Strategic Management: Theory and Practice


John A. Parnell

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    Description of Text

    The challenge to lead an organization has never been more demanding. The impact of the global financial crisis of 2008 has lingered well into the 2010s. Ethical crises have plagued a number of well-known companies during this time as well. As a result, the stature of business organizations—particularly large, corporate entities—has declined with consumers demanding greater trust and responsiveness. Firms are expected to both generate satisfactory profits and pursue elusive social objectives in an environment marked by increasing government regulation. Managing organizations is complex, challenging, and fraught with uncertainty.

    Executives and managers at all levels must think strategically and leverage firms resources so effectively. This text draws from all functional areas of business and presents a cohesive strategic management model from a top-level strategic perspective. It is most useful for students with backgrounds in related fields such as management, marketing, finance, accounting, and economics.

    Unlike many other books on strategic management, the text is organized sequentially around the strategic management process. Readers begin with an assessment of the external environment, including industry, political-legal, economic, social, and technological influences on the organization. Within this context, they shift to internal considerations and evaluate the appropriateness of such factors as the mission, ethics, and social responsibility. Armed with a solid understanding of external and internal factors, they consider the content of various strategies at the corporate, business, and functional levels and proceed to formulate the strategy for the organization. Formal and informal influences on strategy execution are evaluated. The text closes with strategic control and a discussion on crisis management, a topic of keen interest in today's fast-paced business world. The chapters are outlined as follows:

    • Foundation (Chapter 1)
    • External Environment (Chapters 2–4)
    • Internal Environment (Chapter 5)
    • Fundamentals of Strategy (Chapters 6–8)
    • Strategy Formulation (Chapter 9)
    • Strategy Execution (Chapter 10–11)
    • Strategic Control and Crisis Management (Chapter 12)
    • Case Studies

    Global issues are addressed in the various chapters, not as a separate concern. These include the nature of global competition and strategic issues like outsourcing and offshoring. The influence of emerging markets such as the BRIC (Brazil, Russia, India, and China) nations is addressed throughout the book. Global icons in the margins alert the reader to these discussions.

    Numerous examples—many from the Wall Street Journal—are integrated in the chapters as well. This process orientation is augmented with a strong chapter on ethics and social responsibility before strategy content is addressed.

    Key Features

    This book is also distinguished from its peers in that the strategic analysis of a firm (i.e., a case analysis) is viewed as inseparable from the concepts presented in the chapters. As such, the 25 key questions that should be answered as part of a strategic analysis are presented in Case Analysis boxes throughout the text alongside the relevant theory.

    Strategy at Work boxes provide examples of concepts introduced in the text. They focus on one or several firms and provide sufficient details to promote class discussion as well.

    Strategy + Business Readings are included at the end of each chapter. These provide advanced and detailed discussions of select topics in the chapters.

    End of chapter features such as Key Terms, Review Questions and Exercises, Practice Quiz, and Student Study Site provide students with the opportunity to apply concepts they have read about in the chapter. These sections are especially helpful as students prepare for lectures and exams.

    Real-Time Cases are brief narratives of well-known firms. They can be used as a starting point for team case projects—as updated information is readily available on the Internet. Alternatively, they can be used as the basis for class discussion, particularly as it relates to analyzing cases.

    Traditional Cases are full-length cases that feature small, private, and international enterprises. Although additional research is optional, these cases are self-contained. They can be used for term projects or daily discussions, giving instructors a broader range of assignment options.

    The text is also very readable. It provides a comprehensive presentation of current strategic management thinking in a clear and succinct format. This approach enables the professor to cover the entire book in a typical capstone business course while retaining valuable course time for case projects, simulations, discussion of real-time strategic issues, and other activities.

    What's New in this Edition

    The fourth edition uses the same strategic management model presented in the previous edition though minor enhancements have been made. The integration of new concepts and the enhancement of existing ones can be seen throughout the chapters, including a large number of global strategy references and a chapter devoted entirely to ethics and social responsibility.

    Specifically, key changes to the fourth edition include the following:

    • Coverage of ethics and social responsibility has been expanded and integrated with other topics related to organizational direction in Chapter 5.
    • Coverage of the external environment has been expanded into two chapters. Chapter 3 explores political, legal, and economic forces while Chapter 4 discusses social and technological forces.
    • A large number of recent examples have been added. Many of these address the effects of social, technological, and other external forces on firm performance. Others highlight the success and failure of specific firms.
    • A new section on emerging trends in Chapter 12 integrates key topics in the text along the themes of global competitiveness, the Internet, sustainability, strategic complexity, and crisis management.
    • This edition features 11 new Traditional Cases. Real-Time Cases have been updated as well.
    • References have been completely updated, and a large number of new global references have been added to this edition.

    The password-protected Instructor Teaching Site at gives instructors access to a full complement of resources to support and enhance their course. The following assets are available on the site:

    • Test bank: This Word test bank offers a diverse set of test questions and answers for each chapter of the book. Multiple-choice, true or false, short-answer, and essay questions for every chapter help instructors assess students' progress and understanding.
    • PowerPoint slides: Chapter-specific slide presentations offer assistance with lecture and review preparation by highlighting essential content, features, and artwork from the book.
    • Sample syllabi: Two sample syllabi—for a semester and a quarter-length class—are provided to help professors structure their courses.
    • Discussion questions: Chapter-specific questions help launch discussion by prompting students to engage with the material and by reinforcing important content.
    • SAGE journal articles: Links to full-text SAGE journal articles provide opportunity for further study in key subject areas.
    • Web resources: These links to relevant websites direct both instructors and students to additional resources for further research on important chapter topics.

    The open-access Student Study Site—available at—is designed to maximize student comprehension of the material and to promote critical thinking and application. The following resources and study tools are available on the student portion of the book's website:

    • Answers to end-of-chapter quizzes: Full answers to each chapter quiz are provided on the Student Study Site.
    • SAGE journal articles: Links to full-text SAGE journal articles provide opportunity for further study in key subject areas.
    • Web resources: These links to relevant websites direct both instructors and students to additional resources for further research on important chapter topics.
    • E-flashcards: These study tools reinforce students' understanding of key terms and concepts that have been outlined in the chapters.
    • Web quizzes: Flexible self-quizzes allow students to independently assess their progress in learning course material.


    SAGE and the author gratefully acknowledge the contributions of the following reviewers: Kristin Backhaus, State University of New York at New Paltz; Thomas M. Box, Pittsburg State University; Jacalyn M. Flom, The University of Toledo; John M. Guarino, Averett University; Keith Harman, Oklahoma Baptist University; Maureen S. Heaphy, Ferris State University; Mazhar Islam, Drexel University; Sonya B. Merrill, Towson University; David Olson, California State University Bakersfield; Vasu Ramanujam, Case Western Reserve University; E. Kevin Renshler, Florida Southern College; Peter Schneider, College of Saint Elizabeth; Jeffrey Slattery, Regent University; David L. Sturges, The University of Texas-Pan American; James L. Whitney, Champlain College; and Gregory F. Zerovnik, Touro University Worldwide.

    About the Author

    Dr. John A. Parnell currently serves as the William Henry Belk Distinguished Professor of Management at the University of North Carolina at Pembroke. He completed the BSBA, MBA, and MA Ed degree from East Carolina University, the EdD degree from Campbell University, and the PhD degree from the University of Memphis. His academic career includes a number of institutions, including service as professor and head of the Department of Marketing … Management at Texas A&M University-Commerce. He received the H. M. Lafferty Distinguished Faculty Award at Texas A&M-Commerce in 2002, the Adolph Dial Award for Scholarly … Creative Activity at UNC-Pembroke in 2005, and the Pope Center Spirit of Inquiry Award in 2011.

    Dr. Parnell is a recognized authority in the field, having published more than 200 articles, cases, proceedings, books, and book chapters in strategic management and related fields. Recent work appears in leading journals such as Academy of Management Learning and Education, Management Decision, and the British Journal of Management. He serves on a number of academic journal editorial boards and consults with select firms in the area of strategic planning. He has also appeared frequently as a guest discussing issues related to business and competitiveness on Sirius XM's The Wilkow Majority.

    Dr. Parnell has lectured at a number of institutions abroad, including Instituto Tecnologico Y De Estudios Superiores De Monterrey-Campus Estado de Mexico (ITESM-CEM), Chung Yuan Christian University in Taiwan, and China University of Geosciences in Beijing. He also served as a Fulbright Scholar in Cairo, Egypt, in 1995.

  • Appendix

    Appendix: Case Analysis

    Case studies provide opportunities to apply the principles discussed in the concepts portion of the text. These concepts are better understood when they are seen at work in ongoing enterprises. The 25-question model presented in the text provides a clear and comprehensive approach to completing a case project. Several additional considerations are discussed in the following sections.

    There are two different types of case studies in the text. The short, real-time cases provide company snapshots and resources for researching firm activities in real time. The longer, traditional cases provide detailed information about a particular situation facing an organization at a point in time. Traditional cases can be analyzed in the time frame in which they are presented— typically several years ago. Depending on the organization and key issues discussed, some can be brought to the present by supplementing the case with additional research.

    Preparing for the Case Project

    Case studies may be discussed in class, but they are often assigned as team projects that require additional research and analysis. The following suggestions should be considered, especially when approaching the case project as a team:

    • Start early: You should have a basic understanding of the strategic management process and the 25-question case analysis model before you begin your research. However, this does not mean that you cannot begin researching the company and the industry before you complete all of the chapters. Get acquainted with your company and its situation early. Most of your research can be done on the Internet, and the websites suggested later in this section can be helpful.
    • Do not “over-isolate” the steps in the research process: If you are analyzing a case as part of a team, you should exchange information frequently with your teammates. Regardless of the sections you focus on, you will probably uncover information that will be useful to team members working in different areas. It is also helpful to keep a copy of the 25 questions with you as you read and take notes as necessary. For example, if you are reading the annual report and come across some material of new technology affecting the industry, make a quick note of this under “technological forces” for future reference. While individual team members might concentrate their efforts in different areas, dividing the sections among team members and completing the work independently is discouraged because earlier sections must flow logically into later sections. Perform the steps in order!
    • Keep clear records of all potentially useful information you find: Print or save electronic copies of all articles that might be useful in your analysis, and make sure that these files contain complete bibliographical information for use in citing your sources.
    • Plan to spend a considerable amount of time reading and collecting information before writing the report: As you read more about a firm, its competitors, and its industry, the most prominent issues will usually become clear. This process takes time. Schedule frequent sessions of casual reading before you begin writing.
    • Investigate multiple sources of information early: Depending on the firm and industry you investigate, you will probably find several particular Internet sources of information to be most useful. Test many different Internet sources of information for your case at the outset to determine which ones are most promising.
    • Establish a timetable for completing various stages of the analysis, and agree to it in writing: Establish your own completion target for the project at least a few days before it is due, and set firm benchmarks for completing various parts along the way. Case projects typically suffer when 80% of the work is done in the last 20% of the time allotted. Moreover, written agreements with timetables can be invaluable if a team member is unwilling or unable to meet his or her responsibilities.
    • Communicate: Stay in touch with your team members and your professor as needed. If you have questions along the way, do not hesitate to ask for assistance.
    Researching the Case Project

    Each of the real-time cases provides a brief overview of an interesting company, identifies key case analysis tips and current issues, and provides links to several Internet sources of information on the organization. Each of the traditional cases provides detailed information about an organization, its industry, and challenges faced by the company. For traditional cases, your instructor may ask you to analyze the case in the time frame it was written or conduct additional research on the firm.

    In general, the most current information available on a large organization can be found online. Visiting the firm or one of its locations can be helpful as well, especially when assessing a retailer.

    The first Internet site of interest is the company website. Most major publicly traded firms provide extensive webpages that discuss the firm's business units, key products, financial position, and current issues it faces. The company website is an excellent place to start to learn about a company, and the links to press releases and/or investor information can be especially helpful. In addition, competitor websites can also be very useful sources of information. However, a firm's website is designed to promote the organization, not provide objective information.

    Additional sites may include websites for key competitors, industry associations, and trade journals. Most industries are represented by one or more industry or trade associations. These organizations provide useful information about trends and other issues to its member firms and may also publish a trade journal. An example of a trade association is the American Booksellers Association (, whose website provides a wealth of information and trends about the industry. Because trade associations represent the interests of an industry, their published views may not always be objective. Most trade associations do not require a subscription for current articles, although some require either a subscription or registration—often free—to access the entire site.

    The Internet is replete with a wide variety of unusual information sources. A dissatisfied customer may launch a website devoted to the dissemination of negative information about a company (see for an example). Individuals or organizations may post the results of their research studies on an organization or industry. These sources can be quite helpful in the research process, but their reliability must be considered. Links to such sites are provided in some cases.

    In addition to case-specific sources of information, the Recommended Strategic Management Research Links table, which is next, provides links to key Internet resources that can be helpful for conducting a strategic analysis on any company. This list is also available online at Research sites and URLs are always changing, so some of the sites included in the list may not be up to date. Moreover, the potential sources of information on the Internet is quite extensive, so your research should not be limited to these sites.

    Citing your sources is critical when preparing a case analysis. Whenever any information obtained from an external source is presented, the reference must be included at the appropriate point in the report, and complete bibliographical information must be provided. Whenever information is repeated verbatim, quotation marks must be used as well. Plagiarism—whether intended or not—is a serious issue with serious consequences.

    The popular business press reports on activities within most large firms. The best sources are usually available online although most charge for full access. The Wall Street Journal (, the Economist (, and Financial Times ( require subscriptions to access articles online, although brief free trial periods are often available. University libraries often have subscriptions to extensive databases such as ABI/INFORM, Hoover's, and LexisNexis, providing a wide range of search access to articles in many publications that would otherwise charge for that access. Other sources such as and provide free search access to articles in a variety of business and trade publications.

    ASAE allows you to find professional and trade associations for some industries; searching is not always easy on this
    Big Charts allows for easy financial comparisons of two
    The Business Journals offers links to articles in a number of business periodicals. Search by company name, keyword, or industry. Most articles come from local business periodicals in the United States, so information gleaned from this source may not be readily available offers links to articles in a number of business is a good source of business news, although many of the sites and links may not be
    Business Week is a popular business periodical. Free registration may be
    CEOExpress represents an elaborate array of links to business research sites. Some information requires a
    CNN Interactive News Search contains a free search of CNN news
    CNN Money provides a wealth of financial information.
    e-Commerce times is an excellent news source specifically for e-commerce. This can be very useful for firms heavily involved in
    The Economist is a premier information source for business research from a European perspective. A subscription is required for most information, but a free trial may be
    Edgar Database is the U.S. government site for company reports. This is not always easy to navigate, but the information is extensive. See for printable Edgar
    Europages contains information for researching firms in
    Fast Company is an excellent source for strategic management articles although most are on personalities or issues, not companies or
    Financial Times is a premier information source for business research from a European perspective. A subscription is required for most information, but a free trial may be
    FindArticles is an exhaustive search engine for articles from numerous
    Forrester Research is an excellent source for learning about business trends although many reports can be
    Fortune500 is a listing of America's largest firms. An article search is also available.
    The Globalist provides interesting information on the international business
    Google is a popular Internet search engine. Enter the names of companies/ industries for a
    Hoover's is an excellent source of company information and financial reports. This is one of the most comprehensive sites for case research, but complete access requires a subscription. Many college and university libraries have a license, but one must access the site through the library's
    Impact Articles provides an interesting array of articles although search results are
    Industry Week offers an eclectic array of articles of various companies— especially those in
    Internet Public Library is the starting point for an exhaustive series of links to find information about anything on the
    MagPortal is an exhaustive search engine for articles from numerous periodicals—many of them with free
    Marketing Power is a marketing-oriented site sponsored by the American Marketing
    Morningstar is an excellent source of financial information, including financial
    The Motley Fool provides information on many
    NAICS is the current North American industry classification
    Newswise is an interesting source of business news, often from unusual sources. Free registration may be
    PR Newswire contains news releases from more than 1,500 companies provided by PR Newswire during the past 3 years. This is a great way to access press
    The Public Register provides links to numerous annual
    Retailing Today is an excellent research source for retailers. Free registration is
    Reuters is an excellent source for business and other news (free subscription may be required)
    The Wall Street Journal is a premier source of business information. A subscription is required for most research, but a free trial may be available. Articles over 1 month old are not available free of charge at the website.
    The Washington Times Business website contains current business
    Yahoo! Finance provides firm overviews, financial information, and more.
    Yahoo! Business News is one of the oldest and most popular news searches on the Internet.

    Recommended Strategic Management Research Links

    Finalizing Your Report

    Professors use different grading schemes for evaluating the quality of a case analysis. Nonetheless, the extent to which of the 25 questions identified in the text are addressed accurately and in detail will likely be a major factor in the assignment of a grade. Case analysis boxes throughout the chapters address each of these questions in detail:

    • Introduce the organization. Is the case well organized and cited?
    • What is the specific industry? Identify the competitors.
    • What companies have succeeded and failed in the industry, and why? What are the CSFs?
    • What is the potential profitability of the industry?
    • What political/legal forces affect the industry?
    • What economic forces affect the industry?
    • What social forces affect the industry?
    • What technological forces affect the industry?
    • What is the current firm-level strategy?
    • What is the current business-level strategy?
    • What are the business strategies of the major competitors?
    • What is the current marketing (functional) strategy?
    • What is the financial position and (functional) strategy of the organization?
    • What are the current production and purchasing (functional) strategies?
    • What are the current strategies in other functional areas, such as human resources (HR) and information systems?
    • What strengths exist for the organization?
    • What weaknesses exist for the organization?
    • What opportunities exist for the organization?
    • What threats exist for the organization?
    • What strategic alternatives are available to the organization?
    • What are the pros and cons of these alternatives?
    • Which alternative should be pursued and why?
    • How should this alternative be implemented?
    • How should this alternative be controlled?
    • What crisis events should the firm anticipate? What are the future prospects for the company?

    After a draft of the case analysis has been prepared, it is useful to reconsider each of these questions concerning the extent to which the analysis does the following:

    • Provides a clear and accurate answer to the question
    • Provides as much detail as possible to understand the issues
    • Provides citations in proper format for all sources used
    • Follows the guidelines presented in the text and specifically in the case analysis box for that question

    In addition, consulting with your professor concerning grading policies, formats for oral and/or written reports, and other issues unique to each situation is strongly suggested.

    Real-Time Cases

    Real-time cases are short narratives that facilitate discussion on key strategy issues or serve as a basis for additional research. Thirty real-time cases are provided in this book. Questions are provided to spark interest on some of the more salient challenges facing each company. The suggested websites can help bring them up to date, but these links represent only a starting point for additional research.

    The following real-time cases are included:

    • Allstate
    • American Express
    • Anheuser-Busch-InBev
    • AutoZone
    • Avon
    • Bank of America
    • Bed Bath & Beyond
    • Stanley Black & Decker
    • Cici's Pizza
    • Costco
    • Dell
    • Delta Air Lines
    • Dollar Tree
    • FedEx
    • Ford
    • Home Depot
    • International Paper
    • Jack in the Box
    • Kroger
    • Lands' End
    • Mattel
    • Nike
    • Papa John's
    • Pfizer
    • Southwest Airlines
    • Starbucks
    • Walgreens
    • Wal-Mart
    • Yum! Brands
    Traditional Cases

    Traditional cases are more detailed than real-time cases. These are self-contained but can be updated with additional research as well. The following traditional cases are presented in this text:

    • Bob's Supermarket
    • Costco
    • Dollar General
    • Family Dollar
    • General Electric
    • Kapai
    • Kodak
    • Macy's, Inc.
    • Netflix
    • Skoda Auto
    • Staples
    • Toyota
    Real-Time Cases
    Case 1: Allstate

    Allstate was founded in 1930 as a subsidiary of Sears. As the giant retailer embarked on its great expansion, Allstate sold auto insurance through all of the new stores. Following World War II. the popularity of the automobile in the United States sparked continued growth for Allstate. In the late 1950s, Allstate added life insurance and continued to grow for the next several decades.

    In the 1980s, Sears became interested in expanding its financial services operations. The retailer sought to become a diversified financial services company, launching the Discover Card through Allstate's Greenwood Trust Company. Hard times followed for the retailer, however, especially on the traditional retail side of the business. Sears changed course and began to divest its financial holdings. Sears sold 20% of Allstate in 1993 and the remainder in 1995.

    In 2000, Allstate added online and telephone distributions and acquired Provident National Assurance Company. To reduce distribution expenses, Allstate eliminated 4,000 jobs that year: turned its agent-employees into independent contractors; and launched an integrated distribution system that allows customers to transact business via the Internet, telephone, or traditional agent.

    Allstate entered the car repair business in 2001 with its purchase of Sterling Collision Centers. An intense effort aimed at adding new Sterling outlets throughout the United States followed although some critics have suggested that an auto insurer owning a body shop constitutes a conflict of interest.

    Natural disasters have had a major impact on profit and loss in insurance companies like Allstate over the years. For example, the 2005 hurricane season resulted in substantial catastrophic losses in the insurance industry, including $5.67 billion for Allstate.

    Today, Allstate is the second-largest personal lines insurer in the United States behind State Farm. Although the firm maintains a global presence, Allstate has divested most of its unrelated holdings, particularly those outside of North America; its current focus is on the United States and Canada. Allstate's subsidiaries include Allstate Life and Allstate Protection. Allstate Financial provides life insurance and investment products aimed at affluent and middle-income consumers.

    Case Challenges
    • Allstate has chosen to concentrate its efforts on the United States and Canada. Is this a good strategic move? What opportunities and threats are associated with expansion into other parts of the world?
    • Evaluate Allstate's competitive position vis-a-vis rival State Farm, the industry leader. What can Allstate do to compete more effectively with State Farm?
    • How has the Internet—including instant access to insurance quotes and customer satisfaction data at sites such as—affected traditional insurance companies like Allstate?
    Internet Sites of Interest
    Case 2:

    In 1994, recent Princeton graduate and Wall Street executive Jeff Bezos left his job, began working out of the garage of his rented home, and raised several million dollars of start-up capital to launch an online retail business. The following year, he opened a 400-square foot office in Bellevue, Washington, and launched, billed as “the world's largest bookstore.” By 1996, Amazon had become one of the most successful web-based retailers, with revenues of almost $16 million.

    In 1997, Bezos took Amazon public and annual sales rose to $147 million. In that same year, Amazon became the sole book retailer on America Online's (AOL) public website and Netscape's commercial channel. In 1998, Amazon launched its online music and video stores, began to sell toys and electronics, and expanded its European reach with the acquisition of online booksellers in the United Kingdom and Germany. The company grew at a phenomenal pace in the years that followed.

    In 2000, Amazon launched a 10-year partnership with to co-brand a toy and video game store. In the following year, Amazon cut 15% of its workforce as part of a restructuring plan that also forced a $150 million charge. Amazon also partnered with now defunct Borders in 2001 to manage the rival's web operation. AOL invested $100 million in Amazon in 2001, and in the fourth quarter of 2001, Amazon showed its first profit. Rapid growth has continued throughout the mid-2000s.

    Amazon introduced the Kindle e-reader in 2007 and was selling more Kindle e-books than print books in 2011. The firm also expanded its online reach by engaging in a number of partnerships and by acquiring in 2009 and Quidsi and Woot in 2010. Amazon has grown exponentially, increasing revenues from about $11 billion in 2006 to more than $34 billion in 2010.

    Today, Amazon offers a wide variety of products in addition to books, including free electronic greeting cards, online auctions, CDs, videos, DVDs, toys and games, electronics, kitchen-ware, and computers. The company competes with publishers, distributors, manufacturers and physical-world retailers.

    Case Challenges
    • How would you define Amazon's industry? What difficulties do you encounter identifying primary competitors and key lines of business?
    • There has been a general trend toward “bricks and clicks”—the combination of Internet and traditional retailing outlets. How has Amazon succeeded as an e-tailer without brick-and-mortar operations?
    • Given its Internet base, can Amazon's success be easily duplicated by copying its web materials? If so, why has Amazon been so dominant in recent years?
    • With myriad websites that offer price comparisons that exist for book and other e-tailers (e.g.,, is it possible for Amazon to maintain a strong customer base without an extreme emphasis on low prices?
    Internet Sites of Interest
    Case 3: American Express

    American Express was formed in 1850 as a delivery services company but soon emerged as a leader in travel-related services. In 1868, the firm developed a money order to compete with the government's postal money order. In 1891, American Express introduced the notion of traveler's checks.

    During World War I, the U.S. government nationalized and consolidated all express delivery services. After the war, American Express incorporated as a provider of overseas freight and financial services and exchange provider. The famous American Express charge card was introduced in 1958. The firm acquired Fireman's Fund American Insurance (which it later sold) and Equitable Securities in 1968.

    Under the leadership of James Robinson, chief executive officer (CEO) from 1977 to 1993, American Express bought brokerage Shearson Loeb Rhoades in 1981 and investment banker Lehman Brothers in 1984, establishing a Shearson-Lehman business unit. Its 1987 launch of Optima, a revolving credit card (as opposed to its traditional charge card), did not succeed. Following mounting losses, Harvey Golub was appointed CEO in 1993 and charged with turning around the firm.

    In 1994, American Express divested its brokerage operations (as Shearson) and its investment banking (as Lehman Brothers). In 2001, the firm suffered from bad investments in below-investment grade bonds, resulting in a $1 billion loss. In addition, the firm's employees at its New York City headquarters located across from the World Trade Center were displaced by the 2001 terrorist attacks. Its headquarters did not reopen until May 2002.

    American Express has been active in acquisitions, divestments, and partnerships throughout the past decade. In 2004, the firm partnered with Industrial and Commercial Bank of China to issue its branded credit cards in that country. In 2005, American Express sold its American Financial business (formerly American Express Financial Advisors), the firm's insurance and investments arm.

    American Express experienced significant losses in 2008 and 2009 as a result of the financial crisis. The company received $3.4 billion in TARP (Troubled Asset Relief Program) funds in 2009 and repaid the amount within a few months. The firm has remained relatively cautious since then, trimming jobs in 2010 and again in 2011.

    Today, American Express remains a leader in global travel, traveler's checks, and credit cards. The firm has almost 100 million cardholders and more than 2,200 locations in more than 200 countries and is the world's largest issuer of traveler's checks. Approximately 80% of its revenue is derived from the United States.

    Case Challenges
    • How has the financial crisis altered the competitive position for American Express? Explain.
    • The American Express card is not as widely accepted as those of its rivals Visa and MasterCard. How can American Express differentiate its credit card from these two competitors as well as a host of retailer-affiliated cards?
    • Should American Express seek future growth in the United States or in other countries?
    Internet Sites of Interest
    Case 4: Anheuser-Busch InBev

    George Schneider founded Anheuser-Busch in St. Louis in 1852. In 1860, the brewery was sold to Eberhard Anheuser and several other investors, although Anheuser later bought out the others. Adolphus Busch married into the family in 1861—hence the Anheuser-Busch connection.

    Budweiser was first introduced in 1876. By 1907, production peaked at approximately 1.6 million barrels per year. Between 1919 and 1933, the company survived Prohibition by producing such products as malt syrup, ice cream, and even a chocolate beverage. Following the end of Prohibition, sales climbed again, reaching 2 million barrels per year by 1938 and 3 million by 1941.

    Anheuser-Busch acquired the St. Louis Cardinals baseball team in 1953. In 1957, Anheuser-Busch passed Schlitz as beer industry revenue leader. In 1959, the Busch Entertainment theme park division was established. Throughout the 1950s, 1960s, and early 1970s, new breweries were periodically added, with production reaching 30 million barrels by 1974.

    Anheuser-Busch launched its Eagle Snacks unit in 1982 and introduced Budweiser in the United Kingdom and Japan in 1984 through licensing agreements. In 1996, the company sold the Cardinals baseball team and stadium for $150 million and closed its Eagle Snacks unit, completing its departure from the food business. Anheuser-Busch continued its global activity in the 1990s, acquiring interests in brewers in Mexico in 1993, in China in 1995, and in Brazil and Argentina in 1996. Company growth was steady throughout the 1990s and 2000s.

    Belgian-Brazilian multinational beverage company InBev acquired Anheuser-Busch in 2008. At that time, Anheuser-Busch led the U.S. beer market with 30 different varieties, including Budweiser, the nation's top-ranked beer. Anheuser Busch also produced Bud Light, Michelob, Busch, and an array of specialty brews and also operated several theme parks including Busch Gardens and SeaWorld. InBev was the largest brewer in the world, boasting a 25% market share globally. The merged firm—Anheuser-Busch InBev—employs over 100,000 workers throughout the world, generates about $40 billion in total revenues, and is the dominant brewer globally.

    Case Challenges
    • The merger of global brewing giant InBev with Anheuser-Busch created an even more dominant global brewer, Anheuser-Busch InBev. Evaluate the pros and cons of the merger since 2008.
    • Does the growth of microbreweries (i.e., small-scale brewers) pose a serious threat to Anheuser-Busch InBev?
    • To what extent can Anheuser-Busch InBev control or influence public sentiment concerning such social issues as drinking and driving, underage drinking, and alcohol abuse?
    Internet Sites of Interest
    Case 5: AutoZone

    Joseph “Pitt” Hyde opened the first Auto Shack auto parts store in 1979 in Forrest City, Arkansas. Having served on the board of directors at Wal-Mart for 7 years, Hyde built on the big box's business model and concentrated on smaller markets in the South and Southeast, emphasizing service and everyday low prices. The auto parts retailer enjoyed early success and grew to almost 200 stores by 1984. Shortly thereafter, the Duralast private label was launched, and the company changed its name to AutoZone. By 1991, the retailer had amassed nearly 600 stores and went public. Sales topped $1 billion in 1992.

    John Adams replaced Hyde as CEO and chairman in 1997. In 1998, AutoZone acquired Chief Auto Parts, converting its 560 stores—mostly in California—into AutoZones the following year. The company also acquired Adap's 112 Auto Palace Stores in the Northeast. In the early 2000s, emphasis shifted from acquisition to internal growth. In 2003, AutoZone amassed 12% of the $36 billion DIY automotive aftermarket. By 2004, AutoZone had grown into the leading automotive aftermarket retailer with over $5 billion in annual revenues.

    AutoZone stores sell parts under a variety of brand names and private labels and offer diagnostic testing services, but they do not sell tires or perform repairs. A typical store stocks over 20,000 parts. Most AutoZone stores are freestanding with the remainder located in strip malls.

    AutoZone targets the do-it-yourself (DIY) consumer with cars more than 7 years old (i.e., what the company calls OKVs—“our kind of vehicles”). Today, the company also continues to grow its do-it-for-me business by selling to professional repair shops through its AZ Commercial program, although not all stores participate in this endeavor. Future prospects for both segments bode well for AutoZone, however, as continued steady growth is projected in both the DIY and the do-it-for-me segments.

    Today, AutoZone operates about 4,400 retail auto parts stores in the United States and Puerto Rico and about 250 in Mexico. Advance Auto Parts is number two in the industry with over $3 billion in sales and about 3,000 stores. Key competitors include Pep Boys, Advance, and O'Reilly, as well as discount retailers like Wal-Mart and Target. Although the firm has made several acquisitions, AutoZone emphasizes internal growth, opening about 150 to 200 additional stores per year.

    Case Challenges
    • Does AutoZone perform best in a down economy? Explain.
    • Is automotive aftermarket retail an attractive industry? Why or why not?
    • How can AutoZone differentiate itself from rivals O'Reilly Automotive and Advance Auto Parts?
    • Is international expansion an attractive alternative for AutoZone? Why or why not?
    Internet Sites of Interest
    Case 6: Avon

    Avon Products, Inc., is a global manufacturer and marketer of beauty and related products, including cosmetics, toiletries, fragrances, jewelry, gifts, home furnishings, and health and wellness offerings. Unlike most of its rivals, Avon's business is comprised primarily of Internet and direct selling by over 6 million independent contractors worldwide who serve as company representatives. Headquartered in the United States, Avon operates in over 110 countries, including Canada and Mexico, as well as in other parts of Latin America, Europe, and Asia.

    Avon was launched in 1916 and later began to emerge as one of the most successful beauty and cosmetic marketers in the world, primarily supported by housewives who sold the products as a means of generating extra income. By 1970, Avon had grown into the undisputed world leader in cosmetics. In the mid-1970s, however, the company suffered as a global recession made its products less affordable and women in the West began to leave home in search of full-time employment. Following this period, Avon began to market more intently to younger women and teenagers and even launched the slogan, “It's not your mother's makeup.”

    In the late 1980s and early 1990s, Avon expanded its product line considerably, introducing Avon Color cosmetics in 1988, preschool toys and sleepwear in 1989, and apparel in 1994. “Avon calling” has been central to the New York City-based firm's advertising campaigns in recent years.

    Lately, however, slow growth in the United States has led to another “makeover” for Avon, as the company began to drop a number of product lines in favor of brands with greater global promise. In 2001, the company revised its website, allowing Avon reps to sell products through their own personal websites with assistance from the site. In 2002, Avon announced a $100 million investment in research and development (R & D) aimed at fostering a greater global presence. In the mid-2000s, Avon launched a new cosmetics line called “mark” targeted to the ages 16 to 24 category. New York Yankees star Derek Jeter has promoted Avon's men's fragrance Driven.

    The late 2000s and early 2010s has been a period of change for Avon. The firm has expanded globally, including a significant presence in Brazil, China, Russia, and the United Kingdom. Avon focused on cost-cutting as well, however, including a reduction of more than 10% of its workforce in 2008.

    Avon has been promoted as the “company for women” by providing business opportunities for women worldwide and supporting women's charities. Part of the firm's mission is to develop its Avon Foundation into the largest women's foundation in the world. The group actively supports a number of projects associated with economic empowerment and health issues.

    Case Challenges
    • How has Avon capitalized on growth outside of the United States? Should Avon continue to focus its growth efforts on international markets?
    • Is Avon's direct selling approach outdated? Why or why not?
    • What can Avon do to attract young consumers in a highly competitive industry?
    Internet Sites of Interest
    Case 7: Bank of America

    Bank of America is the third-largest bank by assets in the United States behind Citigroup and JPMorgan Chase. Following its 2004 acquisition of Fleet Boston, the bank boasted the most extensive branch network in the industry, encompassing over 5,700 locations and 17,000 ATMs throughout the United States. The firm's coverage is especially strong in California, Texas, and Florida. Bank of America also owns about one-fourth of one of Mexico's largest banks, Santander Central Hispano.

    Bank of America is a diversified firm, operating in four principal business segments. The most substantial segment is consumer and commercial banking and includes traditional banking services such as deposits, loans, credit cards, and the like. Bank of America offers brokerage and related services to institutional clients within the global corporate and investment banking segment, featuring its subsidiary, Bank of America Securities. Its asset management segment primarily serves institutional investors and individual investors with substantial portfolios. The firm also purchases stakes in various businesses through its equity investment segment.

    Bank of America was established in 1874 as Commercial National Bank, later to become American Trust Company, American Commercial Bank, and finally North Carolina National Bank (NCNB) in 1960. Following its expansion outside of North Carolina, NCNB renamed itself NationsBank in 1991. Acquisitions continued throughout the 1990s. The firm acquired Chicago Research & Trading in 1993, Boatmen's Bancshares in 1997, and Barnett Banks in 1998. Following a merger with BankAmerica in 1998, the new company was renamed Bank of America.

    In the early 2000s, however, emphasis shifted from external to internal growth. Today, Bank of America is aggressively expanding its number of branches, locating in retail establishments such as Wal-Mart and Starbucks. The firm's advertising campaigns emphasize highly full service, convenience, and accessibility. Bank of America is expanding its branch network and is aggressively targeting consumer deposits, supported by about $150 million on advertising.

    In September 2003, a New York attorney general's investigation into illegal after-hours trading implicated Bank of America's Nations Funds. In 2004, the company spent tens of millions of dollars in fines and repayments to settle with investors who may have lost money because of the improprieties.

    In the mid-2000s, Bank of America shifted its attention once again to external growth, acquiring broker-dealer Fleet Securities for $48 billion in 2004 and MBNA, the largest affinity credit card issuer in the United States for $35 billion in 2005. In 2006, it purchased a 9% stake in China Construction Bank and a 5% stake in General Motors (GM). While its global footprint continues to expand, Bank of America operates about 5,700 locations in the United States.

    Bank of America suffered substantial losses as a result of the 2008 financial crisis but also embarked on some opportunistic acquisitions, including troubled mortgage lender Countrywide and investment bank Merrill Lynch in 2009. Adding Countrywide made Bank of America the largest residential mortgage lender in the United States, but the acquisition posed challenges as well. Because Countrywide was a major player in the subprime loan crisis, the company was renamed Bank of America Home Loans.

    Case Challenges
    • Was Bank of America managed effectively during the financial crisis? Defend your response.
    • Although Bank of America's size offers a number of scale economies, is the firm vulnerable to smaller banks that offer a high degree of personal service?
    • In 2007, Bank of America decided to offer credit cards to individuals without social security cards, a group that is comprised primarily of illegal immigrants. Has this turned out to be a wise strategic move? Why or why not?
    Internet Sites of Interest
    Case 8: Bed Bath & Bevond

    Warren Eisenberg and Leonard Feinstein launched Bed 'n Bath in 1971 with one small linens store in New York and another in New Jersey. The firm expanded into two other states— California and Connecticut—by 1985, at which time its first successful superstore was launched, a format that became a prototype for all future outlets. The company changed its name to Bed Bath & Beyond (BBB) in 1987, went public in 1992, and quadrupled its total retail square footage between 1992 and 1996.

    BBB is a nationwide chain of superstores selling domestics merchandise and home furnishings, including large selections of department-store quality, brand-name, and private-label products. The company's domestics merchandise line includes items such as bed linens, bath accessories, and kitchen items. BBB's home furnishings line includes items such as cookware, general housewares, cutlery, glassware, and general home furnishings. The firm benefited immensely from the demise of former rival Linens 'n Things in 2007.

    BBB operates about 1,000 stores, each averaging about 42,000 square feet, with some stores much larger than others. BBB emphasizes service, selection, and everyday low prices. In addition to BBB stores, the firm operates 70 Christmas Tree Shops, 55 Buy Buy Baby stores, and 45 Harmon discount health and beauty shops. The company continues to grow steadily, with a recent emphasis on international markets. BBB launched its first store in Canada in 2007, where it currently operates more than 20. It has also established a joint venture with Mexican retailer Home & More.

    Management attributes its success in part to the freedom it gives its store managers with regard to inventories, new products, and layouts. The firm's decentralized structure allows store managers to have more control than their counterparts at other retailers. The company ships merchandise directly to retail outlets, eliminating the expense of a central distribution center and reducing warehousing costs.

    Case Challenges
    • Is the industry for BBB limited to other specialty retailers? To what extent are discount retailers such as Wal-Mart and Target prime competitors of BBB?
    • Is BBB likely to remain a successful retailer without a substantial emphasis on Internet business?
    • Is BBB pursuing a low-cost, a differentiation, or a combination business strategy? Explain.
    Internet Sites of Interest
    Case 9: Stanley Black & Decker

    Stanley has been a prominent manufacturer of high-quality tools since 1843. Stanley's reputation has been a key strength and has contributed to its success throughout the years. Black & Decker has been a leading producer of power tools and accessories in the United States since its inception in 1910. The two firms merged operations in 2010 to form Stanley Black & Decker.

    Stanley Black & Decker markets its products worldwide, emphasizing the United States, the United Kingdom, and Latin America with recent ventures into Europe and Asia. Best known for its Black & Decker, Stanley, and DeWalt brand names, the firm also produces Pfister plumbing products, Kwikset security hardware, Snake Light flashlights, DustBuster vacuum cleaners, and a variety of electric lawn and garden tools, including edgers and trimmers.

    Most of the firm's products are sold through retailers, with home improvement giants Lowe's and Home Depot accounting for approximately 10% of the company's revenues. A limited number of its products are distributed through Wal-Mart. Stanley Black & Decker maintains a small number of reconditioning centers and factory outlets where new and refurbished products are sold directly to the public.

    Today, Stanley Black & Decker boasts combined revenues of about $10 billion globally with manufacturing facilities in the United States, Mexico, China, Brazil, and the United Kingdom. Black and Decker products have been targets in the United States because of outsourcing concerns with production shifting from the United States primarily to China throughout the 2000s and early 2010s.

    Case Challenges
    • To what degree is Stanley Black & Decker's success contingent on its distribution through home improvement giants Home Depot and Lowe's, as well as discount retailers such as Wal-Mart and Target?
    • Is international growth an attractive option for Stanley Black & Decker? Why or why not?
    • Could Stanley Black & Decker experience a backlash from American consumers if it continues to move manufacturing operations abroad, particularly to China?
    Internet Sites of Interest
    Case 10: Cici's Pizza

    Cici's Enterprises was founded in Plano, Texas, in 1985. The firm operates and franchises a chain of Cici's Pizza restaurants in the United States. Most locations can be found in strip malls in suburban areas of the Southeast and Southwest. Known for its “Hi, welcome to Cici's” greeting, the restaurant chain seeks to offer a fun, economical, and family-oriented environment.

    Cici's is known for its all-you-can-eat buffet including pizza, salad, dessert, and other select items. Product selection is limited, typically with only several salad and specialty dessert options, but the price is usually around $6, consistently lower than buffets offered at competitors like Pizza Hut. Moreover, Cici's offers its buffet all day, every day.

    Patrons who choose to eat inside a Cici's restaurant must order the buffet at the counter. Customers can request special pizzas, but only as part of the buffet. Menu service is available for take-out, but delivery is not offered. Cici's offers a number of unusual items from time to time, including macaroni and cheese pizza and Bavarian cream dessert pizza.

    Cici's success is built on the firm's clearly defined business model. By offering only a self-service buffet and limited nonpizza items, Cici's keeps costs at a minimum. Cici's low costs translate into low prices as well. In most markets, competitors offering pizza buffets do so only at lunch or on certain days and typically charge more. Although its pizza quality is widely viewed as modest, its simplicity, speed, and price is usually unmatched by its rivals.

    The company's growth rate has been extraordinary. Over 600 Cici's Pizza locations are in operation, and the company plans to double this number over the next 10 years. Most units are franchised, a model Cici's is likely to exploit in its continued growth effort.

    Case Challenges
    • What is the basis for Cici's cost leadership position? Can competitors duplicate this basis? Explain.
    • What is responsible for Cici's rapid growth rate? Is this pace likely to continue in the future?
    • What competitive vulnerabilities does Cici's face?
    Internet Sites of Interest
    Case 11: Costco

    The first Price Club Warehouse was opened in San Diego in 1975 by Sol Price, Robert Price (Sol's son), Rick Libenson, and Giles Bateman. The firm originally sought to sell merchandise in volume at deep discounts only to small businesses but later expanded the concept to include government, utility, and hospital employees. By 1980, the company had four stores in Arizona and California and went public.

    During the 1980s, the company expanded to the eastern United States and Canada. In 1988, Price Club acquired grocery distributor A. M. Lewis and launched Price Club Furnishings. In the early 1990s, however, competition intensified from Sam's Club and Pace. In 1992 and 1993, Price Club's joint venture with retailer Controladora Comercial Mexicana led to the opening of two Price Clubs in Mexico City.

    Later in 1993, Price Club merged with Costco Wholesale. During the 1990s, the firm expanded its international interest, launching outlets in Great Britain, Japan, and South Korea. Price Club changed its corporate name to Costco Companies in 1997 and again to Costco Wholesale in 1999.

    Costco is the largest wholesale club operator in the United States, operating about 600 membership warehouses—each amassing about $150 million in sales—and serving about 65 million members. Most of its outlets are located in the United States and Canada, but additional stores can be found in Mexico, Japan, Australia, South Korea, Taiwan, Puerto Rico, and the United Kingdom. Membership costs about $50 per year and is available to businesses and individuals.

    Costco's business model emphasizes rock bottom prices on a limited selection of mostly brand-name products in a wide range of merchandise categories. A typical outlet carries about 4,000 products ranging from alcoholic beverages and appliances to fresh food, pharmaceuticals, and tires. Costco also offers its members insurance, financial, and travel services. Its subsidiary, Costco Wholesale Industries, operates manufacturing business in food packaging, meat processing, and jewelry to support retail efforts.

    Much of Costco's success can be attributed to its ability to minimize costs by negotiating fiercely with suppliers. The company never requires its members to pay more than 14% above the firm's cost for goods.

    Jim Sinegal stepped down as CEO in 2012 and was succeeded by chief operating officer (COO) Craig Jelinek.

    Case Challenges
    • What are the strategic limitations faced by membership clubs?
    • Does Costco compete with nonmembership retailers such as Wal-Mart and Target? Why or why not?
    • How does Costco's business model differ from that of traditional discount retailers? Is this model likely to be more successful in the coming years?
    • Can Costco compete successfully on a large scale outside of the United States and Canada? Why or why not?
    Internet Sites of Interest
    Case 12: Dell

    By the time Michael Dell enrolled at the University of Texas in 1983, he was already a successful entrepreneur. Although his initial academic interest was not business, Dell launched a venture selling random-access memory (RAM) chips and disk drives for IBM personal computers out of his dorm room. When his business grossed $80,000 a month the following year, he decided to drop out of college and focus on his new enterprise full-time.

    Dell decided to build and market IBM clones directly to consumers rather than through retail outlets. His direct marketing strategy resulted in price reductions of about 40% below retail prices. International sales offices were added in 1987 and Dell went public the next year. In 1991, Dell began to allow select retailers to sell its PCs at direct-mail prices, a strategy it would abandon several years later. In the following years, the firm opened markets in Latin America, Japan, and Australia. Dell also began manufacturing servers.

    In 1996, Dell began selling PCs through its website. Growth continued, and in 1998, the company increased manufacturing in the Americas and Europe and added its first production and customer facility in China. Growth continued and in 2004, founder and chairman Michael Dell was succeeded as CEO by company president Kevin Rollins. Michael Dell remained as chairman, however, and retook control of the company from Rollins in 2007.

    Dell began selling its PCs through retail stores again in 2007, a marked shift in its distribution strategy. Since that time, the firm has also made a number of acquisitions and has shifted most of its manufacturing activities from Austin, Texas, and other U.S. locations to facilities in Mexico and Asia.

    Dell has operations primarily in the United States, Canada, Latin America, Europe, the Pacific Rim, Japan, Australia, and New Zealand. Dell offers PCs, servers, storage devices, and a wide variety of hardware components, as well as integration, training, and support. Although the firm has sought to develop a number of new products, desktop PCs account for approximately 50% of revenues, with notebook computers accounting for approximately 25%. Dell has grown aggressively in parts of Asia, including India, China, and Malaysia. Today, Dell is the world's third largest supplier of PCs behind Hewlett-Packard (HP) and Lenovo.

    Case Challenges
    • Although Dell began selling PCs through retailers in 2007, the firm continues to rely heavily on direct sales to end users. How did and does Dell's marketing strategy differ from that of its major competitors such as HP and Lenovo?
    • Sales of personal computers grew rapidly in the 1980s and early 1990s but have leveled off in the 2000s. Is it possible for Dell to continue to grow in such a heavily saturated market?
    • Will Dell face significant problems of CEO succession when Michael Dell eventually leaves the firm?
    Internet Sites of Interest
    Case 13: Delta Air Lines

    Atlanta-based Delta Air Lines provides scheduled air transportation for passengers and cargo throughout the United States and around the world. Delta serves over 350 cities in more than 60 countries. Founded as the world's first crop dusting service in 1924, Delta has grown to become the third largest airline in the world behind United and American.

    The firm launched no-frills Delta Express in 1996 to compete with low-cost producers like Southwest and JetBlue. Although a success at first, costs began to rise rapidly in subsequent years. In 2003, Delta's revised its concept of a budget carrier and launched Song, a brand that subsumed Delta Express shortly thereafter. Most Song routes connect major Northeast cities with Florida leisure travel destinations.

    Like other global airlines, Delta was affected substantially by the 9/11 terrorist attacks. As a result, Delta quickly eliminated a number of flights and reduced its workforce.

    In 2002, Delta entered into a marketing alliance with Continental and Northwest Airlines that included code-sharing whereby two or more airlines list the same flight as their own to streamline passenger bookings. The alliance also allows for reciprocal frequent flier and airport lounge access arrangements.

    Delta currently operates a fleet of over 700 aircraft with U.S. hubs located in Atlanta, Cincinnati, Detroit, Memphis, Minneapolis, New York, and Salt Lake City. Passenger revenues account for over 90% of Delta's total revenues with cargo and other revenues accounting for the rest.

    Delta fell on hard times and sought bankruptcy protection in 2005. The airline emerged from bankruptcy in 2007, acquired Northwest Airlines in 2008, and completed the integration in 2010. Delta has been profitable in recent years, but continues to struggle with increased operating costs, particularly those tied to increases in the price of fuel.

    Case Challenges
    • Is Delta positioned well if another terrorist attack involving aircraft occurs in the United States? Explain.
    • As a full-service carrier, should Delta really be concerned with low-fare carriers?
    • Is Delta's future success inextricably tied to that of its rivals? If so, how can Delta differentiate itself from other full-service carriers?
    Internet Sites of Interest
    Case 14: Dollar Tree

    In 1986, Douglas Perry, Macon Brock, and Ray Compton founded Dollar Tree Stores as an offshoot of retail chain K & K Toys. K & K was divested in 1991 in order to place full emphasis on developing the dollar store concept. At that time, strategic challenges included shifting the company away from closeouts, growing the firm, and locating stores in more economical strip centers rather than shopping malls.

    Dollar Tree went public in 1995 and acquired Chicago-based retail chain Dollar Bills the following year. Dollar Tree acquired California retail chain 98 Cent Clearance Centers in 1998: New York state retail chain Only $One in 1999; and Pennsylvania-based, single price retail chain Dollar Express in 2000. The acquisition effort continued with Greenbacks, adding its 96 stores in 2003, and Deal$-Nothing Over a Dollar, adding another 138 stores in 2006. Dollar Tree continues to expand internally as well, opening fully automated distribution centers in an effort to improve its operating efficiency and support its ongoing expansion.

    Merchandise in a typical Dollar Tree includes candy and food, housewares, seasonal goods, health and beauty care, toys, stationery, and gift items. The company operates about 4,100 discount stores in 48 states with the following names: Dollar Tree, Dollar Bills, Dollar Giant, and Deal$. Stores are located primarily in high-traffic strip centers anchored by mass merchandisers and supermarkets. New stores also tend to be larger than older ones, approaching 15,000 square feet.

    Most of Dollar Tree's products are priced at one dollar; about 40% of its product line is imported from China. Sales of consumables—including food—have increased to about half of total revenues. To address this shift, Dollar Tree has added freezers and coolers in about half of its stores.

    Dollar Tree customers tend to be price-conscious and perceive the prices at other discount retailers such as Target and Wal-Mart to be excessive. Dollar Tree offers low prices and exceptional convenience due to small store layouts and the simplicity of checkout with most products costing one dollar.

    Case Challenges
    • Dollar Tree's initial growth was almost exclusively through acquisition. Is it likely to be an attractive option in the near future?
    • Why is Dollar Tree able to offer its products at prices below those of discount chains such as Wal-Mart and Target, firms with greater economies of scale?
    • With annual inflation, it will become more and more difficult for Dollar Tree to continue offering almost all of its products for $1? How might such a company ease into offering its products at higher prices? Would doing so undermine the company's image?
    Internet Sites of Interest
    Case 15: FedEx

    Between 1969 and 1971, Fred Smith secured $90 million in financing to launch Federal Express (now known as FedEx), a service that originally provided overnight and second-day delivery to 22 major cities in the United States. FedEx began delivery in 1973, and the company enjoyed immediate success. FedEx was the first major air transport firm to implement a “hub and spoke” system, whereby all packages were flown to a central location (Memphis) each night and redistributed by air to final destinations in the predawn hours. The airline shift from parcels to passengers and the strike at UPS in 1974 all contributed to the firm's early market share gains. FedEx went public in 1978.

    By the late 1980s, FedEx had begun to move internationally, purchasing Tiger International (also known as Flying Tigers) and carriers in Japan and Italy. In 1989, FedEx doubled its international volume. In 1995, FedEx created Latin American and Caribbean divisions and became the first U.S. express carrier to offer direct flights to China.

    In 1996, FedEx introduced the first Internet-based shipping management system, known as interNetShip. Another UPS strike in 1997 sent 850,000 packages a day to FedEx, creating more opportunities for the firm. In 1998, FedEx averted a pilot strike of its own, prompting the company to outsource more of its flights.

    In 2000, Federal Express adopted its nickname FedEx as its official company name. FedEx acquired Kinko's in early 2004 in an effort to serve a broader array of shipping and office-related needs, particularly those of small-business owners; stores were renamed FedEx Office in 2008. In 2007, FedEx acquired its Chinese partner DTW Group and launched the first 1-day guaranteed service in the country later in the year. FedEx expanded its presence in Mexico in 2011 with its acquisition of Servicios Nacionales Mupa, S.A. de C.V.

    Today, FedEx provides transportation, e-commerce, and supply chain management operations, including worldwide express delivery, ground small-parcel delivery, small quantity freight delivery, and supply chain management services. FedEx remains the world's leading express delivery company, with more than 60,000 drop-off locations, 690 aircraft, and about 50,000 vehicles, delivering over 3.5 million packages to about 220 countries and territories and from about 2,000 FedEx Office shops every business day. FedEx has even partnered with the U.S. Postal Service to provide air transportation for postal express shipments, an arrangement that allows FedEx to utilize post offices as critical package drop-off locations.

    Founder Fred Smith remains the CEO and owns approximately 6% of FedEx shares. Smith is known as a popular and cagey leader, both inside and outside of the company.

    Case Challenges
    • The Internet has alleviated the need for overnight delivery of many documents. How has FedEx survived and even prospered in the midst of this key technological change?
    • Should FedEx be partnering with a key competitor and protected government entity, the U.S. Postal Service? Why or why not?
    • Do FedEx and UPS offer the same delivery services, or has each chosen to focus on different forms of delivery and or customer needs? Explain.
    Internet Sites of Interest
    Case 16: Ford

    Henry Ford founded Ford Motor Company in 1903 in Dearborn, Michigan. In 1908, Ford assembly lines produced the company's first car, the Model T. Henry Ford is often quoted as saying that a customer could have a Model T in any color as long as it was black. By the late 1910s, more than one-half of all vehicles on the road were Fords. In 1919, the firm bought back all of its outstanding shares and did not go public again until 1956.

    Ford bought Lincoln in 1922, and the Model T was replaced with the Model A in 1932. Market share fell behind GM and Chrysler in the late 1930s, and Ford did not return to second place again until 1950. Ford introduced the infamous Edsel in 1958 and the popular Mustang in 1964.

    Ford, like other domestic automakers, was hurt by the oil crisis of the 1970s. The company responded by cutting its workforce and closing plants during the 1980s. Ford purchased 75% of Aston Martin in 1987 (and the remaining shares in 1994). In 1988, the company introduced the Ford Taurus and Mercury Sable, and its domestic market share increased to 21.7%.

    Ford diversified in the 1980s and 1990s, acquiring car rental agencies Hertz in 1994 and Budget in 1996 (which it sold the following year). Ford also established a one-third ownership stake in Mazda in 1997. During this time, international expansion was also evident. In 1997, Ford began building a minibus line in China. Ford purchased Volvo's auto manufacturing operations in 1999, as well as several other related businesses.

    In 2001, Ford announced a 50-50 truck-building joint venture with Navistar to produce a common medium-duty chassis customized for Ford and Navistar vehicles. In early 2002, Ford embarked on far-reaching cost-cutting measures, including the elimination of 35,000 jobs worldwide, the closure of three North American assembly plants, and the discontinuation of the Ford Escort, the Mercury Cougar, the Mercury Villager, and the Lincoln Continental. Ford continued to expand abroad, opening new facilities in China.

    After 5 years at the helm and a failed restructuring effort, Ford remained as chairman of the board but was replaced as CEO by Boeing executive Alan Mulally in 2006. Ford's “Way Forward” restructuring program was designed to cut costs in the company's North American operations—including health care expenses—trim production capacity, cut its workforce, and build more customer-focused vehicles. Ford struggled in the late 2000s but did not seek U.S. government assistance when GM and Chrysler pursued bankruptcy protection.

    Ford has since returned to profitability, propelled by a growing global footprint. Ford has developed strategic alliances in a number of countries, including Russia, China, Turkey, and Vietnam.

    Case Challenges
    • Is it necessary for Ford to produce and/or sell a large proportion of its vehicles abroad in order to maintain its strong domestic market position in the coming decade?
    • A number of analysts have suggested that world car makers will likely consolidate into only two or three within the next 20 years. Should Ford actively pursue any specific mergers and acquisitions at this point? Why or why not?
    • How can and should Ford address environmental concerns? Explain.
    Internet Sites of Interest
    Case 17: Home Depot

    Bernard Marcus and Arthur Blank founded Home Depot after losing their jobs in the home improvement industry in 1978. Home Depot focused on the needs of the DIY market, specializing in building materials and lawn and garden equipment. Three stores were launched in the Atlanta area in 1979, and four stores in South Florida were added in 1981. The firm posted sales of $50 million that year and went public. By 1983, Home Depot had opened stores in Louisiana and Arizona with total sales exceeding $250 million.

    Home Depot expanded into California in 1985 and by the following year had amassed a total of 60 stores and sales of $1 billion. Home Depot continued to grow and entered the northeastern United States and Canada in subsequent years, reaching 500 stores by 1997. Home Depot added a direct-mail interest by acquiring mail-order firm National Blind & Wallpaper Factory and direct-marketer Maintenance Warehouse.

    Home Depot launched Villager's Hardware stores in New Jersey in 1999, a 40,000-square-foot outlet designed to compete with traditional hardware stores. The firm also began to add large appliances to many of its stores. In 2000, Marcus and Blank became cochairmen, and former General Electric (GE) executive Robert Nardelli was named president and CEO.

    Aggressive expansion continued in 2001 when Home Depot added another 200 stores and acquired Total Home, a small home improvement chain in Mexico. Marcus and Blank stepped down as cochairmen, and Nardelli assumed the role in addition to his CEO responsibilities.

    Having abandoned its Villager's Hardware concept in the previous year, Home Depot opened its first small store—about 60,000-square-feet—in New York City in 2002. The firm continued its expansion into Mexico, acquiring Del Norte, a small chain in Juarez. Home Depot operates over 100 stores in Canada and has opened a business development office in China.

    Competitive pressure by Lowe's has caused Home Depot to aggressively upgrade its old stores while continuing its growth efforts, and contributed to CEO Robert Nardelli ouster in 2007. Nardelli was replaced by Frank Blake. Sales peaked in 2008 amidst the housing crisis and began to rise again in 2011.

    Today, Home Depot is the world's largest home improvement chain and second-largest retailer after Wal-Mart, operating approximately 2,250 stores throughout the Americas. Home Depot continues to focus on the DIY customer, with more than 40,000 products stocked in a 130,000-square-foot facility.

    Case Challenges
    • Is it necessary for Home Depot to emphasize both the DIY and contractor segments of the market to build and maintain economies of scale? Is one segment tied more closely to the general state of the economy than the other? Explain.
    • Has competitive pressure from Lowe's caused Home Depot to modify its business strategy? If so, how?
    • Do international opportunities exist for Home Depot beyond North America?
    Internet Sites of Interest
    Case 18: International Paper

    International Paper (IP) was launched in 1898 when 18 northeastern pulp and paper firms consolidated to reduce costs. Growth was not rapid in much of the 1900s, although the firm acquired a number of small, related businesses. Following some diversification in the 1960s and 1970s, IP began to refocus its efforts on paper and pulp. In the 1980s and 1990s, IP embarked on a series of key acquisitions, including office paper provider Hammermill Paper, paper manufacturer Arvey, composite wood products firm Masonite, and paper products firm Federal Paper.

    IP engaged in a restructuring effort after a loss in 1997. The firm sold $1 billion in assets and trimmed its workforce by about 10%. The following year, IP acquired Weston Paper & Manufacturing and Mead's distribution business. In 1999, IP acquired rival Union Camp for $7.9 billion.

    The acquisitions continued in 2000 when IP bought Shorewood Packaging for $850 million and Champion International for $9.6 billion. Interestingly, the firm restructured again in 2001, trimming another 10% of its workforce. In 2003, IP began an effort to sell about 17% of its timberland—about 1.5 million acres—to improve its financial position.

    At first glance, IP's myriad of acquisitions and divestments over the past decade may be difficult to comprehend. Divestitures alone between 2000 and 2002 totaled about $3 billion. However, a closer look reveals that IP has been aggressively acquiring businesses that support its core paper, packaging, and forest products focus, while divesting of businesses that may only have been tangentially related.

    Today, IP is the world's largest forest products company. IP is involved in a full array of production of printing and writing papers, pulp, tissue, paperboard, packaging, plywood, and other wood products. IP also processes forest products including pine lumber, engineered wood, laminates, and particleboard. Approximately three quarters of revenues are distributed somewhat evenly among paper packaging, paper distribution, and printing papers.

    IP has a number of international holdings including Papeteries de France, Scaldia in the Netherlands, and Impap in Poland. In addition, the firm controls about 9 million acres of forest in the United States and 900,000 acres in Brazil and Russia. In 2006, IP announced a job venture with Ilim Pulp, Russia's leading forestry products supplier. IP acquired Asian packaging firm Svenska Cellulosa in 2010, facilitating greater expansion into China. IP acquired U.S.-based Temple-Inland in 2012, enabling the firm to expand its packaging operations in North America.

    Case Challenges
    • During the past several years, IP has engaged in both rapid acquisition of highly related businesses and divestment of less related or unrelated businesses. Has this been an effective strategy?
    • Are economies of scale essential for firms in the forestry products industry?
    • What types of political or publicity problems associated with environmental concerns could IP face in the future?
    Internet Sites of Interest
    Case 19: Jack in the Box

    In 1951, Robert Peterson launched a chain of drive-thru restaurants located primarily in California, Texas, and Arizona. From the beginning, Jack in the Box restaurants featured a clown named Jack who greeted motorists ordering through a two-way speaker device encased inside Jack's head. Business operations have been conducted under various names and public, private, and subsidiary affiliations, including Foodmaker, Ralston Purina, and currently (public) Jack in the Box, Inc.

    Jack in the Box is known as a fast-food innovator, introducing the first breakfast sandwich and prepackaged portable salad. Whereas other fast-food restaurants are often hesitant to make major product line changes, Jack in the Box continuously modifies its offerings to provide customers with an ever-changing array of food items.

    In response to a well-publicized E. coli food poisoning incident in 1993, Jack in the Box implemented the industry's first comprehensive Hazard Analysis & Critical Control Points (HACCP) system for managing food safety and quality the following year. Jack in the Box continues to support tougher legislation to mandate food safety systems throughout the fast-food industry and actively partners with national consumer organizations to educate the public about the best techniques families can use to protect themselves against home-based food poisoning.

    In the mid-2000s, Jack in the Box began to emphasize pricier, more upscale items on its menu. The firm hopes to succeed with such higher-margin products as deli sandwiches while retaining its traditional customer base.

    Jack in the Box currently operates and franchises more than 2,200 restaurants in the western and southern United States, most of which are company-owned, as well as about 600 Qdoba Mexican Grill fast-casual restaurants. The restaurant targets the adult market with a broad and changing selection of distinctive, innovative products, including hamburgers, specialty sandwiches, tacos and other ethnic products, finger foods, breakfast foods, unique side items, and dessert items.

    Case Challenges
    • Jack in the Box is a well-known fast-food restaurant chain in many parts of the southwestern United States and California. However, the chain has not penetrated markets in much of the remaining sections of the country. Should Jack in the Box continue to concentrate its efforts on a limited geographical area?
    • Jack in the Box experienced a crisis in 1993 when four customers died from E. coli-tainted hamburgers. What could have been done to avoid this type of crisis? Was it managed effectively?
    • Jack in the Box owns a higher percentage of its stores than do most of its fast-food rivals. Should the chain continue this approach or does franchising offer greater prospects for growth?
    • In an industry where all competitors appear to market similar products with dollar menus, how has Jack in the Box differentiated itself from its rivals? What more can and/or should be done in this regard?
    Internet Sites of Interest
    Case 20: Kroger

    Bernard Kroger was only 22 when he launched the Great Western Tea Company in 1883. Growing to 40 stores in the Cincinnati area, the company became known as Kroger Grocery and Baking Company in 1902. Kroger continued to grow rapidly in the 1900s and 1910s, acquiring a number of smaller grocery stores. The company acquired Piggly Wiggly stores in six states in the late 1920s, as well as most of the rival's corporate stock (which it did not sell until the early 1940s). Kroger reached 5,575 stores before the stock market crash in 1929. Interestingly, Bernard Kroger sold his shares and retired just 1 year prior to the crash.

    After a brief decline in the number of stores during the Great Depression, Kroger began to grow again during the following three decades. In the 1970s, Kroger began to emphasize internal growth; Kroger added only a small number of new stores, but its total floor space nearly doubled.

    Kroger grew through acquisitions again in the 1990s, including Fred Meyer in 1999 and various units from Winn-Dixie, Hannaford, Albertsons, Farmer Jack, and Scott's Food and Pharmacy in the 2000s. Kroger acquired a majority stake of The Little Clinic—an in-store walk-in medical clinic—in 2008 and completed the acquisition in 2010.

    Today, Kroger is the leading supermarket chain in the United States but would be considered a distant second if Wal-Mart were included in this category. Kroger operates more than 2,500 supermarkets; 800 convenience stores; 125 supermarket fuel centers; and 430 jewelry stores. The company also manufactures and processes food for private label sales in its own supermarkets. Kroger stores are primarily located in the Midwest, South, and Western parts of the United States although it continues to acquire smaller supermarkets throughout the country, as well as poor performing outlets of its major competitors. Retail operations account for about 98% of company revenues.

    Case Challenges
    • What forms of differentiation are available to supermarket chains? What forms is Kroger using effectively?
    • Should Kroger continue its acquisition strategy in the future? Why or why not?
    • Does the Internet pose specific opportunities or threats to Kroger? How should Kroger prepare to meet these challenges?
    Internet Sites of Interest
    Case 21: Lands' End

    Copywriter Gary Comer launched Lands' End (the misplaced apostrophe resulted from an early typographical error in a company catalog and has remained ever since) in 1963, a Chicago-based mail-order supplier of sailboat hardware and equipment. In the mid-1970s. Comer began to emphasize clothing and soft luggage and subsequently eliminated sailboat hardware from the product line. In 1979, Lands' End moved its warehouse and fulfillment operations to rural Dodgeville, Wisconsin.

    In 1981, Lands' End launched a national advertising campaign to promote the company's brand name. The company grew following the campaign, emphasizing folksy catalog copy to sell traditional clothing in basic colors. Lands' End went public in 1986.

    In 1990, Comer stepped down as CEO and was replaced by Richard Anderson. During this same year, the firm experienced a significant inventory and fulfillment crisis. As sales declined in the early part of the year, Lands' End cut inventories and released a myriad of new products. Christmas orders surged, however, and Lands' End was unable to fulfill customer demand on its promised same-day basis. As a result, the company lost sales and incurred substantial shipping costs by fulfilling back orders at its own expense. The situation improved in the following year.

    In 1991, Lands' End introduced its first catalog in the United Kingdom and opened a distribution center there shortly thereafter. Former L.L. Bean executive William End was named CEO in 1993 but was replaced by Michael Smith in 1994. In the same year, the company was shipping small mailings of catalogs in France, Germany, and the Netherlands from its UK distribution center. Lands' End opened an outlet store in the United Kingdom and started selling products online in 1995. Product-line debates and sales declines led to another round of management changes in 1998, when David Dyer replaced Smith as CEO. Restructuring followed, as more than 10% of the salaried workforce was eliminated.

    Lands' End has been active on the web in recent years, including new sites in 1999 in Germany, Japan, and the United Kingdom. In the United States, products are marketed on the Internet, as well as through traditional catalogs. Lands' End is the leading online clothing retailer in the United States and arguably one of the most successful since the web's development.

    Emphasis is placed on traditionally styled apparel, bed and bath items, casual clothing for adults and children, accessories, shoes, and soft luggage. Lands' End is organized into four segments, including (1) adult apparel; (2) specialty goods; (3) international operations; and (4) shipping, handling, and gift wrap operations. The company seeks to provide the highest levels of quality and service in the industry along with an unequivocal ironclad guarantee.

    Sears bought Lands' End in 2002 for nearly $2 billion but has struggled to build the anticipated synergy. Sears and Kmart merged in 2004. Sears opened about 75 separate store-in-store Lands' End shops inside Sears retail stores in 2006 and another 24 Lands' End Canvas shops in Sears stores in 2010.

    Case Challenges
    • How and why did Lands' End succeed as an online retailer during the late 1990s and early 2000s when a number of Internet businesses failed?
    • How important is further international expansion to Lands' End's success?
    • Has Sears' acquisition of Lands' End helped or hindered the company? Explain.
    Internet Sites of Interest
    Case 22: Mattel

    Founded in 1948 by Elliot and Ruth Handler, Mattel, Inc., designs, manufactures, and markets a variety of toy products for infants, boys, and girls worldwide. Mattel distributes most of its toys through retailers, with a small percentage sold directly to the public. The company employs more than 25,000 people in 36 countries and sells products in more than 150 countries.

    Major brands of the world's number one toymaker in the world include the famous Barbie dolls, Hot Wheels and Matchbox cars, Magna Doodle, and Fisher-Price, as well as a number of products based on characters from Disney, Sesame Street, Barney, Blue's Clues, Winnie the Pooh, and even Harry Potter. About one-third of the company's revenues are derived from Barbie-related products. Major rivals include Hasbro, JAKKS Pacific, and LeapFrog.

    Mattel developed a number of core toy lines in the 1950s and 1960s. Barbie was introduced in 1959, joined by companion Ken in 1961. Mattel entered the preschool market with the See 'n Say talking toy in 1965 and launched Hot Wheels in 1968.

    In the 1970s, however, the company moved into several nontoy areas, acquiring Western Publishing and the Ringling Brothers and Barnum & Bailey Combined Shows circus. The Mattel Children's Foundation was established in 1978 and has since been funded exclusively by cash donations from Mattel.

    Mattel underwent a major restructuring in the mid-1980s when the company divested itself of all assets not related to toys and cut toy production capacity by about 40%. In the 1990s, the company acquired a number of related businesses, including Aviva Sports, International Games, Fisher Price, Tyco, Kransco, and American Girl (then, the Pleasant Company) in 1998. The company even made an unsuccessful bid for rival Hasbro in 1996. Mattel acquired The Learning Company in 1999 and sold it after mounting losses only a year later. During 2003, the Mattel Children's Foundation distributed cash grants of almost $6 million, including a grant of $5 million to the Mattel Children's Hospital at UCLA.

    Mattel announced the breakup of Barbie and Ken in 2004 after over 40 years together. Barbie sales declined in the months shortly thereafter and have suffered as a result of intense competition from rivals, including MGA Entertainment's Bratz dolls. Mattel announced a reorganization of its core toy business in 2005 and acquired Hong Kong-based electronic toy company Radica Games in 2006 in an effort to expand its appeal to older children and young adults. Mattel unveiled a new generation of Barbie dolls in 2007.

    Today, Wal-Mart, Target, and Toys “R” Us account for almost half of Mattel's sales. After peaking in 2007, sales declined for 2 years during the recession before increasing modestly in 2010. Non-U.S. revenues have increased steadily over the years to about 40% of the total in 2010.

    Case Challenges
    • Is Mattel too dependent on retail giants such as Wal-Mart, Toys “R” Us, and Target?
    • How important is it for Mattel to develop the “winning toy” each year? How important is the Barbie franchise in this effort?
    • Having secured the number one position in the United States, should Mattel focus its efforts primarily on global markets? Explain.
    Internet Sites of Interest
    Case 23: Nike

    Phil Knight and Bill Bowerman met at the University of Oregon in 1957. Five years later, they formed Blue Ribbon Sports to manufacture high-quality running shoes. In 1963, they began selling Tiger shoes—manufactured by Onitsuka Tiger in Japan—out of cars at track meets in the United States. The company became Nike in 1972, named for the Greek goddess of victory.

    Nike grew rapidly, securing 50% of the U.S. running shoe market by 1979; the company went public in 1980. The shoemaker expanded into other sports with Michael Jordan's Air Jordan in 1985 and the cross-trainer in 1987. Nike signed Tiger Woods to a $40 million endorsement contract in 1995 and continued its prowess into most major sports. Nike acquired competitor Converse in 2003 and currently competes with shoemakers Adidas, Reebok, and others. The firm continued to expand its product offerings to a variety of sports-related categories, including apparel, clothing bags, two-way radios, and even heart monitors. Nike's late 1980s advertising slogan “Just Do It” is still widely renowned as highly effective and memorable.

    Today, Nike is the number one shoemaker in the world and controls over 20% of the athletic shoe market in the United States. The company designs and markets shoes for basketball, baseball, golf, cheerleading, volleyball, and other sports—in addition to Cole Haan dress and casual shoes and a line of athletic apparel—in about 200 countries. Chairman, CEO, and cofounder Phil Knight still owns controlling shares in the company. Much of Nike's success may be attributed to its endorsements, including such notables as LeBron James, Kobe Bryant, Michael Jordan, and Roger Federer.

    Nike products are distributed through an estimated 23,000 retail sporting goods and shoe stores in the United States and 30,000 abroad. The firm operates about 700 company-owned stores, accounting for about 15% of revenues. The Nike brand accounted for 87% of revenues in 2010. Nike also operates 24 distribution centers worldwide, with approximately half of the company's revenues coming from outside of the United States. Nike veteran Mark Parker has been CEO since 2006.

    Because most of its shoes are manufactured by contractors in low wage companies, Nike has been a constant target of human rights activists citing poor wages and alleging child labor violations and substandard working conditions. Nike has taken steps to improve conditions, but critics continue to charge that more should be done.

    Case Challenges
    • How important are Nike's expensive endorsements to the company's success? Are the endorsements really worth the money? Explain.
    • To what extent, if any, is Nike liable for the actions of its manufacturing contractors with regard to employment issues and human rights violations?
    • Do small rivals like China's Li-Ning pose a serious threat to Nike? Could private label athletic shoes challenge Nike, especially in poor economic times?
    Internet Sites of Interest
    Case 24: Papa John's

    Papa John's is the third largest pizza chain in the United States behind Pizza Hut and Domino's. The company operates more than 3,500 pizzerias—about 600 company-owned and the remainder franchised—in the United States and about 30 countries. Papa John's typically offers delivery and carryout options but no restaurant seating. CEO John Schnatter founded Papa John's in 1985 at age 23 and owns 30% of the company.

    Papa John's has always distinguished itself from rivals by using only fresh ingredients, concentrating on quality, and limiting the number of nonpizza items on the menu. The company frequently comes out on top in national taste tests and customer service surveys. Papa John's has received the top customer satisfaction rating among all national fast food restaurant chains every year from 1999 to 2004, as measured by the American Customer Satisfaction Index.

    The Papa John's menu includes pizza with limited side items such as breadsticks and chicken strips. Bottled soft drinks are also available. Papa John's traditional pizza crust is made fresh, topped with 100% mozzarella cheese, meats with no fillers, and fresh vegetables.

    During 2003 and 2004, Papa John's has closed unprofitable stores, while selling a number of units to franchisees. Papa John's opened its first store in Russia in late 2003 and expanded its number of stores in Canada and the Bahamas in 2004.

    Papa John's operates quality control centers that offer economies of scale and deliver fresh ingredients to stores twice weekly. Domestic franchises are required to purchase dough and spice mix from the quality control centers or approved suppliers to ensure consistent quality.

    Its high customer satisfaction scores notwithstanding, Papa John's has secured only about 7% of the quick-service pizza segment, behind Pizza Hut with 20% and Domino's with 12%. Other competitors include Pizza Inn, Little Caesar's, and Cici's, a low-price buffet-oriented pizza chain. Individual Papa John's locations must also compete with various independent pizzerias that have only one or a few locations.

    Since the recession of the late 2000s, Papa John's has emphasized cost containment. About 170 additional franchises were added in the United States in 2010, but about 80 poor-performing units were closed. Recent global expansion has occurred in China, where Papa John's owns more than 20 locations.

    Case Challenges
    • Why does Papa John's seem to be pursuing a stability strategy in a market where some of its key competitors are expanding rapidly?
    • To what extent do low-cost pizza providers like Little Caesar's and Cici's pose a threat to Papa John's?
    • Should Papa John's develop eat-in restaurants like Pizza Hut or stick to delivery and carry-out service?
    Internet Sites of Interest
    Case 25: Pfizer

    Pfizer was founded in 1849 in Brooklyn, New York, by Charles Pfizer and Charles Erhart and was incorporated in 1942. The company experienced considerable growth during the half century following its incorporation. After its merger with Warner-Lambert in 2000 and the company's acquisition of rival Pharmacia in 2003, Pfizer became the world's largest research-based pharmaceuticals firm.

    During this same period, however, the company shed some of its non-pharmaceutical businesses, including the Schick-Wilkinson Sword shaving products division, the Tetra fish-care division, and the Adams confectionary business. Currently, Pfizer's subsidiaries include Warner-Lambert, Goedecke, and Parke-Davis.

    Pfizer currently markets eight of the world's top 25 drugs. The firm's best-known products include pain management drug Celebrex, erectile dysfunction therapy Viagra, antidepressant Zoloft, and cholesterol control aid Lipitor. In addition, Pfizer provides some over-the-counter (OTC) drugs, including BENGAY rubs, Neosporin antibiotic ointment, Unisom sleep aid, cold remedies Benadryl and Sudafed, and a variety of skin and eye care products. Pfizer also has a veterinary products division.

    In 2003, Pfizer amassed $45 billion in sales worldwide, well ahead of its closest rival GlaxoSmithKline. The company depends heavily on a limited number of highly successful drugs, however. In 2003, ten different drugs accounted for over 80% of the firm's sales.

    Pfizer's growth and success may be attributable to a number of factors, including the firm's recent acquisitions and its ability to work effectively within various government regulations. The company has enjoyed substantial success marketing its prescription drugs directly to consumers. Pfizer has also been able to leverage its R & D efforts by developing a number of highly successful and lucrative prescription drugs. In an industry recognized for its R & D capabilities, Pfizer is known as a leader.

    One of Pfizer's most visible drugs is the “little blue pill” Viagra, which received U.S. Food and Drug Administration (FDA) approval in 1998. Pfizer enjoyed market dominance at first with this product, but intense competition from rivals, including Bayer's Levitra and Lilly's Cialis, ensued shortly thereafter. Nonetheless, the product name remains a household word in the United States and many parts of the world. Three drugs—(1) cholesterol-lowering Lipitor, (2) Norvasc, and (3) Zoloft—account for a significant percentage of overall revenues.

    Pfizer acquired pharmaceutical firm Wyeth in 2009 and was able to reduce its workforce by 15% as part of the integration. Pfizer agreed to a $2.3 billion settlement later in the year to settle allegations that it improperly marketed four drugs, including painkiller Bextra. The penalty was the largest health care fraud fine at the time.

    Case Challenges
    • Evaluate the effectiveness of Pfizer's recent acquisitions and divestments?
    • How can Pfizer maintain its leadership position in the world pharmaceutical industry?
    • Identify the ethical considerations that are especially prominent in the pharmaceutical industry. How has Pfizer fared with regard to these factors?
    Internet Sites of Interest
    Case 26: Southwest Airlines

    Texas businessman Rollin King and attorney Herb Kelleher founded Air Southwest in 1967 as a regional airline linking Dallas, Houston, and San Antonio. Southwest made its first scheduled flight in 1971 and passed the $1 billion revenue mark in 1989. Today, Southwest Airlines operates about 3,400 flights each day and is the largest airline in the United States based on passengers carried.

    Southwest is a classic no-frills airline although service is generally perceived to be excellent and on-time performance rivals or exceeds its larger peers. Meals are not served although passengers are encouraged to bring their own food on the plane. In addition, there are no reserved seats. Each passenger is allowed to board and select a seat based on his or her arrival time at the gate. Southwest operates out of smaller airports whenever possible.

    Southwest was the first carrier to establish an Internet home page and sells a substantial portion of its tickets through its own website. Southwest spends about $1 to book a ticket online, compared to $6 to $8 per ticket when booking through agents. The airline's frequent-flier program, known as Rapid Rewards, is among the most generous in the industry.

    Southwest has enjoyed 38 consecutive years of profits, including 2001 when the 9/11 terrorist attacks riveted other American carriers into deep losses. The airline has been the only major U.S. carrier to avoid layoffs and maintain a full flight schedule since that time. The company even began hiring additional employees in early 2002.

    Southwest is known for its fun-loving, service-oriented culture. Every flight attendant seems to be an amateur comedian, an approach that subsided after 9/11 but reemerged a few years later. Chairman Herb Kelleher, who stepped down as CEO in 2001, helped establish a reputation for the company as one of the top employers in the United States. Fortune typically recognizes Southwest as one of the most admired companies in its annual surveys. Southwest is nearly 85% unionized but has experienced only one strike.

    Southwest acquired AirTran in 2011, giving the airline a foothold in Atlanta, the world's most traveled airport.

    Case Challenges
    • Because Southwest competes primarily in short-haul routes at low fares, should traditional carriers such as American and Delta be considered as primary competitors? What about other transportation providers such as Amtrak and Greyhound?
    • Southwest was the only major U.S.-based airline to turn a profit in 2001. Why?
    • How does Southwest's acquisition of AirTran alter the firm's competitive landscape?
    Internet Sites of Interest
    Case 27: Starbucks

    Starbucks was founded in 1971 in Seattle by Gordon Bowker, Jerry Baldwin, and Ziv Siegl. By 1982, Starbucks had five retail stores and was selling high-quality whole bean and ground coffee products to restaurants and espresso stands in the Seattle area. In that same year, Howard Schultz joined Starbucks to manage retail sales and marketing. After convincing the firm to open a downtown Seattle coffee bar in 1984, which was successful, Schultz left Starbucks to open his own coffee bar, Il Giornale, which served Starbucks coffee. Schultz acquired Starbucks in 1987, and locations were opened in Chicago and Vancouver. The company published its first mail-order catalog in 1988. In 1991, Starbucks became the first U.S.-based privately held company to offer stock options to all employees. The company went public in 1992.

    Today, Starbucks' coffee shops and kiosks can be found in a variety of shopping centers, office buildings, bookstores, and other outlets. Starbucks' product line includes food and beverage items such as coffee, coffee beans, and pastries, as well as accessories such as mugs and grinders. Starbucks' beans are also marketed to restaurants, airlines, hotels, and directly to the public through mail order and online catalogs. Interestingly, Starbucks is capitalizing on taste changes that predate the company's founding. In the early 1960s, American adults consumed an average of three cups of coffee each day.

    Consumption has declined to less than two cups, with only half of American adults as coffee drinkers. During this time, decaffeinated coffee sales soared. In addition, a new category of intensely loyal coffee drinkers was born. This group of adults consumes “specialty” or “premium” coffees, including regular and decaffeinated versions with a variety of origins and flavors. Sales of specialty coffee has climbed from about $45 million annually to well over $2 billion today, accounting for about 20% of all coffee sales.

    Because Starbucks markets both whole beans and coffee beverages, its competition comes from two distinct groups of firms. A number of regional coffee manufacturers distribute premium coffees in local markets, while several large national coffee manufacturers, such as Nestle, Procter & Gamble (P&G), and Kraft General Foods, market and distribute specialty coffees in supermarkets. Coffee beverages are distributed by restaurants, grocery stores, and coffee retailers. Seattle's Best Coffee is a fierce competitor.

    Starbucks operates about 17,000 stores in 40 countries. More than half of the stores— including those in the United States—are company-owned, while the remaining non-U.S. units are franchised. Growth slowed in the late 2000s due primarily to a global economic decline and increased competition from McDonald's.

    Case Challenges
    • What are some of the challenges associated with Starbucks' aggressive growth strategy?
    • Could an unanticipated change in coffee consumption patterns disrupt Starbucks in the same way that it paved the way for the company's growth in the 1980s and 1990s?
    • What problems might arise from Starbucks' efforts to expand rapidly into nations such as China and Mexico?
    Internet Sites of Interest
    Case 28: Walgreens

    Walgreens was founded in 1901 and incorporated in 1909 in Chicago. Like other drugstores in the early 20th century, Walgreens emphasized a soda fountain and a lunch counter. By 1929, the firm had amassed 394 stores and $47 million in revenues. By the 1950s, Walgreens had begun a shift to self-service stores, but rapid growth did not occur until the late 1970s and early 1980s. Walgreens passed the 1,000-store milestone in 1984 and continued to grow steadily.

    Today, Walgreens is the leading drugstore chain in the United States, operating almost 8,000 stores throughout the United States, Guam, and Puerto Rico. The firm also operates two mail service facilities and 13 distribution centers throughout the country.

    Prescriptions account for about 65% of company sales, with the rest coming from OTC medications, cosmetics, toiletries, photo processing, and grocery items. Approximately 90% of prescriptions are paid by insurance companies or other third parties. Most stores offer drive-thru pharmacies and almost all offer in-store photo processing. Walgreens' closest rival is CVS, although competition from pharmacies in grocery stores and discount retailers such as Wal-Mart has intensified.

    More consumers are using health insurance to pay for prescription drugs. Retailers receive the same payment from insurers for a given drug and consumers pay the same co-pay regardless of pharmacy. As a result, convenience appears to have replaced price as the most important factor in the pharmacy side of the business. In this regard, “convenience” includes such factors as the acceptance of a given insurance plan, store hours, waiting periods, options for telephone and Internet refills, and the availability of grocery or other items that a consumer might wish to purchase while picking up a prescription.

    Walgreens has responded to this emphasis on convenience by developing highly visible and accessible freestanding stores in high-traffic locations. Many of the stores are open 24 hours a day. As such, Walgreens continues to emphasize building new stores rather than acquiring them from smaller rivals.

    Walgreens has benefited from constant increases in U.S. expenditures on prescription drugs, a trend that is projected to continue well into the future. The effects of the Patient Protection and Affordable Care Act of 2010 (and any subsequent revisions) on Walgreens remain unclear.

    Case Challenges
    • Is “low price” an important factor in the drug store industry? Explain.
    • Is Walgreens' rapid growth strategy realistic? Why or why not?
    • How will changes in U.S. health care policy affect Walgreens? Explain.
    Internet Sites of Interest
    Case 29: Wal-Mart

    Sam Walton began his career in retailing as a J. C. Penney management trainee. He later leased a five-and-dime store in the rural community of Newport, Arkansas, in 1945. Five years later, he launched Walton 5 & 10, and by 1962, Walton owned 15 Ben Franklin stores under the Walton name. Walton envisioned a rapid expansion of chain discount stores in small towns, a concept rejected by Ben Franklin. As a result, Sam and his brother James “Bud” Walton opened the first Wal-Mart Discount City in 1962. Wal-Mart Stores reached 18 stores with sales of $44 million in 1970, and the company went public.

    The company continued to avoid the competition by opening stores in small and midsized towns. The company amassed 276 of its own stores with annual sales in excess of $1 billion by 1980. Three years later, the first Sam's Wholesale Club was opened, touting a cash-and-carry, membership-only warehouse format. Rapid growth continued through the 1980s and 1990s.

    Today, the Bentonville, Arkansas-based firm operates more than 10,000 stores—over half outside the United States—including traditional discount stores, “supercenters” that also sell groceries, and Sam's Wholesale Clubs, as well as some Internet sales. Wal-Mart has locations in all 50 states and is the leading retailer in Canada and Mexico (through its Wal-Mart de Mexico division). Wal-Mart also operates stores in Germany, Korea, Japan, and China, as well as other nations in Asia, Europe, and South America. The heirs of the late Sam Walton (Wal-Mart's founder) own about 38% of the company.

    It is almost impossible to separate Wal-Mart from its founder. The flamboyant leader was known for his charismatic style, emphasis on customer service, and high esteem for Wal-Mart employees. More than anything, however, Walton instilled a bias for action in managers and associates alike. Store change is constant as opportunities for improvement were constantly being sought. Within each store, department managers act as entrepreneurs and are encouraged to innovate. CEO David Glass continued Walton's commitment to cost control, innovation, greater emphasis on the upscale market, and a customer-centered culture until the top job was handed to Lee Scott in 2000. Following an incessant stream of criticism alleging such practices as unfair price competition and employment discrimination, Scott launched a concerted effort in late 2004 to defend Wal-Mart's record, both as a successful retailer and as a good corporate citizen. Wal-Mart is under constant pressure from environmental groups and organized labor, and defends itself against the most lawsuits of any firm in the United States.

    Wal-Mart has continued to expand in the early 2010s, including an emphasis on smaller, neighborhood stores that carry both grocery and household items. Major appliances such as flat-screen televisions were added in the late 2000s. Wal-Mart acquired a 51% stake in South African firm Massmart in 2011, giving the firm access to sub-Saharan Africa.

    Case Challenges
    • Is it easy to become enamored with a company when it has enjoyed so much success over the years? What are Wal-Mart's weaknesses?
    • Does Wal-Mart's new neighborhood store format run counter to the cost-cutting emphasis that is at least partially responsible for the success of its traditional stores? Explain.
    • What challenges can Wal-Mart expect with its international expansion efforts?
    Internet Sites of Interest
    Case 30: Yum! Brands

    In 1997, PepsiCo spun off three of its restaurant holdings—(1) Pizza Hut, (2) Taco Bell, and (3) Kentucky Fried Chicken (KFC)—in order to focus more on its core beverage business. The resulting company, Tricon Global Restaurants, was renamed Yum! Brands and boasts over 37,000 locations in more than 110 countries—the largest number in the industry—although the firm still trails McDonald's in terms of revenue.

    Yum has three primary business units: (1) KFC, (2) Pizza Hut, and (3) Taco Bell. KFC has about 17,000 outlets, half of which are located in one of more than 80 countries outside of the United States. KFC also accounts for almost half of the quick-service chicken business in the United States. Pizza Hut has about 13,000 outlets throughout the world and leads the U.S. pizza market with a 15% market share. Almost all of its approximately 6,000 Taco Bells are located in the United States, where the brand controls about 60% of the Mexican fast-food segment. Yum also owns Long John Silver's and A&W Restaurants.

    Prior to the spin-off, PepsiCo had sought to create synergy among its beverage, fast-food, and snack food businesses but only with limited success. For example, because the beverage business was owned by the same parent company (PepsiCo) that owned several prominent fast-food businesses, Pepsi was always guaranteed a substantial piece of the lucrative fast-food market for soft drinks. In the late 1980s, however, Coca-Cola began to market its soft drink line aggressively to non-PepsiCo fast-food vendors such as McDonald's and Burger King. Coke was quick to remind these restaurants that contracts with Pepsi provided direct financial support to KFC, Taco Bell, and Pizza Hut. As a result, Coke was successful in securing contracts with a number of fast-food companies—a factor that many analysts believe led to PepsiCo's decision to spin off the three restaurants.

    About 80% of Yum's restaurants are franchised. The firm has engaged in aggressive global expansion in recent years, opening more than 1,400 new units outside of the United States in 2010—400 in China alone. Yum controls a total of about 4,000 units in China, where the restaurant earns about 15% of its global revenues.

    Case Challenges
    • Do all of Yum's business units compete in the same fast-food industry, or does each compete in a different industry based on product type? Explain.
    • What kind of synergy can Yum create among its restaurants? What challenges does the firm face by operating multiple related businesses?
    • McDonald's is known globally for a strong brand image and unrivaled consistency. What lessons can Yum learn from McDonald's?
    Internet Sites of Interest
    Traditional Cases
    Bob's Supermarket: Competing with the Big Boys

    This case was prepared and is intended to be used as a basis for class discussion. The views represented here are those of the case author(s) and do not necessarily reflect the views of the Society for Case Research. The views are based on professional judgment.

    As 2008 was coming to an end, Bob Thompson wondered about the direction he should take his family-owned independent grocery store. While he and his brother were satisfied with the current sales and profitability of their store, they had gone through some very rough times in the past against tough competitors like Wal-Mart. A new and serious concern was the severe recession gripping the country. Hanover and Jefferson County, Indiana, were not very prosperous before the recession, and suffered along with the rest of the country. Several large local employers supplied the automobile industry, which was particularly hard hit. Would his customers continue to pay higher prices for groceries at his store, given they could shop at Wal-Mart, Aldi or Kroger about 10 miles away? Would some of his business be cherry-picked by price-oriented stores like Dollar General located just down the street? How could he absorb rising minimum wage costs? Bob wondered what changes he should make to the business to survive the recession and help his business ultimately thrive against competition from the big boys.


    Bob's Supermarket was owned by Bob Thompson and his younger brother, Sam. They formed a subchapter-S corporation in 1988 to purchase an existing supermarket in Hanover, Indiana. Originally, there was a third partner who provided most of the financing for the business, while the brothers supplied sweat equity.

    The previous owner operated the store for 19 years, but had lost interest in running it. It had become somewhat rundown and was only marginally profitable. By putting in a great deal of time and attention, the brothers were able to increase store sales by 40% in the first year and triple its profits.

    The partners tried to build on their success with the Hanover store by adding a second location. They bought a store in Westport, Indiana, about 50 miles away. The Westport store proved to be a lot of work and was never more than marginally profitable. It was closed after two years. In 1994, they tried again to expand, purchasing an existing store in Hope, Indiana, near the larger city of Columbus, Indiana.

    The arrival of Wal-Mart Supercenters in 1995 was a major blow to Bob's Supermarkets. The first Supercenter in the area opened on the Madison hilltop about 10 miles from Hanover.

    Wal-Mart's arrival led to a drop in sales at the Hanover store of 20%. In 1996, Wal-Mart added another Supercenter in Columbus, Indiana, near the Hope store. The Columbus Wal-Mart resulted in a 30% loss in sales at the Hope store, and they were forced to close it. Bob and his brother bought out their partner to gain full control over decision-making. The two failed attempts at expansion and a less attractive industry situation with Wal-Mart in the market caused them to be much more conservative in running the supermarket in Hanover.

    By 2005 the Hanover store was teetering on the brink of failure. It was run down inside and out, and was barely profitable. Over the next couple of years, the Thompsons invested a great deal of their time and money to improve the external appearance of the store. They also invested in technology to help them manage it more effectively. They added a new point-of-sale (POS) system to scan and track all purchases and sales. The store improvements significantly improved the profitability of the store to record levels.

    Mission Statement

    The owners viewed their mission as follows:

    To provide groceries, fresh foods, and ready-to-eat food that is of the highest quality and convenient at a fair price, while being a valued member of the community of Hanover.

    The Store

    Bob's Supermarket was a small and rather modest store, with less than 6,000 square feet of retail space. The outside was remodeled in 2007. The owners painted the brick front and put up a new metal façade above the windows. They also cleaned up the look of the store by eliminating clutter such as an old ice machine sitting in front of the store. The store still had a bit of an industrial appearance, but looked much cleaner with the new finishes. There was a large and accessible parking lot with a sign on a pole at the street and one painted on the façade over the entrance. There was also a lighted sign lower on the signpost where they could put up a limited number of letters to announce specials. The owners typically didn't use that sign, however. They occasionally put hand-lettered posters in the window or at the street to announce specials.

    The inside of the store received only some modest remodeling over time. The ceilings were fairly low relative to the high ceilings of newer grocery stores. The floors, walls and ceiling were older and, while clean, were stained or patched in places. The ceiling lights were bare fluorescent bulbs. Some fixtures and freezer cases appeared newer, while others did not.

    A rough layout of the store is shown in Appendix A. The entrance to the store was through double doors on the side of the building. As one entered the store, they passed the two checkout lines on the right and displays of featured items on the left. One would then proceed straight ahead to the fresh produce that wrapped around the opposite end of the store. Continuing around the perimeter toward the back was the dairy section. The back wall includes a small hot deli area, a cold deli case (cold cuts and cheeses), and a fresh meat case.

    There were some freestanding displays down the front aisle of the store and also from the back to the front of the store as one neared the check-out area. The display pieces were of various vintages and styles—some owned by the store and some provided by the manufacturer. Some were simply dressed-up wooden delivery pallets. In addition to national brands, the store tended to display a few locally-produced items (e.g., locally-made jams) in these areas.

    Bob took particular pride in their meat department. They were the only local grocery that cut its own meat fresh every day. Other stores brought in meat pre-packaged. Bob's on-site butcher would do special cuts upon request. Bob and Sam believed their fresh meat brought customers in from other communities. Meat was housed in a horizontal meat case that was clean, but didn't have the modern look and special lighting chain stores use to make meat look good.

    Bob was pleased his younger brother, Sam, took it upon himself to develop a line of fresh salads and ready-to-eat (RTE) foods that were made in the store. These were sold in an upright refrigerated case in the back corner of the store across from the deli. Items included salads (potato, chef), coleslaw, baked beans, deviled eggs, lasagna, chili and many more. These were packed in plastic containers with labels similar to those used on fresh meat items. Some items, like deviled eggs, were in a black plastic tray with clear lid. Other items were in translucent plastic tubs. Bob felt that these items were quite good. The packaging and display case, however, were not very prominent or particularly upscale in appearance. Wal-Mart and Kroger also carried some RTE foods in their Madison stores, but did not have the emphasis on RTE foods and deli one would see in more upscale, urban/suburban stores.

    They sometimes offered lunch specials by combining the few hot items they carried in the deli with their store-made RTE items. For example, they offered two pieces of deli fried chicken, some fried potatoes and a container of their RTE coleslaw for a set price. They got some takeout lunch business that way.

    Bob and Sam made a decision early that they would not sell alcoholic beverages. This was based on input from the local community. They felt there was more to be gained in goodwill by being a good neighbor and family market than could be gained in sales from alcoholic beverages.

    Bob believed his employees were part of the reason customers kept coming back. The employees got to know and typically greeted regular customers. With the exception of three more long-term folks who worked full time, most employees worked part time for minimum wage and received no benefits other than those required by the state and federal governments. One full-time worker received medical insurance. The part-time employees were generally high school students or housewives. It was difficult to attract committed, long-term workers paying only minimum wage.

    One major worry for Bob was a series of mandated increases in the minimum wage. The minimum wage had been $5.15 for a number of years, but rose to $5.85 in 2007 and $6.55 in 2008. Another increase to $7.25 was mandated for mid-2009. Obviously, this had an impact on a major cost component. While the minimum wage increase also impacted on Bob's competitors, it probably had a greater impact on Bob's Supermarket due to its smaller size (lower sales per employee). In addition to Bob and Sam, Bob's has three full-time and typically about 10 part-time employees who work a total of about 320 hours per week.

    Reflecting the small size of the operation, there were no written policies or procedures. Training for new employees was typically done on the job by shadowing current employees. The employees did not wear uniform vests or name tags (or any other type of store identification) typically found at chain supermarkets. It was sometimes difficult for patrons who were not regulars to identify employees.

    Bob's Supermarket recently acquired a computerized point-of-sale (POS) system that scanned all purchases and sales, and tracked purchase and sale prices via checkout scanner similar to those in more-sophisticated grocery retailers. The system also kept track of inventories. The POS system was integrated with their accounting system to provide profitability information on the SKU (stock-keeping unit) level. This also allowed them to determine shrinkage (items lost or stolen). They could determine which items sold best and were most profitable to carry and which didn't carry their weight. They were also able to use the system to determine order quantities. The information allowed them to improve both their sales and profit margins.

    The Owners

    Bob and Sam were very frugal, and performed all management and many other functions themselves. Bob Thompson had an MBA degree and felt very comfortable with the accounting and finance side of the business. Sam worked in the store and was in charge of the ready-to-eat foods. Bob was just not very comfortable with the marketing and human resources side of running a business, and admitted they gave it less attention.

    The owners did very little advertising or promotion. According to Bob, “we are not particularly comfortable tooting our own horn, and are not sure of the best way to let people know about our store.” Their location in the town of Hanover and their good customer service were their primary forms of promotion. Bob added that “we have not done any market research on the best way to position ourselves in the marketplace. Our work in this area has been pretty much seat-of-the-pants.” The owners were not very visible or active in the community.

    Their early experience with rapid expansion caused the Thompsons to be rather conservative in their approach to investing in and operating the business. In addition to running the operation themselves, they saved money by doing most of their own repairs and maintenance. They also did much of the remodeling work. Their “do-it-yourself” approach had the obvious benefit of saving money. It did, however, take away time and energy from other aspects of managing the business, particularly pursuing new ideas.

    Retail Market Analysis

    A retail marketing analysis was prepared by Marketek a few years earlier to help local businesses better understand the Jefferson County market. While the information was several years old, this report provided the most thorough information on the market and consumer shopping habits. The following are some excerpts.

    The report's overall location assessment included the following:

    Jefferson County
    • Jefferson County, Indiana, is located in the southeast region of the state, with the southern edge bordering Kentucky. The Ohio River runs along the southeastern border of the county. The county is characterized by rolling hills, valleys, farmland and forests.
    • Jefferson County is predominantly rural with more than 222,000 acres. Forty-two percent … are used for agricultural purposes.
    • Residential and commercial uses are concentrated in the cities of Madison and Hanover.
    Madison/Hilltop Area
    • There are two distinct portions of Madison. One is downtown Madison, which is the historic gem of the county and located along the banks of the Ohio River. The second is the Hilltop area, which sits above the downtown and has attracted residential development as well as several national retail establishments.
    • Built primarily in the 19th century, the Madison Historic District covers 2,160 acres, virtually all of the downtown area. The Madison historic downtown district includes an array of merchandise and two grocery stores … As the county seat, downtown also hosts several institutional anchors.
    • Commercial development in the Hilltop area is generally a mix of strip shopping centers, national chains (including Wal-Mart), motels, restaurants/fast food establishments, service businesses, and auto-related businesses almost all of which are concentrated on Highway 62. The Hilltop area is increasingly becoming a regional shopping area, drawing customers from throughout the county and surrounding areas.
    • With approximately 10,000 acres, Hanover is primarily rural with more than 7,000 acres designated as agricultural.
    • Hanover's main commercial development is located on Highway 56 (LaGrange Street). The corridor includes a number of businesses, eating and drinking establishments, various service businesses and two grocery stores. Hanover residents reportedly rely on the Hilltop area for many of their shopping needs.
    • Hanover is a mix of students, college related professionals, low to moderate income households in and to the north of the center of town as well as more upscale communities south of Highway 56 …
    • Hanover College owns almost 2% of the land in the Town. The college is located on the eastern border of the town and dates back to 1827. Several of the faculty members live on campus as well as students. As such, the campus is a sort of “town within a town.” (Marketek, 2002, pp. 3-6)

    The report provided lifestyle profiles of the trade area:

    Overall, households within the trade area are middle age and older families, frequently with school age children but also with children that have moved out of the house (i.e., “empty nesters”). As two-thirds of trade area households fall within the Middle America (34%) and Rural Industrial Workers (30%) lifestyle groups, the characteristics of both groups should be emphasized. As the name suggests, Middle America households are typical of the “American Household”—just slightly older, more family oriented and predominantly white. Rural Industrial Worker households are older, have low to moderate incomes and enjoy the outdoors. (Marketek, 2002, p. 48)

    Issues outlined in the report specifically for Hanover included:

    • Hanover has two distinct identities: as a “low to moderate” income bedroom community of about 2,900 year round residents and as home to Hanover College adding another 1,100 to the population base nine months out of the year.
    • With the existence of a Super Wal-Mart just 10 miles from Hanover and the daily out-commute of the working population, retail leakage is a significant issue.
    • Hanover's commercial district lacks a critical mass or core business center. Situated on a curve of Highway 56 and consisting mainly of a series of freestanding, destination businesses, it is difficult for the potential shoppers to identify the areas as a “shopping district.” The organization is fairly random. (Marketek, 2002, p. 10)

    The report included a resident survey that shed some light on shopping patterns:

    • Over 700 Jefferson County residents participated in the survey, one-third (33%) of whom reside in the rural Jefferson County, 24% in the Hilltop area, 18% in downtown Madison, 15% in Hanover and 9% outside the county.
    • All respondent groups rely heavily on Wal-Mart for their grocery shopping needs. More than one-half of Hilltop and Hanover residents (52% and 57% respectively) surveyed do 'most' of their grocery shopping at Wal-Mart. Kroger is also a popular shopping destination among all groups surveyed. Not surprisingly, a large share of downtown Madison residents (46%) surveyed reported that they do most of their grocery shopping at JayC in downtown Madison.
    • A large percentage of each of the groups surveyed, including residents of outside the county, do most of their non-grocery shopping in the Hilltop area. With limited retail businesses close to home, residents of Hanover (73%) and rural Jefferson County (59%) rely greatly on the Hilltop area for their non-grocery shopping.
    • Reflecting busy schedules and limited budgets, survey respondents are generally most concerned with selection, convenience and price in selecting a place to shop. Small town attributes such as familiarity, service and quality are also valued, just less so. (Marketek, 2002, pp. 29-30)

    Jefferson County had a population of 33,010 in 2009, having grown only 4.1% since 2000. The residents were a bit older than average for Indiana (39.6 versus 36.8 median age), and were less affluent (median family income $42,646 versus $48,010). (U.S. Census Bureau, U.S. Bureau of Economic Analysis & Indiana Business Resource Center)


    Bob and Sam were competing with both traditional grocery retailers and such non-traditional grocers as Wal-Mart and Aldi. There were also a number of non-grocery outlets that provided some less direct and obvious forms of competition for consumers' food dollars.

    In 2008, most grocery competition was on the Madison Hilltop, about 10 miles from Hanover. Part of that drive was on a fairly congested stretch of road lined with strip malls and fast food restaurants. The Wal-Mart Supercenter and Kroger were right across the street from each other.

    Bob's competition included the two largest and most sophisticated chains in the industry. Wal-Mart was the giant in the U.S. retail grocery business. The Wal-Mart Supercenter ( was similar to Wal-Mart Supercenters everywhere. It carried clothing, general merchandise and a pharmacy in addition to a broad and deep assortment of grocery items. While Bob's Supermarket is open from 7:00 a.m. to 10:00 p.m., Wal-Mart is open 24 hours a day.

    Kroger, headquartered in nearby Cincinnati (, was the second largest grocery chain in the U.S., with sales in excess of $70 billion. The Madison Kroger was a typical chain supermarket, with about 40,000 square feet of space. It provided a nicer shopping experience than Wal-Mart, with somewhat higher prices. Kroger employees were knowledgeable and professional. The store was open 24 hours a day. A typical Kroger also had a broad and deep assortment of grocery items, and it had a pharmacy. Kroger also had a customer loyalty card customers could use to get discounts on advertised products, and Kroger could use to track individual customer purchases and response to promotions.

    Another grocer on the Hilltop a mile or so closer to Hanover was Aldi ( Aldi was a very unusual chain owned by one of Europe's largest retailers. The stores were small and Spartan, with very low operating costs. The Madison Aldi is open from 8 a.m. to 9 p.m. They typically carried only a limited selection of more popular grocery items in only one brand (usually one of Aldi's own store brands) and in one size. The typical Aldi was operated by only one or two employees. Customers had to bring their own grocery bags, pack their groceries themselves and return their cart to the inside of the store (there was a cart dispenser that required a $.25 deposit that was returned when the cart was returned). In return for their sacrifices, customers received very low prices.

    The only other grocery store in the area was the Jay-C Store ( in downtown Madison. It was a small store, very similar to Bob's Supermarket in size, age and merchandise selection. It was owned by Kroger, however, which gave it some real advantages in sourcing groceries.

    While Bob's Supermarket was the only true grocery store in Hanover, there were several other retailers in Hanover that offered some grocery items. These stores carried primarily staple items that bring customers into the store frequently, such as milk, soft drinks and snacks. CVS had just built a new, centrally-located pharmacy very close to Bob's Supermarket, replacing an older store that was farther toward the edge of town. It offered milk and some staple food and beverage items, as well as pharmacy items.

    Figure 1 Madison Area Map

    There were also two combination gasoline/convenience stores in Hanover. Both were fairly new and modern. In addition to selling the usual convenience-type items, one of the stores contained a small McDonald's restaurant. Both of the convenience stores and the CVS sold beer. CVS also carried wine and hard liquor.

    There was also a Dollar General store in Hanover ( It billed itself as an updated version of a general store, carrying a limited number of popular items across many categories, including limited food and general merchandise items. It tended to offer very attractive prices, often on unique sizes or configurations.

    In addition to McDonald's, there was a larger pizza restaurant (Jendy's) and a Subway sub shop almost directly across the street from Bob's. All of the retail outlets and restaurants in Hanover were within less than a mile of each other.

    With the opening of the Wal-Mart Supercenter, the owners saw their sales mix shift. An unusually large portion of Bob's sales were fresh items, meat and produce, and other items consumers “fill in” between major “stock-up” trips to stores such as Wal-Mart. Sales of items consumers could easily stock up on at less expensive stores were lower than would be typical for the size of the store. Bob's Supermarket experienced particularly low sales of larger and higher-priced items like laundry detergent and cleaning products that were easy for consumers to stock up on at Wal-Mart. Bob believed his customers tended to make the trip to Wal-Mart only every week or so, and then used Bob's Supermarket to fill in between visits. As a result, Bob's typically carried only a single, smaller size of those types of items (e.g., 50 oz. Liquid Tide versus 100 oz., and single rolls of Bounty paper towels rather than 8-packs).


    Table 1 shows price comparisons with other local stores for some common items across categories. Bob's Supermarket was more expensive than others on most items, with the exception of the ready-to-eat products where Bob's was fairly price-competitive. Stores like the Shell convenience store and CVS tried to be competitive on some items, like Coke, where consumers had a clear idea of what a good price was and would shop around, but they charged very high prices on other items. Non-traditional retailers like Dollar General often carried unusual sizes of key items to project an image of better value.

    Table 1 Price Comparisons

    Part of the reason for Bob's generally higher prices was the higher cost structure to run a much smaller store than Wal-Mart or Kroger. Another reason was that Bob's Supermarket must buy through and have products shipped in by wholesalers. The chains bought in large quantities directly from producers and often shipped items to the stores on their own trucks. While not disclosed separately, Bob believed wholesalers marked up most items 3% to 4% and passed along the higher costs of shipping small quantities to the store.

    A few years ago Bob considered affiliating with a buying group, IGA, that would have lowered their product costs, but decided the requirements were simply too onerous. IGA required a large up-front investment in signage, an up-front fee, minimum order quantities, and an ongoing fee as a percentage of sales.


    The financial statements for Bob's are shown in Tables 2 through 4 (for fiscal years ending December 31). There were some unusual features of the financial statements that reflected the nature of the store as a small business, as well as the owners' other investments in real estate. The physical store and the land it sat on were owned by the brothers in a real estate company, which was a separate legal entity from the Supermarket. The Supermarket paid rent to the real estate company. The fixed assets on the Supermarket's balance sheet were fixtures and equipment. Most of the fixed assets were either fully depreciated or were acquired used at a fairly low cost, often at auction. The notes and loans receivable were loans from the store to the real estate company to fund the major exterior improvements and the POS system.

    Finally, as a subchapter S corporation, Bob's Supermarket worked like a partnership for tax purposes. The owners paid personal income tax on their share of operating income. They then drew funds from the company as they chose.

    Economic and Consumer Trends

    Bob found the economic news quite distressing. A headline in the December 22, 2008 BusinessWeek magazine was pretty distressing: “The Great American Shopper Hits a Wall,” with a subhead that read, “The unprecedented falloff in spending means the consumer is leading the economy into one of the harshest recessions in 60 years.” The article went on to summarize all that was going on in the economy:

    This is the classic recession pattern: Weakness in the economy feeds on itself - as consumers retrench, companies cut back, further undercutting spending. This time the cycle is magnified by the credit crunch and the breadth of the slump. Households are even curbing outlays for services, such as recreation and other discretionary activities. That's a factor in the record loss of service jobs in recent months. (Cooper, 2008, p. 10)

    Later on in the same issue, there were other articles that suggested the scope of the recession. One was entitled “Job Losses: Is the Panic Justified?” (Coy, 2008). Another was entitled “Is Housing Close to Bottom” (Kalwarski, 2008).

    While consumers typically cut back major discretionary purchases first in a recession, in a serious downturn they were likely to look for ways to economize anywhere they could.

    An article in the August 25, 2008 BusinessWeek highlighted a shift in consumer trends that began fairly early in the recession.

    By now, a number of the nation's largest supermarkets are finding that a tighter economy is prompting some customers to look for cheaper options. Executives at midmarket grocery giants such as Safeway, SuperValu, and Delhaize Group have cut their growth projections recently amid slowing sales. The problem: More Americans are buying food at Wal-Mart and deep-discount stores such as Aldi. TNS Retail Forward, which tracks retail trends, published a study in July that found at least one-third of consumers have switched their shopping to discounters for food and household essentials. (McConnon, 2008, p. 72)

    On the other hand, consumers had for many years increased the percentage of meals eaten outside the home. As a more expensive discretionary purchase, Bob saw a ray of hope that consumers would cut back on meals eaten outside the home in favor of less-costly meals at home.


    As Bob considered the future of his store, he was proud of what they had accomplished in the face of strong competition from Wal-Mart and others. At the same time, however, he was also worried about the impact of the recession and the coming increase in minimum wage. He wondered what steps he should take to strengthen the business to survive the recession and thrive long term competing with the big boys.

    Table 2 Balance Sheet

    Table 3 Income Statement

    Table 4 Statement of Changes in Stockholders' Equity

    James C. Cooper (2008). The Great American Shopper Hits A Wall. Business Week, 4113, 10.
    Coy, Peter (2008). Job Losses: Is the Panic Justified? BusinessWeek, 4113, 22-26.
    Kalwarski, Tara (2008). Is Housing Close to a Bottom? BusinessWeek, 4113, 11.
    Marketek, Inc. (2002). Retail Market Analysis: Jefferson County, Indiana. Atlanta, GA.
    McConnon, Aili (2008). Grocers: A Shift Toward Thrift. BusinessWeek, 4097, 72-73.
    U.S. Census Bureau, U.S. Bureau of Economic Analysis, & Indiana Business Resource Center. Jefferson County, Indiana Profile. Retrieved from
    Bob's Supermarket Store Layout

    Appendix A
    Costco: Maximum Employee Benefits or Maximum Shareholder Return?*

    “Our attitude has always been that if you hire good people and provide good wages and good jobs and more than thatif you provide careersthat good things will happen to your company. I think we can say that that has been proved by the quality of people that we have and how they have built our organization.”1.

    —Jim Sinegal, Costco CEO

    Costco believed they had a formula for success. A company built around a no frill, minimal mentality, Costco distinguished itself by taking care of its employees. Many companies followed the Wal-Mart example to achieve high margins by cutting employee hourly wages and decreasing employee benefits. Yet, Costco had a novel approach; they pioneered the offering of premiere employee benefits. They created a competitive advantage through employees that improved productivity each year with an operating profit per hourly employee of $13,647 compared to $11,039 at Sam's Club.2.

    Costco seemed to be “doing it right,” paying employees well and offering generous benefits. Yet, this kind-hearted philosophy towards over 100,000 employees drew criticism from Wall Street. Some analysts contended that Costco was too good to their employees, resulting in shareholder loss. They argued that if Costco cut employee expenses, shareholders would reap more profit. Other investors promoted the Costco philosophy. John Bowen, investment manager in Coronado, California, argued, “Happy employees make for happy customers, which in the long run is ultimately reflected in the share price.” The title of a Wall Street Journal article summed up what many were beginning to ask: “Costco's Dilemma: Be Kind To Its Workers, or Wall Street?”3. Were these concepts mutually exclusive?


    In 1982, Jeff Brotman and Jim Sinegal founded Costco. The first Costco wholesale membership club opened in Seattle, Washington on September 15, 1983.4. Seattle was “a good market because of the low level of competition from a pricing standpoint.”5. Costco's theme consisted of high quality national and regional brands at prices consistently below traditional wholesale or retail outlets with 100% guaranteed customer satisfaction.6. Costco expanded into California and established a Canadian warehouse in Burnaby, British Columbia in 1985.7. In December of the same year, just two years after commencing operations, Costco went public on the New York Stock Exchange under the symbol “COST.” In 1987, Costco became the first wholesale membership warehouse to offer produce and bakery departments.

    As Costco expanded, the competition did likewise. In 1986, Sam's Club surpassed Price Club, the pioneer of the membership warehouse concept. Sam's Club threatened to overtake Costco and Price Club, which led Costco to develop a different strategy8. In 1993, Costco and

    Price Club merged to become PriceCostco, Inc., the nation's second largest warehouse chain. Changes in executive management followed; Jim Sinegal became CEO of the merged company, and Joe Price, the founder of Price Club, assumed the role of chairman.9. Jeffrey Brotman stayed behind the scenes and focused on selecting ideal locations for expansion. In 1994, sales declined 3%, and Jeffrey Brotman took over as chairman.10.

    In 1995, PriceCostco became the first warehouse to sell gasoline.11. Other discount superstore chains such as Wal-Mart and Sam's Club quickly replicated the idea.12. E-commerce became the company's single largest sales “location” in 1998.13. In 1999, PriceCostco, Inc formally became Costco Wholesale Corporation.14. Costco continued to expand internationally and opened their first Japanese warehouse in Hisayama in 1999.

    One-fourth of all Costco warehouses were located in California in the early years. In 2001, California suffered a major energy crisis, resulting in an unexpected decline in Costco's earnings the first part of the year.15. Energy prices soared to unexpected levels forcing the company to deal with large unexpected expenses. After the energy crisis, Costco opened twenty-seven new locations resulting in a 90% increase in fixed asset expenditures.16. Costco equipped warehouses with emergency generators, efficient air-conditioning, and skylights to reduce overhead.17.

    In 2002, Costco bounced back with a novel concept, Costco Home; they opened their first location in the Seattle suburb of Kirkland, Washington. Costco Home offered affordable, high-value furniture to consumers. In 2005, three additional Costco Home stores opened, and over $1 billion in furniture, bedding, and accessory sales resulted.18. By the end of 2007, Costco had expanded into different money making venues (e-commerce, travel, and home), and had established physical proximity to customers in eight countries and forty states, with a total of 538 stores.19.

    Costco increased the size of their shopping carts four times since 1984. Members bought greater quantity and shopped more frequently. In 1995, customers frequented Costco an average of once every three weeks, but by 1999, customers returned every ten days.20. Costco continued to bring value to customers; Costco card holders increased to more than 50,400 in 2007 with an 87% renewal rate.21. The Gold Star Membership was $50 and the Executive Membership cost $100.

    Over the years, Costco consistently carried high quality merchandise at exceptional values. Dr. Sinegal stated, “We were not going to carry any seconds or irregulars or poor quality merchandise.”22. Costco became the top warehouse-club retailer in the nation, the 4th largest retailer in the nation according to Retailing Today in 2006, and the 29th largest retailer on the Fortune 500 list. These accolades were impressive as was the $30 billion market cap Costco had in May 2008.23.

    External Environment

    The warehouse club industry was established in 1976 when Price Club opened in San Diego. Price Club warehouses were on average 108,000 square feet; they patented the no frills, limited shelf stocking, and minimum number of employee concept. Other “clubs” mimicked their strategy. By 1986, warehouse club industry sales accounted for almost 1% of total retail sales in the United States. One percent did not seem substantial; yet, the “mini-industry” was worth about $4.4 billion annually at that time.24. The increasing number of new club warehouses made competition intense.

    In the 1990s, competition between warehouse chains intensified as larger competitors expanded beyond core market areas. Different warehouse chains competed in the same geographical area. Some focused on lowest-pricing, others on fresh food, and some concentrated on niche markets such as small business. At this time, the largest warehouse chains were Costco, Sam's Club, Pace Membership Warehouse (operated by Kmart), and Price.25. Along with growing competition, the 1990s Gulf War and rising gas prices resulted in chains stumbling and losing retail ground. Costco and Price Club merged in 1993 to achieve greater efficiency through economies of scale.

    In the mid to late 1990s, the economy rebounded. Costco sales and earnings grew 6% a year from 1995 to 2000.26. Yet, soon after in 2001, the stock market fell and inflation increased. According to Standard & Poor's, wholesale prices for processed foods rose 7.3% in 2007; there was a projected 7.8% rise in 2008 due to commodity and energy costs.27. Higher costs of perishable, non-perishable, and nonfood items resulted from energy costs, gas prices, and the economy.

    Food costs were heavily affected by gas prices. Gas prices rose 33% from September 2007 to September 2008, straining the economy and consumer budgets that were already dwindling from falling home prices.28. The United States had not experienced gasoline as a high percentage of personal spending since September of 1982. The increase was due to the energy crisis, which evolved from the revolution in Iran.29. Colin McGranahan, an analyst with Sanford C. Bernstein & Co. in New York, commented, “Discretionary spending is down, and they're (consumers) being crowded out with food and energy prices.”30. Fortunately, warehouse chains, classified in the sub-industry of HyperMarkets and Super Centers, were projected to have increased sales growth the second half of 2008 due to consumers converting to the membership mentality.31. According to Deborah Weinswig, “Anytime the economy drops, the consumer is more likely to trade down to a club, where prices per ounce are more attractive than at a supermarket.”32.

    New customers joined warehouse chains, for the larger quantities, the lower cost per item, and the large assortment of perishable and non-perishable foods offered. Warehouse chains allocated over 40% of warehouse space to perishable and non-perishable foods, and were classified under the larger industry of supermarkets and drugstores, which had sales of over $535.4 billion.33. Not only did warehouse chains have large areas dedicated to food, often they incorporated pharmacies. Pharmacies resided in large-scale Costco, Sam's Club, and BJ's Warehouse Club stores.

    Costco, Sam's Club, and BJ's Warehouse Club thrived in the food and pharmacy sectors of business as well as in the Super Center store context, which offered merchandise mixes of both a discount store and supermarket/drugstore combination in a single location. According to Standard and Poor's, in 2008 the HyperMarkets and Super Centers Index increased 19%, versus an 11.1% decline in the S&P 1500 Index.34. [The year] 2007 resulted in a mere 3% sales increase, the smallest gain in five years, according to the National Retail Federation. In 2008, most United States retailers prepared for one of the worst holiday-shopping seasons since 1979.35. Ironically, warehouse retailers prepared for a strong holiday season.

    Warehouse stores prospered in the down economy because value-conscious consumers perceived low-cost retailers as the mode to purchase necessities with the least amount of money.36. Even affluent customers searched for places to shop for high-end merchandise at more reasonable prices. According to the United States Census, affluent families comprised 17% of all United States households in 2007 and were projected to account for 22% of households by 2010.37. In 2007, the affluent shopper was twice as likely to patronize a warehouse club store and 9% more likely to frequent a mass merchandiser than a lower-income family that earned $20,000 or less.38. Affluent households of $100,000 found warehouses desirable to meet needs.

    Warehouse chains such as Costco and Sam's Club offered particular products to target affluent customers. Warehouse clubs offered designer handbags, diamond rings, and even jet aircraft. The typical affluent warehouse club shopper spent $111 per trip, which was $46 more than that spent by a lower income home.39. Some designers were angry that their products were offered by warehouses and brought legal action against unauthorized retailers; Fendi filed a complaint alleging that Sam's Club sold counterfeit handbags. Sam's refuted the allegation by providing authenticity papers. Analysts cautioned against aggressive warehouse up scaling citing it might prove dangerous by raising questions on product authenticity and costs to defend the litigation.40.

    By the 1990s, a new demographic emerged as a potential force in retailing. The number of Hispanics had grown four times as fast as the population as a whole.41. In 2007, minorities comprised 34% of the total population in the United States representing 102.5 million people42. Among consumers of ethnic food and retail, the Hispanic population was the largest minority with a population that totaled 45.1 million in 2007, up from 35.3 million in 2000. Projections showed Hispanics would increase to more than 80 million by 2010 and to 95 million by 205043. Retailers accommodated this growing market.

    Many warehouse clubs, especially those located in heavily Hispanic areas, hired bilingual cashiers and stockers and featured entire aisles dedicated to Hispanic cuisine.44. Warehouses such as Costco and Sam's Club recruited ethnic employees to reflect the demographic base of warehouse locations. Costco recruited ethnic personnel for positions ranging from store associate to upper management. Many warehouse chains with a large first-generation Hispanic customer base added bilingual signage in stores. At these locations, Hispanic customers became loyal shoppers. According to Jim Hertel, Senior VP of Willard Bishop Consulting, “They're (Costco) not just accommodating ethnic shoppers, but embracing ethnic shoppers and becoming a part of the community, which is a huge part of the store choice paradigm for ethnic shoppers.”45.


    With the changing demographics, economy, and inflation in the United States, two main warehouse chains remained competitive with Costco: Sam's Club (a sector of Wal-Mart) and BJ's Warehouse Club (Exhibit 1). In 2008 Costco, Sam's, and BJ's, combined, controlled 90% of the warehouse market share. Of that 90%, Costco had 49%, Sam's had 42%, and BJ's had 9%.46.

    Sam's Club

    Sam's Club was established in 1983 in Oklahoma City by Sam Walton, the creator of Wal-Mart. Sam's led the warehouse industry until 2003, when Costco surpassed them in sales. Yet, Sam's still had the greatest number of warehouse locations. As of 2008, there were over 593 Sam's locations in 48 states (excluding Vermont and Oregon). There were thirty-seven international properties with six in Canada, seventy in Mexico, three in China, fifteen in Brazil, and nine in Puerto Rico (Exhibit 2).47. These properties contributed to sales of over $44.4 billion in 2007, up 6.7% from 2006. Sam's was expected to increase sales an average of 6.2% a year over the next four years to $48 billion in 2008 and up to $56 billion in 2011.48.

    Sam's differentiated itself by offering a lower-cost product; it attracted foodservice customers ranging from restaurants to caterers. Wal-Mart was the parent company of Sam's, which translated into buying power and strong relationships with large vendors.49.

    BJ's Wholesale Club

    BJ's Wholesale Club was introduced in 1984 in New England, offering rock-bottom prices and a bare-bones approach. BJ's primarily located warehouses in the Eastern United States; they operated 172 warehouses in 16 different states from New England to Florida (Exhibit 2).50. BJ's survived against large competitors, like Costco and Sam's Club, by distinguishing themselves; they focused on serving small-business customers and accommodated retail shoppers by offering grocery items in smaller quantity packaging. 11% of BJ's warehouses were smaller in structural size to serve markets in which the population would not support a full-size warehouse. In 2008, BJ's had approximately 8.8 million members. The membership fee was $45, as compared to Costco's $50.51. Revenues grew by 7.2% from 2005 to 2007.52. BJ's was flexible and adapted quickly to customer demand.

    Internal Environment
    Jim Sinegal

    Jim Sinegal was a blunt-spoken, retail veteran; he was the company's alter ego, CEO, and president since the inception of Costco, Inc. He instilled the “people first” philosophy in every employee.53. According to Sinegal, the “people first” he referred to were customers, employees, and shareholders. When these “people” were taken care of, revenues reflected the efforts.54. Jim Sinegal exemplified this philosophy. His career in retail stretched back to 1954, where he worked as a teenager for Fed-Mart discount store. Sinegal left Fed-Mart to work for his former boss, Price, at his first Price Club; and then later left to found Costco.55. Sinegal expressed that his greatest accomplishment was working with his partner to establish the right-time saying, “Anything I've accomplished is a result of what they have done.”56. His eagerness to give credit to others was not false modesty. According to Sol Price, “Jim is a good thinker, but he pulls together ideas from a lot of different people.”57. Jonathan Ziegler, a Santa Barbara, California analyst with Dutton Associates described Sinegal as simply,

    the best retailer in America because he recognizes that people are what makes a business work—employees, vendors, shareholders, and customers—and as a result, he's constantly aware of doing what's right for all of them.58.

    Jeff Brotman

    Jeff Brotman was chairman of the board at Costco. Brotman was essential in the founding of Costco and secured capital investments in the early years. He initiated the strategy of locating in prosperous locations. Brotman recognized that the company “market was an urban market, not a small town market;” Costco located in urban areas for the population draw and the higher discretionary income.59. Brotman knew to succeed Costco needed to pay employees well. Brotman stated, “We've never deviated from that philosophy.”60.


    Costco cared for customers by offering high quality items below average retail price; items were priced with no more than a 14% margin on brands and a 15% margin on the Kirkland Brand. Costco wanted customers to know that they would not be taken advantage of by the company; if a customer was not satisfied with a product for any reason; he/she could return the item without question. Employees were added to check-out lanes to better serve customers and to lighten the load of check-out employees.61. Costco refused to carry items that were losing money.62.

    Human Resources

    Among employees, Costco was known for their “people first” attitude. The average Costco employee was paid $17/hr, compared to the $10.11/hr the average Wal-Mart employee received.63. [Approximately] 82% of Costco employees had health-insurance coverage compared to less than 50% of Wal-Mart employees. Costco employees averaged a 6% turnover after an employee had worked for one year, and a 17% overall turnover rate, much lower than the industry rate. Wal-Mart's average turnover rate was 44%.64. According to Julie Molina, a seventeen-year Costco veteran in South San Francisco, California, “Employees are willing to do whatever it takes to get the job done.”65.

    The respectful treatment of employees was evident in the high number of job applications for Costco positions. When a new Costco store in Green Oak Township, Michigan opened, over five-thousand people applied for one-hundred and fifty positions.66. A former Wal-Mart and Kmart employee described Costco as “the Marine Corps of the retail industry—the elite, the finest.”67. Not only did individuals desire to become a part of the Costco team because of benefits, over 90% of management jobs were filled in-house.68. Employees had opportunities for growth within the company.

    Corporate Culture

    Many credited Sinegal for the “hands-on” culture at Costco.69. Sinegal stated, “A deep involvement is encouraged and realized throughout the management and as a group we're hands on, that is the nature of our business.”70. The culture was evident in each layer of the company, from CEO, to ground-level sales employee. Sinegal spent more than 40% of his time on the road visiting stores; he tried to visit each store twice a year.71. If a new store opened, Sinegal was likely present. He was an example of “hands-on” culture and created a sense of inclusion at Costco.

    Analysts commented that it was Sinegal's “down-in-the-trenches” approach of doing business and his genuine sense of caring for his employees that created and defined Costco's corporate culture.72. This sense of inclusion resulted in 'happy' employees who desired to uphold Costco's golden rule: “to work hard and respect customers, to uphold high ethical standards, and look like they were having a good time doing it.”73.

    Code of Conduct

    Costco's mission was “to continually provide members with quality goods and services at the lowest possible prices.” The shared responsibility of the mission was evident in Costco's Code of Ethics. The Code pointed out the company's responsibility to obey the law, take care of members, take care of employees, and respect suppliers. The Code of Ethics was applicable to all directors, employees, and officers of the company.


    In the market of membership warehouses, Costco was considered the most innovative. Costco searched for new ways to engage customers and bring them more value at lower cost. Costco encouraged vendors to help in these efforts by creating the Salmon Award. Developed in 2002, the Salmon Award was given to vendors that used innovative methods to cut costs and improve the value of the product.74.

    According to consumers, shopping at Costco was a treasure hunt with never-ending surprises. Costco limited inventory selection to 4,000 SKUs (Stock Keeping Units), while standard grocers offered 40,000 SKUs. A constant influx of new items appeared in Costco stores. When members entered Costco, they would never be 100% certain of what they would find. Jim Sinegal reiterated,

    One time [customers] may come in and see that we have some Coach handbags, and they come in the next time, and the Coach handbags aren't there, but perhaps there are some Fila jackets. The attitude is that if you see it, you have got to buy it because it may not be there next time.75.

    A feeling of excitement and need was created as shoppers noticed new products; customers would not know what products would be available upon entering nor if those particular products would be there when they returned. According to the PowerRanking Report of Cannondale Associates, Costco ranked seventh in the innovative consumer marketing and merchandising department.76. One surveyor explained, “They (Costco) make it fun and exciting to shop their stores.”77. Through Costco's innovative efforts, they became more of an item merchandiser than most warehouse companies and created the treasure-hunt experience for customers at any Costco location.


    Costco relied on one type of marketing: word of mouth. Joel Benoliel, Senior VP of Membership and Marketing at Costco, had a “marketing, not advertising” approach.78. The philosophy of anti-advertising marketing was established from the beginning. In the early years, when every item on the budget was scrutinized, one of the first expenses eliminated was advertising, estimated to have saved Costco 2% of sales.79. Word-of-mouth marketing became a fixture at Costco. The only similance of advertising was in Costco Connection, a monthly magazine distributed to five million members by mail and to millions inside Costco stores.80. Even in 2008, Costco did not submit to the advertising edict; they increased communication with club members and continued the “treasure-hunt” word-of-mouth marketing through customers.

    E-commerce stimulated word-of-mouth marketing. In Fiscal 2007, Costco's E-commerce business reached $1 billion in sales.81. It benefited Costco by helping them capture a portion of the multi-billion dollar online office supply business.82. Websites included and, the Canada site.

    Analysts cautioned that the treasure-hunt, no-ads approach might hurt Costco in the future, despite their affluent customer base. Rising gas prices and the increased cost of living might discourage customers from driving to Costco without knowing what was available. Philip Rist, VP of strategic initiatives at BIGresearch explained, “consumers, when they are stretched, rely on traditional advertising like newspaper inserts; they want to plan where to go before they spend $3 driving.”83. Benoliel insisted advertising was not the culture of this no-frill company; Costco would likely not change their mentality.84.


    Over the years, Costco's stock price reflected company growth and practice viability. In 1985, Costco went public with an initial public offering of $10.06 a share.85. Over the past five years, Costco's stock price rose from $33.95 to $61.13 from October 2003 to October 2008 (Exhibit 3). Market cap was $26.92 billion at the end of fiscal year 2007. Not only was the stock price rising, but shareholders received dividends of $.145 per share every quarter in 2007 for a total dividend payout that year of nearly $250 million.86.

    Costco experienced beneficial growth; net sales rose substantially from 2003 to 2008 from $41,695 million to $53,088 million, respectively. Costco experienced sales growth of 7% from 2007 to 2008 (Exhibit 4).87. In August 2008, Costco's sales grew in the declining market by 9%.88. Costco had a low-margin, high-volume selling strategy; they marked up brand products by no more than 14% above cost. Typical retailers operated on a 25% to 40% gross margin. Costco collected over $1.4 billion in cash membership fees annually. A basic one-year membership cost $50; an executive membership cost $100, which included a 2% cash rebate on most items.

    Members grew from 47,700 in September of 2006 to 50,400 in September of 2007.89. Costco produced considerable cash inflow from membership renewal with an average membership renewal rate of 87% (see Exhibits 5 and 6).

    Costco was the poster company for employees. Since their opening in 1983 until the beginning of 2008, Costco consistently showed their business approach was economically viable. Analysts agreed that Costco attracted customers because of their ability to keep product costs low. Yet, market analysts contended that Costco was not focused enough on the classical, primary stakeholder of the company—the shareholder. They insinuated that Costco could turn a higher profit if they eliminated some employee benefits. Management was left to ponder the following questions. Should the primary stakeholder be the shareholder? Should shareholders have the power to change/influence a financially successful organization? What effect did employee benefits and employee goodwill have on profitability? What was the interrelationship between stakeholders and their effects on one another? Did one stakeholder have to suffer in order for another to benefit?


    Exhibit 1 Costco, Sam's Club, &BJ's Wholesale Club Net Sales (2003-2007)

    Exhibit 2 Costco, Sam's Club, & BJ's Wholesale Club Total Store Locations (2003-2007)

    Exhibit 3 Five Year Stock Price Graph

    Source: Yahoo Finance, 2008

    Exhibit 4 Costco Comparative Income Statement, Fiscal Year 2007

    Exhibit 5 Costco Comparative Balance Sheet, Fiscal Year 2007
    Costco Wholesale Corporation Consolidated Balance Sheets(amounts in thousands, expect per value)
    September 2, 2007September3, 2006
    Current assets
    Cash and cash equivalents$2,779,733$1,510,939
    Short-term investments575,7871,322,181
    Receivables, net762,017565,373
    Merchandise inventories4,879,4654,561,232
    Deferred income taxes and other current assets327,151272,357
    Total current assets9,324,1538,232,082
    Property and equipment
    Buildings, leasehold and land improvements7,035,6726,241,357
    Equipment and fixtures2,747,2432,405,229
    Construction in progress276,087248,454
    Less accumulated depreciation and amortization(3,548,736)(3,078,141)
    Net property and equipment9,519,7808,564,295
    Other assets762,653698,693
    Liabilities and stockholders' equity
    Current liabilities
    Short-term borrowings$53,832$41,385
    Accounts payable5,124,9904,581,395
    Accrued salaries and benefits1,226,6661,080,382
    Accrued sales and other taxes267,920324,274
    Deferred membership fees692,176583,946
    Current portion of long-term debt59,905308,523
    Other current liabilities1,156,264899,286
    Total current liabilities8,581,7537,819,191
    Long-term debt, excluding current portion2,107,978215,369
    Deferred income taxes and other liabilities224,197253,713
    Total liabilities10,913,9288,288,273
    Commitments and contingencies
    Minority interest69,31763,358
    Stockholders' Equity
    Preferred stock $.005 par value; 100,000,000 shares authorized; no
    shares issued and outstanding
    Common stock $.005 par value; 900,000,000 shares authorized;2,1852,312
    437,013,000 and 462,279,000 shares issued and outstanding
    Additional paid-in capital3,118,2242,882,652
    Accumulated other comprehensive income370,589277,263
    Retained earnings5,132,3436,041,212
    Total stockholders' equity8,623,3419,143,439

    Source: Costco 2007 Annual Report

    Exhibit 6 Costco Comparative Statement of Cash Flows, Fiscal Year 2007


    1. Alyce Lomax, “Most Foolish CEO: Jim Sinegal.” In Motley Fool,>. (26 September 2006) Accessed October 20, 2008.

    2. Michelle V. Rafter, “Welcome to the club: Part 1 of 2.” Workforce Management (1 April 2005): 41.

    3. Ann Zimmerman, “Costco's Dilemma: Be Kind to Its Workers, or Wall Street.” The Wall Street Journal (26 March 2004): Bl.

    4. “Costco milestones come fast, furious.” MMR 21:13 (Racher Press, Inc. 23 August 2004): 18.

    5. Ibid.

    6. Duane E. Knapp, The BrandPromise. (New York: McGraw-Hill), 1995.

    7. “Ten events that defined the company.” MMR 23:1 (Racher Press, Inc. 9 January 2006): 7.

    8. Tina Grant Ed, “PriceCostco, Inc.” International Directory of Company Histories. 14 vol. (USA: St. James Press, 2009): 393-395.

    9. Ibid.

    10. Ibid.

    11. Ibid.

    12. Tina Grant Ed, “Costco Wholesale Corporation.” International Directory of Company Histories. 43 vol. (USA: St. James Press, 2009): 123-125.

    13. Ibid.

    14. Costco, “2007 Annual Report,” Costco 10-K 31 December 2008.

    15. Tina Grant, Costco, op.cit.

    16. Ten events, op.cit.

    17. Ibid.

    18. Clint Engel, “Costco Home Steadily Expands.” Furniture Today (21 August 2006).

    19. “Shopping is a treasure hunt at Costco.” MMR 21:13 (Racher Press Inc. 23 August 2004): 9.

    20. Ten event, op.cit.

    21. 2007 Annual Report, op.cit.

    22. Ibid.

    23. Shopping, op.cit.

    24. Tina Grant Ed, “Sam's Club.” International Directory of Company Histories. 40 vol. (USA: St. James Press, 2001): 385-387.

    25. Ibid.

    26. Ten events, op.cit.

    27. Joseph Agnese, “Key Industry Ratios and Statistics: Supermarkets & Drugstores” in Standard & Poor's <http://www.netadvantage.standardandpoors.eom/docs/indsur//snd_0708/snd40708.htm>. (17 July 2008) Accessed September 17, 2008.

    28. Mark Clothier and Lauren Coleman-Lochner, “Discounting Costco to Wal-Mart Signals Surge on Sales (Update2).” In Bloomberg. < =aKmzcFa4plcQ&refer=home>. (3 September 2008) Accessed September 16, 2008.

    29. Ibid.

    30. Ibid.

    31. Joseph Agnese, “Sector Scorecard: GICS Sub-Industry Summary.” in Standard & Poor's <http://solutios.standardandpoors.corn?SP?sectortool/>. (17 September 2008) Accessed September 17, 2008.

    32. Elliot Zwiebach, “Bulking Up. (comparison between Wal-Mart Stores Inc. Sam's Club and Costco Wholesale Corp) (Company overview).” Supermarket News 56:15 (14 April 2008): NA in General OneFile. <>. Gale. Maryville College. Accessed September 11, 2008.

    33. Joseph Agnese, “How the Industry Operates: Supermarkets & Drugstores.” In Standard & Poor's, <http://www.netadvantage.standardandpoors.eom/docs/indsur///snd_0708/snd30708.htm>. (17 July 2008) Accessed September 17, 2008.

    34. Ibid.

    35. Mark Clothier and Lauren Coleman-Lochner, op.cit.

    36. Aaron Smith, “Discount stores score big in August.” In CNNMoney. <>. (04 September 2008) Accessed September 16, 2008.

    37. “The Affluent Like Club Stores, Alternative Formats: Nielsen Study.” Convenience Store News (20 February 2007): NA. In General OneFile. <>. Gale. Maryville College. Accessed September 11, 2008.

    38. Ibid.

    39. Ibid.

    40. Sharon Edelson, “Warehouse Clubs Aim for Frugal and Fancy.” WWD (16 October 2006): 6B.

    41. Debbie Howell, “Bilingual in-store marketing - a sign of the times.” In DSN Retailing Today. <>. (17 May 2004) Accessed September 17,2008.

    42. Ibid.

    43. Joseph Agnese, “Industry Trends: Supermarkets & Drugstores.” In Standard & Poor's. <>. (17 July 2008) Accessed September 17, 2008.

    44. Ibid.

    45. Debbie Howell, op.cit.

    46. Elliot Zwiebach, op.cit.

    47. Elliot Zwiebach, op.cit.

    48. Elliot Zwiebach, op.cit.

    49. Elliot Zwiebach, op.cit.

    50. “BJ's Wholesale Club.” In wikinvest. <'s_Wholesale_Club_(BJ)>. Accessed September 17, 2008.

    51. “BJ's Wholesale Club: Business Summary.” In Standard & Poor's. <>. (17 July 2008) Accessed September 17, 2008.

    52. Ibid.

    53. Michelle V. Rafter, Part 1, op.cit.

    54. Mike Troy, “A model business: long-term vision benefits customers, employees.” DSN Retailing Today 44:23 (19 December 2005): 16

    55. Mike Duff, “The Sinegal factor: thriving with a hands-on approach.” DSN Retailing Today 44:23 (19 December 2005): 26.

    56. Elliot Zwiebach, “Jim Sinegal.” Supermarket News 55:49 (3 December 2007): NA.

    57. Ibid.

    58. Ibid.

    59. “Brotman: 'Costco has arrived'.” MMR 23:13 (23 August 2004): 24.

    60. Ibid.

    61. Michelle V. Rafter, “Welcome to the club: Part 2 of 2.” Workforce Management (lApril 2005): 41.

    62. Ibid.

    63. Wayne F. Cascio, “The High Cost of Low Wages.” Harvard Business Review 84:12 (1 December 2006): 23.

    64. Ibid.

    65. Stanley Holmes and Wendy Zellner, “The Costco Way.” Business Week (12 April 2004): 76.

    66. Michelle V. Rafter, Part 2, op.cit.

    67. Ibid.

    68. Elliot Zwiebach, op.cit.

    69. Mike Duff, op.cit.

    70. Ibid.

    71. Doug Desjardins, “Culture of inclusion: where top executives lead by example and honesty and frugality are valued virtues.” DSN Retailing Today 44:23 (19 December 2005): 25.

    72. Ibid.

    73. Ibid.

    74. Mike Duff, “Innovation has its own reward.” DSN Retailing Today 44:23 (19 December 2005): 38.

    75. “Jim Sinegal Quotes.” In Evan Carmicheal.>. Accessed October 20, 2008.

    76. Mike Duff, “The ultimate 'itemmerchant'.” DSN Retailing Today 44:23 (19 December 2005): 34.

    77. Ibid.

    78. Mya Frazier, “Costco; Joel Benoliel.” Advertising Age 76:45 (7 November 2005): S14.

    79. Mya Frazier, “Benoliel resists retail media trends, insists it's all word of mouth.” Advertising Age 77:33 (14 August 2006): 22.

    80. Ibid.

    81. 2007 Annual Report, op.cit.

    82. Ibid.

    83. Mya Frazier, Benoliel, op.cit.

    84. Ibid.

    85. “Costco (COST).” In Yahoo Finance. <>. (2 October 2008) Accessed October 2, 2008.

    86. 2007 Annual Report, op.cit.

    87. Ibid.

    88. Mike Duff, The ultimate 'item merchant,' op.cit.

    89. 2007 Annual Report, op.cit.

    Dollar General—Today's Neighborhood Store
    Dollar Stores

    In 2011, Dollar General was the leader in the dollar store retail sector with sales of more than $13 billion. It was the largest discount retailer in the US by number of stores, more than 9,800 as of December 2011. Dollar stores, including Dollar General, Family Dollar, and Dollar Tree, operated in the deep discount segment of US retailing, offering low-priced merchandise in convenient small-store formats.

    The merchandise sold by dollar stores varied somewhat from one store to another. However, consumable merchandise, including snacks, other food, health and beauty products, and cleaning supplies, made up a substantial part of the sales mix for most dollar stores. Consumables accounted for an increasing percentage of sales from 2000 through 2011. Other merchandise included variety merchandise, seasonal items, and basic apparel. The stores might have 5,000 to 10,000 stock keeping units, carefully targeting their customers' frequent shopping needs. The merchandise often included both national brands and private-label brands. Some dollar stores priced all their merchandise at $1 or less, while others offered a range of price points, often from less than $1 up to $10. Prices generally were comparable to or lower than other discount stores, including Wal-Mart.

    Dollar stores could be found in rural areas, small towns, suburbs, and large cities, serving customers living within three to five miles of the store. The stores were in low-rent locations, either free standing or in strip shopping centers. Because the chains emphasized convenience to their customers, each store generally had plenty of parking available at its front door. For ease of shopping, the stores were small, usually in the range of 6,000 to 10,000 square feet.

    Dollar stores targeted their merchandise assortment and store locations to meet the shopping needs of value-conscious customers. A high percentage of their customers came from low or lower-middle income brackets or were on fixed incomes. These customers always had to control their spending. They came to dollar stores looking for bargain prices on items they needed.

    After several months of public fears about the state of the economy, in December 2007 the United States entered a recession, widely considered the worst recession since the 1930's. The economy was shaken by record-high prices for gasoline in the first half of 2008 and by weakness in financial markets and real estate prices. The unemployment rate more than doubled, from 4.7 percent in November 2007 to 10.1 percent in October 2009.

    Dollar stores often have recorded increased sales and income during recessions. While their usual customers suffered from unemployment and lower purchasing power, people from higher income brackets found their way to dollar stores, looking for bargains. During the recession of 2007-2009, the major dollar store chains adjusted their sales mix in an effort to drive increased customer traffic and larger purchases. They sought to keep their traditional customers and attract new customers. In June 2009, the recession officially ended. However, the economy remained weak through 2011, and the unemployment rate remained near 9 percent.

    Dollar General's Background

    Dollar General was founded in 1939 by J. L. Turner and his son, Cal Turner, Sr., as a wholesaling business. The first Dollar General Store, which was the first dollar store in the US, was opened in Springfield, Kentucky, in 1955. The store sold close-out and discontinued items, all priced at $1 or less. The company grew rapidly, operating 255 stores by 1965. Cal Turner, Jr., took over leadership from his father, becoming president in 1977 and chairman of the board in 1988. He achieved rapid growth of the chain, increasing sales through opening new and larger stores and by changing the merchandise mix. Cal Turner, Jr., concluded that customers wanted to find a predictable assortment of items at the stores, including brand-name merchandise, so Dollar General reduced the amount of close-out and discontinued merchandise and increased the amount of consumable merchandise in the stores. It added coolers and refrigerators so that its stores could carry perishable food items. At the beginning of 1991, there were l,46l Dollar General stores; by the end of 2002, the chain had 6,113 stores and sales in excess of $6 billion.

    In April 2001, the company announced that it would restate its financial statements for the three preceding years due to accounting errors that had increased its reported income. This announcement led to an investigation by the Securities and Exchange Commission. Shareholders filed lawsuits against Dollar General, which the company eventually settled for $162 million. An investigation conducted by the company discovered numerous accounting errors. In November 2002, the leadership by the Turner family ended, when Cal Turner, Jr., announced his retirement.

    David Perdue replaced Cal Turner, Jr., as CEO and board chairman. Perdue had extensive experience in manufacturing but none in retailing. Under his leadership, the company continued to open new stores and expand its offerings of consumables. However, by 2005, Dollar General was experiencing decreasing customer traffic, and same-store sales declined for two quarters. Perdue noted that seasonal, home, and apparel categories were not performing well. The company launched Project Alpha, which was based on comprehensive analyses of the performance of each store and the company's inventory management model. Dollar General decided to move away from its inventory pack-away model, by which unsold seasonal, apparel, and home products were stored away and then returned to the sales floor the next year. In 2006, Dollar General took markdowns to eliminate most of its out-of-season and outdated merchandise. Project Alpha also included changes to the company's real estate practices for lease renewals, store site selection, and remodeling decisions. Dollar General identified and began closing approximately 400 underperforming stores, resulting in slower growth of number of stores for 2006, compared to company performance over the previous decade (Exhibit 1). For 2007, Dollar General closed more stores than it opened and recorded a loss for the year as a whole (Exhibit 2).

    Exhibit 1 Dollar General Performance, 2004-2006

    Exhibit 2 Dollar General Performance, 2007-2009

    The Merger

    Although David Perdue had initiated a turn-around of Dollar General in 2006, the company still was a likely candidate for a take-over. Rumors circulated that the company was about to be acquired by private equity investors, who seek to profit by purchasing under-performing businesses and then streamlining their operations. In 2007, Perdue led a merger, by which existing shareholders received $22 in cash per share, a premium of about 30 percent over the market price, and approximately $6.9 billion total. As result of the merger, Dollar General became a subsidiary of Buck Holdings, L.P, which was a Delaware limited partnership controlled by Kohlberg Kravis Roberts & Co. (KKR) and affiliated investors (GS Capital Partners VI Fund, Goldman, Sachs & Co., Citi Private Equity, Wellington Management Company LLP, CPP Investment Board, and other equity co-investors). The merger was funded through Dollar General's available cash, investment by KKR and its affiliates, equity contributions from some Dollar General managers, and $4.5 billion in debt financing. Following the merger, Dollar General's common stock was no longer registered with SEC and no longer traded on a national securities exchange. One other consequence of the merger was recognition of more than $4.3 billion in goodwill and other intangible assets, more than doubling the assets on Dollar General's balance sheet. After the successful completion of the merger, Perdue resigned as CEO and board chairman.

    Rick Dreiling (Exhibit 3) became CEO of Dollar General early in 2008, when the United States was in the worst recession in nearly 80 years. Under Dreiling's leadership, the company managers identified four operating priorities: driving productive sales growth, increasing gross margin, improving processes and information technology to reduce costs, and strengthening the Dollar General culture of serving others. These priorities provided direction for Dollar General's operations through 2011. (Exhibits 4 and 5 and Appendix I)

    Exhibit 4 Dollar General Priorities
    PrioritiesSteps for achieving the priority
    Driving productive sales growth
    • Increase shopper frequency
    • Increase average transaction amount
    • Increase sales per square foot
    • Manage merchandise categories (consumables, apparel, etc.) effectively
    • Eliminate unproductive items from inventory
    • Open new stores; expand or remodel existing stores
    Increasing gross margin
    • Expand private label offerings
    • Increase foreign sourcing
    • Reduce shrink
    Improving processes and information technology
    • Install energy management systems
    • Improve preventive maintenance
    • Recycle cardboard
    • Make favorable lease renewals
    • Implement new store staffing model
    Strengthening the Dollar General culture of serving others
    • Serve others in 4 primary areas: customers, employees, shareholders, and communities
    • Help customers “Save time. Save money. Every day!”
    • Respect employees; allow them to work with dignity and earn a decent living
    • Provide shareholders with a superior return on their investment
    • Provide a better life for people in the communities it serves

    Source: Dollar General 10-K Report for Fiscal Year 2010

    Exhibit 5 Dollar General's Mission
    Dollar general's mission: serving others
    • For Customers: Convenience, Quality, and Great Prices.
    • For Employees: Respect and Opportunity.
    • For Shareholders: A Superior Return.
    • For Communities: A Better Life.
    Who we are
    • Today's neighborhood general store, serving the needs of our customers by providing convenience, value, and service every day.
    Values we believe in:
    • Demonstrating integrity in everything we do.
    • Providing the opportunity for growth and development, in a friendly and fun environment.
    • Delivering results through hard work and shared commitment.
    • Celebrating success and recognizing the contributions of others.
    • Owning our actions and decisions and learning from our mistakes.
    • Respecting the dignity and differences of others.

    Dollar General did not identify specific income groups as its target customers. However, its long-term mission was serving customers who were value-conscious and seeking to make the most of their spending dollars. Dollar General managers believed that the small-store format and selection of products at everyday low prices (ranging from less than $1 up to $10) had generally met its customers' needs and driven company growth over the years. In an effort to achieve its four operating priorities, Dollar General began measuring customer satisfaction to identify areas needing improvement.


    As of February 25, 2011, Dollar General operated 9,414 retail stores in 35 states, as shown in Exhibit 6. Most of the stores were located in leased space, often with lease terms of 10 to 15 years. About 58 percent of the stores were in freestanding buildings, with 41 percent in strip shopping centers. The company's store strategy involved low initial capital expenditures, limited maintenance capital, and low occupancy and operating costs. In 2010, the average cost of equipment and fixtures in new leased stores was approximately $165,000. Initial net investment in inventory was about $75,000. Because of these low costs, Dollar General achieved a rapid payback of its investment in new stores and generated strong operating cash flows. In 2010, it used part of this money to purchase some of the leased stores, taking advantage of the weak real estate market to lower its operating costs for future years.

    Exhibit 6 Number of Dollar General Stores By State

    Growth through Opening New Stores

    Dollar General had slowed its store growth from 2006 through 2008. In 2009, despite the recession, it accelerated the rate of opening new stores (Exhibit 7). Although there were thousands of dollar stores in the United States, there was considerable opportunity for growth in the dollar store sector. AC Nielsen found that dollar stores had increased their penetration across all income brackets over a period of several years. However, the sector as a whole accounted for just 1.2% of consumer products spending—leaving ample room for growth. Because customers usually shopped at dollar stores within 3 to 5 miles of their homes, Dollar General still had substantial opportunity for opening additional stores in existing markets without cannibalizing sales at its older stores. During Dollar General's refocusing initiatives from 2006-2008, it had not expanded to new states. In 2011, it planned to expand to Connecticut, New Hampshire, and Nevada.

    Exhibit 7 Growth in Number of Stores

    In addition to building new stores, Dollar General had pursued an active program of remodeling and renovating existing stores. Many of its stores had been remodeled into a new race track format that improved merchandise adjacencies and made the stores easier to shop. To increase stores' sales productivity, the company had raised the height of some of its merchandise fixtures over a period of three years. As a result, sales per square foot had increased (Exhibit 8 and Appendix IV). The company had also refined its store standards to achieve a consistent look and feel across the chain.

    Exhibit 8 Financial and Operating Data

    Most of the merchandise was transported to a store from the nearest distribution center by third-party trucking companies using Dollar General trailers (Exhibit 9). When the cost of diesel fuel increased, as it did in 2008, Dollar General's distribution costs went up, putting pressure on the company's gross profit rate. In 2010, Dollar General completed the installation of a voice pick system in the distribution centers, whereby employees in the distribution centers could communicate with warehouse software systems by speech recognition.

    Exhibit 9 Distribution Centers


    Dollar General classified its merchandise in four categories: consumables, home products, seasonal, and apparel. Of the four categories, sales in consumables increased most rapidly from 2006 through 2010 (Exhibits 10 and 11). Even though consumables generally had a lower gross profit rate than the other categories, Dollar General was able to increase its gross profit percentage in 2009 and 2010. Because of the impact of sales mix on sales growth and gross profit (two of the company's four operating priorities), Dollar General continually reviewed its merchandise mix, adjusting it when appropriate. During the recession, it had expanded its offerings of consumable goods to serve customers' needs and increase traffic in the stores. Careful management of merchandise categories had allowed Dollar General to achieve increases in same-store sales for 20 consecutive years. Shrinkage reduction (loss of merchandise due to shoplifting, employee theft, damage, and obsolescence) was a key part Dollar General's effort to increase gross margin. The company installed new analytical and monitoring tools to assist with inventory shrinkage reduction efforts.

    Exhibit 10 Inventory Categories
    Inventory categoryItems included
    ConsumablesPaper and cleaning products, food (including packaged food and perishables), health and beauty and pet supplies
    Seasonal productsDecorations, toys, batteries, small electronics, stationery, prepaid cell phones, gardening supplies, hardware, automotive and home office supplies.
    ApparelCasual everyday apparel for infants, children, women and men, as well as socks, underwear, disposable diapers, shoes and accessories
    Home productsKitchen supplies, cookware, small appliances, light bulbs, storage containers, frames, craft supplies and kitchen, bed and bath soft goods

    Source: Dollar General 10-K Report for Fiscal Year 2010

    Exhibit 11 Pattern of Merchandise Sales


    Marketing at Dollar General had evolved into a very sophisticated operation. Its marketing strategies resulted from manipulation of the four variables, Price, Place, Promotion and Product, to allow the company to attract more and new customers. Since 2007, Dollar General had been able to capture “trade-down” shoppers. “Trade-down” shoppers came from middle and higher income levels. They generally had not shopped at dollar stores but came during the recession to find bargains and increase their purchasing power.

    A careful examination of the marketing variables revealed significant changes in how marketing was approached. In the area of Promotion, Dollar General began using newspaper inserts, and its web site highlighted bargains to bring customers into the stores. The web site also allowed customers to place orders online, and some items qualified for free shipping. When the first Dollar General store opened, the Price variable was very straightforward: everything in the store was a dollar or less. Over time, the pricing strategy evolved to items being priced from $1 and under to no more than $10, in most cases.

    The Place variable saw perhaps the most dramatic changes as Dollar General developed a national footprint. The stores appeared in rural, urban, and suburban areas, as stand-alone units or in strip malls. Some cities had multiple stores with multiple formats and differing merchandising mixes.

    The Product variable also experienced significant changes, leading to substantial growth. Dollar General managers believed that the company's ability to attract customers of varying economic status depended on offering both national and store brands. The company offered products carrying many well-known national brands; a few examples are shown in Exhibit 12.

    Exhibit 12 National Brands
    Gain and TideLaundry detergent
    Quaker OatsCereal
    HeftyTrash bags
    HanesUnderwear and casual apparel
    CharminPaper products
    HuggiesDisposable diapers
    Glade, Shout, Scrubbing BubblesCleaning products
    Suave, Q-tipsPersonal hygiene

    Source: Dollar General website, October 2011

    While many Dollar General customers selected national brand products, store brands (private label brands) were also important to the growth of the chain. Especially during the recession, increasing numbers of customers chose private label products, perceiving that they offered greater value than the national brands. The store brands usually offered higher gross margins than national brands, thus adding more to the company's bottom line. In 2010, private-label brands made up 22 percent of consumables sales for Dollar General. There was potential for further growth of private labels in consumables, and the company made a major push to increase its private-label offerings in non-consumables. By direct sourcing (directly importing, rather than buying through agents, importers, or other third parties) merchandise, Dollar General controlled costs and increased its gross profit. Direct-sourced merchandise made up 8 percent of purchases at cost in 2010, and the company believed there was opportunity to expand its direct sourcing efforts.

    In addition to brands developed by Dollar General, the company held licenses to use various trademarks and brands, including the Bobbie Brooks brand for clothing, the Fisher Price brand for some items of children's clothing, and the Rexall brand for vitamins and related products. Some of Dollar General's private label brands and brands that it was licensed to use are shown in Exhibit 13.

    Exhibit 13 Dollar General Licensed and Private Label Brands
    Clover ValleyFoods—sodas, cereals, snacks, coffee
    DG PartyDecorations, novelties, party favors
    Bobbie BrooksApparel for women and girls
    Open TrailsApparel for men and boys
    RexallVitamins and supplements
    DG HealthHealth care products, such as pain relievers

    Source: Dollar General website, October 2011

    Dollar General Employees

    At the end of 2010, Dollar General employed 85,900 full-time and part-time employees. The typical staffing model for a store was one store manager, one assistant manager, and three or more sales clerks. The company had focused on recruiting, training, and retaining qualified employees, and on improvement of employee performance. At the beginning of 2011, the company was ready to roll out a new staff scheduling model to help ensure staffing levels appropriate to the level of sales volume at different times during the week.

    In 2006, Cynthia Richter filed a lawsuit in Alabama alleging that she and other Dollar General store managers were incorrectly classified as exempt executive employees under the Fair Labor Standards Act and therefore not entitled to overtime pay. Richter asserted that many of the duties performed by store managers were not managerial in nature: unloading trucks, stocking shelves, cleaning bathrooms. The suit sought to recover the overtime pay and damages. The case was certified as a class action, with 3,860 current and former store managers joining the suit. Dollar General argued that its store managers were properly classified as exempt and that the action did not qualify for class action status. At the start of 2011, the outcome was not yet known; an unfavorable outcome could have a material impact on the company's financial position.

    Also in 2006, Janet Calvert, a former store manager, filed a complaint that she was paid less than male store managers because of her sex, in violation of the Equal Pay Act and Title VII of the Civil Rights Act of 1964. Other plaintiffs were added to the case. The plaintiffs and Dollar General agreed to mediate the matter. Dollar General reached a settlement in principle, by which it would pay $15.5 million to the plaintiffs and their legal fees and costs of $3.25 million. If these payments were approved by the court, Dollar General expected to receive reimbursement of $15.9 million from its Employment Practices Liability Insurance. Dollar General also agreed to make changes to its pay setting policies and procedures for new store managers.

    Stockholders: IPO and a Special Dividend

    In November 2009, more than two years after being taken private, Dollar General went public again, through an initial public offering (IPO) of common stock. In the IPO, 22,700,000 new shares of stock were sold to the public, and existing shareholders sold 16,515,000 outstanding shares. The cash proceeds to Dollar General, $446 million, were used to pay down outstanding debt from the merger. The company paid a $4.8 million transaction fee to Kohlberg Kravis Roberts & Co., L.P. and Goldman, Sachs & Co. in connection with the offering. Upon completion of the IPO, the company incurred additional charges of $58.8 million for fees paid to terminate advisory agreement with KKR and Goldman, Sachs & Co. During 2010, there were secondary offerings of 59 million shares of Dollar General stock, all sold by existing stockholders, with no cash proceeds to the company. After the IPO and these transactions, KKR and its affiliates still held about 71 percent of Dollar General's stock, with the remainder publicly traded. Exhibit 14 shows the prices for Dollar General stock throughout 2010.

    The company had not paid any dividends since being taken private. In September 2009, as part of the preparation for the IPO, the board of directors declared a special dividend of $0.7525 per share, approximately $239.3 million total. After the IPO, the company had no plans to pay cash dividends; it retained earnings for expansion and debt repayment.

    Exhibit 14 Price for Dollar General Stock in 2010

    Dollar General's Competitors: Family Dollar

    In 2011, Family Dollar was the second largest dollar store chain in the United States, operating 7,000 general merchandise discount stores in 44 states and generating sales revenue of $8.5 billion. Family Dollar focused on four main priorities: increasing the chain's relevancy to its customers: driving increased profitability; managing risk; and building its employee teams (Exhibit 15).

    Family Dollar customers were mostly in low and middle-income brackets. In 2010, 55 percent of customers had annual gross income of less than $40,000, and 24 percent had annual gross income of less than $20,000. About 34 percent of customers were African American or Hispanic, and 68 percent were age 45 or older. Although the overall economy showed signs of stabilizing, Family Dollar managers believed that its customers would continue to experience significant economic pressures.

    Exhibit 15 Family Dollar Mission
    Family Dollar Mission: “to provide customers with a compelling place to shop, our team members with a compelling place to work, and investors with a compelling place to invest. Our vision is to be the best small-format convenience and value retailer serving the needs of families in our neighborhoods.”

    Source: Family Dollar 10-K Report for Fiscal Year 2011

    Family Dollar Stores

    Family Dollar stores typically had between 7500 and 9500 square feet of selling space and served customers living within 5 miles of the store. The stores were successful in urban, suburban, small town, and rural markets. The company grew from 3,777 stores in 2000 to 7,000 stores in 2011 (Exhibit 16). From 2007 through 2010, the company had slowed the rate of opening new stores to focus on improving returns in existing stores. During this time, Family Dollar re-engineered its merchandise and supply chain processes and store technology platform. It also created a new store layout designed to support a wider assortment of consumable merchandise (key traffic-driving categories) and improve merchandise complementarity. By 2011, the company was ready to re-accelerate new store growth, planning to open 300 new stores and renovate 600 to 800 stores. The soft real estate markets had created additional opportunities for new store growth by reducing lease costs.

    Merchandise at Family Dollar

    Family Dollar (Appendix II) sold consumable merchandise, home products, apparel and accessories, and seasonal and electronics, at prices generally ranging from less than $1 to $10 (Exhibit 17). The company offered a focused assortment of merchandise in core categories— health and beauty aids, packaged food and refrigerated products, home cleaning supplies, housewares, seasonal goods, apparel, and home fashions. To sell merchandise at low price points, Family Dollar had to achieve low overhead and low cost of goods sold. In 2011, the average customer transaction was $9.94.

    At the same time that Family Dollar was redesigning its stores, it focused on inventory productivity, reducing inventory levels for discretionary merchandise categories. As a result, the company reduced the amount of seasonal markdowns and experienced less inventory shrinkage. Family Dollar continued to expand its private brand programs and global sourcing capabilities. In 2010, the company launched or refreshed several private-label brands, increasing the sale of private-label merchandise from 19 percent of net sales to 22 percent. National brand name merchandise constituted 51 percent of 2010 sales, while other brand names made up most of the remainder. Family Dollar purchased merchandise from a wide variety of suppliers: approximately 9 percent of the merchandise purchased in 2010 was imported.

    Family Dollar CEO Howard Levine believed that the company was in a good position to increase market share, based on its strategy of providing value and convenience. During 2010, increasing customer traffic supported an increase in comparable store sales of 4.8 percent. Basic consumable needs were the primary driver of recurring shopping trips, but Family Dollar was also seeing improvements in some certain discretionary categories.

    Exhibit 16 Family Dollar Stores by State

    Exhibit 17 Merchandise Categories

    Dollar Tree

    Dollar Tree (Appendix III) operated a chain of discount variety stores (Exhibit 18: 4,011 stores as of January 2011) offering merchandise at a fixed price of $1. The stores had names of Dollar Tree, Deal$, Dollar Giant, and Dollar Bills. At the end of 2010, approximately 3,935 of the stores sold almost all items for $1 or less in the United States ($1.25 or less in Canada). Most of the remaining stores operated as Deal$, selling some items at prices in excess of $1.

    Exhibit 18 Dollar Tree Stores by State or Province


    Dollar Tree sought to exceed customers' expectations of the variety and quality of products they can purchase for $1. Between 55 and 60 percent of the merchandise was purchased domestically, and the remainder was imported. The domestic purchases included closeouts and promotional merchandise (about 10 percent of purchases). The company's direct relationships with manufacturers allowed it to select from a broad range of products, packaging, and product sizes that met its customers' needs.

    Dollar Tree offered a selection of consumable merchandise (candy, other foods, health and beauty products, plastics and cleaning supplies, and in almost half the chain's stores, frozen and refrigerated food), variety merchandise (toys, housewares, gifts, party goods), and seasonal goods (Easter, Halloween, and Christmas merchandise) (Exhibit 19). On average, each store carried approximately 6,100 items, of which 2,700 basic everyday items were automatically replenished. Dollar Tree attempted to keep basic consumable merchandise stocked in the stores continuously and had slightly increased the mix of consumable merchandise to increase the store traffic.

    Exhibit 19 Merchandise Categories for Dollar Tree
    Merchandise category as a percentage of sales20102009
    Variety categories45.8%46.9%

    Source: Dollar Tree 10-K Report for Fiscal Year2010

    Stores and Growth Strategy

    From 2005 through 2010, Dollar Tree net sales increased at a compound annual growth rate of 10.3 percent. The company grew its sales through opening new stores, remodeling and expanding existing stores, and selective mergers and acquisitions. Dollar Tree opened new stores in strip shopping centers anchored by mass merchandisers or grocers whose target customers were similar to Dollar Tree's. The stores were successful in metropolitan areas, mid-sized cities, and small towns.

    Since 1995, Dollar Tree had added 695 stores through mergers and acquisitions, targeting companies with a similar single-price point concept. In 2006, Dollar Tree acquired 138 Deal$ stores, which offered an expanded assortment of merchandise, including items that sold for more than $1. The merger gave Dollar Tree an opportunity to test a new merchandise concept without disrupting the operation of the Dollar Tree stores. In subsequent years, the company opened new Deal$ stores, operating 164 of the stores by the end of 2010. In 2010, the company acquired 86 Dollar Giant stores based in Vancouver, British Columbia. These stores offered a merchandise assortment similar to Dollar Tree stores, all priced at $1.25 Canadian or less. The stores operated in British Columbia, Ontario, Alberta, and Saskatchewan provinces, Dollar Tree's first expansion outside the United States.


    At the start of 2011, Dollar General and its competitors had not only survived the recession, but had thrived and expanded. While the recession had officially ended, substantial economic uncertainty and high unemployment continued. Dollar General had completed a turnaround that included being taken private, the closing of several hundred under-performing stores, and then re-emerging as a publicly-traded company. Rick Dreiling faced the challenge of evaluating the strategies and performance of Dollar General and its competitors (Appendix IV) and setting the path for the company's future.

    Appendix I

    Dollar General Corporation and Subsidiaries Consolidated Statements of Income (In thousands, except per share amounts)

    Dollar General Corporation and Subsidiaries Consolidated Balance Sheets(In thousands, except per share amounts)
    Jan 28,2011Jan 29,2010
    Current assets:
    Cash and cash equivalents$497,446$222,076
    Merchandise inventories1,765,4331,519,578
    Income taxes receivable-7,543
    Prepaid expenses and other current assets104,94696,252
    Total current assets2,367,8251,845,449
    Net property and equipment1,524,5751,328,386
    Intangible assets, net1,256,9221,284,283
    Other assets, net58,31166,812
    Total assets$9,546,222$8,863,519
    Liabilities and Shareholders' Equity
    Current liabilities:
    Current portion of long-term obligations$1,157$3,671
    Accounts payable953,641830,953
    Accrued expenses and other347,741342,290
    Income taxes payable25,9804,525
    Deferred income taxes payable36,85425,061
    Total current liabilities1,365,3731,206,500
    Long-term obligations3,287,0703,399,715
    Deferred income taxes payable598,565546,172
    Other liabilities231,582302,348
    Commitments and contingencies
    Redeemable common stock9,15318,486
    Shareholders' equity:
    Preferred stock, 1,000 shares authorized--
    Common stock; $0.875 par value, 1,000,000 shares authorized, 341,507 and 340,586 shares issued and outstanding at January 28, 2011 and January 29, 2010, respectively298,819298,013
    Additional paid-in capital2,945,0242,923,377
    Retained earnings830,932203,075
    Accumulated other comprehensive loss(20,296)(34,167)
    Total shareholders' equity4,054,4793,390,298
    Total liabilities and shareholders' equity$9,546,222$8,863,519

    Dollar General Corporation and Subsidiaries Consolidated Statements of Cash Flows (In thousands)

    Appendix II

    Family Dollar Stores, Inc., and Subsidiaries Consolidated Statements of Income

    Family Dollar Stores, Inc., and Subsidiaries Consolidated Balance Sheets
    (in thousands, except per share and share amounts)August 27,2011August 28,2010
    Current assets:
    Cash and cash equivalents$141,405$382,754
    Short-term investment securities96,006120,325
    Merchandise inventories1,154,6601,028,022
    Deferred income taxes60,01152,190
    Income tax refund receivable10,326
    Prepayments and other current assets71,43663,005
    Total current assets1,533,8441,646,296
    Property and equipment, net1,280,5891,111,966
    Investment securities107,458147,108
    Other assets74,31462,775
    Total assets$ 2,996,205$2,968,145
    Liabilities and shareholders' equity
    Current liabilities:
    Current portion of long-term debt$ 16,200$-
    Accounts payable685,063676,975
    Accrued liabilities310,818309,347
    Income taxes4,97418,447
    Total current liabilities1,017,0551,004,769
    Long-term debt532,370250,000
    Other liabilities270,466253,576
    Deferred income taxes89,24038,246
    Commitments and contingencies (Note 10)
    Shareholders' equity:
    Common stock, $.10 par; authorized 600,000,000 shares; issued 147,316,232 shares at August 27, 2011, and 146,496,237 shares at August 28, 2010, and outstanding 117,353,341 shares at August 27, 2011, and 130,452,959 shares at August 28, 201014,73214,650
    Capital in excess of par274,445243,831
    Retained earnings1,969,7491,665,646
    Accumulated other comprehensive loss(6,403(7,046
    Common stock held in treasury, at cost (29,962,891 shares at August 27, 2011, and 16,043,278 shares at August 28, 2010)(1,165,449(495,527
    Total shareholders' equity1,087,0741,421,554
    Total liabilities and shareholders' equity2,996,2052,968,145
    Appendix III

    Dollar Tree, Inc. And Subsidiaries Consolidated Statements Of Operations

    Dollar Tree, Inc. And Subsidiaries Consolidated Balance Sheets
    (in millions, except share and per share data)Jan 29, 2011Jan 30, 2010
    Current assets:
    Cash and cash equivalents$311.2$571.6
    Short-term investments174.827.8
    Merchandise inventories803.1679.8
    Deferred tax assets16.36.2
    Prepaid expenses and other current assets27.920.2
    Total current assets1,333.31,305.6
    Property, plant and equipment, net741.1714.3
    Deferred tax assets38.035.0
    Other assets, net95.0101.5
    Total assets$2,380.5$2,289.7
    Liabilities and shareholders' equity
    Current liabilities:
    Current portion of long-term debt$16.5$17.5
    Accounts payable261.4219.9
    Other current liabilities190.5189.9
    Income taxes payable64.448.6
    Total current liabilities532.8475.9
    Long-term debt, excluding current portion250.0250.0
    Income taxes payable, long-term15.214.4
    Other liabilities123.5120.2
    Total liabilities921.5860.5
    Commitments and contingencies
    Shareholders' equity:
    Common stock, par value $0.01. 400,000,000 shares authorized, 123,393,816 and 131,284,455 shares. Issued and outstanding at January 29, 2011 and January 30, 2010, respectively1.20.9
    Additional paid-in capital--
    Accumulated other comprehensive loss(0.4)(2.4)
    Retained earnings1,458.21,430.7
    Total shareholders' equity1,459.01,429.2
    Total liabilities and shareholders' equity$2,380.5$2,289.7
    Appendix IV

    Summary Data for Dollar General and Its Competitors: Same-Store Sales Increase (Decrease)

    Number of Stores at Year End

    Net Sales per Selling Square Foot

    Net Sales (in millions of dollars)

    Gross Profit (in millions of dollars)

    Operating Profit (in millions of dollars)

    Net Income (in millions of dollars)

    Family Dollar Stores
    Dollar Stores—Small-Box Discounters

    Dollar stores operated in the deep discount segment of retailing. The three national dollar store chains were Dollar General, Family Dollar, and Dollar Tree. By the end of 2011, these chains together operated more than 21,000 stores and were generating more than $27 billion in annual sales revenue. Each store was small, typically having 7,500 to 10,000 square feet of selling space and serving customers living within three to five miles of the store. Most dollar store customers came from low and lower-middle income groups and people living on fixed incomes. By necessity, these customers were the most value-conscious shoppers in the US. Dollar stores tailored their merchandise and store operations to fit the needs of their economically hard-pressed customers. The merchandise often included food (milk, bread, frozen and packaged convenience foods, and snacks), household products (paper products and cleaning supplies), seasonal items, home decor items, and a small selection of basic apparel. Some dollar stores priced all their merchandise at $1 or less; others sold goods at low price points ranging up to $10. The dollar stores operated in a highly competitive environment, with competitive factors including store locations, convenience, price, quality, and assortment of merchandise.

    Dollar Stores and the Recession

    According to the National Bureau of Economic Research, the United States slipped into recession in December 2007. During the first half of 2008, a rise in commodity prices, most notably prices for oil and gasoline, contributed to the economic slowdown. The unemployment rate, which was 4.8 percent in February 2008, rose to 7.4 percent by December of 2008 and topped out at 10.1 percent in October 2009 (Exhibit 1). Stock prices fell, with the S&P 500 dropping from 1412 in early January 2008 to 903 by the end of the year. The value of homes and other real estate plummeted, along with consumer confidence ratings. Consumer spending dropped for many retailers; for example, see the data for Home Depot and Macy's in Exhibit 2, below.

    Exhibit 1 Economic Data
    US unemployment rateFebruary 20084.8 percent
    December 20087.4 percent
    October 200910.1 percent
    June 20109.5 percent
    December 20109.4 percent
    Average national price for regular gasolineJuly 2007$3.005
    January 2008$3.159
    July 2008$4.165
    December 2008$1.710
    December 2009$2.739
    December 2010$3.179
    June 2011$3.789
    S&P 500January 2, 20081411.63
    December 29, 2008903.25

    Exhibit 2 Sales (in millions of dollars) for fiscal year

    As consumers experienced reduced purchasing power, they changed their shopping patterns and limited their discretionary spending. Many shoppers, looking for the lowest prices on necessities, began doing more of their shopping at discount stores, including dollar stores. Higher gas prices led consumers to forgo the drives to big box stores and shop neighborhood stores that were closer to home. Middle income shoppers who had not shopped dollar stores before contributed to the increase in sales for the dollar store chains. Regular shoppers at the dollar stores began purchasing more consumables there, and less discretionary merchandise. Exhibit 3 demonstrates the growth in quarterly revenues and profit experienced by Family Dollar during the recession.

    The National Bureau of Economic Research concluded that the recession ended in June 2009. By late 2009, there was some evidence of economic recovery, although unemployment rates remained high. Discount stores had always done well during recessions, including the recession of 2008-2009; the question began to be asked, what would happen to shopping patterns once the recession clearly was over? Some analysts argued that consumer tastes might have been permanently changed by the recession. Customers who had, perhaps, learned to value frugality might create a “new normal” in retailing.

    Family Dollar

    Leon Levine opened the first Family Dollar in 1959, in Charlotte, NC. The store sold closeout merchandise from nearby apparel factories, with all items priced under $2. As a child, Howard Levine (who was born the same year that the first Family Dollar store opened) often traveled around with his father to look at commercial real estate. Howard graduated from the University of North Carolina and then worked at Family Dollar as a trainee. In 1987, he left the company for several years, due to disagreements with his father over how the company should be managed. During the next nine years, Howard started a chain of discount clothing stores and then worked as an investment consultant. In 1996, he returned to Family Dollar, becoming chief executive officer in 1998 and executive chairman in 2003.

    Exhibit 3 Family Dollar Quarterly Sales Data (in millions of dollars)

    Soon after Howard Levine returned to Family Dollar, the company adopted an everyday low pricing (EDLP) strategy. With EDLP, the company set lower prices for its merchandise, ran fewer sales, carried less closeout merchandise, and advertised less. Customers could go to the store knowing what merchandise they could expect to find and what the prices would be.

    By the end of 2011, Family Dollar operated more than 7,000 stores and was the second largest chain of general merchandise retail discount stores (dollar stores) in the United States (Exhibit 4). The stores catered to low to lower-middle income customers in 44 states and the District of Columbia. The company employed 52,000 people and earned revenues of $8.5 billion for its fiscal year ended in August 2011, an increase of 9 percent over 2010. Its net profit of $388.4 million represented an 8 percent increase over 2010, and comp-store sales (for stores open more than 13 months) increased by 5.5 percent over 2010 (Exhibit 5 and Appendix 1). Family Dollar had become a Fortune 400 company and part of the S&P 500, and it had been identified as one of the top 50 brands in retailing. (Wal-Mart was #1.)

    Exhibit 4 Family Dollar Stores in 2011

    Exhibit 5 Selected Financial Data

    Family Dollar Mission and Goals

    Family Dollar's mission was to provide a compelling place for customers to shop, a compelling place for employees to work, and a compelling place to invest. (See Exhibit 6.) The company had identified four corporate goals that would drive growth and financial results: (1) build customer loyalty and improve the customer's shopping experience; (2) deliver profitable sales growth; (3) drive continuous improvement; and (4) build high-performing employee teams.

    Exhibit 6 Family Dollar Mission
    Family Dollar
    “Our Mission:
    • For our customers:
      • A compelling place to shop … by providing convenience and low prices
    • For our team members:
      • A compelling place to work … by providing career opportunities and rewards for achievement
    • For our investors
      • A compelling place to invest… by providing strong financial returns.
    Our Vision:
    • To be the best small-format convenience and value retailer serving the needs of families in our neighborhoods.”

    Source: Family Dollar 10-K Reportfor2011

    Building Customer Loyalty

    Family Dollar's typical customer was a female head of household. Approximately 54 percent of customers had annual gross incomes below $40,000, and 24 percent had incomes below $20,000. About 33 percent of customers were African American or Hispanic, and 68 percent were 45 or older.

    In 2008, most of Family Dollar's sales growth came from its core customers. However, by 2009, about a third of Family Dollar's customers were from a different demographic: customers earning up to $70,000 per year, and who traditionally had not shopped at dollar stores, were increasing as a percentage of sales. These trade-down customers were likely to have school-aged children and to prefer national brands. Because of the recession, they were shopping for value and were attracted by Family Dollar's everyday low pricing strategy.

    By 2011, the recession had ended, but economic uncertainty continued. Family Dollar managers believed that value and convenience continued to resonate with its customers. To increase the shopping frequency of its core low-income customers and middle-income families, Family Dollar launched a comprehensive store renovation program. It expanded consumable categories and improved in-store signage, fixtures, and merchandise adjacencies (locating related items close together in stores to make them easier for customers to find). The renovations were intended to enhance customer sightlines, increase store capacity, and simplify the restocking process. By the end of 2011, more than 1,300 stores had the new format, and Family Dollar expected to renovate or expand at least 1,000 stores in 2012.

    Delivering Profitable Sales Growth

    Family Dollar stores typically had between 7,500 and 9,500 square feet of selling space and served customers living within five miles of the store. The small size of the stores allowed the company to find locations convenient to its customers, locations that were either free standing or in shopping centers. Stores were located in urban, suburban, small town, and rural markets: Howard Levine had been the first to believe that dollar stores could succeed in urban environments. At end of 2011, approximately 23 percent of stores were in large urban markets and 20 percent in small urban or suburban markets.

    For many years, Family Dollar had grown by opening new stores in existing markets and by expanding into new states. By 2008, the company slowed the rate of new store growth to focus on improving the profitability of existing stores. It engaged in a re-engineering of merchandising and supply chain processes and store layouts. These investments increased productivity and expanded financial returns, providing a foundation for renewed growth. In 2010, Family Dollar managers announced an intention to increase selling-space at an annual rate of 5 to 7 percent by 2013. During fiscal 2011, the company opened 300 new stores, including its 7000th store, located in Memphis. (See Exhibit 7.) By October 2011, the chain had 7,059 stores, including its first four stores in California. Managers anticipated that the company might open 450 to 500 new stores in 2012, an increase of more than 50 percent over the growth rate for 2011.

    Exhibit 7 Number of Family Dollar Stores

    Family Dollar's goal was to sell quality merchandise at everyday low prices. The merchandise assortment included consumables, home products, apparel and accessories, and seasonal and electronics, with prices generally ranging from less than $1 to $10. (See Exhibit 8.) Howard Levine commented that, “We want our customers to know they can afford anything in our stores.”

    Exhibit 8 Family Dollar Merchandise Categories

    In 2009, the average customer purchase per visit was $9.84. Market research had shown that customers spent an average of about $10 per shopping trip to Family Dollar, whether they came once a week or once a month. To increase its sales, Family Dollar needed to increase the frequency of customer trips. Howard Levine determined that the answer was to carry milk. eggs, frozen pizza, and other food that customers needed to purchase frequently. Family Dollar wanted to be the place its customers came to for their “ran out of trips. Therefore, the company installed refrigerators and coolers in its stores. By 2009, almost all Family Dollar stores carried frozen and refrigerated foods that helped to drive sales, and most shoppers purchased at least one food item on each trip to Family Dollar. Customers' increased purchases of consumables helped drive overall revenue growth. However, the markup percentage that could be applied to consumable merchandise generally was lower than for discretionary items, placing pressure on the company's margin and income. In 2011, Family Dollar also experienced significant inflationary pressures across numerous categories, as costs for various raw materials and food items went up. Family Dollar had limited ability to pass these cost increases on to its customers, due to its everyday low pricing strategy.

    One method for preserving margin and profitability despite inflationary pressures and increasing sales of consumables was to sell more private-label merchandise, which the company marked up by a higher percentage than it could nationally branded merchandise. In 2011. nationally advertised brand name merchandise accounted for about 53 percent of sales; merchandise sold under Family Dollar's private labels amounted to 25 percent of sales. The company had made significant progress in increasing the penetration of its private-label brands: private-label sales were 22 percent higher than in 2010, with sales of private brands of consumables being 26 percent higher than the year before.

    In 2011, 31 percent of Family Dollar's purchased merchandise was manufactured overseas. Much of this merchandise was purchased using domestic importers, agents, or other third parties. To improve gross margin, Family Dollar began to purchase an increasing amount of merchandise directly from overseas manufacturers, rather than through third parties. In 2011, Family Dollar opened offices in Hong Kong and Shenzhen, China, to expand its supplier network. As a result of these efforts, it increased direct imports by 24 percent in 2011. This operational change offered better value to customers and also improved overall markup percentages.

    Driving Continuous Improvement

    In 2008 and 2009, Family Dollar worked at upgrading register and point-of-sale technology. The changes allowed more stores to accept additional payment types—credit cards and electronic benefit transfers, such as food stamps. Accepting food stamp payments had become more important as the economy weakened and more Family Dollar customers began receiving food stamps. The changes in technology also enabled use of computer-based tools to provide managers with better training, analytics, and workflow management. To help control costs, Family Dollar developed a centralized procurement organization that used an online system for purchase of non-merchandise items, such as store supplies.

    In 2011, the company re-engineered many of its core store processes, including restocking and in-store merchandising. About 90 percent of merchandise was delivered to stores from Family Dollar's nine distribution centers. Family Dollar maintained substantial depth of merchandise inventory at stores and in the distribution centers, to allow weekly store replenishment. Having adequate merchandise in stock at the stores was a key competitive factor in the dollar store industry. However, the company had to balance having a high in-stock inventory position with the potential costs of having too much inventory, such as needing to take price mark-downs to sell goods at the end of a season. Use of a demand forecasting system for replenishment of merchandise in stores and a centralized system for assortment optimization and space management helped the company to control the levels of its inventory. To reduce the costs associated with holding inventory, Family Dollar negotiated vendor payment terms to help offset these costs.

    Most Family Dollar stores were leased: as of October 2011, 6,510 of the company's 7,059 stores were leased. The company used an electronic lease management system to keep track of the terms and conditions of its store leases and to help it negotiate favorable terms on new leases.

    Building High-Performing Employee Teams

    Family Dollar believed that its long-term success depended on the quality of its employees, especially those who work in the stores. Each store had a store manager, who was responsible for hiring and training employees and providing customer service. Each store manager reported to a district manager or area operations manager, who usually was responsible for 15 to 25 stores. In 2011, the company used an online hiring system to improve the consistency of pre-employment assessments. It had expanded the use of computer-based training applications for store managers and clerks and created better-defined career paths for employees. As a result of the focus on reducing employee turnover, retention of store managers, assistant managers and cashiers reached historically high levels, and the rate of internal promotions was at almost 80 percent.

    Legal Issues

    Family Dollar and its main competitors, Dollar General and Dollar Tree, had all been sued by store managers and former store managers. The store managers brought action under the terms of the Fair Labor Standards Act and similar state laws, claiming that they should have been classified as non-exempt and thus entitled to overtime pay. The three chains argued that store managers were executives and not entitled to overtime. In some cases, courts had allowed the lawsuits to proceed as class-action suits representing large numbers of plaintiffs.

    In one of the lawsuits against Family Dollar, the courts found that many of its store managers had no power to hire or fire staff and spent most of their time operating cash registers, stocking shelves, and helping to unload trucks. Because these managers did not have typical decisionmaking responsibilities, the court ruled they were entitled to back overtime pay. Family Dollar, still asserting that its store managers were executives, appealed the decision. In December 2009, the 11th Circuit Court upheld the $35.6 million class action judgment on behalf of 1,424 managers. Other lawsuits related to the same issue continued: at the end of 2011, 22 such cases were still pending. If Family Dollar were to be forced to reclassify store managers as non-exempt, the impact on its financial position and operating results would be material.

    The dollar stores, including Family Dollar, were also involved in lawsuits with former employees who argued that the companies provided better pay and treatment to store managers who were male than they did to women store managers. In 2011, the United States Supreme Court ruled that a similar case filed against Wal-Mart could not proceed as a class action. Following this Supreme Court ruling, Family Dollar filed a motion to dismiss the lawsuit its former employees had filed.

    A Takeover Bid

    Hedge funds and other equity investors sometimes seek to acquire existing businesses. These investors expect to profit by increasing the value of the acquired company, through changing its strategy or management or by spinning off some of the target's assets. Dollar General, Family Dollar's biggest competitor, had been acquired and taken private in 2007.

    In March 2011, Nelson Peltz and the activist hedge fund Trian Group Management made a bid to acquire Family Dollar. Peltz asserted that the performance of Family Dollar lagged significantly behind the performance of its rival, Dollar General. He informally offered to pay a total of about $7 billion to acquire Family Dollar, or $55 to $60 per share, at a time when Family Dollar stock was trading at about $44 per share. Family Dollar management rejected Peltz's offer, saying that it substantially undervalued the company. The Family Dollar board of directors argued that implementing the company's existing strategy was the best way to deliver value to its shareholders. The board then enacted a shareholder rights plan, or so-called poison pill, that would go into effect if an investor acquired 10 percent or more of the company's stock. The shareholder rights plan would not necessarily have prevented a hostile takeover, but it would have made the process more time-consuming and was described as ensuring that all shareholders would be treated fairly in the acquisition process. About six months later, Peltz withdrew the possibility of a hostile takeover, saying that the company's existing strategy would be effective in increasing the value of the company. At the same time, his son-in-law was added to the Family Dollar board of directors.

    Family Dollar's Competition: Dollar General

    Dollar General, the largest of the dollar store chains (Exhibit 9 and Appendix 2), traced its roots to a store opened by J.L. Turner and Cal Turner, Sr, in 1939. The Turners opened the first Dollar General store in Springfield, Kentucky, in 1955. By the end of 2011, Dollar General had more than 9,800 stores in 38 states, primarily in the southern, southwestern, midwestern, and eastern states (Exhibit 10). It was the largest discount retailer in the United States based on number of stores. Dollar General stores sold consumables and home, apparel, and seasonal merchandise under the tag line, “Save time, Save money. Every day!” (See Exhibit 11 for amounts of the different categories of merchandise sold by Dollar General.) The company sold its merchandise at everyday low prices, usually $10 or less, through small (approximately 7,500 square feet) stores.

    Beginning in the 1990's, Dollar General grew rapidly by opening new stores and expanding into more states. By 2005, Dollar General stores experienced decreases in customer traffic and declines in same-store sales for two quarters. The company launched a turnaround strategy to improve the performance of each store and the management of inventory. It took markdowns to eliminate most of its out-of-season and outdated merchandise. It also identified and began closing 400 under-performing stores. In 2007, Dollar General closed more stores than it opened and recorded a loss for the year.

    Exhibit 9 Number of Dollar General Stores

    Exhibit 10 Number of Dollar General Stores by State

    Exhibit 11 Pattern of Merchandise Sales for Dollar General

    Despite the progress Dollar General had made in implementing a turnaround, it remained a target for a takeover. In 2007, it became a subsidiary of Buck Holdings, which was controlled by equity investor Kohlberg Kravis Roberts (KKR) and affiliated investors. Following this merger, the company's stock was not publicly traded. The new owners made changes in Dollar General's top management. The company identified four new operating priorities: driving productive sales growth, increasing gross margin, improving processes and information technology to reduce costs, and strengthening the Dollar General culture of serving others. In November 2009, Dollar General went public again through an initial public offering (IPO). In the IPO, new shares of stock were issued, and KKR and the affiliated investors recovered part of their investment by selling some of their shares of stock. After the IPO and other stock sales, KKR and the affiliated investors still controlled more than 70 percent of Dollar General stock.

    Dollar General's managers described its business model as providing a broad base of value-conscious customers with everyday and household needs, supplemented with general merchandise at everyday low prices in conveniently located small-box stores. The small-store format and selection of merchandise had met customers' needs and driven company growth over the years. After slowing the growth of new stores from 2006 through 2008, in 2009, Dollar General accelerated its rate of opening new stores. The company's store strategy involved low initial expenditures and low operating costs. The average cost of equipment and fixtures for new stores was about $165,000, and the initial investment in inventory usually was $75,000. Because of these low costs, Dollar General achieved rapid payback of its investment in new stores and strong operating cash flows.

    Some of Dollar General's product offerings are described in Exhibit 12. Home products and seasonal categories usually had the highest gross profit margins, and consumables, generally the lowest. Dollar General managers believed that it offered a price advantage over most food and drug retailers. Each store offered 10,000 to 12,000 stock keeping units (SKUs) with a limited number of SKUs per category, which helped the company maintain strong purchasing power and bargaining power with its suppliers. Most items were priced below $10 and about 25 percent at $1 or less.

    Exhibit 12 Dollar General Product Offerings
    Merchandise CategoryExample ItemsBrand Names
    • Paper and cleaning products
    • Food, beverages and snacks
    • Health and beauty supplies
    • Pet food
    • Procter & Gamble
    • Campbell's, Coca Cola,
    • Hershey
    • Tylenol, Suave, Rexall
    • Purina
    • Decorations, greeting cards
    • Toys
    • Gardening supplies
    • Hardware
    • Mead Stationery
    • Crayola
    • Miracle Gro
    Home Products
    • Kitchen supplies
    • Cookware, small appliances
    • Craft supplies
    • Sterilite
    • General Electric
    ApparelCasual everyday apparelExclusive license to sell Bobbie Brooks clothing

    Source:Source: Dollar General website, January 2012

    Dollar General offered a wide selection of national brand products, as well as store brands (private label brands). Many of the company's customers preferred private label products, perceiving that they offered greater value than national brands. In addition, store brands usually provided higher gross margin percentages than did national brands. In 2010, private label goods made up 22 percent of consumable sales, and Dollar General made a major push to increase its private-label offerings in other merchandise categories. The company also was increasing the amount of merchandise that it imported directly, to help control costs and increase gross margin.

    Family Dollar's Competition: Dollar Tree

    The Dollar Tree chain of discount stores began with a Ben Franklin store founded in 1953 by K. R. Perry and located in Norfolk, Virginia. Dollar Tree managers described the chain as the leading operator of discount variety stores in the United States (Exhibit 13 and Appendix 3). As of November 2011, Dollar Tree operated 4,335 stores (Exhibit 14). Approximately 90 percent of these stores sold nearly all items for a dollar or less. The remaining stores were mostly Deal$ stores, a chain that Dollar Tree had acquired, that had some items selling for more than $1. Dollar Tree stores had been successful in metropolitan areas, mid-sized cities, and small towns.

    Exhibit 13 Dollar Tree Mission and Vision
    Dollar Tree, Inc. is a customer-oriented, value-driven variety store operating at a one dollar price point. We will operate profitably, empower our associates to share in its opportunities, rewards and successes, and deal with others in an honest and considerate way. The company's mission will be consistent with measured and profitable growth.
    Attitude: Responsibility, Integrity, Courtesy
    Judgment: Do the Right Thing for the Right Reason
    Commitment: Honor and Respect for self & company

    Source: Dollar Tree 10-K Report for Fiscal Year 2010

    Exhibit 14 Dollar Tree Stores


    Dollar Tree offered a selection of consumable merchandise (food, health and beauty products, cleaning supplies), and in about half the chain's stores, frozen and refrigerated foods. It also sold variety merchandise (toys, housewares, party goods) and seasonal goods (merchandise for Halloween and Christmas, for example). The company had expanded its selection of consumable merchandise over the period 2007 through 2010, as a means of bringing more traffic to its stores and to appeal to a broader demographic mix. Most Dollar Tree stores carried 6,100 stock keeping units, about 2,200 of which were basic, everyday items automatically replenished through the company's inventory management system (Exhibit 15).

    Exhibit 15 Dollar Tree Merchandise
    Merchandise category as percentage of sales20102009
    Variety categories45.8%46.9%

    Source: Dollar Tree 10-K Report for Fiscal Year2010

    Dollar Tree's growth strategy involved opening new stores, expanding and remodeling existing stores, and acquiring stores through mergers and acquisitions. From 2005 through 2011, the number of stores grew from 2,914 to 4,335 and the average selling square footage per store from 7,900 to 8,480. The company's operating cash flows allowed it to self-fund infrastructure improvements, acquisitions, and the construction of new stores. Many of the new stores were opened in strip shopping centers anchored by mass merchandising companies whose target customers were similar to Dollar Tree's.

    Since 1995, Dollar Tree had added 695 stores through mergers and acquisitions. In 2008, it had acquired 138 Deal$ stores, which offered a broader range of merchandise, including items sold for more than $1. The merger allowed Dollar Tree to test a new merchandising concept without disturbing the operation of the Dollar Tree stores. In 2010, Dollar Tree acquired 86 Dollar Giant stores located in four provinces of Canada, the company's first expansion outside the United States. These stores sold merchandise similar to Dollar Tree stores, all priced at $1.25 Canadian or less.

    Family Dollar's Challenges in 2012

    Howard Levine and the rest of the Family Dollar management team were well pleased with how the company had weathered the recession. Sales were higher than ever before. During the recession and the slow recovery in 2010 and 2011, Family Dollar had attracted increasing numbers of middle-income shoppers, and it had sought to balance their needs with the needs of its traditional customer group.

    Family Dollar had reduced its rate of opening new stores for about three years, while it improved its store formats and implemented new technologies and procedures. During 2011, Family Dollar had again accelerated its new store program, expanding for the first time into California, and it had survived a hostile takeover bid. The renewed growth and store renovation program had been driven by four goals identified by Family Dollar managers: building customer loyalty, delivering profitable sales growth, driving continuous improvement, and building high-performing employee teams. Howard Levine and the other Family Dollar managers had to decide where to lead the company now to achieve its goals.

    Appendix 1

    Family Dollar Stores, Inc., and Subsidiaries Consolidated Statements of Income

    Family Dollar Stores, Inc., and Subsidiaries Consolidated Balance Sheets
    (in thousands, except per share and share amounts)August 27, 2011August 28, 2010
    Current assets:
    Cash and cash equivalents$ 141,405$382,754
    Short-term investment securities96,006120,325
    Merchandise inventories1,154,6601,028,022
    Deferred income taxes60,01152,190
    Income tax refund receivable10,326
    Prepayments and other current assets71,43663,005
    Total current assets1,533,8441,646,296
    Property and equipment, net1,280,5891,111,966
    Investment securities107,458147,108
    Other assets74,31462,775
    Total assets$ 2,996,205$2,968,145
    Liabilities and shareholders' equity
    Current liabilities:
    Current portion of long-term debt$ 16,200$-
    Accounts payable685,063676,975
    Accrued liabilities310,818309,347
    Income taxes4,97418,447
    Total current liabilities1,017,0551,004,769
    Long-term debt532,370250,000
    Other liabilities270,466253,576
    Deferred income taxes89,24038,246
    Commitments and contingencies (Note 10)
    Shareholders' equity:
    Preferred stock, $1 par; authorized 500,000 shares; no shares issued and outstanding
    Common stock, $.10 par; authorized 600,000,000 shares; issued 147,316,232 shares at August 27,2011, and 146,496,237 shares at August 28, 2010, and outstanding 117,353,341 shares at August 27, 2011, and 130,452,959 shares at August 28, 201014,73214,650
    Capital in excess of par274,445243,831
    Retained earnings1,969,7491,665,646
    Accumulated other comprehensive loss(6,403)(7,046)
    Common stock held in treasury, at cost (29,962,891 shares at August 27, 2011, and 16,043,278 shares at August 28, 2010)(1,165,449)(495,527)
    Total shareholders' equity1,087,0741,421,554
    Total liabilities and shareholders' equity$ 2,996,205$968,145


    Appendix 2

    Financial Information for Dollar General


    Jan 28, 2011Jan 29, 2010
    Current assets:
    Cash and cash equivalents$497,446$ 222,076
    Merchandise inventories1,765,4331,519,578
    Income taxes receivable7,543
    Prepaid expenses and other current assets104,94696,252
    Total current assets2,367,8251,845,449
    Net property and equipment1,524,5751,328,386
    Intangible assets, net1,256,9221,284,283
    Other assets, net58,31166,812
    Total assets$9,546,222$8,863,519
    Liabilities and shareholders' equity
    Current liabilities:
    Current portion of long-term obligations$1,157$3,671
    Accounts payable953,641830,953
    Accrued expenses and other347,741342,290
    Income taxes payable25,9804,525
    Deferred income taxes payable36,85425,061
    Total current liabilities1,365,3731,206,500
    Long-term obligations3,287,0703,399,715
    Deferred income taxes payable598,565546,172
    Other liabilities231,582302,348
    Commitments and contingencies
    Redeemable common stock9,15318,486
    Shareholders' equity:
    Preferred stock, 1,000 shares authorized--
    Common stock; $0.875 par value, 1,000,000 shares authorized, 341,507 and 340,586 shares issued and outstanding at January 28, 2011 and January 29,2010, respectively298,819298,013
    Additional paid-in capital2,945,0242,923,377
    Retained earnings830,932203,075
    Accumulated other comprehensive loss(20,296)(34,167)
    Total shareholders' equity4,054,4793,390,298
    Total liabilities and shareholders' equity$9,546,222$8,863,519


    Appendix 3

    Financial Information for Dollar Tree


    (in millions, except share and per share data)20102009
    Current assets:
    Cash and cash equivalents$311.2$571.6
    Short-term investments174.827.8
    Merchandise inventories803.1679.8
    Deferred tax assets16.36.2
    Prepaid expenses and other current assets27.920.2
    Total current assets1,333.31,305.6
    Property, plant and equipment, net741.1714.3
    Deferred tax assets38.035.0
    Other assets, net95.0101.5
    Total Assets$2,380.5$2,289.7
    Liabilities and shareholders' equity
    Current liabilities:
    Current portion of long-term debt$16.5$17.5
    Accounts payable261.4219.9
    Other current liabilities190.5189.9
    Income taxes payable64.448.6
    Total current liabilities532.8475.9
    Long-term debt, excluding current portion250.0250.0
    Income taxes payable, long-term15.214.4
    Other liabilities123.5120.2
    Total liabilities921.5860.5
    Commitments and contingencies
    Shareholders' equity:
    Common stock, par value $0.01.400,000,000 shares authorized, 123,393,816 and 131,284,455 shares. Issued and outstanding at January 29,2011 and January 30, 2010, respectively1.20.9
    Additional paid-in capital--
    Accumulated other comprehensive income (loss)(0.4)(2.4)
    Retained earnings1,458.21,430.7
    Total shareholders' equity1,459.01,429.2
    Total liabilities and shareholders' equity$2,380.5$2,289.7

    Family Dollar Stores, inc., and Subsidiaries Consolidated Statements of Income

    General Electric: Ecomagination as a CSR Initiative

    In 2005, Jeffrey Immelt, CEO of General Electric, Inc., launched a new program called “Ecomagination” to utilize the resources and experience of the company in responding to environmental concerns of GE's stakeholders. The commitment began with an attempt to count GE's global-warming emissions but later spread to other company processes in order to demonstrate that financial and environmental performance could work together. This new program began after several religious groups had complained at its 2002 annual shareholders meeting that GE had ignored the environment.

    Even after the launch of the Ecomagination initiative, shareholders continued to criticize Immelt's motives. At General Electric's 2006 annual shareholder meeting, the Free Enterprise Action Firm (FEAF) voted to withhold its support for approving Immelt as a director. Tom Borelli, a spokesman for FEAF, suggested after the meeting (Marshall, 2006), “Mr. Immelt's fascination with pandering to fringe advocacy groups is distracting him from focusing on the business. He is acting more like a politician than a CEO.”

    By 2010, it was evident that CEO Jeffrey Immelt and the GE Board of Directors were faced with the dilemma of how to respond to outcries from some members of the public and shareholders that they were either being overly responsive to the concerns of environmental groups or spending too much money on extraneous public relations matters that had little impact on the environment. Such responses suggested that the management of GE needed to find a way to focus the attention of their detractors on the efficacy of their Ecomagination program as a sound path to profitability and environmental responsiveness.

    GE's past Social Responsibility Efforts

    General Electric's efforts to engage in socially responsible programs in the past had included the following high-profile efforts:

    Clean-Up of the Hudson River. The history of GE's problems with the Hudson River began on November 12, 1945. On that day, the company announced that it was buying a former federal plant that had manufactured B-29 bombers during World War II. The facility was near the village of Fort Edward, New York, and GE had decided to manufacture capacitors there. On November 13, the New York Times suggested that the plant would bring 500 jobs to the vicinity. A few years later, the company bought more land near the village of Hudson Falls to be able to expand its capacitor operations.

    For the next 30 years, the Environmental Protection Agency calculated that GE dumped more than 1.3 million pounds of PCBs into the Hudson River. PCBs are neurotoxic, and they have been linked to several different types of cancer and also to immune system problems. However, at the time, the dumping was not illegal. Over time, contaminated sediments built up at the base of a dam in Fort Edward and were released and washed downstream when the deteriorating structure was removed. Contaminated fish were found in the river extending all the way to New York City. By 1976, the New York State Department of Health banned all fishing between Fort Edward and Troy because of the pollution by PCB. The GE factories did close in 1977, and in 1984 the EPA declared the entire 200 miles from Fort Edward to New York City as a Superfund site (Homsy, 2008).

    In 2000, the Environmental Protection Agency (EPA) ordered General Electric to clean up the company's PCB contamination of the Hudson River. The actual dredging was begun in 2005 and then delayed until the spring of 2007. General Electric was paying for most of the project, although the state did share fiscal responsibility because it had permitted some of the harmful discharges.

    The decision to clean up the river was, interestingly enough, hotly debated in the area. General Electric argued that any cleanup efforts would only worsen the situation by stirring up sediments that were buried there. Some of the local government officials and citizens in the area agreed with GE, and they believed that the river was safely burying the contamination a little more each year. On the other hand, dredging advocates believed that improved technology would safely remove the contamination, which was still leaking into the water and showing up in fish (Homsy, 2008). Although this was not a CSR effort voluntarily pursued by GE, it was an attempt to deal with the issue of retroactive liability, which has been a contentious issue for many companies.

    Bringing Good Things to Light. An additional environmental challenge for GE was posed by their incandescent light bulbs. Interestingly, this was the very technology that founder Thomas Edison made a household name. Although GE did make fluorescent bulbs, they attempted to protect their much-larger incandescent business. Meanwhile, lobbyists tried to shift the debate to efficiency standards for lighting—rather than a bulb's technology. Unfortunately for GE, some CSR advocates accused GE in 2007 of trying to thwart a move to fluorescents (Kranhold, 2007).

    However, in promoting an advanced incandescent bulb that used half as much energy GE argued that at issue was customer choices that should not be restricted by narrow regulations. A further consideration forwarded by GE was that improved technology may make incandescent bulbs comparable to fluorescents in energy efficiency without the danger of the mercury included in fluorescents (Hamilton, 2007).

    African Program. GE's healthcare initiative in Africa is a good example of a company shifting from a defensive to an offensive strategy, then using the full capabilities of the entire corporate team to carry out the initiative. Even though Africa was one of the primary markets for GE's products, the unrelenting poverty and disease in the region were a concern of the company's 4,000 employees in their African-American Forum. Instead of sending a large check to a non-profit aid organization in Africa, CEO Immelt decided to use GE's core competencies to solve these problems. At the heart of the problems of disease and poverty were such factors as clean water, reliable energy, and state-of-the-art medical technology. These were all businesses in which GE had a substantial investment (Kramer, 2006).

    The action plan that GE chose utilized its well-developed six sigma system in solving the problem. To begin with, GE executives interviewed 100 experts from UNICEF, Africare, the European Union, the U.S. Agency for International Development, and the U.S. Department of State. At the conclusion of its research, the company selected Ghana as the target for its program. Soon thereafter, the company sent a team of senior executives from its energy, health, and water businesses to Ghana in December of 2003.

    The company decided to work in one of Ghana's 110 districts with a population of 100,000 but little power, clean water, or access to healthcare other than a single midwife. GE involved the state health ministry, several local members of parliament, and tribal leaders as well as some non-profit organizations in its work. Each of the partners contributed something to the effort. The government chose to waive import fees on the equipment donated by GE, the health ministry assigned a doctor to the region and agreed to complete a half-finished hospital in the region, and the non-profit organizations worked with the tribal leaders and residents to dig trenches for water pipes. Just nine months after the project was begun, it was completed (Kramer, 2006).

    By 2008, GE had eight similar projects in the planning stages or already underway. The company made a commitment to open hospitals in all of the country's 22 districts that did not have such a facility. They were also considering extending their work into South Africa, Malawi, Tanzania, and Uganda.


    Under Jeff Immelts leadership, GE has become more proactive in its stance and strategic position toward the environment. In 2002, several religious groups had submitted a shareholder proposal asking GE to count its emissions of global-warming gases. GE opposed the resolution; however, to their surprise, the resolution won 20 percent of shareholder votes. Perhaps in response to such concerns of shareholders, CEO Immelt surprised shareholder activists by pledging at the next year's annual meeting to count GE's global-warming emissions (Kranhold, 2007).

    Launching of Ecomagination. In 2005, CEO Immelt launched his Ecomagination campaign. In a speech at George Washington University, he suggested that GE would “develop and drive the technologies of the future that will protect and clean our environment” (Kranhold, 2007). This campaign of GE sought to demonstrate that financial and environmental performance could work together to drive company revenue growth while at the same time attempting to solve some of the world's biggest social problems. Immelt suggested, “Things that are good for the environment are also good for business.” Immelt further commented that GE launched its Ecomagination initiative not because it was trendy or moral, but because it would accelerate economic growth (“Unilever washes its hands,” 2007).

    Ecomagination was GE's commitment to developing eco-friendly products and solutions that help customers, shareholders, and the public. The company decided that the best way to show its strong resolution in this area was to devote an entire division to overseeing the implementation of this strategy. Its multiplatform campaign included a website, use of the print media, and television advertisements. GE's advertising campaign for this program was showcased with 399 other campaigns, focusing on social and environmental issues at the August 2006 expo in Cannes, France, by Advertising Community Together (ACT). GE's ad campaign was selected along with Greenpeace's “Trees” and Microsoft and Nike's “” as the three best ads for socially responsible programs by organizations that were presented at the meeting.

    The thrust of Ecomagination was to create products and services that were as profitable as they were ecologically sound. At a time when GE and their competitors were involved in litigation and lobbying to avoid liability, the company saw opportunities along with the risks. The program sought to unite the company's green technologies, such as wind turbines and solar panels, under a single umbrella. In early signs of success, revenues from this program exceeded $12 billion annually by the year 2006 (Bekefi, 2008). This figure improved to an estimated 18 million in 2009 as GE has invested in alternative energy products. A recent manifestation of Ecomagination coupling with a renewed focus on manufacturing is a partnership with Lake Erie Energy Development Corp to manufacture wind turbines for a wind farm in Lake Erie (Katz, 2010). In their push for a greener environment, GE established a goal of reducing greenhouse gas emissions through the development of more efficient nuclear power reactors and jet engines. GE's figures have been defined by the company itself, which has led to skepticism by some experts (Harvey, 2008).

    Ecomagination's Use of the Value Chain. GE's 2010 Annual Report stated the following:

    It is the belief and commitment (of our company) that we have been presented with a false choice—great economics or great environmental performance—the real answer is through innovation we can design and deliver both. And as a result, GE will grow faster and win. And it's working. We believe we can lead in this era. We have deep and practical technical knowledge honed by more than a century of experience; expertise across the entire energy and water value chain; capital to invest; and strong channels to market.

    The company has pinpointed water desalination as a global problem that can be addressed through its expertise in the water value chain. One of GE's goals is to take wastewater and purify it—not only for discharge but to recycle back into agriculture and industrial processes. Furthermore, the company proposes using the transformed water for producing semiconductors, for human consumption, for refining oil, and for making paper.

    Steve Fludder, the GE Ecomagination chief, was asked by a journalist, “How does GE manage the politics of taking something like water, once seen as a public good, and turning it into a commodity?” His reply was, “I think it was Benjamin Franklin who said nobody thinks about the value of water until the well runs dry” (Kamenetz, 2009).

    As an example of their accomplishments in this area in the past: On February 25, 2008, GE's Water and Process Technologies unit and the Algerian government opened a $250 million Hamma Seawater Desalination Plant (SWDP) to combat a continual pervasive shortage of potable water in Algiers, Algeria. The Hamma SWDP used GE's advanced ecomagination-certified reverse osmosis membranes to purify up to 53 million gallons of seawater a day. This system provided as many as two million residents of Algiers with a reliable and drought-proof supply of fresh water (“General Electric, Algerian Government,” 2008).

    Results of Ecomagination. GE claims that since its launch, Ecomagination has either met or exceeded all of the following goals that the company had set:

    • $5 billion of clean-tech research and development
    • $85 billion in revenue from Ecomagination products and solutions
    • 22 percent reduction in greenhouse gas emissions
    • 30 percent reduction in water use
    • $130 million in energy efficiency savings

    In GE's 2011 Annual Report, the company set the following goals for the next five years:

    • Double clean-tech R&D to $10 billion
    • Grow Ecomagination revenue at twice the rate of overall GE revenues
    • Reduce energy intensity by 50 percent and greenhouse gas (GHG) emissions by 25 percent
    • Reduce water use by 25 percent

    In terms of partnerships in their global transformation, the company cites the following as examples of their accomplishments in 2010:

    • Continued to lead in clean-tech innovation by committing nearly $2 billion to research and development and by launching the Ecomagination Challenge, a record-breaking $200 million partnership with top venture capital firms to drive and fund open innovation for clean tech
    • Helped drive adoption of electric vehicles by purchasing 25,000 EVs, the largest single commitment ever; launching the user-friendly WattStation charging solution; and building total EV systems for customers, from the battery to the grid
    • Kept our Ecomagination portfolio focused on only GE's most innovative technologies, such as: the first FAA-approved Required Navigation Performance (RNP) solution, which helps reduce fuel costs and emissions for flights, and Nucleus, a smart-meter technology that helps homeowners manage energy use
    • Launched 22 new Ecomagination products and solutions, bringing the total portfolio to 110
    • Reduced GHG by 24 percent compared to 2004, ahead of our goal, and water use by 22 percent compared to 2006
    Models of CSR

    In order to identify the various responsibilities that managers face in attempting to be socially responsive, Archie Carroll (1991) developed a model that consisted of economic, legal, ethical and philanthropic considerations (see Exhibit 1 entitled “Carroll's Four-Dimensional CSR Pyramid”). Carroll suggested that the foundation on which all other management decisions must rest is the responsibility to be profitable. Moving up the hierarchical pyramid, Carroll suggested that beyond profitability the management of an organization had a responsibility to conduct the affairs of the firm within the legal framework of the geographic area in which it operated, next management had a responsibility to lead the firm in an ethical manner, and ultimately there was the decision that management might make to pursue strictly philanthropic issues. Carroll suggested that these four CSR dimensions are not mutually exclusive because managers are constantly forced to balance these competing obligations.

    Shum and Yam (2011) have concluded that even though there has been a movement toward discussions concerning such topics as corporate social performance, corporate citizenship, stakeholder management, business ethics, and relationship with financial performance, their research indicates that Carroll's pyramid offers a better theoretical basis that addresses the key factors that influence management decisions. In the same vein, Pedersen's (2010) review of CSR models suggests that Carroll's pyramid still stands as one of the most prominent of such models.

    Michael Porter and Mark Kramer (2006) later developed a model that brought into consideration the competitive environment in which a firm operates. The model illustrated the link that exists between competitive advantage and CSR. Porter and Kramer proposed a unique way of looking at the relationship between business and society that no longer treated corporate success and social welfare as a zero-sum game. They further believed that the prevailing approaches to CSR were so disconnected from the realities of business that they obscured many great opportunities that existed for companies to utilize to benefit society. They suggested a continuum of social involvement for a company that moved from Responsive CSR to Strategic CSR. They suggested that Responsive CSR contains two elements: acting as a good corporate citizen that is aware of the changing social concerns of stakeholders and also mitigating existing or anticipated adverse effects from their business activities. On the other hand, Strategic CSR goes beyond corporate citizenship and mitigating harmful value chain impacts to launch a number of initiatives whose social and business benefits are large and distinctive. This approach involves inside-out and outside-in dimensions working in tandem. (For the Porter and Kramer model see Exhibit 2 entitled “Corporate Involvement in Society: A Strategic Approach.”)

    Criticism of GE and Jeff Immelt

    Criticisms of GE and its leadership have come from some expected and, at times, unexpected sources. In a surprising development, environmentally related initiatives at GE have been publicly targeted by the Free Enterprise Action Fund, a small but very vocal mutual fund group. The vocal nature of the challenges came at a time when most social responsibility advocates continued to work through already-established channels such as filing ballot resolutions for annual proxies and seeking to negotiate on a private basis with companies about those initiatives. The anti-green movement received a great deal of attention because it was new and also contrarian. At a time when activists made “sustainability” a primary issue, the opposition attempted to show that it was able to grow into a sustainable force (Marshall, 2006).

    In the early years of the twenty-first century, activists increased pressure on companies to address social issues. Because of the rise during that period in anti-American sentiment abroad, there was a sense that the problems of the rest of the world could no longer be held at a distance. Regarding GE's expenditures of $800 million on PCB-related matters, Tri-CRI suggested that this money would have gone a long way toward cleaning up the problem if some of the money had not gone to public relations activities, lobbying, and legal tactics. Meanwhile, GE's Ecomagination has not been without criticism. The program's critics suggest that GE has tried to capitalize on environmental sentiment by supporting government regulation and policy that benefits industries in which they operate (Zakaria, 2008). Critics accuse GE as being too cozy with government and contributing to policy that will slow economic recovery. “Unfortunately, I don't think a lot of investors are aware of the significant political risk that GE is exposing shareholders to because Immelt at this point has put all his cards on government, especially with respect to the green, renewable energies. That's all dependent on government subsidies,” argues Tom Borelli, director for the Free Enterprise Project (Katz, 2010).

    In addition, critics of corporate social responsibility programs contend that the company reports that describe these programs have been misleading, incomplete, and self-serving. Their assessment is that the reports are public relations gimmicks that are not a true reflection of their business practices. Skeptics have accused corporations of using their CSR reports to “green wash” or divert public attention from their business practices that endanger the environment and create risks for the communities in which they operate (Rondelli, 2007).

    Yet, even with an endorsement from Warren Buffet, in the form of an infusion of 3 billion dollars in 2008 that might suggest that GE is on the right track, others argue the problems at GE run deeper (Glader, 2008). Perhaps the most damning criticism of Immelt and GE has come from Jack Welch as the stock price of GE has dropped significantly in 2008. In a CNBC interview, Welch ranted that Immelt was “getting his ass kicked” and lacked credibility with the markets after the stock price decline (Cane, 2008). In that same interview, Welch added, “I'd get a gun out and shoot him if he doesn't make what he promised now.”

    GE's Dilemma

    CEO Immelt and the Board of Directors faced several perplexing questions related to CSR and recovering from their own financial crisis by the fall of 2010. The most prominent question was the consideration of the advantages and disadvantages of focusing on Ecomagination as their primary CSR initiative in terms of sustainability as opposed to their past CSR programs. A second question was how the company might leverage the Ecomagination program to its maximum advantage for the company.

    Exhibit 1 Carroll's Four-Dimensional CSR Pyramid
    Be a good corporate citizenPhilanthropic responsibilitiesContribute resources to the community; improve quality of life
    Be ethicalEthical responsibilitiesObligation to do what is right, just and fair; avoid harm
    Obey the lawLegal responsibilitiesLaw is society's codification of right and wrong; play by the rules
    Be profitableEconomic responsibilitiesThe foundation on which all other rest

    Exhibit 2 Corporate Involvement In Society: A Strategic Approach
    Generic social impactsValue chain social impactsSocial dimensions of competitive context
    Good citizenshipMitigate harm from value chain activitiesStrategy philanthropy that leverages capabilities to improve salient areas of competitive context
    Responsive CSRTransform value chain activities to benefit society while reinforcing strategyStrategic CSR


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    1. The term 'Kiwi' is often used nationally and internationally to refer to a New Zealander. It is perhaps the most prominent and widely-known way in which the New Zealand people gain a sense of identity through drawing on nature. (Bell, 1996)

    2. Justin explained the term 'conventionally' referred to food “grown naturally, without modification or any processing.”

    3. The Kiwi DIY mentality refers to the tendency of New Zealanders to have a go at doing things themselves rather than paying an expert to do something for them. There is a resultant sense of pride in the personal achievement that this brings.

    4. The minimum wage in New Zealand in 2007 was $11.25 an hour.

    5. The phrase “clean and green,” while its accuracy is debated, it often heard when talking about New Zealand's natural environment. While many New Zealand businesses and industries leverage off this image (e.g. the tourism and dairy industries), it is arguable as to how many businesses and industries really add substance to the image through activity and action.

    6. In August 2007, $NZ1 was valued at approximately 0.5 Euro and around U.S. 70 cents.

    7. Food miles (the distance that food travels from the place of its production to the consumer) is a topic of international debate and an issue receiving significant attention in New Zealand due to its potential trade implications for exporters. For further information and a New Zealand perspective on the topic see Landcare Research, 2007.

    8. Figures are derived from Statistics New Zealand and were obtained from The Restaurant Association of New Zealand. Statistics are an amalgam of data from all sorts of operations (e.g., a la carte, buffet, over-the-counter service, and table service) and are provided to indicate industry averages. Individual establishments could vary significantly from these figures. The authors thank an anonymous reviewer for suggesting this table.

    9. Kumara is New Zealand's native sweet potato.

    10. Google New Zealand keyword search with which Kapai New Zealand features either first, or on the first page results, include ‘kapai,’ ‘eat your greens,’ and ‘salad bar.’

    11. Awards included the New Zealand Herald on Sunday 2006 #1 Gourmet Health Food Takeaway and New Zealand Retailers Association Top Shop 2006 Award. (Saladworks, 2007)

    12. Two fast-food salad store franchises were listed on the Official Directory of the Franchise Association of New Zealand web-site. Reload Salad and Juice Bar was listed in the $100,000-$250,000 category while Sumo Salads was priced higher at $300,000-$3 50,000. (Franchise Business, 2007)

    13. Industry averages are identified in Figure 3, which indicate rent and rates to be 6.41%; arguably, a more realistic target for Kapai New Zealand is 8% to 10% due to the nature of the operation and the location requirements (i.e., high pedestrian count and visibility).


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    1. From “The Winds of Change” video presentation shown at the D: All Things Digital Conference, available at, accessed January 19, 2008.

    2. Swisher, K. (June 6, 2006). Interview with Antonio Perez, D4: All Things Digital Conference available at accessed April 18, 2008.

    3. Ibid.

    4. Ibid.

    5. Dobin, B. (February 8, 2008). Kodak aims to tilt investor mood. Associated Press Financial Wire.

    6. Ibid.

    7. Associated Press, (January 28, 2008). Kodak hopes negative results remain in the past, Omaha World Herald, pg. D2.

    8. Dobbin, B. (September 9, 2005). Digital Camera Turns 30—Sort Of. The Associated Press,

    9. Online Extra: What it 'Boils Down To' for Kodak. (November 23, 2003). Business Week

    10. Associated Press, (My 28, 2003). Kodak Struggles to Find Its Focus, The Leader-Post, Pg. B5.

    11. Wolf, C. (September 26, 2003). Kodak Stock Plummets as Dividend Cut: Slashed by 72%, Bloomberg News, pg. FP03.

    12. Ibid.

    13. Ibid.

    14. Deutch, C.H. (September 26, 2003). Kodak to Stress Digital Business and Cut Dividend, The New York Times, Section C, Column 1, Pg. 9.

    15. Research Insight, Accessed on February 29, 2008.

    16. Research Insight, Accessed on February 29, 2008.

    17. Kodak Strategy Review: Digital and Film Imaging, (September 25, 2003). Retrieved December 6, 2004, from, Masson_sept25.pdf.

    18. Deutsch, C.H. (February 9, 2007). Kodak Cuts Another 3,000 Jobs. The New York Times, Pg. 1.

    19. Ibid.

    20. Angelo, W. J. (October 22, 2007). Kodak Retools and Reduces Historic Rochester Site. ENR: Engineering News-Record, Pg. 24-26.

    21. Deutsch, C.H. (February 9, 2007). Kodak Cuts Another 3,000 Jobs. The New York Times, Pg. 1.

    22. Ibid.

    23. Ibid.

    24. Business Week Online. (May 7, 2007). Kodak Prints More Red Ink. Pg. 23-23. Accessed June 11, 2007.

    25. De Aenlle, C. (February 17, 2007). Market Values: History Offers Hope and Fear for Kodak. The New York Times. Pg. 6.

    26. Ibid.

    27. Executive Biography. Accessed on June 18, 2007.

    28. Ibid.

    29. Deutsch, C.H. (February 9, 2007). Kodak Cuts Another 3,000 Jobs. The New York Times, Pg.l.

    30. Kodak Press Release (January 26, 2005). Kodak Has Preliminary 4th-Quarter Reported Net Loss of 4 Cents Per Share. Accessed on June 18, 2007.

    31. Kodak Press Release (February 2, 2005). KODAK Consumer Digital Photography Products Soar. Accessed on June 18, 2007.

    32. Ibid.

    33. Kodak Press Release (May 11, 2005). Kodak Board Elects Current President Antonio M. Perez as Chief Executive Officer. Accessed on June 18, 2007.

    34. Kodak Press Release (January 5, 2006). Motorola and Kodak Announce Global Mobile-Imaging Partnership. Accessed on June 18, 2007.

    35. Fackler, M. (January 12, 2006). Nikon Plans to Stop Making Most Cameras That Use Film. The New York Times, Pg. 11.

    36. Kodak Press Release (January 30, 2006). Kodak's 4th-Quarter Sales Rise 12% to $4.197 Billion. Accessed on June 18, 2007.

    37. Down with the shutters, (March 25, 2006). The Economist, Pg. 76.

    38. Kodak Press Release. (August 1, 2007). Kodak Announces Agreement With Flextronics for Design, Production and Distribution of its Consumer Digital Cameras. Accessed on June 18, 2007.

    39. Kodak Press Release. (January 10, 2007). Kodak to Sell Health Group to Onex for Up to $2.55 Billion, Accessed on June 18, 2007.

    40. PR Newswire. (April 26, 2007). Kodak Gallery and BestBuy Team Up to Offer Retail Customers New and Easy Ways to Enjoy Their Digital Pictures. Accessed on June 18, 2007.

    41. Kodak Press Release. (May 1, 2007). Kodak Reports 1st Quarter Sales of $2.119 billion. Accessed on June 18, 2007.

    42. PR Newswire. (May 14, 2007). Target and Kodak Gallery Partnership Creates Complete Digital Photo Solution. Accessed on June 18, 2007.

    43. Ibid.

    44. Hamm, S., Lee, L. & Ante, S.E. (February 19, 2007). Kodak's Moment of Truth, Business Week, Pg. 42-49.

    45. Castelluccio, M. (March 2007). Kodak's Comeback, Strategic Finance, Pg. 57.

    46. Deutsch, C.H. (February 9, 2007). Kodak Cuts Another 3,000 Jobs. The New York Times, Pg. 1.

    47. Ibid.

    48. Hamm, S., Lee, L. & Ante, S.E. (February 19, 2007). Kodak's Moment of Truth, Business Week, Pg. 42-49.

    49. Deutsch, C.H. (February 9, 2007). Kodak Cuts Another 3,000 Jobs. The New York Times, Pg. 1.

    50. Bulkeley, W.M. (May 5, 2007). Kodak's Loss Narrows as Spending, Costs Drop, The Wall Street journal, Pg. A5.

    51. Transcript of Sales & Earnings Conference Call. (May 4, 2007). Accessed on June 18, 2007.

    52. De Aenlle, C. (February 17, 2007). Market Values: History Offers Hope and Fear for Kodak. The New York Times. Pg. 6.

    53. Ibid.

    54. Austen, I. (February 20, 2006). They're Out of Film: Digital Moves to Top-Tier Cameras, The New York Times, Pg. 1.

    55. Ibid.

    56. Ibid.

    57. Ibid.

    58. Sarmad, A. (January 11, 2006). Camera-Phones Improve, The Watt Street Journal, Pg. D4.

    59. Ibid.

    60. Datamonitor, (June 2006). Eastman Kodak Company Profile, Reference Code 550.

    61. Ibid.

    62. Lyra Research, (March 17, 2006). Nearly Half a Trillion Images Will Be Captured by 2009, Volume 6, Issue 2.

    63. Down with the shutters, (March 25, 2006). The Economist, Pg. 76.

    64. Benderoff, E. (January 8, 2007). Gadget Forecast: Pixels Up, Prices Down, Sales Hot, Chicago Tribune, Pg. 3.

    65. Choe, S. (January 3, 2007). U.S. Digital Camera Sales Soar on Urge to Upgrade, But How Long Will It Last, Associate Press Financial Wire.

    66. Datamonitor, (June 2006). Eastman Kodak Company Profile, Reference Code 550.

    67. Ibid.

    68. IDC Press Release. (April 4, 2007). Digital Camera Shipments Flying High as Market Value Dips in Central and Eastern Europe, Says IDC,>04>03)1248l4, accessed June 15, 2007.

    69. Ibid.

    70. Ibid.

    71. (October 2004). Product focus-Chinese Digital Camera Sales to Soar. Market: Asia-Pacific, Pg.2.

    72. Ibid.

    73. Meredith, R. (November 15, 2004). Middle Kingdom, Middle Class, Forbes, Pg. 188.

    74. (October 2004). Product focus-Chinese Digital Camera Sales to Soar. Market: Asia-Pacific, Pg.2.

    75. Ibid.

    76. Yee, A. (January 9, 2006). Chinese Hunger for Digital Gives Perez a Lesson, Financial Times, Pg. 25.

    77. (September 21, 2006). Technology Leapfrogs: Behind the Bleeding Edge, The Economist, Pg. 16.

    78. Ibid.

    79. Down with the shutters, (March 25, 2006). The Economist, Pg. 76.

    80. Fackler, M. (January 12, 2006). Nikon Plans to Stop Making Most Cameras That Use Film, The New York Times, Pg. 11.

    81. Williams, M. (February 5, 2007). Kodak Loses Out in U.S. Camera Market, Macworld,, Accessed on June 19, 2007.

    82. Ibid.

    83. Tomkins, M.R. (April 4, 2007). IDC Reports on 2006 Digicam Market,, Accessed on June 19, 2007.

    84. Ibid.

    85. Ibid.

    86. Ibid.

    87. Williams, M. (February 5, 2007). Kodak Loses Out in U.S. Camera Market, Macworld,, Accessed on June 19, 2007.

    88. Bulkeley, W. M. (July 6, 2005). Softer View: Kodak Sharpens Digital Focus on its Best Customers, The Wall Street Journal, Pg. A 1.

    89. Ibid.

    90. Ibid.

    91. Ibid.

    92. Ibid.

    93. All prices and number of models obtained from company web sites accessed on June 18, 2007. Prices for Canon and Nikon obtained from






    99. Kodak Poised to Accelerate Profitable Growth, (February 7, 2008), Bloomberg News.

    100. Kodak hopes negative results remain in the past, (January 28, 2008). Omaha World Herald, Pg. D1-D2.

    101. Maney, K. (January 2008). Picture Imperfect. Conde Nast Portfolio,, accessed April 16, 2008.

    102. Kodak hopes negative results remain in the past, (January 28, 2008). Omaha World Herald, Pg. D1-D2.

    103. Smith, A. (December 10, 2007). A Kodak moment: CEO Antonio Perez attends HBS Turnaround Club,, accessed February 29, 2008.

    104. From data contained in “Kodak hopes negative results remain in the past,” (January 28, 2008). Omaha World Herald, Pg. D1-D2

    105., PGO screen accessed on February 15, 2008.

    106. Dobbin, B. (September 28, 2007). As film fades, Kodak hub shrinks, http://wwwr.manu, Accessed February 29, 2008.

    107. From PowerPoint presentations used at the JP Morgan Technology Conference on May 21, 2007 and the Citigroup Technology Conference on September 5, 2007. Both PowerPoint presentations are available at

    108. Calculated from financial statements for Kodak and Canon as provided by Mergent Online, April 15, 2008.

    109. Citigroup Global Technology Conference, (September 5, 2007), Bloomberg Transcript.

    110. Dobbin, B. (February 8, 2008). Kodak aims to tilt investor mood, Associated Press Financial Wire.

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    1. Renn Vara. Moving the Needle at Netflix. 08 June 2007. Web. 28 September 2009. <>.

    2. Renn Vara, op. cit.

    3. Funding Universe. Corporate History <<Netflix. Funding Universe. n.d. Web. 1 September 2009. <>.

    4. Sarah Mason. “Movies on demand: efficiency combines with new technology in Netflix's DVD rental service.” HE Solutions 34.10 (2002): 25+. Academic OneFile. Web. 26 October 2009.

    5. Funding Universe, op. cit.

    6. Lori Bowen Ayre. “Library delivery 2.0: delivering library materials in the age of Netflix.(LPP Special Issue on Libraries and Google).” Library Philosophy and Practice (2007). Academic OneFile. Web. 26 Oct. 2009.

    7. Ibid.

    8. Funding Universe, op. cit.

    9. Gsmoff. Netflix: Just another web blog about Netflix. Wordpress. 30 March 2007. Web. 6 September 2009. <>.

    10. Ibid.

    11. Sarah Mason, op. cit.

    12. “Netflix Launches Lower Price.” Netflix Press Release. 1 November 2004. Web. 17 March 2010. <http://netflix.mediaroom.corn/index.php?s=43&item=147>.

    13. “Netflix Passes 3 Million Subscribers.” Netflix Press Release. 28 March 2005. Web. 17 March 2010. <>.

    14. “Netflix Announces Q3 2008 Financial Results.” Netflix Press Release. 20 October 2008. Web. 17 March 2010. <>.

    15. Cliff Edwards. “Netflix Boosts DVD-Streaming Prices by 60%.” Bloomberg Business Week 12 July 2011. Web. 4 February 2012. <>.

    16. Ibid.

    17. Reed Hastings. “Explanation and Some Reflections.” Netflix Blog. 18 September 2011. Web. 6 February 2012. <>.

    18. Ibid.

    19. Cliff Edwards. “Netflix Declines Most Since 2004 After Losing 800,000 U.S. Subscribers.” Bloomberg Business Week 12 July 2011. Web. 4 February 2012. <>.

    20. Hoover's Company Records. “Blockbuster, Inc.” Hoover's Company Records. LexisNexis. Web. 22 September 2009.

    21. Ibid.

    22. “Blockbuster Inc. Issues FY 2009 Earnings Guidance Below Analysts' Estimates.” Reuters. 19 March 2009. Web. 23 September 2009. <>.

    23. Hoover's Company Records. Netflix, Lnc, op. cit.

    24. Hoover's Company Records. Blockbuster, Lnc, op. cit.

    25. Ibid.

    26. Jeff Chabot. “Netflix vs. Blockbuster - Why is Netflix winning?” HD News. 4 March 2010. Web. 1 June 2010. <http://www.hd-report.com2010/03/04/netflix-vs-blockbuster-why-is-netflix-winning/>.

    27. Hoover's Company Records. “Blockbuster, Inc.” Hoover's Company Records. LexisNexis. Web. 20 January 2012.

    28. Hoover's Company Records. “Hollywood Entertainment, Inc.” Hoover's Company Records. LexisNexis. Web. 4 February 2012.

    29. Ibid.

    30. Ibid.

    31. Goodrich, op. cit.

    32. Ibid.

    33. Goodrich. The History of Redbox. n.d. Web. 22 September 2009. <http://redbox>.

    34. Jeff Chabot, op. cit.

    35. Hoover's Company Records. “Redbox Automated Retail, LLC.” Hoover's Company Records. LexisNexis. Web. 20 January 2011.

    36. United States Department of Labor. Employment Situation Summary. 6 November 2009. Web. 15 November 2009. <>.

    37. Michael Souers. GICS Sub-Industry Summary: Internet Retail. Standard & Poor's Net Advantage. Web. 23 September 2009.

    38. Ibid.

    39. Hoover's Company Records. “Netflix, Inc.” Hoover's Company Records. LexisNexis. Web. 22 September 2009.

    40. Robert Stammers. Netflix Thrives Despite the Recession. Forbes. 25 February 2009. Web. 15 November 2009. < buster-personal-finance-investing-ideas_movie_rentals.html>.

    41. History of VHS. n.d. Web. 10 June 2010. < histoiy-of-videotape.htm>.

    42. Corrado Passein. “History of the DVD.” n,d. Web. 10 June 2010. <>.

    43. Ibid.

    44. SDCD “How Netflix got Started.” Wholesale DVD Distributor. n.d, Web. 10 June 2010. <>.

    45. Netflix Investor Relations. Management. n.d. 27 September 2009. <Error! Hyperlink reference not valid.>.

    46. Patrick Sauer. How I Did It: Reed Hastings, Netflix. 01 December 2005. Web. 28 September 2009. <>.

    47. Alyssa Abkowitz. “How Netflix got Started.” CNN Money. 28 January 2009. Web. 1 June 2010. <>.

    48. Ibid.

    49. Netflix Investor Relations, op. cit.

    50. Michelle Conlin. “Netflix: Flex to the Max” LexisNexis. 24 September 2007. Web. 29 September 2009.

    51. Ibid.

    52. Netflix Investor Relations. Management, op. cit.

    53. Ibid.

    54. Ibid.

    55. Ibid.

    56. Renn Vara, op. cit.

    57. Michelle Conlin, op. cit.

    58. Renn Vara, op. cit.

    59. Ibid.

    60. Ibid.

    61. Sarah Mason, op.cit.

    62. Ibid.

    63. Ibid.

    64. Glassdoor. Best Places to Work. 15 December 2008. Web. 15 November 2009. <,19.htm>.

    65. Ibid.

    66. Netflix Annual Report, “2008 Annual Report,” Netflix 10-K25February 2009.

    67. Ibid.

    68. Patrick Sauer, op. cit.

    69. “Netflix (NFLX).” Yahoo Finance. 29 September 2009. Web. 29 September 2009. <>.

    70. Sarah Mason, op. cit.

    71. Netflix Prize, op. cit.

    72. “Netflix Prize.” Netflix. n.d. Web. 30 September 2009. <>.

    73. Arnab Gupta. “What We Can Learn from Netflix.” Business Week. 30 September 2009. Web. 30 September 2009. <>.

    74. Ibid.

    75. “Netflix.” MSN Finance. n.d. Web. 29 September 2009. <>.

    76. “Netflix.” MSN Finance. n.d. Web. 2 February 2011. <>.

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