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PROCEEDINGS OF THE AMERICAN SOCIETY OF
BUSINESS AND BEHAVIORAL SCIENCES TRACK
SECTION OF SMALL BUSINESS DEVELOPMENT,
INTERNATIONAL BUSINESS, AND BUSINESS
CASES
February 17-21, 2000
Las Vegas, Nevada
Steven Hall
Editor
Texas A&M University-Corpus Christi
Dawn Martin
Co-Editor
Texas A&M University-Corpus Christi
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
Las Vegas, 2000
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PROCEEDINGS OF THE AMERICAN SOCIETY OF BUSINESS AND
BEHAVIORAL SCIENCES TRACK SECTION OF SMALL BUSINESS
DEVELOPMENT, INTERNATIONAL BUSINESS, AND BUSINESS CASES
TABLE OF CONTENTS
COMPETING IN THE SALTY SNACK INDUSTRY……………………………………………………1
Clyde Vollmers, Moorhead State University
Stacy Vollmers, Moorhead State University
James Swenson, Moorhead State University
FOREIGN DIRECT INVESTMENT IN INDIA:
PROBLEMS AND PERSPECTIVES OF GROWTH IN
THE NEXT MILLENNIUM………………………………………………………………………………17
Girish Kumar Rebbapragada, University of Louisiana
Rammohan Rao Yallapragada, University of Louisiana
MICRO-LOANS: NEW HOPE FOR AFRICA, ASIA,
AND CENTRAL AND SOUTH AMERICA……………………………………………………………...25
Frank J. Gaskill, Delta State University
JACK AND JILL RAN UP THE HILL: A CASE IN ETHICS……………………………………….…..31
David E. Morris Sr., Ph.D, North Georgia College and State University
SCUBA UNLIMITED, INCORPORATED B…………………………………………………………….41
Larry Patterson, Ph.D, Southwest Texas State University
SUPPLY CHAIN PARTNERSHIPS: A CASE EXAMPLE…………………………..………………….47
John T. Byrd, Bellarmine College
USING A STEPWISE MULTIPLE REGRESSION APPROACH
IN FORECASTING AND BUSINESS DECISION MAKING………………………………..…………50
Rajabali Kiani-Aslani, California State University
Mohammad Sangeladji, California State University
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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COMPETING IN THE SALTY SNACK INDUSTRY
Vollmers, Clyde
Moorhead State University
vollmers@mhd1.moorhead.msus.edu
Vollmers, Stacy
Morehead State University
s.vollme@morehead-st.edu
Swenson, James
Moorhead State University
ABSTRACT
This case study explores the competitive environment of the $13 billion snack chip industry. With sales
of $7.474 billion, Frito-Lay has used excellent marketing distribution, and manufacturing skills to capture more
than a 60% market share. The other national manufacturer, Proctor and Gamble, is a single-product niche
player with a 3.3% market share. Other national competitors include Anheuser-Busch who recently closed its
snack food company, Keebler and Bordens who recently retreated from a national rollout of its regional brand.
Within this competitive environment, regional and local firms with less than 1% market shares face the
daunting task of attempting to grow sales and market share. Environmental factors compound the problems they
face.
BACKGROUND
Snacks, which are integrated into the work, relaxation, and recreation of Americans, supply about 25%
of our daily calories. In fact, North Americans are the largest per capita consumers of chip snacks, comprising over
36% of the world market.
Feeding our demand for snacks is the $72 billion snack food and wholesale bakery industry. This industry
generally includes wholesale bakery goods that generate 40.2% of sales, specialty snacks 12.9%, confectionery
products 21.9%, and salty snacks 25%. Included in the salty snack category are meat snacks and pork rinds, salted
nuts and peanuts, and the snack chip industry. The $13 billion snack chip industry provides consumers with potato
chips, potato crisps, corn chips, tortilla chips, pretzels, ready to eat popcorn and extruded cheese products such
as curls, balls, and puffs.
Americans are increasing their consumption of snack foods. During the past decade, dollar sales of salty
snacks have increased an average of 5.2% while sales in pounds have increased 3.2%. According to U.S. Industry
& Trade Outlook '99, market growth for salty snacks is projected to increase by 2 to 4% over next five years.
Table 1: Sales of chip snacks: 1998
Pound volume
Type of chip
Potato chips
Tortilla chips
In millions
1,517.3
1,354.5
Dollar volume
% of total
31.7%
28.3%
In millions
$4,587.2
$3,569.8
% of total
32.9%
25.6%
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Frito-Lay
estimates
% of total
41.0%
25.0%
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Corn chips
239.8
Pretzels
629.3
Ready to eat popcorn
129.9
Extruded cheese
280.5
Variety pack
82.3
Other: crisps, etc
Other: party mix, crisps, 552.0
Total chip snack sales
4,785.6
Source: Snack Food Association
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5.0%
13.1%
2.7%
5.9%
1.7%
$744.7
$1,247.6
$464.6
$810.9
$342.6
5.3%
8.9%
3.3%
5.8%
2.5%
11.5%
100.0%
$2,189.2
$13,956.6
15.7%
100.0%
4.0%
9.0%
3.0%
7.0%
10.0%
Table 1 shows the sales of chip snacks for 1998. The other category includes potato crisps. Crisps are
baked and some are made from reconstituted potatoes. The largest crisp brand is Proctor and Gamble’s Pringles,
in addition, Frito-Lay has several baked brands.
The largest shack chip manufacturer is the Pepsico Inc. Their snack foods division, Frito-Lay, has over
a 60% market share, sales of $7.474 billion, and the top selling brand in each of the major snack chip categories
except ready-to-eat popcorn. Frito-Lay has achieved its success through extremely effective marketing, production
and distribution as well as very aggressive competitive strategies.
With its Pringles brand of potato crisps, Proctor and Gamble is a single-product niche player with about
a 4% market share. It is the only other competitor at the national level.
Other national firms have attempted success in the extremely competitive and difficult snack chip industry
and have failed. Anheuser-Busch, the beer marketing guru that has been able to capture more than 40% of beer
sales, recently closed it snack food company, Eagle. Keebler and its elves, exited the snack chip industry by selling
its brands including Ripplins, Tato Skins, and O'Boises. Bordens recently retreated from a national rollout of it
regional brand, Wise.
In addition to the few national competitors in the industry, numerous regional and local companies attempt
to compete in the highly competitive industry dominated by Frito-Lay. Highly successful regional brands such as
Herr’s, Old Dutch, and Utz each have less than 1% of the total market in the United States and sales ranging from
$100 million to $225 million. Other regionals include Jay’s, Guys, Golden Flake, and Granny Goose. Each of these
companies is a full line manufacturer offering products within at least five of the six major snack chip categories
(potato chips, corn chips, tortilla chips, ready to eat popcorn, pretzels, and cheese snacks).
Local companies have sales ranging from $100 million on the upper end to less than a $1 million for the
smallest firms. Some of these firms are niche players with single or limited line product offerings while others are
full line manufacturers that have not achieved the sales success of the regional organizations.
Within this competitive environment, most of the regional and local firms believe that Frito-Lay’s strategy
is to be the only snack chip manufacturer in the U.S. The overwhelming presence of Frito-Lay is revealed by the
president of a regional manufacturer that stated “I wake up each morning thinking about them”.
INDUSTRY SUPPLIERS
The major ingredients for potato chips and crisps are potatoes and oil while corn and tortilla chips are
made from corn and oil. Generally, about 100 pounds of potatoes yield 25 pounds of chips. And cooking oil
comprises about 30% of the final chip weight.
Chipping potatoes are primarily sourced from growers in the northern potato production areas of Maine,
North Dakota, Minnesota, and Michigan. However, potatoes are perishable and can only be stored for eight to ten
months. Starting in about May, chip manufacturers purchase new crop potatoes from Texas and Florida. As the
summer progresses, harvest moves north and chip manufacturers continue to source new crop potato. By
September and October, the harvest has reached the new crop from the northern potato production areas. By midOctober, harvest has ended and until May. From mid-October to May, chip manufacturers purchase potatoes out
of storage from the northern production areas.
The volume of chipping potatoes available varies depending on variations in weather, disease, insects,
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or other factors. To illustrate, in 1998, El Nino cut potato yields in Florida by 54% and processors were forced
to choose between closing plants or bidding up prices of the Florida new crop. As a result, potato prices reached
$24 per cwt. for a four to six week period, but by September, prices for potatoes in North Dakota had fallen to $5.
Generally, chip manufacturers absorb short-term price fluctuations rather than passing them on to consumers.
Historically, new potatoes, created through the use of genetics, have not been protected by patents.
However, the Plant Variety Protection Act added potatoes as a protected crop in 1995. This has encouraged
expanded research into potato varieties within the private sector and has substantially increased the desirability of
other countries exporting seed potatoes to the U.S. Further, Frito-Lay’s genetic department continually develops
improved varities of chipping potatoes.
While oil and corn also exhibit significant price fluctuations they can be store for several years, therefor
these price fluctuations have less of an impact than potatoes. Prices of corn and oils have fallen because of
increased yields from genetically altered varities. To illustrate, farmers are using an insect-resistance management
strategy with Bt-corn. The National Corn Growers Association has expressed concern that the EPA may restrict
insect-protected crops to the point that they will no longer be practical for farmers to grow. Several anti-technology
and environmental interests have threatened to sue the EPA if they don’t restrict genetically altered crops.
Soybean oil is used in manufacturing several niche snack chip products. Because soybeans are one of
the eight foods responsible for most of food allergies, the snack chip industry is very concerned about possible
contamination of non-soy based products and proper labeling.
Other supplies needed by the industry include packaging and spices. Corrugated packaging (cardboard
boxes used for transportation and delivery to the store shelf) is generally recycled by the chip manufacturers. For
example, Old Dutch uses each of their corrugated containers five times and Frito-Lay drivers are required to knock
down all corrugated packaging and return it to the warehouse for reuse. In part, this is driven by fluctuations in
price such as 1996 when prices of corrugated increased 50%.
Advances in packaging materials, barrier films, and printing have enabled snack makers to extend the
shelf life of the products, attract new customers with eye-catching designs, and lower costs. Stronger, thinner,
cheaper: those are the buzzwords in packaging circles today. Flexible packaging continues to grow in response
to consumer demands for fresh-tasting food in easy-to-open, resealable packages.
While small in volume, spices are essential for taste. Further, spice manufacturers are constantly
pressured to deliver new flavors.
NATIONAL COMPETITION
Several years ago, Anheuser-Busch purchased Eagle snacks and unsuccessfully attempted to take the
brand national. In the end, Anheuser-Busch sold several Eagle plants to Frito-Lay and sold the brand to Proctor
and Gamble. A variety of factors contributed to Eagle’s demise. 1) Frito-Lay tied up retail space significantly
limiting Eagle’s ability to get into retail outlets. 2) Eagle could not duplicate the distribution system that Frito-Lay
and the regional manufacturers had in place. Frito has over 15,000 route drivers calling on supermarkets,
convenience stores, and other retail outlets. To duplicate Frito-Lay’s delivery system, Eagle needed to invest $450
million in delivery vehicles alone. 3) Anheuser-Busch attained excellent quality at the expense of cost control.
“Their expertise was and is in canning," Sabatino, president of Guy's Snack Foods says. "As a result, they weren't
familiar with vertical form/fill/seal equipment, with fragile products like potato chips. They were lost. So they
inspected the quality into the product rather than engineering it in." A good example is the continuous potato chip
line which had seven Eagle employees operating and today has three under Guy's ownership.”
Keebler, with total company sales of $2.2 billion exited the snack chip industry be selling its brands
including Ripplins, Tato Skins, and O'Boises. These brands were sold to Wabash Foods, Bluffton, IN and more
recently Poore Brothers purchased Wabash.
Bordens owns Wise, a major regional shack chip manufacturer. When Wise attempted to role out
nationally, they failed. Bordens exited the ready-to-eat popcorn category by selling their Cracker Jacks brand to
Frito-Lay.
Proctor and Gamble has one niche product in the chip snack category, Pringles. This brand of baked
crisps generates estimated annual sales of $462 million. They differ from the rest of the industry by delivering
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completely through warehouses. They also now own the Eagle brand name. Further, P&G manufacturers Olestra
which is sold to Frito-Lay, Utz and Herr's for their fat free chips.
NATIONAL COMPETITION: FRITO-LAY
Industry insiders suggest that Frito-Lay believes that there should be one chip snack company in the U.S.
and it should be them. With sales of $7.474 billion in North American, it is the dominant salty snack manufacturer
and the only national firm. Further, it has an overwhelming market share overall (60%) and it dominates key
market segments such as potato chips, corn chips, and tortilla chips.
Frito-Lay it the second largest company owned by Pepsico (annual sales $35 billion). Its operating profit
margins were 19.05% in 1998, 19.92% in 1997, and 19.40% in 1996.
It has 50 manufacturing and processing plants U.S. and Canada of which, 44 are owned and 6 are leased.
These plants provide the capability to run each efficiently and minimize the costs of manufacturing. Further FritoLay owns 189 and leases 35 warehouses and distribution centers in the U.S. and Canada. An additional 1,840
smaller warehouses or storage spaces are leased or owned. International sales are supported through 75 plants and
1,000 distribution centers, warehouses, and offices.
Potato chips account for 41% of all snack chip sales and Frito-Lay has about half of the market. Their
strategy is to price potato chip products very competitively. With a 73% market share in Tortilla chips (25% of
all snack chip sales) and an 86% market share in corn chips (4% of snack chip sales), Frito-Lay has and uses the
ability to price these products with much greater margins. This practice is reflected in a statement in their third
quarter report of 1999, "Higher margin brands Frito, Doritos, and Cheetos".
Frito-Lay’s 20,000 person sales force delivers chip snacks directly to the store shelf using 15,000 route
trucks. This system permits Frito-Lay to work closely with approximately 480,000 retail trade locations weekly
and to be responsive to their needs. Frito-Lay believes this form of distribution is a valuable market tool and is
essential for the proper distribution of products with a short shelf life. Drivers work on commission and are well
paid. An experienced driver can earn in excess of $50,000 per year for Frito-Lay. Inspection of store shelves
reveals a great deal of discipline for the Frito-Lay delivery driver. Each bag is carefully placed on the shelf to
insure that the top corners are square, the shape of each bag is uniform, and each bag is turned slightly towards the
flow of traffic to insure maximum eye appeal. Further, supermarket managers consistently reported that Frito-Lay
drivers are excellent to work with, present their information effectively and represent Frito-Lay effectively.
Frito-Lay has very strong brand names nationally and it continues to build and support these brands with
effective advertising and promotion campaigns. Their brands include:
*
Potato chip brands: Lay's, Ruffles, WoW!
*
Tortilla chips brands: Doritos, Tostitos, Wow!
*
Corn chip: Fritos
*
Extruded cheese snack brand: Cheetos
*
Pretzels brand: Rold Gold
*
Multigrain chip brand: Sunchips
*
RTE popcorn brand: Cracker Jacks
Frito-Lay has an excellent product development process which reflect both technical developments and
marketing enhancements. An example of a marketing enhancement is the addition of a line of bags to Cracker
Jacks. This created additional retail selling points, giving them distribution in both the salty and confectionery
section. Technical product developments include the recent introductions include home meal replacement products
such as Fritos Chili & Scoops and Hot Chee-Tos. Further, Frito-Lay leads the industry with its no-fat, low-fat, and
reduced-fat products including the Olestra based chip line, WoW!. WoW! sales exceeded $350 million in 1998
meeting expectations, and is being touted as Frito-Lay's most successful new product launch (according to FritoLay). They invested $35 million in marketing for WoW! products and also formed a joint venture with Proctor and
Gamble to build the $250 million production facility to produce Olestra.
In the fight to get retail shelf space, Frito-Lay has used two strategies. Its strong pull marketing creates
more sales per retail shelf facing than competitors. And therefore, competitors are charged higher fees for their
shelf space to compensate for the lower revenue per facing. When they introduced WoW!, rather than cannibalize
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their own space, Frito-Lay purchased competitor shelf space. And some competitors report that because WoW!
has not done well, they Frito-Lay are paying a premium to keep the space.
"A hell of a program," is how one store manager described the Frito-Lay store promotion program. The
program financially rewards retailers with growth incentives based on shelf space and sales increases. Further,
with its Pepsi link, Frito does joint promotions with Pepsi including a "Stars War" promotion in the summer of
1999, and annual Halloween promotions.
Frito-Lay competitors in the snack food industry include Keebler, Nabisco, General Mills, Hostess,
Proctor and Gamble, Mars, Hershey, and numerous other firms. Against these firms, in 1997, Frito-Lay had six
products in the top 20 for advertising expenditures. This reveals its commitment to build brand loyalty through
strong advertising investments. “Lots of advertising” is how some competitors describe their strategy. Further,
Frito-Lay is capable of developing strong campaigns. To illustrate, it advertised Cracker Jacks on the Super Bowl
in January of 1999. The ad was one of the few that received high marks from advertising aficionados during the
game.
While Frito-Lay is an extremely effective marketer, it is also a very aggressive firm that is targeting
continued growth in market share. Other competitive strategies include: 1) One industry source reported that FritoLay threatened retailers that it would not deliver to their store if they started carrying a competitors brand. The
Canadian Government had an inquiry regarding this practice, but determined that Frito-Lay had more money and
more lawyers and therefore, they took no action. 2) Other sources reported that Frito-Lay purchases the retail shelf
space of competitors. In the Southeast, it bought all of the shelf space of its major competitor from three retail
chains. One Frito-Lay competitor stressed that Frito-Lay was buying their competitors right out of the store. "Its
illegal and the government is doing nothing!"
REGIONAL COMPETITORS
Old Dutch, of St Paul, MN had 1998 sales estimated sales of $217 (U.S. and Canadian. Their major
brands are Old Dutch and Restaurante Original. They serve Wisconsin, Iowa, Nebraska, and the Dakotas. In the
Twin Cities, their market shares and Frito-Lay shares are:
Corn products
Frito
70%
Old Dutch
16%
Potato chips
Frito
35%
Old Dutch
40%
Core categories include potato chips and tortilla chips representing more than 70% of their volume. Old Dutch
is increasing these categories by increasing advertising and by encouraging consumers to trade up to larger sizes.
They have expanded their line of tortilla chips from two items to five. The fastest growing tortilla item is the round
bite size. These introductions have helped gain 4 to 5 market share points in the category. They believe their
business grew because of good products. As snack manufacturers wage their merchandising battles in the
supermarket aisles and as new products regularly enter the market place, Old Dutch relies on consistent quality
and taste to remain competitive. "We're always looking for something new and exciting, not just line extensions.
We're going down a few new alleys now. We're always experimenting with new introductions and testing new
flavors against the competition." One of the biggest issues facing snack manufacturers is the consolidation of their
customer base. This means that a big national company can run chainwide programs for customers, and this can
squeeze smaller companies off the shelf. Brand building is an essential activity because pull strategies can save
the organization in the long run. In total, promotions are up for industry. Old Dutch is family-owned and familyrun. They have 193 company owned routes in the US and 260 owner operator routes in Canada. The organization
is currently in the second generation of management and financial resources. The management team is considered
strong by others in the industry.
UTZ, of Hanover, PA had a 1998 sales estimate of $162 million. Their major brands: Utz, Grandma Utz,
Hanover Home Brand, Kettle Classics, Home Style, and Yes! They have a very strong market share in the
Baltimore market. Further, they are the first regional to come out with their own Olestra-based product and the
product has met expectations. However, they expect the category to max out at between 10-12% of the market.
They have also been successful with big bag sales, particularly in mass merchandiser channels. This privately held
company has second generation of ownership and is run by the family. Utz is one of several brands that is
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outperforming the pretzel category and Frito-Lay by nurturing consumers on a constant flow of new flavor
offerings, new shapes, new promotions, and new packaging.
Herr, of Nottingham, PA had estimated sales of $159 in 1998. Their major brand is Herr's. They serve
a 10-state area and have very strong market share in New York City and Philadelphia. They introduced an Olestrabased product called Rave in mid-1999. To grow volume in potato chips, Herr is looking at a variety of new
flavors. Their latest extruded snack resembles cheese curls, but are coated with chocolate, peanut butter and
marshmallow flavors. They are targeting kids with some of these products. They operate 500 DSD (direct store
delivery) routes. This privately held company is now in the second generation of ownership, but has gone outside
the family to secure professional management.
Golden FlakeError! Bookmark not defined. of Birmingham, AL had 1998 sales of $130 million. Golden
Flake has always played the "home team" angle to the fullest in Birmingham, where it has a significant presence.
It sponsors collegiate sporting events (SEC) and hosts plant tours for schools and civic groups. They use stone
ground corn for better flavored corn and tortilla chips, have never expanded with debt financing, and use a product
action committee from sales, marketing, quality control, manufacturing. They are the only publicly owned company
among the major regional firms. Their sales are $10 million lower in 1999 than they were in 1997. And their
profit has fallen from $3.5 million in 1997, to just over $1 million in 1999.
Jays, of Chicago, IL, has 1998 estimated sales of $129 million and their major brands include Jays,
Tesoritos, and O-ke-Doke. Jays introduced the combination pack business with its E-Z Dippin's Snack & Dip
products. They focus on tortilla chips with salsa dip or nacho cheese dip. The line has succeeded at both
convenience stores and mass merchandisers. They introduced a new line of extruded products that took their
market share from 4 to 10% in supermarkets. With a real cheese type of product, they are competing in the
premium segment. This privately held company is now in the second generation of ownership, and has gone
outside the family to secure professional management.
Guy's of Liberty, MO had 1999 estimated sales of $125 million for their brands Guy's, Krunchers! KrunChee, Snacktime, La Famous, Spirals, KAS, and Kitty Clover. They operates 475 routes from two production
plants. Guy's purchased a former Gable Snacks plant in Robertsonville, N.C. from Prepco to expand their nut line
and kettle cooked chips. However, they have no intention of adding a DSD delivery system because the cost would
be prohibited. The Robertsonville facilities symbolizes a more aggressive tack that regional snack manufacturers
find necessary for survival. "This industry can't just sit back and allow the market leader to continue to take market
share via excessive spending until we can't survive," Sabatino says. "We have to fight back. You'll see us being
more aggressive than we've been in the past. We're going to be spending more dollars across the board." Those
dollars...are targeted for additional promotional activities, everything from thematic campaigns with beer and soft
drink suppliers to off-the-shelf floor displays designed to move products via consumer pull-through strategies. It's
a war of maintaining brand awareness and trial in an extremely competitive environment. Sabatino says, "If we're
competitive on price and offer the best quality, we don't have to have the lowest price. Retailers will pay for quality
because they know that they'll sell more product." Guy’s recently filed for bankruptcy for the company which owns
the new plant.
Weaver, located in Lincoln, NE had 1997 estimated sales of $12 million. 1999 sales are assumed to be
substantially less. This company was recently purchased by new owners after the previous owner filed bankruptcy.
Their strength is their private label, which probably accounts for nearly half of their sales. In most cases, it appears
that they have chosen to avoid buying expensive self space. They stress the importance of their quality is making
all sales. Overall, Frito-Lay has an 85% market share in Omaha, Weaver’s home market. It appears that Weaver
is having difficulty buying shelf space with major retailers.
Poore Brothers, in Goodyear, AZ, has projected 1999 sales of $30 million and their major brands are
Poore Brothers and Bob's Texas Style. It appears that Poore Brothers believe their future involves substantial
growth. Recently they purchased Texas Snacks, manufacturers of Bob's Texas Style potato chips and Wabash
Foods, a Bluffton, IN based potato chip, potato crisps, tortilla chips and pretzels manufacturer that owned Keebler
snack products brands Ripplins, Tato Skins, and O'Boises. They produce premium batch-cooked potato chips
under Poore Brothers brand and private labels for retailers in Arizona and California.
Guiltless Gourmet of Austin, TX, saw their brand, Guiltless Gourmet, grow at double digit rate in 1998
because of packaging redesign and increased public interest in organic and natural products. The packaging
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redesign has had a phenomenal effect on their business accord to Robert Greenberg, vice president of marketing.
They have also made product improvements and have improved their independent distributor system. They believe
that flavors drive growth because the consumer is consistently seeking variety. They are targeting the health
segment of the business and by the end of the year, all of their tortilla chips will be made from organic corn.
Lincoln, in Stamford, CT, had estimated 1998 sales of $25 million. Their major brands include
Poppycock, Fiddle Faddle and Screaming Yellow Zonkers. Henk Hartong, president and CEO, a manufacturer of
caramel and popcorn products, acknowledges that Frito-Lay's presence has helped renew interest in the category.
"The lift in consumption is driven through new distribution and by category managers allocating space," he says.
"That coupled with Frito-Lay's decision to go to bags through direct-store delivery system has opened up an
opportunity for caramel corn suppliers who have warehouse distribution," Hartong adds. As a result, Lincoln has
introduced several new products among their family of brands. They plan to grow by investing in their brands and
using "synergistic additions. We are actively looking to add on companies."
Boyd's, Lynn, MA, major brands include State Line, Boyd's, and Vincent's. In the 1980's, management
tried to compete with the national brands on price alone. For the State Line brand especially, and to a lesser degree
with Boyd's and Vincent's. This proved to be a disastrous strategy. Brand image declined significantly: what were
once viewed as high-quality, good-value chips took on the image of "cheap chips." The quality was still there, but
because the chips were so heavily price-promoted to compete with the national brands, and because packaging was
allowed to become outdated and didn't reflect the quality that was still there, previously loyal snackers stopped
buying. In the early 1990's, the conventional wisdom was consolidation to create economies of scale. Therefore,
Boyd's and State Line were merged, but the result was bankruptcy. To fix the problems, they outsourced billings,
acquired new accounting software (cut employees from 20 to 4), upgraded receivables to collect from the retailer
rather than distributor, cut season variations by 30%, and carton sizes were reduced from 17 to 5. They completely
redesigned their packages to send the image of high-quality and high-value potato chips. Further, they added maple
flavoring to their New England Barbecue Chip to focus on regional tastes. What SLB Snacks won't do, is stray far
from the potato chip market. "We can't be all things to all people. We think that if you can do one thing right, that's
what you need to be doing." However, they are coming out with new products and flavors. They also are putting
together a distribution alliance with another snack food company. "It put us up a notch in the supermarket business,
and we'll be able to better penetrate that particular market channel."
Route 11 is located in Middleton, VA and their major brand is Route 11. Their philosophy is "you have
to do something completely different, find your niche, stick with it and forget notions of grandeur. The best way
to compete with the big corporation is to stay small." They have two cookers, 175 and 60 pounds per hour. They
use a premium quality and premium pricing strategy. Their point of difference is their very unique product line.
All products are organic. They offer a vegetable-chip line including mixed vegetable (taro root, sweet potatoes,
carrots, yucca, beets, parsnips, purple potatoes), Sweet Potato Chips, and Taro Chips. Their latest flavor for potato
chips is Death Rain which is spiked with habanero powder,
Wyandot Inc. of Marion, OH, specializes in private label packing for supermarkets and potato chip
distributors, and in contract packaging for major marketers. It makes corn chips, potato chips, tortilla chips, cheese
puffs and popcorn.
Dakota StyleError! Bookmark not defined. of Clark, SD had estimated 1998 sales of $1 million. While
the company is 14 years old, it was sold to the current owners in July of 1998. They believe that their product
offers a unique flavor which has appeal in their sales region. They are also attacking marketing much more
aggressively with radio and in-store demos. They stated that getting in the store is not as difficult as getting shelf
space. Stores apparently will give a few facings but are much more careful about giving more space. Dakota has
both in-house (4) routes and distributor (6) routes. They have found that in-house routes do better because Dakota
Style is their bread and butter.
INDUSTRY CHARACTERISTICS
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
Las Vegas, 2000
American Society of Business and Behavioral Sciences Conference
page 8
In 1998, the Snack Food Association conducted their annual survey of snack food manufacturers. Of the
86 member firms, 43 responded to the survey. To enhance the statistics gathered in the survey, 17 of the companies
were noted as "full-line" companies. These full-line companies manufacturer at least five of the following: potato
chips, tortilla chips, corn chips, ready-to-eat popcorn, pretzels and extruded snacks.
Industry leaders considered the central problems and challenges to be the fierce competition in the
marketplace and the competitive pricing. Many also cited the problem of retaining adequate sales volume growth
and profitability amidst increasingly stiff competition in retail outlets. Other major challenges topping the list
included locating a high quality means of distribution, finding and retaining quality employees, increased cost of
retail shelf space and fluctuations in the cost of commodities and ingredients.
In looking to the future, the most significant trend and issue facing individual snack companies and the
snack food industry as a whole in the next five years includes industry growth amidst ever-present competition and
competitive pricing in the snack food marketplace. Many cited the continuing consolidation of retail chains as a
challenge to overcome. Other issued included shelf space fees, slotting allowances, health issues, regulation,
changes in quality and pricing of raw material, and keeping pace with rapidly changing technology in the industry.
Jack Salmon, Vice President of Sales and Marketing for Guy's Snack Foods stated, "The industry as a
whole isn't doing enough evaluating, conceptualizing about the future, we may have long-run objectives, but we
operate with a short-run mentality." Potato chips tend to be the staple that all other chip snack products are
leveraged against says Salmon. "As a result, there's been aggressive and incredible competitive pricing in the
category," he says. It would be better for the category and the players involved, Salmon says, for companies to
eschew "the short-term blip. Branded competition must get more realistic."
Tom Howe, president of Jays Foods, concurs that there's been particularly heavy promotional allowances
in supermarkets for potato chips. "For large bags, potato chips supermarket segments, it's a bit of whore's market.”
There hasn't been a week where one of the major potato chip brands isn't being promoted."
Industry profitability is displayed in the following table. Overall, the niche firms earn operating profits
of about 8% while the full line firms return about 5%.
Table 2: Industry profitability and cost structure
Expense category
All companies
1998
1997
Benefits
Administrative
Salaries & direct labor
Commodities & ingredients
Flexible and corrugated packaging
Delivery
Advertising/promotion
Operating profits
Full line companies sell at least five of
popcorn, pretzels, and extruded snacks.
Source: Snack Food Association
1996
Full line manufacturers
1998
1997
1996
5.2
4.8
4.3
5.2
6.3
4.9
7.9
9.0
10.9
7.6
8.0
9.9
17.9
17.8
16.0
22.0
20.3
18.4
29.6
29.9
30.5
24.2
30.5
27.7
12.7
13.8
13.4
10.5
10.3
11.8
7.9
8.8
9.7
11.3
9.6
12.8
10.3
8.0
7.9
13.3
10.0
?????
8.5
8.0
7.4
5.9
5.1
4.2
the following: potato chips, tortilla chips, corn chips, RTE
Salty snack products have extremely low density and very high physical volume through a retail outlet.
These characteristics impact distribution practices and generally, they are delivered to retail stores in one of three
ways:
Table 3: Industry distribution strategies for all companies and full line manufacturers
Distribution strategy
All companies
Full line manufacturers
Company owned routes direct store delivery (DSD)
28.6%
57.2%
Independent distributors (DSD)
44.4%
29.0%
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
Las Vegas, 2000
American Society of Business and Behavioral Sciences Conference
page 9
Warehouse delivery
25.6%
13.1%
Other
3.2%
0.7%
Full line companies sell at least five of the following: potato chips, tortilla chips, corn chips, RTE
popcorn, pretzels, and extruded snacks.
Source: Snack Food Association
An important part of DSD is keeping shelves adequately stocked. And this involves determining how
many times per week snack food manufacturers should call on retailers.
Table 4: Customer service strategy for all companies and full line manufacturers
Calls per week made to
All companies
Full line manufacturers
Supermarkets
4.0
5.4
Warehouse clubs
3.4
4.1
Mass merchandisers
3.2
3.9
Grocery stores
2.6
2.8
Convenience stores
1.6
2.0
Drug stores
1.3
1.4
Full line companies sell at least five of the following: potato chips, tortilla chips, corn chips, RTE
popcorn, pretzels, and extruded snacks.
Source: Snack Food Association
Full-line snack companies revealed that price reductions accounted for nearly half of their advertising
budgets. And they ranked in-store displays as the most effective promotional tool.
Table 5: Allocation of advertising and promotion expenses and effectiveness ranking of media
Type of promotion
% of budget
Effectiveness rank by full
line manufacturers
Price reduction
46.0%
2
Co-op advertising
14.5%
9
In-store displays
11.3%
1
Radio advertising
6.3%
4
Television advertising
5.8%
6
In-store features
3.7%
5
Outdoor advertising
2.6%
3
In-store demonstrations
2.4%
8
Print advertising
2.2%
10
Coupons
1.7%
11
Community event sponsorship
1.7%
7
On-pack promotion
1.0%
Other
0.8%
Total
100.0%
Source: Snack Food Association
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
Las Vegas, 2000
American Society of Business and Behavioral Sciences Conference
10
page
Among the 20 largest advertising budgets for snack products for 1997 were several salty snack products.
Proctor & Gamble lead all shack products with their investment in Pringles while Frito-Lay had six products in
the top 20.
Table 6: Advertising investment for salty snack brands among the top 20 snack brands (1997)
Rank
Product Total
Magazin
Network
Spot TV
Syndicat
Cable
Snacks
es
TV
ed TV
TV
Network
radio
1
2
6
7
8
11
12
Total
Pringle
s
Doritos
Tortilla
Baked
Lays
Tostitos
Bite
Salsa
Lays
Low
Fat
Cheetos
Rold
Gold
Pretzels
$29,998.9
$11,519.2
$2,095.2
$4,730.4
$8,369.6
$3,284.5
$25,340.5
$10,061.0
$415.3
$4,287.1
$4,295.2
$6,236.8
$13,115.2
$9,982.3
$99.2
$1,938.3
$855.5
$13,040.2
$6,693.2
$436.0
$2,136.4
$3,774.6
$4,691.6
$117.9
$1,098.2
$3,544.5
$4,255.3
$2,427.5
$1,594.8
$928.0
$324.6
$47,202.6
$5,591.1
$15,785.
2
$21,767.
4
$9,845.9
$11,392.5
$7,081.8
$9,776.0
$323.8
$9,530.2
$112,193.
5
Source: Snack Food Association
$7,405.6
National
spot
radio
-
$239.9
$239.9
Market shares for major competitors vary across product category. The following two
tables provide information from two sources. Scanning data from food stores, drug stores, and
mass merchandisers are displayed in the first table. This includes data based on about half of
all sales. The second table is directly from Frito-Lay and reports their estimate of their market
share.
Table 7: Market share for major manufacturers by product type: sales through food, drug and mass merchandisers with scanners, 1998
Manufa Potato chips
Corn/tortilla chip
Cheese snacks
RTE popcorn
Pretzels
Other salty snack
cturer
Sales
Share
Sales
Share
Sales
Share
Sales
Share
Sales
Share
Sales
Share
Frito$1,582.3
68.2
$1,855.3
81.2
$252.
56.9%
$23.7
9.3%
$156
26.6
$397.2
36.6
Lay
%
%
8
%
%
Private
$164.2
7.1%
$100.3
4.4%
$47.8
10.8%
$19.0
7.5%
$71.0
12.1
label
%
Wise
$60.3
2.6%
$30.6
6.9%
$6.9
2.7%
foods
Utz
$54.4
2.3%
$26.6
4.5%
Herr's
$42.5
1.8%
$14.0
2.4%
Jays
$35.0
1.5%
$6.9
2.7%
Food
Golden
$33.8
1.5%
$9.3
2.1%
Flake
Old
$22.5
1.0%
Dutch
Mission
$37.3
1.6%
Granny
$24.8
1.1%
Goose
Planters
$40.7
9.2%
Bachm
$10.1
2.3%
$21.6
3.7%
an
Snyder'
$138.
23.6
s
7
%
Nabisc
$11.6
2.0%
$34.9
3.2%
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
page 11
o
Mars
Gardett
o's
P&G
$17.4
$17.0
General
Mills
Other
$326.6
4.1%
$266.5
Total
$2,321.6
100%
$2,284.2
11.7
%
100%
$53.0
11.9%
$444.
3
100%
$254.
8
3.0%
2.9%
$112.
8
$586.
7
19.2
%
100%
$45.1
4.2%
$462.7
$102.0
42.7
%
9.4%
$42.9
4.0%
$1,084.
8
Source: Snack Food Association
Table 8: Frito-Lay reported market share for their brands
Category
Market share
Potato chips
54%
Tostilla chips
73%
Corn chips
86%
Pretzels
24%
Extruded snacks
50%
Overall
60%
Source: Frito-Lay
ANNEL MEMBERS
Snack chips utilize an extensive distribution strategy and thus, are available in a wide variety of retail
outlets with food retailers dominating snack chip sales. Convenience stores and mass merchandisers are also major
channel members. Further, sales by retail type vary between products.
Table 9: Sales by type of retail outlet for 1998
Type of outlet
Potato chips
Tortilla chips
Sales
%
Sales
%
Supermarkets
$2,096.4 45.7%
$1,599.3 49.9%
Grocery stores
$389.9
8.5%
$314.1
7.8%
Convenience
$596.3
13.0%
$439.1
9.8%
stores
Mass
$465.3
10.1%
$399.8
14.2%
merchandiser
Warehouse
$215.6
4.7%
$228.5
4.2%
club
Vending
$192.7
4.2%
$124.9
3.6%
Drug stores
$165.1
3.6%
$103.5
3.8%
Other
$467.9
10.2%
$360.6
6.7%
Total
$4,587.2 100%
$3,569.8 100%
Type of outlet
Supermarkets
Pretzels
Sales
$542.7
%
43.5%
Other salted
Sales
%
$1,015.8
46.4%
RTE popcorn
Sales
%
$145.9 31.4%
$24.2
5.2%
$32.5
7.0%
Cheese snacks
Sales
%
$353.6
43.6%
$85.1
10.5%
$104.6
12.9%
$143.5
30.9%
$96.5
11.9%
$31.1
6.7%
$55.1
6.8%
$8.4
$42.3
$36.7
$464.6
1.8%
9.1%
7.9%
100%
$46.2
$29.2
$40.6
$810.9
5.7%
3.6%
5.0%
100%
Corn snacks
Sales
%
$371.6 49.9%
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
Category total
Sales
%
$6,125.3
4
5
Las Vegas, 2000
American Society of Business and Behavioral Sciences Conference
page 12
Grocery stores
$177.2
14.2%
$194.8
8.9%
$58.1
7.8%
$1,243.4
Convenience
stores
$138.5
11.1%
$295.5
13.5%
$73.0
9.8%
$1,679.5
Mass
merchandiser
$112.3
9.0%
$205.8
9.4%
$105.7
14.2%
$1,528.9
Warehouse club
$86.1
6.9%
$107.3
4.9%
$31.3
4.2%
$755.0
Vending
$52.4
4.2%
$102.9
4.7%
$26.8
3.6%
$554.3
Drug stores
$39.9
3.2%
$83.2
3.8%
$28.3
3.8%
$491.5
Other
$98.6
7.9%
$183.9
8.4%
$49.9
6.7%
$1,238.2
Total
$1,247.6
100%
$2,189.2
100%
$744.7
100%
$13,616.1
.
0
%
9
.
1
%
1
2
.
3
%
1
1
.
2
%
5
.
5
%
4
.
1
%
3
.
6
%
9
.
1
%
1
0
0
%
Source: Snack Food Association
Retail sales growth varies based upon the type of retail outlet. Overall, total retail has increased 5.4%
during the past five years. However, discount stores have increased nearly 10%, while drug stores have increased
nearly 6%.
Table 10: Growth in retail sales by type of outlet: 1994 through 1998
1994
1995
1996
1997
Discount department
12.9%
10.5%
7.3%
8.9%
Drug stores
2.4%
4.2%
6.8%
8.5%
Total retail
7.5%
4.9%
5.3%
3.3%
1998
10.0%
7.7%
5.9%
Average
9.9%
5.9%
5.4%
Convenience
Restaurants
3.7%
1.2%
3.7%
3.0%
2.7%
4.5%
8.2%
4.6%
1.4%
2.0%
2.4%
2.5%
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
Grocery
3.5%
2.8%
3.2%
CPI
2.6%
2.8%
3.0%
Source: Convenience Store Industry: Trends and Averages
page 13
1.2%
2.3%
2.0%
1.6%
2.5%
2.5%
RETAILER TRENDS
The retail industry has undergone consolidation and mergers. Mass merchandising is dominated by three
chains: Wal-Mart; K-Mart; and Target. Comparatively, supermarkets still exhibit a low level of concentration.
However, during the past decade, mergers have created companies with several thousand stores and sales
approaching $40 billion. Safeway, the largest chain, has sales of about $37 billion while Albertsons and Super
Valu have sales of about $33 billion. "Economies of Scale," are playing a large role in this industry. From
promotion to distribution, everyone is attempting to drive down costs to become more efficient. With its
extraordinary distribution and logistics efficiencies, Wal-Mart has rewritten the rules for both the mass
merchandisers and the supermarket industry. Historically, neither other mass merchandisers nor supermarkets have
been able to match Wal-Mart's efficiencies. And with its foray into food retailing through super stores, Wal-Mart
has discovered that they can increase their sales in their traditional store by more than 30% when they add a
supermarket to it.
With the information from scanners and computers to process the information, specialized experts can
more effectively analyze the data than store managers who see such a small part of the overall picture. Therefore,
more decisions are being made at centralized locations. Specifically, buying decisions and program decisions are
being centralized. Thus, national supermarket chains want a private label supplier who can serve their entire chain.
And they want the same promotions provided to every store in the chain.
Further, there is a blurring between supermarkets and discount stores. Discounters took the soap and
paper categories from supermarkets without a fight. With snacks, supermarkets are fighting back and are stopping
the drift of snacks to the discounters. Since the supermarket gets the customer more frequently than the mass
merchant, snack sales can be maximized through the use of special displays and end caps.
Retailers and wholesalers stress very strongly that they prefer to have three vendors for both branded and
private label chip snacks. Some stated that it hurt the market when Eagle failed. One person stated that it is scary
with only Frito-Lay. On-the-other-hand, chip manufacturers report that they have found the incentive of short term
profits tends to overwhelm the supermarket manager’s desire for multiple suppliers with management taking shortterm profit motivated actions, which leads to the long-term demise of the second and third vendor.
Store managers reported a variety of factors that drive the sales of the chip snack category. These include:
è
Quality products drive the market. This was seen as very important by almost everyone.
è
Price doesn't drive market according to most.
*
Price can be important to help private label sell.
*
Lower price point on lower quality does not work.
è
Chip snacks are an impulse item and therefore, then need strong presence in the store.
è
Price promotions are essential and supermarket managers suggested that up to 65 to 70% of their sales
were items on price promotion.
è
Single item facings do not generate sales. It is essential to have several facings for each product item.
è
A quality line with different varieties, fresh or new flavors, quality packaging.
è
Several stores reported they liked prepriced packages. They send a message that a special is real.
Otherwise, a low price is perceived as regular price.
è
Store owners like hot items (infrequent cooperative sales events in which both retailer and manufacturer
sell item below cost).
è
There is a need for daily delivery service and two times a day service on hot items.
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
page 14
DIRECT STORE DELIVERY
Merchandise is delivered to retail outlets such as supermarkets and mass merchandisers through two
distribution channels: direct store door (DSD) and through distribution centers.
The largest volume is shipped from the manufacturer in truck load quantities to a distribution center
controlled by the retailer. At the distribution center, break-bulk occurs and the product is shipped on to retailers
in truck loads of mixed products from numerous manufacturers. Examples include meats, fruits and vegetables,
canned goods, boxed goods such as cake mixes and breakfast cereals, and personal items. Manufacturers use
company sales people or manufacturers representatives to call on both the corporate buyer and individual retail
store. They attempt to insure the manufacturers have good product placement, have adequate shelf space, and
create good will.
For select items, manufacturers operate fleets of route trucks that deliver the merchandise direct to the
supermarket. Generally, the route driver delivers the product to the store, a store employee checks it in to insure
that all of the product is actually delivered, and then the route driver stocks the retail self. Examples include soft
drinks, frozen pizzas, and salty snacks. Soft drinks and salty snacks are delivered DSD because of the extremely
large volume of product and for salty snacks, the product characteristics. Potato chips have very low density and
take large volumes of room. DSD type products tend to be very competitive with high promotions. When asked
what do you do to a drowning competitor, the former CEO of Coke said, "shove a loaded hose down their throat."
DSD is the most competitive area of the supermarket.
Manufacturers use two selling activities for DSD. 1) Drivers are frequently in the store on a daily basis
and become very good friends with retail managers. The DSD driver meets regularly with the store manager to
discuss up-coming promotions, product placement, inventory turns, and profitability. Some individuals even
suggest that DSD drivers might be known to buy a beer for store managers. In some cases, the DSD driver is the
only knowledgeable person a store manager has to talk to regularly. A good DSD driver is invaluable. 2)
Manufacturers also have salespersons calling on corporate buyers and store managers to present co-op advertising
campaigns and other big picture issues.
The current trends for DSD have significant implications for the shack chip industry. 1) DSD is growing
faster than overall supermarket sales. 2) Store owners (supermarket chain owners) prefer products to move
through warehouses while store managers and store workers want product moved DSD. 3) Super-markets like
DSD for some products because their volume or density preclude efficient movement through a warehouse.
For the salty snack industry, when DSD competes with warehouse delivery, DSD wins. 1) Store
managers and assistant managers have too many product categories to oversee. With warehouse delivery, the chip
category is not well-managed. 2) Delivery drivers are paid commission and therefore their livelihood depends on
insuring that product does not reach expiration date, that displays are attractive, and that the maximum amount of
product is sold. 3) Delivery drivers build bonds with retailers that can be useful in securing shelf space or other
advantages. 4) On-the-other-hand, the retail stocker generally does not take a very strong interest in the overall
appearance or performance. Their income will be the same regardless of the volume of private label chips sold.
In fact, by intentionally sabotaging the private label brand and reducing its sales, the stock person creates less work
for themselves and more for the Frito-Lay driver. 5) Inventory levels are maintained more effectively through DSD.
The driver can scan the shelf and instantly fill the order. With warehouse delivery, someone may forget to order
an item or it may not get filled. Therefore, the shelves are generally not as well stocked.
PRIVATE LABEL
While private label chip sales are lower than other private label categories, they still comprise a major
competitive factor. Sales of private label chips totaled more than a quarter of a billion dollars annually in food,
drug, and mass merchandisers in 1998.
Table 11: Sales of private label snack chips
Private label
Market rank
Potato chips
3
Dollar sales (million)
$164.2
Market share
7.1%
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
Tortilla chips
4
Corn chips
5
Total
Source: Snack Food Association
$82.8
$15.8
$262.8
page 15
4.5%
3.5%
While each retailer manages private label differently, in general, retailers like private label products for
several reasons. They provide a lower priced alternative for the value or price conscious consumer while providing
higher margins to the store and creating customer loyalty to the store brand. One manager stated that “Private
labels allows stores to be in charge of their own destiny and we have the choice of what programs to run and when
to run them”.
Retailers prefer that private label chips be delivered DSD. Without a delivery person, competitive
delivery drivers constantly encroach into the private labels designated shelf space. In fact, to grow private label
snack chip sales, some retailers have had to create brand managers to call on the retail store. They can guard shelf
space for the private brand and protect against competitive encroachment. Further, they can insure the product is
merchandised properly.
Private label accounts want quality and service but their standards are probably less than the national
brands in most cases. And even though private-label offerings in the snack arena have taken a hit, Nick Chilton,
president of Wyandot, Inc. maintains there's still a strong interest in private label. "The role of private label today
is that of high quality, price-discounted products," he says. "In fact, private label products across the grocery store
are at an all-time high." He suspects that the introduction of WoW! last year could have cut into private-label
snacks' share of the aisle, with retailers taking away space from private label and giving it to Frito-Lay.
CHIP CONSUMERS
The big drivers in the snack food industry are flavor and convenience according to D. Thomas, director
of marketing for Herr Foods. Thomas points out, "consumers are looking for options, choices, something different.
They are looking for a fun experience in snacking. We need to keep vitality in the industry through new products."
Adds Salmon, "Snacks are a personal reward." That reward takes on different connotations for consumers during
various times of the day. As Howe notes, "you need different varieties of snacks for different kinds of people. As
a result, you're seeing more segmentation of the categories." Thomas stated, "Snacks are a high-impulse item,
recent studies indicate that 56% of all snack purchases are spontaneous." Thus, there is the need to excite and
encourage the consumer to buy.”
An illustration of the role of snacks as a fun experience is reported by Frito-Lay. They stated that
133,400,000 Americans watched Super Bowl 98 on TV. Here's what those armchair quarterbacks munched during
the game.
Table 12: TV Super Bowl consumption of snacks
Snack product
Consumption
(million pounds)
Potato chips
11.2
Tortilla chips
8.2
Pretzels
4.3
Popcorn
3.8
Snack nuts
2.5
Source: Snack Food Association
Increasing time pressures on consumers from hectic schedules continue to provide opportunities for the
snack food industry. While other food processing industries such as meats (Oscar Mayer's Lunchables) and
crackers (Kraft) have responded several years ago with home-meal replacement dishes or dash board meals, FritoLay and Jays attacked this market during the past year. Customers shopping in convenience stores appear to be
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
page 16
an ideal target market because C-stores are the ultimate "grab'n go" channel for quick eats. However, other
channels are also responding positively including mass merchandisers. The best salty snack product for these
channels are tortilla chips which are generally consumed with a sauce or dip anyway.
Concerns about health are beginning to reshape the snacking habits of American consumers, although
not always in predictable ways. These new eating patterns can, in fact, result in mixed signals for retailers and
manufacturers striving to offer the best product combinations.
As Americans move from having three meals each day to eating more frequently throughout the day, many
are looking for snack food items with some perceived nutritional value. But for all the signs pointing toward
greater consumer interest in more healthful eating, there are at least as many indicators suggesting that the opposite
is true. As ,mentioned at the beginning of the case, research shows that Americans remain dedicated snackers,
getting about 25% of their total calories from snacks. And recent surveys suggest that while most Americans say
they are making an effort to improve their eating habits, two-thirds continue to eat more fat than is recommended
under federal dietary guidelines.
Nabisco, which scored big with SnackWell's low-fat brand in 1992, has struggled in recent years, and in
some cases have increased fat content to make them taste better.
Proctor & Gamble appears to be facing similar challenges with Olestra fat substitute. But consumer
interest in low fat peaked in 1997, before Olestra. "Consumers are tired of deprivation," says Tom Howe. While
sales executives at UTZ and Herr's see Olestra-based products carving out about a 10% market share of the
category, Howe sees them ranging between 3%-6%. Jack Salmon states, "Olean has had zero impact on Guy's.
My personal opinion is that the Olean product will be a colossal failure, that it won't be embraced by the
consumer."
By late 1999, it appears that the Olestra based chips have missed expectation significantly and retailers
and competitors are waiting to see how Frito-Lay tries to put a spin on this product "failure".
With the graying of the Boomer generation, herbal remedies, alternative health techniques and natural
medicines have made an increasing impression on the public. Over the past few years, the media have bombarded
consumers with tales of St. John's Wort treating mild-to-moderate depression, the role of gingko biloba in helping
reverse memory loss and poor circulation, the use of echinacea in simulating the immune system and kava kava
in alleviating anxiety and tension. Salmon sees the advent of pharmacological snacks. The fastest growing
segment of the U.S. population are people over the age of 65," he says. "In 11 years, those war babies are going
to retire. They will not want the same old snacks. They'll want nutritionally enhanced products, snacks that contain
vitamins, minerals. Unfortunately, there's a woeful amount of research in this area."
Here are some questions to consider.
• What does the future hold for the snack chip market?
• What opportunities and threats exist in the industry?
• What does our regional owner need to take into consideration as he or she develops strategies to grow market
share and profitability?
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FOREIGN DIRECT INVESTMENT IN INDIA:
PROBLEMS AND PERSPECTIVES OF GROWTH IN
THE NEXT MILLENNIUM
Rebbapragada, Girish Kumar
University of Louisiana, Lafayette
rrkumar48@hotmail.com
Yallapragada, Rammohan Rao,
University of Louisiana, Lafayette
rammohan@louisiana.edu
ABSTRACT
Since attaining independence from the British rule in 1947, India pursued what is known as “socialist
pattern” with a highly controlled and centralized economy. Indian markets were virtually closed to foreign
investment. The Indian economy mainly consisted of state owned public sector units. Lack of competition and
centrally controlled policies had put a lid on the country’s economic rejuvenation. India was brought to the
threshold of a new era during the NarasimhaRao’s regime in the early 1990’s by adopting economic reform
policies and opening up of Indian markets to foreign competition. However, the Narasimha Rao government lost
the election in 1997 and a shaky government was put in its place. Busy as it was in warding off threats to its own
survival and subjected to conflicting ideological pressures from different quarters, the coalition government
could not give the much needed boost to the country’s economy. Consequently, there was a decline in Foreign
Direct Investment (FDI). The Bharateeya Janata Party, which was voted back to power with a relatively
comfortable majority in the recent elections, has to subject itself to deep introspection if it wants to come to grips
with the problem and reverse the current trends in the flow of FDI. This paper analyzes the causes for such
decline and suggests some appropriate strategies, which the new government has to follow in order to attract
the foreign investors in the new millennium
INTRODUCTION
After attaining Independence on August 15,1947, India followed socialist oriented economic policies,
leading to emergence of large public sector units, which were euphemistically called “the commanding heights of
economy.” As stated by Salve (1993), “India followed a predictable path towards socialism. Once on this path
the country was inexorably drawn into the vortex of regulations, controls.” Salve (1993) held that these ever
increasing regulations and controls were “carried to a point where, after four decades of governmental interference,
the nation had become virtually bankrupt in almost every sphere - economic, political, and communal.” In 1991,
Prime Minister Narasimha Rao had finally cast aside all the socialist policies introduced after Independence and
embarked on a major reform policy, liberating the economy and opening it for foreign investment. He was
responsible for initiating measures which helped India to closely integrate itself with the international economy.
After the defeat of Rao in 1996 elections, the country was ruled by shaky coalition parties, which lead to
political instability. The National Front-Left Front, a coalition of 13 parties formed a minority Government under
H.D.Deve Gowda as Prime Minister but he failed to continue very long. Inder Kumar Gujral replaced Deve Gouda
and continued till December, 1997. In the Mid-term elections which were held in Feb-March, 1998,the Bharateeya
Janata Party (BJP) emerged as the single largest party and formed a coalition government under the leadership of
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Vajpayee. Once again the weak coalition government was brought down in 1999, and the country witnessed
another round of elections in September, 1999 which resulted in the return of Bharateeya Janata Party and its allies
to power with a solid majority. The newly formed BJP government has already evinced a new sense of urgency to
kick-start the flow of Foreign Direct Investment into India.
BOLD DEPARTURE FROM THE PAST
With the advent of Liberalization policy of Prime Minister Narasimha Rao in 1991,foreign direct
investment (FDI) showed a phenomenal increase. Jain and Parikh (1994) observed that India’s tryst with
liberalization and market reforms finally seemed to be paying off. With the liberalization, the inflows of FDI in
India increased from $154 million in 1991 to $2.4 billion in 1996 as shown in the figure below.
Flow of FDI in India during 1991-98
4000
3500
3351
3000
2400
$ in million
2500
2258
1958.97
2000
($ million)
1500
950.54
1000
567.75
500
154.54
231.22
0
1991
1992
1993
1994
1995
1996
1997
1998
Years
Source: UNCTAD, World Investment Report, 1999
However, due to several reasons, partly economic and partly political, the FDI flow started showing a
downward trend in 1998. Critics largely attribute it to lack of direction and string pulling by one and all due to the
shaky nature of successive coalition governments which ruled India during 1996-99. According to the figures
provided by United Nations Conference on Trade and Development (UNCTAD) World Investment Report (WIR
1999), India attracted $2.26 billion by way of FDI in 1998 compared with $3.35 billion in 1997.
The Gross Domestic Product (GDP) growth also decelerated significantly from 7.8% in 1996-97 to 5%
in 1997-98. However, the country achieved a modest reduction in the Gross Fiscal Deficit (GFD), from 6.1 % of
GDP in 1997-98 to 5.6% of GDP in 1998-99(Budget estimate). The average inflation rate for the year 1998-99
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was higher than the 4.8% registered in 1997-98. Total gross domestic savings declined to 23.1% of GDP in 199798 from 24.4% of GDP in 1996-97. Net capital inflows were expected to be lower in 1998-99 than in 1997-98
as a result of a deceleration in the inflows of foreign direct investment and commercial borrowing and the outflow
of portfolio investments by Foreign Investment. The East Asian crisis also seemed to have cast its shadow on the
investment destinations of global financial markets.
MEASURES TAKEN TO BOOST THE ECONOMY DURING 1996-98
Despite the shaky nature of the coalition government(s), the reform process which was commenced
during the Rao’s regime was continued during 1996-98 although with much reduced vigor. Some major policy
initiatives that were taken during this period were as follows:
1) Scope of direct equity investment under the Reserve Bank of India’s automatic approval scheme has been
enhanced, permitting Indian companies to accept investment under the automatic approval route without the prior
permission of Reserve Bank of India (RBI).
2) Requirement of prior approval from the Reserve Bank of India (RBI) for Non Resident Indians’
(NRIs)/Overseas Corporate Bodies (OCB) investment and for issue of shares to foreign investors has been
eliminated.
3) Investment limit for individual NRIs and OCBs in the total paid-up equity capital of a company has been
increased from 1% to 5%.
4) NRIs and OCBs are permitted to invest in unlisted companies
5) Amendment to the Indian Electricity Act of 1910 was passed permitting private investment in power
transmission.
6) Procedures for issue of sovereign counter guarantees are simplified. Foreign equity participation up to 100%
is allowed for electricity generation, transmission and distribution and also in construction and maintenance of
roads, highways, ports, and harbors,
7) The Urban Land Ceiling Act, 1976 was repealed which contributed towards the development of urban
infrastructure including housing,
There is a wave of excitement and hope in the country that the BJP which returned to power in the latest
elections would initiate the second generation of economic reforms, ushering the country into the new millennium
with spectacular performance on the economic front.
Addressing the Parliament on the October 25,1999, K.R.Narayanan President of India announced a broad
set of policies and laid out the road map to carry forward the second generation of economic reforms. The President
emphasized the importance of a new pro-development mindset in every section of society, polity and
administration, creating a strong consensus for the bold departure from the past. Ajit Kumar, (1999) Industry
Secretary to Government of India in a panel discussion on “Foreign Direct investment into India: problems and
prospects” stated that “we are aiming at a single page all-purpose form which will be acceptable to all other
government departments, thereby facilitating single-window clearance on all investment proposals.”
PROBLEMS AND ISSUES REQUIRING THE ATENTION OF THE NEW
GOVERNMENT
The new policy initiatives by the government of India will no doubt attract the major foreign investors and
galvanize the market with a new sense of confidence and renewed vigor. However, how far the government will
sustain this enthusiasm and implement the reforms in the face of traditionally entrenched opposition is yet to be
seen. Government has to act with grit and determination to give a push to the economic reforms and the
privatization of inefficient public sector companies. Some of the issues, which require careful handling by the
government, are listed below.
1) Any escalation of conflict with Pakistan may not only prove to be a drain on the national economy but also
impede the flow of FDI into India as foreign investors would be increasingly wary of investing their funds in India.
2) Getting environmental clearances, power connections, and other requirements like land and water seem to pose
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a daunting problem even to local investors. These problems will be far more discouraging for foreign investors.
Negotiating the labyrinth of bureaucratic hurdles calls for extreme patience apart from huge costs by way of time
and efforts. Government may ask the various state governments to introduce a single–window system and obviate
the need for dealing with several overlapping government agencies, and dealing with multiple forms and red tape.
Adoption of such uniform procedures all over the country will benefit the investors, given the wide gap in the
political ideologies of various state governments towards reforms. According to Timo Treadgold (1998) “even with
government seeking more FDI (especially in infrastructure), foreign investors find it difficult to cut a path through
the paperwork and over-lapping agencies. Transparency International, this year ranked India close to the bottom
of its corruption list, beaten only by Russia, Venezuela, Colombia, Indonesia, Nigeria and Cameroon.”
3) Poor infrastructure is often cited as a major hurdle for inflow of foreign investment into India. Badale (1998)
states that regional differences in infrastructure have become critical determinants for outside investors. According
to him, companies can not build the supporting network of bridges and roads to carry goods, nor can they supply
enough power plants to satisfy their needs.
4) Indian firms, in the face of increasing penetration of the markets by foreign firms, have to change their strategies
and gain competitive advantage to their products not only in the local markets but also in international markets.
They must find new markets, new buyers, and gain advantage by upgrading their knowledge, skills and technology.
Their thrust should be in bringing out world class products. According to Porter (1990), “competitive advantage
involves the entire value system—the entire array of activities involved in a products creation and use,
encompassing the value chain of the firm, supplies, channels, and buyers. Ultimately, it requires a global approach
to strategy. A firm can not sustain competitive advantage in international competition in the long run without
exploiting and extending its home based advantages with a global approach to strategy.” Instead of clamoring for
higher tariffs and protective umbrella of the government for their domestic products, the local companies have to
try to be self-reliant and competitive. They must realize that the role of government in the changed scenario will
be that of a moderator and not an active player or protector.
5) Lack of transparent and appropriate accounting and disclosure policies, enforceable intellectual property rights,
well regulated brokerage firms and institutions for analysis of fundamental corporate and economic data are often
cited as some of the major hurdles in attracting foreign investors to markets in India. Agarwal (1999) states, “
unfortunately, building robust financial systems is not an instantaneous process, ---and without the development
of this supporting infrastructure, security markets are likely to remain speculative and unlikely to intermediate
significant proportion of national savings and capital.”
According to Hecht (1999), “the Asian crisis clearly demonstrates the increasing sophistication of determination
of appropriate level and mix of capital flows in a global economy. The urge to reconsider the role and the stage
of capital account liberalization is not baseless under the light of current evidence.”
6) Khanna et al (1999) state that advanced markets tend to reduce the costs of transactions by providing effective
intermediaries, sound regulations and contracts that can be enforced. These authors also maintain that the existence
of soft infrastructure to serve a country’s capital, labor, and product market is just as important to a modern
economy as a hard physical infrastructure, such as roads, ports and telecommunication system. In the long run, the
absence of a soft infrastructure depresses a country’s standard of living and restricts access to international capital
and management talent.”
According to Arnold (1998), India is operating in an environment where there is no market data. The distribution
system is poorly developed, and there are relatively very few communication channels. The absence of regulatory
discipline and a propensity to change business regulations frequently and unpredictably would turn away the
Multinational Corporations from the emerging markets as they find the situation intimidatory.
7) In the past, the government has been having a considerable time lag between policy formulation as evidenced
by statements of the leaders and policy implementation by the civil services bureaucracy. Reducing the time lag
immediately will reduce the credibility gap of the government.
8) The first and the foremost measure that will ensure sustainability to the economic reforms lies in keeping the
entire exercise as transparent as possible and seeking effective involvement of people including trade and industrial
bodies, and voluntary agencies in the decision making. Such transparency will reduce the economic and political
risks that a government normally faces while carrying out broad market reforms.
9) If it is not possible to create a separate ministry to oversee the implementation and coordination between various
departments and agencies, the government may at least set up small committees with adequate powers to intervene
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and take decisions promptly. Apparently there is one such committee functioning in the Ministry of External
Affairs. It is desirable that the committee is made to operate directly under the control of the Prime Minister to cut
short the delays involved in decision making.
10) Lack of dynamism and decisiveness in action in bringing about economic reforms is going to hurt India’s
economy. There is enormous amount of global capital looking for investment opportunities world- wide. The
recently humbled East Asian markets are gradually coming back into business with leaner companies and cheaper
currencies. If successive governments of India continue to hold on to their complex web of rules, permits, and red
tape regarding foreign direct investment, they will miss a golden opportunity of attracting considerable global
capital and facilitate diverting the flow of capital into the East Asian countries once again.
11) Increase in FDI flow into India can be achieved by implementing the following: a) Cutting down of the list of
items reserved for the domestic small scale sector and opening up many of the reserved avenues for FDI
participation. (b) Speeding up of privatization of public sector units which were already referred to the
disinvestment committee. (c) Comprehensive rationalization and simplification of laws so as to encourage
productivity and customer orientation. (d) Reintroduction of Insurance Regulatory Act and privatization of
Insurance sector deserve the due consideration of the government to enhance the FDI inflow.
12) Lifting of remaining trade restrictions and lowering of tariffs, introduction of value added tax are some of the
items which should find place in the government agenda in line with the policy initiatives taken by the government.
13) Other measures to improve the inflow of FDI in to India: (a) Controlling government deficits, particularly those
which are not put to use to finance productivity -enhanced investment in the economy;
(b) encouraging increases in Research & Development efforts within firms; (c) closer integration of industries with
universities and government laboratories are perhaps some other areas which are equally important that call for
immediate attention of the government.
PERSPECTIVES OF GROWTH IN FOREIGN DIRECT INVESTMENT IN INDIA
Any government planning towards economic reforms and privatization has to face certain economic and
political risks. It is clear from the way the Indian government pursues its policies that it would like to avoid overtly
risky measures. In India, elections are held right from the panchayat (Village) level to the national level
(Parliament) at different times and at different parts of the country (States). The compulsions of the electoral
politics affect the pace of reforms and the privatization. The electorate, 30% to 40% of whom are poor and belong
to disadvantaged sections of the society, do not condone any party tampering with the existing welfare measures
and subsidies. The Indian politicians are well aware of the psyche of their electorate and they seldom try to rub
them on the wrong side. Hence, the policy initiatives of the government must be understood in the context of
compulsions of political survival of the ruling party and its allies in different states and in the center.
WITHDRAWAL OF SUBSIDIES AND PRIVATIZATION
The test for the new government lies in how it would go about in cutting the costly subsidies on kerosene,
cooking gas and fertilizers. The amount of subsidy on kerosene and cooking gas comes to about Rs. 12,000 crores
($ 2.75 billion), part of which is made good from the high prices of petrol and aviation fuel. It is said that due to
political compulsions, the BJP led government in its last stint slowed down the implementation of the agenda
approved by the previous government for dismantling the administered price regime for petroleum products. There
are different schools of thought in India and abroad about adoption of growth strategies as an effective instrument
of reduction of poverty in India.
Critics of economic reforms charge that these reforms are inimical to the reduction of poverty. They feel
that “liberalization drive is helping more in creating two different worlds, one for the vast majority of the poor and
another for a handful of the rich?” (Groats Retrospection, 1997). Denying the claim of opponents of reforms that
pro-globalization policies are responsible for the accentuation of poverty, Bahgavati (1998) asserts that proglobalization and pro-privatization economic reforms must be treated as complementary and indeed friendly to both
the reductions of poverty and social agendas. ---Increased integration into the global economy (through trade and
FDI) and other reforms (such as privatization) currently being proposed in poverty-ridden countries can be fully
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expected to assist in poverty eradication. He however also cautioned that poverty might be exacerbated in the
initial stages of transition to globalization and integration of economies to the world economy.
Josiam et. al. (1999) state that economic reform policies in any country can not be divorced from the
socio-political realities of the country. They observe that before the collapse of the East Asian economies such as
Thailand, Malaysia and Indonesia, the neo-classical economists at the World Bank were extolling the virtues of
economic growth fueled by foreign capital. Recent history has indicated that foreign investment by itself cannot
guarantee economic growth unless supplemented by socio-political and economic policies.
Cowan (1990) strikes a balance when he says that, in the final analysis, the spread of privatization will
depend on the ability of the political leadership of a country to demonstrate concrete benefits from the privatization
to the public at large.-------Any decision to privatize involves a degree of risk for any government. The solution
lies in reducing the risk to a politically acceptable level while still leaving the government in a position to achieve
a successful privatization program
Ricupero (1999) states that formulation and implementation of an effective strategy requires above all
a development vision, coherence and co-ordination. It also requires the ability to decide on trade-off between
different objectives of development. Once the development vision is in place, it would be much easier to formulate
the FDI policy to suit the requirements of that vision.
Wells (1986) states that “the foreign firms that come in search of raw materials is a different animal from
the firm that manufacture in a developing country. More over, the manufacturing firm that invests for the local
market is likely to be quite different from the firm that manufactures for export. The impacts of these different types
of firms on developing countries are likely to differ-----An understanding of the differences between the behavior
of foreign capital flows associated with multinationals and portfolio flows may turn out to be important in
determining the role of multinationals in developing countries.”
RELATIONSHIP OF MULTI-NATIONAL CORPORATIONS (MNCs) WITH
THE GOVERNMENT
It is also difficult to judge as to how different MNCs adapt themselves to the local situations. The
relationship between the MNCs and the local government may turn sour over the years and conflicts are likely to
arise unless both parties have a good perception of the requirements of the other. The public may not view kindly
to the incursion of MNCs into certain fields if it means loss of many jobs. This might trigger a chain of events
leading to public protest programs and other types of demonstrations. The impact of MNCs on the local population
deserves careful monitoring, as any ugly incident involving the MNCs and local authorities is likely to be blown
out of proportions in the world media.
AN AGENDA FOR THE NEW MILLENNIUM
Government should set itself on a bold and challenging path to drive the reform process forward –it must
develop a vision for the country and make the people feel a part of the vision process. It is the only way to stimulate
progress in a country as diverse as India.
Geographically there is going to be clusters of progress with in the country as some of the state
governments like Andhra Pradesh, Maharashtra, Tamilnadu, Karnataka have established a niche for themselves
for attracting FDIs for improving the infrastructure and industries. It is a healthy trend and all efforts should be
made to allow the state governments to shape their own destinies.
There is a strong feeling that government was not able to do away with some of the subsidies as some
interest groups have powerful stakes in the continuance of subsidies. Disinvestment of public sector units is another
critical issue where successive governments were found to drag their feet. Time has come for taking bold decisions
in this regard.
Downsizing and pruning of government machinery needs a higher priority by the government. Reducing
fiscal deficit is and will always be a critical determinant in the path to economic progress. Streamlining of rules
for foreign investment in infrastructure will go a long way in improving the attractiveness of Indian market. Strategy
for attracting more FDIs lies in improving the roads, power generation, telecommunications, ports and harbors.
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Overhauling of banking system, reforms to capital markets, tax reforms, reduction of tariff barriers are
some of the other measures that will make India a vibrant economy in the new millenium.
CONCLUSONS
Whether the government led by Vajpayee of B.J.P will bring in much cheer to the country and the people
at large in the new millennium depends a lot on what measures he takes to boost the flow of FDIs into the country.
Though the present government has a five year term ahead (1999-2004), it can ill afford to postpone the difficult
decisions as the foreign investors are not likely to await for things to happen in India. When each country is
offering best terms and incentives to lure the foreign investors, there is apparently no room for complacency in this
regard. Delays will cost a lot to the country in terms of opportunities lost, perhaps forever.
The government’s resolve to attract $10 billion a year by way of FDIs is no doubt an attractive and
challenging goal. Realizing the target in the next two years may not prove to be difficult, given the soundness of
the Indian economy, attractiveness of Indian markets and the leadership drive as witnessed during the first few
weeks of the present government. But a lot depends on keeping the momentum on an even keel. The government
must evolve a development vision and support it with well-coordinated, concerted and decisive measures to gain
the competitive edge in the international arena.
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REFERENCES
Agarwal (1999). “Restoring Growth in Asia after the Late 1990s Economic Crisis: Need for Domestic and
Internal Reforms.” Multinational Management Review, Volume Seven, Number Two, Fall 1999, 2231.
Arnold (1998). “New Strategies in Emerging Markets.” Sloan Management Review, Volume Forty,
Number One, Fall 1998, 7-20.
Badale (1998). “Putting India on the Map.” Across the Board, Volume Thirty-five, Number Three, March
1998, 38.
Bhagavathi (1998). “Poverty and Reforms: Friends or Foes?” Journal of International Affairs, Volume
Fifty-two, Number One, Fall 1998, 33.
Bouton (1998). “India’s Problem is not Politics.” Foreign Affairs, Volume Seventy-seven, Number Three,
May/June 1998.
Cowan (1990). Developing a Strategy for Privatization, New York: Greenwood Press, First Edition, 1990,
10.
Groots (1997). “Fifty Years of Democratic Survival.” Women’s International Network News,
Volume Twenty-three, Number 4, Autumn 1997, 54.
Hecht (1999). “The Triad of Sustainable Development: Promoting Sustainable Development in
Developing Countries.” Journal of Environment and Development, Volume Eight, Number Two,
June 1999, 111-132.
Jain & Parikh (1994). “The Economy of India: A New Confidence, But --- “. India Today, January 15,
1994, 51-56.
Josiam, Zutshi & Ahmed (1999). “India’s Economic Reforms: Interpreting the Dynamics of Change from
a Contextual Perspective.” Competitiveness Review, Volume Nine, Number One, 1999, 68-81.
Khanna & Krishna (1999). “The Right Way to Restructure Conglomerates in Emerging Markets.”
Harvard Business Review, Volume Seventy-Seven, Number 4, July/August 1999, 125.
Moran (1986). “Multinational Corporations and the Developing Countries: An Analytical Review.”
Multinational Corporations, Lexington Books, Toronto, May 1986, 1-20.
Porter (1990). The Competitive Advantage of Nations, The Free Press, 1990.
Ricupero (1999). United Nations Conference on Trade and Development. World Investment Report,
September 27, 1999.
Salve (1993). “Reforms in Indirect Taxation.” The Chartered Accountant, February 1993, 636-642.
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MICRO-LOANS: NEW HOPE FOR AFRICA, ASIA,
AND CENTRAL AND SOUTH AMERICA
Gaskill, Frank J.
Delta State University (MS)
fgaskill@dsu.deltast.edu
ABSTRACT
A micro-finance plan pioneered by economist Muhammad Yunus and his Grameen Bank in Bangladesh,
supported by a United Nations specialized agency, the International Fund for Agricultural Development (IFAD),
provides a model for grass roots economic development, that has been successfully replicated elsewhere, through
granting micro-loans to the poor to start small scale enterprises. Previous attempts at the alleviation of world
poverty has taken many forms-missionaries, food aid, land reform, the green revolution-with varying degrees
of success. Economic development schemes by multilateral organizations and bilateral aid projects in the third
world has resulted in a landscape, that is littered with large scale projects, that disrupted socio-cultural fabric
of traditional societies, and brought about many unintended undesirable consequences. Micro-lending offers
new hope for third world economic development that does not disrupt traditional societies, nor assume
industrialization as a goal. The concepts of micro-finance, solidarity group lending, support training and
institutions, successful applications and case studies are presented and examined.
INTRODUCTION
Micro-credit loans for self-employment give people a means to transform their lives, and become selfsufficient (Thirion, 1997). Micro-loans give access to the poor to credit and business planning advice (Summit
focuses on micro-loans to the world's poor, 1997). The Consulting Group to Assist the Poorest states that extension
of micro-loan concept has demonstrated that impoverished families can become self-supporting on loans of as little
as $100, (Micro-credit programs, 1995). Micro-loans typically range from $25 up, (Coulton, 1997). The microloan concept is no longer novel, institutions such as Bangladesh's Grameen Bank have proven and popularized it.
Contrary to conventional wisdom, poor people have proven to be a good credit risk (Thiron, 1997). Recent studies
have found that 95-98% of micro-borrowers repay their loans, a higher average rate than U.S. commercial bank
borrowers. Additionally, World Bank Vice President Ismail Serageldin, says micro-lending is growing at an annual
rate of 30% (Friedland, 1997).
Micro-credit is a cost effective method of granting foreign aid. Foreign aid for credit is recycled-it is
loaned, paid back, and then used again for new loans. An assessment of micro-credit programs concluded that as
programs grow, they require less grant money, become self-sufficient, and then become linked to the countries
formal financial system (Mayer & Davies, 1998; Thirion, 1997 and Friedland, 1997).
IMPACT OF LARGE SCALE DEVELOPMENT PROGRAMS
Billions and billions in foreign aid have been spent over the years and yet the world poor are still with us.
In fact, foreign aid, in many quarters, has become synonymous with wasteful bureaucratic spending, that has
resulted in projects that are inappropriate, culturally or environmentally damaging to recipients (Truitt, 1996). In
part it is because of the dominant development theory that all countries must develop towards and through a process
of industrialization.
There is hope for the poor of developing nations, but it does not lie in large-scale industrialization. Instead
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of accepting industrialization as the only route to satisfy the economic aspirations of their people, developing
nations can turn to several decentralized, inexpensive, and environmentally friendly techniques and tools including
micro-loans (Mayer & Davies, 1998).
While a few large scale projects may be appropriate and justified in some circumstances some are clearly
not. It is also apparent well intentioned governments and donors have traditionally favored mostly large scale
projects, that have damaged the ecosystems and destroyed cultures (Mayer & Davies, 1998). For example, the
World Bank underwrote the building of two huge dams in Brazil, whose watershed covered large areas of the rain
forest, destroying the homelands of many indigenous people, to provide electricity, that attracted mining operations.
The new mining operations, in turn, obliterated even more of the rain forest. Another project financed by the World
Bank in Brazil, funded construction of an all-weather road in Rondonia, also had unintended and undesirable
consequences. The road was intended to promote regional integrated economic development by facilitating the
shipment of products from farmers, ranchers, and miners to cities. However, the road also opened large areas of
the rain forest to land hungry developers that employed slash-and-burn farming techniques. The unintended result
was the World Bank was, in effect, helping fund harmful global climate change (Mayer & Davies, 1998).
CASES
In Africa, women account for more than 60% of the agricultural labor force, and, it is estimated, contribute
up to 80% of food production, however, they receive less than 10% of the formal credit provided to small farmers,
(Wheat, 1997). Micro-lenders are changing this picture and making loans to women farmers because they have
found that women are better re-payers of micro-loans than men. Khady's story below presents one typical case.
Khady's story shows how micro-credit can change the lifestyle of the world's poor, one by one, and
cumulatively result in development in the third world. Khady is a Senegalese woman and a mother of four. Since
she did not have access to loans and lacked business skills, she relied on various charity programs through
international relief agencies that visited her village. In 1990, a community development bank was set up in the
village. She applied for, and received a $40 loan, which she used to start a livestock business on her small plot of
land. Currently, she raises cows, chickens, sheep and horses with the help of the micro-lender's initial and
subsequent loans. Her livestock business enabled her to earn a steady income and repay her loans in small monthly
installments. Further, her income is recycled in the community resulting in incomes to others for supplemental feed
and supplies, veterinary services, and tax payments to her government. Furthermore, her adequate steady income
has resulted a small savings account for unforeseen emergencies and in an improved diet for herself and her family,
and plans are being made to fund schooling for her children (Microcredit summit, 1997).
In Boliva, Gloria Quintanilla, a widow, reports similar results due to the granting of a micro-loan. More
than a decade ago, Quintanilla started selling clothes in a street stand in La Paz. Today she has three stands, nine
sewing machines, tens of employees, a upscale dress shop, and a newly constructed house. Quintanilla approached
BancoSol to finance additional inventory for her original stand. Quintanilla started out in a group of four that took
out a loan from BancoSol for $300. Now Quintanilla and two other members of that original group have individual
credit lines of $3000 each. The fourth member of the group didn't repay her loan, but other members of the group
repaid the loan, so as to remain creditworthy (Friedland, 1997).
In Latin America, Francisca Rojas, of El Salvador, an orphan and single mother, provides another
typical example of micro-lending success. Rojas has used three loans of $50 to buy spices and noodles to sell at
the market. As the result of the loans and her entrepreneurial efforts she has a savings account with $45 in it.
Further, she relates "I used to earn $17 a week. Now I earn $35 to $53 a week. I can spend almost twice as
much on food, live in a much nicer home, buy medicine, and save money. I sleep calmly at night because I am
not so worried how to pay back the money lender (Wheat, 1997)."
THE MONEY LENDER
Street vendors, seamstresses, artisans, carpenters, small farmers, and small business proprietors typically
would be shunned by banks. Traditionally, the source for credit in the third world has been the money lender. The
money lender typically charged up to 10% interest daily (Stix, 1997-emphasis supplied). As one activist put it
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"legal money lenders are charging interest rates up to 75% and illegal lenders are charging up to 20,000%, the need
for more reasonable rates is huge, (Wheat, 1997)." The money lender in addition to usurious rates charged for
lending is almost exclusively a male loaning to males, who have assets as collateral. Further, commercial banks
in the cities typically make loans of $100,000 and up. They traditionally have shunned the poor as bad credit risks
or as unprofitable business. However, micro-lenders seek out the poor as good and profitable business. In fact,
Fernando Romero, one of Bolivia's richest businessmen and a principal in BancoSol states "poverty pays."
BancoSol has changed the lives of thousands of micro-entrepreneurs, small-scale merchants and artisans by lending
them as little as $80 at real interest rates. BancoSol charges its clients an annualized local currency rate of 48%.
While that is steep, it is payable for most of the bank's customers and it is certainly less than the rates changed by
money lenders (Friedland, 1997).
EXTENT AND IMPORTANCE OF MICRO-LENDING
Currently, more than eight million poor have benefited from micro-loan programs (Coulton, 1997). One
researcher placed the upper limit at a much higher figure of sixteen million beneficiaries (Wheat, 1997). Further,
there are now more than 7000 micro-finance institutions (Wheat, 1997). The microcredit movement has spread
to Africa (e.g. Kenya Rural Enterprise Project, K-Rep), Asia (e.g. SANASA-Sri Lanka, BRAC-Bangladesh, BRIIndonesia), South America (e.g. Grupa Carsa-Peru, Accion-Peru, BancoSol-Boliva) and Latin America (e.g.
FINCA-El Salvador), (Thirion, 1997 and Wheat, 1997). Large scale programs include Grameen with 1.8 million
borrowers, Bangladesh Rural Advancement Committee (BRAC), Bank Rakyat Indonesia Unit Desa (BRI), Accion
in Central America, SANASA in Sri Lanka, FINCA in South America, and K-Rep in Kenya. Additionally,
thousands of smaller micro-finance institutions exist, many of which are supported by private aid agencies, such
as, Christian Aid, Oxfam, and Care (Wheat, 1997).
ANCILLARY BENEFITS OF MICRO-LOAN PROGRAMS
Micro-loans are "good for the environment because they offer alternatives to farming marginal land and
provide (outreach services) to women...(with) information about personal health and family planning.... (The)
borrowers send their children, (including) girls, to school, expanding choice for young women and resulting in long
term population stabilization, (Summit focuses on micro-loans to the world's poor, 1997, and Micro-credit
programs, 1995)." "Micro-loans are a particularly effective way of reaching women... (The small scale enterprises
they set up) improve (their) incomes and the well-being of (their) children (Micro-credit programs, 1995)."
MODELS OF MICRO-LENDING
The pioneer in micro-lending is Muhammad Yunus of Bangladesh. As a college economist two decades
ago he began arranging small loans for poor people near the university. The Grameen Bank he founded has loaned
over a billion dollars to two million people.
One measure of the approaches effectiveness, is that, nearly one half of the bank's borrowers no longer live in
poverty (Microenterprise: Small loans...big returns, 1999). In fact, the Grameen Bank is successful lending to
people banks have traditional scorned. Today, Grameen Bank has more than 1000 branches and lends over $30
million a month (Microenterprise: Small loans...big returns, 1999).
There are many models for micro-lending. The most popular involves formation of small groups of
potential borrowers (called lending, solidarity or peer groups) to replace the collateral requirement that most
commercial lenders require (Kosnett, 1992). Group members are responsible for ensuring that every other member
repays his/her loan. Repayment is made in frequent small installments, typically weekly during group repayment
meetings. In these meetings business ideas are approved, business counseling is provided by the lender, and
discussions about health, education and community problems occur (Thirion, 1997). Similarly, ACP's program in
Peru, relies on groups of three or more micro-entrepreneurs who cross guarantee each others loans. After
establishing a prompt repayment history, (two days past due is too late), clients can move to individual loans
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(Truitt, 1996).
Grupa Carsa, a for profit micro-loan specialist in Peru, employs a model that relies on a newly instituted
government policy of land registry to the poor. Micro-lenders help shantytown dwellers obtain title to their land
in order to mortgage it for credit to set up or expand street vending, workshops, sewing, handicraft or other small
scale enterprises. Further, a Grupa Carsa loan officer, in the absence of employment papers, visits the client's home
to gather "lifestyle" information that is used to establish repayment installment amount and period of time the loan
is extended to the client. Possession of rugs or appliances, as well as materials of which the house is constructed
of, helps establish the income of the client or success of the client's existing small scale enterprise (Truitt, 1996).
Other systems work on the basis of individual references, personal guarantees, or rotating savings and
credit associations (ROSCAs) where loans are given to group members out of a communal savings pool, (Wheat,
1997).
First time loans are universally small. New, higher loans depend on repayment of earlier loans. Clients
get access to training and group support. For example, Accion provides training and technical assistance in Peru
(Truitt, 1996). Interest rates are the same as commercial bank rates. Success is measured by payback, not the
number of loans granted (Microenterprise: Small loans...big returns, 1999). Examples of success abound like
Bolivia's BancoSol. BancoSol, the first commercial bank dedicated exclusively to micro-entrepreneurs, was
profitable, even with the provision of the many required support services to the poor, after only four years of
operations. Further, BancoSol has the largest lending base in the country, and has sold bonds and CD's to world
investors backed by nothing more than street vendors promises to repay, (Truitt, 1996)!
The costs of support
services, business planning assistance (not unlike services provided by the S.B.A. in the U.S.), and collection costs
(due to weekly or other frequent collection schedules) are higher than traditional large bank loans. The President
of BancoSol, Hermann Krutzfeldt, recently said BancoSol's administrative costs are higher, running at between 1516% of assets compared to 5-6% at larger Bolivian banks specializing in commercial loans. However, he
emphasized the business is profitable and expanding (Friedland, 1997). In fact, two Bolivian banks Banco Union
and Banco Economico have been attracted to this market and are endeavoring to lure away BancoSol's best
customers (Friedland, 1997).
The micro-lending model has even been applied in the U.S.. The S.B.A. began offering small
experimental micro-loans in 1992 for home-based businesses, for entrepreneurs with few assets, loosely patterned
after cooperatives that lend to poor inexperienced business owners in Africa, Asia and Latin America (Kosnett,
1992). A 1996 survey by the Aspen Institute found nearly 250 microenterprise programs in the U.S. (Stix, 1997).
SUMMIT HELD
In the spring of 1997, 2000 government agencies and non-governmental organizations held a summit in
Washington D.C., to draft an action plan to extend micro-loans to 100 million world's poor by 2005 (Thirion, 1997,
and Summit focuses on micro-loans to the world's poor, 1997). Mrs. Hillary Clinton was an honorary co-chair. A
spokesman for donors such as Mastercard and Citicorp said they support these programs as a hand up, not a
handout (Coulton, 1997). This hand up approach has often been touted, however, the hand out approach was the
most frequent reality. The approach prevalent in various aid programs has been to approach the world's poor as
objects of charity, rather than, as the micro-loan institutions have, that is to build market incentives and
entrepreneurial optimism in clients. Micro-loan institutions in this way are helping create mass markets that fuel
economic growth (Truitt, 1996).
BIG MONEY FOR SMALL LOANS
Signers of the declaration of support to reach a 100 million poor goal included the World Bank, various
UN agencies, governments, private foundations, and corporate donors. Results International, the organizer of the
summit estimated to achieve this goal $21.6 billion must be raised to form, support, or capitalize microcredit
institutions, and provide technical services. Of the $21.6 billion goal approximately $11.6 billion will be sought
in the form of grants or concessions, with $10 billion to be borrowed commercially (Al-Sultan, 1997). Toward that
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end, many major contributors, multilateral and governmental organizations and private contributors have
announced donations. The Inter-American Development Bank has earmarked $500 million, over three years, to
micro-finance (Wheat, 1997). The World Bank, in support of the concept, has provided more than a $200 million
fund for various micro-loan programs, (Micro-credit programs, 1995). The United Nations Conference on Trade
and Development (UNCTAD) has announced a initiative to raise $100 million over five years. The British
Overseas Development Administration (OAD) pledged $50 million for micro-finance primarily targeted at Kenya,
Tanzania, Zimbabwe, and Bangladesh (Wheat, 1997). The United Nations Educational, Scientific, and Cultural
Organization (UNESCO) is raising a $41 million fund to provide grants and technical assistance for micro-finance
institutions (Al-Sultan, 1997).
CRITICISMS OF MICRO-LENDING
Criticisms of micro-finance range from concerns that micro-finance is only a limited micro-strategy, that
it is a further exploitation third world poor, that there has been an upward creep in economic status of clients
served, relief agencies are concerned about diversion of health and education funding, and bankers worry about
the ability of micro-finance institutions to properly support clients in vastly enlarged programs. UNESCO Director
General Federico Mayor was among the first to raise questions about relying on micro-finance as a primary antipoverty strategy (Al-Sultan, 1997). Other critics complain that it is unethical for capital market investors to profit
from, or exploit, developing country poor (Wheat, 1997). Further, Manchester University micro-finance expert,
Professor David Hume, is concerned about that micro-finance institutions appear to be moving away from working
with the very poor and instead are focusing their activities predominately on the middle and upper poor, rather than
people in the most desperate circumstances (Wheat, 1997). Some relief agencies fear donors enamored with microfinance might reduce contributions they now make to them, to the detriment of on-going health care and education
programs (Wheat, 1997 and Al-Sultan, 1997). Bankers are warning donors that they are throwing too much money
into micro-finance, warning such an "indiscriminate" flow of funds may result in micro-finance institutions to take
on more clients than they can provide support services for (Al-Sultan, 1997).
CONCLUSIONS
Micro-credit is more than a micro solution (Al-Sultan, 1997). Microcredit, the principle of giving small
loans to developing country poor to help them generate income of their own is concept whose time has come. The
technique offers much promise in the struggle to alleviate worldwide poverty (Wheat, 1997). The practical applied
approach of the Grameen concept has shown to effective in different regions and among different peoples. The
Grameen concept challenges much of traditional development theory and practice, including the large-scale project
mentality, charitable emphasis, bureaucratic award and delivery systems, and non-profit/governmental nexus of
many development programs. However, if properly implemented the Grameen concept could become a basis for
rural and urban development in Africa, Asia, and Central and South America (Kammen & Dove, 1997).
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REFERENCES
Al-Sultan, F.H. (1997). Micro-finance for macro-results. UN Chronicle, 34(1), p. 36-37.
Coulton, A. (1997). Mastercard to educate members on micro-loans in global anti-poverty effort,
American Banker, 162(23), p. 14.
Friedland, J. (1997-July 15). Bolivian bank thrives with little loans. The Wall Street Journal,
p. A14.
Kammen, D.M. & Dove, M.R. (1997). Mundane economics: Grameen banking, Environment,
39(6), p. 10-20.
Kosnett, J. (1992). Help for small businesses. Kiplinger's Personal Finance Magazine, 46(10),
p. 14.
Mayer, R. & Davies, B. (1998). The technology of hope. Futurist, 32(7), p. 46-52.
Micro-credit programs, Economy & Finance. (1995). Presidents & Prime Ministers, 4(5), p. 27.
Microcredit summit. (1997, February 2-4). http://www.brookes.ac.uk
Microenterprise: Small loans…big returns. (1999). http://www.interaction.org/pub/alliance/micro.html
Stix, G. (1997). Small (lending) is beautiful. Scientific American 276(4), p. 16-18.
Summit focuses on micro-loans to the world's poor. (1997) NWF Members at Work. International Wildlife, 27
(3) p. 8.
Thirion, T. (1997). 100 million microloans by the year 2000. Business Journal Serving Charlotte & the
Metropolitan Area, 11 (47), p. 52.
Truitt, N. S. (1996, September 20). Microlending to Peru's poor is becoming big business. The Wall Street
Journal, p. A15.
Wheat, S. (1997). Banking on the poor. Geographical Magazine, 69 (3), p. 20-23.
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JACK AND JILL RAN UP THE HILL: A CASE IN
ETHICS
Morris, David E., Sr., Ph.D.
North Georgia College and State University
demorris@ngcsu.edu
This case focuses on an individual who is faced with a question of ethics. It centers on Dr. Tom Lawley who
teaches at a state college in Texas. The university system has decided to participate in “Take Our Daughters
to Work Day,” and Tom has been assigned to the committee responsible for planning that day’s activities at his
school. Having both a son and a daughter, Tom becomes concerned about the ethical aspects of the exclusion
of boys from, what is in essence, a career day at his college.
As Professor Tom Lawley returned from his 1:00 class, he sat down to read his Wall Street Journal. As
an accounting professor, he felt it was part of his job to stay on top of the latest business news, especially news
related to accounting. After looking at the headlines and reading a couple of articles of interest, he checked his email. Included was a message from the college president stating that he was needed to serve on a campus-wide
committee. The committee was to be in charge of and plan “Take Our Daughters to Work Day.” The president
stated that the chancellor of the University System of Texas had decided that all schools within the System would
participate in this day which would encourage daughters of university employees to go to work with their parents
to see what kind of work they do. He also stated that all young girls in the state would be invited to participate in
this day-long series of activities to assist girls in becoming aware of professional careers available to them, the
advantages of obtaining a college education, etc.
Tom thought this was a great idea. Being happily married and having two children, one daughter and one
son, Tom believed this would be a great opportunity for his children. Tom was very much of a family-oriented
person. That was one reason for his choosing to be a professor. Although he worked forty hours a week (and
sometimes more), he had flexibility and was able to do some of his work at home. His son, Edward, was eleven
years old and his daughter, Michelle, was thirteen years old. His wife, Betty, worked in the registrar’s office at
the same school, West Texas College.
As he began to think about “Daughters Day” a few hours later, he assumed that it really was, in essence,
a career day for all children and, surely, not just for girls.
At the committee’s first meeting, a chairperson was chosen. Her name was Dr. Debbie Harris. She was
the department head for the Department of Social Sciences. The rest of the committee consisted of three females
and Tom. The committee began by discussing various activities that would make the event successful.
This case was prepared by David E. Morris, Sr., North Georgia College & State University, and is
intended to be used as a basis for class discussion. The views represented here are those of the case author and
do not necessarily reflect the views of the American Society of Business and Behavioral Sciences.. Author’s views
are based on his own professional judgements.
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The names of the organization, individuals, location and/or financial information have been disguised to
preserve the organization’s and individual’s request for anonymity.
Copyright 1999 by David E. Morris, Sr.
As the discussion progressed, it became apparent to Tom that the rest of the committee
was really interested in this being a “girls only” event. Suggestions for speakers were all women and they were
to discuss career opportunities available to women. Tom brought up the idea of more gender-neuter programs and
activities and the inclusion, at least on an informal basis, of sons as well as daughters.
Strong objections by the chairperson and the other committee members were the response to Tom’s
suggestions. Dr. Harris stated that the chancellor’s letter indicated the purpose of the event was to “encourage girls
into professional careers and encourage them to obtain a college degree.” She said that the letter clearly indicated
that “Take Our Daughters to Work Day” was only intended for girls and that the day would not include any
“gender-neutral” activities nor would boys be invited or welcomed to the campus on that day.
Tom was distressed but did not say anything more at the meeting. The next meeting was scheduled for
two weeks later, at which time assignment of duties would be made to committee members. Working at a smaller
college, it was the president’s policy that all faculty members serve on campus-wide committees. It is important
to note that these assignments were random, and faculty members were expected to serve on their assigned
committees. It was understood that faculty members did not have a choice as to their committee assignments.
Thus, Tom felt that asking to be removed from the committee was not an option.
Tom spent the rest of the day thinking about this situation. Was he making a big deal over nothing?
Maybe he was.
That night Tom and his family were having dinner when he first mentioned to his family the school’s
career day. He was, for one thing, interested in seeing the response of his children. “Children, our school is going
to have a career day. Children are invited to school to spend part of the day with their parents and attend activities
describing various professional careers available to young people.” He continued to explain to them that children
from the entire community would be invited to attend the activities, and arrangements had been made with the
schools that their absences would be excused.
Both children were very excited. Michelle was interested in becoming an engineer, and Edward, who had
always loved animals, wanted to be a veterinarian. In fact, last summer Edward had worked part-time for a
veterinarian in his clinic. Betty also thought it was a great idea and a wonderful opportunity for the children.
At that point, Tom explained that it appeared that only girls were invited. The school would be taking
part in “Take Our Daughters to Work Day.” Edward immediately asked why he could not attend. Tom said, “Well,
Edward, you need to understand that ‘Daughters Day’ is a special day set aside just for girls.” Edward responded,
“Well Dad, when will there be a special day for boys?” Tom responded, “At the present time, there are no plans
to have a special day for boys, but I think you have given me a great idea!” During dinner both Michelle and Betty
expressed a concern of lack of fairness in excluding boys from the event.
Over the next few days, Tom continued to think about “Daughters Day” and the question of excluding
boys. Tom certainly realized that women had historically (and still do) experienced discrimination in the
workplace. Maybe it was now fair that girls get special attention and exposure to professional careers and have
women serve as role models to explain to girls their potential.
On the other hand, Tom thought, he had always believed that discrimination based on age, race, sex,
religion, etc. was unethical and morally wrong. As a member of the American Institute of Certified Public
Accountants (AICPA), he felt an obligation to uphold their Code of Professional Ethics. Additionally, he had
always stressed the importance of accountants living up to high ethical standards. He was very pleased that most
accounting textbooks included brief discussions of ethical issues, and some texts included an entire chapter
covering the importance of ethics in the workplace.
Was Tom being asked by his employer to engage in unethical behavior? Was this a case of what was
called “reverse discrimination?” If so, was reverse discrimination unethical? None of the textbooks he had read
ever discussed this issue. Many of the situations presented in texts involved behavior by employees that would be
considered illegal, as well as unethical. Tom felt confused and uncertain as to the answers to these questions.
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At this point in time, an announcement had not yet been made to the College at large that it would
recognize “Daughters Day.” Tom thought this might be a good time to share his concerns with a few of his trusted
colleagues. Generally speaking, his fellow professors agreed with him that it did not appear to be right to exclude
boys from a special career day. A few suggested that it would be much better to call it “Take Our CHILDREN to
Work Day,” thus including children of both sexes. As a way of testing their willingness to publicly express their
opinions, Tom asked them if they would sign a letter to the college president asking him to consider calling the
career day “Take Our Children to Work Day.”
His colleagues soon disappointed Tom. Out of the six professors to whom he had spoken in private, none
of them was willing to sign such a letter. When Tom questioned them about their unwillingness to openly express
their opinion, responses included, “I can’t do that. I don’t have tenure;” “I don’t want to be labeled a
troublemaker;” “You are going against what is politically correct. You are asking for trouble;” and finally a
warning from a friend who said, “Tom, you had better be careful. Your pursuit of this matter is politically very
dangerous. The administration is going to follow whatever the chancellor wants to do. Your questioning this might
cause serious damage to your career at this school. Yes, you do have tenure, but that certainly does not protect you
from being ‘punished’. Questioning the ethical actions of the administration is very foolish.”
After these conversations, Tom began having stronger feelings regarding this issue. He went back to
several textbooks and read sections on professional ethics. In one text, he read that “a decision becomes an ethical
issue when accepted rules no longer apply and the decision maker must use his or her own moral principles and
standards to decide what is right or wrong” (Gatewood and Ferrell, 1995). Another text which Tom found of
interest stated that “Ethics are the moral principles that guide the conduct of individuals … proper ethical conduct
implies that you not only consider what’s in your best interests, but also what’s in the best interests of others.” This
same text stated that a person should “expect to suffer adverse personal consequences for holding to an ethical
position … Thus in the short term, ethical behavior can sometimes adversely affect your career” (Warren, Reeve,
and Fess, 1999). An article on ethics stated that centuries ago it was considered unethical to charge interest on
loans, while, at the same time, the slave trade was considered ethical (Dunham, 1999). Does this mean that ethics
is “situational”? After reading this and other articles on ethics, Tom began to have a stronger feeling that he was
right about this specific issue.
Tom next decided to go to the library to see if he could find any articles specifically related to the topic
of “Take Our Daughters to Work Day.” He was surprised at the amount of material that he found. Some articles
supported the need for a “girls only” day to encourage girls to consider potential career opportunities. However,
others expressed opinions that were in agreement with Tom’s ideas. A well-known law firm even warned that
companies taking part in a girls-only day could be considered discriminatory (Welch, 1998). Some large
businesses, including Chrysler Corporation, have refused to take part in “Daughters Day.” They cited the exclusion
of boys as their reason for such action (Lewin, 1996).
After reading much of this literature, Tom wondered if professional ethics were “situational.”
Furthermore, he wondered why his colleagues appeared to agree with him but were unwilling to “practice what
they preached.” Was ethical behavior subject to “political correctness?” Would there be any negative reactions
if the chancellor had proposed only a “Take Our Sons to Work Day” or a program entitled “Take Our White
Children to Work” at taxpayers’ expense? Tom knew the answer. The University System would be flooded with
lawsuits alleging sexual or racial discrimination. The chancellor might even be fired by the Governor for proposing
such unethical behavior. What was the difference here; WAS there a difference?
Before Tom attended the next committee meeting, he decided to obtain information regarding the male
to female ratio enrollment of students at both his school (West Texas College) as well as for schools in the
University System of Texas. He wished to obtain information for the current and previous few years. If many of
the schools were indeed predominantly male, it would provide evidence that girls were not being made aware of
professional careers and encouraged to obtain a college education to the same degree that boys were. His source
of information was the Board of Regents of the University System of Texas. The results of his research are found
on the next page:
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TABLE 1
Percentage of Female
Students
Percentage of Female
Students
West Texas College
University System of Texas
1997-98
67.15
58.38
1996-97
68.40
58.53
1995-96
63.83
58.73
1994-95
64.90
57.28
1993-94
67.25
59.75
The results clearly indicated to Tom that girls did not need special encouragement to attend college and pursue
professional careers.
At the next meeting of the “Take Our Daughters to Work Day” committee, Tom again addressed the
committee and asked the question “What about the boys?” The chairperson, Dr. Harris, again stated that this was
of no concern to the committee since it had nothing to do with the charge by the College President. Tom explained
the disappointment expressed by his son. Dr Harris interrupted him by stating, “For the last time, Dr. Lawley, this
committee is only concerned with planning our ‘Take Our Daughters to Work Day’ activities, and these will
include ONLY girls.”
At this point, Tom became angry. He told the committee he believed this behavior constituted
discrimination and, in his opinion, was unethical. He suggested to the committee that it recommend to the college
president either a change of name and intent to “Take Our Children to Work Day” or have a separate day for “Take
Our Sons to Work.” All of the other members of the committee immediately disagreed with him and proceeded
with the meeting.
Dr. Harris began to assign tasks to each committee member in order to prepare for “Daughters Day.”
Tom was assigned the job of finding two female leaders of the community who would be willing to come to campus
to discuss career opportunities available to women.
Tom, still angry, suggested that he might not be willing to serve on the committee and again expressed
his questions about the school being involved in unethical, and possibly discriminatory, practices. Dr. Harris told
him that his refusal to participate would be communicated to the administration and that he might be sorry for
“trying to cause trouble.” Tom left the meeting uncertain as to what he should do.
Tom continued throughout this time to wonder if this was really a trivial issue that he was trying to turn
into a mountain. Each time he came back and asked himself if it was a trivial issue then it should make no
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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difference if the day were “Take Our White Children to Work Day” or “Take Our Sons to Work Day.” In both
cases, Tom knew it would become a very big issue. All of the colleagues with whom Tom addressed the issue
agreed with him. He then asked each of them why there would be a different reaction. No one could give him an
answer to these questions. Tom came to the conclusion that the issue was not trivial because of the underlying
principal (discrimination), which he felt was anything but trivial.
The next day Dr. Harris sent an e-mail to all employees of the college announcing the “Take Our
Daughters to Work Day” and inviting all employees to bring their daughters to work with them. She also told them
that all girls in the community between the ages of 7 and 15 were to be invited. An announcement was placed in
the local newspaper describing the day’s planned activities and inviting all girls to attend. The announcement also
indicated that the local school superintendent had stated that girls participating would be given an excused absence
for the day. (In fact, as an afternote, approximately 70% of the girls who did participate were not daughters of
employees of the college.)
Later that day, Tom also sent an e-mail to all employees explaining his concerns regarding the ethical
issue of excluding boys. Tom received several messages from individuals, some expressing support for his concern
of inequity, but none expressing an interest in becoming involved publicly with the issue. One e-mail of
significance was from Dr. Sam Johnson, Vice-President/Special Assistant to the President. Dr. Johnson’s e-mail
was addressed to all college employees. He stated that Tom was making a big deal over nothing and that, in fact,
most children would probably find it boring to go to work with their parents. Additionally, Dr. Johnson stated that
if Tom felt strongly about the issue he should proceed through proper channels and seek permission from the
administration to have a separate “Sons Day.” At best, Dr. Johnson stated that Tom would receive permission to
plan a “Sons Day” but would receive no support from the college in terms of endorsement, advertising, funding,
etc. This message was important because since it was from Dr. Johnson, it was generally viewed to represent the
president’s opinion.
At this point, Tom’s position, of course, became public knowledge to everyone at the college. He was
disappointed that two professors within his department, both females, stopped talking to him. A third person called
him into her office and told him that he “didn’t understand the situation and your causing trouble is going to create
problems for you in the future.” This lady was a full professor known to have a great deal of “political power” on
campus. Tom left her office happy that he had tenure!
After giving the situation a great deal more thought over the next few days, Tom decided to bring the issue
before the University Senate, a group of elected faculty members serving as liaison between the faculty and the
administration. His idea was to propose to the Senate that they recommend to the President a change in name to
“Children’s Day” to include all children or a separate day for boys with equal funding from the college.
As he was leaving for home that Friday afternoon, Tom had many thoughts running through his mind.
Should he participate in the committee work despite his belief that the event was unethical due to the exclusion
of boys? Should he bring this issue before the Senate? Tom also had to consider the fact that he was the primary
breadwinner in his family and had two young children to raise and a large mortgage to pay. He would like a raise
between now and his retirement. He certainly did not want to be labeled a “troublemaker.” Should these political
factors override his ethical questions? As he was driving home, he knew that it would be a long weekend, with
much time given to study and consideration of all factors involved in this issue.
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REFERENCES
Dunham (1999). “Right and Wrong,” The Wall Street Journal, January 11, 1999, R48.
Gatewood and Ferrell (1995). Management: Comprehension, Analysis and Application. Irwin
Publishing Company, 1995.
Lewin (1996). “On Daughters-At-Work Day, Some Are Including the Sons,” The New York Times, April
25, 1996, A1.
Warren, Reeve, and Fess (1999). Financial and Managerial Accounting. Southwestern Publishing,
1999, 7.
Welch (1998). “Girls’ Day Under Attack as Tables Turn Against Boys,” People Management, May 14,
1998, 17.
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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JACK AND JILL RAN UP THE HILL : A CASE IN
ETHICS
TEACHING NOTE
CASE OVERVIEW
This case focuses on an individual faced with a question of ethics. It centers on Dr. Tom Lawley who
teaches at a state college in Texas. The university system has decided to participate in “Take Our Daughters to
Work Day,” and Tom has been assigned to the committee responsible for planning that day’s activities at his
school. Having both a son and a daughter, Tom becomes concerned about the ethical aspects of the exclusion of
boys from, what is in essence, a career day at his college.
Tom is faced with the following questions:
1.
What is ethics, and is the question answered, in part, by whether or not certain professional
behavior
is legal or “politically correct”?
2.
What is discrimination, and when is it considered to be unethical behavior?
3.
Once Tom decides that this type of discrimination is, in his opinion, unethical, should he refuse to participate
even though he is fearful of the adverse effects it might have on his career and the negative reactions of his
colleagues, a few of whom have a lot of “political influence” on campus?
This particular case can be used in any upper-level business course that covers professional ethics. This case
can be especially useful in a capstone course taken by all senior-level business majors and that integrates many
business topics into one course.
TEACHING OBJECTIVES
1.
2.
To demonstrate to students the difficulty in sometimes determining what is ethical and unethical behavior. As
stated in the case, the author is concerned by the fact that some textbooks he has read that dealt with ethics
have presented more-or-less “clear-cut” cases in which there was little doubt as to whether or not the behavior
was unethical. Many of these situations involved behavior that was illegal, as well as unethical.
To demonstrate to students that once an individual has decided that a particular behavior is unethical, the
difficulty in deciding whether or not to refuse an employer’s request to take part in the behavior. It is too easy
for students to sit in a classroom and simply say that someone should always refuse to take part in what they
believe to be unethical behavior. Students need to realize that in the “real world” individuals faced with such
a question must consider financial responsibilities to their families, the possibility of being labeled as a
troublemaker, losing friends at work, and being “punished” by an employer in non-monetary ways.
QUESTIONS
Note to Instructors:
the remaining questions.
1.
One purpose of questions one through three is to serve as a foundation for answering
State in your own words what you believe is meant by the term “professional ethics.” Do you believe
professional ethics is important in the workplace? If so, why?
The American Heritage Dictionary of the English Language (Houghton Mifflin Company, 1992) defines
“ethics,” in part as “a set of principles of right conduct,” and “the rules and standards governing the conduct
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2.
.
3.
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of a person or the members of a profession.” It is important to note that this dictionary states that the words
“ethical” and “moral” are synonymous.
It is believed by the author that most students will respond that they believe professional ethics are
important in the workplace.
Conduct some brief research in the area of professional ethics. Several methodologies have been developed
that assist in evaluating ethical issues. Describe a methodology that you have read. Also, discuss other ideas
that have expanded your knowledge of this important topic as a result of your research.
A few excellent resources are as follows:
Badaracco, Joseph L. Busines Ethics: Rules and Responsibilities. Richard D. Irwin, Inc., 1995.
Harwood, Sterling. Business As Ethical and Business As Usual. Jones and Bartlett Publishers, 1996.
Hodgson, Kent. A Rock and a Hard Place.: How to Make Ethical Business Decisions When the
Choices are Tough. American Management Association, 1992.
Hoffman, Michael W. and Jennifer Mills Moore. Business Ethics: Readings and Cases in Corporate
Morality. McGraw-Hill, Inc., 1984.
May, William W. Ethics in the Accounting Curriculum: Cases and Readings. American Accounting
Association, 1990.
McGee, Robert W. Business Ethics and Common Sense. Quorum Books, 1992.
Snoeyenbos, Milton, Robert Almeder and James Humber. Business Ethics. Prometheus Books, Revised
Edition, 1992.
One methodology employed in deciding professional ethical issues is described by Kent Hodgson in his
book, A Rock and A Hard Place: How to Make Ethical Business Decisions When the Choices Are Tough.
Hodgson defines ethics as “…the skill of making thoughtful, professional, value-based, and fitting choices
of action that affect you and others.” (page 61)
After discussing what he refers to as “Universal General Moral Principles,” he goes on to develop “The
Three-Step Process,” as follows:
“1.
Examine the situation.
n Get the critical facts.
n Identify the key stakeholders.
n Identify each stakeholder’s options (what each stakeholder wants done).
2.
Establish the dilemma.
n Identify the working principles and norms that drive each option (why each stakeholder
wants it done).
n Project the possible outcomes (consequences) of each stakeholder option. Do any violate
your principles, or those of your organization?
n Determine the actions (means) necessary to produce each outcome. Do any violate your
principles, or those of your organization?
n State the dilemma.
3.
Evaluate the options.
n Identify the general principle(s) behind each stockholder option.
n Compare the general principle(s) behind each option. Which is the most responsible
general principles in this situation.
n The option with the most responsible general principle(s) is your choice for action.”
(pages 93-94) This model is, of course, discussed in much more detail in Hodgson’s book.
An application of Hodgson’s model, as well as similar ones, can be applied to this case by
students without difficulty.
What is discrimination? When is discrimination in the workplace considered to be unethical based on sex,
race, age, etc? Is discrimination unethical only when it is also illegal? Should all legal actions in the
workplace be considered, by definition, ethical?
Black’s Law Dictionary (West Publishing Company, 5th edition, 1979) defines discrimination as: “In
constitutional law, the effect of a statute or established practice which confers particular privileges on a class
arbitrarily selected from a large number of persons, all of whom stand in the same relation to the privileges
granted and between whom and those not favored no reasonable distinction can be found. Unfair treatment
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American Society of Business and Behavioral Sciences Conference
4.
5.
6.
7.
8.
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or denial of normal privileges to persons because of their race, age, nationality or religion. A failure to treat
all persons equally where no reasonable distinction can be found between those favored and those not favored.
Baker v. California Land Title Co., D.C.Cal., 349 F. Supp 235, 238, 239”
The author believes that most students will strongly agree that discrimination in the workplace based on
sex, race, age, etc.is highly unethical. It is believed that students will disagree as to whether all legal actions
in the workplace should be considered ethical.
It is important to realize that there are two sides to every issue. What are some reasons why many individuals
feel the need to have an event such as “Take Our Daughters to Work Day”?
Historically, women (as well as racial minorities) have been discriminated against in the workplace.
There are still professions that are dominated by males. Many feel that women face a “glass ceiling” in
obtaining upper-management positions in the workplace, and there is research to support this opinion.
“Take Our Daughters to Work Day” is designed to expose girls to the opportunities available to them in
the workplace and to provide role models for them.
In this situation, the chancellor wanted to provide an opportunity to all young girls in the state to learn
about professional careers available to them if they obtain a college degree.
In your opinion, is excluding boys from a career day at work (Take Our Daughters to Work Day)
discrimination that is a violation of professional ethics? Do you believe Tom is correct in thinking that if the
event had excluded girls (Take Our Sons to Work Day) or excluded racial minorities (Take Our White
Children to Work Day) that reactions by his colleagues and the community would be very different? If so,
why?
A pilot study of this case by the author found agreement by students that Tom is correct in believing that
if the event had excluded girls or racial minorities reactions by his colleagues and the community would have
been very different. Most students felt that lawsuits to block the event from taking place, based on
discrimination, would have been filed by organizations such as the ACLU, NOW, the NAACP, etc.
Students generally agreed that the difference in reactions would be due to the simple fact that exclusion
of girls or racial minorities would not, at the current time, be “politically correct.”
Discuss Tom Lawley’s handling of this situation. What do you believe he did “right” and “wrong’? Assuming
that you were Tom and had the same feelings of discomfort with the event, how would you have handled this
situation?
In a pilot study, most students felt that Tom was wrong in not telling his children the truth in the first
place, that the event was a “Daughters Day” and not a “Career Day.”
As is true with employment in any organization, Tom must face the idea of being labeled a “whistleblower”
or a troublemaker. What are the possible secondary consequences an employee might face in such a situation?
Should this affect what Tom does?
Employees face, for example, being labeled a troublemaker, being ostracized by fellow workers and being
“punished” by their employer in non-monetary as well as monetary ways. Additionally, it might be difficult
if not impossible for any employee to prove any connection between these events and the original incident..
It is believed by the author that students will have mixed reactions as to how Tom should react to this
problem.
Assuming that Tom is correct in believing this exclusion of boys is unethical, should he refuse to work on the
committee? If not, why?
First, students need to remember that the college president felt strongly that faculty members should serve
on the committees to which they were appointed. Thus, Tom did not believe he had the option of being
removed from the committee.
The author believes that students will disagree as to whether or not Tom should work on the committee.
EPILOGUE
After giving this situation much thought and considering the possible consequences, Tom decided not to
further pursue his objections. He did remain on the “Daughters Day” Committee but refused to participate.
Furthermore, he refused to allow his daughter, Michelle, to go to work with him on that day. He did explain to
Michelle that he did not think it fair to allow her to go while Edward could not participate simply because he was
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
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a boy. Michelle agreed with this decision, but she was disappointed that she could not attend. Tom’s wife, Betty,
was in total agreement with Tom.
Tom stated that the day appeared to have gone well. Since that time, the chancellor has never again
planned a “Take Our Daughters to Work Day.” A few months after the event, a faculty member suggested that the
school plan its own “Family Day” where all children of employees would be invited to spend the day at their
parent’s workplace, followed by a cookout. The president reluctantly agreed to fund the event. This has become
an annual event, and everyone seems pleased with it.
The author spoke with Tom several months later, asking him about his reflections on “Daughters Day.”
Tom had not changed his mind in any way regarding the ethical aspects of what was, in his opinion, a career day
that discriminated against half of the population by excluding boys. Tom still did not consider the issue trivial
because the underlying principle, discrimination, was anything but trivial.
Tom stated that, after about a month, the two female professors in his department began speaking to him
again. He came to believe, sadly, that being “politically correct,” in some cases, was more important than living
up to one’s ethical standards.
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American Society of Business and Behavioral Sciences Conference
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SCUBA UNLIMITED, INCORPORATED B
Larry Patterson, Ph.D.
Southwest Texas State University
SITUATION
Wayne Simpson was finishing his fourth years as an employee of a marketing research firm in Tampa, Florida. Six
months earlier he had been promoted to his current job of account executive. Wayne enjoyed the interaction with
clients his new position offered. One of his current clients was Mr. Cecyl Crampton, marketing manager of Scuba
Unlimited, Incorporated (Scuba). Scuba was one of the top manufacturers of scuba equipment in the world. At
their initial meeting, Mr. Crampton told Wayne his management team was interested in knowing how retailers felt
about the top manufacturers of scuba equipment, which manufacturers they purchased from, and what they liked
and did not like about each manufacturer. Secondary goals included finding out retailers’ opinions concerning the
current economic state of the industry, their perceptions of the relative importance of trade shows and whether or
not they offer a diver certification program. Wayne and Cecyl had established a good working relationship during
the past month as they worked together to set precise research goals, develop the study methodology and design
the study questionnaire.
RESEARCH OBJECTIVES
During the first meeting to specify research objectives, Mr. Crampton brought two of his most trusted colleagues
to make sure the study addressed the correct issues and the data provided would be what was needed to make the
best marketing decisions. After three hours of discussions and a few telephone calls to other officials at Scuba, the
following research objectives were established for the study.
To determine the image retailers of scuba equipment held of Scuba and its top competitors on the following criteria:
product quality, prices, service quality and credit terms.
To find out why retailers purchased from specific manufacturers.
To measure retailers’ perceptions of current year-to-date sales compared to the previous year.
To measure expectations of next year’s sales.
To find out the percentage of retailers who attend D.E.M.A sponsored trade shows and the best time of the year
to schedule them.
To determine the percentage of retailers who offer diver certification programs.
To find out what retailers think is the most important factor influencing their sales.
METHOLODGY
After the research objectives were identified, Wayne and Cecyl immediately turned their attention to how the study
was to be conducted. The first issue was to clearly define the study population. Although there are scuba equipment
retailers located in most states, the population was ultimately defined as all retailers of scuba equipment operating
in the three states that are home to most dealers: California, Texas and Florida.
The next consideration was how to sample the population. Personal interviews were ruled out due to the
geographic dispersion of the population and the corresponding cost and time problems. Telephone interviews were
seriously considered but ultimately ruled out because Wayne and Cecyl believed some of the questions would be
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
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difficult to administer over the telephone. A mail survey was chosen because of the relative ease in sampling a
large geographically dispersed population and the availability of randomly selected mailing labels. The plan was
to send questionnaires to 500 randomly selected scuba retailers with the hope that at least 200 would be returned.
To improve the response rate, respondents were offered a summary of the results of the study for their cooperation.
The questionnaire shown in Exhibit A was developed over a series of meetings between Wayne and
Cecyl. In between the meetings Wayne would consult with his colleagues at the research firm to refine the
questionnaire. The envelope finally mailed to respondents contained a cover letter appealing for their response;
the questionnaire; and a self-addressed, postage-paid envelope.
QUESTIONS
Both men were concerned that the number of returned questionnaires might not be large enough to achieve the
precision and confidence goals they agreed were essential. Discuss ways to improve the response rate of mail
surveys.
Assuming they get at least 200 completed questionnaires returned, do you believe nonresponse bias will be a
significant threat to the validity of the study?
How large a sample would be required if Scuba wanted a 95% confidence level, felt the most important questions
were the scaled image questions (14-18), and was willing to accept a margin of error on these questions of no more
than a plus or minus 0.2. The standard deviation is not known but the range of responses is expected to vary from
1 to 7 for these scaled questions.
How would the sample size change if Scuba wanted a margin of error no greater than plus or minus 0.1?
How would sample size change if Scuba would accept a 90% level of confidence for the study? Calculate sample
size using both margins of error of (0.2 and 0.1).
What improvements could be made to the questionnaire?
INSTRUCTOR’S NOTE
1.
There are many ways to improve the response rate of mail surveys. Some that would apply to this case
are: preliminary notification either by mail or telephone, monetary inducements, offers to contribute to a worthwhile
cause or charity, placement of the respondent’s name in a raffle and follow-up mailings.
2.
If they get 200 responses, the response rate would be 40 percent. This is a relatively high response rate
for mail surveys. Since the questionnaire does not address highly controversial subjects or issues that are highly
emotional for respondents, nonresponse bias should not be a major threat to study validity.
3.
In order to compute sample size, standard deviation must be estimated. In this case, one can use one-sixth
of the range as our estimate of standard deviation. The range equals 7-1 or 6, and estimated standard deviation
equals 6/6 or 1. Assuming a confidence of 95% and a margin of error of .2, the sample size would be 97.
4.
If the margin of error is cut in half, the sample size is quadrupled! n=385
If the confidence level is changed to 90%, sample size for a margin of error of 0.2 is 68. When the margin of error
is 0.1, sample size is 271.
There are a number of ways to improve the questionnaire. Some suggestions are listed below.
a. Move the demographic questions to the end of the questionnaire.
b. Questions 2, 3 and 4 do not relate to any of the research objectives. Either revise the objectives or delete the
questions.
c. In addition to question 12, it would be useful to know when the respondent last attended a D.E.M.A. trade show.
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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EXHIBIT A
1.
What was your approximate sales volume last year?
___Less than $100,000
___$500,000-$999,999
___$100,000-$249,999
___$1,000,000-$2,000,000
___$250,000-$499,999
___Over $2,000,000
What is your education level?
___1-11 years
___High School Graduate
___Some college, Any business courses? ___Yes ___No
___College graduate, which major?___________________
How long have you owned your own business?
___Less than 1 year ___4 to 6 years
___1 to 3 years
___7 to 10 years
___Over 10 years
What was the main reason you chose to open a dive equipment
business?____________________
________________________________________________________________________
________________________________________________________________________
______________
What do you believe is the most important factor affecting your annual sales? Please
check only one answer.
___General economy
___Store location
___Industry sales
___Advertising
___Number of new drivers
___Your retail prices
___Your sales staff
___New technology
___Other, please explain_____________________________________________
How would you describe the general economic health of the dive equipment industry?
___Healthy ___Unhealthy ___Not sure
Compared to last year, do you expect your sales this year to:
___Increase ___Decrease ___Stay about the same
Compared to last year, do you expect total sales this year for the industry to:
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
___Increase
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___Decrease ___Stay about the same
Do you offer a new diver certification program? ___Yes
___No (skip to 11)
Approximately how many new divers did you certify last year? _____
11.Please list the top three scuba equipment manufacturers from which you purchase
inventory for your store. By top 3, we mean those manufacturers that sell you the most
inventory as measured in dollars.
Manufacturer
_____________________________
_____________________________
_____________________________
Main reason why?
______________________________
______________________________
______________________________
Do you attend D.E.M.A. trade shows?
___Always
___Sometimes
___Never
When is the best time of the year for you to attend manufacturer trade shows?
___Jan-Feb
___May-June
___Sept-Oct
___Mar-Apr
___July-Aug
___Nov-Dec
The following questions ask for your opinions about dive equipment manufacturers.
14.
Please circle your opinion of Dacor on the following attributes:
High Quality
Products
7
High Quality
Service
7
Attractive
Prices
Attractive
Credit
Terms
15.
6
6
5
5
4
4
3
Low Quality
1 Products
3
2
2
Low Quality
1 Service
Unattractive
1 Prices
7
6
5
4
3
2
7
6
5
4
3
2
Unattractive
1 Credit
Terms
Please circle your opinion of Parkway on the following attributes:
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
Las Vegas, 2000
American Society of Business and Behavioral Sciences Conference
High Quality
Products
7
High Quality
Service
7
Attractive
Prices
Attractive
Credit
Terms
6
6
5
5
4
4
3
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Low Quality
1 Products
3
2
2
Low Quality
1 Service
Unattractive
1 Prices
7
6
5
4
3
2
7
6
5
4
3
2
Unattractive
1 Credit
Terms
16. Please circle your opinion of Sherwood on the following attributes:
High Quality
Products
7
High Quality
Service
7
Attractive
Prices
Attractive
Credit
Terms
6
6
5
5
4
4
3
Low Quality
1 Products
3
2
2
Low Quality
1 Service
Unattractive
1 Prices
7
6
5
4
3
2
7
6
5
4
3
2
Unattractive
1 Credit
Terms
17. Please circle your opinion of U.S. Diver on the following attributes:
High Quality
Products
7
6
5
4
3
2
Low Quality
1 Products
High Quality
Service
7
6
5
4
3
2
Low Quality
1 Service
Attractive
Prices
6
5
4
3
2
Unattractive
1 Prices
7
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
Attractive
Credit
Terms
18.
7
6
5
4
3
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2
Unattractive
1 Credit
Terms
Please circle your opinion of Scuba Unlimited on the following attributes:
High Quality
Products
7
6
5
4
3
2
Low Quality
1 Products
High Quality
Service
7
6
5
4
3
2
Low Quality
1 Service
Attractive
Prices
6
5
4
3
2
Unattractive
1 Prices
Attractive
Credit
Terms
7
7
6
5
4
3
2
Unattractive
1 Credit
Terms
Thank you very much for your time and cooperation.
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
page 47
SUPPLY CHAIN PARTNERSHIPS: A CASE
EXAMPLE
Byrd, John T.
Bellarmine College
Jbyrd@bellarmine.edu
ABSTRACT
This case explains how two companies were able to focus on their individual core competencies and
work with each other in a partnership arrangement to benefit both parties. The larger company which initiated
the relationship, experienced some communication and co-ordination difficulties and developed a process
whereby they could resolve the problem issues and work more effectively together. As a result customer service
was greatly improved.
INTRODUCTION
In today’s environment, companies are outsourcing many of their logistical activities in order to focus
more effectively on their core competencies. In the office supply division of one large company, the outsourcing
of logistical activities provides a way for management to improve the quality of service. The management of this
company views logistics as the process of planning, implementing, and controlling the efficiency, cost effective
flow and storage of materials and related information from point of origin to point of consumption. As a result of
the consumers demand for quick efficient service and their concerns for variety of product, the case company
decided to organize the logistics process differently. They are doing this to be more responsive and flexible. This
case describes some of the problem issues and ways of solving problems effectively.
CASE RESULTS
After the partnership was developed and implemented, communication and co-ordination problems
developed. This caused the case company to create a workshop format to identify problem areas and resolve the
issues causing the conflict. The following outline provides a detail breakdown of the critical business issues, the
project scope, goals, deliverables, and roles. It also outlines the disconnects causing the problems, and an action
plan. This outline provides the basis for the case.
SUPPLY CHAIN PARTNERSHIP PROBLEM OUTLINE
A.
B.
Critical Business Issue
1.
What is the critical business issue (problem/opportunity)?
Packaging Unlimited is an outsource packager for 3M (SPD, OSD, CHIM, and BSD).
Currently, required inventories and service requirements are not being met. Information
exchanged between the companies is confusing and difficult to correlate.
Project Scope
1.
What activities and components are included in the project?
Information exchange (content and method), Pkg. Unlimited master scheduling, procurement
activities as related to planning, invoicing/billing, determination of optimum inventory levels.
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American Society of Business and Behavioral Sciences Conference
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2.
C.
D.
E.
What activities and components are excluded from the project?
Actual manufacturing execution.
3.
What are the teams or areas of the business with a direct interface to this project?
Materials control/supply chain, procurement involvement with planning.
Project Goals
1.
What are the goals of this project?
To truly have a supplier managed inventory process that is profitable for both parties by
streamlining the exchange of information, eliminating redundant activities, and relying on the
supplier to replenish product to statistically pre-determined inventory levels.
Project Deliveries
1.
What will this team define and deliver?
a)
Short Term
“IS” map understanding of the current process, identification of gaps/issues,
determination of path forward
b)
Mid Term
Implementation of “quick hits”
c)
Long Term
Implementation of supplier managed inventory process
2.
When will this be accomplished?
a)
Short Term
Q2, 1999
b)
Mid Term
c)
Long Term
Project Roles
Role
Sponsor
Steering Team
Project Leader
Team Members
Corporate
Support
Name(s)/Function
Responsibility
DISCONNECTS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Information is generated at different points in time. What are the guidelines for when changes will be
allowed? What months are we planning for? What is meant by “current”, “previous”, “month 1”, “month
2”, etc?
What is a blanket PO? Release? Is it firm? FYI?
When do we/don’t we fill backorders from open releases?
What data should go into Packaging Unlimited MRP? Physical vs. available inventory?
What are our manufacturing strategies (make-to-stock (MTS), make-to-order (MTO)) for different
products and what are the associated business process differences?
Need to clarify roles of 3M and Packaging Unlimited.
What tool(s) will be utilized and what information will be provided for the planning process?
How do we update a PO after it has shipped so it is accurate before invoiced?
Priorities shift within the month. Need to move from “priorities” to expected ship dates.
How do we deal with different priorities among different divisions?
Need the ability to measure performance of both 3M and Packaging Unlimited.
There is some lack of confidence in the MRP output, PO numbers, target inventory levels, etc.
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
13.
14.
page 49
Need to define terminology.
Organization structure and knowledge of backup contacts needs to be clear. Need to maintain a current
e-mail listing. Also need to know who should receive mass communications (pricing, new capabilities).
Planning process varies by planner.
15.
MISCELLANEOUS NOTES
1.
2.
3M forecast is what we think we will sell (forecast of sales demand, not production demand).
Unless a due date is noted, 3M PO releases expect delivery by month end.
ACTION PLAN
v
Routine, on-going communication.
Lynn and Bob will arrange for the group to communicate on a regular basis. This may be face-to-face,
via teleconference, or via videoconference. Timing will be determined but may be monthly, quarterly,
semi-annual, etc. This does not replace the informal communication that takes place on an as-needed
basis; but provides a routine, scheduled opportunity to review ongoing business status.
v Establish sub-team to validate accuracy of MRP inputs and outputs and determine optimum process for MTO
and MTS consisting of:
Ø Common, defined terminology
Ø Explicit inputs and outputs
Ø Definitive timeline
Ø Business rules
Ø Roles/responsibilities
Ø Performance measurements
Core team of Lynn, Bob and Joe will coordinate this effort. Others will be pulled in on an asneeded basis and are asked to make themselves available to review development and provide feedback when
requested.
v Clarify blanket PO information to ensure it meets the process requirements.
This will be done as new process is developed.
PARKING LOT
1.
New/revised product introduction: Determined this is outside scope of this project. Bob Griffith
will relay to Jim Johnson.
2.
Billing/Invoicing: Will be addressed during “should” development.
3.
Backcard contract: This is outside scope of this project. Bob Griffith will be addressing.
4.
Manufacturing cycle time reduction, cost & waste reduction, inventory reduction: Issues outside
of planning will be relayed to Jim Johnson.
CONCLUSION
The paper will include an analysis of all of the above elements contained in the outline.
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
Las Vegas, 2000
American Society of Business and Behavioral Sciences Conference
page 50
USING A STEPWISE MULTIPLE REGRESSION
APPROACH IN FORECASTING AND BUSINESS
DECISION MAKING
Kiani-Aslani, Rajabali
California State University
rajabali.kiani@csun.edu
Sangeladji, Mohammad
California State University, Northridge
mohammad.sangeladji@csun.edu
ABSTRACT
In making strategic and tactical decisions, managers need to forecast future events such as sales, costs, and
other economic conditions. There are various forecasting models available, including the regression analysis.
In a regression analysis, attempts are made to forecast a variable with the help of other variable(s). The first
variable is usually called dependent variable and the other variables are called independent variables. There
are cases that a dependent variable has association with more than one independent variable. Those are the
cases that application of multiple regression is warranted. In those cases, the selection of a proper and
meaningful set of independent variables could, indeed, pose a problem for a manager. The independent
variables must not be closely associated with each other, while showing a high association with the dependent
variable. Examining all the independent variables and their subsets in multiple regression with four or more
independent variables is a very tedious and time-consuming task. The stepwise multiple regression approach
can reduce significantly the time and efforts needed for selecting the meaningful and reliable independent
variables. The main purposes of this paper are(a) to explain how a stepwise multiple regression approach is
applied in estimating sales and/or costs for budgeting and profit planning purposes and (b) the implication and
application of this approach in teaching cost estimation and profit planning in cost and managerial accounting
courses.
Profit planning - whether strategic or tactical - can not be effective without a realistic appraisal of future
economic conditions, global business competition, and other business factors such as sales and operating expenses
behaviors. Reliable forecasts of future sales and expenses are usually the most important and critical factors for
managing a business successfully. A proper sales forecast, in turn, provides a basis for production planning,
inventory control, cash-flow management, and capital budgeting. According To Buckley and Lightner,
“Forecasting is the process of estimating future events. Recording the accounting significance of the outcomes of
such events is budgeting”.
For product pricing, profit planning, and inventory costing the critical issue is cost estimation. Among
the various costs, those with no clear and direct relation to the products are difficult to estimate. Usually, this
difficulty can be overcome by analyzing various costs and classifying them into variable, fixed, and mixed cost
elements. The most common methods for such a classification and cost estimation are (a) account analysis, (b)
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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page 51
engineering estimates, (c) scatter graph and high-low estimates, and (d)statistical models (simple and multiple
regression).
Because of the availability of computer software and knowledge of how to apply statistical models, a
decision-maker or a cost analyst can use easily a statistical technique in cost estimation. The different statistical
approaches provide measures that indicate how good estimates have been made. For instance, the regression
approach uses the ensuing measures (a) the coefficient of determination (R2), (b) the standard error of the estimate
(Se), and (c) the standard errors of the regression coefficients for the slope of the line and the “y” intercept.
Because of the aforementioned attributes of statistical models, the regression (correlation) analysis can
be used as an effective tool for forecasting and budgeting of sales, costs, and other business activities. This
technique is concerned with discovering and measuring the degree of association between (dependent and
independent) variables. Stepwise multiple regression approach can be used effectively by a decision-maker to
analyze independent variables affecting a dependent variable. This technique, in contrast to examining each
independent variable individually and separately, economizes on computational efforts and arrives at a reasonably
good set of independent variables.
The main purposes of this paper are (a) to explain how stepwise multiple regression approach is applied
in estimating sales and/or costs for budgeting and profit planning purposes and (b) the implication and/or
application of this approach in teaching cost estimation and profit planning in managerial accounting.
To accomplish these purposes, we will: (a) briefly explain the concept of the stepwise regression
approach, (b) use a set of data to demonstrate the application of the stepwise multiple regression approach using
computer software, and (c) summarize the study and make final recommendations.
STEPWISE MULTIPLE REGRESSION APPROACH:
Stepwise multiple regression approach is a versatile form of multiple regression analysis. It is a
mathematical model used to measure the relationship between one dependent variable and several independent
variables. Generally speaking, a regression model provides a rational rather than a casual relationship between
dependent and independent variables, and therefore, the discovered relationship is not necessarily a cause-andeffect one. To provide meaningful information and to make valid inferences when using a statistical stepwise
multiple regression approach, the following basic criteria must be met:
(1) Linearity within a relevant range ;
(2) Constant variance(homoscedasticity) ;
(3) Serial correlation(obsevations are independent from each other) ; and
(4) Multicollinearity(independent variables are correlated to each other)
Stepwise regression approach is a process that eliminates correlated independent variables. It is an iterative
method that adds and eliminates one independent variable at a time. The decision to add or delete an independent
variable is made on the basis of whether that an independent variable improves the regression result. An
improvement is achieved when (R2) of the regression approaches “1” and the (Se) decreases to a lower level.
There are three different methods that add or delete independent variables to or from the regression model one
at a time. These are forward selection, backward elinimation, and stepwise selection approaches. The forward
selection approach starts with no independent variable in a rgerssion model. At each step,the method adds one
independent variable at a time from the set of available variables which has highest impact on both the standard
error of the estimate(Se) and the multiple coefficient of determination (multiple R2). The iteration and adding
processes stop when there are no more independent variables that could result in a significant increase in the
multiple R2 and the (Se) of the model.
The backward elinmation approach,in contrast, starts with all potential independent variables in a regression
model designed to predict the behvior of the dependent variable. At each step, the method elinminates one
independent variable at a time-- always the one that causes the least changes in multiple R2 and (Se). The iteration
process stops elininating any independent variable in the regression model when no significant changes in the
multiple R2 and (Se) are achieved.
The stepwise selection approach is a combination of forward selection and backward elimination. An
important feature of this approach is that an independent variable that has been added into the regression model
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
page 52
at an early stage may subsequently be elinminated once other independent variables are considered.That is, in
stepwise selection strategy, independent variables are either added or deleted from the regression model at each
step of the iteration and evaluation. The stepwise selection process stops with the selection of the best fitting
regression model when no additional independent variables can be added or eliminated from the last regression
model fitted. This approach assists the researcher to find the the best regression model without examining
all the possible independent variables separatly and collectively.
APPLICATION AND OUTCOMES:
The data presented in table 1 is used to demonstrate the application of a stepwise regression approach in
estimating the factory overhead cost for the 24th month of the RK manufacturing company. For this purpose the
SPSS computer software has been used.
Table 1
DATA RELEVANT FOR ESTIMATING FACTORY OVEHEAD COST OF THE RK COMPANY
WITH FOUR INDEPENDENT VARIABLES
Month
Overhead
Cost
Labor
Hours
Machine
Hours
Units
Produced
Orders
Processed
1
374500
29950
8600
6000
310
2
568000
27100
23100
7650
625
3
498000
19200
23000
7355
475
4
470000
26160
17600
7100
459
5
564300
34800
19600
7610
652
6
658900
17000
27000
8000
715
7
514900
38125
17000
7000
645
8
449200
21600
18800
6300
475
9
468300
23800
17800
6530
495
10
559300
26700
30370
6710
554
11
479400
23300
21290
7355
486
12
536700
36200
19300
7569
514
13
484980
21600
22160
6850
498
14
595340
35300
19000
8524
625
15
503300
30270
20000
8000
613
16
545700
27800
18600
8312
633
17
582300
43780
22400
7985
659
18
622200
33900
26400
9125
678
19
467600
28540
18400
6500
489
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
Las Vegas, 2000
American Society of Business and Behavioral Sciences Conference
page 53
20
514100
33900
16900
6625
525
21
484296
19400
20700
6750
489
22
425000
26900
15500
6315
495
23
475200
26540
16300
6245
498
The RK Company is a Medium Size Manufacturing High Tech.Company which produces CD players.
The two statistical regression approaches which are intended to be discussed in this paper are: (a) the Bestsubsets approach and (b) Stepwise regression approach. For both approaches, the following variables have
been used:
Y= dependent variable- monthly factory overhead cost
X1=direct labor hours (expected cost driver-independent variable)
X2=machine hours (expected cost driver-independent variable)
X3=units of production (expected cost driver-independent variable)
X4=orders processed (expected cost driver-independent variable)
THE BEST-SUBSETS APPROACH:
Under this approach, a researcher can develope15 possible regression models: four regression models with
only one independent variable, six regression models with two independent variables, four regression models with
three independent variables, one regression model with all four Independent variables (see figure 1).
Among all the 15 possible regression models, only one can be accepted as the best model. The criteria used
to choose the best model were the multiple coefficient of determination (R2) and the standard error of the estimate
(Se). Fig. 1 shows a list of computer summary outputs. Under this approach the best regression cost equation
model is:
Y= 78449.08+4.43 (x2) +20.56 (x3) +363.30 (x4) with adjusted R2 =. 88 and Se=23227.37
THE STEPWISE REGRESSION APPROACH:
As can be seen, in the Best-Subsets approach, fourteen possible regression estimates (sub-sets) are not
satisfactory and expected to be eliminated by the researcher. Only one subset generates the best forecasting model
and should be adopted. Consequently, the selection of the best subset is a tedious and time-consuming process. The
stepwise regression approach, in contrast, can culminate in the same result, by selecting the best combination of
independent variables with less effort.
The addition and elimination processes used by the software in the stepwise regression approach are presented
in figures 2 to 5. As reflected in figure 2, the independent variables (X4, X2, and X3) are added by the computer
according to the stepwise selection criteria, namely in terms of their importance to the dependent variable (Y). The
Fig.3 (model summary) shows the ranking of the above selected independent variable on the basis of their (R2)s
and (Se)s. To summarize, the independent variable (X4) entered first by the system because it explains almost 80%
of the variability in the dependent variable (Y). When independent variable (X2) is added to the model, R2
increases to 86.6% from 79.9%. At the same time, the standard error of the estimate decreases from 30,236.48 to
25,285.36. Finally, when (X3) is added to the existing model, making it a model with X4, X2, and X3 independent
variables, the (R2) further increases to 89.3% and the (Se) decreases to 23,227.37.
The stepwise selection stops at this stage and model 3 in figure 4 is selected as the best equation based upon
highest adjusted R2(88%) and lowest Se(23,227.37).
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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Y=78,449.08 +363.30 (x4) +4.43 (x2) + 20.56 (x3)
The software also explains the reasons for excluding some of the variables. Fig. 5 displays the excluded
variables and the reasons.
SUMMARY AND CONCLUSIONS:
Relevant and accurate cost estimation by identifying which cost is strictly fixed or variable and which one
is mixed can help a decision-maker to make sound economic decisions. The stepwise regression approach with
the help of computer software such as SPSS, Storm, and other can help managers in forecasting cost and
formulating business budgets. The stepwise multiple regression approach can be used when a decision-maker
wants to determine which independent variables (cost drivers) contribute more satisfactorily to the explanation
of the dependent variable, in what extent and in which order. Since the application of a stepwise multiple
regression approach is less tedious and time-consuming, it is recommended for cost estimation, sales
forecast, and other similar estimations.
However, in applying the stepwise multiple regression approach, adequate attention and efforts should
be exerted by a manage or researcher to avoid the following situations and factors:
. The presence of unusual data and outlier which could be result of data misclassification.
. The possible violation of the underlying assumptions of the multiple regression.
. The possibility of misinterpretation of outcomes.
The following steps are also useful for building a regression model:
. Define the dependent variable
. Select the independent variables (potential predictors, i.e. cost drivers) that can be used to explain
the dependent variable. Independent variables selected should have strong logical
correlation with the dependent variable but not with other independent variables.
. Collect a reasonable sample size from a homogenize population.
. Use software such as SPSS, Storm, Minitab etc. to solve the problem.
. Use your best judgment and the result of the analysis for choosing the best fitted regression
model.
It needs to be emphasized at this point that the best-fitted regression model only quantifies
information and does not substitute for a good judgment.
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
page 55
REFERENCES
1.
Buckley, J.W. & Lighter, K.M.(1973), Accounting: An Information Systems Approach,
Encino,Calif.: Dickenson Pub.,Inc.,951-952
2.
Hirsch, M., (1994), Advanced Management Accounting,( 2nd ed.) Boston: PWS-Kent publishing
Co.130-135
3.
Hamburg, M & Young .P, (1994), Statistical Analysis for Decision Making, Forth
Worth,TX: The Dryden Press , 537-561
American Society of Business and Behavioral Sciences Conference
4.
page 56
Koher, H.,(1994), Statistics for Business and Economics, (3rd ed.),New York: Harper Collins
collegePublishing. Co., 585-617
5.
Levine, D., Brensen, S, (1998), Statistics for Managers ,Englewood Cliffs, NJ: Prentice-
Hall,Inc.
6.
Keller, G/Warrack, B.,(1998), Statistics for Management and Economics, 5th Ed, Duxbury-Thomson
Learning, 758-769
Figure 1
The Best Subsets Regression model output Summary using SPSS software
Std error Of
the Estimate
(Se)
Consider
this
Model?
Regression Model
R2
R2
adj.
1. Y= 446710.73+2.40(x1)
.06
.016
65383.56
NO
2. y=297,904.69 +10.85(x2)
.53
.51
46279.80
NO
3. y= 46731.81 +64.7(x3)
.66
.64
39623.87
NO
4. y= 175355.54 +619.37(x4)
.80
.79
30236.48
NO
5. y=164186.21+3.91(x1)+11.99(x2)
.68
.65
38903.32
NO
6.y=48034.22-.14(x1) +65.06(x3)
.66
.62
40591.95
NO
7. y= 185394.97+-.67(x1)=635.51(x4)
.803
.783
30665.79
NO
8.y=42385.72+6.44(x2)+47.52(x3)
.795
.774
31305.63
NO
9.y=150290.97+4.73(x2)+492.50(x4)
.866
.853
25285.36
NO
10.y=90791.37+23.67(x3)+461.21(x4)
.835
.818
28109.40
NO
11. y=24002.12+1.85(x1)+7.75(x2)+39.20(x3)
.821
.793
30000.64
NO
12.y=13618.38+.94(x1)+5.57(x2)+447.11(x4)
.872
.852
25343.33
NO
13.y=100267.79-.86(x1)+24.63(x3)+475.55(x4)
.841
.816
28250.15
NO
14.y=78449.08+4.43(x2)+20.56(x3)+363.30(x4)
.893
.876
23227.37
YES
15.y=69854.33+.63(x1)+5.00(x2)+19.45(x3)+339.96(x4)
.895
.872
23567.62
NO
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
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American Society of Business and Behavioral Sciences Conference
page 57
The Stepwise Regression Model Output Summary Using SPSS software
Figure 2
Variables Entered/removeda
Model
Variables
Entered
1
X4
2
X2
3
X3
Variables
Removed
Method
Stepwise (Criteria: Probability-of-F-to-enter<=.05,
Probability-of-F-to-remove >=.100 )
Stepwise (Criteria: Probability-of-F-to-enter<=.05,
Probability-of-F-to-remove >= .100 )
Stepwise (Criteria: Probability-of-F-to-enter<=.05,
Probability-of-F-to-remove >= .100)
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Dependent Variable: Y
Figure 3
Model Summary
Model
R
R Square
Adjusted R Square
1
.894a
.799
.789
2
.931b
.866
.853
3
.945c
.893
.876
a. Predictors: ( Constant ), X4
b. Predictors: (Constant ), X4, X2
c. Predictors: (Constant ), X4, X2, X3
Std. Error of the Estimate
30236.478
25285.356
23227.371
Figure 4
Model
1 (Constant)
X4
2 (Constant)
X4
X2
3 (Constant)
X4
Coefficients
B
175355.540
619.365
150290.97
492.501
4.732
78449.079
363.303
Coefficientsa
t stat.
Std. Error
37682.726
67.779
32491.012
69.408
1.494
44594.912
87.269
4.653
4.626
7.096
3.167
1.759
Sig.
.000
9.138
.000
.000
.005
.095
Regression Cost Equation Model
.000
Y=175355.54+619.37(X4)
Y=150290.97+492.50(X4)+4.73(X2)
4.163 .001
X2
4.426
1.380
3.208 .005
X4
20.562
9.483
2.168 .043
Y=78449.08+363.30(X4)+4.43(X2)+20.56(X3) The best fitted Regression Model
a. Dependent Variable: Y
Figure 5
Excluded Variablesd
Sig.
Partial Correlation Collinearity Statistics(Tolerance)
.526
-.143
.883
.005
.578
.66
.051
.421
.406
.352
.214
.656
.043
.445
.401
.508
.157
.637
Model
Beta In
t stat.
a
1 X1
-.068
-.0645
X2
.317a
3.167
X3
.296a
2.073
b
2 X1
.096
.953
X3
.257b
2.168
3 X1
.064c
.675
a. Predictors in the Model: (Constant), X4
b. Predictors in the Model: (Constant), X4, X2
c. Predictors in the Model: (Constant), X4, X2, X3
d. Dependent Variable: Y
Proceedings of the American Society of Business and Behavioral Sciences Volume 7, Number 6
Las Vegas, 2000