Mini Case 1
Sany Heavy Industry Co., Ltd The Sany Heavy Industry Co., Ltd is China’s largest producer of heavy equipment. In fact, it is the fifth largest producer of this type of equipment globally. In 2014, its revenue was decreasing because of the downturn of overall GNP in China. Sany’s total sales revenue in 2012 was $12.9 billion, well behind industry leader Caterpillar at $65.9 billion. However, Sany has a goal of eventually unseating Caterpillar as the industry leader. Sany plans to achieve $47 billion in annual sales within 10 years. Sany has already surpassed Caterpillar as a leader in its Chinese domestic markets. Sany has four core businesses: (1) cranes, (2) road construction machinery, (3) port machinery, and (4) pumpover machinery. While each is distinct, some similar technologies are used in the production and equipment. Furthermore, similar technologies allow similarities in production processes and equipment for certain parts. Therefore, there is a transfer of knowledge across these businesses. In addition, customers and markets share some similarities because all relate to some form of construction. For this reason, in the United States, Sany has become a major sponsor of a Chevrolet on the NASCAR auto racing circuit. Sany America’s marketing director, Joe Hanneman, said that research showed NASCAR racing events to be the primary recreation event for people in the U.S. construction industry. Sany invests 5 percent of its annual sales in R&D to continuously improve the quality of existing products, identify new technologies, and develop new products. Through the end of 2012, Sany held 3,303 patents as a result of its R&D efforts. Indicative of its intent to be a technological leader in its industry, Sany has developed new postdoctoral research centers to attract top research scientists. In 2013, the company was awarded China’s National Technology Invention Prize for its “superlength-boom” technology. Although it has been pursuing technological innovations, Sany was recently accused of patent violations by Manitowoc, a diversified producer of equipment including large cranes. In 2014, a judgement went against Sany concluding “one Sany crane product infringed one of Manitowoc’s patents and that six trade secrets of Manitowoc were both protectable as trade secrets and misappropriated.” This is a negative signal for Sany as it seeks to pursue more diversified growth outside of China. Sany continues to grow organically and through acquisitions. For example, in 2012, it acquired Putzmeister, a well-known concrete pump manufacturer. In addition, it has established subsidiaries in many countries, including the United States, Germany, and Brazil, to enhance its international equipment sales and broaden its market reach. Largely because of its major goal of internationalization, it is moving its corporate headquarters from Changsha to Beijing for enriched international connections.
Questions
1. What corporate diversification strategy is being pursued by Sany? What evidence do you have that supports your position?
2. How does the level of change in gross domestic product (indicator of country economic health) influence a firm like Sany?
3. Why does a firm such as Sany (in the heavy equipment industry) spend so much of its revenue on R&D and innovation?
4. Given that it is now seeking international expansion, how do you expect the judgement against it (patent and trade secret infringement case) to affect its growth prospects outside of China?
Mini Case 2
Imperial CEO, JPMorgan Chase’s Jamie Dimon Jamie Dimon, CEO of JPMorgan Chase & Co., is one of the very few top executives at large banks or major financial services firms who was unscathed by the substantial economic recession which began in 2008—a recession largely caused by those firms taking inappropriate risks. He is described as charismatic and an excellent leader. Yet, in 2012, JPMorgan Chase experienced its own scandal caused by exceptional risk taking. Traders in its London operations were allowed to build a huge exposure in credit derivatives that breached the acceptable risk limits of most analytical models. As a result, the bank suffered losses of more than $6 billion. It is referred to as the London Whale trading debacle. In 2013 and 2014, there were large regulatory and legal settlements. Most significant was a $13 billion settlement with regulators over mortgage bond sales in 2013. In addition, to this record settlement, “the bank paid $2.6 billion to resolve allegations that it didn’t stop Bernie Madoff ’s Ponzi scheme and two fines of about $1 billion each stemming from currency rate manipulation and the London Whale trading loss.” It may need an additional $20 billion in additional capital to satisfy regulatory bank safety rules. One Democratic Senator from Delaware, Ted Kaufman, noted: “I think Jamie Dimon is Teflon-coated.” Because of the huge loss and concerns about the lack of oversight that led to these fines and settlement, there was a move by shareholder activists to separate the CEO and chair of the board positions, requiring Dimon to hold only the CEO title. Playing key roles were the American Federation of State, County and Municipal Employees (AFSCME) and the Institutional Shareholder Services (ISS). The AFSCME was pushing to separate the holders of the CEO and chair positions at JPMorgan Chase. The ISS was pushing for shareholders to withhold the votes for three directors currently on the Morgan’s board policy committee. Dimon described the London Whale debacle as an anomaly caused by the inappropriate behavior of a few bad employees. However, this debacle plus the huge fines and settlements seems to suggest serious weaknesses in the bank’s oversight of activities involving significant risk and compliance with regulatory rules. Executives and board members of JPMorgan Chase worked hard to thwart these efforts. Lee Raymond, the former CEO of ExxonMobil who has been on the JPMorgan board for 28 years, played a key role in these efforts to support Dimon and avoid a negative vote. This group lobbied major institutional shareholders and even asked (though he declined) former U.S. President Bill Clinton to help work out a compromise with the AFSCME. They even suggested that Dimon would quit if he had to give up one of the roles and it would harm the stock price. In the end, Dimon and the bank won the vote with a twothirds majority for Dimon to retain both positions. Several analysts decried the vote and suggested that having a third of the shareholders vote against Dimon is not a major vote of confidence. One even suggested that the vote is not surprising because of the 10 largest institutional owners of the bank’s stock, seven have CEOs who also hold the chair position. So, how could they openly argue that this is bad for JPMorgan when they do it in their organizations? Furthermore, these major institutional investors want the banks to engage in high-risk activities with the potential to produce high returns. This is especially true because the downside risk of losses is low as the government cannot afford to allow the big banks to fail. One analyst suggested that the shareholders voted out of fear (potential loss of Dimon) and for personality instead of good corporate governance. Analysts for the Financial Times argued that the outcome of this vote demonstrates how weak shareholder rights are in the United States. Finally, another analyst noted that while splitting the CEO and chair positions does not guarantee good governance, it is a prerequisite for it. Lee Raymond suggested that the board would take action. Several speculate that such actions will not relate to Dimon duel positions, but rather to a reconfiguration of the board members on the risk and audit committees. Some have argued that certain members of these committees have little knowledge of their function and/or have financial ties to the bank, thereby creating a potential conflict of interest. One protection for Dimon is that the JPMorgan Chase continues to perform well, even with poor ratings from governance evaluators.
Questions:
1. How well do you think the governance system of JPMorgan Chase is working in protecting shareholder interests?
2. What particular governance devices are helping or hindering good governance in the JPMorgan Chase situation?
3. What do you recommend to improve the governance system specifically for JPMorgan Chase but also overall relative to the system of governance devices described in Chapter 10?
Mini Case 3
Unilever, a European-headquartered (in both the Netherlands and the United Kingdom) consumer products company, is committed to using a sustainable environment strategy while manufacturing its large array of food and beverage products. Historically, consumer products companies, especially those from Europe, have pursued the multidomestic strategy, needing to adapt their products to each country or region market. Accordingly, most have implemented their strategy using the worldwide geographic area structure. Many consumer product companies, such as Avon, have begun to use aspects of the worldwide product structure to become more efficient. This is also the case with Unilever. However, Unilever has continued to emphasize geographic areas, but it has done so using the transnational strategy while implementing the combination structure to meet local market responsiveness as well as global efficiency objectives. Moreover, its CEO, Paul Pullman, who took the job in 2009, has also suggested, “our purpose is to have a sustainable business model that is put at the service of the greater good.” Accordingly, Unilever created a manifesto in 2010 called the Sustainable Living Plan. This plan calls for Unilever to double its sales at the same time that it cuts its environmental footprint in half by 2020. One goal embedded in this plan is to source all of the firm’s agricultural products in ways that “don’t degrade the Earth.” Unilver also has a campaign promising to improve the wellbeing of one billion people by “persuading them to wash their hands or brush their teeth, or by selling them food with less salt or fat.” It seeks to realize many of these goals through cooperative strategies with other profit-seeking organizations as well as nonprofit entities. In 2010, for instance, Unilever signed a contract with Jacobs Engineering Group Inc. forming a global (overall corporate) alliance to facilitate the efficiency of Unilever’s capital improvement projects around the world. Unilever has 250 manufacturing sites and is expanding aggressively, especially in developing and emerging economies, to support its ambitious growth goals. Unilever expects emerging economies to drive 75 percent of its growth in the long term. The alliance with Jacobs Engineering will be managed out of Singapore and will provide engineering services for Unilever’s manufacturing facilities around the world. Both companies will “work as a team to insure their sustainable growth model,” implement cost reductions, and “drive co-innovation and implement the harmonization and cross-category standardization of designs.” The alliance will also work with supply chain team members to increase speed to market with designs that “reduce carbon, water, and waste footprints across its manufacturing sites.” In alignment with marketing growth goals, Unilever has initiated the Unilever Nutrition Network. This organization has divided the world into six regions and focused on providing world-class nutrition and health innovation. Its goal is to generate ideas to facilitate sustainable product launches and improve existing products while strengthening their brand value. As part of this overall strategy, Unilever has used Salesforce’s Chatter technology in the implementation of its new social marketing platform. This technology allows local markets and distributors of Unilever products to share insights and best practices with the marketing team from Unilever to help drive its “crafting brands for life” strategy. In a recent Sustainable Living Plan report, Unilver described how it is working with a number of nonprofit, nongovernment organizations (NGOs) to help address real issues, facilitate solutions for suppliers for improving sustainable living, and reach customers in society at large who need information to improve their sustainability approaches to life with better food security and poverty alleviation. Initiatives include partnering with the following NGOs: the Consumer Goods Forum; the World Business Council for Sustainable Development; the World Economic Forum; the Tropical Forest Alliance 2020; Refrigerants, Naturally; the Global Green Foundation Forum; and Zero Hunger Challenge and Scale-Up Nutrition initiatives supported by the United Nations. Interestingly, Unilever no longer provides quarterly earnings guidance reports and suggests that this has allowed it to focus shareholders on its longer-term goals. Furthermore, since Pullman took over in 2009, Unilever has sustained its positive growth trajectory with better income performance and associated stock market performance. As can be seen, it is accomplishing these things through better organizational design, lofty objectives, but also by using a number of cooperative strategies with many organizations outside the organization, such as Jacobs Engineering and many NGOs.
Questions
1. Why have consumer product companies headquartered in Europe historically used the multidomestic strategy? In your view, is this an effective choice of international strategy for these firms? Why or why not?
2. To implement its “sustainable business model,” what types of strategies is Unilever considering for use and why?
3. What organizational structure will Unilever need to use to reach its sustainability objectives?
4. What issues about organizational structure surface as a result of Unilever’s proposed strategies and objectives regarding sustainability?
Mini Case 4
A. G. Lafley joined Procter & Gamble (P&G) in 1977 as brand assistant for Joy dishwashing liquid. From this beginning, he worked his way through the firm’s laundry division, becoming highly visible due to a number of successes including the launching of liquid Tide. A string of continuing accomplishments throughout the firm resulted in Lafley’s appointment as P&G’s CEO in June 2000, a post he held until retiring in mid-2009. Bob McDonald, who joined P&G in 1980, was Lafley’s handpicked successor. McDonald took the top position at P&G in July 2009, but resigned under pressure in May 2013. Lafley, revered by many, was asked to come out of retirement and return to P&G as president, CEO, and chair of the board of directors. Lafley said that when contacted to return to P&G, he agreed immediately to do so, committing to remain “as long as needed to improve the company’s performance.” However, speculation is that Lafley likely would not remain beyond three years. What went wrong for McDonald, a long-time P&G employee who seemed to know the firm well and who received Lafley’s support? Not surprisingly, a number of possibilities have been mentioned in response to this question. Some concluded that, under McDonald’s leadership, P&G suffered from “poor execution globally,” an outcome created in part by P&G’s seemingly ineffective responses to aggressive competition in emerging markets. Other apparent problems were a failure to control the firm’s costs and employees’ loss of confidence in McDonald’s leadership. Still others argued that McDonald did not fully understand the effects on U.S. consumers of the recession in place when he took over, and that, during that time period, P&G “was selling BMWs when cashtight consumers were looking for Kias.” The net result of these types of problems included P&G “losing a step to rivals like Unilever.” In turn, this caused investors to become frustrated by “P&G’s inability to consistently keep up with its rivals’ sales growth and share price gains.” But why bring Lafley back? In a few words, because of his previous success. Among other achievements during his first stint as P&G’s main strategic leader were building up the firm’s beauty business, acquiring Gillette, expanding the firm’s presence in emerging markets, and launching hit products such as Swiffer and Febreze. An overall measure of P&G’s success during Lafley’s initial tenure as CEO is the fact that the firm’s shares increased 63 percent in value while the S&P fell 37 percent in value. Thus, multiple stakeholders, including investors and employees, may believe that Lafley can return the firm to the “glory days” it experienced from 2000 to 2009. Product innovations are a core concern and an area receiving a significant amount of attention. Analysts suggest that P&G needs to move beyond incremental innovations, seeking to again create entirely new product categories as it did with Swiffer and Febreze. This will be challenging, at least in the short run, given recent declines in allocations to the firm’s research and development programs. These reductions have resulted in a product pipeline focused mainly on “reformulating rather than inventing.” Additionally, efforts are underway to continue McDonald’s strong, recent commitments to reduce the firm’s “bloated” cost structure and reenergize the competitive actions it will take in global markets. Restructuring P&G’s multiple brands and products into four sectors, each of which will be headed by a president, is a major change Lafley is initiating. Currently, the firm has two global business divisions—beauty and grooming and household care. Final decisions about the precise compositions of the four sectors were not announced by mid-2013. Speculation, though, was that each sector would be formed “to reflect synergies between various businesses.” For example, one expectation was that paper-based products such as “Bounty paper towels, Charmin toilet paper, Pampers diapers and Always feminine care products” would be combined to form a sector. Moreover, Lafley’s replacement was expected to be selected from among the four presidents who would be chosen to lead the new sectors.
Questions:
1. What makes a CEO’s job so complex? Use the mini-case to provide examples that help support your answer.
2. Is it a good practice to rehire a former CEO who has retired? Please explain the potential advantages and disadvantages of doing so.
3. What should P&G do to replace Lafley when he retires for a second time? What actions should they take to prepare for the succession?
