Harrison Case: Q 3

Harrison Case: Q 3

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Read the Harrison Case. Please answer Rubric Question #3 in it’s entirety.

The Harrison Company Case
General Information

The Harrison Company, a public company headquartered in State College, PA is facing a time of crisis. (See Attachment 1 for financial statements.)  The company is a mid-sized regional retailer. It has 80 stores in seven states, primarily in the Northeast.  It also owns two equally-sized distribution centers, one in Pennsylvania and one in Massachusetts. All of its stores are in rural areas and generate exactly $600,000 per store in 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 been brought in as president to move the company in a new and better direction. The previous president has just retired at age 70, is no longer on the board of directors, and has broken all contacts within the company.
Although your predecessor did not see the need to employ an explicit strategy for running the business, competition from retail chains, such as Wal-Mart and Dollar General, has become more intense. In the past, your company has been somewhat shielded from competition by its stores’ rural locations. Now there is a Wal-Mart store within 10 miles, on average, of each of your stores. Your eight home office employees have not developed advanced business skills.  For example, your marketing manager does not prepare either store or company-level sales forecasts.
As you look at the company situation, there does not appear to be an obvious choice between a low-cost strategy (such as that followed by Wal-Mart) and a differentiation strategy (such as that followed by Nordstrom).  Next year’s plans, which you can alter, call for the purchase or construction of eight new stores, as well as the renovation of the Pennsylvania distribution center. Planned new store locations include three stores in West Virginia, two stores in Rhode Island, two in Vermont, and one in New York. The board wants to know if you agree with this specific action plan. There have been no store openings, closings, or changes to the distribution centers last year or this 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 with accusations that your company has been buying very inexpensive clothing from a Honduran company whose employees face slave-like conditions. He claims that the main reason 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 actively discouraging the entry of unions into your company.  Although this seems to be taking place primarily by store managers, it would seem reasonable that company headquarter personnel are directing this effort. This resistance, bordering on being illegal, seems to be driven by the company’s culture.
Harrison Company has traditionally supported a local charity near the company headquarters, which is the favorite charity of the previous president.  Over the past several years, substantial contributions have been approximately $1,000,000 a year. The company has also supported a wide variety of other community endeavors in the general locale of some of the stores, such as sponsoring little league baseball teams.  The total support for these other organizations has been roughly $25,000 per year in total. You wonder if these donations can be maintained, given the company’s current financial condition. If cutbacks are necessary, how much should they be and how should they be phased in?

Locations and Logistics
Locations and Logistics
When you examine the company’s store locations and distribution network, you find that that there are 16 stores in Massachusetts, 12 in Connecticut, 10 in Maine, 10 in Vermont, 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 the same 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 been approximately 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 Pennsylvania distribution center serves the 10 stores in New York, the eight stores in Pennsylvania, the three 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 in western Massachusetts. As can be seen from the map, both distribution centers serve some stores that are more than 250 miles away. A constraint of this case is that no drop-shipments directly to the stores are allowed.
Merchandise orders from the stores are received on a daily basis and trucks make deliveries 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 receive merchandise from suppliers on one side of the center, place them in inventory, and ship from the other side of the center. Inventory is stored with the large size items closest to the bays for shipping to the stores. Shipments from individual suppliers are received once every two to four weeks. You accept no partial contract deliveries from suppliers. Emergency quick-delivery contracts are frequently made when multiple stores report stock-outs. No inter-store transfers are made. Forty percent of your suppliers are located in eastern Canada, 40% from developing countries, and the balance from the United States, east of the Mississippi River. You have approximately 500 suppliers.

Marketing and Store Characteristics
Your marketing people have described their strategy as a push strategy with heavy advertising to create customer demand. Seventy-five percent of your sales occur during the summer vacation months (June through August) and the Christmas holiday season (late November and December). Advertising consists of 50% local television spots and 25% sponsorship of local events, such as concerts, which attract a significant number of tourists. The remaining 25% of marketing cost relates to discount coupons placed in motels, restaurants, and other locations such as nearby ski resorts. Due to deteriorating financial conditions, normal store maintenance has been significantly reduced. The company 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. Each store is 2,800 square feet in total area. The industry average is $400 sales/per square foot per year. Approximately 20% of each store’s total floor space is devoted to a back-room area for inventory storage and an employee break area. Harrison calculates its sales per square feet using front end space only (not the inventory area). Fifty percent of the merchandise could be categorized as a combination of country style and new age high-end products. Employees dress “country-style” or “hippie-style” to support this atmosphere. This half of the store’s merchandise includes such things as candles, paintings, incense, jewelry, music CDs, and country-style furniture (e.g., oak rocking chairs, bed headboards, and cabinets). Premium pricing for this merchandise is the norm. The other 50% of store merchandise consists of consumer non-durables (convenience items), targeted primarily to the local community. These items are moderately priced and include a wide range of items from soap to cookies to laundry detergent to clothes. These items 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 producers despite the fact that they are produced in moderate volumes by small producers from a variety of places and shipped exclusively from the two distribution centers. Merchandise production identifiers, such as “made in China” are covered over where possible. Most of the 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 through Saturday. Stores are closed on Thanksgiving, Christmas day, and New Year’s Day.

Finance and Store Operations
Your finance people have provided you with only basic financial information as shown as Attachment 1. You are on a calendar year and the last year’s financial statements, the most recent, have been issued in April of this year. The financial needs to support your company’s current operations and the implementation of your new strategy must be assessed. Unfortunately your financial people do not have the skills to prepare these and other important analyses. For example, you would like to see an assessment of the profitability and efficiency of company operations. There will most likely be other financial information that you will need to effectively manage the company. Inventory turns 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 late payments your company is still taking supplier prompt payment discounts. Your suppliers have little control over this situation because they are relatively small compared with your company. In fact, the delay in payments has recently caused one very small supplier to go out of business. The company continues to put pricing pressure on suppliers. None of your long-term debt repayments were due in the last three years or are due within the next two years.
Attachment 1 shows a line item called “Operating Expenses.” These are expenses related to operating the stores, such as payroll or electricity. The separate line item called “General and Administrative” reflects similar expenses, but only for the company headquarters. Notice that this detail is available only for Harrison Company. Information for the largest competitor and the industry average capture this information only at a summary level called “Operating, General, Selling, & Administration” (as shown in Attachment 1).
Store managers receive salaries of $35,000 including benefits. Your eight home office employees average $70,000 per year including benefits. Your salary is $150,000 per year including benefits. The previous president made $200,000. Annual salaries are for 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 Conditions
The 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 increase an average of 7% per month over the prior year’s same monthly sales. Boutique and high-end stores have held steady. The industry as a whole (USA) is down 4% from the prior year’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 trusted consulting firm. The following information has been included in their report:

Consultant’s Report – Current Industry Position
The industry is experiencing significant consolidation and many companies are facing financial pressures. This current trend may be particularly significant since consolidation began to increase before the recession. Normal consolidation results in highly leveraged positions, since debt is a major source of acquisitions. Consolidation has taken place as companies strive to achieve economies of scale and expand geographic coverage. Several of the larger companies are in the process of developing a global presence in their placement of stores. The large majority of companies in the industry rely on merchandise from developing countries, due to price benefits from low labor costs. The union movement in the USA is strengthening, but only slightly.

Consultant’s Forecast – Three Year Projection
Diesel 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 at about 15% per year. Inflation, which had been fairly insignificant for many years, will increase to about 9% within three years. Unemployment will peak at 11% in two years and decrease very slowly after that.  Despite inflationary pressures, the Fed will maintain a relatively low Fed Fund Rate of 2-4% starting this year. This will be an attempt to support the economy and to help it to expand. This will also most likely affect exchange rates. The recession will continue to be more severe and the government more proactive in the United States than in other countries. Many economists are uncertain about inflation and unemployment relationships because of the massive amount of money that has been spent by the federal government on stimulus packages.

Your reaction to the report
As with most consultant reports, this report provides only a starting point for strategic development. You are struggling to determine what to believe and how it would affect not only operations, but more importantly the strategy that you are developing. One of your biggest challenges is to determine what aspects of the report to communicate and to whom. On the one hand, many people do not have the expertise to make much use of this information. Yet, withholding information may have a negative effect on morale.

Company Culture and Internal Considerations
During your interview with the seven member board of directors, you received the impression that there was still a great deal of loyalty to the previous president and his past decisions. The board appeared to be quite conservative. Three directors were focused only 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 the impression from the board that profitability is a strong priority, both in the short and long run. Presently, the company has only one class of common stock (voting). Three of the other 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 demonstrate leadership ability. They seem to be “yes” people. When asked direct questions about their areas of expertise, none are able to give a coherent or concise answer. They do not seem to have an understanding of either the big picture or specific details in their area. There is commonly a great deal of silence when you ask questions during meetings.
A different consulting company had been hired the previous year to assess the morale of people at the company headquarters. This consultant’s report had been based upon anonymous individual meetings and the results seem to have been quite direct and blunt. Conclusions included:
1)    There was significant infighting between people.
2)    There was no accountability for decisions and, in fact, actual clear decisions were rare.
3)    There were many examples of passive-aggressive behavior.
4)    Six of the eight people said that they would not recommend the company as a place to work.
5)    Employees felt that the company was in financial difficulty and moving in the wrong direction. Most felt insecure about their jobs.
You have no information about the morale of the stores’ workforce or store managers. You have decided that you must tour several stores in order to assess morale and see the overall conditions of the stores.  Until you have time to do this, you must make assumptions about store morale.


STATEMENTS    Harrison
Last Year    Harrison
Percent of Sales    Harrison
2 Years Ago    Harrison
Percent of Sales    Harrison
3 years
Ago    Harrison
Percent of Sales    Global Market Leader    Global
Leader    Industry
$Million        $Million        $Million        $Million
Revenue     48.127    100.0%    48.992    100.0%    52.102    100.0%    348,650    100.0%    $25.00
Cost of Goods Sold    38.453    79.9%    39.292    80.2%    41.786    80.2%    265,152    76.1%    80.0%
Gross Profit    9.674    20.1%    9.700    19.8%    10.316    19.8%    83,498    23.9%    20.0%
Operating Expense    7.893    16.4%    8.132    16.6%    7.659    14.7%     xxxxxxx    xxxxxx    xxxxxxx
General & Administrative    1.059    2.2%    .686    1.4%    .625    1.2%     xxxxxxx    xxxxxx    xxxxxxx
Marketing     .193    0.4%    .245    0.5%    .313    0.6%     xxxxxxx    xxxxxx    xxxxxxx
Operating, Gen., Sell, & Admin.          xxxxxxx         xxxxxx     xxxxxxx       xxxxxx    xxxxxxx    xxxxxx    64,320    18.4%    15.0%
Interest Expense    .385    0.8%    .193    0.4%    .312    0.6%    1,529    0.4%    1.6%
COGS and Total Expenses    47.983    99.7%    48.548
99.1%    50.695    97.3%    331,001    94.9%    96.6%
Net Income Before Taxes    .144    0.3%    .444    0.9%    1.407    2.7%    17,649    5.1%    3.4%
Taxes    .048    0.1%    .147    0.3%    .469    0.9%    6,365    1.8%    0.9%
Net Income After Taxes    .096    0.2%    .297    0.6%    .936    1.8%    11,284    3.3%    2.5%
% Total Assets    $Million    % Total Assets    $Million    % Total Assets    $Million    % Total Assets

Cash & Equivalents    .288    1.0%    .440    1.5%    2.421    7.9%    8,373    5.5%    1.7%
Receivables    .548    1.9%    .469    1.6%    .429    1.4%    3,840    2.5%    2.2%
Inventory    7.694    26.7%    8.155    27.8%    8.582    28.0%    34,375    22.8%    24.6%
Total Current Assets    8.530    29.6%    9.064    30.9%    11.432    37.3%    46,588    30.8%    28.5%
Land, Stores,  Equipment, Distribution Centers,  & Trucks    20.289    70.4%    20.268    69.1%    19.216    62.7%    104,605    69.2%    71.5%

Total Assets    28.819    100.0%    29.332    100.0%    30.648    100.0%    151,193    100.0%    $13.457

Accounts Payable    7.407    25.7%    6.921    23.6%    3.287    10.7%    28,371    18.8%    12.1%
Other Current Liabilities    5.043    17.5%    8.151    27.8%    6.554    21.4%    23,363    15.4%    10.1%
Total Current Liabilities    12.450    43.2%    15.072    51.4%    9.831    32.1%    51,734    34.2%    22.2%
Long Term Debt    4.813    16.7%    2.407    8.2%    3.900    12.7%    37,886    25.1%    39.3%
Stockholder’s Equity    11.556    40.1%    *11.853    40.4%    16.917    55.2%    61,573    40.7%    38.5%
Total Liabili  ties & Stockholder Equity    28.819    100.0%    29.332    100.0%    30.648    100.0%    151,193    100.0%    $13.457

Year End
Stock Price     $6.25        $10.00        $13.13
Dividends     $0.00        $0.00        $0.00
*Equity withdrawal in “2 years ago”

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