to assist in totaling the negotiation score. For items with * (an asterisk), see notes below.

The Political Component

The political component integrated into the simulation not only adds interest, but also has a basis in reality from the real-world ITER negotiations concluded in June of 2005. Consider the following excerpt from an article in The Economist that appeared shortly after agreement was reached:

ITER is a joint project between America, most of the European Union, Japan, China, Russia and South Korea. For the past 18 months, work was at a standstill while the member states wrangled over where to site the reactor in what was generally recognized as a proxy for the debate over the war in Iraq. America was thought to support the placing of ITER in Japan in return for Japan's support in that war. Meanwhile, the Russians and Chinese were supporting France, which, like them, opposed the American-led invasion. That France was eventually chosen owes much to the fact that the European Union promised to support a suitable Japanese candidate as the next director general of ITER. (Nuclear ambition, The Economist, June 30, 2005)

Conclusion

The real-world tension integrated into the FEET simulation is very much appreciated by the participants, who tend to do an admirable job of animating various political motivations. The FEET simulation has been run very successfully with U.S. military officers and Intelligence officials, who seem particularly adept in understanding the political nuances. Regardless of the background of the participants, however, the FEET simulation plays out extremely well and provides everyone with an interesting and engaging educational experience. The real-world nature of the FEET simulation - derived straight from the headlines - creates a context rich in learning opportunities with respect to dealing with multiple parties, building coalitions, maintaining coalitions, managing intercultural communications, contending with political biases and, of course, cultivating negotiation skills. Accordingly, the simulation provides no shortage of topics to discuss and explore during the postnegotiation debriefing analysis.

NEGOTIATION TERMS (FOR INSTRUCTOR'S USE IN DEBRIEF)

BATNA: A negotiator must determine his/her Best Alternative to a Negotiated Agreement. This is so important that it has been made into an acronym. A BATNA is the point at which a negotiator is prepared to walk away from the negotiation table. A negotiator should be willing to accept any set of terms superior to their BATNA. Moreover, a negotiator should reject any set of terms that are worse than their BATNA (Fisher, et al. (1991), Thompson, 2004).

EXPANDING THE PIE: Expanding the pie is a method used to create integrative agreements through the use of integrative negotiation. It is the opposite of Pie Slicing, also known as Distributive Negotiation or Fixed Pie Negotiation, a faulty perception that the parties' interests are completely opposed. Expanding the pie means identifying trade-offs and avoiding compromise (Thompson, 2004).

INTEGRATIVE NEGOTIATION: Integrative negotiation is also known as "win-win" negotiation. Common misperceptions are that win-win negotiation means compromise, an even split, feeling good or building relationships. What win-win really means is that both parties are better off than if there were no agreement. The very best integrative outcome -- an optimal agreement - means all creative opportunities are exploited and no resources are left on the table. (Thompson, 2004).

Subject: Negotiations; International relations; Nuclear reactors; Proposals; Case studies

Location: Russia

Classification: 1210: Politics & political behavior; 8340: Electric, water & gas utilities; 9180: International; 9176: Eastern Europe

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 4

Source details: INSTRUCTORS' EDITION

Pages: 17-26

Number of pages: 10

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216290006

Document URL: http://search.proquest.com/docview/216290006?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 26 of 100

PUT A LEADER ON THAT HORSE (ASSOCIATION)

Author: Green, LaVon; Conners, Susan E; Green, Sherry; Mick, Michael

ProQuest document link

Abstract:

The Arabian Horse Association is responsible for the breed registry, membership, marketing and promotion, and member programs for Arabian and Half-Arabian horses in the United States. The growth of the organization resulted in poor financial planning and no long term strategic plan to guide the organization. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

This case provides an example of a non-profit organization in a specialized industry. While not a "for profit" organization, it still requires strategic planning and management to be successful. This case raises the important issue of developing a viable strategy for a not-for-profit organization. This case is best suited for an introductory undergraduate course in business that addresses strategic planning and management. The degree of difficulty is 'easy'. The case can be used for a group assignment, individual homework, or class discussion. Additional research can be conducted to expand the discussion questions, but the students can complete the assigned questions without additional information.

The web site of the Arabian Horse Association is http://www.arabianhorses.org . If students need help navigating the site, direct them to select the Market Development option. Here they will find the mission statement and objectives of the AHA. In addition, the MDP 2005 Year-In-Review Convention Presentation offers information regarding the significant changes made in the organization.

A related web site for the Quarter Horse Association is http://AQHA.org . This web site provides a comparison to that of the AHA. The mission statement and details of this organization are easily found by clicking The Association link, then clicking the Who We Are tab on the menu bar of The Association web page, and then selecting the appropriate option from the corresponding drop-down menu. The ease of navigation of this site points out the need for a revision to the site of the AHA.

DISCUSSION QUESTIONS

1. What one aspect of strategic planning was the most beneficial to this organization and its restructuring? Explain how it helped them.

The most significant aspect of strategic planning was recognizing the need to have a plan. This resulted in the following changes:

* Following best practices to establish a new structure that included staffing the positions with professionals in information systems, marketing, and finance.

* Improving information systems most likely generated improvements in registration information, tracking Breeders Sweepstakes information, and the maintenance of the web site.

* Conducting market research to determine the appropriate client base allowed the organization to increase membership from its previous decline.

* Establishing best practices in finance allowed the organization to generate revenue to become solvent. The Breeders Sweepstakes is no longer running at a loss.

2. Evaluate the benefits and pitfalls of this rapid restructure.

The benefits of combining the Arabian Horse Registry and the International Arabian Horse Association into the Arabian Horse Association are:

* The most significant benefit of the restructure was the awareness of the lack of a strategic plan and the effort of the organization to correct that situation at the request of its members.

* The new organization can operate more efficiently by eliminating the redundancy of activities in the two organizations.

* The promotion of the Arabian horse through two organizations must have been confusing to prospective buyers. An individual trying to decide between the purchase of an Arabian versus a half-Arabian previously would have had to deal with two competing organizations. Now a prospective owner can be advised through experts in one organization by pointing out the differences of the two types of breeds.

The pitfalls of this rapid restructure were:

* There was probably membership loss due to member loyalty to the former organizations. Explaining the reasons for the change could have convinced members to make the change to the new organization.

* Explaining the restructure and establishing new connections to other equestrian organizations and publications must have taken a massive effort and must have caused major confusion for a short time.

3. What suggestions would you make to the Arabian Horse Association for future strategic planning?

The most significant area of strategic planning as indicated by the mission statement is the promotion of the breed to prospective owners. Setting goals for growth in number of members will have the most positive impact on the organization. Improving communications on the web site to make it more user-friendly can provide the promotional material that will attract new members. This is where comparison to the American Quarter Horse Association would be most helpful as it is the largest breed in the United States.

4. What would you have done with this organization to correct the situation after the merger?

The market study began with the membership and then expanded to identify successful strategies used by other equine breed associations. The membership study included researching how people used their horses for show or pleasure and how many of them were still breeding their horses.

This organization had never used traditional strategic planning methods in the past. The new leadership undertook basic strategic planning methods and formulated a plan for the next 5 years and presented it to the membership. The new plan included bringing in new professional people to address issues like marketing and information systems as part of the permanent staff. These methods were already in use by other successful breed associations. Their market study of the membership revealed that the majority of the membership did not show their horses at horse shows. This was a major departure from the thinking of the past that horse shows were the most important issue for the association.

Subject: Case studies; Nonprofit organizations; Horses; Organizational structure; Financial management; Memberships

Location: United States--US

Company / organization: Name: Arabian Horse Association; NAICS: 813410

Classification: 2200: Managerial skills; 3100: Capital & debt management; 2320: Organizational structure; 9540: Non-profit institutions; 9110: Company specific; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 4

Source details: INSTRUCTORS' EDITION

Pages: 27-29

Number of pages: 3

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216273810

Document URL: http://search.proquest.com/docview/216273810?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 27 of 100

THE STITCH HOUSE: A CASE OF ENTREPRENEURIAL FAILURE

Author: Kampschroeder, Karl F; Ludwig, Nancy; Murray, Mary Ann; Padmanabhan, Prasad

ProQuest document link

Abstract:

Why did The Stitch House fail so quickly? Louise had business experience, adequate start-up capital, and people with experience in marketing her product. But, in less than six months time what seemed like a certain success consumed her capital, was abandoned by her erstwhile partners, and left her with substantial personal debt. This case gives students the opportunity to learn from one of the majority of new small business startups - those which fail in less than two years. Based on an actual entrepreneurial situation, the case illustrates the impact that each decision an entrepreneur makes may have on the ultimate survival of the business and how easily a new business can fail. It presents students with the opportunity to analyze the basic decisions that an entrepreneur must make in creating a new business. Alternatively, advanced students may be challenged to re-construct the business concept and create a business plan for The Stitch House. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Aproaches

The authors recommend two possible approaches to using this case in a course. The first focuses on analyzing the decisions that the entrepreneur made during the process of forming and starting up the business. The second approach focuses on analyzing the market and formulating a business plan using the information provided.

A Decision-making Approach to the Case

For use in a single 75 - 90 minute class session, use of the case may focus on exploring and analyzing the decisions that may have contributed to the ultimate failure of the business. We suggest the following structure for management of the discussion:

* 10-15 minutes - free-form student discussion of what went right and what went wrong in the business;

* 15 minutes - list each decision that Louise made;

* 30-45 minutes - go through the list of decisions Louise made and critically evaluate each one; analyze her presumed motive for deciding as she did and the effect this decision had on the conduct of the business;

* 15 minutes - wrap-up.

If this approach is followed, students should be expected to list the following specific decisions the entrepreneur made in the course of establishing and operating her business:

1. She decided to start a new business, in a field in which she had no experience, based on personal contacts and weak information. She also did not do adequate research on the business background of her partners.

2. The initial market (thread bobbin supplies) targeted was changed with little examination of the risks inherent in the new market (embroidered goods).

3. The business was established as a sole proprietorship, thereby making Louise personally liable for any debts of the business.

4. She made two other people "partners" using a self-written contract. However, although they were partners, Louise seemed to most of the work and kept total control of the decisionmaking process when setting up the business. While one might wonder what the partners were doing, it appears that they were standing by - waiting for Louise to give them direction.

5. Production equipment was selected without considering how its capacity might limit sales volume and, it appears, without consulting either partner, both of whom had experience in the industry.

6. Funds were spent on advertising and setting up a website, although Robert seemed to base his expectations for success on personal selling.

7. She spent funds to "do things the right way" without considering the impact on the cost structure of the business.

DISCUSSION AND ANALYSIS

Students should be encouraged to discuss and critically analyze each of the above decisions and its effect on the business. Three specific questions can then be used to guide further discussion.

1. Using Michael Porter's model of the five forces that shape an industry, describe the structure of the embroidered products industry, specifically the portion of the industry that The Stitch House (TSH) sought to compete in.

TSH faces intense rivalry with 60 local competitors of all sizes currently listed in the San Antonio Yellow Pages directory (2005 edition). There are few suppliers so there is little opportunity to bargain for lower prices on inputs but there are also many small buyers. Interfirm rivalry enables even small buyers to bargain with competing firms to drive down prices. It also appears that there are very low barriers to entry into the business. At the same time, consumers may elect, in many applications, to substitute lower-cost screen printed apparel for embroidered apparel.

2. Is there one decision that Louise made which, more than the others, contributed to the current failure of the business?

It appears to the authors that the most critical decision Louise made - once she decided to start the business - was in the selection of production equipment. The equipment selection severely limited production capacity and, therefore, the types of business The Stitch House could pursue and its ability to compete. Some argument can be made to the effect that the lackadaisical manner in which she selected her business partners contributed to the failure of the business.

3. Do you think this business can be salvaged or not?

Making some crude assumptions, we could say that TSH's contribution margin is $5.00 per blanket (selling price minus $4.00 raw material + assumed $1.00 variable labor cost). With fixed expenses of $1635/month (rent has been eliminated by moving operations to Louise's house), the business needs to sell 327 pieces per month, or 82 pieces per week just to break even. This is within their production capacity, but profits will are likely to be very low. The real question may well be whether or not they can get orders for this much product without Robert. Reduction of expenses such as advertising and general office expenses, and stretching out the Visa payments will further reduce the breakeven quantity. It is, however, optimistic to expect the business to generate much profit given the production constraint.

A MARKET ANALYSIS/BUSINESS PLAN APPROACH

This approach is most appropriate for use with senior or first-year graduate students and may be used in conjunction with the questions in the previous section. Using the approach, instructors will find it most convenient to introduce the case in one class session and assign the analysis or business plan as a written assignment or presentation for a subsequent class session.

First, instruct students to analyze the market the business proposes to serve, based on the planned main product: embroidered baby blankets. Students should develop a definition of the target market and an estimate of the market size. Census data at http://www.census.gov for San Antonio (Bexar County, Texas) should be used to estimate the number of babies in the market area. Geodemographic lifestyle data based on PRIZM segmentation profiles, which may be found on the Claritas Corporation website, http://www/claritas.com, may also be useful. Instructors should note, however, that the PRIZM data is compiled by zip code; so students should survey a number of zip codes to gain understanding of the San Antonio market. In the analysis, students should be encouraged to be creative in assessing the market and the behavior of buyers. While the financial aspects of the business are important, in this phase of the assignment, students should be encouraged to focus on the potential buyers of the product and potential demand. A good analysis will include: 1) a profile of potential buyers and the buying occasion, 2) an estimate of the potential market demand, 3) a description of how the product may be marketed and the marketing channels used, and 4) a pro-forma breakeven analysis.

Second, students should attempt to develop a business plan for the next twelve months of operations. Using the data given in the case, and the information developed in the market analysis, the business plan should map the operations, marketing, and projected financial of the business. Depending on the organization of the course, instructors may specify different levels of detail in the plan. At a minimum, the plan should describe the production process, state the plans' assumption about production quantities, and project production costs. It should then describe the marketing channels for the product and estimate unit volume and marketing expenses. Finally, the business plan should project the financial results from the planed operations and marketing activities. While the plan itself is important, of equal importance in teaching entrepreneurship is the process of developing the business plan for The Stitch House. The process should be used to illustrate the problems - many unforeseen by Louise - of creating a successful small entrepreneurial business.

Subject: Startups; Entrepreneurs; Case studies; Business failures

Location: United States--US

Classification: 8620: Textile & apparel industries; 9520: Small business; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 4

Source details: INSTRUCTORS' EDITION

Pages: 31-35

Number of pages: 7

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216276113

Document URL: http://search.proquest.com/docview/216276113?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 28 of 100

CENTRAL CITY MAKES A PROMOTION - PART B

Author: Palmer, Steven C; Weyant, Lee; McNary, George W

ProQuest document link

Abstract:

Are Affirmative Action Plans meaningful guidelines to employment decisions? Or, are these plans merely an exercise in satisfying legislative directives? What is an equal opportunity employment environment? The Central City Police Department faces these questions concerning their recent employment practices. More specifically, what is the department's justification for not promoting the individual with the second highest score on the promotion test? How can an employee with excellent performance evaluations and a clean discipline record not be promoted? Could it be that the individual was a woman? Does the work environment penalize women? Finally, are supervisors and employees appropriately trained and supervised regarding employment discrimination issues? This case explores the integration of women into a predominately white male work environment. For example, the organization as a whole (i.e., city government) has developed affirmative action plans for over a decade. Only in the last several years has the branch level (i.e., police department) developed separate goals addressing their specific operation. Branch managerial decisions over the years did not eliminate discriminatory practices. In fact, branch management faced separate lawsuits from African American and then Hispanic employees over employment discrimination issues based on race. Now, branch management faces the integration of an additional protected class within the workforce. Will they follow their previous managerial behavior? [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Objectives

This case can be used in a variety of undergraduate and graduate classes. The authors believe that it fits into any of the following courses: Principles of Management, Human Resource Management, Business Ethics, Business Law and Employment Law. The analysis of the case can be from a managerial or a legal perspective. The case has also been successfully used in an Organizational Communications class.

The learning objectives for this case are:

1. Students should be able to summarize the purposes of an Affirmative Action Plan (AAP).

2. Students should be able to summarize the necessity for employment discrimination policies and procedures within an organization.

3. Students should be able to analyze a situation for disparate impact and a disparate treatment employment discrimination practices.

4. Students should be able to apply the 4/5ths or 80% rule in evaluating a fact situation.

5. Students should be able to synthesize managerial alternatives to alleviate employment discrimination within the workplace.

RESOURCES AVAILABLE

Students may find the following U.S. Department of Labor and the U.S. Department of Justice resources on affirmative action and equal employment opportunity useful:

http://www.dol.gov/esa/regs/compliance/ofccp/pdf/sampleaap.pdf

http://www.eeoc.gov/

ISSUES PRESENTED

What is the purpose of an Affirmative Action Plan (AAP)? Is this a regulatory document prescribed to address past actions? Is this a document that guides recruitment and promotion opportunities? Should this document provide guidance in any other areas of employment? Only senior management can develop the answer to these questions. Organizational communication of their "true" answer will be seen by employees not through bulletin board, or policy statements, but through managerial actions. That is, what role will social learning theory play in the implementation of a company's AAP?

The issues that arise from the lack of proper policies and procedures quickly become apparent in this case. The city lacks a formalized procedure for assignment of officers to particular duties or light duty assignments. The city also appears to lack a definitive process for handling complaints of possible illegal discrimination. The city's promotion practices do not reflect the goals established in its affirmative action policy. Instead, the policies that are in place are not written to cover foreseeable and common situations. The modifying of policy is not consistent nor is it done in a formal manner. Of course this will create situations, as the one in this case, that may lead to legal problems for the organization.

Prima Facie Case

In employment discrimination cases, the United States Supreme Court [McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973)] set forth the requirements for the establishment of a prima facie case in employment discrimination cases. The elements are: (1) the plaintiff is a member of a protected class; (2) the plaintiff applied and was qualified for the position; (3) the plaintiff, despite being qualified, was not hired; and (4) after plaintiff's rejection the position remained open and the employer sought others with the plaintiff's qualifications.

Disparate treatment/disparate impact

Under law there are two theoretical bases for Title VII legal actions, disparate treatment and disparate impact. Disparate treatment occurs when there is evidence that the discriminatory act was an intentional act based on race, color, sex, national origin or religion on the part of the employer. Under the theory of disparate impact, the discriminatory act was the result of a facially-neutral policy that has an adverse impact on members of a protected class. Statistics are frequently used in establishing disparate impact. The four-fifths rule (sometimes called the 80% rule) is frequently used as the preliminary tool to determine disparate impact. Under this rule, it is expected that members of protected classes will have a success rate that is at least 80% of the majority's success rate on selection devices. If the success rate is less than 80%, then the employer must show that the selection device was relevant to the requirements of the position and that the there was no other devise that could be used to measure, as accurately, the applicants' performance that has a less adverse impact on members of the protected class.

Defenses

There are several defenses that an employer can raise in employment discrimination cases. The first defense available is a legitimate, nondiscriminatory reason for the employment decision. The plaintiff can counter this defense if he/she can show that the reason was actually pretext. Another defense is that there is a bona fide occupational qualification (BFOQ) that requires the discriminatory act. Race and color can never be a BFOQ under Title VII. In defense of a claim of disparate impact the employer may argue business necessity. This argument maintains that the policy was a business necessity thus making the policy a legitimate requirement of the job. Employers may also avoid liability under disparate impact even if a particular selection device is discriminatory if the overall process is not. Of course the employer may also prove that the plaintiff's evidence is not truthful or is inaccurate.

Improper conduct is mentioned throughout the case

Some actions may individually rise to the level of illegal conduct. Other actions collectively may create a hostile work environment. Students should be able to determine if a hostile work environment exists. To do so, they will have to determine if the conduct is pervasive, abusive, offensive or intimidating workplace.

QUESTIONS

1. Is the AAP a good one? What could be done to make it better?

Divide the class into groups to focus on each particular issue. Each group should develop a one page response for each question. Each group should report their findings to the class using flip chart paper which is posted in the classroom during the discussion period.

For a web-based activity, divide the class into groups. Create group work areas (i.e., group discussion boards, chat rooms, email). Each group will prepare a one page document listing their collaborative discussion to the class Discussion Board created for this assignment.

2. Is there evidence of employment discrimination? If so, does Jones have a good case?

In order to establish a prima facie case, Jones must show that (1) she is a member of a protected class; (2) she applied and was qualified for the position; (3) despite being qualified, she was not promoted; and (4) after her rejection the position remained open and the employer sought others with the plaintiff's qualifications. The first element is not difficult to show. Jones is female and therefore is a member of a protected class. She clearly applied and was qualified for the position; otherwise, her name would not have been on the eligibility list. Jones was not even a finalist in the consideration for either promotion, much less promoted. Therefore, the third element of the prima facie case can be shown. The final element is a little more difficult. However, since her name was not referred and the city did continue to seek qualified people for promotion after rejecting Jones, it appears that the fourth element can be proven.

3. What could her attorney argue?

An argument can actually be made that both theories of discrimination, disparate treatment and disparate impact, can be successfully asserted. In this case, the disparate treatment argument is not as strong as the disparate impact argument. Disparate treatment is intentional discrimination against a person because they are a member of a protected class. The decision was made that no woman would be promoted by the decision to only refer the names of the black candidates. Likewise, the decision not to apply the affirmative action in regard to women but to do so for all other protected classes is another example of a specific act that discriminated against women.

However, the case for disparate impact may be stronger. Over the three periods of time identified by affirmative action plans, the testing process has always resulted in a success rate for women of less than 80% of the success rate of men. In two of the three time periods the hiring rate for women was less than 80% of the hiring rate for men. In fact under the current plan the hiring rate for women is 20% that of men.

4. What could the city's attorney argue in its defense?

As the attorney for the city I would argue that there was a legitimate, non-discriminatory reason for the hiring decision. The city was under a federal court order to promote black police officers to the rank of sergeant. At the time of the promotions the city was two black sergeants short of the goal. By promoting only black police officers, the city would attain the hiring goal for sergeants. Court orders take precedence over the city's affirmative action plan. Further it was only coincidental that the decision to refer only the names of black officers resulted in only males being referred. Had there been female black police officers on the list, their name(s) would have been referred.

Further, the change in determining affirmative action goals at the rank of sergeant was a business necessity to more accurately reflect the current situation. Because the percentage of female police officers eligible for promotion to sergeant was significantly less than 22%, such a goal is not realistic.

5. If you were the judge, how would you decide this case? Explain your decision.

(The students' answers to this question will vary.)

EPILOGUE

Although this case has been fictionalized to protect the identities of the people involved, Central City Makes a Promotion - Part B is based on a true story. Below is a summary of what happened in the real-life case.

Mary Jones' attorney filed a lawsuit on her behalf when the state court opened on promotion day. Among other relief, she sought a temporary restraining order and a preliminary injunction preventing any promotions to sergeant unless she was also promoted. The state judge assigned the case, after a brief hearing involving the attorneys for both sides, issued a temporary restraining order and set a hearing for a preliminary injunction. At the hearing Jones' attorney suggested that the city be allowed to promote Williams because he was first on the list. The judge agreed and entered a temporary restraining order prohibiting any promotions to sergeant, except for Williams, unless Jones was promoted to sergeant. The judge also order the city to turn over volumes of documents requested by Jones' attorney. The matter was set for hearing on the preliminary injunction.

The day before the hearing on the preliminary injunction the city removed the case to the federal court. The federal judge maintained the temporary restraining order until a hearing on the preliminary injunction could be held about a month later. After a three-day evidentiary hearing, in his ruling on the motion for preliminary injunction the federal judge wrote that there was substantial evidence that Jones had been discriminated against. However, the judge denied the preliminary injunction and extinguished the temporary restraining order because Jones could not demonstrate irreparable harm and the city assured the judge that Jones would be promoted immediately after the order was extinguished because another vacancy at sergeant had occurred.

Once the judge ended the temporary restraining order, Jones and White were promoted to sergeant. The city backdated White's promotion so he would have seniority over Jones.

Shortly after the hearing on the preliminary injunction, the plaintiff filed an amended complaint that broadened the lawsuit into a class action on behalf of all Central City female police officers and police applicants. Over the objections of the city, the federal court certified the lawsuit as a class action after another two-day hearing.

After considerable discovery (interrogatories, depositions and requests for production) by both sides, the parties started serious settlement negotiations. The settlement efforts intensified after approximately 8-10 female officers testified by deposition about their personal experiences related to discrimination and harassment. Ultimately, the case was settled three years after being filed without trial. The settlement involved a comprehensive plan for correcting the practices and policies that resulted in the alleged illegal discrimination. Jones and another female sergeant who had been passed over for promotion were promoted to lieutenant as part of the settlement. White was still a sergeant so the seniority issue no longer existed.

The rest of the story: Jones was passed over for promotion to captain although she was the top name on the list approximately four years after her promotion to lieutenant (see Part C). Fourteen years after Jones was promoted to lieutenant, she was a lieutenant preparing for retirement with 25 years of service. Retirement was just six months away. Robert White had become police chief in Central City. Just five months earlier, Jones was passed over for promotion to captain for a second time. Again Jones was the top name on the list at the time of the promotion. Just as when she was passed over the first time, there were no apparent reasons in her records to indicate that she was not promotable. However, White decided not to promote her. Jones decided not to fight the decision. On this day with about six months left in her tenure with Central City Jones' phone rang unexpectedly. It was Chief White congratulating Mary Jones. He advised her that he decided to promote her to captain.

Subject: Case studies; Police administration; Affirmative action; Personnel policies; Discrimination

Location: United States--US

Company / organization: Name: Police Department-Central City KY; NAICS: 922120

Classification: 6100: Human resource planning; 9550: Public sector; 9110: Company specific; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 4

Source details: INSTRUCTORS' EDITION

Pages: 47-53

Number of pages: 7

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216273925

Document URL: http://search.proquest.com/docview/216273925?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 29 of 100

CENTRAL CITY MAKES A PROMOTION - PART C

Author: Palmer, Steven C; Weyant, Lee; McNary, George W

ProQuest document link

Abstract:

What is an equal opportunity employment environment? What constitutes illegal retaliation under the 1964 Civil Rights Act? The Central City Police Department faces these questions concerning their recent employment practices. More specifically, what is the department's justification for not promoting the individual whose name is on top the promotion list at the time the promotion is being made? How can an employee with excellent performance evaluations and a clean discipline record not be promoted? Could it be that the individual was a woman? Was the fact the woman had previously filed a sex discrimination lawsuit a factor in the decision? Does the work environment penalize women or people who stand up for their legal rights? Finally, are supervisors and employees appropriately trained and supervised regarding employment discrimination issues? This case explores the integration of women into a predominately white male work environment. A woman has previously filed an employment discrimination lawsuit against Central City for its discriminatory employment practices regarding women. The city eventually chose to settle the lawsuit rather than go to trial. The settlement is a comprehensive plan to address the issue of sex discrimination. The case picks up several years later when the woman is being considered for promotion. Despite her being the top candidate on the eligibility list at the time, the new police chief decides to pass her over for promotion. There is a new police chief but has the workplace environment changed? [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Objectives

This case can be used in a variety of undergraduate and graduate classes. The authors believe that it fits into any of the following courses: Principles of Management, Human Resource Management, Business Ethics, Business Law and Employment Law. The analysis of the case can be from a managerial, ethical or a legal perspective. The case can also be successfully used in Organizational Communications, Leadership and Conflict Management classes.

The learning objectives for this case are:

1. Students should be able to evaluate the necessity for a performance management system.

2. Students should be able to analyze a situation for disparate impact, disparate treatment and retaliatory employment discrimination practices.

3. Students should be able to synthesize managerial alternatives to alleviate employment discrimination and retaliatory practices within the workplace.

4. Students should be able to analyze a situation for potential ethical issues and develop strategies for resolving the ethical dilemmas.

5. Students should be able to recognize organizational communications issues and develop strategies for resolving the same.

RESOURCES AVAILABLE

Students may find the following U.S. Department of Labor and the U.S. Department of Justice resources on equal employment opportunity useful.

http://www.dol.gov/esa/regs/compliance/ofccp/pdf/sampleaap.pdf

http://www.eeoc.gov/

ISSUES PRESENTED

The issues that arise from the lack of proper policies and procedures quickly become apparent in this case. The city lacks a performance management system for the evaluation of their police officers. The city also appears to lack a definitive process for handling complaints of possible illegal discrimination. The city's promotion practices incorporate the goals established in its affirmative action policy and previous court rulings. However, the application of the promotion policies by the current chief administrator may lead to legal problems for the organization.

Disparate Treatment/Disparate Impact/Retaliation

Under law there are two theoretical bases for Title VII legal actions, disparate treatment and disparate impact. Disparate treatment occurs when there is evidence that the discriminatory act was an intentional act based on race, color, sex, national origin or religion on the part of the employer. Under the theory of disparate impact, the discriminatory act was the result of a facially-neutral policy that has an adverse impact on members of a protected class. Statistics are frequently used in establishing disparate impact. The four-fifths rule (sometimes called the 80% rule) is frequently used as the preliminary tool to determine disparate impact. Under this rule, it is expected that members of protected classes will have a success rate that is at least 80% of the majority's success rate on selection devices. If the success rate is less than 80%, then the employer must show that the selection device was relevant to the requirements of the position and that the there was no other devise that could be used to measure, as accurately, the applicants' performance that has a less adverse impact on members of the protected class.

Title VII makes it a separate violation for retaliation regardless if the underlying claim of discrimination proves to be true or not. Title VII provides that it is unlawful to discriminate against anyone for making charges, testifying, assisting, or participating in enforcement proceedings. It is also an unlawful employment practice, under the law, for an employer to discriminate against any employee or applicant for employment because he/she has opposed any practice made an unlawful employment practice or because he has made a charge, testified, assisted, or participated in any manner in an investigation, proceeding, or hearing under Title VII.

Burden Shifting/Prima Facie Case

In disparate treatment cases the plaintiff can prove the case through direct evidence of intent to discriminate. The courts, however, recognized that rarely will there be direct evidence available to prove disparate treatment. Therefore the burden shifting approach was developed. Under this approach the plaintiff must prove the existence of a prima facie case. If successful the burden shifts to the defendant to articulate a legitimate, nondiscriminatory reason for the alleged discriminatory action. After the employer puts forth the legitimate reason, the plaintiff has the opportunity to show that the proffered reason was pretexual.

The United States Supreme Court [McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973)] set forth the requirements for the establishment of a prima facie case in employment discrimination cases. The elements are: (1) the plaintiff is a member of a protected class; (2) the plaintiff applied and was qualified for the position; (3) the plaintiff, despite being qualified, was not hired; and (4) after plaintiff's rejection the position remained open and the employer sought others with the plaintiff's qualifications.

A prima facie;1015;1015 case of retaliation;1018;1018 under Title VII has generally been held by the courts to require a showing that: (1) employee engaged in statutorily protected activity; (2) adverse employment action was taken against him/her; and (3) causal connection exists between two events. Many courts have held that a temporal proximity is sufficient to establish the third element. However, for the most part that temporal proximity has been held to be a relatively short period of time.

Defenses

There are several defenses that an employer can raise in employment discrimination cases. The first defense available is a legitimate, nondiscriminatory reason for the employment decision. The plaintiff can counter this defense if he/she can show that the reason was actually pretext. Another defense is that there is a bona fide occupational qualification (BFOQ) that requires the discriminatory act. Race and color can never be a BFOQ under Title VII. In defense of a claim of disparate impact the employer may argue business necessity. This argument maintains that the policy was a business necessity thus making the policy a legitimate requirement of the job. Employers may also avoid liability under disparate impact even if a particular selection device is discriminatory if the overall process is not. Of course the employer may also prove that the plaintiff's evidence is not truthful or is inaccurate.

Improper Conduct Is Mentioned Throughout The Case

Some actions may individually rise to the level of illegal conduct. Other actions collectively may create a hostile work environment. Students should be able to determine if a hostile work environment exists. To do so, they will have to determine if the conduct is pervasive, abusive, offensive or intimidating workplace.

LEARNING ACTIVITIES

1. Divide the class into groups to answer this question, "Does the city police department have a performance management system?" Each group should develop a one page response for this question. The groups should be given the additional instruction "As you develop your response, consider what are the reasons an organization would, or would not, have a performance management system?" Each group should report their findings to the class. The instructor should use these responses to explore the rationale for performance management systems.

Keeping the students in the same groups, give them this instruction. "You have been hired as a HR consulting firm. The city has asked you to recommend a possible performance management system. As part of your report, the city would like for you justify your recommendation and to provide a sample of the new system." Each group should be given time to write a report with their recommendation and to present their recommendations in class.

2. Divide the class into three groups, plaintiff counsel, defense counsel and jury. Have the two groups representing the respective parties write down all of the points/arguments that they would use to support their client's position. Then each group should present their case to the third group, the jury. After hearing argument from both sides, the jury should decide which party should win and why.

QUESTIONS

1. Does the city police department have a performance management system?

Students need to define the term performance management system. For example, according Mathis and Jackson1 (p. 328) performance management systems are "composed of the processes used to identify, measure, communicate, develop, and reward employee performances." Using this definition, students could conclude that placing Jones in the "temporary captain" position, the city is trying to develop their employees. However, the city has no apparent processes to address the other elements of the definition.

The city could address these missing elements through the adoption of a performance appraisal system. According to Mathis and Jackson (p. 329), this system is "the process of evaluating how well employees perform their jobs and then communicating that information to the employees." Possible methods for appraising employees include (Mathis & Jackson, 342-350):

* Graphic Rating Scales

* Behavioral Rating Scales

* Ranking

* Forced Distribution

* Critical Incident

* Management by Objectives

* 360° Systems

2. Does the evidence indicate a prima facie case of retaliation? If so, does Jones have a good case?

In order to establish a prima facie case of retaliation, Jones must show that (1) employee engaged in statutorily protected activity; (2) adverse employment action was taken against him/her; and (3) causal connection exists between two events.

The first element is not difficult to show. Jones filed a federal, class action lawsuit accusing Central City of employment discrimination based on sex in violation of Title VII. It also could be argued that Jones' meeting with Chief Adams regarding the FBI National Academy in which she claimed that Deputy Chief Schmidt was retaliating against her was also a protected activity

There can be little doubt but that Jones suffered an adverse employment action. Jones was passed over for promotion to captain. It also could be argued that her not being sent to the FBI National Academy constituted an adverse employment action. So the real question comes to the third element of the prima facie case.

It is based on this third element, the causal connection, that it might be argued that Jones does not have a strong case. The City will argue that there is no evidence of a causal connection. It has been more than four years since the lawsuit was settled. Four years is too long of a period of time for temporal proximity to be established. The case shows no other evidence of retaliatory intent.

However, it may also be argued that a causal connection can be made based on temporal proximity. Several events could be argued to have created the causal connection:

A. This was the first opportunity the city had to retaliate against Jones in the promotion process. So even if four years had passed, the City could not have retaliated earlier because it was the first opportunity that the retaliatory action could be taken.

B. The meeting that Jones had with Adams constituted a protected activity. The decision making process regarding the captain promotion was within a short window of time after that protected activity.

C. Chief Adams was potentially impacted by the Jones Agreement when his hiring as chief was challenged in court as a violation of the Jones Agreement. That occurred less than six months prior to the captain promotion decision.

D. The Jones Agreement was still impacting policies and decisions being made by the police administration. Its terms had not been completely met and therefore it was in full force and effect. In Title VII law there is a recognition of the concept of continuing violation. Under this doctrine, if any act of discrimination within a continuing practice of discrimination occurred within the statute of limitations period, then all discriminatory acts within the continuing violation are actionable. This same doctrine should be extended to the temporal proximity test of retaliation. Since the Jones Agreement still must be considered in the decision and policy making processes, it is a continuing protected activity.

3. Can an argument be made by Jones that she is the victim of disparate treatment or disparate impact discrimination? How strong is the claim, if there is one?

It is doubtful that a case of disparate impact discrimination would be successful. Disparate impact discrimination occurs when the employer has a policy that appears to be neutral on its face but in practice treats a protected class in an unfair manner. Nothing presented in this case indicates that any facially-neutral policy impacted the captain promotion decision.

An argument may be made that disparate treatment occurred. Disparate treatment is intentional discrimination against a person because they are a member of a protected class. The elements of a disparate treatment prima facie case are: (1) the plaintiff is a member of a protected class; (2) the plaintiff applied and was qualified for the position; (3) the plaintiff, despite being qualified, was not hired; and (4) after plaintiff's rejection the position remained open and the employer sought others with the plaintiff's qualifications. There is no question that Jones met the first two elements. Jones would argue that she was qualified and Central City will argue she was not qualified for the job. However, for the purpose of the prima facie case she did meet the technical qualifications for the position. She had been a lieutenant on the Central City Police department for more than two years at the time she applied, she tested successfully for the position and she was within the top three names on the eligibility list at the time of the promotion. Since Jones, who was on top of the eligibility list at the time, was not promoted, it can be argued that the city continued to seek another candidate.

It can also be argued that there is direct evidence of disparate treatment against Lt. Jones. In the chief's interview as part of the promotion process, it can be argued that an illegal question was asked and was part of the basis for the decision. The chief acknowledged that part of his reason for not promoting Jones was her failure to answer one particular question in the interview. The question was only asked of Jones, and no candidate other than Jones was asked different questions than the other candidates. Also the question itself related to a claim of discrimination that Jones had made previously. Therefore, the asking of an illegal question and basing the decision in part on the lack of answer constitutes disparate treatment discrimination.

Finally, an argument concerning disparate treatment could be made because Chief Adams did not investigate her claim of employment discrimination and retaliation. In fact he testified that he would never investigate such a claim because Jones was simply expressing her opinion. An employer has a duty to investigate claims of illegal actions under Title VII. The failure to do so implicates the employer in any illegal conduct that occurred.

4. If a prima facie case of discrimination is shown, what might the city articulate as a legitimate, nondiscriminatory reason for its decision?

As the attorney for the city I would argue that there were legitimate, non-discriminatory reasons for the hiring decision. Lt. Jones was not qualified to be a captain because she lacked trust and confidence in leadership, she did not demonstrate the ability to meet deadlines, and finally her reactions under stress were questionable. In addition, secondary reasons for her lacking qualifications were demonstrated by her improperly pressuring citizens to write letters of recommendations and her lack of networking with citizens during the open house. In regard to the disparate treatment claim, Central City would also argue that they were not discriminating against women because they promoted a woman to the position.

5. Is there evidence of pretext?

It appears that all of the legitimate, non-discriminatory reasons that the chief has given are pretext. Below is an examination of each reason set forth by Central City for not promoting Lt. Jones:

A. Lt. Jones lacked trust and confidence in leadership: This argument is based the meeting Chief Adams had with Jones regarding the FBI National Academy. Chief Adams says that she challenged his veracity. However, Jones paints a much different picture, with a tape recording to support her position. She will testify that after the point in the conversation that Chief Adams claims he lost trust in her, he started talking about a politically embarrassing issue. If the chief did not trust her, why would he share information that could result in political embarrassment? The chief can give no other incidents in which Jones demonstrated an alleged lack trust or confidence in his leadership. This particular incident involved Jones complaining to the chief that she was being treated illegally by a deputy chief; this would be a protected activity.

B. Lt. Jones did not demonstrate the ability to meet deadlines: Chief Adams based this determination on one assignment issued to Jones while she was acting captain. Adams testified that he did not investigate the circumstances of this incident. He simply blamed Jones for being late. Adams gave the assignment to Deputy Chief Schmidt. Adams did not blame Schmidt for the assignment being late. Likewise, he did not blame the lieutenant assigned to do the task, Wayne Fox. Rather, Adams placed sole blame for the assignment being late was Lt. Jones. Adams also admitted that he never looked at Jones' file to see if she was late on other assignments. He also stated that he did not know, nor cared, if the person who was promoted, Patricia Meyer, was ever late with any assignments.

C. Lt. Jones' reactions under stress were questionable: This finding was based on Jones' inability to answer one question in the chief's interview. Chief Adams could not identify any time in her career that Lt. Jones did not perform under pressure in the field. Another problem with this item was that the question was only asked of her and no other candidates for promotion. None of the other people were asked a meaningful question that was not asked of all the candidates. Regarding the question there is also an argument to be made that the question was an illegal question as it went to Jones' prior claim to Adams that Schmidt had been discriminating against her. It should also be noted that Chief Adams could not answer more than 100 questions in his deposition.

D. Lt. Jones improperly pressuring citizens to write letters of recommendations: The problem with this claim was that Adams admitted that he also included letters of recommendation with his application to be Central City police chief, despite the process not requesting letters of recommendation. Adams tries to justify the difference as Jones' letters were job specific while his letters were in general and not to a particular person or potential employer. Also without talking with any of the people who wrote letters or looking in Jones' personnel file, Adams assumed that Jones put undue pressure on these people to write letters.

E. Lt. Jones did not network with citizens during the open house: First, Adams could not remember whether or not this was a factor in his decision. Even though he made the decision six weeks earlier and the lawsuit was filed immediately after the decision was made. Chief Adams testified that he had no knowledge of Jones' relationship with any of the attendees. Also he did not know what she was talking about with people as she served drinks and cookies.

6. If you were the judge, how would you decide this case? Explain your decision.

(The students' answers to this question will vary.)

EPILOGUE

Although this case has been fictionalized to protect the identities of the people involved, "Central City Makes a Promotion - Part C" is based on a true story. Below is a summary of what happened in the real-life case.

Central City Makes a Promotion Parts A and B outline the circumstances of Jones' protected activities that were the foundation of Part C. Originally, Jones was passed over for promotion to sergeant by Robert White. Jones was number two on the original eligibility list for that promotion and the city was making two promotions. White was 19 on the original eligibility list. Although Jones was successful in temporarily blocking White's promotion, the federal district court extinguished the temporary restraining order after a hearing and the city's assurance that Jones would also be promoted. Central City did promote both White and Jones at the same ceremony, but back-dated White's promotion to the original date White was to be promoted. This meant that White had seniority over Jones. Because in the settlement agreement between Jones and Central City Jones was promoted to lieutenant, the seniority issue became moot.

When the circumstances in Case C arose, Jones, based on state law, asked the state court to temporarily restrain the city from promoting any one before Mary Jones. The judge ruled that there would be no irreparable harm from promoting Patricia Meyer. In the judge's ruling he stated that Jones could be made whole through damages and injunctive relief if she is successful in her lawsuit. The city promoted Meyer.

Jones then filed an EEOC claim, as required by Title VII. The EEOC District Director learned of the pending lawsuit based on state law and administratively dismissed the EEOC claim. In doing so, the District Director issued Jones a right-to-sue letter.

Once the right-to-sue letter was issued, Jones' case was amended to include Title VII claims of disparate treatment and retaliation. Central City removed the amended case to federal court. Shortly thereafter, due to a conflict of interest that had arisen, Jones' attorney had to withdraw from the case. Matlock had represented Jones in the first case. He was extremely well versed in the issues, personalities and nuances of the case. Jones retained new counsel.

The matter went to trial in the federal district court. After the plaintiff's case was presented, the judge granted the city's motion for directed verdict. The judge based his decision on the plaintiff's failure to prove the third element of the prima facie case, a causal connection exists between the protected activity and the failure to promote Jones.

In hindsight Jones stated that her new attorney was not as well versed on her case as Matlock was. This resulted in her new attorney oversimplifying the facts of the case in the presentation of evidence. Jones stated that she wished Matlock had been able to remain on the case because he understood how to present the case to the jury and judge. Rumor has it that Mason also made comments to members of the legal community that Matlock withdrawing from the case made their efforts easier.

THE REST OF THE STORY: Ten years after being passed over for promotion, Jones was a lieutenant preparing for retirement with 25 years of service. Retirement was just six months away. Robert White had become police chief in Central City. Five months earlier, Jones was passed over for promotion to captain a second time. Again Jones was the top name on the list at the time of the promotion. The city, again, dropped down the eligibility list to take another female rather than promote Jones. Again Jones had been an acting captain for three months when the promotion decision was made. By this second occasion Central City had instituted a performance evaluation system. Jones' evaluations were very good. There were no apparent reasons in her records that would indicate that she was not promotable. However, White decided not to promote her. Jones decided not to fight the decision. On this day with about six months left in her tenure with Central City Jones' phone rang unexpectedly. It was Chief White congratulating Mary Jones. He advised her that he decided to promote her to captain.

Subject: Case studies; Police administration; Performance appraisal; Discrimination; Litigation

Location: United States--US

Company / organization: Name: Police Department-Central City KY; NAICS: 922120

Classification: 4330: Litigation; 6100: Human resource planning; 9550: Public sector; 9110: Company specific; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 4

Source details: INSTRUCTORS' EDITION

Pages: 55-65

Number of pages: 11

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216308089

Document URL: http://search.proquest.com/docview/216308089?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 30 of 100

NINE DRAGON THEME PARK: MARKETING STRATEGY IN CHINA

Author: Zhang, Jindong; Chen, Kuan-Chou; Chuang, Keh-Wen arin; Woods, Denise M

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Abstract:

This case examines the development and role of destination marketing in the China tourism industry in general and in the theme park in particular. A case study of Nine Dragon Theme Park in Beijing, China is demonstrated to explore the detonation marketing development. The China tourism industry has effectively merged its service with that from local attractions to the development of global and modern theme parks. This study provides a comprehensive viewpoint for China destination marketing development and strategies. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

This paper studies the case of a theme park in China, its destination marketing practices, and the market reaction during the different development stages. By presenting and analyzing this case, the paper strives to identify the role of destination marketing to theme parks in the future China market. Students should be asked to critique the NDA situation throughout its three stages. They should be able to make recommendations for each stage, paying particular attention to the third, and least successful, stage.

STUDY OF DESTINATION MARKETING IN CHINA

Destination in the tourism industry always refers to a physical place that can provide visitors with sightseeing, entertainment, shopping and other services and experience. In this study, the following reasons demonstrate that the destination marketing approach is unique in the Chinese tourism industry. estination marketing has become increasingly necessary in the modern travel and tourism industry as places seek to be distinctive and attractive, aiming to establish a favorable position and sell themselves in a highly competitive environment (Henderson, 2000, p. 37)..

Second, as one of the first artificial theme parks opened to the public, NDA endured the successes and difficulties of such kind of amusement park. With this effort, they revealed some important things in common for reference of the future development of the theme parks in China. Third, the period when NDA was established and operated is one that the Chinese tourism industry developed from early rapid growth in the early stages to severe competition in its mature stage. The macro environment and government policy also changed according to this situation. The marketing approach of NDA also reflected this change and the market response.

DISCUSSION QUESTIONS

1. Identify the destination marketing strategies that apply in the in each of the three periods in the NDA case.

Destination market organizations (DMOs) focus mainly on marketing as the principal management function Marketing, therefore, is the principal purview of DMOs. More specifically, recognizing that marketing entails much more than just elling or dvertising, destination promotion is normally the DMOs major activity and budget item (Dore and Crouch, 2002, p. 137).

NDA opened to tourists on August 1990 after five years of construction. The income and numbers of visitors increased excessively, to a peak in 1995 and then had a sharp decrease in 1996. The operation can be divided into three periods by the numbers of tourists and incomes: The first increase period from 1990 to 1995, the 1996 fall of the business and the continuing decrease from 1997. Both the macro environment and the management practices, especially the marketing approach, played an important role in these three periods.

Figure 1 displays the periods of NDA case.

2. What specific suggestions would you make to NDA for a new marketing strategy, taking into consideration their limited revenue and investor funding?

Answers will vary widely for this question. Students should base their suggestions on proven strategies employed by other amusement companies specifically in China. Things the students should consider is: how to improve the attractions that are already available at NDA, how to incorporate new attractions that fit in with the general water theme of the park, how to add new attractions that are more current to the Chinese culture, and how to market these products. Special consideration should be paid to the accessibility of the theme park to other Chinese tourist attractions. How can the NDA experience be best advertised throughout China? Students should also consider how to go about doing a thorough market analysis to determine what their target audience wants for their tourism experiences.

Students can also answer from the perspective of the Disney Company. Answers should include a thorough review of the tourism options available through the Disney company. Analysis of Disney World and Disneyland in the U.S. as well as in Europe, Hong Kong, and Japan should be included. One thing that Disney does well is to partner with airlines, car rental agencies, and hotels to give customers a vacation package. What companies can NDA partner with in order to be a more full-service tourism provider? What partnerships are currently available in China that could be duplicated? Tickets to the Disney properties can all be purchased online. Whole vacation packages can also be selected via telephone by using the Disney 800-number. Disney provides links to its many destinations and shopping as well as links to games for the children. What can NDA do on their Web site in order to pull customers in?

3. What did you learn from this case regarding the tourism industry in China using a destination marketing approach?

With the beginning of the Chinese open policy in the 1980s, the Chinese tourism industry has made great progress and became the key industry in the development of China (Figure 2). According to the statistics from the National Bureau of Statistics of China, the revenue of Chinese domestic tourism industry is $46.7 billions in 2002, with 877.82 million domestic tourists. According to the estimate of the World Travel Organization, China is going to be one of the major destinations in the near future.

China is rich with tourism resources because of its long history, large territory and great diversity in landscape, geography, climate, customs, culture and people. With these unique advantages, the Chinese tourism industry will play an important role in China development.

Increasing competitiveness in the Chinese tourism industry is forcing operators to take greater leaps in the race to provide quality service and guest satisfaction. According to Pyo (2002), the destination can use the knowledge to determine its marketing strategy and tactics in real time, as changes develop in the market place and new tourist demands arise. This study reviews the destination marketing strategy for a Chinese theme park. It is proposed that by understanding China destination marketing, one can determine a better premise and structure for the processes, the potential tourist demands, the barriers of the China tourism system as well as China tourism policy. For tourism investors and researchers, China destinations can therefore effectively use marketing strategies in their search for a tourism investment, competitive positioning, and growth within a worldwide tourism industry.

Subject: Amusement parks; Market strategy; Tourism; Business government relations; Case studies

Location: China

Company / organization: Name: Nine Dragon Theme Park; NAICS: 713110

Classification: 2430: Business-government relations; 7000: Marketing; 8307: Arts, entertainment & recreation; 9179: Asia & the Pacific

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 4

Source details: INSTRUCTORS' EDITION

Pages: 67-71

Number of pages: 5

Publication year: 2008

Publication date: 2008

Year: 2008

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

ProQuest document ID: 216274073

Document URL: http://search.proquest.com/docview/216274073?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 31 of 100

CHILDREN AND FAMILY SERVICE CENTER CASE STUDY

Author: Tomlinson, Vickie; Ward, Terry J; Smith, G Robert

ProQuest document link

Abstract:

In this case, you are asked to take the role of the Director of Fiscal Operations of a not-for-profit organization, Children and Family Service Center. The Trustees have hired you because of concerns that the accounting records are not adequate. You are give ten areas of concern and asked to answer various questions related to these concerns. Thus, you attempt to determine the appropriate treatment for each item. This case will help you to better understand the basic principles and concepts that differ between for-profit and not-for-profit organizations. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Solutions to Requirements

1. Explain what makes a not-for-profit entity distinct from a for-profit entity? You may wish to include in your discussion how Statement of Financial Accounting Concepts (SFAC) # 4 distinguishes the two types of entities.

According to SFAC # 4, the major distinguishing characteristics of a not-for-profit entity from a for-profit entity are as follows:

Receipts of significant amounts of resources are from resource providers who do not expect to receive either repayment or economic benefits proportionate to the resources provided. These resource providers are interested in the services the organization provides.

Operating purposes are not to provide goods and services at a profit or profit equivalent. A not-for-profit's purpose is to use resources to provide goods and services to its constituents and beneficiaries, and it is generally prohibited from distributing assets as dividends to its members, directors, officers, or others.

Absence of defined ownership interests that can be sold, transferred, or redeemed, or that convey entitlement to a share of a residual distribution of resources in the event of liquidation of the organization (SFAC # 4, paragraph 6).

2. According to SFAS # 117, what is the primary purpose of not-for-profit financial statements? Based on SFAC # 4, what are the objectives of not-for-profit financial reporting? Compare these objectives to the objectives of financial reporting for business enterprises described in SFAC # 1. What are the similarities and dissimilarities?

According to SFAS # 117, "the primary purpose of financial statements is to provide relevant information to meet the common interests of donors, members, creditors, and others who provide resources to not-for-profit organizations" (SFAS # 117, paragraph 4). These users have the common interest in "assessing (a) the services an organization provides and its ability to continue to provide those services and (b) how managers discharge their stewardship responsibilities and other aspects of their performance." According to SFAC # 4, the objectives of financial reporting for nonbusiness organizations are:

To provide information that is useful to present and potential resource providers and other users in making rational decisions about the allocation of resources to those organizations (SFAC # 4, paragraph 35).

To provide information to help present and potential resource providers and other users in assessing the services that a nonbusiness organization provides and its ability to continue to provide those services (SFAC # 4, paragraph 38).

To provide information that is useful to present and potential resource providers and other users in assessing how managers of a nonbusiness organization have discharged their stewardship responsibilities and about other aspects of their performance (SFAC # 4, paragraph 40).

To provide information about the economic resources, obligations, and net resources of an organization, and the effects of transactions, events, and circumstances that change resources and interest in those resources (SFAC # 4, paragraph 43).

According to SFAC # 1, the objectives of financial reporting for business enterprises are:

To provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions (SFAC # 1, paragraph 34).

To provide information to help present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from the sale, redemption, or maturity of securities or loans (SFAC # 1, paragraph 37).

To provide information about the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change its resources and claims to those resources (SFAC # 1, paragraph 40).

Both sets of objectives focus on providing information that would be useful in deciding whether to provide resources to an entity. However, the two sets of objectives reflect different interests of the respective resource providers; investors and creditors seek monetary repayment of, and a return on, resources they provide. Nonbusiness resource providers expect no, or disproportionate, benefits to the resources provided.

One of the primary objectives of financial reporting in SFAC # 4 was providing information to assess how managers have discharged their stewardship responsibilities. This objective is important in not-for-profit organizations because these organizations are not profit oriented and are dependent upon the continuing support of resource providers. However, in SFAC # 1, this objective is viewed as less important in financial reporting for business entities.

The objectives regarding economic resources of an enterprise are very similar. The main distinguishing difference is in the terminology that reflects one of the distinguishing characteristics of nonbusiness organizations-the lack of ownership interests entitled to a residual distribution in the event of liquidation.

3. SFAS # 117 requires that the net assets of nonprofit organizations be classified in one of three ways. Identify these three classifications and briefly distinguish between them.

The classifications required by SFAS # 117 were first identified in SFAC # 6. These classifications are: permanently restricted; temporarily restricted; and unrestricted. Permanently restricted net assets result from:

contributions of assets where donors impose limitations that do not expire,

other asset changes subject to similar limitations, and

where donors require reclassifications from (or to) other classes of net assets (SFAC # 6, paragraph 92).

These assets include endowments whose term lasts indefinitely and other certain assets that must be maintained or used in a certain way. The assets will be restricted so long as the organization has custody of those assets. Temporarily restricted net assets result from:

contributions of assets where donors impose limitations that expire as time passes or may be fulfilled by other organization actions,

other asset changes subject to similar limitations, and

where donors require reclassifications from (or to) other classes of net assets (SFAC # 6, paragraph 93).

These assets include term endowments where the term lasts for a specific period or expires once certain requirements are met. Unrestricted net assets result from:

all revenues, expenses, gains, and losses that are not changes in permanently or temporarily restricted net assets, and

reclassifications from (or to) other classes of net assets (SFAC # 6, paragraph 94).

All assets are assumed unrestricted unless there are specific donor limitations.

4. Based on SFAC # 6 and SFAS # 116, explain the difference between a donor-imposed gift restriction and a conditional promise to give. How is a conditional promise to give reported on the financial statements?

According to SFAS # 116, a donor-imposed gift restriction is a donor stipulation that specifies a use for a contributed asset that may be temporary or permanent (SFAS # 116, paragraphs 11 through 16). The donor has already transferred the asset to the organization, but the asset must be used according to the specific use set by the donor. However, the use must fall within the broad limits resulting from the nature of the organization, the environment in which it operates, and the purposes specified in its articles of incorporation or bylaws or comparable documents.

A conditional promise to give depends on the occurrence of a specified future and uncertain event. The donor does not transfer the gift to the donee until the conditions on which the promise depends are substantially met.

Recipients of conditional promises to give are to disclose the following in the financial reports:

The total of the amounts promised.

A description and amount for each group of promises having similar characteristics, such as amounts of promises conditioned on establishing new programs, completing a new building, and raising matching gifts by a specified date.

5. Following the enumerated items in this case, prepare the journal entries necessary to reclassify net assets at December 31, 2001 into the various classes required by SFAS # 117. Explain the reason for each reclassification and the reason for each nonreclassification.

1) SFAS # 116, paragraph 14, requires that a donor's restriction to restrict use of an asset be explicit or clearly evident as an implicit stipulation. It is impossible for the CFSC to determine the nature of the restriction in this case. Since the accounts were established before any accounting standard addressed the concept of donor restrictions, and since no documentation on the purpose of the accounts can be found, it may be assumed that the accounts represent unrestricted net assets.

2) One of the requirements for an asset to remain restricted is that the asset be under the control of the entity from which the donation was made. Since the Institute for Family Services no longer exists, it may be interpreted to mean that these monies are no longer restricted. To confirm this, the entity should attempt to gain the signatures on the Authorization for Termination of Accounts.

3) The will stipulated the principal amount be restricted for a specific purpose-college scholarships. The will did not stipulate the earnings from this fund also be restricted for this purpose. Kate cannot determine that no student resident of CFSC would ever attend college; some may attend if funds were available. Therefore, since the restricted use is within the nature and purposes of CFSC, the corpus amount would need to be reclassified to temporarily restricted net assets.

Dr. Unrestricted Net Assets $50,000

Cr. Temporarily Restricted Net Assets $50,000

As the funds are used for college scholarships, an entry would be made to release temporarily restricted net assets by debiting Temporarily Restricted Net Assets and crediting Unrestricted Net Assets.

4) According to SFAC # 6, paragraph 96,

"Donors need not explicitly limit uses of contributed assets for a not-for-profit organization to classify the increase in net assets as restricted if circumstances surrounding those receipts make clear the donor's implicit stipulation of restricted use. For example, use of contributed assets is restricted despite absence of a donor's explicit stipulation about use if the assets are received in a fund-raising drive declared to be for a specific purpose. . ."

Therefore, the journal entry needed is:

Dr. Unrestricted Net Assets $800,000

Cr. Temporarily Restricted Net Assets $800,000

According to SFAS # 116, paragraph 9, "Contributions of services shall be recognized if the services received (a) create or enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation." Therefore, an additional journal entry needed is:

Dr. Diagnostic Treatment Center, Bristol, TN $20,000

Cr. Temporarily Restricted Net Assets $20,000

According to SFAC # 6, paragraph 115,

"Restrictions are removed from temporarily restricted net assets when stipulated conditions expire or are fulfilled by the organization. . . Purpose-restricted net assets generally become unrestricted when the organization undertakes activities pursuant to the specified purpose, perhaps over several periods, depending on the nature of donors' stipulations. The resulting reclassifications increase unrestricted net assets, often at the same time that the activities that remove the restrictions result in expenses that decrease unrestricted net assets. Temporarily restricted net assets may become unrestricted when an organization incurs liabilities to vendors or employees as it undertakes the activities required by donor stipulations."

Therefore, an additional journal entry needed is:

Dr. Temporarily Restricted Net Assets $120,000

Cr. Unrestricted Net Assets $120,000

It does not matter that more was raised than needed for the project. Once the project is completed, the remaining balance of gifts temporarily restricted for this purpose will be transferred to Unrestricted Net Assets.

5) No journal entry is required for this board designation of endowments. Board designations are not the same as donor restrictions. SFAS # 117 discusses this issue as part of unrestricted net assets (paragraph 116). The standard allows disclosure of board designations in the notes or on the face of the financial statements. However, these designations would be shown as a component on unrestricted net assets.

When the Statement of Financial Position is prepared, the net unrestricted net asset amount, shown as a "Board-designated Endowment", should be $9,455,350 (the $10,305,350 investment account, less the restricted amounts in journal entries 3 ($50,000) and 4 ($800,000) above).

6) SFAS # 116, paragraph 16, addresses the issue of what may be done with long-lived assets that have no donor restrictions. This land is clearly restricted as to use. The covenants restrict the CFSC from ever selling the land or using it for a purpose consistent with the purpose of the organization. Therefore, it should be recorded as permanently restricted.

If the land had not been recorded in the accounting records of the entity, the following entry should be made:

Dr. Land $20,000

Cr. Permanently Restricted Net Assets $20,000

7) SFAS # 116, paragraph 14, clearly requires reporting this type of donation as restricted net assets. Therefore, the entry to correct the receipt is:

Dr. Unrestricted Net Assets $25,000

Cr. Permanently Restricted Net Assets $25,000

SFAS # 117, paragraph 22, requires that changes in fair values of investments be reported as increases or decreases in unrestricted net assets, unless the use of the change in value is restricted by the donor. In this case, the donor said that interest and dividends were to be used for ongoing operations. Thus, these amounts would be reported as changes in unrestricted net assets. Therefore, the loss on the investment should also be reported as a change in unrestricted net assets.

8) SFAS # 116, paragraph 22, states that conditional promises to give should be recognized when the conditions are substantially met. Clearly, this situation exists. Assuming that the donor has not yet been notified, the following entries should be made:

For the amount due from the businessman:

Dr. Promises Receivable $30,000

Cr. Permanently Restricted Net Assets $30,000

For the amounts already received from the "matching donors" and the amount to be reclassified by the CFSC:

Dr. Unrestricted Net Assets $30,000

Cr. Permanently Restricted Net Assets $30,000

9) According to SFAS # 116 paragraph 20, not-for-profit organizations "shall report the contribution income as an increase in either temporarily or permanently restricted net assets if the underlying promise to give is donor restricted." According to paragraph 15, "Receipts of unconditional promises to give with payments due in future periods shall be reported as restricted support unless explicit donor stipulations or circumstances surrounding the receipt of a promise make clear that the donor intended it to be used to support activities of the current period."

In addition, according to SFAS # 116, "Recipients of unconditional promises to give shall disclose the following:

The amounts of promises receivable in less than one year, in one to five years, and in more than five years.

The amount of the allowance for uncollectible promises receivable.

Therefore, the journal entry needed is:

Dr. Pledges Receivable $5,000

Cr. Allowance for Uncollectible Pledges $ 500

Cr. Temporarily Restricted Net Assets $4,500

According to SFAS # 116, paragraph 155, the Financial Accounting Standards Board (FASB) decided to permit contributions with restrictions that are met in the same reporting period to be reported as unrestricted support provided that an organization reports consistently from period to period and discloses its accounting policy. Therefore, the gifts of $15,000 would not need to be reclassified to Temporarily Restricted Net Assets because the stipulation has been fulfilled during the same year that the gifts were received.

10) According to SFAS # 116, paragraph 7, "A donor-imposed condition on a transfer of assets or a promise to give specifies a future and uncertain event whose occurrence or failure to occur gives the promisor a right of return of the assets transferred or releases the promisor from its obligation to transfer assets promised." Therefore, the gift must be returned to the donor. The journal entry needed is:

Dr. Unrestricted Net Assets $10,000

Cr. Gifts payable due to unfulfilled condition $10,000

6. SFAS # 117 further requires certain financial statements be prepared for nonprofit entities. Identify these financial statements and briefly describe what is reported in each. Based on the data provided in the case and the journal entries prepared in question five, prepare an adjusted Statement of Financial Position.

Three financial statements are required of all nonprofit organizations. These three statements are as follows.

Statement of Financial Position. This financial statement reports in three broad categories: assets, liabilities, and net assets. The net asset classifications were discussed in a previous question. The standard does not require that assets and liabilities be reported in the same classifications.

Statement of Activities. This financial statement reports the revenues, expenses, gains, and losses of the nonprofit entity. These elements must be reported by net asset classification. In addition, the standard requires that reclassifications between the classes of net assets be reported.

Statement of Cash Flows. This statement follows the guidelines of SFAS # 95, The Statement of Cash Flows, with some modifications, including: requiring that donor-restricted contributions be reported as cash flows investing activities; and interest and dividends that are part of donor restrictions not be reported as cash flows operating activities.

A fourth financial statement, Statement of Functional Expenses, is required of all voluntary health and welfare organizations. This statement is to be prepared as a matrix showing natural classifications of expenses (salaries, rent, depreciation, etc.) by functional activity. This information may be presented by other nonprofit entities in the notes to the financial statements.

Subject: Nonprofit organizations; FASB statements; Accounting standards; Case studies; Social services

Location: United States--US

Classification: 4120: Accounting policies & procedures; 9540: Non-profit institutions; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 4

Source details: INSTRUCTORS' EDITION

Pages: 73-82

Number of pages: 10

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216290229

Document URL: http://search.proquest.com/docview/216290229?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 32 of 100

STRAYER EDUCATION, INCORPORATED: AN EQUITY VALUATION

Author: Stotler, James

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Abstract:

The student is placed in the role of an equity analyst and asked to prepare a buy or sell recommendation for Strayer Education, Incorporated(NYSE: STRA) stock. Strayer Education, Inc. through its subsidiary, Strayer University, offers graduate and undergraduate degree programs in business, information technology, education and public administration. The student must assess the competitive environment of Strayer using the DuPont identity and Porter's five force model of competitive strategy as well as estimate the value of the stock. All information in the case is publicly available. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Pedagogy

The valuation of the common stock of Strayer Education, Incorporated, the holding company operating Strayer University, is the focus of this case. The student must remember, however, that they are to interpret the case from the perspective of an external analyst or investor. Implementation of processes that address industry concerns through Porter's Five Force Model and the usage of the DuPont identity will identify the company's strength and weaknesses among its competition. The difficulty level of the case is appropriate for seniors or first year graduate students. The case should take a maximum of two hours of class time and two and one-half hours of student preparation outside of class.

Stock evaluation issues relating/but not limited to the following are to be discussed:

* the expected return

* risk-free rates

* security's beta

* discount rate

* growth rates

Teaching Plan

Class discussion should be initiated with the students identifying Porter's five competitive forces and the strength of these pressures. Instructors may want to focus on the following topics for class discussion.

1. List and describe the sources and strengths of the five competitive forces.

2. Analyze the ROE, Profit Margin, and ROA using the DuPont identity.

3. Calculate the expected return for STRA stock.

4. Estimate the value for STRA stock using the constant growth model.

5. Determine the value estimate using a Price/Earnings valuation approach.

6. Find the value estimate for STRA using the two-stage Dividend Discount Model.

7. Present an overall external investment recommendation to buy or sell the stock based on your analysis. Explain.

1. List and describe the sources and strengths of the five competitive forces.

* Threat of entry by new competitors

* Threat of substitute goods

* Bargaining power of buyers

* Bargaining power of suppliers

* Rivalry among existing competitors

Threat of entry by new competitors

Competition in this industry could be evaluated in two ways. It could be viewed as just other publicly traded for-profit educational services corporations. In this case, the threat of entry by new competitors would be quite high, particularly in the online sector since the entry costs would be much lower. The threat of new competitors is somewhat less in the campus based area, but it is still significant since it is common in the industry to lease instructional space (typically in a local office complex).

On the other hand, if the potential new competition is viewed as all degree granting institutions, the threat of entry by new competition would still be high. While it is unlikely that new public or private non-profit universities would be created to compete with companies like Strayer, it is very possible that existing non-profit universities could change their focus to target students who would have otherwise chosen to attend a corporate University.

Threat of substitute goods

The product offered by this industry (educational services) is a college degree or certificate. There are essentially no goods which could be substituted for a college degree. During good economic times many individuals choose to enter or stay in an employment position rather than going to college, but even this is not a substitute, it is just deferred consumption.

Bargaining power of buyers

The bargaining power of buyers in this industry is quite low. The buyers would be the students who are seeking a degree and the price would be the tuition, books and supplies. Tuition is typically set for given academic year and not negotiable. It also typically rises each year at most universities annually at a rate greater than inflation. In this industry, about one third of students rely on some type of government funding program, about one third rely on employers paying for tuition, and about one third rely on private funding sources including loans.

Bargaining power of suppliers

Suppliers in this industry would come in basically two forms. First, there would be faculty who supply the campus based or online instruction. Individual faculty negotiate their contracts in an open and union-free environment, however, due to the ample supply of potential faculty in most disciplines bargaining power is fairly low.

The other type of supplier in this industry would be the suppliers of campus instructional space. It is common in this industry for companies to own some of their instructional space, but most of the space is leased. In the case of leased instructional space the bargaining power of the suppliers of space will depend mostly on the local market factors such as occupancy rates. Suppliers bargaining power would be higher in markets with higher occupancy rates and lower in markets with lower occupancy rates.

Rivalry among existing competitors

The rivalry among existing competitors in this industry is moderate to high. The primary focus among competitors in this industry is recruitment and retention. Most firms in the industry spend large amounts of advertising money to recruit new students, particularly in markets where new campuses are opened. To assure that students continue to take courses, most firms in the industry utilize retention managers. Typically, firms in this industry lack some of the factors that a traditional universities might be able to offer, such as campus life, athletics, student organizations and other extra-curricular activities. To compensate, many firms in the industry emphasize cost, convenience and an accommodating schedule in order to compete with traditional universities.

2. Analyze the ROE, Profit Margin, and ROA using the DuPont identity

The return on equity (ROE), profit margin, and return on assets (ROA) for Strayer, a select group of competitors, and the real estate industry was given as supplemental information. Knowing this information, the students can analyze the company's placement in the market and its profitability. Only one competitor has an ROE higher than Strayer. It can be seen from the relatively high profit margin that the company is more effective at controlling costs than other firms in the industry.

Strayer has an ROA of 31.7 percent which is second only to Apollo Group, Inc. and well above the industry average of 19.68 percent. As noted above Strayer's ROE is also above the industry average and also equal to the ROA of 31.7 percent. Students should recognize that since the ROA and ROE for Strayer are equal, they have no debt in their capital structure. For other firms in the industry ROA and ROE are not equal, indicating the other firms do have debt in their capital structures. This does not mean that a change is needed. It just indicates that Strayer operates with a more conservative capital structure.

Even though there were not any computations that were needed to determine the ratios, the students should recognize that the ROA is a component of the ROE. Refer to the diagram below:

3. Calculate the expected return for stock.

The Capital Asset Pricing Model (CAPM) will be used to calculate the expected return for Strayer stock. The formula for the CAPM model is as follows:

R^sub E^ = R^sub F^ + β * (R^sub M^ - R^sub F^)

R^sub E^ - Expected return on a security

R^sub F^ - Risk-free rate (long term government bond yields)

β - Beta of STRA: This is a measure of systematic risk. The beta measures the correlation of a stocks total return with the market return.

R^sub M^ - Expected return on the market (The S&P 500 used as a proxy)

The expected return estimate:

R = .05 + ..85 (.10-.04) = .101 or 10.1%

4. Estimate the value for the stock using the constant growth model.

As stated in the case growth rate expectations are about 16 percent per year for the next 5 years.

It is not reasonable to assume that this growth rate will continue in the future for valuation purposes. It will likely decline at some point in the future. As a result, the constant growth model would not be appropriate to use in this type of valuation. In this case the growth rate of 16 percent exceeds the required return of 10.1 percent estimated above. The 2-stage Dividend Discount model would be more appropriate in this valuation.

5. Determine the value estimate using a Price/Earnings valuation approach.

The value of the stock will now be determined in this segment using the Price/Earnings approach. The earnings per share and the price earnings ratio is needed. It should be noted that most analysts expect the forward looking P/E ratio to decline. The formula is as follows:

EPS * P/E = Stock Value

$3.55 * 30 = $106.50

6. Find the value estimate using the two-stage Dividend Discount Model.

5 Year Projection: EPS^sub 5^ = EPS * (1+g)^sup 5^ =

EPS^sub 5^ = $3.55 * (1+.16)^sup 5^ = $7.46

P^sub 5^ = 30*7.46 = $223.80

The value of the stock will now be calculated using a discount rate of .101 +/- .01 and growth rates from .14 to .18 varying by +/- .02 for the next 5 years. The formula for DDM is:

P^sub 0^ = PV(D^sub 1^) + PV (D^sub 2^) + PV(D^sub 3^) + PV(D^sub 4^) + PV(D^sub 5^ +P^sub 5^)

Sensitivity to changes in the required return and growth rate

7. Present an overall external investment recommendation to buy or sell the stock based on your analysis. Explain.

The price quote for a share of Strayer Education, Incorporated given in the case $106. Given the valuations methods exhibited in this case the stock seems to be undervalued. The stock should be given a buy recommendation based on the results of the sensitivity analysis using the 2-Stage dividend discount model. All value estimates in the sensitivity analysis indicate that the stock is undervalued. In addition, the P/E model indicates a buy as well. Overall, a buy recommendation is appropriate. Other profitable strategies would include buying a call option, selling a put option or a long margined position.

Subject: Case studies; Colleges & universities; Business valuation; Common stock; SWOT analysis

Location: United States--US

Company / organization: Name: Strayer Education Inc; NAICS: 551114, 611310

Classification: 3400: Investment analysis & personal finance; 8306: Schools and educational services; 9110: Company specific; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 4

Source details: INSTRUCTORS' EDITION

Pages: 83-89

Number of pages: 7

Publication year: 2008

Publication date: 2008

Year: 2008

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: Diagrams Equations Tables

ProQuest document ID: 216284109

Document URL: http://search.proquest.com/docview/216284109?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 33 of 100

DR. TALAL'S HONDA

Author: Khanfar, Nile M; Loudon, David

ProQuest document link

Abstract:

Dr. Sultan Talal and his wife have made a decision that they need to purchase a new minivan to replace the older large-size van they own. Talal has decided on a Honda Odyssey, even without test driving the vehicle for confirmation. The case takes the reader through the various stages in the decision process from information gathering to decision and postpurchase activities. Talal experiences many typical consumer interactions in this environment. The case focuses on some of the ineffective actions taken by employees in the dealership including inadequate sales effort, rudeness, unethical behavior, and poor customer relations and follow-up. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case is designed for use in undergraduate marketing courses to help students:

* learn how to deal with customer satisfaction and ethical issues in a personal selling situation for a small business organization;

* evaluate an actual sales incident and critique the approach taken to develop improved strategies for a car dealership.

It is very suitable for a written report and/or oral presentation by students. It can also be used for examination purposes. The case lends itself to a variety of marketing courses, including Principles, Services, Consumer Behavior, Personal Selling, Ethics, and Strategy. It can also be used as a role-playing device in any of these courses. Faculty may want to cover the following elements in their discussion of the case.

DISCUSSION POINTS

Brand Loyalty

Ask students "Why did Dr. Talal seek out a Honda dealer?" Brand loyalty is the key reason that he is searching for a dealership in order to buy another Honda. Satisfaction with the reliability, dependability and brand quality of his first Honda has led Dr. Talal to trust the brand so strongly that he was willing to buy another Honda without even taking it for a test drive. Ask students if they could consider spending $30K on a vehicle without a test drive. Dr. Talal did. The Honda customer profile is different from other brands. Honda customers tend to be more educated and value driven.

Location

Ask students how important they think location is for such a decision as this. The location of the nearest dealer is always an important consideration in purchase decisions. For products such as automobiles, which may need after-sale fine tuning or service, it can be a very important issue. Dr. Talal decided to purchase the vehicle from the Honda dealership closest to his house, if possible. Although he did not shop the price of the vehicle with local dealerships, he did find out the cost of the vehicle from a dealership in his previous hometown just to keep the Florida dealer "honest."

Consumer Behavior

Ask students if they can identify any stages in the consumer decision process. They should be able to generate discussion about the problem identification stage, information search and evaluation, purchase decision stage, and postpurchase behavior. An interesting situation in this case is that the early Honda brand choice determination eliminated much of the information search and evaluation that many car-buying consumers go through as they travel (or surf) from brand to brand or dealer to dealer.

Ask students if the purchase decision process in the case is highly representative of what they would expect for most car purchase situations. The first encounter the customer, Dr. Talal, has with the sales representative at the car dealership may seem somewhat unrealistic. Seldom does a sales representative at a car dealership give his best price on the first encounter with no bargaining or negotiation. The negotiation process was not the usual situation because the sales person was aware that Talal was a former Mercedes-Benz sales manager as indicated in the case; therefore, he was aware that Talal would undoubtedly find out the cost of the vehicle. As a result the rep gave Talal a very fair price of $26,994 plus fees for a vehicle considered to be a hot seller. This price results in almost $650.00 profit to the dealership. From Talal's experience, he knew that the rep's commission would likely be $50-100. Talal's goal was not to bleed the salesman, who had given him an excellent deal. Talal knew that he might need his help in the service department at some time in the future. This point can be a good issue to stimulate students' thinking about fairness and ethics in negotiation.

In the auto sector, as in many other industries, a downpayment is a normal part of the purchase process. Ask students why they think Dr. Talal, a highly intelligent professor with a PhD, did not ask the amount that would be charged before giving the sales representative his credit card? Students will find that in the car business a deposit normally does not exceed $500 dollars. In fact, Talal used to charge only that amount when ordering a $50k Mercedes-Benz for his customers. Also, a deposit is a psychological commitment to the sale. As the sequence of events in the case indicates, Talal had made them a firm commitment and, in fact, East Coast Honda had already sent a driver to the nearby dealership to pick up his minivan. All of that was done before they asked him for the deposit. Therefore, he probably assumed it was unnecessary to even ask for a deposit. Additionally, a deposit is normally used to test the credibility of the customer. The sales person should have known that Talal was credible person, since he had his business card and had called him at his office several times. The sales person also knew that Talal was not using the deposit as a down payment because he was paying for the vehicle with a cashier's check. A proper approach in this situation would have been for the rep to clearly state the amount that he intended to charge and to ask for Talal's permission.

Students might also be asked if they think there are any significant "environmental" factors that may have influenced behavior in the case. There are many possibilities they might suggest. The role of family life cycle stage, spousal power and influence, and cultural/subcultural factors are some of the obvious elements students could identify and discuss.

It is possible that prejudice arose in the buying situation with Reed because his sons were soldiers serving in Iraq and Afghanistan. Also the name Talal is a well known Middle Eastern name. It may also be possible that having Dr. Talal's extended family in Reed's office aggravated him. While it is not at all unusual in the automobile business for the whole family to be in the finance manager's office, in this situation perhaps Reed was aggravated by seeing that many foreign people, especially two females wearing middle eastern garb, and a successful middle eastern college professor. Ms. Talal's parents were there because if they were left outside the office it might be culturally disrespectful.

Students could be asked their reaction to the extended family showing up for the purchase. This could be another cultural factor in the case. From a sales standpoint, it is important that the family shows up to look and take delivery of a spotless vehicle and to even take pictures with it (most dealers will do this for purchasers to post in their company scrapbooks). These are the lasting moments that buyers will always remember. Because this vehicle was to be for Dr. Talal's wife, having her parents participate in the purchase process in which the minivan is picked up gives them a good feeling that their daughter is well cared for. Remind students that in automobile marketing (as in other settings), we are not just selling vehicles but rather we are providing solutions and great feelings of customer satisfaction, even extending to important bystanders of the purchase event.

Personal Selling Issues

Ask students to cite some of the personal selling interactions that occurred with dealership personnel that were not effective. The salespeople and finance manager need to take lessons in customer service and how to greet a customer. The initial salesperson, Mr. Donald, gave Dr. Talal a brochure when they first met and told him to look at it and let him know whenever he was ready to come back! He made some potentially fatal assumptions. He assumed that the customer would automatically return, and return to him. The salesperson needs to follow a greeting protocol and a pre-qualifying process and never to underestimate the power and options (other brands and dealers) available to the customer.

The finance manager and the salesperson should always respect the wishes of the customer. If the customer decides to pay cash for a vehicle, then it is the job of the finance manager to offer other options to the customer, but never to misrepresent or deceive the customer into financing with the dealership. In this case, the finance manager "forced" the salesperson to give Dr. Talal a blank credit application for him to sign. When Dr. Talal asked "why," he was told it was a post-911 federal law. At this point, not only was dealership policy and the law misrepresented, but also the customer was lied to and his intelligence insulted (as a highly educated person and a former Mercedes-Benz sales and finance manager). This was a clear violation of the law and could have resulted in severe repercussions for the individuals and dealership. This illustrates to students just you how far some employees in the car business will go to make an extra dollar. Even though the Honda dealership was a member of the prestigious President's Club, unfortunately the personnel reflected a negative image that has become widespread within the new car industry.

The case notes that Dr. Talal thought that pulling the credit might reduce his credit score. Dr. Talal assumed that whenever a company pulls someone's credit report, the credit agency tracks the frequency of inquires and the names of companies that pulled the person's credit. If the customer has been to several dealerships and all of those dealerships pulled his credit, a bank may look unfavorably toward this because they will wonder why he did not buy or get financed. Actually, there are "soft" inquiries and "hard" inquiries. A soft inquiry could be made by a lender to make you a preapproved offer or a car dealer to check your credit report. Hard inquiries occur when lenders pull one's credit report in response to your application for credit, and could contribute to a lower credit score depending on what else is in your credit report. Fair Isaac, the maker of the FICO score, states that its scores ignore all auto-loan inquiries made in a rolling 30-day period prior to scoring and typically count car-loan inquiries older than 30 days as one inquiry when they are made within a 45-day period.

Customer Satisfaction

Ask students how important they think customer satisfaction is in the automotive industry. They should be aware of the concept of "customer lifetime value." For example, GM believes a customer could be worth over $275K to them during their purchase lifetime. This assumes that a loyal buyer will purchase over 11 GM vehicles during that time.

Dealerships generally strive to obtain high Customer Satisfaction Index scores from customers. The scores are tabulated from customer satisfaction surveys conducted via phone or mail by American Honda Corporation, which is a subsidiary of the Honda parent in Japan. Some dealerships will offer a free oil and filter change just to entice customers into giving them high scores. Or they might offer no charge-rental cars in the service department for Honda customers whenever they bring in their cars for service.

Ask students how they think a dealer might benefit from high CSI scores. Dealerships that obtain high CSI scores will be given priority to choose from limited-availability vehicles or even get a higher quota of supply of vehicles. In a very competitive market (e.g., south Florida) this could be a very important differentiating edge for the dealership. They will also get bonus money that is tied to volume under the condition that the dealership maintains high CSI scores. The dealership may also get a designated elite status such as the prestigious President's Club. Such status may then be reflected in dealership advertising, managers' and salespeople's business cards and letterheads. The designation will help the dealership to promote itself and Honda products to the public in an impressive and convincing way.

A very important point to bring out is that dealerships spend huge amounts of money in newspaper, radio, and television ads to promote themselves and their products. Yet when a loyal customer like Dr. Talal comes along to buy a vehicle, they may fail to offer simple, honest, straightforward customer service and respect to such prospects. As marketing literature indicates, loyal customers and positive word-of-mouth are the most effective marketing methods to obtain new customers.

Lack of marketing training and supervision by dealerships and lack of understanding of customer wants and desires has cost the automobile business dearly in the poor perceived reputation they currently have. Customers are not attracted to a dealership solely because of their "need" to own a vehicle. Dealerships also need to understand their "wants" for fair price, respect, service (before and after the sale), honesty, and integrity.

A smart manager will save the dealership lots of money and earn more business and higher CSI scores if only a fraction of the budget designated for promotions were spent, instead, on training their sales force and management on these issues.

Subject: Consumer relations; Business ethics; Salespeople; Case studies; Automobile industry; Consumer behavior

Location: United States--US

Classification: 2400: Public relations; 9190: United States; 8680: Transportation equipment industry; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 4

Source details: INSTRUCTORS' EDITION

Pages: 103-107

Number of pages: 5

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216284269

Document URL: http://search.proquest.com/docview/216284269?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 34 of 100

The Canadian National Railway Company's (CN) North American Strategy1

Author: Leblond, Patrick

ProQuest document link

Abstract: None available.

Full text:

Introduction

"Is the story over? Our answer is a resounding no." This was the message delivered by Hunter E. Harrison, CN President and CEO, to CN shareholders present at the company's annual meeting held in Montreal on April 21, 2005.2 Obviously, he was referring to the story of CN's success since being privatized by the Canadian government in November 1995. Since then, CN has seen a constant rise in its sales, profits, cash flow and, consequently, its market value. For example, its market capitalization shot up from C$2 billion in 1995 to more than C$25 billion in 2006 (see Exhibit 1 for the evolution of CN's share price). Free cash flow jumped from being negative in 1995 to more than C$1.3 billion in 2005. The operating ratio - the cost of operating and maintaining the railway as a percentage of revenue - fell from 89% in 1995 to 61% in 2006, well below that of its main competitors, which averages about 80%. At the same time, its revenue almost doubled (see Exhibit 2). "These types of improvements are unheard of in our industry," Mr. Harrison told CN shareholders.3

To achieve such phenomenal results, CN needed the freedom to spread its wings and shed quite a bit of excess weight, but it could not do this as long as it was a Canadian Crown corporation. While the privatization and deregulation of the rail industry in Canada provided the necessary freedom, these conditions were not sufficient. CN's success also required a sound strategy as well as its effective execution.

During CN's time as a Crown corporation answerable to the Canadian Parliament, CN management operated under a notion of shareholder value added different from the traditional meaning of providing shareholders with financial returns higher than the cost of capital. Instead of maximizing profits, CN had to "maximize" employment and the rail network. As a result, CN's operating costs were too high, it had too many employees, too much trackage and not enough profit, if any. CN also had problems on the revenue side, since its service was slow and unreliable. Finally, top management's focus was scattered across many different businesses, from hotels to telecommunications.

Paul M. Tellier, the most senior civil servant in the Canadian government at the time, was appointed President and CEO of CN in 1992, with a mandate to turn around the loss-making company. The government was forced to cut its fiscal deficit in order to reduce its debt and, therefore, could no longer afford to cover CN's losses. Tellier had no choice but to cut costs and increase revenues. Cutting costs meant reducing the workforce and closing or selling unprofitable tracks. It also meant investing in more efficient rail equipment and technology. To increase revenues, the company needed to focus on customers' needs and expectations as well as attracting customers whose business was growing more rapidly. As a result, Tellier and his top management team devised and implemented a strategic plan with three main focuses: productivity, a customer orientation and the North American Free Trade Agreement (NAFTA).

Although the federal government backed Tellier's turnaround plan, the hands of CN's management were still tied by rail transportation regulations in Canada in terms of shedding excess trackage and employees. Furthermore, CN's status as a Crown corporation made it difficult to raise new financing from capital markets to fund the turnaround plan, which was necessary given that the government was not interested in extending more financing. Privatization and more deregulation were necessary if Tellier's plan was to have any chance of success.

Background: CN as a Crown Corporation Subject to Heavy Regulation

Parliament passed an act to incorporate the Canadian National Railway Company in June 1919, taking over a number of small railways owned by the Canadian government. CN then acquired Grand Trunk Railway's transcontinental network to become one the largest railroads in the world, with 22,000 miles (35,000 km) of track and more than 100,000 employees. At the time, CN also owned a telegraph company, a chain of hotels, a steamship line, and an express services company.1

For the next 60 years, CN and Canadian Pacific Railway (CP) would form the backbone of Canada's railroad system, under heavy regulation. In the early 1980s, CN and CP faced increasing competition from the trucking industry and American railroads, which were now able to abandon unprofitable lines and set prices independently under the Staggers Rail Act, 1980. For example, this legislation allowed railways to reduce lines to match declining revenues. The Canadian government responded with the National Transportation Act, 1987 (NTA 1987), which deregulated prices as well as track restructuring (albeit in a very limited fashion).2 Price deregulation led to a significant decrease in rail rates (35% over 11 years in constant dollar terms), since these rates were set in response to competition from other railways (intramodal competition) as well as from other modes of transportation such as trucks (intermodal competition).1 Track abandonment or restructuring was much more limited under the NTA 1987 because it was capped at 4% per year and still subject to the National Transportation Agency's complex regulatory procedures. As a result, Canadian railroads continued to be less competitive than their American counterparts, because they could not restructure their operations as rapidly and effectively.

CN and CP both experienced hard times at the beginning of the 1990s. In CN's case, revenues were declining as a result of falling prices (following the NTA 1987) and declining traffic density, which was only 43% of its U.S. Class I counterparts in 1995.2 Fixed costs were still high due to the difficulty of shedding unprofitable tracks and routes. Finally, capital investment was well below the industry average.3 Given that CP was experiencing similar difficulties, it proposed to merge CN's and CP's rail operations east of Thunder Bay. When merger talks failed, CP offered to buy CN's eastern network instead. The federal government refused the offer but recognized that it had to reconsider CN's future as a Crown corporation. This paved the way for CN's privatization.

CN's Privatization

In 1993, the National Transportation Act Review Commission recommended that CN be privatized. However, it was not until July 1995 that the CN Commercialization Act (CN Act) was passed. This legislative gestation period allowed Paul Tellier and his team to begin implementing their turnaround plan and improve CN's performance, thus making it more attractive to private investors.

The CN Act stipulated that CN was to become an investor company and that stock ownership would be capped at 15% of outstanding shares for any individual shareholder. However, there would be no limit on foreign ownership. As a result, a majority of foreigners (about 50-55%) now owns CN shares. Finally, the Act required that CN's headquarters remain in Montreal.

Although CN's operating performance was improving as a result of Tellier's plan, the company was still crippled with debt, which acted as a drag on the bottom line. For this reason, and as a means to continue focusing CN's offer, non-core assets such as the CN Tower in Toronto, AMF Technotransport and CN Exploration were sold prior to the initial public offering (IPO), thereby raising C$500 million to pay back debt. CN had already sold its telecommunications and hotel activities in 1988. In addition, the federal government agreed to forgive about C$900 million of CN's long-term debt. Consequently, CN's total long-term debt decreased from C$2.4 billion in 1994 to C$1.3 billion in 1995. This made CN's balance sheet look a lot more attractive to investors.

Working on improving CN's existing performance was not sufficient, however. Investors also wanted to make sure that, once privatized, CN would be able to compete on a level playing field with intramodal as well as intermodal competitors in Canada and the United States in order to continue improving its performance. This is why the federal government was working on the Canada Transportation Act (CTA 1996), which was enacted in May 1996, not long after CN was privatized. Based on the work of the National Transportation Act Review Commission, the purpose of the CTA 1996 was to consolidate and revise the NTA 1987 in order to push deregulation further and bring rail regulation in Canada more in line with U.S. regulation under the Staggers Rail Act.

The CTA 1996 was beneficial to CN on many fronts.1 First, it continued the NTA's price deregulation. Second, it simplified the process for line sale and abandonment by recognizing that it was a business rather than a public interest decision. As a result, railways no longer needed to prove that selling or abandoning unprofitable lines was in the public interest. Moreover, the new rules reduced the approval time for the sale of short lines to local operators from about two years to only a few weeks. Finally, the CTA 1996 reduced the Canadian Transportation Agency's powers to interfere with railway decisions about routes, employment and corporate policy.

With the CTA 1996 soon to be in place and CN's improved performance and balance sheet, the table was set for a successful IPO. On November 28, 1995, CN shares were listed on the Montreal, Toronto and New York stock exchanges, raising C$2.2 billion for the Canadian government.2 Of all the shares sold to investors, CN employees ended up with 42%. CN's privatization was Canada's largest and most successful privatization.

CN as an Investment Company: Free to Be Productive

With the new regulatory environment in place and a new set of shareholders to bring value to, CN took concrete steps to improve the efficiency of its operations. Between 1994 and 1999, CN decreased the size (in terms of miles owned) of its rail network by 46%. This helped improve its traffic density by 72% over the same period.3 CN also reduced the size of its workforce by more than 16,000 over a six-year period that began before privatization but gained momentum afterwards.4 Union contracts were also made more flexible.5 For example, train shifts were extended to reduce crew changes and the automation of train assembly systems was allowed. Moreover, redundant employees were given six years of salary, at 90%; however, those employees who did not to transfer to another position were promised only 65% of their salary for a period of two years. These reductions did not only affect unionized employees; middle managers also saw their ranks trimmed as management layers were cut.

Tellier's objective was not limited to ridding CN of its excess weight, as was now permitted by the new regulatory system under the CTA 1996. He also wanted to change CN's corporate culture in order to foster a more competitive, cost-conscious, profit-oriented approach. The fact that a large portion of CN employees were also shareholders facilitated this change. However, additional measures were required, such as eliminating management layers and putting in place new procurement rules (e.g., competitive bidding).1

To improve the efficiency as well as the effectiveness of CN's operations, it was important to increase capital investments in equipment and infrastructure. For too many years before privatization, CN's capital investment was below that of its U.S. competitors. This had led to a rapid deterioration of its capital stock, making it harder to remain competitive. With its improved performance and outlook, it was now much easier for CN to raise the financing necessary to fund capital investments. As a result, CN almost trebled its annual capital investment between 1995 and 1999, from C$686 million to C$1.5 billion.2 These investments allowed CN to acquire a new generation of high-horsepower locomotives, which were 40% more efficient than the old ones. They also allowed CN to make use of the latest information technology to automate a series of operational functions, including track maintenance, such that a small number of skilled workers could now accomplish within hours what whole crews had previously taken weeks to accomplish.3

In sum, all the steps taken to improve productivity, combined with the new-found freedoms brought about by privatization and the CTA 1996 allowed CN to bring its operating ratio down to 60.7%, while its top U.S. competitors remain around 80% on average.4

CN's North American Expansion

To satisfy shareholders, it was not sufficient for Tellier and his management team to cut costs and improve efficiency; CN needed to boost its revenues. To do so, given the increasingly competitive environment facing CN, it was crucial to retain existing customers as well as attract new ones, especially high-volume ones. To be successful, CN had to improve its service offering to customers by focusing on three key elements: competitive rates, speed, and reliability. This required CN to expand its network to the south. It also had to invest in upgrading and then maintaining the quality of its infrastructure in order to offer more reliable service. Finally, CN needed to invest in information technology that would reduce the risk of human errors. In addition, the investments made to improve the efficiency of CN's operations would also contribute to improving the reliability of its service.

Although CN could control the reliability of its service when goods were transported over its own network, it could not do so when goods were transported over another rail network in order to reach their final destination. This represented a problem for CN, since it was dependent on U.S. railroads to service shipments to and from the U.S. hinterland, owing to the fact that its rail network covered continental Canada from east to west with only a link to Chicago at the time of privatization (Exhibit 3). What was even more problematic was that the growth in demand was coming mainly from north-south (transborder or NAFTA) traffic flows rather than Canadian east-west flows. In the first instance, the annual rate of growth was between 10 and 15%, while in the second case the rate oscillated between 2 and 4%.1 As result, it was difficult for CN to control the reliability of its service for an increasing share of its business.

The rapidly increasing demand in NAFTA traffic and CN's mainly Canadian network made it difficult to offer customers the other two elements crucial to its service-oriented strategy: competitive rates and speed. In the case of rates, the economics of freight railways is such that average costs decrease with the density of traffic as well as with the distance goods travel without being handled anew. Hence, the larger a railroad's network and the more goods that travel on it, the better the rates it can offer. Clearly, CN had a competitive disadvantage because its network in the U.S. ended in Chicago. In the case of speed, the problem was similar. The more goods need to be handled and trains assembled and dismantled, the longer it takes for the goods to reach their destination. Goods travelling on the same network with few interruptions and downtime (referred to as "single-line" rail transportation) reach their destination faster. It is also a lot easier to work with fixed-time schedules, which CN adopted in 1998, when one controls the entire route over which goods travel.

In a competitive environment where the growth in demand spurred by NAFTA and operating efficiency as well as customer-service effectiveness were key strategic imperatives to achieve success, CN's mainly Canadian network represented a competitive disadvantage. This is why CN announced the merger with Illinois Central Corporation (IC) for US$2.4 billion in 1998.2 This merger allowed CN to extend its network through the central United States from Chicago all the way to New Orleans and the Gulf of Mexico. To complement the CN/IC merger, CN negotiated a marketing alliance with Kansas City Southern (KCS) to extend its reach to the U.S. Southwest and Mexico (see Exhibit 4). For example, automotive customers could now benefit from a single-line service between facilities in Canada, the Unites States, and Mexico, all with one single call.3 Within one year and two key transactions, CN turned itself into a true North American (or NAFTA) railroad with a clear competitive advantage over its competitors.

Eager to build on its successful integration of IC and the marketing alliance with KCS, CN announced a US$19 billion merger with Burlington Northern Santa Fe (BNSF) in late December 1999. The new entity would become the largest railroad in North America, spanning from Los Angeles to Halifax and the Gulf of Mexico to Vancouver.

The goal was to seize a larger share of north-south NAFTA trade while achieving strong operating efficiencies. For instance, expected synergies from the merger amounted to US$500-600 million over three years. Unexpectedly, the Surface Transportation Board (STB), the U.S. regulator responsible for approving the merger, decided to impose a 15-month moratorium on rail mergers in March 2000. CN and BNSF challenged the STB's decision in court on the grounds that it did not have the authority to impose a moratorium. On July 14, 2000, the U.S. Circuit Court of Appeals for the District of Columbia upheld the moratorium. A few days later, CN and BNSF called off their merger because they did not want their strategic plans to be frozen for two years until the moratorium was lifted and the STB ruled on the proposed merger. They could not afford to allow competitors to benefit from market opportunities while they waited.

The Politics of CN's Failed Merger with BNSF

The STB is a regulatory agency charged by Congress with resolving railroad rate and service disputes as well as reviewing proposed railroad mergers.1 In other words, the STB has to make sure that shippers have access to a competitive surface freight transportation network that is suited to their purpose and offers reasonable rates. Given the STB's rapid approval of previous rail mergers, CN and BNSF expected that their merger would get the same treatment. However, the STB decided to impose a 15-month moratorium on rail mergers and acquisitions in March 2000 because it had two important concerns related to its public mandate: competition and service. For this reason, the STB indicated that it was abandoning its long-standing practice of reviewing M&A applications on a "case-by-case" basis and notified CN and BNSF that they were expected to address the likely impact of their proposed transaction on the industry's future consolidation.2

Competition fears were raised because the U.S. rail industry had experienced a rapid consolidation since 1980, with the number of major railways dropping from 66 to 7.3 The concern was that the CN-BNSF merger would trigger a retaliatory merger between Union Pacific, with operations west of the Mississippi, and either CSX or Norfolk Southern, which are both strong east of the Mississippi. Taking into account the marketing alliance between CN and KCS, the U.S. rail industry would then be dominated by two behemoths. Therefore, many shippers feared that they would eventually see their choice of carrier seriously limited, if not eliminated altogether. For example, the American Chemistry Council, the chemical industry's trade association, indicated that 63% of chemical manufacturing facilities were already captive to a single railroad and that it would only get worse if the CN-BNSF merger was allowed to go through. The chemical industry is the railroads' second-largest customer.4 Similarly, the Society of the Plastics Industry, the plastics industry trade association, opposed new major mergers because three-quarters of its members that ship by rail were already captive to one railroad.5 Such major rail customers convinced the STB that new mergers would only make things worse in terms of giving railroads monopoly power vis-à-vis shippers in certain geographical areas.

Another important and more immediate concern for the STB was the degradation in the quality of service provided by many recently merged railroads. The STB was concerned that another major merger would cause serious service disruptions and, as a result, financial losses for shippers. This concern was based on the fact that recent mergers between major railroads had caused a sharp drop in service quality (see Exhibit 5). A National Industrial Transportation League (NITL) survey conducted at the end of 1999 indicated that shippers rated the quality of service for many merged rail carriers to either be no better or worse than before the merger. For example, 80% of shippers found BNSF's service to be the same or worse than before the merger between Burlington Northern and Santa Fe, which had taken place five years earlier. In the case of the division of Conrail by Norfolk Southern (NS) and CSX, 91% and 89% of shippers reported worse service levels on NS and CSX, respectively.1 United Parcels Service (UPS), the railroads' largest intermodal shipper, opposed the BNSF-CN merger on the grounds that post-merger rail service failures had negatively affected its reputation for on-time delivery and, as a result, forced it to violate contracts with the Teamsters by shifting more freight from rails to highways. UPS argued that any major rail merger needed two to three years before quality of service could return to pre-merger levels. Therefore, it strongly supported the STB's moratorium.2

CN responded to the issues raised by its proposed merger with BNSF by arguing that the problems listed by UPS had nothing to do with the BNSF-CN merger. The moratorium, it argued, had been imposed as a result of industry problems and the STB's inability to deal with them adequately, not because of the merger proposal itself.3 Moreover, CN argued that the moratorium reduced competition in the industry by providing competitors with a protection that allowed them to restructure their operations and bring their service levels up to standard while preventing CN and BNSF from doing so. CN also argued that shippers would be hurt as a result of the moratorium, since they would be denied the benefits that the CN-BNSF merger could provide them, including more efficient routing, more port options, and increased market access. In sum, CN (and BNSF) argued that their merger would provide shippers with more flexibility, while service levels would be maintained.4

CN claimed that the merger with BNSF would not cause a deterioration in service quality, unlike mergers involving rail competitors. CN pointed to its excellent service record following the merger with IC (see Exhibit 5) as proof of what to expect from the BNSF merger. Only 4% of CN-IC shippers surveyed by NITL reported a deterioration in service quality after the merger.5 Like the CN-IC merger, the BNSF-CN merger would combine two railroads that would join end to end with no overlap or need for restructuring, thereby minimizing the risk of any service disruptions. Furthermore, CN indicated that it shared the same basic information technology platform since it bought its own platform from Santa Fe before the latter merged with Burlington Northern. Finally, service disruptions were unlikely because the two railroads would continue to exist under their own identities, greatly limiting the need to reorganize operations and staff. Under the terms of the merger, CN and BNSF would become subsidiaries of a holding company called North American Railways Inc. To back up their claim that service quality would not be affected by the merger, CN went so far as to offer written guarantees to shippers that service would be as good as - or better than - the service they had before the merger. To convince the STB of their good intentions, CN and BSNF submitted a service integration plan that explained how the merged entity intended to provide service that was equal to or better than what they had provided individually. In short, CN understood that service was a big concern regarding large rail mergers. However, it was convinced that it could repeat the success it had had with the integration of IC.

Another CN argument against the STB's decision was that it did not have the support of an overwhelming majority of industry stakeholders. Having been present during the four days of special hearings held by the STB before deciding on the moratorium, Paul Tellier concluded that there was no consensus on the need for a moratorium between railroads, labour unions, shippers, legislators, and public officials.1 Norfolk Southern and CSX described the BNSF-CN merger proposal as "untimely" because it was in their self-interest to delay any new industry restructuring while they tried to restore service levels following their acquisition of Conrail.2 The other two so-called "amigos," Union Pacific and CP, supported this view. However, KCS, with which CN has a marketing alliance, supported the BNSF-CN merger and opposed the moratorium. The KSC President and CEO declared that the proposed merger was "an important development at a critical period in the history of the industry underscoring KCS's long-held conviction that NAFTA-generated economic growth will play a significant role in determining North American freight transportation patterns in the 21st century."3 Wisconsin Central, which CN later acquired, also supported the merger, following concessions it received from CN-BNSF (e.g., haulage rights on the new merged network, though with some limits).

Labour unions were also divided in their positions vis-à-vis the moratorium and the CN-BNSF merger. The United Transportation Union (UTU) was in favour of the moratorium and against the merger because it feared further job losses in the industry if there was another wave of consolidation. Moreover, it did not want BNSF, with which it had poor relations, to gain more power over the rail market. On the other hand, the Brotherhood of Locomotive Engineers, the UTU's rival, supported the BNSF-CN merger after it received job protection assurances from the two railroads.4

Like the railroads and labour unions, shippers were also divided regarding the moratorium and the merger. As mentioned earlier, some, including the plastics and chemical industries, UPS, and the Canadian Industrial Transportation Association, supported the moratorium. Others, such as the NITL, opposed it, although it did not take any official position on the BNSF-CN merger. CN argued that, in fact, a majority of shippers (88% of those who participated in the STB hearings) were not in favour of the moratorium.5

Politicians and public officials also stood on both sides of the argument. For example, Senator Charles Grassley (R-Iowa) was preoccupied with the potential negative effects of the BNSF-CN merger on Midwest grain shippers, because the latter were already suffering from service problems associated with Union Pacific's acquisition of Chicago and North Western.1 On the other hand, Rodney Slater, U.S. Secretary of Transportation, opposed the moratorium. He is quoted as saying that "We do not believe a moratorium is the right response."2

In spite (or as a result) of stakeholders' mixed positions, the STB decided to opt for the status quo until it had rewritten the rules of the M&A game, which would make sure that competition and service quality would not be prejudiced by further consolidation in the rail industry.

The STB's New Rules and CN's Position and Role in the Consultation Process

As scheduled, the STB issued its proposal for new merger rules in the rail industry on October 3, 2000, with a view to lifting the moratorium in June 2001. The proposed new standards required that M&As enhance competition, maintain or improve rail service quality, and specify how alleged benefits would be achieved. According to the STB, the old rules were geared toward eliminating excess capacity in the industry. Taking for granted that the rationalization of the U.S. rail industry had been accomplished by then, the STB argued that the aim of the new rules was to enhance competition and improve service. To ensure that service was unlikely to be affected by a merger, the STB required proposals to specify how they would address track and terminal constraints as well as provide a sufficient supply of adequately trained personnel.3 Interestingly, in their merger submission to the STB, CN and BNSF did meet many of these proposed new standards.

Although CN found issues with many provisions in the STB's proposed new rules, there was one in particular that it felt would be very damaging to its North American strategy. It was the proposed requirement for additional information for transnational mergers.4 This section of the proposed rules required transnational applicants to (a) explain how cooperation with the Federal Railroad Administration [responsible for rail safety] will be maintained without regard to the national origins of merger applicants; (b) assess the likelihood that commercial decisions made by foreign railroads could be based on national or provincial rather than broader economic considerations, and be detrimental to the interests of the United States, and discuss any ownership restrictions imposed on them by foreign governments; (c) discuss and assess the national defence ramifications of the proposed merger.

In its submission to STB's Major Rail Consolidation Procedures (STB Ex Parte No. 582 (Sub-No. 1)) in November 2000, CN argued that the above-mentioned provision discriminated against foreign railroads since it imposed additional requirements in the case of transnational mergers. CN indicated that this provision was a direct violation of the NAFTA principle of national treatment. It also argued that information on rail safety and national security was already covered by other provisions of the new rules and, therefore, these additional requirements were not necessary. To give additional (political) weight to its position vis-à-vis the STB, CN turned to the Canadian government. It informed the federal government of the STB's proposed new rules for mergers and indicated that the above-mentioned provision discriminated against Canadian railroads. In consultation with CN, the Canadian Department of Foreign Affairs and International Trade (DFAIT) and its embassy in Washington prepared a brief that was submitted to the STB in May 2001. The Canadian government's submission essentially contained the same arguments as made by CN in its earlier comments. In short, it called for the removal of proposed § 1180.11.

When the STB's final merger rules were officially issued in June 2001, provision § 1180.11 had been eliminated. While a number of other specific changes were made to the standards originally proposed, the new rules were generally in line with the objectives set in October 2000: enhance competition and improve service. With respect to enhancing competition, applicants would have to explain why benefits arising from a merger could not be achieved through other forms of cooperation (e.g., alliances, joint ventures, etc.). As for maintaining service, the new rules required merging railroads to file a detailed "service assurance plan" indicating how the merger would be implemented as well as how any contingencies would be dealt with. The STB's new merger framework also formalized a practice that had been informally introduced with recent mergers, which is that merged railroads must be under federal oversight for at least five years in order to ensure that they respect their commitments.1

CN Reinforces Its Strategic Position to Take Better Advantage of NAFTA

During the STB's proceedings on new merger rules (January 30, 2001), CN announced its intention to acquire Wisconsin Central Transportation Corporation (WC) for US$1.2 billion in order to reinforce its NAFTA rail network by securing a link between Chicago and CN's transcontinental network across Canada. This link would improve CN's competitiveness for trade between Western Canada and the United States. Under a 1998 agreement, WC already hauled CN freight between Superior, Wisconsin, and Chicago. This transaction allowed CN to offer single-line transportation to its customers, thereby improving delivery speed as well as reducing costs. The STB approved the transaction under its new rules on September 7, 2001.2

To further reinforce its position in the Great Lakes region following the WC transaction, CN made a smaller acquisition in October 2003. In a deal worth US$380 million, it acquired the railroad and related holdings of Great Lakes Transportation LLC (GLT). The transaction was justified on the grounds that it would "improve CN's NAFTA rail link between Western Canada and Chicago and expand its role in the transportation of bulk commodities for the U.S. steel industry."3 Strategically, the transaction gave CN control over a 17-mile segment of track in the Duluth, Minn.-Superior, Wis. area that is considered an essential part of CN's Chicago-Western Canada main line. Before the transaction, CN operated over this short segment under a trackage rights agreement with a GLT subsidiary. With this transaction, CN also acquired a fleet of eight vessels that carry bulk commodities on the Great Lakes. These vessels provide additional flexibility to CN's network since they connect many points on CN's rail system in the Great Lakes region. However, their operation was outsourced to Keystone Shipping Co. Following regulatory approval from the STB (under the "minor" merger rules), the U.S. Marine Administration and Coast Guard, as well as the U.S. Federal Trade Commission and the Department of Justice Antitrust Division, CN began integrating GLT into its operations in May 2004.

The last acquisition that CN made after the collapse of its proposed merger with BNSF was that of BC Rail, Canada's third-largest rail network, in November 2003. CN paid C$1 billion to acquire the company from the government of British Columbia. However, the B.C. government kept ownership of BC Rail's rail bed, making the deal a public-private partnership, whereby CN signed a long-term lease that gave it the right to operate over BC Rail's track network. Under the terms of the lease, CN also assumed responsibility for maintaining the rail infrastructure. With this transaction, CN strengthened its position in forest products, one of the key industries in B.C., especially softwood lumber destined for the United States. CN also improved its access to the port of Prince Rupert, which is taking on increasing importance as an alternative to the congested port of Vancouver in light of North America's increasing trade with East Asia. This way, it could take a larger share of these trade flows. Following regulatory approval from Canada's Competition Bureau, CN began integrating BC Rail into its North American operations in July 2004.

Although the failed merger with BNSF was a blow to CN's strategic objective of becoming the ultimate NAFTA railroad, the three smaller (more acceptable to regulators) acquisitions that followed between 2001 and 2004 reinforced CN's position as a North American railroad. These transactions were especially beneficial to CN in terms of trade in goods between Western Canada and the U.S. Midwest and Gulf of Mexico regions. They also improved CN's competitive position with respect to the increasing trade flows between North America and East Asia.

Border Security: A New Strategic Issue for CN

Following the events of September 11, 2001, the security of the U.S. border with Canada and Mexico became a primordial concern for governments and the business community in North America. Within hours of these events, security at the borders was tightened, which caused significant delays. These delays negatively affected the operations of a multitude of businesses and manufacturing plants across North America, which rely on the just-in-time delivery of components. For a transportation company like CN, which focuses a large part of its operations on transborder shipments, border security in North America became a key strategic issue.

CN reacted immediately to the events of September 11, 2001, making sure that it cooperated with other carriers as well as with Canadian and U.S. governments to ensure that rail transport remained reliable and secure while border crossings remained open and efficient. It worked effectively with the Association of American Railroads and the Railway Association of Canada to put in place measures that would increase the security of rail transportation, not only at border crossings but also within North America's borders. Some of the measures put in place by the industry and adopted by CN included restricted access to railcar location data, spot employee identification checks, increased tracking and inspection of certain shipments, increased security at rail yards, increased inspection of priority tracks, tunnels and bridges, new encryption technology for selected data communications, and, finally, increased employee training.1 As a result of these efforts, the rail industry has been recognized as a North American leader in implementing preventive security measures. CN was an integral part of these efforts.

In order to deliver on its commitment to provide secure rail transportation, CN became the first North American railroad to secure C-TPAT membership from the U.S. Customs Service in October 2002. The Customs-Trade Partnership Against Terrorism (C-TPAT) "is a joint government-business initiative designed to build cooperative relationships that strengthen overall supply chain and border security."2 C-TPAT members agree to undergo a comprehensive self-assessment of supply chain security. They also agree to develop a program to enhance security throughout the supply chain in accordance with C-TPAT security recommendations. Finally, they agree to communicate these recommendations to their partners along the supply chain and work with them to make sure that they are effectively implemented.

With respect to border security, CN (and CP) signed a declaration of principles to further enhance security at the Canada-U.S. border and ensure secure rail access to the U.S. in April 2003. This agreement is part of the process implementing the Smart Border Declaration adopted by Canada and the United States in December 2001. It outlines the principles for targeting, screening and examining rail shipments transported by CN and CP into the U.S. from Canada. It also provides guidelines for collecting advanced electronic manifest information (which must be sent within eight hours to border officials) and installing imaging and radiation detection equipment at seven CN and CP border crossings. Vehicle and Cargo Inspection System (VACIS) technology is located at key points on CN's network, including ocean ports of entry, and enables inspectors from the U.S. Customs and Border Protection and the Canada Border Services Agency to view the contents of rail cars and containers in a non-intrusive manner while trains are in motion. This procedure increases the efficiency and speed of transborder crossings.

Thanks to its relentless efforts to enhance the security of its operations and assets, CN has not been negatively affected by the monitoring procedures put in place in the wake of the events of September 11, 2001. Owing to its NAFTA strategy, CN had no choice but to implement all the necessary measures to ensure that the border would remain open and efficient. In this sense, border and railway security was a non-issue for CN. Nevertheless, close cooperation with the rail industry and governments was required to ensure a level playing field, whereby competitors adopted similar high security standards so that they would not end up with an undue competitive advantage.

Conclusion: From a Regional to a Global Presence?

Between 1996 and 2004, the revenue generated by CN's U.S. operations jumped from 12% to 37% of total revenue. However, if one also includes revenue from transborder trade with the United States, the share of total revenue increases to 55% for 2005, compared to 37% in 1994. This means that more than half of CN's revenue comes from traffic flows with or within the United States. These results are a direct consequence of CN's NAFTA strategy.

The combination of CN's NAFTA strategy with its relentless focus on customer service has led to an increase in CN's revenue by a compounded average growth rate of 6% annually (see Exhibit 2). The third component of CN's strategic plan back in 1995 was productivity improvement for its operations. On this front, CN has managed to reduce the operating ratio from 89% in 1995 to 61% in 2006, corresponding to a 20% compounded average annual rate of growth for the period (see Exhibit 2). The end result for shareholders, which include CN employees, is a stock price that has more than quintupled since 1995, while that of its closest competitors doubled at best (se Exhibit 1). CN now has a market value that is ten times what it was when it was privatized.

So is this great story over? Not according to CN's CEO, Hunter Harrison. But what can CN do to continue growing its revenue while maintaining if not improving its productivity, especially if the growth in NAFTA trade is slowing down and merger and acquisition possibilities are very limited? Can CN limit itself to its current NAFTA strategy? How can CN take advantage of economic growth in Asia, especially China and India, as well as in other emerging markets (e.g., Brazil)? Should CN expand overseas, where it can apply its operational effectiveness and efficiency? These are all key strategic questions that CN management is contemplating in order to keep CN's current performance on track.

2008-05-28

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

Volume: 6

Issue: 1

Pages: 1-21

Number of pages: 21

Publication year: 2008

Publication date: May 2008

Year: 2008

Publisher: HEC Montréal

Place of publication: Montréal

Country of publication: Canada

Publication subject: Business And Economics--Management

ISSN: 1911-2599

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

ProQuest document ID: 197465743

Document URL: http://search.proquest.com/docview/197465743?accountid=38610

Copyright: Copyright HEC Montréal May 2008

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 35 of 100

HOW SMALL NATIONS FARE IN THE GLOBAL WAR ON TALENT: THE CASE OF DENMARK

Author: Tung, Rosalie L; Worm, Verner; Petersen, Susan Aagaard

ProQuest document link

Abstract:

In light of the looming shortage of skilled professionals, companies are increasingly eager to recruit highly educated and competent employees, regardless of country of origin and nationality, in order to remain globally competitive. This paper seeks to shed light on how nations compete for the same talent pool by presenting the findings of two related studies on whether (a) Chinese students who are studying in Denmark choose to return to work in China; and (b) Danish students in Denmark are willing to work for Chinese companies in Denmark and/or China. Despite its population of 1.3 billion, China has a critical shortage of managerial talent. The vast majority of Chinese students in Denmark do not plan to remain in Denmark upon completion of their education, while many Danish students are receptive to working for Chinese companies, albeit more so in Denmark than in China. The findings of this study have implications on the plight of smaller nations, such as Denmark, in attracting and retaining human talent. These findings also have implications for small-sized companies in their competition with large firms for human talent. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

The growing boundaryless nature of the workforce (DeFilippi and Arthur, 1996; Stahl, Miller, and Tung, 2002; Tung, 1998), brought about by the globalization of the world economy and the reduction in immigration and emigration barriers to the movement of people (Johnston, 1991), has contributed, in part at least, to the war on talent worldwide. The 2006 World Economic Forum in Davos, Switzerland, highlighted the magnitude of this problem by bringing together executives and academics from developed and emerging economies to focus on the human capital deficit in countries both large and small, and to discuss ways to deal with this challenge (World Economic Forum, 2006).

As Samuel A. DiPiazza Jr., Global CEO of PricewaterhouseCoopers (USA) noted, "Globalization is not just something for the big guys but everybody. People coming out of college now have different horizons and they are often just as willing to start work in Shanghai as their home town. There is this war for talent and we are not just talking about the top five percent" (The Global Talent Gap, 2006). Implicit in Mr. DiPiazza's assertion is that this talent gap is of equal concern to all nations, regardless of size, because ultimately the international competitiveness of a country depends upon its ability to develop, attract, and retain a pool of highly developed human talent. An important keyword in the looming war on talent is retention, as talent poaching appears to be an expedient means to acquire and gain highly qualified professionals.

The challenge to attract and retain talent appears to be particularly acute for countries and firms that are perceived as less enticing from the cosmopolitan's (Kanter, 1995) perspective. Cosmopolitans refer to people who are rich in concepts, competence, and connections. Nations that are small, economically underdeveloped, and/or politically unstable are less alluring to cosmopolitans in comparison to economies that are dynamic. The latter countries provide plenty of opportunities for growth and learning, even though these economies may still be at the emerging market stage with all its accompanying challenges. This serves to explain why China, the country that has experienced the fastest rate of economic growth in the past quarter of a century, has become a popular destination for graduates and professionals from the West (Tung, 2007).

At the firm level of analysis, companies that are small may also be perceived as less attractive from the cosmopolitans' perspective because they appear to present more limited opportunities for further learning and development. According to Towers Perrin's 2006 global survey of 86,000 employees from 16 countries across four continents, "access to learning opportunities" emerged as one of the top ten drivers in the attraction, retention, and engagement of employees who are "informed, connected, and more demanding than at any other time in history" (Winning Strategies for a Global Workforce, 2006).

This paper seeks to cast some light on the war on talent by examining how Denmark, a small country of 5.3 million people, stacks up to China, the most populous country in the world with a population of 1.3 billion. This research question will be examined in the context of two separate surveys: First, a study of the attitude of Chinese students in Denmark to return to work in China; and, second, an investigation of the opinions of Danish students toward working for Chinese companies in Denmark and/or China. The findings of this study have implications for small-sized vis-à-vis large companies in their competition for human talent.

DENMARK VIS-À-VIS CHINA

Denmark

Denmark is a small country, both in terms of land mass and population. Denmark has a total land mass of 16,629 square miles, about one-tenth the size of the state of California, and a population of 5.3 million (U.S. States: Area and Ranking). Denmark is a welfare state; as such, roughly one-third of all taxes received are redistributed to its citizens in the form of transfer income (Andersen, 2007). As such, Danes enjoy high wages and generous social welfare benefits.

Because of the limited size of the domestic market, many Danish companies are "born global" (Madsen & Servais, 1997). With the exception of Maersk, one of the largest shipping lines in the world, most Danish companies are small, employing less than 100 employees. However, the majority of them have a high export ratio compared to domestic sales. As such, most Danes keep an international outlook and, despite low levels of immigration into Denmark because of the homogeneity of its society and the difficulty of learning the Danish language, Danes have been generally perceived to be open to people of other cultures. Furthermore, tuition at all levels of education was provided free to citizens and non-citizens alike until 2006. Thus, Denmark was able to attract a fairly large number of students from China.

According to unofficial sources, there are 5,000 Chinese students studying in Denmark. These Chinese students comprise approximately one-half of the total number of Chinese living in Denmark. The Danish Ministry of Education has restricted the maximum foreign intake of students from any given country to 2 percent of the total student population in Denmark. The exception to this 2 percent quota is other European Union (EU) countries. However, this quota does not apply to colleges and other non-university institutions. Even with the introduction of tuition fees for all students outside of the EU in 2006, tuition in Denmark is still low compared with those in the U.S. For example, the tuition fee at Copenhagen Business School (CBS), the leading business school in that country and one of the most highly-ranked business programs in Europe, is around US $15,000 per year for a two-year Master's program, and US $40,000 for a one-year full-time or two-year part-time MBA program. CBS offers primarily undergraduate and Master of Science programs, since MBAs are still a relatively new phenomenon in Northern Europe. Most Chinese students who come to Denmark enroll in the undergraduate and graduate programs in engineering and business. More recently, some Chinese students came to Denmark to attend middle school before continuing on to a university.

Since the general workforce is highly educated, the Danish government, in collaboration with its trade unions and employers' federation, has targeted the development of home-grown knowledgeintensive companies. Thus, like other countries with a similar objective, Denmark has embarked on a race to attract human talent, wherever they could be found (Denmark - a Knowledge Society).

As far as international competitiveness is concerned, according to the 2006-2007 World Competitiveness Index, Denmark ranked number 4, ahead of the U.S. at number 6 position (World Competitiveness Report, 2006-2007) .

China

In contrast, China has a population of 1.37 billion and occupies a landmass of 3.6 million square miles, roughly the same size as the U.S. In principle, while China is still a socialist country, it has adopted many aspects of the market economy. This means that state-owned enterprises (SOEs) co-exist with private and foreign-invested enterprises (FIEs), with the latter outperforming the former. Prior to the adoption of market mechanisms, tuition at all levels of education was free and the government assumed responsibility for all aspects of the social welfare of its citizenry. With the transition to a planned market economy, tuition fees have been introduced. At Fudan University, a leading university in China, for example, the tuition fee for an International IMBA program is US $20,000 and US $35,000 for the Executive MBA program. At the China Europe International Business School, the top-ranked business program in China, the tuition for a two-year MBA program is US $40,000. Furthermore, with liberalization the Chinese are free to emigrate and study overseas on their own accord, provided they have the means and wherewithal.

According to a 2007 report by the Chinese Academy of Social Sciences (CASS), there are 35 million Chinese emigrants worldwide, making it the largest emigrant population in the world. In the 1990s alone, an estimated 450,000 Chinese from mainland China have emigrated to the U.S. Between 1978 and 2006, CASS reported that over 1.06 million Chinese have gone abroad to study. In 2005 alone, of the 118,500 Chinese students who went overseas, 105,600 did so at their own expense. Thus, most overseas Chinese students are under no obligation to return home upon graduation. Furthermore, according to the CASS report, 70 percent of Chinese students have remained abroad upon completion of their studies (Watts, 2007). This constitutes a major brain drain for that country.

Since its open door policy in 1978, China has experienced the fastest growth rate in the world to become the "manufacturing workshop of the world." Every year since 2002, according to A.T. Kearney's Foreign Direct Investor Confidence Index, China has been ranked as the most attractive destination for foreign direct investment (FDI). In 2007, China is poised to overtake Germany as the third largest economy in the world. In 2006, China was the third largest recipient of FDI, after the U.S. and the United Kingdom (U.K.). In 2006, China overtook Japan to hold the world's largest foreign reserves - this has enabled China to embark on its own "go global" policy where the objective is to create 30 to 50 "world class" national champions. These developments, coupled with China's aspirations to become a "technology powerhouse" and the high stay rates of Chinese students abroad after completion of their overseas studies, have resulted in an acute human talent shortage in China (Tung, 2007). According to Farrell and Grant (2005), in 2005 alone, China had a talent shortfall of 70,000 executives. One effective way of redressing this shortfall is to appeal to the nationalistic sentiments of overseas Chinese to return to contribute to economic development at home - the Chinese government has done precisely that. Another method is to attract qualified nonnationals to work for Chinese companies within and outside of China.

As noted above, this paper seeks to shed light on how a small but prosperous country such as Denmark can compete with China, a gigantic country that is still plagued with lingering economic and social problems, for the same pool of talent supply in Denmark. This talent pool includes Danes and Chinese who are currently studying in that country.

The two studies reported in this paper used the same methodology and questionnaire that Tung (2007) adopted in her survey of the attitudes of Chinese and non-Chinese students in Canada to work for Chinese companies in China and/or Canada. Where relevant, the findings here will be compared with the Canadian study.

The first of the two studies presented in this paper investigates the intention of Chinese university students in Denmark to return to work in China upon graduation. The second study explores the willingness of non- Chinese students at Danish universities to work for Chinese firms in Demark and/or China. The most visible example of a Chinese presence in Denmark is Lenovo, the Chinese multinational that acquired IBM's personal computers' division. These two surveys are supplemented by in-depth interviews with Chinese who want to remain in Denmark and those who wish to return home. Together, these studies can provide a more comprehensive picture of how Denmark will fare vis-à-vis China as both countries strive to compete for the same talent pool.

METHODOLOGY

First Study: Chinese Students in Denmark

Sample. A modified version of a 5-page questionnaire developed by Tung (2007) was used to investigate the attitudes of Chinese students with regard to their return to China upon graduation from Danish institutes of higher learning. Information was obtained on the following: (a) whether they planned to return to China or remain in Denmark, including their reasons for so doing; (b) if they intend to return to China, the types of companies they hope to work for; and (c) the most significant challenges they expect to encounter upon return. Where relevant, the findings from Denmark will be compared with those obtained in Canada (with a population of 32.9 million) to determine if country size and other characteristics matter as far as the retention of Chinese graduates are concerned.

In spring 2007, the questionnaire was distributed online to members of the Association of Chinese Students and Scholars group in Denmark for completion by ethnic Chinese students enrolled in the engineering and business programs at Danish universities and colleges. The reason for focusing on students in these two disciplines is that graduates of such programs are in demand in China. Thirteen questionnaires were returned online and another 29 responses were collected at an annual job fair for Chinese students in Denmark at the Danish Technical University. Thus, a total of 42 usable questionnaires were obtained.

Unlike the Canadian sample where many have obtained Canadian citizenship or landed immigrant status despite the fact that all were born and raised in China, all participants in this study were studying in Denmark on a student visa. This difference might be attributed to one or both of the following reasons: One, the Canadian policy on immigration and citizenship is fairly liberal. All foreign students who graduate from a Canadian university program can apply for landed immigrant status provided they could find employment. Once landed, the immigrant is eligible for Canadian citizenship in three years' time. Two, given the cultural and ethnic diversity in Canada, it has become a popular destination for emigration by many Chinese.

In the Danish sample, the vast majority of Chinese students have lived there for under five years (57 percent has stayed in Denmark between two to five years, and 38.1 percent has lived there for less than two years). Only 4.8 percent has been in Denmark between 5 to 10 years. Over one-third (38.1 percent) of the respondents were female and 57.1 percent were male; the rest did not specify their gender. Slightly under one-quarter of the respondents (23.8 percent) were enrolled in the undergraduate programs, while 69 percent were studying in a Master's program.

Second Study: Non-Chinese Students

Sample. For the second study, another fourpage questionnaire was adapted from Tung (2007) to gather information on the opinions of non-Chinese students toward working for (a) a Chinese majority- or wholly-owned company in Denmark, and the reasons for so doing; and (b) a Chinese majority- or wholly-owned company in China. The questionnaire also sought to examine likely challenges that non-Chinese students would encounter if they were to work for a Chinese company, regardless of location.

In spring 2007, the questionnaire was distributed online to non-Chinese students enrolled in five classes at a leading business program in Denmark. In this second study, 55 usable responses were obtained. About one-half (43.6 percent) of the students were female and roughly one-half (45.5 percent) of all respondents in the second study were enrolled at the undergraduate level. The overwhelming majority of the students were born in Denmark.

The two surveys of Chinese and non-Chinese students were supplemented by interviews with three Chinese (two females and one male) who have chosen to remain in Denmark and another two Chinese who wished to return to work in China (one male and one female). These interviews were conducted in May and June 2007 and in the language of their choice (i.e., either English or Mandarin). Furthermore, in order to obtain qualitative data from non-Chinese students about their willingness to work for a Chinese company either in Denmark or China, eight Danish students (three males and five females) were interviewed in May 2007. Each interview ranged from 45 to 90 minutes. Relevant excerpts from these transcribed interviews were used to support and/or elucidate some of the issues raised in the two questionnaire surveys.

FINDINGS

First Study: Chinese Students Abroad

40.5 percent of the respondents expressed their intentions to return to work in China in the next five years; one-half (51.1 percent) said that they were "not sure"; and only a small percentage (2.4 percent) indicated that they "would not" return. No statistically significant difference was found between male and female respondents. Compared to the sample of Chinese students in Canada (Tung, 2007), a significantly higher percentage of Chinese students in Denmark expressed the intention to return (40.5 percent for the Danish study vis-à-vis 32.1 percent for the Canadian sample) while substantially fewer Chinese in Denmark (compared to those in Canada) indicated that they "would not return to China" (2.4 percent vis-à-vis 29.4 percent, respectively). These statistics appear to suggest that a large country like Canada, a country that espouses an official policy of multiculturalism and has a large ethnically diverse community, including a sizable Chinese settlement, enjoys a better chance of attracting Chinese students to remain upon graduation.

Respondents who indicated that they plan to return or were uncertain about returning - the overwhelming majority in this study - were asked to evaluate the importance of different reasons for their decision. Table 1 presents these reasons, in descending order of importance.

The means and rank-ordering of reasons for their decision were consistent with, while not identical to, that of the Canadian sample. "Family-related reasons" emerged as a very important reason for their decision. Because most Chinese respondents were single, this issue was probed further in the interviews. The interviews revealed that from the Chinese perspective, "family" includes one's parents and additional extended family, as opposed to the narrower definition of nuclear family in western countries. As such, even though the majority of Chinese students did not experience discrimination nor encounter major problems in adapting to the Danish lifestyle, the absence of a sizable ethnic Chinese community and the difficulty of learning the Danish language appears to have caused many Chinese respondents to consider Denmark a less attractive destination for their parents and members of their extended family. Consequently, they demonstrated reluctance to settle in Denmark upon completion of their studies.

In-depth interviews with several Chinese who have decided to return to China have shed some light on these issues. One respondent, for example, said that he "never felt that I am part of them." The "them" here refers to Danish society: while the Danes are international in their outlook, in general, they espouse a paradoxically "inward" orientation toward their families and friends. The average Dane has a limited number of friends and these seldom include foreigners. A Chinese who has settled in Denmark has declared to one of the co-authors: "I would like to have a Danish friend," thus suggesting that although he works alongside Danes, he does not have any Danish friends with whom he could socialize outside of the workplace. Another respondent stated, "We always feel that we belong to China and should be there." It is probably a universal concern that most people harbor fears of "non-belonging or psychological anomie in their adoptive countries" (Tung, 2007).

A statistically significant difference (p < 0.01) was found between the male and female respondents on the item "not used to Danish life style." Apparently, females (mean of 2.07) had an easier time adjusting to Danish society than males (mean of 3.06). This finding is consistent with Tung's (2004) assertion that because women still represent a minority in many professional fields, in order to advance their careers, they have to adapt to the majority, even in their home country. Thus, in general, women have more experience in adapting. One interviewee concurred by stating "that women always have to adjust - in China and other places." Furthermore, women are perceived to possess stronger language skills than men, including acquisition of foreign languages. Through magnetic resonant imaging scans of the brain, the blood flow to the brains of men and women were compared in terms of their language processing functions. When reading a novel, in the male subjects, "only the left hemisphere of their brains was activated. The brains of female subjects, however, showed activity on both the left and right hemispheres" (Nazario, 2005), thus appearing to support the commonly-held stereotype that women tend to possess stronger language skills. Greater proficiency in a foreign language can, of course, facilitate adaptation to a foreign environment.

Another difference based on gender pertained to the finding that female students emphasized "improved standard of living in China" as a more significant reason for returning to China than their male counterparts (p < 0.01). A possible explanation for this finding could be that men tended to focus on career prospects while women were more concerned about living standards given their more nurturing instincts. This difference is consistent with the observed patterns between male and female students from China (Murphy, 2002).

In addition, some statistically significant differences were found between undergraduates and graduate students regarding their reasons to return to China. Compared to their undergraduate counterparts, graduate students were significantly less used to Danish lifestyle (p < .01). This might stem from the fact that since the graduate students were older when they arrived in Denmark, they have experienced more difficulties in adjusting to the host culture. This finding thus serves to reinforce the conjecture that Chinese respondents might be concerned about their elderly parents not being able to adapt to Danish lifestyle in the event that they should decide to remain in Denmark.

When asked about the types of companies they preferred to work for upon return to China, about one-half (45.2 percent) indicated that they want to work for FIEs; a slightly higher percentage (47.7 percent) expressed that they "don't know", i.e., it depended on the opportunity upon return; and 7.1 percent wished to set up their own company. None of the respondents specifically expressed a desire to work for SOEs or Chinese companies in the private sector. For those who planned to work for FIEs, they emphasized "better career opportunities" (mean of 4.21), the provision of "more training" (mean of 4.13), "better salary" (mean of 3.88), and "better working conditions" (mean of 3.82) as the most important reasons for their preference. Thus, even though many Chinese students have chosen to return to China, nevertheless they have indicated a preference to work for FIEs. Given their knowledge of the Danish language and its culture, these Chinese students appear to be well-suited to work for Danish operations in China. Danish FDI in China grew from US $6.5 million in 2004 to US $33 million for the first five months of 2006 (FDI in China, 2006). In addition, some Danish investments made in China are routed through Hong Kong as several Danish companies have wholly-owned operations there.

With the exception of "better salary," the differences between females and males were significant at the p < 0.1 level. Females emphasized "better career opportunities," "more training," and "better working condi t ions " mor e than the i r ma l e counterparts. A possible reason for this finding could be that females, in general, have less career and training opportunities in China. Hence, they value these attributes in a job more so than "better salary."

Over one-third (38.1 percent) of the respondents indicated that if they were to return to China, they would plan to remain there indefinitely. Other respondents said that if they were to return, they would stay for under 5 years (19 percent), between 5-10 years (7.1 percent), and more than 10 years (16.7 percent). The fact that over 60 percent of the Chinese respondents believe they would not remain permanently in China is an indication of their openness to leave their country of origin and settle elsewhere. This accounts for the CASS finding, reported earlier, that Chinese constitute the largest emigrant population in the world (Watts, 2007).

Second Study: Non-Chinese Students

When Danish students were asked whether they would consider working for a majorityor wholly-owned Chinese company in Denmark, 18.2 percent said "definitely yes" and 81.8 percent opted for "maybe/not sure." None of the respondents said they would "definitely not" work for a Chinese company. Thus, it appeared that all the Danish students, in this study at least, were willing to entertain the possibility of working for Chinese companies in Denmark. This finding might be attributed, at least in part, to two factors: One, the international outlook of most Danes - this is common among people from smaller nations since opportunities appear to abound in the larger world outside as opposed to the limited domestic market. Two, China has experienced the fastest rate of growth in the world in the past three decades. Thus, many young people see the need to learn about that country. In comparison, 10.8 percent of the non-Chinese Canadians said that they will "definitely not" work for a Chinese company, while 64.7 percent were "unsure" and 24.5 percent were definitely willing to do so (Tung, 2007). The higher percentage of Canadians who expressed clear-cut opinions (i.e., either "definitely yes" or "definitely no") could stem from the fact that because non-Chinese Canadians have more experience and opportunity to interact with the Chinese, they have more information to make a decision on this matter.

The reasons, in descending order of magnitude, that have influenced the Danish students' responses with regard to whether they would consider working for a majorityor wholly-owned Chinese company in Denmark are presented in Table 2a.

Growth prospects associated with China emerged as the most important reason for choosing to work for Chinese companies, while the greatest concern that Danish students noted is a "disagreement with Chinese government policies and programs." Even though the questionnaire probed about working for Chinese companies, the fact that "disagreement with Chinese government policies and programs" emerged as the primary deterrent for seeking employment with Chinese firms suggests that many Danes appear to consider Chinese companies as inseparable from their government. In other words, this perception is analogous to the fear, yet admiration, that much of the western world had toward "Japan Inc." in the 1980s. The term "Japan Inc." first appeared in a 1936 Fortune magazine and was later popularized by old Japanese hand, James C. Abegglen, to characterize the cohesiveness of government, big business and labor in Japan. The remarkable harmony of mission and objectives among these three groups made possible the phenomenal growth of the Japanese economy from the 1960s through the 1980s (The Story of Japan Inc., 2002). This finding of the inability of Danish respondents to distinguish between the Chinese companies and the Chinese government is consistent with the perceptions of Canadians in Canada (Tung, 2007).

However, there were gender differences with regard to attitude to working for a Chinese company in Denmark. In general, females were more willing to work for Chinese companies (p < .05) because of the more limited career opportunities available to them. Even though Denmark scores high on Hofstede's femininity index (1983), women are significantly under-represented at the senior management level. In Denmark, only 22 percent of corporate board memberships are represented by women (Facts on Gender Equality, 2006). This finding that Danish women are more willing to work for Chinese companies paralleled the results of the Canadian sample, albeit in a different manner. In the Canadian sample, fewer women were willing to work for a Chinese company. However, for those who did, they expressed "better career prospects" as a reason for their decision more often than their male counterparts (Tung, 2007). This again points to the fact that even in countries that espouse high gender equality, such as Canada and Denmark, women continue to experience, whether real or perceived, a glass ceiling in their ascent up the organizational ranks.

Even though Danish students were generally receptive to the idea of working for Chinese companies in Denmark, it is not surprising, given their inability to separate Chinese companies from their government, that less than one-tenth (9.1 percent) of the respondents indicated that they will work "indefinitely" for a Chinese company. The vast majority (58.2 percent) said they were "not sure" whether they will leave once they have acquired the necessary work experience, and about one-third (29.1 percent) expressed certainty about such a career move.

When the questionnaire turned to gauging Danish students' attitude toward working for a Chinese majority- or wholly-owned company in China, a very different profile emerged. Approximately one-third (30.9 percent) said that they "definitely would not"; another one-half (49.1 percent) indicated that they were "not sure"; and only 14.5 percent gave an unequivocal "yes." However, even for those who were prepared to work for Chinese companies in China, 41.8 percent indicated they would quit once they have gained the necessary work experience. This finding paralleled the Canadian situation in which there was a greater reluctance to work for Chinese companies when relocation to China was involved (Tung, 2007).

Despite the fact that more Danish students were willing to work for Chinese companies in Denmark as compared to those in China, the sheer fact that 14.5 percent of them responded positively to this question and almost 50 percent were "not sure" is consistent with the growing trend toward boundaryless careers (Tung, 1998; Stahl, Miller, and Tung, 2002) whereby highlyqualified professionals were receptive to relocating outside of their countries of origin in search of opportunities that could enhance their careers. Given the phenomenal growth in the Chinese economy, both Chinese and non-Chinese alike perceive the value associated with acquiring work experience there, albeit for a couple of years.

In the follow-up interviews with the Danish students, one Danish male indicated that ownership did not matter to him. "Nationality of the firm is completely irrelevant to me. That is not important. It is all about the opportunities that the company can offer me and my career. I do not care if it is a Chinese, Danish, German, French, or Turkish company as long as the work and the position are interesting." Although none of the Danish students could identify a Chinese company by name, the majority of Danish respondents who were interviewed for this study echoed this sentiment by stating that ethnicity or nationality of the boss does not matter as long as the person can "build team spirit and develop his employees."

Some interviewees noted that, indeed, it would be interesting to live in China for a predetermined period of time because of the allure of working in a dynamic economy, especially compared to the alternative of remaining in a stable business environment all the time. A co-author of this paper shares these students' perspective that China does look attractive to those who come from a country that has experienced little change over the years. In the words of a Danish expatriate living in China who was interviewed in 2007, "nothing is happening in Denmark." Other Danish students felt that if they could perform well in China, it would be a major asset on their resume.

For those Danish students who were willing to relocate to China, the preferred destinations were Shanghai, the commercial center of China, Beijing, and Guangzhou in the south. These are the most developed cities in China and are consistent with the preference expressed by Chinese students in other studies (World HR Lab Survey, 2004; Tung, 2007). The Danish students felt that it was important to live and work in the developed cities because the sizable foreign community in these locations would help ease adjustment: "If I can work for a Chinese company in Denmark, I don't see any problems with working for one in China. I would prefer to work in Shanghai, Beijing, or Guangzhou because these places have attracted many companies and have a strong foreign community."

In general, there was little gender difference among Danish students in their overall attitude toward working for Chinese companies. That is, both male and female Danish students were more willing to work for a Chinese company in Denmark and were less concerned about the nationality of the firm. In fact, one female student thought that "it sounds cool to say that one works for a Chinese company." However, by and large, the female students were more apprehensive about the prospects of working for a Chinese boss. One Danish female student expressed that: "It would be difficult for me to work under a Chinese boss - maybe he is not used to Danish women's straightforwardness and equality." Another female interviewee elaborated on this concern: "I am probably prejudiced, but I think that Chinese society is much more male dominated than society in Denmark, and there are more men in leading positions than women in China. That is why it would be more difficult for me - a woman - to be promoted to the top in a Chinese company with a male boss." In other words, Danish women perceive the possible existence of a glass ceiling in a maledominated country. There may be grounds for this concern - Bishop and Chiou (2004), for example, found that the gap between organizational/managerial ranks held by men and women has widened in recent years in China, with females losing more ground to their male counterparts. In 2006, Denmark ranked 15th on the Gender-related Development Index (GDI) compared to 81st position for China. For the same year, Canada ranked 6th (Gender-related Development Index, 2006).

Yet another female interviewee expressed a different challenge associated with working for a Chinese boss: "I think it would be a bigger challenge to work under a boss who is a Chinese national because I would not know what to expect ... Normally we (Danes) talk in a casual and informal tone, and don't really care about titles and all that stuff. Perhaps with a Chinese manager, this might not be appropriate. I suspect that there would be communication problems in the beginning."

Similar to the findings in the Canadian sample (Tung, 2007), while the majority of Danish women interviewees expressed more reservations about working for a Chinese company, one female respondent saw a silver lining by stating that: "Career women in China definitely have a harder time. Women need to be a little bit tougher, more persistent and not give up easily. However, I see that many of the students from China are women which imply that they have the will and the possibilities to have a career. The more career women there are, the better the conditions for women in general. China's booming economy perhaps offers more job and career opportunities for women than in our part of the world - no matter how hard it is." In fact, even women in more gender egalitarian countries, such as the U.S., perceive the advantages associated with successfully serving in an international assignment on their subsequent career advancement. In her study of a comparative sample of 80 male and 80 female expatriates, Tung (2004) found that the women executives were more willing to undertake assignments to culturally tough , economically less developed and politically unstable countries as long as they were not precluded from performing the duties associated with their job. Furthermore, in the interest of career advancement, women were more willing to make personal sacrifices, including accepting an overseas posting even if their family objected to the assignment. These findings have led Tung (2004) to raise the specter that women may be the ideal global manager.

When asked about the challenges that they would most likely encounter if they were to accept employment to China, the Danish students expressed many concerns. These challenges, in descending order of significance, are presented in Table 2b.

Four of the six challenges had a mean score above 3, the neutral point, suggesting that these concerns were quite significant. In the Canadian sample, all six challenges received mean scores of over 3. Furthermore, most of these concerns pertained to family issues and perceived problems of dealing with the Chinese bureaucracy. The spouse's possible objection to relocation was identified as the most significant challenge. Thus, the Danes appear to be as equally concerned as the Chinese students with family issues. This finding might stem from their awareness that successful adjustment to living and working abroad is very much a family affair, a point that has been repeatedly made in the expatriation literature (Tung, 1981; Garonzik, Brockner, and Siegel, 2000; Hutchings, 2003; Spector, Cooper, Poelmans, Allen,O'Driscoll, and Sanchez, 2004; Tung, 1998).

One Danish respondent bluntly stated that he would not relocate for any company, regardless of its nationality: "No! I don't think that I would consider moving to China to work. Not for a Chinese or a Danish company or any other company for that matter. I am too attached to Denmark. My girlfriend, family, and friends are all here." Aside from members of the immediate family who will usually relocate with the expatriate, the sentiment expressed by this Danish respondent here exemplifies the paradoxical "inward" orientation that many Danes have toward their family and friends discussed earlier.

As far as the perceived problems with the Chinese bureaucracy is concerned, one Danish respondent noted as follows: "I think there would be more bureaucracy in a Chinese company compared to a Danish one. The former communist countries that I have visited have all been very cumbersome and bureaucratic. I have never been to China, so this is just a feeling. You need a stamp on everything and you have to pay to get your papers stamped. I suspect China and Chinese organizations are also like that too." Another female interviewee elaborated on her concerns as follows: "Another challenge would be to understand how business operates in China. I suspect that although the economy is roaring, there are still areas where things are not as developed as in the west. For instance, I hear that it is most important to know the right people. China is still a totalitarian regime and companies need to have much more contact with the authorities and that probably means a lot of red tape, etc. Business does not quite operate according to that in the west."

Another reservation about working in China that emerged in the interviews pertained to perceived problems of communication: "Language is also important. That is another reason for not considering China. I want to be able to speak the local language if I were to live in a certain place." This concern was elaborated upon by another interviewee: "Language is important to make you feel that you belong in a place. If you cannot speak to the local people in the local language, then you will never belong and always remain an outsider. I don't want that."

DISCUSSION AND CONCLUSION

This paper has used the case of Denmark to illustrate the challenges that a smaller nation has in attracting and retaining human talent. This analysis was couched in the context of two related studies: a sample of Chinese students in Denmark who could choose to return to China, opt to stay in Denmark, or relocate elsewhere upon graduation; and a sample of Danish students about their attitude toward working for the world's most dynamic economy even though it is still fraught with growing pains. The two studies revealed that: One, an overwhelming majority of Chinese students did not plan to remain in Denmark. However, most Chinese students preferred to work for FIEs in China. Two, many Danish students were receptive to the idea of working for a Chinese company, al be it in Denmark, and substantially fewer of them were willing to relocate to work in China. However, for the minority of Danish students who were open to working in China for a while, they were attracted by the excitement of gaining work experience in a fast-paced environment where "change" appears to be the only constant.

In surmising the findings of both samples reported in this paper, coupled with the study of Chinese students in Canada and non- Chinese Canadians' attitude toward working for Chinese companies (Tung, 2007) which inspired the surveys at hand, several important conclusions can be drawn about the global war on talent, with implications for small- and medium-sized enterprises (SMEs):

First, the war on talent is here to stay. With the dawning of the knowledge-based economy, those companies that can attract and retain the best and most qualified professionals will thrive. Thus, it is imperative that companies, regardless of size, seek to recruit talent from wherever they could be found. However, just as companies can readily recruit highly qualified professionals from other countries, given the growing boundaryless nature of the workforce, they have to be cognizant that it is just as easy to lose these cosmopolitans to other firms, both domestic and international. Hence, the key here is not just attraction, but retention of cosmopolitans. As shown in the two studies reported in this paper, companies in both Denmark and China have to compete for the same talent pool, in this case Danish and Chinese graduates in business and engineering.

Second, consistent with the 2006 Towers Perrin survey on "Winning strategies for a global workforce" (Towers Perrin, 2006) reported earlier, the Chinese students identified opportunities for career development, i.e., acquiring valuable experience on the job, as one of the principal reasons for returning to China. The same motivation applied to Danish students if confronted with an offer to work for a Chinese company. Thus, it appears that from the perspective of highly qualified professionals, regardless of nationality and country of origin, the "job of choice" is one that offers abundant opportunities for learning and development. This is so because the skills and competencies that they acquire can be readily transferred to another position and locality, if they so choose. By virtue of their size, SMEs appear to be wellpositioned to do this since the employee would have more opportunity to learn about different aspects of the organization as compared to their larger counterparts.

Third, similar to the findings of the Canadian samples (Tung, 2007), the two studies reported in this paper showed that while men and women both look for challenging positions and opportunities for learning and development, their concerns about accepting a position tend to be different. In general, women are more concerned about the existence of a glass ceiling. Because of the "personal touch" and flatter organizational hierarchy typically associated with SMEs, many women may find them to be more attractive as prospective employers (Worm, 1997).

Fourth, a larger country such as Canada that embraces cultural and ethnic diversity has a better chance to attract and retain cosmopolitans from around the world. However, size does not appear to matter as much as cultural diversity since Canada has only one-tenth the population of the U.S. Thus, openness to members of other ethnic groups appears to be more salient. Since many immigrants have a more difficult time in finding employment with larger organizations in their adoptive countries, SMEs might have a better chance of attracting them (Chung, 2002).

Future research based on a larger and more diversified sample should, of course, explicitly test these assertions to determine how SMEs would fare vis-à-vis large companies in the global war on talent.

Subject: Competition; Human capital; Recruitment; Comparative analysis; College students; Case studies

Location: Denmark, China

Classification: 9130: Experiment/theoretical treatment; 9175: Western Europe; 6100: Human resource planning; 9179: Asia & the Pacific

Publication title: Journal of Small Business Strategy

Volume: 19

Issue: 1

Pages: 1-14

Number of pages: 14

Publication year: 2008

Publication date: Spring/Summer 2008

Year: 2008

Publisher: Small Business Institute

Place of publication: Peoria

Country of publication: United States

Publication subject: Business And Economics--Small Business

ISSN: 10818510

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables References

ProQuest document ID: 201469653

Document URL: http://search.proquest.com/docview/201469653?accountid=38610

Copyright: Copyright Journal of Small Business Strategy (Bradley University) Spring 2008

Last updated: 2013-11-21

Database: ABI/INFORM Complete

Document 36 of 100

ENVIRONMENTAL TURBULENCE AND SCANNING BEHAVIOR: THE MODERATING EFFECTS OF ORGANIZATIONAL MATURITY

Author: Liao, Jianwen; Welsch, Harold; Stoica, Michael

ProQuest document link

Abstract:

This paper examines the relationship between environmental turbulence and information scanning behavior in a sample of 242 small and medium-sized enterprises (SMEs), and the moderating effects of organizational age. Our results suggest that SME decision makers utilize a selective, cognitive simplification process in their information search activities. Scanning behavior of SMEs is highly differentiated and very selective in the face of turbulent task environments. In general, our sampled SMEs seem to be more attuned to technological and competitive turbulence. Additionally, young and mature SMEs also exhibit different scanning behaviors. While young SMEs prefer a search mode of proactive continuous internal gathering, mature SMEs opt for a mode of reactive internal and external information gathering. Implications of this study are discussed. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

The environmental conditions facing today's businesses are increasingly fraught with complexity, turbulence, and uncertainty. Scanning and interpreting environmental changes are the first step in strategic formulation and implementation (Hofer and Schendel, 1978; Hambrick, 1981; May, Stewart, and Sweo, 2000). To date, most studies on environmental scanning and information search activities have centered on large organizations. However, timely and relevant environmental information is equally important for small and mediumsized enterprises (SMEs). Gudmundson, Tower, and Hartman et al. (2001) have stated that management of information and knowledge is the key to developing and sustaining competitiveness for companies big and small.

The few studies with a focus on the environmental scanning behavior of SMEs are far from conclusive (i.e., Beal, 2000). For example, Pineda, Lerner, Miller, and Philips (1998) found that managers of SMEs are less willing to seek and accept advice from others, which can be attributed to their high internal locus of control. By contrast, several other researchers contended that small business decision makers lack sufficient resources to create a formal system to conduct environmental scanning; therefore, they must rely more heavily on externally focused scanning activities (Churchill and Lewis, 1983; Mohan-Neill, 1995). Matthews and Scott (1995) also noted that SMEs typically lack the infrastructure necessary to adequately search and collect information needed to deal with environmental turbulence and uncertainty.

This study examines the relationships between environmental turbulence and environmental scanning activities in the context of SMEs. Specifically, this study focuses on two research questions. First, as compared to large companies, do SMEs exhibit a different pattern of scanning behavior when facing environmental turbulence? Second, does SME maturity make a difference in the relationship between environmental turbulence and SMEs' scanning behavior, i.e., do younger start-up firms behave differently from more established firms?

THEORETICAL BACKGROUND AND HYPOTHESES DEVELOPMENT

Environmental Turbulence

Duncan (1972) defined the environment as the relevant physical and social factors outside the organizational boundaries that are taken into consideration during organizational decision-making. Environment can be conceptualized as task environment and general environment. Task environment involves environmental elements that have direct impact on the competitive situation of individual organizations. These elements are commonly defined as technology, competitors, customers, suppliers, and regulatory bodies. General environment refers to factors that affect organizations indirectly, including political, economic and social/demographic elements. Palmer, Wright,and Powers (2001) suggested that the nature of competitive environments may play a critical role in the frequency and success of innovation by firms. Starbuck (1976) performed an excellent literature review on the organization-environment relationship and provided a classification of organizational and industrial task environments. Dess and Beard (1984) built on Starbuck's seminal work (1976) and identified three environmental dimensions: munificence (capacity), complexity, and dynamism. Their work represents an excellent operational guide for classifying organizational task environments in terms of accepted industrial classification.

It is widely accepted in the strategy literature that the external environment is a primary source of uncertainty for managers responsible for identifying opportunities and threats (Duncan, 1972). Duncan proposed that environmental complexity and variability are the two dimensions of uncertainty. Out of the two, environmental variability or turbulence is most important to organizational adaptation. Turbulence is generally defined by high levels of interperiod changes of key environmental variables (Glazer and Weiss, 1993; Sinkula, 1994). The environment, including both task and general environment, is perceived as turbulent if the number of events per period of time is high for key characteristics such as: consumer preferences, number of new customers, new products, number, and position of competitors (Jaworski, Wee, and MacInnis, 1995), size of the market, use of technology and regulations (Glazer et al., 1993).

Botchway, Goodall, Noon, and Lemon (2002) provided an overview of the literature on turbulent environments and the appropriate managerial approaches. They suggested the necessity of studying the impact of environment turbulence on firms' scanning activities, giving as an example the Coventry case, and developing an emergence conceptual model. That study focused mainly on the impact of task environment turbulence on SME environmental scanning activities, excluding general environmental turbulence for the following reasons. First, since task environment refers to forces that may have an immediate or direct impact on an organization, decision makers at SMEs may focus more of their scanning efforts on these immediate forces compared to those in the general environment (Johnson and Kuehn, 1987). For example, empirical research by Brush (1992) indicated that more than half of SME managers participating in her study "never" collected information about the general environment. She observed that SME managers perceived information about "immediate" marketplace environment as more important than information about the "remote" environment. Second, in terms of variability, forces in the task environment may change more frequently and rapidly than those in the general environment such as regulatory, social and cultural changes. Third, decision makers in SMEs often feel they have more direct control of task environment sectors than general environmental sectors.

The environment described by Achrol (1991), Glazer (1991), and Glazer and Weiss (1993) is characterized by its turbulence primarily due to the information, knowledge accumulation and dissemination that changes frequently. Achrol and Stern (1988) provided a complex and comprehensive framework by integrating multiple dimensions of environmental conditions to analyze the challenges facing channel management. Beinhocken (1999) and later Botchway, Goodall, Noon, and Lemon (2002) adopted the same approach. Botchway et al. (2002) constructed a model to explore the issues related to regional economic development. In their study, levels of inter-period changes of variables defining the environment were used to measure turbulence.

Environmental Scanning Behavior

Researchers have developed a number of models to describe the ways managers and organizations deal with environmental turbulence (e.g., Dutton and Duncan, 1987). Daft and Weick (1984) proposed that organizational adaptation entails three key activities: scanning, interpreting, and responding. Scanning refers to as the activities and processes associated with acquisition of information about events, trends, and relationships potentially affecting the supplies of resources (Pfeffer and Salancik, 1978) or protecting the core organization from uncertainty (Thompson, 1967). Aguilar (1967) defined scanning as "the way in which top management gains information about relevant events occurring outside the company in order to guide the company's future course of action."

The terms information, intelligence, and knowledge are sometimes used interchangeably. Glazer (1991) defined information as data that have been given structure (i.e., placed in a context). In terms of organizational performance, the most important context can be seen as a function of information's role in facilitating exchange. Jaworski, Wee, and MacInnis (1995) defined competitive intelligence as the ethical gathering and use of publicly or semipublicly available information about trends, activities, or strategies of competitors. Narver and Slater (1990) and later, Kohli, Jaworski, and Kumar (1993) developed scales to measure the concept of market orientation. The concept of market orientation was one-dimensional for Narver and Slater (1990) and three-dimensional for Kohli et al. (1993), integrating intelligence generation, intelligence dissemination, and responsiveness. These studies all used information processing as a key element for their scales. Information search represents the 'generator' of information for the organization. Market signals are identified and information on those signals is gathered and transmitted to the organizational filter. The more information that can be collected over a given period, the better the information search works. Information is critical for both the formulation of the strategy and for the daily operation of a company.

Information search represents a construct that is referred to as 'active listening.' In searching for information, the organization uses more than the usual data collection sources from customers and competition. The more information the organization can gather through the search for information, the more options exist for identifying changes in the environment, and therefore, the better it can respond and perform. For example, Gavetti and Levinthal (2000) found that, in a dynamic business environment, strategies containing elements of information search and learning enhance long-term success. Barkema and Piaskowska (2002) and Barkema, Baum, and Mannix (2002) also demonstrated that information search along with experiential learning are critical for market entry and market location decisions.

Information search is also recognized as a difficult organizational process because of environmental complexity and dynamism, and managerial bounded rationality. Managers typically cannot fully and comprehensively understand the environment (Cyert and March, 1963). Moreover, given the constraints of resources, time and capacity, managers often have to select from a range of scanning alternatives, such as the frequency of information search, the extent of internal search, and external search.

Research on SMEs' Environmental Scanning Behaviors

Numerous attempts have been made to extrapolate research on environment scanning behaviors from large organizational settings to small firms, but with limited success (i.e., Pearce, Chapman, and David, 1982). SMEs differ from large firms in several important ways that may affect their environmental scanning behaviors. Overall, environmental scanning activities are expected to be low for SMEs (Smeltzer, Fann, and Nikolaisen, 1988). This is primarily because SMEs usually have: (1) little presence of formal organization structure and processes geared toward environmental scanning; (2) lack of extensive external contacts and sophisticated internal management information systems (Kagan, Lau and Nusgart, 1990) and relative inability to influence external events; (3) the low levels of resources available for information search (Golde, 1964); and (4) lack of specialization of scanning activities among top management and the dependence of information search on one or two individuals (Hambrick, 1981). Although conflicting demands of boundary-spanning roles and internal operation roles are pervasive in any size organization, the problem is particularly acute for SMEs. The individuals who are responsible for environmental scanning activities usually are the entrepreneurs themselves. They often have a high degree of internal locus of control and self-efficacy. Due to these contextual features, SME environmental scanning behavior may be unique in many areas, as compared to large companies, even between young SMEs and mature SMEs.

Most prior research always assumes a rational perspective that SME managers would conduct extensive search and make the "best" decision. It fails to consider how bounded rationality affects the search efforts of SME decision makers and how they make decisions heuristically. In this sense, managers in SMEs and large companies share similar human cognitive limitations when facing a task of complexity, ambiguity and uncertainty, such as environmental scanning. Given the constraints of SMEs (i.e., resources, degree of specialization), SME managers may be more apt to use perceptual processes to simplify scanning activities. Cognitive psychologists and behavioral scientists have identified a wide range of cognitive processes, which serve to simplify decision-makers' perceptions of external environments (Schwenk, 1984). These processes suggest that SME scanning activities may be more complicated than what normative, rational decision theories would imply.

Prior hypothesis bias. Cognitive psychologists found that decision makers who formed beliefs or hypotheses about the relationship between variables tend to seek and use information consistent with these hypotheses rather than disconfirming information (i.e., Kozielecki, 1981). This process may lead decision makers to ignore certain information (Beinhocken, 1999).

Reasoning by analogy. This involves the application of simple analogies and images to guide problem definition (Steinbruner, 1974). This process helps to reduce the uncertainty perceived in the external environment without resorting to extensive scanning and search efforts.

Single outcome calculation. Cyert and March's (1963) concept of problemistic search suggested that decision making involves a single valued problem and a single preferred alternative to which decision makers are committed from the outset of the decision process, rather than attempting to specify all relevant values and goals and generate a number of alternative courses of action as normative decision theory would suggest. This is an extremely powerful simplification process and is probably more likely to occur in highly complex and uncertain decision environments.

Environmental Turbulence and The Frequency of Information Search

Information search frequency is referred to as the number of times managers receive data about the environment (Hambrick, 1981). Fahey, King and Narayanan (1981) observed that managers can obtain information along a continuum ranging from irregular to continuous gathering. The irregular approach is a reactive, spot behavior that involves external cues to force management into action. By contrast, continuous scanning is a perpetual, systematic, and proactive approach to search relevant environmental information. Some researchers suggest that the level of environmental uncertainty and the availability of resources within an organization affect the extent of scanning activities undertaken by managers (Boyd and Fulk, 1996; Milliken, 1987). Managers routinely use information search to reduce uncertainty. When the environment remains relatively stable or changed in slow cycle, managers at SMEs would commit fewer resources to information search, lengthening cycle time. Higher environmental turbulence generally elicits more frequent scanning efforts (Chakravarthy, 1997). Under such conditions, SME decision makers need more information to define problems and generate and evaluate alternative solutions (Elenkov, 1997).

Based on the above argument, we hypothesize:

H1: In general, the greater the degree of environmental turbulence, the greater the frequency of information search in SMEs.

Firm age is frequently treated as a moderating variable in SMEs and entrepreneurship research (e.g., Smallbone and North, 1995). Research findings generally support the importance of environmental scanning for the survival of new ventures (Brush, 1992; Chrisman and Leslie, 1989). New ventures, as compared to more established small businesses, face a higher level of uncertainty because of their "newness" and lack of legitimacy in the marketplace. Younger firms are also at a disadvantage in terms of contacts established in the marketplace and amount of historical or internal data from which to draw. They are probably still learning the "rules of the game." When facing the same level of environmental turbulence, younger SMEs may require more frequent and intense information search than mature SMEs to reduce the uncertainty they face. Consequently we hypothesize:

H1a: Environmental turbulence has greater positive impact on the information search frequency of young SMEs than mature SMEs.

Environmental Turbulence and Sources of Information Search

Aguilar (1967) distinguishes two major sources of search, namely internal and external. Internal search mode pertains to reports, memos, and discussion with internal partners, managers, and employees about the external environment. External sources of search include direct contacts with government officials, customers, trade magazines, and attendants of association. Gudmundson et al. (2001) analyzed the internal and external information search for small businesses. Their findings suggest that managers in small firms might want to consider increasing both the acquisition of more external information and the use of various processes for gathering and sharing information, especially present in turbulent environments.

However, several studies suggested that while SME managers use a variety of information, they are usually apt to rely heavily on their own experience and internal sources of information when making decisions, even in situations where seeking external sources of information would be more appropriate and beneficial (i.e., Pineda and Lerner, 1998; Brush, 1992). There are several possible explanations for the types of search behavior by SMEs. First, SME decision makers tend to place a high value on their personal judgments due to their high levels of internal locus of control and selfefficacy. People with an internal locus of control tend to believe that what happens to them is the consequence of their own actions and that rewards are contingent upon their own behavior, as opposed to being controlled by outside factors (Robbins, 1994). Second, SME decision makers are likely to use more accessible sources even if the quality of the sources used may be lower than other alternative (O'Reilly, 1982). Third, even when SME managers seek external sources of information, there is an issue of trust, which is perhaps the most significant factor in influencing the choice of various sources. Who can be trusted to see issues in the same context as the managers of a SME? Who has a vested interest in dealing with issues in a way that SME decision makers would find acceptable and maintain confidence? SME managers tend to look for advice and information from those with whom they share a common bond, often within an organization. Finally, due to limited time and resource constraints for information search activities, SME managers are always conscious of social and economic costs associated with obtaining such information. In most of the cases, external sources of information are usually more expensive than internal ones. Therefore, rather than searching extensively for optimal sources of information and incurring the additional costs, they prefer to use the most readily available information sources, usually internal - a characteristic of bounded rationality (March and Simon, 1958).

As the overall environmental conditions become more turbulent, SME managers may increasingly depend on the internal sources of information due to low search costs and high level of trust. Based on the above arguments, we propose:

H2: In general, the greater the degree of environmental turbulence, the greater the extent of internal search in SMEs.

As Covin and Covin (1990) adroitly argued, "the simple fact that researchers study new ventures implies that the age effect can be significant." Entrepreneurship research generally supports the importance of external environmental contact and scanning activities, and frequently points out that the lack of information is a primary problem for new ventures (Chrisman et al., 1989). The typical organizational challenges, such as time and resource constraints, are especially greater for young SMEs compared to their mature counterparts due to the liability of newness and smallness. For mature SMEs, as they become experienced over time in terms of where to find internal and external sources of information, they may have developed, or be in the process of developing, formal organization structures and processes for information search. Additionally, these mature SMEs may have to overcome the liability of newness and establish a network of relationships upon which they can draw resources and information. When facing environmental turbulence, mature SMEs may have an internal organization routine to upon which to rely. However, this may not be the case for young SMEs. Consequently, we argue:

H2a: Environmental turbulence has greater positive impact on the internal search of mature SMEs than young SMEs.

Internal search and external search may not be the two extremes on a continuum, rather two different sources of search. The preference of one source of information search does not preclude SME managers to use the alternative sources at the same time. For example, there may be incidences when SMEs use both sources of information extensively. However, given the time and resource constraints, the lack of personnel specialized in environmental scanning, coupled with a high degree of dependence on one or few individuals, there could be a trade-off relationship between internal and external sources of information search. Therefore, in conjunction with hypothesis 2, we hypothesize the following corollary:

H3: In general, the greater the degree of environmental turbulence, the less the extent of external search in SMEs.

Young SMEs have to overcome the "liability of newness." Survival remains a major concern for young SMEs as compared with mature SMEs. As Johannisson (1990) argued, entrepreneurs should use their personal relationships with individuals outside their respective organizations to collect relevant environmental information. Such external search would not only serve the purpose of reducing organizational uncertainty, but would also increase organizational legitimacy in the marketplace. Therefore, in conjunction with hypothesis 3, we expect the following corollary:

H3a: Environmental turbulence has a greater positive impact on the external search of young SMEs than that of mature SMEs.

METHODS

Sampling

A random sample of 1,000 SMEs in Washington State was bought from Sampling, Inc. to test the hypotheses. Responses were collected from 284 companies (28.4 % response rate) and 242 usable questionnaires were obtained. Nineteen were incomplete, 12 belonged to companies having fewer than 30 employees, and 11 were not-for-profit organizations. Almost half of the respondents, 43.4 %, represent businesses in the manufacturing sectors and 22.3 % were businesses in the service sector. Retailers and wholesalers come next, each with 8.7%; the rest were finance businesses, transportation companies, construction, and agriculture businesses.

The questionnaire was mailed to businesses having between 50 and 500 employees. Nevertheless, responses were obtained from companies with both large numbers of employees and very small number of employees; there are 13 respondents under 50 employees and 11 over 500. Companies having at least 40 employees and those having less than 900 employees were retained in the study. More than 85% of the respondents had between 50 and 400 employees. Only 12% had between 400 and 500 employees. Eighty-one percent are corporations and all are privately held. Almost half of the businesses were in manufacturing (see Table 1).

The overall response rate was of 28.4% but some of the questionnaires were either incomplete or the companies were not-forprofit. We test for the non-response bias using Chi-square. Table 2 shows the distribution of respondents and nonrespondents for the eight types of industries used to classify businesses in U.S. The ÷2 test was statistically insignificant, suggesting that there is no difference in the industry distribution between our sample and nonrespondents.

Measures

Task environmental turbulence. It was measured by managers' perception of number and extent of changes for a given period of time (Bourgeois, 1980). The study adopted a 14-item scale validated in Stoica (1995), Glazer et al. (1993), and Sinkula (1994). Participants were asked to rate the degree of change for various characteristics of task environment, including technology, competition, market/customers, suppliers, and regulations. The answers were measured on 5-point scales, with a rating of "1" indicating that environmental element has the least change and a "5" indicating many changes. The scale is reliable with a Cronbach alpha of 0.84.

Information Search. Market signals are identified and information on those signals is gathered and transmitted to the filter. How well the company does on this scale should be judged on the amount of information that is detected. The more information that can be collected over a given period of time, the better the detector operates. The major problem for any research involving information is represented by its measurement. Kholi, Jaworski, and Kumar (1993), Narver and Slater (1990), and Slater and Narver (1994) measured information generation by the number of signals gathered in a given period of time. It can be assessed by how often the responsible entities in the business unit meet with clients, competitors, etc. Multiple departments (within the organization) should engage in this activity because each has a unique market lens (Kholi, Jaworski, and Kumar 1993). Consistent with previous research by Glazer and Weiss (1993) and Sinkula (1994), we adopted a twelve-item intelligence generation MARKOR scale to measure the construct of information search. An additional two items were added after indepth interviews. Our measure has a Cronbach-alpha 0.77, suggesting good reliability.

Frequency of information search was measured by asking participants the frequency with which the managers scan the task environment. This construct was measured using a five-point ordinal scale anchored by extremely infrequent to extremely frequent.

Internal search was measured by a list of items related to internal sources of information, such as "We consider every employee in the business as a possible source of information," or "In this business, we do a lot of in-house market research." Respondents were requested to rate the statement on a five-point scale, with a rating of 1 indicating strongly disagree and 5 indicating strongly agree.

External search was measured by a list of items related to external sources of information. Respondents were requested to rate statements-e.g., "We poll end users at least once a year to assess the quality of products/services"-on a 5-point scale. A rating of "1" indicates strongly disagree and a "5" indicates strongly agree.

Statistical Procedures

Multiple regression analysis was utilized to test the formulated hypotheses. The statistical testing procedures are as follows. First, three full regression models using frequency of information processing, internal search, and external search as the dependent variables, and different types of task environmental turbulence as the independent variables were tested. Second, the sample was divided into two subsamples using SMEs' median age, yielding young and mature SMEs. Third, the same regression models were tested for each of the two sub-samples.

RESULTS

Descriptive statistics and correlation matrix for the independent and dependent variables are reported in Table 3.

The first hypothesis (H1) stated that environmental turbulence overall will lead to more frequent information search activities in SMEs. The full model I indicates a strong significant relationship exists between environmental turbulence and information search frequency (R2 = . 061, F = 3.018, p < 0.05). The individual standardized regression coefficients suggest that technological turbulence increases the frequency of information search activities significantly (â = .155; p < 0.05), however, competitive changes were found to be negatively associated with information search frequency (â = -.164; p < 0.05). Thus, H1 was partially supported (See Table 4). The hypothesis (H1a), stating that environmental turbulence will have greater positive impact on information search frequency of young SMEs than mature SMEs, was strongly supported. As presented in Table 4, a regression model for the young SME subgroup yielded an R-square of .097 (F = 3.236; p < 0.1), with technological turbulence as the leading predictor (â = . 238; p < 0.05).

However, we did not find an overall significant relationship between environmental turbulence and search frequency for the mature group. Also, competitive turbulence, which leads to decreasing search frequency for mature SMEs, showed no impact on the young SMEs.

Hypothesis 2 (H2), stating that the usage of internal search will increase as the environmental turbulence increases, was supported. As indicated in Table 4, the full model with internal search as the dependent variables yielded an R-square of .063 (F = 3.142; p < 0.01) was also found. A strong significant positive relationship between turbulence and internal search activities of mature SMEs (R2 = .164; F = 4.679, p < 0.01) was also found. Among the significant predictors were turbulence in the sectors of technology (â = .269; p < 0.01) and suppliers (â = .268; p < 0.01). However, the analysis failed to detect the overall relationship between turbulence and internal search for young SMEs (R2 = .058; F = 1.283), although the model indicates internal search activities in young SMEs increase as the task environments become more turbulent. These findings lend support for hypothesis H2a in predicting that environmental turbulence will have a greater positive impact on mature SMEs than young SMEs.

The third hypothesis (H3) stated that the greater environmental turbulence, the less likely SMEs would resort to external search. As presented in Table 4, overall turbulence is a significant predictor of external search (R2 = .093; F = 4.764; p < 0.01). However, we found mixed results for individual environmental factors. Technological turbulence tended to intensify the usage of external search (â = .191; p < 0.01) but that was not the case for supplier turbulence (â = -.230; p < 0.01). Thus, we only found partial support for H3.

Hypothesis H3 a 'sprediction that environmental turbulence will lead to greater usage of external search in young SMEs rather than mature SMEs was supported, but in the opposite direction. As indicated in Table 4, regression analysis for the young SMEs subgroup uncovered significant negative relationship between turbulence and external search (R2 = .102; F = 2.368; p < 0.05), with competitive turbulence (â = -.244; p < 0.05) and regulatory turbulence (â = -.172; p < 0.1) as the significant predictors.The findings suggested that decision makers in young SMEs tend to decrease, rather than increase, the external search activities, as the regulatory and supplier environment become more turbulent. However, for the mature SMEs sub-sample we failed to detect an overall relationship between turbulences and external search. Yet, technological changes were positively related to the external search activities (â = .269; p < 0.01). This finding suggests that mature SMEs were more geared toward external searh as technological changes increase.

DISCUSSION

The results of this study shed insightful light into the relationship between environmental turbulence and SMEs' environmental scanning activities, and the moderating role played by firm age in the context of SMEs. These findings can be explained if the specificity of SMEs and the decision makers' cognitive limitations are taken into consideration.

This study shows that SMEs overall are very selective and prudent, or somewhat biased in their search efforts when facing increasing task environmental turbulence. As Table 3 indicates, our sampled SMEs were very attuned to technological and competitive turbulence, but surprisingly not to market turbulence. There are several possible explanations. First, as environmental conditions become more uncertain, ambiguous and turbulent, SMEs may experience information overload. Given the limited times and resources and lack of specialization in scanning activities within SMEs and individual cognitive limitations, SME decision makers may therefore resort to a series of cognitive simplification techniques such as prior hypothesis bias and single outcome calculations. Consequently, they will not be equally (rather than selectively) responsive to all environmental signals. Second, environmental turbulence by itself does not lead to scanning activities unless the external events are perceived to be salient to SME decision makers. SME decision makers may even choose to ignore certain environmental changes that do not fit with their schematic preference. There were approximately 45% manufacturing firms in the sampled SMEs, which points to the possibility of a bias regarding technological environmental factors. The lack of response and some ignorance of market signals may also well be attributed to the phenomena of single outcome calculations and prior hypothesis bias. SMEs in the sample may have strong preference to be "prospectors", instead of "defenders" (Miles and Snow, 1978). Therefore the perceived market, regulatory and supplier turbulence may be less salient for SME managers than technological turbulence and competitive turbulence.

Results suggest different search modes for young and mature SMEs in the face of a turbulent task environment, which support the presence of an age effect on the relationship between environmental turbulence and SMEs' search behavior. First, as technological turbulence increases, decision makers in young SMEs prefer to increase their search frequency and more extensive utilization of internal sources of information. By contrast, their counterparts in mature SMEs are apt to engage in more extensive internal and external searches, but will not necessarily increase their search frequency. External search is usually an expensive choice as compared with an internal one (Pearce, Chapman, and David, 1982). This is due to the fact that young SMEs compared with mature SMEs may have fewer resources available for search and fewer contacts in the external environment, among other disadvantages. Therefore, they tend to make up the shortage of external search with more frequent internal search in face of technological turbulence. Second, as competitive turbulence increases, managers in young SMEs are apt to decrease their external search activities, while managers in mature SMEs will decrease their search frequency. These counter-intuitive findings challenge the widely held rational notion that in order to reduce organizational uncertainty, SME managers would increase their search activities with the increase in competitive dynamics. It is speculated that SMEs might place different emphases on their search efforts. Young SMEs' search efforts may be understandably more geared toward efficiency and timeliness, given the resource constraints. Frequency takes precedence over search breadth. For mature SMEs, effectiveness is more important than efficiency. Therefore, search scope and breadth may be valued more importantly than frequency. The results suggested that young SMEs prefer a search mode of proactive internal gathering (high frequency, continuous) and mature SMEs a mode of reactive internal and external gathering (low frequency, irregular).

These findings offer some cautions on the conventional wisdom of improving problem solving through planning and increasing search frequency and range of information provided to managers. When facing environmental conditions with a high degree of complexity, ambiguity, and turbulence, managers quickly reach the point of information overload and errors of attribution and selective perception are likely to occur. Although there may be good noncognitive reasons for advocating more timely and broader information, increasing the rate and the range of information scanning does not alter the kinds of cognitive errors (Kiesler and Sproull, 1982). In reality, it may simply increase the opportunity for constructing illusory correlations, erroneous causal explanations or false analogies, given total cognitive limits on their information processing capacity. The results are somewhat consistent with Bhide's (1994 ) observation that entrepreneurs typically lack the time and resources to conduct extensive information search. In fact, he found that compared with typical corporate practice, successful entrepreneurs use a more timely, selective, and economic approach that represents a middle ground between planning paralysis and no planning at all (Bhide, 1994; 2000).

CONCLUSIONS AND FUTURE RESEARCH OPPORTUNITIES

This paper contributes to the SMEs' research in the following ways. First, it may sensitize SME managers and researchers to the role of cognitive limitation and selective perception played in SMEs' search behaviors. We found that SME managers are not equally receptive to all task environmental changes. Instead, their search behaviors are highly differentiated and very selective in face of turbulent task environments. Additionally, it was discovered that age does make a difference in SMEs' search activities. Young and mature SMEs exhibit different search behaviors in the face of a wide range of environmental turbulence.

In understanding SMEs' information search behavior, a model that integrates both a rational perspective and cognitive psychology theory is called for. Also, there are a variety of additional factors that should be considered in understanding the relationships between the environment of SME search behaviors, such as individual parameters and competitive strategy, and organizational structure and processes. Differences in SME decision makers' cognitive capabilities, predispositions, and inclinations, to a large extent may determine the choices and uses of sources. Which individual factors determine the entrepreneur's selection of information sources (Welsch and Young, 1982)? The dominant competitive strategy may determine the types of external stimuli to which SME manager may be responsive. Structural parameters such as formal and informal positions for scanning activities and the importance placed on these functions should be also incorporated when building a comprehensive model.

In dynamic business environments, strategies containing elements of learning theory will enhance long-term success. Both external and internal information search will help foresight (Karp, 2004). Organizational foresight will augment the organization's ability to envision the future and then actively shape the future. However, new information will very often be denied unless, through effective foresight, there exists a balance between the amount of threat (generated by a turbulent environment, we say) and enough psychological safety (Gavetti and Levinthal, 2000) to allow the change target (the business) to accept and disseminate the new data. Organizations that want to enrich their foresight abilities need to become learners, in order to expose themselves to different contexts (Karp, 2004). This study can be seen as a preliminary step towards the development of foresight abilities in small businesses. Future research is needed to understand the way companies craft strategies that contain elements of learning theory, particularly when operating in a turbulent environment.

Subject: Small & medium sized enterprises-SME; Organizational behavior; Data collection; Decision making; Regression analysis; Environmental scanning; Case studies

Location: United States--US

Classification: 9190: United States; 2500: Organizational behavior; 9520: Small business; 9130: Experiment/theoretical treatment

Publication title: Journal of Small Business Strategy

Volume: 19

Issue: 1

Pages: 15-31

Number of pages: 17

Publication year: 2008

Publication date: Spring/Summer 2008

Year: 2008

Publisher: Small Business Institute

Place of publication: Peoria

Country of publication: United States

Publication subject: Business And Economics--Small Business

ISSN: 10818510

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables References

ProQuest document ID: 201371539

Document URL: http://search.proquest.com/docview/201371539?accountid=38610

Copyright: Copyright Journal of Small Business Strategy (Bradley University) Spring 2008

Last updated: 2013-11-21

Database: ABI/INFORM Complete

Document 37 of 100

EMPLOYEE RETENTION IN GROWTH-ORIENTED ENTREPRENEURIAL FIRMS: AN EXPLORATORY STUDY

Author: Kemelgor, Bruce H; Meek, William R

ProQuest document link

Abstract:

This study uses a sample of 47 high-growth small firms to examine the understudied topic of employee retention. We found that firms reporting very low annual voluntary turnover (0-2%) rates engaged in creating a positive work environment, provided employees more freedom and flexibility, offered ample employee involvement and opportunities for growth; were clear about the processes associated with compensation and benefits, and frequently communicated with and provided assistance to their employees. Firms reporting turnover higher than 10% for the past year described their retention practices in much diminished frequency and richness along these same dimensions. Given that these firms were all part of a pool of 77 high growth small companies (over $1 million annual revenue, less than 12 years old and compound annual growth greater than 15%), retention of intellectual capital would be a prime issue. Industry differences among the companies are explored and theoretical and practical implications are discussed. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

A recent edition of Entrepreneur magazine stated that the retention of key employees is the biggest problem facing entrepreneurial companies (Entrepreneur, 2006). With today's increasingly competitive global economy, the retention of intellectual capital would appear to be a prime issue for entrepreneurial companies around the world, yet it remains understudied in both the Human Resource (HR) and entrepreneurship literature (Hayton, 2003; Hornsby and Kuratko, 2003). Cardon and Stevens (2004) suggest retention is the most overlooked factor in growth-oriented firms besides organizational culture. As scholars, we are beginning to understand how to hire, pay, and perhaps even motivate workers in small growth-oriented firms. However, there is little theory or data concerning issues of retention within evolving organizations. Thus, this study seeks answers to the research question: "What HR practices appear to have positive employee retention results among growth - oriented entrepreneurial firms?" This is important because, to date, very few studies look at factors influencing employee retention in entrepreneurial firms, although "few imperatives are more vital to the success of young companies than retaining key personnel" (Baron and Hannan, 2002; 21). Evolutionary economic theory (Nelson and Winter, 1982) and the accompanying work on strategic management of intellectual capital (Winter, 1998) provide a theoretical foundation for the importance of employee retention in young firms. Nelson and Winter's focal point is that organizations and accompanying organizational performance are simply a reflection of deeply engrained repertoires, norms, and routines. Winter further elaborates that these knowledge processes are the defining characteristics of an organization and these routines are a reflection of how an organization really functions and turns knowledge into organizational memory (Winter, 1998). Organizational memory within a new firm is developed from the constant repetition of activities within an organization and related codifications into rules and procedures that allow for the lessons of experience to be retained and accumulated over time in routines (Nelson and Winter, 1982). Thus, organizational memory and the accompanying routines are often the way in which knowledge is exercised in a firm. Yet, in small, fast - growing firms the organizational memory and routines may not be explicitly codified or recorded, but simply reside in the knowledge structures of the current employees. Therefore, these individuals are often the key resource for valuable ideas to bundle knowledge and resources to create incremental innovations (Ireland and Webb, 2007). Retaining these individuals is a key requirement for maintaining sustainable growth and remaining competitive. The potential loss of organizational memory through employee turnover is a major impediment for newer firms. While voluntary employee turnover is good for established firms because it disrupts the existing patterns of communication and brings new knowledge, it is bad for new firms because individual employees take knowledge with them that is not yet part of the norms and routines of the firm (Aldrich, 1999).

Scholarship focusing on the retention issue to which scant attention has been paid would shed light on what draws and keeps employees engaged as well as what drives their performance (Cardon and Stevens, 2004; Rutherford, Buller, and McMullen, 2003). Another important facet of this research study is its attention to some of the weaknesses of other retention studies. Heneman and Tansky (2002) suggest that simply extending existing retention models from large firms to small emerging firms would not be meaningful, since it has not worked well to extend other HR practices from large firms to small ones (Barber, Wesson, Roberson, and Taylor, 1999). Instead, we should develop HR theories such as those dealing with retention that are specific to small growth-oriented firms and their strategic practices (Heneman and Tansky, 2002). Further, we follow the suggestion of Heneman and Tansky (2003) to address gaps in the literature by conducting descriptive surveys of practices and developing new data sets that are designed to test specific hypotheses and theory. This article adds to the literature by specifically examining the frequency and extent of retention practices that high-growth entrepreneurial firms utilize.

In following the above prescriptions, it has been noted that in many small emerging firms, founders do not think about HR issues as distinctly different from other issues in the firm, but rather as a flow of interrelated activities that change and fluctuate over time that they deal with concerning their employees (Cardon and Stevens, 2004). We used the most widely used definition of small business - the one specified by the Small Business Administration (e.g., Peterson, Albaum, and Kozmetzky, 1996; Stewart, Watson, Carland, and Carland, 1999) - that generally classifies a firm as small if it has less than 500 employees. In applying the "muddle through" approach, many of these founders/managers probably stumble upon ways to manage and retain personnel that do not fit into our traditional notions about HR. Therefore, data should be gathered concerning what these founders/ managers are actually doing and the impact of those activities on employee retention. Aldrich (1999) points out that we know very little about how HR evolves in firms until those firms reach older stages of growth and have become medium or large in size. Looking at both informal as well as formal mechanisms through which small growthoriented firms manage employee retention issues while continuing to address growth, would provide a more practical and theoretical view focused upon such firms and how their retention practices develop.

Therefore, we first examine what we know about employee retention. Then we summarize relevant retention factors which lead to the creation of testable hypotheses. Finally, we report results and discuss implications for both theory and practice.

The Cost of Poor Employee Retention Practices

Several studies suggest that the total cost of voluntary employee turnover (i.e., voluntary quits) varies between 150% (Ramlall, 2003) to 250% (Henricks, 2006) of the employee's annual salary. This includes all of the recruitment and training costs, not to mention the public perception of the company, employee morale and productivity, and many other factors. Of course, the more talent a person brings to the company, the more expensive that person is to replace. This may be especially true for high growth entrepreneurial companies where intellectual capital is often the competitive advantage (Becker and Gerhart, 1996; Delaney and Huselid, 1996; Hayton, 2003). And the pressure to keep key employees is even greater for small companies because they usually can't offer the same amount of salary, benefits, or opportunities for advancement that are available in large companies (Henricks, 2006).

Losing even one key employee engenders far-reaching consequences and, at the extreme, may jeopardize efforts to attain organizational objectives. Small, growthoriented firms are especially vulnerable. Frazee (1996) reported on a study of 434 CEOs of fast growth companies and found that 47% said their lack of skilled workers was a barrier to their companies' growth. If we consider that entrepreneurial companies seek to grow and capture market share, employee retention becomes a critical human capital objective.

RETENTION FACTORS

Most employees come to expect salaries and benefits and are therefore not motivated by them (Henricks, 2006; Smither, 2003). Key elements in helping make any company a good place to work include: being treated fairly, flexible hours, opportunities for meaningful contributions, opportunities for growth and skill development, a positive work environment and culture, and frequent management feedback (Arthur, 2001; Dibble, 1999; Glanz, 2002; McKeown, 2002; Rye, 2002). The aforementioned elements thus provided the basis for the construction and development of our survey assessment instrument. As small, growth-oriented organizations evolve and pursue sustainability, many of these key elements appear relevant in providing an attractive work environment. However, Heneman and Tansky (2002) offer evidence suggesting that small firms have strategic human resource issues which are different than those of large firms. Small firms also cannot afford to have a separate human resource department or personnel exclusively devoted to addressing these issues (Cook, 1999), thus leaving responsibility to the owner or manager. Additionally, many small firms do not make explicit formal HR procedures (such as an employee handbook) that are often standard in large organizations (Aldrich and Langton, 1997). With so many challenges associated with managing the business to address, human resource issues are often pushed to the end of the priority list or do not appear there at all (MacMahon and Murphy, 1999). We now discuss each of these retention factors and their perceived importance to employee retention within small, growthoriented firms.

Positive Work Environment

This factor is associated with the organization's culture and practices of valuing employees as an asset, not a cost. Companies that actively promote a positive work environment, and who also value employee contributions while achieving a true work-life balance have been found to be more successful at communicating the idea that their employees are one of their most valuable resources (Hom and Kinicki, 2001; McGrath, 2006; Mitchell, Holtom, Lee, Sablynski, Erez, 2001). Others have suggested the aspects of the workplace as being enjoyable or fun, the organization being a special place to work, and the firm regarded as an employer of choice (Butler and Waldroop, 1999; Kristof, 1996; Saks and Ashforth, 1997). Taken together, these dynamics, if positive, portray a workplace that values its people and their talents. This leads us to the following hypothesis:

H1: Companies that display greater characteristics of a positive work environment will have higher employee retention than companies that display fewer characteristics of a positive work environment.

Freedom & Flexibility

In growth-oriented entrepreneurial firms, there is a high dependence upon most employees to be multi-skilled and exhibit some flexibility in both skills and scheduling. Thus, in the recruitment of these employees it becomes necessary to present a realistic job preview that addresses many of the roles they will be expected to fulfill and the level of freedom they will have in conducting these roles. Most people seeking to work in a start-up or small entrepreneurial firm are often attracted to it for these varied role opportunities (Kickul, 2001). In addition, providing opportunities for employees to showcase special talents by working on interesting or meaningful projects is often seen as an essential attraction that small firms can provide (Mitchell et al, 2001). This leads us to the second hypothesis:

H2: Companies that offer higher levels of flexibility and freedom will have higher levels of employee retention than companies that offer lower levels of employee flexibility and freedom.

Employee Communication & Assistance

Apparently, one of the most important factors associated with employee commitment to a firm is the extent to which clear and frequent performance feedback is provided. High performing employees are especially interested in receiving frequent, specific feedback (Prewitt, 1999; Smither, 1999). Recent research on employee commitment and the likelihood of staying with the firm indicate a strong positive relationship (Kickul, 2001; Payne and Huffman, 2005). In an entrepreneurial firm, it is likely that the environment is marked by turbulence and changing objectives (Hayton, 2003). Thus, it seems logical to assume that a need exists for clear communication of expectations along with frequent feedback. Finally, adequate help and support to complete job assignments have consistently been cited as important to job satisfaction. This leads us to the next hypothesis:

H3: Companies that provide frequent feedback and clear expectations will have higher levels of employee retention than companies that provide infrequent feedback and unclear expectations.

Employee Involvement & Growth

One of the frequently cited reasons for working in a large company is the clear path for career advancement and growth. Smaller, entrepreneurial companies simply lack varied career ladders. Employees seek to enhance their skills and increase their earning potential, whether the firm is large or small. If the entrepreneurial firm can provide such things as training, mentoring relative to career goals, and growth through employee empowerment the likelihood of their employees remaining loyal is significantly increased (Delaney and Huselid, 1996; Payne and Huffman, 2005). Loyalty, or organizational commitment, is the relative strength of the individual's identification with and involvement in a particular organization (Mak and Sockel, 2001). Individuals exhibiting loyalty are not prone to leave (Mitchell et al, 2001). One aspect of enhancing loyalty is providing the employees a stake in decision-making and the freedom to communicate throughout the organization. Additionally, some people are now setting career paths based on their own values and definitions of success, thus redesigning how they contribute to their prospective organizations on their own terms (McGrath, 2006). This leads us to the fourth hypothesis:

H4: Companies that offer greater options for employee involvement and growth will have higher levels of employee retention than companies that offer lower or fewer options for employee involvement and growth.

Compensation & Benefits

A recent article in Harvard Business Review discussed the findings of two nationwide studies. The results indicate that of numerous factors associated with keeping good employees, pay was the least significant factor - money is not a prime motivator (Prewitt, 1999). This is not to suggest that pay, or good benefits are not important - they are. It is just that good pay and benefits are expected and are readily available in our society (Prewitt, 1999). What seems more important than pay or benefits, per se, is awareness of how such rewards are calculated or determined (Mulvey, LeBlanc, Heneman, and McInerney, 2002). Knowledge about compensation and benefit options impact retention. In particular, employees are more likely to remain with an organization when the rewards and actions necessary to earn rewards are well understood (Mitchell et al, 2001; Mulvey et al, 2002). Aside from pay, benefits have become an even more critical factor for retaining good employees (Henricks, 2006), especially for smaller firms. We could envision a scenario where the small, growthoriented company is sacrificing the costs of benefits that match larger employers and taking the savings to reinvest in growth. This is where stock options frequently are applied in entrepreneurial firms. Imposing a traditional incentive program in an entrepreneurial venture may be the easiest thing to do, but the challenges inherent in working in a start-up or fast growth firm imply a new relational contract. In a new, growth oriented firm, traditional models (of compensation and rewards) are not embedded in a company history. Thus, the possibility exists that alternative views of what is fair and equitable in that context can emerge. This leads to the final hypothesis:

H5: Companies that offer well-defined and varied compensation and benefits programs will have higher levels of employee retention than companies with unclear procedures or limited options regarding compensation and benefits.

METHODOLOGY

Sample

The local Chamber of Commerce of a Midwestern (U.S.) city of just over one million people provides support and mentoring for small firms they have identified as fast-growth. Presently, 77 such firms are part of this portfolio. The firms range in age from just over 18 months to 12 years, with the vast majority between 4 and 8 years in business. These firms have exhibited compound growth rates of at least 15% annually and at least $1 million in revenue each year. Sample firms were contacted using a multiple method format. A presentation was given at a meeting comprised of founders/CEOs of the fast growth firms announcing the launch of the retention study. The firms were then sent an e-mail inviting participation together with a link to an on-line survey instrument. Following Dillman's (2000) multiple contact approach, all firms were contacted by e-mail after two weeks and asked to participate if the survey had not been completed. After 1 month, firms were then called and the founder/CEO reminded to complete the survey if they had not already done so. Of the 77 companies that were invited to participate, 47 completed the web-based survey, resulting in a response rate of 61%. In almost all cases, company founders or one of the founding team members completed the survey instrument. In the few remaining cases, a CEO who was hired to manage the firm responded to our request.

Based upon the self-report of describing their company in 10 words or less, various industry profiles emerged among these fastgrowth companies. Using just the brief descriptions, two senior members of the Chamber of Commerce who had working knowledge of the companies helped the authors sort the responses into industry groups. The five resultant groups are (number of firms in parenthesis): manufacturing (11); biomedical (8); information technology (12); consulting and related services (9); and service (7).

Research Instrument

The survey instrument was designed after conducting relevant literature reviews and an assessment of some existing instruments (e.g., Arthur, 2001; Dibble, 1999; Glanz, 2002). Additional input was derived by holding interviews with three top executives of a world-wide human resource consulting firm. The 21 survey items plus five additional firm-specific items (age of firm, size of firm, years in operation, respondent's position with the firm, and specification as to the voluntary turnover during the past 12 months) were then compiled and a follow-up evaluation was held through a pilot test of 14 firms owners. The results of this pilot test indicated the items measure the concepts they are intended to measure. Additionally, although none of the previous survey instruments (Arthur, 2001; Dibble, 1999; Glanz, 2002) reported reliability measures, we found reliability levels that were all quite acceptable. The factor we labeled positive work environment had a Cronbach's alpha of .83. The employee freedom and flexibility factor and the employee involvement and growth factors each displayed a Cronbach's alpha of .72 while the employee communication and assistance factor indicated a Cronbach's alpha of .73. Finally, because the compensation and benefits factor included only two items, a measure of reliability was not possible. However, the correlation between the two items (.62) was significant at the .01 level, suggesting a strong relationship between these two items. The 21 survey items were measured using a Likert scale from 1 (not at all), 2 (slightly), 3 (somewhat), 4 (quite a bit), and 5 (significantly).

RESULTS

An analysis of the 47 companies revealed the following information. Thirteen firms exhibited the highest levels of employee retention (lowest turnover) at 0 to 2% annual employee turnover. Another six firms displayed turnover rates of 3-5% annually. Eight firms displayed turnover rates from 6-8% annually. Six firms displayed annual turnover rates of 9-10% and thirteen firms displayed turnover rates greater than 10% annually (the lowest level of retention in our survey). Based on this distribution we chose to compare the 13 companies with the highest retention rate to the 13 companies with the lowest retention rate to determine if significant differences exist between the two groups' retention practices.

T- tests were used to measure whether there was a significant difference between the very high retention group and the very low retention group. T-tests are a useful tool for understanding whether a difference exists between two groups in social science research. Table 1 provides the t-values and significance levels of all the variables compared in our study. These variables include questions from each of the clusters in our study: creation of a positive work environment, employee freedom and flexibility, employee involvement and growth, employe e communi c a t ion/ assistance, and employee compensation and benefits. A total of 21 items comprise this data pool. Five additional items were openended responses, seeking input relative to specific employee practices (e.g., how does the company demonstrate it trusts its employees?).

An examination of the t-tests shows that all values are greater than the required score of 1.96 in order to be significant at the .05 alpha level. A closer look shows that all of the variables are significant at the .001 level as well.

The first hypothesis (H1) predicted a higher level of employee retention for firms that create a more positive work environment. This hypothesis was supported. The six items reflecting a positive work environment were all significant. These items and their associated significance levels and t-scores are presented in Table 1. This implies that there are statistically significant differences in the practices associated with positive work environments in the high retention companies versus the practices in low retention companies.

Hypothesis 2 predicted a higher level of employee retention for firms that offer higher levels of employee flexibility and freedom. This hypothesis was supported. The five items reflecting the level of employee flexibility and freedom were all significant. These items and their associated significance levels and t-scores are presented in Table 1. This implies that there are statistically significant differences in the extent of employee flexibility and freedom in the high retention companies versus the low retention companies.

Hypothesis 3 predicted a higher level of employee retention for firms that offer more frequent performance feedback and clear expectations. This hypothesis was supported. The three items reflecting the level of performance management/feedback were all significant. These items and their associated significance levels and t-scores are presented in Table 1. This implies that there are statistically significant differences in the practice of performance management and frequency of feedback in the high retention companies versus the low retention companies.

Hypothesis 4 predicted a higher level of employee retention for firms that offer options for employee involvement and growth. This hypothesis was supported. The five items reflecting the level of employee involvement and growth were all significant. These items and their associated significance levels and t-scores are presented in Table 1. This implies that there are statistically significant differences in employee involvement and growth in the high retention companies versus the low retention companies.

Hypothesis 5 predicted a higher level of employee retention for firms that offer well defined and varied employee compensation and benefits programs. This hypothesis was also supported. The two items reflecting well-defined and varied programs regarding employee compensation and benefits were all significant. These items and their associated significance levels and t-scores are presented in Table 1. This implies that there are statistically significant differences in the level of knowledge about and quality of the employee compensation and benefits in the high retention companies versus the low retention companies. This category also included two items that asked for openended responses regarding benefits and perks that are part of the company's practices. Analysis is currently underway to examine specific activities and their effect upon retention within this sample.

Industry Differences

Table 2 shows the differences in turnover rates among industries. In analyzing the 47 firms, the authors refrained from making conclusions about industry differences because the sample size for each industry is small. Once the authors have gained a substantial number of firms in each industry, positing some potential explanations for industry differences should be feasible. However, we felt it was necessary to briefly discuss the numbers in each industry, including the unemployment rate, to provide some initial clues about the nature of the local industry. The unemployment rate for the entire Metropolitan Statistical Area (MSA) at the time of this study was 5.2%. This was slightly higher than the national unemployment rate of 4.5% at the time. With eleven firms out of 47 in the sample, manufacturing accounted for 23.4% of the total respondents. This industry also had the highest rate of unemployment in our sample at 8.67%. Eight of the 47 firms, or 17.02% in the sample, were in the biomedical research industry. The local unemployment rate in the biotech industry in the MSA was 1.36%, the lowest of all the industries in our sample. The sample also included 12 firms in the Information Technology (IT) industry, representing 25.53% of the sample. Unemployment rate in the IT industry was 3.16%. The consulting and related services industry accounted for nine of the 47 firms or 19.15% of the sample. The unemployment rate in the IT industry was 2.88%. The service industry accounted for seven of the 47 firms in the sample (14.59%) and had an unemployment rate of 4.24%.

DISCUSSION

The purpose of this study was to better understand employee retention practices in high-growth entrepreneurial firms. The key research question was - "What HR practices appear to have positive employee retention results among growth - oriented entrepreneurial firms?"

Our sample provided a useful group of companies to begin exploring answers to this question. Because significant differences between the high retention and low retention groups were found for every single variable used in this study, we can infer that the high retention companies do a better job of promoting a positive work environment, providing employee flexibility and freedom, giving feedback about performance and expectations, ensuring employees understand the compensation process, and providing career development guidance. The results of this study suggest that the companies with the highest level of employee retention use certain employee retention practices to a greater extent than firms with the lowest levels of employee retention.

Implications for Research

This study used evolutionary economic theory and the associated work on the strategic management of intellectual capital to build support for the differential effect that using certain practices has on employee retention in growth-oriented entrepreneurial firms. Because support was advanced from this study that increased use of specific human resource practices to have a positive effect on the employee retention levels of growth-oriented firms, the field of human resources and entrepreneurship have moved one more step forward in deciphering the effects of one upon the other.

There are additional insights to be obtained from this data. First, one might argue that some of the variables suggest that companies achieving a good work-life balance for their employees are reaping the rewards in terms of high retention. Hom and Kinicki (2001) report on several studies that reinforce the importance of this issue upon retention. For example, they report that job interference with off-the-job roles activated withdrawal cognitions (Hom and Kinicki, 2001). At least one of the survey questions used in this study implicitly addresses this issue. Contained within the responses, yet not reported here, is an open-ended option asking respondents to describe various ways the companies embrace work-time flexibility. Our item regarding flexible work schedules embraces this as well and the results indicate there is a statistical difference between high retention and low retention firms in this regard.

A second issue to address concerns the role that changes in culture and structure within young firms have upon voluntary separation. Baron, Hannan, and Burton (2001) report that changes in the employment models or blueprints embraced by organizational leaders increase turnover, which in turn affects subsequent performance. It would be interesting to examine how many of these firms have undergone major structural or cultural changes recently, including those encompassing leadership at the top, to discover whether they reside in the high retention or low retention group.

Implications for Practice

The practical implications of this study include the idea that firms who seek to retain their employees need to increase the extent to which they apply the practices outlined in Table 1. This is possible, as witnessed by the much higher annual employee retention rates of the firms in the highest retention group versus the lowest retention group in this sample. It may be possible for growthoriented firms to increase their retention rates by ensuring that their employees are given the tools, guidance, and feedback necessary to work towards company goals. At the same time, employees need to be given the flexibility and freedom to showcase their special talents, work on projects that are interesting to them, and be allowed to work toward their own personal career goals. If employees are given this freedom, they will know that the firm they are working for is a special company. Consequently, the firm's reputation as an employer of choice will improve and it may become easier for the firm to hire additional high quality employees to fuel their growth. Also, by decreasing turnover, companies can avoid the excessive costs that correspond with recruitment and training.

Significant implications for growth-oriented firms include these practices reinforcing the strategic implications of individual risk taking and experimentation, employee commitment, shared ownership, communication and learning - all especially important for firms operating in uncertain or dynamic markets (Hayton, 2003). Part of the strategic controls necessary within such firms embrace risks and potential trade-offs (Hayton, 2003), furthering the creation of a true learning organization. As knowledge becomes transferred throughout the organization, the discretionary initiatives and innovative culture essential for growthoriented firms becomes strategically embedded. Hayton (2003) found that investments in employees are an important success factor for firms seeking to promote innovation and entrepreneurship. We believe that our data further proves the importance of certain practices relating to human capital as being necessary investments by the firm's management to encourage knowledge creation and exchange.

By employing these sound retention practices, firms can avoid the turbulence associated with lowered employee morale and productivity. Additionally, aside from the internal firm dynamics, the public perception of a company with low turnover is less likely to be damaged by dissatisfied former employees. As suggested by evolutionary economic theory (Nelson and Winter, 1982) and research on the strategic management of intellectual capital (Winter, 1998), perhaps the most important aspect for high growth entrepreneurial companies is not only the retention of human capital but also the retention of highly valuable intellectual capital, which is often the competitive advantage.

Limitations and Future Research Directions

We would be remiss if we did not acknowledge the study's shortcomings. The sample only tracked responses from high growth companies in one Midwestern city with a population of approximately one million people. Thus, our sample is not a representative sample of the general population of growth-oriented firms and our generalizability is limited. Additionally, although the sample was well-defined and had a very high response rate, a larger sample size could increase the statistical power of our study. Our future research will include a larger sample size from a more diverse geographic area. As an extension of this study, we plan to obtain responses regarding these retention practices from the employees of a sampling of firms used in this study.

Although the respondents were anonymous, we plan to seek voluntary association with a follow-up study that will provide each firm, data specific to it generated by its employees. The data, collectively, will be used for the follow-up macro-level research. This could help us better understand whether perceptions of HR practices are the same between management and employees, and would provide a more accurate description of whether or not the founders/CEOs were engaged in self-report bias while completing the survey. We could also collect longitudinal data from these same firms to determine whether changes in their retention practices continue to have an impact on their annual retention rate over time. Finally, an interesting comparative study would be between firms that have both a domestic and an international location, and the extent to which firm-specific practices affect retention practices across cultures.

Subject: Small business; Retention; Work environment; Intellectual capital; Employment practices; Case studies

Location: United States--US

Classification: 9190: United States; 6100: Human resource planning; 9520: Small business; 9130: Experiment/theoretical treatment

Publication title: Journal of Small Business Strategy

Volume: 19

Issue: 1

Pages: 74-86

Number of pages: 13

Publication year: 2008

Publication date: Spring/Summer 2008

Year: 2008

Publisher: Small Business Institute

Place of publication: Peoria

Country of publication: United States

Publication subject: Business And Economics--Small Business

ISSN: 10818510

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables Charts References

ProQuest document ID: 201382104

Document URL: http://search.proquest.com/docview/201382104?accountid=38610

Copyright: Copyright Journal of Small Business Strategy (Bradley University) Spring 2008

Last updated: 2013-11-21

Database: ABI/INFORM Complete

Document 38 of 100

GELATO NATURAL S.A.

Author: Smith, D K (Skip); Aimar, Carlos; Davalli, Ariel Gustavo; Barbero, Rafael

ProQuest document link

Abstract:

Ariel Davalli is the Vice President of Gelato Natural S.A., a company which (at the time of the case) was selling Chungo (it's high-quality homemade ice cream) from several locations in the northern suburbs of Buenos Aires, Argentina. Based on high demand for its products from individual consumers living in the northern suburbs, the company invested $2,000,000 U.S. dollars to significantly increase the capacity of its factory. This $2,000,000 expansion was funded by borrowing $750,000 U.S. dollars (the loan comes due in four years) and by shifting the localcurrency equivalent of $1,250,000 of working capital into fixed assets. Unfortunately, just as the expanded factory started production, the economic environment in Argentina deteriorated significantly. In addition, the exchange rate of the peso with the U.S. dollar fell from 1-to-1 (at the time of the loan) to 3-to-1. Currently, demand for Chungo is stagnating, and the new factory is operating at only 30% of capacity. Additional data and information in the case include: 1. For Argentina: Historical overview, a sample of recent statistics from the World Bank, and (for benchmarking purposes), comparable statistics for the United States. 2. On the company: Historical overview, current performance, and numerous factors impacting that performance. 3. Characteristics of the company's current strategy, including descriptive information on the product line, characteristics of the distribution system, information on the promotion and pricing strategies the company is currently using, etc. 4. Characteristics of the current competitive situation. 5. Detailed data on the attitudes and behaviors of buyers of homemade ice cream in Argentina. [PUBLICATION ABSTRACT]

Full text:

THE SITUATION

Looking at the figures for Gelato Natural S.A.'s most recently-completed month, Ariel Davalli was stunned by how quickly the performance of and prospects for his company had changed. Several months ago, demand for Gelato Natural S.A.'s homemade ice cream had been so strong that the company had borrowed US$750,000 (repayable in four years, in US dollars) and tied up the local currency (pesos) equivalent of US$1,250,000 in working capital to finance an overall US$2,000,000 program to double the capacity of their ice cream factory. The purpose of this expansion was to ensure that the factory would be able to keep up with demand from its customers living in the northern suburbs of Buenos Aires, Argentina. During the time when the new factory was under construction, however, Argentina defaulted on its overseas debt (i.e., the country declared bankruptcy), and demand for Gelato Natural S.A.'s "Chungo" brand homemade ice cream fell dramatically. Looking again at the figures, Davalli saw that utilization of the expanded new factory was currently 30% of capacity. Because the value of the peso had now fallen from "one peso = one dollar" to "three pesos = one dollar," the amount of revenue and profit (in pesos) needed to repay the US$750,000 loan had tripled. "Unless we figure out a way to dramatically increase revenues and profits," Davalli thought to himself, "this company will follow Argentina into bankruptcy."

THE COUNTRY

At 2.78 million square kilometers (larger than India, approximately 1/3 as large as Brazil), Argentina is South America's second largest country. The country is 3,500 kilometers long (2,170 miles), and 1,400 kilometers (868 miles) wide at its widest point. While the climate ranges from tropical in the north to sub-antarctic in the far south, most of Argentina lies in the temperate zone. Similarly, while the landscapes range from jungles to glaciers, a significant portion of Argentina consists of fertile alluvial plains covered in grasses and known as "pampas." In the west (that is, in the rain-shadow created by the Andes mountains), these grasslands are quite dry. In eastern Argentina, however, the pampa receives adequate rainfall, is one of the best agricultural areas in the world, and is intensively farmed (soybeans, plus wheat, corn, sunflower and other grains) and ranched. Other parts of the country support a wide variety of additional agricultural activities, including the growing of fruits (including grapes for wine), tobacco, sugar cane, and vegetables. Patagonia (the southern quarter of the country) has a cool, wet climate, and supports some agriculture plus a large sheep-raising industry. Given all the above, it is no surprise that the production and processing of agricultural commodities accounts for a substantial portion of total economic activity in Argentina.

Institutionally, Argentina is composed of 23 provinces and the Buenos Aires Federal District. Since 1995, the president and vice-president are elected for 4-year terms and can be re-elected once. The bicameral national congress has 72 senators (three from each of the above areas) serving 6 year terms. The lower house has 257 deputies, proportionately elected and serving 4 year terms. Because greater Buenos Aires makes up more than 40% of Argentina's total population, the city's influence on the lower house is very large. There is a federal judiciary system, and a nine-person supreme court.

In addition to the federal institutions, there are provincial institutions. In Argentina, each province has a governor, a legislature, and a judicial system. Across the country, the major political parties are the Justicialist Party (Peronists), the Radical Civic Union (UCR), the ARI Party (Alternative for a Republic of Equals); and the Federal Recreate Movement (RECREAR).

THE PEOPLE

Prior to the arrival of the first Europeans, the area which has become Argentina was lightly populated. Starting in 1506 and continuing for the next 300 years, most of the immigrants coming to Argentina were Spanish. While African slaves were brought to Argentina in the 17th and 18th centuries, they were very susceptible to a variety of problems which disproportionately impacted the poor (wars, yellow fever and other epidemics, terrible living conditions for the poorest members of society, etc.), and relatively few of them survived. Beginning in the late 19th century and continuing on through the first third of the 20th, 3.5 million new immigrants arrived in Argentina, mostly from Spain and Italy. However, many other nationalities are represented in Argentina's millennium population of just over 37 million people, including the Welsh (primarily in Patagonia), the British, the French, the German, the Swiss, various Eastern Europeans, and Chileans. Indian peoples make up about 15% of the population. Ninety-three percent of the population is Catholic, 2% is Jewish, and 2% Protestant; yet, at 1%, Argentina has one of South America's lowest population growth rates. A few additional statistical characteristics of Argentine and its people, together with (for benchmarking purposes) comparable figures for the United States can be mentioned:

THE ECONOMY

With a Gross Domestic Product (GDP) of 483 billion dollars and its population of only 37 million, Argentina has a GDP per capita of approximately US$12,500. Historically, a very substantial portion of this economic activity has been based on agriculture and/or ranching plus related (for example, food and/or meat processing) activities. By the year 2004, however, 53% of Argentina's GNP was service s-related, 36% was industry-related (food processing [including meatpacking, flour milling, and canning] is the largest industry), and only 11% was directly accounted for by agriculture. International trade in goods accounts for 18% of GDP; this figure is approximately evenly split between imports and exports. Major exports include soybeans, wheat, corn, flax, oats, beef, mutton, hides, and wool. Principal imports include machinery, metals, and other manufactured goods. The chief trading partners are the United States, Brazil, Italy, and other European countries.

One might think that a country so richly endowed in natural and human resources should be extremely prosperous. However, in 2002, Argentina was unable to meet its debt obligations. The debt and debt service levels for Argentina in 2000 suggest the magnitude of the problem Argentina faced; those figures were as indicated below:

THE COMPANY

Gelato Natural S.A. was founded in 1973 by Ariel's father, Enrique Jorge Davalli. The sole activity of the company at this time was the manufacture and sale of a small selection of high-quality homemade ice cream flavors from one location (Av. San Isidro 4598, Nunez) in a northern suburb of Buenos Aires. These ice creams were sold under the brand name "Chungo."

Since its inception, the primary target market for Chungo has been families and individuals falling in the "ABC1" categories. Characteristics of these purchasers include: High levels of purchasing power, culturally sophisticated, buyers interested in innovative flavors and quality products, people interested in recreation and pleasant moments, families who want to enjoy ice cream in a very comfortable store, families accustomed to having ice-cream (as a dessert) at home, sophisticated customers who make decisions in terms of new sensations (flavors, names, innovative combinations), etc. In Argentina, 80% of consumers classified in the ABC1 category live in Buenos Aires.

Since the company ' s beginning in 1973, the product offered by Gelato Natural S.A. has been very consistent: a top-quality homemade ice cream. Over the years, the only changes in the product line have been the addition (from time to time) of new flavors of ice cream. Some of the new flavors developed over the years include: Dulce de Leche Bombom, Malaga al Rhum, Quinotos al Whisky, Super Sambayon con Almendras, Tiramisu, Tramontana, Yema Quemada, Trisapore, Spaghetti Pasta, Mascarpone con Frutos del Bosque, Gianduia, Manzana, Melon, and so on. In any case, Gelato Natural S.A. started out making (and continues to make) one and only one high quality homemade ice cream. However, over the years, a number of different changes have been made to other aspects of the business, including the following:

1979: The appearance of the store and the brand image were both revised. Changes made at this time included: (1) Remodeling of the building and the equipment, plus replacement of the original Formica furniture with stainless steel; and 2) White uniforms became mandatory for all workers.

1986: The building next to the store was purchased, and both the existing store and the new property were remodeled. Most of the changes in layout were in the manufacturing area.

1989: Ariel joined his father in working for Gelato Natural S.A., first as assistant manager and later as business store manager.

1990: The old building was torn down, and replaced by a new building with a retail store in the front and a production room in the back. A second retail store was opened in Belgrano, at Olleros 1660.

1993: The company opened another retail store in Belgrano, at Virrey del Pino 2500.

1993: After four years as business store manager, Ariel became Vice President of Gelato Natural S. A.

1994: Construction of the US$2,000,000 new factory began in the area of Nunez. A 1000 square meter piece of land was acquired with the purpose of building a fully-equipped plant with the latest technology.

1996: The company opened its new manufacturing plant facilities. Also, two additional stores were opened in the northern district: (1) Belgrano, at the intersection of Cabildo Avenue and Olazabal Street; and (2) Palermo, at the intersection of Avenue Bullrich and Libertador.

By the end of 1996, in other words, Chungo was selling its homemade ice creams from five different locations (San Isidro - Olleros - Virrey del Pino - Cabildo - Palermo), all of which were located in the northern suburbs of Buenos Aires.

Over the years, the prices of various forms of ice cream in Argentina have increased considerably. However, the relationship between the price of ice cream from big factories (i.e., industrial ice cream) and the price of homemade ice cream like Chungo has remained fairly constant. Usually, homemade ice creams sell for a bit more than twice as much per liter as industrial ice creams.

Historically, Chungo has not utilized a lot of radio, television, and/or print advertising. Much of the advertising is by word of mouth, that is, satisfied customers sharing their experiences and reactions with friends and neighbors. The promotional tool which Chungo does attempt to use intensively is publicity, that is, reports by newspapers and/or television or radio on various aspects of its business (for example, the opening of a new shop, the introduction of new flavors and the naming of these flavors for family members, etc.). Chungo does print small promotional flyers listing phone numbers and flavors which customers can pick up at the shop and take home with them. Chungo has introduced a continuity program (the Fildelization Customer Card), to reward faithful customers for their multiple purchases. Chungo also has special promotions for frequent customers; an example would be giving birthday gifts to loyal customers. Finally, Chungo does get involved in helping sponsor cultural events organized with neighborhood association/institutions.

THE ICE CREAM INDUSTRY INARGENTINA

There are many manufactures of ice cream in Argentina. However, all manufacturers fall into one of two categories: (1) Producers of industrial ice cream; or (2) Producers of homemade ice cream. Differences between these two product categories can be illustrated by comparing Chungo to industrial ice cream. The batch size for an industrial producer of ice cream is approximately 1000 liters, and a batch can be produced in about one hour. Because a lot of air is blown into industrial ice cream, one liter weights approximately half a kilogram. For Chungo, on the other hand, batch sizes are 120 liters, producing one batch takes a couple of hours, and (because no air is blown into the ice cream) each liter of Chungo weighs 50% more than a liter of industrial ice cream. Prices for industrial ice cream are in the range of 10-12 pesos per liter, while prices for homemade ice creams are in the range of 24-28 pesos per liter.

Ice cream is very popular in Argentina, especially in the summer (that is, December-March). In the winter, however (that is, June through September), demand for ice cream usually falls dramatically (i.e., by nearly 50%). While this does not create big problems for large diversified retailers (other products which do sell well in winter will offset the decline in purchases of summer products like ice cream), it does create problems for companies like Gelato Natural S.A., where ice cream is the only product. Ariel Davalli would be very interested in adding a few products which would sell well in the winter and therefore offset the seasonal nature of the ice cream business and the revenues it generates. Another reason for his interest in adding products besides ice cream is that per capita consumption of ice cream in Argentina (3.5- 4 liters per year) is lower than per capita consumption of ice cream in some neighboring countries (per capita consumption of ice cream in Chile is six liters per year).

CONSUMERS IN ARGENTINA AND THEIR BEHAVIORS

Shopping behaviors of consumers in Argentina are somewhat different than the behaviors of consumers in the United States. In the U.S., consumers are likely to go to a Wal-Mart or a large supermarket and do one big shopping trip each weekend. During that trip, consumers will buy not only frozen and canned goods plus other packaged goods, but also fresh goods like bread, fruit, and vegetables. In Argentina, on the other hand, while consumers may make a large shopping trip to a large shopping center or supermarket on the weekend for frozen and/or canned and packaged goods, they are likely to buy fresh products (bread, fruit, vegetables, etc.) every day from small shops located in their immediate neighborhood.

As regards ice cream, shopping behaviors of customers in Argentina also differ somewhat from those of customers in the U.S. In the U.S., a very large portion of all ice cream purchased (both industrial quality ice cream as well as upmarket brands such as Hagen-Das, Ben & Jerry's, etc.) is sold in bulk packages (for industrial ice cream) or pints/quarts/half-gallons (premium brands) through supermarkets. In Argentina, however, consumers purchase ice cream in three separate ways: (1) Impulse purchases of bulk containers of industrial ice cream at supermarkets and of small containers of homemade ice cream in supermarkets, gas stations, movie theaters, etc.; (2) Destination store purchases, where the individual drives or walks to an ice cream outlet and then enjoys ice cream there (in cones or cups) with friends and/or family; and (3) Home delivery, where customers finish up dinner and then (for dessert) call their local ice cream store and place orders to be delivered (by motorcycle) to their house. By volume, the amounts of ice cream purchased by consumers in Argentina these three ways are approximately 55%, 30%, and 15%, respectively.

THE COMPETITION

As indicated earlier, ice cream products in Argentina fall into one of two categories: (1) Industrial ice cream; and (2) Homemade ice cream. Supermarkets are full of industrial ice creams; however, those products are not serious competitors for homemade ice creams like Chungo. Chungo's most serious competitors fall into two categories: (1) Local homemade ice creams like Chungo; and (2) High-quality imported ice creams like Hagen-Das.

Chungo's primary local-brand competitors include brands such as "Freddo," "Munchis," "Volta," and "Persico." Like Chungo, these local competitors offer very high-quality homemade ice creams in a variety of flavors, from small shops located in the upmarket suburbs of Buenos Aires. Prices for these brands are very similar to the prices charged by Chungo. As for preferences, some consumers have a preference for the flavors offered by one brand or the other, but basically, all of these ice creams are quite similar and very delicious. Like Chungo, all of these local competitors do offer home delivery (by motorcycle), for customers living close to a shop who call in their orders.

The case of Hagen-Das in Argentina is different. Prior to the economic downturn in Argentina, Hagen-Das ice creams were imported from France. After the peso lost two-thirds of its value, the cost of importing from France was too high, and General Mills (the U.S. multinational company which owns Hagen-Das) stopped selling ice cream in Argentina. Rumors indicate, however, that General Mills is eager to begin manufacturing ice cream in Argentina and/or Brazil. If General Mills does this, it is very likely that they would re-introduce Hagen-Das and sell their ice cream in Argentina using that brand.

THE CHALLENGE

Assume you are Ariel Davalli. How will you "dramatically increase" revenues and profits, so as to ensure that Gelato Natural S.A. does not follow Argentina into bankruptcy?

Subject: Case studies; Ice cream; Business growth; Factories; Dairy industry

Location: Argentina

Company / organization: Name: Gelato Natural SA; NAICS: 311520

Classification: 9173: Latin America; 8610: Food processing industry; 9110: Company specific; 8400: Agriculture industry

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 3

Pages: 1-8

Number of pages: 8

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216277146

Document URL: http://search.proquest.com/docview/216277146?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 39 of 100

BAHAMASAIR: The Airline of The Bahamas Ponders Privatization

Author: Rarick, Charles A, PhD; Nickerson, Inge, DBA

ProQuest document link

Abstract:

Suffering from a number of internal and external problems, Bahamasair, the national airline of The Bahamas is being considered for privatization. Proponents of privatization argue that such a move will make the airline more efficient, profitable, and customer-focused. Opponents of privatization feel that relying solely on private airlines is too risky an approach for a country that is dependent on tourism for much of its national income. With mounting losses the government of the Bahamas is under increasing pressure to make a decision concerning the national airline. [PUBLICATION ABSTRACT]

Full text:

Introduction

The Commonwealth of the Bahamas is an independent country comprised of over 700 islands off the southeastern coast of the United States. When Columbus first arrived in the New World he landed on a small island that he named San Salvador, an island in present day Bahamas. He claimed the island for Spain and eventually the rest of the islands came under Spanish control. When pirates such as Black Beard and Calico Jack began using the Bahamian islands to raid British trading vessels, the British appointed a governor to rid the Bahamas of pirates and to claim the territory for England. When the British lost the American War of Independence, a number of British colonists immigrated to the Bahamas along with their slaves. Spain finally ceded the Bahamas to Great Britain in 1783. Prohibition in the United States provided an economic boom to the Bahamas as the islands became a source of illegal alcohol. World War II also helped with the economic development of the islands as the British built up the infrastructure of the country to use as pilot training and a strategic base for anti-submarine warfare. This infrastructure helped the Bahamas develop its successful tourism industry. Although The Bahamas gained its independence from Great Britain in 1973, the British monarchy is still recognized as its head of state. With a thriving tourism industry, and as a center for offshore business and banking, The Bahamas has managed to develop its economy well beyond that typically found in the other island states of the region.

Tourism in The Bahamas

Although not technically located in the Caribbean, the Bahamas is viewed as a Caribbean tourist destination. The islands of The Bahamas are located in the Atlantic Ocean, close to the Florida coast and within easy reach either by sea or air. Air travel has been a popular means for tourists to travel to The Bahamas; however, increasingly tourists are arriving in The Bahamas by cruise ship. With a population of just 317,000, The Bahamas benefits greatly from this tourism. Over 5 million visitors per year, the vast majority from the United States, are attracted to the islands for shopping, beaches, water sports, and the attractions offered by the luxurious hotels such as Atlantis in Nassau. The Bahamas offers visitors parasailing, diving, snorkeling, historical tours, Caribbean dining, and much sunshine. Most tourists visit the capital, Nassau, or the other major city, Freeport. The tourism industry employs about 50% of the Bahamian workforce and contributes approximately 40% of the country's GDP. Currently, tourists spend over $2 billion a year in The Bahamas. Tourism is expected to increase in the coming years as resorts such as Atlantis expands and new mega-resorts, such as those planned in Nassau's popular Cable Beach, become operational. The government of The Bahamas is planning to develop the outer islands to attract even more tourists. The outer islands offer a slower-paced vacation and are of special interest to some tourists.

The Bahamas does face stiff competition for Caribbean tourist dollars as tourist opt for sometimes more trendy destinations such as Barbados, St. Kitts, or the Turks and Caicos Islands. The Bahamas has remained a popular tourist destination despite this increasing competition. One threat facing the entire region is a new homeland security regulation. Beginning in January 2007, Americans returning from the Caribbean must present a U.S. passport for reentry into the United States. Previously other forms of identification such as a birth certificate or driver's license were sufficient documentation. The effect on tourism as a result of this new regulation is uncertain.

Bahamasair

Bahamasair, the national airline of The Bahamas, was born out of the energy crisis of the 1970s when British Airways ended its service to The Bahamas due to rising fuel costs. Fearing the effect of other carriers also ending service, the government decided to begin its own airline in 1973. The company has experienced difficulties with financial performance, labor unrest, and customer service throughout most of its existence. Currently, the airline requires a government subsidy of around $10 million a year to operate. Bahamasair has been accused of being poorly managed, as represented by recent groundings due to poor maintenance record keeping, and late payments of a U.S. Customs bond.

Bahamasair flies out of four cities in the U.S. - Miami, Ft. Lauderdale, West Palm Beach, and Orlando-and has service throughout The Bahamas. Bahamasair also flies to Jamaica, the Dominican Republic, and the Turks and Caicos Islands (see Figure 1). In 2004, Bahamasair entered into a code-sharing agreement with US Airways that allows an expansion of its market into Charlotte, Philadelphia, and New York. Code sharing allows one flight to be marketed by more than one airline and increases the market reach of cooperating airlines. Bahamasair had expanded into the U.S. market in the 1980s to include Philadelphia, Newark, and New York but found those routes to be unprofitable at the time. The airline is a small carrier with only eleven aircraft that includes Boeing 737 jets and smaller turboprops. Bahamasair competes directly or indirectly with a number of different international airlines, including US Airways, Delta, American Airlines, Jet Blue, Spirit Airlines, and Air Tran. All six American carriers fly into The Bahamas, most to Nassau or Freeport. Bahamasair would like to compete on the basis of its country identity and slogan (We don't just fly there. We live there); however, more often Bahamasair competes on the basis of price (see Figure 2).

At one time Bahamasair had exclusive intra-country routes, however, a number of private airlines have now begun operating with The Bahamas, including Pineapple Air, Cat Air, Seair Airways, Western Air, and Southern Air. These domestic competitors compete with Bahamasair on some of the same intra-country routes, operating with a lower cost structure than Bahamasair. In order to offset this loss of revenue due to domestic competition, Bahamasair is considering expanding into smaller cities in the U.S. such as Cleveland and Richmond.

Privatization

Faced with increased competition and a poor record of profitability, the government of the Bahamas has begun to explore the possibility of finding a foreign investor for Bahamasair. The government has requested bids from investors who would purchase a less than 50% equity interest in the airline. International investors will find in The Bahamas offering a favorable tax structure, close proximity of the country to the United States, an English speaking population, political stability, and a developed infrastructure. Additionally, the Bahamian dollar is pegged on par (1-1) with the U.S. dollar, thus reducing exchange risk volatility.

In an effort to explore the privatization issue, the Bahamian government contracted with the American consulting firm McKinsey & Co. to provide an assessment of the issue. The consultants, reporting on the airline industry, stated that "domestic markets are mature and saturated; Florida is over-serviced; and penetration of U.S. markets will not likely generate positive margins for Bahamasair in the short or long run." Additionally, the consultants stated that it was essential that Bahamasair improve operating efficiency, reduce costs, increase market share, and right-size the present aircraft fleet. Without improvements, finding a foreign investor would be very difficult.

Bahamasair is expecting a loss of $10 million on revenues of $76 million for the fiscal year 2005-2006. Bahamasair is essentially bankrupt, and according to its managing director, the company has a negative equity of around $84 million. The company survives only through government subsidies that have ranged been between $10-32 million a year. Attempts at cost-cutting have resulted in labor resistance, including groundings due to sickouts by employees.

Some see Bahamasair as a typical example of the problems of government ownership of industry. They argue that governments often do not generate the interest in efficiency and customer service found in private companies. Furthermore, government-owned industries can become vulnerable to destructive political meddling in economic decision-making.

Others argue that many countries have state-owned airlines. Some airlines are fully owned by the government, such as British Airways and Japan Airlines International. In other cases, the government has a partial equity interest in the national carrier. Government ownership of airlines varies from 100% ownership to only a token equity interest. Scandinavian Airlines (SAS) is owned 50% by the government and 50% by private investors. KLM Royal Dutch Airlines is 25% state-owned, and the German government has a small equity interest (1.6%) in Lufthansa. According to the Bahamian Ministry of Works and Utility, "The provision of reliable, efficient, low-cost airline service is essential to the social and economic development of the Bahamas and the continued growth and development of our tourism industry." Not all government officials agree with this position and a decision regarding the future of the airline must be made.

Questions for Discussion

1. Would you invest in Bahamasair as a foreign investor? Explain your answer.

2. Why do governments typically own airlines and not grocery stores?

3. Should the government of The Bahamas privatize Bahamasair, liquidate the airline, or continue to operate it? Explain your answer.

Subject: Airlines; Privatization; Decision making; Pricing policies; Tourism

Location: Bahamas

Company / organization: Name: Bahamasair Holdings Ltd; NAICS: 481111

Classification: 8350: Transportation & travel industry; 9173: Latin America

Publication title: Online Journal of International Case Analysis

Volume: 1

Issue: 1

Pages: 1-6

Number of pages: 6

Publication year: 2008

Publication date: Spring 2008

Year: 2008

Publisher: Florida International University, Department of Management and International Business

Place of publication: Miami

Country of publication: United States

Publication subject: Business And Economics

ISSN: 15485137

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: Maps Tables

ProQuest document ID: 236753122

Document URL: http://search.proquest.com/docview/236753122?accountid=38610

Copyright: Copyright Florida International University, Department of Management and International Business Spring 2008

Last updated: 2010-11-12

Database: ABI/INFORM Complete

Document 40 of 100

Fiji Pine Limited: A Case Study of Long Term Privatization and Stakeholder Conflict

Author: Duesen, Cheryl Van, PhD

ProQuest document link

Abstract:

Fiji Pine, Ltd. (FPL), a former government managed asset (state owned enterprise), was incorporated in 1990 in order to privatize the forests, ultimately transferring ownership back into the hands of the private citizens of Fiji, the owners of the forests. FPL management has to balance the demands of a variety of stakeholders, including the government (the majority shareholder), the forest landowners, the extension (leased) forest owners, managers, employees, contract labor, the union, village communities, and external funding agencies, all with conflicting needs and expectations. A similar but conflicting organization, Fijian Hardwood Corporation (FHC), granted Sustainable Forests Industries Ltd. of Fiji the concession to harvest rights for the mahogany products, producing further dissatisfaction among FPL stakeholders. [PUBLICATION ABSTRACT]

Full text:

Introduction

The Fiji Islands are comprised of approximately 300-350 islands (depending on high tide) in the South Pacific, of which approximately 200 are inhabited. The total land area is 7,056 square miles, roughly the size of the state of New Jersey, USA. It is located northeast of Australia and New Zealand while slightly southwest of Hawaii in the Oceania region. The economy is based upon tourism, sugar, copra, apparel, gold, fishing, and lumber. The tropical climate is temperate year round, and the Fiji Islands have primarily developed their land in the old custom of 'nothing taller than a coconut tree' (Van Deusen, 2005). In 1874, the ruling Fijian chief, Cakobau, ceded the Fiji Islands to the British Crown in a political maneuver designed to quell opposition between European settlers and village tribes (Lotherington, 1998). This move changed the ethnic make-up of Fiji in that the British colonial government recruited indentured laborers from the Indian subcontinent to do the hard work in the sugar cane fields. In 1970, Fiji achieved independence although the citizens of Fiji still welcome the royal family from England. However, the almost century of colonial rule changed the islands from a network of feuding tribal villages into a multiracial nation. Still the village system is firmly entrenched in the Fijian society today. The Ratu (village chief) and Vanua (land owning villagers with a common ancestor) are the focus of hereditary authority and decision-making (Tuimaleali'ifano, 2000).

By most standards, Fiji is one of the most successful of the Pacific Island nations. The literacy rate is over 92% although it was not until 1956 that Fijians other than the village chiefs were provided with secondary education. As of 1986, over 95% of the teachers were trained reflecting the Fijian government's efforts to professionalize its teaching force (Tavola, 1991). Fiji has been called one of the most promising economies in the South Pacific (Frank, 2000: A-10), although recent political unrest has led to concerns about current foreign direct investment in the country. Like most developing nations, the government of the Fiji Islands is working towards privatization of most of its government, state-owned enterprises. As such, Fiji Pine Ltd. (FPL) is a public company created in 1990 to manage the assets, liabilities, and obligations of the Fiji Pine Commission following its incorporation. The company's primary activity is growing and selling wood. Mature trees are sold to the majority owned subsidiary, Tropik Wood Ltd. (Tropic), which is responsible for the processing and marketing of wood products. FPL has committed most of its forest resources to Tropik through a long-term strategic alliance that expires in 2008. Their products are sold domestically and exported internationally with Japan as the predominant purchaser of the woodchips and Australia as the major purchaser of sawn timbers, the more valuable of the products. The ratio of sawn timber to woodchips is approximately 30%/70% which is problematic since the initial goals and strategies were based on a projected ratio of 55%/45% respectively. This deviation from the projection has affected profits and, ultimately, stakeholder relations, creating conflict between managers, stockholders, and land owners.

In 1997, FPL sold an estimated 428,000 tons of logs to Tropik. To maximize FPL output, trees should be harvested at approximately 22 years of age. Given the existing capacity of Tropik's processing plant, the trees are being harvested early at 17 years of age, a practice which fails to maximize their potential yield for shareholders and landowners alike. Ultimately, FPL should provide 450,000 tons within a decade, but, in the short term, repeated cyclones (hurricanes) and bad fire years have cut the yield to well below expectations, thus requiring reduction of the planned rotation age. The reduction of the planned rotation age affects the earnings of contract laborers and extension forest owners and leads to other stakeholder conflict. Given these unexpected events, FPL undertook cultural reengineering to increase the overall effectiveness of the organization as it works towards privatization and its other community oriented goals. The ongoing challenge is to balance the social role of providing employment with the economic role of providing an adequate return to the landowners of the forests and the shareholders.

The vision of FPL is to be the country's leading forestry company, achieving commercial excellence in managing an efficient forest industry. In 1991, the incorporation affirmed three roles for the organization: social, economic, and commercial. The stakeholders involved in this design include government, forest land owners, extension forest owners, villagers, managers, employees, and the union. They all have conflicting needs and demands. Some of the varying expectations are identified in Table 1.

FPL is targeted to remain in existence until 2025 when ownership of the company will be passed on to the landowners. Until then, the interests of stakeholders are to be balanced. The rate of return and profits will determine the actual handover date when the company will become privately held by the landowners. The organizational structure of FPL includes three divisions comprised of 80 salaried staff (75 local and 5 expatriates), 90 hourly wage staff, and approximately 80 "permanent temporary" workers. In keeping with their goals of developing local expertise, FPL has weaned its reliance on expatriate managers. Also, an estimated 370 contract laborers have responsibilities for establishment (nursery, planting and weeding) activities. The wages the contract laborers earn help fund community projects such as churches, water supply systems, village electrification schemes, and reconstruction after hurricanes and cyclones. Both men and women participate as contract laborers with women handling the nursery activities and the men conducting the planting and weeding operations. These funds provide the basis for capital improvements in the villages. Fiji's cultural heritage is as a collectivist society. Unlike most individualistic societies, wages are contributed to the communal fund, rather than taken home as private earnings. Implementing the privatization of FPL is more of a challenge in this cultural framework than it would be in a more individualistic culture.

Prior to 1992 the employees of FPL had been members of a union. Since they wanted to continue the union affiliation, the company voluntarily recognized an in-house trade union in 1992 rather than face a new certification election. Thus, company-union relations are fairly cordial with amicably negotiated pay and benefits increases.

Training of workers has focused on forest protection, project planning, defensive driving to minimize accidents, and occupational health and safety training. In terms of stakeholder relations, corporate planners continue to have focus meetings with landowners, extension forest owners and the government to maintain solid relations. However, with conflicting goals, as identified in the next section, it is extremely difficult to balance the wide variety of long-term and short-term needs.

Goals and Objectives of FPL

FPL is expected to work towards several goals within the country of Fiji. The government and the citizenry expect FPL to address social, political and environmental issues associated with the industry and at the same time to maintain a commercial focus (1997 10-K: 14). FPL's ultimate goal is to prepare and deliver the forests into the hands of the mataqalis (landowner villagers). One major objective towards achieving this goal is the education and development of landowner expertise so that landowners learn to manage their assets wisely. Landowner development is an integral function of the company (1997 10k: 31). Since landowners will eventually become the majority owners of the company, they must be prepared to participate fully at all levels within the industry so as to maximize the benefits flowing to them while maintaining responsible management and environmental practices.

Children of landowners are given priority to receive college scholarships overseas, particularly in the areas of commercial management of forestry operations. However, many of the children have remained overseas after receiving their university degrees and have not returned to work at the company. Too, many pursue degrees in other fields. The ongoing dilemma is that many children of landowners are provided with college educations overseas, only to change into non-forestry majors or to remain overseas after graduation. The investment of time and money may then be shifted to benefit the country of Fiji in other ways, as in remittances sent back to families from children working abroad, but on a more individualistic basis rather than on a community-oriented basis where the entire village community would benefit.

Balancing the commercial and developmental objectives is an ongoing dilemma for the firm. Landowners believe their short-term needs (i.e., higher ROI) should come first over the longer-term developmental and commercialization needs. Consequently, the landowners have expressed dissatisfaction with the way management decisions are made. One of the forests had to be sold in late 1997, much earlier than planned, back to landowners who demanded to take over ownership and management of the forests, as they were not satisfied with the company's management. There is strong speculation that the village in fact was negotiating with an American consortium of forestry firms wishing to harvest the hardwood timber, mahogany. Fijians call them 'white people's trees' because the mahogany plantations covering 80,000 acres were started by the British in the early 1900s when Fiji was a British colony. These are believed to be the world's largest mahogany farms (Frank, 2000), adequate to supply two-thirds of the world's mahogany needs. To date, FPL has not received any payment for this transaction. This uncertain turn of events is discussed later in the paper.

In order to attain the objective of having the landowners ultimately manage their assets as a privatized organization, FPL is working to create an efficient and effective company. Having operated fifteen years as a government commission, the company has a workforce that is unprepared to operate in a commercial, for profit, environment. Therefore, the culture of the organization has to be changed to ensure the long-term viability of the firm.

FPL is expected by the government and the citizenry to have a positive socio-economic impact on the rural sectors of Fiji. This goal involves providing jobs and funds for villagers and landowners for which there is no hope for alternative employment. Approximately 10,000 landowners in the rural sector have limited employment opportunities. Creating commercial awareness and developing sustainable business objectives, skills, and management expertise is the main thrust for the development of these landowners (1997 10-K: 31). Another goal is to further utilize the extensive lower productivity lands for which there are not many alternative uses. Lastly, FPL's forestry scheme also protects the soils and downstream areas from soil erosion and sedimentation, which further increases land productivity.

Another goal of FPL is to provide business for a trucking company in which FPL is a major stockholder. The growth of Tropic Wood will provide increased opportunities for low-level involvement by landowners, thereby furthering the objective of increasing low-level commercial involvement by landowners and increased employment opportunities.

Financially, FPL's shareholders expect a long term 3% rate of return. Although this rate may appear low, it is realistic given the potential for natural disasters such as fires, cyclones, and droughts. However, many shareholders are dissatisfied and demand a higher rate of return. This was a major source of contention that led to the sale of the Nadroga forest back to the villagers much earlier than planned, thereby endangering the long-term sustainability of the area. In addition, the Fijian dollar was devalued about 20% in 1997 to remain competitive given the economic downturn in the Asia Pacific region. Given the variety in time orientations of the abovementioned goals, it has been a challenge for the top management team to address the varied needs of the stakeholders.

FPL Community Relations

FPL operates in a unique and sensitive business environment that requires the company to maintain an open and intensive two-way communication policy. The company plays a vital role in the lives of the community by providing jobs, economic opportunities, and educational activities. Company people continuously interact with all of the local communities via participation in community projects, sponsorship of charitable, educational, and recreational events, provision of recreational facilities in the forests, participation in disaster relief efforts, and organization of life saving activities. FPL maintains a high profile image through publication of annual reports, newsletters, and regular news releases in the newspapers. Its CEO and other executive committee members are highly visible in their communities.

A major irritant to the extension owners' stakeholder group is that FPL company leases have not always been accurately surveyed and this is causing disputes about ownership of maturing timber. The extension owners entered into long term leases on forest land that they own with FPL. FPL has managed and developed these forests for future harvesting. In some cases, double leases exist or the landowners argue that they never gave their initial consent, and therefore, they do not acknowledge, FPL's ownership of the timber. This uncertainty must be addressed as a top priority as it is causing extreme alienation between management and citizens. However, forest products are being harvested even while ownership remains unclear.

Fire Protection

In an average year, FPL fire crews fight about 150 plantation forest fires, about 50 wild fires, and about 1000 controlled burns. The primary causes of fires are "spill-over" from the burning of sugar cane (the other major use of land within Fiji) and grazing land, careless hunting fires, and some arson. Landowner relations are especially critical because of the high propensity of disgruntled landowners to commit arson. The landowners fail to realize the damage they are doing to the community as a whole as well as to FPL, by burning down the forests. This increases the company's costs and ultimately reduces the profits to the landowners as it translates to a need to establish aggressive fire protection measures. These include improving road access and fire breaks, upgrading fire equipment, and increasing controlled burning. Programs to improve relations with the landowners include supplying seedlings at subsidized rates, giving advice on planting and managing forests, and coordinating the sale of forest products. The extension forests are especially vulnerable to fire as they have minimal fire fighting capabilities due to their remote locations.

In 1997, a total of $1 million had to be written off due to fire damage. In addition, $1.7M was written off due to cyclone damage. FPL needs to reexamine its strategies to reduce risks to plantations, as the earlier strategies focusing on fire suppression measures were not effective. Increased commitment by landowners based on fostering a sense of ownership and increasing public awareness may help. A long-term educational awareness effort is underway.

Political Environment

The political environment in Fiji is extremely challenging for fully and partially owned government companies. Ministers, (e.g., Health, International Investment and Trade, Education, Forestry) are appointed by the Prime Minister. Similarly, the Board of Directors and the Managing Director of FPL are politically driven appointments. Many board members represent the landowners' interests from the villages which ultimately will take over the management of their forest assets. This imbalance of power strongly influences decision making by the leaders of FPL. If the government, as majority shareholder, prefers different strategies, they can ultimately replace the Managing Director and board members. With this constant threat, it becomes very difficult for top management to formulate and implement a long-term strategic plan.

In 1998, there was a change in the Managing Director. At the time, the chief in the Nadroga province was pushing to regain control of their forest so that it could be sold to an American consortium of forestry firms. After a bidding war between a British firm and an American firm, the higher bid came from the Americans. However, the government awarded the contract to the British firm, even though there were public protests. The award was probably based on the historical ties between the UK and Fiji, although Fiji became independent from the UK in 1970.. Fiji still celebrates the birthday of the Queen and entertains her heirs as royalty during their occasional visits to the island (For added details on culture, see http://www.hobotraveler.com/colony.php).

Dissatisfied landowners also gain power by expressing their unhappiness to their elected Parliamentary officials. These officials, in turn, voice their questions and concerns to the appropriate Minister. Pressure is then applied to the board and the top management team. George Speight, a USA educated MBA, became the acting director of FPL after the long-term managing director was ousted politically in 1998. (Speight led a coup against the government in May, 2000, Backed by a 100-man private army, Speight stormed parliament, taking members hostage. He was then arrested and charged with treason.

The senior management team is trying to address all of these concerns. They decided to modify the existing organizational culture to become a more profit-oriented, efficient and effective organization, but many obstacles remain from the days of public ownership.

Reengineering the Culture

According to Mr. Leonard Newell (retired) of the Pacific Southwest Region of the U.S. Forest Service, the USFS has a long history of international cooperation and has an active program to combat world deforestation. Since 1990, the USFS has provided assistance to South Pacific countries and the affiliated islands in Micronesia and Samoa. More recently, in 1995, the Department for International Development (DFID) extended an earlier project where the government of Fiji began planting pine into degraded grasslands in the 1950s to avoid land erosion and to rehabilitate the lands. The areas that were planted were leased from the native land owning groups exercising collective control (http://odi.org/uk/tropics/projects/2268/htm).

One international study found that within the Pacific Island nations, their greatest need was for managerial development and training. FPL recognized that it needed help in shifting from a largely bureaucratic, government department to a commercial enterprise competing in the global marketplace. The company developed a Total Quality Management (TQM) program, with 18 quality teams, five facilitator teams and a steering committee. The teams primarily focus on strategic areas with the next areas targeted including standardization of processes and benchmarking. The company believes that TQM has had a marked effect on morale and job satisfaction. At the end of 1997, although sales were down, profits were up and ROE was also up 2% (1997, 10-k). Regardless, in early 1998, the Managing Director was asked to resign his political appointment, as it later turned out, so that the future rebel leader, George Speight, could be given control of the firm.

In 1998, Price Waterhouse (now Pricewaterhouse Coopers) was hired by the government to search for a foreign logging partner. The list was narrowed to two finalists including Timber Resource Management (TRM), a 65% US owned firm, with the remainder owned by various Australian and New Zealand timber companies. The other finalist was Commonwealth Development Corporation (CDC), owned by the British government. Ultimately, Pricewaterhouse Coopers recommended CDC due to its being a more established company with greater direct benefits to Fiji. The government challenged the results and terminated Pricewaterhouse's involvement. George Speight attacked the CDC's proposal saying it did not meet the requirements outlined by the government. Unknown to most, Mr. Speight had received two wired payments from a subsidiary of TRM in the spring of 1999 (Frank, 2000). Speight acknowledged receipt of the payments, but said it was for a pine-logging contract that was later cancelled (the Nadroga forest that was removed from FPL ownership). Mr. Speight was removed from his position as FPL's Managing Director in the spring of 1999 when a new government was put into place. Mr. Chaudhry, then Prime Minister, proceeded with negotiations with CDC. Yet his negotiations were not made public.

Meanwhile TRM flew four ministers to New York to promote their bid. The Foreign Corrupt Practices Act (FCPA) prevented US firms from paying for the trip, but the US Trade and Development Agency agreed to fund the $25,000 trip for the ministers. Months afterward, TRM learned of the then Fijian government's commitment to CDC and the wasted time, effort, and US taxpayer's dollars in hosting the trip. As of that date, TRM had filed nine lawsuits in Fiji, including two against the government, four against consultants and equity holders, and three against newspapers for libelous and false reports about the TRM bid. More recently, the Fijian villagers staged protests to take back the mahogany forests on their land, currently leased by the government. New competitors from Europe and Canada emerged to compete with TRM and CDC who vowed to continue negotiations. The outcome was that Sustainable Forests Incorporate (SFI) received the concession harvesting rights which were granted from Fijian Hardwood Corporation (FHC), a sister state-owned enterprise to FPL (http://www.fijimahogony.com/bout-sfi.htm).

Questions for Discussion

1. Identify the internal and external stakeholders in the change process.

2. What are the three roles that FPL plays in Fiji?

3. Identify the short term and long term goals of FPL and contrast these with the goals of the various stakeholders.

4. Develop retention strategies for young, university educated managers and children of landowners who receive university scholarships.

5. What ethical issues do US and other international companies face when doing business with a recently privatized company in a politically fragile country like Fiji?

Subject: Privatization; Shareholder relations; Forest products industry; Corruption

Location: Fiji

Company / organization: Name: Fiji Pine Ltd; NAICS: 113210

Classification: 8630: Lumber & wood products industries; 9179: Asia & the Pacific; 2400: Public relations

Publication title: Online Journal of International Case Analysis

Volume: 1

Issue: 1

Pages: 11-21

Number of pages: 11

Publication year: 2008

Publication date: Spring 2008

Year: 2008

Publisher: Florida International University, Department of Management and International Business

Place of publication: Miami

Country of publication: United States

Publication subject: Business And Economics

ISSN: 15485137

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: Tables

ProQuest document ID: 236753217

Document URL: http://search.proquest.com/docview/236753217?accountid=38610

Copyright: Copyright Florida International University, Department of Management and International Business Spring 2008

Last updated: 2010-11-12

Database: ABI/INFORM Complete

Document 41 of 100

DHR PATIO HOMES, LLC: "FOR THE SAKE OF A NAIL, THE KINGDOM WAS LOST!"1

Author: Sherman, Herbert; Rowley, Daniel J

ProQuest document link

Abstract:

Derived from observation and field interviews, the case describes how two college professors operating a home construction LLC are trying to close on a major land deal ($2.5 million dollars) that would net them over $4 million dollars in estimated profits in a 12-16 month time period. These professors have no experience in raising funds but luckily have the assistance of Justin Martin, the President of the Snowy Mountains, the firm that they will be purchasing their subdivision from (Mountain Trails). Through Justin Martin's connections Stephen Hodgetts and Richard Davis meet with Benefit Bank and arrange for the loan. Davis was under the impression that the bank required a 10% down payment ($250,000) which Davis and Hodgetts finally raise by borrowing on their retirement accounts and liquidating Hodgetts' stock holdings. However, the bank actually required a 20% down payment since Davis and Hodgetts were new customers. Justin Martin promised to lend Davis and Hodgetts this amount ($250,000) as a same day loan to be paid back by them from the proceedings of their closing on Justin Martin's mother-in-law's house. At the last minute, however, Justin Martin insisted that Davis and Hodgetts deposit $50,000 in an escrow account; $50,000 that Davis and Hodgetts did not have access to for at least a few days after the closing date. The case ends with Davis wondering how he is going to raise $50,000 in one day. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Overview

The case subtitle, "for the sake of a nail the kingdom was lost" perhaps best summarizes Davis and Hodgetts' situation in that they are on the cusp of a deal that would propel this small, startup home builder into a full-fledged operation. The estimated profits from this project would be quite substantial and could be used in funding future ventures with the same developer. Furthermore, the timing of this project could not have been better for Davis and Hodgetts since their current development was having legal problems (there were large third party liens on their properties because the land developer did not pay his landscapers). They could not close on their currently constructed homes and it therefore made no sense to build new homes on these properties.

However this "deal of the century" is not an easy one to make given the purchase price of the subdivision ($2.5 million) and Davis and Hodgetts' inexperience in raising venture capital. An interesting twist in the case is that Davis and Hodgetts seemed to have found themselves a benefactor and a possible mentor in Justin Martin, the President of Snowy Mountains. Justin first connects them with a lender and then offers Davis and Hodgetts a one day loan using his own money. Ironically, each deal that Justin brokers (the Benefit Bank loan and his own personal loan) seems to have a hidden catch or caveat (including his own) creating last minute problems for Davis and Hodgetts. The case seems to be a comedy (or tragedy) of errors in that every time Davis and Hodgetts think that they have solved one problem related to the purchase of the Mountain Trails subdivision, another unexpected problem rears its ugly head and threatens to ruin the land deal.

Intended Instructional Audience & Placement in Course Instruction

This case was primarily developed for undergraduates taking a course in Small Business Management and/or Entrepreneurship (SBME) although it could also be employed in any course that deals with the raising of venture capital (i.e. Corporate Finance, Venture Capital Investing) and investing in real estate (Real Estate Management). The case should be introduced after students in the SBME class have read the chapters on how to obtain financing for your business, profit planning, and business growth and the entrepreneur (Chapters 6, 13 in Megginson, Byrd, and Megginson, 2003; Chapters 6, 10 in Lambing and Kuehl, 2003) while Corporate Finance students should be familiar with the topics of sources of capital, cost of debt, and income statements (Chapters 4, 9, 13 in Gallagher and Andrew, 2003; Chapters 2, 9, 12, 14 in Keown, Martin, Petty, and Scott, Jr., 2005). Since the case covers numerous chapters in each text, it is recommended that the case be employed as a sectional or comprehensive case rather than an end-of-chapter case.

Secondarily, the case could also be employed in a Business Policy and Strategy course under the topic of strategy implementation; business tactics at the functional level. These students should therefore be exposed to functional tactics with a focus on business financing (Chapter 9 in Pearce and Robinson, 2005; Chapter 6 in Harrison and St. John, 2004).

Learning Objectives

The overall purpose of this case is to introduce students to the nuances associated with managing a small business in the home construction market, specifically the difficulties associated with raising capital for land acquisition. Furthermore, an additional goal is for students to be able analyze DHR's projected profits from the land deal (based upon construction costs and the cost of capital) and determine the general viability (and therefore the value to DHR) of the land acquisition.

Students obtain a "real-world" feel of the situation and tacitly experience some of the frustration associated with trying to close a business deal when one is highly dependent upon other parties' actions. Specific learning objectives are as follows:

1. For students to obtain a basic understanding of the real estate development and residential construction industries.

2. For students to understand and appreciate the difficulties in raising investment capital.

3. For students to determine the profitability of the residential construction project taking into account the cost of capital, taxes, land acquisition costs, and construction costs.

4. For students to understand the importance of cash flow in this type of business and determine what Davis and Hodgetts' cash flow needs might be if they were close on this land deal.

5. For students to develop recommendations on how Davis and Hodgetts should proceed in closing this land deal.

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 which course this case is to be employed with, students should have some exposure to the home construction business and residential land development. The Urban Land Institute provides an excellent handbook on real estate development (Peiser and Frej, 2003) while Gerstel's (2002) builder's guide provides a good overview to the home construction business. Both texts have short introductions to the topics that could be copied and distributed to the class as background material. A one page handout is provided at the end of this teaching note with short descriptions of each industry - see Appendix 1.

Secondly, it is also recommended that students have some grounding in some basic financial analysis techniques including breakeven analysis, internal rate of return, and net present value. This will be useful in analyzing the profitability of DHR's proposed project. This information may be delivered prior to assigning the case by using at least one (1) of the follow methods:

* a short lecture, student presentation, discussion session, and/or reading assignments on aforementioned topics.

* a guest lecturer from a local builder and/or land developer on project development.

* a guest lecturer familiar with raising venture capital (i.e. a representative from the SBA,

* a local lending institution, a venture capitalist, etc...)

Case Method

Although most of the students in a small business management or introductory finance course may have had some exposure to the case method, it behooves the instructor to provide the students with a review to the case method of analysis. 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 although the focus should be on the current course content. 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 issues

* adopt the appropriate time frame

* draw on all your knowledge of business. (Pearce and Robinson, 2005)

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 field work. (Nicastro and Jones, 1994)

Regardless of the variation employed, it is recommended that the students' work be evaluated and graded as partial fulfillment of the course's requirements. However, if this case is not employed as a comprehensive case, it is not recommended that this case (and its related assignments) have a large weight or impact on students' overall course standing.

Using Case Questions

Whether or not the instructor assigns questions for students to analyze with the case is usually a matter of educational philosophy and student readiness. Naumes and Naumes (1999), for example, thought that if the questions were handed out with the case "students will tend to focus only on the issues specifically raised by the questions ..." (p.86). Lynn (1999), on the other hand, noted that the use of assignment questions provided students with more concrete guidance in case preparation and analysis; specifically directing them to consider the decision to be reached.

In deciding whether or not to assign questions, the instructor should first answer the following questions:

1. What is the level of course instruction?

2. What type of case is being taught? (Iceberg, incident, illustrative, head, dialogue, application, data, issue, or prediction - see Lundberg et. al., 2001 for full descriptions.)

3. What is the instructor's preliminary assessment of the students' ability to be self-directed learners?

4. What are the students' previous experience with case instruction?

5. If the students have already been exposed to the case method, what types of cases have they been exposed to? case incidents (1-2 page cases with questions)? Short cases (3-8 page cases with and/or without case questions? Comprehensive cases (greater than 8-15 pages) Harvard-style cases (greater than 15 pages)? (David, 2003)

6. What is the instructors preferred method for case instruction? (For example, "sage on the stage", "guide on the side", "student as teacher" (student-lead discussions), "observer and final commentator" (open class discussion with faculty summation), etc....

Role-Playing (50 minutes)

Role-playing enacts a case and allows the students to explore the human, social, and political dynamics of a case situation. This case lends itself quite well to a role playing exercise since it involves a rather simple situation with only two characters and therefore most of the class can role play in this exercise.

Prior to role-playing the case part, students should be asked to not only read the case part but to answer the following questions:

1. Who are the key participants in the case? Why?

2. What is the "role" of each of these participants in the organization?

3. What is their motivation or rationale for their behavior?

4. What is the dilemma that the character is facing and/or how can the character assist someone else in solving a problem?

The instructor may either go through these questions prior to case enactment or wait for the role playing exercise to be completed in order to use this material to debrief the class.

Step 1: Assignment of Roles & Instructions (10 minutes). The class should form groups of three students with two of the students enacting the key roles in the case and the other acting as observer. The instructor should pass out a short reminder notice about participants staying within their roles.

Step 2: Enactment (20 minutes). The student enacting the role of Davis should be instructed to start the conversation, summarizing the situation for Hodgetts. The instructions to the students playing Davis is that really wants this deal to go through and will do anything within reason to make it happen. The instructions to the students playing Hodgetts is that although his is for pursuing this deal, he is not at all happy that he has had to liquidate his stock holdings and the he has become suspicious of Justin Martin's behavior. The instructor should note how well each groups enacts the role-play and offer suggestions (if necessary) if some groups seem a bit confused or lost.

Step 3: Debriefing (20 minutes). The instructor might want to ask the following questions:

* What was the results of the exercise? Did Davis and Hodgetts solve their problem?

* How many groups ended up needing to with Justin Martin? If so, why?

* How many groups decided they needed to contact a lawyer, an accountant, or an alternative funding source?

* Did Davis and Hodgetts agree or disagree as to whether they should finally go through with the land deal? If the disagreed, what were the reasons?

* If Davis and Hodgetts did disagree, and Hodgetts backed out of the deal, did Davis try to make the deal happen anyway?

The instructor should then have the class as a whole comment on the results of the role-play and determine with the class their overall sentiment towards DHR's last minute problem. Students should also be given the opportunity to comment on the role-playing exercise as a learning instrument. The instructor might ask the class the following questions:

* Did this exercise animate the case? Did students get a "feel" for the issues surrounding the business offer?

* What were the strengths and weaknesses of the exercise? What changes would they make to the exercise given their experiences with it?

The debriefing session should produce closure for students by connecting the theory of capital formation and raising venture capital with case specifics and the results of the role-playing exercise.

Suggested Case Questions

1. Before Davis and Hodgetts received Justin Martin's assistance in raising capital, they assigned themselves the task of researching methods of raising capital. Describe some of the methods that Davis and Hodgetts could use to raise the $2.5 million dollars needed to purchase Mountain Trails.

This question requires that students do some reading and research, even beyond the handout supplied in the teaching note (Appendix 2). The below average student in answering this question will provide a laundry list of methods of raising capital without differentiating between equity and debt financing. This student will also list alternatives that are not available to Davis and Hodgetts given their corporate structure (LLC) such as going public and issuing common and preferred stock, or selling corporate bonds.

The average student will discuss the typical methods that small business use to raise funds (self, family, friends, angel and venture capitalists, bank loans, and SBA guaranteed loans) in general terms and perhaps reference Hodgetts' ability to loan the firm $250,000.

The above average student will note that far more information is needed about the personal and business financial situation of both Davis and Hodgetts in order to determine what assets of theirs may be available for leveraging. They may suggest that it may be possible for Davis's and Hodgetts' two other firms to borrow these funds (presumably from their own commercial bank) or open a line of credit without looking for other funding sources. These students also may suggest taking on a business partner who has the capital.

The exceptional student will try to raise the funds creatively or look at rarely used methods. For example, "a new and emerging kind of equity financing is the Small Company Offering Registration ... [this] lets a company raise up to $1 million by selling common stock directly to the public." (Megginson, Byrd, and Megginson, 2003, p. 147.) In terms of debt equity, this student might suggest locating small business investment companies (SBICs), firms regulated by the SBA to make venture investments in small firms. Furthermore, this student would note what investors and lenders would look for before, see TN Table 1 below.

Lastly, this student might also recommend that Davis and Hodgetts seek a new partner with capital.1

2. Estimate the total average net profitability for the Mountain Trails project using the data from Table 2, Estimated Profits from Mountain Trails Subdivision.

The purpose of this question is to ascertain whether students can a) estimate what the average profit would be per unit in the development; b) whether students understand that net profit requires that taxes and interest payments be deducted from the gross profit amount denoted in Table 2; and c) that students can calculate the interest associated with a 12-16 month loan and understand the need to make certain assumptions about the loan payment schedule.

The below average student might either conclude that the minimum profit is the average profit or may need some personal guidance in order to start analyzing this question. The average student should be able to calculate the average total profit of the project by first averaging the profit from each of the units (see TN Table 2 below) and then adding on the additional profit for lakeside units.

This is a very basic methodology and excludes interest expenses as well as taxes.

The above average student will realize that interest expenses have not been deducted from the gross profit margin as calculated above. In terms of calculating interest expenses, the student may overlook the one day loan of $200,000 ($250,000 loan - $50,000 collateral; 6%/365 days x $200,000 = $32.86) while realizing that they do not have an exact repayment schedule in terms of either monthly amount or in terms of number of months (estimated between 12-16months). However, they do know the following: interest rate (6%), amount borrowed ($2.5 million), amount of down payment ($500,000), and the minimum payment is interest only. The student may therefore decide on one of many loan repayment schedules based upon his or her assumptions about Davis's and Hodgetts' cash flow needs and estimated completion time of the project. For demonstration purposes, we have assumed a straight line 12 month repayment schedule. See TN Table 3.

Given the total interest charges of $65,594.31, the estimated average profit after interest would be $4,649,772.70 ($4,715,367 - $65,594.31).

The well above average student will also note that there may be tax liabilities associated with the profits derived from the project. Calculating the tax liability on $4,649,772.70 also requires that the student make several assumptions and also understand tax liabilities for LLC's. First, the student should recognize that the tax liability of the firm is not a function of the project but is a function of total revenues minus total costs during the firm's tax year. There is no financial data (income statements or balance sheets) in the case that will assist students in determining the firm's overall profits and losses and therefore students may make some assumptions in order to proceed.

Second, some students may assume that since Justin Martin has talked about future projects with Davis and Hodgetts, that DHR would reinvest all of its profits into land purchases and therefore avoided any tax liabilities. Given the difficulties that DHR has had obtaining a $2.5 million dollar loan in order to get this first project off the ground, using internal assets for future purchases is a highly likely strategy.

Third, some students who have researched the tax laws may find that the Jobs and Growth Reconciliation Act of 2003 changed the provisions concerning bonus depreciation (depreciation you can take against brand new business property) allowing for a 50% depreciation of property if purchased between May 5, 2003 and before January 1, 2005. (Mancuso, 2004) This would allow DHR to immediately depreciate $1.25 million dollars as expenses and reduce their overall profitability and therein their tax liability.

Most importantly, the exceptional student will realize that for all LLC' s, profits and losses pass through the corporation to the personal tax returns of the owners, with the profits and losses allocated by percentage ownership. Since the question asked for average corporate profits from the project, not for the owners, tax liabilities are not an issue. These students may note, however, that if there were profits, these profits would become tax liabilities for Davis and Hodgetts. Therefore Davis and Hodgetts would have to weigh these tax liabilities against the tax liabilities associated with becoming a C corporation. This analysis would have to then compare the personal tax rates of Hodgetts and Davis against the corporate tax rate of 15% (Mancuso, 2004) plus any addition tax liability associated with declared dividends, the cost of converting to a C corporation, as well as the additional administrative expenses associated with maintaining the records of a C corporation.2

Looking at Table 3, these students may also question Davis and Hodgetts's ability to repay the loan beyond interest only payments given their cash flow needs, at least for the first three months of operation. Specifically, these students might challenge Davis and Hodgetts' ability to pay $ 172,132.86 per monthfor the first three months since they would only be drawing slightly more than enough money from their clients' Single-Close Construction-To-Permanent Loan to pay for the land purchases plus their construction expenses. The next question will deal with cash flow needs for the business.

3. Assume that DHR can obtain the additional $50,000 and make the deal for Snowy Mountains. Also assume the project will take 12 months. Describe DHR's monthly cash flow needs for this project in light of Davis and Hodgetts' financial position.3

The purpose of this question is to have students analyze the possible cash flow implications of the land deal on DHR. DHR will have the cost of construction covered due to their customers' construction loans, however they still must service both the loan for the land and the loan from Justin Martin.

The below average student will either not attempt this question, require assistance in order to start working on this question, or assume that the cash flow of the firm will be solely the monthly interest payments on the land purchase.

The average student would assume that for the first three months of the project DHR would only receive revenues through their customers' construction loans to offset construction costs including each property ' s land purchase. DHR would then have expenses equal to the monthly interest payment on approximately $1.91 million ($2.5 million - $500 thousand down payment and - $90 thousand for land reimbursement; @ 6% per annum = $9550/month) and the repayment of Justin Martin' s loan. They may also assume that by the time DHR would have to make their first payment to the bank (the next month) that Davis and Hodgetts' TIAA-CREF funds would be available to them, $100,000. From these funds they could easily cover three months ' worth of interest only payments as well as pay part of Justin Martin's loan back, say $50,000, leaving them a little over a $20,000 cushion.

The above average student would go beyond this analysis and try to analyze the cash flow needs for the entire project. Once three months had passed and homes had been built (assuming there were no delays in construction), the minimum profit that DHR could expect would be $106,900 per home. An additional $89,000 for seven homes would be generated from lakefront properties. There are several assumptions that have to be made by these students including the number of homes to be built simultaneously and when the lakeside homes would be built.

For example, these students might assume that over the remaining time period that at least three homes would be completed per month for seven months (21 homes) and that four homes per month would be completed for the following three months (12 homes). They might also assume a worst case scenario for revenue generation, that the lakeside homes would be built only in the last two months. See TN Table 4, below.

These students might recommend that by the end of the third month that DHR pay off the remainder of their loan to Justin Martin ($150,000), and Davis and Hodgetts' loan from TIAA-CREF (S 100,000). They might then recommend that Davis and Hodgetts make nine equal payments toward the loan until the loan was paid off. See TN Table 5, below. These students might also observe that the profit generated from the project would then be calculated as follows:

Profit = Project Revenues - Land Costs - Interest Costs (3 months Interest only + 9 months) $ 4,078,367.61 = $ 6,658,700 - $ 2,500,000 - $ 80,332.49 (S 30,000+ $ 50,332.49)

The exceptional student would make several cautionary comments before proceeding in their analyses. First, that although the construction costs are covered by the home buyer's construction loan, there may still be some out-of-pocket expenses that DHR will have to assume since construction loan payments may not based upon actual construction expenses but based upon a fixed payment schedule of the estimated percentage of project completion. (see Appendix 3 - Basic Construction Loan Draw Schedule and Formula)

Second, this student might also indicate that there may be other expenses not accounted for in the construction costs that might be incurred by DHR that may impact cash flow. The case specifically mentions a $1000 sales commission and rental fees for show homes (for those homes already built) but there may be other expenses incurred, most probably indirect expenses, that may not be accounted for. Furthermore, the cost of certain critical construction items may go up over time (i.e. wood, plaster board, etc...) as well as the cost of some of the subcontractors. DHR will not be able to pass these expenses along to their customers if those customers have already closed on their houses.

Third, and most important, there may be several delays in starting and completing this project (weather, availability of subcontractors and materials) and therefore a three month home building schedule may be unrealistic.4 A longer completion schedule would negatively impact the cash flow since the reimbursement schedules would be spread out over a longer time period thereby increasing the cost of the overall project. This student might allow for an additional month for home building (four months total) and the maximum time allowed to repay the loan (16 months). See TN Tables 6 and 7 below for the recalculation of the building and loan repayment schedule.

Profit = Project Revenues - Land Costs - Interest Costs (4 months Interest only +12 months)

$4,042,640.30 = $ 6,658,700 - $ 2,500,000 - $ 116, 059.74 (S 30,000 + $ 86059.74)

This student would finally note that given the projected cash flows Justin Martin would be paid off one month later and that this new payment schedule would result in a loss of $ 35,727.31 as compared to a 12 month schedule.

4. Develop recommendations on how Davis and Hodgetts should proceed in closing this land deal.

This question gets to the heart of the case; can Davis and Hodgetts raise $50,000 in one day in order to make this profitable deal go through, and if not, what other options are available to them? The questions asks students to struggle with the facts of the case and to develop some creative solution strategies.

The below average student will have Hodgetts and Davis run around 'willy-nilly' so to speak in order to raise the funds from traditional sources most small businesses would deal with; friends, family, and local lending institutions. They may also suggest that Davis and Hodgetts borrow the money 'off the street,' that is, use illegal lenders (loan sharks) who would charge a rather hefty fee (5% a week, O'Connor, 1997). Given Hodgetts and Davis' profession (college professors), one would find the later solution highly unlikely.

The average student would have Hodgetts and Davis first try to talk Justin Martin out of requiring the $50,000 down payment or to increase the loan to $300,000. Given the information provided in the case in terms of Mr. Martin's overall assistance to DHR in raising capital, as well as his insistence on the down payment, better students might predict that this approach would exacerbate the situation and possibly not only kill this deal but all future dealings with Justin Martin.

The above average student would suggest calling Justin Martin, explaining the situation in detail, and then asking for Mr. Martin's assistance in resolving this problem. The hope is by involving Mr. Martin in the problem-solving process that he will develop ownership of both the problem and the solution (cooptation; see Pfeffer and Salancik, 1978). Students may note that this is a less confrontational approach and gives credence to Justin Martin's role as mentor and supporter of Davis and Hodgetts.

The exceptional student will note that asking for Justin Martin' s help has always lead to hidden negative consequences and worse, takes the control of the situation out of Davis and Hodgetts' hands and places it into a third party stakeholder. This student's preferred method would be to develop a set of alternatives that could be explored with Justin Martin and to have DHR and Mr. Martin reach a consensus on how to proceed. Alternatives could include, but are not limited to, the following:

1. Delaying the closing until Hodgetts' bank account cleared or Davis's check cleared the bank.

2. Going ahead with the closing but having DHR put $50,000 in an escrow account once their TIAA-CREF funds cleared.

3. Mr. Martin forgoing the down payment but obtaining a small equity position in the firm equal to $ 50,000 - Davis and Hodgetts would have an option to buy him out at the end of the project.

4. Rather than funds being placed into an escrow account, one of the inner lots would be held in escrow.

EPILOGUE

Hodgetts and Davis thought that their only recourse was to call Justin Martin and explain the situation to him as succinctly as they could. When they did get a hold of Justin Martin he was quite pleasant but insisted on maintaining the escrow account. They agreed that they would go to closing on July 15th but that DHR would wire transfer $ 50,000 into the escrow account by the 19th, the day Davis ' s check was supposedly to clear. An enraged Justin Martin called Davis at around 3 PM on the 19th (since the funds had not been transferred to his escrow account) to find out that Davis's check would not clear until the following business day. Hodgetts ' s bank account was also not going to clear until the 20th. Hodgetts wired the $ 50,000 the first thing in the morning of the 20th, to Justin Martin's satisfaction. Justin Martin's loan was repaid on August 23, 2004 through an upfront all cash home sale to Justin Martin's mother-in-law (the home was discounted by approximately $50,000).

Subject: Home building; Construction companies; Small business; Venture capital; Case studies

Location: United States--US

Company / organization: Name: DHR Construction LLC; NAICS: 236115

Classification: 3400: Investment analysis & personal finance; 9520: Small business; 8370: Construction & engineering industry; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 2

Source details: INSTRUCTORS' EDITION

Pages: 1-22

Number of pages: 22

Publication year: 2008

Publication date: 2008

Year: 2008

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 Equations

ProQuest document ID: 216282110

Document URL: http://search.proquest.com/docview/216282110?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 42 of 100

DAVID WALENTAS' TWO TREES MANAGEMENT COMPANY: A CASE OF DELIBERATE ENTREPRENEURSHIP

Author: Rahman, Noushi; Naumi, Fabiha

ProQuest document link

Abstract:

Real estate entrepreneur-turned-mogul David Walentas has deliberately transformed Brooklyn's DUMBO neighborhood, where he holds about 3 million square feet of building space. Walentas has worked methodically to give the deserted area of DUMBO a neighborhood feel. Initially, he allowed artists to move in for very low rent. As artists moved in, so did culture, sophistication, and the need for art-related things. This gave rise to multiple galleries, design studios, and printing services firms in DUMBO. With an increasing population in the neighborhood, the government was more willing to invest in redeveloping State-owned properties in the area. This had strong positive spill over for Walentas' Two Trees Management Company. At an estimated current going price of $700 per square foot, Walentas' 3 million square feet real estate holdings are worth about $2.1 billion. With development work in DUMBO factory buildings going full-steam, however, Walentas now faces a dilemma concerning his growth strategy. Once these buildings are all leased out or sold, the growth of his company Two Trees Management will stagnate. Thus, despite tremendous success, what the future holds for Two Trees is anyone's guess. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Case Abstract

Real estate entrepreneur-turned-moghul David Walentas has deliberately transformed Brooklyn's DUMBO neighborhood, where he holds about 3 million square feet of building space. Walentas' Two Trees Management Company has added value to the properties in both traditional and novel ways. Traditionally, Two Trees has added value by making infrastructural changes. For example, converting factory buildings to luxury loft apartments has added much value to the buildings. Constructing grand lobbies, modern appliances, concealed wiring, convenient electrical outlets, decorative hallways, wide windows-all these infrastructural changes have added value to Two Trees' properties. However, the value generated from these infrastructural changes assumes a reasonable quality of life in the neighborhood that DUMBO did not have previously. Walentas has worked deliberately to give DUMBO a neighborhood feel. Initially, he allowed artists to move in for very low rent. As artists moved, so did culture, sophistication, and a need for art-related things. This gave rise to multiple galleries, design studios, and printing services firms in the neighborhood. With an increasing population in the neighborhood, both City and State governments were more willing to invest in redevelopment projects. From rerouting Bus 25 through DUMBO, to substantial improvements in the neighborhood park, to establishing a boardwalk by the East River, the governments ' interest and help had strong positive spillover for Two Trees Management.

In the late 1990s, with a rejuvenating neighborhood, an established cultural flare, and a rising NYC real estate market, Two Trees Management finally started selling and leasing its value-added apartments in DUMBO. All units of the first building were sold for a total of $70 million within months. All units of the second condo-con verted building also were sold within months in 2003. At the current going rate of about $700 per square foot, Walentas ' 3 million square feet of building space in DUMBO is worth about $2.1 billion.

With development work in DUMBO factory buildings going on in full-steam, Walentas now faces a dilemma concerning his growth strategy. His DUMBO resources, which made him a real estate moghul were unique and he had accessed them early on. Once these buildings are all leased out or sold, the growth of his company Two Trees Management will stagnate. Anticipating this impending slowdown, Walentas has been trying hard to construct new high-rise buildings in DUMBO. However, political opposition has made such vertical expansion remote. Growing in other neighborhoods in a manner similar to DUMBO remains another alternative for Walentas ' Two Trees. Besides growth through real estate development, Two Trees Management may consider moving in other supporting and related industries. For example, household appliance, grocery, etc. can contribute to the neighborhood feel. However, Two Trees Management has no experience operating such businesses. What path Walentas pursues to achieve growth remains to be seen.

Teaching Objectives

1. Entrepreneurship

a. Traits

b. Behavior

c. Planning and Deliberation

2. Opportunities from external environment coupled with internal strength

3. Corporate strategy for future growth: Horizontal Integration vs. Vertical Integration and Related Diversification

4. Re s our ce-based view of Walentas' assets

Courses

This is a complex case and it requires some prior understanding of strategy concepts. It will be appropriate for senior undergraduate as well as graduate students.

Undergraduate:

1. Business Policy and Strategy course

2. Entrepreneurship courses

Graduate:

1. Strategy courses

2. Entrepreneurship courses

Class Room Discussion Questions

1. What entrepreneurial traits do you observe in Walentas? How do these contribute to his success?

2. In what ways did Walentas add value to his properties?

3. To pursue further growth, speculate which strategy Two Trees should pursue. Justify your answer in terms of Two Trees' resources and capabilities.

4. Walentas' holdings of 3 million square feet of building space in DUMBO have been his main source of competitive advantage. Can Walentas sustain this competitive advantage? Justify your answer in light of the re source-based view.

Teaching Suggestions

1. This case needs to be pre-assigned; students must have read this case before coming to the class

2. Questions about the case should also be pre-assigned to point students' thinking in the desired direction

3. Actual analytical discussion should take roughly 10 minutes per question discussed (plus another 5 to 10 minutes of case summary in class)

Supplemental Video (available for sale at $11.95 from www.bobvila.com)

Vila, B.( 2002). Demolition and Preservation in Brooklyn. Waterfront Warehouse Rehab - Episode 2 (Show 1402). From: Bob Vila's Products and Services <http://webl.bobvila.com/BVTV/HomeAgain/Episode0 -1402.html>.

In this video, as excerpted from www.bobvila.com, "Chris Vila joins Bob again to tour a loft space in the neighboring Sweeney Building. In addition to stunning views of the Brooklyn Bridge and downtown Manhattan, the building boasts a "tar beach" rooftop deck space. Bob and Chris are joined by David and Jed Walentas, the owners of the project building, who share with us their vision for the area. Back on site, demolition is underway and Bob meets Bill Higgins from Higgins and Quasebarth preservation experts to find out more about the history of the building."

Sample Student Answers for the Questions in DUMBO case

1. What entrepreneurial traits do you observe in Walentas? How do these contribute to his success?

"A" response

By being proactive, innovative, and risk-taking, David Walentas shows all three generic traits of entrepreneur ship. Soon after he bought roughly 2.5 million square feet of space in Fulton Ferry Landing, he renamed the place to call it DUMBO (abbreviation of down under the Manhattan bridge overpass). This was very inventive! So were offering the four-step leasing plan to businesses, allowing specific types of businesses (i.e., those adding to his envisioned cultural flare) to move in, and bringing renowned restaurants to DUMBO.

Second, he wanted the City government to give him the contract to work on the Fulton Ferry Park. When the government put up a tender, he was the first and only bidder. This shows his proactive attitude. The whole process of gearing "gentrification" in a "focused and quick" manner to revitalize the dilapidated neighborhood into a chic one was a unique case in gentrifi cation history; and without Walentas' proactive attitude, this could not have happened. Specifically, arranging different festivals (e.g., 'It's my park' day) to create a neighborhood feel was a proactive step by Walentas.

Lastly, when people were scared to even go to DUMBO, he was risk-taking enough to buy 2.5 million square feet of space in 9 deserted buildings! Even under extreme financial pressure, he sent his son to the University of Pennsylvania and had him apprenticed under Donald Trump. The University of Pennsylvania was a risky choice for Walentas at that time and situation; but Walentas went ahead and made sure that his management team was getting the best training.

"B" response

Walentas shows all three entrepreneurial traits. For example, providing the fourstep leasing plan to business tenants shows that he is inventive (because it is not a very common thing to offer). Walentas is proactive as well; we understand it from the fact that he organized several art-related festivals to create a neighborhood feel in DUMBO. As the developer, he just did not renovate the old buildings; he thought more and proactively arranged these festivals to make his tenants happier. Initially, buying 2.5 million sq feet of building space in nine deserted buildings was risky enough. The problem with deserted neighborhoods is that nobody wants to go there. But Walentas took the risk and bought those buildings with $16.5 million.

"C" response

Walentas is innovative and risk-taking. So he has two out of three entrepreneurial traits. He is innovative because he started new things that one wouldn't normally expect. For example, the four-step leasing plan and bringing in the higher end restaurants are innovative tasks that he did. He is risk-taking because he invested millions of dollars to buy a lot of space in an abandoned sort of a place. If his planned neighborhood revitalization hadn't occurred, he'd be doomed.

2. In what different ways did Walentas add value to his properties?

"A" response

Walentas added value to his properties in both traditional and novel ways. While renovating dilapidated buildings with large windows and new fittings is a traditionally valueadding task, most of Walentas' initiatives and works added value to his properties in unconventional ways.

His concept of changing old factory buildings into posh offices and uppermiddleclass residential apartments is rather unique; after all, we do not normally expect to find these in Once abandoned' factories. Instead of relying on a slow gentrification process and counting on others ' contributions, Walentas purchased a lot of building space in the area and became the deliberate catalyst for triggering his envisioned neighborhood revival of DUMBO. On one hand, he offered the four step leasing opportunity (visit space, sign lease, move in, and get to work) to his business tenants; this all-inclusive deal (where all amenities came with the package) was hard to refuse. On the other hand, he also did a lot of things to give DUMBO a neighborhood feel for his residential tenants - from creating art festivals to bringing in Zagat-rated restaurants, to choosing the neighborhood bakery - Walentas did it all to make DUMBO a better place. The cultural character and upper-middleclass aura of DUMBO (i.e., the neighborhood upheaval in general), in turn, made his properties more valuable and easier to market.

"B" response

Walentas offered a 'ready to work' environment to his business tenants. He practically handpicked those tenants, making sure that they added to the cultural character of gentrifying DUMBO. In choosing these tenants, he could also create an interdependent business community in the neighborhood. Also, the large windows and good fittings added value to his properties. He also brought in many expensive and well-known restaurants, which also made the neighborhood more attractive.

"C" response

Walentas' apartments (that he rented out to businesses) already had electric, phone, and cable wires. It is not ordinary practice as it makes life more convenient for the tenants. Tax break also attracted businesses. He also tried to give DUMBO an artsy feel; and he also brought in many restaurants for fine dining.

3. To pur sue further growth, speculate which strategy Two Trees should pur sue. Justify your answers in terms of Two Trees' resources and capabilities.

"A" response

Walentas should expand his real estate business through horizontal integration strategy. Red Hook, Brooklyn seems like a perfect target for him next. As far as his buildings in DUMBO are concerned, he should decide his plan of action rationally. If he has at least ten buildings in hand, he should rent out three buildings to take advantage of the ongoing increases in the rental market prices. He needs to focus on quality in the future; so, generating profits currently will help him to provide continuous maintenance on each building (of course, condo fees are usually designed to cover basic maintenance anyway).

As made evident in the article, "ushering in premium quality businesses" would most definitely "increase the value of the neighborhood." Therefore, Walentas could afford to sell at least two of his buildings to gain a set amount of money to payoff any existing mortgages. While he rents three, sells two, he can begin renovations to the other buildings at a pace that is convenient to him, especially in terms of completing the renovations when the market is hot.

Walentas has been successful because he has always acted rationally and competitively; so, making totally rash decisions and occupying all ten sites would not be as much of an advantage. Walentas should stick with real estate because, in addition to the leadership, he also has other resources, i.e., his four-step plan and a skilled and supportive management team. Now, having worked miracles in DUMBO, the management team is even more experienced, and thus is likely to be successful again.

"B" response

Walentas should use horizontal integration as a corporate strategy. Real estate is his area of expertise and he should stick to real estate for now. Two Trees should consider merging or partnering with other developers in DUMBO. This would give Two Trees greater control over the real estate properties in the neighborhood, which will continue to become more attractive every year. On a related point, while Walentas is enjoying the hot real estate market (like any other developer), he should make sure that he reaps his profits before the real estate market turns sour.

"C" response

Walentas' resource is his large ownership of real estate in DUMBO. And due to his reputation and DUMBO's new culture, he has the capability to build theater, art galleries and art trading centers. So he should diversify into the entertainment business now.

4. Walentas' holdings of 3 million square feet of building space in DUMBO have been his main source of competitive advantage. Can Walentas sustain this competitive advantage? Justify your answer in light of the resource-based view.

"A" response

In order to determine whether Walentas can sustain his competitive advantage, it is crucial to analyze the situation from all four angles - value, rareness, inimitability, and non-substitutability. First, his traditional and novel ways of value adding transformed the dilapidated neighborhood of DUMBO into a vibrant area, which is more cultured, feasible and attractive now. From $6 per square foot to an average of $700 per square foot numerically corroborates the value he added. Second, DUMBO is rare because there are very few waterfront neighborhoods in New York City proper. So even if somebody else wants to repeat Walentas' work in DUMBO in some other place, chances are slim to none that s/he would find a similar geographic setting (with a similarly unique view). Third, Walentas wins even where inimitability is concerned. Walentas had a vision of converting these factory buildings into posh offices and residential apartments to certain specifications ; and that is exactly what he did. The cultural identity and the trading nature of the neighborhood that he created is one of a kind. So is his care in selecting his tenants. So DUMBO is inimitable. Lastly, there seems to be no substitute for Walentas' DUMBO project, since competitors would have to incur very high switching costs (i.e., large-scale real estate is a very capital intensive business). Also, he provides an all-inclusive packaged deal to tenants, so any building trying to compete with these perks would most likely lose. Walentas successfully created a project that has a positive outlook for the future from the perspective of his profits and from that of the people who live in the community. Thus, with the kind of resources that Walentas has, he can sustain his competitive advantage.

"B" response

Walentas' company has the ability to maintain its competitive advantage because it has four criteria necessary for that. Its capabilities are valuable, in that it has been successful in creating its vision by using incredible insight and innovation. It is rare because of the services offered to the tenants before they move in, such as internet, and phone connections. The DUMBO neighborhood enjoys inimitability because of the way it is setup. There are great quality buildings with a park nearby. Walentas' DUMBO project is also difficult to imitate because it has many tax breaks provided by the local government. Finally, the strategic capabilities are non-substitutable because the development strategy involves a large investment of a huge underdeveloped area and a long-term goal.

"C" response

I believe Walentas can sustain his competitive advantage. His property has added great value over the years, mainly cultural value. He wanted an area where work and entertainment could happen together. Over the years, the area has become an exciting place with different cultures and many different things to do. DUMBO has many rare qualities like the geographic uniqueness as well as Walentas' treatment with his tenants. I believe that Walentas will come up with new innovations to maintain the rareness of his property.

Subject: Real estate; Entrepreneurship; Vertical integration; Neighborhoods; Case studies

Location: United States--US, New York City New York

Company: Two Trees Management Co

Classification: 9110: Company specific; 2320: Organizational structure; 9520: Small business; 8360: Real estate; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 2

Source details: INSTRUCTORS' EDITION

Pages: 23-31

Number of pages: 9

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216281915

Document URL: http://search.proquest.com/docview/216281915?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 43 of 100

PEARL BEER

Author: Elrod, Henry ("Rod")

ProQuest document link

Abstract:

Pearl Beer is purposefully written in an easy-going style intended to appeal to students, and is designed to stimulate classroom discussion. The case can be used in and management policy strategy classes or marketing classes. There is no intention to cast odious reflections on particular people or companies, Coors Beer and Pearl Beer included, nor to suggest a better way of management. The things Wayne says are just his opinions, and no one knows if they are true or not. Students should prepare an analysis of what is going wrong at the company, and what they are going to do about it. The case does not include data for the students to analyze because the problems in the case, and their solutions, have their genesis in behavioral issues which are not affected by the application of statistical approaches or by the tools of managerial accounting. The case presents no technical difficulty, but requires the logical thought and clarity of expression typical of seniors and graduate students. It can be taught in a single class if the students prepare ahead of time, and students should spend perhaps an hour in a discussion group to prepare. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Management

Forced field analysis, as described by Besterfield (Besterfield, Besterfield-Michna, Besterfield, & Besterfield-Sacre, 2003) may help students understand the forces involved in the company's marketing and management problems. Given an objective to increase sales, students may identify management's desires and emphasis on marketing as promoting attainment of the objectives. The low pay provided to the drivers, the perception that increases in the routes will be taken from the current route drivers, limitations on the number of stops a single truck can make in a day, prior adversarial relations between management and the drivers, and lack of sales and marketing training for the drivers may be listed as forces inhibiting the attainment of management's objectives.

The company is organized to deliver beer, but not to market it. Changes that management may contemplate to address this issue might include organizing the routes so that drivers can become supervisors of multiple routes, giving them the organizational room and the time in the workday to pursue new accounts and manage expanded route responsibilities.

The structure of the routes and the pay system is central to the company's failure to market effectively using the route drivers as the primary sales force. Does the route delivery system and commission pay system provide incentive for the drivers to perform as better sales agents, or does it simply give management an excuse to keep wages low, by containing wages as a percentage of sales? The company may consider putting one driver in charge of two or three adjacent routes, with an override commission. This would provide the additional sales structure and incentive pay needed to emphasize the importance of signing new accounts.

Should the Pearl Brewing Company, located in San Antonio, Texas, provide this Fort Worth distributor with assistance, advertising money and expertise? Should the local company conduct advertising? What about store displays and specials in cooperation with the local grocery chains?

Students should consider the effects on job performance of the management attitudes and style implicit in this organization. Management's underlying assumptions about how people behave are important influences in their planning and thinking, and send important messages to employees (McGregor, 1960). What messages about job performance and personal advancement has Wayne been getting? Are his goals aligned with company goals?

Students should consider questions like "what business are we in?", and "what businesses should we be in?" (Drucker, 1954) Force-field analysis or SWOT analysis may be helpful (Besterfield et al., 2003). The company's strict definition of the Pearl distributor in Fort Worth as a beer distributor was to restrictive to allow the company to consider handling other products which their vehicles, sales/delivery personnel and route structure could accommodate, which may have helped sales and profitability. Expanding their vision to include "liquid refreshments" may have helped. If their vision of the company had included "packaged food and beverage distributor" it would have allowed them to deliver non-alcoholic beverages, snacks and other convenience food items to their basic customer base, without much change in methods or equipment.

Although their contractual arrangements with Pearl Brewing may have restricted this flexibility, management should also consider purchasing or contracting for distribution of other brands of beer. Pearl was marketed as a popular beer as opposed to a premium beer. These classifications refer to the retail price of the products, but have no effect on the cost of the products. Thus, if Pearl Distributing could deliver a premium beer as well as the popular-priced Pearl, gross profit margins may be improved.

Pearl Brewing Company (the San Antonio brewer) did not engage in this kind of analysis, and likely, their distributors did not either. Although some Pearl is still made, the main Pearl brewery in San Antonio, the oldest in Texas and established in 1881 (Hennech, 2002), has been closed for several years. Coors, Anheuser-Busch and Miller Brewing dominate the Texas market today.

Ethics

There are also some important ethics issues embedded that students should discuss. In their career selection process, students should consider whether they should participate in an industry whose products are regularly blamed, albeit when not "used responsibly," for significant levels of death and destruction in our society. Students should consider alcoholism, alcohol related traffic deaths, and whether they should make their living in an industry that profits from the misery of others. The drivers (at least the ones in this case) regularly drink beer during the workday, and then get back into the 25 thousand pound vehicle to fight the traffic to the next delivery.

There are also ethical and legal issues that should be considered beyond simply paying fair wages for hard work. What becomes of the employees who are injured or disabled on the job? What becomes of employees who are too old to continue in the job? What will they do without a pension plan or 401K? This company offered nothing to their employees other than wages and group health insurance.

EPILOGUE

Jan Williamson, the manager of Pearl Beer Distributing Company, was fired about three months after the facts in this case were developed, when the annual sales figure once again dropped.

Subject: Organizational behavior; Motivation; Breweries; SWOT analysis; Case studies

Location: United States--US

Company / organization: Name: Pearl Brewery; NAICS: 312120

Classification: 9110: Company specific; 2310: Planning; 8610: Food processing industry; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 2

Source details: INSTRUCTORS' EDITION

Pages: 33-36

Number of pages: 4

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216274843

Document URL: http://search.proquest.com/docview/216274843?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 44 of 100

HEDGING FOREIGN CURRENCY TRANSACTION EXPOSURE

Author: Dow, Benjamin L; Kunz, David

ProQuest document link

Abstract:

St. Louis Chemical is a regional chemical distributor, headquartered in St. Louis. Don Williams, the President and primary owner, began St. Louis Chemical ten years ago after a successful career in chemical sales and marketing. The company has gradually expanded it product line and network of manufactures. However, a year-end report had shown shrinking profit margins on product lines that include chemicals purchased from a Canadian manufacturer. Williams has asked for recommendations regarding his firm's exposure to exchange rate risk. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

CASE OVERVIEW

St. Louis Chemical is a regional chemical distributor, headquartered in St. Louis. Don Williams, the President and primary owner, began St. Louis Chemical ten years ago after a successful career in chemical sales and marketing. During a year-end review, Williams noticed a significant deterioration in the profit margins of many specialty chemical lines. After further investigation, Williams learned their supplier, Norcand Chemical, required all orders to be invoiced in Canadian dollars. As a result of the invoicing policy, St. Louis Chemical was exposed to an average of 90 days of exchange rate transaction exposure. Williams solicited the help of James Thorton, a newly hired assistant in the finance office, in proposing alternatives to manage the exchange rate risk.

The primary subject matter of this case is foreign currency exchange rate risk. secondary issues examined include assessing transaction exposure and comparing hedging techniques to effectively manage exposure. The case requires students to have an introductory knowledge of accounting, statistics, finance and international business, thus the case has a difficulty level of four (senior level) or higher. The case is designed to be taught in one class session of approximately 3 hours and is expected to require 4-5 hours of preparation time from the students.

TASKS TO BE PERFORMED

1. Calculate the percentage change in the #CAD/1USD exchange rate between the order month and invoice month for past transactions. Determine the US dollar cost differ ence per transaction between the estimate used by Packmore and the in voice paid by Scott. Explain the effect of exchange rate movements on profit margins during 2005.

During the first 6 months of 2005, the exchange rate risk had benefited St. Louis Chemical. A modest strengthening of the US dollar that had occurred for orders placed from October 2004 to March 2005 but paid for from January to June 2005 meant that St. Louis Chemical had actually paid a total of $18,260 less for Norcand orders compared to costs Young entered at the time of the orders. Unfortunately, the last 6 months of 2005 had provided a much different outcome. Orders placed from April to September of 2005 and paid for from July to December 2005 had resulted in actual payments of $46,390 more than costs entered in by Young. The US dollar cost difference is a function of the percentage change in the value of the dollar and the size of the order placed. Looking at all of 2005, St. Louis Chemical had actually paid $28,130 more for Norcand orders compared to cost estimates used by Packmore, thus reducing the already thin profit margins characteristic of the industry.

2. For the C$300,000 December 2005 order, determine a probability distribution of the US$ cost to St. Louis Chemical in March, 2006 incorporating the following assumptions:

-The percentage change in the Canadian dollar/US dollar (indirect quote) exchange rate follows a normal distribution.

-The expected percentage change between the spot rate in 90 days and the current spot rate is 0%, but the 90-day standard deviation in the percentage change between the spot rate in 90 days and the current spot rate is equal to 4%.

In the case of the December 2005 order valued at 300,000 Canadian dollars, the spot rate between the Canadian dollar and the US dollar at the time of the order is 1.17CAD /1USD. If the expected percentage change in the spot rate in 90 days has a mean of 0% then the spot rate is 90 days is expected to be 1.17CAD / 1USD. Therefore, the expected payment in 90 days is equal to (300,000 / 1.17) $256,410. However, if the percentage change in the exchange rate has a standard deviation of 4%, then the probability distribution of the spot rate in 90 days and the corresponding range of payments in March 2006 would be as follows:

There is a 68% probability the CAD/USD exchange rate in 90 days will be between 1.12CAD/1USD and 1.22CAD/1USD corresponding to a March 2006 payment in US dollars of between $267.86 and $245.90 thousand. There is a 95% probability that CAD/USD exchange rate in 90 days will be between 1.08CAD/1USD and 1.27CAD/1USD corresponding to a March 2006 payment in US dollars of between $277.78 and $236.22 thousand. Assuming a normal probability distribution with an expected percentage change of 0% for the spot rate in 90 days implies that St. Louis Chemical is equally as likely to pay less than what was expected as they are to pay more than what was expected. Williams decision as to whether the additional currency risk is acceptable will depend on William's degree of risk aversion. If the additional currency risk is not acceptable to Williams, the risk must be transferred to a third party via a hedge position.

3. Discuss with Williams the extent of exchange rate risk faced by St. Louis Chemical arising from the C$300,000 Dec. 2005 transaction using a 90-day Value-at-Risk methodology based on a 95% confidence level.

-The December 2005 spot rate (indirect quote) at the time of the order is 1.17CAD/1USD.

-The Dec. 2005 order is expected to cost US$256,410 in 90 days.

-A Value-at-Risk methodology incorporates the timehorizon, confidence level and transaction size to determine a maximum loss on the value of the position at risk.

-The maximum loss is determined by the lower boundary of the probability distribution, which is approximately 1.65 standard deviations away from the mean for a 95% confidence level.

-The percentage change in the Canadian dollar/US dollar (indirect quote) exchange rate is assumed to follow a normal distribution.

-The expected percentage change between the spot rate in 90 days and the current spot rate is assumed to be 0%, but the 90-day standard deviation in the percentage change between the spot rate in 90 days and the current spot rate is assumed to be equal to 4%.

To determine the extent of the downside risk faced by St. Louis Chemical using a Value-at-Risk methodology, the transaction size, time horizon, and confidence level must be given. In the case of the Dec. 2005 order, the transaction size is C$300,000, the time horizon is 90 days, and the confidence level is given as 95%. The expected payment in 90 days converted to US dollars is $256,410. However, any variation in the exchange rate over the next 90 days gives rise to the exchange rate risk faced by St. Louis Chemical. The Value-at-Risk methodology attempts to provide a single number summarizing the total risk exposure for a particular transaction. If the percentage change in the exchange rate is assumed to be normally distributed, the 95% confidence level for a 90-day maximum loss is determined by the lower boundary of the probability distribution approximately 1.65 standard deviations away from the expected percentage change in the exchange rate. This implies a -0.066 change in the exchange rate (0.0 + 1.65*-0.04 = -0.066). Since the expected spot rate in 90 days is 1.17CAD/ 1USD, a-0.066 change in the expected spot rate in 90 days would result in an exchange rate equal to 1.09CAD / 1USD: 1.09 = [1.17*(1+0.066)]. Based on a 95% confidence level, the maximum price for the C$300,000 Dec. 2005 order would be US$275,229. This implies a 90 day 95% Value-at-Risk equal to US$18,819 (US$275,229-US$256,410).

4. Discuss the strengths and weaknesses of paying Nor and at the time of delivery rather than waiting 60 days until the invoice is due.

An advantage of paying Norand at the time of delivery is a reduction in the exchange rate transaction exposure from 90 days to 30 days. However, many disadvantages arise including a lengthening of the cash cycle due to an elimination of the accounts payable period, an increase in net working capital requirements, and an increase in the effective cost of the order. In order for early payment to be beneficial, St. Louis Chemical would have to negotiate a sufficient cash discount to compensate for the loss of 60 days free credit. However, this would only reduce the magnitude of the transaction exposure, not eliminate it entirely. St. Louis Chemical would still be exposed to 30 days of exchange rate risk, the average length of time required by Norcand to deliver the order.

5. Describe a money market hedge that could be used to eliminate the exchange rate risk associated with the Dec. 2005 order valued at C$300,000 incorporating the following assumptions.

-The Dec. 2005 spot rate is 1.17CAD / 1USD.

-According to St. Louis Chemical's banker, the company can currently borrow US dollars for 3-months at an annual rate of 7.25%, but would only earn an annual rate of 2% on a 3-month Canadian dollar time deposit for transactions below $1 million.

A money market hedge is generally an arrangement with the bank requiring St. Louis Chemical to buy the present value of C$300,000 today in the spot market and place it in a Canadian dollar time deposit or some other Canadian dollar asset until it is needed for payment. The purchase of Canadian dollars today would be financed in US dollars by a short-term loan or by using cash reserves if they were available. The cost of this hedge would be the difference between the interest paid on the US dollar loan and that received from the Canadian dollar deposit. If cash reserves are used, an opportunity cost of funds must be estimated. Using the assumptions given, St. Louis Chemical would need to purchase C$298,507 in the spot market at the time of Dec. 2005 order:

C$300,000/[1 + (0.02/4)] = C$298,507.

If cash reserves are not available, a short term loan of $255,134 would be required at the time of the December 2005 order:

C$298,50771.17 = $255,134.

At the time of the invoice payment 3 months later, C$300,000 would be available for payment to Norcand and St. Louis Chemical would then repay $259,758 for the dollar denominated loan:

$255,134*[1+ (0.0725/4)] = $259,758.

The money market hedge locks in a payment price at the time of the December 2005 order equal to $259,758. This implies a 3-month forward rate of 1.1549 CAD/1 USD:

C$300,000/$259,758 = 1.1549.

6. Describe a Forward Rate Hedge that can be used to eliminate the exchange rate risk associated with the Dec. 2005 order valued at C$300,000.

-The Dec. 2005 spot rate is 1.17CAD / 1USD.

-A 3 month forward rate at the time of the order is quoted at a bid price of 1.1590 CAD/1USD and an ask price of 1.1600 CAD/1 USD for transactions valued at $1 million or more.

A forward rate contract is an agreement between a corporation and a commercial bank to exchange a specified amount of currency at a specific exchange rate (forward rate) on a specified date in the future. Using a forward hedge to lock in an exchange rate implies the future price of the Canadian dollar would in effect be set today. This type of hedge ensured that whatever the spot rate in the future might turn out to be, the effective price paid for the shipment of goods would still be that which was agreed upon at the time the forward contract was established. For example, the exchange rate at the time of the Dec. 2005 order between the USD and CAD was 1.17 and the three month forward rate was 1.1590 for transactions valued at $ 1 million or more. Note the bid price is used in this example because St. Louis Chemical would be selling US dollars and receiving Canadian dollars. While a bank might quote a forward rate for a smaller amount, the most competitive forward rates are for larger transactions. If available, St. Louis Chemical would agree to buy C$300,000 at the time the invoice is due at an agreed upon rate today (regardless of the spot rate in the future) and use the Canadian dollars purchased from the bank to pay the Canadian supplier.

7. Describe the specific details of a Canadian dollar futures contract. Propose a Canadian dollar futures contract hedge that can be used to eliminate the exchange rate risk associated with the Dec. 2005 order valued at C$300,000.

-The Dec. 2005 spot rate is 1.17CAD / 1USD (indirect quote) or 0.8547USD/ 1CAD (direct quote).

- A March 06 Futures contract is quoted as 0.8620 (direct quote)

- A June 06 Futures contract is quoted as 0.8641 (direct quote)

- A September 06 Futures contract is quoted as 0.8659 (direct quote)

The purchase of C$300,000 worth of specialty chemicals by St. Louis Chemical invoiced in Canadian dollars has exposed them to a "natural short" position in Canadian dollars for 90 days. In order to remove the currency risk, St. Louis Chemical must enter into a "long hedge" position in Canadian dollars of equal value. A futures contract hedge is provided by an instrument sold on the Chicago Mercantile Exchange (CME). Quotations for Canadian dollar futures are given as direct quotes. Futures contracts are established through a member of the futures exchange, usually a broker. Currency futures come in standard contract sizes (each Canadian dollar futures contract is for 100,000 Canadian dollars) and standard maturity dates (the third Wednesday of March, June, September, and December).

In order to trade on the futures market, the client must open and maintain a margin account with the broker. The current margin requirements on the Canadian dollar include an initial margin of $ 1,215 per contract and a maintenance margin of $900. In addition, the broker will charge a commission on all transactions. Buying a futures contract implies a long position and selling a futures contract implies a short position. As protection against loss from currency fluctuations, St. Louis Chemical would buy a sufficient number of futures contracts to create the long hedge. It could wait until the futures contract came to maturity and take delivery of the Canadian dollars paying the futures price previously established, assuming the delivery date and the invoice date were identical. More often, the invoice date and maturity date will not match and a hedge position will need to extend beyond the invoice date.

When the hedge position is no longer needed but before the futures contract reaches maturity, the futures contracts can be sold. If the Canadian dollar strengthens over the 90 days, the invoice (natural short) will cost more in terms of US dollars then what was expected. However, the hedge position will profit from the strengthening Canadian dollar. The net cost will be close to that which is established today. In order to fully hedge the Dec. 2005 order and take advantage of the full 60 days of free credit, St. Louis Chemical would buy 3 Canadian dollar June 06 futures contracts at the time of the order to establish a long hedge position. Because the invoice date is March 31, 2006 and the March 06 contracts expire on March 15, 2006 (the third Wednesday in March), a June 06 contract would be required to fully hedge the position. On March 31, the June 06 contract would be sold. Any profit on the futures trade resulting from a strengthening of the Canadian dollar over the next 90 days would offset a higher price paid for the Dec. 2005 order. Any loss on the futures trade resulting from a weakening of the Canadian dollar over the next 90 days would be compensated by a lower price paid for the Dec. 2005 order. The net result is that the cost of Dec. 2005 order is established at the time of the order.

8. Compare the strengths and weaknesses of a for ward rate hedge and a futur es contract hedge in terms of the following:

a) Size of the contract

b) Delivery date

c) Transaction costs

Forward Contract: The size of the transaction is tailored to an individuals needs, although most competitive rates (smallest bid/ask spreads) are for transactions involving $ 1 million or more.

Futures Contract: Futures contract sizes are standardized. One Canadian dollar futures contract represents C$100,000. While the Dec. 2005 order is for exactly C$300,000, many other transactions are not divisible by 100,000 and an overhedging (a hedge position that exceeds the natural position) or under-hedging (a hedge position that is less than the natural position) of the natural position would result. If the order were for C$342,000, a long position in three future contracts would hedge most, but not all, of the natural short position as C$42,000 would remain unhedged. On the other hand, four futures contracts would represent an over-hedging of C$58,000. The potential overpayment or underpayment relative to the expected payment would be substantially reduced but not entirely eliminated.

Forward Contract: The delivery date is tailored to a specific date based St. Louis Chemical's anticipated payment date. However, there is no flexibility if shipment orders are delayed.

Futures Contract: Delivery date is standardized and is always the third Wednesday of the delivery month. A purchase of a futures contract with a delivery date extending beyond the estimated invoice payment date would provide additional flexibility if shipments were delayed. For example, a Dec. 2005 order is expected to arrive in Jan. 2006 with payment due 60 days after the end of the delivery month (March 2006). If the Dec. 2005 order experienced a delay in shipment and was not received until Feb. 2006, then payment would also be delayed until April 2006). Hedging a Dec. 2005 order with a June 2006 contract would allow for additional flexibility in the event of a shipment delay.

Forward Contract: The transaction costs involved in a forward contract are determined by the bid-ask spread. The larger the size of the transaction the lower the transaction cost (narrowest spread). Most forward contract hedges are for large transactions (typically involving $1 million or more).

Futures Contract: To trade on the futures market, a client must open and maintain a margin account with the broker. The initial margin requirement for a Canadian dollar futures contract is $1215 per contract and the maintenance margin requirement is $900 per contract. In addition, the broker will charge a commission for each transaction.

9. Describe a currency pair spot transaction. Discuss the strengths and weaknesses of hedging the Dec. 2005 order valued at C$300,000 using a currency pair spot hedge.

-The Dec. 2005 currency pair quote USD/CAD

Bid=1.1698 Ask=1.1702

The purchase of C$300,000 worth of specialty chemicals by St. Louis Chemical invoiced in Canadian dollars has exposed them to a "natural short" position in Canadian dollars for 90 days. In order to remove the currency risk, St. Louis Chemical must enter into a "long hedge" position in Canadian dollars of equal value. A currency pair spot hedge involves the buying of one currency and the selling of another simultaneously. For example, the USD/CAD currency pair refers to the US dollar and the Canadian dollar. The first currency, USD is referred to as the base currency. The second currency, CAD, refers to as the counter or quote currency. The currency pair exchange rate is given as a bid price and an ask price. An example would be aquote of USD/CAD 1.1698/02. The bid price of the USD/CAD currency pair is 1.1698 and the ask price of the currency pair is 1.1702. Buying one unit of the currency pair at the ask price implies buying one unit of the first, base currency and selling an equivalent amount of the second, quote currency (to pay for the base currency). Selling one unit of the currency pair at the bid price implies selling the first, base currency, to buy an equivalent amount of the second, quote currency. When a trader buys or sells a currency pair, the value of the currency pair, as an instrument, is close to zero. As market rates fluctuate, the value of the currency pair position held will also fluctuate. A margin deposit is required is case the position results in a loss. The initial margin deposit requirement may be as little as 1% of the value of the position, but is often slightly higher (2% or more).

In order to hedge the natural short position created by the Dec. 2005 C$300,000 order using a currency pair spot hedge, St. Louis Chemical would take a long hedge position equal to 300,000 Canadian dollars. Since the currency pair spot rate is quoted as USD/CAD 1.1698/02, St. Louis Chemical would establish a long hedge in Canadian dollars by selling 256,454 units of the currency pair USD/CAD. This would imply that the St. Louis Chemical is short US$256,454 and long C$300,000 Canadian dollars using the bid price of 1.1698. (C$300,000 /1.1698 = 256,454) In 90 days, St. Louis Chemical would buy 256,454 units of USD/CAD using the ask price to close out the currency pair spot hedge. If the US dollars weakens and the ask price of the USD/CAD currency pair is for example 1.16, then buying 256,454 USD/CAD will close the hedge position out (long US$256,454 and short C$297,487). St. Louis Chemical's account will show a balance (C$300,000-C$297,487) of C$2,513. Converting the balance (C$2,513) into US dollars will result in a profit of US$2,166 (C$2,513 /1.16). The cost of the goods at invoice would rise from an expected US$256,410 to an invoice cost of US$258,621, a difference of US$2,211. The US$2,166 profit from the currency pair trade hedge will offset the higher cost of the goods.

The advantage of hedging with a currency pair transaction includes maturity date flexibility (the hedged position has no defined maturity date) and specific size determination (any size transaction can be hedged). The disadvantage may be higher transaction costs (margin deposit, bid/ask spread, and interest rate differentials) compared to a futures contract hedge, although an exact comparison of costs would have to be calculated on a case by case basis.

10. Make a recommendation to Williams regarding the exchange rate risk faced by St. Louis Chemical.

St. Louis Chemical faces an average of 90 days of transaction exposure due to Norcand's requirement of invoicing specialty chemical orders in Canadian dollars. In the event of a neutral exchange rate forecast for the Canadian dollar, Williams must decide if the addition risk faced by fluctuations in the exchange rate is worth assuming. The extent of transaction risk exposure can be explained to Williams using a value-at-risk methodology. In light of very thin profit margins faced by Chemical distributors, it is likely that Williams will decide to hedge the exchange rate transaction exposure. While there are many potential hedging mechanisms available, the most likely vehicles include a futures hedge or a currency pair spot hedge. Paying Norcand early has many disadvantages as described above. While a money market hedge will eliminate exchange rate risk, the cost of the hedge is relatively large given the spread between interest paid in US dollars and interest received from the deposit. In addition, the money market hedge may artificially inflate St. Louis Chemical's balance sheet due to additional deposits and loans used in the money market hedge. Forward rate hedges, while simplistic, are usually most cost efficient for large transactions ($ 1 million or more) and not readily available for smaller transactions. At present, the amount of transaction exposure per order is likely too small to utilize the forward markets. A futures contract hedge provides flexibility in terms of maturity but in most cases will not provide a complete hedge (over-hedging or under-hedging) for orders not divisible by 100,000. However, a significant amount of transaction exposure will be reduced through the futures hedge. A currency pair spot hedge has many advantages in terms of size (any size order can be fully hedged) and maturity flexibility (no defined maturity date). A direct comparison of the actual transaction costs (margin requirements and brokerage commissions for the futures hedge versus the margin requirements and bid/ask spread involved in a currency pair spot transaction) between a futures hedge versus a currency pair spot hedge would have to be calculated on a case by case basis. However, due to interest rate parity, the difference between a futures hedge and a currency pair spot transaction is minimal and often times is simply a matter of preference. From an operational perspective, Williams will also have to clearly specify who is responsible for managing transaction exposure and make explicit any constraints on the use of expo sure-management techniques. Finally, Williams will need to develop a system of monitoring and evaluating any risk management activities his company chooses to engage in.

Subject: Hedging; Foreign exchange rate risk; Case studies; Chemical industry; Futures market

Location: United States--US

Company / organization: Name: St Louis Chemical Inc; NAICS: 325188

Classification: 9110: Company specific; 8640: Chemical industry; 3400: Investment analysis & personal finance; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 2

Source details: INSTRUCTORS' EDITION

Pages: 37-49

Number of pages: 13

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216284649

Document URL: http://search.proquest.com/docview/216284649?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 45 of 100

THE EFFECT OF CHANGES IN ACCOUNTING FOR DEFINED BENEFIT PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS ON COMPANIES' FINANCIAL STATEMENTS AND STAKEHOLDERS

Author: James, Marianne L

ProQuest document link

Abstract:

Since the introduction of the first pension plan by American Express in 1875, traditional (defined benefit) pension plans have become an important source of millions of employees' retirement income. At one time, defined benefit pensions, which promise employees a specific amount of retirement income, represented the most common type of employer-sponsored plan. Legislation, especially the ERISA ACT of 1974 and the creation of the Pensions Benefit Guarantee Corporation (PBGC) added security to these benefits. Sadly, these traditional pensions have become less popular. In 1981, 81% of employees who were covered by employer-sponsored retirement plan were covered by a traditional pension plan; by 2003, that percentage decreased to 38% (Clements, 2006). This trend appears to be continuing. For example, recently, several large well-known public companies have decided to freeze their existing pension plans. Reasons for this reduction in traditional pension plans include the financial risk to the employer, and the uncertainty created by negative or low-performing stock markets. Other postretirement plans (e.g., postretirement health care) also have become less popular, primarily due to rising costs. Changes in accounting for traditional pensions and other postretirement benefit plans may sharply increase the liabilities and expenses and decrease the equity shown on companies' financial statements and may further increase the risk and cost of these types of plans. These changes may affect employers' willingness to continue offering these plans. The primary focus of this case is to examine the potential short-term and long-term effects of recently promulgated and expected accounting changes on companies' (1) financial statements, (2) stakeholders, and (3) willingness to offer these plans. The case can be taught at the same time that retirement benefits are covered in an intermediate accounting class, or in an advanced accounting class focusing primarily on underlying concepts. The case has analytical, communication, and research components. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Teaching Strategies

This case focuses on FASB's promulgated and expected changes in accounting for defined benefit pensions and other postretirement benefit plans, and the potential impact of these changes on companies' (1) financial statements, (2) stakeholders, and (3) willingness to offer traditional pensions and other postretirement plans to their employees. The case has conceptual/analytical as well as research components. Written and/or oral communication skills can be enhanced utilizing this case.

This case can be utilized in intermediate accounting as part of the coverage of pensions or in a more advanced graduate class focusing primarily on underlying conceptual issues. The case could be solved in groups during class time, or it could be assigned as a group or individual homework project. In either case, students should review the case prior to discussion in class. The research component can be utilized as an extra credit assignment or as a regular assignment.

Students should be encouraged to focus not only on the financial statement effects, but also on the economic consequences of accounting standards and changes in these standards. The relevance and reliability, and thus the usefulness of financial information should be emphasized. The instructor may wish to point out that in the long-run capital markets tend to become more efficient when accounting information provides full disclosure and relevant as well as reliable information. Enhanced disclosure and accruals tend to enhance usefulness. The case will require about two hours of outside preparation if completed solely as an assignment. Detailed in class discussion will require about 45 minutes.

The research questions are particular pertinent for a graduate accounting class, but can also be assigned as an individual or group research project in intermediate accounting. These questions are shown in the research section. These include questions regarding other companies' reactions to the changes, historical economic effects of issuance of SFAS 106, and legislative changes recently enacted by Congress.

If used in a graduate level class, additional focus on underlying theories, such as the theory of economic consequences could be stressed. Sometimes, companies' reactions to changes in accounting may adversely affect some stakeholders.

Suggested Answers to Questions

Students may want to present the answers in the format of a memorandum to the controller.

To: Jackie McKiern, Controller

From: Student's Name, Accounting Assistant

RE: Expected Effect of Changes in Accounting for Defined Benefit Pension and Retiree Health Care Plans

Below, as requested, are answers to the questions you asked me to research. Please let me know, if I may be of further assistance.

On September 29, 2006, FASB issued SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statement No. 87, 88, 106, and 132 R." For public companies, most of the provisions of SFAS 158 will be effective for fiscal years ending after December 15, 2006. The answers below incorporate changes promulgated by SFAS 158 as well as expectations of potential future changes under phase two. To date, no exposure draft for phase two of FASB's project has been issued; I will keep you abreast of any changes.

Company-specific questions

1. What would be the short-term impact on Neuman Company's a) balance sheet, b) income statement, and c) statement of cash flows?

When the provisions of SFAS 158 become effective, Neuman Company will have to recognize any underfunded amount related to both its defined benefit pension plan and its retirement health care plan as part of the company's comprehensive income and also recognize a liability. Based on year 2005 financial date, for the pension plan, the amount that would have to be recognized is $293,000 on the balance sheet (the difference between the PBO and the plan assets). For the retiree health care plan, the amount is $1,100,000 (the accumulated obligation that is currently unfunded). On the balance sheet, the effect of recognizing the unfunded obligations could be quite significant, reducing equity, increasing liabilities, and reducing the company's net worth. In addition, unrecognized prior service costs and actuarial gains or losses arising during the current period would have to be recognized as part of comprehensive income. Based on 2005 financial data, this amount would have been $137,000, the difference between the estimated and actual returns.

In the short-term, the income statement would not be affected. No short-term cash flow effect would occur, unless the company decides to increase its funding status.

2. What would be the long-term impact on Neuman company's a) balance sheet, b) income statement, and c) statement of cash flows?

After SFAS 158 becomes an effective standard, Neuman Company will have to recognize any underfunded amounts in both the pension plan and the retiree health care plan in the company's comprehensive income. On the balance sheet, the long-term effect could be quite significant.

If under phase two, the actual return on plan assets may have to be utilized to calculate income, income will also be affected via the calculation of the periodic pension cost and other postretirement benefits cost (retirement health care cost). In the long-term, the company would tend to have to increase its cash contributions to mitigate the negative effect on the income statement and balance sheet.

3. What options does the company have?

The company has four basic options:

Option 1) Continuing the existing plans: Neuman can continue with the existing defined contribution pension and health care plans, regardless of the impact on the company's financial statements.

Option 2) Discontinuing the defined benefit pension plan and switching to a defined contribution plan: Neuman Company can discontinue the plan and switch to a defined contribution plan, such as a 401 (k) plan. This would reduce uncertainty and risk for the company and reduce potential income volatility.

Option 3) Discontinuing all retirement plans: Neuman Company could discontinue (freeze) all retirement plans.

Option 4) Discontinuing the health care plan: Neuman Company could discontinue or curtail the retirement health care plan only.

4. How would implementing each of these options affect the company's a) balance sheet, b) income statement, and c) statement of cash flows?

Option 1) Continuing the defined benefit plan: The effect will be the same as outlined in questions 1 and 2. Since the defined benefit pension plan and especially the retirement health care plan are underfunded the company likely would have to show a long-term liability on its balance sheet, which would significantly change key financial ratios. To mitigate the effect on the balance sheet liabilities and equity, the company could increase its funding of the plans, which could significantly decrease its cash available for other purposes. IfFASB decides that the actual return on pension and other postretirement benefits assets must be utilized to calculate the periodic pension cost (expense) income will fluctuate. This tends to be undesirable. To mitigate any negative effect on income that may occur under the phase two expected change, the company could encourage the pension plan trustee to change the investment mix made by the plan; more conservative investments combined with an optimally diversified portfolio may smooth the returns over time and avoid potentially sharp fluctuations in costs.

Option 2): Discontinuing the defined benefit plan and changing to a defined contribution plan: This will result in a predictable income statement effect, with no income and cash flow surprises; cash flow will be equal to the contribution. If the contributions are funded, the balance sheet will not be affected.

Options 3 and 4): Discontinuing all or some of the retirement plans: Discontinuing all (or some) of the retirement plans likely will increase income and cash from operations. No differential effect on the balance sheet is likely (except for the increase in the cash balance).

5. Who are the stakeholders? Who would benefit from each option?

The company's primary stakeholders are the company, its executives, investors, employees and their families, fund managers, and the public.

Option 1): Defined benefit plans continued: the employees benefit by being able to count on a certain definite amount of benefits. The employer bears the risk of market changes.

Option 2) Change to a defined contribution pension plan: the employer and shareholders benefit by knowing exactly how much the period expense will be; the employees bear the risk of market changes.

Options 3 and 4) Discontinue some or all of the defined benefit plans: The company and shareholder likely would benefit in the short-run. However, in the long-run, decreased employee satisfaction may adversely affect the company's ability to hire and retain highly qualified individuals. This could negatively affect the company, its shareholders, and potentially the public.

The CFO may or may not have a bonus plan that is tied to income. If that is the case, the CFO may benefit by an income increase caused by a curtailment of retiree benefits.

6. How would the employees be affected by each of these potential options?

Option 1) Continuing the defined benefit plans: Less risk for employees; the employees can count on receiving a specific amount of retirement income and health care coverage; this increases financial security.

Option 2) Defined contribution plan: higher risk for employees; perhaps less retirement benefits upon retirement.

Option 3) Cancelling all retirement plans: If the company cancels all retirement plans, the retirees would incur considerable risk and potentially financial hardship during retirement.

Option 4) Cancelling the health care plan only: If the company froze its retirement health care plan, the future retirees would encounter considerable risk and uncertainty and potentially incur considerably higher cost in the future.

7. What are the ethical issues involved?

The ethical issues are balancing the competing interests of the employees, the company executives, and stockholders. Promises made to employees and their welfare must be considered. Also, as a for-profit entity, this company has a commitment to maximize investors' return.

8. How would each of these options affect the perceptions of people outside the company?

Options 1 and 2) Continuing the existing plans or switching to a defined contribution pension plan: The company likely will be viewed as a caring, employee-friendly employer.

Options 3, 4) Cancelling or freezing benefits plans may impact how employee-friendly a company is perceived. In the long run, the company might find it more difficult to attract highly qualified employees. Also, customers' views may be negatively affected if the company chooses to restrict or freeze such plans.

Additionally, some investors may perceive a pension plan as reducing the company's profitability; on the other hand, investors may view changing to a defined contribution plan as a sign of financial stability and decrease in long-term risk exposure.

9. What do you recommend that we, the company should do?

Answers will vary. Each answer should be supported by focusing on the interests of the stakeholders that are viewed as most important.

Some issues to consider: The CFO wants the company to perform well, which is in the best interest of the stockholders. However, he should not be motivated by self-interest and the effect on a potential bonus plan. The CFO and other executives must make decisions that will help balance and enhances the long-term interests of all and particularly its primary stakeholders.

Researchable Questions

1. How have other companies reacted to this proposed change?

Some companies, such as Verizon and IBM, have frozen their defined benefit pension plans and are now offering defined contribution plans (Wessel et al., 2006). The effect of this change is a shift of the financial risk from the employers to the employees. It also somewhat reduces compliance and financial reporting costs mandated by FASB, the Labor Department, and other regulatory agencies.

2. Is there any historical evidence that new accounting rules and proposals may lead to decreases in employee retirement benefits?

SFAS 106 for the first time required that postretirement benefits other than pensions, such as retiree heath care, must be accrued periodically. Up until that point, companies typically recorded expense only when benefits were paid in cash. Research by Mittelstaedt et al. (1995) suggests that companies curtailed their retiree health care benefit plans after SFAS 106 was issued. This can be considered a negative economic consequence affecting employees. For example, in 1988, 66% of the employers with more than 200 employees provided health care benefits for their retired employees. This has decreased to about 33% today. (Wessel et al., 2006). Some of this decrease has been attributed to SFAS 106 requiring accrual accounting for these plans.

3. Are other companies' pension and other retirement plans currently funded?

According to one article (Byrnes & Welch, 2005), only 22% of postretirement benefit plan obligations are covered by assets, while 88% of the pensions are. In addition, large companies currently carry approximately $300 billion in pension and other postretirement benefits off their balance sheets (Byrnes & Welch, 2005). Total underfunded pension benefits are estimated at $313 billion (Solomon, 2006).

4. How does recent legislation impact on traditional pension plans?

August 2006, President Bush signed a new pension bill into law (Wessel, 2006). Consistent with this new law, companies must fully fund their pension plans. This rule is effective 2008 and companies will have seven years to fully fund any underfunded plans. Once this law and FASB's new pension standards go into effect, accrual accounting and cash flow for pension plans will become more consistent. These changes are likely to cause significant changes for companies' financial statements and may affect employers' willingness to offer such plans.

Subject: Defined benefit plans; Credit cards; Case studies; Accounting changes; Financial statements

Location: United States--US

Company / organization: Name: American Express Co; NAICS: 522210, 551111

Classification: 4120: Accounting policies & procedures; 9110: Company specific; 9190: United States; 8120: Retail banking services

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 2

Source details: INSTRUCTORS' EDITION

Pages: 51-59

Number of pages: 9

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216294216

Document URL: http://search.proquest.com/docview/216294216?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 46 of 100

CREDIT CARDS, DEBIT CARDS AND MONEY DEMAND

Author: King, Amanda S

ProQuest document link

Abstract:

John Williams recently returned from a trip on which he realized that he no longer needed cash-not even at fast food restaurants. Everyone accepts credit and debit cards these days. He becomes concerned that this may mean that money is going away. He begins to look into the idea of a cashless society. Certainly credit and debit cards will play a large role in a cashless society. He quickly realizes that to truly understand the impact of credit and debit cards, he will have to understand their impact on money demand (specifically M1 and M2). He researches the four key theories of money demand-The Quantity Theory of Money, Keynes's Liquidity Preference Theory, Friedman's Modern Quantity Theory of Money, and the Baumol-Tobin Model-and comes up with a list of questions applying the impacts of credit cards and debit cards to the results of the models. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

This case allows students to apply a financial innovation to the models of money demand. Thus the case allows the students to work with the theories of money demand that they have encountered in lecture and interpret results given a change in the financial market. This case would be an especially useful way to end a section on money demand since it reinforces the traditional theories while allowing students to think about credit and debit cards, two methods of payment that they are very familiar with.

CASE QUESTIONS AND ANSWERS

1. Typically, economists assume that technological innovations in the banking industry will lead to an increase in the velocity of money.

a) Is this true for the introduction of credit cards? Explain. Does your answer change if you define money as M2 instead of Ml?

b) Is this true for the introduction of debit cards? Explain. Does your answer change if you define money as M2 instead of Ml?

c) Explain how an increase in velocity would occur for the general case of a technological/financial innovation.

a) Credit cards may function in two ways, as a method of borrowing and as a medium of exchange. If we assume that the card is functioning as a medium of exchange, then the number of purchases made with cash or checks should fall, leading to a decrease in money demand (when money demand is defined as Ml), and therefore an increase in velocity. (Recall that velocity is defined as PY/M and thus if total purchases remain unchanged but less are made with M, M falls and thus V rises.) If we define money as M2 instead of Ml our answer depends on how households hold the income that they are not using immediately to make transactions. If this income goes into something such as a savings account then M2 is unaffected-income is merely transferred from an account that is more liquid to one that is less (recall Ml is part of M2). This would seem the reasonable reaction of households that plan to pay off the credit card bill at the end of the month. If the households move the money into other types of even less liquid assets though, M2 could fall as well. Given that the card is being used as a medium of exchange and NOT a method of borrowing this seems less likely.

If the credit card is functioning as a method of borrowing, velocity may remain unchanged. Households continue to demand the same level of money in order to make their standard purchases and then make extra purchases.

b) The introduction of debit cards should not change velocity when money demand is defined either as Ml or M2. In order to use the debit card instead of cash, deposits equal to the value of the cash must be available. Both cash and deposits are money so Ml doesn't change. Since Ml is included in M2, M2 does not change either.

c) Assume a financial innovation that allows households easier access to funds. The household does not need to hold as many funds in Ml or M2 at any given time. Thus M decreases while PY remains unchanged. Since velocity= PY/M, this leads to an increase in velocity.

2. Consider the Baumol-Tobin Model.

a) Given the general assumption that households want to maximize interest earned on "bonds" while minimizing the number of trips made to the bank to switch between bonds and money, which instrument should households use, credit cards or debit cards?

b) How would the model predict that Ml would be affected if more households began using credit cards to make their daily transactions? How would the model predict that M2 would be affected?

c) Under this model, would there be any reason to use debit cards? Which would be preferable, debit cards or checks?

d) If credit cards were used according to this theory, would consumer revolving credit (credit debt) levels rise? Why or why not?

a) Credit cards should be used. The use of credit cards allows households to hold their earnings in some sort of interest bearing asset for longer, because the use of the credit card allows them to make purchases while postponing payment.

b) M1 should fall if more households begin using credit cards to make their daily transactions based on Baumol-Tobin. This is because households should move money out of Ml and into accounts that have higher yields (such as savings accounts or money market accounts). M2 might not be affected at all. Money that used to be held in Ml could be moved to M2 and since Ml is included in M2 there would be no change in the overall value of M2 (assuming the "bonds" held based on Baumol-Tobin are assets that help make up M2).

c) Under this model, there is no reason to use debit cards. In fact, paper checks would be preferable. Paper checks take longer to clear than do debit cards, therefore allowing a household's income to stay in an interest bearing account (if it is a checking account with interest) for longer than it would if a debit card is used.

d) If credit cards were used, there would be no reason to expect consumer revolving debt (credit debt) to rise. The household would make purchases on the credit card throughout the month, hold its income in an interest bearing account, and then at the end of the month transfer the amount charged into an account from which the credit card could be paid off.

3. Keynes's Liquidity Preference Theory asserts that there are three motives for holding money-1) a transactions motive 2) a precautionary motive and 3) a speculative motive.

a) Which motives would be affected by the introduction of credit cards into the economy? What would be the end result on money demand based on Keynes's Liquidity Preference Theory? Explain.

b) Which motives would be affected by the introduction of debit cards into the economy? What would be the end result on money demand based on Keynes's Liquidity Preference Theory? Explain.

a) Since a credit card can be used as a method of payment the transactions motive would be affected. Households could use the credit card to make purchases during the month instead of using money, and therefore money demand from this motive would fall. The precautionary motive for money demand would also be affected. Instead of needing to hold large sums of money for emergencies, a household can now choose to hold a credit card to protect against unexpected expenses. The speculative motive should not be affected by the introduction of the credit card. Based on the changes to the transactions motive and the precautionary motive, money demand based on Keynes's Liquidity Preference Theory would decrease.

b) A debit card is a plastic/electronic check. It clears faster than a paper check but in essence it is still a check. Its introduction into the economy should have no impact on any of the motives in Keynes's Liquidity Preference Theory. It is merely a different way of writing a check. If, however, people perceive that the transactions costs of using a debit card are less than the transactions costs of using a credit card (or even using apaper check), the introduction of the debit card could actually induce more people to hold more money in order to take advantage of the ease of electronic payments without the pitfalls of credit. (The major increase in transactions costs of credit over debit would be the possible danger of falling into debt.)

4. Based on Friedman's Modern Quantity Theory of Money, when would you expect credit card usage to rise-as interest rates in the economy rise or as they fall? When would you expect debit card usage to rise-as interest rates in the economy rise or as they fall?.

(Note to the instructor: this question is a "trick" question in that it is asking about movement in all interest rates, but what really matters in this particular model are changes in relative interest rates. This question also leads to the opportunity to talk about short-run versus long-run outcomes, as Friedman' s result is really a long-run result. Interest rates will not adjust immediately in all markets.)

Friedman believed that the when the interest rate on other assets rises, banks will begin to compete to keep deposits coming in, thereby raising the return on money. This means that the spread between the return on money and other assets will remain constant. Thus, in this model, interest rates have no effect on the demand for money. According to the results for Friedman's Modern Quantity Theory of Money, changes in interest rates should have no impact on credit card or debit card usage because they should not affect the level of money that households desire to hold. This however, could be considered a long-run result (the zero profit result in a competitive market). In the short-run, however, relative shifts in the interest rates on bonds and equity could lead to changes in the demand for money. As the interest rate on bonds or equity rise (before banks have time to adjust to the change) the relative spread on the interest rates will rise, leading to a decrease in money demand. In order to keep consumption levels constant, you would expect credit card usage to increase as the relative spread between bonds or equity and money increases (which would lower the demand for money), and credit card usage to decrease as the relative spread between bonds or equity and money decreases (which increases the demand for money). As the relative spread between bonds and equity and money rises in the short-run, you would expect debit card usage to fall as money demand falls. As the relative spread between bonds and equity and money falls in the short-run, you would expect debit card usage to increase as money demand rises.

5. Based on the four theories of money demand, are there any generalizations that can be made about what occurs when credit cards are introduced into the economy? What about when debit cards are introduced into the economy? If there are similarities among the results generated by each model, why do four theories of money demand persist in economics?

In every case, if credit cards are used by convenience users (so as a method of transaction not as a method of borrowing) then money demand will decrease. Since debit cards are plastic/electronic checks, money demand should not be affected by their introduction. If however, consumers feel that it is easier to make transactions because of the debit card and increase their level of spending then money demand could increase. Each of the theories of money demand allows economists to focus on a different aspect of the economy. In some instances new theories were introduced as a means of explaining a phenomenon that one of the other theories was unable to explain (for example, the Quantity Theory of Money cannot deal with the relationship between money demand and interest rates but Keynes' s Liquidity preference adds in assumptions that allows it to deal with this issue). In other instances, the focus changes from economy-wide impact to household level (the Baumol-Tobin model takes the individual perspective; the others give a more aggregate perspective).

Note to the instructor: For those who wish to add some discussion of international ramifications of the introduction of credit and debit cards, ask students to consider how credit and debit cards impact the international demand for dollars. The discussion could proceed as follows.

In general, credit and debit cards should not impact the international demand for dollars. Many credit and debit cards are accepted worldwide. If a British consumer wants to make a purchase in New York City, she may do so with her credit card or debit card. Has the purchase taken place in pounds instead of dollars? No. The credit card bank handles the exchange from pounds to dollars for the consumer instead of the consumer making the exchange before making the purchase. From this perspective, the international demand for dollars should remain unchanged. However, if foreign consumers perceive that it is now easier to make purchases abroad, their consumption behavior could change. If the foreign consumer is now more willing to make purchases abroad, because the trouble of exchanging currency has been eliminated, then the demand for foreign currency (dollars in this case) could increase.

This could lead to interesting discussions on exchange rates, balance of trade, and the regulatory environment for international financial markets.

Subject: Demand analysis; Macroeconomics; Quantity theory of money; Case studies; Consumer credit

Location: United States--US

Classification: 1130: Economic theory; 8120: Retail banking services; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 2

Source details: INSTRUCTORS' EDITION

Pages: 61-67

Number of pages: 7

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216277304

Document URL: http://search.proquest.com/docview/216277304?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 47 of 100

UPHEAVAL IN AN ORGANIZATION: A CASE OF ORGANIZATIONAL MISMANAGEMENT?

Author: Jones, Nona J

ProQuest document link

Abstract:

In the wake of numerous recent corporate scandals, there has been renewed interest in the subject of leadership and what makes a true leader. While much of the attention has been focused on high-level executives and the impact their actions have had on the internal and external stakeholders of entire corporations, this very attention has caused some managers at all levels, as well as instructors of management and leadership, to take a closer look at the actions or behaviors of leaders. Of particular interest is how these behaviors are guided by a person's ethical standards. Because the behavior of managers or leaders can affect the organization's performance, and because this performance, especially in a marketing organization, has a direct impact on customer satisfaction, an understanding of these leadership behaviors becomes critical. And if diversity is an added element in the situation, the need for understanding is even greater. The following case relates the actual experiences of a third-level manager of a diverse marketing communications group as she deals with difficulties resulting from the actions of her superiors. The case focuses on the impact the behaviors of her organization's leaders had on her, her department, and at least one group of the organization's customers. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

Analysis of the case will give students the opportunity to examine different leadership styles, particularly with respect to the impact these styles can have on the effectiveness of an organization. The case will allow students to examine the role ethics plays in management in so far as leader-follower exchanges and performance appraisals are concerned, particularly when organizational diversity is an issue. Finally, the case will afford students the opportunity to examine the dynamics of diversity as a component of Human Resources management. The case is particularly intriguing because it centers on a manager who is both a female and an African American, whose superiors are all Caucasian, and who has made a concerted effort to abide by the organization's stated diversity and Affirmative Action guidelines.

Teaching Objectives

Through analysis of this case, students will be expected to:

* Illustrate their understanding of basic management principles by developing a plan of action for the Marketing Communications Planning department going forward.

* Demonstrate their understanding of the various leadership behaviors by identifying the behaviors of the principals in the case with leadership responsibilities. Students should also be expected to recommend leadership behaviors that might have been more appropriate.

* Illustrate their understanding of, and appreciation for, the complexity of managing diversity as a component of human resources management by developing a plan of action that they themselves would follow if they were in the positions of Sharon, Sam, Lewis, and Donna.

* Demonstrate their understanding of the behavior of subordinates by analyzing and evaluating the actions of Sharon and Norma with respect to their superiors.

* Demonstrate their ability to recognize the role ethics plays in management by identifying the moral philosophies being followed by the principals in the case and illustrating how these philosophies can have an impact on the effectiveness of the organization both internally and externally. Students will be expected to write a report showing how a manager's treatment of his/her subordinates may be a predictor of that manager's ethical reasoning with respect to marketing and general business practices.

* Illustrate their knowledge and understanding of Title VII of the Civil Rights Act of 1964-as well as the Civil Right Act of 1991 amending several sections of Title VII-by identifying what parts of the law appear to have been violated and explaining Sharon's legal options.

Teaching Methodologies

With leadership, ethics, and diversity being prominent issues in management, instructors will have considerable latitude in the use of this case. For example, some instructors may use the case simply as a basis for discussing whether there is a difference between leadership and management. Students can be asked to describe Sam as either a leader or high-level manager and to support their descriptions based on evidence from the case and their knowledge of how leaders and managers are defined. These descriptions could then be used as a basis for discussing differences and similarities.

Because the three issues - leadership, ethics, and diversity - are so intertwined, however, the case affords instructors opportunity to introduce a variety of activities for students. For example, as an expansion of question 4, the instructor could have students write a paper discussing the different ethical systems and moral philosophies (universalism, egoism, utilitarianism, etc.) and indicating the philosophy they believe Sam is following based on evidence presented in the case. As an extension to question 5, students could be asked to recommend a leadership behavior or style they believe would have been more appropriate for Sam to use. This exercise would enhance students' understanding of how leadership behavior should be adapted to the situation. With respect to the diversity of Sharon' s department, the instructor could require students to do research not only into the EEOC and Title VII of the Civil Rights Act of 1964-as suggested in question 4-but also into the composition of the marketing profession (particularly the marketing communications sector) by gender to determine if Sharon's group is unusual. Students could also be asked to research companies in the telecommunications industry for information regarding the diversity in these companies.

Suggested Questions and Answers

1. Now that the department is without a manager, without leadership, what action should Lewis and Donna take?

Lewis and Donna are obviously in a quandary now that Norma has flatly refused to accept the temporary acting manager position. Some students may suggest that since the department has accomplished such great things for the company, it may be capable of operating on its own for a while without direct supervision; the department may be operating as what Bateman and Snell (2004) refer to as a self-managing team. On the other hand, despite their capabilities and accomplishments, the sudden news that their manager is leaving could demoralize the department, especially since up until this time, they have been kept in the dark concerning the whole situation. The instructor may wish to elicit discussion on the importance of organizational communication, both downward and upward. The instructor may also wish to expand the discussion on communication to include what Howell and Costley (2006) refer to as fair and just social exchanges. According to the authors, if high-quality exchanges are to be developed, both the leader and the follower must view the exchange as fair or just. Below is one example the authors list as an ineffective social exchange behavior: 4

A leader showed little understanding of a follower's job problems and needs, and blamed all the problems on the follower's lack of effort. When the follower attempted to explain her perceptions of the problems, the leader constantly interrupted her and ignored her explanation. (Howell & Costley, 281)

Students will undoubtedly recognize this behavior as being demonstrated by Sam.

Beyond recognizing the need for Lewis and Donna to communicate with the department members, however, Students will probably have several suggestions as to what action should be taken to ensure that the department will be able to function. These suggestions should be discussed and evaluated based on the management and leadership concepts the instructor has covered with the students.

2. Comment on Norma's refusal to accept the assignment of "acting manager." Should she be punished for insubordination? What does her action indicate about her moral philosophy?

This question is a natural follow-up to question 1, since one of the actions students might suggest could be that Lewis and Donna punish Norma in some way. It might be suggested that Norma be fired for refusing to accept the job that her management is now saying is her job; however, students must be made to see that taking this action could very well exasperate conditions by demoralizing the department even more. It may also be suggested that Lewis and Donna again try to convince Norma to accept the position, perhaps by appealing to her sense of duty to the organization.

With respect to the moral philosophy Norma appears to be demonstrating, some students will probably recognize it as virtue ethics, "a perspective that goes beyond the conventional rules of society by suggesting that what is moral must also come from what a mature person with 'good' moral character would deem right." (Bateman and Snell, 140) These students might also feel that Norma is in the principled stage of Kohlberg' s model of cognitive moral development, the stage at which a person takes a broader perspective in which they see beyond authority, laws, and norms and follow their self-chosen ethical principles. Other students may argue that Norma simply seems to be looking out for herself, that is, that she is demonstrating egoism, a type of teleology, because she is just doing what will maximize consequences for herself. At this point, the responsibility of followers could also be discussed.

3. Which leader ship behavior or style do you think was being demonstrated by Sam in his relationship with Sharon? Cite evidence to support your answer.

Students should recognize that there are several approaches to understanding leadership, as discussed in most management or leadership texts ( Bateman and Snell, 2004; Howell and Costley, 2006; Griffin, 2005; among others). While a discussion of leader traits such as drive and integrity are a good starting point, the instructor should strive to get students to see that leader behaviors in different situations provide a deeper understanding of how leaders relate to followers and how they effectively guide their organizations to greatness. As Howell and Costley (2006) explain, there are three key tasks effective leaders must carry out to fulfill their role in increasingly complex organizations: (1) diagnose situational and follower characteristics (to determine the extent to which followers need a particular leadership behavior), (2) provide the leadership behavior needed by followers, and (3) develop followers or modify their tasks or environment (to allow them to act more effectively or independently of the leader).Students should be asked to indicate how well Sam performed these tasks; the instructor may also wish to ask about Lewis and Sharon' s performances in this regard, although the case does not provide much evidence to support an answer either way. The instructor should also stress that as Howell and Costley note, the different leadership behaviors are usually used in combination with one another, combinations that often result in several typical leadership styles. Students should be asked to indicate into which of these leadership styles (Coach, Human Relations Specialist, Controlling Autocrat, Transformational Visionary, or Servant) Sam seems to fall.

4. Would you classify Sam's behavior toward Sharon as unethical? Why or why not? What bearing, if any, do you think Sharon's race of gender had on Sam's behavior? Explain your answer. What recourse does Sharon have if she believes that Sam's behavior toward is due to racial or gender discrimination?

Some students may feel that based on his behavior, Sam appears to have apersonal vendetta against Sharon. If this opinion is expressed, the instructor can use this as an opportunity to discuss the relationship of power to ethical behavior. As Howell and Costley (2006) note, leaders are often in roles that can determine the well-being of others, and in this case, Sam was the orchestrator of Sharon's downfall. The authors further note that perhaps the most important and most difficult ethical issue is the leader's power, as it is the basis for a leader's influence on followers. Howell and Costley also note that when leaders interact with followers to achieve goals, there is an implicit assumption that both parties will behave fairly and ethically. This is essential in order for them to trust one another, and trust is needed for mutual cooperation. Because unethical behavior by high-level leaders in large organizations has been the topic of several scandals in recent years, more responsible leadership is being demanded. Unethical leaders do not treat everyone fairly; they often benefit themselves and inflict harm on other, including followers, customers, and investors who trusted them. By doing this, they destroy the commitment and willing cooperation of these other parties, commitment and cooperation that are needed to make their organizations prosper.

This issue, however, goes far beyond either fairness or ethics. The instructor should stress that Sharon is an African-American female who is recognized in the industry-and up to this time, by her employer-for her expertise and accomplishments. Therefore, Sam's attack on her character and reputation, at the very least, hints at racial or gender discrimination. It is at this point that the instructor can draw students' attention to the legal aspects of the case. Investigation into the Equal Employment Opportunity Commission (EEOC) and to Title VII of the Civil Rights Act of 1964, as well as the 1991 amendment to sections of Title VII, will enable students to identify which laws Sam appears to be violating and to recommend legal courses of action that Sharon can pursue if she so desires. Students can be directed to begin their search at www.eeoc.gov. From this Web site, they will be able to obtain facts and guidance related to discrimination by race and gender/sex, and they will find a direct link to Title VII. They will learn that Title VII protects individuals against employment discrimination on the bases of race and color, as well as national origin, sex, and religion, and that it prohibits race and color discrimination in every aspect of employment, including recruitment, hiring, promotion, wages, benefits, work assignments, performance evaluations, training, transfer, leave, discipline, layoffs, discharge, and any other term, condition, or privilege of employment. After becoming aware of even the basic provisions of Title VII and the objectives of the EEOC, many students will probably conclude that Sharon's situation does constitute some form of discrimination for which she has legal recourse.

Before delving into a discussion of Sharon's legal recourse, however, the instructor may want to explore with students Sharon' s options within the company. After all, the case suggests that the company had clearly-stated diversity and affirmative-action guidelines by which Sharon herself had diligently abided. Evidence of this can even be seen in the make-up of her department. Although she may not have been solely responsible for the department's being half African-American and half Caucasian, for example, evidence in the case clearly demonstrates that she was not practicing discrimination. She had promoted Marge, a Caucasian, twice and had given her permission to work from home on several occasions during family emergencies. And one of the African-Americans in her group believed that Sharon had rated her lower than a Caucasian because Sharon wanted to promote the Caucasian. The argument can also be made that given Sharon's current position in the organization, the company as a whole makes at least some attempt at affording all employees equal opportunity.

It can be assumed, then, that the organization believes in being proactive with respect to diversity and equal opportunity. Therefore, some students may suggest that, as the EEOC itself recommends as a first step, Sharon escalate the issue to upper management, who may have a vested interest in ensuring that all managers follow EEO guidelines and promote the company's own diversity and affirmative-action policies. On the other hand, other students may note that Donna, the Vice President and Sam's superior, is already aware of the situation and yet, has done nothing about it other than to condone Sam's actions. Based on Donna's behavior, Sharon may have concluded that escalation of the problem internally would be to no avail. Therefore, it would appear that if Sharon believes her employment rights have been violated, her best recourse at this time would be to file a charge of discrimination with the EEOC, the commission empowered to prevent any person from engaging in any unlawful employment practice as set forth in Title VII.

The extent of the discussion surrounding the legal issues will depend on the amount of time the instructor can devote to this aspect of the case. Regardless of the amount of time allotted, however, the major point that needs to be made is that given the severity of the situation, Sharon does have some legal recourse, provided she is willing to initiate such actions. The instructor may even wish to revisit this question after sharing the epilogue with students.

5. What impact do you think the situation overall will have on the rest of the Marketing Communications Planning department? On the organization as a whole? Given that the case is about management of a marketing communications planning department, what impact do you think the situation will have on the ability of the department and the organization as a whole to satisfy the needs of customers?

The instructor should point out that responsible leadership plays a critical role in establishing the ethical climate of an organization; leaders provide the role model for everyone in the organization. If the rest of the department views Sam's actions as being unjust, this may undermine their faith in management and the organization. Members of Sharon's former group could begin to feel that if something like this could happen to her, either one of them could easily be next.

The point of this discussion is to emphasize that a leader's behavior has a definite effect on followers. Howell and Costley (2006) point out that a leader's behavior has its most direct impact on the psychological reactions of individual followers and groups of followers. While students should be able to readily see the impact Sam's behavior has had on both Sharon and Norma, they should be asked to speculate as to what effect Sam's behavior will have on the organization as a whole, including its ability to satisfy customers. The negative effects of a leader's behavior could very well translate into an inability to adequately meet the needs of customers. If this happens, the overall mission of the organization could be compromised. The ultimate goals of an organization - to satisfy the needs of customers and achieve the objectives of the organization - must begin with efficient management of the organization responsible for achieving those goals. If the organization itself is in upheaval, its ability to function is severely hampered.

6. Do you think the composition of Sharon's department (all female and equally divided between African-Americans and Caucasians) might have had a bearing on Sam's behavior? Why or why not?

Considering the number of females and African Americans in Sharon's organization, some students may believe that Sharon has carried the concept of diversity too far. In fact, some students may even be of the opinion that with no males in her organization, Sharon is guilty of reverse discrimination. If this opinion is expressed, the instructor should point out that it is not unusual for marketing departments to be comprised of a large percentage of females. With respect to the high number of African Americans in the department, some students may find it unusual that fifty percent of Sharon's group is African American, whereas this group constitutes a much smaller percentage of the organization as a whole. Therefore, they may argue that perhaps Sam thought Sharon was moving too fast, taking things too far. In addition, some students may speculate that breaking the department up might have been Sam's goal all along. This speculation will give the instructor an opportunity to explore the complexities of managing a diverse organization. The instructor may want to ask, for example, "What happens when a manager (in this case, perhaps Sam) believes that an organization is becoming" too diverse?"

If Sam does hold such a belief, and if he is somehow thwarting Sharon's efforts at diversity, then he is working against the company's policies. If his superiors suspect that Sam may have a problem with abiding by these policies, then they will need to begin monitoring his behavior and to take appropriate steps, perhaps including diversity training, to modify it. In any case, the question will allow instructors the opportunity to explore with students the skills required in managing a diverse workforce.

EPILOGUE

Deciding, after Norma's refusal to assume the acting manager position, that no one else in the department was capable of handling the assignment on a long-term basis, the decision that Lewis and Donna made was to rotate the position among the various department members. Each member of the department would thus act as the department manager for a period of one or two weeks until a more permanent solution to the dilemma could be found. Norma refused to be a part of the "rotating manager" solution; instead, she began looking for a position outside of the department, and within a couple of weeks had landed a new job in which she would be in charge of marketing communications for one of the company's "new ventures" organizations. These intrapreneurial organizations were charged with creating and marketing new innovative products, and Norma was thrilled about the amount of independence the new position would afford her. She began her new assignment immediately after the Users Conference. It had now been three weeks since she had first learned that Sharon would be leaving.

After one cycle of rotating managers, Lewis and Donna finally named one remaining member of the department as the more permanent acting manager. This solution lasted for about two months, as by that time all but two of the department members had transferred to other organizations. Ultimately, the two remaining department members were made a part of the larger corporate marketing communications organization, a move that resulted in the loss of much of the original department's independence, uniqueness, and ability to respond quickly to customers, both internal and external. In fact, Norma heard from several members of the sales teams, as well as from some customers, that members of the Users Group were becoming increasingly dissatisfied, as they were not getting the attention they had become accustomed to getting.

Sharon did well in her new assignment as manager of training for the Product Marketing organization, receiving good verbal feedback from Lewis regarding her performance. However, on November 30, in a meeting with Lewis for a formal review of her performance for the year, Sharon learned that on a scale of 1 to 9, she had been rated a "2". Lewis informed her that this was primarily due to Sam's comments on her performance as manager of the Marketing Communications Planning department, but that he would be a bad manager if he ignored these comments. Sharon was given 60 days to find a new job or face a demotion. Lewis informed her that he would, of course, have to show her job evaluation to anyone who asked and that this would probably ruin her attempts to get a new job at her current level. And, indeed, this was apparently the case, because Sharon was unsuccessful at finding a comparable new position. On December 11, she met with Lewis and informed him that she had decided to accept the demotion and that she was taking the rest of the year off beginning the following Monday. Apparently, due to the stress she had been under, Sharon had begun having stomach pains on December 4, pains that were so severe by December 29 that she could not get out of bed and could not eat. She had lost several pounds, and when she went to see the doctor again, her blood pressure was 200/110. She was immediately given medication to lower her pressure and had to stay in the doctor's office until some improvement was shown. Sharon was referred to a stomach specialist and was given a test to try to determine the cause of her pains. On January 5, she returned to her doctor because she had also started having chest pains. She still could not eat, and as a result had lost 12 pounds. Her EKG was normal, but her blood pressure still required medication. The specialist set Sharon up for an invasion procedure to determine the cause of her illness. By this time, she was feeling delirious, she still could not eat, and she was completely bedridden. The invasion procedure revealed that Sharon had a stomach bacteria and a hernia. She was given an acid reliever, two antibiotics, and told to continue taking her blood pressure medication.

On February 15, Sharon returned to work. However, she was still experiencing crying spells, so at some point in March, she decided to go into mental therapy.

Subject: Ethics; Marketing; Leadership; Mismanagement; Case studies

Location: United States--US

Classification: 2200: Managerial skills; 2410: Social responsibility; 9190: United States; 7000: Marketing

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 2

Source details: INSTRUCTORS' EDITION

Pages: 69-78

Number of pages: 10

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216286793

Document URL: http://search.proquest.com/docview/216286793?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 48 of 100

PROCESS INNOVATION AT THE SANDY LUMBER MILL

Author: Metlen, Scott; Lawrence, John J

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Abstract:

The Sandy sawmill produced dimensional lumber. The mill had recently completed a $2.6 million process upgrade that had allowed it to improve yields and better match lumber produced to market conditions. Revenues had increased from $29,000,000 to over $40,000,000 as a result. But challenges and opportunities remained. The milling process was theoretically capable of producing closer to specification, and operators still had difficulty identifying where in the process defects originated. Further, the mill manager was somewhat overwhelmed by the amount of data being produced and how best to use this data. The case ends with the mill manager wondering what he should do next to get the most out of the new system. This case was designed for use in a quality management class to facilitate discussion of the design and implementation of a statistical process control systems. [PUBLICATION ABSTRACT]

Full text:

INSTRUCTORS' NOTES

Introduction

The Sandy sawmill produced dimensional lumber from a variety of soft wood species. The softwood lumber industry was a competitive commodity industry - 14% of companies producing in 1997 were no longer in business by 2004. The Sandy mill had remained competitive through sound management, process redesign, and continuous process improvement, but mill manager Tony Flagor knew more could be done. In particular, the sawmill process did not recover as many units of lumber from the raw log input as possible because lumber was initially cut larger than specification to reduce the risk of producing undersized product. At the time of the case, the mill has recently completed a $2.6 million process upgrade that has allowed the mill to reduce the extent of this overcut and better match lumber produced to market conditions. This upgrade has allowed the mill to increase revenues from $29,000,000 in 2002 to over $40,000,000 in 2004. But challenges and opportunities remained because of certain systems limitations. The milling process was capable of producing closer to specification, but could go out of control easily. In addition, the quality control process was such that out of control conditions were not noticed quickly and did not indicate which part of the milling process was out of control. Further, Tony was somewhat overwhelmed by the amount of data being produced and how best to use this data. The case ends with manager Tony Flagor wondering what he should do next to get the most out of the new system and how he might approach upper management for additional investment funds to address the systems perceived limitations.

Teaching Objectives

This case was written to facilitate discussion of the design and implementation of process control systems and the impact that such systems can have on the organization. Specific teaching objectives include:

* Illustrate how improved processes and process control can provide an organization with significant cost savings in addition to enhanced quality, and illustrate how looking only at cost of quality can be used to justify investments in process control systems. The case includes numbers in it that allow students to calculate the cost of poor quality and determine the value of the process control system to the organization's bottom line, and then compare this to the cost of implementing the new system. There is also enough information in the case to determine total processes improvement return.

* Emphasize the importance of under standing inherent process variation and the ability to distinguish between product specifications and the natural tolerance limits of the process.

* Provide a context for discussing a number of issues related to the design of a control system, including what level of automated technology is appropriate, what and how much data to collect and store, how access to data is provided to those who need it, and how the design of the system impacts subsequent process improvement activities.

* Provide a basis for discussing the process of implementing new process control systems and technologies, with particular emphasis on the need to consider people issues in the implementation process. The case also provides a good vehicle for illustrating how a work design model (e.g., Hackman & Oldham's) can enhance a managers understanding of implementation issues.

* Provide a context for discussing the appropriate use of information generated from a process control system, including whether and how such information might be used to evaluate employees and managers in the organization.

Courses and Levels For Which the Case is Intended

This case was written for use in either an upper division undergraduate or MBA level course in Quality Management that includes discussion of statistical process control concepts. The case might also be used in an introductory level Operations Management course at the MBA level.

RESEARCH METHODOLOGY

The case describes a real company, real people, and a real situation, although the names of the company and manager have been changed at the request of the business. It was prepared based primarily on interviews with the company ' s mill manager. Some of the information for the case was also obtained through a review of some company documents and secondary research on the industry.

TEACHING SUGGESTIONS

Discussion of this case should follow four steps of cost benefit analysis: 1) what is the current situation, 2) what situation is desired, 3) how to implement or gain the desired situation, and 4) what is the benefit of gaining the new situation. To adequately address the first discussion question, students have to understand the state of the milling process in 2002, the state of that process after alterations, how the new milling and QC systems were implemented, and how much money the company saved by going to the new milling and QC systems. Question #2 asks students to evaluate the new state to determine if it is optimal, or if there is still a more desirable state to achieve. The third question deals specifically with implementation, that is, the effects of implementation. Effects include, job satisfaction, job design, and employee effectiveness. The last question asks the students to go through all four steps of the cost benefit analysis given the state of the processes at the end of the case. Students should develop a quality control policy they would like to implement, explain why they want to change the current policy, determine how much it would cost to implement the policy, what the policy would save the company, and how they would go about implementing the new policy.

DISCUSSION QUESTIONS

1. What is the value of the current milling process and automated process control system to the Sandy mill, just from the aspect of process control?

This question provides students the opportunity to consider the process capabilities of the mill and to quantify in dollars the costs of the allowed process variation both with and without the new quality control system. Appropriate process and market parameters are embedded throughout the case and allow the student to conduct a fairly thorough analysis of the situation. The necessary parameters are presented in Exhibit TN-1. Students will have to make some assumptions about an appropriate discount rate and a time horizon for their analysis. We have used 12% and 3 years in our calculations. The first step of the analysis is to calculate the cost of boards that were too big and too small produced by the pre 2002 production process. Presented in Exhibit TN-2 are steps taken and answers to calculations used to determine that the Sandy mill was losing about $6.145 million per year to off-sized boards. The information presented in Exhibit TN-3 show the steps taken to determine the loss if Tony had not installed the QC processes where the gain from overcut would only have been $668,671.79. By adding the QC process, Exhibit TN-4 shows the mill realized a gain of $1,285,105.35 from having nearly real time control of the process. By improving the QC process and achieving real time control, Exhibit TN-5 shows the mill could realize an additional gain of $1,011,955.95 or a total gain from controlling over cut on a real time bases of $2,297,061.30. Exhibit TN-6 shows that the current NPV of controlling overcut at the time of the case was just $.604 million, which is better than if no QC process had not been included in the original project where the NPV would have been a negative $.922 million. Yet if real time control of overcut had been installed with the original project, the Sandy mill could have realized a NPV for the project of $3,003,232.05.

There are several key points here to drive home with students. The first is that the limited process control capabilities, pre-2002, were costing the organization significant money relative to the new system ($1.285 million/year), and that basic cost of quality calculations provide a means of understanding the business implications of not having better processes and process control systems. The second key point to make is that the initial process automation and added QC system could be justified based entirely on quality savings (i.e., an NPV of $.604 million on an investment of $2.602 million). Additional savings are possible from labor savings, market advantages, increased speed, and the yield increases from more intelligent decisions of how to saw logs and boards. These gains are important both in emphasizing the impact that poor quality can have as well as in justifying Tony's position that the automation did not need to lead to layoffs for it to be effective. The third key point to emphasize is that the subsequent possible investment in the board route ID and automatic process control system, which provided better real time process tracking and adjusting capability, would deliver the biggest bang for the buck - an additional $2.399 million in NPV on an investment of $140,000! This is a huge payback and illustrates the potential value of having the right data and controls with which to manage the process.

2. Are mill operators utilizing the current milling and QC systems optimally?

Students should have recognized from the first question that both the milling and QC systems have had a very positive impact on the organization, and the improvements resulting from the systems have clearly justified the cost of the systems. However, the gains realized from implementing the systems do not indicate that the systems are being utilized optimally. There seem to be two significant areas where the QC system utilization is suboptimal, which in turn causes the milling system to be operated sub-optimal.

The first significant limitation of the system relates to how the data being generated is being used - the system seems to be used primarily to detect when the process has changed sufficiently as to be causing defective product rather than to detect when the process has gone out of control. The description in the case makes clear that the QC system raises red flags for the workers when measurements exceed product specifications. From a quality management standpoint, the QC system ideally should be used to indicate when the process has shifted (or gone out of control), regardless of whether this leads to out of specification product or not. It appears that some, but not all, production supervisors are sensitive to this issue, as the case mentions that some supervisors were at times using the graphical output to detect system drift and act on it prior to a computer generated alert. However, use of the system in this way appears haphazard and driven by no standard protocol. This situation provides a good opportunity to hammer home the difference for students between the ideas of specification limits and control limits, concepts that students routinely confuse (particularly undergraduate students). What is particularly powerful about this example is that students can put a dollar value on shifts in the process that remain within the specification limits - the case indicates that every 1/1000 of an inch system drift can cost the company approximately $20,302.00 per year. Students often fail to see the point in correcting an out of control process that doesn't produce defective product, in part because it is difficult to put a cost on being out of control but within specifications. This case illustrates that a shifting process, even if it still produces products entirely within specifications, has very real costs.

Two additional teaching points can also be built into the preceding discussion of control versus specification limits and the proper use of the system to understand the inherent process variation. First, the circumstances in the case allows the instructor to make the point that the quality control system needs to be used in a consistent manner. The current situation of having some supervisors using the graphical output to try to detect process shifts, with no standard protocol and no apparent statistical foundation to their decision making, could easily contribute to increased process variability. Tony clearly needs to establish a consistent, and statistically valid protocol for the use of this graphical data. And second, Tony's contemplation of whether or not to use the data in some way to evaluate the effectiveness of operations on a given shift raises an interesting question about the appropriate uses of process control data. Certainly, Deming would argue against the use of system data toward such uses, first because it runs the risk of evaluating people based on random process variation, and second because it may cause supervisors to view the process control system in a negative way. Clearly neither of these would be desirable results. However, a review of the QC system data can reveal whether the supervisor is using the QC system appropriately to manage the milling process. At least initially, Tony would want to focus any use of the data in this way on identifying developmental/training needs of each supervisor, as opposed to making a formal part of a supervisor's evaluation system to avoid a potential backlash against the QC system.

The second significant limitation of the system relates to the design of the system and what specific information is being obtained - the limitation stems from the fact that the design of the current QC system stops short of allowing easy detection of where the milling process is out of control when it does go out of control. Because boards from different saws are mixed, and because there is no system for marking or tracking individual boards so that they can be traced back to particular saws, detection of a change in the milling process requires workers to hunt for which part of the milling process (i.e., which saw) is causing the problem. This confusion entails the workers watching each sawing step individually, pulling off a number of boards from that step, and measuring the boards. All the time this is going on, the milling process is continuing to produce sub-optimal boards and costing the company money. Once the problem source is identified, the worker can then shut down the milling process and begin to try to understand why the milling process went out of control. This situation allows for a discussion of the value of thinking about problem identification at the time the process control system is being designed. One option that is available to Tony to improve this situation is the installation of additional scanners at other points in the process or the use of a system to mark boards as they come through the milling system, as well as automatically adjusting machinery at critical tasks. Discussion of these options is probably best postponed till the latter part of the case discussion.

The material in Exhibit TN-4 indicates that the new milling and QC systems are still producing $4.86 million of boards that are either too big or too small. Because mill operators are not able to tell where an off size board comes from and from continual operation of the milling system while the operator determines the process is producing off size product and fixes the problem, too many off size boards are being produced.

Finally, it is worth having a discussion about just how much data the QC system can potentially generate and whether any of this data holds unrealized value for Sandy. Clearly, the QC system has the capability of creating vast amounts of data, and one of the challenges of the automated data collection technologies is converting all of this raw data into useful information and knowledge for the firm. It is interesting to point out to students that in some sense, Tony has both too much and not enough data. The system produces up to 1920 measurements per second (one 10 foot board with a depth width measure every 1/8 of and inch), yet Tony does not have enough data in that he cannot identify where the milling process has gone out of control. The fact that so much data already exists may make it difficult for Tony to convince upper management that more money should be spent to collect additional data. In addition, it is unclear whether full value is being realized by the huge quantity of data already being collected. Instructors may find it useful to link this discussion to section 4 of the Baldrige quality award criteria on Measurement, Analysis and Knowledge Management. In one sense, measurement, analysis and knowledge management really are at the center of the challenge that Tony faces. Section 4.1.a.1 of the Baldrige award, for example, opens by asking respondents how they "select, collect, align and integrate data and information for tracking daily operations and for tracking overall organizational performance." section 4.2 goes on to ask about how organizations "ensures the quality and availability of needed data and information for employees . . ." These are exactly the questions that Tony is wrestling with, and it is worth emphasizing to students the need for managers to constantly work toward improving information management processes.

3. Evaluate how well Tony has implemented the current systems. What has been the impact of the new systems on workers jobs? How did Tony's management of the implementation of the systems account for the affect that the systems had on job design at Sandy?

This question provides a good opportunity to discuss the affect that automated process control technology can have on line employees, and how a well planned implementation can help make this change a positive one. Hackman and Oldham's (1980) work design model, which appears in some quality management textbooks, provides a good theoretical framework with which to look at how the changes implemented at the mill influenced workers. Exhibit TN-7 shows the work design model along with notes on the influence of the new milling and QC systems. One can see from this exhibit that the overall impact of the new systems is positive on workers jobs - according to the model it should have contributed to higher internal work motivation, higher job satisfaction, and higher work effectiveness.

Once this model has been discussed and students understand that the impact of the change, theoretically, should have been positive on workers, students can then be asked whether or not they think such a change will always have a positive impact 'in the real world'. From here, the discussion can segue into the critical role that implementation played in realizing the benefits of this change on workers at the Sandy mill.

The instructor might start by discussing the moderators included in the Hackman and Oldham model - specifically workers' knowledge and skills and their need for growth. In implementing the system, Tony put significant effort into providing training for the workers and into building the case for why the change was needed. These are both critical elements in the implementation of any major organizational change. They also directly impact the moderating variables in the model. Given the characteristics of the workforce at the mill, it is clear that workers initially lacked the skills to use and benefit from the system. Had Tony not provided training, the change would have almost certainly had the opposite affect on worker motivation, satisfaction and effectiveness. Additionally, students can logically conclude that workers' need for growth was probably somewhat low. In many cases, workers were second or third generation mill workers. Many probably grew up in this small rural town simply expecting to work in the mill - to learn the craft, put in their time at the mill, and live a rural lifestyle. The young people in the community with significant need for growth probably routinely left the community in search of that growth. This characteristic of the workforce would have been an added challenge for Tony's efforts to implement the job change.

Tony's solution to the implementation impediment of liking the status quo and other impediments such as fear and/or mistrust of the unknown, and fear of losing employment (McNamara, 1999) was multifaceted. Tony convinced the workers that they needed to grow in order to maintain what they had by showing them that if they wanted to continue to prosper in the small rural community and if they wanted there to be jobs for their children at the mill, that they needed to grow. The alternative to growth would be the closure of the mill due to the increasingly competitive environment that the company faced.

Other key elements of the implementation can also be raised at this point. Tony guaranteed workers that no one would be laid off as a result of the changes being made at the mill. This guarantee was likely a hard sell to Tony's managers given the competitive nature of the industry, but was critical to getting workers' support for the changes. Additionally, Tony worked hard to involve all of his workers in the design and implementation of the changes, again in an effort to achieve buy-in from the workers and to insure a system that was compatible with the capabilities of the current workforce. As suggested by McNamara (1999), Tony also kept the communication channels open about any changes to the plan and encouraged recommendations about how the plan could be improved all the way through implementation.

In addition to the Oldham model, instructors may want to utilize the thirteen guidelines to organizational change recommended by McNamara (1999) to discuss the merits of how Tony managed implementation of the new production and quality control systems. A detailed evaluation of Tony's actions in comparison to McNamara's guidelines is shown in exhibit TN-8.

4. What should Tony do next with respect to the process control system and what affect will what he does have on the milling process?

In questions one and two students should have determined the state of the current QC system and what needs to be done to correct the system. In the answer to this last question, the students have the opportunity to utilize the design for six sigma tools to determine how much it will cost to change the QC system and what the projected savings would be from the changes they recommend. Furthermore, students have the chance to address how to convince management a project is a good project and how to get employee buy-in to the additional changes. Material presented in Exhibits TN-5 and TN-6 show steps used to calculate an expected NPV when the costs of determining which of the saws a board comes from and installing automatic process adjusting devices at each of the twelve problem areas is added to the proceeding process changes. The NPV for the total project would then be $3.003 million. The quality control process should then be built around process capability. The mean overcut and the range of the overcut should be used to determine the upper and lower control limits on X-bar and R charts. The mean and range should be determined from random sampling. Once the limits of the processing system are determined, the QC system should consist of an automated system that has been programmed to scan data for statistically significant process shifts in variation and amount of overcut. When such a shift has been detected, the milling process should adjust automatically as appropriate. Mean and range should be determined randomly and graphed on control charts for benchmarking purposes. Attribute data charts could also be utilized to determine if the frequency of off sized boards was changing. Twenty minutes of production would produce about 1320 boards with 3 to 4 boards beyond plus or minus three standard deviations thus; defects per 20 minutes of production could be graphed for benchmarking purposes. Tony also needs to work to formalize how supervisors use this information to insure better and more consistent use of the quality information generated. An additional round of training seems in order for both supervisors and operators.

Subject: Innovations; Lumber industry; Quality control; Project management; Case studies

Location: United States--US

Classification: 5320: Quality control; 8630: Lumber & wood products industries; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 14

Issue: 2

Source details: INSTRUCTORS' EDITION

Pages: 95-112

Number of pages: 18

Publication year: 2008

Publication date: 2008

Year: 2008

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: 216308537

Document URL: http://search.proquest.com/docview/216308537?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2008

Last updated: 2013-09-09

Database: ABI/INFORM Complete