Case Study - The Golden Rule

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BUS500 Principled Leadership & Ethics Case Study #3 Preparation Document Golden Rule Case Read the Christian Business Faculty Association case study (When the Golden Rule Yields No Gold) posted on Moodle and answer the following questions (the text boxes will expand as you type in your responses). You should focus on leadership traits, especially as they relate to the specific circumstances noted in the case. 1. What are the business issues at stake in the case study? a. 2. What are the Christian and ethical issues at stake in the case? a. 3. Where the business and Christian issues intersect? Where do they conflict? a. 4. What would you do if you were Zach? Explain your reasoning. a. 5. If you were an employee of the company, what would you expect Zach to do? a. 6. What do you think that Jesus would do? What scripture supports your conclusion? a. BUS500 Principled Leadership & Ethics Case Study #3 Preparation Golden Rule Case Study: When the Golden Rule Yields No Gold Michael Zigarelli Messiah College mzigarelli@messiah.edu Gary Page Page & Associates, LLC gary@gpagecpa.com ABSTRACT: Zach Jordan (a real person but not his real name), the owner of a small business in Connecticut, may not be able to compete any longer in the spring manufacturing industry. Overseas competition has put him at a significant cost disadvantage, and the losses continue to mount year after year. At the same time, he’s deeply committed to care for his handful of employees — people who are dependent on him and who he considers “family.” Now at a crossroads, he faces an apparent dilemma: (1) gamble $200,000 on rent to extend the jobs of his employee family or (2) liquidate the business while it’s still worth something, sending his employees to the unemployment line during a bad economy. There may be other, more attractive options and identifying them and selecting from among them is largely what this case is about. Framed from a Christian worldview, the case comes down to this: In an intensely competitive environment, how can we faithfully serve employee needs while effectively stewarding the business? The Case Zach Jordan sat at his desk seeking the high road. It had been his approach from day one. Now, though, on day 10,001, that road was obscure. Or perhaps this time there were two or three high roads. Metaphors aside, this much was apparent: If he sold his ailing company, several people — good people whom he had embraced as family over the years — would lose their jobs in a bad economy. But if he didn’t sell and if business didn’t improve, he could lose hundreds of thousands of dollars in rent. He looked at the pictures adorning the walls, pictures of his three girls, pictures of his employees, a photo of him doing his magic act (Zach’s favorite hobby) for mesmerized school children. Zach had a zest for life and an authentic love for everyone around him. Throughout his career, his priorities made that abundantly clear. Zach had often worked from home during his 30s and 40s, sacrificing business growth so that he could help raise his girls. He had adopted a “Golden Rule” approach to management, paternalistically caring for his employees’ needs, maintaining integrity in every deal, insisting on quality, respect, and timely delivery for every customer, treating all of his stakeholders as he would want to be treated. The fruit of that management style was a fiercely loyal workforce — hardly any turnover in twenty years of business — as well as an equally loyal customer base. One of Zach’s eleven employees summed it up well: “Zach’s the glue that holds everything together around here. And he’s a great boss, too. He treats us better than anyone’s ever treated us in our other jobs. I’ll give you an example: In good times and in bad, he’s always given a big Christmas bonus. One time he even had to borrow the money to do it!” 1|Page BUS500 Principled Leadership & Ethics Case Study #3 Preparation Golden Rule There was financial fruit as well — lots of profit, at least through the first ten years. His New England Spring Company (NES) in Connecticut earned a great return throughout the 1980s. But international competition and a sputtering economy began to take their toll, and in the 1990s, many of Zach’s customers began to import their springs, primarily from manufacturers in Asia whose costs were a fraction of Zach’s. Profit evaporated and eventually turned to losses. The past five years had been particularly difficult, almost all of which culminated in red ink (see Exhibit 1 for NES financial information). As he wiped some dust from the photo of the NES family celebrating an employee’s birthday (Zach commemorated every employee birthday with a card and a $30 check), in walked his two invited guests for the day. Steve, his accountant and longtime friend, and Charles, a professor (now emeritus), from Zach’s business school days. This was a bittersweet occasion. Zach embraced each but then had to share with the professor his reason for the invitation: He needed advice about whether to sell his beloved company. Zach closed the door. “Thanks so much for coming, you guys. I really appreciate your willingness to give me some candid advice.” His expression turned somber, as did his tone. Zach looked squarely at the septuagenarian professor and repented: “Charles, this place is bleeding, and it has been for years. I’m seriously thinking about getting out rather than signing off on another two-year, $200,000 lease for the building. Steve tells me I can get at least $750,000 for the customers, the inventory, the receivables, and the equipment, but the problem is this: with my financials, nobody is going to buy the business itself. So if I sell, it has to be by parceling it off. But then NES won’t exist anymore and my people would lose their jobs. And in this economy, they’re not going to find jobs anytime soon, certainly not much beyond minimum wage. I could take a chance and try to keep it afloat, but I’m on the verge of losing my biggest account to India – twenty percent of my business! If that happens, I probably couldn’t survive more than two months, and the selling price of the business would drop a whole lot more. But even if I keep this account, there’s no guarantee that things are going to turn around. I just can’t compete with Asia’s dollar-an-hour labor.” That was a lot of information in sixty seconds, but Charles zeroed in on what he considered a critical issue. “What’s the chance of losing that account?” “Probably about 50/50 next year,” Zach replied. “Maybe even 60/40. India’s come out with a stainless steel spring that weighs fifty percent more than ours — much better quality — for the same price, and my customer is genuinely considering making the switch.” “And can you get back the lease money if the business fails?” “No. I’m on the hook for that regardless,” Zach sighed. “I’ve told you this before, pal,” his accountant gently offered. “You’ve gotta get out. Either that or cut your sevenfigure salary.” Zach smiled at the welcome levity — and the irony. Two years ago he had cut his own pay to $31,000, less than what some of his employees were earning. 2|Page BUS500 Principled Leadership & Ethics Case Study #3 Preparation Golden Rule “Funny you should mention that,” Zach returned with a grin. “The SEC is stopping by this afternoon. I thought I’d give ‘em your card.” “Remind me, my friend,” Charles interjected with a chuckle, “what your product line looks like. And tell me how you’ve been pursuing new business lately.” “We manufacture and sell several types of springs,” Zach began, “everything from specialty stainless steel springs to springs for navy jets and helicopters to common springs you’d find in a hardware store. And over the years, I’ve tried to grow the business through a combination of inhouse sales reps and advertising in the standard industry newspapers, both in print and on the web. Quite frankly, though, it’s been years since either approach has paid off, so I’ve recently dropped them. Bids are so tight that a sales rep’s five percent commission required me to bid at my cost to remain competitive. I was taking jobs just to cover overhead! And the hundred grand I dropped in advertising over the past decade has returned almost no business. So basically, I’m left with no sales force and essentially no advertising.” “Sounds like you could use some fresh ideas,” the professor observed thoughtfully. He was often brilliant, Zach thought, but now he was simply stating the obvious. “That would be nice.” Zach was eager for a few hot tips from the good doctor, but he knew those were probably a few days off. “And there might actually be some new business out there. But my ‘fresh idea’ file is freshly depleted. I’ve also thought about re-tooling as an option — you know, create other products that might have a niche — but I’d need about a quarter-million for equipment, even used equipment, and I have no customer list for whatever that new product would be.” “Let me give the marketing piece some thought,” Charles replied with characteristic circumspection. “But in the meantime, tell me just how bad things are financially. Do you have some income statements handy?” Zach buzzed his secretary. “Mandy, can you please bring me the binder of financials?” Mandy, as always, responded promptly, smiling at the gentlemen on her way out. As she closed the door, Zach shared with his guests that Mandy, his secretary for twenty years, was recently widowed, having psychological problems from the loss and in critical need of the health insurance benefits he provides. “My other office gal,” he explained, shaking his head, “has a disabled husband and is the sole support for a family of five. And the guy who runs the plant has four kids, two of them getting ready for college. If he lost his job at age fifty, I don’t know what he’d do.” The professor nodded; the accountant flipped pages in the binder. “It’s not terrible,” Steve said as he opened the books for Charles, “but it’s not sustainable either. We’ve been losing money for years. Costs are inching up, mostly because of health care, workers’ comp, and raw material prices. Salaries are exactly at market — anywhere from $10 to $26 an hour. But we’ve cut everything else to the bare bones. And as far as sales goes, we’ve been flat for a long time, and we have no expectation for new sources of revenue.” Charles adjusted his glasses as he reviewed the statements. His grimace told Zach that there was no quick fix forthcoming. 3|Page BUS500 Principled Leadership & Ethics Case Study #3 Preparation Golden Rule “I’m telling ya, Zach, cut and run,” Steve recommended, preempting the professor’s analysis. “I know you care about these people, but they’re big boys and girls now. They can take care of themselves. Believe me, they’ll be fine.” Zach didn’t know whether to be irritated at or grateful for the counsel. Maybe Steve’s was the only rational response, but Steve was also ignoring the fact that Zach didn’t want to sell out his employees. Irritation trumped gratitude for the moment. “Would you be ‘fine’ if your income were cut in half and if you lost your health insurance?” Zach retorted softly but firmly. “Would your family be ‘fine’? I know you’re looking out for me, Steve, but I simply can’t operate that way.” “All right,” his accountant back-peddled with a shrug. “So spend $175,000 to give them six months’ severance. And spend another twenty-five grand to maintain their health benefits. Will that help you to sleep at night?” Zach pondered the idea, but it seemed a bit excessive. “I’m getting too old for this kind of stress,” he said leaning back in his chair and rubbing his eyes. “I’m 62 now Charles, which I know sounds like a spring chicken to you. But the spring business is taking all the spring out of this spring chicken.” Deep down, Zach desperately wanted his company to bounce back. But that seemed unlikely without some bold new strategy. And he wasn’t sure he had either the energy to pursue it or the gumption to roll the dice on another $200,000 lease. “Cut and run” seemed like a logical course of action, but what about his people? This “Golden Rule” spring manufacturer recoiled at the thought of repaying their loyalty with a trip to the unemployment line. 4|Page BUS399-01 Management Leadership Case Study #2 New England Spring Company Income Statements ($ in thousands) Sales Cost of Sales Materials Production wages Overhead & other Total Cost of Sales Gross Margin Operating Expenses Rent Admin salaries Employee benefits Office & supplies Utilities & phone Depreciation Other & miscellaneous Total operating expenses Net Income (Loss) 2012 $ 1,211 2011 $ 1,282 2010 $ 1,256 2009 $ 1,294 2008 $ 1,308 403 390 51 844 367 396 375 135 906 376 375 362 65 802 454 349 395 49 793 501 353 399 84 836 472 100 66 63 32 52 46 22 381 $ (14) 100 98 59 42 57 46 18 420 $ (44) 100 145 52 38 54 46 26 461 $ (7) 100 152 49 42 51 58 47 499 $2 100 168 44 31 49 61 26 479 $ (7) New England Spring Company Balance Sheets ($ in thousands) Assets Current assets 2012 2011 2010 2009 2008 Cash Accounts receivable Inventories Other Total current assets Fixed assets (net of depreciation) Total Assets $ 98 22 98 3 221 382 $ 603 $ 142 19 106 6 273 416 $ 689 $ 121 27 89 4 241 462 $ 703 $ 92 38 95 9 234 508 $ 742 $ 119 41 42 12 214 566 $ 780 Liabilities & Equity Current liabilities Long-term debt Common stock Retained earnings Total Liabilities & Equity $ 284 300 19 $ 603 $ 356 300 33 $ 689 $ 326 300 77 $ 703 $ 294 64 300 84 $ 742 $ 314 84 300 82 $ 780 5|Page
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RUNNING HEAD: WHEN THE GOLDEN RULE YIELDS NO GOLD

When the golden rule yields no gold
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1

WHEN THE GOLDEN RULE YIELDS NO GOLD

When the Golden Rule Yields No Gold
1. What are the business issues at stake in the case study?
a.
The business issues at stake include overseeing competition, especially from Asian countries.
This is making Zach Jordan’s Spring manufacturing company, have fewer profit margins
every year respectively since 2008. Many of his customers had shifted to importing springs
from overseas. Imported springs from for instance India are stainless and of better quality
with the same price in the market. On the same, the major issue is that he is in a dilemma of
doing away with the company to evade signing another $200,000 rental money or maybe
finding a buyer (Zigarelli & Page,2014). However, finding a buyer tends to be a problem
because the business is not sustainable....


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