Case Study #3 - The Golden Rule Read the case study provided and complete the preparation worksheet questions 1-5 only (also provided below). Post your worksheet to the assignment portal and bring a c

He had adopted a “Golden Rule” approach to management, paternali stically caring for his employees’ needs, maintaining integrity in every deal, insisting on quality, respect, and timely delivery for every customer, treating all of his stakeholders as he would want to be treated. The fruit of that management style was a fiercely loyal workforce — hardly any turnover in twenty years of business — as well as an equally loyal customer base. One of Zach’s eleven employees summed it up well: “Zach’s the glue that holds everything together around here. And he’s a great boss, t oo. He treats us better than anyone’s ever treated us in our other jobs. I’ll give you an example: In good times and in bad, he’s always given a big Christmas bonus. One time he even had to borrow the money to do it!” BUS500 Principled Leadership & Ethics Case Study # 3 Preparation Golden Rule 2 | P a g e There was financial fruit as well — lots of profit, at least through the first ten years. His New England Spring Company (NES) in Connecticut earned a great return throughout the 1980s. But international competition and a sputtering economy began to take their toll, and in the 1990s, many of Zach’s customers began to import their springs, primarily from manufacturers in Asia whose costs were a fraction of Zach’s. Profit evaporated and eventually turned to losses. The past five years had been particularly difficult, almost all of which culminat ed in red ink (see Exhibit 1 for NES financial information). As he wiped some dust from the photo of the NES family celebrating an employee’s birthday (Zach commemorated every employee birthday with a card and a $30 check), in walked his two invited guest s for the day. Steve, his accountant and longtime friend, and Charles, a professor (now emeritus), from Zach’s business school days. This was a bittersweet occasion. Zach embraced each but then had to share with the professor his reason for the invitation: He needed advice about whether to sell his beloved company. Zach closed the door. “Thanks so much for coming, you guys. I really appreciate your willingness to give me some candid advice.” His expression turned somber, as did his tone. Zach looked squar ely at the septuagenarian professor and repented: “Charles, this place is bleeding, and it has been for years. I’m seriously thinking about getting out rather than signing off on another two -year, $200,000 lease for the building. Steve tells me I can get a t least $750,000 for the customers, the inventory, the receivables, and the equipment, but the problem is this: with my financials, nobody is going to buy the business itself. So if I sell, it has to be by parceling it off. But then NES won’t exist anymore and my people would lose their jobs. And in this economy, they’re not going to find jobs anytime soon, certainly not much beyond minimum wage. I could take a chance and try to keep it afloat, but I’m on the verge of losing my biggest account to India – tw enty percent of my business! If that happens, I probably couldn’t survive more than two months, and the selling price of the business would drop a whole lot more. But even if I keep this account, there’s no guarantee that things are going to turn around. I just can’t compete with Asia’s dollar -an -hour labor.” That was a lot of information in sixty seconds, but Charles zeroed in on what he considered a critical issue. “What’s the chance of losing that account?” “Probably about 50/50 next year,” Zach replie d. “Maybe even 60/40. India’s come out with a stainless steel spring that weighs fifty percent more than ours — much better quality — for the same price, and my customer is genuinely considering making the switch.” “And can you get back the lease money if the business fails?” “No. I’m on the hook for that regardless,” Zach sighed. “I’ve told you this before, pal,” his accountant gently offered. “You’ve gotta get out. Either that or cut your sevenfigure salary.” Zach smiled at the welcome levity — and th e irony. Two years ago he had cut his own pay to $31,000, less than what some of his employees were earning. BUS500 Principled Leadership & Ethics Case Study # 3 Preparation Golden Rule 3 | P a g e “Funny you should mention that,” Zach returned with a grin. “The SEC is stopping by this afternoon. I thought I’d give ‘em your card.” “Remind me , my friend,” Charles interjected with a chuckle, “what your product line looks like. And tell me how you’ve been pursuing new business lately.” “We manufacture and sell several types of springs,” Zach began, “everything from specialty stainless steel spr ings to springs for navy jets and helicopters to common springs you’d find in a hardware store. And over the years, I’ve tried to grow the business through a combination of in - house sales reps and advertising in the standard industry newspapers, both in pr int and on the web. Quite frankly, though, it’s been years since either approach has paid off, so I’ve recently dropped them. Bids are so tight that a sales rep’s five percent commission required me to bid at my cost to remain competitive. I was taking job s just to cover overhead! And the hundred grand I dropped in advertising over the past decade has returned almost no business. So basically, I’m left with no sales force and essentially no advertising.” “Sounds like you could use some fresh ideas,” the professor observed thoughtfully. He was often brilliant, Zach thought, but now he was simply stating the obvious. “That would be nice.” Zach was eager for a few hot tips from the good doctor, but he knew those were probably a few days off. “And there might actually be some new business out there. But my ‘fresh idea’ file is freshly depleted. I’ve also thought about re -tooling as an option — you know, create other products that might have a niche — but I’d n eed about a quarter -million for equipment, even used equipment, and I have no customer list for whatever that new product would be.” “Let me give the marketing piece some thought,” Charles replied with characteristic circumspection. “But in the meantime, tell me just how bad things are financially. Do you have some income statements handy?” Zach buzzed his secretary. “Mandy, can you please bring me the binder of financials?” Mandy, as always, responded promptly, smiling at the gentlemen on her way out. As she closed the door, Zach shared with his guests that Mandy, his secretary for twenty years, was recently widowed, having psychological problems from the loss and in critical need of the health insurance benefits he provides. “My other office gal,” he exp lained, shaking his head, “has a disabled husband and is the sole support for a family of five. And the guy who runs the plant has four kids, two of them getting ready for college. If he lost his job at age fifty, I don’t know what he’d do.” The professor nodded; the accountant flipped pages in the binder. “It’s not terrible,” Steve said as he opened the books for Charles, “but it’s not sustainable either. We’ve been losing money for years. Costs are inching up, mostly because of health care, workers’ comp , and raw material prices. Salaries are exactly at market — anywhere from $10 to $26 an hour. But we’ve cut everything else to the bare bones. And as far as sales goes, we’ve been flat for a long time, and we have no expectation for new sources of revenue. ” Charles adjusted his glasses as he reviewed the statements. His grimace told Zach that there was no quick fix forthcoming. BUS500 Principled Leadership & Ethics Case Study # 3 Preparation Golden Rule 4 | P a g e “I’m telling ya, Zach, cut and run,” Steve recommended, preempting the professor’s analysis. “I know you care about these people, but they’re big boys and girls now. They can take care of themselves. Believe me, they’ll be fine.” Zach didn’t know whether to be irritated at or grateful for the counsel. Maybe Steve’s was the only rational response, but Steve was also ignoring the fac t that Zach didn’t want to sell out his employees. Irritation trumped gratitude for the moment. “Would you be ‘fine’ if your income were cut in half and if you lost your health insurance?” Zach retorted softly but firmly. “Would your family be ‘fine’? I k now you’re looking out for me, Steve, but I simply can’t operate that way.” “All right,” his accountant back -peddled with a shrug. “So spend $175,000 to give them six months’ severance. And spend another twenty -five grand to maintain their health benefits . Will that help you to sleep at night?” Zach pondered the idea, but it seemed a bit excessive. “I’m getting too old for this kind of stress,” he said leaning back in his chair and rubbing his eyes. “I’m 62 now Charles, which I know sounds like a spring chicken to you. But the spring business is taking all the spring out of this spring chicken.” Deep down, Zach desperately wanted his company to bounce back. But that seemed unlikely without some bold new strategy. And he wasn’t sure he had either the energy to pursue it or the gumption to roll the dice on another $200,000 lease. “Cut and run” seemed like a logical course of action, but what about his people? This “Golden Rule” spring manufacturer recoiled at the thought of repaying their loyalty with a trip to the unemployment line. BUS399 -01 Management Leadership Case Study #2 5 | P a g e New England Spring Company Income Statements ($ in thousands) 2012 2011 2010 2009 2008 Sales $ 1,211 $ 1,282 $ 1,256 $ 1,294 $ 1,308 Cost of Sales Materials 403 396 375 349 353 Production wages 390 375 362 395 399 Overhead & other 51 135 65 49 84 Total Cost of Sales 844 906 802 793 836 Gross Margin 367 376 454 501 472 Operating Expenses Rent 100 100 100 100 100 Admin salaries 66 98 145 152 168 Employee benefits 63 59 52 49 44 Office & supplies 32 42 38 42 31 Utilities & phone 52 57 54 51 49 Depreciation 46 46 46 58 61 Other & miscellaneous 22 18 26 47 26 Total operating expenses 381 420 461 499 479 Net Income (Loss) $ (14) $ (44) $ (7) $ 2 $ (7) New England Spring Company Balance Sheets ($ in thousands) Assets 2012 2011 2010 2009 2008 Current assets Cash $ 98 $ 142 $ 121 $ 92 $ 119 Accounts receivable 22 19 27 38 41 Inventories 98 106 89 95 42 Other 3 6 4 9 12 Total current assets 221 273 241 234 214 Fixed assets (net of depreciation) 382 416 462 508 566 Total Assets $ 603 $ 689 $ 703 $ 742 $ 780 Liabilities & Equity Current liabilities $ 284 $ 356 $ 326 $ 294 $ 314 Long -term debt - - - 64 84 Common stock 300 300 300 300 300 Retained earnings 19 33 77 84 82 Total Liabilities & Equity $ 603 $ 689 $ 703 $ 742 $ 780