Question Strategy in Practice Weekly Assignment #9

Strategy in Practice Weekly Assignment #9

Chapter 9

Strategy, Ethics, and Corporate social responsibility

Read, consider, and analyze this ethical dilemma concerning the Peerless Starch Company of Blair, Indiana. Attentively develop, and defend, your decision by responding to the analytical steps outlined immediately following the case.

The Peerless Starch Company of Blair, Indiana

For as long as anyone in Blair, Indiana, could remember, the Peerless Starch plant had always been the biggest thing in town. Built on a slight hill above the sluggish river, and designed to look as much like the Tower of London as anything in Indiana can, the plant dominated the town spiritually even more than it did physically.

Peerless was the largest employer in town, employing well over 8,000 men out of a population of l20,000 – or every fourth head of a family. It paid the highest wages, if only because most of the men were rated as skilled workers or technicians. And alone of all the large businesses in Blair, it was locally managed; the Peerless top management sat on the ?fth ?oor of the big mill itself, in the “New Building” that had been put up in the 1940s. And from the chief executive officer – the grandson of the founder – on down, all executives were Blair men who had started in the mill and worked their way up, and who were more often than not second- or third-generation Peerless employees.

Peerless had started in Blair during the Civil War when the founder had developed one of the ?rst methods to extract starch from corn. Until the 1940s, Peerless had only one mill. But the, company had prospered so much that three additional mills were built in rapid succession during the years after World War II: one in Illinois, one in Texas, and, the biggest yet, in Oregon, built in the late 1950s.

But while Peerless had ?ourished, the town of Blair had not. During World War II it had boomed. But then Blair had gradually drifted into being ?rst a run-down and then a depressed area. One after the other of the town’s factories had laid off people and then finally closed its doors. The Peerless mill in Blair seemed to be the only exception to this general rule of slow decay and downhill drift. But appearances were deceptive. Actually, the Peerless mill in Blair was in dire straits and was kept going only by the success of the new mills in other states.

Blair’s sales were about one-?fth of the entire Peerless Company’s. But the Blair Mill employed almost half of Peerless’s hourly rated labor force and three-quarters of Peerless’s managerial and professional people. Unlike the other mills, Blair did not make its own raw

materials but got intermediates from outside suppliers or from the other mills. It should, therefore, have needed less labor per unit produced. Instead, it needed up to four times as much.

There were reasons for Blair’s high costs – or at least there were arguments to justify them. The mill itself was a towering structure built to withstand the Crusaders’ armies but ill-equipped for modern production. All newer Peerless mills, for instance, were single-story

buildings, whereas Blair had ?ve stories capped by twin towers. Nobody at Blair ever got ?red; if a man couldn’t do a job, the word from the head of?ce was “Find him another one.” If a new process came in, the workers on the old one were quietly moved to plant maintenance – or, if they had any skills, were made supervisors, with the ludicrous result that there were whole departments with more supervisors than workers. Above all, Blair considered itself a “quality

mill,” and that apparently meant that nothing could be produced in quantity. But the central problem of Blair – and the greatest drain in money – was precisely that Blair did not turn out quality products. Rejection rates at Blair ran almost twice as high as at the other mills. What the Blair quality-control inspectors accepted provoked angry complaints from the customers. Indeed, as everyone knew, the salespeople spent little time selling. They spent most of their time talking customers into not sending the stuff right back to Blair as faulty and unusable – often by granting the complaining customer a nice rebate. It never appeared in the Blair direct cost accounts but was charged off to the overhead account “miscellaneous customer service.”

Things had been drifting from bad to worse – and no one in Blair expected that they would ever change. But then suddenly, in the spring of 1985, a number of circumstances coalesced.

1. The founder’s grandson, the “old man” who had run Peerless for thirty-?ve years, died. And it turned out that the founding family owned practically no stock at all. Thereupon the outside directors, who had not dared speak up while the “old man” was alive, refused to appoint his son-in-law or his nephew as his successor. Instead they picked an outsider to become

president and chief executive officer: John Ludwig, who was not even a native of Blair, let alone a chemical engineer or a starch machinist. In fact, Ludwig had been with Peerless less [fewer] than four years – and had been imposed on the “old man” by some of the outside directors. Having started as an industrial psychologist, Ludwig had ?rst taught, then worked for the Pentagon as a training specialist, then in Industrial Relations for Ford, where he helped

reorganize one of the major divisions and then had become general manager of one of the smaller Ford Motor divisions. He had come to Peerless in 1981 as its ?rst “professional manager” – at least the ?rst one in Blair – and as executive assistant to the president. The

“old man” had kept him busy with the affairs of the other plants, so that he knew very little about Blair. Although he had several times thought of resigning what he felt was a futile and frustrating assignment, he now found himself in charge.

2. Even before the death of the “old man,” things had turned critical at Peerless, and especially at Blair. The market had suddenly become competitive. Synthetic starches and adhesives were ?owing onto the market out of the labs of the chemical companies and the oil companies and the rubber companies – businesses that never before had been competing in the starch market. Peerless and a few other companies used to have the ?eld all to themselves – and

carefully refrained from hurting each other too badly. But the newcomers didn’t know what everyone else in the industry knew: you can’t make the market bigger by lowering the price or improving product performance; all you can do is spoil the market for everybody. Worse still, the success of the newcomers seemed to disprove such old “truths.”

3. The new mills in Illinois, Texas, and Oregon had managed to hold their own – indeed Oregon did phenomenally well and managed to bring out a highly pro?table new line of synthetics (without even telling the folks in Central Research in Blair) that quickly became industry leaders. But Blair came close to collapse. With supply abundant, customers ?atly refused to tolerate the Blair quality – or lack of quality – anymore. Despite all the efforts of the

sales department, whole carloads of the stuff came back – often with a curt note: “Don’t bother to call on us anymore; we have contracted to buy our supply elsewhere.” And Blair, which for years had been barely breaking even, plunged into the red. By mid-1985 Blair was losing more money than the other three mills made, so that Peerless no longer showed any pro?t and, indeed, barely managed to earn the interest on its ?xed debt. Blair, clearly, was bleeding Peerless white.

As soon as Ludwig had become president, he asked the ablest man in Blair management – an assistant manager of the Blair plant – to study what could be done with Blair. The result was a recommendation to spend some $25 million on modernizing the Blair plant. For this sum, the assistant manager promised, Peerless would get as modern a plant as any in the country (to build one from scratch would cost around $60 million). Employment in the modernized plant would shrink from 8,000 to 2,600.

Ludwig had resolved not to take any action until the assistant manager completed his study. But he hadn’t been idle during that time. He himself carefully studied the economics of Peerless, which had previously been kept rather secret. It soon became apparent to Ludwig that, economically, Blair was untenable. The only economically justi?able course was to close the Blair mill and not replace it. The existing mills in Illinois, Texas, and Oregon could easily replace Blair’s production volume – at a fraction of Blair’s cost and at superior quality. Closing Blair would entail very heavy short-run costs, mainly severance pay. But within six months, the Peerless Company would have absorbed the loss and would have become pro?table

again. If Blair was kept going, no matter how successfully modernized, Peerless could at best hope to break even – and the capital required to rebuild Blair would use up all the credit Peerless could possibly command – if indeed that much money could be raised in Peerless’s shaky

condition.

Ludwig was deeply disturbed by this conclusion. He knew how much the Peerless Mill meant to Blair; without it there weren’t going to be any jobs in the town. He himself was old enough to remember the Depression days when his father, a machinist in a Milwaukee

automobile plant, had been unemployed for three bitter years. Yet Ludwig also knew that he had to make a decision fast. When he had been made president, he had asked the board of directors to

give him six months to study the situation – and the board had given him that much time only grudgingly At that time the board had not really known how bad things were – and at the next Board meeting, in January 1986, he would have to tell them that the first nine months of 1985 had been catastrophic months. Surely at that meeting, if not before, the board would expect him to have a de?nite recommendation.

As a business decision, there was clearly no choice: Blair had to be closed. But what about the company’s social responsibility to Blair and to the people who depended on the Peerless mill for their livelihood? The more Ludwig thought about this the more he became convinced that Peerless had the social responsibility to try to save the Blair mill, and the town with it. There was a fair chance, after all, that the rescue operation would succeed. He was not at all sure that his board would go along – indeed, he half-suspected that the board would ask for his resignation rather than authorize spending $25 million on Blair. Still he saw no choice in conscience but to try. But before recommending to the board that the Blair mill be remodeled, Ludwig thought it prudent to discuss the matter with an old acquaintance, Glen Baxter. Baxter had attended the same college as Ludwig, had wanted to become a minister, and had actually had a year or two of divinity school, but had then turned to economics and was now the economist

for the very union that represented the Peerless workers. Ludwig was really more interested in getting Baxter’s support than in getting his advice – privately, he had always considered Baxter somewhat of a “radical” and an “oddball.” But Ludwig knew that he needed union support for any plan to rebuild Blair – and that his board would not even listen to such a plan unless h

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