Page 421 - Business Principles and Management

Unit 5

Focus On...

Ethics–Cost Cutting at any Cost

The Sunbeam Corporation had been experiencing financial difficulties
before the board of directors hired CEO Al Dunlap to fix the company.
Sunbeam was a well-known manufacturer of household appliances.
Soon after Mr. Dunlap came on board, Sunbeam’s stock started to
climb. Within seven months, he had saved the company $225 million
by such actions as firing 12,000 employees, closing 16 of 26 factories,
and disposing of unwanted products and facilities.
Employees learned early why others had nicknamed him “Chain-
saw Al.” The firm’s culture changed quickly. Before Dunlap’s arrival,
the firm was in trouble, with few new products, weakening sales, and
declining profits. His arrival seemed to signal a quick turnaround in
the company’s financial performance. The stockholders and investors
were happy.
But soon after the major cost-reduction steps were completed, sales
and profits again began to decline. The new CEO required all product
managers to show increased sales. He suggested practices, many uneth-
ical, that would make it appear as if sales were rising and expenses
were falling. Dunlap eliminated the information technology depart-
ment by outsourcing it. As part of that change the computer system
was replaced and no backup files were created. Not only did that make
it nearly impossible to determine the accuracy of records but it created
additional work as all records had to be manually reentered into the
new computer system. Chaos prevailed. While the reduced number of
employees manually prepared inventory records and invoices, they also
had to handle hundreds of calls from upset customers and suppliers.
Dunlap pressured employees relentlessly to produce more. Morale
dipped. Budget goals were unrealistic. To make it appear as though
goals were being met without creating cash flow problems, some man-
agers were forced to postpone paying bills and suppliers were asked to
accept only partial payment to keep costs down temporarily. Unrealistic
credit terms were extended to large retailers to obtain enough orders to
meet sales goals. Large discounts were given to customers to encourage
them to buy well in advance so as to make Sunbeam’s income
statement look good. These undesirable business practices led to
Think Critically high inventory levels, while accounts receivable and payable both
rose and cash flow weakened. Sales were recorded for the cur-
1. Why do you believe Mr. Dunlap rent year that under accounting rules should have been post-
had early success and yet the poned to the next year. Profit margins got thinner. The firm
financial fortunes of the com- was in deep trouble.
pany quickly turned around? The board of directors met and agreed it had made a seri-
2. Why were Mr. Dunlap and com- ous error in hiring Al Dunlap. He was fired. The firm reorga-
pany managers willing to use nized, but it couldn’t recover and fell into bankruptcy. Even
illegal and unethical practices though Sunbeam eventually emerged from bankruptcy, its
to try to improve the financial image had dropped among investors, suppliers, and customers.
position of Sunbeam? It has now become a subsidiary of a large international firm,
3. If you were on the board of Jarden Corporation.
directors, what questions would
you ask Al Dunlap about his
beliefs and values before you
hired him?

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