BIGBRAND INC.

BigBrand Inc. is an American company specializing in manufacturing and delivering home and office furnishings. The company operates in the U.S. Midwest with four production facilities and 950 employees. Currently, its business is limited to North America with a 4 percent share of the North American home and office furniture market. Its major sales channels include warehouse centers, home renovation stores, and office and electronic superstores. With 50 years of operations, the company was viewed as producing high-quality furniture and delivering exceptional service every time, at comparable prices. The company is currently listed on the New York Stock Exchange with a market capitalization of $23 million.

Ryan Spielman has been the CEO of the company for the past 10 years. He holds a CPA designation and has an MBA degree from Harvard Business School. He has 20 years of experience in the home furniture manufacturing industry and has accumulated extensive knowledge about the industry. For many years, Mr. Spielman has had a vision of developing the company into a multinational firm. Only recently has he gained a strong feeling that the time for his vision of the company has finally come. Motivated by his observations of the rapid economic and market growth in Asia and the limited growth potential in North America, Mr. Spielman believes that expansion into Asia through direct investments will provide BigBrand with new business opportunities. Establishing international competitive advantages is a long- term strategic goal he has set up for the company. According to his long-term plan, if the business in Asia grows well, further expansion may be considered; in this situation, it could be beneficial to have the company listed on the Hong Kong Stock Exchange, although listing involves a series of complicated issues and is costly. Mr. Spielman is currently focusing on the first steps of the expansion.

The expansion plan is partially motivated by Mr. Spielman's serious concerns over the company's sales potential in the North American market. In recent years, due to the financial crisis, the U.S. economy has significantly slowed down. Although the economy has recovered slightly since 2011, the lingering effect of the crisis still remains, leaving a high level of household debt and unemployment. These factors constrain consumers' purchasing power and business expansion. Consistent with the state of the economy, the company's sales declined in 2009 and 2010, followed by a slight increase starting in 2011. However, sales are flat.

The level of competition in the industry has worsened the situation. Consumers are increasingly buying furniture through nontraditional channels, such as the Internet or catalogues. As a result, Homewonder, like other furniture suppliers, is facing greater challenges with respect to competition and growth. Although two competitors have lowered their selling prices to increase sales, Mr. Spielman is not sure whether this is an appropriate choice for BigBrand given the company's high product quality.

Furniture demand is strongly related to new home and office building construction, as well as home and business resale. Both areas have shrunk significantly in the U.S. market, in part because the U.S. housing starts and permits for future home construction have been declining. As a result, driven by the reduced demand and intensified competition in recent years, BigBrand is currently only utilizing 84 percent of its production capacity.

In the middle of 2014, the company was on the threshold of missing analysts' earnings expectations. Mr. Spielman is afraid that this situation may continue. After a thorough analysis of the company's financial data of 2011-13 (see Appendix A for financial data), he perceived limited sales growth potential in the U.S. market and realized that promoting domestic sales would be very costly given the fierce competition. To grow, the company desperately needs new markets to increase sales and earnings. Mr. Spielman stated in his letter to shareholders, "For the company to grow and succeed, we need to make changes, and these changes should create opportunity for BigBrand to move to the next level. We need to make a sustainable company." He believes the Asian market can provide a long-term solution to the challenges the company is currently facing.

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Mr. Spielman has earned a reputation of being "profit-driven," and he often states, "maximizing profit is the only effective approach we should take to return to our shareholders" and "our competitive advantage should be built on our quality products and services at competitive prices." However, the company's board members view success factors differently. They also perceive the needs of other stakeholders as important to the company's sustainable development, and believe being socially responsible is an accountability that companies should take for the society at large. Under the board's influence, the company has been spending resources on social activities (see Appendix B for social programs). Specifically, it sponsors scientific programs in three local high schools and children's mental health programs. All the children-related activities are based on the belief that children are the future customers of the company as well as the future of the country.

The company also supports local community sports and arts activities and implements water projects. Activities under those programs benefit not only current but also future generations. Because of these programs, the company has developed a better public image, compared to its peers.

Although social activities provide many benefits, they do compete with business activities for resources. Mr. Spielman well understands the need for the trade-off between business activities and social activities. He reviewed the company's spending in these social programs over the last several years. To release some of the current serious costs and earnings pressures, he thought of downsizing these programs and is even considering eliminating some of them entirely.

A STRATEGIC PLAN

Expansion into the Asian market is largely motivated by two salient features of that continent. First, compared to more developed countries, Cambodia, Malaysia, Vietnam, Thailand, China and India offer much lower materials and labor costs (See Exhibit 1 for labor cost comparisons). Second, the continent has recently exhibited a high and rapidly growing demand for furniture, especially high-end furniture products. The main driving factors include the size of the population, strong economic growth and improvements in living standards. Demands are partially satisfied by imported furniture (see Appendix C for information on the economy and furniture industry as well as import growth in China as an illustration). This creates promising opportunities for direct investments in the Asian furniture market. BigBrand currently has two production lines mainly targeting the business owners and institutions, and two high- end production lines mainly targeting luxury home owners. Mr. Spielman plans to target both market segments in Asia to build a broader customer base and achieve market potential. Under his strategic plan, BigBrand will shift its solely U.S.-based operations by moving one high-end home furnishing manufacturing division and one office furnishing manufacturing division to Asia, as well as establishing a sales department there. However, the locations for the two divisions have not been decided yet. As the business in Asia grows, more production divisions can be established there.

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The plan has a high probability of success given the company's brand name, superior product quality and management expertise. BigBrand is known as selling high-quality products at comparable prices. Mr. Spielman has conducted some research and has perceived that middle and upper class families in Asia prefer high-end furniture. For instance, the import of solid wood furniture in China has a high increase

rate of about 22.88 percent (see Appendix C). This market potential offers a good product choice for the company. In 2013, home furniture in China had a gross margin of 32.9 percent, and office furniture had a margin of 26.4 percent (see Exhibit 2 for cost percentages), much higher than corresponding margin figures in North America. However, Mr. Spielman realized that the plan would require a large initial investment and that part of the fund had to be generated internally. He also anticipated some risks and uncertainties associated with this plan. The most significant uncertainty, in his mind, is related to political and cultural risks in Asia. Resources are needed to understand and build good relationships with local governments in order to receive favorable treatment, and also, product design has to be altered to meet Asian customers' tastes and preferences.

Mr. Spielman understands it will take a couple of years for the plan to generate the expected economic benefits and improving current earnings performance will have to depend on making some immediate internal improvements. He is considering a cost cutting project. However, after reviewing the company's cost data, he failed to see significant opportunities for further cost reductions. The only opportunity he perceived is to outsource high-cost service divisions. He formed a cost cutting project including both cutting social programs and outsourcing high cost service divisions. Downsizing IT and delivery divisions will be necessary, even without outsourcing, if the U.S. operation becomes smaller after moving the two production divisions to Asia.

To come up with a concrete plan, in his office, Mr. Spielman met his senior management team, including Michael Patrice (the CFO), the controller and all the divisional managers. They had the following conversation regarding the expansion plan.

MR. MOORE, a production division manager. I can see it is a great plan. However, it requires a lot of thinking and preparation. First of all, we need a good understanding of the costs of doing business in Asia. My feeling is that there may be some costs that we will have to incur over there but not here. For instance, I heard from one of my friends currently doing business in China that companies need to offer a place for single employees to live free of charge. There could be other types of costs like this, and we need to anticipate them seriously.

MR. PATRICE. I agree with the plan because it can offer us a huge growth potential. Regarding the costs, I am more concerned with where and how we can build our factory. What will be the budget for the construction? Should we sell our machines here and buy new ones there, or should we ship our machines there? If we buy new machines over there, prices could be lower, but the quality might be a concern. We need to conduct some research on that. In addition, what rent will we have to pay for the living quarters of the employees?

MRS. BURGER, the HR manager. We need to recruit both production and sales staff over there. I am afraid we may encounter unexpected issues and incur unexpected costs since we have little knowledge of the cultural practices over there, and there are language barriers, too. Sending our own production and sales managers there is a good idea; however, it will be very costly. This is an issue we will have to address.

MR. PATRICE. Indeed, we need a budget to deal with possible unexpected costs.

MR. HARRISON, another production manager. Sending our own managers there will increase our fixed costs and bring up our break-even point. That could increase our operating and financial risks for the first few years' operations. We need to carefully estimate the sales we need to break even, the sales we need to achieve our profit target, and how long we need to achieve these goals.

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THE CONTROLLER. I am reading about the political risks of doing business in Asia. Governments over there can really do whatever they want without considering the harm to businesses. For instance, they can take over or force closing because of special events such as APEC.

MR. PATRICE. It is so important to make this project a well-controlled and streamlined operation with reduced budget overrun. However, how can we achieve that? We first need a project management team to manage this expansion project. We also need to be clear about the priorities of the team.

MR. SPIELMAN. Excellent! We do have a number of things to consider and plan, especially the project costs and sales. We can discuss them in great detail at another meeting. First of all, we need to bring the proposal to the board and get it approved. Are there any further comments?

As nothing was heard, Mr. Spielman moved the meeting to the next agenda item: outsourcing high-cost divisions and downsizing social programs.

MR. SPIELMAN. I know our company is at a historical turning point. I have spent quite a lot of time studying our financial statements and other cost and operation related information. In my opinion, we have a big cost problem and need to cut costs right away to improve our bottom line as well as accumulate more cash for our expansion plan. Are there any suggestions?

MR. PATRICE. I have carefully examined the segment reports. In my opinion, the delivery and the IT network divisions seem too costly to maintain given our current sales and earnings problems [see Appendix A for the cost information of the two divisions]. We need to focus on our core business operations. Outsourcing the two divisions would do the trick. I have contacted two suppliers and seen the possibility of getting similar services from them for 85 percent to 90 percent of the costs of providing the services ourselves.

THE CONTROLLER. I agree. Doing this will likely allow us to meet analysts' forecasts. Our shareholders should be happy with that.

MANAGER OF THE DELIVERY DIVISION. The high cost of the delivery service was largely driven by diverse customer needs. Our company has a tradition of customer care. Employees in my division have worked for the company for a long time and have achieved high customer satisfaction in the past. Their quality service is important to our business.

MANAGER OF THE IT DIVISION. That's right. Most current IT employees were hired during the Internet boom period. They have provided quality services and are paid competitive salaries and benefits. I am proud of our tradition and the dedication of our employees. If we outsource our IT, we will lose our investments in intellectual capital. In addition, we may not be able to develop any internal know-how to extend on the applications we outsourced. We need to carefully weigh the benefits against the costs. I would like to suggest keeping the two divisions. However, I understand the costs and earnings pressures we face now. If outsourcing is the best for the company as a whole, I have no objection.

MANAGER OF THE DELIVERY DIVISION. But we have to make sure we can get quality suppliers.

MR. SPIELMAN. I appreciate what you have said. I do not think we will have problems getting them.

MANAGER OF THE DELIVERY DIVISION. While outsourcing is a good strategy for cost saving, and it can also offer us a follow-the-sun workforce, we are exposed to supply-chain risks. If our providers are affected by natural or political events, we will be in big trouble. I suggest we have contingent plans in place.

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MR. PATRICE. There is also a resource management issue. We need to think about how to communicate with our suppliers and perform some monitoring and governance to make sure we can get what we want at the time we need it.

MR. SPIELMAN. Indeed, we have more to do. Another thing on my mind is that outsourcing is not enough, and we need to do more. Given the declining profitability trend in the past three years, even a 1 percent increase in net income is significant good news to our shareholders. I think we should also downsize our social programs to save some costs. I suggest we cut our school and water projects by 50 percent and suspend all other programs. Are there any comments?

After one minute of silence, all members agreed: "Of course, it is the right thing to do. After all those cuts, we will look much better financially."

Mr. Spielman was not surprised with the outcome. He did not anticipate resistance from the managers of the two affected divisions, as they are both close to retirement. The written plan was presented to the board of directors after this meeting without any communications with the employee in the two divisions.

BOARD RESPONSE

The board meeting to discuss the proposal was held in the conference room on September 15, 2014. Mr. Spielman and Mr. Patrice walked to the room together, each with a slight but confident smile.

There are nine members on the board (see Appendix D for board information). Mr. Mundy, the independent chairman, led the meeting. He first asked Mr. Spielman to present the proposal and then opened the discussion. While the board members and the managers had some similar concerns, the discussion focused on the possible social impacts of the proposal that Mr. Spielman did not address.

MRS. THOMAS. Mr. Spielman, I can see the proposal will result in many layoffs. Have you had a chance to consider what impacts it may generate? What can we do to mitigate such impacts?

MR. SPIELMAN. Mrs. Thomas, I totally understand your concerns. Of course, it will generate some negative impacts. However, my understanding is that cost efficiency is one of the major issues we face. I often think our primary task is to provide more return to our shareholders. The additional tax we pay after we become more cost-efficient will help the government to better deal with the unemployment issue.

MRS. THOMAS. While you might be correct, shouldn't we help our government by doing more than providing tax revenues? More importantly, I also have some concerns over the existing employees. How would they react to those layoffs? Employee morale and productivity are important to the company's sustainable development. We have to consider the impacts on those things. Some of the employees may consider leaving our company because of the layoffs, and if that happened, we may have to incur the costs to retain them or to hire new people.

MR. WRIGHT. Related to Mrs. Thomas's point, I am worried about any potential impacts on the local economy and residents. I am in the retail industry, and I know how the local economy and market demand influence this industry. These factors should also be important to the furniture industry, as we both are very sensitive to economic growth and demand changes. I can see your proposal will definitely cause several local impacts. Therefore, I suggest you talk to local communities and anticipate potential impacts as much as possible.

MR. SPIELMAN. I appreciate your thoughts, Mrs. Thomas and Mr. Wright. For some time, I have been thinking to what extent an economic entity should consider social issues. My opinion is when

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there are conflicts between financial and social objectives we should focus on financial issues first, as we are mainly accountable to our shareholders. However, I could be mistaken.

MR. PATRICE. I agree that the needs of shareholders are more important, and we should satisfy them first. We create jobs, offer products and pay taxes, which is all we can do for the local governments and communities. I am afraid if we do not take any actions now, given our current financial situation, the price of our stock could drop, and our shareholders will lose.

MR. SPIELMAN. Yes, by doing nothing now, we may eventually lose some of our competitive advantage and business. When that happens, more people may have to lose their jobs and the local economy will be adversely affected.

MRS. THOMAS. What if the employees in the two divisions take actions to raise media and government attention? It may cause us trouble. Based on our publicized profile, I can see it is likely. If it happens, our reputation will be damaged. Very likely, the company will lose customers and sales because of this, and our shareholders will lose, too. In addition, what do you think about the impact of outsourcing on our future recruiting? It will be more difficult and costly if we develop an "outsourcing" reputation.

MR. PATRICE. I agree with you, Mrs. Thomas. Indeed, we need to deal with this situation carefully. I will ask our public relation director to provide some solutions.

MR. KELLY. Mr. Spielman and Mr. Patrice, I have another concern. Employees in the delivery division have a strong relationship with our existing customers, and employees in the IT division are knowledgeable and difficult to replace. Do you think we are losing valuable assets if we outsource these divisions?

MR. SPIELMAN. Unfortunately, I do not think so. The job market is really favorable to us now.

MR. PATRICE. As a matter of fact, we can actually get quality IT staff with lower salary.

MR. WRIGHT. Managing an outsourced business can be very challenging. Have you investigated all operational issues, such as communication and documentation? I suggest that you have a comprehensive plan in place before proceeding.

MR. SPIELMAN. Thank you for the good point; we will definitely look into it.

MR. KELLY. Mr. Spielman and Mr. Patrice, have you perceived any adverse impacts from cutting our social programs? What about the damage to our public image? My understanding is this: in today's business environment, companies are competing on intangible assets. Public image is, of course, one of the most valuable intangible assets. If we are viewed poorly, our current customers may leave us, and potential customers may not come to us. Is it possible to keep these programs the way they are now?

MR. PATRICE. I have thought about that. Ideally, we would like to keep them. However, we will do what we can do. I personally think, at the moment, the best for the company is to cut them to release some cost and earnings pressures.

MR. SPIELMAN. Under the new strategic plan, it is difficult to maintain these programs. All resources may have to concentrate on the new plan. We could come back after we earn more money from the new plan.

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MR. KELLY. Related to the new plan, have you thought of the U.S. customers' reaction to the offsourcing you proposed? Currently, our unemployment rate is relatively high; do you think our U.S. customers will like the outsourcing idea? How might they react to that?

Neither Mr. Spielman nor Mr. Patrice had a response.

MR. MUNDY. I agree with our board members. The social impacts of the plan have to be dealt with properly. Mr. Spielman mentioned in his letter that the company needs sustainable development. However, it should be recognized that other stakeholders are also an important driving force for achieving this development and should not be ignored.

While this strategic plan was appealing to the top management, it turned out that the majority of board members were not in favor of its current version. The overall concern of the board lies in the lack of consideration of the impacts of the plan on other stakeholders. At the end of the meeting, Mr. Spielman was required to revise his proposal, addressing the concerns the board members raised and providing more costs and benefits analysis.

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APPENDIX B Investment in Social Programs

BigBrand has had a social sustainability program in place for many years and has taken many important initiatives, such as energy and recycling programs, to minimize its environmental impact, and it is actively researching and using more energy-efficient and environmentally friendly raw materials in its production lines. The chairman of the Board, Mr. Mundy, believes that commitments to corporate social responsibilities are an important component of the company's overall business strategy.

In addition to its sustainability program, in recent years, under the influence of the board, BigBrand has participated in a variety of community activities in order to enhance its corporate social image and to better serve society and its customers.

Under its scientific programs, the company sponsors activities that help students apply knowledge they learn in class, and develop new knowledge, social skills and self-esteem. The children's mental health project provides financial aid to organizations dedicated to providing early intervention, increasing public awareness and reducing the stigma of mental illness. The company also supports various community sports activities to encourage exercise and communication within communities.

The art project consists of donations to organizations whose programs support advancements in all forms of art, especially emerging arts. With respect to environmental concerns and sustainable development,

the company's water projects are a 15-year global charitable commitment to help provide access to drinkable, swimmable, fishable water. These projects will benefit both current and future generations.

Furniture companies in North America face tough competition, and typically enjoy only about 3 percent to 5 percent of net margin for profitable firms. Social responsibility is an important tool to gain a customer base and a positive public image because it can move customer and public attitude toward socially responsible firms. The company has a policy of investing 3.5 percent of net income in social responsibility activities. This commitment to social activities over the years is well above the industry norm. The company's expenditures on selective social activities in the past three years are summarized below:

APPENDIX C Economy and Furniture Industry Growth in China

The economy in China is increasing continuously. In 2013, GDP increased by 7.7 percent; inflation- adjusted disposable income increased by 9.7 percent; investments in real estate increased by 19.8 percent. Furniture retail sales reached $163,998 million in the period of January-July 2013 with an increase of 20.7 percent compared to the same period in 2012. In July 2014, furniture imports reached $226,475 (in thousands) with an increase of 16.88 percent compared to the same period in 2013; among others, the wood-made home furniture imports increased by 22.88 percent. China is a net exporter of furniture with total furniture exports of about $84,640 (in millions) in 2013. Manufacturers and distributors are performing active marketing activities. There will be 11 furniture exhibits taking place in 2014 across a number of large cities and provinces. According to the estimation of the Chinese Furniture Association in 2013, the demand for furniture in China for the next 15 years will increase at a rate of 10 percent annually. Furniture prices in China are largely equivalent to ones in the United States.

Data Sources

http://www.stats.gov.cn/tjsj/zxfb/201402/t20140224_514970.html http://www.chyxx.com/data/jinchukou/201409/284079.html http://wenku.baidu.com/link?url=fknpWu1STX610RBG7Ss3TzYYaNOaa- 6D9Fd3Rvn3WZiof9jQiBzoOB5aNnJOIgK2Igz7nuujSceptiU0aUVCG9SDe0ZHqbiHbCdVB6Pi6B3 www.meilele.com

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APPENDIX D Other Board Members

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Name

Position

Years since joining the board

Qualifications, experience or expertise

Jeffery Mundy

Chair

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7-years of president and CEO experience; specialty stores: executive position; private companies: board member experience; expertise in operations, finance, marketing and corporate development

Michael Patrice

CFO

25

Controller experience in the furniture industry; expertise in financial risk management, financial planning and reporting

Alan Richards

Member

7

CPA; retired vice-chairman of an accounting firm; 25 years of accounting firm work experience; 5-year auditing committee member of BigBrand; board member experience in the related industry

David Kelly

Member

5

University professor; teaching and research interests in sustainability and corporate social responsibility

Greg Wright

Member

4

MBA; marketing manager, board member experience in the retail industry; expertise in customer relations

Erin Thomas

Member

4

Retired HR manager; experience in the insurance industry

Ashley Kitchy

Member

6

Commentator of TV programs; author of several books on home decoration and furnishing

Malcolm Richardson

Member

9

CEO experience in the manufacturing industry

REQUIRED

The management team and the board of directors have different understandings of whether corporate social responsibilities should be considered in goal setting and strategic planning.

Mr. Spielman is not sure how to address the board's concerns. He has approached you, a business consultant, for advice.

In your report, you need to provide Mr. Spielman with your thoughts or suggestions that you think can help resolve the dilemma faced by the company, including the differences in opinions regarding the importance of other stakeholders' interest between the management team and the board of directors.