Harrison Company - Ethical and Socially Responsible Decisions - Assignment Example

EXECUTIVE SUMMARY The Harrison Company is looking to raise its profitability to $5 million by the end of five years. The profitability will be achieved through Memorandum of Understanding with corporates such as financial institutions in the long-term and the intensively optimized strategies in the short-term. The optimization strategy will mainly apply cost management where the company will maintain a total cost to revenue ratio of 95% despite the economic dynamics like, projected increase in cost of energy. INTRODUCTION The Harrison Company is a mid-sized retailer whose headquarters are in State College, Pennsylvania. It is a public company with a wide network of 80 branches most of which are across the Northeast. Two distribution centers serve these branches, which are spread across seven states. The Board of Directors of Harrison Company has recruited a new president to help better the company’s sales and profit after the previous president retired due to old age. The Harrison Company is also involved in a number of social responsibilities around the communities it operates. They range from supporting the little local baseball teams to a local charity, which it contributes $1,000,000 annually. Rubric question 2 ETHICAL AND SOCIALLY RESPONSIBLE DECISIONS Ethical dilemma Harrison Company has an average sale of $48 million in all of its 80 stores combined. The company is contributing just over 2 percent of its total sales to charity and community endeavors. Worldwide, companies are involved in community social responsibility (CSR). CSR is an ethical endeavor. The recipients also become accustomed to receiving a contribution from the company. Therefore, recipients become major stakeholders in the company. The shareholders are also stakeholders since they invest their money in the company from which they would get their return on the equity invested. The top management and the employees are also stakeholders since they are involved with the day-to-day running of the company, and they are responsible for any loss or profit that it may incur. Some of the responsibilities of the company towards its stakeholders are highlighted below: Social and ethical responsibility Description Suppliers Major stakeholders Make on time payments to the suppliers as agreed upon in the contracts. - To settle the debts owed to the suppliers, Harrison Company will employ a model, which under promises, but over delivers. - For goods supplied which require intensive capital investment but with low margins, an agreement will be reached with the suppliers so that the latter are only paid once the goods have been sold. -The retail company will need to maintain a working capital that will ensure that its suppliers and creditors are paid on time. Employees Major stakeholder The payment should reflect the work they do in the company -The employees like the suppliers have to be paid all their dues before the end of the month. Such early payment will boost the morale of the employees and have faith in the company’s financial health. - An organized financial payment system allows the financial department to prepare in advance the payslips. Furthermore, the management has ample time to strategize on the coming months. - In addition, when the payments of the employees are done early, they have increased confidence in the financial health of the company. Employees Conducive and safe working environment - Employees are provided with the necessary personal protective equipment (PPE) to keep them safe from injuries. The employees are thus assured of their safety in the work environment. Employees Open channels of communication both: vertical and horizontal communication - The company gains a lot by keeping the communication channels open and free for its employees. They can communicate within themselves and with the management. - Better communication means a better working environment. Employee Equal opportunity to everyone The Harrison company avoids discrimination when assigning duties and when dealing with its employees. Shareholders Major stakeholder - They are interested in the return on their investments and the overall financial well-being of the company. The annual general meeting (AGM) provides the stakeholders a chance to know the financial position of the company. Shareholders Provide the shareholders with updated information about the company’s current and future performance and its ongoing projects. The shareholders will receive quarterly reports with information about Harrisons short-term and long-term goals. Shareholders The company ensures that the shareholders equity is optimized fully and efficiently. To achieve optimization, the company should ensure that it puts in place a well-structured and integrated capital framework. Consumers Major stakeholder The company will provide quality goods, which serve the needs of the customers adequately. The service offered to the customer must be of the highest quality. It is paramount for the quality assurance department and the customer service to work tirelessly so that the customer always get fresh and goods of high quality. Consumers The organization pays attention to the customer’s feedback so that it can constantly improve and innovate. This will involve acknowledging that it received the feedback, and it is working on improving the services for the customers. Environmental sustainability To achieve environmental stability, the company has decided to invest into a street cleaning program, where it seeks to place litter bins on the streets around its areas of operation. Shopping bags are a major nuisance, and they present a huge environmental problem due to its disposal and non-biodegradability. To achieve its goal of cleaning the streets, the company will place bins in every street to collect the plastics, waste glass, and paper. The company realizes further that the bins offer an avenue for advertising. Thus, the bins will be branded with Harrison’s corporate colors. Apart from the free advertising space, the bins will also help in keeping the areas around Harrison’s operations clean. For several years, the charity organization near Harrisons headquarters has been receiving close to $1 million per year. The financial contribution can be converted into a project, which will generate money for the charity. The project will wean the charity organization off the money handed out to it while it will free some of the money, which can be put into other uses. For instance, the charity will benefit more if the $1 million is used to start an income-generating project. Rubric Question #3 SYNTHESIZING ANALYZING Marketing Short- term strategies Product Moving forward, the company will concentrate its efforts on the low capital-intensive products. These products are basic and fast moving hence they exhibit a high turnover rate. When a company decides to increase the price of such goods, the consumers will less notice it as a significant gain. On the other hand, if the company decides to increase the price of the more capital-intensive goods, it will be easily noticed. For instance, consider a commodity A, which is currently retailing at $2.5 and a commodity C that is retailing at $350. When a company increases the price of C to $400, it will draw more attention than an increase in A to $4. Price Pricing is a strategy that I will adopt. For starters, I will reduce the price of A to $250 and hold the price of C at $4. The price of C will be further be influenced by the sources of demand and supply such that the consumers will not complain. Promotion Use of loss leaders With the reduced price of A will act as a loss leader. The lowered price will attract clients thereby increasing the turnover of the more costly and capital-intensive commodity. However, the low priced commodities are basic needs. Therefore, the consumers will still buy a large number of the commodity C. the advantage of this promotional method is that commodity A’s turnover will rise. Using billboards Billboards are a great visual tool in advertising. The loss leaders will be put onto the billboards showing a comparison of the prices offered by Harrison and those currently of the market. Place Customer loyalty and reward The company will introduce loyalty cards that reward the customers with points for every purchase made in any of its branches. The rewarded points can be redeemed for goods bought. The reward system will also allow the company to create a database of its client. The customers can provide their feedbacks through the database system. The customer loyalty will increase the company’s customer base. This is a short-term strategy, which should be implemented by the end of the first financial year. Marketing campaign evaluation: Yr 1 and Yr 2 represent the short-term Short- term Long- term Year 1 Year 2 Year 3 Year 4 Year 5 Capital Intensive Products (TVs, Refrigerators, PS4) Pricing $515 $525 $545 $545 $545 Place Pennsylvania Pennsylvania Pennsylvania Pennsylvania Pennsylvania Promotion Loss leaders (less 18%, 14% ) $442.3 $451.1 $545 $545 $545 Billboards $20,000 $20,000 $20,000 $20,000 $20,000 Less Capital Intensive Products (Household goods like sugar, flour ) Pricing (500g quantities) $1.93 $1.96 $2.04 $2.04 $2.04 Place Pennsylvania Pennsylvania Pennsylvania Pennsylvania Pennsylvania Promotion loss leaders (Add 9%, 11% ) $2.10 $2.18 $1.94 $1.94 $1.94 Corporate partnership discounts N/A N/A 5% 4% 4% TOTAL SALES FOCUS $48.12M $53.46M $62.01M $77.52M $100.77M Long-term Strategies Signing a Memorandum of understanding that allows the employees of a financial institution to shop at a discount using shopping cards. The Harrison Company can seek value addition proposals to increase its bottom line and improve its relationship with other firms. For instance, the company can enter into a partnership with a financial institution like banks in order to share a mutually beneficial partnership. The partnership will bring benefits to both the company and the financial institution. The Harrison Company will offer to guarantee its employees when they are acquiring loan facilities at the bank. The bank will thus get an increase the number of its customers who have access for both its short-term and long-term loan facilities. In return, the bank will allow its employees to receive shopping cards from the Harrison Company. The cards will be branded with the financial institution’s and Harrisons Company trademarks. The employees of the bank will shop at discounted prices when they use the shopping cards. The partnership with the bank will increase the number of banks employees who visit Harrisons chain stores. This strategy will target to sign six corporates on an annual continuing basis beginning the second year. The firms target will have at least 7000 employees. As such, the addition of the firms’ employees every year will see an increase in the number of customers visiting Harrisons chain stores annually. Finances Profitability Ratios These ratios are utilized to show the income generating ability of a firm. The financial metrics that make up the ratios include the Return on Equity (RoE), Return on Assets (RoA), Operating Profit Margins, and the Gross Profit Margins. (Zions Business Resource Center, 2008). Profit Margins. The Gross profit Margins The Gross Profit Margin refers to the difference between the net sales and the cost of goods used incurred by the firms. The cost of goods does not involve any other expenses other than those that are directly incurred by the firm during the production of a good. Therefore, the Gross Profit Margins of a business is represented by a ratio of the gross profit to net sales, which is expressed as a percentage. A higher margin implies that the business will be able to cover up for the cost of goods. A lower the margin would be quite alarming for the company (Zions Business Resource Center, 2008). Gross profit margins = Gross profits *100 Net sales Harrison’s gross profit Margins 3 years ago 2 years ago Last year 19.8% 19.8% 20.1% According to the figures above, the gross profit margins for Harrisons company had stagnated for two consecutive years. However, it rose slightly last year to 20.1 percent. Net profit margins The net profit margin measures a companys ability to pay for its operational expenses. The higher the net profit margin, the better business can pay for its operational expenses. (Zions Business Resource Center, 2008). Net profit margins = Net profits *100 Net sales Harrison’s net profit Margins 3 years ago 2 years ago Last year 2.7% 0.9% 0.3% In the profitability ratios, the gross profit margin is a strength of the company with highs of up to 20%. In addition, the increasing margin implies a positive trend. However, the net profit margins are worrying because the value has gone down by an index of 2%. The situation may even worsen if not well managed due to the projected increase in cost of diesel, as per the consultant forecast. There is also a very high disparity between the gross and net margins. It is important that the company comes up with cost-cutting measures to mitigate the situation. The company is exposed to a high risk since the operational expenses are rising, and the revenues are reducing. The situation is further worsened by the reduced expenditure on marketing. I will target 1.5% net profit margin by the end of the first financial year by regularizing the administration cost, which approximately doubled within one financial year. Return on Assets. This is a method, which determines the financial benefits that a company draws from its assets. The following expression shows the expression of deriving the return on assets. Return on Assets = Net Profits before tax *100 Total Assets Harrison’s return on assets 3 years ago 2 years ago Last year 1.407/ 30.648 * 100= 4.59% .444/ 29.332 * 100= 1.51% .144/ 28.819 * 100= 0.50% The return on assets has been falling in the past three years. It fell from 4.59% three years ago to 0.50% last year. The sharp decrease was due to a drop in the net profitability of the company. Return on equity The return on equity is the returns that the owners of the firm get for their capital share. It is expressed as a percentage of the net profits before tax and the Shareholders equity. Return on equity = Net Profits before tax *100 Shareholders’ equity Harrison’s Return on equity 3 years ago 2 years ago Last year 1.407/ 16.917 * 100= 8.32% .444/ 11.853 * 100= 3.75% .144/ 11.556 * 100= 1.25% For every dollar invested by the shareholder during the first year, a shareholder got 8.32 cents more in returns. However, the returns have dwindled to around 0.832 cent per each dollar invested by the shareholder. The low returns have caused panics to not only the shareholders but also the employees. It is evidenced by the falling value of shareholder’s equity. Liquidity ratio It is a measure that is used by the company to gauge its ability to cover up its short-term debts. The liquidity ratios include the current, cash, and quick ratios. A business aims for a value greater than 1, which means that it will be able to cater for its liabilities. (Small Business Western Australia, 2014). Current ratio It shows that the firm has enough current assets to cover its short-term liabilities. (Small Business Western Australia, 2014) Current ratio = Current assets Current liabilities When the current ratio is less than 1, it means that the firm is not in a position to settle its liabilities. On the other hand, a high ratio means that the business is compromising on its return on assets. (Small Business Western Australia, 2014). Harrison’s current ratio 3 years ago 2 years ago Last year 11.432/ 9.831= 1.16:1 9.064/ 15.072= 0.60:1 8.530/ 12.450= 0.68:1 The company liquidity ratio was good three years ago, but it got worse from then on. This is evident as it has not been able to pay its creditors and suppliers as per the agreed 30-day wait period. The company will cease to invest in the long-term assets until the situation is regularized. Efficiency Ratios They are ratios used to assess how well an organization optimizes its assets and liabilities Total asset turnovers Total asset turnovers = Revenues Total assets Harrison’s total asset turnover 3 years ago 2 years ago Last year 52.102/ 30.648= 1.7 48.992/ 29.332= 1.67 48.127/ 28.819= 1.7 Fixed asset turnovers Fixed asset turnovers = Revenues Fixed assets Harrison’s fixed asset turnover 3 years ago 2 years ago Last year 52.102/ 19.216= 2.7 48.992/ 20.268= 2.4 48.127/ 20.289=2.37 The asset turnovers of a company are strengths of the company. Safety ratios These are measures of the adaptability of the company to unfavorable conditions. Safety ratio = Total liabilities Shareholder’s equity Harrison’s safety ratio 3 years ago 2 years ago Last year 13.731/ 16.917= 0.81 17.479/ 11.853= 1.47 17.263/ 11.556=1.49 The safety ratio trend is not encouraging although it shows that the business can survive adverse conditions. The performance of the company has been compromised because of the expenses that the company is incurring during its operation. For example, the administration expense went up by double digits in the previous year. In regards to this, I will cut the total expenses of the company by 2% and strive to achieve the cost of income ratio of 0.95. Logistics and Operations The supply chain faces a variety of issues including reduced customer expenditure, slow streaming, cost of energy and performance lagging. Supplier transportation to Harrison’s distribution centers Slow steaming refers to a tendency by captains to slow down the ship to avoid congestion and save on fuel. The result of this action is that it inconveniences the distributors as they receive the goods late. Storage (inventory) at the distribution centers Reduced level of customer spending means that the rate of stock turnover is low. The Harrison’s Company has inventories of more than $7.6 million. These assets lie idle without generating any income for the company. Therefore, it calls for a better management of inventories. The historical records and data of Harrison’s consumers can be used to predict their consumptions. The predictions will then be used to manage the inventories. Transportation from the distribution centers to the stores The consultant has predicted that the cost of diesel fuel will rise. The rise in the cost of diesel will increase the cost of distribution of goods. Therefore, the company can decentralize its goods receipt system. Whenever possible, the suppliers can deliver the goods directly to the stores. Storage (inventory) in the stores Performance lagging: The performance lags when the company begins to apply inventory management strategies, investing in customer service and the company’s dynamism in response to market changes. Rubric Question #4 IDENTIFYING INDUSTRY AND GLOBAL TRENDS Industrial Trend Diversification: Investment in the finance sector To increase productivity, some chain stores have ventured into the financial and banking sectors and the insurance industry. By diversifying their services, they increase their revenues since it offers convenience to the customer who does not have to have liquid cash in order to shop at the bank. The bank can lend cash to the customers without money. By doing this, the stores can earn twice the amount they would have earned. The double earnings come from the interest from the loans given and the revenue from the sales Further exploration of corporate value addition strategies would put the company in a competitive hedge since Harrison Company is not well positioned to make such diversifications. Mergers Other chain stores have come together to enable them implement expansive strategies. It shows that the store will have many stores in many places including the places that have been dominated by Harrison. Invading such areas will lead to sharing of clients and struggles for market shares. One of the major ways the company should do to handle the situation is by creation of customer loyalty in the short- run and innovation in the long- run. Global trends Production cost There has been a noted increase in the cost of production especially in the petroleum products, which is one of the major sources of energy. The rise in cost petroleum affects the cost input by manufacturers. To accommodate such costs, the manufacturer increases prices of the final goods. The marketing strategies that are implemented by the company ensures that it hasn a large share of the market. It can further invest in a large number of profitable stock turnovers. Unemployment There has been a global recession and an increasing level of unemployment. However, under such conditions the clients will have a tendency of buying goods in smaller units and quantities. For example, instead of buying a kilo of commodity A, they ought to buy in bits of a quarter kilogram of the same commodity. This is in line with our strategy to capitalize in less capital-intensive goods. Rubric Question #5 LEADERSHIP AND GROUP DYNAMICS Leadership theories include the great man theory, behavioral theory, contingency theory, trait theory, and situational theory. In relating with the board of directors, I will adapt situational leadership theories. It entails adaptation of democratic styles, but other times authoritative approaches will be adopted to enforce certain initiatives. For example, when handling the issue of administrative expenses, because it has affected the performance of the organization in the previous year. If the negotiation fails to bear fruits, I will have to use expert power because some of the members seem to have very little knowledge of what is going on in the organization. I would encourage mediation or arbitration processes by their respective supervisors until all issues are resolved. After resolving the issues, there are cases that will require complete restructuring and division of labor. Unmanageable cases would result to staff suspension from work until the issues are completely resolved. Rubric Question #1 IMPLICATION OF INTEGRATED BUSINESS PROCESSES Defensive strategies The defensive strategies will be through optimization processes of every resource that the companys exposure, from the human resource, companys assets, capital structure of the business, cost optimization among other aspects. Defensive strategies will secure the company from further deterioration in output levels. Moreover, ending the negative trend is the initial step in gaining the confidence from all the stakeholders, and one of the ways of increasing the morale of the employees is by alleviating their fears. More often than not, offensive strategies create unforeseen loopholes in the organization, which expose it to high risk. Focus generic approach Through optimization, the overall net output per unit input is increased. I will adapt a focused generic approach because I would like to have one-on-one link with the clients, where the clients’ request and we respond. The focus will be through a creation client database and target the working class group of people. I would not go for a cost generic approach because clients need more than cost reduction from the organization. Moreover, a focused approach is in line with the main optimization strategy. It will be a question of how many clients are served well in a day, rather than how many clients are served in a day, thats why low cost does not necessarily result to a perfect increase in the volume of sales. On the contrary, a satisfied and happy client will always be ready to spend an extra coin. I might be reserved to go for differentiation because the company is more inclined to the market than to production/ manufacturing. The market link of the business makes customer service key to maintaining and increasing the companys revenues. Holding employees A retrenchment approach will create fear and panic to the employees. This will also bring down their morale, which would be a compromising factor to attaining of the company’s objectives. Expansive approach exposes the organization to the cost, without guaranteed returns because the newly acquired stores have to be pushed to a break- even point by the shrinking balance sheet. With the current number of employees, I would task every supervisor to develop a performance index for the group he supervises. These indexes will be compared scrutinized, and final copies will be drafted upon which they will be used to appraise the employees under certain performance scales. The scores in the monthly appraisals will be used for staff promotion, inter- departmental transfers, bonuses, and mentorship programs for underperforming staff members. The supervisors will also be judges on how the group that he is in charge of performs. To instill further confidence in the employees, I would personally invest in the company by buying shares, despite the worrying trend. References Small Business Western Australia, 2014. Liquidity Ratios. [Online] Available at: https://www.smallbusiness.wa.gov.au/liquidity-ratios [Accessed 31 October 2014]. Appendices Ratios; profitability, liquidity, efficiency and safety. profitability Harrison             Year Three Years ago   Two Years ago   Last Year     Ratio Name Calculations Result Calculations Result Calculations Result   Gross profit margin 10.316/52.102*100 19.80% 9.700/48.992*100 19.80% 9.674/ 48.127*100 20.10%   Net profit margin 1.407/52.102*100 2.70% .444/48.992*100 0.90% .144/ 48.127*100 0.30%   Return on assets 1.407/30.648*100 4.59% .444/29.332*100 1.51% .144/ 28.819*100 0.50%   Return on equity 1.407/16.917*100 8.32% 3.444/11.853*100 3.75% .144/ 11.556*100 1.25%                   Liquidity               Current ratio 11.432/9.831 1.16:1 9.064/ 15.072 0.60:1 8.530/ 12.450 0.68:1   Efficiency Ratios             Total asset turnover 52.102/30.648 1.7 48.992/ 29.332 1.67 48.127/28.819 1.7 fixed asset turnover 52.102/19.216 2.7 48.992/ 20.268 2.4 48.127/28.819 2.37 Safety ratios             Liabilities/equity 13.731/16.917 0.81 17.479/ 11.853 1.47 17.263/ 11.556 1.49 Profitability projections for the five years Sales Forecast for Harrison plc. Not counting overlaps (for example, economic condition and industry growth would overlap) Base Year Actual Year 1 Year 2 Year 3 Year 4 Year 5 Sales Forecast Inflation 3% 5% 9% 9% 9% Economic Conditions -3% 0% -2% -4% 0% Demographic Changes 0% -2% -1% 0% 0% Price Changes not Including Inflation 5% 3% 0% 2% 2% Gains from Direct Competition from Rivals and Substitutes -3% -3% 2% 4% 6% Additional Industry Growth -4% 0% 2% 6% 8% Total Percentage Change 1% 10% 16% 25% 30% TOTAL SALES $48.12M $48.60M $53.46M $62.01M $77.52M $100.77M Company Financial Constraints Limiting New Sales Poorly maintained liquidity ratio Fully optimized floor space and company resource, necessitating expansive strategies. Operations and Capacity Constraints 80% capacity utilization 80% 84% 96% 133% of original 160% Read More