Hot & Cold Inc.
Hot & Cold Inc., is a publicly-owned company headquartered in the Los Angeles
area. It is a global company with thousands of employees around the world. The company
manufactures an extensive variety of temperature measuring equipment and pressure
gauges. The company has been a leader in its field for almost twenty years and it has
never been too concerned with cost control. Whenever its raw material, labor or
overhead costs increased, Hold & Cot simply passed it along to the consumer by raising
prices. That strategy had worked quite well up until the past two years. During that time,
less expensive products made in Mexico put pressure on Hold & Cold to cut costs in
order to reduce prices 20 percent to remain competitive.
Stan Bonner is the chief executive officer (CEO) of Hot & Cold. Jon Smith is the
chief financial officer (CFO). Frank Lumin is the chief operating officer (COO). Janice
Roben is the company’s chief legal counsel. The four top executives are meeting to
discuss the cost-cutting measures required to maintain the company’s competitive
position.
“Listen Frank, we have to cut some workers. That’s the only way to reduce costs
sufficiently to match the 20 percent price reduction.” Smith said.
“I agree with Jon,” Bonner added.
“I won’t abandon the workers like that.” Lumin said. “We have a responsibility to
them and their families.”
“Frank has a point,” said Roben. We may have some legal liability to the workers
if we cut them or reduce their benefits.
“That’s nice but where else can we save $20 million?” Smith asked.
“We have been very generous with the stockholders in paying out higher
dividends each year. The stockholders now get a 6% return on their investment, and
they’re common stockholders.” Lumin responded.
“I’ll have my head chopped off if we do that,” Bonner said. “Our primary
responsibility is to the stockholders, not the employees.”
Lumin had a disgusted look on his face. He scratched his forehead, took a deep
breath, and then began to lecture both Bonner and Smith. “The workers are this
company. They haven’t had a raise in two years. We threatened the union with layoffs
and got their agreement to cut the pension and health benefits last year. How much
longer do you think they will stand for it before they strike? Do you really want a union
fight on your hands?” Lumin asked rhetorically.
Bonner glanced at Smith expecting him to answer Lumin, but Smith was silent.
Bonner got up, poured himself a cup of hot coffee, and began to respond. Looking
straight at Lumin who had a chilled expression on his face, Bonner said: “I’m giving you
one week to come up with a proposal to cut $20 million from operating costs. I don’t
care how you do it. You can hire cheaper labor if you want. Just get it done.”
This case has discusses the challenges of a company trying to meet demands in staying
competitive in a global economy.
Ethical Issues
The case addresses how to be ethical while a company may be in financial distress. The
company will be challenged to decide whether the ends justify the means or whether to
treat people like means instead of ends (Kant). The management will have to determine
stakeholder priority preferences, whose money is it and who should or can take losses.
The right to health insurance is the ultimate threat, especially to older workers. Once the
plans to handle the financial distress have been made, the employees have the right to
know plans truthfully from management, instead of from rumors. If employees are to get
laid off, those employees being laid off should hear the news before anyone else, in
person, with privacy, and a weekend to recover.
Questions
1. To which party or parties does management owe its ultimate allegiance?
How should they balance that obligation with other responsibilities of
managing a company with $400 million in annual sales and thousands of
employees?
Management owes its ultimate allegiance to stakeholders, particularly those whose
cooperation has led to success and with whom promises have been made. Management
has a financial duty to spend dollars as promised and as reported to stockholders. The
stakeholders in probable order of allegiance: shareholders, employees, creditors,
2. What should be the expectations of workers for fair treatment by
management? Be specific. Do workers have a right to lifetime employment?
Do they have a right to pensions? To health benefits? Are these consideration
all part of good governance?
Workers have a right of fair treatment by management; this right includes being treated as
a means, not an end. Workers do not have a right to lifetime employment but do have a
right to hear truthful plans from management and under certain circumstances should
have a right to give input into the plans. Management should treat the workers with
respect and give as much warning as possible to lessen the damages. Management should
3. Do you think the ultimatum Bonner gave Lumin was ethical? Why or why
not? Assume Lumin came back with a proposal to save $800,000 through the
following operational changes:
a. No replacement of five workers who are scheduled to retire within the
next six months. The savings would be $400,000.
b. Changing raw material suppliers for a saving of $200,000.
c. The reduction in the number of quality control inspectors from three
to two. This would produce another $100,000.
d. Reduction in paid vacations for all hourly workers from three weeks
to two weeks for another $100,000 savings.
Use ethical reasoning, evaluate each of the proposed cuts. If the proposed
costs went through and it enable Hot & Cold to maintain its competitive
position for the next two years, do you think the cuts will have been worth it?
That is, what might be the long-term effects of the costs? Be sure to include
union considerations.
The unethical part of the ultimatum was the last sentence of “I don’t care how you do it.”
Management has the ultimate responsibility and risks of decisions made, so should make
In (a), while the decision not to replace retiring personnel avoids a lay-off, management
needs to determine if those positions are necessary for the needed skill set or safety
concerns. There is a fairness issue with remaining workers if they are expected to cover
In (b), would changing raw material suppliers break a promise or contract with current
suppliers? Will the new suppliers be of equal quality or customer satisfaction could
In (c ), will the decrease in number of quality control inspectors affect reliability or
quality, warranty expense or customer satisfaction? Is there another reason why the
In (d) reduction in paid vacation will be a broken promise to workers and the union; this
can have a large effect on worker morale. Has management shared in the vacation cuts;
Management should share the different considerations with the workers and maybe let
workers discuss priorities of each option and concerns. Workers may be willing to have