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The Harrison Company, a public company

The Harrison Company CaseGeneral InformationThe Harrison Company, a public company headquartered in State College, PA isfacing a time of crisis. (See Attachment 1 for financial statements.) The company is amid-sized regional retailer. It has 80 stores in seven states, primarily in the Northeast. Italso owns two equally-sized distribution centers, one in Pennsylvania and one inMassachusetts. All of its stores are in rural areas and generate exactly $600,000 per storein sales per year (to simplify the case). As shown in the attached financial statements,sales and profits have been dropping over the last three-year period. You have beenbrought in as president to move the company in a new and better direction. The previouspresident has just retired at age 70, is no longer on the board of directors, and has brokenall contacts within the company.Although your predecessor did not see the need to employ an explicit strategy forrunning the business, competition from retail chains, such as Wal-Mart and DollarGeneral, has become more intense. In the past, your company has been somewhatshielded from competition by its stores’ rural locations. Now there is a Wal-Mart storewithin 10 miles, on average, of each of your stores. Your eight home office employeeshave not developed advanced business skills. For example, your marketing manager doesnot prepare either store or company-level sales forecasts.As you look at the company situation, there does not appear to be an obviouschoice between a low-cost strategy (such as that followed by Wal-Mart) and adifferentiation strategy (such as that followed by Nordstrom). Next year’s plans, whichyou can alter, call for the purchase or construction of eight new stores, as well as therenovation of the Pennsylvania distribution center. Planned new store locations includethree stores in West Virginia, two stores in Rhode Island, two in Vermont, and one inNew York. The board wants to know if you agree with this specific action plan. Therehave been no store openings, closings, or changes to the distribution centers last year orthis year.There are several immediate concerns that face you upon taking over as president.One of your store managers, who has recently been fired, has gone to the press withaccusations that your company has been buying very inexpensive clothing from aHonduran company whose employees face slave-like conditions. He claims that the mainreason for his being fired was that he insisted on raising this issue with top management.There seems to be no documentation within the company related to this issue.As with many of your competitors, you find that the company is activelydiscouraging the entry of unions into your company. Although this seems to be takingplace primarily by store managers, it would seem reasonable that company headquarterpersonnel are directing this effort. This resistance, bordering on being illegal, seems to bedriven by the company’s culture.Harrison Company has traditionally supported a local charity near the companyheadquarters, which is the favorite charity of the previous president. Over the pastseveral years, substantial contributions have been approximately $1,000,000 a year. Thecompany has also supported a wide variety of other community endeavors in the generallocale of some of the stores, such as sponsoring little league baseball teams. The totalsupport for these other organizations has been roughly $25,000 per year in total. Youwonder if these donations can be maintained, given the company’s current financial1condition. If cutbacks are necessary, how much should they be and how should they bephased in?Locations and LogisticsLocations and LogisticsWhen you examine the company’s store locations and distribution network, youfind that that there are 16 stores in Massachusetts, 12 in Connecticut, 10 in Maine, 10 inVermont, 10 in New York (four of those in Western New York), eight in Pennsylvania(six of those in Western Pennsylvania), four in New Hampshire, four in Rhode Island,three in West Virginia, two in western Maryland, and one in New Brunswick, Canada.(See Attachment 2 for a map of distribution centers and store locations.) All stores are thesame size and carry the same merchandise. Your company owns all of its own trucks(nine) and makes all deliveries directly from the distribution centers to the stores.Distribution (including trucking) expenses have been steady at 8% of cost of goods sold,except for the last 10 months. During these months, distribution expenses have beenapproximately 9% of the cost of goods sold, due primarily to a spike in fuel costs.Fifteen percent of the stores account for 20% of annual profits. The Pennsylvaniadistribution center serves the 10 stores in New York, the eight stores in Pennsylvania, thethree in West Virginia and the two in western Maryland. Depending upon specific needs,the Pennsylvania distribution also serves the 10 stores in Vermont and/or seven stores inwestern Massachusetts. As can be seen from the map, both distribution centers servesome stores that are more than 250 miles away. A constraint of this case is that no dropshipments directly to the stores are allowed.Merchandise orders from the stores are received on a daily basis and trucks makedeliveries to the stores once a week. This is done weekly in order to fill up each truck(partially-full trucks are discouraged). Because of different store merchandise needs,trucks are not permanently assigned to selected stores. Distribution centers receivemerchandise from suppliers on one side of the center, place them in inventory, and shipfrom the other side of the center. Inventory is stored with the large size items closest tothe bays for shipping to the stores. Shipments from individual suppliers are received onceevery two to four weeks. You accept no partial contract deliveries from suppliers.Emergency quick-delivery contracts are frequently made when multiple stores reportstock-outs. No inter-store transfers are made. Forty percent of your suppliers are locatedin eastern Canada, 40% from developing countries, and the balance from the UnitedStates, east of the Mississippi River. You have approximately 500 suppliers.Marketing and Store CharacteristicsYour marketing people have described their strategy as a push strategy with heavyadvertising to create customer demand. Seventy-five percent of your sales occur duringthe summer vacation months (June through August) and the Christmas holiday season(late November and December). Advertising consists of 50% local television spots and25% sponsorship of local events, such as concerts, which attract a significant number oftourists. The remaining 25% of marketing cost relates to discount coupons placed inmotels, restaurants, and other locations such as nearby ski resorts. Due to deterioratingfinancial conditions, normal store maintenance has been significantly reduced. Thecompany has recently developed an on-line store which accounts for 0.05% of sales.Store designs are quaint and are modeled on a rural local corner store theme. Eachstore is 2,800 square feet in total area. The industry average is $400 sales/per square foot2per year. Approximately 20% of each store’s total floor space is devoted to a back-roomarea for inventory storage and an employee break area. Harrison calculates its sales persquare feet using front end space only (not the inventory area). Fifty percent of themerchandise could be categorized as a combination of country style and new age highend products. Employees dress “country-style” or “hippie-style” to support thisatmosphere. This half of the store’s merchandise includes such things as candles,paintings, incense, jewelry, music CDs, and country-style furniture (e.g., oak rockingchairs, bed headboards, and cabinets). Premium pricing for this merchandise is the norm.The other 50% of store merchandise consists of consumer non-durables (convenienceitems), targeted primarily to the local community. These items are moderately priced andinclude a wide range of items from soap to cookies to laundry detergent to clothes. Theseitems must be sold at competitive prices. All products are marketed as high-quality items.Country/new age items are claimed to be produced by small “home” or local producersdespite the fact that they are produced in moderate volumes by small producers from avariety of places and shipped exclusively from the two distribution centers. Merchandiseproduction identifiers, such as “made in China” are covered over where possible. Most ofthe stores are located in the downtown area of the small rural towns.Each store currently operates from 9:00 AM to 7:00 PM, Monday throughSaturday. Stores are closed on Thanksgiving, Christmas day, and New Year’s Day.Finance and Store OperationsYour finance people have provided you with only basic financial information asshown as Attachment 1. You are on a calendar year and the last year’s financialstatements, the most recent, have been issued in April of this year. The financial needs tosupport your company’s current operations and the implementation of your new strategymust be assessed. Unfortunately your financial people do not have the skills to preparethese and other important analyses. For example, you would like to see an assessment ofthe profitability and efficiency of company operations. There will most likely be otherfinancial information that you will need to effectively manage the company. Inventoryturns might be just one of many pieces of useful information. There is much to do.Currently the company is paying suppliers on more than a sixty-day average,despite the fact that suppliers have contracted for a thirty-day payment. Even on latepayments your company is still taking supplier prompt payment discounts. Your suppliershave little control over this situation because they are relatively small compared withyour company. In fact, the delay in payments has recently caused one very small supplierto go out of business. The company continues to put pricing pressure on suppliers. Noneof your long-term debt repayments were due in the last three years or are due within thenext two years.Attachment 1 shows a line item called “Operating Expenses.” These are expensesrelated to operating the stores, such as payroll or electricity. The separate line item called“General and Administrative” reflects similar expenses, but only for the companyheadquarters. Notice that this detail is available only for Harrison Company. Informationfor the largest competitor and the industry average capture this information only at asummary level called “Operating, General, Selling, & Administration” (as shown inAttachment 1).Store managers receive salaries of $35,000 including benefits. Your eight homeoffice employees average $70,000 per year including benefits. Your salary is $150,000per year including benefits. The previous president made $200,000. Annual salaries are3for a base of 2,000 hours worked. The warehouses operate less than five days per week.Each store is staffed at 6,500 hours per year including store managers’ base work-load.No overtime is paid to salaried employees. Part-time workers are heavily relied upon,most making the minimum wage.Industry and General ConditionsThe recession has significantly affected your industry in the last eight months.Some of the low-cost companies, such as Wal-Mart, have actually seen revenues increasean average of 7% per month over the prior year’s same monthly sales. Boutique and highend stores have held steady. The industry as a whole (USA) is down 4% from the prioryear’s comparable monthly sales. Consumers have become more price-sensitive,although some retailers have maintained customer loyalty.You have received an industry and general economic forecast from a trustedconsulting firm. The following information has been included in their report:Consultant’s Report – Current Industry PositionThe industry is experiencing significant consolidation and many companies arefacing financial pressures. This current trend may be particularly significant sinceconsolidation began to increase before the recession. Normal consolidation results inhighly leveraged positions, since debt is a major source of acquisitions. Consolidation hastaken place as companies strive to achieve economies of scale and expand geographiccoverage. Several of the larger companies are in the process of developing a globalpresence in their placement of stores. The large majority of companies in the industryrely on merchandise from developing countries, due to price benefits from low laborcosts. The union movement in the USA is strengthening, but only slightly.Consultant’s Forecast – Three Year ProjectionDiesel fuel costs will increase steadily to about $4.80 per gallon in three years,and then drop by about 10%. Heating and electrical costs will continue to rise steadily atabout 15% per year. Inflation, which had been fairly insignificant for many years, willincrease to about 9% within three years. Unemployment will peak at 11% in two yearsand decrease very slowly after that. Despite inflationary pressures, the Fed will maintaina relatively low Fed Fund Rate of 2-4% starting this year. This will be an attempt tosupport the economy and to help it to expand. This will also most likely affect exchangerates. The recession will continue to be more severe and the government more proactivein the United States than in other countries. Many economists are uncertain aboutinflation and unemployment relationships because of the massive amount of money thathas been spent by the federal government on stimulus packages.Your reaction to the reportAs with most consultant reports, this report provides only a starting point forstrategic development. You are struggling to determine what to believe and how it wouldaffect not only operations, but more importantly the strategy that you are developing. Oneof your biggest challenges is to determine what aspects of the report to communicate andto whom. On the one hand, many people do not have the expertise to make much use ofthis information. Yet, withholding information may have a negative effect on morale.Company Culture and Internal Considerations4During your interview with the seven member board of directors, you received theimpression that there was still a great deal of loyalty to the previous president and his pastdecisions. The board appeared to be quite conservative. Three directors were focusedonly upon company performance. It is no coincidence that these three directors own 65%of the company stock. Although sales and profitability are often correlated, you had theimpression from the board that profitability is a strong priority, both in the short and longrun. Presently, the company has only one class of common stock (voting). Three of theother directors are CEOs from companies in other industries.Having met with your home office personnel, both collectively and individually,you have become somewhat concerned. None of the team members demonstrateleadership ability. They seem to be “yes” people. When asked direct questions about theirareas of expertise, none are able to give a coherent or concise answer. They do not seemto have an understanding of either the big picture or specific details in their area. There iscommonly a great deal of silence when you ask questions during meetings.A different consulting company had been hired the previous year to assess themorale of people at the company headquarters. This consultant’s report had been basedupon anonymous individual meetings and the results seem to have been quite direct andblunt. Conclusions included:1) There was significant infighting between people.2) There was no accountability for decisions and, in fact, actual clear decisions wererare.3) There were many examples of passive-aggressive behavior.4) Six of the eight people said that they would not recommend the company as aplace to work.5) Employees felt that the company was in financial difficulty and moving in thewrong direction. Most felt insecure about their jobs.You have no information about the morale of the stores’ workforce or storemanagers. You have decided that you must tour several stores in order to assess moraleand see the overall conditions of the stores. Until you have time to do this, you mustmake assumptions about store morale.Rubric Question #3 – Synthesizing/Analyzing: None of your functional managershave adequate expertise and you must develop the analyses that you need to makeboth functional and strategic decisions. Provide a detailed analysis of the threefunctional areas listed below. Provide a brief conclusion for each. (Learning Goals#1 and #3)Marketing: Prepare a five-year sales forecast for the company. List andexplain/quantify each factor that went into your forecast (e.g., past three yearcompany sales trends). Do not rely solely upon past sales trends. Make this a highlevel forecast and include broad items that would affect strategy. Show yourcalculations in a table and, if needed, explain your calculations so they are clear.Analyze your marketing efforts in terms of product, price, place, and promotion. Bespecific for each of the four items and pay particular attention to the strategicimplications of your pricing plan and product mix. What might be some of thefinancial, logistical, and strategic implications of your marketing plan?5Finance: Prepare financial analyses using data from the financial statements(Attachment 1). Use specific ratios or other measures to assess the financialstrengths and weaknesses of your company using appropriate baseline comparisons.Provide this in table form. Provide the formula for each item used. Address anyother issues in the case that might affect the current financial position. Be sure toaddress Liquidity, Safety (e. g., leverage), Profitability, and Efficiency ratios. Whatis your overall financial position and how should it be handled? If needed, what isan appropriate way to finance your strategy and what funding constraints mightaffect your strategy? Explain. Describe the specific financial linkages and effects onmarketing, logistics, and strategic initiatives.Logistics and Operations: Discuss supply chain issues and possible areas forimprovement. Desired improvements should be stated specifically. The logisticsareas should address all parts of the supply chain which may or may not be limitedto the following six items:Supplier transportation to Harrison’s distribution centersStorage (inventory) at the distribution centersTransportation from the distribution centers to the storesStorage (inventory) in the storesInformation needs, covering all the above items including merchandise purchasingand store re-orderingItem iii is one of the most important, strategically. Given your strategy, you willincrease the number of stores (expansion strategy), decrease them (retrenchmentstrategy), or keep them the same (holding strategy). Although you do not need todraw a map (see Attachment 2), you should identify the number of stores affectedby location in a table. Changes in distribution centers, if any, should also be outlinedin this table. You will address these issues further when you discuss your strategy(Rubric #1).In terms of store operating expenses, there are several things to consider. Are thestores the right size? Constraints of the case are that you own all of your stores andyou cannot lease (you may only purchase) new stores. You cannot relocate to adifferent store in the same town.Prepare an additional operating analysis which outlines the planned employee loadschedule for a store. Provide this in table form and clearly explain your calculations.For example, you might state that all Saturdays throughout the year should bestaffed by two employees. Your analysis should reflect the number of hoursavailable per store. How might sale forecasts be important for making theselogistical and operating decisions? What might be some financial implications forthe company?67ATTACHMENT 1 – HARRISON COMPANY CASE FINANCIALAND COMPETITOR/INDUSTRY INFORMATIONINCOMESTATEMENTSRevenueCost of Goods SoldGross ProfitOperating ExpenseGeneral &AdministrativeMarketingOperating, Gen.,Sell, & Admin.Interest ExpenseCOGS and TotalExpensesNet Income BeforeTaxesTaxesNet Income AfterTaxesBALANCESHEETSCash & EquivalentsReceivablesInventoryTotal CurrentAssetsLand, Stores,Equipment,DistributionCenters, & TrucksTotal AssetsAccounts PayableOther CurrentLiabilitiesTotal CurrentLiabilitiesLong Term DebtStockholder’sEquityTotal Liabilities &Stockholder EquityYear EndStock PriceDividends*Equity withdrawalin “2 years ago”Harrison HarrisonHarrison HarrisonLastPercent2 YearsPercentYearof SalesAgoof Sales$Million$Million48.127100.0%48.992100.0%Attachment 2 – Harrison Case38.45379.9%39.29280.2%20.1%9.70019.8%S 9.674and Distribution Centertore7.89316.4%8.13216.6%Location1.059.193xxxxStoresxxx.3852.2%Map .6860.4%.245xxxxxx xxxxxxx0.8%.193Harrison3 yearsAgo$Million52.10241.78610.3167.659HarrisonPercentof Sales100.0%80.2%19.8%14.7%GlobalMarketLeader$Million348,650265,15283,498xxxxxxxGlobalMarketLeaderIndustryAverage100.0%76.1%23.9%xxxxxx$25.0080.0%20.0%xxxxxxx1.4%0.5%.625.3131.2%0.6%xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx0.4%xxxxxxx.312xxxxxx0.6%64,3201,52918.4%0.4%15.0%1.6%Distribution47.983Centers99.7%48.54899.1%50.69597.3%331,00194.9%96.6%.144.0480.3%0.1%.444.1470.9%0.3%1.407.4692.7%0.9%17,6496,3655.1%1.8%3.4%0.9%.0960.2%.2970.6%.9361.8%11,2843.3%2.5%$Million.288.5487.694% TotalAssets1.0%1.9%26.7%$Million.440.4698.155% TotalAssets1.5%1.6%27.8%$Million2.421.4298.582% TotalAssets7.9%1.4%28.0%$Million8,3733,84034,375% TotalAssets5.5%2.5%22.8%1.7%2.2%24.6%8.53029.6%9.06430.9%11.43237.3%46,58830.8%28.5%20.28970.4%20.26869.1%19.21662.7%104,60569.2%71.5%28.819100.0%29.332100.0%30.648100.0%151,193100.0%$13.4577.40725.7%6.92123.6%3.28710.7%28,37118.8%12.1%5.04317.5%8.15127.8%6.55421.4%23,36315.4%10.1%12.4504.81343.2%16.7%15.0722.40751.4%8.2%9.8313.90032.1%12.7%51,73437,88634.2%25.1%22.2%39.3%11.55640.1%*11.85340.4%16.91755.2%61,57340.7%38.5%28.819100.0%29.332100.0%30.648100.0%151,193100.0%$13.457$6.25$0.00$10.00$0.00$13.13$0.008

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