Strategy
in Practice Weekly Assignment #9

Chapter 9

Strategy, Ethics,
and Corporate social responsibility

Read, consider,
and analyze this ethical dilemma concerning the Peerless Starch Company of
Blair, Indiana. Attentively develop, and
defend, your decision by responding to the analytical steps outlined
immediately following the case.

The Peerless Starch Company of Blair, Indiana

For as long as anyone in Blair, Indiana,
could remember, the Peerless Starch plant had always been the biggest thing in town.
Built on a slight hill above the sluggish river, and designed to look as much
like the Tower of London as anything in Indiana can, the plant dominated the
town spiritually even more than it did physically.

Peerless was the largest employer in town, employing
well over 8,000 men out of a population of l20,000 – or every fourth head of a
family. It paid the highest wages, if only because most of the men were rated
as skilled workers or technicians. And alone of all the large businesses in
Blair, it was locally managed; the Peerless top management sat on the ?fth ?oor
of the big mill itself, in the “New Building” that had been put up in the
1940s. And from the chief executive officer – the grandson of the founder – on
down, all executives were Blair men who had started in the mill and worked their
way up, and who were more often than not second- or third-generation Peerless
employees.

Peerless had started in Blair during the
Civil War when the founder had developed one of the ?rst methods to extract
starch from corn. Until the 1940s, Peerless had only one mill. But the, company
had prospered so much that three additional mills were built in rapid succession
during the years after World War II: one in Illinois, one in Texas, and, the
biggest yet, in Oregon, built in the late 1950s.

But while Peerless had ?ourished, the town of
Blair had not. During World War II it
had boomed. But then Blair had gradually drifted into being ?rst a run-down and
then a depressed area. One after the other of the town’s factories had laid off
people and then finally closed its doors. The Peerless mill in Blair seemed to
be the only exception to this general rule of slow decay and downhill drift.
But appearances were deceptive. Actually, the Peerless mill in Blair was in dire
straits and was kept going only by the success of the new mills in other
states.

Blair’s sales were about one-?fth of the
entire Peerless Company’s. But the Blair Mill employed almost half of
Peerless’s hourly rated labor force and three-quarters of Peerless’s managerial
and professional people. Unlike the other mills, Blair did not make its own raw

materials
but got intermediates from outside suppliers or from the other mills. It
should, therefore, have needed less labor per unit produced. Instead, it needed
up to four times as much.

There were reasons for Blair’s high costs – or
at least there were arguments to justify them. The mill itself was a towering
structure built to withstand the Crusaders’ armies but ill-equipped for modern production.
All newer Peerless mills, for instance, were single-story

buildings,
whereas Blair had ?ve stories capped by twin towers. Nobody at Blair ever got
?red; if a man couldn’t do a job, the word from the head of?ce was “Find him
another one.” If a new process came in, the workers on the old one were quietly
moved to plant maintenance – or, if they had any skills, were made supervisors,
with the ludicrous result that there were whole departments with more supervisors
than workers. Above all, Blair considered itself a “quality

mill,”
and that apparently meant that nothing could be produced in quantity. But the
central problem of Blair – and the greatest drain in money – was precisely that
Blair did not turn out quality
products. Rejection rates at Blair ran almost twice as high as at the other
mills. What the Blair quality-control inspectors accepted provoked angry complaints
from the customers. Indeed, as everyone knew, the salespeople spent little time
selling. They spent most of their time talking customers into not sending the
stuff right back to Blair as faulty and unusable – often by granting the
complaining customer a nice rebate. It never appeared in the Blair direct cost
accounts but was charged off to the overhead account “miscellaneous customer
service.”

Things had been drifting from bad to worse – and
no one in Blair expected that they would ever change. But then suddenly, in the
spring of 1985, a number of circumstances coalesced.

1. The founder’s grandson, the “old man” who
had run Peerless for thirty-?ve years, died. And it turned out that the
founding family owned practically no stock at all. Thereupon the outside
directors, who had not dared speak up while the “old man” was alive, refused to
appoint his son-in-law or his nephew as his successor. Instead they picked an
outsider to become

president
and chief executive officer: John Ludwig, who was not even a native of Blair,
let alone a chemical engineer or a starch machinist. In fact, Ludwig had been
with Peerless less [fewer] than four years – and had been imposed on the
“old man” by some of the outside directors. Having started as an industrial
psychologist, Ludwig had ?rst taught, then worked for the Pentagon as a
training specialist, then in Industrial Relations for Ford, where he helped

reorganize
one of the major divisions and then had become general manager of one of the
smaller Ford Motor divisions. He had come to Peerless in 1981 as its ?rst
“professional manager” – at least the ?rst one in Blair – and as executive
assistant to the president. The

“old
man” had kept him busy with the affairs of the other plants, so that he
knew very little about Blair. Although he had several times thought of
resigning what he felt was a futile and frustrating assignment, he now found
himself in charge.

2. Even before the death of the “old man,”
things had turned critical at Peerless, and especially at Blair. The market had
suddenly become competitive. Synthetic starches and adhesives were ?owing onto
the market out of the labs of the chemical companies and the oil companies and
the rubber companies – businesses that never before had been competing in the
starch market. Peerless and a few other companies used to have the ?eld all to
themselves – and

carefully
refrained from hurting each other too badly. But the newcomers didn’t know what
everyone else in the industry knew: you can’t make the market bigger by lowering
the price or improving product performance; all you can do is spoil the market
for everybody. Worse still, the success of the newcomers seemed to disprove such
old “truths.”

3. The new mills in Illinois, Texas, and
Oregon had managed to hold their own – indeed Oregon did phenomenally well and managed
to bring out a highly pro?table new line of synthetics (without even telling
the folks in Central Research in Blair) that quickly became industry leaders.
But Blair came close to collapse. With supply abundant, customers ?atly refused
to tolerate the Blair quality – or lack of quality – anymore. Despite all the
efforts of the

sales
department, whole carloads of the stuff came back – often with a curt note:
“Don’t bother to call on us anymore; we have contracted to buy our supply
elsewhere.” And Blair, which for years had been barely breaking even, plunged
into the red. By mid-1985 Blair was losing more money than the other three mills
made, so that Peerless no longer showed any pro?t and, indeed, barely managed
to earn the interest on its ?xed debt. Blair, clearly, was bleeding Peerless
white.

As soon as Ludwig had become president, he
asked the ablest man in Blair management – an assistant manager of the Blair
plant – to study what could be done with Blair. The result was a recommendation
to spend some $25 million on modernizing the Blair plant. For this sum, the
assistant manager promised, Peerless would get as modern a plant as any in the
country (to build one from scratch would cost around $60 million). Employment
in the modernized plant would shrink from 8,000 to 2,600.

Ludwig had resolved not to take any action
until the assistant manager completed his study. But he hadn’t been idle during
that time. He himself carefully studied the economics of Peerless, which had
previously been kept rather secret. It soon became apparent to Ludwig that,
economically, Blair was untenable. The only economically justi?able course was
to close the Blair mill and not replace it. The existing mills in Illinois,
Texas, and Oregon could easily replace Blair’s production volume – at a fraction
of Blair’s cost and at superior quality. Closing Blair would entail very heavy
short-run costs, mainly severance pay. But within six months, the Peerless
Company would have absorbed the loss and would have become pro?table

again. If
Blair was kept going, no matter how successfully modernized, Peerless could at
best hope to break even – and the capital required to rebuild Blair would use up
all the credit Peerless could possibly command – if indeed that much money
could be raised in Peerless’s shaky

condition.

Ludwig was deeply disturbed by this
conclusion. He knew how much the Peerless Mill meant to Blair; without it there
weren’t going to be any jobs in the town. He himself was old enough to remember
the Depression days when his father, a machinist in a Milwaukee

automobile
plant, had been unemployed for three bitter years. Yet Ludwig also knew that he
had to make a decision fast. When he had been made president, he had asked the
board of directors to

give him
six months to study the situation – and the board had given him that much time
only grudgingly At that time the board had not really known how bad things were
– and at the next Board meeting, in January 1986, he would have to tell them
that the first nine months of 1985 had been catastrophic months. Surely at that
meeting, if not before, the board would expect him to have a de?nite recommendation.

As a business decision, there was clearly no
choice: Blair had to be closed. But what about the company’s social
responsibility to Blair and to the people who depended on the Peerless mill for
their livelihood? The more Ludwig thought about this the more he became
convinced that Peerless had the social responsibility to try to save the Blair
mill, and the town with it. There was a fair chance, after all, that the rescue
operation would succeed. He was not at all sure that his board would go along –
indeed, he half-suspected that the board would ask for his resignation rather
than authorize spending $25 million on Blair. Still he saw no choice in
conscience but to try. But before recommending to the board that the Blair mill
be remodeled, Ludwig thought it prudent to discuss the matter with an old
acquaintance, Glen Baxter. Baxter had attended the same college as Ludwig, had
wanted to become a minister, and had actually had a year or two of divinity school,
but had then turned to economics and was now the economist

for the
very union that represented the Peerless workers. Ludwig was really more
interested in getting Baxter’s support than in getting his advice – privately,
he had always considered Baxter somewhat of a “radical” and an “oddball.” But Ludwig
knew that he needed union support for any plan to rebuild Blair – and that his
board would not even listen to such a plan unless he could give assurances of
union support. And surely Baxter would support a plan that maintained

2,600
jobs for his members!

Much to I.udwig’s surprise, Baxter did no
such thing. On the contrary, he became almost violent in his opposition. “To
invest all this money in rebuilding Blair,” he said, “is not only ?nancial
folly; it’s totally irresponsible socially. You aren’t just president of the Blair
mill; you are president of the Peerless Company with its 8,000 employees
outside of Blair. And you propose to sacri?ce the 8,000 people you employ
outside of Blair to the people at Blair. You have no right to do so. Even if
you succeed and Blair survives, Peerless will have lost the capacity both to
pay severance pay and pensions should you have to lay off more people and to
raise the money to modernize and expand the other mills and to maintain the
jobs there. All right, John Ludwig, maybe you’ll be a hero in Blair with your
plan, maybe people there will think you’ve done great things for them. But in
my book you’ll he a cheap demagogue – as president

of the
company you are paid for doing the right thing and not for being popular.”

“Of course,” Baxter said, “we in the
union will do everything to make closing Blair as expensive as possible for
Peerless – we do have a responsibility toward our members. But for you to jeopardize
the jobs and livelihoods of the workers in the healthy plants, just because

you have
a guilty conscience about Blair’s mismanagement all these years – that’s the
height of social irresponsibility.”

In order to
thoroughly analyze this ethical dilemma:

Step 1: Identify the Issues and Problems

What are
the major factual issues raised by this case?

What are
the major conceptual issues raised by this case?

What are
the major moral or ethical issues raised by this case?

Who are
the many stakeholders in this case?

(stakeholders refers to all individuals whose
interest could be affected

by the decision made in the case).

Step 2: Outline the Options

What are
the possible options that Peerless’s management must consider?

How does
each of these options affect the various stakeholders?

Step 3: Formulate Your Decision

Formulate
your decision after taking into account both Ludwig’s and Baxter’s points of
view and the options that you outlined. Ultimately, as a strategic manager
charged with making the optimum decision for the Peerless Starch Company, what
would you recommend in this situation? Please thoroughly explain your decision.