BUS 402 Week Five

Ashford 6: - Week 5 (Jun 23 - Jun 29)

The Forbes School of Business at Ashford University is proud to announce two scholarship opportunities. The application process for both scholarships is quick and easy. Please visit: http://www.ashford.edu/admissions/scholarships.htm for more information and a chance to secure $5000.00 towards your educational cost at Ashford University. Week Five Learning Outcomes This week the students will:

· Evaluate the nature of Corporate Social Responsibility (CSR)

· Explain the role of corporations in being economically, legally, ethically, philanthropically, and environmentally responsible. 

· Assess the different strategies an international corporation can use to extend its markets

Overview

Assignment	Due Date	Format	Grading Percent
Corporate Social Responsibility	Day 3 (1st post)	Discussion	2.5
International Strategies	Day 3 (1st post)	Discussion	2.5
Final Case Study and Strategic Plan	Day 7	Assignment	40

Required Readings Abraham, S. (2012). Strategic management for organizations. San Diego, CA:   Bridgepoint Education.  This text is a Constellation™ course digital materials (CDM) title.

· Chapter 10: Ethics and Corporate Social Responsibility

· Chapter 11: Diversified, Global, and Other Types of Organizations

Recommended Resources Article

Favaro, K. (2014).  How IKEA, Disney, and Berkshire Hathaway succeed with adjacencies . Forbes. Retrieved from http://www.forbes.com/sites/boozandcompany/2014/03/31/how-ikea-disney-and-berkshire-hathaway-succeed-with-adjacencies/ Fisher, G. S. (2012). Why global diversification still makes sense . Forbes. Retrieved from http://www.forbes.com/sites/greggfisher/2012/01/17/why-global-diversification-still-makes-sense/  Geromel, R. (2012). Can we use corporate social responsibility to evaluate companies?  Forbes. Retrieved from http://www.forbes.com/sites/ricardogeromel/2012/05/21/csr-corporate-social-responsibility/  Guthrie, D. (2014).  A conversation on corporate social responsibility . Forbes. Retrieved from http://www.forbes.com/sites/dougguthrie/2014/01/09/a-conversation-on-corporate-social-responsibility/ Henderson, R., & Reavis, C. (2009, August 25).  What’s Driving Porsche?  Retrieved from https://mitsloan.mit.edu/LearningEdge/CaseDocs/08-075-What%27s%20Driving%20Porsche.Henderson.pdf History of Porsche AG – FundingUniverse . (n.d.). Retrieved from http://www.fundinguniverse.com/company-histories/porsche-ag-history/

To participate in the following discussions, go to this week's Discussion link in the left navigation.

1. Corporate Social Responsibility [CLO: 5]   In your own words, explain what corporate social responsibility (CSR) is. Name two examples of social responsible companies you know and explain why you consider them so.  We learned that CSR can be viewed as a pyramid with Philanthropic Responsibilities at the top. Discuss what particular advantages accrue to companies who proactively take steps to be philanthropically responsible. Guided Response: Respond to at least two of your fellow students’ posts in a substantive manner and provide recommendations to extend their thinking. Agree or disagree with your classmate’s post. Defend your position by using information from your textbook and this week’s lecture.  

2. International Strategies [CLO: 4]

When companies expand into the international arena, they do so either because their home market has matured or because they see real opportunities in the foreign market. Discuss which kinds of international strategies are most appropriate for companies in the following domestic industries:

· Producing movies

· Software

· Management consulting

· Breakfast cereals

· School of business 

Guided Response:

Respond to at least two of your fellow students’ posts in a substantive manner and provide recommendations to extend their thinking. Agree or disagree with your classmate’s post. Defend your position by using information from your textbook and this week’s lecture..

Assignment To complete the following assignment, go to this week's Assignment link in the left navigation.

Final Case Study and Strategic Plan [CLOs: 1,2,3,4,5]

Read What’s Driving Porsche?  and History of Porsche AG – FundingUniverse . From the perspective of an executive with the firm, prepare a strategic plan to grow the business over the next three years.  Your strategic plan must be future-oriented and must:

· Describe Porsche’s history and its 4Ps (Product, Price, Place, and Promotion). 

· Explain the current situation of the organization in the market (industry, market, and general environment analysis). 

· Assess the financial performance and condition of the organization.

· Conduct a SWOT analysis (strengths, weaknesses, opportunities, and threats) to determine areas that offer opportunities for change.

· Choose three or four areas from your SWOT analysis and explain why the areas you have chosen are essential to your strategic plan. 

· Describe your recommended organizational structure.

· Explain your plan to measure the success of your strategic plan.

Your paper must be 10 to 12 pages in length (excluding the title and reference pages) and be formatted according to APA style guidelines as outlined in the Ashford Writing Center. In addition to the text, you must use at least five scholarly sources. Remember to incorporate information that you have learned from this course as well as your personal experience.

Carefully review the  Grading Rubric  for the criteria that will be used to evaluate your assignment

Weekly Lecture

Business Ethics

Ethics refers to accepted principles of right or wrong that measure the conduct of a person, the members of a profession, or the actions of an organization (Abraham, 2012, p. 278).  Managers may be confronted with ethical dilemmas while pursuing strategies that maximize the long-term profitability of the organization. We need to consider that the quest for profitability should not be constrained only by law, but also by ethical considerations.

Ethical Issues in Strategy

The ethical issues that managers confront are often due to the conflict between the goals of the company and the rights of the stakeholders. The most common examples of unethical behavior involve: self-dealing, information manipulation, and anti-competitive behavior among others.

Proponents of the stakeholder view of business ethics often argue that managers should behave in an ethical manner to ensure the support of the stakeholders, which will ultimately benefit both the stakeholder and organizations. Others argue that acting ethically is simply the right thing to do.

When facing an ethical dilemma, managers can ask themselves five questions that might help in making the right decision:

1.         What's in it for me?

2.         What decision or action would lead to the greatest good for the greatest number?

3.         What rules, policies, and social norms (written or unwritten) apply in this situation?

4.         What are my obligations to others?

5.         What will be the long-term impact on me and on important stakeholders (Abraham, 2012, p. 287)?

For a real life example of the role of ethics in determining company actions, see this discussion on Nike and the use of sweatshops: http://www.forbes.com/sites/realspin/2013/05/02/sweatshops-in-bangladesh-improve-the-lives-of-their-workers-and-boost-growth/

Corporate Social Responsibilities

Ethics and social responsibility are closely related. Social responsibility is the conscious effort to operate in a manner that creates a win-win situation for all stakeholders. It is often called corporate social responsibility as CSR is an umbrella term for exploring the responsibilities of business and its role in society (Abraham, 2012, p. 287).

Corporations have a responsibility to try to create a win-win situation for stakeholders. For customers, the corporation must provide safe products and services with customer value. For society, the corporation should improve the quality of life, or at least not destroy the environment. The corporation must compete fairly with competitors. Through technology, the corporation should develop new ways of increasing customer value and the quality of life. The corporation must work with suppliers in a cooperative manner. It must abide by the laws and regulations of government. The corporation must strive to provide equal-employment opportunities for the labor force. It must be financially responsible in relation to the economy. The corporation must provide shareholders with a reasonable profit. It must provide employees with safe working conditions with adequate pay and benefits.

For a discussion on the use of social media to promote CSR, you may find the following article interesting: http://blogs.hbr.org/2013/07/how-the-voice-of-the-people-is/

Going Global

As companies expand into foreign markets, they face the challenge of how best to organize their activities across different nations and regions. The five most common strategies include:

•           Exporting and market expansion

•           Strategic alliances

•           Joint ventures

•           Acquisition

There are a number of ways in which global expansion can enable companies to increase and rapidly grow profitability. At the most basic level, global expansion increases the size of the market in which a company is competing, thereby boosting profit growth. Global expansion offers opportunities for reducing the cost structure of the enterprise or adding value through differentiation, thereby potentially boosting profitability.

A company can increase its growth rate by taking goods or services developed at home and selling them internationally. The Ford Mustang is an excellent example of a product that is being launched globally. Ford CEO, Alan Mulally talks about the challenges of changing the look and feel of the Mustang to appeal to international and domestic customers. Check out the video here: http://money.cnn.com/video/news/2013/12/05/n-ford-new-mustang-mulally.cnnmoney/

Startups and Small Business

A small business is a business that is independently owned and operated, with a small number of employees and relatively low value of sales (Abraham, 2012, p. 322). Small businesses are generally less bound by bureaucracy and corporate policies and usually maintain closer relationships with their customers.  In other words, their flexibility affords them the ability to focus on their customers and meet their needs, which naturally generates customer loyalty.  At the same time, small firms often grow out of the innovative ideas of their entrepreneurial founders, and therefore this mindset is likely to prevail in the small business.

The U.S. Small Business Administration provides numerous articles on starting and managing a small business. Check out its website here: http://www.sba.gov/category/navigation-structure/starting-managing-business

When starting a new business, managers should consider developing a business plan which helps to ensure systematic coverage of the important factors to be considered in starting a new business.  By identifying the variables that can affect the success or failure of the business, the business plan becomes a model that helps the entrepreneur and any employees focus on important issues and activities for the new venture.  Finally, a business plan is essential when additional capital from outside investors will be needed at some time in the foreseeable future.

The Forbes website provides valuable information on writing a successful business plan: http://www.forbes.com/sites/groupthink/2014/05/14/how-to-write-a-business-succession-plan/

Nonprofit Organizations

The fundamental difference between nonprofit and for-profit organizations is that the primary goal for a nonprofit organization is not financial in nature.  Another major difference between nonprofit and for-profit organizations is that nonprofit funding comes from a third party rather than a customer. Lastly, nonprofits are cause driven and socially geared (Abraham, 2012, p. 324).

Although some noteworthy differences exist, the manager’s role is the same in for-profit and not-for-profit organizations. All managers need management skills, perform management functions, and play management roles regardless of the organization type.

SPACE ON RYDER FARM is an excellent example of a leading arts nonprofit. For a brief discussion of the nonprofit and its founder, Emily Simoness, visit: http://www.forbes.com/sites/tiffanypham/2014/06/05/how-i-did-it-from-actress-to-founder-executive-director-of-a-leading-arts-nonprofit/

References:

Abraham, S. (2014). Strategic management for organizations. San Diego, CA:   Bridgepoint Education.

Ashford 6: - Week 5 - Discussion 1

Your initial discussion thread is due on Day 3 (Thursday) and you have until Day 7 (Monday) to respond to your classmates. Your grade will reflect both the quality of your initial post and the depth of your responses. Reference the Discussion Forum Grading Rubric for guidance on how your discussion will be evaluated.

Corporate Social Responsibility [CLO: 5]

In your own words, explain what corporate social responsibility (CSR) is. Name two examples of social responsible companies you know and explain why you consider them so.  We learned that CSR can be viewed as a pyramid with Philanthropic Responsibilities at the top. Discuss what particular advantages accrue to companies who proactively take steps to be philanthropically responsible. Guided Response: Respond to at least two of your fellow students’ posts in a substantive manner and provide recommendations to extend their thinking. Agree or disagree with your classmate’s post. Defend your position by using information from your textbook and this week’s lecture.

shford 6: - Week 5 - Discussion 2

International Strategies [CLO:4]

When companies expand into the international arena, they do so either because their home market has matured or because they see real opportunities in the foreign market. Discuss which kinds of international strategies are most appropriate for companies in the following domestic industries:

· Producing movies

· Software

· Management consulting

· Breakfast cereals

· School of business 

Guided Response: Respond to at least two of your fellow students’ posts in a substantive manner and provide recommendations to extend their thinking. Agree or disagree with your classmate’s post. Defend your position by using information from your textbook and this week’s lecture.

Ashford 6: - Week 5 - Final Case Study

Final Case Study and Strategic Plan [CLOs: 1,2,3,4,5] Read  What’s Driving Porsche?  and  History of Porsche AG – FundingUniverse . From the perspective of an executive with the firm, prepare a strategic plan to grow the business over the next three years.  Your strategic plan must be future-oriented and must:

· Describe Porsche’s history and its 4Ps (Product, Price, Place, and Promotion). 

· Explain the current situation of the organization in the market (industry, market, and general environment analysis). 

· Assess the financial performance and condition of the organization.

· Conduct a SWOT analysis (strengths, weaknesses, opportunities, and threats) to determine areas that offer opportunities for change.

· Choose three or four areas from your SWOT analysis and explain why the areas you have chosen are essential to your strategic plan. 

· Describe your recommended organizational structure.

· Explain your plan to measure the success of your strategic plan.

Your paper must be 10 to 12 pages in length (excluding the title and reference pages) and be formatted according to APA style guidelines as outlined in the Ashford Writing Center. In addition to the text, you must use at least five scholarly sources. Remember to incorporate information that you have learned from this course as well as your personal experience. Carefully review the  Grading Rubric  for the criteria that will be used to evaluate your assignment

WEEK 2 ASSIGNMENT

Porsche’s Analysis

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BUS 402 Strategic Management & Business Policy

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June 8, 2015

Porsche Automobil Holding SE, typically abbreviated to Porsche, is a German holding organization with interests in the car business. Porsche SE is headquartered in Zuffenhausen, a city region of Stuttgart, Baden-Württemberg and is possessed by the Porsche and Piëch families. The organization was established in Stuttgart as Dr. Ing. H.C. F. Porsche Gmbh in 1931 by Ferdinand Porsche (1875–1951) and his child in-law Anton Piëch (1894–1952).

It fabricates Cayenne and Panamera demonstrates in Leipzig, Germany, and parts for the SUV are additionally amassed in the Volkswagen Touareg plant in Bratislava, Slovakia. Boxster and Cayman.it aldso makes tractors and air ship motors.

Separated from the aforementioned Volkswagen AG and Porsche AG, different subsidiaries and working divisions of Porsche SE incorporate Porsche Engineering, Porsche Design Group, Mieschke Hofmann und Partner (81.1%) and Bertrandt (25%).

Products

1952 Porsche 356 K/9-1 Prototype

In post-war Germany, parts were by and large in short supply, so the 356 auto utilized segments from the Volkswagen Beetle, including the motor case from its inside ignition motor, transmission, and a few parts utilized within the suspension. The 356, in any case, had a few evolutionary stages, A, B, and C, while in generation, and most Volkswagen sourced parts were supplanted by Porsche-made parts. Starting in 1954 the 356s motors began using motor cases composed particularly for the 356. The smooth bodywork was planned by Erwin Komenda who additionally had outlined the collection of the Beetle. Porsche's signature outlines have, from the earliest starting point, emphasized air-cooled back motor arrangements (like the Beetle), uncommon for other auto producers, however delivering vehicles that are exceptionally overall adjusted.

Financial performance

The organization has been very fruitful lately, and for sure claims to have the most astounding benefit for every unit sold of any auto organization in the world.Table of benefits (in a huge number of euros) and number of autos delivered. Figures from 2008/9 onwards were not reported as a feature of Porsche SE.

Year ending	Revenue	Pre-tax profit	Production	Sales
31 July 2002	€4,857m	€829m	55,050	54,234
31 July 2003	€5,583m	€933m	73,284	66,803
31 July 2004	€6,148m	€1,137m	81,531	76,827
31 July 2005	€6,574m	€1,238m	90,954	88,379
31 July 2006	€7,273m	€2,110m	102,602	96,794
31 July 2007	€7,368m	€5,857m	101,844	97,515
31 July 2008	€7,466m	€8,569m	105,162	98,652
31 July 2009	€?m	€-2,559m	76,739	75,238
31 July 2010	€7.79b	N/A	89,123	81,850
31 December 2010	€9.23b	€1.67b[60]	N/A	97,273
31 December 2011[60]	€10.9b	€2.05b	127,793	116,978
31 December 2012	€13.9b	€2.44b	151,999	143,096[61]
31 December 2013	€14.3b	€2.78b	165,808	162,145[62]

Production composition

Of the 165,808 cars produced in the 2013 financial year, 29,751 (17.9%) were 911 models, 28,996 (17.5%) were Boxster and Cayman cars, 81,916 (49.4%) were Cayennes, 24,798 (15.0%) were Panameras. There were 312 Macan and 35 918 Spyder models also reported.The production figures of sports cars were quite similar to the 2001/2 totals when 33,061 Porsche 911 and 21,989 Boxsters were produced(Porsche SE, 2013).

North American sales

Annual sales 2003–2005
model	2003	2004	2005
	units	% of total	Units	% of total	units	% of total
911 (996)	9,935 ( 18%)	33%	10,227 ( 3%)	31%	10,653 ( 4%)	31%
Boxster	6,432 ( 38%)	21%	3,728 ( 42%)	11%	8,327 ( 123%)	25%
Cayenne	13,661	45%	19,134 ( 40%)	57%	14,524 ( 24%)	43%
total	30,028 ( 33%)	33,289 ( 11%)	33,859 ( 2%)

Annual sales 2006–2008
model	2006	2007	2008
	units	% of total	Units	% of total	units	% of total
911 (997)	12,702 ( 19%)	35%	13,153 ( 4%)	36%	8,324 ( 37%)	30%
Boxster	4,850 ( 42%)	14%	3,904 ( 24%)	11%	2,982 ( 24%)	11%
Cayman	7,313	20%	6,249 ( 17%)	17%	3,513 ( 44%)	13%
Cayenne	11,141 ( 23%)	31%	13,370 ( 20%)	36%	12,898 ( 4%)	46%
total	36,095 ( 7%)	36,680 ( 2%)	27,717 ( 24%)

Annual sales 2009–2011
model	2009	2010	2011
	Units	% of total	units	% of total	Units	% of total
911 (997)	6,839 ( 17.8%)	35.00%	5,735 ( 16.1%)	22.65%	6,016 ( 5.0%)	20.72%
Boxster & Cayman	3,875 ( 39.4%)	19.00%	3,499 ( 9.3%)	13.84%	3,150 ( 9.02%)	10.86%
Panamera	1,247	6.33%	7,741 ( 520.8%)	30.57%	6,879 ( 11.13%)	23.70%
Cayenne	7,735 ( 31.0%)	39.27%	8,343 ( 7.9%)	32.94%	12,978 ( 55.55%)	44.72%
total	19,696 ( 24.3%)	25,320 ( 28.6%)	29,023 ( 15%)

Annual sales 2012–2014
model	2012	2013	2014
	units	% of total	Units	% of total	units	% of total
911	8,528	24.34%	10,442
Boxster & Cayman	3,356	9.58%	7,953
Panamera	7,614	21.73%	5,421
Cayenne	15,545	44.36%	18,507
total	35,043 ( 21%)	42,323

SWOT Analysis

One advantage of SWOT Analysis is that analysis can be applied in any situation management, type of company (regardless of size and activity) or business area. The first step we must take is to describe the current situation of the company or department in question, identify strategies, the changes occurring in the market and our capabilities and limitations. This will be the basis for a historical, casual and projective analysis.The strengths and weaknesses are internal aspects of the company or entrepreneur that affect the chances of success of a strategy. For example, the ignorance of the market, lack of capital and inexperience often weaknesses of many businesses that start; while enthusiasm, working capacity and the desire to grow are among the common strengths. A going concern also has weaknesses of various kinds depending on the sector and the team. Typical examples are failures in production, inadequate or lack of proper marketing people to use new technologies; strengths can come from the hand of the specific experience of senior management, or may be the result of other assets as a loyal customer base and a highly differentiated product. The opportunities and threats arising from the context, that is, what happens or may happen outside the company. Usually these events can not be influenced, but given independently. A change in the legal and tax framework, a trend in consumption, the arrival of a new technology or a change in strategy by a competitor can increase the chances of success (opportunities) or decrease (threats).

RUNNING HEAD; PORCHE’S ANALYSIS 1

Porsche’s Analysis 99

Strengths

-Domestic market -experienced business units -high profitability and revenue -high growth rate -skilled workforce

Weaknesses

-Small business units -investments in research and development -tax structure -costs

Opportunities

-New products and services -growing economy -income level is at a constant increase -new markets

Threats

-Unexpected problems

Decision making

The unlucky deficiency of genuine system, market research,sales anticipating and the nonattendance of vision and taking the danger of changing division procedure, . They considered these entrance level models to be shabby and failing to meet expectations. Most supporters never truly acknowledged these models as genuine Porsches. Truth be told, they were not in any way blissful that they needed to impart their brand to a client who didn t fit the Porsche holder profile. They were turned off by what they saw as a corporate method that had concentrated on mass over class showcasing. This discolored picture was exacerbated by the way that Nissan, Toyota, BMW, and other auto producers had increase top of the line sports auto offerings, making some wild rivalry. Actually, both the Datsun 280-ZX and the Toyota Supra were less expensive than Porsche s 944 as well as quicker. A battling economy tossed more sand in Porsche s tank. By 1990, Porsche deals had dove, and the organization played with chapter 11(Henderson & Reavis, 2009).

As per CNBC, even an at-the-time sketchy attack into the SUV market with the Cayenne in 2003, couldn't harm Porsche credibility.The Times writer Andrew Frankel says on one level, it is the world's best 4x4, on an alternate, it is the critical abuse of a brilliant brand that dangers long haul harm to that mark's extremely character in the quest for simple money with his verdict being "Incredible auto, if it wasn't a Porsche".

Recommendations

Rapidly they perceived the lapse of its ways and ended creation of the section level models. It modified its harmed picture by patching up its higher-end model lines with more race-reproduced engineering. In an exertion to recapture compatibility with clients, Porsche at the end of the day focused on the high end of the business sector in both cost and execution. It set unobtrusive deals objectives and chose that direct development with higher edges would be more beneficial in the long haul. Along these lines, the organization set out to make one less Porsche than the general population requested. As per one official, We re not searching for volume; we re hunting down restrictiveness. Porsche s deliberations had the craved impact. By the late 1990s, the brand was at the end of the day supported by the same kind of achiever who had so profoundly adored the auto for quite some time. The autos were by and by restrictive. Also the organization was at the end of the day beneficial. Notwithstanding the contention confronted by faultfinders, the Cayenne has been a win, creating enough benefit for the organization to put resources into and update the current model reach, and store the Panamera project.

Conclusion

This paper has analyzed the case for Porsche AG.The company has been successful seeing a rise in revenue and sells.The paper analyzed the history, provided the swot analysis for the company, financial performance, decisions and impacts on the company.

References

Henderson, R., & Reavis, C. (2009). What’s Driving Porsche?

Porsche SE. (2013). Annual Report Fiscal Year 2013 (p. 25). Retrieved from http://www.porsche-se.com/filestore.aspx/Porsche-Download.pdf?pool=pho&type=download&id=investorrelations-annualreport2013-pdf&lang=en&filetype=default&version=960af9ec-b8af-11e3-ab3e-001a64c55f5c

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Ch 10: Ethics and Corporate Social Respo…

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Chapter 10

Ethics and Corporate Social Responsibility

Cultura Limited/SuperStock

Learning Objectives

By the time you have completed this chapter, you should be able to do the following:

· Understand the differences among ethics, morals, and values.

· Understand ethical issues and behavior.

· Learn about the various unethical behaviors that tempt managers and corporations.

· Learn about ethical dilemmas and an approach to coping with them.

· Ponder the extent to which ethics can be taught.

· Understand the nature of corporate social responsibility (CSR) and the role of corporations in being economically, legally, ethically, philanthropically, and environmentally responsible.

Ethics and ethical behavior should be embedded into the way people are brought up and the way business students are trained. But the sad fact is that unethical behavior is more the norm in the business world than the exception. The fact that it is widespread in no way condones unethical behavior. This chapter will clarify the distinctions between ethics, morality, and values, what unethical behavior is and isn't, situations that make it difficult to be ethical and how to cope with them, and the degree to which ethics can be taught.

The chapter also discusses corporate social responsibility (CSR), what it is, and the extent to which corporations have a duty to be socially responsible. Finally, the physical environment (air, land, water) is—or should be—an important stakeholder for corporations. What does the responsibility to safeguard the environment mean, and what role should corporations play?

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10.1 Ethics, Morals, and Values

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10.1 

 Ethics, Morals, and Values

The terms ethics, morals and values are often confused or used interchangeably in everyday speech. Before discussing ethics in more detail, it is important to establish definitions of what each means and the differences among them. A traditional definition of ethics is the art and discipline of applying principles and frameworks to analyze and resolve complex moral dilemmas (Rossy, 2011).

The Josephson Institute of Ethics, a nonprofit organization based in Los Angeles, defines ethics differently but perhaps more aptly for the business world: "Ethics is about how we meet the challenge of doing the right thing when that will cost more than we want to pay."

This definition gets to the heart of why "doing the right thing" is sometimes so difficult; we are unaware of the associated cost. The Institute breaks down the definition into two parts: (1) the ability to discern right from wrong, good from evil, and propriety from impropriety; and (2) the commitment or will to do what is right, good, and proper (Maxwell, 2003). People and organizations need to develop a standard to follow and then the will to uphold it, an ongoing struggle for both.

A moral person knows right from wrong and chooses right; an immoral person knows the difference too but chooses wrong, while an amoral person either doesn't know the difference or doesn't care. This description includes notions of bad versus good. Both require societal and cultural norms of right and wrong and, because these evolve over time, what is "right" is far from clear.

Values are the tenets most important to people and the ways that govern how they choose to live their life. That statement also applies to organizations (see Section 2.8). Some people have been known to die for preserving a value very important to them (like freedom, or protecting another's life), and at the other end of the scale are people who think nothing of inflicting harm on others if their cause warrants it (like allegiance to a gang and killing rival gang members to defend "turf").

Virtually every company has an ethics code of behavior, which more accurately might be called a moral code. More than 85% of companies have created and circulated organizational codes of conduct. Simply having a code does not necessarily mean that employees will follow it, however; there is no proof that codes of conduct actually influence ethical behavior (Rossy, 2011). An example of a less-than-successful code is that of energy corporation Enron. Enron's 64-page Code of Ethics, which opened with a motivating forward by CEO Kenneth Lay, did not avert one of history's worst instances of corporate ethical failure (Rossy, 2011). Enron went bankrupt as a result of corporate officers' unethical accounting practices. By inflating earnings and cash flow, and keeping liabilities off the books, Enron presented a distorted picture of financial health, attracting investors in the process. Among the losses were the 401K retirement accounts of Enron employees. In contrast, CEO Lay sold stock in the months before the scandal broke and profited greatly (Oppel, 2001).

An unethical act is carried out with immoral intent, done with the full knowledge that it is legally and morally wrong or goes against societal or organizational norms (Rossy, 2011). It usually infringes obvious rules, laws, and corporate codes of ethics. An ethical "mistake," on the other hand, is an act that is not deliberately unethical, and is something an individual or group regrets afterward and desires to undo (Rossy, 2011). The following three components separate unethical actions from ethical mistakes:

· Intentionality—did you harbor good or bad intention? Were you aware that you were doing something wrong? Did you attempt to hide or cover up your motives?

· Remorse—did you recognize and regret your unethical behavior? Or did you regret only being found out and exposed?

· Accountability—were you willing to own up to your mistakes and take responsibility for any unethical actions? Were you ready to try and reverse your actions and set things right? (Rossy, 2011)

The next four sections focus on ethics in business, amplifying the nature of ethical issues and dilemmas, revealing the unprecedented extent of unethical behavior, offering some guidelines for dealing with ethical dilemmas, and discussing the extent to which ethics can be taught.

Discussion Questions

1. Does obeying the law make a person "moral," and breaking it "immoral"? Discuss the reasons for your answer.

2. Can ethics vary from country to country? If you think so, provide an example of a country in which principles, norms, and standards of conduct are different from the United States, and provide as much detail as you can (even anecdotes).

3. Is a dictator moral, immoral, or amoral? Give reasons for your answer and an example that could validate your answer.

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10.2 Ethical Issues and Behavior

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10.2 

 Ethical Issues and Behavior

The chairman of AOL Time Warner Book Group was having dinner in New York one evening with John Maxwell, a prominent author on leadership issues from a Christian perspective, and suggested he'd be the perfect fellow to write a book on business ethics. "There's no such thing," replied Maxwell. When asked what he meant, he said, "There's only ethics." This conversation spawned the title of the book Maxwell came to write (Maxwell, 2003).

People get into trouble when one set of ethics or values governs their private life and another their working life. For example, a typical sales employee might say, "I'm an honest person, but it's OK to pad my expense report because that's what everyone in the company does." In fact, many people are ethically duplicitous without realizing it. As Maxwell says, "The same person who cheats on his taxes and steals office supplies wants honesty and integrity from the corporation whose stock he buys, the politician he votes for, and the client he deals with in his own business" (Maxwell, 2003).

Ethical issues arise whenever people are tempted to behave unethically or not do the right thing. Maxwell lists the five most common things that give rise to unethical responses:

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Ethical issues arise when people succumb to pressure to achieve results. Executives manipulate stock prices to increase value, students cheat to get higher grades, and workers produce inferior products to increase production rates.

· Pressure to achieve results when things aren't going as planned, which is why people often "cook the books," cut corners, or "bend the rules." Students often cheat to get higher grades, executives manipulate information to increase stock price, factory workers produce inferior products to reduce costs or increase throughput rate. Many of us are under pressure—in 2005, the Ethics Resource Center conducted a national survey of U.S. employees and found that 10% of them at all levels reported feeling pressure to compromise ethical standards (Treviño & Nelson).

· The desire for pleasure (if it feels good, do it) leads people to live beyond their means, abuse drugs (of all kinds), suffer divorce and broken homes, and so on. Executives that have achieved an elevated compensation level may do whatever they must to preserve their lifestyle. The consequences are never worth the promise of the temptation and are almost always regretted later.

· Abusing the power a person has been given. This, too, can act like a drug: "having power is like drinking salt water. The more you drink the thirstier you get" (Maxwell, 2003, p. 80). Powerful executives may develop a sense of entitlement. They believe that they and the institution are one, so they can take what they want when they want it (Abraham Zaleznik, as quoted in Maxwell, 2003). Those who want to keep their power at all costs are also most likely to compromise standard ethical behavior to do so.

· While pride itself is not a bad thing—after all, we have all been brought up to take pride in ourselves, our work, our family, and our country—having an exaggerated sense of pride and self-worth (hubris) is destructive. Pride is essentially competitive; one is proud only of being richer, smarter, or better looking than others. If everyone else were as rich, smart, or good looking, there would be nothing about which to be proud. If your goal is to outdo everyone else, then your focus is entirely on yourself and your own interests (Maxwell, 2003). "Pride can blind you to your own faults, to other people's needs, and to ethical pitfalls that lie in your path" (Maxwell, 2003, p. 86).

· Priorities. German poet and novelist Johann Wolfgang von Goethe said, "Things that matter most must never be at the mercy of things that matter least" (Quoted in Maxwell, 2003). Is being liked by others the most important thing to you? Is keeping your job more important than doing the right thing, like, blowing the whistle on some malfeasance? Do you know what your priorities are?

The following breakdown broadens our understanding of ethical issues in the corporate world:

· Human-resources issues. An obvious example of this type of ethical issue is discrimination, which can lead to rampant unfairness. Sexual and other types of harassment may take the form of an individual in a hierarchy taking advantage of their position to use power to control others lower in the organizational structure. Harassment may also occur between peers and result in a hostile work environment for those who are the objects of the unwanted attention. Conflicts of interest may take many forms such as bribes and kickbacks, inappropriate influence, and the use of privileged information to bestow favor on special friends or interests.

· Customer-confidence issues. In many business situations a person may be privy to confidential information, which they may not reveal regardless of their position. To breach that confidentiality and divulge such information is a serious ethical violation. Product safety issues, whether the dangers to consumers were intentional or not, also fall into this category. When products are misrepresented, hyped beyond the benefits they provide, or false claims are made, this transgresses truth in advertising ethical boundaries. In professions that handle other peoples' money, such as stockbrokers, there is an ethical obligation called fiduciary responsibility to base all actions on the best interest of the client. A stockbroker making an investment of a client's money for which the only motivation is the stockbroker's commission would be a violation of the broker's fiduciary responsibility.

· Issues arising from the use of corporate resources. These issues range from what may seem to be mundane to the extremely serious. Many people do not give a second thought to making personal calls from work, taking a long lunch or break, or taking stationery products from the supply room to use at home. All of these are examples of stealing company resources. Using company letterhead for personal reasons or allowing a personal view to be construed as the company's are misappropriations of the company's reputation. Most people would clearly recognize the ethical wrong in falsifying data to make a company's financial results look better or receive approval for a new drug (Treviño & Nelson).

The root problems in most of these instances are unfairness, lack of respect, and self-interest.

Discussion Questions

1. This section introduced the notion that people behave unethically rather than bear the costs of ethical behavior (an economic reason). Do you think this is prevalent in corporations today? Why or why not?

2. We have all heard of the Golden Rule: "Do unto others as you would they do unto you." According to John Maxwell, it is the only guide to ethics one needs. Do you agree?

3. Assuming you do the "right" thing all or most of the time, how do you know it? Elaborate on your answer as best you can.

4. Ethics exist in law, business, medicine, and other spheres of life, even politics. Other than the settings in each sphere, would you say that the concept of ethics was the same or different in all spheres? Discuss.

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10.3 Unethical Behavior

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10.3 

 Unethical Behavior

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In the case of Bernie Madoff's Ponzi scheme, greed overruled all ethics. Madoff received a long-term prison sentence for bilking investors out of billions of dollars.

Every day brings new reports of some new ethical violation or the disposition of a case brought against someone or a company for unethical behavior. Unethical behavior consists of conduct undertaken to benefit a person or organization while knowingly (or being oblivious to the possibility of) harming others. Behavior is still considered unethical if the act is wrongful, whether or not it results in harm, for example, a deceitful representation even though not acted upon (Christopher D. Stone, J. Thomas McCarthy Trustee Chair in Law, University of Southern California Gould School of Law, personal communication, October 3, 2011).

Many cases involve greed, like the Ponzi scheme run by Bernard Madoff, a former chairman of the board of directors of the National Association of Securities Dealers (NASD). Madoff used money from new investors to pay "profits" to old ones until the situation imploded and the scam was revealed. People who trusted him with their investments lost billions of dollars. Another type of greed-induced unethical behavior is illustrated by the case of Raj Rajaratnam, founder of the Galleon Group, an international hedge fund based in New York. In 2011, Rajaratnam was convicted of securities fraud and conspiracy for insider trading and sentenced to 11 years in prison, the longest-ever term imposed for that type of offense. Unlike Madoff's Ponzi scheme, which swindled identifiable victims directly of specific amounts of money, insider trading cheats "the system" including all those investors who are not privy to the information on which profitable trades are made. At the heart of the prosecutors' case was an allegation that Mr. Rajaratnam gained access to confidential information about a $5 billion investment in Goldman Sachs by Berkshire Hathaway Inc. in 2008 during the financial crisis. Prosecutors described an environment of rampant insider trading on Wall Street of which the defendant was only one prominent offender. In pronouncing his sentence, U.S. District Judge Richard Holwell stated that the billionaire investor's crimes "reflect a virus in our business culture that needs to be eradicated." In addition to the prison term the judge also ordered Mr. Rajaratnam to pay a $10 million fine and forfeit $53.8 million (Pulliam & Bray, 2011).

Kai Chiang/iStockphoto/Thinkstock

Company consumer contracts' fine print allows a firm to change the terms as they see fit at any time, initiate higher fees, and forbid consumers from filing lawsuits.

Not all unethical behavior can be attributed to an individual acting out of the prospect of personal gain. Companies may collectively make unethical decisions that result in harm to others. Workers on the Deepwater Horizon oil platform in the Gulf of Mexico were concerned about safety on the rig months before the oil rig exploded but feared retribution and retaliation if they reported problems. In particular, employees reported that drilling took priority over maintenance that could have ensured safety. The explosion killed 11 employees and resulted in history’s largest accidental oil spill. The oil killed large numbers of wildlife, shut down crucial industries such as fisheries and tourism in large areas of the Gulf of Mexico, causing billions of dollars of economic damage and affecting untold numbers of people directly and indirectly (Urbina, 2010).

Entire industries may be tarred with the brush of unethical behavior in the interest of making profits. For decades the tobacco industry fought a cynical campaign to deny and discredit extensive research that demonstrated the very serious health risks of smoking. In the meantime, the tobacco companies were among the largest spenders on all forms of advertising to induce people to become addicted to smoking. As we all know, they finally lost their protracted case, and it has been conclusively shown that executives were aware of the dangers even as they denied it publicly. Tobacco ads are no longer allowed on television, and it is now illegal to smoke in many public places such as restaurants, movie theaters, museums, aircraft, and so forth. Some states such as California have gone further, banning smoking in parks, apartment-complex balconies, and on the beach. There is now no disputing the fact that tobacco kills, yet these same tobacco companies continue to expand their markets for cigarettes around the world and get new generations addicted to smoking. The argument often used to justify their actions is that tobacco is a legal product. Of course, if tobacco was a new product being introduced to the market today, with all the attendant proven health effects, there is no question that it would be immediately rejected by regulatory agencies as unsafe.

What about new drugs and medical products rushed to market without adequate testing or approval? In 2010, DePuy Orthopaedics, a unit of Johnson & Johnson, issued a global recall of its ASR XL Acetabular System and Hip Resurfacing System (hip implants) because of growing problems with the products and for selling them and other products without FDA approval (Kavilanz, 2011). Also in 2010, France's health regulators issued a recall of prefilled silicone breast implants manufactured by Poly Implant Prothese (PIP), a French company, and said to affect 35,000–45,000 women worldwide. The gel used in them was unauthorized, and the implants have been associated with abnormally high rupture rates (PIP breast implant recall, 2010). In these examples, the companies involved paid for reparations to victims—and PIP was even shut down.

An ethical concern that may not be as obvious as the preceding examples because the harm is harder to identify has to do with the immensely complicated "fine print" that we seem to confront on an increasing basis. Every time we install or update a software package we are required to accept a lengthy user agreement filled with legalese unintelligible to (and ignored by) most people. Hidden among the verbiage often are clauses that have been described as "weasel words in contracts that allow a company to change the terms at any time, or lay the groundwork for sky-high fees, or that forbid a consumer from filing a lawsuit." Web service providers such as Facebook and Google have attracted firestorms of protest when they have decided to make unilateral changes to their privacy policies that invariably give the companies more freedom to make commercial use of the users' information or browsing habits and eroding what little is left of the individual's privacy. As Web entrepreneur David Hirsch commented in an interview on the burgeoning practice, "This fine-print world we're living in is bad for consumers, bad for business, and bad for the country. You've got people not understanding what they're agreeing to, and they're getting clobbered" (Lazarus, 2011).

It may be glib to say that executives cheat, lie, fudge, and line their own pockets because they can, or because it's unfortunately more acceptable nowadays, or because no one will find out. But isn't this at the heart of ethical behavior—to do the "right" thing, even when no one is looking? Doing otherwise is unethical, and there must be many more unreported instances where people and organizations intentionally get away with such behavior, thus, in their minds, legitimizing it.

Case Study

Corporate Ethics

On January 13, 2012, Carnival Corporation's Costa Concordia cruise ship ran aground a reef and capsized off the Italian coast after its captain, Francesco Schettino, steered the ship off the approved course. The ship sustained a hole in its hull greater than the length of a football field, causing it to take on water immediately. The chaos that ensued aboard the ship of panic-stricken passengers futilely seeking information and a disorganized evacuation was heavily reported in international news reports. Surviving passengers even reported that the ship's safety briefing hadn't been conducted at the time of the disaster and wasn't scheduled until the next day—three days after the ship sailed. And this is just the beginning of the ethical issues that arose in the days following the crash.

The captain's ethics were called into question when reports emerged that he had an unauthorized female companion on the ship's bridge at the time of the crash with whom he'd also shared dinner and wine just minutes before, that he was performing a close "sail-by" to show off to the residents of the Island of Giglio or to "salute" a friend living on the island. Days later, recordings of conversations between the captain and Italian Coast Guard officials revealed that he had abandoned ship and was aboard a lifeboat before most of the ships passengers were evacuated. The Christian Science Monitor concluded that Schettino had engaged in "a pattern of untruths and attempted coverup" (Marquand, 2012, para. 1).

Carnival's corporate ethics were called into question, as well. For example, Schettino later deflected attention from his initial "salute" story with the claim that his corporate managers told him to take the ship close to the shore as a publicity maneuver. Surviving passengers described chaos aboard the ship as language barriers, an unskilled crew, passenger lack of knowledge about evacuation procedures, and malfunctioning lifeboats all contributed to fear and panic. Reports indicate that passengers were initially told that the problem was an electrical failure; in an amateur video shot by a passenger, a crew member is heard telling passengers: "The situation is under control. Go back to your cabins. We ask you that you all return to your cabins. Once the electrical problem is sorted out everything will be back to normal shortly. Everything is under control. We are resolving the problem" (Pisa, 2012). An hour passed before the Captain ordered everyone to abandon ship, plunging nearly 4,000 people into complete chaos. During evacuation, crew members appeared to have little control and offered minimal support to panicked passengers—calling into questions corporate safety procedures.

Subsequent to the disaster, the corporation's moral compass was questioned when Carnival authorized call center employees to phone survivors and offer "30% off their next voyage." News accounts and editorials have labeled the offer "insensitive" and "crass," indicating that the decision to offer the discounts was an ill-conceived strategy for promoting company loyalty that might, in fact, further damage the cruise line's reputation (Costa Concordia disaster, 2012).

Finally, the wreck posed a grave threat to the maritime environment and the health and safety of coastal residents amid fears that the ship's 17 fuel tanks might begin to leak into the sea. As National Public Radio noted, "What do you do with a 1,000-foot wreck … Remove it. Very carefully" (Neuman, 2012, para. 1). The article further noted that removing the wreck involved "logistical and environmental issues that are just as large" as the ship (Neuman, 2012, para. 5).

Question for Critical Thinking and Engagement

Assume the role of a consultant hired by Carnival Corporation. Prepare a briefing on the critical issues that executives, management, and other leaders should address. What recommendations would you make to the corporation relative to public concerns about employee ethics, corporate safety policies, and the impact of this disaster on the environment?

Discussion Questions

1. List as many reasons as you can why a company would wish to abide by ethical standards. Organize the reasons based on whether they are morally or economically motivated.

2. Do you think business executives, particularly CEOs, have a general public image of behaving selfishly and unethically? Do you think that reputation is deserved? Discuss.

3. Imagine you are looking for a job. Is the company's having an ethical culture or behavior important to you? If so, how would you go about determining this?

4. Imagine you are hiring people. Your company is proud of the fact that it makes a profit by being ethical. How would you ensure you are hiring people with a similar ethos?

5. Cite some examples of trust in business from your personal experience or from reading the newspapers. What happens when trust is lost?

6. What other industries not discussed in this section have also succumbed to unethical behavior? Cite examples to justify your choices.

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10.4 Ethical Dilemmas and How to Approac…

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10.4 

 Ethical Dilemmas and How to Approach Them

Every person will be faced with ethical dilemmas throughout life; it is inevitable. By definition, the "right answer" is elusive. An ethical dilemma arises when a person is presented with a choice (ordinarily of action) in which one consideration is the rightness or wrongness of the action (Christopher D. Stone, J. Thomas McCarthy Trustee Chair in Law, University of Southern California, personal communication, October 3, 2011). Some ethicists evaluate the action in itself, whatever the consequences. Consider a situation in which a person is attempting to shoot someone but realizes too late that the gun isn't loaded; the act is unethical even though the target didn't die. Others focus their evaluation on the consequences. For example, lying, which is a "bad" act, may have good consequences. Within the workplace, the "right thing to do" is usually complicated by time pressures and conflicting financial and political demands, and often comes with a price tag. While we never seem to have the right answer when we need it, there are five questions we can ask ourselves when faced with an ethical dilemma that might well help us avoid making the wrong decision:

De Agostini Picture Library/De Agostini/Getty Images

The German philosopher Immanuel Kant believed that moral decisions should be based upon the one principle he called the "Categorical Imperative"–act as if the maxim of your action were to become the general law.

1. What's in it for me? How will my loved ones and I benefit, and what price will I pay in terms such as time, money, effort, and reputation? To fully understand what influences your self–interest in a situation, it can be helpful to ask, "Would I be comfortable sharing my real motives with the public?"

2. What decision or action would lead to the greatest good for the greatest number? This presupposes that one knows and understands the legitimate interests and values of others. John Stuart Mill's classic work on utilitarianism holds that the preferred decision is the one that will return the highest net social benefit to all stakeholders (those people who might be affected by the outcome) (Mill, 1906). Value conflicts can make achieving such a noble outcome difficult; how do we define the "greater good"? Many environmental and air-quality regulations, for example, are motivated by a desire to protect the general public and act in its behalf.

3. What laws, regulations, and written or unwritten social norms apply in this situation? German philosopher Immanuel Kant thought that moral decisions should be made by following a principle he called the Categorical Imperative; behave as though the maxim of your decision were to become a general law, required of all people. Patricia Werhane, Director of the Institute for Business and Professional Ethics at DePaul University, asks the following germane questions implied by such a rule-based perspective:

· Does the action set positive or negative precedents?

· Is the action acceptable to other reasonable persons?

· Is it applicable to other similar situations?

· Does it respect, or at least not denigrate, human dignity? (Werhane, 1994)

4. What are my obligations to others? To understand this, one has to appreciate the role of reciprocity and trust in society. Reciprocity is a universal norm common to all human cultures; it is embodied in the Golden Rule. Implicit in this view is that people have to trust one another. How do you feel when someone you've previously helped rejects your request for help? Will you ever forget when someone you have helped many times doesn't reciprocate?

5. What will the lasting impact be on me and on my key stakeholders? Informed self–interest requires looking at the big picture and assuming that one's self–interest is aligned with societal interests. That is, one's self-interest rests on doing what is right for others. For example, consider the actions of environmentalists and others who make sacrifices for societal movements.

These five questions in fact constitute a framework for identifying ethical dilemmas and help think through any inherent conflicts among the values and obligations they underscore. The following three criteria will help you to choose from and resolve those conflicts:

· Priority. In this instance, which questions are most applicable to the key values held by you and your company?

· Balance. If you must compromise among your values, which is the best tradeoff?

· Acceptance. How well will your decision and rationale fare if submitted to public scrutiny? (Rossy, 2011)

In conclusion, ensure that you consider all five questions before making a decision. Always keep in mind the pivotal role of values when assessing the implications of the issues at hand. Compare the short- and long-term consequences. Take your time and avoid the urge to give into quick solutions that may be too good to be true. Go with your instincts, but remain open to counsel and advice. And be brave—sometimes the ethical answer can be politically unpopular. As a way of thinking through the ethical criteria just presented, consider the following examples of common, everyday situations that many employees face, and answer the related questions.

Everyday Ethics

Sheryl often takes home pens, pencils, printer paper, and other small office supplies for her personal use—even though she doesn't perform any work from home. Is Sheryl's behavior ethical or unethical? Why or why not? Is there any "gray area" to what Sheryl is doing? In other words, under any circumstances, is her behavior ethical? What are the potential consequences of Sheryl's behavior to others? To her organization? How about to herself?

In order to get some new business, Phil overpromised, knowing his company couldn't deliver. He told the prospect that their orders would be delivered within 14 days, when he knew that deliveries have been taking 30–45 days. He also told the client that technology platforms were updated annually. However, due to the recent economic downturn, Phil knew that the platform hadn't been updated in over three years. What are the potential consequences of Phil's distortions? Is Phil's behavior unethical, or is he just doing what it takes to stay competitive in a tough economic climate?

Suzanne works in management for a pet supply retail chain and is upset by some questionable corporate policies about how small animals sold by the store are cared for. For example, she is not permitted to schedule cage cleaning for the hamsters and birds as often as she believes is necessary for their optimal health and well-being. What are her options? Are there any risks to Suzanne should she decide to expose her employer's policies? Do the benefits of blowing the whistle on corporate policy outweigh the risks?

Cathy gets to work in the morning at the required hour, and spends about 20 minutes having coffee with her friends before heading to her desk. Cathy then spends the first hour of her day checking her personal e-mail, Facebook account, and even online dating sites. By about 10:00, she starts working; but she keeps Facebook and her personal e-mail account open throughout the day. Is Cathy's behavior ethical or unethical? Is there any "gray area" to what Cathy is doing? In other words, is her behavior acceptable? Would the answer be different if she is able to complete her assigned tasks and meet deadlines?

Eric is a supervisor for a transportation company that has several government contracts. This work is obtained through a strict competitive bidding process regulated by the federal government. He recently discovered that a coworker responsible for preparing project bids is having an affair with an insider at the government agency. Is the activity that Eric has observed (or learned of) unethical? Why or why not? If Eric is reasonably sure that the information he's learned is accurate, would it be unethical if he chose to ignore it? Why or why not? What are Eric's options?

Discussion Questions

1. Consider the case of a highly profitable public company that is rewarding its stockholders with capital gains on rising stock prices and dividend payouts. It is also awarding its top management generous compensation packages with guaranteed bonuses. Its rank-and-file employees, however, don't get raises or bonuses or otherwise realize the effects of such impressive corporate performance. In fact, the profit is achieved by keeping labor and other costs down. Is this an ethical issue? Do such companies perceive it as an ethical issue? Why or why not?

2. The role of unions has been to give a voice and some power to employees as stakeholders. Have they balanced the ethical issue? Do you see the rise in power of unions as a bad thing because they constrain what management can do and increase labor costs? Discuss.

3. If a corporation did not have an ethics officer, to whom would someone report a breach of organizational ethics? What if the alleged perpetrator were that person's manager?

4. When are ethics and ethics standards especially important in companies?

5. Companies often require that their employees work long hours or travel extensively. If you worked for such a company but had young children or elderly relatives to care for, you might find that your career would be jeopardized if you declined these additional work pressures. Is it unethical for a manager or a company to expect so much of employees despite their needs as parents, caregivers, or other life outside work? Discuss.

6. Is employing illegal migrant workers ethical? Why or why not? What is the nature of the dilemma?

7. Why do companies do business with other companies in China or Indonesia given unsettling reports one hears concerning labor practices? Is saving a few extra dollars the most important thing? Do companies realize that by doing so, they are helping perpetuate such practices?

8. Companies don't give a second thought to outsourcing jobs to lower-cost countries. Does the end (making profits) always justify the means? What does it say about the companies' attitude to its workers?

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10.5 Can Ethics Be Taught?

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10.5 

 Can Ethics Be Taught?

Associated Press/Matt Houston

Ethics classes may teach ethics, but by the time students get to college, most have learned their personal values from their family environment.

Today, every business school includes courses in ethics or requires ethics to be a part of every course in its curriculum. Judging by the results, however, the regular reports of unethical practices in business suggest the requirement hasn't made much difference. An informal poll of students in a business program a few years ago posed two questions: "Would you cheat if you knew for certain you would not be found out?" and "Would you cheat if everyone else was cheating?" Sadly, over 85% of the students answered "Yes" to each question. This experience seems to be shared by many instructors in business education. College business students are more likely to practice academic dishonesty, such as plagiarizing or cheating on exams, than students who are pursuing different majors or careers (McCabe & Treviño, 1995). Based on research showing that business-school students' moral reasoning skills may be ranked lower than students in philosophy, political science, law, medicine, and dentistry, business students may require increased ethics training (McCabe & Treviño, 1993). Lester Thurow, former Dean of the Sloan School of Management at MIT, believes the foundation of ethics must begin with family, clergy, schooling, and the jobs students hold prior to business school (Treviño & Nelson, 2007).

In the mid-'90s, Joseph Badaracco, an ethics professor at Harvard Business School did some research on MBA graduates that had taken an ethics course at Harvard and faced ethical dilemmas in the business world. Fifty percent of them had been employed by companies with official ethics programs. He wrote: "Corporate ethics programs, codes of conduct, mission statements, hot lines, and the like provided little help . . . the young managers resolved the dilemmas they faced largely on the basis of personal reflection and individual values, not through reliance on corporate credos, company loyalty, the exhortations of senior executives, philosophical principles, or religious reflection" (Badaracco & Webb, 1995, p. 9). In other words, their personal integrity came from their upbringing rather than from ethics courses.

To find out how students felt about the business world, another professor asked his students a series of questions, one of which was whether they would dump known carcinogens in a river. Astonishingly, the students said that they would, claiming if they did not, someone else would. When asked if such a pessimistic environment was one in which they would like to live, students made the argument that they already lived in one. Disheartened, the professor concluded that his students' attitudes had been shaped long before his course began. He decided, as others had before him, that as a society, our obsession with money and material goods was producing future generations eager to succeed at any cost (Treviño & Nelson, 2007).

People, it turns out, are taught values early in life. If they do have a set of values that includes honesty, fairness, and selflessness, being around others that dismiss their values out of self-interest will quickly erode them. Parents will attest to changes that take place when their teenage children begin paying more attention to their peer group than to them. It becomes really challenging when people learn that in order to "win" (whether it's passing a test or climbing the career ladder), they have to sacrifice their values and ethics.

Boys and girls that participate in sports in middle and high school and college are fortunate because, besides acquiring skills and stamina, they are taught the ethics of good sportsmanship and other character-building traits, such as teamwork, discipline, and sacrificing individualism for the team. Unfortunately, there are coaches—and parents—that preach winning at any cost. In some sports such as track & field and cycling, we have almost reached a point where there is a presumption of guilt against those who are successful. When athletes in any sport are caught cheating, the common refrain is that "everyone else is doing it so I had to as well just to compete."

To conclude, the values and ethics ingrained in us from a very early age by our parents and family are the most reliable indicator of how we will fare when ethically tested later in our careers, no matter what those careers are. However, even people with good values and ethics can, when thrust into morally and ethically wanting corporations, behave unethically. When told by your manager to fudge some data or do something else that's wrong, do you comply in order to remain in their good graces and stay on that fast track up the corporate ladder, or do you stand your ground and risk not only your prospects but also your job? And when you are a few years from retirement, do you succumb to such demands or lose everything, knowing that getting another job at your age is highly unlikely? It is the unusual corporation that develops an ethical system and culture to make sure that employees behave ethically and want to behave ethically. One way that organizations can teach, encourage, and promote ethical behavior is by creating and modeling social responsibility and good citizenship through policies. Corporate social responsibility policies will be covered in the next section.

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10.6 Corporate Social Responsibility

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10.6 

 Corporate Social Responsibility

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Economist Milton Friedman considers a corporation's sole responsibility to society to be to make a profit and continue to create wealth and jobs.

Perceptions of corporate social responsibility vary widely. As University of Chicago economist Milton Friedman wrote almost 50 years ago: "Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible" (Friedman, 1962). Many people still believe, like Milton Friedman, that a corporation's sole responsibility to society is to make a profit so it can continue to provide jobs for people and thereby sustain communities and standards of living. To many others, corporate social responsibility (CSR) is so much more. For example, The Gap Inc. has a comprehensive social responsibility commitment that encompasses a youth development program, an environmental protection plan that addresses supply chain and in-store issues, and community investment that confronts social challenges (Gap, n.d.).

CSR is the idea that business has a duty to serve society as well as the financial interest of stockholders (Pierce & Robinson, 2005). CSR was conceptualized by Archie B. Carroll of the University of Georgia as a pyramid that represents various kinds of social responsibility (Figure 10.1). Economic responsibilities, at the base of the pyramid, are met by all well-managed corporations; the ones that aren't well managed fail or are acquired. The economic responsibility is to make as much profit as possible in order to create wealth and jobs. Then follow in order of importance legal, ethical, and philanthropic responsibilities. The pyramid is useful because it not only provides a structure for discussion but also demonstrates the complexities of the topic—different people perceive CSR to mean different things.

Legal Responsibilities

Companies are duty bound to honor the law and not break it in whichever country they do business. This is called their legal responsibilities. As was discussed earlier, many regulations and laws are enacted to protect the public and the public good, and there are a plethora of government agencies responsible for enforcing them, including the following:

· The Securities and Exchange Commission for ensuring the proper functioning of the securities industry (online and stock exchanges) and the integrity of financial reporting for public companies

· Occupational Safety Health Administration for ensuring safety in the workplace

· The Environmental Protection Agency for protecting the environment

· The US CPSC, while not a government agency, still has the authority to ensure the safety of consumer products sold in the United States

· The Internal Revenue Service for collecting taxes owed the federal government

· The National Labor Relations Board for minimizing unfair labor practices and ideally preventing them from happening

Figure 10.1: Corporate social responsibility pyramid

Source: From A. B. Carroll, "The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders." Business Horizons, Vol. 34 No. 4, 1991, pp. 39-48. Copyright © Elsevier. Used with permission.

These agencies came into being to enforce appropriate regulations and laws to prevent corporations from inflicting harm on particular constituencies—investors, workers, consumers, the environment, and so on. Corporations know about these laws and the consequences for breaking them; it is their obligation to the shareholders and employees to be aware of the laws. Despite this, they may commit both errors of commission (they know about the laws but still try to circumvent them) and omission (they are not aware of particular laws or their consequences or don't agree with them). But are these laws effective? Do they succeed in changing the corporate behavior that is at the root of much malfeasance?

As far back as 1975, Christopher Stone (1975) of the University of Southern California Law School explored this very topic. He found maximization of profits to be the dominant characteristic of corporations and that, by and large, corrective actions by the law in terms of fines and penalties for wrongdoing had little effect on changing behavior. They were perceived as a "cost of doing business" so long as they were a relatively small percentage of profits, so firms simply paid them and then went about business as usual. In 2011 United States District Court Judge Jed Rakoff took a strong stand from the bench regarding the culpability of financial institutions in the mortgage crisis that contributed to the recent recession. He refused to approve a boilerplate agreement between Citigroup and the Securities and Exchange Commission to settle a civil fraud case in which Citi was accused of having loaded a $1 billion mortgage fund with securities that it believed would fail. Citi sold the fund to investors and then it bet against its customers and reaped enormous profits when values declined. The settlement Rakoff rejected called for Citigroup to pay $285 million, which the judged described as "neither fair, nor reasonable, nor adequate, nor in the public interest." He characterized the $285 million figure as "pocket change to any entity as large as Citigroup," and stated that large financial institutions regard such penalties "as a cost of doing business." In reaching this opinion, Judge Rakoff noted that Citigroup had settled similar cases with the SEC in the past and promised not to repeat the same behavior. The judge, in rejecting the agreement referred to Citi as "a repeat offender" (Wyatt, 2011).

To make penalties so severe as to jeopardize a company's ability to continue to produce goods and possibly force it out of business would be counterproductive and perhaps viewed as overregulation. Stone made persuasive arguments in his book that the law, as part of the punishment for specific kinds of wrongdoing should insert into the corporation a probation officer or trustee, answerable to the court, to make sure that procedures are changed and that the problem would not recur. The types of offenses for which he envisions this type of remedy include the kind where the source of the problem could be ascertained, like the poor design of a car, quality of materials purchased not checked, cooking foods to the wrong temperature, lack of quality inspections, and the like.

It seems that laws and regulations play a necessary but far from sufficient role in trying to get corporations to behave more responsibly; so long as corporations can absorb the costs incurred when they are indicted, in all likelihood they will continue to do whatever they want in pursuit of profit. The best solution, as Stone surmises, is for corporations to want to behave ethically. While a good number do, that number is not nearly large enough.

Ethical Responsibilities

Vince Mannino/Bettmann/Corbis

Corporations dislike becoming ethically responsible of their own volition. Ralph Nader and others formed Campaign GM to buy GM stock and wage a proxy fight against GM, urging them to adopt stricter testing and environmental standards.

Notwithstanding the ethics of individuals within a company, companies themselves are often reluctant to become ethically responsible on their own. They are typically pushed to do so by critics or stockholders. Campaign GM, formed by Ralph Nader and others, bought stock in General Motors and proceeded to wage a proxy fight to force GM to adopt stricter testing and environmental standards and to put women and representatives from minority groups on its board of directors. Corporations have found themselves trying to satisfy their critics while at the same time hoping the critics would go away. How could corporations become socially responsible if their management couldn't, even in principle, determine what their social obligations were (Wyatt, 2011)?

Corporations and researchers developed a new idea—instead of being socially responsible, why not be socially responsive? As long as a company was "responsive" to the demands of society and tried to anticipate and meet these demands, it didn't have to worry about being "responsible." In other words, it would have no obligation to be moral or ethical. Corporate social responsiveness is primarily pragmatic and perverts the connection between ethics and strategy. It is simple, easy, and wrongheaded (Freeman & Gilbert, 1988). It conveniently sidesteps the true notion of responsibility.

Ethical responsibilities encompass the more general responsibility to do the right thing and avoid doing undue harm to others. Unless a company's culture and public declarations put a priority on behaving ethically, individual managers will have a hard time being true to their values—swimming against the tide, so to speak. It is much easier to "go along" if it's okay with everyone else. In the rare instance when it's not okay, that individual will tender his or her resignation and join a company whose values are aligned with the individual's own.

Philanthropic Responsibilities

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In U.S. culture, wealthy individuals and businesses are expected to share their good fortune. Many of the wealthiest billionaires in the United States are prolific philanthropists. Bill and Melinda Gates top the list, having given $24 billion to their Bill and Melinda Gates Foundation to help bridge the gap in human health between the developed and developing world.

Philanthropic responsibilities are voluntary and engage the corporation's participation in activities that promote human welfare and goodwill. These take the form of donations of time or money to any of a number of deserving causes, charities, and civic-related projects. However, because such activities are voluntary and discretionary, failure to be philanthropic is not considered unethical, and some don't consider it even a responsibility (Treviño & Nelson, 2007).

It was Milton Friedman who said, in not so many words, that giving corporate profits to charity or using them in a way that doesn't benefit stockholders was tantamount to stealing from stockholders (Freeman & Gilbert, 1988). Wouldn't it make more sense to return excess profits to the stockholders and let them decide to donate the money to causes near and dear to their hearts? What right does the corporation (and its board of directors) have to give its money away?

Fortunately, many companies feel it is their duty to "give back" to society and to contribute where the need is greatest. When the tsunami of 2004 hit Southeast Asia, companies like FedEx, Abbott Laboratories, and Coca-Cola jumped in to help. Over 100 companies are estimated to have sent $178 million worth of cash and medicine to affected countries, many doing so quietly, not announcing or advertising their contributions (Chandler, 2005). Many corporations also responded swiftly in September 2005 to help victims of hurricane Katrina after it rampaged through Louisiana, Mississippi, and Alabama. Walmart donated over $20 million to aid victims and donated 1,500 truckloads of free merchandise, food for 100,000 meals, and the promise of jobs for all displaced workers (Barbaro & Gillis, 2005). The recent earthquake, tsunami, and resultant nuclear accident that hit northern Japan on March 11, 2011, cost an estimated 22,000 lives and an estimated $300 billion, not counting the tens of thousands that were still homeless months later. The nuclear contamination is expected to persist for decades. The flood of donations and assistance from countries, nongovernmental entities, corporations, and individuals has come from every region of the world. Businesses have provided donations of cash, materials, and services to help the victims. Many, such as Sony and Mitsubishi from Japan, Disney and Goldman Sachs from the United States, and Pak Suzuki Motors from Pakistan have contributed matching funds to supplement employee donations (Philanthropy News Digest, 2011). Again, these are examples of the best of human nature, coming to the aid of those less fortunate and in dire need.

In the United States, there is a tradition of philanthropy on the part of wealthy individuals and businesses. In support of this, the federal tax code includes tax incentives to do so. Many of the wealthiest individuals and families in the United States are prolific givers. Bill Gates tops the list, having given generously to The Bill and Melinda Gates Foundation over the years to help bridge the gap in human health that exists between the developed and developing world (Treviño & Nelson, 2007). Warren Buffet, arguably the most successful investor in recent history, has, in addition to donating in excess of $9.5 billion to the Gates Foundation alone, committed to donating the bulk of his fortune to charity on his death. Further, he has persuaded more than 40 other billionaires to pledge the majority of their fortunes to charity during or after their lifetimes. The commitments by these benefactors are expressed in personal letters from each at Giving Pledge.com, describing the role philanthropy has played in their lives.

Other forms of philanthropy support the arts (such as symphony orchestras, opera companies, and museums), city beautification projects (such as commissioning a work of art or a garden), scholarships for students, research facilities at universities, hospitals, libraries, and so on. Many high-profile contemporary organizations have significant corporate social responsibility programs. For example, retailer Target contributes 5% of its income to programs benefitting local communities with a Target presence (Target.com, 2008). Philanthropy goes beyond "doing the right thing," because it is something no one has a right to expect but something for which everyone is thankful.

Many of America's cities owe their greatest cultural features—museums, artwork, buildings, auditoriums, schools, and community facilities to the philanthropic efforts of corporate families such as the Carnegies, Rockefellers, Vanderbilts, and many more. Just walk around any university campus, and the names of some of those who have donated to fund education will be evident in the names of the buildings.

Environmental Responsibilities

Associated Press/Tokyo Electric Power Co.

For consumers, the benefits of using nuclear power rather than fossil fuels are overshadowed by the risk of nuclear accidents, such as the one that occurred at the Fukushima nuclear facility in Japan in March of 2011.

Externalities are costs to society, such as air and water pollution, that are produced by companies but not reflected in the company's cost structure (Kuttner, 1997). Historically, it was cheaper for such companies to pollute than not to; profits won out over the harm being done to society. The only way to protect society was through regulation. Thus, despite the aversion that companies have for regulations, not all are bad; some force an ethical standard on companies that otherwise would be ignored.

Because environmental responsibilities was not included in the pyramid shown in Figure 10.1, one shouldn't assume that they are "less important" or of a "lower order" of responsibility than philanthropic responsibilities. On the contrary, they are a vital part of corporate social responsibility and becoming more so with each passing year.

What we are talking about here is a company accepting responsibility for and reducing the adverse environmental effects stemming from its operations. Not only are expectations rising for corporations to become more environmentally responsible but technologies are advancing even faster to make some actions possible that only a few years ago were not. Take genetically engineered crops and genetically modified foods—are they safe, and what will be the effect on farmers in regions where GM crops are planted (Schwartz & Gibb, 1999)? Or consider the case of Pacific Gas and Electric's contamination of the water supply in a small California town popularized in the film Erin Brockovich. It turns out that 20 years later, water samples indicate that PG&E has not solved the problem.

Despite this bad news, a growing number of companies are becoming more environmentally responsible— leading one scholar to label the phenomenon business's new "megatrend" (Reid, 2010). For instance, the Coca-Cola Corporation has partnered with communities to restore watersheds (Coca-Cola Company, n.d.). Apple seeks to lead the industry in "reducing or eliminating environmentally harmful substances" from its packaging and the metal and plastic in its parts (Apple and the environment, n.d.); and hotelier Marriott is focused on "integrating greater environmental sustainability . . . through architecture and construction, engineering and procurement (Marriott, n.d.).

While companies are motivated by current pressures and existing laws to "clean up after themselves" in the short term, they resist making investments in causes such as research toward long-term solutions to the adverse environmental impacts of their operations. Generally, the immediate pressures to produce profits prevail. Michael Porter has said that pollution is in itself a form of inefficiency in production, creating negative externalities that until now companies have been able to shift on to the public sector (Schwartz & Gibb, 1999). Will there come a time when the accounting profession begins to include costs for safeguarding the environment as a legitimate cost of doing business? Probably not until everyone in an industry is forced to do the same thing. Of course, in some industries, such costs are much higher than in others (for example, preventing oil spills, nuclear accidents, and tainted food).

Another problem is the growing skepticism the consumers have for technological advances being risk-free. A case in point is nuclear power, where the potential benefits over using fossil fuels are balanced by the real risks of a nuclear accident such as the one experienced in Japan in March 2011. In a cost/benefit analysis of nuclear power, how do you account for the possibility of a major nuclear accident or the risk in storing irradiated spent fuel for hundreds of years?

But whom do we blame for overly high levels of mercury in seafood? For the dumping of plastic and other indecomposable garbage now swirling in the Pacific Ocean in two pools, each the size of Texas? For rapidly depleting the world's supply of fossil fuel? For adding to our global carbon footprint? For changing global climate patterns?

Taking care of negative externalities caused by a particular firm's operations is one thing, but there is growing evidence of massive environmental damage that is collectively caused, making it difficult to pin blame and rendering the law helpless. While I don't have any solutions (nor is this the appropriate forum for delving into the full extent of the problems), becoming aware of the problems is a first step, followed closely by nations getting together to try to mitigate them. How bad do they have to get before we are all forced to cooperate and take responsibility for solving them?

Discussion Questions

1. In your opinion, what is the most pressing environmental problem: (a) that particular corporations are responsible for, and (b) that the global community is responsible for. Explain your choices.

2. Why is the law so far behind developments and policymakers even further behind? (Stone's book, for example, is a call for policymakers to act.) Is it because not enough facts are available, or there is too much ambiguity, or the costs of following through too high? Discuss.

3. If companies were suddenly expected to bear the costs of their negative externalities, whether or not you agree that is just, how do you think it will affect their stock prices, their prospects for the future, their investors, and their other stakeholders?

4. Following on from (3), do you believe it will spur innovation and investment in innovation?

5. What particular advantages accrue to companies who proactively take steps to safeguard the environment (like BMW), besides giving them a warm, fuzzy feeling?

6. Just from your perception over the past few years of reading the papers and listening to the news, what has accelerated interest in environmental responsibilities of corporations? Has it been the growth of environmental "watchdogs," investor activism, or consumer pressure? Discuss your thinking.

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Summary and Key Terms

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Summary

Ethics is about how we meet the challenge of doing the right thing when it will cost more than we want to pay, which is a better definition for the business world than the traditional definition of "the art and discipline of applying principles and frameworks to analyze and resolve complex moral dilemmas." Morality is knowing the difference between right and wrong and choosing right. Someone who is immoral also knows the difference but chooses wrong. Values are tenets that are important to an individual or group and the ways that govern how they choose to live their life. An unethical act has immoral intent and is done with the full knowledge that it is legally and morally wrong or contravenes the prevailing societal or organizational culture. Unethical behavior consists of conduct undertaken to benefit a person or organization while knowingly—or being oblivious to the possibility of—harming others. Behavior is still considered unethical if the act is wrongful, whether or not it results in harm.

Why do people behave unethically? In most instances, they are motivated by self-interest. Often they justify such behavior by claiming that other people are getting away with it. Fudging data to make quarterly results look good or to qualify for a bonus, cutting corners to meet production targets, and obeying an order by your manager to cover something up are a few examples of unethical behaviors. Organizations, particularly large ones, are so focused on meeting profit goals, buoying their stock price, and pleasing their stockholders that they may go to great lengths to avoid or minimize unnecessary expenditures. This includes a proclivity for externalizing whatever costs they can such as pollution. In some industries it is common for firms to tolerate fines and penalties for breaking the law or to settle a lawsuit so long as they are a fraction of profits, but continuing to do "business as usual." To some, this is simply a cost of doing business.

Ethical issues arise whenever people are tempted to behave unethically or not do the "right" thing. In the business world they include a host of issues. In the sphere of human resources, they include such matters as discrimination, sexual and other forms of harassment, and conflicts of interest. Customer-confidence issues encompass confidentiality, product safety, truth in advertising, and fiduciary responsibilities. The use, or misuse, of corporate resources includes such behaviors as co-opting corporate reputation, stealing corporate resources, and falsifying data. The root problems in most of these instances are unfairness, lack of respect, and self-interest.

All of us face ethical dilemmas—a choice in which one consideration is the rightness or wrongness of the action—at some point in our careers. You will recognize you are facing one when you're not sure what the right thing to do is. However, asking yourself five questions might help you avoid making the wrong decision: (1) What is in it for me? (2) What decision or action would lead to the greatest good for the greatest number? (3) What laws, regulations, and social norms apply in this situation? (4) What are my obligations to others? (5) What will the lasting impact be on me and on my key stakeholders? Three further questions will aid in resolving conflicts you may encounter: In the current situation, which questions above relate most to your personal and organizational values? If those values must be jeopardized, which is the best tradeoff? How well will your decision and rationale fare if submitted to public scrutiny?

It is naive to think that ethics can be taught either in the workplace or in business school. Research has shown that such courses make little if any difference and that one's values and ethics are molded early on in life by our parents, family, church or religious group, and so on. Those values and ethics turn out to be the most reliable indicator of how we will fare when ethically tested later in our careers, no matter what those careers are. However, even people with good values and ethics can, when thrust into morally and ethically challenged cultures, behave unethically.

Corporate social responsibility (CSR) is the idea that business has a duty to serve society as well as the financial interests of investors. CSR can be viewed as a pyramid. At the base is economic responsibility, which is in essence the obligation of a corporation to make profits, provide jobs, and pay taxes. Many people believe, like economist Milton Friedman, that they are a corporation's only social responsibility.

Companies are duty bound to honor the law in whichever country they do business, which constitutes their legal responsibilities. Over the years, many government agencies have been created to enforce appropriate regulations and laws to prevent corporations from inflicting harm on particular constituencies—investors, workers, consumers, the environment, and so on. While these agencies have been, to varying degrees, effective at enforcing regulatory compliance, it is debatable whether laws and regulations have produced change in corporate ethical behavior. An eminent legal scholar, Christopher D. Stone, surmises that the best solution is for corporations to want to behave ethically.

Ethical responsibilities encompass the more general responsibility to do what's right and avoid doing undue harm to others. Many corporations are reluctant to embrace such responsibilities absent pressure from critics, stockholder groups, and lawsuits. Corporations that have tried to be socially responsive act on the belief that they have no obligation to be moral or ethical. Social responsiveness is primarily pragmatic and conveniently sidesteps the true notion of ethical responsibility.

Philanthropic responsibilities promote company involvement in causes and events that encourage human welfare and goodwill. Since such undertakings are optional, an absence of philanthropy does not mark a company as unethical, and some do not consider it a responsibility. Fortunately, many companies feel it is their duty to "give back" to society and to contribute in times of emergency or disaster, or to fund cultural and civic activities. Philanthropy goes beyond "doing the right thing," because it is something no one has a right to expect but something for which everyone is thankful.

Environmental responsibilities involve a company's accepting responsibility for and reducing the adverse environmental effects stemming from its operations. While a growing number of corporations are voluntarily becoming more environmentally responsible, others must be forced to do so by the regulations. There is also massive environmental damage that is collectively caused, making it difficult to assign responsibility to anyone and rendering the law helpless. The law lags behind the need, and policymaking lags behind the law; while changes are occurring, the pace is still too slow.

Concept Check

 

 

 

Chapter 10 Concept Check

Test Section: 1 Identify the following statements as either true or false: 1. Ethics are the tenets most important to people and the ways that govern how they choose to live their life. a. True b. False 2. Only half of companies have developed an organizational code of conduct a. True b. False 3. A firm that acts with corporate social responsibility is one that tries to improve society as well as the financial interest of stockholders. a. True b. False 4. An amoral person is a person that knows the difference between right and wrong but chooses wrong. a. True b. False 5. Air and water pollution created by companies are example of externalities. a. True b. False

 

 

 

Key Terms

amoral Not knowing the difference between right and wrong or not caring.

corporate social responsibility (CSR) The idea that business has a duty to serve society as well as the financial interest of stockholders.

economic responsibilities Making profits so that the corporation grows and endures while providing jobs and paying taxes.

environmental responsibilities A company's accepting responsibility for and reducing the adverse environmental effects stemming from its operations.

ethical "mistake" An act that is not deliberately unethical, and is something an individual or group regrets afterward and desires to undo.

ethical dilemma A choice (ordinarily of action) in which one consideration is the rightness or wrongness of the action.

ethical issues Arise whenever people are tempted to behave unethically or not do the right thing.

ethical responsibilities Encompass the more general responsibility to do the right thing and avoid doing undue harm to others.

ethics (1) The art and discipline of applying principles and frameworks to analyze and resolve complex moral dilemmas.

ethics (2) Is about how we meet the challenge of doing the right thing when it will cost more than we want to pay.

externalities Costs to society, such as air and water pollution, that are produced by companies but not reflected in the company's cost structure.

immoral Knowing right from wrong and choosing wrong.

legal responsibilities Where companies are duty bound to honor the law (in whichever country they do business) and not break it.

moral Knowing right from wrong and choosing right.

philanthropic responsibilities Are voluntary and promote company involvement in causes and events that encourage human welfare and goodwill.

unethical act Is carried out with immoral intent, done with the full knowledge that it is legally and morally wrong or goes against societal or organizational norms.

unethical behavior Conduct undertaken to benefit a person or organization while knowingly (or being oblivious to the possibility of) harming others. Behavior is still considered unethical if the act is wrongful, whether or not it results in harm.

values The tenets most important to people and organizations and the ways that govern how they choose to live their life.

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Ch 11: Diversified, Global, and Other Ty…

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Chapter 11

Diversified, Global, and Other Types of Organizations

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Learning Objectives

By the time you have completed this chapter, you should be able to do the following:

· Understand the added complexities involved in strategically managing both multibusiness and diversified corporations.

· Appreciate the different strategies an international corporation can use to expand its markets and the difficulties involved in the strategic management of international and global corporations.

· Appreciate the differences between a business plan and strategic planning for startup companies.

· Learn how small businesses with meager resources can do strategic management (and why they don't).

· Understand how strategic management of nonprofit organizations differs from that of for-profit corporations.

The discussion to this point through the first 10 chapters has intentionally focused on single-business, single-country corporations, which are the least complex of organizations to illustrate the model of strategic management and strategic planning expounded in this book. That knowledge can help you work through the additional complexities presented by multibusiness and diversified corporations, and international and global corporations.

Entrepreneurial organizations have to be focused on entering the market with a better product or service and in fact need a business plan, not a strategic plan. Small businesses, whether intent on growth or mom-'n-pops, are handicapped by insufficient funds and experience of the owners. Finally, nonprofit organizations lack a profit motive, are financed in part or wholly by third parties (principally grants or philanthropy), and are driven by causes; they present a very different strategic-management challenge.

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11.1 Multibusiness and Diversified Corpo…

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11.1 

 Multibusiness and Diversified Corporations

This discussion so far has focused on single-business corporations or strategic business units (SBU) that compete in a specific industry with specific competitors. They require unique strategies and financial resources to enable them, with someone, typically the CEO, accountable for what is achieved. Both multibusiness and diversified corporations operate more than one business, that is, have more than one strategic business unit (SBU). By extension, a multibusiness corporation is one that owns more than one SBU or is in more than one business.

Yoshikazu Tsuno/AFP/Getty Images

An excellent example of an international diversified corporation is Disney, who has diversified in the entertainment industry by producing movies, TV broadcasting, theme parks, cruise lines, and stores all around the world.

Why might a company want to operate a second SBU? It might want to pursue an opportunity in another industry or follow through on a different application of a technology it owns. Running a second SBU typically means being in a different industry or a substantially different segment of the same industry. If a men's jeans manufacturer wants to produce jeans for women, is that another business? No. If the same men's jeans manufacturer wants to produce denim jackets for men, is that another business? Again, the answer is no. However, in the latter case, it would morph from a jeans manufacturer into an apparel manufacturer to reflect the change. Since jeans is apparel, the "business" it's in wouldn't change. But manufacturing or even distributing anything that wasn't apparel would mean getting into another business. For example, Levi's did not create another business with the creation of its Dockers brand; the new identity still represented a presence in the apparel industry. However, Sara Lee, a frozen and prepackaged foods company, pursued a new industry when it bought Hanes—a manufacturer of hosiery and clothing.

A diversified corporation also called a conglomerate owns businesses that are unrelated to each other. Take the case of Honda. It is an auto manufacturer—all its different models of cars and trucks and manufacturing plants and international markets don't change that. But it also manufactures motorcycles, power equipment (generators, lawnmowers, pumps, snowblowers, tillers, and trimmers), marine engines, and jet engines (HondaJet)—all different businesses (Honda.com, n.d.).

So it is a multibusiness company. But is it diversified? No. All of its businesses have a common element— in fact its core competence—and that is engines and engine design. It doesn't produce anything that doesn't have an engine in it.

Consider another example. Disney Corp. is broadly in the entertainment industry, and is in animated and live moviemaking (and DVDs), TV broadcasting (ABC, ESPN, Disney Channel), theme parks (Walt Disney World and Disneyland and other resorts worldwide), cruise lines, licensing its trademarked characters to other companies, and its own stores that sell everything Disney, including books, toys, and branded merchandise (Disney, n.d.). Yes, it's a multibusiness corporation, but is it diversified? To answer this question, use the definition as a guide, notwithstanding they are all in the "entertainment" industry. You will find that they are basically unrelated businesses—they have different competitors, demand different strategies and financial investments, and need different people to run them. Multibusiness corporations can encompass businesses that are related but still SBUs, like Wrigley's chewing gum and its acquisition of Lifesavers and Altoids from Kraft Foods. Related SBUs can benefit from shared expertise and resources and thus have high potential to add more value to the corporation. Multibusiness corporations can also own different companies that constitute a complete value chain, like the global, 100% vertically integrated oil companies that find and drill for oil, transport it via pipeline or tanker to their refineries, refine the crude into many different products, and sell some of those products directly to consumers (for example, gas and home heating oil).

Management Challenges

Managing a corporation with multiple businesses involves everything we have discussed so far and more. Certainly, each business should be managed strategically and do strategic planning. One major difference is that these divisions or subsidiaries cannot go outside the corporation for financing, either to get a bank loan or any equity investment; they must ask the (parent) corporation for the financing they need. It is the parent that must make sure it has sufficient financial resources for the needs of all its companies.

As we know, companies at different stages of their lifecycle vary in their need for capital. Young growing and expanding companies are voracious in their appetite for funds, while those that are mature and doing well are throwing off cash but still need funds for innovation. Knowing this about a corporation's businesses helps it to anticipate funding needs and preempts it from treating all its companies the same way. A useful way of arraying a corporation's portfolio of companies and their financial needs was created by the Boston Consulting Group (BCG) (Figure 11.1).

Figure 11.1: BCG portfolio matrix

Source: Adapted from Alan J. Rowe, Richard O. Mason, Karl E. Dickel, Richard B. Mann, and Robert J. Mockler, Strategic Management: A Methodological Approach, Fourth Edition (Reading, MA: Addison-Wesley Publishing Company, 1994) 253. Reprinted by permission of Pearson Education.

The matrix is used to array both a portfolio of products as well as a portfolio of companies. In the latter case, the "industry-growth-rate" axis applies to different industries. Both products and companies begin life as "question marks," a capital-intensive state, ideally growing in market share until they are the market leaders (relative market share 1.0) and become "stars." Over time, as the industry matures and they still retain market leadership, they become "cash cows," throwing off cash that is often used to fund new "question marks." The last quadrant, "dogs," although a nickname given by the Boston Group, is a misnomer. For example, in any mature industry, only one company can be market leader; does that make all the other companies "dogs"? Is Ford Motor Company, currently in number-two position in the automobile industry, a "dog"? While it is entirely possible for products and companies to go from "question marks" to "dogs" and still be profitable, BCG is really saying that companies should aim for and nurture "stars" and "cash cows."

The value for a multibusiness corporation is to use the tool to help manage the portfolio. A portfolio with too many "question marks" is going to require huge amounts of cash; however, with several cash cows to finance those needs, the overall pressure to raise capital is reduced. Also, a portfolio heavy with cash cows has no future stars on the horizon, jeopardizing the company's long-term future. So the need is to have a balanced portfolio.

There are four principal management challenges: (a) ensuring that the right person is heading up each company, (b) ensuring that each company is following the right strategy to perform to expectations, (c) getting as balanced a portfolio of companies as possible, and (d) maximizing the synergy or advantages (also called "spillover effects") created through related businesses (Saloner, Shepard, & Podolny, 2001). Even though the parent may have acquired a company with a CEO already at the helm, once the parent owns it, this becomes the parent company's responsibility. Both company performance and reports from other senior and middle managers can provide a better indication. And the only way to check on the appropriateness of the strategy is to insist the company engages in strategic planning, read its strategic plan, and then grill the CEO and the key executives on its contents. If the answers are satisfactory, the parent company need only give them the capital they need, get out of the way, and let them perform. If the answers are not satisfactory, then there is a problem and management will have to work through to a new solution.

The kinds of questions to ask should be familiar by now:

· Is your current strategy working? Why or why not?

· How are your industry, competitors, markets, and technologies changing?

· How are these changes impacting the company? How are you planning to cope with these impacts?

· Do you have a competitive advantage? If not, are you trying to develop one?

· Do you have any financial problems, and, if so, how are you fixing them?

· What are the key strategic issues facing your company?

· What other strategic options did you consider? Why did you reject them?

· What makes you believe your strategy will work?

· What will you need ($ amount) to implement your strategy?

· What could go wrong as you move ahead, and how might you cope with that?

Strategic-Management Complexities

Assuming that the SBU companies in a diversified corporation's portfolio do the kind of strategic planning described in this book, what does the corporation's top management do? It cannot do strategic planning because the companies in its portfolio are in different industries. Instead, it can do two things:

Comstock/Stockbyte/Thinkstock

The track record of diversified corporations is dismal. Often, only corporate lawyers, investment bankers, and original sellers make a profit, rather than the shareholders.

· Set corporate-wide annual objectives that are typically financial and profitrelated, such as 15% ROE or 10% NPM.

· Sell any company in its portfolio that is preventing the corporation from achieving its objectives and buy any other that is a high performer to boost achievement of the corporation's objectives. The strategic challenge becomes having the right portfolio and the portfolio's ability to achieve the required financial performance.

As discussed earlier, a diversified corporation's first approach should be to "rescue" a poorly performing SBU, or give it a chance to right itself through following a different strategy, or even being led by a different CEO. Only if its performance cannot be improved quickly enough should the SBU be put up for sale. For example, conglomerate Sara Lee spun off Coach, a leading brand in leather goods in 2000, and sold its personal care products unit to Procter and Gamble, Unilever, and SC Johnson between 2009 and 2011 (Crown, 2006).

It is worth noting that the track record of diversified corporations or conglomerates in adding value has been historically dismal, just as the track record of acquisitions being successful (around 20%) is also dismal. Michael Porter, as far back as the late ‘80s, asserted that in the 33 companies he studied, only the lawyers, investment bankers, and original sellers profited from the diversification acquisitions, not the shareholders (Porter, 1987). One factor against a conglomerate's ability to add value is that each acquisition is unrelated, and few synergies or economies of scale are possible. Given this record, why do firms diversify, especially into unrelated businesses? One answer could be that it provides additional benefits to top-level executives that stockholders do not enjoy. As firms get larger, so does executive compensation. As firms become more complex and difficult to manage, so does executive compensation increase (Hitt, Ireland, & Hoskisson, 2007). And these correlations are true whether or not each new acquisition adds value to the firm.

Diversified firms with related businesses, either producing different products for the same consumer market nationally or internationally (like Kraft or Nestlé) or using proprietary technologies in all its products (like Canon), have a more difficult challenge in trying to maximize synergies and efficiencies among its portfolio companies. When they succeed, they perform beyond expectations; when they don't, the situation is harder to correct because of the web of relationships between and among the companies. The parent can't just "sell off" the underperforming unit. Diversified firms are often also international in scope, to which we turn in the next section.

Discussion Questions

1. Managing a diversified corporation at some point becomes largely a financial exercise—the overall objectives for the corporation are financial, and the decision to buy or sell companies for the portfolio is financial. Do you agree with this view? Why or why not?

2. If one of the portfolio companies in a diversified corporation wasn't performing up to expectations yet provided a valuable service to society and had first-rate people among its staff, what argument would you use to keep the company in the portfolio and get it to perform better?

3. What other kinds of expertise does a multibusiness corporation need at the top besides accounting and financial? Explain.

4. On what basis might staff at the corporate level be hired and fired?

5. Before acquiring a company to add to the portfolio, how might the management team really evaluate the company, which is in another industry, besides its financial results?

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11.2 International Corporations

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11.2 

 International Corporations

Companies, regardless of the country in which they ordinarily do business, are driven to go explore international opportunities for two principal reasons. One is the maturing of the home market and a subsequent slowing of its growth rate. The other is recognition of significant growth opportunities for the company's product or service in one or more foreign countries. Either or both will impel a company to expand internationally.

Becoming an international corporation is not that simple. The biggest difference is that competing abroad is quite unlike competing at home in the United States. In each country, the rules and culture are different, the playing field is not level, competitors are ruthless, and prices demand that costs be lower than low. For example, in an analysis of the luxury fashion industry in Brazil, which has historically had a strong market for high-end fashion and accessories, Imran Amed (2012) wrote, "When you try to do business here, you will eventually find yourself stuck in a morass of government bureaucracy, corruption, and an incomprehensible system of taxation."

Stephen Rhinesmith underscores the complexity of a global organization; managers need to balance issues of "centralization vs. decentralization, global efficiency vs. local responsiveness, and geographic vs. functional priorities" (Rhinesmith, 1996, p. xii). Our focus at this point is on international, not global, corporations (which are discussed Section 11.3). International corporations include essentially domestic companies that export products to other countries through incountry representatives or distributors (requiring no knowledge of foreign markets), international corporations that have an international division with foreign subsidiaries or divisions, and multinational enterprises that establish mini-replicas of their domestic business in each foreign market, having foreign nationals manage those businesses. Nestlé of Switzerland is a good example of this last type. In fact, multinational corporations try to look like "multidomestic" organizations so that local regulatory authorities treat them as a local business.

Going International

Belinda Images/SuperStock

For companies venturing into the foreign market, there are management challenges involved in estimating the demand for a product.

In the arena of international business, the adage "know before you go" is important advice. Many countries in the world have consulate offices in the largest U.S. cities on both coasts, and they are well informed as to what kinds of products are most needed in their countries as well as a list of products they are trying to export to the United States. They will also provide advice on how to go about exporting products to their country.

A prospective exporter must become familiar with the laws in that particular country, particularly as they apply to selling products there, paying taxes, and repatriating profits back to the home country. Japan, for example, is a closed market, and entering it requires a strategic alliance or partnership with a Japanese company. But the overarching consideration, besides potential demand, is the country's political climate and stability.

It is incumbent on any company planning to do business abroad to get all the information it can about the countries before deciding to expand elsewhere. Read voraciously about them and their relationships with the United States. Generate a list of questions and then seek answers from appropriate agencies of the federal government like the U.S. State Department. Best of all, visit the countries in question, shop at the kind of retail outlets that will stock your product, chat with customers, make appointments to talk with prospective business customers and distributors, and get information on bidding for government contracts if that is your market (of course, go with a translator if you cannot speak the language). Doing anything less heightens the risk immeasurably.

Management Challenges

For a company that has never ventured abroad before, there are considerable management challenges involved in doing so. In some respects, these challenges are similar to those that startups face when they enter a market for the first time. The most common include the following:

· Estimating demand for its product in that country (and in every country being considered for expansion). Obtaining data is vital; guesses or opinion are not the bases on which to make large financial decisions.

· Knowing the current competitors, some of whom could be familiar because they probably compete in the domestic market. And what prices and versions of the product are being sold, and why might the company's also fare well?

· Determining whether enough infrastructure is in place such as for transportation and telecommunications. This can be a major issue in developing countries.

· The dominant language spoken in that country and, if not English, how you will overcome that barrier.

· How long it will take to break even and make money. This involves knowing which international strategy (discussed in the following section) makes most sense, particularly in the beginning.

· Whether to hire staff in the foreign country and, if so, how to train them, reward them, and nurture loyalty in them.

Note again that domestic companies that outsource production or other services to another country are not considered international companies if they serve only their domestic market. However, Chinese factories, on the other hand, are international companies because most of their markets are in other countries (Midler, 2009). While companies that license their technology or trademarks to foreign companies are considered international in this discussion because their customers are located in other countries, the negotiations nevertheless take place on their home turf, and they don't have to learn about foreign cultures or business practices, or even take the risks that international companies do.

International Strategies

The following discussion includes different strategies that a hitherto domestic company can use to transform itself into an international company. They can be market-entry strategies as well as strategies to further its growth depending on available resources and what it might be facing competitively. They are discussed in order of increasing complexity, commitment, and cost.

Exporting and Market Expansion

Exporting doesn't require a presence in the host country, just knowledge of shipping and freight, insurance, and custom regulations. Most of all, it needs a distributor or importer in the host country that acts as the customer and places the orders. In an ideal situation, the importer would contact the company (manufacturer) to make the deal, but more typically, the company has to find the customer. With foreign consulates in the home country and the power of the Internet and telephone, the problem is not insurmountable. However, the domestic company will discover a great deal of pressure on prices, because it is now competing with manufacturers from all over the world.

Associated Press/James Crisp

Toyota built car-manufacturing plants in the United States when they determined it was more profitable to build and sell cars in the United States rather than ship them from Japan.

To a large extent, how a company responds to pricing pressure depends on the country that is receiving the goods. The European Union is very different from a developing country like India. Savvy U.S. manufacturers, unless their product is unique and proprietary, might arrange to outsource manufacturing to reduce the price and then have the product shipped directly to their foreign customers, saving even more money. Of course, that introduces additional risks. There is the danger that the outsourced manufacturer has no scruples about selling the product to still other customers in other countries (Midler, 2009).

A risk that cannot be avoided (except by choosing a different foreign market) is currency-exchange fluctuations. For example, a surge of the Japanese yen against the U.S. dollar recently erased 80 billion yen ($1 billion) from Toyota's latest (2011 Q3) quarterly net income (Associated Press, 2011, Toyota profit drops). When a company determines that too much money is being lost bringing profits home, it will try to establish a manufacturing plant in the host country. That not only reduces currency-exchange losses, but also transportation costs and pressure on the home factory to produce for both markets. Keeping with the example of the auto industry, there is another benefit to a manufacturer that decides to open a plant in different state or city. An automobile factory significantly influences a community in diverse ways, not just as a result of local employment but also through an economic multiplier effect. Creating a factory within a community benefits not just the local community, but also surrounding regions and even nearby states. Because the auto industry pays above–average wages and boasts a job–creation multiplier of 7.5—the highest of any United States industry—capital investment often has potential to reach or exceed $1 billion (McAlinden & Fulton, 2001), it is easy to see why communities battle each other to be chosen for an automotive-assembly plant. The cost to attract such an automotive investment is high; in some cases communities have offered incentive packages to car manufacturers reaching upward of $300 million per facility and over $100,000 per job (Car Research, 2003).

Market expansion, unlike exporting, does require a presence in the foreign market. Market expansion is a way of ending dependence on a foreign distributor or importer, which doesn't release any market information, and eliminating the markup it charges. Companies open sales offices and staff them with nationals of that country, because it's easier to train a local person about the product and company's procedures than to transplant someone from the home market and expect them to learn about the country, its culture, business practices, and market. Kenichi Ohmae (1990) believes the problem is more complex than this. Companies are held back because they cannot seem to get rid of the "headquarters" mentality. This is not just a problem of bad attitude, but rather stems from their entrenched systems, structures, and behaviors. But these are the last to get management's attention because the first symptoms are local (in the host country). For example, if advertising in the host country is not paying off as expected, the company may not recognize that the cause could be back at its own headquarters. Lacking cultural awareness, it may not understand what it takes to market effectively in the host country. Other possible causes for the failure to realize anticipated results include a reluctance to make long-term, front-end capital investments in new markets, or the failure to ensure that strong employees are in place at the local level. Instead the failure may be diagnosed as a local problem and the company will try to "fix" that (Ohmae, 1990).

One of the challenges is the tension between headquarters telling the host sales office what to do, and the sales office—because of its proximity to the customer and knowledge of market trends in that country—telling headquarters what should be done. There is no easy solution to the problem except to choose the host sales manager with care; it should be someone headquarters can really trust and listen to. Headquarters should remind itself why it hired that person and what it is trying to do in that market, and be open to suggestions that can benefit both. If things turn out as planned, the host sales office will grow to become a major part of the international division of the home company, a pattern to be repeated with every new foreign market the company chooses to enter.

Marka/SuperStock

Eighty percent of Coca-Cola Company's revenues are outside the United States, making it perhaps the biggest global franchise in the world.

Another challenge is the realization that different countries require different versions or variations of the product. An example would be European's need of very small major appliances, like clothes washers and dryers and dishwashers, because they more commonly live in small apartments, unlike the very large appliances common in more spacious U.S. homes. Such product changes grow out of market research—the data and intelligence collected and made sense of by the office that the company maintains in that country. This typifies a multidomestic strategy, when customer demands and needs vary substantially from country to country, forcing a company to modify any combination of product features, packaging, advertising, servicedelivery methods, and pricing; centralized control or integration is virtually impossible (Abraham, 2006). For example, McDonald's has succeeded in France, in part, by demonstrating an understanding of the country's cultural preference for longer, more leisurely meals than U.S. customers prefer and offering table service in response. Further, because the French are not inclined to "snack" in between meals, McDonald's emphasizes meals rather than the quick-serve snack foods that are so popular in the United States. And, the company has introduced cultural favorites to the French McDonald's menu—such as baguettes (Fancourt, Lewis & Majka, 2012).

Another international-market-expansion strategy is franchising, which has been used successfully by well-known companies in the fast-food industry like McDonald's, KFC, and Subway (Hitt, Ireland, & Hoskisson, 2007). However, a host country's culture and preferences may dictate modifications in the menu items. For example, McDonald's in India could not serve beef because the cow is a sacred animal to Indians and Hindus; it served vegetarian and mutton burgers instead. Subway, when it first entered China, found the going difficult because the Chinese weren't used to eating with their hands; so at least one item on the menu had to be eaten with chopsticks (Hitt, Ireland, & Hoskisson, 2007).

Perhaps the most global franchise system is Coca-Cola, which derives over 80% of its revenues outside the United States. It franchises bottlers in virtually every country in the world; to manage those companies, it depends on the relationship with its bottlers and thus has to be organized geographically. For example, the Eurasian and Africa Group is responsible for 90 emerging markets, headquartered in Turkey (Holstein, 2011). Franchising is also the way in which the product turns out to be identical no matter the location.

Strategic Alliances

Forming strategic alliances has become more popular over time principally because it allows firms to share both risks and resources as it tries to enter international markets. (Strategic alliances were introduced in Section 1.6. This section discusses the role of strategic alliances only in international expansion, sometimes called cross-border strategic alliances.) If the right partner can be found, then a strategic alliance with a firm in the host country has distinct advantages over a simple exporting or market-expansion strategy:

· The host partner is familiar with the host market, industry and competitive conditions, legal and social norms, political trends, and cultural idiosyncrasies of the country.

· Partnering with a local host company avoids paying tariffs and is sometimes the only way a foreign company can do business in a host country. This is true of Japan, which is otherwise closed to foreign businesses.

· The risks (and profits) are shared.

· Both partners learn capabilities from the other, including but not limited to technological skills, competitive/marketing skills, and a greater cultural awareness. (By the same token, each partner brings to the relationship unique knowledge and resources.)

While many strategic alliances are formed to create a competitive advantage, the purpose in this context is to expand the market for the home company in a way that reduces the risk and raises the probability of success (Ireland, Hitt, & Valdyanath, 2002). A successful strategic alliance depends critically on doing due diligence on the prospective partner and developing a sound agreement to which both parties are committed. Many companies have expanded their markets in this way, including Fujitsu, Cisco, Dell, and Microsoft. Lockheed Martin has formed over 250 alliances with firms in more than 30 countries (Hitt, Ireland, & Hoskisson, 2007). French automaker Renault has had a successful strategic alliance over the years with Japanese automaker Nissan because it was well managed; executives from both companies knew their companies well, understood how each partner perceived the other, and could adapt while remaining true to their own company and cultural values (Pooley, 2005). The primary reasons why strategic alliances fail include incompatible partners, often a result of rushing into the agreement without fully considering key factors, and conflict between the partners (Robins, Tallman, & Fladmoe-Lindqvist, 2002). In addition, the very nature of cross-cultural alliances can complicate the negotiotion process and result in a lack of communication and trust between the partners. Other reasons for failure include the possibility that one partner acts opportunistically outside the terms of the agreement, a lack of trust (which cannot be overemphasized), "stealing" proprietary information and even the partner's tacit knowledge of processes and ways of doing business, misrepresenting resources and competences brought to the relationship, and lack of transparency regarding necessary disclosures (Midler, 2009).

In pursuing international expansion, host-country partners are typically distributors. Some refer to this as a vertical complementary strategic alliance because it shares resources and capabilities from different stages of the value chain (as in vertical integration), compared to a horizontal complementary strategic alliance that involves one with a competitor. Choosing the right distributor partner is not easy. It has to have a good reputation with retailers (or with companies if the market is commercial) and the physical and organizational capacity to grow. A different kind of alliance would be with a manufacturer in the host country, not a distributor, and would entail a cross-distribution alliance, which is an agreement between two companies in different countries to market and distribute each other's products in the other's country. If this possibility is appealing, then the search for a partner should include manufacturers of products that are targeting similar markets and would benefit from this particular kind of strategic alliance.

Joint Ventures

Associated Press/Long yudan/Imaginechina

Starbuck's and China's President's Coffee formed a joint venture to open hundreds of Starbuck stores in China, creating a whole new market for what had previously been a nation of tea drinkers.

As noted in Chapter 1, a joint venture is a strategic alliance that requires a greater level of commitment. Also governed by an agreement between the two parties, a joint venture requires the formation of a separate corporate entity jointly owned by the two parties. International joint ventures are particularly difficult to manage successfully for some of the same reasons that complicate strategic alliances. Care should be taken in choosing the country in the first place before looking for potential joint venture partners; for example, Russia appears to have significant disadvantages that should be taken into account including a chronic shortage of certain raw materials and difficulty repatriating profits back to the home country, which neither Russian banks nor authorities can guarantee or facilitate. A company contemplating this type of arrangement must also take measures to protect against government expropriation such as by limiting the circumstances in which it would be considered legal, defining a lump sum in U.S. dollars should expropriation occur unexpectedly, and taking out expropriation insurance before signing an agreement. American companies must also address natural- environmental issues, because Westerners often are blamed for airand water-pollution problems and habitat destruction (David, 2005).

The following are examples of well-known joint ventures:

· NUMMI (New United Motor Manufacturing, Inc.), the joint venture between General Motors and Toyota formed in 1984 in Fremont, California (and recently disbanded in 2010). GM saw an opportunity to learn about lean manufacturing, and Toyota established its first manufacturing base in North America and the chance to implement its production system in an American labor environment (Bensinger & Strack, 2009). NUMMI produced a number of models, notably the GM brands Geo Prizm and Pontiac Vibe and Toyota brands Voltz, Corolla, and Tacoma pickup truck. GM, despite its reason for entering into the joint venture, did not apply what it learned about efficient Japanese manufacturing to its other manufacturing divisions.

· Hewlett Packard's entry into the computer market in Japan through forming a joint venture with Yokogawa Electric (Yokogawa Electric, 1999).

· Starbucks formed a joint venture with China's President's Coffee to open hundreds of Starbucks coffeehouses in China. Long a country of tea drinkers, Starbucks is having success in helping the Chinese develop a taste for coffee (David, 2005).

· The Dutch company Philips Electronics NV has over $2.5 billion worth of investment in China that includes 30 wholly owned enterprises and joint ventures that employ 18,000 people and produce everything from semiconductors and lighting to medical diagnostic imaging equipment (David, 2005).

Joint ventures can prove thorny if managers assigned to operate the venture were not involved in forming or shaping it, if customers experience poorer service, if the support from the two "parents" is unequal in important ways, or if the venture itself begins to compete with one of the parents (Hutheesing, 2001).

Acquisition

Cross-border acquisitions increased significantly during the 1990s and comprised 45% of all acquisitions completed worldwide (Shimizu, Hitt, Valdyanath, & Pisano, 2004). Why should a company expand internationally by acquiring another when it could form a strategic alliance or even a joint venture? There are several reasons for preferring an acquisition strategy:

· Where the business is the same, it enhances economies of scale.

· In cases where technology transfer takes place, proprietary processes and other intellectual property can be more easily safeguarded.

· It provides the fastest and often largest initial international expansion of any of the other international strategies (Hitt & Pisano, 2003). Walmart expanded into Germany and the UK through acquiring local firms (Levine, 2004). In most cases, the buildings and locations already exist instead of having to be built and situated, which takes considerable time in any country.

· While similar to a strategic-alliance strategy, in that the home company has partners in the host country to continue the expansion, only in the case of an acquisition can the acquirer control what the acquired company does.

· It lends itself to replication if the acquiring firm has become adept at acquiring companies (foreign or domestic), that is to say, develops a core competence in doing this. The large companies that rely on acquisitions to grow have departments with experienced people whose sole job is to help make and help digest each acquisition.

Many references and mentions about acquisitions frequently include mergers and confuse the two, but, as Section 1.6 makes clear, the strategies are very different. As an international expansion strategy, mergers are far less common and more difficult to pull off, primarily because cultures from different countries must be successfully integrated.

Acquiring companies must realize that negotiations to acquire a company in another country are more complex than those for a domestic acquisition and must deal with two legal systems; only about 20% of cross-border bids lead to a completed acquisition compared to 40% of bids for domestic acquisitions (French dressing, 1999)

Ethics Challenges

Jim Bourg/Reuters/Corbis

The U.S. Securities and Exchange Commission enforces the international accounting provisions through the 1977 Foreign Corrupt Practices Act.

Companies doing business in the international arena often find themselves facing ethical dilemmas. What is regarded as "unethical" at home sometimes seems to be "business as usual" in other countries. So why not, as the saying goes, "When in Rome, do as the Romans do"? If other companies are doing it and, in U.S. eyes, are "getting away with it," why not do likewise?

The Foreign Corrupt Practices Act is a federal law enacted in 1977 that prohibits the payment of bribes to foreign government officials and politicians as a means of establishing business in another country. The act contains two parts: an anti-bribery provision that is enforced by the Department of Justice, and an accounting provision overseen by the Securities and Exchange Commission (World Compliance, 2011). If a U.S. company is found to have been engaging in bribery abroad or taking or giving kickbacks in order to win a contract, they can be prosecuted at home regardless of whether others engage in the practice. In the past several years, enforcement of the law has significantly increased.

Other challenges, encountered principally in international marketing, include but are not limited to the following:

· Gifts/favors/entertainment—includes a variety of items such as generous gifts, personal travel opportunities funded by the company, items gifted upon completion of a business transaction, sex workers, and similar costly entertainment.

· Pricing—includes unfair differential pricing, inaccurate invoicing (e.g., invoices showing an amount different from the price paid by a buyer), pricing strategies that force out competitors, selling products abroad at price points far below that of the home country, and practices such as price-fixing agreements that are legal abroad but illegal at home in the U.S.

· Products/technology—includes products and technology whose use is legal in the host country but illegal in the United States, and/or products deemed unacceptable or inappropriate for consumers in the host country.

· Tax-evasion practices—includes transfer pricing (where amounts paid between affiliates and/or the parent company are modified to benefit profit allocation), the use of tax havens (where profits gained are recorded in a low-tax jurisdiction), adjusted interest payments on intra-firm loans, and dubious amounts charged for management and services between affiliates and/or the parent company.

· Activities considered illegal or immoral in the host country—including harm to the environment, unsafe working conditions, duplication of products and technology in places where patent protection, trademarks, or copyrights are not enforced (of particular concern in China), and short-weighting overseas shipments by charging a country an inaccurate weight.

· Questionable commissions to channel members—includes paying exorbitant commissions to sales agents, consultants, middlemen, dealers, importers, and other channel members.

· Involvement in political affairs—includes politically driven marketing activities such as the exertion of political influence by multinationals, conducting business while either country is at war, and illegally transferring technology. (Armstrong, 1992)

In many instances the playing field is not level for an international firm, but that's why developing or acquiring skills traversing that field is a decided advantage.

Discussion Questions

1. How does environmental analysis differ in the international arena from the home market? Comment on the relative difficulty of obtaining the requisite information.

2. Choosing an international strategy is often difficult—is it better to open a sales office, form a strategic alliance, or acquire a company in the target country? We know that country-specific factors and the potential size of the opportunity significantly affect the decision. But what role do financial considerations play? For example, how important is the size of the required investment, return on that investment (including ease of repatriating full profits), and time to breakeven (to recoup the investment)? Should these be more or less important? Explain.

3. Which kinds of international strategies are most appropriate for companies in the following domestic industries to use, and why?

· producing movies

· software

· management consulting

· breakfast cereals

· school of business

4. Imagine playing a role in deciding an international strategy for a company. You decide that forming a strategic alliance with a company in Brazil is the best way to go to enter that market. But negotiations don't go well because the deal is not structured fairly and you distrust the potential partner. Do you keep looking for the right partner or decide on another strategy?

5. When competing and operating internationally, by which moral compass do you steer? To what extent are your actions governed by what you perceive to be ethical and right? Discuss.

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11.3 Global Corporations

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11.3 

 Global Corporations

Global corporations are designed to compete globally and serve markets in most countries of the world that have enough experience and have developed sophisticated systems to manage such a complex enterprise. They are typically in one major industry (like electronics, telecommunications, or automobiles) but may have many product lines in many segments of that industry in order to achieve a global brand and economies in many areas of the value chain.

Global vs. International Corporations

There are two principal differences between global corporations and international corporations. The first is that a global company has centralized strategy-making and marketing control, meaning that country-specific product preferences are minimal or nonexistent, and a standardized product can be marketed and sold to all countries, generating significant economies of scale in purchasing, production, and advertising. SBUs operating in each country are interdependent and coordinated and integrated by the home office (MacMillan, Van Putten, & McGrath, 2003). The second difference is that global businesses have the freedom to move functions to anywhere in the world; for example, they can purchase from anywhere, produce anywhere, carry out R&D anywhere, acquire companies anywhere, and even move the headquarters anywhere in the world.

A good example is the Focus ST (Sports Technology), one car manufactured by the Ford Motor Co., which is a multinational corporation. This Focus was designed, manufactured, and marketed in several countries. Today, it can be purchased in over 40 markets including the United States, Canada, Mexico, South Africa, Australia, New Zealand, and 15 European countries. It was engineered by the Ford Global Performance Vehicles group—a strategic partnership between Europe’s Team RS and North America’s Special Vehicle Team (SVT).

Focus ST has not come around by chance. . . . What came first was our global performance strategy, which has been developed with North America, Europe, and Asia together. With this, the core DNA attributes—steering, driving dynamics, sound quality, and power enhancements for all ST models—have been defined to the extent that our engineers can take that global DNA fingerprint and use it to create the new Focus ST. (Jost Capito, as quoted in Ford News Center, 2011)

Management Challenges

The discussion here presumes that most of the challenges that beset the various international strategies also apply to pursuing global strategies. In addition, the following should be mentioned:

Associated Press/Sakchai Lalit

Global strategies are vulnerable to local catastrophes that disrupt their operations. In October of 2011, flooding at a Honda plant in Thailand caused a chronic shortage of parts, forcing Honda to cut production by 50% in the United States and Canada.

· Customer needs may change over time resulting in diminished demand for the global product. If the corporation is attentive, then it should take steps to phase in a transnational strategy, a name for a global strategy that capitalizes on efficiencies and economies of scale while being locally responsive, epitomized by the familiar saying, "Think globally, act locally."

Whirlpool Corporation embarked on a global strategy in the late 1980s, anticipating that a few global players would dominate the worldwide appliance industry. It grew through acquisitions and investments in companies in Europe, India, China, and South America. However, by the mid-90s, it suffered large losses in every market, calling into question its centralized global strategy. Once the company had established itself in these countries, each center of production began developing various skills and designs tailored to that particular region—they became centers of excellence for technology and production. In fact, the Whirlpool's Duet washers and dryers now popular in the United States are engineered and made in Germany; the quality of its "kink-free German technology" justifies the high price and outsells the competition (Hitt, Ireland, & Hoskisson, 2007).

· Global strategies are particularly vulnerable to local catastrophes that disrupt finely tuned operations. Two recent examples involve Toyota and Honda. Toyota's plunging sales and profits in the summer of 2011 were caused by parts shortages from the combination earthquake and tsunami disaster in northeastern Japan in March 2011 that closed its factory for a month (Associated Press, 2011, Toyota profit drops). Honda also underwent an unanticipated parts shortage when they were forced to cut U.S. and Canadian factory production by half due disastrous flooding in Thailand shortly after the company had begun to recover from the March 11 earthquake and tsunami in Japan (Associated Press, 2011, Honda to cut).

Global corporations often use sophisticated modeling and analysis techniques, perhaps more than multinational corporations. They use variants of the "traveling salesman problem," which chooses an optimum route for a sales representative to visit a number of cities at least once and travel the least distance. Global corporations use approximations of the model to locate factories and assembly plants to be both close to suppliers and close to customers in order to minimize transportation costs. Such a model can at best be a guide, however, because other factors must be taken into account such as investments, laws, and labor pool in particular countries that cannot be included in a quantitative model. The insights gained from such analyses enable the corporation to derive new solutions as soon as conditions change, just as a PERT model can be reconfigured instantly to recompute a new critical path to take into account delays or overspending in completing previous tasks.

Discussion Questions

1. Why do you think only a few companies achieve a bona fide globalization strategy?

2. Can you think of any forces that might be acting against globalization?

3. Research assignment: Go to the following companies' websites and determine whether they are pursuing a global, transnational, or multinational strategy (justify your conclusions):

· IKEA	· Siemens
· Sony	· Singapore Airlines
· BMW	· Netflix
· Cisco	· Google
· Exxon	· Walmart

4. Can you come up with any social or political arguments against globalization?

5. Can a global corporation become too big? Why or why not?

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11.4 Startups and Small Businesses

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11.4 

 Startups and Small Businesses

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Startups need a business plan to help secure needed funding to launch new products, as well as an operational plan to guide them to their objective.

Having considered the case of very large multinational and global companies, we now turn our attention to very small businesses. While many startups and small businesses have little or no history, have insufficient funds at their disposal, and don't do strategic management or strategic planning, only startups need a business plan, not a strategic plan. A startup is a company, venture, or organization that comes into being the moment money is expended in its behalf, not when revenues are achieved or when it is registered. This section discusses startups first and then covers small businesses, which need to do strategic planning and management, but usually don't. Defining small business is a matter of opinion as there is no standard agreement as to how small is small. On the grand scale of things, while companies with revenues or sales of under $100 million qualify as "small," this section focuses on even smaller businesses that have sales of under $10 million.

Business Plans vs. Strategic Plans

Startups have no way of answering the following questions:

· Is the current strategy working?

· Should the current strategy be changed?

· Does the company have any financial problems?

· What strategic options does the company have?

These questions are at the heart of strategic planning and require both some history to go on and the existence of strategic options to consider. Startups have neither.

Instead, startups are formed and come into being with a product or service idea of sufficient merit to enable them to enter the industry and immediately be competitive. The startup's industry is preordained by its particular product or service or, in extremely rare cases, by creating a brand-new industry. Its strategy is to enter the market, which it does usually through innovation and differentiation strategies, but sometimes through cost leadership (as when a startup disrupts incumbents in an industry with a much lower price point).

What startups need is a business plan, for two reasons—to secure funding the company needs to launch its product or service and to develop an operating plan to guide what it needs to do. With respect to securing investors, a business plan is a document that clearly explains the concept of the business, the opportunity it is going after, its vision in the five-to-seven year range, how it intends to meet existing competition, how it will make and price the product, why there will be a demand for it, when the company will break even, how much startup capital is sought and how it will be spent, and the founder's experience, motivation, and how much of his or her own money is invested in the company.

A business plan for operational purposes needs only to have a detailed cash-flow projection for two years by month with lots of detail, notably the sales projections form revenue targets for each month and the expenses form monthly budgets. Once things get going, the plan needs constant updating to reflect new realities. It is for this reason that some people say that it isn't worth putting together a startup business plan, because no sooner has the ink dried than everything has changed.

Securing funding is often a huge problem; it is the rare startup (other than a mom-and-pop) that can launch a business financed entirely by the owner. Even getting a bank loan is problematic because banks typically require three years of profitable operations before giving a loan without commensurate collateral. In the economic climate following the banking crisis of 2008, many lenders raised their lending requirements or stopped making small-business loans entirely. But they continued to give a loan on the basis of collateral or with a cosigner whose credit rating and net worth were sufficient.

Business plans constitute the principal way that startups secure external equity funding, typically from venture capitalists and angel investors. Getting the right investors that are as motivated for the venture to succeed as they are to make money is not easy. What many entrepreneurs don't realize is that venture capitalists are as eager to find a good venture that has some likelihood of succeeding as entrepreneurs are to get funded.

Outline of a Business Plan

Executive Summary (This should be done last and summarize every section in the business plan; its purpose is to get an investor to read the plan. It precedes the table of contents, is not page-numbered, and should be one page long single-spaced.

Main Sections

The Business Concept (one page)—introduce the company or idea, tell how the company came to be, describe its history to date if it has already been started (this may take up to three pages), and provide contact information (person to contact, address, phone, e-mail, website).

Industry and Competitive Analysis (what you know about the industry in which you will compete and your competitors).

Market Analysis (everything you know about your customers—how many, whether growing, where dispersed, how they buy, price-sensitivity, needs, trends—consumer or business customers).

Environmental Trends (in the economy, technology, regulation, sociocultural, political, etc.—what might adversely affect the startup?)

Management Team (include ownership, who is taking what management role, how the company is organized now and at the end of two years, and something about the values or culture and how these will be sustained. Principal roles are marketing, operations, finance, and R&D/engineering for a technical product).

Marketing Plan (what activities are needed to get the intended sales and how much will they cost)

Operations Plan (include all other programs, such as training, IT, staffing, leasing, manufacturing, outsourcing, security, etc. not included in the marketing or financial plans).

R&D/Engineering Plan (include if the company is still developing its product or intends to develop a next-generation product).

Financial Projections and Investment Deal (must include two years of projections, by month, with subtotals for each year, both for a "most likely" scenario and a "worst-case" scenario; must include a section called "Assumptions" that explains every number in the projections, together with a summary of the differences between the most-likely and worst-case projections [typically 4–6 key differences]; must summarize the key results from the projections, e.g., revenues and cash surplus [loss] for each year, return on initial investment, breakeven month, and capital investment required; and if outside investment is required, then must include a section on the investment deal [not a loan, because startups can't really get loans save in exceptional circumstances or from a family member]—amount required, stock percentage offered, how proceeds will be used, and any other terms).

Risks and Contingencies (enumerate the major risks the startup will face and what will be done to cope with or ameliorate each one).

Appendices (these can be A, B, C, etc. if you have more than one; continue with the page numbering. Full résumés of all principles should be in one appendix.)

Source: Adapted from Stanley C. Abraham, handout for his course on The Business Plan, California Polytechnic University, 2011.

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One of the most important challenges for a startup business is keeping it properly capitalized.

A venture capitalist is a person that invests in a startup or expanding business venture with potential to achieve significant returns on invested capital. Venture capitalists are looking for a high rate of return, to compensate for the much higher risk involved in investing in early-stage startups. Typically they are looking for over 25% but often closer to 40% return. When a high-tech prototype, for example, has proven the business concept and production begins, much of the early risk has dissipated and returns are much lower.

What's the difference between a venture capitalist and an angel investor? An angel investor is a former entrepreneur that has become wealthy from prior ventures and wants to help other entrepreneurs, usually in the same field. For example, someone that founded and sold a software venture is inclined to invest only in software startups. Angel investors typically invest smaller amounts than venture capitalists and take a more active role with the company's management. It is not uncommon for ventures to be funded by a group of angel investors, just as very large ventures expanding nationally (like IKEA) would be funded by several venture-capital firms and other investors.

An oft-overlooked source of funding, particularly with high-tech companies that have developed new technology, is a strategic alliance with a large corporation. Such corporations, both domestic and foreign and in many different industries, invest in entrepreneurial companies in return for rights to make or market new products and services. The investment is considerable for the small company and, besides the aforementioned rights, might also involve a small ownership stake (Silver, 1993).

Unique Challenges Facing Startups

The biggest challenge, of course, is to produce the product successfully, establish it, get people buying it, generate positive cash flow, and continue to grow—easy to say but very hard to do. To accomplish this, other challenges need to be met almost simultaneously:

· Make sure the company continues to be properly capitalized as it grows and expands, yet not relinquish too much of the founders' shares in the process. High-tech startups should consider forming a strategic alliance with a large corporation interested in its technology in exchange for the capital it needs and first rights to using the technology.

· Make sure the right people are hired who can do the job and perpetuate the culture of the founders.

· Be extra careful in forming a partnership; the partner might look perfect in the beginning, but it's not until the contracts have been signed and the working relationship is tested that the viability of the relationship becomes apparent. Also, choose partners with complementary skills and experience (not a clone of you) and a history that will not prove detrimental to the company (Jaffe, 1998).

· Adjust quickly as more is learned about the company's customers and competitors; while the business plan is a good foundation to start the business and obtain initial capital, it quickly becomes out of date.

These challenges are all business-related. However, many new entrepreneurs with ideas worth investing in have virtually no business experience. Depending upon the industry, they may be software or IT experts, scientists of one kind or another, or engineers that know more than anyone else about their product and why it works and, as a consequence, have a product-centered view of the business. The problem with this is that such an entrepreneur may tend to dwell on the technical aspects of the product, where they feel most comfortable, forgetting that venture capitalists are not necessarily technically inclined and are more interested in the business aspect of the startup. It is important when seeking funding to develop a customer-centered view of the business and speak the language of venture capitalists. There's nothing wrong with being the best expert in the world on the technology or product, but a startup needs to have someone on the team who knows marketing, accounting, and finance.

Strategic Planning Challenges for Small Businesses

A small business is one that is privately owned and operated, has relatively few employees and small sales volume. Small businesses are typically privately owned corporations, partnerships, or sole proprietorships. Legally, a "small" business is defined as having less than 500 employees, the upper limit which governs whether business can qualify for any Small Business Administration programs. Small businesses can also be defined by their sales, assets, or net profits. This discussion excludes startups that have the benefit of carefully conceived business plans and investor advisors and that are designed to grow quickly. It also excludes sole proprietorships, like CPAs and consultants, and independently owned mom-and-pop businesses, like convenience stores. Finally, it excludes franchisees that, although independently run, are too constrained by the corporate parent through its franchise agreement and, for the franchised business certainly, are restricted from doing strategic planning.

Very small businesses, below $1 million in revenues, focus on surviving and, if they can, growing. They typically don't have additional staff to do research, or information systems to provide them with performance data when they need it, and are so pressed for time by the exigencies of day-today demands they don't often find time for strategic planning. Many small-business owners don't know how to do strategic planning and often cannot afford a consultant to help them. Finally, they may not need to do strategic planning. They may be pursuing the same strategy they had when the company was founded, spending all their resources, time, and energy in making it work, getting established, and surviving amid the competition. If the strategy is not working, the company will go under, usually by the owner declaring personal bankruptcy. It often has neither the know-how nor the resources to adopt a new strategy even if it knew what that might be.

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Small businesses that grow to a certain size begin doing strategic planning.

Small businesses in the $1–10 million range also face the same challenges to do strategic planning but are probably organized better, have systems in place, and more experienced managers in leadership positions to help the owner. But they are still strapped for time and resources and may see no need to change the strategy if they are still growing. If the strategy faltered, the owner would seek either to be acquired or to declare bankruptcy. However, if performance had dropped far enough (or debt risen high enough) to adversely affect the price the company could get for selling it, then it might seek consulting assistance to explore other alternatives, like targeting a completely different market and restructuring its debt and cutting costs.

Larger small businesses, with revenues over $10 million, are often more sophisticated and financially more able to do strategic planning. However, in many cases, it is more likely than not for the owner to dictate what the company should do strategically and get the other functional vice presidents to go along. Doing really participative, research-based strategic planning with a group of top executives and operational managers is still rare with companies of this size. They have grown successfully without doing it and, subconsciously, often feel they can continue in the same vein.

The Association for Strategic Planning (ASP), a nonprofit professional society whose mission is to help people and organizations to succeed through improved strategic thinking, planning, and action (Association for Strategic Planning, n.d.) has, since its inception, tried to appeal to small businesses. To date, however, small business owners and managers account for only about 1.5% of its current membership. The inference is that despite ASP's efforts and word-of-mouth advertising, small businesses don't have time to even learn more about strategic planning.

Strategic Management for Small Businesses

Some small businesses that reach a certain size do begin doing strategic planning, if only because they are not sure what the best course of action is in the foreseeable future. Perhaps also a recent executive hire with strategic-planning experience persuaded the owner/CEO that the benefits of doing it would outweigh the costs. Either way, there are obstacles that need to be overcome.

First, assuming that the company's new executive could organize and facilitate a strategicplanning process, it would have to be explained and justified to the other key managers in the company. There would need to be training: What is it? Why do it? How will things change? There would need to be preparation; specific people would be asked to compile more information on external changes and educate the group. Then the group might spend a weekend offsite for an open discussion about feasible options the company could consider and, under the circumstances, which one might be best. If an option other than the one the company was pursuing were chosen, then the discussion should tackle how it was going to implement it and how it might be funded.

Even doing bare-bones strategic planning is not easy, especially for managers that are not used to the process in which decisions are made based on their input. But the predominant benefit for doing strategic management is a greater level of confidence that the company is pursuing the right strategy to be able to compete more effectively and achieve its vision and objectives. Without going through strategic planning, the company wouldn't have paused to reflect on what it was doing and whether there was anything else it could be doing that would benefit it more. Other benefits, particularly for smaller businesses doing strategic planning for the first time, are updating everyone's mental models to reflect a common reality and realizing that change is inevitable—the best kind being that which you initiate, not that to which you have to react.

Discussion Questions

1. Startups and small businesses often don't do strategic planning, or they have an aversion toward it; yet, changes keep happening all around them all the time. How are they able to grow and survive without doing strategic planning?

2. What arguments would you use to persuade the owner/president of a small business that strategic planning would benefit his or her company, even if only one person participated?

3. Do venture capitalists and angel investors need to have a strategic-planning background in order to judge whether a business plan is real enough and has a good chance of succeeding? Discuss.

4. The success rate of venture-capital investments is only 20%. Do you believe the reason for this is unforeseen circumstances, a poor assessment of the entrepreneur, or a lack of experience (and strategic-planning knowledge) on the part of the venture capitalist? Explain your choice.

5. An entrepreneur has written a detailed business plan, probably with the help of a consultant. What advice would you give to prepare him or her for a meeting with investors that have read the business plan? How can the entrepreneur make the best impression?

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11.5 Nonprofit Organizations

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11.5 

 Nonprofit Organizations

MBA programs, in general, don't have specific courses on managing nonprofit or not-for-profit organizations. Many feel this is a huge omission. Nonprofits or 501(c) tax-exempt organizations in the United States in 2009 numbered over 1.5 million, accounted for 9% of all wages and salaries paid in the United States, and comprised 5.4% of GDP (Urban Institute, n.d.a).

Nonprofits include arts organizations, some institutions of higher education, some hospitals, human-services organizations, religious organizations, foundations, museums, social-welfare, labor unions, neighborhood organizations, business leagues, and social and recreational clubs, among many other categories (Urban Institute, n.d.b). Only those organizations knowledgeable about strategic management manage strategically, and then with variable success. Numerous consulting firms specialize in strategic planning and organizational development for nonprofit organizations. For example, Raybin Associates specializes in fundraising, strategic planning, and management development for arts-related organizations and has completed projects for the New York Public Library, the Historic House Trust, and the Virginia Museum of Fine Arts (Raybin.com., n.d.).

How Nonprofits Differ from For-Profit Corporations

Associated Press/Chuck Burton

Nonprofit organizations rely on funding from philanthropists, foundations, corporations, and individual charitable donations to raise funds.

The key difference between nonprofit organizations and for-profit organizations is that their primary goal is not financial in nature, and this applies even to foundations, which must manage huge endowments. Yet all of them need money to exist and operate, and they must be managed. Being registered as a nonprofit means that the organization is a legal entity, giving its members and officers the benefit of limited liability. Counterintuitively, so long as the organization does not benefit a single person and is organized for a nonprofit purpose, it can make a profit on which it is not taxed if it has also met the IRS test for tax-exempt status. It has to meet both state and federal requirements to operate as a tax-exempt organization (Allen, 2006).

Another difference is that the source of funding comes from a third party and not directly from those that benefit from the service—that is, a customer. Nonprofits must rely on reports of past progress and accomplishments and proposals for more funding. The feedback from "customers" that for-profits rely on to dictate what products to produce is missing for nonprofits. If the customer is whoever is supplying money to the entity, is the foundation, philanthropist, or corporate donor "the customer"? Clearly not.

A final difference is that in the absence of financial objectives, most nonprofits are cause-driven and serve an important social purpose. This makes it hard to determine how well a nonprofit is doing. Instead of measuring the economic value created, which is relatively easy for a forprofit corporation, measuring the social value created is far more difficult. For example, the mission of Habitat for Humanity is not building houses efficiently (on which measure it would score low since building takes place only on weekends when volunteers are available) but it is rather, to build houses for people who could not afford it, to add to the social capital generated when individuals contribute to their community and to the welfare of others (Magretta, 2002).

Unique Challenges for Nonprofits

Nonprofits rely on funding—whether from foundations, philanthropists, alumni, or charitable donations—from sources and people that believe in the cause or social purpose to which the nonprofit is committed. So fundraising is a constant challenge for nonprofits, and administrative costs for doing so (for example, widely distributing mailers to targeted prospective donors as well as paying for such lists) are appreciable and unending.

Again counterintuitively, just because they are nonprofits doesn't mean they don't compete. They compete for funding, for good people, and for clients. A museum or opera company, for example, competes with all other forms of entertainment and leisure activities for patrons. The Chronicle of Philanthropy maintains a list called the "Philanthropy 400" of the nonprofits that annually raise the highest amount of funds. The 400 institutions in the survey in 2009 raised $68.6-billion, though the drop they suffered in contributions that year (11% over the previous year) was nearly four times as great as the next biggest annual decrease: 2.8% in 2001, when charities also labored to raise funds from donors affected by the recession (Barton & Hall, 2010). There are many examples of nonprofits competing. Kaiser Permanente, the largest nonprofit HMO (health maintenance organization) in the United States, competes with for-profits for subscribers. David Lawrence, then chairman and CEO, wondered, "Was it possible to compete in the marketplace and, at the same time, remain true to our social mission?" (Magretta, 2002, p. 90). The Metropolitan Museum of Art competes with other museums, art institutions, and private collections worldwide when bidding for art works to add to their collections.

Another major challenge is recruiting people to work in the nonprofit who share the values and social purpose of the organization. Sometimes people happily find the organization and apply to work there. But that alone is insufficient; they must also have the requisite skills and management experience of the position to be filled. It is tempting to fill a position with someone that has the skills and experience but not the values and mission of the enterprise.

Another challenge is deciding on what objectives to achieve. A nonprofit that is committed to reducing the teenage crime rate in a community through conducting classes for high-school students shouldn't be measuring the number of classes taught and the attendance at each class, but rather the extent to which the teen-crime rate in the area discussed, declines. How might the Red Cross, to use a complex, global nonprofit, measure how effectively it is achieving its mission? Should foundations focus on the number of grants they've awarded or on the outcomes those grants were designed to produce? Parents and taxpayers alike (not to mention the school principals involved) would like public education to do a better job of educating students—but what exactly is meant by "better education" or "an effective teacher" or "student learning"? Translating the nonprofit's mission into measurable performance outcomes is not easy, and without such measures no one in the organization or that depends on it will know what is expected of them. What gets measured gets managed, in any kind of organization, and that means measuring results, not activity (Magretta, 2002).

Yet another challenge is competing for clients, just like for-profits. Museums, to be viable, must still advertise to get people to come to see their exhibits. Similarly, symphony orchestras, opera companies, and theater-production companies get people to come to their performances.

A final challenge for some but not all nonprofits is maintaining their status as nonprofits. Things change over time, and some nonprofits start profit-making businesses (like cafeterias, websites) and must declare profits from such operations as income. If those initiatives grow, the relative amount of profit and the divergence from the stated mission could cause a problem in maintaining the nonprofit's tax-exempt status.

Case Study

Measuring Effectiveness in Ashoka

Ashoka is a multinational nonprofit organization dedicated to finding and supporting true social entrepreneurs. It considers social entrepreneurs as drivers of innovative solutions and extraordinary outcomes that improve the lives of millions of people. By finding and supporting them, Ashoka leverages its influence for benefiting society. Since it began, it has supported more than 1,800 social entrepreneurs, called Ashoka Fellows ("Fellows"), in more than 60 countries around the world. The enterprises they indirectly sponsor range from agriculture to public health.

Ashoka is interested not only in the immediate success of its Fellows, but also in the enduring value that they have years after their funding has finished. Here's how it measures this value.

Each year, Ashoka conducts a Measuring Effectiveness study focusing on the Fellows selected in the past 5–10 years. The study includes a survey sent to all Fellows elected in a given year, as well as a series of in-person interviews with a cross-section of survey respondents. The survey features the following indicators of success and social impact:

1. Original vision: Is the Fellow still working toward his or her original vision? (Five years later, 94% of Fellows say they are.)

2. Independent replication: Are others mimicking the programs started by the Fellows? (Five years later, 93% of Fellows say yes.)

3. Policy influence: Have the Fellows' programs influenced public policy? (Five years later, 56% respond affirmatively.)

4. Leadership building: Have Fellows developed into leaders in their fields? (Five years later, 54% of Fellows have.)

5. Leverage: How did Ashoka support help Fellows to succeed? This measure looks at how the stipend, collaboration, communications assistance, and other dimensions of Ashoka support, helped the Fellows.

Ashoka's approach is far ahead of the field simply because it desires to measure its long-term social impacts.

Source: Ashoka, measuring effectiveness: A six-year summary of methodology and findings. Arlington, VA: Ashoka, 2006; and www.ashoka.org, as cited in Arthur C. Brooks, Social entrepreneurship: A modern approach to social value creation. Upper Saddle River, NJ: Pearson Prentice-Hall.

Strategic Management for Nonprofits

Just as for-profits need to know what not to do as well as what to do, so also do nonprofits; it is a hallmark of strategy. Small nonprofits have clear missions and an unequivocal direction. However, some larger ones are faced with choices that might alter their mission (or not if they ignore the choices), and so should engage in strategic thinking and strategic planning. For example, Habitat for Humanity, discussed earlier, builds homes in stable communities that allow local merchants, volunteers, and the future homeowner to contribute to each other's welfare in a true grassroots endeavor. Should it extend its efforts to urban homelessness or disaster relief? Does that fit its business model, social mission and what makes it unique (Magretta, 2002)?

In today's rapidly changing environment of scarce resources, nonprofits need to behave as tough competitors and thus constantly be aware of how their environment is changing and what it takes to stay on course. The need to manage strategically is more acute than ever.

And when a nonprofit is changing course and has to revise its mission, it doesn't need to get permission from its sponsors for making such strategic decisions, but it does need to be clear on its new mission and why it was changed. And it needs to make sure that its stakeholders or members also share that revised mission.

Discussion Questions

1. Think of 2–3 nonprofits to which you contribute or would like to contribute (i.e., with whose cause or social purpose you identify). It is one thing to know how the nonprofit is spending the money it receives from people like you, but do you know how well it is achieving its mission? If you don't, why is that?

2. Many benefactors feel good when they give donations (both cash and in-kind) to a charity, and not just because they get a tax deduction for doing so. But they don't read the letter and pamphlet showing what they have accomplished and what there is still to accomplish that many charities send only to donors. Is there a solution to this problem? Is it a problem?

3. Many famous private universities have huge endowments and are actually very well off. Give one or more good reasons why they should retain their tax exempt status.

4. Following (3), why should alumni get a tax deduction for giving to an alma mater that is, actually, very well off financially?

5. Many social-welfare nonprofits, like hospitals, care for the indigent; hospices, etc. rely on donations from the general public as well as benefactors. Why doesn't the government support them? (The government does provide support in many areas like health for seniors (Medicare), education, the arts, and cancer research, to name a few.)

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Summary and Key Terms

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Summary

This chapter focused on the difficulties and added complexity of strategic management in complex organizations. Multibusiness organizations simply have more than one strategic business unit (SBU) to run, and choose carefully who will head up each one. When the number of SBUs owned reaches the high double-digits, the company has to manage a portfolio of companies and make sure each one is performing to the best of its ability and that its strategy makes sense. In such organizations, management must rely more on financial results to assess the SBU. If its current portfolio is not achieving financial objectives set for the corporation as a whole, it has the ability to sell off those that are underperforming and acquire more highly performing companies. Diversified corporations have, by definition, subsidiaries or divisions that are in different industries or in very different segments of the same industry, unlike multibusiness corporations, which could have companies in the same industry. Both have to manage portfolios of companies.

When companies expand into the international arena, they do so either because their home market has matured or because they see real opportunities in foreign markets. The key international- expansion strategies are exporting (no presence in the host country is required), market expansion (requires sales offices in the host country), manufacturing in the host country (if tariffs or transportation costs get too high), forming strategic alliances (principally with distributors and because alliances are expected in order to enter some countries like Japan), forming joint ventures and acquiring a company in the host country (usually but not exclusively in the same industry). Companies who develop a core competence in a particular strategy will fare very well.

Startups and emerging businesses have no history of performance and begin their existence with a single-minded market-entry strategy. The only questions they must answer are whether there is sufficient demand for the product, whether they can compete with existing companies, and whether they can be profitable. Because strategic planning involves choices—what to do and what not to do—startups and very young businesses need a business plan to guide them (and raise the required startup capital), not strategic planning.

As a small business grows, typically beyond $10 million in annual revenues, its systems and organizational processes become more sophisticated, its managers more experienced, and the need for doing strategic planning more pronounced. However, if such a company has never done strategic planning, it faces the challenges of training its managers to do and believe in strategic planning, and to go through the inevitable change process that ensues. Even finding the right strategic/change consultant can present a problem.

Nonprofits are ubiquitous in the United States and cover the gamut of types including arts organizations, universities, hospitals, religious organizations and charities, labor unions, foundations, and neighborhood organizations, to name a few. They differ from for-profit companies in that they are financed in most cases by a third party (not their customers or banks), are cause-driven, serve a social purpose, and qualify as tax-exempt. Counterintuitively, nonprofits are highly competitive; they compete for funding for good staff and for clients. They would be well advised to adopt the competitive mindset of for-profit corporations. Nonprofits cannot use financial measures to denote how well they are doing, but rather have to devise ways to measure the extent to which they are achieving their social purpose, a more difficult task and one not done well by many nonprofits. Translating their mission into objectives that clarify the organization's mission is perhaps their greatest challenge.

To be sure, some aspects of managing these more complex organizations are similar to what has been discussed in the previous nine chapters, but managing these more complex organizations presents more challenges.

Concept Check

 

 

 

Chapter 11 Concept Check

Test Section: 1 Identify the following questions as either true or false: 1. A multibusiness corporation is defined as a company that operates in more than one country. a. True b. False 2. In a strategic alliance, two companies work together by creating a third entity that is co-owned by the two companies. a. True b. False 3. According to the Foreign Corrupt Practices Act of 1977, Americans are not allowed to bribe foreign officials, even if bribery is legal in the country where the bribery took place. a. True b. False 4. A firm following a transnational strategy is one that seeks efficiencies and economies of scale across its operations in different countries while still being responsive to differences in local preferences. a. True b. False 5. Venture capitalists are usually satisfied if they earn a 10% return on their investment. a. True b. False

 

 

 

Key Terms

angel investor A former entrepreneur that has become wealthy from cashing out prior ventures and wants to help other entrepreneurs in the same field.

conglomerate A corporation whose portfolio companies are in unrelated businesses.

cross-distribution alliance An agreement between two companies in different countries to market and distribute each other's products in the other's country.

diversified corporation See conglomerate.

franchising An agreement with an independent company to capitalize, open, and operate identical stores/restaurants for an upfront fee and royalties based on gross sales in exchange for the right to use the brand, exclusivity in a certain market area (or country), access to suppliers, training, advertising, and other assistance.

global corporation One that utilizes a centralized strategy and marketing approach for a product that satisfies customers in different countries without modification and can purchase, produce, do R&D, and direct operations from anywhere in the world.

international corporation One that manufactures a product in its home country and distributes and sells it in foreign countries. (Outsourcing to foreign manufacturers does not make a corporation "international.")

multibusiness corporation One that owns more than one strategic business unit or is in more than one business.

multidomestic strategy Tailoring a product (including modifying its features, packaging, advertising, service-delivery methods, and pricing) to the varying demands and needs of customers in different countries, making centralized control virtually impossible.

nonprofit organization One that has a mission reflecting a social purpose; relies on taxdeductible contributions from corporations, foundations, philanthropists, and individuals for its funding; does not measure success in financial terms; and qualifies as a taxexempt organization by state and federal tax authorities.

small businesses Privately owned and operated businesses with relatively few employees and small sales volume.

startup A company, venture, or organization that comes into being the moment money is expended in its behalf (not when revenues are achieved or it is registered).

strategic business unit (SBU) A single-business company that competes in a specific industry with specific competitors and requires unique strategies and financial resources to enable it, with someone accountable for what it achieves (typically the CEO).

transnational strategy A global strategy that capitalizes on efficiencies and economies of scale while being locally responsive—adapting its product in some way to certain markets.

venture capitalist A person that invests in a startup or expanding business venture with potential to achieve significant returns on invested capital.