Walgreens
Despite thirty straight years of increased revenues and profits, Walgreens found itself facing
intense competition from Costco, Wal-Mart, and CVS. However, the biggest and newest threat to
Walgreens’ business was mail-order prescription sales managed by pharmacy benefit managers
(PBMs), who work closely with companies, insurers, and health maintenance organizations to reduce
pharmaceutical costs, which have been increasing an average of 13% per year. With Costco’s rock
bottom prices, Wal-Mart’s incredible volume-based purchasing power, and PBMs, according to a
government study, able to sell brand-name drugs and generic drugs 27% and 53% cheaper than
traditional drug stores, Walgreens is going to have to tightly control its expenses to continue to be
competitive.
In terms of efficiency, it costs Walgreens less to fill a prescription order (i.e., fulfillment costs)
than any other retailer in the business. PBMs, however, can still fill a prescription for half as much as
Walgreens. To get its fulfillment costs down, Walgreens reduced its pharmaceutical inventory supply
from 68 days (that is, if Walgreens quit ordering pharmaceuticals, it would be able to fill prescriptions
for 68 days before running out) to 41 days. This reduction saves the company nearly $2 billion a year.
Other steps to reduce expenses include no longer accepting American Express cards at Walgreens
stores. Every time a customer uses an American Express card to make a payment, the store pays
American Express a fee of 2.05%. By contrast, Visa and MasterCard charge 1.55%. While the
difference seems small, the savings amount to $50,000 on every $10 million of sales, which can add
up quickly given Walgreens’ $40 billion in annual sales. Finally, Walgreens keeps costs low in its
stores with one of the best employee retention rates in the industry. Howard Davidowitz, chairman of
Davidowitz & Associates, a retail consulting and investment banking firm, says, “Their pharmacists
don’t turn over, which increases consumer trust in the pharmacist. The retention rate of store and
district managers is also high. This is such an advantage.” Walgreens is also using technicians who are
paid $16 an hour to fill more prescriptions. While pharmacists, who are paid $42 an hour, still review
all filled prescriptions, using technicians who are paid $16 an hour to fill more prescriptions clearly
reduces expenses.
Walgreens started its “Advantage 90” program, which it now offers through its mail-order system
and its stores. Walgreens believes that Advantage 90 will help it take sales away from other PBMs
AND from other retail pharmacies, which have higher fulfillment costs. Advantage 90 is now used by
150 companies, including Southwest Airlines, and Walgreen’s CEO maintains that it is cheaper than
mail-order PBMs.
110. Refer to Walgreens. If you managed a pharmacy chain that was trying to compete with Walgreen’s,
you should use ____ to determine ways to improve business efficiency.
a.
benchmarking
b.
data decentralization
c.
information processing
d.
mirroring
e.
comparative criterion
111. Refer to Walgreens. Walgreens elected to reduce expenses by no longer accepting American Express
cards at Walgreens stores. This occurred during which step of the control process?
a.
situational analysis
b.
taking corrective action
c.
benchmarking
d.
minimizing suboptimization
e.
setting standards
112. Refer to Walgreens. When Walgreens elected to reduce expenses by no longer accepting American
Express cards at Walgreens stores, management was trying to affect the company’s:
a.
revenue budget
b.
expense budget
c.
profit budget
d.
capital expenditure budget
e.
cash budget
113. Refer to Walgreens. Walgreens’ implementation of a mail-order pharmacy business is only one change
that it will need to make as it contends with increasing costs and new competition. This statement
underlies the ____ nature of control.
a.
synergistic
b.
static
c.
reciprocal
d.
autonomous
e.
dynamic, cybernetic
114. Refer to Walgreens. When Walgreens’ managers responded to the threat of PBMs by creating
Walgreens Health Initiatives, its own PBM business, they were using ____ control.
a.
concurrent
b.
intermittent
c.
feedback
d.
feedforward
e.
synergistic
115. Refer to Walgreens. When Walgreens’ managers changed how much inventory the company holds at a
time, they were affecting the ____ perspective of the balance scorecard.
a.
customer
b.
innovation and learning
c.
internal
d.
feedback
e.
external relations
116. Refer to Walgreens. Advantage 90 will most likely have an impact on which quadrant of Walgreens’
balanced scorecard?
a.
customer
b.
innovation and learning
c.
internal
d.
all of the quadrants
e.
Advantage 90 represents a new business, so will have no impact on Walgreens’ balanced
scorecard.
South West Trading
South West Trading is a small business that had created demand for its line of yarns made from
bamboo, corn, and soy fibers, but it couldn’t supply it fast enough. The factory cranked out 500 to 800
metric tons of yarn each month. Its skeins were stuck somewhere between its manufacturing plants in
China and its warehouse in Phoenix, and it had no easy way to track its orders. The company kept $1
million worth of excess inventory in Phoenix to ensure that it could meet orders. South West Trading
had no way to combine products from different Chinese factories into one oceangoing container, so it
paid a freight forwarder $1,000 to $2,000 to send each small shipment separately, at an annual cost of
more than $100,000. A trucking company picked up the goods in the Port of Los Angeles and
transported them to Phoenix at a cost of $20,000 a year. Each trucking shipment could take as long as
18 days to get to Phoenix. The company solved its problem by hiring UPS, which in recent years has
been aggressively marketing the work of its Supply Chain Solutions division to small-business clients.
117. Refer to South West Trading. Which management function did South West Trading need to use to
achieve its organizational goal of improving distribution?
a.
implementation
b.
goal-setting
c.
control
d.
suboptimization
e.
benchmarking
118. Refer to South West Trading. To determine the ways in which its distribution system is unsatisfactory,
South West Trading probably had to specify performance:
a.
standards
b.
potentials
c.
autonomy
d.
decentralization
e.
resource goals
119. Refer to South West Trading. In terms of the control process, South West Trading _____ when it hired
UPS to solve its distribution problems.
a.
revaluated its communication systems
b.
used benchmarking
c.
created autonomous feedback controls
d.
took corrective action
e.
used concertive control
120. Refer to South West Trading. When the company examined the financial costs of its distribution
system, it was using _____ controls.
a.
concertive
b.
normative
c.
feedback
d.
concurrent
e.
bureaucratic
121. Refer to South West Trading. South West probably used _____ control to measure how much the use
of UPS’s service improved the company’s distribution process.
a.
normative
b.
market-oriented
c.
industrial betterment
d.
objective
e.
administrative
122. Refer to South West Trading. South Wind Trading probably used a _____ perspective to measure its
performance.
a.
financial
b.
customer
c.
value/quality
d.
quality/profit
e.
suboptimization
123. Refer to South West Trading. What measures were probably used to determine how maintaining
excess inventory influenced the company’s liquidity?
a.
budgets
b.
income statements
c.
statement of retained earnings
d.
balanced scorecards
e.
financial ratios
124. Refer to South West Trading. South West Trading should emphasize which perspective of the
balanced scorecard if it wants to continue to improve and create value?
a.
financial perspective
b.
policies and procedures perspective
c.
customer perspective
d.
internal business perspective
e.
innovation and learning perspective
Gap
The GAP clothing chain was founded in 1969, by Donald and Doris Fisher, and over the next few
decades, it grew into America’s largest fashion retailer. Now, sales have slumped, with same-store
sales either flat or declining in 29 of the last 31 months and down 9 percent in each of the last two
years. The wheels began to come off in 2000 when the company’s efforts to attract teenagers alienated
its twenty and thirty year old customer base. At the same time, CEO Mickey Drexler, whose brilliant
management of the fashion side of the business had propelled GAP to success, had let the financial
side of the business slip.
With production costs out of control and a burgeoning inventory, Drexler was replaced with
Paul Pressler, who rapidly closed underperforming plants, reduced inventory, and began carefully
tracking the company’s finances. Unfortunately, the fashion side was left with no real direction. As the
new interim CEO Robert Fisher said, “We almost tried to institutionalize creativity.” GAP needed to
find a way to balance its financial controls with the focus on design and creativity that made them a
fashion competitor to begin with.
Fisher emphasized the importance of Pressler’s controls; however, certain changes needed to
be made to encourage creativity. Fisher decentralized certain operations, such as fabric purchasing,
that were slowing things down and limiting the individual companies. While looking to maintain the
control versus creativity balance, Fisher felt GAP needed to reestablish its focus. Ultimately, fashion,
which brings in the customers, must come first.
With numerous successful companies in the fashion space, there is a lot that GAP could gain
from analyzing its competition. Abercrombie & Fitch has made significant success in the teen market.
Chico’s, which particularly specializes in the quality of store personnel, has been leading the way
recently with an eclectic approach to working women’s apparel. From an efficiency standpoint, GAP
could also examine the efforts of Land’s End and its move to sell merchandise in Sears stores.
GAP also needs to work on achieving a balance between operational efficiency and creativity.
Offering employees incentives for finding creative ways to market and sell merchandise might be
useful, as well as tacking performance on a company-wide scale. GAP should also allow design teams
and purchasers to establish their own norms, which might be quite different from store operations.
125. Refer to Gap. The scenario suggested that the Gap stores needed to benchmark Chico’s. This means
that:
a.
Gap should strive to sell more than Chico’s does
b.
Gap employees should work harder because they are second-best
c.
Gap should target the exact same target market as Chico’s does
d.
Gap should adopt the same control methods used by Chico’s
e.
Gap should examine Chico’s to learn ways it could operate more creatively
126. Refer to Gap. During which stage of the control process did Gap management realize they needed to
pay more attention to the fashion side of the business?
a.
situational analysis
b.
taking corrective action
c.
benchmarking
d.
minimizing suboptimization
e.
setting standards
127. Refer to Gap. What kind of control did the company’s declining profits require?
a.
feedback
b.
stasis
c.
preemptive
d.
feedforward
e.
concurrent
128. Refer to Gap. _____ occurred when Gap concentrated its efforts more on control and less on
creativity.
a.
Suboptimization
b.
Control loss
c.
Cybernetic infeasibility
d.
Feedforward control
e.
Satisficing
129. Refer to Gap. A decrease in customers from the twenty to thirty year old customer base is an example
of:
a.
customer defections
b.
output control
c.
cybernetic feasibility
d.
demographic control
e.
suboptimization
SHORT ANSWER
1. List the steps in the basic control process. How would you respond to the statement, “Control is a
process that should be employed intermittently?”
2. Define benchmarking. List the three steps in this process.
ANS:
3. Explain the term cybernetic and its relevance to the control process.
4. Identify and briefly define the three basic control methods.
5. List and briefly identify the five methods that managers can use to achieve control in their
organizations.
6. Some approaches to control tend to be more stressful for employees than others. Discuss how
bureaucratic and concertive control influence workers.
7. Briefly describe the balanced scorecard approach to control. Explain how it differs from the traditional
approach to control used in most companies.
8. How does financial control in the balanced scorecard approach differ from its use in the traditional
approach to control?
9. In an effort to determine the effectiveness of their control system, how do most companies attempt to
determine how they are seen by their customers? What is wrong with this technique?
10. Identify which of the four perspectives from the balanced scorecard approach the topic of waste
minimization is related to. Specify the four levels of waste minimization in order (from that producing
the greatest minimization to that producing the smallest minimization).
ESSAY
1. Describe the nature of the control process. Identify its basic steps, as well as the three basic methods of
control. Explain how specific policies and procedures related to grading used at a college or university
could be seen as an example of the control process, and specify which method(s) of control your
example(s) represent.
2. Compare and contrast the nature and operational basis of the five methods of control available to
managers and organizations. Comment on whether it matters that a manager selects one method of
control over another in a given set of circumstances.
ANS:
3. Identify and explain the balanced scorecard approach to control. Specify its advantages, and how it
differs from the traditional approach to control used in most companies. Comment on which approach
(the traditional or balanced approach to control) is more likely to help a company adapt to a changing,
competitive marketplace.
ANS:
4. What is economic value added (EVA)? Why it is so important in comparison to the traditional
approach to controlling financial performance?
