Financial Ratio Analysis

Using financial ratios to view a company’s health is a useful tool used by investors and shareholders.  Taking information off of the company’s financial reports such as the balance sheet and income statement and comparing key numbers from those forms has been proven to be a good barometer of where the company is going and if the company would be a good investment.  It is important to realize however that while financial ratios are helpful they do have some possible shortcomings.

One ratio that many view as important when considering a company’s financial health is called the current ratio.  The current ratio is very simply the company’s current assets divided by the company’s current liabilities.  This simple ratio should be a good indicator of a company’s short term liquidity, however the effectiveness of this ratio is questioned because “current liabilities are never wholly discharged, and current assets are never entirely available to meet current maturing obligations by analogous reasoning” (Zeller, Stanko & Cleverly, 1997, p. 62-6).

Another failure of using ratios to calculate a company’s health is the complexity of calculating and interpreting the ratios.  Overanalyzing the data gained from ratios can cause a company or investors to delay action because there is simply too much data.  In one study of ratios it was found that in reality “the majority of the information in the original 28 ratios can be provided by six ratios” (Zeller, Stanko & Cleverly, 1997, p. 62-6).

One of the benefits of using ratios is it can often identify an issue in the company’s financial data and suggest a solution.  Years ago Home Depot was experiencing rapid growth and expansion and was suffering problems with cash flow due to the growth.  Ratio analysis indicated that the best way from the company to continue growing was to maintain the same sales amount per transaction and increase the number of transactions per store.  A marketing plan was devised to increase traffic in existing stores which helped the company (Financial ratio, 2003, p. 1-1).

Another benefit to using financial ratio analysis is that since it is an accepted practice when investors are comparing companies it can create a common ground for comparison.  Although there may be differences in markets and regions most financial ratios can be compared across several companies and a basis can be seen.

Financial ratio analysis helps home depot nail growth targets. (2003). IOMA’s Report on Financial Analysis, Planning & Reporting, 03(12), 1-1,11+. Retrieved from http://search.proquest.com/docview/203152343?accountid=32521

Zeller, T. L., Stanko, B. B., & Cleverly, W. O. (1997). A new perspective on hospital financial ratio analysis. Healthcare Financial Management, 51(11), 62-6. Retrieved from http://search.proquest.com/docview/196373520?accountid=32521

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Advertising and Ethics

Open the website Yahoo.com and there are many types of advertisements that appear, some for car manufacturers, television shows, and prescription drugs. Today the first advertisement that displayed on Yahoo.com was for a drug called Vyvanse from a manufacturer called Shire, LLC. The advertisement states that Vyvanse helps control ADHD and shows a picture of a smiling young girl who is supposed to be a happy user of the drug. Is it possible that the drug is indeed a help for some people with ADHD but not for all? How many does it have to help in order for the manufacturer to be able to claim that it helps control ADHD? How does Shire advertise other medicines? A visit to http://www.shire.com shows more smiling happy people that are helped through many diseases by medications produced by Shire (Shire, 2013, n.p.).

Another advertisement that seems very similar but has been challenged is when Zales jewelry store advertised their diamonds as the most brilliant in the world. “Akron-based Sterling Jewelers Inc., a retailer that operates more than 1,300 stores under several brands that include Kay Jewelers and J.B. Robinson Jewelers, has sued rival Zale Corp., which operates about 1,870 stores under the Zales brand and others. Sterling says Zale’s claim that its Celebration Fire diamond is “the most brilliant diamond in the world” is false and misleading. “Fire diamonds are not the most brilliant in the world, and the research claimed to prove that Fire diamonds are the most brilliant in the world does not and cannot so prove,” Sterling alleges in the lawsuit, which was filed last Tuesday, Nov. 13, in U.S. District Court in Cleveland” (Park, 2012, p. 0003).

There is no way to react to advertising puffery or deceptive advertising since there is hardly an item that is advertised today that does not use one or the other kind of advertising. People do not react in any sort of way to advertising today. Most people see an advertisement for something and then check out reviews and comments online, so if there is some exaggeration in an advertisement but most people are still happy with the product or service that is OK, and if people are not happy with the product or service new customers will read the comments and reviews and not be duped. The discussion about ethics and advertising and how vulnerable consumers are reflects an outdated view of how consumers react to advertisements.

PARK, M. (2012). Sterling Jewelers goes to court over rival’s ‘most brilliant diamond’ claim. Crain’s Cleveland Business, 33(45), 0003.
Shire, llc. (2013). Retrieved online at: http://www.shire.com/shireplc/en/home

Ethics Training

Ethics is the study of ideal behavior.  Although there are many definitions of ethics many refer to the definition put forth by Will Durant, the historian and writer.  “Durant’s definition of ethics as the study of ideal conduct has meaning because it teaches that ethics has two elements. First, knowledge of ethics is not something with which we are born; it is acquired by study. Second, ethics is not common behavior, it is the ideal conduct we hope to find in the best of us” (Christensen, 1995, p. 32).  Ethics is not something that people are born with, ethics are learned.  Comparing cultures shows that while one culture may find an activity acceptable and ethical other societies may condemn the same behavior.  An organization that is concerned with ethical behavior by its members must teach what is an acceptable and ethical behavior.

Corporations must teach ethics to its employees.  The guidelines that the company sets in place must be made known to every employee and upheld.  It is a huge task to make sure the company is covering ethics in its training program.  Large organizations have to make a serious commitment to training, take for example the fact that in 2011, Accenture spent more than “370,000 hours of ethics and compliance training, and the company has a zero-tolerance policy for corruption or serious violations of its Code of Business Ethics” (“Ethics”, 2012, p. 74).  The training procedure for ethics should involve clear notice of what is considered ethical behavior along with examples of people acting appropriately as well as examples of employees not acting in an ethical manner.  The goal of the ethics training is to make sure employees know that if they act in an unethical manner there will be consequences.

Christensen, B. A. (1995). Ethics by definition. Journal of the American Society of CLU & ChFC, 49(5), 32. Retrieved from http://search.proquest.com/docview/209609074?accountid=32521

Ethics; accenture releases 2010-2011 corporate citizenship report. (2012). Information Technology Newsweekly, , 74. Retrieved from http://search.proquest.com/docview/993132242?accountid=32521

Cloud Computing: History and Future

Andrew McLaughlin, who heads public policy and government affairs for Google, described the use of cloud computing as “one of the most important transformations the federal government will go through in the next decade,” noting the cost advantages of cloud infrastructure (Miller, 2009).  Cloud computing is a concept that involves distributing computer power across remote computers and doing computations outside of the local area of a user.  Cloud computing is a concept that will revolutionize human interaction in both the world of computing as well as the normal interactions of people, industry and governments; the cost savings, ease of implementation, interactivity and overall mobility afforded users outweigh any possible drawbacks.  The fact that there is support across the computer industry and that there is new focus on Web 2.0, which encourages user interaction and ease of use will push cloud computing to the forefront of computer systems.

Cloud computing is a very popular term that describes several types of shared distributed or grid computing.  The book Tomorrow’s Technology and You describes “grid computing isn’t about sharing files; it’s about sharing processing power” (Beekman & Beekman, 2009, p. 306). In the early days of internet usage it was used as a connection between private networks.  It was common for the connected networks to be quite large networks run by institutions, schools, governments, and research centers.  Each network had network engineers that were responsible for the configuration and maintenance of the private network; which included creating graphical representations of the network.  Many network engineers of the day did not understand how to accurately depict the journey of a packet across the internet so it became common practice to use a cloud as the internet.  As the use of the cloud became accepted as a representation of an unknown network outside of the private network people were working with it came to be known as the cloud, or computing in the cloud, or cloud computing.  Cloud computing therefore can refer to any computing that occurs outside of a private local network.

 As more people became comfortable with the data changes that occur in the cloud there occurred a fundamental shift in the way people viewed the internet.  The internet was no longer just a connection between large institutional intranets but it became a direct connection between individuals.  Cloud computing now means that instead of data simply being transferred through the cloud data is being created and changed inside of the cloud.  This paradigm shift will serve as the basis of the next evolution of both computers and mankind it will create one of the most significant market opportunities since the explosive growth of the Internet itself. While writing about cloud computing James Urquhart stated in an article for CNET that “I’m not dealing in hyperbole here; I honestly believe that there is a clear evolutionary step to the cloud occurring well after stand-alone self-service clouds are mainstream (which they arguably are today) that will inspire massive innovation.” (Urquhart, 2008).

There are several differences between computing of the past and the way cloud computing is structured:

1.    Users of cloud computing generally do not have to own many of the hardware components required of conventional computing.

2.    Software in cloud computing resides in the clouds with shared programs not installed on users computers but maintained on central servers.

3.    Software in cloud computing is usually provided on a subscription basis with users paying a monthly fee instead of an larger one time fee.

4.    Resources in cloud computing are delivered over the web instead of being contained on local computers.

5.    Users of cloud computing interact with other users in two way conversations as opposed to traditional software which usually limited users to strict rules of one way interaction.

The benefits of cloud computing are wide reaching and are the reason that the shift to distributed computing ideologies such as cloud computing.  Cloud computing offers users a highly automated platform for software updates, always giving users the most up to date software.  Flexibility of access is another benefit of distributed cloud computing; allowing users to access files and data from different types of devices such as laptops, home computers and mobile devices.  Mobility is one of the greatest advantages of cloud computing services since services are not tied to a local network users can be in almost any situation and participate in the computing process.  Cloud computing also helps corporate and individual users reduce costs.  Computing in the clouds tends to be much more interactive for users as opposed to more traditional software.

There are many reasons that cloud computing has not become the defacto standard for all computing.  One issue that faces distributing computing is the question of how to enforce privacy guidelines on the remote service.  For many users the challenge of finding sufficient bandwidth to successfully implement computing in the clouds is a major hurdle.  Depending on the application and type of data being manipulated cloud computing can have performance issues such as lagging and lack of responsiveness.  A common issue raised regarding cloud computing that can be used as both a positive and a negative is that a local support team is not needed which can reduce overall cost but also means any repairs or programming must be outsourced.

Commercial implementation of cloud computing is being developed by most major computer companies such as International Business Machines, Intel, Sun Microsystems, Microsoft and others as shown in Figure 1.  The other players in the growth of cloud computing come from not only traditional software and operating software companies but also from hardware providers and companies that are new to the private computing market.  An investigation of the concepts being offered as well as those that are being planned in the future will show that cloud computing is the direction that personal, industrial, and governmental computing is being driven.

Figure 1 www.boston.com illustration of providers of cloud computing resources.

 

One of the most aggressive providers of cloud computing is salesforce.com which provides sales and contact management based entirely in the cloud.  Founded in 1999 by Marc Benioff who was formerly with Oracle Corporation, salesforce.com was created with a “vision to create an on-demand information management service that would replace traditional enterprise software technology. Benioff is regarded as the leader of what he has termed “The End of Software,” the now-proven belief that multitenant, cloud computing applications democratize information by delivering immediate benefits at reduced risks and costs” (Salesforce: Leadership, n.d.).  Salesforce.com helped popularize the concept of software as a service or SaaS.  Salesforce.com allows salespeople in multiple locations to access real time customer and product information allowing them to react instantly to changes.

Amazon is another player on the cloud computing field.  Calling their entry into the service EC2, which stands for Elastic Compute Cloud, Amazon offers scalable web services for companies.  Amazon’s EC2 website proclaims “Amazon Elastic Compute Cloud (Amazon EC2) is a web service that provides resizable compute capacity in the cloud. It is designed to make web-scale computing easier for developers Amazon EC2 reduces the time required to obtain and boot new server instances to minutes, allowing you to quickly scale capacity, both up and down, as your computing requirements change by allowing you to pay only for capacity that you actually use” ( Amazon: products and services, n.d.).  Amazon also offers products for cloud storage that gives users scalable and elastic room for growth as needed.

Microsoft has been pushing the cloud computer market with its version of what it describe as “a flexible cloud–computing platform that lets you focus on solving business problems and addressing customer needs. No need to invest upfront on expensive infrastructure. Pay only for what you use, scale up when you need capacity and pull it back when you don’t” (Microsoft Windows Azure, n.d.).  The newest release of Microsoft’s cloud computing is called Azure.

Even companies that traditionally have provided hardware solutions are poised to enter the cloud computing arena.  For instance, Dell computers has recently announced that they will be providing cloud solutions. “ This web application platform as a service (PaaS) solution is designed to address the key issues around web application development and deployment: unpredictable traffic, the fear of under-provisioning and migration from development to production. The solution will combine Dell cloud-optimized servers and services with fully-integrated Web application cloud software from Joyent, a leader in cloud computing” (Dell Press Releases, 2010).  Dell is positioning itself to be the leader in cloud computing hardware solutions with its PowerEdge C servers that are optimized for Web 2.0, social networking, and gaming.

Apple has announced its newest plans for cloud computing based on its iWork program. The me.com site that Apple has been using in cooperation with iWork allows access to data, contacts and programs all based in the cloud. Although Apple is not launching a platform on its own they are focusing on the personal side of the cloud.  By enabling the new iPhone to use multiple applications and with the extensive applications available for the platform Apple will remain a dominant player in the personal cloud computing industry.

Is the change to cloud computing the future of the computing industry?  Information technology professionals were asked by survey takers at KPMG Netherlands if they though cloud computing was a technology that was here to stay or something that was simply being promoted by vested interests.  As figure 1 shows over fifty nine percent of those asked either agreed or strongly agreed that cloud computing was the way computing was going to evolve.  The importance of how users can interact with each other is driving companies to make the vision of cloud computing a reality (Hermans & Chung, 2010, p. 16).

Figure 2 KPMG survey of IT professionals regarding cloud computing being the future of IT.

 The concept of cloud computing is gaining popularity because of the failure of the current software and internet in connecting people with people and information.  Consider that most computer software in the early days of the internet was written in computer languages and by programmers used to communicate with large institutional networks.  Computers such as UNIVAC or any of the myriad of other first generation computers were not made to be personal or interactive. Figure 3 shows an image from the Computer Desktop Encyclopedia of one of the early computers and just from the numbers of switches, buttons, and gauges it is apparent that interactivity and simplicity was impossible to achieve at that time.  As computers and software have become more adaptable and interactive new ways of connecting were required, which is why cloud computing and Web 2.0 have become so important.


Figure 3 EDSAC computer.


One of the main forces that will continue to drive the move to computing in the clouds is the redefining of the internet and how users make use of web resources.  The new implementation of the web has been called Web 2.0.  Applications that make up the new web are interactive in nature; popular websites such as Facebook which allows users to receive constant interactive updates from other users and YouTube which encourages users to watch and comment on other users’ videos have exceeded the original intent of the programmers. There are many definitions of Web 2.0 however it can be summed up by saying “anyone can create an online publication, photo gallery, movie, music video, radio show, or video podcast” (Beekman & Beekman, 2009, p.242).

Cloud computing will use the advantages that Web 2.0 will provide which are the interaction of users and the contributions of not only programmers but also users that will reshape software.  Cloud computing will shift the power of computing from being centralized in institutional and governmental centers to all of the users of the internet.  Cloud computing is a concept that will revolutionize human interaction in both the world of computing as well as the normal interactions of people, industry and governments; the cost savings, ease of implementation, interactivity and overall mobility afforded users outweigh any possible drawbacks.  The fact that there is support across the computer industry and that there is new focus on Web 2.0, which encourages user interaction and ease of use will push cloud computing to the forefront of computer systems.  The future is going to belong to those that can adapt to the computing power of cloud computing.

References

Amazon: Products and services. (n.d.). Retrieved from http://aws.amazon.com/‌ec2/

Beekman, G., & Ben, B. (2009). Tomorrow’s technology and you (9th ed.). Upper Saddle River, New Jersey: Pearson Education.

Company leadership. (n.d.). Salesforce: Leadership. Retrieved June 22, 2010, from http://www.salesforce.comhttp://www.salesforce.com/‌company/‌leadership/‌executive-team/‌#benioff

Dell press releases. (2010, March 24). Retrieved June 28, 2010, from http://content.dell.com/‌us/‌en/‌corp/‌d/‌press-releases/‌2010-3-24-cloudedge-launch.aspx

Hermans, J., & Chung, M. (Eds.). (2010). KPMG From Hype to Future 2010 Cloud Computer Survey.

Microsoft windows azure. (n.d.). Retrieved June 28, 2010, from http://www.microsoft.com/‌windowsazure/

Miller, R. (2009, January 20). Obama tech team envisions federal cloud [Tech article]. Retrieved June 20, 2010, from http://www.datacenterknowledge.com/‌archives/‌2009/‌01/‌20/‌obama-tech-team-envisions-federal-cloud/

Urquhart, J. (2008, December 22). The great paradigm shift of cloud computing is not self-service… In CNET news. Retrieved June 22, 2010, from http://news.cnet.com/‌8301-19413_3-10127654-240.html

The Rolex Marketing Mix: A Success Story

The Rolex Marketing Mix

Marketing is the effort made by an organization to identify needs and wants of potential customers and then satisfying them.  The most successful organizations are those that are the most successful in first identifying and second satisfying customer’s needs.   Identifying needs and then meeting them does not happen by accident; it takes a concise plan.  The marketing mix for a product is made up of the controllable factors available to organizations.  A marketing manager has four tools to use when developing and executing a marketing plan: product; price; promotion; and place (Kerin, Hartley, & Rudelius, 2011, p. 11).  A careful examination of the marketing mix of a company yields insight into the health and direction of the company by indicating the market being pursued by the company.  There are many organizations that excel at marketing products and services but the greatest example of marketing genius is displayed by the Rolex watch company.

Rolex took a huge leap forward in “1914, just before the shooting of Archduke Ferdinand would throw the world into bloody conflict, the Bavarian Hans Wilsdorf was paying little attention to world events. Having established his London-based watch company Rolex in 1908, he had decided to test the accuracy of his products by sending them off to a Swiss observatory. It was a decision worth taking, as Rolex was rewarded with the world’s first timing certificate for a wristwatch” (Haig, 2004, p. 126).  Because the company had focused on wristwatches instead of the more popular pocket watch and had garnered such a reputation for accuracy they became common issue for soldiers during the First World War.  the First World War, as they were easier to use than pocket watches in the trenches.  Rolex focused on accuracy and innovation which led to features such as a self winding mechanism and an automatic day and date window.  The innovation and quality that Rolex built into each watch soon gave the company a clear advantage over the competition.

Considering Rolex’s positioning in view of the components of the marketing mix will show how the company positions its product in the marketplace.  The discussion of Rolex’s marketing genius is incomplete without including the pricing structure followed by them as well as the distribution channels employed.

Rolex has focused on the features that are important to its customer base since the company was founded in 1908.  The company has built a reputation of extreme accuracy and has been recognized as having a very accurate watch movement.  The second feature that is important to Rolex customers is the prestige associated with the brand.

The competition that Rolex faces comes from elite watchmakers and the companies that create replica watches that imitate the Rolex brand.  The competition from elite watchmakers is fierce and many companies make quality prestigious watches.  Audemars Piguet is a watch that is made in Switzerland that creates high quality watches that are often more modern in style than Rolex.  The Cartier Roadster watch is a direct competitor of Rolex and has an equally accurate movement and displays a much more artistic styling than the Rolex.
Consumers shop this category of watch by research and more importantly by word of mouth.  The specific types of watches carried by Rolex dictate how they are used.  The Rolex Yacht-master is built for timing and actions necessary on a boat specifically during a yacht race and so most customers use it for sailing.  The Rolex Submariner is a watch designed specifically for divers and was the first watch to be waterproof up to 100 meters and is now made to withstand depths of up to 300 meters (Rolex, 2011, np.).

The way that Rolex creates a brand image is unique and extremely effective.  Instead of relying on a complex brand image based on words or a complex picture Rolex relies on a simple single image of a crown for its branding.

The pricing strategy that the Rolex company employs is distinct in its conception and execution.  Rolex sets its prices with little regard to the competition and their pricing, choosing instead to price its timepieces as it sees fit and therefore setting the price point for others to follow.  The company does not offer any sort of discounts for customers or any sort of price reductions or sales although occasionally there are dealers that offer discounts because of financial difficulties.  Rolex does not offer discounts because consumers are willing to pay the prices set by the company as is evidenced by the fact that even during an economic downturn and faced with discounted other brands of watches the majority of luxury watch shoppers where looking for a Rolex, “’For every 10 clients interested in other brands, we have 50 looking for Rolex watches,’ Aurel Bacs, international co-head of Christie’s watch department, said from Geneva” (Lankarani, 2009, np.).

Rolex has a very exclusive distribution network consisting of only a limited number of fine jewelry stores.  A search of the area surrounding Columbia, South Carolina area reveals that only two jewelers are authorized Rolex dealers.  The limited availability of products lends itself to the high end exclusive pricing strategy employed by Rolex.  The locations selected are all in upscale areas and have an established reputation for quality.

Rolex does not have a company outlet on the internet.  The website http://www.rolex.com has information on the watch lineup and the information on dealers in the area but it does not have a location to purchase.  Some of the dealers do offer online sales but all encourage buyers to visit the retail locations.

The genius of Rolex is that they have narrowed the marketing communications message being sent to a simple one that is consistently conveyed across all mediums.  The company does not use many of the channels of mainstream advertising such as national television and radio advertisements that are not targeted to their market.  The broad strokes of advertising that are often used by large promotions such as purchasing time during large sporting events like the Super Bowl are not used by Rolex.

Rolex has focused in on events that attract the type of demographic that has the desire and ability to purchase a watch from $5,000 to $100,000.  The Rolex Sports Car Series and the Rolex 24 Hours at Daytona both attract not only race fans but sports car owners that spend large amounts of money to run vehicles in the series and so are perfect advertising opportunities for Rolex.  Rolex also advertises during golf tournaments and yachting events that attract patrons that can afford to purchase an item like an expensive watch.

Watching the commercials that Rolex has produced and aired in the past shows that they have a consistent message and a consistent presentation during the advertising they do air.  The commercials convey prestige and wealth by displaying images of large yachts and race cars racing.  The main message that is portrayed to consumers is that Rolex purchasers are wealthy, attractive, active, and lead interesting lives.  The image that is portrayed is that customers purchase Rolex as a statement and as a reward for success.

In response to the market and how people are reached Rolex created a page on Facebook in 2013. As of January 2015, they have over four million likes of their page. A quick review of what is posted on the Rolex page reveals that although they are reluctantly embracing the necessary use of social media they are not straying from the basic marketing strategy that has made them successful: post successful people doing amazing things wearing Rolex watches. Below is a picture of tennis star Roger Federer wearing his Rolex (www.facebook.com/rolex).

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The problem that Rolex faces is that as its popularity grows more and more of the standard watches that the company makes are being cloned by watchmakers in all parts of the world.  Some of the replicas are of similar quality and are almost identical in appearance as an original Rolex and so those that are willing to purchase copies are able to find them in greater supply than the original.  The limited distribution channels that have been authorized by Rolex allow a greater demand for the product but also allows dealers to set prices for sales and repairs that exclude many demographics.  It would be better for Rolex to not only authorize additional retail outlets for its products but also offer refurbished and remanufactured originals on a company website.  The company loses revenue to those that resell used watches that it could capture by controlling the value of the used market by trying to control the supply.

Rolex is one of the greatest marketers of its products in the market today.  Rolex achieves success by controlling the four main tools available to marketing managers to make up the market mix: price; product; promotion; and place.  Rolex has a firm grasp on the necessity to control retail pricing of its products by paying little attention to the pricing of competitive firms such as Cartier and Audemars Piguet but instead setting the price that others follow.  The product that Rolex offers is close to unmatched in several arenas such as timing watches for boating and diving watches for undersea diving.  The promotion of its watches through television and print advertising support the sports centered approach to Rolex’s advertising that follows closely to the sponsorship of yachting races, sports car racing, and other sponsorships such as skiing.  Unlike most manufacturers that try and obtain as many retail outlets for products as possible Rolex has decided to severely limit the number of outlets that can be authorized to sell the Rolex brand and those that are authorized are all required to be successful and high end jewelry stores.

The marketing mix of the Rolex watch company is an example of why not following the usual way to market products is often a good idea.  When the company was started if the founder had not taken the unusual step of gaining certification as to his watches accuracy the company and the hallmarks of the product would not be known.  It is important that successful marketing managers take advantage of the controllable tools of the marketing mix as they have done at Rolex.

References

Haig, M. (2004). Brand Royalty. London, , GBR: Kogan Page Ltd. http://site.ebrary.com/lib/ashford/Doc?id=10074922&ppg=132
Kerin, R. A., Hartley, S. W., & Rudelius, W. (2011). Marketing(10th ed.). Boston: McGraw-Hill/Irwin.
Lankarani, N. (2009). Special report: Watches. New York: New York Times Publishing.
Rolex. (2011). Rolex website submariner. http://www.rolex.com/en#/rolex-watches/submariner/introduction

Subcontractor or Employee?

Employment of a commissioned salesperson is often viewed as a subcontractor relationship because many employers only pay if sales are made, however based on the laws that cover labor relations in most cases salespeople are employees.  There are many reasons that a company might prefer to use subcontractors instead of hiring full time employees.  There are many laws that define how workers are classified.  It is important for a company to properly define its sales staff for several reasons.

Salespeople are typically employees rather than sub-contractors.  Is it better for a company that needs sales representatives to hire employees or to contract with subcontractors?  What are the benefits of using subcontractors?  Why could using employees be a good idea for a company?

Examples of Subcontractor Salespeople

There are several examples of salespeople that are usually legitimately classified as subcontractors.  Supplemental health insurance is an industry that is known for having salespeople that are classified as independent contractors or independent subcontractors.  The best known of the providers of supplemental insurance is the American Family Life Assurance Company of Columbus, Ohio, popularly known as AFLAC.  AFLAC is a company that hires salespeople to represent it but only as independent agents.  The website is clear about how agents are hired, using the freedom of being an independent agent as a draw for working for AFLAC by asking, “Work or family? You don’t have to choose with Aflac. As an Aflac independent insurance agent, you’re the boss, so balancing work and play is easier than ever before since you make your own work schedule. As an independent insurance agent representing Aflac, you get the support of a Fortune 500 company and industry leader, along with the ability to own your own business and enjoy a flexible work schedule” (American Family Life Assurance Company, 2012).

Although the independent agent is a subcontractor there is still some control the company exercises over its agents.  AFLAC requires a new agent undergo training and be familiar with the products offered by the company.  The company requires agents to attend sales meetings and although the schedule can be flexible there are certain requirements about the number of calls an agent should make each week.

Examples of Employee Salespeople

Most salespeople are actually classified as employees.  Automotive dealerships usually classify their salespeople as employees.  The reason that automotive dealerships typically use employees as salespeople is because most dealerships have salespeople report to the same location on a set schedule every week.

A typical advertisement for a employee salesperson reads, “Previous auto sales experience is NOT REQUIRED for this position. Those with experience in customer service, account executive, financial services, mortgage and restaurant industries have proven to be very successful when switching careers to Auto Sales. Qualified applicants should have a professional appearance, a high school degree (or equivalent) and a valid driver’s license with an acceptable driving record. Drug screening and background checks will be performed. High-energy, positive, out-going individuals with strong verbal communication skills WILL succeed at Nissan Infiniti Mazda of Elk Grove” (Automotive Retail Sales Careers , 2013).

Benefits of Classifying Salespeople as Subcontractors

There are numerous benefits to classifying salespeople as subcontractors for a company.  The first advantage comes when a company needs salespeople on a temporary or seasonal basis since hiring subcontractors allows a company to avoid paying an employee when they are not needed.  Subcontractors only expect to be paid for the time they actually work instead of an employee that expects to be paid “for hours that they are not necessarily needed and this can increase your costs if not managed well (Newman, 2011, p. 48).

Subcontractors do not typically qualify for benefits so a second benefit to hiring subcontractor salespeople is the reduced cost of benefits.  Benefits such as health care, unemployment insurance, tuition assistance, and others can cost an employer tens of thousands of dollars per year for each employee that can be avoided by the use of subcontractors.

Benefits of Classifying Salespeople as Employees

There are several major benefits to hiring employees to make up a company’s sales staff.  One major benefit is that employees are totally under the control of the company which mean that the company can choose to do background checks and determine who is hired as well as when and where they work (Atkinson, 2012, p. 24).

A large benefit to hiring employees as salespeople is that it is often the most compliant legal solution.  In many cases because of the nature of the business involved in a company can only have employees as salespeople because of the strict definition of a subcontractor.

Laws Concerning Classification of Salespeople

The laws surrounding employee classification are diverse because each industry and job has unique requirements.  Most laws concerning classification of employees are centered around the tax implications of such classifications. A recent decision in the classification of subcontractor versus employee admits that “although there is no “bright line” test for worker classification, there are certain recurring themes. The most prevalent factor emphasized by various regulatory agencies and the courts is one’s “right to control” the detail of the individual’s work performance. (Franklin, Kota, & Milane, 2012, p. 64).

The Internal Revenue Service takes the classification of employees very seriously because the classification changes the way taxes are paid.  The position of the IRS is very clear but the line continues to be blurred by employers.  According to the rules the IRS takes the “position as outlined in IRS Publication 15A is that: Anyone who performs a service for you is your employee “if you can control what will be done and how it will be done.” The general rule is that an individual is an independent contractor if you, the person for whom special the services are performed, have the right to control direct only the result of the work and not the means and methods of accomplishing the result. Areas that government will determine the appropriate classification of employee or subcontractor is based upon are financial control, behavioral control, and the type of relationship of the parties. Remember, the government wants to know if you are calling them a subcontractor instead of an employee for the sole purpose of avoiding paying employee-related taxes” (Atkinson, 2012, p. 25).

Discussion Based on Article

A dealership that was involved in selling used cars classified its salespeople as independent contractors and then was investigated by the Internal Revenue Service and eventually went to court regarding how their salespeople were classified.

The dealership lost the case in District Court and was instructed to classify salespeople as employees but on appeal The Court of Appeals overturned the decision and upheld the dealership’s right to classify salespeople as independent contractors.

The case was based on Section 530 of the Revenue Act of 1978.

Fiore, N. J. (1996). Independent dealership’s used car salesmen were independent contractors under “significant segment” industry practice. The Tax Adviser, 27(10), 650-650. Retrieved from http://search.proquest.com/docview/194136845?accountid=32521

Conclusion

There are benefits to having employees as salespeople for a company and there are benefits to using subcontractors as well.  Employee salespeople are under the direct control of the company so that the schedule and method they use to sell the company’s product are approved and directed by the company.  Having employees allows a company to completely control the sales process.

Having subcontractors serve as the sales staff of a company can have great benefits for the company.  Since subcontractors are usually only paid when they produce the company is not required to pay for downtime as they would have to for employees.  Because subcontractors do not qualify for benefits from the company there is no impact on group health insurance or other benefits that usually cost the company thousands of dollars.

It is apparent that each type of salesperson, employee or subcontractor, has benefits that will appeal to companies in unique situations.  It is important that each company analyze the benefits of each type of salesperson and decide which is best for them.

 

References

American Family Life Assurance Company. (2012). Become an agent. Retrieved April 19, 2013, from AFLAC Web site: http://www.aflac.com/agents/flexibility/default.aspx

Atkinson, W. (2012). Employees VS Subs. Qualified Remodeler , pp. 24-26.

Automotive Retail Sales Careers . (2013, Aprril). Automotive Retail Sales Careers. Retrieved April 20, 2013, from http://automotiveretailsalescareers.com/jobs/

Fiore, N. J. (1996). Independent dealership’s used car salesmen were independent contractors under “significant segment” industry practice. The Tax Adviser, 27(10), 650-650. Retrieved from http://search.proquest.com/docview/194136845?accountid=32521

Franklin, R. T., Kota, M., & Milane, R. M. (2012, March). Independent contractor or employee. GP Solo , pp. 64-65.

Newman, P. (2011, June). Are You Hiring a Subcontractor or an Employee? Pavement , p. 48.

 

Potato Monopoly

A monopolistically competitive market structure used to be the normal condition for the potato chip industry in the Northwest section of the United States.  In 2008, the firms competing against each other were purchased by a group of investors that merged the firms together to create a monopoly.  The company created as a monopoly came from a market that was in a long-run competitive equilibrium with a goal of operating in a state of long-run competitive equilibrium as a monopoly.  The company will gain the most benefit from making the change to operating as a monopoly but the change will only benefit a small portion of the stakeholder’s of the company.

A monopolistically competitive industry is identified by easy entry into the market and therefore many firms are the norm (Case, Fair, & Oster, 2009, p. 303).  In the monopolistically competitive industry each firm does not create the exact same product or offer the exact service but each firm creates a different version of the same product.  Because each product is different each firm can choose to set a different price based on its individual product. 

A pure monopoly is identified by a single firm that controls a unique product and because of technological or other barriers has no competition.  The monopoly produces under what capacity would be produced in a competitive market at a price higher than what would be the case in a competitive market.  The basic difference between monopoly and “perfect competition in its analysis of the behaviour of the firm in one_respect only: the monopolist’s demand curve slopes downward. So also does that of the monopolistically competitive firm, and in long-run equilibrium it is just a special case of monopoly where zero profits are being made. If this analysis does add anything to our understanding of firms’ behaviour it must be because it tells us something about the interactions between firms in an industry, for it tells us nothing new about the individual firm” (Maurya, 2008, p. 178).

Given that the new potato chip company is now run as a monopoly, the stakeholders involved, such as the government, businesses, and consumers will be affected in different ways.  Government will be affected because the new potato chip monopoly will produce less than competing firms and raise potato chip prices which will leave less income for investment and other spending.  Businesses that do business with the new company will have a huge benefit because of the volume of business however many suppliers will lose out on dealing with the individual potato chip producers.  Consumers will be adversely affected by the new monopoly since production will decrease and prices will increase.

The reason that the price will increase under a monopoly is that there is a direct correlation between production and profit in a monopoly.  The price of potato chips and the amount of labor  will be linked to production since “Any direct increase in profit due to an extra unit of input must be counterbalanced by an indirect decrease via the impact of that extra unit on the concurrent price system. In our set-up, the extent of monopoly power is driven by the current profit, the marginal product of labor and the (positive) quantity A, which captures the consumer’s attitude toward risk over consumption” (Basak & Pavlova, 2004, p. 503)

The best structure for the new potato chip company is to be a monopoly.  The monopoly is best for the company because there is no competition and “In a world of perfect competition, there are gains from trade because a country can import things that would otherwise be produced at home at a higher cost. The gains from trade under monopolistic competition need not be from comparative advantage, but rather from achieving greater variety and/or lower costs for those differentiated goods. With differentiated products and free entry, the larger market from international trade allows each country to exploit economies of scale for some selected products but at the same time give consumers even greater variety from other countries” (Roy, 2009)

 

Figure 1. Comparison graph of monopolistically competitive industry and monopoly (Case, Fair, & Oster, 2009, p. 269)

Figure 1 shows why the new potato chip company will produce less chips and charge a higher price than if the firms remained competitive.  The cost curves, marginal revenue curve and demand curve show that the intersection of the competitive supply curve and the market demand curve are controlled by the market in a competitive market.  The new potato chip company operating as a monopoly can set any price and quantity combination along the demand curve (Case, Fair, & Oster, 2009, p. 269)

A monopolistically competitive market structure is the normal market in the United States.  Monopolistically competitive markets are identified by many firms making similar products.  When a market is combined into a monopoly the stakeholders of the company typically do not benefit.  When the monopoly is formed the main benefactor of the monopoly is the firm itself.  Consumers do not benefit from a monopoly because production is less and prices are higher.  The company will gain the most benefit from making the change to operating as a monopoly but the change will only benefit a small portion of the stakeholder’s of the company.

 REFERENCES

 

Basak, S., & Pavlova, A. (2004). Monopoly power and the firm’s valuation: A dynamic analysis of short versus long-term policies. Economic Theory.

Case, K., Fair, R., & Oster, S. M. (2009). Principles of microeconomics. Upper Saddle River, NJ: Prentice Hall.

Maurya, M. (2008). Modern microeconomics: Theory and application. Delhi, IND: Mangalam Publishers.

Roy, J. R. (2009). Monopolistic competition. Princeton, Princeton: Princeton University Press.