In July 2012, Mr X, CEO of Corp Y, was preparing his presentation for tomorrow’s meeting with company’s board of directors and Investors. He has just rattled off a list of statistics describing the financial performance of Y (NYSE : YYY), the company he has run since late 2006. They show that it has been growing, earning high profit margins, and paying respectable returns to shareholders through dividends and stock buybacks. So, he wonders, what’s the problem? Why on earth has he been taking such an infernal amount of heat from investors, Wall Street analysts, and the media? He clearly resents it.
All these years he has been trying to transform a soft drinks company — into a global enterprise with a product line that can prosper in a world where obesity is fast becoming the No. 1 health problem. Making that profound shift, he thinks, is “the right thing” to do. What’s more, the company has been “performing while transforming,” delivering those financial results. Yet for all that, the conventional wisdom is that he and Y are in trouble, return on investment is going down [Exhibit 1]. Projected profits are also not upto the mark, moreover investors think that there is no scope of improvement in near future too [Exhibit 2].
Y is a global food and beverage leader with net revenues of more than $65 billion. Y, Inc. is founded by DMK, President and Chief Executive Officer of Y-Cola and HWL, Chairman and Chief Executive Officer of FL, through the merger of the two companies. Y-Cola was created in the late 1890s by CB, a New Bern, N.C. pharmacist. FL, Inc. was formed by the 1961 merger of the F Company, founded by ED in 1932, and the HWL Company, founded by HWL, also in 1932. During the Great Depression, X gained popularity following the introduction in 1936 of a 12-ounce bottle. With a radio advertising campaign featuring the jingle “X hits the spot / Twelve full ounces, that’s a lot / Twice as much for a nickel, too / X is the drink for you”, arranged in such a way that the jingle never ends. X encouraged price-watching consumers to switch, obliquely referring to the Coca-Cola standard of 6.5 ounces per bottle for the price of five cents (a nickel), instead of the 12 ounces X sold at the same price. Coming at a time of economic crisis, the campaign succeeded in boosting X’s status. From 1936 to 1938, X-Cola’s profits doubled. X started as a soft drink company but later on added wafer, chips etc in it’s product line. Current product line of X consists of soft drinks, health drinks, snacks etc, complete product line of X is given in exhibit 4
X’s current problem is that the Investors are not very happy with Y’s stock performance and ROI. Investors don’t expect Y’s economic profit to increase for years; on the contrary, they expect it to decline slowly [Exhibit 2] — not an endorsement of management. X has been blamed for shifting the focus from soft drink to healthy product line. There is a unanimous agreement between all the investors to replace X with someone else. Z predecessor of X says:
This is the hardest time in any transformation, when the returns haven’t arrived and no one knows when or if they will. The recent past reminds me of pivotal moments in our history when bold leaders made decisions that weren’t popular but were the right decisions to position the company for the future.
Soft drink making is a profitable business as the major ingredient is sugar, prices of sugar remains more or less constant and can be purchased at low price and stocked for future processing. Fruit juices and other health drinks are made from fruits and vegetables. Fruits and Vegetables cannot be purchased in bulk and need constant refrigeration, moreover most of the fruits are seasonal hence prices vary from one season to another. All these make juice business low margin and high risk.
Dilemma of X
Do I need to take care of the investors and board or should I work for the greater good of the society? As a CEO my only job is to make profit for the company and it’s stakeholders? Should I focus on soft drink that is more profitable, Investors will be more than happy and I will be rewarded? Anyhow, I will not going to be in Y forever? Am I committing far too much time and money to healthy products that make a CEO the darling of the President’s Global Initiative but that real-world consumers don’t want to buy? Shouldn’t I concentrate on soft drink and let people decide what they want ? Is it right by utilitarian theory? Do I have any moral responsibility to the consumers , it’s their choice. If they want to buy soft drink let it be. Am I in wrong industry, should I leave the job and try my luck in some other industry? But the dilemma will still be there, hope one day I will answers to all my questions.
The company’s return on capital plunged from 22% to 11% (vs. mid-to-high teens for competitors). Investors are not happy with this plunge, they want X to bring it back to it’s original level. Exhibit 2:-
Profit margin is decreasing and forecast is also not good, more reasons for X to worry.
Companies profit after tax is decreasing and the forecast for near future also looks dim.
Decision : X is still continuing with the company, X convinced board of directors regarding his strategy for greater good of the community and how it will have super normal results in next 2-3 years. This strategy is not only correct from utilitarian point of view but also from sustainable growth perspective.