'ower and Control in Organizations
311
pay Paul. When the loan officer's superiors were due [0 examine the branch's accounrs,
for instance, he had one borrower sign a blank Chase check that was later filled in in the
amount of $500,000. The check was [hen allegedly used to reduce the borrower's own
overdrafts.
According to The Wall Street Journal, Chase may have lacked effective control
measures to prevent such loans. They report that the bank's "credit policy guide"
stipulates that new borrowers must submit detailed financial statements, including
unqualified opinions from an accountant. Yet this documentation wasn't furnished when
a $2.96 million loan was made. Chase also had a credit-review policy whereby a creditreview committee reviewed prospective loans. But individual loans weren't reviewed
unless the officer involved brought the loan to the committee's attention-the equivalent.
according to The., Wall Street Journal, of blowing a whistle
'on oneself. (At Citibank, in comparison, at least three officers must approve any loan.)
The Brooklyn branch office from which these loans were made has meanwhile
been staffed with all new managers. And although Chase still refuses to discuss the case
or identify its principals, it defends its auditing procedures. "Hypothetically," says a
Chase spokesman, "if one or more officers were to violate established procedures. they
may be able to circumvent the system. but eventually those violations will be exposed
through the audit process." Nevertheless, the spokesman adds. "As a result of all this,
we have made some- minor enhancements in the credit procedures. "
QUESTIONS
1 What do you think were the main inadequacies in Chase's control system?
2 To what extent do you think behavioral factors like company culture and improved
employee selection and training could have helped Chase avoid this problem?
".
CASE FOR CHAPTER 11
CLEVER CASH MANAGEMENT REVS FIAT'S FINANCES
Minimizing Exchange Risk and Interest Costs Pays Off So
Well It Is a Corporate Priority*
Last year an astounding 554 billion in cash-paymenrs, receivables, and other itemsflowed through the giant auto maker Fiat's Italian operations. Careful yet innovative
management of this cash flow was a key reason Fiat survived a flood of
XReprimed from Business Week. April 30. 1~84.
312
POWER AND CONTROL IN ORGANIZATIONS
red ink that swampe.d earnings through the late 1970s and early 1980s. Now. the same tight
controls and centralized financing are enabling the company to make new investments at a
rate oi a~out $1 billiop. a year. even while reducing debt from $5 billion in 198G- to $3.5
billion today. "We operate as a cenn-al bank.'· explains Gian Luigi Garrino. director of
corporate finance and control. "and we think it works."
Guido Vitale. managing director of Milan-based investment bank Euromobiliare.
praises Fiat's cash management system for being "as sophisticated as an~' worldwide" To
keep a tight rein on its 421 companies in 55 countries. Fiat has opted for a high degree of
centralized financial control. Executives. at company headquarters in Turin se~ financial
strategy and manage operations for the worldwide group. The head office also does most or
the negotiating for new lines of credit and international loans. and it oversees aU Fia!'s
foreign exchange~operations.
To keep track of everything. Fiat has put in place a complicated reporting system that
allows it to check toe exact income and outflow positions of its companies over successive
10-day periods and to estimate the company's financial position over the following four
months. That allows the central finance operation in Turin to exploit expected cash surpluses
by investing the money or to cover potential shortfalls. "Without that," says Garrino. "we
would have no cash management"
• Hedging by Telex
I?ecause Fiat must use the lira. a weak currency. for much of its operations. conrrolling
foreign exchange exposure is especiall~' important. Punctually every Friday afternoon, the
central finance department sends telexes to its operating companies throughout Italy, where
60% of Fiat's sales and the bulk of its exports are generated. The telexes give strict guidelines
to be used in foreign exchange transactions for the following week.
Generally. Fiat bills all exports in the buyer's currency. and the company tries to
minimize its exchange risK by borrowing in local currencies. "In this way. none of our
operating companies run risks. Only we do in centra! finance." says Garrino. To cover that
risk. every 10 days Garrino checks the foreign exchange exposure of 40 companies in the Fiat
group that together account for 80% of the company's total foreign exchange operations. "We
find where the long and short positions are and balance them out.·' says Fiat's 37 -year old
finance manager, Gabriele Galateri di
Genola, who holds an MBA from New York's Columbia University.
.
This close attention to foreign exchange exposure and local cash management can
translate into significant savings. When Fiat recently decided to transform some short-term
debt into medium-term, it elected to borrow in dollars to cover ~imultaneously a long dollar
position it held in the foreign exchange market. So or, ,v1ar. 5 ii issued $100 million in
variable-rate notes priced at %% over the London interbank offered rate (LlBOR), thereby
solving two problems at the same time.
In another example. Fiat found that its U.S. operation had an excess of $10 million and
that its Swiss-based company. International Holding Fiat (lHF). had a $10 million debt for
which it was paying 1/4<rO over LlBOR If the U.S. company had
Power and Control In Or,?antzatlons
313
I.
put its money on deposit, it would have earned LIBOR minus 1/8%. So Fiat had the U.S.
operation lend its excess cash to [HF at LlBOR. The American company / earned more than it
would have from a bank. and IHF ha<;i its interest payments
cut In all, the company saved %% on the deal.
• Doing a Service
Despite its success with a centralized treasury, Fiat has not made' cash management a profit
center. "Cash management at Fiat is a service for the members of the group, and our job is to
ensure mat they get the lowest-cost money they can." says Gar-' rino. "If we allow our Fiat
auto operating company, with sales of $7.1 billion. to go to the market on its own it will get
better terms than our Sorin Biomedica, witn sales of $63.8 million. But if we send. them
together under the Fiat name, they both benefit. ,.
By aggregating the borrowing needs of the group's individual companies into a lump
sum and arranging a single big loan, Fiat has more negotiating clout with banks anxious to
get the business. In Italy, where the company borrowed $1.5 billion last year, Fiat managed
to win favorable terms-at least 1 % below the prime rate, now at 17.5%.
Even in its foreign borrowings. Fiat takes the package approach, negotiating for all
under the Fiat name and saving as much as ~/2% on the spread over LIBOR by doing so.
Using this method. Fiat has a $1.8 billion "umbrella line of credit" 'Mth major international
lenders, among them Citibank, Deutsche Bank. and Banque Paribas. The cost varies from
1/4% over LIBOR for money borrowed for six months to 3/8% over LIBOR for up to twoyear funds. "It gives us tremendous flexibility, and it is nice to know it is there," says Galateri
di Genola of the credit line.
Although it was born to combat lean times, centralized cash management is now at Fiat
to stay. The company plans to invest an average of $1 billion a year through most of the
1980s. and it wants to do that while shrinking its debt further. Fiat executives hope that
continuing with tight cash and financial management practices will be a big help in meeting
that goal.
'.
QUESTIONS
1 How do Fiat's centralized financial controls help the firm to achieve coordinated actions
among its subsidiaries?
2 Do finance chief Garrina and his department exercise only "staff' authOrity? Explain your
answer.
J.
jJ
-
CASE 10.2
The Motivation Crisis: Hitting the Wall
Many people have achieved great fame and fortune before turning 40. Mozart died five
years before reaching 40. Alexander the Great conquered Asia Minor and died at 34.
Steve Jobs (co-founder of Apple Computer) i~ Just turning 35. When Jack Benny was in
his 60s and 70s, he used to get laughs by claiming to be 39 instead of what he really was.
say 74. Why did Benny pick 39'1
Some consider 39 to be the last-gasp outpost of youth. In business. the goal to be
president or the ambition to invent a world-renowned product may run smack into reality
at 40. A 40-Year-old often has a long history of work experience. including a few scars
from failures.
Many 39-year-olds and even younger men and women have accomplished a lot. They
may have been promotcd--every three or four years. and their compensation packages may
be in six figures. They may also have realized that the'
• corporate program or the management hierarchy is becoming narrow and that their
opportunities are decreasing. The first 15 years in the work force arc often
Adapted frum "/lillin!: the Wall al 40:' f1".\;/ICJ.\ MOIII!,. Scplemhcr 1990.1'1'. 5Z-511.
Chapler 10 Human Rp.lillions and Mollvalton
years of advancement, recognition. autonomy, and high expectations. Motivational
inspiration is all around. However. reality. burnout. fatigue. long hours • . and travel
are also common. By 40. motivational inspiration may be harder to find.
A few examples will highlight how self-motivation becomes a very serious
concern for many people around 40 years old. Tim hit the wall at about 38 years old.
He was a senior product manager at Borden's Consumer Products Division in
Columbus, Ohio. He had always wanted to be president of a company. At 38 he
realized that, at Borden, this wouldn't happen. His goals were being stalled. He left
Borden and joined a manufacturing firm in Dayton. Today. at 44, as vice president for
sales, marketing, and engineering applications for Freund Precision. he is happier and
more realistic. He wants to be financially independent at 55. but he is not going to
drive himself to exhaustion.
Juanita was a fast tracker when the birth of her son made her rethink her goals.
The Princeton graduate had been only 34 when she stepped up to the top rung of the
management ladder as president of telemarketing for Time-Life Libmries. At 36 she
started to assess her life, the dizzying schedules and the frequent travel. She
concluded that a person can have it all-but not all at the same tim!? By all. she meant
success, power. money. recognition, time. energy. and influence. Juanita is now
enjoying motherhood. When she wants to go back to managing, she will go back to
work. She is confident. satisfied. and very aware of the costs and benefits of being a
mother, wife. and management superstar.
About 4 million Americans turn 40 each year. Forty is the age at which reality.
pyramid' narrowing. and self-assessment become crucial. However. success can oe
measured in many ways. How a person copes depends on many things. Sell'
;;onfidence. talent. resourcefulness. goals. and adaptability all count. Pe' ,pie who
love their work. have strong work ethics. and know themselves well will not be
stymied by the "40" wall. The over-40 successes are the ones who:like Jack Benny.
have a passion to accomplish. to achieve. and to be creativ.e well into old age without
feeling a day over 39.
Questions for Discussion
K. Can a person like Tim achieve a sense of self-actualization even though he
hasn't achieved o.:e of his major goals (becoming a president of a
firm)'? Explain.
.
2.What role docs self-confidence r1ay in terms of motivation for Juanita'! ~. How
did Tim and Juanita use self-assessment to their advantage in maintaining a strong
degree of self-motivation'!
rWha, 'ypo of mol;,,(;ooal ,df-a'""m,"' do yO" pononn"p
For decades Walt Disney reigned as king of family entertainment, with wellloved
animated classics, family movies, a weekly TV show, arid Disneyland and Walt
Disney World-fantasy come to life. But his empire faded after his death in 1966.
The movie studio turned out box office duds. The TV show disappeared. Only the
theme parks were profitable. By 1984 the Magic Kingdom had had years of
declining earnings and faced threats by raiders.
Then Michael D. Eisner became chairman and chief executive officer of-the Walt
Disney Company, and Frank G. Wells became president. These former Hollywood
executives developed a markctillg strategy to take Disney to the forefront of
modern entertainment.
They brought the "Disney Sunday Movie" back to network TV and.devel,?ped
new children's cartoon series and new adult shows such as '·'Golden Girls." The
Disney Channel became available to cable subscribers. Disney reissued classics
such.as Snow White and the Seven Dwarfs and Bambi for a new generation of
children to see in theaters. The movie studio created new children's movies, such as
the critically acclaimed The Little Mermaid .. It also started produci.ng films for
new audiences-teens and adults. Box office hits like Down and' Out in Jkverly
Hills, Three Men and a Baby, Good Morning, Vietnam, and Dick Tracy also
became big video hits. Disney began releasing its classics on cassettes for the huge
home video market. (One million copies of Sleeping Beauty sold in one year.)
Disney moved into international broadcasting, too. Mickey Mouse and Donald
Duck are prime-time stars on Chinese television. "Adventures of the Gummi
Bears," "Ducktails." and ."The Disney Club" air weekly .in seven European
countries. Videocassette sales are high in
Britain. Spain, and Israel:
.
Disney expanded the merchandising of its famous mouse and his pals, with 8,000
products now sold in 50 countries. Besides stuffed toys, books, and clothes, fans
can find skis, a $175 Seiko Mickey Mouse watch, or a $3,200 diamond-studded
Dumbo brooch. Disney sells its products through 8 million catalogs mailed each
year or in new mall stores that offer a touch of Disneyland
coast to coast.
.
At the theme parks; the company raised admission prices and added new
attractions, including a "Star Tours" spaceship ride Sind Indiana Jones adventure at
Disneyland, Big Thunder .Mountain at Tokyo Disneyland. and the MGM movie
studio in Florida. To keep visitors pouring into the parks. Disney launched big
advertising campaigns. Disney's goal is to make every customer feel like a guest.
The company makes sure it knows who its customers ani and what they expect from
a' family vacation. then tries to exceed their expecta·· tions. Employeesattcl)d
Disney University to learn how to provide superio~
Adapted from Stewart Toy. Robert Neff. c:t al.. "An American in Paris." Busint'.u Wuk, March 12.
1990. pp: 60-61. 64; Jeanne' Meister. "Disney Approach Typifies Quality Service:' Markt'ling Nt'ws.
January 8. 1990. pp. 38-39; Ronald Grover. "Disney's Magic:' BII.fint'S.<
March 9. 1987. pp. 62-69 ..
W..,k.
Part Five Marketing
service, such as solving customer problems on the spot. The Disney approach to
satisfying customers is so successful that the company holds seminars for
executives in other industrie~. Since 19~6 more than 3,000 executives from 1,200
companies have attended three-day seminars.
Eisner firmly believes in the Disney tradition of providing high-quality family
entertainment. "I must maintain the company, the quality, the image," he says.
Effective marketing contributed to a dramatic turnaround for the company . . Disney
profits increased 35 percent for the year ending September 30. 1989. on revenues of
$4.6 bil1ion.
Stil1, some people believe Disney's growth years in U.S. markets arc over.
Executives are looking to Europe for growth in the 1990s. Their largest new venture
is the $2.6 billion Euro Disneyland on 4,500 acres near Paris. The park is within
two hours' driving distance for 17 million people and two hours' flying time for 310
mil1ion. Disney also plans to open a $1 billion studio tour next to the theme park in
1996. (MCA, Inc. plans to build a similar studio two years sooner and only 20 miles
away.)
Tokyo Disneyland is a big hit with the Japanese, who are enjoying new affluence
and who seem to love American culture, the Disney characters, and the park's
cleanliness, order, outstanding serv.ice, and technology. But Disney may face
problems in Europe, with its diverse languages and tastes as well as France's. chilly
winter weather. Many French see Disney as the height of for- . eign arrogance and
are critical because their government has spent $350 million on park-related
infrastructure (roads, utilities, etc.) and h'ls condemned farmers' land for sale to
Disney.
Qu.stions for Discus.ion
I. Would you say that the Walt Disney Company practices the marketing
. concept? Why or why not?
.
2. Which approach to selecting a target market has Disney taken'! Name
some of the market segments Disney wants to reach.
3. What are some factors of the marketing environment that have an
influence on Disney's marketing decisions? Explain.
CASE 13.2
The Downfall of Uptown
For its new Uptown cigarette, the R. J. Reynolds Tobacco Company followed
basic marketing strategy: define your target market and develop a marketing mix
for it. The strategy had every indication of being a winner. Reynolds selected black
smokers as its target. As a group, blacks smok~ in greater numbers than other
population segments. According to the U.S. Office of Smoking and Health, 34
percent of blacks smoke, compared to 28.8 percent of whites and 29.1 percent of
the total U.S. population. And while the number of U.s. smokers is dropping 2
percent a year, the number of black smokers is on the rise.
Adapted from Associated Press. "Flawed Sirategy Doomed Cigarette." J/l'rtI/d·Ll'cul,., (Lexington.
Ky.):January 28.1990. p. EI; Judann Dagnoli. "fUR's Uptown Targcts Rlad .• ,'· Adv~rtisinJl AJll',
December 18. 19119. pp. 4, 44; Michacl Quinn. "Don't Aim that Pack al Us," Timr, January 29, 1990.
p. 60.
Chapter 13 Marketing Strategy
Reynolds carefully designed Uptown for the tastes of the black consumer.
Since 65 percent of all black smokers smoke menthols, Reynolds made Uptown a
menthol cigarette, with a lighter menthol flavor than its m~ior menthol, Sa· lem.
Although Salem is the number five cigarette in the industry and the best· selling
menthol, it never succeeded with black smokers, who saw it as a "whitebread
brand." Uptown would compete with Lorillard Inc.'s Newport, the fastest-growing
menthol, which is advertised using black models and in black publications but also
is advertised to whites and Hispanics.
Reynolds packaged Uptown in a glitzy black-and-gold box. Its advertising
agency developed ads featuring blacks enjoying nightlife and suggesting glamour
and high fashion. Rernolds planned a market test of Uptown beginning in
Philadelphia, wht;re blacks make up 40 percent of the population.
But then the wrong people got a whiff of the new cigarette. Shortly after
Reynolds announced plans for the Philadelphia market test, the American Cancer
Society there started making plans to block it. Within a week, nearly 30 re~gious,
health, and black community groups jo;ned the Coalition against Uptown. Said the
Rev. Jesse Brown, president of the Philadelphia-based Committee to Prevent
Cancer among Blacks, "The protest was designed to say to R. 1. Reynolds ... we do
not need another instrument of destruction to come into the African-American
community." The uproar caused U.S. Health and Human Services Secretary Louis
W. Sullivan to ask Reynolds to halt the campaign of "slick and sinister
advertising." Reynolds did stop the market test: the company denounced the
"unfair and biased" attention that had been focused on the product by a "small
coalition of antismoking zealots."
Targeting tobacco products to specific market segments is not new; 398 brands
and brand styles are sold in the U~ited States. Since Philip Morris USA introduced
Virginia Slims, companies commonly target women. (In 1986 lung cancer
surpassed breast cancer as the most common cancer in women.) But 'an organized
protest against cigarettes designed for women has never occurred. After the defeat
of Uptown. however, Sullivan and others now plan to approach cigarette makers
that target women-.
Protesters of the new cigarette aimed so obviously toward blacks argued that the
black community is already overburdened with smoking-related diseases. Black
men have a 58 percent higher incidence of lung cancer than white men. And blacks
lose twice as many years of life because of smoking-related diseases. But many
people, blacks included, disagreed with the protest. Civil rights activist Benjamin
Hooks said that "buried in this line of thinking is the rationale that blacks are not
capable of making their own free choices." Still, a concern exists that big
corporations have targeted minorities as markets for tobacco, liquor, and even junk
food. A survey in Bi\ltimore found that only 20 percent of the billboard advertising
in white communities featured smoking and drinkin~ while in black
neighborhoC'ds 76 percent promoted those habits.
Questions for Discussion
<II'
1. What consumer trends determined Reynolds' marketing strategy for
Uptown cigarettes?
") Do you think Reynolds' marketing strategy for Uptown was flawed in some
way?
3. What marketing environment factors influenced Reynolds' decision to
cancel the market test of Uptown'!
'..
I. /
Did R,ynold, d,mon"",,, ,0d,1 ,,,pon~ibili'y in 'his ind".~11 EX~in/
4.
V
/
M.
L.