February 02, 2008 – Business Ethics Article

Exxon Mobil and 2007: Record Profits

Oil companies like Chevron and Royal Dutch Shell reported strong profits in 2007. Chevron, the second-largest American oil company, reported profits of $18.7 billion (increase by 9 percent compared to last year). Royal Dutch Shell reported the best figure ever for a British company when its net income rose by 23 percent to $31 billion. Most oil companies, benefited from a near doubling of oil prices. In early January, the cost of crude oil passed the $100-a-barrel mark for the first time and has stayed above $90 for most of the time since then.

Exxon Mobil’s net income increased by 3 percent to $40.6 billion and sales figure was more than $404 billion. The fourth quarter of 2007 was the most profitable quarter ever in its history with net income increasing by 4 percent, to $11.7 billion. Revenue for the fourth quarter increased 30% to $116.6 billion. Exxon Mobil beat its own record for the highest profits ever recorded by any company to become the world’s most profitable publicly traded corporation.

But the main question is, Will Exxon Mobil face controversy again like it did last time in 2005, when it reported highest quarterly profits in the corporate history of the US. Already, the Foundation for Taxpayer and Consumer Rights, has called the profits unjustifiable and at the cost of an economy tipping into recession.

History of Exxon Mobil Corporation

In 1870, John D. Rockefeller (Rockefeller) along with his associates formed Standard Oil. In about 40 years time period, Rockefell went on to become the richest man in the world after he built Standard Oil into one of the largest integrated oil producing, refining, and marketing organizations in the world. However, US politicians and journalists accused Standard Oil of monopolistic practices and stifling competition. In 1911, after a US Supreme Court ruling Standard Oil Trust was dissolved into 34 separate companies.

Two of the thirty four companies formed by the dissolution, Jersey Standard and Socony went on to become Exxon and Mobil respectively.

In 1999, Mobil Corporation became a wholly-owned subsidiary of Exxon Corporation, and Exxon changed its name to Exxon Mobil Corporation.

Fourth Quarter 2005 – Record profits and Controversies

In 2005 (fourth Quarter), Exxon Mobil recorded profits of US$ 10.71 billion. This was the highest ever quarterly profits in the corporate history of the US. However, with rising oil prices there were problems. A few US policy makers and consumer activist groups accused Exxon Mobil of price gouging (pricing above the market when no alternative retailer is available) and corporate greed. In May 2006, the US House of Representatives passed a price gouging bill that would penalize any oil company found guilty of price gouging with penalties of up to US$ 150 million.

Even environmental activist groups were unhappy with the Exxon’s Valdez oil spill and oil drilling in the Arctic National Wildlife Refuge. In March 1989, Exxon Valdez, the oil tanker owned by Exxon, had caused major ecological and financial damage when it spilled 11 million gallons of crude oil in the Alaskan region.

Exxon Mobil maintained that though the rise in prices helped record profits, its ability to complete projects on time as well as keeping its costs in check was also a main contributing factor. The oil industry and American Petroleum Institute (API) too defended Exxon’s record profits. An advertisement in the media by API stated that the profitability of America’s oil and natural gas industry was far less than many other major industries, like banks, pharmaceuticals and real estate on an average in the past five years. And the US$ 10.7 billion fourth quarter profits of Exxon was a reasonable rate of return.

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Business Ethics, Chevron, Exxon Mobil, Oil Companies, Scams and Controversies

January 27, 2008 – Business Management Article

Chairman and chief executive of Caterpillar Inc, Jim Owens, expects to see record results again in 2008, in what he thinks will be a challenging year. But he hopes to see the world’s biggest maker of earth-moving equipment have all-time record results again fuelled by growth in markets outside the U.S.

Last quarter Caterpillar’s sales rose more than 10 percent inspite of a difficult domestic market. However, a very strong global footprint ensured record sales and profit for the whole year.

Caterpillar’s Turnaround Story

Until 1982, Caterpillar or ‘CAT’ (as most people refer it to) enjoyed a long-standing record of profitability and market leadership. However, with increased competition it was almost out of business. It then turned around its business from near-bankruptcy to profitability in a space of a few years. Jim Owens (now CEO), who started as a mid level manager at Caterpillar believed that it was a spectacular transformation of a kind of sluggish company into one that actually has entrepreneurial zeal. What made Caterpillar different was how it reshaped its DNA in a way that permanently changed the culture and capabilities of the enterprise. Caterpillar focused on its decision rights, organizational structure, motivating factors and metrics and measures – the four essentials of organizational DNA. CAT delivered 12 straight years of profit after that. It nearly tripled both its top and bottom lines since1993. In 2005, Forbes had listed Caterpillar as the best-managed industrial corporation in America. …

Caterpillar, Corporate Restructuring, Turnaround Strategies

January 26, 2008 – Business Management Article

FedEx (NYSE: FDX), is among the 100 “Best Companies to Work For” in the US announced by FORTUNE magazine and the Great Places to Work Institute. FedEx (the largest employer in 2008 list and only shipping company included) now figures in this list in 10 of the past 11 years after being named to the “Best Companies to Work For” Hall of Fame in 2005. FedEx was ranked as 97th overall. FedEx already has a reputation of being one of the most employee-friendly companies in the world.

A History of Employee Commitment at FedEx

The history of FedEx goes back to 1971, when Frederick W. Smith felt the need for an airfreight system which could deliver documents overnight. He decided to setup his own company to effectively serve this need. Smith always believed that since FedEx was essentially a service organization, employees were largely responsible for ensuring success.

FedEx was incorporated as ‘Federal Express Corporation’ in June 1971 at Little Rock, Arkansas, US. Since it began in 1971, its’ management focused on providing a suitable work environment that encouraged employees to come up with innovative solutions. Such was the commitment of the employees to the company that, when FedEx was going through severe financial difficulties during the first couple of years, the employees were prepared to sell their personal belongings. They were also prepared to use their own credit cards to purchase fuel to deliver the packages to the customers. Even when the employees didn’t receive their salary on time, they continued working with FedEx.

Human Resource Management (HRM) Best Practices at the FedEx Corporation

FedEx has developed several innovative human resource programs over the years. These programs have served as a benchmark for many companies.

FedEx’s ‘People-Service-Profit’ (PSP) philosophy

In 1973, Founder and CEO, Smith had developed and implemented FedEx’s ‘People-Service-Profit’ (PSP) philosophy. This philosophy was based on the fact that if FedEx took proper care of its employees, they would provide efficient service to the customers. This in turn would benefit the company by generating more profits.

Survey-Feedback-Action Program or SFA Program at FedEx

The SFA program (a key employee relations and satisfaction program) helped management take decisions regarding romotions. From its inception, the SFA was administered manually, but that changed in 1992 with the introduction of online survey system in the US and other automations. Each April, every employee is asked to participate in the on-line survey. After the results are gathered, managers hold feedback sessions with their employees to discuss the survey findings and identify problems within and outside of their department.

Leadership Evaluation and Awareness Process’ (LEAP)

In 1988, FedEx devised a program known as ‘Leadership Evaluation and Awareness Process’ (LEAP) to encourage non-managerial cadre employees to move to the managerial level within the company.

Employee Communication Program

The employee communication programs implemented by FedEx included the SFA program, Guaranteed Fair Treatment Procedure and Open Door Policy. FedEx also devised a mechanism to address and resolve employee grievances. This was apart from employing a formal communication system to inform employees about the major events taking place in the company.

Job Change Applicant Tracking System (JCATS)

JCATS is an on-line computer job posting system that allows hourly employees to post for any available job.

Recognition and Reward Program

FedEx rewards employees for their work with awards such as the ‘Bravo Zulu’ and the ‘Golden Falcon Award’.

FedEx is an example of an organization that has created an effective HR strategy that supports productivity and profitability.

Read related post on UPS: A bit of UPS history, some UPS and some downs

FedEx, HR Best Practices

January 31, 2008 – Business Management Article

For Mattel, 2007 was dubbed “the year of the recall.” ‘How will Mattel fare in the aftermath?’, was a question put forth by many. Analysts were divided over whether the leading toy maker was able to handle the crisis situation effectively.

About Mattel

Mattel Inc (MAT), the world’s largest toy company, with its headquarters in California was founded in 1945. The company designs, manufactures, and markets toys worldwide. Its well known brands include Barbie dolls, Fisher-Price items, American Girl dolls, Hot Wheels, Matchbox, and others.

Product Recall Crisis in Mid 2007

In the middle of year 2007, Mattel had to deal with a product crisis, the worst-ever in its history. Mattel feared that its toys had toxic lead content higher than the permissible level. This could lead to a risk of health hazards for kids. Mattel was heavily criticized for allowing Chinese made toys with unacceptably high levels of lead paint to enter U.S. stores. In August 2007, Mattel recalled about 1.5 million Chinese-made Fisher-Price infant toys. These toys included characters such as Dora the Explorer, Elmo and Big Bird. A second recall followed soon after, when Mattel withdrew approx. 9.3 million Chinese-made toy sets. This time Mattel feared that these toys with small magnets and other parts, could be dangerous if swallowed by kids. This was followed by a third recall of its toys withdrawing more than 800,000 toys across the globe. Mattel even announced that a significant portion of the toys were recalled because of a design flaw and not substandard manufacturing. During this crisis, Mattel’s stock plunged by as much as 25 percent from its year-to-date high.

Mattel Turnaround

Robert A. Eckert, Chairman and CEO of Mattel Inc. had then stated that, Mattel was at the forefront of responsible corporate citizenship and the recent challenges have presented it an opportunity to again be an industry leader. Many analysts would not have been that optimistic. But Mattel, posted a better-than-expected fourth-quarter profit. Mattel was helped by stronger international demand for its Hot Wheels cars and Fisher Price line and by $47.3 million in tax benefits. And of course not to forget the significance of the fourth quarter for toy companies because it includes the holiday shopping season. Research firms like NPD have reported that the toy industry makes nearly half its annual sales during the holiday season. The results included charges and costs of about $42 million stemming from a spate of recalls last year. Worldwide gross sales of Barbie increased by 4 percent, Fisher Price segment by 4 percent and overall Mattel’s girls and boys brands by 9 percent. Mattel’s Wheels business, which includes Hot Wheels and Matchbox cars, increased 15 percent. Net income grew to $328.5 million, from $286.4 million, a year ago.

Mattel, Scams and Controversies, Toy Industry, Turnaround Strategies

January 23, 2008 – Business Management Article

Starbucks (SBUX) is famous for its frappuccinos and mochas and has always concentrated on premium coffee, typically costing more than £2 a cup. But now Starbucks Corp is testing $1 coffee and free refills. Starbucks says that this test is not indicative of any new business strategy. Well, new strategy or not it surely makes business sense. Over the past year, Starbucks’ shares have lost about half their value. Analysts feel that this is due to over-expansion, increasing competition from fast-food rivals, and concerns about lower U.S. consumer spending. There is stiff competition from fast-food rivals such as McDonald’s Corp and Dunkin’ Donuts, a unit of Dunkin’ Brands Inc.. Both offer specialty coffees and regular coffee prices at both start in the low $1 range.

Download full-text of Case Study:
Will restructuring help Starbucks Turnaround?

Earlier this year, Starbucks had announced management restructuring. Howard Schultz, was brought back back into the CEO position. Howard Schultz is once again looking after day-to-day operations of the business. His return follows after the sudden departure of chief executive Jim Donald. Scultz has immediately felt the need to fix important things, particularly in the US like over enthusiastic expansion, large queues in stores and bureaucracy. Starbucks started 2,571 new stores globally last year, taking its total to 15,011. According to Starbucks’ estimates there was scope for 20,000 more stores in the US and a further 20,000 internationally. Schultz is expected to scale back such ambitious expansion strategy and concentrate on reviving the popular brand after transactions in its 10,600 US stores slowed down. Schultz commented in an interview to the Fortune magazine, “Yes, we became less passionate about customer relationships and the coffee experience. We spent time on efficiency rather than experience. We never wanted to be transaction driven.“

Starbucks: A contrast in 2003

When Fortune came out with its annual list of ‘Fortune 500 companies’ in March 2003, Starbucks featured in the list. For Howard Schultz, Chairman of Starbucks Corp (Starbucks) and Seattle based entrepreneur it was like a dream coming true. Afterall, Starbucks announced a 31% increase in its net earnings and a 23% increase in sales for the first quarter of 2003. This inspite of many retail majors reporting losses and applying for bankruptcy. The US economy was reeling under recession. For Starbucks it only showed that a quality product speaks for itself. Also the fact that Starbucks spent less than 1% of its sales on advertising and marketing was indicative of its popularity. Many analysts felt that the success of Starbucks was primarily due to its profitable domestic operations. They felt that Starbucks’ international operations were not as well planned as its US operations.

Starbucks History

In 1971, Jerry Baldwin, Zev Siegl and Gordon Bowker had launched a coffee bean retailing store named Starbucks to sell specialty whole-bean coffee in Seattle. The three partners, took the name “Starbucks” from mate Starbuck in the novel Moby Dick. In ten years, by 1981, Starbucks had five stores and a small roasting facility in Seattle. In 1982, Schultz joined Starbucks as marketing manager. In 2001, Interbrand (a brand management consultancy) had named Starbucks as one of the 75 global brands of the 21st century. In 2002, Starbucks had 5689 outlets in 28 countries. By early 2006, Starbucks had more 11,000 stores around the world. Starbucks had turned coffee from a commodity into an experience to savour.

Keywords: Coffee Retailing, Retailing, Starbucks, Howard Schultz

February 22, 2008 – Business Management Article

Starbucks, the leading retailer, roaster and brand of specialty coffee in the world, has been struggling amidst a faltering economy, its own rapid growth (international expansion and growing presence in 43 countries) and increased competition from cheaper rivals. Starbucks wants to turnaround its business by providing customers with the distinctive Starbucks Experience and building on Starbucks legacy of innovation.

The return of Schultz and the Starbucks success story

Howard Schultz returned in early January as Chairman and Chief Executive. Schultz had served as chief executive officer from 1987 to 2000, a period where Starbucks enjoyed exceptional U.S. and international growth. Schultz is acknowledged as the architect of Starbucks brand image and a coffee visionary . In 1982, he joined Starbucks Coffee Company as director of operations and marketing. At that time Starbucks had only four stores. In August 1987, Schultz purchased Starbucks Coffee Company. In 1992, under his leadership, Starbucks was the first specialty coffee company to become a public company. The growth of Starbucks has been amazing: from 17 stores in 1987, to more than 15,000 worldwide today.

The Restructuring Moves

Ever since his return, Schultz outlined a series of initiatives to help transform Starbucks. These initiatives were largely governed by the principle – ‘getting back to the essence of what drove Starbucks past success’.

Soon after Schultz returned as CEO, quite a few top management jobs were shuffled and some new posts were created like the chief creative officer to lead efforts to improve the experience customers have in the stores. For the first time, Starbucks unveiled plans to start offering limited free wireless Internet service. The partnership with T-Mobile – which only offered a paid subscription service – ended with switching over to AT&T Inc.

Commenting on the recent reorganization efforts Schultz said, “We realize that we are operating in an intensely challenging environment, one in which our customers and (employees) have extremely high expectations of Starbucks. And we have to step up to the challenge of being strategic as well as nimble as our business evolves. Unfortunately, we have not been organized in a manner that allowed us to have a laser focus on the customer.” He added that the company will be reorganized from two to four U.S. field divisions, in an effort to “enable the company to align our leaders closer to our customers and partners.” The East and West divisions will be replaced with four new ones: Western/Pacific, Northwest/Mountain, Southeast/Plains and Northeast/Atlantic.

No warm breakfast sandwiches and job cuts

In January 2008, Starbucks announced that it will stop selling warm breakfast sandwiches. The reason: the egg, cheese, bacon and ham competed with the coffee aroma in stores. Perhaps to re-ignite the emotional attachment with customers and restoring the connections customers have with Starbucks® coffee, brand, people and stores. A three-hour training session for all employees on making espresso was also scheduled.

In 2008, Starbucks will open hundreds fewer U.S. stores than initially planned and will close about 100 poorly performing domestic stores. It will ramp up its expansion overseas to increase the profitability of Starbucks outside the U.S, even redeploying a portion of the capital originally earmarked for U.S. store growth to the international business.

Also, in February 2008, Schultz announced 600 job cuts (about one-third who worked at the company’s Seattle headquarters in the US) in an e-mail to Starbucks’ more than 170,000 employees, calling it a difficult decision aimed at sharpening the company’s focus on customers. Some analysts felt the move was to remove bureaucracy and lower costs.

More restructuring changes will be announced at the company’s annual meeting on March 19.

Related Stories:
Starbucks for a dollar, Storm in a coffee cup?

Keywords: Brand Strategy and Management, Coffee Retailing, Corporate Restructuring, Starbucks, Turnaround Strategies

January 29, 2008 – Business Management Article

Wal-Mart Stores Inc (WMT) announced a price cut on thousands of items including groceries, popular electronics and other items. Price cuts range from 10 percent to 30 percent. Though Wal-Mart announces such price cuts during the holiday shopping season, this promotional move (just before the Super Bowl football championship game) is aimed at winning sales from limited budget shoppers ahead of the Super Bowl. Besides, forecast for retail sales in the US for 2008 is believed to grow slowly, the slowest in six years. Retail analysts opine that holiday sales rose by no more than 4 percent, one of the slowest rate increases since 2002. The National Retail Federation (NRF) in its 2008 economic forecast, predicted that retail industry sales (which exclude automobiles, gas stations, and restaurants) will increase 3.5 percent from last year. According to the NRF report, the slow pace in sales growth will continue before picking up in the second half of the year.

Retailers must turn to promotions to lure cash strapped shoppers into their stores, and at the same time try to keep inventory lean at the start of the season. There is a lot of pressure to give more discounts to clear unsold merchandise which hurts profit margins.

Others like Best Buy Co Inc and Circuit City Stores Inc are charging no interest on their websites on electronic items (like no interest for three years on all Samsung flat panel TVs $999 and up) ahead of the Super Bowl weekend.

Weak holiday sales

But, are such promotions working. One would certainly think so, specially after Wal-Mart’s December sales at U.S. same-store rose 2.4 percent, beating Wall Street’s forecast for a 2.1 percent gain. However, consumers are reluctant to spend. If one looks at Wal-Mart’s sales, necessary products drove sales. Shoppers spent mostly on cheap grocery and pharmacy items. Most U.S. retailers reported disappointing holiday sales in December. No. 1 wholesale club Costco Wholesale Corp. was another rare bright spot, benefiting from budget-conscious consumers seeking bargain electronics and buying bulk-food items.

Lackluster traffic levels in the weeks leading up to Christmas drove increased promotional activity. Many analysts feel that the reasons for shopper’s spending less and being more budget conscious are:

• Concerns for higher gasoline prices or higher energy costs
• Higher food costs
• Slow Job Growth
• Declines in the credit and housing markets.

Year 2008 is definitely going to be a struggle for most retailers, even for the well-established and the best-known brands.

Related Stories: Wal-Mart’s Marketside stores (smaller Neighborhood Markets) will compete with competitor and British retailer Tesco. Read: Wal-Mart’s Marketside or Tesco’s Fresh and Easy stores in US

Retailing, Wal-mart

February 05, 2008 – Business Management Article

Whirlpool’s fourth-quarter results 2007

Whirlpool, the appliance maker announced its fourth-quarter results. Its net income rose 72% to $187 million up from $109 million, a year earlier. Revenue increased 7.5% to $5.33 billion from $4.95 billion. Gross profit margin rose to 15.7% from 14%.

Chairman and Chief Executive Jeff M. Fettig of Whirlpool Corporation said, “We delivered record financial results in the face of both the most challenging U.S. industry demand environment in more than two decades and unprecedented global material price inflation.”

Whirlpool benefits from strong International sales and its 2006 Maytag Acquisition

Whirlpool benefited from its Maytag acquisition, an improved product mix, and robust international sales. Whirlpool’s had bought Maytag for $1.68 billion in order to gain market share and ward off competition from Asian manufacturers like Samsung Electronics and LG Electronics. When Whirlpool acquired Maytag in March 2006, Maytag was struggling with high fixed costs and nothing to show as investments in product innovation. In 2005, even retailer Best Buy had stopped selling Maytag appliances. But it was a turnaround this quarter, as Maytag gained market share after it received a boost when retailer Best Buy began selling Maytag appliances again last year. On the other hand, sales dropped in 2007 from 14% last year to 12% with its biggest retail customer, Sears Holdings Corp. (Also see: Restructuring at Sears, Can the retailer turnaround its business) Whirlpool makes some appliances that are sold under Sears’ proprietary Kenmore label.

Whirlpool’s North American earnings rose 41% to $175 million (benefiting from cost-cutting as part of the 2006 acquisition of Maytag and sales of higher-margin products), European earnings rose 22% (benefiting from higher sales on favorable currency exchanges) and Latin American 73% (benefiting from volume, pricing and an asset sale gain). North America sales dropped less than 1% compared to the 6% drop industry-wide. Other American manufacturing companies which benefited from strong International sales include Caterpillar (Also See: From a sluggish Caterpillar to an alert CAT) and Honeywell International, benefiting from strong international results. IBM also reported strong International figures.

Expensive name-brand home products are having a tough time with rising product prices and the home credit crisis risk affecting the market badly. Then there are other macroeconomic challenges like increasing raw material costs, unprecedented global material price inflation and expected lower product demand in U.S. and Europe. Companies need to adjust their cost structure to the lower expected industry demand levels.

Last month, Whirlpool had announced that it would get rid of two of its North American factories to face the challenges better and counter the economic downturn. Whirlpool is planning to offset increasing material and oil-related costs through cost-based pricing adjustments and productivity improvements.

Whirlpool expects 2008 appliance industry shipments for Latin America to increase 5% to 8%, Europe to be same as in 2007, U.S. to decrease 3% to 5% and Asia up by 5% to 10%.

Whirlpool is in a better position to counter any economic downturn than many as a major portion of its business is not new home-oriented, but essentially a replacement business. Moreover, many of the products it makes are not considered optional items anymore like the vacuum cleaners, dishwashers and refrigerators are necessities to any home. And if an old washing machine breaks down, then it can supply customers a new washing machine, which in many cases might be a better bargain for customers than high repair costs.

History of Whirlpool

In 1911, Whirlpool was a small firm manufacturing wringer washers. It was founded by three brothers – Frederick, Louis and Emory Upton in Michigan, USA. In 1916, Upton entered into a business partnership with Sears, Roebuck and Co. Sears marketed the washers manufactured by Upton under the brand name ‘Allen’. By early 2000, Whirlpool became one of the most well-established brands and leading manufacturer and marketer of home appliances. Whirlpool manufactured refrigerators, microwave ovens, washers, dryers and air conditioners. It then marketed its products under the names Kenmore, KitchenAid, Roper, Inglis and Speed Queen, in addition to the brand name ‘Whirlpool’. Whirlpool’s other brands included Amana and Jenn-Air.

Appliance Makers, Maytag, Mergers and Acquisitions, Whirlpool