ARM & HAMMER (1998): Poised for Growth?
I. CASE ABSTRACT
For 150 years, Church & Dwight Company, Inc. has been building market share on a brand name that is rarely associated with the company. This brand name has become so pervasive that it can now be found on a variety of consumer products in 95% of all U.S. households. As the world's largest producer and marketer of sodium bicarbonate-based products, Church & Dwight had, until recently, achieved consistent growth in sales and earnings.
By capitalizing on its easily recognizable brand name logo, ARM & HAMMER, Church & Dwight moved into such products as: (1) laundry detergents - with approximately a 4% market share in 1998 and approximately 5% in 1996; (2) carpet deodorizers - with approximately a 28% market share in 1998 and 35% in 1996; (3) air deodorizers - with approximately a 13% market share in 1998 and 1996; (4) toothpaste - with approximately a 7% market share in 1998 and 1996; (5) deodorant/anti-perspirants - with less than 2.0% market share in 1998 and approximately 2.5% in 1996. The company's family branding strategy has allowed the company to promote multiple products using only one brand name. Baking soda has become synonymous with environmental safety in the consumers' minds. "As a result, environmentally-conscious consumers instinctively turn to the yellow box." This has led to the introduction of new products.
Church & Dwight proves to be an interesting company to analyze and discuss since most consumers are unfamiliar with the company but very familiar with its brand name. ARM & HAMMER brand products have become so pervasive in the consumer product markets they can be found in 95% of all U.S. households. Sodium bicarbonate has applications far beyond its original use as a leavening agent in baking. It can now be found in such diverse uses as deodorizers, cleansers, toothpaste, animal feed, blast media, chemical neutralizers, kidney dialysis, and other medical purposes.
Although Church & Dwight controls over 75% of the sodium bicarbonate production and 85% of the baking soda market in the U.S., it has been either unable or unwilling to successfully expand internationally. Church & Dwight has historically capitalized on consumer recognition of the ARM & HAMMER logo, thus avoiding the need for costly advertising. This strategy has allowed the Company to price its products slightly below those of similar brands. However, as the company entered new markets with products such as ARM & HAMMER Dental Care and Deodorant/Anti-Perspirant, more aggressive advertising strategies were pursued.
Descendants of the family's co-founders own more than 50% of the outstanding shares of common stock. Dwight C. Minton, who has just stepped aside (1995) as Chairman and C.E.O., is a direct descendent of the founders and succeeded his father as Chairman in 1981. Several executives with extensive product marketing backgrounds joined the company in the early 1990s. Although they were expected to assist the company in its push into the consumer products field, their efforts faltered. Previous Church & Dwight executives (Robert A. Davies, C.E.O., Zri Erief, Vice President and Chief Financial Officer) had rejoined the company to get growth efforts back on track. Both individuals had held senior management positions at Church & Dwight during the rapid growth years of the 1980s.
Sales of chemicals to the Specialty, Industrial, and Agricultural Product markets have fluctuated due to acquisitions, joint ventures, and subsequent divestitures. The future growth and contributions of the Chemical Division to Church & Dwight's overall performance remains clouded. Successful application in circuit board cleaning and paint removal are being developed while several new and potentially exciting applications in pollution and water quality control and medicine are being tested. As management positions the company to enter the 21st century, many strategic questions must be answered.
Decision Date: 1998 1997 Sales: $574,906,000
1997 Net Income: $24,506,000
II. CASE ISSUES AND SUBJECTS
Consumer Products Industry
Portfolio Analysis
Pollution Control Products
Acquisitions and Divestitures
Internal vs. External Growth
Environmentally Clean Products
Marketing Strategy
Corporate Governance -
Family-Controlled Company
Poison Pill
Sociocultural Forces
Differentiation Strategy
Organizational Structure
Parenting Strategy
Executive Succession
Organizational Life Cycle
Brand Management
International Strategy
Mission and Policies
Growth Strategies
Competitive Advantage
Concentric Diversification
vs. Line Extensions
Vertical Integration
Competitive Strategy
Industry Analysis
Environmental Scanning
Strategy Formulation
Distinctive Competence
Stages of Corporate
Development
III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS
(see Figure 1.5 on pages 20-21)
IV. CASE OBJECTIVES
1. To illustrate changes in a top management team and the Board of Directors.
• First non-family member CEO.
2. To illustrate the management of a "cash cow" - ARM & HAMMER baking soda.
3. To discuss the marketing strategy of family branding* (e.g., ARM & HAMMER soda, toothpaste, laundry detergent, carpet deodorizers, air deodorizers, and deodorants and anti-perspirants) in terms of the problems and benefits of using line extensions.
4. To illustrate the need for performing a strategic analysis of a company.
5. To illustrate the potential impact of a rapidly changing environment on a closely-held company.
6. To illustrate the usefulness of building on company strengths.
7. To illustrate a corporate takeover situation where a company has protected itself from unwelcome takeover candidates.
8. To discuss whether environmentally-friendly products are a temporary fad or the future.
9. To examine the benefits as well as the problems in pursuing a line extension strategy.
10. To evaluate the benefits and problems associated with acquiring and assimilating established consumer brand names into the Church & Dwight family of products.
11. To explore the complexities of entering international markets.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
1. This is an excellent comprehensive case for individual case analysis or an exam. Financial and portfolio analyses can be done.
2. We suggest placing this case toward the beginning or middle of the course. The students enjoy learning about a relatively unknown company making such a well-known product.
• Students have expressed frustration that the case is short in page length. After doing the case assignment(s) they admit it is a tight, well-written comprehensive case.
3. This is an excellent case for a team presentation.
4. The case author provides additional suggestions in Section VII - CASE AUTHOR'S TEACHING NOTE -- ADMINISTRATIVE COMMENTS.
5. SUGGESTION FOR DAILY CLASS PARTICIPATION
We have found it is difficult to get quality daily participation from our students. We suggest the following:
1. Have the class members prepare - individually or as a team - (a) EFAS, IFAS and SFAS or (b) just a SFAS- for the assigned case.
*We have 1 or 2 individual students or a team bring their EFAS, IFAS, and SFAS or just their SFAS on a transparency. We have found in the 75-minute class that SFAS alone as a transparency works more effectively.
2. We compare the students’ work with the team or individual students making the presentation to the class.
*We also discuss how the WEIGHTS and RATING were developed and assigned. This greatly helps the students in future presentations.
3. We ask each student at the beginning of the class to write down his/her Total Weighted Score for the case under discussion and pass it in.
*Can use the results to call on students, whose scores seem to be out of line with the case.
**It allows for a discussion of the Total Weighted Score as his/her overall evaluation of how the management of the company is managing the company’s internal and external environments.
***We ask the students if they would buy stock in this company - then the Total Weighted Score seems to have real meaning.
VI. DISCUSSION QUESTIONS
1. What are the strengths and weaknesses of Church & Dwight?
2. What are the opportunities and threats facing Church & Dwight?
3. What are the strategic factors facing Church & Dwight?
4. Does Arm & Hammer have any core competencies? If 'yes', what are they?
5. Does Arm & Hammer have any distinctive competency? If 'yes', what is it?
6. Do you feel Church & Dwight's strategy of family branding is an effective or ineffective marketing strategy for the company? Why?
7. Is there synergy between Church & Dwight's two divisions (chemical and consumer products)? Should there be?
8. Does the stated mission for Church & Dwight correctly represent the entire company?
9. What strategy would you recommend to cash in on its environmental friendly products?
• Should this be an aggressive or conservative strategy?
10. The case author provides 6 excellent discussion questions and answers. See Section VII - CASE AUTHOR'S TEACHING NOTE -- QUESTIONS FOR DISCUSSION AND ANSWERS TO DISCUSSION QUESTIONS.
VII. CASE AUTHOR’S TEACHING NOTE By Roy A. Cook*
A. CASE SUMMARY - This is presented in Section I - CASE ABSTRACT
B. CASE AND TEACHING OBJECTIVES - These are listed in Section IV
C. ADMINISTRATIVE COMMENTS
1. This case, despite its moderate length, encompasses a wide variety of issues including competitive strategy, market assessment of both consumer and industrial products, financial analysis, and effective defenses against unwanted takeovers. Since the case is straight forward and fairly complete without being complex, it can be used early in a policy/strategy course or as an exam for the same course.
2. The primary focus of the study of Church & Dwight should be on analyzing the company's current situation, including its performance, past and present strategies, and its prospects for the future. The case raises some strategic concerns such as marketing and international strategies as well as concerns for future growth and profitability in an increasingly competitive marketplace.
3. The case provides sufficient information for financial analysis and discussion.
*Reprinted by permission of the case author.
D. DISCUSSION QUESTIONS AND ANSWERS
1. What factors have led to Church & Dwight’s long history of slow and stable growth?
Church and Dwight can attribute much of its success to the fact that it has concentrated on the production and sales of sodium bicarbonate. Strong family control has shielded management from the problems of defending the company from hostile takeover attempts. The company has successfully taken a commodity chemical, branded it, and marketed it to the point where it controls a dominant market position. It has subsequently capitalized on consumer recognition and loyalty to the ARM & HAMMER brand by introducing multiple consumer products under this logo. As the dominant producer and marketer of sodium bicarbonate products, Church & Dwight has faced limited competition in its primary markets and has successfully entered the markets with other consumer products using a low price strategy with limited advertising expenditures.
2. What are the major strengths and weaknesses of Church & Dwight?
The company's strengths and weaknesses can be summarized as follows:
Strengths
• Over 150 years of experience as a sodium bicarbonate producer and marketer.
• Fifty percent of the outstanding shares of common stock are owned by descendants of the company's co-founders.
• Company controls approximately 75% of the sodium bicarbonate production in the U.S. and is also the only producer of ammonium bicarbonate and potassium carbonate.
• Company controls 85% of the baking soda market.
• Extensive consumer brand name recognition and loyalty (in 95% of U.S. households) which allows the company to promote multiple products using a single brand name.
• Anti-takeover defenses including a board of directors with staggered terms of office and voting rights that are weighted in favor of long-term shareholders.
• Controlling the production of raw materials, the manufacturing and processing facilities, and the primary marketing functions allows the company to price its products below those of competitors - thus creating a barrier to entry.
Weaknesses
• Company's lack of financial strength (although borrowing is possible) and international marketing and management expertise are hampering expansion outside of North America.
• Primary focus on the ARM & HAMMER brand name has left the company with a void in product promotion experience that may be needed in the highly competitive consumer products field or international expansion.
• Inability to determine the strategic fit of Specialty Products Division into overall company operations.
• Lack of financial strength to launch aggressive marketing campaigns for new products.
• Top management turnover.
3. What are the opportunities and threats facing Church & Dwight?
The company's opportunities and threats can be summarized as follows:
Opportunities
• Potential expansion into international markets.
• Expanded uses of company's basic raw materials for pollution control and potable water applications as stricter environmental legislation is enacted.
• Potential use as a paint stripping compound and an industrial cleaner based on the low abrasion qualities and environmental safety of sodium bicarbonate.
• Diversification of product line to include related consumer products using the ARM & HAMMER brand as well as other brand names, similar to The Dial Corp. acquisitions.
• Expand use of sodium bicarbonate-based products to meet demands for environmental safety.
• Potential medicinal (pharmaceutical) applications of sodium bicarbonate formulations.
Threats
• Competitors with greater marketing and financial strength entering the company's traditional markets.
• Operations in many mature markets with limited growth potential.
• New or increased domestic production of the company's basic raw materials by other potential producers.
• Potential consumer confusion through overuse of the family branding line extension strategy which could eventually weaken the ARM & HAMMER brand name.
• Retaliatory reactions as the company enters into new consumer product markets.
• Potential substitutes for current products.
4. What potential strategies could Church & Dwight pursue?
Potential strategies Church & Dwight could pursue:
• Continue to follow the family branding line extension strategy in order to introduce new products (especially sodium bicarbonate-based products) such as skin care, soaps, mouthwashes, lotions, and antacids in order to gain increased market exposure and economies of scale. Recent launches of products such as chewing gum with baking soda are testing this strategy.
• Expand the limited advertising program for current niche market products to retain and gain market share.
• Promote products carrying the ARM & HAMMER logo as being environmentally safe.
• Direct resources to testing and developing new brands to lessen dependence on the ARM & HAMMER brand due to the possibility of loss of its present customer appeal.
• Since the company's consumer products are competing in mature markets with limited growth potential, tap the opportunities available although the environmental safety of its chemical products; e.g., pollution control, water purification, circuit board cleaning, and industrial paint stripping.
• Generate new chemical product applications requiring minimal promotional support while offering opportunities for rapid sales growth.
• Explore the opportunity of forming joint ventures with foreign companies to gain access to the necessary experience and capital to succeed in international markets.
• Explore joint ventures in medical applications since the company lacks experience in medical trial testing and reporting procedures for certification.
• Continue to lower costs of production and distribution to counter competitive threats from new entries in the low-cost end of product offerings such as detergents.
• Acquire small, international consumer products company to gain access to international markets and marketing expertise.
5. What is your assessment of the outlook for Church & Dwight?
Assessment of Church & Dwight's future outlook:
• Pricing and profitability: Church & Dwight competes against several large multinational competitors such as Proctor & Gamble, Colgate-Palmolive, and Unilever, who control large market shares, especially in soaps and detergents. Due to the competitors’ market dominance, Church & Dwight does not have the luxury of setting prices but must follow the lead established by its major competitors. Being dependent on the pricing strategy of others could adversely impact profitability. New entrants from low-cost producers such as USA Detergents and Huish Detergents are also resulting in intensified pricing competition at the low end of the pricing scale. New products could offer some pricing relief and flexibility.
• Specialty Products Division: At this time, Church & Dwight has not developed a solidified strategy to exploit the full potential of the Specialty Products Division. Although the Consumer Products Division appears to have focused management and strategies, the Chemical Division has not yet exhibited an identifiable focus and/or strategies. If the Specialty Products Division is to gain equal footing with the Consumer Products Division, the strategic decision makers in the company must expend a considerable amount of time and energy on this division.
• Vulnerability: Church & Dwight approaches the turn of the century with a strong consumer franchise in the consumer products field in North American markets. However, its dependence on domestic markets and a singular brand focus may leave the company vulnerable to foreign and other competitors with more financial resources. It is interesting to note moves at Church & Dwight to mitigate these potential difficulties: first, the company has begun a limited move into the European market; and second, trusted management that was in place during the company's rapid growth years had been brought back to add stability, focus, and renewed energy for growth; third, new consumer brand names not tied to the ARM & HAMMER logo are being added to the company’s product offerings through acquisitions; and fourth, new top management members as well as board members with consumer products backgrounds are being brought in to lead the company forward.
6. What is your assessment of the financial condition of Church & Dwight?
The financial health of Church & Dwight can be characterized as being a mixed picture. It is highlighted by the strong upward trend in net profit margins and return on equity. However, when attention is turned to other key ratios, the picture becomes cloudy. Both the current and quick ratios have drifted downward. In addition, the inventory turnover ratio, after showing some improvement, has also drifted downward. Overall, a brief review of the financial ratios listed indicates that there continues to be room for improvement.
E. FINANCIAL ANALYSIS
Fiscal Year Ending 12/31/97 12/31/96 12/31/95 12/31/94
Current Ratio 1.18 1.37 1.23 1.23
Quick Ratio 0.70 0.88 0.80 0.68
Inventory Turnover 9.38 10.8 11.75 8.92
Net Sales/Total Assets 1.64 1.71 1.66 1.67
Total Liabilities/Total Assets 0.49 0.46 0.48 0.48
Times Interest Earned 43.42 95.24 13.98 11.93
Long-Term Debt/Equity 0.04 0.05 0.05 0.05
Net Profit Margin 0.04 0.04 0.02 0.01
Return on Equity 0.14 0.13 0.07 0.04
Return on Assets 0.07 0.07 0.03 0.02
VIII. STUDENT STRATEGIC AUDIT / STUDENT PAPER
I. CURRENT SITUATION
A. Performance:
• Company controls 85% of baking soda market.
• Mixed financial performance (1997-1994).
• International market expansion.
B. Strategic Posture:
1. Mission for the 1990s: "We will supply customers quality Arm & Hammer Sodium Bicarbonate and related products, while performing in the top quarter of American businesses."
2. Objectives:
• To improve financial performance.
• To increase market shares: (1) laundry products, (2) carpet deodorizers, and (3) deodorant.
- - Stop declining market shares.
3. Strategies: Concentric diversification - The stated strategy for the 80's and 90's is "selling related products in different markets all linked by common carbonate and bicarbonate technology."
4. Policies: Church & Dwight doesn't seem to have any stated policies or any implied policies that provide guidance for the organization.
II. CORPORATE GOVERNANCE
A. Board of Directors:
Dwight C. Minton, Chairman of the Board
Robert A. Davies, III, CEO
Historically, Church & Dwight has traveled a slow course focused by its top management. The company's outstanding stock is owned by descendants of the company's co-founders. In addition a golden parachute was created by the board and peculiar voting rights of common stock which reflect the board's oversight of the company. No other information could be found.
B. Top Management:
Zri Efief, Vice President & Chief Financial Officer
Robert A. Davies, III, President & CEO - head of Arm & Hammer Division
• One female - Joyce Snednicki
• Time with the company - 1976-1997
• Age of executives - 45 to 62
III. EXTERNAL ENVIRONMENT (EFAS - see EXHIBIT 1)
A. Societal Environment:
The sociocultural environment is changing, leaning toward environmental issues and health-conscious issues which are ideologically consistent with the products Church & Dwight makes. The political-legal environment is also consistent with the mission of Church & Dwight. The Superfund Act, Clean Water Act, and the Clean Air Act help provide markets for cleaning products. The technological environment revolves around the development of new products for industry and animal feed products. The economic environment has changed. There are more two-earner families, more health conscious consumers, as well as more environmentally conscious consumers. Inflation is in check and the growth of the economy is moderate, and interest rates have declined, making economic conditions conducive for growth. The sociocultural environment is most important. It represents the opinions of the general public - the prime customers of Church & Dwight.
B. Task Environment:
High degree of rivalry is evident in the toothpaste industry. Church & Dwight is losing market share against brands in all products except Mentadent. Rival firms are starting to see the potential in sodium bicarbonate products as well.
IV. INTERNAL ENVIRONMENT (IFAS - see EXHIBIT 2)
A. Corporate Structure:
1. The corporation is a divisional structure composed of the Arm & Hammer Division and the Specialty Products Division. The organizational authority implied in the case is more centralized than not. It is based on products and projects and finding out what the customer wants.
2. It is divided into two divisions, which is appropriate for the strategy of going into new markets with different product lines. The policies and objectives of the two divisions are not consistent with the strategy. There are no quantifiable goals stated for each division.
B. Corporate Culture:
1. The culture isn't defined very well; there's not an abundance of uniform beliefs or expectations that can be derived from the case. There is one exception in the current mission statement, though, "to be in the top quarter of American businesses." Another inference that can be drawn is that Davies may be starting a tighter culture; see Minton's comment that "Davies’ presence with us today is seen in an improved marketing focus and tighter cost structure."
2. The culture needs to be modified to meet the objective of being in the top quarter of U.S. businesses. Management needs to lead, give direction, and inspire their people to accomplish what needs to be done.
C. Corporate Resources:
1. Marketing: They are starting to stress marketing by using a segmentation approach and engaging in market research. They need to utilize marketing more effectively to get better recognition and to increase sales. This would help to facilitate their stated strategy.
2. Finance: They have been investing and divesting back and forth in related markets and businesses. I don't think that they have a clear direction that they want to go with finance, and that is reflected in their financial statements. The ROI is down, their payable turnover is enormous, etc.
3. R&D: This area may be their niche if they can make their functional areas work together to promote some of the products that they are developing and ultimately to place their environmentally friendly products in the hands of their customers.
4. Operations: The firm has U.S. toothpaste-manufacturing facilities in Greenville, South Carolina, and about one-half of Church & Dwight assets are owned Property, Plant and Equipment, which is reflected in the 1994 balance sheet.
5. Human Resource Management: There isn't much information about the human resource department. The corporation is committed to upper management by adoption of the board resolutions in 1986.
6. Management Information Systems: Again, there isn't much said about MIS in the case. The firm should evaluate it, however, to make sure that each division's upper management is getting a clear picture from its functional areas, like R&D.
V. ANALYSIS OF STRATEGIC FACTORS (SFAS - see EXHIBIT 3)
VI. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY
A. Strategic Alternatives
1. Continue Present Efforts: By continuing the present efforts they will probably remain on a course that results in financial hardship. They don't seem to have any objectives or policies that relate to their suggested strategy.
2. Retrench: They could cut some product costs and personnel, as well as their overall size, and concentrate on a specific area of the industry.
3. Growth Through Horizontal Integration: They could expand the firm's range of products offered into the current markets. They are set to do this, and they could do this very well if they had consistent strategies, policies, and objectives throughout their two divisions.
B. Recommended Strategy
I recommend that they try to grow through horizontal integration by offering new products into existing markets. They need to establish policies on how to use the functional areas of marketing and R&D, as well as some objectives for the two divisions to shoot for. The Arm & Hammer Division should use the market research to keep the name Arm & Hammer respected. They should also use it to promote new developments from the Special Products Division.
VII. IMPLEMENTATION
Upper management needs to take the lead and state the policies and objectives to the managers and personnel. They need to state some objectives for the divisions to reach so that they can evaluate them in an objective fashion. They have to battle for market share in highly competitive markets, so objectives would allow upper management the ability to evaluate the effectiveness of new products sent to the market.
VIII. EVALUATION AND CONTROL
The divisional structure should allow for easy evaluation of the corporation as a whole. The information system wasn't mentioned, but I assume that it is adequate enough for facilitating the control of the plan. If they would implement this growth through horizontal integration, the vagueness and ambiguous objectives and policies that they have currently should clear up and they could, quite possibly, reach sales growth like they had in the 80's.
IX. EFAS, IFAS AND SFAS EXHIBITS
Exhibit 1
EFAS (External Factor Analysis Summary)
External Strategic Factors
Weight
Rating
Scale
Comments
Opportunities
Pollution control concerns .12 4 .48 Growing concern about pollution
Replacing chlorofluorocarbon brand cleaning system
.10
3
.30
Ozone-friendly cleaning products
Baking soda has become synonymous with environmental safety
.10
4
.40
The product's reputation is secure and advantageous to C&D
Appears to be room for growth in dental care
.08
4
.32
Health-conscious society likes it
Industrial and animal feed products industry
.10
4
.40
Special Products Division niche
International expansion .11 3 .33
Threats
Overseas markets are still product-driven, not market-driven
.10
3
.30
Sociocultural environment is different
More competition in domestic markets
.09
3
.27
Substitute products are being introduced.
Toothpaste market is becoming more competitive
.15
3
.45
Losing market share to competition.
Mature domestic markets
.05
4
.60
Must battle for market share
TOTAL SCORES 1.00
3.85
IX. IFAS, EFAS AND SFAS EXHIBITS
Exhibit 2
IFAS (Internal Factor Analysis Summary)
Internal Strategic Factors
Weight
Rating
Score
Comments
Strengths
World's largest producer of sodium bicarbonate products .10 4 .40 Approximately 60% of the sodium bicarbonate capacity in the U.S.
Experienced top management
.05
4
.40
Been with C&D for a long time
Specialty Products Division
.10
3
.30
Expanding public and corporate int.
Arm & Hammer name and logo
.10
4
.40
Known in the U.S. as "the yellow box"
Protected from hostile takeover
.05
5
.25
Golden parachutes for upper management
Marketing
.15
3
.45
Marketing needs to advertise actively
Financial – poor performance .20 2
.40
Weaknesses
Shift in upper management structure .05 3 .15 Need leadership and direction!
Market share down
No focus from within
.10
.10
2
2
.20
.20
Corporate culture is vague
TOTAL SCORES 1.00 3.15
IX. SFAS, EFAS AND IFAS EXHIBITS
Exhibit 3
SFAS (Strategic Factor Analysis Summary)
Strategic Factor Analysis Summary
Weight
Rating
Score Duration
S I L
Comments
World's largest producer of sodium bicarbonate products
.08
4
.32
X
Need to keep this niche
Specialty Products Division
.09
3
..27
X
Need to make viable prod.
Financial – poor performance
.15
2
.30
X
X
1994-97 weak
Arm & Hammer brand name
.10
4
.40
X
Keep its reputation up
Marketing
.12
3
.36
X
Need to utilize this
No focus from within
.10
2
.20
X
Need quantifiable obj.
Baking soda has become synonymous with environmental safety
.05
4
.20
X
Make products to suit public's needs
Industrial & animal feed products industry
.05
4
.20
X
Expand to inc. sales
Competition/market share
.15
3
.45
X
X
Declining market share
International expansion
.11
3
.33
X
X
X
Future growth
TOTAL SCORES 1.00
3.03
Saturday, April 4, 2009
BROOKSTONE HOSPICE: HEEL OR HEROINE?
BROOKSTONE HOSPICE: HEEL OR HEROINE?
I. CASE ABSTRACT
Mr. Gardner had joined the Brookstone Hospice three weeks before the medical emergency and was receiving regular nursing visits. On Sunday, February 18th, Gardner’s daughter Beverly had contacted Brookstone’s duty nurse, Kathy Bennett, saying that her father seemed to be bleeding profusely internally. The problem had been in progress for 16 hours. His family was at a hysterical level when the visiting nurse arrived at his home. The nurse called Kathy to tell her that Mr. Gardner needed to be admitted to a hospital.
Kathy then followed the lengthy admittance procedure for Covington General (the Hospice had a contractual agreement with this hospital). The patient’s primary doctor refused to go to Covington General Hospital. He wanted Gardner transported to Catholic Charities Hospital. No contractual agreement existed between Brookstone and Catholic Charities. While they were discussing this admittance issue with the primary doctor, Mr. Gardner waited in the ambulance to be transported. Kathy had ordered an ambulance because of the high concern of the visiting nurse and family.
Kathy then tried to contact any one of the four Hospice doctors who were on call, but to no avail. After trying for 45 minutes to get approval to transport Gardner to the nearest hospital, Covington General, Kathy acted on her own and gave permission for transporting the patient to the hospital.
At the hospital, the Emergency Room doctor, Dr. Wallace, recommended urological surgery for Monday. Brookstone had a well defined policy about how Hospice patients were to be treated once a patient signed with the Hospice: no other health care professional could take any action whatsoever without contacting the Hospice. The Hospice doctors tried to discourage Mr. Gardner from having the surgery, but the operation was performed. Mr. Gardner’s life has been extended from three months to three years as a result.
A physician at Brookstone Hospice commented on the situation discussed in this case - "That man (patient - Sam Gardner) is 86 years old and has cancer...That surgery will cost (our) Hospice a minimum of $7,800. We will pay for that decision (of nurse Kathy Bennett) right out of our pockets...Gardner will be dead in three months. Our purpose is not to extend life but to ensure quality life even until death."
Kathy was subsequently fired from her job at Brookstone because of her violation of numerous policies and procedures which cost Brookstone $7,800.
II. CASE ISSUES AND SUBJECTS
Values and Ethics Individual Values Versus
Mission and Objectives Organization Values
Legal and Ethical versus Organizational Structure and Economic Responsibilities Culture
Policies and Procedures Role Conflict
Profit Versus Patient’s Life Termination of an Employee
Stakeholders Matrix Organization
III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS
see Figure 1.5 on pages 20 and 21
IV. CASE OBJECTIVES
1. To provide the students with a case to examine his/her personal value system.
2. To discuss the mission and objectives of a Hospice and to compare them with objectives of key stakeholders (e.g., patients and employees).
3. To discuss the concept of dying with dignity and the value (cost) of life.
4. To discuss the physician’s comments "...that surgery will cost (our) Hospice a minimum of $7,800. We will pay for that right decision right out of our pockets."
5. To discuss, as a part of the evaluation and control process, the termination of Kathy for her handling of Mr. Gardner’s hospitalization.
6. To illustrate the impact of policies and procedures upon individual and organizational decision making.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
1. We have found this to be an excellent case to question the students’ value systems.
2. Try dividing the class into the following groups - (1) patient and family, (2) Kathy Bennett and (3) Jim Cole - Hospice Administrator.
• Let them discuss the issues, but hold patient’s comments until Bennett and Cole have finished presenting their positions.
3. Students have a difficult time analyzing this case in a paper. Their values strongly affect their analysis.
• It can be an excellent exam case to use to examine values and ethics and stakeholders’ conflicts with organizational objectives.
4. We have found this to be an excellent case for open-class discussion.
• We have students write on a piece of paper whether Kathy should have been terminated or not, and why? This forces a decision and improves class discussion.
VI. DISCUSSION QUESTIONS
1. Was the firing of Kathy appropriate given her actions?
2. Would you sign up your parents for Brookstone Hospice care?
3. Do you agree with the mission and objectives of Brookstone Hospice?
4. Is Brookstone’s problem typical of all health-related businesses?
5. How should life and death decisions be made? Who should decide? Why? How can costs be controlled?
6. What do you think of the physician’s comment that Kathy’s decision would cost the doctors $7,800 out of their pockets?
7. Was Kathy correct in her handling of the incident?
8. Should a Hospice be profit-making or not-for-profit?
9. Does Brookstone have an appropriate organizational structure?
10. What do each of Brookstone’s stakeholders want from Brookstone?
11. Why couldn’t Kathy locate one of the four doctors on call? Whose fault is this?
12. Should Mr. Gardner’s family have been required to pay for his life-extending surgery?
VII. CASE AUTHOR’S TEACHING NOTE by Sharon Olson and Sharon Ferguson*
This case is applicable to a business ethics class, a general management class, a personnel class, or a strategy class (if used early in the semester). Brookstone Hospice provides an excellent illustration of: questionable business ethics; the impact of structure on the functioning of an organization; a study in the paradox of control; individual versus corporate ethics; and a company’s focus on strategy while excluding mission and purpose.
An interesting method of beginning the discussion is to ask students - What would you have done if you had been Kathy Bennett? Essentially her options fell into the lose/lose category. If she had chosen not to send the ambulance to transport Mr. Gardner because she was unable to locate the Hospice doctor, she knew the patient would die but procedure would have been followed. If she did send the ambulance, she was well aware of the violation of company procedure.
Insight into the value system of the organization was evident in the comments made by administrator Jim Cole, who appears to measure success in dollar terms. His comment "...we grossed $2.5 million (last year) and are projecting $3.2 this year..." seems central to the issues at hand. Ask the accounting and finance majors how this can be reconciled with the cash flow problems the company is having.
Of course, a growth company will experience cash flow problems, and the question is, "Are patients being sacrificed for growth purposes?" Is growth for its own sake that important? The question becomes - were those revenues generated with strict adherence to company procedure and a corresponding increase in human suffering? After all, Bennett seems to have lost her job because of the decision she made to transport a patient to the hospital - a visit which cost Hospice $7,800. That bill seems to have been the real root of the dismissal - not the procedure violation as stated.
The ethics of the team doctors appear commensurate with that of Cole. One of the physicians commented, "That man is 86 years old and has cancer...That surgery will cost Hospice $7,800 minimum...we will pay for that decision right out of our pockets...Gardner will be dead in three months." His comment also gave insight into Brookstone’s strategy as well. Because of the nature of the services provided by the Hospice, the management must recognize that what Brookstone does in terms of goals, missions, etc. should be more important than how it does them. Yet their strategy appears to have priority over their mission. Company procedures must be re-evaluated in this light. This firm is dealing with human lives where change is a given fact. Brookstone should see itself as needing to manage that change within an environment of uncertainty and disorder. The bureaucratic procedures do not enhance this process but rather - as noted already - place focus on the "how to" aspect of services provided instead of on the services themselves.
___________
*Reprinted by permission of the authors
Brookstone is a study in paradoxical structures as well. The firm is described by Cole as a loose structure wherein the employees themselves make decisions, but Bennett suddenly finds herself terminated for making a decision. While the matrix structure of Brookstone would normally lend itself to the self-initiated decision process, the procedures outline operating in a matrix structure under bureaucratic guidelines. The two simply do not mix.
Another aspect which must be considered from a managerial perspective is the fact that no mention is made of action taken regarding the four Hospice doctors who could not be contacted although they were on call. Surely policy demanded that they be available as needed. Some action is required regarding them. Otherwise Bennett has the beginnings of an excellent lawsuit.
The case also involves a patient caught in the middle. His own primary care doctor refused to care for Gardner if he were admitted to Covington General (CGH). Brookstone Hospice meanwhile contracted with Covington General and not Catholic Charities, the facility preferred by the primary care doctor. The result was a patient left on hold, bleeding to death in an ambulance while waiting for the issue to be resolved.
No doubt Kathy Bennett did attempt to follow procedure. She spent 45 minutes (which must have seemed like an eternity) attempting to abide by all the regulations. Then as a matter of personal and professional ethics, she made the decision - a life saving decision - to transport the patient to CGH.
Brookstone may be one of the best examples available to illustrate the philosophy of "The business of business is business." As a series on Ethics published by the Wall Street Journal several years ago noted, "The ethics of business have fallen due to increased financial pressure to show a profit" (Wall Street Journal, Dow Jones Company, October 31, 1983, pp. 23, 41). That same series went on to note that because of time and money pressure, business people do what is expedient - not what is right. Bennett in contrast elected to do what was right for the patient but because her actions cost Brookstone $7,800, she is now unemployed. The direct contradiction between her personal values and those of the corporation is readily apparent.
But what happens now? Should Brookstone maintain its stringent procedures? Was this a one in a million case which will probably never happen again? Should some action be taken against the doctors involved? Should Brookstone consider contracting with some other hospitals than just Covington General? What action should Bennett be contemplating? Should Brookstone Hospice consider revamping its structure to enhance its mission?
VIII. STUDENT PAPER
The Brookstone Hospice case poses the question whether or not the Hospice nurse supervisor, Kathy Bennett, should have been fired for taking action which resulted in extending a patient’s life at a cost which the Hospice could not afford. The question involves legal, ethical, and managerial consideration which must be addressed to arrive at a resolution.
Summary
Case facts include a legal contract between Brookstone Hospice and Sam Gardner (age 85, terminally ill with a kidney malignancy, and expected to die within three months). The Hospice contract provided in-home assistance, with no more than seven days of 24-hour hands-on care if needed, to support both the patient and family in preparation for and acceptance of the patient’s relatively pain-free death. A medical crisis occurred near the end of Mr. Gardner’s first month under Hospice care. It resulted in Kathy Bennett, without proper authority, approving Mr. Gardner’s admission to Covington General Hospital -- a hospital with which Brookstone had a contract, presumably for the 24-hour care noted earlier. At the hospital, the emergency room doctor decided to operate. This decision was not approved by Brookstone. The operation increased Mr. Gardner’s life expectancy by three years; it also cost more than the Hospice could pay and still meet its weekly payroll. Mr. Gardner was happy but the Hospice was not. Consequently, Kathy Bennett was fired.
Legal Considerations
Organizations have the legal right to fire employees assuming there is no union contract or prejudice based on race, color, creed, sex, or national origin. The union contract restricts an organization’s legal right to fire by placing conditions on that right. Federal law precludes an organization from firing an employee solely for the prejudicial reasons noted above. Neither of these circumstances applied in the Brookstone case. Kathy was fired because she committed the Hospice to Mr. Gardner’s hospitalization without having proper authority (a Hospice policy violation) and/or because her actions adversely affected the Hospice’s profit position (a financial issue). No law was broken concerning the reason she was fired, so the Hospice had a legal right to fire her.
Ethical Considerations
The case poses several ethical questions. The basic one puts a patient’s right to life against Hospice profitability. Equally significant, however, is that physicians and other medical personnel are sworn to preserve human life to the best of their ability. Culturally, Americans favor an individual’s right to life; indeed, it is constitutionally guaranteed. The significance currently placed on the right to life in America can be seen in the anti-abortion movement, and efforts to ban the death penalty. Not only do Americans value life, they believe in quality of life, as is seen through legal and popular provisions for shelters for the homeless, Medicare, and Medicaid. In American culture, the Hospice concept is almost an anathema. The concept is bearable only because of Americans’ equally strong belief in an individual’s right of self-determination within the constraints of the law.
Constitutionally the right to the "pursuit of happiness" extends to the right of self-determination and thence to a business’ right to make a profit. In today’s world, it could be argued that the right to profit may be more important than the right to life, since among other things there is a lack of low-rent housing primarily because landlords cannot profit by providing such housing. One could therefore argue that Mr. Gardner exercised his right of self-determination when he signed the contract with the Hospice and thereby subordinated his right to life to the Hospice’s right to make a profit. In this argument, Kathy’s interference by sending him to the hospital where he underwent life-extending treatment could be said to have been a contract violation on the part of the Hospice, and, if anything, Brookstone could be sued for breach of contract.
However, there is also the issue of the physician’s Hippocratic Oath to consider. The surgeon was faced with a legal-ethical conflict. Sworn to preserve life, his supervisors had denied that oath in their contract with the Hospice. Since the mission of a hospital is to preserve life, it is arguable that the hospital should never have accepted the Hospice contract. On the other hand, had the hospital not accepted the contract, it would be denying the relatively pain-free death the Hospice was committed to provide.
In sum, America has yet to resolve the ethical debate between the right to life and the right to profitability. High medical costs are beginning to affect that debate, particularly in view of the "graying of America." Perhaps America will eventually adopt the British position where socialized medicine is the rule; life extending treatment after age 55 is not allowed unless privately paid for, and Hospices are common and accepted. In any case, when a country’s ethics are firm, they are generally grounded in law. Ethics, and consequently laws, change. America has conflicting laws concerning these issues (abortions are legal; the death penalty exists; contracts are inviolable, in most cases, once signed; and Medicare provides life-extending treatment but no nursing home care). These laws represent the conflicting ethics of the country as well as the continuing ethical debate.
Managerial Considerations
The case poses several managerial issues. First, the fact that matrix management was employed in the Hospice and there was no formal organizational structure obviated the point that decision lines were unclear within the Hospice organization. Teams were formed for patient care. There was an internal decision authority line from team members to team chiefs; there was an additional internal authority line between the team nurse and the team doctor. Team doctors also reported to the in-house physician. The case states that Hospice doctors report to the Chief Medical Director but does not state whether he is the same as or different from the in-house physician. The overall administrator, Jim Cole, sees himself as the boss -- the final authority.
Kathy, as nurse supervisor, coordinated the nurses (i.e., their team assignments) but it is questionable what chain of command authority (hire or fire) she had over them. It is unclear to whom she reported as a staff member -- was it the team operator or the Executive Medical Director? Regardless, it is evident that confusing lines of operational and staff authority are present. Similarly, the fact that Kathy could not find the on-call doctor indicates both a total lack of communication and coordination and a lack of supervision of the doctors. Operating on the principle that "there is always a higher authority," Kathy should probably have called Jim Cole when faced with the crisis and no doctor was available. Since Jim is apparently not a doctor, he may not have had sufficient medical knowledge or have been able to find a doctor. If nothing else, Kathy’s call to him would have alerted him to the fact that his "loose" management style was not working.
Additionally, Kathy was fired by committee. The committee included not only Jim Cole, but at least one team doctor - who was at best Kathy’s organizational equal. The committee approach highlights Jim Cole’s reluctance to take responsibility for his actions. The meeting was accusatory; no attempt was made to discover Kathy’s motive for sending Mr. Gardner to the hospital, or why she had done so. It should be noted that Kathy may have sent Mr. Gardner to the hospital only to obtain for him the work of hands-on care authorized under his contract with the Hospice. Further, the committee failed to consider either the internal or external impact of the firing decision. Externally, if Kathy discussed her feelings about the firing -- as she obviously has -- she paints a picture of an inhumane Hospice, which could cause other medical professionals not to refer future patients to the Hospice for care. Internally, the fact that Kathy was fired for making an on-the-spot decision could reinforce others’ determination to avoid making decisions. This, in turn, could result in such fear of decision-making that the Hospice would be ineffective -- both in planning for the future, and in making patient care decisions.
Thus, it is apparent that there is not only a lack of clear-cut authority and communication at Brookstone, but also a failure to identify responsibility. Decision by committee reinforces the lack of identifiable authority and responsibility lines. If the functions of management are to plan, organize, direct, control and communicate, one wonders how any of these functions are effectively accomplished at Brookstone under the current regime. Brookstone’s management problems, countless, are the prime factor in its shaky financial condition. Kathy was an unfortunate, convenient scapegoat.
Conclusion
Given that Coventry General violated its contract with Brookstone, the matter could have been resolved by a refusal by Brookstone to pay the hospital bill and a reprimand to Kathy. Since Kathy was fired instead, one might say that the action was legally supportable, ethically debatable, but epitomized poor management techniques. Thus, Kathy should not have been fired. Other, better solutions were available to Brookstone.
IX. EFAS, IFAS AND SFAS EXHIBITS - Were inappropriate for this case.
X. FINANCIAL RATIO ANALYSIS - Was inappropriate for this case.
I. CASE ABSTRACT
Mr. Gardner had joined the Brookstone Hospice three weeks before the medical emergency and was receiving regular nursing visits. On Sunday, February 18th, Gardner’s daughter Beverly had contacted Brookstone’s duty nurse, Kathy Bennett, saying that her father seemed to be bleeding profusely internally. The problem had been in progress for 16 hours. His family was at a hysterical level when the visiting nurse arrived at his home. The nurse called Kathy to tell her that Mr. Gardner needed to be admitted to a hospital.
Kathy then followed the lengthy admittance procedure for Covington General (the Hospice had a contractual agreement with this hospital). The patient’s primary doctor refused to go to Covington General Hospital. He wanted Gardner transported to Catholic Charities Hospital. No contractual agreement existed between Brookstone and Catholic Charities. While they were discussing this admittance issue with the primary doctor, Mr. Gardner waited in the ambulance to be transported. Kathy had ordered an ambulance because of the high concern of the visiting nurse and family.
Kathy then tried to contact any one of the four Hospice doctors who were on call, but to no avail. After trying for 45 minutes to get approval to transport Gardner to the nearest hospital, Covington General, Kathy acted on her own and gave permission for transporting the patient to the hospital.
At the hospital, the Emergency Room doctor, Dr. Wallace, recommended urological surgery for Monday. Brookstone had a well defined policy about how Hospice patients were to be treated once a patient signed with the Hospice: no other health care professional could take any action whatsoever without contacting the Hospice. The Hospice doctors tried to discourage Mr. Gardner from having the surgery, but the operation was performed. Mr. Gardner’s life has been extended from three months to three years as a result.
A physician at Brookstone Hospice commented on the situation discussed in this case - "That man (patient - Sam Gardner) is 86 years old and has cancer...That surgery will cost (our) Hospice a minimum of $7,800. We will pay for that decision (of nurse Kathy Bennett) right out of our pockets...Gardner will be dead in three months. Our purpose is not to extend life but to ensure quality life even until death."
Kathy was subsequently fired from her job at Brookstone because of her violation of numerous policies and procedures which cost Brookstone $7,800.
II. CASE ISSUES AND SUBJECTS
Values and Ethics Individual Values Versus
Mission and Objectives Organization Values
Legal and Ethical versus Organizational Structure and Economic Responsibilities Culture
Policies and Procedures Role Conflict
Profit Versus Patient’s Life Termination of an Employee
Stakeholders Matrix Organization
III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS
see Figure 1.5 on pages 20 and 21
IV. CASE OBJECTIVES
1. To provide the students with a case to examine his/her personal value system.
2. To discuss the mission and objectives of a Hospice and to compare them with objectives of key stakeholders (e.g., patients and employees).
3. To discuss the concept of dying with dignity and the value (cost) of life.
4. To discuss the physician’s comments "...that surgery will cost (our) Hospice a minimum of $7,800. We will pay for that right decision right out of our pockets."
5. To discuss, as a part of the evaluation and control process, the termination of Kathy for her handling of Mr. Gardner’s hospitalization.
6. To illustrate the impact of policies and procedures upon individual and organizational decision making.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
1. We have found this to be an excellent case to question the students’ value systems.
2. Try dividing the class into the following groups - (1) patient and family, (2) Kathy Bennett and (3) Jim Cole - Hospice Administrator.
• Let them discuss the issues, but hold patient’s comments until Bennett and Cole have finished presenting their positions.
3. Students have a difficult time analyzing this case in a paper. Their values strongly affect their analysis.
• It can be an excellent exam case to use to examine values and ethics and stakeholders’ conflicts with organizational objectives.
4. We have found this to be an excellent case for open-class discussion.
• We have students write on a piece of paper whether Kathy should have been terminated or not, and why? This forces a decision and improves class discussion.
VI. DISCUSSION QUESTIONS
1. Was the firing of Kathy appropriate given her actions?
2. Would you sign up your parents for Brookstone Hospice care?
3. Do you agree with the mission and objectives of Brookstone Hospice?
4. Is Brookstone’s problem typical of all health-related businesses?
5. How should life and death decisions be made? Who should decide? Why? How can costs be controlled?
6. What do you think of the physician’s comment that Kathy’s decision would cost the doctors $7,800 out of their pockets?
7. Was Kathy correct in her handling of the incident?
8. Should a Hospice be profit-making or not-for-profit?
9. Does Brookstone have an appropriate organizational structure?
10. What do each of Brookstone’s stakeholders want from Brookstone?
11. Why couldn’t Kathy locate one of the four doctors on call? Whose fault is this?
12. Should Mr. Gardner’s family have been required to pay for his life-extending surgery?
VII. CASE AUTHOR’S TEACHING NOTE by Sharon Olson and Sharon Ferguson*
This case is applicable to a business ethics class, a general management class, a personnel class, or a strategy class (if used early in the semester). Brookstone Hospice provides an excellent illustration of: questionable business ethics; the impact of structure on the functioning of an organization; a study in the paradox of control; individual versus corporate ethics; and a company’s focus on strategy while excluding mission and purpose.
An interesting method of beginning the discussion is to ask students - What would you have done if you had been Kathy Bennett? Essentially her options fell into the lose/lose category. If she had chosen not to send the ambulance to transport Mr. Gardner because she was unable to locate the Hospice doctor, she knew the patient would die but procedure would have been followed. If she did send the ambulance, she was well aware of the violation of company procedure.
Insight into the value system of the organization was evident in the comments made by administrator Jim Cole, who appears to measure success in dollar terms. His comment "...we grossed $2.5 million (last year) and are projecting $3.2 this year..." seems central to the issues at hand. Ask the accounting and finance majors how this can be reconciled with the cash flow problems the company is having.
Of course, a growth company will experience cash flow problems, and the question is, "Are patients being sacrificed for growth purposes?" Is growth for its own sake that important? The question becomes - were those revenues generated with strict adherence to company procedure and a corresponding increase in human suffering? After all, Bennett seems to have lost her job because of the decision she made to transport a patient to the hospital - a visit which cost Hospice $7,800. That bill seems to have been the real root of the dismissal - not the procedure violation as stated.
The ethics of the team doctors appear commensurate with that of Cole. One of the physicians commented, "That man is 86 years old and has cancer...That surgery will cost Hospice $7,800 minimum...we will pay for that decision right out of our pockets...Gardner will be dead in three months." His comment also gave insight into Brookstone’s strategy as well. Because of the nature of the services provided by the Hospice, the management must recognize that what Brookstone does in terms of goals, missions, etc. should be more important than how it does them. Yet their strategy appears to have priority over their mission. Company procedures must be re-evaluated in this light. This firm is dealing with human lives where change is a given fact. Brookstone should see itself as needing to manage that change within an environment of uncertainty and disorder. The bureaucratic procedures do not enhance this process but rather - as noted already - place focus on the "how to" aspect of services provided instead of on the services themselves.
___________
*Reprinted by permission of the authors
Brookstone is a study in paradoxical structures as well. The firm is described by Cole as a loose structure wherein the employees themselves make decisions, but Bennett suddenly finds herself terminated for making a decision. While the matrix structure of Brookstone would normally lend itself to the self-initiated decision process, the procedures outline operating in a matrix structure under bureaucratic guidelines. The two simply do not mix.
Another aspect which must be considered from a managerial perspective is the fact that no mention is made of action taken regarding the four Hospice doctors who could not be contacted although they were on call. Surely policy demanded that they be available as needed. Some action is required regarding them. Otherwise Bennett has the beginnings of an excellent lawsuit.
The case also involves a patient caught in the middle. His own primary care doctor refused to care for Gardner if he were admitted to Covington General (CGH). Brookstone Hospice meanwhile contracted with Covington General and not Catholic Charities, the facility preferred by the primary care doctor. The result was a patient left on hold, bleeding to death in an ambulance while waiting for the issue to be resolved.
No doubt Kathy Bennett did attempt to follow procedure. She spent 45 minutes (which must have seemed like an eternity) attempting to abide by all the regulations. Then as a matter of personal and professional ethics, she made the decision - a life saving decision - to transport the patient to CGH.
Brookstone may be one of the best examples available to illustrate the philosophy of "The business of business is business." As a series on Ethics published by the Wall Street Journal several years ago noted, "The ethics of business have fallen due to increased financial pressure to show a profit" (Wall Street Journal, Dow Jones Company, October 31, 1983, pp. 23, 41). That same series went on to note that because of time and money pressure, business people do what is expedient - not what is right. Bennett in contrast elected to do what was right for the patient but because her actions cost Brookstone $7,800, she is now unemployed. The direct contradiction between her personal values and those of the corporation is readily apparent.
But what happens now? Should Brookstone maintain its stringent procedures? Was this a one in a million case which will probably never happen again? Should some action be taken against the doctors involved? Should Brookstone consider contracting with some other hospitals than just Covington General? What action should Bennett be contemplating? Should Brookstone Hospice consider revamping its structure to enhance its mission?
VIII. STUDENT PAPER
The Brookstone Hospice case poses the question whether or not the Hospice nurse supervisor, Kathy Bennett, should have been fired for taking action which resulted in extending a patient’s life at a cost which the Hospice could not afford. The question involves legal, ethical, and managerial consideration which must be addressed to arrive at a resolution.
Summary
Case facts include a legal contract between Brookstone Hospice and Sam Gardner (age 85, terminally ill with a kidney malignancy, and expected to die within three months). The Hospice contract provided in-home assistance, with no more than seven days of 24-hour hands-on care if needed, to support both the patient and family in preparation for and acceptance of the patient’s relatively pain-free death. A medical crisis occurred near the end of Mr. Gardner’s first month under Hospice care. It resulted in Kathy Bennett, without proper authority, approving Mr. Gardner’s admission to Covington General Hospital -- a hospital with which Brookstone had a contract, presumably for the 24-hour care noted earlier. At the hospital, the emergency room doctor decided to operate. This decision was not approved by Brookstone. The operation increased Mr. Gardner’s life expectancy by three years; it also cost more than the Hospice could pay and still meet its weekly payroll. Mr. Gardner was happy but the Hospice was not. Consequently, Kathy Bennett was fired.
Legal Considerations
Organizations have the legal right to fire employees assuming there is no union contract or prejudice based on race, color, creed, sex, or national origin. The union contract restricts an organization’s legal right to fire by placing conditions on that right. Federal law precludes an organization from firing an employee solely for the prejudicial reasons noted above. Neither of these circumstances applied in the Brookstone case. Kathy was fired because she committed the Hospice to Mr. Gardner’s hospitalization without having proper authority (a Hospice policy violation) and/or because her actions adversely affected the Hospice’s profit position (a financial issue). No law was broken concerning the reason she was fired, so the Hospice had a legal right to fire her.
Ethical Considerations
The case poses several ethical questions. The basic one puts a patient’s right to life against Hospice profitability. Equally significant, however, is that physicians and other medical personnel are sworn to preserve human life to the best of their ability. Culturally, Americans favor an individual’s right to life; indeed, it is constitutionally guaranteed. The significance currently placed on the right to life in America can be seen in the anti-abortion movement, and efforts to ban the death penalty. Not only do Americans value life, they believe in quality of life, as is seen through legal and popular provisions for shelters for the homeless, Medicare, and Medicaid. In American culture, the Hospice concept is almost an anathema. The concept is bearable only because of Americans’ equally strong belief in an individual’s right of self-determination within the constraints of the law.
Constitutionally the right to the "pursuit of happiness" extends to the right of self-determination and thence to a business’ right to make a profit. In today’s world, it could be argued that the right to profit may be more important than the right to life, since among other things there is a lack of low-rent housing primarily because landlords cannot profit by providing such housing. One could therefore argue that Mr. Gardner exercised his right of self-determination when he signed the contract with the Hospice and thereby subordinated his right to life to the Hospice’s right to make a profit. In this argument, Kathy’s interference by sending him to the hospital where he underwent life-extending treatment could be said to have been a contract violation on the part of the Hospice, and, if anything, Brookstone could be sued for breach of contract.
However, there is also the issue of the physician’s Hippocratic Oath to consider. The surgeon was faced with a legal-ethical conflict. Sworn to preserve life, his supervisors had denied that oath in their contract with the Hospice. Since the mission of a hospital is to preserve life, it is arguable that the hospital should never have accepted the Hospice contract. On the other hand, had the hospital not accepted the contract, it would be denying the relatively pain-free death the Hospice was committed to provide.
In sum, America has yet to resolve the ethical debate between the right to life and the right to profitability. High medical costs are beginning to affect that debate, particularly in view of the "graying of America." Perhaps America will eventually adopt the British position where socialized medicine is the rule; life extending treatment after age 55 is not allowed unless privately paid for, and Hospices are common and accepted. In any case, when a country’s ethics are firm, they are generally grounded in law. Ethics, and consequently laws, change. America has conflicting laws concerning these issues (abortions are legal; the death penalty exists; contracts are inviolable, in most cases, once signed; and Medicare provides life-extending treatment but no nursing home care). These laws represent the conflicting ethics of the country as well as the continuing ethical debate.
Managerial Considerations
The case poses several managerial issues. First, the fact that matrix management was employed in the Hospice and there was no formal organizational structure obviated the point that decision lines were unclear within the Hospice organization. Teams were formed for patient care. There was an internal decision authority line from team members to team chiefs; there was an additional internal authority line between the team nurse and the team doctor. Team doctors also reported to the in-house physician. The case states that Hospice doctors report to the Chief Medical Director but does not state whether he is the same as or different from the in-house physician. The overall administrator, Jim Cole, sees himself as the boss -- the final authority.
Kathy, as nurse supervisor, coordinated the nurses (i.e., their team assignments) but it is questionable what chain of command authority (hire or fire) she had over them. It is unclear to whom she reported as a staff member -- was it the team operator or the Executive Medical Director? Regardless, it is evident that confusing lines of operational and staff authority are present. Similarly, the fact that Kathy could not find the on-call doctor indicates both a total lack of communication and coordination and a lack of supervision of the doctors. Operating on the principle that "there is always a higher authority," Kathy should probably have called Jim Cole when faced with the crisis and no doctor was available. Since Jim is apparently not a doctor, he may not have had sufficient medical knowledge or have been able to find a doctor. If nothing else, Kathy’s call to him would have alerted him to the fact that his "loose" management style was not working.
Additionally, Kathy was fired by committee. The committee included not only Jim Cole, but at least one team doctor - who was at best Kathy’s organizational equal. The committee approach highlights Jim Cole’s reluctance to take responsibility for his actions. The meeting was accusatory; no attempt was made to discover Kathy’s motive for sending Mr. Gardner to the hospital, or why she had done so. It should be noted that Kathy may have sent Mr. Gardner to the hospital only to obtain for him the work of hands-on care authorized under his contract with the Hospice. Further, the committee failed to consider either the internal or external impact of the firing decision. Externally, if Kathy discussed her feelings about the firing -- as she obviously has -- she paints a picture of an inhumane Hospice, which could cause other medical professionals not to refer future patients to the Hospice for care. Internally, the fact that Kathy was fired for making an on-the-spot decision could reinforce others’ determination to avoid making decisions. This, in turn, could result in such fear of decision-making that the Hospice would be ineffective -- both in planning for the future, and in making patient care decisions.
Thus, it is apparent that there is not only a lack of clear-cut authority and communication at Brookstone, but also a failure to identify responsibility. Decision by committee reinforces the lack of identifiable authority and responsibility lines. If the functions of management are to plan, organize, direct, control and communicate, one wonders how any of these functions are effectively accomplished at Brookstone under the current regime. Brookstone’s management problems, countless, are the prime factor in its shaky financial condition. Kathy was an unfortunate, convenient scapegoat.
Conclusion
Given that Coventry General violated its contract with Brookstone, the matter could have been resolved by a refusal by Brookstone to pay the hospital bill and a reprimand to Kathy. Since Kathy was fired instead, one might say that the action was legally supportable, ethically debatable, but epitomized poor management techniques. Thus, Kathy should not have been fired. Other, better solutions were available to Brookstone.
IX. EFAS, IFAS AND SFAS EXHIBITS - Were inappropriate for this case.
X. FINANCIAL RATIO ANALYSIS - Was inappropriate for this case.
THE AUDIT
THE AUDIT
I. CASE ABSTRACT
This case deals with personal value conflicts within the context of established organizational practices which run counter to stated policy. The case involves conflicts between professional and possibly personal values on the one hand and peer pressures to conform on the other.
"The Audit" is set in a national CPA firm. Sue, a newly hired auditor, has been sent out on an audit where she discovers that the client has been treating a large number of its workers as "independent contractors." This practice saves the client the payroll taxes that would otherwise be due. In Sue’s professional judgment, this may be improper and should be further investigated to see whether it should be noted in the audit report. A conversation with her immediate supervisor gives her no help.
Co-workers put pressure on Sue to drop the matter. If she goes over the head of the partner in charge of the audit, she will get them all in trouble as they have ignored the practice in prior years’ audits. They say that while they realize that it was probably wrong, they are sure their supervisor wants them to ignore it again this year. They encourage her to be a "team player."
Clearly, Sue faces a dilemma. If she drops the issue she will be violating her professional code of ethics. On the other hand, if she continues with the matter, she may well jeopardize her future with the firm.
Decision Date: No Date
II. CASE ISSUES AND SUBJECTS
CPA Firm Ethics and Moral Relativism
Personal Values vs. Group Norms Corporate Culture
Role Conflict Decision Making
Policies and Procedures Evaluation and Control
Whistle Blowing Code of Ethics
III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS
(see Figure 1.5 on pages 20 and 21)
IV. CASE OBJECTIVES
A. To help students identify personal value conflicts which occur in the work setting where the individual may be forced to choose between professional standards (or personal values) and group norms.
B. To introduce the idea that small concessions to peer pressure may lead to larger concessions later on.
C. To introduce the counter point that the act of disagreeing with one’s supervisors may also lead to unanticipated consequences.
D. To focus on the ethical dilemma posed by a violation which is relatively minor but which still appears to the central figure in the case to be a violation of professional standards.
E. Overall, to provide a vehicle for discussing the relationship between personal values, group norms, and codes of ethics.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
A. This is an excellent value case for open-class discussion.
• We suggest that you require each student to write out a specific solution to the employee’s dilemma. You can go back to the student’s individual solution after the class discussion.
B. This is an excellent in-class exam case focusing on ethics in decision making.
C. This is an excellent case for role playing followed by questioning by the students.
D. This case can be placed anywhere in the course that you want to discuss ethics or value oriented issues.
VI. DISCUSSION QUESTIONS
A. What would you do in this situation if you were Sue?
B. Should Sue go over the head of the partner in charge of the audit to upper management? What are the pros and cons of such a decision?
• Would this help or hinder her career at the CPA firm?
C. What role does the group (co-workers) play in Sue’s choice?
D. The case authors provided 11 excellent discussion questions and answers in the following Section VII - CASE AUTHORS’ TEACHING NOTE - Discussion Questions and Answers.
VII. CASE AUTHORS’ TEACHING NOTE by John Kilpatrick, Gamewell Gantt, and George Johnson*
A. Teaching Objectives - These were listed in Section IV - CASE OBJECTIVES
B. Discussion Questions and Answers
1. What are the responsibilities or obligations which the main characters in the case owe to themselves?
This is the issue of personal integrity and the duty one owes to oneself. Students will inevitably be faced with pressures to bend their standards or to agree with and cooperate with policies and practices which they find offensive ... all in the name of job security and/or promotion. In the words of the short story, how far are you willing to go with this "kiss, kiss, grovel, grovel?"
2. What are the responsibilities or obligations which the main characters in the case owe to the organization?
In our experience at this point questions of loyalty to the organization inevitably come up. It is possible to introduce the notion that "loyalty" is a two-way street and requires a certain level of trust, integrity, and reciprocity. The issue of organizational culture also should be introduced. Organizations can either encourage the moral “high road” from the top down or discourage compliance with company policies and community or professional standards. This may be done either by tacitly approving of actions which generate revenues but do not place the organization in jeopardy, or by actively encouraging disregard for those same standards. It may be argued that an organization gets the moral climate it deserves. The student should be encouraged to identify the stress which occurs between the respect for organizational values and the need to get along with peers and/or to advance one’s own career.
___________
*Reprinted by permission of the authors
3. What are the responsibilities or obligations which the main characters in the case owe to their profession?
One of the distinguishing characteristics of professionals is the tendency to identify more with their chosen profession than with any particular organization. Another is the importance of upholding the reputation and integrity of the profession by adhering to standards and practices which other members of the profession have concluded are appropriate and important. In "The Audit," questions of potential conflicts between company policy and practice, and professional standards are all evident. How does a profession maintain its integrity and reputation with its clients and the general public if members are not willing to make difficult choices?
The accounting profession is regulated by state licensing boards and state statutes. Each state has its own code of ethics, which is largely patterned upon the code of ethics of the profession’s national association, the American Institute of Certified Public Accountants (the "AICPA").
Excerpts from relevant sections of the state of Idaho’s Code of Ethics for certified public accountants appear below:
Rule 202 - Auditing Standards. A licensee shall not permit his name to be associated with financial statements in such a manner as to imply that he is acting as an independent public accountant unless he has complied with the applicable generally accepted auditing standards. Statements on Auditing Procedure issued by the Institute’s Auditing Standards Executive Committee are, for purposes of this rule, considered to be interpretations of the generally accepted auditing standards, and departures from such statements (or other standards considered by the board to be applicable in the circumstances) must be justified by those who do not follow them.
Rule 103 - Accounting Principles. A licensee shall not express an opinion that financial statements are presented in conformity with generally accepted accounting principles if such financial statements contain any departure from such accounting principles which has a material effect on the financial statements taken as a whole, unless the licensee can demonstrate that by reason of unusual circumstances the financial statements would otherwise have been misleading.
Rule 301 - Confidential Client Information. A licensee shall not without the consent of his client disclose any confidential information pertaining to his client obtained in the course of performing professional services.
An accountant who violates the profession’s code of ethics can be subject to a number of possible sanctions including (1) public and/or private reprimands, (2) license suspension, (3) license revocation, and/or (4) potential civil liability to the client and to third parties for damages in appropriate cases.
In “The Audit,” Sue faces the likelihood of immediate adverse repercussions on the job if she continues to call objections to the client’s practice. She also faces the possibility of even more severe adverse professional consequences if she fails to object and if she is later accused of violating the profession’s code of ethics in having failed to pursue the matter further. Indeed, an auditor who has reason to suspect improper accounting practices has an obligation to further investigate the questionable practice. Failure to do so could result in a violation of generally accepted auditing standards as well as the presentation of financial statements that are not in accordance with generally accepted accounting principles.
This case is particularly difficult because Sue’s supervisors and the partner in charge of the audit seem to be encouraging her to violate the profession’s code of ethics and professional standards in order to retain the client.
4. What are the responsibilities or obligations which the main characters in the case owe to their peers?
Most students will be able to identify with the peer pressures which are being exerted, or are anticipated, in the case. In our experience many students will underestimate the consequences of attempting to change departmental practice or of disagreeing with one’s supervisor or of going further and engaging in some form of "whistle blowing." (For a discussion, see for example Near and Micelli, "Retaliation against whistle blowers: predictors and effects" in the Journal of Applied Psychology (February, 1986): 137-146.
5. What are the responsibilities or obligations which the main characters in the case owe to the business community?
Edward T. Hall, a cultural anthropologist who has written a number of books dealing with the practices of sub-cultures, suggests that employees operate in three cultures: the broad community culture, the business culture of the region or country, and that of the specific firm in which the individual works (E.T. Hall, The Silent Language, Doubleday-Anchor, 1973). The question opens the door to a discussion of a number of "rules" of the U.S. business culture and, by way of comparison, those predominating in other cultures. It also leads into questions of the type of business community--what are the rules of the game?--which the individual student would like to see. To what extent does this type of business community require that individuals exercise some degree of "moral restraint?"
6. What are the responsibilities which the main characters in the case owe to the broader community?
This issue allows the issues identified above to be extended to the local, regional, national, and global communities. While it may be counter-productive to try to get too much mileage out of cases which are fairly narrowly focused, the students can be encouraged to recognize that none of the dilemmas exist in a vacuum. This should be particularly appropriate at the community level. What kind of community do they wish to live in, and in what ways is that issue dependent on the choices of individuals? To what extent are the choices of individuals swamped by policies and practices of major institutions, including those of business? At some point, everything is connected to everything, as the ecologists are inclined to point out.
7. What are the implications for the individual of each of the options?
Discussion of this issue can be useful in getting the students to really think through the significance and likely outcomes of the various choices. Students with work experience will probably keep the discussion from becoming too naive. Our experience has been that students are eager to explore the ramifications of moral and, to some, political choices.
8. How does an organization ensure that the policies which it develops will be followed by organization members?
This, of course, is an issue for which there is no short or easy answer. Research suggests that a number of characteristics and practices are critical if organization members are going to commit to organizational values. Among these are the full support of top management, recognition and support for compliance, censure for failure to comply, a willingness to not reward behavior strictly on the basis of bottom-line performance, and effective communication of policies and the reasons for them.
9. What impact does an organization’s reward system have on member’s decisions when confronted by ethical dilemmas? Specifically, what are the implications of asking for "ethical conduct" while rewarding solely on the basis of narrowly defined (short-term) performance goals?
This is simply an extension of the "reward structure" question raised above. The students in colleges of business will have thoroughly absorbed the manager’s responsibility for profitability. However, they may not have been challenged to consider the trade-offs and conflicts which sometimes evolve from the pursuit of single or narrowly defined goals.
10. How does a group leader balance between the need to work with his or her group and the need to provide strong leadership?
Management and organization behavior classes focus attention on the task/people dimensions and on the balance between being liked and being effective. This question addresses the ethical dimensions of those conflicts: at what point does the group leader make an issue of a breach of company policy?
11. What is the role of trust in these matters? What are the costs and benefits of using "administrative controls" vs. trusting employees to act in good faith?
It can be argued that the tendency in many American firms has been to rely on administrative controls: the greater the perceived level of "misbehavior" the more tightly bureaucratic and rule-oriented the firm becomes. This line of argument suggests that frequently "misbehavior" is a symptom of some other underlying problem, which is only exacerbated by increasing autocratic or unilaterally designed and imposed controls. At the other end of the spectrum are firms which focus on developing an atmosphere of trust which, ideally, leads to a lessened need for administrative controls. The goal is to have the employees "internalize" and identify with the objectives of the organization. This of course presupposes a high level of integrity on the part of top management in particular. Most firms, and perhaps the values and management style of most managers, lie somewhere in between these two extremes. This question confronts the students with some of the practical managerial issues which confront managers in attempting to set the ethical tone for the firm.
C. General Discussion
Short cases provide a number of advantages to an instructor. They can easily be slipped into a course when the instructor or students need a change, or when something planned does not work out. Since the text is only a page or two, students can be given time to read the case in class with minimal lost time. Also, at times it seems that students today struggle with a steady diet of business ethics "essays." Short cases provide some relief and can be used on very short notice.
Overall, we have found the interest level to be very high in discussing issues such as are found in this brief case. The discussions tend to be lively and thought-provoking. Many students have indicated that these discussions have proven to be among the most stimulating and eye-opening of the semester.
We have used "The Audit" for a number of pedagogical purposes. The case focuses very clearly on an example of the potential conflicts between group norms and personal and professional standards of the type which the students will face as they begin their professional lives. The situation serves to highlight the importance of personal values, organizational culture, and the responsibilities of management in ensuring an environment in which personal and professional standards are respected.
The cases have been used in a variety of courses: sophomore level legal environment courses, junior or senior level management or organization behavior, business and society or business ethics, marketing, purchasing;, and senior level accounting courses.
These materials do not presuppose advanced work in philosophy or ethics. The intention, as noted above, is to present moral dilemmas which students will likely face, and to engage them in the exchange of ideas and the comparing of values and insights. In the process it is hoped that students will better understand the nature of such value conflicts and the relationship and importance of their own values.
For "The Audit," the instructor should be aware of the auditing standards which require the noting of certain practices in the audit report, as well as having some knowledge of the specific standards dealing with the accounting for "independent contractors." A brief discussion of relevant auditing standards is included below for the instructor’s use.
Under the accounting profession’s guidelines, independent accountants are required to state whether or not they believe a client’s financial statements "fairly present" the financial position of the client at a given point in time. If the client in "The Audit" is improperly accounting for wages paid to some workers as payments to independent contractors when those workers are in fact common law employees, the result would be an understatement of the client’s payroll tax expenses and an understatement of liabilities for potential back taxes, penalties, and interest. This is something that generally accepted auditing standards require the accounting firm to call to the attention of management of the client, and it could require a "qualified opinion" (i.e. disclosure in the financial statements) if management refused to modify its statements to reflect the correct expenses and liabilities involved.
Moreover, under the profession’s guidelines, Sue, as a staff accountant, would have an obligation to document the disagreement with her supervisors as part of the working papers on the audit.
Finally, the accounting profession’s code of ethics prohibits an accountant from disclosing confidential information to third parties. Therefore, under the guidelines of the profession, at least, Sue should not report the client’s practice to the state or federal government tax authorities.
Not all of the above specialized knowledge concerning the position of the accounting profession is necessary to use "The Audit" in non-accounting classes. The information is included in this teaching note for use in upper level accounting classes where students may have had some exposure to the profession’s guidelines. It is also included to provide background information for instructors who may wish to use the case in general management courses which typically include a broad cross-section of business majors.
It should be emphasized, however, that the case is intended to illustrate the discovery of facts which might lead a reasonable auditor to take further action. The relevant question is whether or not Sue should continue to pursue the matter in light of the pressure from her peers and the partner in charge of the audit for her to "drop it."
VIII. STUDENT PAPER
Sue is in a difficult position, one with far-reaching consequences. To make it worse, she is feeling a great deal of pressure to do nothing, and the others involved are presenting what seems to be quite a few arguments supporting their position.
Several issues were raised to promote the "don’t make waves" position and to be a team player. Paul, the partner in charge of the audit, brought up the point that others in the industry of the company in question followed the same practice. He further encouraged no action by stating that to pursue the issue could mean the loss of the account and hinted at negative repercussions for Sue if this were to happen.
Sue’s co-workers, Bill and Mike, echoed the sentiment by urging Sue to be a "team player." They pointed out that the practice had been ignored in the past. If Sue were to follow through, her co-workers’ careers would be jeopardized. In addition, her relationship with her superiors would be so threatened, it could possibly force her to leave the firm.
The arguments for raising the issue were not many in the case itself (see Exhibit 1). The fact that the practice was wrong was confirmed. Despite evidence to the contrary, the firm endorses high ethical standards and highlights the ethical responsibilities of a CPA. Also, Sue’s conscience would bother her if she were to do nothing.
The support for Sue’s speaking up is far greater than mentioned in the case. If the authorities were to discover the understating of taxes, the company could be fined as well as forced to pay back taxes. This would, in all likelihood, be a material amount. The stockholders rely on an auditor’s clean opinion to ensure that there is not a material deviation.
If she were to overlook this situation, Sue could be expected to overlook the next one. It seems as if once a person backs down, it is easier to do so again. This step could have serious consequences for Sue’s career as a CPA.
As stated previously, Paul hinted at possible negative actions were Sue not to let the issue die. I question whether this is a type of firm one would want to work for anyway. To tailor an opinion because of the risk of losing a client is a very dangerous practice and a highly unethical one. It defeats the entire concept of an auditor’s independence.
All these factors are very significant in making the decision, but the one which most moves me to recommend pursuing the issue is Sue’s feelings. If she does not feel comfortable with the situation, she should act on it. To deviate from one’s own standards could lead to a lifetime of regret. Because of this and the other reasons, Sue should follow through on this issue.
EXHIBIT 1
PROS AND CONS OF PURSUING THE ISSUE
Do Not Pursue Issue Do Pursue Issue
- better relationship with superiors - impact on conscience
- better relationship with co-workers - make a firm statement
about her beliefs
Pros - wouldn't risk losing account - act in manner firm
preached
- wouldn't risk losing job - doubtful if you would
- other professionals would follow want to stay with a
same practice firm that did not
practice what they
preach
- firm's members confirmed practice - damage relationship with
was not correct co-workers
- potential liability - damage relationship with
- bothered conscience - might cause firm to lose
- firm members might expect her to an account
Cons overlook other issues in the - damage her future with
future - possible damage to
- would not act in a manner that the co-workers' careers
firm "preached"
- once you back down it is easier to
do it again
IX. EFAS, IFAS and SFAS EXHIBITS - Were inappropriate for this case.
X. FINANCIAL ANALYSIS - Was inappropriate for this case.
I. CASE ABSTRACT
This case deals with personal value conflicts within the context of established organizational practices which run counter to stated policy. The case involves conflicts between professional and possibly personal values on the one hand and peer pressures to conform on the other.
"The Audit" is set in a national CPA firm. Sue, a newly hired auditor, has been sent out on an audit where she discovers that the client has been treating a large number of its workers as "independent contractors." This practice saves the client the payroll taxes that would otherwise be due. In Sue’s professional judgment, this may be improper and should be further investigated to see whether it should be noted in the audit report. A conversation with her immediate supervisor gives her no help.
Co-workers put pressure on Sue to drop the matter. If she goes over the head of the partner in charge of the audit, she will get them all in trouble as they have ignored the practice in prior years’ audits. They say that while they realize that it was probably wrong, they are sure their supervisor wants them to ignore it again this year. They encourage her to be a "team player."
Clearly, Sue faces a dilemma. If she drops the issue she will be violating her professional code of ethics. On the other hand, if she continues with the matter, she may well jeopardize her future with the firm.
Decision Date: No Date
II. CASE ISSUES AND SUBJECTS
CPA Firm Ethics and Moral Relativism
Personal Values vs. Group Norms Corporate Culture
Role Conflict Decision Making
Policies and Procedures Evaluation and Control
Whistle Blowing Code of Ethics
III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS
(see Figure 1.5 on pages 20 and 21)
IV. CASE OBJECTIVES
A. To help students identify personal value conflicts which occur in the work setting where the individual may be forced to choose between professional standards (or personal values) and group norms.
B. To introduce the idea that small concessions to peer pressure may lead to larger concessions later on.
C. To introduce the counter point that the act of disagreeing with one’s supervisors may also lead to unanticipated consequences.
D. To focus on the ethical dilemma posed by a violation which is relatively minor but which still appears to the central figure in the case to be a violation of professional standards.
E. Overall, to provide a vehicle for discussing the relationship between personal values, group norms, and codes of ethics.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
A. This is an excellent value case for open-class discussion.
• We suggest that you require each student to write out a specific solution to the employee’s dilemma. You can go back to the student’s individual solution after the class discussion.
B. This is an excellent in-class exam case focusing on ethics in decision making.
C. This is an excellent case for role playing followed by questioning by the students.
D. This case can be placed anywhere in the course that you want to discuss ethics or value oriented issues.
VI. DISCUSSION QUESTIONS
A. What would you do in this situation if you were Sue?
B. Should Sue go over the head of the partner in charge of the audit to upper management? What are the pros and cons of such a decision?
• Would this help or hinder her career at the CPA firm?
C. What role does the group (co-workers) play in Sue’s choice?
D. The case authors provided 11 excellent discussion questions and answers in the following Section VII - CASE AUTHORS’ TEACHING NOTE - Discussion Questions and Answers.
VII. CASE AUTHORS’ TEACHING NOTE by John Kilpatrick, Gamewell Gantt, and George Johnson*
A. Teaching Objectives - These were listed in Section IV - CASE OBJECTIVES
B. Discussion Questions and Answers
1. What are the responsibilities or obligations which the main characters in the case owe to themselves?
This is the issue of personal integrity and the duty one owes to oneself. Students will inevitably be faced with pressures to bend their standards or to agree with and cooperate with policies and practices which they find offensive ... all in the name of job security and/or promotion. In the words of the short story, how far are you willing to go with this "kiss, kiss, grovel, grovel?"
2. What are the responsibilities or obligations which the main characters in the case owe to the organization?
In our experience at this point questions of loyalty to the organization inevitably come up. It is possible to introduce the notion that "loyalty" is a two-way street and requires a certain level of trust, integrity, and reciprocity. The issue of organizational culture also should be introduced. Organizations can either encourage the moral “high road” from the top down or discourage compliance with company policies and community or professional standards. This may be done either by tacitly approving of actions which generate revenues but do not place the organization in jeopardy, or by actively encouraging disregard for those same standards. It may be argued that an organization gets the moral climate it deserves. The student should be encouraged to identify the stress which occurs between the respect for organizational values and the need to get along with peers and/or to advance one’s own career.
___________
*Reprinted by permission of the authors
3. What are the responsibilities or obligations which the main characters in the case owe to their profession?
One of the distinguishing characteristics of professionals is the tendency to identify more with their chosen profession than with any particular organization. Another is the importance of upholding the reputation and integrity of the profession by adhering to standards and practices which other members of the profession have concluded are appropriate and important. In "The Audit," questions of potential conflicts between company policy and practice, and professional standards are all evident. How does a profession maintain its integrity and reputation with its clients and the general public if members are not willing to make difficult choices?
The accounting profession is regulated by state licensing boards and state statutes. Each state has its own code of ethics, which is largely patterned upon the code of ethics of the profession’s national association, the American Institute of Certified Public Accountants (the "AICPA").
Excerpts from relevant sections of the state of Idaho’s Code of Ethics for certified public accountants appear below:
Rule 202 - Auditing Standards. A licensee shall not permit his name to be associated with financial statements in such a manner as to imply that he is acting as an independent public accountant unless he has complied with the applicable generally accepted auditing standards. Statements on Auditing Procedure issued by the Institute’s Auditing Standards Executive Committee are, for purposes of this rule, considered to be interpretations of the generally accepted auditing standards, and departures from such statements (or other standards considered by the board to be applicable in the circumstances) must be justified by those who do not follow them.
Rule 103 - Accounting Principles. A licensee shall not express an opinion that financial statements are presented in conformity with generally accepted accounting principles if such financial statements contain any departure from such accounting principles which has a material effect on the financial statements taken as a whole, unless the licensee can demonstrate that by reason of unusual circumstances the financial statements would otherwise have been misleading.
Rule 301 - Confidential Client Information. A licensee shall not without the consent of his client disclose any confidential information pertaining to his client obtained in the course of performing professional services.
An accountant who violates the profession’s code of ethics can be subject to a number of possible sanctions including (1) public and/or private reprimands, (2) license suspension, (3) license revocation, and/or (4) potential civil liability to the client and to third parties for damages in appropriate cases.
In “The Audit,” Sue faces the likelihood of immediate adverse repercussions on the job if she continues to call objections to the client’s practice. She also faces the possibility of even more severe adverse professional consequences if she fails to object and if she is later accused of violating the profession’s code of ethics in having failed to pursue the matter further. Indeed, an auditor who has reason to suspect improper accounting practices has an obligation to further investigate the questionable practice. Failure to do so could result in a violation of generally accepted auditing standards as well as the presentation of financial statements that are not in accordance with generally accepted accounting principles.
This case is particularly difficult because Sue’s supervisors and the partner in charge of the audit seem to be encouraging her to violate the profession’s code of ethics and professional standards in order to retain the client.
4. What are the responsibilities or obligations which the main characters in the case owe to their peers?
Most students will be able to identify with the peer pressures which are being exerted, or are anticipated, in the case. In our experience many students will underestimate the consequences of attempting to change departmental practice or of disagreeing with one’s supervisor or of going further and engaging in some form of "whistle blowing." (For a discussion, see for example Near and Micelli, "Retaliation against whistle blowers: predictors and effects" in the Journal of Applied Psychology (February, 1986): 137-146.
5. What are the responsibilities or obligations which the main characters in the case owe to the business community?
Edward T. Hall, a cultural anthropologist who has written a number of books dealing with the practices of sub-cultures, suggests that employees operate in three cultures: the broad community culture, the business culture of the region or country, and that of the specific firm in which the individual works (E.T. Hall, The Silent Language, Doubleday-Anchor, 1973). The question opens the door to a discussion of a number of "rules" of the U.S. business culture and, by way of comparison, those predominating in other cultures. It also leads into questions of the type of business community--what are the rules of the game?--which the individual student would like to see. To what extent does this type of business community require that individuals exercise some degree of "moral restraint?"
6. What are the responsibilities which the main characters in the case owe to the broader community?
This issue allows the issues identified above to be extended to the local, regional, national, and global communities. While it may be counter-productive to try to get too much mileage out of cases which are fairly narrowly focused, the students can be encouraged to recognize that none of the dilemmas exist in a vacuum. This should be particularly appropriate at the community level. What kind of community do they wish to live in, and in what ways is that issue dependent on the choices of individuals? To what extent are the choices of individuals swamped by policies and practices of major institutions, including those of business? At some point, everything is connected to everything, as the ecologists are inclined to point out.
7. What are the implications for the individual of each of the options?
Discussion of this issue can be useful in getting the students to really think through the significance and likely outcomes of the various choices. Students with work experience will probably keep the discussion from becoming too naive. Our experience has been that students are eager to explore the ramifications of moral and, to some, political choices.
8. How does an organization ensure that the policies which it develops will be followed by organization members?
This, of course, is an issue for which there is no short or easy answer. Research suggests that a number of characteristics and practices are critical if organization members are going to commit to organizational values. Among these are the full support of top management, recognition and support for compliance, censure for failure to comply, a willingness to not reward behavior strictly on the basis of bottom-line performance, and effective communication of policies and the reasons for them.
9. What impact does an organization’s reward system have on member’s decisions when confronted by ethical dilemmas? Specifically, what are the implications of asking for "ethical conduct" while rewarding solely on the basis of narrowly defined (short-term) performance goals?
This is simply an extension of the "reward structure" question raised above. The students in colleges of business will have thoroughly absorbed the manager’s responsibility for profitability. However, they may not have been challenged to consider the trade-offs and conflicts which sometimes evolve from the pursuit of single or narrowly defined goals.
10. How does a group leader balance between the need to work with his or her group and the need to provide strong leadership?
Management and organization behavior classes focus attention on the task/people dimensions and on the balance between being liked and being effective. This question addresses the ethical dimensions of those conflicts: at what point does the group leader make an issue of a breach of company policy?
11. What is the role of trust in these matters? What are the costs and benefits of using "administrative controls" vs. trusting employees to act in good faith?
It can be argued that the tendency in many American firms has been to rely on administrative controls: the greater the perceived level of "misbehavior" the more tightly bureaucratic and rule-oriented the firm becomes. This line of argument suggests that frequently "misbehavior" is a symptom of some other underlying problem, which is only exacerbated by increasing autocratic or unilaterally designed and imposed controls. At the other end of the spectrum are firms which focus on developing an atmosphere of trust which, ideally, leads to a lessened need for administrative controls. The goal is to have the employees "internalize" and identify with the objectives of the organization. This of course presupposes a high level of integrity on the part of top management in particular. Most firms, and perhaps the values and management style of most managers, lie somewhere in between these two extremes. This question confronts the students with some of the practical managerial issues which confront managers in attempting to set the ethical tone for the firm.
C. General Discussion
Short cases provide a number of advantages to an instructor. They can easily be slipped into a course when the instructor or students need a change, or when something planned does not work out. Since the text is only a page or two, students can be given time to read the case in class with minimal lost time. Also, at times it seems that students today struggle with a steady diet of business ethics "essays." Short cases provide some relief and can be used on very short notice.
Overall, we have found the interest level to be very high in discussing issues such as are found in this brief case. The discussions tend to be lively and thought-provoking. Many students have indicated that these discussions have proven to be among the most stimulating and eye-opening of the semester.
We have used "The Audit" for a number of pedagogical purposes. The case focuses very clearly on an example of the potential conflicts between group norms and personal and professional standards of the type which the students will face as they begin their professional lives. The situation serves to highlight the importance of personal values, organizational culture, and the responsibilities of management in ensuring an environment in which personal and professional standards are respected.
The cases have been used in a variety of courses: sophomore level legal environment courses, junior or senior level management or organization behavior, business and society or business ethics, marketing, purchasing;, and senior level accounting courses.
These materials do not presuppose advanced work in philosophy or ethics. The intention, as noted above, is to present moral dilemmas which students will likely face, and to engage them in the exchange of ideas and the comparing of values and insights. In the process it is hoped that students will better understand the nature of such value conflicts and the relationship and importance of their own values.
For "The Audit," the instructor should be aware of the auditing standards which require the noting of certain practices in the audit report, as well as having some knowledge of the specific standards dealing with the accounting for "independent contractors." A brief discussion of relevant auditing standards is included below for the instructor’s use.
Under the accounting profession’s guidelines, independent accountants are required to state whether or not they believe a client’s financial statements "fairly present" the financial position of the client at a given point in time. If the client in "The Audit" is improperly accounting for wages paid to some workers as payments to independent contractors when those workers are in fact common law employees, the result would be an understatement of the client’s payroll tax expenses and an understatement of liabilities for potential back taxes, penalties, and interest. This is something that generally accepted auditing standards require the accounting firm to call to the attention of management of the client, and it could require a "qualified opinion" (i.e. disclosure in the financial statements) if management refused to modify its statements to reflect the correct expenses and liabilities involved.
Moreover, under the profession’s guidelines, Sue, as a staff accountant, would have an obligation to document the disagreement with her supervisors as part of the working papers on the audit.
Finally, the accounting profession’s code of ethics prohibits an accountant from disclosing confidential information to third parties. Therefore, under the guidelines of the profession, at least, Sue should not report the client’s practice to the state or federal government tax authorities.
Not all of the above specialized knowledge concerning the position of the accounting profession is necessary to use "The Audit" in non-accounting classes. The information is included in this teaching note for use in upper level accounting classes where students may have had some exposure to the profession’s guidelines. It is also included to provide background information for instructors who may wish to use the case in general management courses which typically include a broad cross-section of business majors.
It should be emphasized, however, that the case is intended to illustrate the discovery of facts which might lead a reasonable auditor to take further action. The relevant question is whether or not Sue should continue to pursue the matter in light of the pressure from her peers and the partner in charge of the audit for her to "drop it."
VIII. STUDENT PAPER
Sue is in a difficult position, one with far-reaching consequences. To make it worse, she is feeling a great deal of pressure to do nothing, and the others involved are presenting what seems to be quite a few arguments supporting their position.
Several issues were raised to promote the "don’t make waves" position and to be a team player. Paul, the partner in charge of the audit, brought up the point that others in the industry of the company in question followed the same practice. He further encouraged no action by stating that to pursue the issue could mean the loss of the account and hinted at negative repercussions for Sue if this were to happen.
Sue’s co-workers, Bill and Mike, echoed the sentiment by urging Sue to be a "team player." They pointed out that the practice had been ignored in the past. If Sue were to follow through, her co-workers’ careers would be jeopardized. In addition, her relationship with her superiors would be so threatened, it could possibly force her to leave the firm.
The arguments for raising the issue were not many in the case itself (see Exhibit 1). The fact that the practice was wrong was confirmed. Despite evidence to the contrary, the firm endorses high ethical standards and highlights the ethical responsibilities of a CPA. Also, Sue’s conscience would bother her if she were to do nothing.
The support for Sue’s speaking up is far greater than mentioned in the case. If the authorities were to discover the understating of taxes, the company could be fined as well as forced to pay back taxes. This would, in all likelihood, be a material amount. The stockholders rely on an auditor’s clean opinion to ensure that there is not a material deviation.
If she were to overlook this situation, Sue could be expected to overlook the next one. It seems as if once a person backs down, it is easier to do so again. This step could have serious consequences for Sue’s career as a CPA.
As stated previously, Paul hinted at possible negative actions were Sue not to let the issue die. I question whether this is a type of firm one would want to work for anyway. To tailor an opinion because of the risk of losing a client is a very dangerous practice and a highly unethical one. It defeats the entire concept of an auditor’s independence.
All these factors are very significant in making the decision, but the one which most moves me to recommend pursuing the issue is Sue’s feelings. If she does not feel comfortable with the situation, she should act on it. To deviate from one’s own standards could lead to a lifetime of regret. Because of this and the other reasons, Sue should follow through on this issue.
EXHIBIT 1
PROS AND CONS OF PURSUING THE ISSUE
Do Not Pursue Issue Do Pursue Issue
- better relationship with superiors - impact on conscience
- better relationship with co-workers - make a firm statement
about her beliefs
Pros - wouldn't risk losing account - act in manner firm
preached
- wouldn't risk losing job - doubtful if you would
- other professionals would follow want to stay with a
same practice firm that did not
practice what they
preach
- firm's members confirmed practice - damage relationship with
was not correct co-workers
- potential liability - damage relationship with
- bothered conscience - might cause firm to lose
- firm members might expect her to an account
Cons overlook other issues in the - damage her future with
future - possible damage to
- would not act in a manner that the co-workers' careers
firm "preached"
- once you back down it is easier to
do it again
IX. EFAS, IFAS and SFAS EXHIBITS - Were inappropriate for this case.
X. FINANCIAL ANALYSIS - Was inappropriate for this case.
THE WALLACE GROUP, INC.
THE WALLACE GROUP, INC.
I. CASE ABSTRACT
Harold Wallace, founder, serves as Chairman and President of the Wallace Group. He owns 45% of the outstanding stock. The company consists of three operating groups -- Electronics, Plastics, and Chemicals -- which generate sales of $70 million. Mr. Wallace continues direct operational control over the Electronics Group. Several years ago, Wallace and the Board embarked on a strategy of diversification into plastics and chemicals in order to decrease the company’s dependence on defense-related business.
Presently, the morale within The Wallace Group has deteriorated to the point where some of the employee stockholders made an attempt to force Wallace’s resignation. As a result of this crisis, Wallace has hired Frances Rampar, a management consultant, to conduct a management survey into the problems facing The Wallace Group. Her task is to develop a series of priorities for Wallace’s consideration.
Decision Date: No Date Sales: $70,000,000
Net Income: $1,760,000
II. CASE ISSUES AND SUBJECTS:
Corporate Governance Morale and Culture
Diversification Organizational Structure
Stages of Corporate Development Top Management Responsibilities
Vertical Integration Modes of Strategy Formulation
Transfer Pricing Distinctive Competence
Suboptimization Entrepreneurship
III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS
(see Figure 1.5 on pages 20 and 21)
IV. CASE OBJECTIVES
1. To acquaint the students with a CEO’s management of a company that leads to conflict and power struggles among managers. To deal with an issue in corporate governance: Why hasn't the board of directors become involved in this issue?
2. To have the student act as a consultant. As such, the student should develop a list of the most important problem(s) facing the Wallace Group, and specific action plans to deal with each specific problem.
3. To discuss how to convey potentially negative information to the person who hired you, especially if that person is the principal cause of this negative information.
4. To review the corporation diversification plan from an area of expertise (electronics) into areas (plastics and chemicals) where it has no distinctive competence.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
1. Dr. Larry Stybel, the case author, suggests two possible ways of handling this case.
A. The first option involves students individually formulating a response to the following questions:
• What is the most important problem facing The Wallace Group?
• Develop a specific action plan to deal with this problem.
This option typically involves 1.5-2.0 hours for class discussion.
B. The second option would be to bring in a guest who would take the role of Harold Wallace. A retired president would be ideal for this kind of exercise. Under this format, students are divided into consulting teams and are given the following instructions:
• Attached is some information about The Wallace Group, Inc. This information includes data regarding corporate operations and operating problems as perceived by various managers of the company.
• Your consulting team should review this material. The team will then meet to analyze critical issues facing The Wallace Group and to identify solutions which The Wallace Group management could take either alone or with consulting assistance from your firm.
• On (date) your team will have an opportunity to meet with Mr. Harold Wallace to discuss your diagnosis and action plans. These plans should be as specific as possible, as they may lead to a consulting assignment for your group. In calculating costs associated with your participation in the plan you propose, assume a professional fee of $100 per day plus out-of-pocket expenses for food, travel, hotel, graphics, etc.
• Each team will present its findings to Mr. Wallace separately. You will have thirty (30) minutes for the presentation, plus fifteen (15) minutes for Mr. Wallace to question the team. At the conclusion of the presentations, Mr. Wallace will determine which team, if any, would be awarded the consulting contract.
In addition to the substantive learning objectives discussed earlier, the second option would achieve the following additional objectives:
1. To have students learn to develop formal oral presentations,
2. To determine a proper approach for conveying potentially negatively charged information to someone perceived as a superior,
3. To cost out a consulting project based on specific action plans developed by students.
It is most effective to go through this option in one session lasting three to four hours, rather than to space it over two to three classes.
2. Special note from case author:
Regardless of the option selected, the key element of this case is that the acquisition strategy of The Wallace Group has been disastrous for producing the following problems:
A. The acquisition strategy has moved The Wallace Group away from its area of distinctive competence in electronics into areas where it does not have distinctive competence. In a small firm such as The Wallace Group, this has resulted in a tendency not to effectively utilize scarce technical personnel. It also contributes to lack of morale on the part of employees because the firm does not have a clear mission.
B. The acquisition strategy has locked the Electronics Group into using the Plastics Group as its major supplier, thus increasing costs for one group and making them less competitive. Presumably, the Plastics Group is also locked into using the Chemicals Group and is faced with a similar situation.
C. A complex MIS apparatus has been constructed by the central office to collect data from three very different operational groups. In addition, the central office appears "staff heavy" for such a small firm. This analysis is based on an examination of the organization chart.
D. Problems resulting from being heavily dependent on defense-related contracts have not been solved.
Mr. Wallace was once heard to have remarked, "We’ll get organized tomorrow. But we’ve got to deal with today’s needs today." This all too common approach to management must be challenged by the students. This company desperately needs an organized approach to strategic planning which involves both the commitment of Mr. Wallace and the involvement of key employees within the company.
Designing such a process would not be easy. But the case does seem to indicate that this is the most pressing need faced by The Wallace Group.
3. We have used it as a written paper. The students find the case somewhat difficult to handle because of Mr. Wallace’s direct involvement in the company’s problems.
VI. DISCUSSION QUESTIONS
1. What is (are) the most important problem(s) facing The Wallace Group?
2. What recommendation(s) would you (as a consultant) make to Mr. Wallace, and in what order of priorities?
3. How do you educate a Stage I manager (entrepreneur) to become a Stage II or III professional manager? What impact does this problem have on this case?
4. How do you handle the transfer pricing problems involved in the backward integration? The acquisition of the plastics company has locked the Electronics Group into using its plastics products at a higher cost.
5. If Mr. Wallace is found to be one of the major problems, should he be addressed directly or indirectly?
6. Has the Wallace Group’s diversification strategy been effective? If 'yes,' please explain. If 'no,' please explain.
VII. CASE AUTHOR’S TEACHING NOTE by Laurence J. Stybel*
Presented earlier in Section V, Suggested Classroom Approaches To The Case.
*Reprinted by permission of the case author
VIII. STUDENT PAPER
I. Internal Environment
A. Tremendous dissatisfaction among management and employees. This resulted from Wallace’s failure to delegate to subordinates and a lack of clear strategies or long term plans, goals, or objectives.
B. Lethargy and lack of direction on top management’s part.
II. External Environment
A. Favorable market niche in electronics. Longstanding reputation of reliable government contracts. Potential for increased sales due to administration’s commitment to a strong military with the latest technology.
B. Auto industry on an upward trend with high sales volume suggest solid future sales.
III. Strengths
A. The company is able to supply many of its own component parts and raw materials because it is well-integrated.
B. Solid performance from the plastics and electronics divisions in the past. The electronics group has a good track record in developing and manufacturing countermeasure equipment.
C. Being a public corporation provides the firm with flexibility to attract equity capital vs. long or short term debt.
IV. Problem Analysis
A. Heavy dependence on government contracts could put the corporation in financial difficulty if further sales diversification cannot be found.
B. Poor organizational design creates span of control problems and results in poor operations. Specific job responsibilities need to be defined at the management level.
C. The corporate policy of transfer pricing needs to be addressed in terms of product cost and profit margin.
D. Stage one management in stage three corporation.
E. Unprofitable chemical division needs new management or it needs to be analyzed for sale to someone else.
V. Recommendations and Implementation Costs
A. Develop new organization chart and clearly define job responsibilities. Mr. Wallace needs to stop trying to run the firm himself.
COST: $3,000
B. Diversify product mix and customer base to hedge against loss of large customers. See Mr. Williams.
COST: $30 TO $50,000
C. Change management of chemical division or sell off based on cost/benefit analysis to corporation.
COST: Funds needed to buy Mr. Luskic’s 5% and $45,000 to attract a good manager from another firm.
D. Change management style. Mr. Wallace has got to let his managers manage. At the same time he must develop long term strategies and goals that will help the corporation grow.
E. Clarify transfer pricing policy. Make sure that all managers understand that it is a team effort. The overall profitability of the corporation is what is important. This policy needs to be weighed in terms of overall profitability to corporation and not individual departments.
IX. EFAS, IFAS, AND SFAS EXHIBITS - Were inappropriate for this case.
X. FINANCIAL ANALYSIS - Was inappropriate for this case.
I. CASE ABSTRACT
Harold Wallace, founder, serves as Chairman and President of the Wallace Group. He owns 45% of the outstanding stock. The company consists of three operating groups -- Electronics, Plastics, and Chemicals -- which generate sales of $70 million. Mr. Wallace continues direct operational control over the Electronics Group. Several years ago, Wallace and the Board embarked on a strategy of diversification into plastics and chemicals in order to decrease the company’s dependence on defense-related business.
Presently, the morale within The Wallace Group has deteriorated to the point where some of the employee stockholders made an attempt to force Wallace’s resignation. As a result of this crisis, Wallace has hired Frances Rampar, a management consultant, to conduct a management survey into the problems facing The Wallace Group. Her task is to develop a series of priorities for Wallace’s consideration.
Decision Date: No Date Sales: $70,000,000
Net Income: $1,760,000
II. CASE ISSUES AND SUBJECTS:
Corporate Governance Morale and Culture
Diversification Organizational Structure
Stages of Corporate Development Top Management Responsibilities
Vertical Integration Modes of Strategy Formulation
Transfer Pricing Distinctive Competence
Suboptimization Entrepreneurship
III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS
(see Figure 1.5 on pages 20 and 21)
IV. CASE OBJECTIVES
1. To acquaint the students with a CEO’s management of a company that leads to conflict and power struggles among managers. To deal with an issue in corporate governance: Why hasn't the board of directors become involved in this issue?
2. To have the student act as a consultant. As such, the student should develop a list of the most important problem(s) facing the Wallace Group, and specific action plans to deal with each specific problem.
3. To discuss how to convey potentially negative information to the person who hired you, especially if that person is the principal cause of this negative information.
4. To review the corporation diversification plan from an area of expertise (electronics) into areas (plastics and chemicals) where it has no distinctive competence.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
1. Dr. Larry Stybel, the case author, suggests two possible ways of handling this case.
A. The first option involves students individually formulating a response to the following questions:
• What is the most important problem facing The Wallace Group?
• Develop a specific action plan to deal with this problem.
This option typically involves 1.5-2.0 hours for class discussion.
B. The second option would be to bring in a guest who would take the role of Harold Wallace. A retired president would be ideal for this kind of exercise. Under this format, students are divided into consulting teams and are given the following instructions:
• Attached is some information about The Wallace Group, Inc. This information includes data regarding corporate operations and operating problems as perceived by various managers of the company.
• Your consulting team should review this material. The team will then meet to analyze critical issues facing The Wallace Group and to identify solutions which The Wallace Group management could take either alone or with consulting assistance from your firm.
• On (date) your team will have an opportunity to meet with Mr. Harold Wallace to discuss your diagnosis and action plans. These plans should be as specific as possible, as they may lead to a consulting assignment for your group. In calculating costs associated with your participation in the plan you propose, assume a professional fee of $100 per day plus out-of-pocket expenses for food, travel, hotel, graphics, etc.
• Each team will present its findings to Mr. Wallace separately. You will have thirty (30) minutes for the presentation, plus fifteen (15) minutes for Mr. Wallace to question the team. At the conclusion of the presentations, Mr. Wallace will determine which team, if any, would be awarded the consulting contract.
In addition to the substantive learning objectives discussed earlier, the second option would achieve the following additional objectives:
1. To have students learn to develop formal oral presentations,
2. To determine a proper approach for conveying potentially negatively charged information to someone perceived as a superior,
3. To cost out a consulting project based on specific action plans developed by students.
It is most effective to go through this option in one session lasting three to four hours, rather than to space it over two to three classes.
2. Special note from case author:
Regardless of the option selected, the key element of this case is that the acquisition strategy of The Wallace Group has been disastrous for producing the following problems:
A. The acquisition strategy has moved The Wallace Group away from its area of distinctive competence in electronics into areas where it does not have distinctive competence. In a small firm such as The Wallace Group, this has resulted in a tendency not to effectively utilize scarce technical personnel. It also contributes to lack of morale on the part of employees because the firm does not have a clear mission.
B. The acquisition strategy has locked the Electronics Group into using the Plastics Group as its major supplier, thus increasing costs for one group and making them less competitive. Presumably, the Plastics Group is also locked into using the Chemicals Group and is faced with a similar situation.
C. A complex MIS apparatus has been constructed by the central office to collect data from three very different operational groups. In addition, the central office appears "staff heavy" for such a small firm. This analysis is based on an examination of the organization chart.
D. Problems resulting from being heavily dependent on defense-related contracts have not been solved.
Mr. Wallace was once heard to have remarked, "We’ll get organized tomorrow. But we’ve got to deal with today’s needs today." This all too common approach to management must be challenged by the students. This company desperately needs an organized approach to strategic planning which involves both the commitment of Mr. Wallace and the involvement of key employees within the company.
Designing such a process would not be easy. But the case does seem to indicate that this is the most pressing need faced by The Wallace Group.
3. We have used it as a written paper. The students find the case somewhat difficult to handle because of Mr. Wallace’s direct involvement in the company’s problems.
VI. DISCUSSION QUESTIONS
1. What is (are) the most important problem(s) facing The Wallace Group?
2. What recommendation(s) would you (as a consultant) make to Mr. Wallace, and in what order of priorities?
3. How do you educate a Stage I manager (entrepreneur) to become a Stage II or III professional manager? What impact does this problem have on this case?
4. How do you handle the transfer pricing problems involved in the backward integration? The acquisition of the plastics company has locked the Electronics Group into using its plastics products at a higher cost.
5. If Mr. Wallace is found to be one of the major problems, should he be addressed directly or indirectly?
6. Has the Wallace Group’s diversification strategy been effective? If 'yes,' please explain. If 'no,' please explain.
VII. CASE AUTHOR’S TEACHING NOTE by Laurence J. Stybel*
Presented earlier in Section V, Suggested Classroom Approaches To The Case.
*Reprinted by permission of the case author
VIII. STUDENT PAPER
I. Internal Environment
A. Tremendous dissatisfaction among management and employees. This resulted from Wallace’s failure to delegate to subordinates and a lack of clear strategies or long term plans, goals, or objectives.
B. Lethargy and lack of direction on top management’s part.
II. External Environment
A. Favorable market niche in electronics. Longstanding reputation of reliable government contracts. Potential for increased sales due to administration’s commitment to a strong military with the latest technology.
B. Auto industry on an upward trend with high sales volume suggest solid future sales.
III. Strengths
A. The company is able to supply many of its own component parts and raw materials because it is well-integrated.
B. Solid performance from the plastics and electronics divisions in the past. The electronics group has a good track record in developing and manufacturing countermeasure equipment.
C. Being a public corporation provides the firm with flexibility to attract equity capital vs. long or short term debt.
IV. Problem Analysis
A. Heavy dependence on government contracts could put the corporation in financial difficulty if further sales diversification cannot be found.
B. Poor organizational design creates span of control problems and results in poor operations. Specific job responsibilities need to be defined at the management level.
C. The corporate policy of transfer pricing needs to be addressed in terms of product cost and profit margin.
D. Stage one management in stage three corporation.
E. Unprofitable chemical division needs new management or it needs to be analyzed for sale to someone else.
V. Recommendations and Implementation Costs
A. Develop new organization chart and clearly define job responsibilities. Mr. Wallace needs to stop trying to run the firm himself.
COST: $3,000
B. Diversify product mix and customer base to hedge against loss of large customers. See Mr. Williams.
COST: $30 TO $50,000
C. Change management of chemical division or sell off based on cost/benefit analysis to corporation.
COST: Funds needed to buy Mr. Luskic’s 5% and $45,000 to attract a good manager from another firm.
D. Change management style. Mr. Wallace has got to let his managers manage. At the same time he must develop long term strategies and goals that will help the corporation grow.
E. Clarify transfer pricing policy. Make sure that all managers understand that it is a team effort. The overall profitability of the corporation is what is important. This policy needs to be weighed in terms of overall profitability to corporation and not individual departments.
IX. EFAS, IFAS, AND SFAS EXHIBITS - Were inappropriate for this case.
X. FINANCIAL ANALYSIS - Was inappropriate for this case.
THE RECALCITRANT DIRECTOR AT BYTE, INC
THE RECALCITRANT DIRECTOR AT BYTE, INC.:
CORPORATE LEGALITY VS. CORPORATE RESPONSIBILITY
I. CASE ABSTRACT
Mr. James Elliot, CEO and Chairman of Byte Products, Inc., presents his recommendation to the Board of Directors to purchase an existing plant in Plainville as a temporary plant until the new one is on line in three years. All on the Board except one (10-1) seem to favor the proposal. What ensues is the discussion between Elliott and Kevin Williams, board member, over the proposal to purchase a plant with the intention of closing it in three years.
Byte Products has three existing plants operating at full capacity (24 hours a day and 7 days a week). The new plant proposed to be built in the southwestern U.S. will require three years before it is fully on line. This means that Byte cannot meet the anticipated demand for its products. Alternative courses have been explored - (1) license Byte products and technology to other U.S. manufacturers, and (2)utilize overseas facilities and licensing. Top management found an existing plant in Plainville, New England that would meet the company’s immediate production needs until the new plant comes on-line in three years. The Plainville facility has been closed for the last 8 years. It would take about three months to get the Plainville plant on-line.
The discussion between Elliott and Williams focuses on the impact on the town and on the 1,200 potential employees of opening this temporary plant. The town and the townspeople had gone through a catastrophic closing eight years ago when the plant in question was closed. After a lengthy discussion between Elliot and Williams, a recess in the meeting is called. When the board meeting is reconvened, a major shift has taken place. The vote could be 7-4 or 6-5 for the proposal, but Elliott desires a unanimous vote. As the case ends - Williams is asked whether a compromise can be reached. He responds, "I have to say no."
Decision Date: No Date Sales: $265, 000, 000
II. CASE ISSUES AND SUBJECTS
Social Responsibility to Corporate Governance
Local Community Strategic Alternatives
Board of Directors’ Role Communications
Corporate Stakeholders Ethics and Values
Opening and Closing of Strategic Decision Making
Plants
-Impact on Town
-Impact on Employees
IV. CASE OBJECTIVES
A. To discuss the social responsibilities of a corporation regarding the opening of a temporary plant and its closing on (a) the town, and (b) potential employees.
B. To illustrate the role of board members in strategic decisions.
C. To discuss the ethical issues: Should the company executives inform the town and potential employees that this is a temporary plant?
D. To illustrate corporate governance in action.
E. To illustrate the power of the board of directors.
F. To show how one vote of dissent can sway a vote of the board after a long discussion of the pros and cons of a proposal. Point: The initial tentative vote was 10-1, and after the discussion the vote was likely to be 7-4 or 6-5.
G. To discuss how a compromise may be negotiated on a strategic issue so as to satisfy all affected stakeholders.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
A. We ask the students to vote on the pending proposal before the board. We make everyone commit to a position. What should be the role of the board in such a decision?
B. This case is an excellent open-class discussion case. We get much better discussion after we force each student to take a position on the proposal. The case revolves around how executives and board members deal with questions of social responsibility.
C. Divide the class into two groups representing Elliott and Williams. Select students to represent these two gentlemen and allow them to debate the issues -- without the use of the case.
D. It is an excellent case as an individual test case or a written paper. It has been used as a final exam in class.
E. Have the class list all the corporate stakeholders who will be affected by this decision. List all the alternative solutions and how each group will be affected.
• Movie Suggestion! - Roger and Me
- - This film shows the impact of closing a plant on Flint, Michigan by General Motors.
- - It can be rented.
VI. DISCUSSION QUESTIONS
A. If you were one of the board members, how would you have initially voted for the proposal? What would your vote be after the recess in the meeting? Why?
B. Should the Byte executives tell the town administrators and potential employees that this is a temporary plant, to run for three years?
C. What impact does a plant closing have on a small town like Plainville? What impact does the closing have on the employees?
D. Can you suggest any compromise for the present impasse?
E. If you were Elliott, would you call for a vote on your proposal or postpone the vote until next meeting?
- Students need to remember that the proposal calls for a new plant. Elliott may want to make this a separate proposal and vote now.
VII. CASE AUTHORS’ TEACHING NOTE - None was available for this case.
VIII. STUDENT PAPER
A lack of solid planning and forecasting has resulted in Byte’s current facilities shortage. Construction on a facility that will take three years to complete should not begin when current facilities are working at 100% capacity around the clock, and demand continues to escalate. The state-of-the-art facility, to be located in the southwestern United States, will supply enough capacity to meet demand when it opens in three years, but it does nothing to stem the tide of the current crisis. Management’s concern that Byte’s market leadership is in jeopardy is valid, but they opened the door to new competition by their lack of foresight.
Elliott, Byte’s CEO, is now ready to undertake a stop-gap measure, but once again without enough concern for the future. Several stop-gap measures were proposed by Elliott’s staff. One stop-gap
measure revolves around the renovation of an abandoned factory in New England. Renovation can inexpensively be completed in three months, and attractive lease terms are available because the facility has been abandoned for eight years.
Elliott is aware of some problems with the proposed plant. The plant would never be an efficient producer of Byte products. Profitability would be low for several reasons. High labor costs due to a strong union presence in the area, warehousing expenses, and inadequate transportation links to Byte’s major markets and suppliers would all contribute to higher costs and lower margins. However, the New England plant would be closed in three years when the new plant opened.
Another option available to Byte is licensing, both domestic and international, of Byte product and process technology. Domestic licensing would result in higher production costs and lower margins, since the higher costs could not be passed on to the customer without losing market share. International licensing goes against Byte’s philosophy of remaining a domestic operation. Additionally, patent issues could not be properly protected in the international environment. Finally, both domestic and international licensing could result in lower product quality, another threat to Byte’s market share.
Considering the other options suggested to him by his staff, Elliott has chosen the temporary New England plant as the stop-gap solution. As Elliott prepares his presentation for the Board of Directors, of which he is a member, he anticipates little, if any, opposition to his proposal.
Opposition did come in the single, but very strong voice of Kevin Williams, an outside director, who vehemently opposed the temporary facility on the basis of corporate responsibility. Williams stated the influx of workers and their families, approximately 4,000 people, would seriously disrupt the small New England community. New schools, businesses, hospitals, housing and retail establishments would be necessary to care for the new Byte employees. If the temporary nature of the facility were known, the local government and banking community would not be forthcoming with the funds required to capitalize those projects. If Byte hid the temporary nature of the facility, the funding for the projects would be supplied, but in three years when the plant closed, and the community could become an unemployed ghost town. Williams concluded that it was not a legal issue, but a moral responsibility.
Examining the issue from an objective position, several items appear to require discussion. The temporary plant may supply enough product to meet demand, but the location is far away from the market. This may ultimately cause distribution and service problems. For the employee, the temporary plant is not a good solution. Not knowing the job is temporary, many employees may begin to make a permanent home for their families, buy houses, set down roots. When the layoffs begin due to the plant closing, the employees will be the ones to suffer. Knowing the job is temporary might encourage apathy among workers that could lead to lower quality products. It is clear that Byte would not be doing a public or community service by opening the plant, but that is not a corporation’s main concern. The question is whether or not the new facility would meet the four top priorities.
The location of the temporary plant tends to make it ineffective. Lack of warehousing facilities and transportation systems add to the ineffectiveness of the plant. Elliott has already stated the renovated plant would never be an efficient producer of Byte products. If the temporary nature of the facility is known, then morale is sure to be low. It appears that even the top four priorities of a corporation are not met by this solution.
Employee relationships may be difficult to manage. The strong union presence would require complex negotiations and labor contracts. Legal issues might arise if the closing of Byte’s plant violates a Union agreement.
A thoughtful consideration of all the issues involved with the opening of the temporary plant in New England reveals much conflicting information. In some ways, as compared with licensing, the temporary plant seems like the solution. In other ways it seems like Byte would just be starting more problems. Both licensing and the temporary plant share the same drawbacks: high production costs and lower margins. The temporary plant does not have to deal with control over the operation. In a shared facility, Byte would not have much control over production.
Recommendations
Opening a new temporary plant may be an ideal answer to the lack of capacity, but the New England location is far from ideal. Elliott must weigh the problems associated with the new plant against the benefits of increased capacity. If all forecasts confirm the need for the increased capacity before the new state-of-the-art facility opens in three years, then perhaps Elliott should seek an alternative location. Since the new plant will be located in the Southwest, perhaps temporary space can be found there. Another alternative would be to plan production of the new plant to open in stages. Perhaps that would forestall some of the demand requirements. A third alternative would be to try to locate manufacturing space nearby one of the existing Byte facilities. When the temporary plant would close, job opportunities could be found in the permanent facilities. Production efficiency might increase production at the existing facilities. If no other alternative is available, then Byte should be up front about the temporary nature of the work. Byte might have to offer assistance to workers in the form of housing or credit. Byte might also guarantee jobs in the new Southwestern plant to any worker willing to relocate. Byte must see the opening of the temporary plant as a means to stop the erosion of the market share, but not as a way to increase profit margins. Understanding that the facility would never boost the bottom line is necessary. Sacrifices might, or must, be made by Byte if they go with the New England plant.
IX. EFAS, IFAS, AND SFAS Exhibits - Were inappropriate for this case.
X. FINANCIAL ANALYSIS - Was inappropriate for this case.
CORPORATE LEGALITY VS. CORPORATE RESPONSIBILITY
I. CASE ABSTRACT
Mr. James Elliot, CEO and Chairman of Byte Products, Inc., presents his recommendation to the Board of Directors to purchase an existing plant in Plainville as a temporary plant until the new one is on line in three years. All on the Board except one (10-1) seem to favor the proposal. What ensues is the discussion between Elliott and Kevin Williams, board member, over the proposal to purchase a plant with the intention of closing it in three years.
Byte Products has three existing plants operating at full capacity (24 hours a day and 7 days a week). The new plant proposed to be built in the southwestern U.S. will require three years before it is fully on line. This means that Byte cannot meet the anticipated demand for its products. Alternative courses have been explored - (1) license Byte products and technology to other U.S. manufacturers, and (2)utilize overseas facilities and licensing. Top management found an existing plant in Plainville, New England that would meet the company’s immediate production needs until the new plant comes on-line in three years. The Plainville facility has been closed for the last 8 years. It would take about three months to get the Plainville plant on-line.
The discussion between Elliott and Williams focuses on the impact on the town and on the 1,200 potential employees of opening this temporary plant. The town and the townspeople had gone through a catastrophic closing eight years ago when the plant in question was closed. After a lengthy discussion between Elliot and Williams, a recess in the meeting is called. When the board meeting is reconvened, a major shift has taken place. The vote could be 7-4 or 6-5 for the proposal, but Elliott desires a unanimous vote. As the case ends - Williams is asked whether a compromise can be reached. He responds, "I have to say no."
Decision Date: No Date Sales: $265, 000, 000
II. CASE ISSUES AND SUBJECTS
Social Responsibility to Corporate Governance
Local Community Strategic Alternatives
Board of Directors’ Role Communications
Corporate Stakeholders Ethics and Values
Opening and Closing of Strategic Decision Making
Plants
-Impact on Town
-Impact on Employees
IV. CASE OBJECTIVES
A. To discuss the social responsibilities of a corporation regarding the opening of a temporary plant and its closing on (a) the town, and (b) potential employees.
B. To illustrate the role of board members in strategic decisions.
C. To discuss the ethical issues: Should the company executives inform the town and potential employees that this is a temporary plant?
D. To illustrate corporate governance in action.
E. To illustrate the power of the board of directors.
F. To show how one vote of dissent can sway a vote of the board after a long discussion of the pros and cons of a proposal. Point: The initial tentative vote was 10-1, and after the discussion the vote was likely to be 7-4 or 6-5.
G. To discuss how a compromise may be negotiated on a strategic issue so as to satisfy all affected stakeholders.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
A. We ask the students to vote on the pending proposal before the board. We make everyone commit to a position. What should be the role of the board in such a decision?
B. This case is an excellent open-class discussion case. We get much better discussion after we force each student to take a position on the proposal. The case revolves around how executives and board members deal with questions of social responsibility.
C. Divide the class into two groups representing Elliott and Williams. Select students to represent these two gentlemen and allow them to debate the issues -- without the use of the case.
D. It is an excellent case as an individual test case or a written paper. It has been used as a final exam in class.
E. Have the class list all the corporate stakeholders who will be affected by this decision. List all the alternative solutions and how each group will be affected.
• Movie Suggestion! - Roger and Me
- - This film shows the impact of closing a plant on Flint, Michigan by General Motors.
- - It can be rented.
VI. DISCUSSION QUESTIONS
A. If you were one of the board members, how would you have initially voted for the proposal? What would your vote be after the recess in the meeting? Why?
B. Should the Byte executives tell the town administrators and potential employees that this is a temporary plant, to run for three years?
C. What impact does a plant closing have on a small town like Plainville? What impact does the closing have on the employees?
D. Can you suggest any compromise for the present impasse?
E. If you were Elliott, would you call for a vote on your proposal or postpone the vote until next meeting?
- Students need to remember that the proposal calls for a new plant. Elliott may want to make this a separate proposal and vote now.
VII. CASE AUTHORS’ TEACHING NOTE - None was available for this case.
VIII. STUDENT PAPER
A lack of solid planning and forecasting has resulted in Byte’s current facilities shortage. Construction on a facility that will take three years to complete should not begin when current facilities are working at 100% capacity around the clock, and demand continues to escalate. The state-of-the-art facility, to be located in the southwestern United States, will supply enough capacity to meet demand when it opens in three years, but it does nothing to stem the tide of the current crisis. Management’s concern that Byte’s market leadership is in jeopardy is valid, but they opened the door to new competition by their lack of foresight.
Elliott, Byte’s CEO, is now ready to undertake a stop-gap measure, but once again without enough concern for the future. Several stop-gap measures were proposed by Elliott’s staff. One stop-gap
measure revolves around the renovation of an abandoned factory in New England. Renovation can inexpensively be completed in three months, and attractive lease terms are available because the facility has been abandoned for eight years.
Elliott is aware of some problems with the proposed plant. The plant would never be an efficient producer of Byte products. Profitability would be low for several reasons. High labor costs due to a strong union presence in the area, warehousing expenses, and inadequate transportation links to Byte’s major markets and suppliers would all contribute to higher costs and lower margins. However, the New England plant would be closed in three years when the new plant opened.
Another option available to Byte is licensing, both domestic and international, of Byte product and process technology. Domestic licensing would result in higher production costs and lower margins, since the higher costs could not be passed on to the customer without losing market share. International licensing goes against Byte’s philosophy of remaining a domestic operation. Additionally, patent issues could not be properly protected in the international environment. Finally, both domestic and international licensing could result in lower product quality, another threat to Byte’s market share.
Considering the other options suggested to him by his staff, Elliott has chosen the temporary New England plant as the stop-gap solution. As Elliott prepares his presentation for the Board of Directors, of which he is a member, he anticipates little, if any, opposition to his proposal.
Opposition did come in the single, but very strong voice of Kevin Williams, an outside director, who vehemently opposed the temporary facility on the basis of corporate responsibility. Williams stated the influx of workers and their families, approximately 4,000 people, would seriously disrupt the small New England community. New schools, businesses, hospitals, housing and retail establishments would be necessary to care for the new Byte employees. If the temporary nature of the facility were known, the local government and banking community would not be forthcoming with the funds required to capitalize those projects. If Byte hid the temporary nature of the facility, the funding for the projects would be supplied, but in three years when the plant closed, and the community could become an unemployed ghost town. Williams concluded that it was not a legal issue, but a moral responsibility.
Examining the issue from an objective position, several items appear to require discussion. The temporary plant may supply enough product to meet demand, but the location is far away from the market. This may ultimately cause distribution and service problems. For the employee, the temporary plant is not a good solution. Not knowing the job is temporary, many employees may begin to make a permanent home for their families, buy houses, set down roots. When the layoffs begin due to the plant closing, the employees will be the ones to suffer. Knowing the job is temporary might encourage apathy among workers that could lead to lower quality products. It is clear that Byte would not be doing a public or community service by opening the plant, but that is not a corporation’s main concern. The question is whether or not the new facility would meet the four top priorities.
The location of the temporary plant tends to make it ineffective. Lack of warehousing facilities and transportation systems add to the ineffectiveness of the plant. Elliott has already stated the renovated plant would never be an efficient producer of Byte products. If the temporary nature of the facility is known, then morale is sure to be low. It appears that even the top four priorities of a corporation are not met by this solution.
Employee relationships may be difficult to manage. The strong union presence would require complex negotiations and labor contracts. Legal issues might arise if the closing of Byte’s plant violates a Union agreement.
A thoughtful consideration of all the issues involved with the opening of the temporary plant in New England reveals much conflicting information. In some ways, as compared with licensing, the temporary plant seems like the solution. In other ways it seems like Byte would just be starting more problems. Both licensing and the temporary plant share the same drawbacks: high production costs and lower margins. The temporary plant does not have to deal with control over the operation. In a shared facility, Byte would not have much control over production.
Recommendations
Opening a new temporary plant may be an ideal answer to the lack of capacity, but the New England location is far from ideal. Elliott must weigh the problems associated with the new plant against the benefits of increased capacity. If all forecasts confirm the need for the increased capacity before the new state-of-the-art facility opens in three years, then perhaps Elliott should seek an alternative location. Since the new plant will be located in the Southwest, perhaps temporary space can be found there. Another alternative would be to plan production of the new plant to open in stages. Perhaps that would forestall some of the demand requirements. A third alternative would be to try to locate manufacturing space nearby one of the existing Byte facilities. When the temporary plant would close, job opportunities could be found in the permanent facilities. Production efficiency might increase production at the existing facilities. If no other alternative is available, then Byte should be up front about the temporary nature of the work. Byte might have to offer assistance to workers in the form of housing or credit. Byte might also guarantee jobs in the new Southwestern plant to any worker willing to relocate. Byte must see the opening of the temporary plant as a means to stop the erosion of the market share, but not as a way to increase profit margins. Understanding that the facility would never boost the bottom line is necessary. Sacrifices might, or must, be made by Byte if they go with the New England plant.
IX. EFAS, IFAS, AND SFAS Exhibits - Were inappropriate for this case.
X. FINANCIAL ANALYSIS - Was inappropriate for this case.
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