MGT229\t-\tLesson\t4\tManagement\tExercise To Pay or Not To Pay? Whether it's something as complicated as cars or as simple as toy blocks, the success of a product depends in large part on perceptions of its quality. If consumers feel that product company is committed to delivering highquality, valuable goods, then they are more likely to buy that product. Perhaps consumers will even pay a little extra, if necessary. But, if the product is shabby, and the company is less than diligent about product quality, then sales are likely to dip. So what happens when a company that used to be known for its product quality faces a crisis? Toyota used to sit on top of the world. It basked in the reputation of efficiently building highquality cars. It enjoyed unprecedented growth, even surpassing General Motors as the largest car manufacturer in the world. But, all of the growth and positive reputation would tumble with reports that cars were accelerating out of control, careening down highways, and putting everyone's lives in danger. There was even a recording of a 911 call from an offduty policeman who lost control of his car and died in the ensuing crash. Toyota responded with a recall of historic proportionsnearly 8 million cars in the United States and 1.8 million in Europe. It even suspended sales of brand new models, including the best selling Camry and Corolla, until the vehicles could be repaired. But still, confusion existed about what was causing the problems. Was the problem the floor mats, the braking system, the software controlling the engine, or something else? By early 2009, the company was in a situation it had not faced for decades; its sales had dropped by 16%. Even General Motors, the bankrupt company that looked like it could do nothing right for many years grew 8%during the same time. According to some journalists, the recall cost Toyota more than $2 billion. But by March 2010, things seemed to be on the rebound. Sales picked up dramatically, 35% from the previous year, and 88% from the previous month. Customers were once again buying Toyotas and putting their confidence in its ability to produce reliable cars. But, just as things seemed to be on an upward trend, Transportation Secretary Ray LaHood announced plans to levy a fine of $16.4 million against Toyota. The money itself was not necessarily a problem. Even with losses, Toyota still made $1.8 billion in the fourth quarter of 2009. The fine would be less than 1% of what the company earned in just three months. So why not just \"take the medicine\" as it were, pay the fine, and move on from the whole mess? Because the fine comes attached with a statement that Toyota \"knowingly hid\" safety problems in order to avoid a costly recall. According to LaHood, \"We now have proof that Toyota failed to live up to its legal obligations. Worse yet, they knowingly hid a dangerous defect for months from U.S. officials and did not take action to protect millions of drivers and their families.\" The company could just pay the fine and admit fault, but if they do, the company's reputation for quality and its image will take a perhaps fatal blow in addition to many potential law suits. This is quite a complex decision, keeping in mind what might be at stake. Source: Adapted from MGMT 6 Instructor Resources, Chapter 5, Cengage Learning, 2013. MGT229 - Lesson 4 Case Study History and Products DUPONT The DuPont company got its start when Eleuthre Irne du Pont de Nemours fled France's revolution to come to America. In 1802, he built a mill on the Brandywine River in Wilmington, Delaware, to produce blasting powder used in guns and artillery. In 1902, E.I. du Pont's greatgrandson, Pierre S. du Pont, along with two cousins, bought out other family members and began transforming DuPont into the world's leading chemical company. In its second century, DuPont Corporation would go on to develop Freon for refrigerators and air conditioners; nylon, which is used in everything from women's hose to car tires; Lucite, a ubiquitous clear plastic used in baths, furniture, car lights, and phone screens; Teflon, famous for its nonstick properties in cookware and coatings; Dacron, a washandwear, wrinkle free polyester; Lycra, the stretchy, clingy fabric used in activewear and swimwear; Nome, a fireresistant fiber used by firefighters and race car drivers, and to reduce heat in motors and electrical equipment; corona, a highend countertop used in homes and offices; and Kevlar, the \"bulletproof\" material used in body armor and helmets worn by police officers and soldiers and for vehicle protection. Key Issues You became DuPont's CEO right as \"the world fell apart\" at the height of the world financial crisis. Fortunately, you had early warning from sharply declining sales in DuPont's titanium dioxide division, which makes white pigment used in paints, sunscreen, and food coloring. Sales trends in this division can usually be counted on to indicate what will happen next in the general economy. You and your leadership team began planning with the heads of all of DuPont's divisions to make contingency plans in case sales dropped by 5%, 10%, 20%, or more. Many DuPont managers thought you were crazy, until the downturn hit. It was difficult, but with plans to cut 6,500 employees at the ready, you were prepared when sales dropped by 20% at the end of the year. But when that wasn't enough, salaried and professional employees were asked to voluntarily take unpaid time off and an additional 2,000 jobs were eliminated. Research and Development In all, these moves reduced expenses by a billion dollars a year. But one place you refused to cut was DuPont's research budget (R&D), which remained at $1.4 billion per year. Although R&D budgets were not cut, discretionary travel was eliminated, and every R&D program was expected to produce customervalued products that could be profitable. Uma Chowdhry, DuPont's chief science and technology officer, explained that \"DuPont research managers need to show their projects can be expected to make a tidy profit to continue to receive funding.\" Thomas M. Connelly Jr., DuPont's chief innovation officer, makes the key point that, \"We can't leave our science in the library.\" The focus on research with market potential appears to be working. In 2009, DuPont filed for 2,086 U.S. Patents, the highest in company history, and 8% higher than the year before. What to Do? One of the ways the board of directors measures company performance is by comparing DuPont's total stock returns to 19 peer companies. Over the last quarter of a century, DuPont has regularly ended up in the bottom third of the list. This makes clear that you, as the CEO, have one overriding goal: to restore DuPont's prestige, performance, and competitiveness. The question, of course, is how? Before deciding, you have some big questions to consider. First, given sustained weak performance over the last quarter century, do you need to step back and consider DuPont's purpose, that is, the reason that you're in business? After transitioning from blasting powder to chemicals, DuPont's purpose, mission, and slogan became, \"Better things for better living ... through chemistry.\" Is it time, again, to reconsider what DuPont is all about? Or, instead of an intense focus on DuPont's purpose, would it make more sense to make lots of plans and lots of bets so that \"a thousand flowers can bloom\"? In other words, would it be better to keep options open by making small, simultaneous investments in many alternative plans? Then, when one or a few of these plans emerge as likely winners, you invest even more in these plans while discontinuing or reducing investment in the others. Finally, planning is a doubleedged sword. If done right, it brings about tremendous increases in individual and organizational performance. But if done wrong, it can have just the opposite effect and harm individual and organizational performance. Source: Adapted from MGMT 6 Instructor Resources, Chapter 5, Cengage Learning, 2013