Introduction

The Aerospace and Defense Industry accounted for $350 billion in revenues in 2004. The Boeing Company and Lockheed Martin are the top two revenue producers in the industry accounting for around $88 billion in sales (Yahoo, 2005). Over the last few decades, the industry has assumed numerous mergers and acquisitions to create gigantic industries such as Lockheed Martin and The Boeing Company. A financial analysis of both aerospace corporations will be performed based on the data retrieved on each individual company based on their annual reports over the last three years.

The Boeing Company

Company Overview and History

The Boeing Company is currently the world’s largest aerospace company. Additionally, they maintain the title of the world’s prominent defense contractor. The Chicago based Boeing Company employs roughly 154 thousand people in 67 countries worldwide. In 2004, the company had revenues of $52.45 billion dollars. Presently, Boeing has established itself as the largest United States exporter (Boeing Company, 2005b).

Boeing is widely known for its production of commercial jetliners, military aircraft, satellites, and missiles. The list of current commercial jetliners includes the 717, 737, 747, 757, 767 and 777 series aircraft. There are more than 12,000 of these aircraft in service worldwide, which consist of 75% of the world’s commercial fleet. Boeing also offers global financial services, aviation training services and other diversified services and products (Boeing Company, 2005b).

The Boeing Company was founded in 1916 as the Pacific Aero Products Company by William Boeing. Boeing was a successful lumberman from Detroit, Michigan who was fascinated with flying with the newly invented airplane (Spurge, 1997). He learned to fly and soon was eager to sell and manufacture his own aircraft designs. During World War I, the new company received its first production orders of 50 Model C seaplanes from the US Navy. Shortly after this, the company was renamed to The Boeing Airplane Company. The company was the principal producer of military aircraft during the 1920s and became one of the largest aircraft manufacturers in the nation (Boeing Company, 2005c).

In 1943, the company was forced to break up into three separate companies. These companies became United Airlines, United Technologies, and the Boeing Airplane Company. Boeing continued to prosper during World War II in which it supplied the allies with numerous aircraft. Most notable of these aircraft was the B-17 and B-29 bombers (Boeing Company, 2005c).

After the war, Boeing survived by shifting production efforts to commercial airliners using the newly developed jet turbines. With the Cold War at hand, the military contracted Boeing to erect jet-powered bombers and Intercontinental Ballistic Missile (ICBM) systems. The company was propelled into the space race in the 1960s by becoming the primary manufacturer for NASA (Boeing Company, 2005c).

Boeing continues to have a dominant role in commercial and military aircraft, missile systems and space technologies. Major acquisitions and mergers have included Hughes Electronics Corporation, Jeppesen Sanderson Inc, Hawker del Havilland, and Rockwell International. Boeing continued to expand by merging with McDonnell Douglas in 1997. Jim McNerney is the current Chairman, President, and CEO of Boeing. He has been heading the company since June 2005 (Boeing Company, 2005c).

Despite being the world’s largest aerospace company, Boeing has endured several setbacks in recent years. In 2003, then CEO Philip M. Condit was forced to resign after allegations of corruption by the United States Air Force. Being was accused of inflating lease prices to the Air Force. Harry Stonecipher, the former McDonnell Douglas CEO, replaced Condit but was also removed in 2005 for violating company conduct codes (Wikipedia, 2005a).

In June 2003 Lockheed Martin sued Boeing claiming that Boeing had resorted to industrial espionage in 1998 to succeed in gaining the Evolved Expendable Launch Vehicle (EELV) contract. Lockheed alleged that an ex-employee distributed 25,000 proprietary documents to Boeing. Lockheed maintained that these documents permitted Boeing to win 21 of the 28 offered military satellite launches. In July 2003 Boeing was disciplined, with the Pentagon removing $1 billion worth of contracts away from Boeing and giving them to Lockheed. (Wikipedia, 2005a).

The most recent event started in October 2004 which involves their European rival, Airbus. Boeing claimed that Airbus had dishonored a bilateral agreement when it received what Boeing reasoned to be unfair subsidies from the European Union. Airbus reacted by filing a counter complaint, arguing that Boeing had also dishonored the agreement when it accepted tax breaks from the U.S. Government. The dispute is still being fought in various courts (Wikipedia, 2005a).

Financial Analysis

Profitability Ratios

Boeing captured $52.45 billion dollars in revenues in 2004. This was an increase of 3.91% from the $50.5 billion dollars generated in 2003. The higher revenues are credited to the increase in military contracts during 2004. Military contracts were responsible for $30 billion dollars in 2004. Commercial revenues were hampered by a slow growth in commercial aircraft still because on the airlines concerning September 11, 2001. Airlines are looking to purchase fewer aircraft that can hold more seats. The 787 Dreamliner is expected to fulfill these requirements seating up to 296 passengers per aircraft. The 787 is expected to bolster revenue in 2005 and beyond. The Boeing 757 program was discontinued due to lack of interest from airlines (Boeing Company, 2005a). 2003 revenues were down 6.63% from $54 billion in 2002. The decrease in revenue was attributed to reduced airplane delivery because of lack of need for new aircraft by airlines (Boeing Company, 2004).

Boeing earned a net income of $1.87 billion dollars in 2004, a 161% increase from 2003 figures of $718 million. The large increase was primarily due to the sale of Boeing’s Commercial Finical Services business to General Electric. The company earned $492 million dollars in 2002, creating an increase of 45.93% in 2003. The low net income of $492 million dollars is a result of a $1.8 billion-dollar charge upon the implementation of Statement of Financial Accounting Standards (SFAS) No 142, Goodwill and Other Intangible Assets guidelines. The regulations were an outcome of goodwill that was formerly accounted for being long-term assets. Because of the lowered net income, Boeing recorded a 0.91% profit margin for 2002. These figures were subsequently improved to 1.42% in 2003 and 3.57% in 2004 (Boeing Company, 2005a).

Total assets in 2004 were $53.9 billion dollars; a 1.75% increase from the prior year 2003 which posted $53 billion. 2003 also saw an insignificant 1.32% increase of total assets worth $52.3 billion in 2002. Because of the continued increase in net income and stable levels of total assets, the company’s Return on Investment (ROI) has increasingly improved as well. The ROI in 2004 was 3.47%, 1.4% in 2003, and .91% in 2003. (Boeing Company, 2005a).

Stockholder equity was valued at $11.28 billion in 2004. The 16.59% increase in stockholder equity compared to the $8.1 billion dollars in 2003 was mainly due to Boeing repurchasing almost 15 million shares. The 2003 shareholders’ equity increased 5.76% compared to 2002 figures of $7.69 billion dollars. The resulting changes supplied Boeing with a Return on Equity (ROE) of 16.59% in 2004, 8.82% in 2003 and 6.39% in 2002. The ROE in 2002 was significantly lower because of the lower net income that year. The large increase of ROE in 2004 from 2003 was aided by higher net revenues (Boeing Company, 2005a).

Asset Utilization Ratios

Boeing obtained $4.6 billion in receivables in 2004, which has remained relatively consistent over the course of the last three years. In 2003, accounts receivable was posted at $4.46 billion, which was only a 4.19% decrease compared to 2004. During 2002, the company logged $5 billion, which reflected a 10.8% increase to 2003 figures. Since accounts receivable amounts were stable with moderate changes in revenues, the receivables turnover was also stable. The receivable turnover rates were 11.27X, 11.3X, 10.8X respectively in 2004, 2003, 2002 fiscal years (Boeing Company, 2005a).

Boeing was also consistent in their average collection period statistics. The company obtained average daily credit sales of $145.71 million in 2004, $140.2 million in 2003 and $150.19 million in 2002. This resulted in Boeing’s average collection periods to be 32 days in 2004, 32 days in 2003 and 33 days in 2002 (Boeing Company, 2005a).

Boeing held an inventory of $4.2 billion in 2004, 20% less than $5.33 billion in 2003. This was due to decreased sales in the manufacture of commercial aircraft. This also holds true in the previous year as 2003 resulted in a 13.7% decrease in inventory compared to $6.1 billion in 2002 (Boeing Company, 2005a).

Inventory levels were reasonably linear with revenues which resulted in minimal changes in inventory turnover ratios. The exception is in 2002 when Boeing was unable to stimulate projected sales. During 2004, Boeing achieved an inventory turnover of 12.3X. In 2001, the company had a ratio of 9.46X, and 8.74X in 2002 (Boeing Company, 2005a).

The corporation accrued $38.86 billion in fixed assets in 2004. This is an 8.63% improvement from $35.7 billion in 2003. This increase was aided with a $3 billion in new investments that was listed as an asset. In the year 2003, a .82% increase in fixed assets over the 2002 values of $35.48 billion was achieved (Boeing Company, 2005a). The company avoided purchasing or selling assets during the 2002 year due to conservative moves due to lower revenue projections (Boeing Company, 2003).

Since revenues and fixed assets have for the most part oscillated in a proportional manner in respect to each other, the fixed asset turnover ratios for each year has not radically changed. The fixed asset turnover ratios are 1.35X, 1.41X, and 1.52X during 2004, 2003 and 2002. (Boeing Company, 2005a).

Total asset turnover ratio figure was also stable during the three-year analysis. In 2004, the total asset turnover ratio was .97X up only 2.1% from the previous year. In 2003, the ratio was .95X which was 7.8% lower compared to the 1.03X turnover rate in 2002. The lower ratio in 2003 is directly related to lowered revenues that year (Boeing Company, 2005a).

Liquidity Ratios

Boeing has made significant changes in their current assets over the last three fiscal years. In 2004, Boeing maintained $15.1 billion in current assets and $17.25 billion in current assets in 2002. This represents a 12.5% decrease in 2004. This is due to the company selling $2 billion in discontinued operations during the year. Additionally, the company depleted about $1 billion in cash funds to finance stock repurchases and other investments. The company made a slightly higher increase of 2.39% in 2003 compared to $16.85 billion in 2002 (Boeing Company, 2005a).

The company’s current liabilities have been inversely proportional when compared to their current assets. Boeing accumulated current liabilities of $20.8 billion in 2004, up 12.94% from 2003 figures of $18.4 billion. 2003 decreased by 6.88% from figures during the year 2002 (Boeing Company, 2005a).

Boeing does not show extraordinary current ratios during the last three years. During 2004, the company produced a current ratio of 0.72. This is a sizable improvement from 0.94 that was calculated for 2003. The 2002 year produced the highest current ratio of 1.03 (Boeing Company, 2005a).

The corporation’s three-year quick ratio is as unpretentious as the company’s current ratio. Removing inventory from the equation, the company posts quick ratio of only 0.52 in 2004. The year 2003 even generated slightly higher at 0.65. The quick ratio in 2002 almost matched 2004 figures at 0.54 (Boeing Company, 2005a).

Debt Utilization Ratios

Boeing has annually maintained their total debt levels over the previous three years. In 2004, Boeing had debts totaling $42.67 billion. This is 4.94% lower than their 2003 debt total of $44.89 billion. The $2 billion dollars in debt reduction was only due to the company’s sale of their Commercial Finical Services business to General Electric. The sale released $2 billion in long-term debt. The company increased only slightly by 0.56% in 2003 when compared to 2002. A debt was posted at $44.89 billion in 2003 and $44.64 billion in 2002. Debt to total assets ratio was at its lowest in 2004 at 79% and was decreased from 2003 ratios of 84.65% and 85.30% in 2002 (Boeing Company, 2005a).

Times interest earned ratios have been matching revenue changes during the three years reported. In 2004, the times’ interest earned calculation was found to be 6.85X. This ratio was lower in 2003, with a calculation of 2.40X. During 2002, the ratio was 10.82X (Boeing Company, 2005a).

Market Measures

The Boeing Company can be found on the New York Stock Exchange (NYSE) represented by the symbol BA. The company’s fiscal year ends on December 31. As of July 20, 2005, Boeing common stock is listed at $66.08 per share. The company has a Price to Earnings (P/E) ratio of 30.77. The company has a 12-month high-low stock price from $66.08 to $60.59. Boeing’s stock year end stock values were $51.32 in 2004, $42.14 in 2003 and $32.79 in 2002. The company’s current beta is 0.823 (Yahoo, 2005).

Lockheed Martin Corporation

Company Overview and History

The Lockheed Martin Corporation is an advanced technology company based in Bethesda, Maryland that was established in 1995 when Lockheed Corporation and Martin Marietta merged. Although the company has been newly formed, it is comprised of 17 heritage companies that date back to 1909. These 17 companies include Lockheed Corporation, Martin Corporation, American Marietta, Goodyear Aerospace, General Dynamics, Sperry, IBM Federal Systems, Ford Aerospace, Sanders, Gould, Xerox Electro-Optical Systems, Loral Corporation, UNISYS, and Vought (Lockheed Martin, 2005a).

Lockheed Martin currently employs 130 thousand employees worldwide and in 2004 generated $35.5 billion dollars in sales. The company offers research and development services as well as a manufacturer of advanced technology systems and aerospace aircraft and equipment. 80% of the company’s business is with the United States Department of Defense (Lockheed Martin, 2005a).

The company is best known for its jet-powered aircraft. Most notably are the C-130 transport cargo, F-16 Fighting Falcon, SR-71, F-117A Stealth Fighter, F/A-22 Raptor, and the U-2S spy plane. Lockheed Martin is also responsible for the manufacturer of NEXTRAD Doppler RADAR, the GPS System, the Hubble Space Telescope, Magellan spacecraft, Pershing II missile systems, and the Titan IV missile systems. Additionally, the company has set milestones that have shaped the aerospace industry (Lockheed Martin, 2005a). Some of the prevalent achievements of the company are as follows:

• In 1962, John Glenn is the first American to orbit the Earth using General Dynamics Atlas Rocket (Lockheed Martin, 2005a).
• During 1963, Jacqueline Cochran pilots a Lockheed F-104 Starfighter, setting the woman’s speed record at 1,429 mph (Lockheed Martin, 2005a).
• Lockheed’s SR-71, the world’s fastest aircraft sets the world’s fastest speed record by traveling America’s coast to coast in 64 minutes and 2 seconds at an average speed of 2,144.8 mph in 1990 (Lockheed Martin, 2005a).
• Lockheed Martin develops a tracking infrastructure system for the U.S. Postal Service. This system enabled the Post Office to track and confirm packages, greatly maximizing delivery time and accuracy and reducing the likelihood of lost packages (Lockheed Martin, 2005a).

Lockheed Martin continues to expand their services beyond the limitations of aerospace. The company generated $17.3 billion in 2004 in these diversified services. These services include energy programs, government and commercial IT services, and other federal services. Lockheed Martin is led by Robert J. Stevens, Chairman, President, and Chief Executive Officer. (Lockheed Martin, 2005a).

Financial Analysis

Profitability Ratios

The Lockheed Martin Corporation (LMC) earned $35.52 billion in revenue during 2004. This represents an increase of 11.63% compared to the $31.82 billion generated in 2003. 2003 revenues were 19.74% higher when compared to 2002 revenues. The increasing trend in revenue can be attributed to increased military contracts and the increase of sales in all segments (Lockheed Martin, 2005a).

Net income for 2004 was $1.26 billion. This is a 20.23% increase from 2003 figures of just over $1 billion. Perhaps even more impressive, the company bettered their 2002 net income of $500 million by 110.60%. The reason for the increase in net income in 2003 is principally due to the elimination of charges related to the ceasing of their global telecommunications services business. The profit margin for 2004 was 3.56%. Lockheed Martin reported a profit of 3.31% in 2003 and 1.88% in 2002. These figures show that the company is improving with each year (Lockheed Martin, 2005a).

Lockheed Martin held $25.5 billion in total assets during 2004, down 2.37% from the $26.1 billion in total assets in 2003. 2003 total assets were 1.62% higher in than the 2002-year assets of $25.7 billion dollars. The company has consistently tried to minimize inventory to stabilize their assets (Lockheed Martin, 2005a).

Since net income is used to calculate a company’s ROI, Lockheed Martin has similar results as they did with their profit margins. In 2004, Lockheed Martin posted an ROI of about 4.95%. In 2003, the company had an ROI of 4.02%, and only 1.85% in the year 2002 (Lockheed Martin, 2005a).

Lockheed Martin has increased their stockholder’s equity over the last three years in conjunction with lowering their total debt. Stockholders’ equity was $7 billion in 2004, 3.92% higher than the $6.75 billion in 2003. This number was again increased by 15.19% from 2002 figures of $5.8 billion. This reverses a three-year trend from 2000-2003 of lowering stockholders equity (Lockheed Martin, 2005a).

Yet again, net income had the largest consequence on the company’s ROE. The company generated a ROE of 18.03% in 2004. The ROE figures were 15.59% in 2003 and 8.53% in 2002 (Lockheed Martin, 2005a).

Asset Utilization Ratios

Lockheed Martin attained $4.09 billion in receivables in 2004. This was a 1.36% increase over 2003 results of $4.03 billion. 2003 accounts receivable was 10.51% higher than the $3.65 billion in 2002. The increase was related to the number of increased orders in 2003. The improvement in the company’s receivable turnover ratio during 2004 is reflected by a ratio of 8.68X. This is an enhancement when compared to 2003 where the turn over ratio was 7.88X and 7.27X in 2002. The average collection periods for Lockheed Martin were 41 days in 2004, 46 days in 2003 and 50 days in 2002 (Lockheed Martin, 2005a).

Lockheed Martin held lower inventory levels in 2004 despite obtaining higher revenues. The company reported $1.86 billion in inventory in 2004. $2.34 billion in inventory was reported in 2003 which makes 2004 inventory figures 20.61% less. 2003 inventory levels were 4.36% more than the reported $2.25 billion in 2002. Inventory turnover for 2004 was 19.06X, 13.55X in 2003 and 11.81X in 2002 (Lockheed Martin, 2005a).

Lockheed Martin retained $16.6 billion in fixed assets in 2004, down only 1% from 2003 results of $16.7 billion. 2003 fixed assets were increased by 10.85% when compared to $15.1 billion in 2002. Fixed asset turnover ratios were 2.14X in 2004, 1.9X in 2003 and 1.76X in 2002 (Lockheed Martin, 2005a).

Total assets for remained consistent over the three-year period. The aerospace company held $25.5 billion in total assets in 2004, 2.37% lower than $26.17 billion in 2003. 2003 total assets were 1.6% higher than the $25.78 billion in 2002. These numbers maneuver the company’s total asset turnover to be 1.39X in 2004, 1.22X in 2003 and 1.03X in 2002 (Lockheed Martin, 2005a).

Liquidity Ratios

Lockheed Martin has steadily decreased their current assets over the last three years. This is directly related to their constant drop in inventories. In 2004, the company stated to have $8.95 billion in current assets. In 2003 assets were $9.4 billion, making 2004 figures 4.77% less. In 2003, current assets were lower than 2001 figures by 11.5%, totaling $10.6 billion (Lockheed Martin, 2005a).

Accounts payable levels drove much of changes in levels of current liabilities. In 2004, Lockheed Martin reported $8.56 billion in current liabilities, down 3.68% from 2003 calculations of $8.89 billion. The current liabilities were down 9.45% by the 2002 report of $9.82 billion. The company’s current ratio for 2004 was 1.05, 1.06 for 2003, and 1.08 for 2002 (Lockheed Martin, 2005a).

Lockheed Martin attained a quick ratio of 0.83 in 2004. This was faintly better compared to their 2003 quick ratio of 0.79 and 0.85 in 2002. The largest change in the company’s quick ratio was in 2003 due to higher inventory levels (Lockheed Martin, 2005a).

Debt Utilization Ratios

Lockheed Martin continuously reduced the company’s debt during the three-year period under examination. In 2002 the company had $7.58 billion in total debts. The company lowered that debt by 18% in 2003 with a recorded debt of $6.2 billion. Further debt reductions transpired in 2004 with a debt of $5.1 billion, a 17.5% reduction. Given that the company also reduced their total assets, their debt to total asset ratio was very predictable. Their debt to total assets ratio in 2004 was 20%, 23.7% in 2003 and 29.4% in 2002 (Lockheed Martin, 2005a).

Times interest earned ratios was directly tied to the company’s EBIT. In 2004, Lockheed Martin reached a times interest earned ratio of 4.92X. 2003 calculations were 4.15X and 1.99X for 2002 (Lockheed Martin, 2005a).

Market Measures

Lockheed Martin can be located on the New York Stock Exchange (NYSE) under the LMT symbol. The company’s fiscal year ends on December 31. As of July 27, 2005, Lockheed Martin common stock was trading at $64.06 a share. The company had a high-low stock price from $51.20 to $65.46 in the last 52 weeks. Lockheed Martin’s end-year stock values for 2004 were $55.55, $51.40 in 2003 and $57.75 in 2002. The company currently has a Price to Earnings (P/E) ratio of 21.30. The beta of the company is currently -0.309 (Yahoo, 2005).

Comparison and Conclusion

The Boeing Company is ranked number one in revenues in the Aerospace and Defense industry in 2004 with revenues of $52.45 billion. The nearest competitor is Lockheed Martin with $35.52 billion in revenues. This will place a hefty $16.9 billion-dollar gap between the two companies, or a 32% difference (Yahoo, 2005).

Boeing does not appear to have a pressing threat from their competitors to topple its industry ranking. Boeing has three primary weaknesses. The prevalent threat to Boeing lies within its heavy reliance in the commercial aircraft industry. Since the airlines are still recovering from loses due to September 11, Boeing has seen declines in revenues, although the outlook for 2005 is estimated to be improving. Secondly, Boeing has been unable to convince military officials that they are capable of winning contracts. Despite their extensive resources, they are unable to design highly technological military aircraft at efficient costs. The company has lost almost all their bids to the government in favor of their smaller rivals. The company is in danger of falling behind manufacturing technology of military equipment. They may develop a reputation for not being a serious contender to the bidding process. Lastly, the company is its own worst enemy. Their misconduct and business values have resulted in contracts being lost or stripped away. The government tends to avoid controversial organizations (Boeing Company, 2005a).

Lockheed Martin, on the other hand, has seen increased revenues because 80% of their revenue comes from the Department of Defense. Their dependence on worldwide military concerns has paid off for them in the wake of global terrorism concerns. In 2001, Lockheed Martin was awarded the largest military contract in history. The contract, worth $200 billion, authorizes the company to manufacture and support the F-35 Joint Strike Fighter until 2040. Additionally, the 1970’s designed aircraft F-16 Fighting Falcon has been updated with new technology. The Advanced F-16 Block 50/52/60 has generated orders from all over the world. Ironically, Boeing and Lockheed Martin have teamed up to produce the F-22 Raptor, dubbed the Fighter of the 21st Century (Lockheed Martin, 2005a).

Most impressive about Lockheed Martin is its financing. While Boeing has a 2004 debt to asset ratio of 79% (Boeing Company, 2005a), Lockheed Martin has a debt ratio of only 20%. While Lockheed Martin has raised their stockholder equity to help fund projects, they deliver an 18% Return on Equity for investors. This gives the appearance that Lockheed Martin is using their money prudently (Lockheed Martin, 2005a). Boeing had followed this pattern in 2004 by raising capital to fund worthy projects. They decreased their debt by 4.9% by increasing their stockholder’s equity by 38.6% and producing better profits (Boeing Company, 2005a).

The outlook for both companies seems promising in the near future. For Boeing, sales to the commercial airline are slowly rising and generating resurgence for the company. The company needs to stay on the right track and avoid any negative attention in the media. Boeing needs to regain its reputation to diversify to regain entry as a contender for military contracts. Commercial airline aircraft sales will be unpredictable over the remainder of the decade. The current stock price for Boeing, $66.08, is a 101.52% improvement since the end of 2002 where it ended at $66.08. This implies that investors or confident in Boeing despite their recent problems (Yahoo, 2005).

Lockheed Martin’s stock has not increased as impressive as Boeing. Their stock price improved 10.9% since the end of 2002. However, this company provides consistency for investors to enjoy. The company has continued to improve their performance steadily in the last three years. They have a promising future that should continue to remain stable. The company can continue to develop their digital services to offset any interruption of military sales. As of now, an investor can find plenty of reasons to invest in either company or even both (Yahoo, 2005).

References

Boeing Company. (2003). Boeing company annual 2002 report. Chicago: Author.
Boeing Company. (2005a). Boeing company annual 2004 report. Chicago: Author.
Boeing Company. (2005b). Boeing in brief. Retrieved July 12, 2005, from http://www.boeing.com/companyoffices/aboutus/brief.html
Boeing Company. (2005c). History. Retrieved July 12, 2005, from http://www.boeing.com/history/boeing/
Lockheed Martin. (2005a). About us. Retrieved July 14, 2005, from http://www.lockheedmartin.com/wms/findPage.do?dsp=fec&ci=4&sc=400
Lockheed Martin. (2005b). Lockheed martin corporation annual 2004 report. Bethesda, MD: Author.
Yahoo. (2005). Yahoo finance. Retrieved July 15, 2005, from http://finance.yahoo.com
Wikipedia. (2005a). Boeing. Retrieved July 14, 2005, from http://en.wikipedia.org/wiki/Boeing

The post Aerospace Financial Analysis appeared first on Michael A. Hartmann.

Introduction

The McDonald’s Corporation has been beleaguered for their questionable business practices and ethics. Opponents claim that the corporation aggressively advertises low nutritional food products to children. Challengers also claim that the food is also causes health problems for children and adults as well. These ethical issues have placed the corporation in the spotlight as a representative of fast food restaurant industry. McDonald’s has escaped civil lawsuits thus far. However, the company has been unable to break away from ongoing criticism concerning the integrity within its social responsibility practices.

McLibel

Fast food restaurants have become a popular target of criticism by marketing opponents (Raeburn, 2002). Studies show that near half of the money spent on food by Americans is for eating out. This is estimated to generate over 100 billion dollars income each year for restaurants in the United States. These studies also further conclude that each day at least 25% of America visits a fast-food chain (Appleson, 2003). Fast food has also seen a rise in distribution in the public school system. In the mid 1990’s, 13% of schools served fast food in schools. This has been an issue with nutritionists because the fast food being served lacks the nutritional value that conventional school food does (Raeburn, 2002).

In recent years, The McDonald’s Corporation has been frequently challenged as the leading source of the controversy surrounding marketing food to children (Raeburn, 2002). The corporation reportedly spends two billion dollars each year on advertising. The company also targets children by using promotional tools such as toys, school programs, school team sponsorships, and figures such as Ronald McDonald (McSpotlight, n.d.). To their credit, McDonald’s raised an estimated $15-20 million in 2002 to sponsor World Children’s Day. This is in addition to the 300 million dollars raised to their Ronald McDonald House Charities (RMHC). The corporation claims that these funds are to improve the heath of children around the world (McDonald’s Corporation, 2002).

While their marketing techniques are being criticized, it is the lack of nutritional value that has generated most of the concerns. Fast food rarely meets USDA nutritional guidelines and is high in fats. Today’s super sized menu items have tripled the amount of calories in an order of french-fries that were ordered in the 1960’s (Raeburn, 2002). Typically a person could consume 900 calories in the super-sized soda and french-fries alone (Bird, 1998).

McDonald’s has defended these claims by launching a campaign that also uses information from health experts and nutritionist. McDonald’s has stated that eating habits are just a single element involved in obesity. They state that additional elements such as genetics, exercise, cultural issues, economic, and over-eating contribute to obesity as well. The corporation further states, according to the American Dietetic Association (ADA), that it is unhealthy to eliminate an individual’s favorite food from their diet (McDonald’s Corporation, n.d.). The company further claims, “Many nutrition professionals agree that McDonald’s food can be part of a healthy diet based on the sound nutrition principles of balance, variety and moderation (McDonald’s Corporation, p. 1). McDonald’s also states that there are heaps of alternative foods found in their menu such as salads (Raeburn, 2002). According to the fast food company, it has been providing nutritional information on their menu items for over 25 years (McDonald’s Corporation, n.d.). Under pressure, the company announced in 2002 that it was adding yogurt and a sweetened fruit menu for children. However McDonald’s opted not to accept any responsibility for health problems but to shift blame to other sources (Raeburn, 2002).

Furthermore, McDonald’s has designated a few restaurants to partnership with the Eat Well Play Hard (EWPH) program in New York State. The goals of the EWPH are to prevent obesity in children and reduce the likelihood of chronic diseases through a proper diet and exercise. EWPH selected McDonald’s because of their successful marketing strategies to children. Under a three month promotional period, McDonald’s offered an alternative Happy Meal Plus to the menu that was the same price as the standard Happy Meal. The Happy Meal Plus contained the same food as the Happy Meal but included a cup of fruit. The soda was replaced by the choice of a low-fat milk, low-fat chocolate milk or low-fat frozen yogurt parfait. The conventional Happy Meal toy was replaced with an item that would bring about a child to do physical activity such as a jump rope, Frisbee, or beach ball. Surveys given to the customers indicated that 90% thought that the Happy Meal Plus was pleasant and would purchase it again (Journal of the American Dietetic Association, 2002).

A landmark lawsuit filed against McDonald’s was dismissed in a US District Court in January 2003 (Appleson, 2003). A lawyer was suing on behalf of several teens that blame their obesity on food consumed from the franchise. The lawsuit further claimed that the company deliberately misled customers in regards to the nutritional value of their foods and did not warn customers of the health risks from eating them (BBC News, 2002). This case has been coined as the “McLibel” case (McSpotlight, n.d.). One of the plaintiffs was a 400 pound 15 year old boy that testified that he obtained diabetes and this weight gain because of the restaurant chain. The boy claimed that he ate at McDonald’s everyday since he was six (Appleson, 2003). His mother claimed that she had always believed that McDonald’s fast food was healthy for her son (BBC News, 2002).

The lawyer for McDonald’s claimed that the suit should be considered frivolous. He pointed out that McDonald’s has been providing data on their menu items to the public for many years. The lawyer went on to say that the fast food giant has nothing to hide and the public has a full understanding of the nutritional value of fast food (BBC News, 2002). The judge agreed with McDonald’s on these points and ruled that he did not find evidence that the company was intentionally misleading customers (Appleson, 2003).

Although the judge dismissed the case, he scolded the company on their cooking and processing methods. He further warned McDonald’s the plaintiffs could re-file their case if evidence can be obtained regarding the processing methods of their products (Appleson, 2003). Future lawsuits are expected and other fast food chains are concerned that if a lawsuit against McDonald’s similar to this is successful that they might also be held liable in future cases (BBC News, 2002). Other experts believe that the fast food companies should be partially held accountable for obesity and diabetes in the same fashion that cigarette companies were to nicotine addiction and lung cancer (Bird, 1998). Many nutritionists and attorneys believe that food companies should be held responsible for some of the estimated 117 billion dollars spent on obesity related illnesses (Raeburn, 2002).

In response to prevent a rash of lawsuits, the US Congress has introduced the Personal Responsibility in Food Consumption Act. This legislation would limit lawsuits against restaurant chains to cases where the companies fail to meet regulatory requirements (Supermarket Guru, 2003).

False Advertising

According to the Harvard School of Public Health, 30,000 or more premature heart disease deaths are caused each year by Trans Fatty Acids (TFA) from partially hydrogenated oils in our food supply. In response to these concerns, in September 2002, McDonald’s issued a Press Release that announced a significant reduction of TFAs with improved cooking oil. The new oil was said to reduce French fry TFA levels by 48%, reduce saturated fat by 16% and dramatically increase polyunsaturated fat by 167%. However McDonald’s never committed to the change. Later the company removed the September 2002 Press Release from its website and according to challengers, McDonald’s attempted to hide the existence of the declaration (PRWeb, 2004).

In January 2004, BanTransFats.com, Inc., A California non-profit organization filed a lawsuit against McDonalds Corporation for false advertising regarding its announcement they would implement a change to new cooking oil by February 2003. The plaintiffs claim that McDonald’s lied about this change, and they have not complied by the announcement. The plaintiffs’ further claim that McDonalds never made the change to the new cooking oil, and made no announcement to the public that they had not made this change. They accuse the company of false advertising, misleading the public and not taking the health of others seriously for profit. In the lawsuit, the accusers are asking for an order for McDonalds to inform the public about failure to use the cooking oil, with the same degree of publicity as they gave in September 2002. This lawsuit is still pending (PRWeb, 2004).

Super Size Me

McDonald’s has also received negative publicity about their food quality from filmmakers like Morgan Spurlock. Morgan Spurlock is an award-winning writer, director and producer. Spurlock directed a documentary about McDonalds that was entitled “Super Size Me.” During the making of the film, which is an examination of fast food and obesity in America, Spurlock subjected himself to a grueling, 30-day “McDonald’s only” diet to document the impact on his health. He started out at a healthy 185 pounds and had packed on 25 pounds by the end of the diet. Within a few days of launching his diet, Spurlock, was depicted as vomiting out the window of his car, and doctors who examined him were claimed to be shocked at how rapidly Spurlock’s entire body deteriorated. Moreover, it is professed that his liver became toxic, his cholesterol shot up from a low 165 to 230, and he stated that his libido declined and he suffered headaches and depression (Keppler Associates, 2004).

On March 3, 2004, McDonald’s announced that by the end of 2004, the Super size option will no longer be available in the United States apart from in certain promotions. The company claims that the option was eliminated as part of an endeavor to simplify its menu and give customers selections that support a balanced lifestyle. McDonald’s claimed that the Spurlock movie was not a factor in the menu change. A company spokesman rebuffed the movie and referred to the movie as “a super-sized distortion of the quality, choice and variety available at McDonald’s.” (CNN, 2004)

Conclusion

McDonald’s business ethics and integrity has come into the spotlight. The company has yet to demonstrate genuine endeavors to change their marketing techniques or their questionable food products. Although McDonald’s has escaped lawsuits in the past, however, they may be held liable for some of the health issues surrounding their products such as obesity and diabetes. The corporation consistently avoids any accountability and attempts to shift blame to other sources of unhealthy factors that contribute to diabetes and obesity. McDonald’s has to find a balance between attaining good profits and producing healthy food. Until then, the company must prove that they are indeed making changes and being perceived as being more socially responsible.

References

Appleson, G. (2003). Obesity suit against McDonald’s dismissed. Retrieved February 25, 2004, from http://news.findlaw.com/news/s/20030122/foodMcDonald’sdc.html
BBC News (2002, November 22). McDonald’s targeted in obesity lawsuit. Retrieved February 27, 2004, from http://news.bbc.co.uk/2/hi/americas/2502431.stm
Childhood overweight – A public health issue. (2002, November). Journal of the American Dietetic Association, 11, S4-S5. Retrieved February 29, 2004, from InfoTrac database (Expanded Academic ASAP).
CNN (2004). McSupersizes to be phased out. Retrieved March 3, 2004, from http://www.cnn.com/2004/US/03/02/mcdonalds.supersize.ap/index.html
Keppler Associates (2004). Morgan Spurlock. Retrieved February 28, 2004, from http://www.kepplerassociates.com/speakers/spurlockmorgan.asp?
McDonald’s Corporation (2002, May 13). Social Responsibility Report. Retrieved February 26, 2004, from http://www.McDonald’s.com/corporate/social/report/media/socialresponsibility.pdf
McDonald’s Corporation (n.d.). Facts about overweight and obesity: What the experts say. Retrieved February 26, 2004, from http://www.McDonald’s.com/countries/usa/food/health/health.html
McSpotlight (n.d.). Issues: Advertising. Retrieved February 28, 2004, from http://www.mcspotlight.org/issues/advertising
PRWeb (2004). McDonalds Exposed for False Advertising. Retrieved February 28, 2004, from http://www.prweb.com/releases/2004/1/prwebxml99615.php
Raeburn, P. (2002). Why we’re so fat; Fast food as school, huge portions, and relentless TV ads make it easy. Newsweek, 3804, 112. Retrieved February 28, 2004, from InfoTrac database (Expanded Academic ASAP).
Supermarket Guru (2003, February 1). Obesity and Fast Food Lawsuits. Retrieved February 27, 2004, from http://www.supermarketguru.com/page.cfm/1288

The post McDonald’s Ethical Challenges appeared first on Michael A. Hartmann.

The harsh reality of an economic downturn is that companies must make decisions to perform budget cuts to compensate for diminishing revenues. Budget cuts can be comprised of a combination of sources. These include outsourcing, employee reductions, service reductions, employee benefit changes, organizational realignments, liquidation, or any resourceful techniques to decrease expenditures. Each decision carries its own incentives as well as consequences. Several of these decisions for reducing budget costs will be discussed.

Facing Budget Cuts

Overview

Economic cycles can significantly affect companies in how they handle their financial planning concerns. During prosperous times, managers appear to have an unconstrained budget that permits conglomerates to expand their products into additional markets or to offer more diverse services to customers. On the other hand, during slow economic times administrators are pressured into decreasing budgets in order to compensate for dwindling income levels. This is in response to ensure the survival of the company through these economic downturns without degrading the company’s core competencies. How managers act in response to financial stresses within the organization will result in significant outcomes that are dependent on their skillfulness (McGarahan, 2001).

Developing a Strategy

It is essential for management to develop a realistic strategy in advance to implementing any actions to reducing a budget. There are many directions for a manager to consider that would achieve their objective to trim down expenditures. Cutting costs is a business decision that should be based on well thought out plans that will minimize the impact on the organization. When a financial short fall is recognized, management without delay must amalgamate and answer certain fundamental questions (TechRepublic, 2003).

These questions can be comparable to the following:

• What are the company’s long-term plans? Management can reiterate the current mission, goals, and appraise the existing capacity of the company. This incorporates a realistic assessment of what the company will be able to offer to customers in the future (TechRepublic, 2003).
• How will the company position itself to be successful and profitable? In the changing climate of the industry, the company will have to find a balance between profitability and maintaining their position in the industry. Managers must calculate approximately how the financial recession will affect their entire industry. Furthermore, companies must determine if the monetary degeneration will influence them to take on a changed role in the industry (TechRepublic, 2003).
• What are the preliminary plans for cost-cutting? This includes estimations on how much funding will be necessary to cut and what functions of the company can be afforded to be reduced or viable candidates for elimination (TechRepublic, 2003).

Subsequent to these preliminary inquiries are fulfilled, management must investigate into much greater detail what functions can be eliminated or receive reduced funding. This can be accomplished by generating a discrete priority list of the business functions that are genuinely business essential. In the same respect, a list of business functions that would be negatively impacted if reductions were made to its financial support can be constructed as well. This list includes all the opportunity costs that a cost cutting decision would incur and all of its successive consequences. These lists can assist in directing executives to make a decision on what functions of the company can be financially decreased or eliminated with a minimal impact to productivity (TechRepublic, 2003).

Organizations will find it necessary to recognize and return to their core competencies. This entails that the company begins to return to the basics of the company’s core mission. During flourishing economic times, companies have a tendency to investigate and expand into new services that may not provide added value to the company. A company may have lost its focus and have ventured out of the boundaries of its deep-seated core strengths. Functions that were previously attractive now may have developed into a hindrance to the potency of the company. All activities must be lined up with the strengths of the company. If these functions fail to meet requirements, they should be considered barriers to financial recovery (TechRepublic, 2003).

Outsourcing

An opportunity that companies can consider in order to reduce costs is to outsource certain activities. Outsourcing offers ways for companies to preserve functionality while saving on costs including labor expenditures. If a company already makes use of outsourcers, management may find it beneficial to evaluate their current contracts that are about to expire. Companies can take advantage of outsourcing companies that are also facing budget cutbacks that will aggressively compete for their business (TechRepublic, 2003).

Management must be aware of the advantages and disadvantages of outsourcing and decide if changing to outsourcing is best for the wellbeing of the company. Executives must effusively investigate the prospective service providers before making any commitments. Some contractors may not be able to deliver the cost savings that was anticipated. Some of the advantages of outsourcing include (ROK Connect Limited, 2003):

• Permits a business to focus on core activities
• Streamlines a business’ operations
• Gives access to professional resources that might be their specialty
• Shares the risk
• Confidence that the process is in excellent hands
• Removes the pressure in regards to continually developing new technologies
• Improves service quality
• Releases manpower to focus on other company functions
• Liberates cash flow
• Increases the control of the business
• Enables the business to be more flexible to changes in the demand of the market

The disadvantages to outsourcing are as follows (ROK Connect Limited, 2003):

• The fear of the service provider going out of business
• A company may lose control of the process
• Creates potential redundancies
• Competitors may also be using the service provider. As a result in some cases, the best interests of the service provider may be weakened with other clients
• A company may lose focus of the customer and give attention to the product, the outsourced process
• The loss of talent generated within the company because of dependence on the outsourced company
• Employees may react negatively to outsourcing and as a result their quality of work may suffer

Once management decides that outsourcing is the proper pathway to proceed, intense investigations of qualifying providers must be accomplished. They must discover the histories of the past and current clients of each prospect to gain references on their service quality. They must ensure that there are no hidden terms or costs associated with choosing them as a partner. Last but not least, they must make certain that the company has long term financial stability (ROK Connect Limited, 2003).

E-Learning and Employee Training

A frequent oversight performed by companies during budget constraints is to eliminate staff training. Training is crucial to growth of opportunities within the company. In lean times, training can help increase productivity and improve the overall morale of the company. While layoffs may be inevitable, the costs of replacing valuable staff is always much higher than retaining and training current staff. These core employees will help guide the company throughout hard economic times (Rueda, 2002).

Conventional employee training can be expensive and rather unattractive to management during budget restrictions. A trend in employee training that offers a low cost solution is E-Learning. E-Learning provides a cost effective opportunity for employees to become more efficient. Career education will enable employees to concentrate on their career paths and not on the financial predicament of the company. E-Learning can also assist in helping employees to become skilled at additional tasks that will be added to their duties during any restructuring that the company may have to endure. E-Learning is easily accessed by the employee and can turn them into a better performer to enhance the company’s overall effectiveness (Rueda, 2002).

Employee Downsizing

A manager my find themselves in the position where the downsizing of employees can not be avoided and becomes a causality of a reduced budget. Out of all the changes made to slash budgets, the downsizing of employees will have the most impact on the culture of the organization. Not only are the employees that are selected for layoffs affected by this change, survivors of the reductions may also have difficulty coping with this transformation. A company must carefully perform downsizing in a strategic fashion to limit any ramifications to the culture of the establishment (About, 2003a).

The objectives of downsizing employees are to increase productivity, quality, profitability, customer service and to reduce costs and wastes. The decision to layoff employees is not made lightly. However, once this assessment is made, managers must be conscious that their actions during this time can improve or erode the climate of the organization. If layoffs are instituted correctly, it can be possible to increase the chances that positive results can be achieved. There are simple but complex strategies that can be used to achieve these optimistic benchmarks (About, 2003a).

Some managers will withdraw from visibility throughout the layoff period. These managers may be planning for the future of the company or intentionally avoiding contact with employees’ altogether. The change that layoffs produce is a major event for a company to undergo. Management that does not make themselves visible to the survivors during these times will result in negative implications to the morale of the company (About, 2003a).

Layoff survivors need interaction with their supervisors on a daily basis. Leaders must be able to pay attention to employees that may express pain and sorrow. Leaders ought to appear strong and able to set the tone of the changes being undertaken to be positive to the company and to all the remaining employees. Employees should have confidence in their leaders or they may be suspicious of the intentions of management (About, 2003a).

In order to combat the negative impacts to company morale, climate and culture, management needs to reconstruct the work environment. Survivors must be able to have their self-esteem developed to find their work gratifying. Managers will discover that this is easier to accomplish if they keep the lines of communication open. For example, an executive can meet with employees and let them ask questions that they might have concerns with. Management can help the employees to visualize the new role and direction of the company. Company mission, vision and values can be reemphasized to keep employees focused on their responsibilities (About, 2003a).

Further attention can be given to each individual worker to enhance the success of changes due to employee reduction. Employees are keen on feeling secure and appreciated in the bounds of a company. A good supervisor will be capable to communicate the reasons why workers are valued to the company on a group basis as well as on an individual basis. Survivors ought to know their new individual responsibilities in the organization. Workers also will want to be aware of any new changes in the company that will affect their career path (About, 2003b).

Survivors also carefully watch how the company conducts the layoff process when employees are terminated. In order to maintain morale, survivors must see that the downsized employees are treated with dignity and respect. The practice of escorting people and their personal items out of the door using security officials or supervisors is not an effective way to make survivors feel affectionate about the organization. A more practical technique would be to conduct a meeting towards the end of the day when most of the workforce has left and divulge the dire news to the downsized workers. This would be followed up with a gesture by the supervisor to assist the individuals to gather their belongings. This may possibly present a less damaging impact to the culture of the company (About, 2003b).

Some companies also have found it successful to get in touch with the former employees several days after they depart the company in order to check up on them. This can soften any negative attitude that the laid off employees may carry against their former company. This would be especially beneficial if the ex-employee still maintains contact with current survivors of the company who may perhaps desire to discuss the experience on how the company deals with individuals during layoffs (About, 2003a).

A manager should be attentive of the fact that each employee may respond differently during change. Some employees may be able to accept and adjust to change easily. Others may have some difficulty when transformations occur. Generally people become better at accepting change with experience. However, it is wise not to downplay the potential reaction to change that an individual may bring to bear (About, 2003b).

Management must recognize that workers may need an avenue to communicate their grief and anxieties. Some people may be able to talk about the situation with supervisors and co-workers to vent. Others may suffer silently. There are some individuals that may express their concerns even if they support the changes. There are possibilities that some employees may try to undermine change efforts. The key for managers is to allow survivors a period of grief before any expectations of increased productivity are achieved (About, 2003b).

Managers, supervisors, leaders, human resource managers and change agents must be aware of these issues surrounding change and the potential resistance to change during employee downsizing. Managers must support employees in the company all the way through the heartaches of downsizing. An understanding of the normal progression of change during layoffs is essential. Most importantly, leaders should not expect an immediate return to total productivity (About, 2003b).

Employee Benefits

Employee benefits have been a growing financial burden for a company to continue to offer its workers. Some companies may mull over the proposal to trim down or do away with job benefits during nerve-racking economic times. Benefits are necessary to attract and retain highly qualified staff. This dilemma has resulted in some companies to find alternatives to reducing the costs of benefits but without pillaging the benefits package (Elswick, 2003).

One method of achieving these results is to establish higher co-payments for prescription drugs and office visits but counterbalance the additional cost by launching employee Flexible Spending Accounts (FSA) (Elswick, 2003). An additional way to save on health costs is to take advantage of a Health Reimbursement Arrangement (HRA) plan. HRAs offer unique advantages over Flexible Spending Accounts. With this, the employer can obtain a high-deductible PPO plan such as one with a $1,000, $2,000 or $3,000 individual deductible. Switching to a high-deductible plan has the capability to considerably reduce the group’s monthly health insurance premiums. With an HRA, the employer funds a percentage of the deductible even as the employee funds what’s left. The employer contribution is tax-deductible. Apart from the preliminary deductible funding, the health plan operates the same as normal (Spalt, 2003).

A concluding way for fully insured employers to save in redesigning their health plans, for all intents and purposes entails presenting employees with the choice of maintaining their existing level of benefits but shell out a higher contribution rate, or halt their contribution rate but accept a lower level of benefits. In-between options also may be introduced (Spalt, 2003). Introducing modest cost sharing such as these can have the same effect as cutting out complete features of your benefits plan, according to research published in the June issue of Health Affairs (Business Review, 2002).

Proactive Planning

The solution to restraining the effects to budget concerns is to be proactive to economic changes and not reactive to these fiscal fluctuations (Themba-Nixon & Vizeuta, 2003). Businesses can be affected by long term economic recessions and are also vulnerable to the business cycle of an industry. Business cycles are short term fluctuations of the collective economy around its long-run growth path. In order to prepare for the future that affects a companies financing, pricing, and employment strategies, it is necessary to recognize simultaneously how the business cycles and overall economic cycles impact the company (Spurge, 1997).

In order for an organization to be strong during hard economic times, a company is better off being geared up for change during prosperous financial times. A company that has built up cash reserves and has trained employees efficiently will help their positions in a slow economic environment. Those competitors who have not been prepared may be vulnerable to companies that have executed a well designed financial strategy (Themba-Nixon & Vizeuta, 2003).

Companies that prepare themselves for modest economic times may be able to use the situation to their advantage and open up opportunities to capture additional revenue. As the functions of competitors are deeply affected because of bad financial planning, well planned companies may be able to use their competitive strength to their advantage. Customers and clients will also be attracted to the stability and efficiency of the organization (Themba-Nixon & Vizeuta, 2003).

Jabil Circuit Case Analysis

Attempts to interview management at Jabil Circuit were unsuccessful. Therefore, a discussion on the effects of changes in a budget crisis in the company will be derived from personal experience of the author. Opinions of the author will be also included in the analysis.

Jabil Circuit is a company that specializes in the Global Manufacturing Industry. The company was established in 1966 in Detroit, Michigan and now is incorporated based out of St. Petersburg, Florida. Jabil has over 40 locations worldwide in 18 different countries.

During early 2000, the company did not have such a diverse global presence. One location in Auburn Hills, Michigan was responsible for generating 500 millions dollars of the three billion dollars generated annually worldwide. The Auburn Hills plants were viewed as the company’s top location, which was able to produce an outstanding 12% profit sharing bonus for all Auburn Hills employees. The Auburn Hills plants had contacts with Johnson Controls Incorporated, Lucent Technologies, Avaya Communication, Magellan, Motorola, LTX, Cereva, Phillips and Xedia Corporation. The company was flourishing with the success that the economy provided, especially in the internet telecommunications and automotive industries.

The plant could not hire fast enough to keep up with the employment demand. The company frequently brought in engineers by sponsoring workers from other countries such as Mexico and the Middle East to fill these positions. Raises for employees were generous and promotions were readily available for the taking. The company frequently threw parties for the employees to increase morale and to reward those who worked hard as a team effort for their high productivity.

Three years prior, in 1997, the company released half of its employees in the Auburn Hills plant. Survivors of that reduction would repeatedly enlighten workers how malicious and inconsiderate the company was with handling those layoffs. At this time, the plant was mostly comprised of recruits after the 1997 layoffs. For the reason that these new workers never experienced how the company handles employee reductions, and the thriving status of the company, these employees did not take these warnings seriously. The morale of the company was at its height, boasting 4000 employees in the Auburn Hills plants alone.

By the end of 2000, the telecommunications boom started to taper down and entered a period of decline. Avaya and Lucent began to reduce its orders for work. Jabil Circuit had amassed about two billions dollars in cash reserves in preparation for any short term economic crisis that may have surfaced. The company responded by reducing the budget, which place an end to most company sponsored events. Initially these changes had no impact on the culture of the company, the company simply stressed that we needed to be on a continuing pace for efficiency.

In March of 2001, the economy was fluctuating. Despite this, the employees on the Avaya work cell were treated to a fun time at Gameworks with all expenses paid for. This was a result of the work cell producing a record breaking quarter at 47 million dollars. The company then boasted about the 8% profitability of the plant despite the unsteady economy. This meeting later became to be known as the last supper.

The following week, Avaya announced that they were severely over stocked, and unable to move inventory. They did not anticipate any orders for Jabil for the next three months or longer. Jabil immediately responded by firing about 400 employees at the plant. There were no indications that the company was going to cut back on employees and the scene was ghastly. Towards the end of the shift, they separated the employees in two groups and asked one group to enter a room for a meeting. The others would remain on the floor for a separate meeting. They asked the employees to gather their personal belongings because they were going to get to go home early. They took the one group in a room that was full of security officials and informed them that they were immediately terminated. This was unexpected to everyone, knowing that they were just rewarded the week prior. When the door opened, access to the floor was blocked by an army of management and supervisors, only allowing a path to exit the building.

Survivors were deviated by the surprising news. An immediate distrust brewing across the plant toward the company was felt. Productivity started to dwindle and people were constantly in the dark, wonder what the company might do next. Workers were fearful of being unemployed without warning. Jabil had handled the termination of the 400 employees in the wrong manner. This set a negative impact and tone to the culture of the company. These bombshell layoffs were arbitrarily conducted until the middle of 2003, all using deceitful tactics. Each time, employees were increasingly worried about their jobs and not on productivity. Parallels were drawn to compare the company’s layoff tactics to being a solider in Vietnam. The scenario would be as if soldiers were being killed all around an individual, wondering when it would be their turn to get hit. Some workers wished that in the next round of layoffs, they would be terminated just to get it over with.

During the course of these layoffs, the company did not layoff a single foreign sponsored employee. This caused some resentment among the domestic workers. To make matters worse, Jabil used some of its two billion dollars in reserve to acquire plants all around the world. Jobs from the plant were quickly sent out to these newly formed locations. This further put the employees at odds with the company as people were laid off and their jobs were sent overseas.

Jabil Circuit is estimating revenue of 4.73 billions dollars for fiscal 2003. Financially, the company executed its change to the economic crisis with great success. Globalization of the company has brought on enormous change to the company. The impact to the culture of the company, particularly in Auburn Hills has been devastating.

Today, survivors still hold great distrust in the company. Many of them may leave the company as the economy continues to increase and opportunities at other companies are available. The remaining 600 survivors from the original 4000 employees in 2000 will have plenty of warnings for any future new hires within the company. If cutting a budget involves management to be deceitful to employees, they have failed to effectively manage change. However these intangible assets that include company culture and company morale do not appear evident on annual reports.

Conclusion

A company must approach budget cutting with careful strategic planning. This embraces the need for management to be knowledgeable on the assortment of options to be considered and the effects of each decision. The company should take into consideration the ramifications of the cultural characteristics of the company as well as financial impacts. Employees and customers will judge the company by the decisions made during these hard economic times.

References

About. (2003a). Downsizing survivors: Motivating the employees who remain after layoffs and downsizing. Retrieved November 9, 2003, from http://humanresources.about.com/library/weekly/nosearch/naa011401a.htm?once=true&
About. (2003b). Motivation and retention after layoffs and downsizing. Retrieved November 9, 2003, from http://humanresources.about.com/library/weekly/nosearch/naa012201a.htm?once=true&
Business Review. (2002, October). Employers say they would raise co-pays before reducing benefits. Retrieved November 18, 2003, from http://www.bizjournals.com/albany/stories/2002/10/21/daily11.html
Elswick, J. (2003). Employers strive for better health plans. Retrieved November 12, 2003, from http://www.careerjournal.com/hrcenter/benefitnews/20021125-bn.html
McGarahan, P. (2001, July). How to survive budget cuts and still function effectively. Retrieved November 2, 2003, from http://www.previo.com
ROK Connect Limited. (2003). The advantages and disadvantages of outsourcing in small business. Retrieved November 20, 2003, from http://www.bizhelp24.com/small_business/outsourcing-small-business-2.shtml
Rueda, M. (2002). Learning expert predicts e-learning will survive 2002 budget cuts. Retrieved November 5, 2003, from http://www.hptcorp.com/pdf/E-learning_Expert_Predictions.pdf
Spalt, D. (2003). Insurance assurance: New health insurance product helps control premiums. Retrieved November 14, 2003, from http://www.southernbusinessjournal.com/story.php?i=64&s=1
Spurge, L. (ed.). (1997). Knowledge exchange business encyclopedia illustrated. Santa Monica, CA: Knowledge Exchange.
TechRepublic. (2003). Develop a strategy before budget cuts hit. Retrieved November 5, 2003, from http://techrepublic.com.com/5102-6314-1039060.html
Themba-Nixon, M. & Vizeuta, M. (2003). Fighting back on budget cuts. Retrieved November 15, 2003, from http://www.thepraxisproject.org

The post Enduring Financial Change in a Declining Economy appeared first on Michael A. Hartmann.

Introduction

Global trade expansion has been the goal of societies since the beginning of the concept of trade.  Over the years, trade around the world has been restricted by political barriers, inadequate industrial technology, transportation expenses and long intervals.  There have been communication deficiencies and the deficiency of global management awareness.

As the world enters the 21st century, these boundaries have rapidly begun to dissolve.  Trade agreements between countries are actively being written to reduce political constraints to commerce.   Technology enables manufactures to produce masses of durable products that can be transported around the world.  Products can now be delivered around the world in hours or days instead of months or years.  Communication is now virtually instantaneous as a business can be in constant touch with its affiliates.  Finally, companies throughout the world are gaining knowledge on how to be successful in the new global market.  Managers must be equipped to compete in the global economy or risk domestic market presence against global companies out of the country.  A fundamental symposium on the fundamentals of global management will be presented.

The Global Concept

Overview

The term “Global Marketing” was first created in 1983 with the publication of “The Globalization of Markets” in the Harvard Business Review written by Ted Levitt.  Previous to this time, the terms international or multinational marketing were used to illustrate trade between nations.  Global marketing is often misunderstood to be completely indistinguishable with international marketing.  However, global marketing is used to depict a new phenomenon.  The global marketing concept can be distinguished from other similar terms by studying the history of international trade terminology.  In order to tell between the definitions of global marketing from other terms, a global strategic manager must recognize these differences (Jeannet and Hennessey, 2002).

Domestic Marketing

Domestic marketing gives attention to a company’s efforts exclusively at its own national market.  Although the company decides to market a specified product domestically, they may also choose to expand across many fragments within their individual market.  Management using domestic marketing strategies may be selecting to market domestically for the reason that of a local advantage or because they have a limited merchandise line that would not be viably marketed outside of their home country (Jeannet and Hennessey, 2002).

Export Marketing

Export marketing is when a firm makes a decision to embark on to ship, or export their products outside their domestic borders.  The company’s particular product may be in demand by distributors in another country that will result in a call for exportation.  A company may also come to a decision to penetrate another country’s market by exporting by-products that can not be manufactured without problems in the intended country.  The exporting manufacturer has to meticulously price their products to remain profitable but yet persist to be competitive.  Shipping expenditures and import charges at the destination country are a few of the expenses coupled with exporting.  Government policies in both countries have got to be taken into concern as well as strategic financial requisites with the importers (Jeannet and Hennessey, 2002).

International Marketing

International marketing is when a company moves beyond the extent of exporting and becomes more concerned with the local marketing environment in the importing country.  International marketers are to be expected to have their own sales subsidiaries that will concentrate on marketing tactics in the importing country.  International marketing will bring about the need to develop exclusively distinct marketing strategies for each market.  Companies would have to include local cultural and environmental in consideration in order to successfully develop their products (Jeannet and Hennessey, 2002).

Multinational Marketing

Multinational marketing is where a company to a large extent expands subsidiary assets in a quantity of foreign countries as if the developed establishments were local companies.  The company produces a multi-domestic strategy where each subsidiary contends with the specific marketing tactics in their individual local markets.  This has the advantage of making the local companies to materialize as a local company instead of a foreign operated company (Jeannet and Hennessey, 2002).

Horizontal integration involves the subsidiary companies not only to market the product locally, but to also locally construct the product or service.  This approach removes the requirement to have the product imported from outside the subsidiaries nation.  This circumvents the expenditures of transporting the product from country to country and any associated tariffs and boundaries that may apply.  Subsidiaries may perhaps be directed by the parent country but may be operated independently (Jeannet and Hennessey, 2002).

Pan-Regional Marketing

Pan-regional marketing is where a group of nations structure a trade agreement that gets rid of tariffs and other trade barriers inside the group (Jeannet and Hennessey, 2002).  Launched in 1994, the North American Free Trade Agreement (NAFTA) is an illustration of a pan-regional marketing region.  The NAFTA agreement consists of the United States of America, Mexico and Canada (Spurge, 1997).  Many companies in the United States have been forced to modify their multi-domestic strategies to take advantage of the benefits involved in NAFTA (Jeannet and Hennessey, 2002).  Regionalism has become a trend that has become more common in the global market.  This allows a company to compete in a regional market rather than to jump right into the global arena (Hitt, Ireland, & Hoskisson, 2003).

Global Marketing

A global marketing strategy entails the formation of a single strategy for a product, service, or company for the global market.  This differs with the multi-international marketing models that generate separate strategies for every country.  A Strategic Manager will must possess a far-reaching awareness of multi-national marketing to develop a successful single global marketing plan.  Although a single strategy is created, global marketing may necessitate some local customizing (Jeannet and Hennessey, 2002).

Virtual Nations

Before a company seeks out a country to establish operations in, they must understand crucial international economic specifics.  Certain nations are more economically feasible to the company depending on its necessities.  When nations share mutually beneficial assets, they are referred to as virtual nations.  If the quickly up-and-coming global economic world were depicted as a human body, the intermediary virtual nations form the head of the body; the body virtual nations shape the torso, while the full virtualization countries shape the hands, arms, legs, and feet (Williams, 2003).

Partially virtualized nations that shape the head of the global economic body are the economically superior nations such as Britain, the United States, Germany, and France which put emphasis on service exports but hang on to some manufacturing endeavors that is innovation oriented. The virtual feature of these nations comes by way of mergers, foreign direct investment and joint venture alliances. These are the countries that set off and develop virtual companies and develop virtual nations by means of free trade agreements (Williams, 2003).

Full virtualized nations are the external parts such as the arms, hands, legs and feet of the global economic body.  These consist of manufacturing-focused nations such as Singapore that carry out approximately all of their manufacturing in adjacent nations with a lower standard of living in places like Indonesia, China and Malaysia. These nations have the greatest nationalistic reliance on trade (Williams, 2003).

Body virtual nations, the torso of the global economic body are nations that use their large labor supply and low wages to manufacture most of the world’s low technology products.  These are China, India, Cambodia, Latin America, Burma, and so forth. These nations must swiftly inflate their capital infrastructure and maintain currencies at a low level to make their exports inexpensive to consumers in foreign markets. These are the nations that rely most on virtual companies (Williams, 2003).

Nations must perform their part in the global economy body.  If each country performs their respective functions, the body will operate at a healthy pace.  The responsibilities of each country or industry are as follows (Williams, 2003).

• High technology nations: Such as The United States, Japan, Germany, the majority of Western Europe. These nations must stand out at invention, innovation and marketing.
• Low technology, labor intensive nations: For example Mexico, Indonesia, India, and Malaysia.  These nations offer a hefty, inexpensive labor supply, a determined work ethic, and rising consumerism.
• Innovative, entrepreneurial, specialized companies with high growth/risk-taking potential: The United States. The U.S. has had to globally farm out its production.
• Economies of scale manufacturing: Countries like Japan, Korea, and Germany. These companies supply the world in large size corporations.
• Outsourced manufacturing: The United States, and Western Europe. These nations lead the world in foreign direct investment.
• National industrial planning: Japan, Hong Kong, Singapore, Taiwan, South Korea, and India. These nations stand out in strong nationalism, one-party politics, and undetectable protectionism.
• Laissez faire government policy: The United States, Britain and Canada. These nations do extremely well in having strong institutions and currencies.
• Nations with a core of small, private companies: Italy, China. These social structures of these nations are put together around the extended family.
• Nations with a dominance of large, public corporations: Japan, Korea, and Scandinavia. These nations toil in the sphere of innovation and private entrepreneurship.
• Diversified or integrated conglomerates: Korea, China. These nations will endure future problems of privatizing these incompetent, noncompetitive conglomerates.

Entering the Global Industry

After a company has selected an attractive country in which to carry out business activities in, the company must develop an entry strategy that is tailored for that country.  A successful entry strategy can produce a successful financial return.  In contrast, results could be devastating if the incorrect entry is employed or if it is executed improperly (Jeannet and Hennessey, 2002).

There is various global entry strategies that a company can make use of.  Each strategy holds its own set of advantages and disadvantages.  A global manager must recognize the various global entry opportunities on hand along with their pros and cons and consequently select the proper strategy with unmistakable precision (Jeannet and Hennessey, 2002).

Exporting

The favorable entry strategy for most globally minded companies is to export.  Exporting is where a company manufactures a product outside the intended destination country and then transports it there for sale.  This strategy may be selected if the company does not wish to invest in manufacturing operations in the host country.  The company may also elect to initially export to use it to learn the characteristics and nature of the market and economy before making any major investments (Peter and Donnelly, 2001).  A company may also have concluded that the country does not have a considerable enough market to justify local production strategies.  A company that desires to export may export indirectly or directly (Jeannet and Hennessey, 2002).

A business that is new or inefficient to exporting may choose to indirectly export their products.  Indirect exporting uses a domestic intermediary such as a broker, combination export manager, or a manufacturer’s export agent.  These intermediaries readily provide the company with the expertise they need to be successful in that country (Jeannet and Hennessey, 2002).

Company’s that may have had previously been successfully with exporting strategies and do not require the services of an intermediary may decide to directly export to the country.  This requires the exporter to have a vast knowledge of the local economy and be able to communicate with a large number of foreign contacts.  The company will need to establish a relationship with local distributors and merchants in order to open a distribution channel within the country.  Local distributors will sell their products and may be in the form of independent distributors or sales subsidiaries such as car dealerships (Jeannet and Hennessey, 2002).

There are disadvantages of using exporting as an entry strategy.  The process of exporting may be more costly and timely than expected.  The cost of import duties and other trade barriers to the target country may fluctuate unexpectedly.  Foreign agents may not be dependable and dedicated to the exporter (Peter and Donnelly, 2001).

Licensing

Licensing is a contractual agreement where the licensor’s patents, trademarks, service marks, copyrights, trade secrets, or other intellectual assets may be purchased or made accessible to a licensee for a certain fee that is agreed upon in advance among the parties. These fees are sometimes called royalties may be a lump sum royalty, a running royalty that is rated on volume of production, or a mixture of both. Companies from the United States commonly license their technology to foreign companies that then use it to produce and market products in a country or collection of countries spelled out in the licensing agreement (Peter and Donnelly, 2001).  Licensees are in effect for explicit time periods.  These time periods are dependant on the investment made by the licensee (Jeannet and Hennessey, 2002).

A licensing contract generally allows a firm to enter a foreign market swiftly, and causes fewer financial and legal consequences than owning and operating a foreign production plant or partaking in a foreign joint venture. Licensing also allows companies from the United States to avoid many of the tariff and non-tariff barriers that recurrently get in the way of the exporting of manufactured products. Licensing can be an exceptionally appealing method of exporting for small firms or firms with modest global trade understanding.  Licensing can also be exercised to purchase foreign technology for example, cross-licensing agreements or grant back clauses giving privileges to improved technology developed by a licensee (Hitt, Ireland, & Hoskisson, 2003).

Licensing has undeniable possible downsides. One negative characteristic of licensing is that control over the technology is undermined because it has been passed on to an unaffiliated company. Also, licensing usually yields less profit than exporting actual products or services. In a number of developing countries, there also may be troubles in effectively protecting the licensed technology from unlawful use by third parties (Hitt, Ireland, & Hoskisson, 2003).  Quality issues may become a concern that would damage the company’s reputation. Another disadvantage is that a licensee may become a feasible competitor upon the termination of the license.  The likelihood can be increased if the licensee grows to be efficient with the technology and techniques that was licensed to them (Peter and Donnelly, 2001).

Franchising

Another choice comparable to licensing is acknowledged as franchising.   In franchising, is what happens when an original company, the franchisor, permits rights to a third party, the franchisee, to run its business using the same brand, products, services, promotions and management systems. Franchising can involve an assortment of businesses from fast food restaurants to hotel accommodations (Hitt, Ireland, & Hoskisson, 2003).  In global franchising, the franchiser is the international company that provides a complete marketing system to the franchisee, or the foreign firm.  The franchiser supplies to the franchisee the necessary benefits such as use of logo, brand name, products, and processes as prescribed by the global company (Jeannet and Hennessey, 2002).

The franchisor is the owner of the business system and any brands and trademarks. Franchisors allow their franchisees to use these under license in a designated area. They provide support for them in starting their business, and in running, promoting and developing it (Hitt, Ireland, & Hoskisson, 2003).   The franchiser supplies the necessary tools such as use of logo, brand name, products, and processes as arranged by the global company (Jeannet and Hennessey, 2002).

Franchisees own and operate each outlet within a franchise system. They purchase the rights to run the business using its recognized brands and trading schemes. Franchisees remain self-employed and own the distinct outlet but must operate the business according to procedures arranged in the franchise agreement. They pay for the owner’s help in the means of national promotion, training, organizational services and constant product and system development. Payments can be a set fee, or connected to turnover, or a mixture of both (Hitt, Ireland, & Hoskisson, 2003).

Acquisitions

Another principal manner of global entry is expanding by acquisitions of resources in a foreign country.  This can be identified as local manufacturing.  Local manufacturing is where a company chooses to produce the product locally under its own ownership and control.  There are three established levels of local manufacturing that management must recognize.  There are contract manufacturing, assembly production and full scale integrated production (Jeannet and Hennessey, 2002).

Contract manufacturing is illustrated as a company that positions itself to have their products manufactured by a local company by contractual agreements.  The global company leases manufacturing capacity from the target company.  The local company manufactures the product as the global company issues production orders (Jeannet and Hennessey, 2002).

Assembly production is where a worldwide company manufacturers a segment of the product in the target country.  This is characteristically during the final stages of production where labor is usually intense.  Excessive labor costs can be evaded if the sourced country is in a labor intensive country (Jeannet and Hennessey, 2002).

Not only does this approach steer clear of an extensive capital investment in the target nation, it also circumvents any trade barriers as well.  The shortcomings of assembly production are that supply disruptions can transpire from imported components.  The company would have to have a precise inventory process to keep away from delays in production (Jeannet and Hennessey, 2002).

Full scale integrated production is an entirely set up local production entity.  This represents the greatest obligation a company can put together for a foreign investment.  Full scale integrated production may be selected to take advantage of lower production expenses in the foreign nation in order to be viable in the local market (Jeannet and Hennessey, 2002).

Acquisitions provide quick access to new markets.  However, these purchases are often more complex than acquiring resources domestically.  Political and cultural factors may produce problems of merging with domestic operation.  Additionally, this strategy is high cost solution to expanding to foreign markets (Hitt, Ireland, & Hoskisson, 2003).

Greenfield Ventures

A greenfield venture is a step beyond purchasing acquisitions in foreign country.  This process requires building a new, wholly-owned subsidiary in foreign country.  This is especially complex and often very costly.  Greenfield ventures are time consuming and are subject to high risks.  However, maximum control of business operations is obtains and carries a potential for above-average returns.

Joint Ventures

A joint venture is a contractual arrangement joining together two or more organizations for the intention of accomplishing a certain business activity. All organizations agree to share in the profits and losses of the enterprise. In the global aspect, joint ventures are where a company decides to share management with one or more foreign firms (Peter and Donnelly, 2001).  Joint ventures can only be prosperous if all partners have the same goals (Jeannet and Hennessey, 2002).

Joint ventures and partnerships share many characteristics. In a partnership, each respective partner has equivalent capacity to legally coerce the entire partnership. A partner can embody the entire organization in the normal course of business, and their legal proceedings on behalf of the partnership to create legal obligations (Peter and Donnelly, 2001).

Although it is legal to restrict the strength of individual partners through a partnership or joint venture contract, those agreements do not bind the balance of the world. Given that businesspeople outside of the partnership have no understanding of the restrictions, they are at liberty to rely on the perceptible authority of an individual partner as established by the natural course of dealing or customs in the industry.  Individual members of a partnership or joint venture may deal with liability for the dealings of the partnership or the joint venture. However, new limited liability partnership laws and corporate structure choices for joint ventures may trim down this possibility (Peter and Donnelly, 2001).

Strategic Alliances

Strategic alliances are comparable to joint ventures but differ in that in strategic alliances, the firms combine their resources together that goes further than the confines of joint ventures. Characteristically they may share a mixture of distribution access, product knowledge or technology transfers (Jeannet and Hennessey, 2002).

In order for a strategic alliance to be successful, the company must understand the competitive conditions, legal and social standards of the nation.  The global company must be aware of the core competencies of the company as well as their weakness.  Good partners with a common vision will be mutually beneficial to each other.  All parties must be sensitive to cultural differences.  They must be able to deliver their promises and be flexible in the case that the alliance agreement needs to be adjusted over time to fit new conditions (Hitt, Ireland, & Hoskisson, 2003).

Keys to Success

Managers should look at the world as being a single market.  They must make global-minded decisions on strategic questions about technology, products, and capital. Global sourcing involves optimizing resources on a global scale, sales synergy, and the mastery of virtual joint ventures.  However, make local-minded market decisions in packaging, marketing, advertising, and management.  Managers must grant local management additional freedom for marketing and human resources.  They should try to avoid in micromanaging global operations from headquarters.  Companies ought to develop multicultural dexterity within the establishment to react to new or shifting workforces and consumers. This includes the following (VanAuken, 2001):

• Culturally-mixed work teams
• Significant local ownership
• Catering to cultural lifestyles
• Non-ethnocentric managers

Additionally, managers must establish a relationship between local managers, employees, venders, distributors, and customers.  This includes adversarial in opposition to cooperative business connections with supply chain partners including suppliers, distributors, wholesalers, retailers, and so forth. This entails outsourced manufacturing, global sourcing, global distribution, and technology pooling.  The company should develop a virtual business made up of mutually supporting supply chain partners (VanAuken, 2001).

Measuring Performance in a Global Organization

Some corporations become global in structure and operate with intensification over time. Some are naturally global from the beginning. This bestows some fascinating challenges for managers and executives who find it essential to evaluate performance and formulate decisions on those evaluations. Methods and tools can be used to provide tremendous guidance to assist managers in evaluating performance (Williams, 2003).

Performance evaluation is the periodic appraisal of operations to make certain that the objectives of the company are achieved. A corporation’s performance assessment practice is part of its financial control structure. In other words, the Global Organization must control and utilize accounting information to appraise domestic and foreign operations.  Measuring performance of a Global Organization consequently must be achieved through the use of corporate information systems. Because of the potential impact of mistakes in performance evaluation, corporations should be flexible in their methodology when instituting the regulations and practices. Utilizing corporate information systems to appraise foreign and domestic operations is a limited procedure, but, because of foreign exchange rate fluctuations, appraising foreign operations is yet much further inferior. A manager must recognize the companies’ consolidation procedures and how they render the financial statements of their foreign operations. If management is to use the parent company’s currency for financial measures, then the manager must also be aware of the environment fine distinctions that each subsidiary functions within (Williams, 2003).

The primary tool for evaluating performance and management control ought to be the corporate information system.  These systems are not just used solely used by controllers, but are used increasingly more by managers throughout the organization.  These systems make accessible the information needed to plan, control, evaluate and synchronize all business activities.  The development of accounting information systems is exceptionally vital to the success of any company, particularly a transnational or global company.  There are several design features for information systems, but at a high priority and most important among them, they must be easily shared, transferred and updated between the parent and its subsidiaries (Williams, 2003).

Given that accounting information requirements differ among countries, cultures, senior management and individual country management, the only feasible methodology to existing consolidated information is through these information systems.  Foreign subsidiaries should not be required to use the identical system as the parent company.  Since these systems present the means to compare or model an assortment of financial statements and reports using distinctive accounting tactics to account for economic, political environments, legal constraints, and also sociological distinctions in the country of operation.  Consequently, they must be designed or modified to accommodate to each other.  The organizational form needs to be fully understood in order to get a clearer representation of the information flows.  Although flow may vary, the information itself does not.  Whatever the case may be, information about foreign operations is assembled, processed, integrated and reported to the parent companies systems (Williams, 2003).

Foreign subsidiaries have got to be appraised on their performance as a supplier, as well as how much after tax revenue in dollars they have produced.  Foreign subsidiaries may not necessarily be or possibly shouldn’t be appraised on after tax dollars as their principal objective.  This assessment can be accomplished by means of information flow and reporting through the parent and subsidiary information systems (Williams, 2003).

Foreign subsidiary financial reporting in their domestic currency may offer a more meaningful representation of their activities.  Global Corporations should instruct their managers and directors to become familiar with the foreign currencies operating results in addition to their own currency information.  This would decrease the burden on the information systems in anticipation of such time as they can be incorporated, adapted or replaced.  Integrating systems on this scale, although technologically viable, is not quick and trouble-free. However, the education for management could be a refreshing revelation (Williams, 2003).

In addition to financial performance measurement in a Global Corporation, the mind-set of senior management toward the various business subsidiaries is very significant.  Their attitude should be to narrow in on worldwide objectives and regard their foreign subsidiaries as part of the whole.  This means that senior management must set up standards for evaluation and control that are not only universal, but local as well.  The structure needs to assist global decision synchronization, while responding to host governments and consumers.  Finally, assessing the performance across the corporation becomes more multifaceted, but much more vital in a global organization (Williams, 2003).

Using Information Technology to Assist in a Global Organization

Information technology (IT) can convey a company en route for globalization in a variety of means.  By the means of computer and communications technologies, companies can obtain the information components from tangible products, or substitute knowledge for data, and then instantaneously transfer the electronic information or data all over the planet.  Substance can be added or an information-based product can be used at the most economically beneficial location.  The time delays, high overheads, and lack of customer responsiveness associated with transportation, reproduction, and inventory can be reduced or even eradicate.  This instantaneous world reach generates major transformations in order management, manufacturing, and marketing cycles (Williams, 2003).

Conclusion

In the new global economy, domestic companies may be negatively affected because they ignored the concepts of global management.  As barriers are removed, the world markets will become progressively more globalized.   Not only is it important to learn the concepts of global management for protect a business from foreign companies, in the modern economy, a company will never reach its phoenix without expanding its services into the global market.  Strategic managers that fall short of being educated in global management concepts will discover themselves defenseless to those corporations that have mastered this expertise.

References

Carbaugh, R.J. (2002). International economics (8th ed.).  Cincinnati, OH: South-Western Thomas Learning.
Jeannet, J. & Hennessey, H. D. (2001). Global Marketing Strategies (5th ed.).  Boston: Houghton Mifflin Company.
Hitt, M. A., Ireland, H. R. & Hoskisson, R.E. (2003). Strategic management: Competitiveness and globalization (5th Ed.).  Cincinnati, OH: South-Western Thomas Learning.
Kreinin, M.E. (2002). International economics: A policy approach (9th ed.).  Cincinnati, OH: South-Western Thomas Learning.
Peter, J. P. & Donnelly, J. H. (2001). Marketing management: Knowledge and skills (6th Ed.).  Boston: Irwin McGraw-Hill.
Spurge, L. (ed.). (1997). Knowledge exchange business encyclopedia illustrated.  Santa Monica, CA: Knowledge Exchange.
VanAuken, P. (2001).  International Business Strategy.  Retrieved December 5, 2003, from http://business.baylor.edu/Phil_VanAuken//strcon.htm
Williams, J. F. (2003).  Strategy Driver for International or Global Business.  Retrieved December 6, 2003, from http://www.ravenwerks.com/global/global1.htm

The post Managing Global Expansion appeared first on Michael A. Hartmann.

Introduction

The globalization of markets is one of the major forces impacting companies worldwide.  As the world progresses toward global economic trade, companies seek opportunities to expand their presence around the world.  Strategic Managers must gain knowledge of global marketing strategies in the event that their company elects to enter the global market.  Marketers must also be prepared to educate themselves on the transition from domestic to global marketing to protect themselves from global companies abroad.  A presentation on the fundamentals of global marketing management will be discussed.

Understanding Global Marketing

Overview

The term “Global Marketing” was coined in 1983 with the publication of “The Globalization of Markets” in the Harvard Business Review written by Ted Levitt.  Prior to this time, the terms international or multinational marketing were used to describe trade between nations.  Global marketing is often misinterpreted to be completely identical with international marketing.  However, global marketing is used to describe a new phenomenon.  The global marketing concept can be distinguished from other analogous terms by examining the history of international exchange terms.  In order to differentiate the scope of global marketing from other terms, a global strategic manager must understand these differences (Jeannet and Hennessey, 2002).

Domestic Marketing

Domestic marketing concentrates a company’s efforts solely at its own national market.  Although the company management decides to market a given product domestically, they may also choose to span across many segments within their particular market.  Management using domestic marketing strategies may be choosing to market domestically because of a local advantage or because they have a limited product line that would not be feasibly promoted outside of their home territory (Jeannet and Hennessey, 2002).

Export Marketing

Export marketing is when a firm decides to venture out and ship, or export their products beyond their domestic borders.  The company’s specific product may be in demand by distributors in a different country that will cause a need for exportation.  A company may also decide to enter another countries market by exporting byproducts that can not be produced easily in the target country.  The exporting firm must carefully price their products to remain profitable but yet continue to be competitive.  Shipping costs and import fees at the destination country are some of the costs associated with exporting.  Government regulations in both countries must be taken into consideration as well as strategic financing terms with the importers (Jeannet and Hennessey, 2002).

International Marketing

International marketing is when a company moves beyond the extent of exporting and becomes more concerned with the local marketing environment in the importing country.  International marketers are to be expected to have their own sales subsidiaries that will concentrate on marketing tactics in the importing country.  International marketing will bring about the need to develop exclusively distinct marketing strategies for each market.  Companies would have to include local cultural and environmental in consideration in order to successfully develop their products (Jeannet and Hennessey, 2002).

Multinational Marketing

Multinational marketing is where a company extensively develops subsidiary assets in a number of foreign countries as if the developed firms were local companies.  The company creates a multi-domestic strategy where each subsidiary competes with unique marketing tactics in their respective local markets.  This has the advantage of making the local companies to appear as a local company instead of a foreign based company (Jeannet and Hennessey, 2002).

Horizontal integration involves the subsidiary companies not only to market the product locally, but to also locally produce the product or service.  This approach eliminates the need to have the product imported from outside the subsidiaries country.  This avoids the costs of shipping the product from country to country and any associated tariffs and restrictions that might apply.  Subsidiaries may be governed by the parent country but may be operated independently (Jeannet and Hennessey, 2002).

Pan-Regional Marketing

Pan-regional marketing is where a group of nations form a trade agreement that eliminates tariffs and other trade barriers within the group (Jeannet and Hennessey, 2002).  Effective in 1994, the North American Free Trade Agreement (NAFTA) is an example of a pan-regional marketing area.  The NAFTA agreement includes the United States of America, Mexico and Canada (Spurge, 1997).  Many firms in the United States have been forced to alter their multi-domestic strategies to take advantage of the benefits entailed in NAFTA (Jeannet and Hennessey, 2002).

Global Marketing

A global marketing strategy involves the creation of a single strategy for a product, service, or company for the global market.  This contrasts with the multi-international marketing concepts that create separate strategies for each country.  A Strategic Manager will need to have an extensive knowledge of multi-national marketing to produce a successful single global marketing plan.  Although a single strategy is developed, global marketing may require some local tailoring (Jeannet and Hennessey, 2002).

Selecting Potential Markets

The world marketplace is vast and complicated.  A company choosing enter the global market must thoroughly appraise the entire world market on a repeated basis.  A global company must evaluate and screen countries to determine if that country is feasible to market in (Jeannet and Hennessey, 2002).

Advanced nations, such as the United States, Canada, United Kingdom and Japan can be analyzed for profitability to using fairly stable indicators associated with that country.  Marketing strategies can be developed with reasonably long term plans.  Developing nations that may be located in areas like Africa and the Middle East may involve much greater risks and foster unstable and undesirable markets (Carbaugh, 2002).

In order to identify nations favorable to market in, global managers must screen out countries that would not produce profitable results.  There are four stages that global marketers use to screen and identify promising markets (Jeannet and Hennessey, 2002).  They are as follows:

• The first stage is for a company to use macrovariables associated within a given country to determine if the country is marketable.  Macrovariables describe the entire market using statistics or indicators that contain economic, social, geographic, and political aspects.  This can indicate if a country is large enough economically to be marketed.  This process may indicate that a country may not maintain a high enough per household income to purchase certain products.    Political instability can be a motivating factor in which to screen and identify a disadvantageous market (Jeannet and Hennessey, 2002).
• In the second stage, variables are utilized to capture the potential market size.  Additionally, the analysis must take into consideration if a product will be accepted into the local market.  A company that retails hockey equipment would have to avoid using resources to market their products in warm climates where no indoor hockey rinks are available (Jeannet and Hennessey, 2002).
• The third stage of this screening process is attentive on the local market conditions in the proposed country.  Concerns such as local competition, ease of entry, cost of import and profit potential come into examination.  It is crucial that the company uses comprehensive and the latest information possible for this stage (Jeannet and Hennessey, 2002).
• The fourth and final stage of the screening process is to perform an evaluation and generate a ranking system of the potential target countries.  These rankings are based on corporate resources, objectives and strategies.   One country may be given a higher priority than another country due to one possessing a higher market aptitude for profitability (Jeannet and Hennessey, 2002).

It is important for a successful company to perform continuing market screenings.  Political and economic events can abruptly raise a nations potential for marketing prosperity, therefore raising its priority.  In the same respect, a country may become less desirable and risky in response to negative economic or political events.  A global company must always be aware of such events and be ready to position themselves as opportunities arise or new risks are identified (Jeannet and Hennessey, 2002).

Global Market Entry Strategy

After a company has selected a desirable country in which to perform marketing activities in, the company must develop an entry strategy that is customized for that country.  A successful entry strategy can produce a flourishing financial return.  In contrast, results could be disastrous if the wrong entry is utilized or executed improperly (Jeannet and Hennessey, 2002).

There are two major categories of global entry strategies that a company can engage in.  They can use exporting strategies or foreign production strategies.  Each strategy contains its own set of benefits and risks.  A global manager must understand the various global entry options available along with their advantages and disadvantages and therefore select the correct strategy with paramount precision (Jeannet and Hennessey, 2002).

Exporting

The favorable entry strategy for most globally minded companies is to export.  Exporting is where a company manufactures a product outside the intended destination country and then transports it there for sale.  This strategy may be selected if the company does not wish to invest in manufacturing operations in the host country.  The company may also elect to initially export to use it to learn the characteristics and nature of the market and economy before making any major investments (Peter and Donnelly, 2001).  A company may also have concluded that the country does not have a considerable enough market to justify local production strategies.  A company that desires to export may export indirectly or directly (Jeannet and Hennessey, 2002).

A business that is new or inefficient to exporting may choose to indirectly export their products.  Indirect exporting uses a domestic intermediary such as a broker, combination export manager, or a manufacturer’s export agent.  These intermediaries readily provide the company with the expertise they need to be successful in that country (Jeannet and Hennessey, 2002).

Company’s that may have had previously been successfully with exporting strategies and do not require the services of an intermediary may decide to directly export to the country.  This requires the exporter to have a vast knowledge of the local economy and be able to communicate with a large number of foreign contacts.  The company will need to establish a relationship with local distributors and merchants in order to open a distribution channel within the country.  Local distributors will sell their products and may be in the form of independent distributors or sales subsidiaries such as car dealerships (Jeannet and Hennessey, 2002).

There are disadvantages of using exporting as an entry strategy.  The process of exporting may be more costly and timely than expected.  The cost of import duties and other trade barriers to the target country may fluctuate unexpectedly.  Foreign agents may not be dependable and dedicated to the exporter (Peter and Donnelly, 2001).

Foreign Production

A global company that aspires to make a stronger commitment than exporting may decide that it wants a product or service to be produced locally in that country.  Producing a product in a foreign country to sell locally is referred to as foreign production.  Foreign production has a number of different strategies to choose from.  These strategies include licensing, franchising, and local manufacturing.  Global strategic managers will select the foreign production method based on the company’s resources and the length and depth of commitment in the foreign country (Jeannet and Hennessey, 2002).

Licensing arises when a company permits the usage of patent rights, trademark rights and/or technological processes to foreign companies (Peter and Donnelly, 2001).  Licensees are in effect for specific time periods.  These time periods are dependant on the investment made by the foreign company (Jeannet and Hennessey, 2002).

Licensing can generate advantages to the company who issues the licenses.  The company does not need to use a large investment in assets or managerial staff to start production. The licensee may have a competent team already in place and provide a quick production start.   Finally, the licensee has the responsibility of dealing with all local and political risks (Jeannet and Hennessey, 2002).

There are various disadvantages of licensing for a global company also.  The company does not have much control over operations within a licensed foreign company.  Quality issues may become a concern that would damage the company’s reputation (Peter and Donnelly, 2001).  Another disadvantage is that a licensee may become a viable competitor upon expiration of the license.  The possibility can be intensified if the licensee becomes efficient with the technology and processes that was licensed to them.

Another option similar to licensing is identified as franchising.   In franchising, the franchiser is the international company that provides an entire marketing scheme to the franchisee, or the foreign firm.  The franchiser supplies to the franchisee the necessary benefits such as use of logo, brand name, products, and processes as prescribed by the global company (Jeannet and Hennessey, 2002).

Franchising further separates itself from licensing by requiring the foreign company to agree to conduct operations under strict procedures.  Franchisers may require a lump sum and a share of all future profits.  This strategy has been highly successful in the fast food industry (Peter and Donnelly, 2001).

The last major form of foreign production is dubbed local manufacturing.  Local manufacturing is where a company elects to produce the product locally under ownership of the global company.  There are three prevalent levels of local manufacturing that a global marketer must understand.  There are contract manufacturing, assembly production and full scale integrated production (Jeannet and Hennessey, 2002).

Contract manufacturing is described as a company that arranges to have products manufactured by a local company on a contractual basis.  The global company leases production capacity from the local firm.  The local firm produces the product as the global company issues production orders (Jeannet and Hennessey, 2002).  A good example of a contract manufacturing company is found in Jabil Circuit.  The company provides the worldwide manufacture of electronics products (Jabil, 2003).

Assembly production is where an international company manufacturers a portion of the product in the destination country.  This is typically during the final stages of production where labor is traditionally heavy.  High labor costs can be avoided if the destination is in a labor intensive country (Jeannet and Hennessey, 2002).

Not only does this strategy avoid an extensive capital investment in the ensuing country, it also avoids any trade barriers as well.  The downside of assembly operations is that supply interruptions can occur from imported parts.  The company would have to have a successful inventory operation to avoid delays in manufacturing (Jeannet and Hennessey, 2002).

Full scale integrated production is a fully established local production unit.  This represents the greatest commitment a company can make for a foreign market.  Full scale integrated production may be chosen to take advantage of lower production costs in the foreign country in order to remain competitive in the local market (Jeannet and Hennessey, 2002).

A corporation that elects to engage in assembly or full scale integrated production will also need to establish ownership in the selected foreign market.  A global manager must also be aware of the various options of ownership that are available.  A company can fulfill ownership in any of the one following ways (Jeannet and Hennessey, 2002).

• Joint ventures are where a company resolves to share management with one or more foreign firms (Peter and Donnelly, 2001).  Joint ventures can only be successful if all partners have the same goals (Jeannet and Hennessey, 2002).
• Strategic alliances are similar to joint ventures but differ in that in strategic alliances, the firms pool their resources together that goes beyond the limits of joint ventures. Typically they may share a combination of sharing distribution access, product technology or technology transfers (Jeannet and Hennessey, 2002).
• Direct ownership is where a company wholly owns a subsidiary through development or the acquisition of resources (Peter and Donnelly, 2001).  Recently, corporations have been successful in their attempts in executing hostile takeovers to acquire assets.

Global Pricing Strategy

A marketer will have the same pricing challenges in global markets that transpire in domestic market.  On the other hand, foreign markets produce even a greater challenge due to various elements that do not exist in domestic markets.  These additional issues are concerned with inflation rates, exchange rate fluctuations, inflation, antidumping laws, taxes and tariffs (Peter and Donnelly, 2001).

Exchange rate fluctuations are often cited as one of the most erratic factors that affect foreign prices.  As the exchange rate between two countries change, all international producers are affected.  Most corporations base their costs on their own domestic currency.  As the exchange rate suddenly changes between the two countries, the company would need to adjust market prices to remain competitive in that foreign market. The failure to monitor the exchange rates may cause a firm to jeopardize their foreign market share (Jeannet and Hennessey, 2002).

Inflation rates in the foreign economy can fluctuate and affect product cost.  In some countries, inflation rates have increased by several hundred percent.  As this happens, the local foreign currency would have a swift shortfall of purchasing power.  In order to avoid the traps of inflation rate changes, a company can use a first-in, first-out (FIFO) or a last-in, first out (LIFO) policy to protect itself from a decaying purchasing power.  A company can also attempt to preserve constant operating margins where price adjustments are made on a periodical basis (Jeannet and Hennessey, 2002).

Dumping is when a product is sold to foreign buyers at a price lower than the price charged for the same product on the domestic market (Kreinin, 2002).  This is usually done at below actual production costs.  Dumping can cause harm to domestic companies where they are unable to compete with larger foreign companies that can afford to take a short-term loss to penetrate the market share.  In order to prevent antidumping, countries have initiated antidumping laws to protect their domestic companies.  A global marketer would need to be aware of antidumping laws in the foreign country (Jeannet and Hennessey, 2002).

Taxes that are imposed within local foreign economies can affect the cost of products. A popular form of taxes is value added taxes (VAT).  A VAT is used mostly in the European Union (EU) and is comparable to sales tax in the United States.  This tax is applied at all stages of manufacture, or when value is added (Poddar, 2003).

Tariffs are taxes that are charged on a product when it crosses an international border.  It is intended to raise the price of imports and helping domestic companies continue to be competitive (Kreinin, 2002).  Tariffs are absorbed by the end user and can increase prices considerably.  In order to reduce the costs of tariffs, the company may need to examine their foreign production options (Jeannet and Hennessey, 2002).

In addition to identifying the environmental factors listed above, companies must determine if they will choose to use the global single-price strategy or the individual market strategy.  A single global pricing strategy dictates that prices are the same everywhere around the world.  Prices are transformed to a base currency and match to the countries exchange rate.  This can be a difficult task when dealing with countries with fluctuating environmental costs.  A company uses the individual market strategy to place a different price on each market depending on the costs associated with that market.  While this strategy may yield higher profits, it is susceptible to independent companies taking advantage of goods that are high costs for an importer to distribute (Jeannet and Hennessey, 2002).

Global Advertising and Promotion Strategy

As the company expands into foreign countries, there are many additional factors that a company needs to be aware of when designing their advertising campaigns.  Global companies must ensure that they correctly translate into the language of the country targeted.  Blunders in translation can make a company appear inferior or insensitive to the community.  Therefore, overcoming the language barrier is essential (Jeannet and Hennessey, 2002).

Another critical element in advertising is to prevail over the cultural barrier.  Failing to understand the local culture and their values can distance the company from the community.  Global firms can not assume that what is culturally acceptable in one country will be acceptable in another.  Local advertising firms can be contracted to help with the essential knowledge needed (Jeannet and Hennessey, 2002).

Conclusion

As countries open their borders to trade, the world markets will become increasingly globalized.   Companies in the United States have just begun to realize importance in actively participating in the transition to a global market.  In order for a company to be successful in this transition on both the home front and overseas, their ability to understand and execute global marketing skills is essential.   Strategic managers that fail to gain competence in global marketing concepts will find themselves vulnerable to those corporations that have developed these skills.

References

Carbaugh, R.J. (2002). International economics (8th ed.).  Cincinnati, OH: South-Western Thomas Learning.
Jabil Circuit (2003).  EMS opportunity.  Retrieved August 2, 2003, from http://www.jabil.com/company/emsopportunity.htm
Jeannet, J. & Hennessey, H. D. (2001). Global Marketing Strategies (5th ed.).  Boston: Houghton Mifflin Company.
Kreinin, M.E. (2002). International economics: A policy approach (9th ed.).  Cincinnati, OH: South-Western Thomas Learning.
Spurge, L. (ed.). (1997). Knowledge exchange business encyclopedia illustrated.  Santa Monica, CA: Knowledge Exchange.
Peter, J. P. & Donnelly, J. H. (2001). Marketing management: Knowledge and skills (6th Ed.).  Boston: Irwin McGraw-Hill.
Poddar, S. (2003).  Consumption taxes: The role of the value-added tax.  Retrieved August 2, 2003, from http://econ.worldbank.org/files/23662_chap_12_taxation.pdf

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