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1- 2.5 Strategy or Stakeholders: Which Comes First?
One of the most memorable ramifications of a company’s negotiation of the
strategy or stakeholders predicament, more simply known as shareholders
vs. stakeholders, is the devastation of Flint, Michigan in the wake
of (GM) General Motors’ decision to outsource key production activities to
Mexico in 1978. According to an article in the Arizona Daily Star, “At its peak
in the 1970s when Flint’s population was 190,000, GM employed 80,000
people in Flint alone” (Peter Bourque). The decision to outsource
production ultimately resulted in severe unemployment, failure of small
businesses, and an increase in
foreclosures. It was debilitating to the economic wellbeing of
Flint, Michigan for decades to come. The title of this case can be more
fittingly rephrased to Stockholders or Stakeholders:Which Comes First,
primarily because business strategy inherently looks to maximize shareholder
returns even at the expense of the needs/interests of stakeholders – who can
be employees, customers, suppliers, members of the community, etc.
Perhaps no other financial instance in history is as precise in its illustration
of the author’s sentiment about the difficulty of finding the middle ground
between the needs of shareholders and stakeholders. The GM and
Flint, Michigan ordeal perfectly encapsulates this dilemma and serves as a
historical lesson, illuminating the impacts that result from the prioritization
of shareholder needs for continuous value creation and profit maximization
over stakeholder needs for jobs and a healthy economic environment. At a
time where U.S. automakers were under constant threat of losing market
share to Asian automakers who had established more efficient and cheaper
processes of production whilst maximizing the durability of their vehicles, GM
was indeed faced with the question: Strategy and Stakeholders: Which
Comes First? On one hand, they could pursue a set of goals that will
maximize shareholder value at the potential detriment of the
society/stakeholders in which the business operates. On the other hand,
however, they could prioritize the needs of the society/stakeholders and work
to implement strategic goals to mitigate economic, environmental and social
loss in the community the business operates.
Throughout this case, the author analyzes the strategy/shareholder approach
which maximizes profits at any legal means possible regardless of impact and
the stakeholder approach which prioritizes employees, customers and
members of the local community. The shareholder approach is excellent in
keeping track of company performance and pinpointing areas of improvement,
whereas the stakeholder approach is exceptional in creating a strong
relationship with the community and close parties. However, the stakeholder
approach has difficulty adjusting to emerging business challenges and
remedies because businesses must consider stakeholder impact before
implementing actions that allow businesses to sustain a competitive
advantage in the market place. Thus the author proposes a new approach
which is a hybrid of both theories. He suggests that businesses should start
with strategy first, laying out activities and objectives and then go onto assess
how stakeholders can be involved. It allows businesses to promptly respond
to the ever evolving landscape of industry while working with stakeholders to
ensure that the needs of the community are also attended to.
Relationship of Case to my work experience:
Examining my own work experience, I realized a troubling and emerging trend
in employee compensation benefits. Most companies are switching from fully
funded health plans to high deductible plans that shift the burden of cost from
the employer to the employee. In this case I would regard the employee as
the stakeholder and the employer as the shareholder. Contrary to popular
belief, there are only two ways to increase shareholder earnings, increase
revenue or decrease expenses, my story is about the latter. The
strategy being utilized by my company and many others is to gradually reduce
expenses for the company by exploiting any opportunities they can find. I had
interesting conversations with my manager who has worked longer than I
have and has had the great opportunity of working when pensions and other
benefits where in existence. My manager pointed out that since all
companies are moving in the same direction in terms of benefits, companies
will not lose employees as a result of drastic changes in benefit plans
because all companies in the entire industry are implementing these changes
as well. Companies realize that although there is a competitive
advantage in offering premium benefits at higher costs, there is no negative
impact in recruiting and retaining employees if they chose to offer inferior
benefits at a significant cost savings.
Relationship of Case to material covered in class
The case covers traditional business calculation instruments such as the
balanced score card report which is used by companies to easily identify
factors hindering company financial and non-financial performance and
outline strategic changes tracked by future scorecards. I believe that in this
class we have covered not only the balanced scorecard in Chapter 10, we
have also covered a lot of the financial tools used in the balanced scorecard
including: TQM/ continuous improvement theory, managerial decision
making, performance evaluation metrics and cost analysis to highlight
company performance. The balanced scorecard report is powerful when used
as a tool of continuous improvement, which also relates to some of the
materials we covered on continuous improvement. Another approach is the
stakeholder approach which measures the needs/interests of
stakeholders.Although this approach is not as widely popular as the strategy
approach which uses the balanced scorecard report, a lot of business theory
about corporate social responsibility (CSR) is anchored in the stakeholder
approach.
Conclusion
The author cogently analyzed and articulated the strengths and weaknesses
of both the strategy approach which offers maximization of shareholder
returns and the stakeholder approach which seeks to establish rapport with
the community in which business operates. However, the author did not
address the role of government in the relationship between business and
society. The role of government is crucial because the stakeholders, whether
they are employees, customers, or members of the local community in which
business operates, need to be protected against the aggressive ambition
of business to maximize profits, more specifically when this desire can only be
fulfilled at the expense of the stakeholder. The Enron scandal is one such
instance where the company and its auditors, Authur Andersen, colluded
to manipulate and misstate financial statements to reflect a more favorable
result. As a result, many investors were misled and ultimately lost the entirety
of their investments. In the wake of this scandal Congress came up with the
Sarbanes-Oxley Act which established a governing body called the PCAOB
that would oversee public audit firms and ensure compliance with stricter
guidelines requiring more independence and objectivity in
reviewing/auditing financial statements of publicly traded companies. In
addition, the Sarbanes-Oxley Act also placed more regulations on public
companies, and compliance to these regulations are now monitored by the
SEC. The objective of Sarbanes-Oxley and many other regulations like it is to
protect and restore stakeholder trust. I believe the author could strengthen his
argument by incorporating government intervention in the proposed hybrid
theory of prioritizing both strategy/stockholders and stakeholder
interest/concerns. Government intervention is not exclusive to regulations
and restrictions, it also encompasses incentives. The U.S. Tax Code
established by congress and enforced by the IRS is quite a powerful tool in
driving desired business behavior. There are countless provisions in the tax
code that favor small, medium and large sized businesses in different but
equitable ways. I believe government wields one of the most potent tools
in the U.S. Tax Code as it can enact provisions that allow U.S.
businesses with international operations to benefit by keeping key
components of production in the U.S. This acts to strengthen the
economy and may keep a local community’s economy
intact, although it comes at a cost in the reduction of generated tax
revenue. Nonetheless, it is critical to admit that there are many factors at play
within the economy; however, one thing is certain! Government is an
undeniable and key mediator between business and society or as the author
coined it, strategy and stakeholders.
2- Case 4.3 The Business of Making Movies
Case summary
Motion pictures continue to play an essential role in the ever-changing
entertainment industry. In this case, the authors discussed the processes
involved with favorable distribution and marketing of a film on accounting. By
analyzing production, marketing cost and revenue data on more than 2,000
movies, the article explored the key factors that contributed to a box-office
success. In the motion picture industry, before a film gets into theatres and
seen by audiences, there are three key stages in the value chain for theatrical
motion pictures—production, distribution, and exhibition. Young et al. also
focused on these three sections and examined the impact of each part on the
box office.
Firstly, marketing is universally considered to be the key factor that leads to
box-office success. A movie’s marketing budget was found as high as 50% of
its total production cost for blockbuster films, which mostly comes from
advertising on television, print, radio, and outdoor billboards. The related
attempts to generate a buzz for the movie before release account for the
remaining part of the budget. Viral marketing via social network, email, and
other electronic media campaigns to promote new films is also a critical sector
of marketing. Licensing is especially vital for the marketing of movies in
theatres take for example the McDonald’s and Walt Disney Company
licensing relationship which lasted over 10 years and was extremely profitable
for both parties.
Secondly, distribution is the indispensable process of getting the film viewed
by an audience. This is usually the task of a professional film distributor, who
could be an independent company or a subsidiary of a major studio.
Distributors play a role as a negotiator between the film-production company
and the exhibitors, and has a set of tasks and responsibilities. They need to
arrange industry screenings to make the exhibitor believe they will get
financial profit and contracts with exhibitors on the split of the house nut for
each party. They also determine the time and the number of theatres to
ensure the profit the film can make during its theatrical run and ensure the
transfer to the theatre by the opening day. They also control the contracted
theatres having a certain number of seats, show times, etc. In addition, the
MPAA movie rating sometimes is involved in the distribution process. And,
interestingly, the research has shown different ratings have various revenue
potential. For example, an R-rating movie is likely to make a 12% less
revenue than a film with a lower rating.
Thirdly, the exhibition of a film has always been seen as the retail branch of
the film industry. Exhibitors regularly have a contract with a distributor, which
includes the profit-sharing terms and length of time the movie will be in the
theatre. There is a lot of deals between distributors and exhibitors, which
depend s on the perceived revenue potential, the relative bargaining power of
the parties, the length of running days, the time of film opening, and other
factors. One type of their deals is both distributor and exhibitor take a fixed
percentage during the film’s theatrical run, another is taking a sliding-scale
percentage of gross box-office receipts and other variables. In real life, it
seems that distributor could get larger revenue as the time goes on. Because
distributors can change the two types of payments and take the larger
percentage of ticket revenue after the exhibitor has taken out the house nut.
At the same time, the exhibitor can get the profits in concession in theaters,
which account for around 46% of profits and about 20% of revenues. That
means the exhibitor depend highly on concessions in theatre, as we see, the
price of popcorn and soft drinks in a theatre is relatively higher than the
outsider. By showing the number of screens and theatres of the top-five
chains, the authors proposed that the two most stressful issues for exhibitors
are installing digital technology instalment and providing a better movieviewing experience for the audience. Although digital cinema helps to save an
amount of money on film print and has an advantage of efficiency, it is a huge
number for the conversion. Another thing costs the exhibitor a lot is the
owning and maintenance fee for digital technology. However, the exhibitor
has to cover the cost without split with the studios and survives under the
depression in motion industry due to the poor movie-watching environment.
Besides, theatrical release and box-office performance on opening weekend
has been paid attention by the producer and the distributor, while most
revenues about 80% of the total revenues come from other forms of
distribution, such as DVD, TV.
Taking all the above information into consideration, the author conducted an
empirical study by collecting production, marketing and revenue data from
2,023 films to explore the major factors influence the success of a release.
This study finally found that star power has a significant positive effect on
production cost, and hi-tech motion movies and sequels have higher
production costs than other films. Then the types of distributors also have an
impact on the production costs and the independent distributor have lower
production costs than those distributed by the major studio. What’s more, the
results indicate that production costs, quality of a movie, ratings of motion
pictures and release seasons are the determinants of marketing costs and the
movie features, including star power, hi-tech genre, distributor, also make an
impact on the volume of marketing costs. Production costs and marketing
costs are found to have a positive effect on the box-office revenue. From the
result of regressions, they got a conclusion that marketing costs have a
stronger impact on film’s revenue compared to production cost. The results
also indicate that the star-laden, hi-tech, sequels and major studio finance
lead to a higher production cost.
Relationship of case to work experience
Although I have no experience in the motion picture industry, this case study
gives me a new perspective on assessing the return of marketing investment
and production cost. This case reminds me of my previous work experience in
a small software startup company called Lawei Technology Co.Ltd. It’s a
young company, and it faces a question that it needs to grow its brand to
make money but has zero money. In the early stage, it allocated most of the
capital on equipment, facilities and staff salaries and left limited money for
marketing activities. So it grew slowly and failed to come to light in the
competitive software industry. After getting more investment from the
government and individuals, it began to do more marketing to change the
situation.
In my opinion, for most of young companies, it is a hard determination of the
cost on marketing and makes good use of it to get more return. What I learnt
from this case is that marketing costs can have a stronger positive effect on
film’s revenue compared to production cost. So it is recommended that
companies should allocate a certain percentage of their gross revenue on
marketing, especially for a startup. It may help to create buzz and market
share as well as build industry connections.
Relationship of Case to Material Covered:
Costing systems help companies determine the cost of a product or service
related to the revenue it generates. The accounting for
business nanagers course introduces two costing system: Volume-Based
Cost System and Activity-Based Costing. The Volume-Based Cost System
assigns manufacturing overhead based on the volume of a cost driver,
whereas Activity-Based Costing(ABC) allocates indirect costs to products on
the activities they require. Compared to volume-based cost system, Activitybased costing provides a more full and accurate view of product cost, it
seems to be beneficial for companies by providing greater accuracy, lowering
costs and increasing profitability. Activity-Based Costing (ABC) is commonly
used in manufacturing as a method of assigning indirect costs to products on
the activities they require. It also can be applied in service industries, because
service companies usually do not use cost driver techniques in their cost
measurements and allocation procedures, but can allocate cost by various
functions or activities.
In this case, we can see the different effects of the costs of production and
marketing have on the revenue, and the marketing costs have a stronger
positive impact on the box-office revenue. So it is suggested to apply ActivityBased Costing system on cost accounting. In practice, it means that we can
allocate cost of movie based on activities that cause the costs to vary, such as
production, marketing, and distribution of films. And applying this costing
system would help in evaluating past performance on box-office and cost
management and make cost predictions of future engagements more
meaningful. What’s more, ABC costing requires organizations to focus on and
understand the relationships between costs and activity, so it helps find ways
to manage or reduce costs to improve their profitability.
Summary:
This case shows the business process of selling movies and provides key
success factors for a box-office success. It seems to have great implication for
accounting practices and regulations in the motion picture industry. According
to the result of the study, from a matching-principle perspective, organizations
in movie industry are suggested to pay more attention to marketing and make
bigger investment in marketing than production of movies. It also reveals the
importance of understanding the relationship between cost and activity and
allocating the cost based on activities. So Activity-Based Costing would be a
good choice for service companies to manage their costs.
3- 1.4 Preserving Control
Summary of the Young Reader Case
In order to control the downsizing and other issues related to its operations
corporate controllers have undertaken basic activities to guarantee that
financial and operational controls stay in place. There are some issues which
controllers are facing such as downsizing, new methods and metrics related
to risk management and some issues related to supply chain strategies. They
also agree on adoption of International Financial Reporting Standards
(IFRS) after the great recession. Following are the issue explained in this
case.
Downsizing
Downsizing has an impact on profitable competencies of the firm, general
operational and control condition. As it is said by Marsha Hunt corporate
controller and vice president of Cummins Inc., a global company that “During
downsizing or restructuring one of the main issues regarding the control is to
make sure finance is aware of the decisions and a stop-gap strategy exists in
advance to make sure the control is fully implemented.” Hunt also explained
that while making decisions regarding downsizing there should be clear
awareness and should know who will be impacted as a whole company. This
will help the controllers to manage actions …
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