Porters Five Forces of Kitchen Best - Case Study Example

Kitchen Best Case I. Introduction In 2008 when Henry Chan officially took over the management of Kitchen Best as Chief ExecutiveOfficer and had the ambition to double the company’s revenues by 2012 and increase its profit margin through economies of scale and direct deals with large European and American customers. Upon assuming the position of CEO, Henry Chan uncovered several ethical and legal issues involving the senior officers of his company. The most glaring of which are the Shago incident and Haus de Metro which involved accepting and giving bribes to and from suppliers. The ethical and legal issue brought up in the Kitchen Best case invites ethical questions when doing cross-boundary business in Southern China and the risks associated to such business practices and how could such behavior/s be avoided in the future. II. Analysis Gist of the case The ethical and to certain extent legal issues that beset Kitchen Best became apparent at the end of 2009 when Malaysia-based distributor Shago commission a European designer to come up with a range of appliances for its 40th anniversary collection. Shago then placed orders with Kitchen Best with some of appliances ordered came with a special gift set of microwable tableware. Shago however complained that the bowls and plates in the gift sets were not microwable and this is breach of contract where Shago demanded both a refund and compensation. Upon investigation, it was found that Sze, Kitchen Best’s purchasing and production manager who had been responsible for sourcing the gift sets had awarded the contract to a factory in Dongguan that was owned by his brother-in-law. In return for the order, Sze and his wife were offered a free package tour to Europe. Wei, who knew about the personal relationship between Sze and the factor owner, had not reported it in view of their relationships with Li. When in-house testing later showed that the product was faulty, she informed Sze, who told her he would handle it. However, no remedial action was taken and Wei decided not to pursue the matter any further. This incident was followed by the incident with Haus de Metro where bribery happened in the testing and certification of samples. This occurred when a shipment that was sent to German retail chain Haus de Metro did not meet the company’s safety requirements contrary to the satisfactory testing report received by Kitchen Best. Kitchen Best had subcontracted HdM’s orderfor electric water dispenser to Qinghua Electrical Appliance Ltd as its own production lines were fully occupied. Kitchen Best arranged for Keemark Testing Services which is an independent testing agency in Hong Kong as requiremed by HdM. Keemark in turn sent its own team which is composed of a Hong Kong based team leader and several members to Guangdong sub-office to conduct a site inspection at Qinghua’a factory and collect random samples for laboratory testing. Quinghua’s proprietor was nervous that the samples collected might fail HdM’s Restriction on Hazardous Substances (RoHS”) stamdards. RoHS was an EU directive that restricted the use of harmful substances such as lead and mercury in the manufacturing of electronic products. Qinghua had ordered a substandard paint for the production of the outer casing of the electric water dispenser to minimize production cost and to pass Keemark’s test, Qinghua made a deal with the team leader of Keemark to allow Qinghua to interfere with the sample drawing and substitute the random samples with some selected one for laboratory testing. In turn, Qinghua deposited bribe money in the team leader’s wife’s bank account in Hong Kong. Despite this report, Henry Chan did not pursue the case further for fear of rocking the boat and losing the customer. Porter’s Five Forces a. Threat of rivalry The threat of rivalry is very potent in Hong Kong as well as in in Kitchen Best’s manufacturing plant in Guangdong province, China. This threat of rivalry may have caused Teh proprietor of Qinghua to resort to bribing the team leader of Keemark Testing Services knowing all too well that their materials and products are not that competitive in terms of quality and delivery time. b. Threat of substitute products Electrical appliances are a necessity and there was no mention of substitute in the case. c. Threat of new competitors Althought the case did not mention any new competitors, new players who could provide better products at lower prices is very real in China considering that it is the factory of the world. d. Bargaining power of suppliers The bargaining power of suppliers is very strong strong in China due to the practice of bribery. In the case, Sze the procurement manager accommodated a substandard supplier with the the bribe of a trip to Europe for him and his wife. e. Bargaining power buyers Buyers can also exercise power by resorting to bribe. In the case, the proprietor of Qinghua was able to interfere in the Keemark’s testing to be able to pass Europe’s RoHS standards. Questions What are the major social, ethical, or legal challenges that Kitchen Best and other small- and medium-sized enterprises (SMEs) face doing cross-border business? The major social, ethical, or legal challenges that Kitchen Best and other small- and medium-sized enterprises (SMEs) face doing cross-border business is the practice of accepting and giving bribes to get suppliers and to pass quality testing. This is a major challenge because it undermines the competitiveness of a business enterprise not to mention the risk of being penalized by regulatory agencies in the case of companies that has strict quality and safety standard such as the RoHS of Europe. Offering entertainment and kickbacks to potential clients and business partners. What legal risks does this pose to the company in a cross-border setting? Offering entertainment and kickbacks to potential clients and business partners is not only illegal in the client countries such as those in Europe and United states but also illegal in Hong Kong. Section 9(1) and Section 2 stipulates this prohibition that private sector employees are not allowed to solicit any bribes nor to offer bribes to private sector employees. While this may not be strictly enforced, such prohibition in bribery exists in the Laws of Hong Kong CAP 201. Management shortcoming Management can in part be blamed for the ethical and legal issues that beset Kitchen’s Best. When management did not actively pursue the issues nor made any punitive and remedial measures to correct the unethical practice in Kitchen Best, it inadvertently has encouraged the practice. In the case of Shago incident, the issue involved its purchasing and production manager Horatoin Sze who received bribe from his brother in law. The other case was the payment of bribe by Qinghua proprietor to pass the laboratory testing of Keemark Testing which is part of its arrangement with its buyers. Many of the problems at Kitchen Best are related to Horatio Sze and Ma Luk. Where has the company gone wrong in managing its staff? Horatio Sze and Ma Luk just put face on Kitchen Best’s lack of internal checks and balance and other internal mechanism that would discourage or prevent unethical practices. The practice of receiving and giving bribes will always continue if there is no mechanism to stop it. Are top managers responsible when corruption is afoot? Corruption is an ethical issue and inefficiency of the use of company resources and being such, top managers are responsible when it is afoot in the organization. It makes the company less competitive because its supply chain became weak when it procures products and materials that is not competitive and not in accordance to specified requirements. This is also costly in company in many aspects. In addition to undermining its competitiveness, the company runs the risk of refunding its customers such as the case of Haus de Metro who also asked for compensation. It is also legally risky when its customers file for charges which would make the company to pay fines. Worst, unethical business practices that undermine its competitiveness also affects the company’s image, brand and position in the market whose economic equivalent is difficult to quantify. Many of the problems at Kitchen Best are related to Horatio Sze and Ma Luk. Where has the company gone wrong in managing its staff? Again, when Sze was allowed to go scott-free for receiving bribery in the form of trip to Europe from his brother-in-law supplier, the company has gone wrong in managing its staff because it sent the message that it is okay to receive bribes from the suppliers. It also encouraged similar practice when Henry Chan himself did not pursue upon learning the bribery case involving its shipment for German retail chain Haus de Metro whereby its subcontractor at Qinghua factory bribed the team leader of inspector at Keemark. He have also uncovered similar unethical practices in the company which the case did not elaborate but this was expected considering that such actions go unchecked. Why is it important for SMEs to practice ethical management? How can Henry Chan enhance his role in this regard? It is important to practice ethical management because the lack of it will undermine the company’s competitiveness in terms of providing inferior products and services due to its corrupted supply chain. In addition, unethical management run the risk of damaging the company’s brand and image in the market which again could undermine its position in the market. What would you advise your staff to do when faced with local expectations of “payoffs” or “referral money”? Where would you go for guidance, either within or outside your company organization?  In the absence of guidance, what would you do? I would strongly advise my staff against it. First, I would mention that it is unethical to expect payoffs or referral money from suppliers. I would elaborate further that this kind of practice will undermine the company’s competitiveness in the long run because suppliers who will give payoffs and/or referral money are likely to provide substandard products, services and/or materials that eventually, if the company will fold my employee will lose his or her job. I would also advice, in the case of Kitchen Best, that it is illegal for private sector employees to accept bribes as contained in Section 9(1) in Hong Laws of Bribery Ordinary. I will mention that he or she could go to jail for receiving payoffs or referral money and that would reflect on his or her professional record that no company would employ him or her in the future. Steps Henry Chan can use to help build its corporate culture for the long term benefit of the company. Immediately, Henry Chan should fire Sze and remove Qinghua as supplier for their unethical conduct. This would send the message to organization of Kitchen Best that unethical business practices such as receiving and accepting bribe is not tolerated in the company. A memo must be issued informing all employees of Kitchen Best that bribery and other unethical practice is not tolerated in the company. Internal mechanism for checks and balances in dealing with supplier must be clearly established. For example, parameters for expenses that deal with “wining” and “dining” with suppliers must be clearly established. Policies must be clearly drawn up on the conduct that will govern in dealing suppliers and buyers. Ethical standard must be clearly emphasize in all aspects of the company to make it a part of its culture. III. Conclusion and lesson learned Unethical practice in business should be discouraged not only because it is bad but because it undermines company’s competitiveness. It weakens the supply chain and renders the company vulnerable to the threat of rivalry and new competitors which is very potent in China. Ethical business practice and adhering to the highest standard of integrity in business may be difficult but it will be beneficial to the company in the long run. First, it will make the company more competitive because its supply chain will be strengthened. Second, waste will be avoided by removing the practice of giving bribes. Lastly, ethical business practice will ultimately improve the image and brand of the company earning the trust of its clientele and thereby, making the company more profitable in the long run. Read More