CASE STUDY

The winter was somewhat mild in some parts of the United States in February 2018. Although Spring Practice for football had not officially begun at Mid-Atlantic University, the players were expected to work out on their own informally and stay in top physical condition. An extremely close-knit group of athletes, mutually dedicated to the goal of winning the national championship in the Fall. When upper respiratory infections began circulating among the players, the team physician decided to send specimens to the State Health Department where virologists examined 23 specimens and obtained a positive test for influenza virus for 15 of them. They also confirmed that most of the virus isolates contained the influenza strain A/Victoria, a common type of influenza that occurs every winter. Unfortunately, they could not identify three virus isolates and were uncertain about four others. These seven specimens were forwarded to a federal laboratory where scientists specialize in infectious diseases.

Two months prior to the outbreak at the university, health officials in Vietnam had ordered the destruction of 12 million chickens after evidence surfaced that a "bird flu" strain of virus resulted in 20 confirmed influenza cases, 12 of which proved to be fatal. Health authorities in Hong Kong confirmed that the virus involved human-to-human transmission. Shortly before the campus outbreak at Mid-Atlantic University, local health officials temporarily closed a large meat distribution company in the area that supplied food to the school because its poultry was suspected of being infected with an influenza strain.

While the specimens were on their way to the federal laboratory, more players reported feeling ill and on February 15, an offensive tight-end named Dave Murray died in the university infirmary complaining of flu-like symptoms, his position coach had told him two days beforehand to take a week off and not return to workouts until he felt 100 percent healthy.The same day that he died, an opinion piece in a national daily newspaper by a prominent virologist noted that pandemics occur approximately every 30 years or so. The last one had swept the globe four decades earlier. Over the course of the next few days, State Health Department laboratory experts were unable to identify the strain of two additional influenza-positive specimens, one of which was obtained from the player's corpse. These specimens also were forwarded to federal scientists who discovered that the three previously unidentified isolates, along with the two new ones represented a different virus type. Even more serious was the possibility that the isolates might be closely related to an avian influenza virus believed to have swept the world in a pandemic in 1918, killing an estimated 50 million persons around the world and approximately one-half million victims in the United States. Hong Kong health authorities feared that the virus uncovered there was the same as the strain implicated in that earlier pandemic.

The many deaths that occurred then were due to an accompanying bacterial pneumonia prior to the advent of modern antibiotics.

Human-to-human spread of avian influenza had not been seen in the U.S, in at least 50 years and Dr. Lionel Traister, head of the federal infectious disease agency, contacted officials from other federal agencies and major State health departments around the country and invited them to an emergency meeting at his offices on March 1. Those scientists present who possessed a sense of public health history noted that the 1918 pandemic began relatively mildly in the spring and then returned with a vengeance in the fall, accounting for the vast majority of deaths. As a group, they agreed that the university outbreak could be a harbinger of more lethal and widespread disease on the not-too-distant horizon. No precise estimate of the extent of the risk ever was voiced, however, such as indicating that there might be a 25 percent chance the nation may be headed for a serious outbreak. All that could be stated was that there was a possibility of a pandemic. A question that loomed rather large in their minds was what to do about going public with these concerns. A delicate balance existed between sounding a warning to public health officials around the country and inciting a panic. The media frenzy associated with the outbreak of other influenzas in recent years provided a cautionary lesson. They decided to wait for the results of another round of tests, which in the next three days should confirm whether the virus uncovered at the university was avian influenza. Their worst fears soon were realized. The virus was avian influenza. Another emergency meeting was called on March 7 with the invitation list extended to virologists from private clinics, universities, and pharmaceutical companies. Meanwhile, the search for a further outbreak of the virus among the football team and among the rest of the student body had not yielded any new active cases nor had it spread beyond the campus to the community nearby. Outside the U.S., the World Health Organization had not reported any outbreaks of avian flu nor were any new cases reported in Hong Kong. Had the avian flu returned to its source among poultry or was it spreading in humans sub-clinically, waiting for an explosive eruption during the next flu season?

Although no new cases had been reported, the discussion at the meeting centered around: the logistics of vaccine production and distribution, field testing and licensing vaccines, and how to go about conducting a national immunization campaign. The general consensus was that even if all the vaccine needed could be produced by the beginning of the next flu season, which could occur in September or October, it still might take another 10 weeks to immunize the entire population of the U.S. Even then, it would take an additional two weeks after vaccination for protective immunity to be conferred. Stockpiling vaccine and waiting until an outbreak of flu occurred was not viewed as a workable option since infection produced disease much faster than a needle stick provided immunity. Only one person at this meeting, Dr. Virginia Bell who was director of a State health department on the West Coast, addressed the issue of stockpiling vaccine until clearer signals emerged that would warrant the start of a mass immunization program. Her basic concern was that caution should be exercised when considering the possibility of injecting any foreign substance into the bodies of more than 300 million Americans. She wanted to know at what point do preparations to immunize the entire population stop and the plan is changed to stockpile the vaccine instead. Bell's comments were made dispassionately and seemed to have little or no impact on the group. She did not argue her case any further.

Following the Chain of Command

Lionel Traister was regarded as a tough, highly competent, and occasionally wily career bureaucrat. Not only was he committed to advancing public health measures, he would never be accused of failing to advance himself when opportunity knocked. The appearance of the avian flu virus seemed to be one of those rare occasions when he could be at center stage to demonstrate to a wide audience both his own and his agency's capabilities. Strict caps were imposed on spending for that fiscal year because of a serious budget deficit. Recognizing that a national immunization program would require a supplemental appropriation, coupled with the fact that the federal bureaucracy was so slow moving, he knew that quick, decisive action on his part was imperative. The key was to frame the situation in urgent terms that persons higher-up in the administrative chain would find difficult to ignore. Consequently, he prepared a document that combined a sense of extreme urgency with a set of propositions that would be difficult to counter. On March 11, he contacted his superior, Dr. Myles Borash who was the Assistant Secretary of Health, to let him know that the memorandum was on its way to him. Traister followed procedures by addressing it to Department Secretary Wilma Kester from Assistant Secretary Borash. In the chain of command, Traister was one of six agency heads reporting to Borash. As Assistant Secretary, even though Borash was a highly regarded physician, he was at the low end of the political appointments chain. Essentially, his job was to assume responsibility for official health policy within the Administration. The facts presented in the memorandum were clear and understandable.

The second option proposed a minimal response, with the federal role limited to: advising vaccine manufacturers, providing a stimulus to State/local health departments to take action, and educating the public. Reasons favoring this choice included high visibility, less responsibility for the eventual outcome if it proved to be unfavorable, and reduced federal spending. Arguments against this approach were that drug companies might not produce enough vaccine and significant portions of the population such as the poor and the aged might never be immunized. The third option called for total federal intervention. The main argument favoring this course of action was that widespread availability and distribution of vaccine would be assured. Opposing arguments were the high cost of such a campaign and the fact that the American people would not be favorably disposed to a program that left out the private sector.

The last option involved a combined approach that would have the advantage of using both public and private sectors. The federal government could purchase the vaccine needed, have it tested for safety and efficacy by federal agencies, and distribute it through health departments at all levels of government as well as in hospitals, clinics, and physician offices. This choice would provide a good vehicle for having all facets of the health care system work together cooperatively to assure that every American would have an opportunity to be immunized. The memorandum concluded with a recommendation to pursue the fourth option.

On March 13, the memorandum was discussed at the weekly meeting of the Secretary. Recognizing the likelihood that there might not be a pandemic in the making, there still was a great amount of attention focused on what happened earlier in the 20^th century. Kester indicated that she wanted to meet with Borash and Traister in her office the following morning along with the directors of federal agencies involved in licensing vaccines and overseeing research on viruses. At this session one day later, Traister recommended that the federal government undertake action as recommended in the fourth option. When Kester asked what the probability of a pandemic is, the answer from Traister was "unknown." Nobody at the meeting was willing to assign a probability, but Traister said that it is greater than zero. When asked if it was possible to produce enough vaccine and have it administered, the response was in the affirmative, but with the caveat that time was of the essence and that a decision would have to be made quickly.

Hearing no dissent and determining that every person in the room was in accord with this recommendation, Secretary Kester decided that it was appropriate to bring this matter to the attention of White House staff. Her reasons were: the government's top scientists favored a course of action, a probability of a pandemic greater than zero had to be assumed, and that there would be no credible way after a pandemic struck of telling the public that the government had not prepared to meet the threat because the probability was low and the costs of an immunization program outweighed the benefits. She also had enough political acumen to realize that even if she rejected the memorandum, it still might be leaked to the media.

Kester wrote a memorandum that same day to the head of the federal budget office, indicating that a request for a supplemental appropriation of $1 billion would be forthcoming. She stated that: "There is evidence that there will be a major flu epidemic this coming fall. The indication is that we will see a return of a virus that killed 500,000 Americans in 1918. The projections are that this virus will kill as many as one-and-one-half million persons in this country. The drug industry must be advised now in order to have enough vaccine produced for a mass immunization program. A decision will have to be made in the next week or so."

Reactions at the State Level

Hiram Waters was only one of two individuals who raised questions about a national immunization program during the widely televised Congressional hearings. His closest friend was one of 60,000 fatalities around the nation during the 1957 Asian flu epidemic. He was a staunch advocate of pediatric immunization programs, but did not believe that there was sufficient evidence to warrant what was being proposed. He indicated that his State would accept the vaccine gladly, but none of it would be distributed to local health departments, private physician offices, and hospitals until new cases of the flu began to emerge.  

Bayside was the largest city in his State. It possessed three academic health centers and because of changes in the health care delivery system occasioned by the growth of managed care, these entities were in fierce competition with one another. In medical circles, an oft-repeated question was whether all three could survive. The State already had a huge surplus of physicians, more per capita than any other State in the Union, and a large oversupply of hospital beds.

Coastal Health Center was the most aggressive of the three health centers. Not only had its executives negotiated a contract with the largest managed care company in the State, they were raiding the Atlantic Health Center, the smallest of the three entities as measured by the size of medical staff and the number of inpatient beds. Atlantic, despite its smaller size was more of a boutique operation with a worldwide reputation for providing care of the highest quality.  

Richard Medvecky, CEO of Coastal, viewed Atlantic as a potential acquisition through merger.

He knew that if he ever made such a move, his chief competitor, Bayside Health Center, would counter it immediately. Administrators at Coastal and Bayside knew that an initial move by either side would trigger a bidding war, one in which both could end up being losers. Medvecky conceived of another way of achieving dominance in this highly charged health care environment. He began making offers to Atlantic physicians who were the chiefs of Neurology, Radiology, and Surgery to switch to Coastal. The offer consisted of: doubling their salaries, providing ten-year contracts with guaranteed hefty annual pay raises, and furnishing perquisites such as additional compensation to cover the costs of their children's college education. These offers were accepted.

Based on a case study on the outbreak of a disease along lines of avian influenza that cuts across national boundaries. Adopt the perspective of one of the actors in the situation (e.g., legislators, governmental agency directors, professional association director, vaccine manufacturers) regarding that person’s role in the episode as it unfolds and provide a critique of the performance of the other actors in dealing with the problem adequately.

Scaves
Scaves is one of Scandinavia’s largest furniture manufacturers, and sells their
furniture designs all over Europe and beyond. The company was founded in 1934 in
north-western Norway. From their small base in Sykkylven set amidst deep fjords,
and mountains, the company has gone on to become an international success story.
From these humble origins, the firm has become an international success story, selling
furniture in 19 countries including USA and Japan. The company is famous for its
‘Stressless’ brand of leather recliners. This product range has become the cornerstone
of the company’s success. It sells their extensive furniture range under a number of
different brands such as ‘Stressless’ recliner chairs, the ‘Scaves’ sofa collection,
‘Sbane’ mattresses, and ‘Soko’ beanbags. Scaves uses a variety of different brands to
cater for different markets and consumer segments, but the Scaves name is always
associated with these sub-brands, and the company is always trying to enhance brand
association and awareness. It feels that by consumers seeing the Scaves brand name, it
acts as a sign of great product quality. Scaves has developed into a one of Norway’s
most well known international brands.
Jon Scaves, started the company with three employees, and initially pioneered the
selling of mattresses with springs loaded inside the mattress. This was developed into
the “Sbane” mattress brand. Over 70 years later, this brand continues to be sold.
Gradually the firm expanded their range to include other furniture. Now the firm
encompasses a range of sofas, recliners, ottomans, tables, chairs, mattresses, and other
furniture accessories. It achieved international success and prominence through its
landmark and distinctive recliner designs. Through its history it has experienced highs
and lows, nearly experiencing bankruptcy, and having to face large lay offs. This
evolution has seen the firm use a variety of sales structures, seeing different phases of
expansion and retrenchment. Now the firm is powering ahead, through developing its
international sales, and capitalising on the strength of its recliner range.
Table 1: Scaves at a glance
Headquarters are based in a beautiful mountainous region in Ikornnes, which is an
area called Sykkylven, Norway.
Its slogan - “The Innovators of Comfort”
Founded in 1934.
Has revenue of 2,292 million (NOK) or €282 million in 2005.
Profits of 303 million (NOK) or €37 million
Employs 1,545 staff.
Has a total of seven factories in Norway. The company has invested heavily in state
of the art machinery, including automated robots.
The firm now has the capacity to produce over 2,000 ‘Stressless’ seats a day.
Scaves products are available through a network of furniture dealers in over 19
countries including Germany, UK, France, Russia, Japan, Canada, USA, and Poland.
Over 82% of the firm’s products are destined for foreign markets
Its main vision is to become a leading brand name supplier of home furniture in
domestic and international markets. It believes in offering customers, a great quality
premium product at great value for money. In promoting the range, Scaves uses studio
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merchandising, showcasing a variety of Scaves products in a typical real life setting.
Here samples of the product range are shown to full effect, where prospective buyers
are encouraged to take “the Scaves comfort test”. Scaves designs products with
a focus on comfort, design, and function. Any of the product range has to
entice customers, and make it distinctive from competing furniture ranges, especially
in competing against low cost suppliers. Scaves offers 10-year guarantees on its
internal mechanisms, which is a testament to its quality. The firm uses furniture
designers to come up with new designs that make the range modern and highly sought
after. Similarly, the firm works closely with textile suppliers to ensure their colours,
designs are fashionable for modern consumer tastes. This is particularly important
with the firm’s sofa ranges that can easily date.
The ‘Stressless’ brand is the company’s core brand. It was originally designed back in
1971. Its functional design, unique base support, adjustable headrest, 360 degree
rotation, free standing footstool and overall comfort offered to users proved a winning
combination. The company vigorously defends its unique design, winning copyright
infringement cases against would-be furniture copycats. These recliners are offered in
three sizes, small, medium, and large. One of the main selling points of the
‘Stressless’ recliner is that the chair is highly adjustable to provide maximum lumbar
support and comfort. It uses the strapline of the ‘ultimate recliner’ to support the
‘Stressless’. Furthermore the firm sells a range of ‘Stressless’ accessories to
compliment the recliner such as table attachments, and height adjusters. It offers the
recliners with four different categories of leather, with different finishes, and these
can then be chosen in a wide variety of colours. Scaves customers can choose from
over 50 different leather colours, and 7 different wood grain effects. The level of
customisation is a key selling point that entices would-be customers, and allows the
firm to charge premium prices. These recliners like most of the product range are
priced at the premium end of the market. A recliner can retail for anywhere between
£1,200 (€1,725) and £1,800 (€2,675).
The ‘Stressless’ recliners account for 79% of total sales, the mattress range 9%, the
sofa collection another 9%, while the remainder makes up other Scaves furniture
products. It hopes to break into new markets such as creating suitable furniture for the
home cinema phenomenon, selling a range of sofas and recliners suitable for home
cinema enthusiasts. The company has changed with the times offering a new feature,
called “safe” on certain models allowing the leather upholstery to be removed like a
duvet cover, so that it can be washed and cleaned. The company has also developed
corner and sofa units for its recliner series. These developments have strengthened the
company’s product portfolio, showcasing the ‘Stressless’ brand philosophy.
Its closest comparable competitors in the market are the American famous La-Z-Boy,
and Italian Natuzzi product range. Other recliners are not strongly branded, yet are
sold through well-known large retail chains such as DFS, Argos and Ikea. Some of
these large retail chains have tremendous buying power and market prominence,
selling their own label branded furniture. Many of Scaves competitors are small to
medium sized suppliers, mainly based in Asia. Their distinct advantage is cost. Far
East furniture suppliers have helped drive down furniture prices, and helped
democratise leather furniture. The company envisages that to remain successful, it
must consistently build the brand, invest in product development, and have a strong
distribution network. Through this commitment it can achieve higher margins that
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make its future more sustainable.
To reduce costs Scaves tries to standardise components. It endeavours to garner
economies of scale through large volumes, especially when it competes with low cost
manufacturing sites such as in Far East Asia. Its production philosophy is focused on
continuous quality improvement initiatives, delivery precision, and the optimisation
of the company’s manufacturing resources. In an effort to get greater production
efficiencies, the firm is aiming to reduce the number of models it offers to customers,
whilst achieving higher volume sales on core Scaves products. The company has 32
different ‘Stressless’ recliner models, and 12 different ‘Stressless’ sofa models.
Table 2: The Objectives of Scaves
1. Have a return on total booked assets of min. 25%
2. Have a return on sales of min. 15%
3. Have an asset turnover of min. 1.7 times
4. Have an equity ratio of min. 40 – 50%
5. Have a gross margin in the Stressless business segment of min. 49%
6. Have a gross margin in the Svane business segment of min. 40%
7. Have a gross margin in the Scaves Collection business segment of min. 40%
8. Have an annual growth of 5 – 10%
The company sells its products through selected retail chains and independent
furniture dealers. The company sees further growth in new international markets such
as Italy, Portugal, some Eastern European countries, and Asia. The firm is an export
driven firm with over 82.1% of products exported abroad. The company uses a
network of company owned sales offices to establish a network of specially selected
distributors in foreign markets. Typically retailers include retail chains and
independent furniture dealers. The furniture range is sold exclusively through these
retail dealers, and is not available on the Internet. Scaves believes that customers want
to ‘touch and feel’ furniture before buying it. The tangible nature of furniture buying
is very important. Dealers have samples of different woods and finishes, which
customers can order. The selection of reputable dealers in international markets is
seen as crucial. Dealers are chosen based on suitable geographic distribution
coverage. Scaves view is that they have to form mutually beneficial partnerships with
its dealers that encourage dealer motivation to stock and support Scaves marketing.
Not all of the Scaves range is available internationally. Its truly international brand is
the ‘Stressless’ recliner, with 95% of all ‘Stressless’ recliners being sold in export
markets. Its ‘Sako’ beanbag furniture range specially designed for kids and the
‘Sbane’ mattress is extremely popular in Scandinavian markets, having a 70-year-old
brand heritage.
The company has a presence in over 19 countries. Scaves has even opened
a showroom in Las Vegas. Scaves has a variety of international websites designed to
promote the brand. The look and feel of these websites is generic, yet all the sites
have local content. No prices are published on their website or on dealer websites.
The company encourages dealers to use the Scaves brand on dealer Internet sites
also. The company focuses their marketing strategies on strong point of purchase
displays, and local advertising campaigns in conjunction with their dealer network.
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Building up the distribution base for Scaves internationally is vital. A key activity in
securing greater distribution coverage is forming and cultivating relationships with
dealers. The company uses international furniture fairs to secure new dealers, and
showcase their product range to prospective dealers. The range and number of dealers
vary depending on the international market targeted. For example, to expand in Japan,
Scaves uses a network of 400 dealers, where it directly assumed ownership of the
sales channel, by taking over the activities of an importer who had previous
responsibility. In the USA, there are over 375 furniture dealers with 550 outlets that
stock Scaves. Sales growth for Scaves products is continuing to grow in all
international markets achieving between 5%-10%. However, challenges are on the
horizon including mounting cost pressures, exchange rate fluctuations, pressure on
retailer margins, enhanced competition, and copycat products.
Many international furniture dealers are motivated to stock Scaves due to the
strength of the Scaves brand name, the product range, its heritage, its popularity
within the market, and most importantly its margins! In addition to providing a
dealership contract, Scaves provides dealers with additional training programmes for
retail sales staff, branded marketing material, Internet marketing support, and studio
solutions showcasing the product range. Any marketing activity is designed to
promote Scaves brand identity, and to encourage footfall to their dealer network. Both
the strength of the product and its pricing are important. Scaves feels that an effective
supply chain can help encourage consumer purchase behaviour. Scaves tries to ensure
short lead times for products to be delivered, and that promised lead times are met.
Product is typically flat packed to their dealer network, whereby dealers look after
final assembly and delivery of the product to consumers. Scaves want to create a
reputation as a reputable supplier of furniture. The timely delivery of flawless
products is vital in achieving this reputation. Any complaints are handled as
expeditiously as possible.
Through their advertising the company tries to emphasise – “The Comfort Test”, and
uses the slogan “The Innovators of Comfort”. This is their core positioning strategy,
which has been tremendously successful. Will it continue to yield dividends into the
future?

Case Questions
1. What are the important aspects of the market environment of Scaves?
2. What are the main issues facing the company?
3. Based on available information and company commitments, what strategic direction
would you propose for the company?
4. What is their customer target?
5. What is their competitive advantage in the market?
6. What is their marketing approach?

The Ethical Temperature in Arcticview

Mary Benninger had sought out her old friend, Tom Chu, to discuss her employment situation. Mary and Tom had both graduated in 1985 from Mackenzie King University, and then studied together to attain their CMA designations in 1988. Soon thereafter, Tom was promoted quickly within his division of a large multi-national auto supply company, and now held the position of vice-president/controller. Mary, on the other hand, had temporarily removed herself from full-time employment in 1990 to raise her young daughter. She kept herself up-to-date professionally and handled the occasional short-term consulting assignment. Six months ago, Mary had re-entered the workforce, her return accelerated by the fact that her husband, Frank, had been stricken by a debilitating illness. It had surprised Mary somewhat that she was able to land a position quickly as controller and office manager for Hewsen Chemical Inc., a small, privately-held producer of specialty chemicals used in testing labs and other manufacturing firms. Hewsen was a relatively new and growing company with innovative ideas, and Mary was pleased and excited to have had the good fortune to join its management team. Today, however, meeting with her CMA colleague and trusted friend, Mary was troubled. "I don’t know what to do, Tom. I thought I was taking on an ideal position, an emerging company, with flexible working hours, decent pay and a good benefits package to help with Frank’s medical expenses. But the situation sure turned sour quickly. I really don’t know who to talk to. In fact, Tom, I’m not sure that I should be talking to you." "Nonsense," said Tom, "You know you can count on me after all we’ve been through together. Tell me what’s going on." "Well," said Mary, "Initially, things were going very well for Hewsen Chemical. None of the larger companies were interested in the small niche market that Hewsen had carved out. Sales grew rapidly and, because of our success, Dusque, the big integrated chemical conglomerate, set up a subsidiary to compete with us. Since then, we’ve taken a real hit in sales and profits. Our business is down 30 per cent, and the new plant that we built in Brampton three years ago is operating at 50 per cent of capacity." "That’s certainly not good news," said Tom, "Have you got your expenditures under control?" "I gather we were never very good at cost control and internal controls were virtually non-existent. When we were growing so quickly, sales were more important than costs. When things got tough, they dismissed my predecessor and hired me. They told me that I could have free rein to implement whatever I thought was necessary. And boy, are some changes ever necessary! Our senior staff really don’t know the difference between personal and corporate spending, and I think our sales and marketing expenses are double what they should be. It will be a challenge to sort that out, but I’m pretty sure I can get this under control. The really big problem that has me worried is our northern development grant." "I don’t know a lot about government grant programs," cautioned Tom, "but tell me more." "When business fell off, Brian Hewsen, our president, attended a seminar on how to get government grants. He discovered that a matching program was available for firms to establish northern manufacturing facilities. So, Brian and our V.P. of operations submitted a grant proposal for us to manufacture chemicals in Arcticview, a remote village with about 2500 people, where the mines have been phasing out. The proposal was simply an adaptation of an earlier unsuccessful grant application for our Brampton operations. The government must have been real anxious for someone to locate in Arcticview, because the new proposal was accepted in a wink this time. Moreover, both levels of government have provided matching funds of $750,000,a total of one and a half million in government money. They also guaranteed a bank loan for us of $750,000, and we used the loan proceeds as our contribution." "Well, that sounds great, Mary. What’s the problem?" "After the funds were provided, we rented a temporary facility in Arcticview and we hired a few staff there to maintain the building. However, we told the Ministry of Northern Development that the new equipment needed to be tested and the manufacturing process needed to be developed further. So the equipment was delivered to our Brampton facility. The equipment is currently being used there to streamline our manufacturing of a new line of chemicals that should allow us to regain much of the market share we lost to Dusque. The problem is that the grant requires us to use the funds in Arcticview." Tom jumped in, "But will anybody check on how the funds are really being used?" "That’s what I’m worried about, Tom. At the present time, one of my tasks is to ensure that optimistic reports are sent about how the development work is coming. In the short run, I could handle this because there was a real need to shake down this new equipment. The supplier had suggested two months, but we have already been ‘testing’ the equipment for six months in Brampton, and Brian is hoping that we can continue to ‘test’ it for a full year." "Well, after the year, they’ll simply move the equipment up to Arcticview and your problems will be over!" "No, Tom, that’s when my problems will really start. You see, there is absolutely no way that we can turn a profit up in Arcticview. We would have to transport all the raw materials up there, and then ship the finished product back here. Dusque will soon be competing in our new line of chemicals and, even though they don’t have our advanced technology as yet, they will be able to beat us on cost because of the transportation factor." "I see. Then you’ll have to shut down operations and return the funds?" Mary’s reply was terse. "We can’t. If we shut down operations here, we don’t have enough funds to repay the loan and, apart from Dusque, I doubt we could find a buyer for the equipment. Besides, we would be operating below break-even on the balance of our operations." "Wow! Major problems. Does management have any ideas on how to work things out?" "Well, the size of this new equipment is quite portable as only small quantities of the chemicals are produced in each batch. Brian would like to ship the equipment to Arcticview for a startup phase, and temporarily move workers up there from the Brampton plant, while the government publicity photos are being taken. After a discreet period of time, he’ll return the equipment to Brampton, and bring the workers back down. We’ll continue to ‘produce’ chemicals in Arcticview with a few local workers, but the real operations will be here in Brampton. The grant contract states that the company is obligated to produce in Arcticview for a minimum of three years. So, Brian figures that if we can last for two years past the testing period, we will be able to keep the equipment and keep the company viable." "But surely some government audits are necessary, Mary. What will you do then?" "Believe it or not, Tom, the only audited statements the government requires are our financial statements from our external auditors. Brian figures that the auditors aren’t particularly concerned about where we manufacture but, to give the impression of a high level of activity in Arcticview during the audit, he’ll temporarily ship some people and equipment up there. Our auditors don’t really know the technical aspects of our business and, as long as we can document all the equipment, labour and inventory, we’ll probably be okay with them. One of the things I could do as well, is to bill as much of our supplies as possible to the Arcticview plant and minimize the amount billed through to Brampton. Some of our labour costs down here might even be billed through to Arcticview when you consider that a few of our Brampton workers will, in effect, serve as consultants to the northern facility." "Brian and our V.P. of operations will have to submit an annual written report on how the grant is being used, but for my part, all I have to do is contribute a brief statement on the ‘testing and setup’ along with the financials. I’m hoping that I won’t even have to see their finished report!" "Gee, Mary, I can see why you’ve got a bit of a worry here," Tom injected. Mary continued, "Brian and the other senior managers tell me not to worry. They say that everybody does this for tax reasons. They also figure that nobody could really operate a manufacturing facility in Arcticview anyway, because suppliers and markets are just too far away. They speculate that training costs alone up there could blow our grant budgets and, you know, I agree with them that the government just wants to wave the flag a little bit for votes. Besides, we are giving a few local people employment as custodians of the northern plant, and we are managing to keep Hewsen Chemical afloat during this tough time. Brian is also particularly miffed that Dusque got a major government supply contract away from us, and argues that this government grant merely puts us back on a level playing field." "Tom, I’m really bewildered here. On the one hand, as I think about it, the financial statements will be perfectly accurate and consistent with previous years, so I don’t believe that anyone could nail me on an ethics question there. But I did sign a very restrictive employment contract (see insert) that states that I can’t talk to anyone. I’ve violated it already by talking to you, and of course Frank. And I’d surely be violating it, and perhaps my professional code of ethics, if I talked with the government. Heaven knows that Frank and I need the money and Hewson’s health care package,and there are 60 other employees in Brampton that need their jobs too. I’m having difficulty sleeping at night, but Frank keeps telling me to simply ignore the issue and do what I’m told. In all other aspects, this could be a great job and, if we pull this off, Brian says he’ll cut me in for equity participation. If I quit, it won’t be easy to get another job and you can be sure that Brian would not be helpful in getting me placed." Employment contract, Hewson Chemical Inc. The Employee expressly covenants and agrees that he/she will not, at any time during or after his/her employment with the Company: a) reveal, divulge or make known to any person, firm or corporation, the contents of any formula, chemical compound, product or other substance owned or developed by the Company; or the method, process or manner of manufacturing, compounding or preparing any such formulae, compounds, products or substances; or sell, exchange or give away, or otherwise dispose of any formula, compound, product or substance now or hereafter owned by the Company, whether the same shall or may have been originated, discovered or invented by the Employee or otherwise; b) reveal, divulge or make known to any person, firm or corporation, any secret or confidential information whatsoever, in connection with the Company or its business; or anything connected therewith; or the name of any other information pertaining to its customers or suppliers; c) solicit, interfere with or endeavour to entice away from the Company, any customer or supplier or any other person, firm or corporation having dealings with the Company; or interfere with or entice away any other officer or employee of the Company. If you were Mary, what would you do?

Scaves

Scaves is one of Scandinavia’s largest furniture manufacturers, and sells their

furniture designs all over Europe and beyond. The company was founded in 1934 in

north-western Norway. From their small base in Sykkylven set amidst deep fjords,

and mountains, the company has gone on to become an international success story.

From these humble origins, the firm has become an international success story, selling

furniture in 19 countries including USA and Japan. The company is famous for its

‘Stressless’ brand of leather recliners. This product range has become the cornerstone

of the company’s success. It sells their extensive furniture range under a number of

different brands such as ‘Stressless’ recliner chairs, the ‘Scaves’ sofa collection,

‘Sbane’ mattresses, and ‘Soko’ beanbags. Scaves uses a variety of different brands to

cater for different markets and consumer segments, but the Scaves name is always

associated with these sub-brands, and the company is always trying to enhance brand

association and awareness. It feels that by consumers seeing the Scaves brand name, it

acts as a sign of great product quality. Scaves has developed into a one of Norway’s

most well known international brands.

Jon Scaves, started the company with three employees, and initially pioneered the

selling of mattresses with springs loaded inside the mattress. This was developed into

the “Sbane” mattress brand. Over 70 years later, this brand continues to be sold.

Gradually the firm expanded their range to include other furniture. Now the firm

encompasses a range of sofas, recliners, ottomans, tables, chairs, mattresses, and other

furniture accessories. It achieved international success and prominence through its

landmark and distinctive recliner designs. Through its history it has experienced highs

and lows, nearly experiencing bankruptcy, and having to face large lay offs. This

evolution has seen the firm use a variety of sales structures, seeing different phases of

expansion and retrenchment. Now the firm is powering ahead, through developing its

international sales, and capitalising on the strength of its recliner range.

Table 1: Scaves at a glance

Headquarters are based in a beautiful mountainous region in Ikornnes, which is an

area called Sykkylven, Norway.

Its slogan - “The Innovators of Comfort”

Founded in 1934.

Has revenue of 2,292 million (NOK) or €282 million in 2005.

Profits of 303 million (NOK) or €37 million

Employs 1,545 staff.

Has a total of seven factories in Norway. The company has invested heavily in state

of the art machinery, including automated robots.

The firm now has the capacity to produce over 2,000 ‘Stressless’ seats a day.

Scaves products are available through a network of furniture dealers in over 19

countries including Germany, UK, France, Russia, Japan, Canada, USA, and Poland.

Over 82% of the firm’s products are destined for foreign markets

Its main vision is to become a leading brand name supplier of home furniture in

domestic and international markets. It believes in offering customers, a great quality

premium product at great value for money. In promoting the range, Scaves uses studio

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merchandising, showcasing a variety of Scaves products in a typical real life setting.

Here samples of the product range are shown to full effect, where prospective buyers

are encouraged to take “the Scaves comfort test”. Scaves designs products with

a focus on comfort, design, and function. Any of the product range has to

entice customers, and make it distinctive from competing furniture ranges, especially

in competing against low cost suppliers. Scaves offers 10-year guarantees on its

internal mechanisms, which is a testament to its quality. The firm uses furniture

designers to come up with new designs that make the range modern and highly sought

after. Similarly, the firm works closely with textile suppliers to ensure their colours,

designs are fashionable for modern consumer tastes. This is particularly important

with the firm’s sofa ranges that can easily date.

The ‘Stressless’ brand is the company’s core brand. It was originally designed back in

1971. Its functional design, unique base support, adjustable headrest, 360 degree

rotation, free standing footstool and overall comfort offered to users proved a winning

combination. The company vigorously defends its unique design, winning copyright

infringement cases against would-be furniture copycats. These recliners are offered in

three sizes, small, medium, and large. One of the main selling points of the

‘Stressless’ recliner is that the chair is highly adjustable to provide maximum lumbar

support and comfort. It uses the strapline of the ‘ultimate recliner’ to support the

‘Stressless’. Furthermore the firm sells a range of ‘Stressless’ accessories to

compliment the recliner such as table attachments, and height adjusters. It offers the

recliners with four different categories of leather, with different finishes, and these

can then be chosen in a wide variety of colours. Scaves customers can choose from

over 50 different leather colours, and 7 different wood grain effects. The level of

customisation is a key selling point that entices would-be customers, and allows the

firm to charge premium prices. These recliners like most of the product range are

priced at the premium end of the market. A recliner can retail for anywhere between

£1,200 (€1,725) and £1,800 (€2,675).

The ‘Stressless’ recliners account for 79% of total sales, the mattress range 9%, the

sofa collection another 9%, while the remainder makes up other Scaves furniture

products. It hopes to break into new markets such as creating suitable furniture for the

home cinema phenomenon, selling a range of sofas and recliners suitable for home

cinema enthusiasts. The company has changed with the times offering a new feature,

called “safe” on certain models allowing the leather upholstery to be removed like a

duvet cover, so that it can be washed and cleaned. The company has also developed

corner and sofa units for its recliner series. These developments have strengthened the

company’s product portfolio, showcasing the ‘Stressless’ brand philosophy.

Its closest comparable competitors in the market are the American famous La-Z-Boy,

and Italian Natuzzi product range. Other recliners are not strongly branded, yet are

sold through well-known large retail chains such as DFS, Argos and Ikea. Some of

these large retail chains have tremendous buying power and market prominence,

selling their own label branded furniture. Many of Scaves competitors are small to

medium sized suppliers, mainly based in Asia. Their distinct advantage is cost. Far

East furniture suppliers have helped drive down furniture prices, and helped

democratise leather furniture. The company envisages that to remain successful, it

must consistently build the brand, invest in product development, and have a strong

distribution network. Through this commitment it can achieve higher margins that

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make its future more sustainable.

To reduce costs Scaves tries to standardise components. It endeavours to garner

economies of scale through large volumes, especially when it competes with low cost

manufacturing sites such as in Far East Asia. Its production philosophy is focused on

continuous quality improvement initiatives, delivery precision, and the optimisation

of the company’s manufacturing resources. In an effort to get greater production

efficiencies, the firm is aiming to reduce the number of models it offers to customers,

whilst achieving higher volume sales on core Scaves products. The company has 32

different ‘Stressless’ recliner models, and 12 different ‘Stressless’ sofa models.

Table 2: The Objectives of Scaves

1. Have a return on total booked assets of min. 25%

2. Have a return on sales of min. 15%

3. Have an asset turnover of min. 1.7 times

4. Have an equity ratio of min. 40 – 50%

5. Have a gross margin in the Stressless business segment of min. 49%

6. Have a gross margin in the Svane business segment of min. 40%

7. Have a gross margin in the Scaves Collection business segment of min. 40%

8. Have an annual growth of 5 – 10%

The company sells its products through selected retail chains and independent

furniture dealers. The company sees further growth in new international markets such

as Italy, Portugal, some Eastern European countries, and Asia. The firm is an export

driven firm with over 82.1% of products exported abroad. The company uses a

network of company owned sales offices to establish a network of specially selected

distributors in foreign markets. Typically retailers include retail chains and

independent furniture dealers. The furniture range is sold exclusively through these

retail dealers, and is not available on the Internet. Scaves believes that customers want

to ‘touch and feel’ furniture before buying it. The tangible nature of furniture buying

is very important. Dealers have samples of different woods and finishes, which

customers can order. The selection of reputable dealers in international markets is

seen as crucial. Dealers are chosen based on suitable geographic distribution

coverage. Scaves view is that they have to form mutually beneficial partnerships with

its dealers that encourage dealer motivation to stock and support Scaves marketing.

Not all of the Scaves range is available internationally. Its truly international brand is

the ‘Stressless’ recliner, with 95% of all ‘Stressless’ recliners being sold in export

markets. Its ‘Sako’ beanbag furniture range specially designed for kids and the

‘Sbane’ mattress is extremely popular in Scandinavian markets, having a 70-year-old

brand heritage.

The company has a presence in over 19 countries. Scaves has even opened

a showroom in Las Vegas. Scaves has a variety of international websites designed to

promote the brand. The look and feel of these websites is generic, yet all the sites

have local content. No prices are published on their website or on dealer websites.

The company encourages dealers to use the Scaves brand on dealer Internet sites

also. The company focuses their marketing strategies on strong point of purchase

displays, and local advertising campaigns in conjunction with their dealer network.

4

Building up the distribution base for Scaves internationally is vital. A key activity in

securing greater distribution coverage is forming and cultivating relationships with

dealers. The company uses international furniture fairs to secure new dealers, and

showcase their product range to prospective dealers. The range and number of dealers

vary depending on the international market targeted. For example, to expand in Japan,

Scaves uses a network of 400 dealers, where it directly assumed ownership of the

sales channel, by taking over the activities of an importer who had previous

responsibility. In the USA, there are over 375 furniture dealers with 550 outlets that

stock Scaves. Sales growth for Scaves products is continuing to grow in all

international markets achieving between 5%-10%. However, challenges are on the

horizon including mounting cost pressures, exchange rate fluctuations, pressure on

retailer margins, enhanced competition, and copycat products.

Many international furniture dealers are motivated to stock Scaves due to the

strength of the Scaves brand name, the product range, its heritage, its popularity

within the market, and most importantly its margins! In addition to providing a

dealership contract, Scaves provides dealers with additional training programmes for

retail sales staff, branded marketing material, Internet marketing support, and studio

solutions showcasing the product range. Any marketing activity is designed to

promote Scaves brand identity, and to encourage footfall to their dealer network. Both

the strength of the product and its pricing are important. Scaves feels that an effective

supply chain can help encourage consumer purchase behaviour. Scaves tries to ensure

short lead times for products to be delivered, and that promised lead times are met.

Product is typically flat packed to their dealer network, whereby dealers look after

final assembly and delivery of the product to consumers. Scaves want to create a

reputation as a reputable supplier of furniture. The timely delivery of flawless

products is vital in achieving this reputation. Any complaints are handled as

expeditiously as possible.

Through their advertising the company tries to emphasise – “The Comfort Test”, and

uses the slogan “The Innovators of Comfort”. This is their core positioning strategy,

which has been tremendously successful. Will it continue to yield dividends into the

future?

Q. Develop a marketing objectives, financial objectives, target markets, positioning, strategies, and the marketing mix elements for Scaves.

Case assignments must be completed with a written 1-page study on the assigned case questions in the textbook. The format requested for these assignments is based on elaborating and including two basic parts in the essay: 1) in a bullet presentation style (one phrase each bullet), list a summary of the key issues, situations, problems, opportunities and threats you may identify as relevant; 2) answer all the questions listed in each case in two or three sound paragraphs. Use the APA style for these assignments.

Case SpinCent: The Decision To Export

More than 300,000 U.S. companies export goods. Some 7,000 of these, such as Caterpillar, Boeing, General Electric, and Intel, generate about 65 percent of total exports.2  Their smallest shipments are typically larger than the largest shipments of smaller companies. Still, some 297,000 small and medium-sized enterprises (SMEs)— specifically, companies with fewer than 500 workers—account for nearly 98 percent of all U.S. exporters.3  One such SME is SpinCent of Pennsylvania.

SpinCent manufactures laboratory and industrial centrifuges.

Companies in chemical, pharmaceutical, food, environmental, and

mining industries use them to spin a substance into high-speed rotation

around a fixed axis, thereby moving heavy elements to the bottom,

lighter objects toward the top, and liquid in between. SpinCent’s

56 employees—43 workers, 8 product and process engineers, and

5 managers—operate out of its 90,000-square-foot facility in suburban

Philadelphia. SpinCent began operations in 2010 with one goal

in mind: create high-performance centrifuges that inspire absolute

confidence. Its patented technology anchors a full line of automatic

and manual centrifuges recognized for quality and value. To this day,

management believes it builds “centrifuges for which there simply

are no equals.”

To Export Or Not To Export: That Is The Question

From inception, SpinCent approached export passively. Its international

sales often resulted from other U.S. firms’ orders that were

set for export, occasional sale leads received at trade shows, or an

unsolicited order from a foreign buyer. Export sales generated high

gross margins; occasionally, unexpected complications, such as

customs or credit problems, increased administrative costs. Still,

SpinCent’s net margins on export sales ran about 15 percent higher

than domestic sales.

Paul Knepper, CEO and founder, explained that recurring problems

had dampened his interest in exporting. First, he and his colleagues

were skeptical about the likelihood of international success. Previous

efforts, they felt, had spent more time on unfocused searching or solving

situations than on purposefully growing export activity. Moreover,

serving customers in the domestic market had kept them quite busy.

As a result, developing exports stretched their already thin management

structure. Going international, they feared, would pose tough challenges,

especially heading into direct competition with seasoned exporters from

Germany and Japan.

Still, as time passed, market pressures raised concerns about

SpinCent’s ongoing productivity and profitability. The struggling U.S.

manufacturing sector had slowed SpinCent’s growth and pushed

some of its customers to import cheaper, lower-end centrifuges from foreign suppliers. Increasing price competition was inevitable.

Knepper knew the day of reckoning was at hand: SpinCent must

(1) focus on the domestic market and exploit every possible efficiency

to sustain productivity or (2) expand aggressively into export, looking

to fast-growing overseas markets. Ultimately, Knepper conceded,

market trends forced his hand. The slow-moving deindustrialization

of the United States, forecast to continue for years, would steadily

reduce domestic demand. Meanwhile, quickly industrializing emerging

economies, particularly in Asia, signaled rich opportunities.

Hence, Knepper accepted, somewhat grudgingly, that SpinCent must

export to promising markets.

Asia Calls

Big market trends signaled big opportunities in Asia. “Industries

were coming online everywhere and seemingly overnight,” observed

Knepper. Pro-market reform, improving economic freedom, and accelerating

economic development spurred industrialization throughout

Asia. Moreover, the types of goods moving through Asia’s

seaports signaled budding industries that used SpinCent’s sorts of

centrifuges. And, unlike the United States, which was in the mature

part of the product life cycle, emerging economies looked set to grow

for years.

Getting Started

New to the idea of the Asian market, SpinCent sought help on how

best to access the large, diverse region. Knepper feared wasting

resources flying solo. Moreover, he was not looking to generate a

single-shot export burst, but aimed to build relationships that would

support long-term growth. Hence, the primary challenge was finding

competent and trustworthy distributors who would develop, make,

and service local sales. “We were looking for a long-term partner

and not a quick export sale,” said Knepper. “The right partner for

SpinCent needed to be as confident and competent about the product

as we are, and able to promote, educate, and serve consumers in

the respective territories.” The key, he added, was partnering with

respected firms. On the flip side, SpinCent had to convince potential

agents that partnering with it made long-term sense.

Knepper began by seeking information on potential distributors,

confirming their reputation and resources. A few of the company’s

earlier export transactions, for instance, had run into problems with

agents who struggled financially. As Knepper warned, “Getting paid

is a huge part of running a business, and unless a company has

the right payment policies in place with the right partners, it will get

scammed.”

Mindful of these issues, Knepper attended a trade seminar sponsored

by the U.S. Commercial Service’s Export Assistance Center of  Philadelphia. On the agenda were market analysis and trade reports

on the emerging economies of Asia. Taking his seat, he couldn’t help

but wonder about the opportunities. Sure, he conceded, they sounded

great. However, he had seen hype like this come back to bite, not

to mention the horror stories he’d heard of the problems and pitfalls

of exporting. Indeed, he reflected, a key reason for attending was

reconciling his sense of the opportunities and threats.

Getting Help

Since exports promote economic growth, government agencies offer

extensive assistance, such as trade seminars, market research,

training programs, and financial planning. Trade officials encourage

SMEs like SpinCent, seeing them as the primary beneficiaries of initiatives

to initiate and accelerate international trade activity. Given

that 60 percent or so of all SME exporters posted sales to only one

foreign market, many could boost performance by entering just one

or two others. Expanding SMEs’ market horizons through trade seminars,

official reasoned, bolstered their confidence to do so.

After a full morning of profiles and presentations, Knepper

believed Asian markets held far more opportunities than risk. He

had learned quite a bit about Asia, as well as some technicalities

of exporting. Still, his unfamiliarity of local business practicalities,

compounded by the lack of local sales representatives, bothered

him. Filling in these blanks, he concluded, called for some on-the-ground

research. So, before leaving, he spoke to Commercial Service

agents and arranged to join a 12-day trade mission that was

heading to Hong Kong, the Philippines, Vietnam, and Taiwan the

following month.

Goal Setting

Knepper’s trip had straightforward goals: assess market potential,

identify competitors, get a sense of reasonable price points, and recruit

local sales representatives and distributors. Although he had

never visited Asia, he believed he had prepared well. His time with

the trade representatives in Philadelphia gave him a good sense of

the general characteristics and industry conditions in Asian markets.

Also, in the past, SpinCent had received inquiries from Asian distributors

ordering centrifuges; some had inquired about representing

the company locally. Depending on how busy it was with domestic

customers, SpinCent tried to respond yet nothing substantial had

ever come of it. Still, these contacts had been saved, thereby giving

Knepper a start on potential distributors and likely customers.

Knepper also tapped the Commercial Services’ Gold Key program

to prescreen potential distributors. This program helps SMEs

enlist Commercial Services agents overseas to scan local markets for

qualified agents, distributors, and representatives. Gold Key agents

will prescreen and prequalify potential partners, conduct background

checks, and customize local market research. Exporters report that

the Gold Key program ensures that when a firm adds a partner to its

network, it is a respected company in the target country. Thinking back to his days as a Boy Scout, Knepper believed that

he met the sacred command: “Be prepared.” With a briefcase full of

brochures, a laptop loaded with profiles of his product line, and the

sense of doing something potentially great, he headed to Asia. Over

the next two weeks, he interviewed potential agents, chatted with

likely customers, scouted competitors’ offerings, test called their

service support, spoke to freight forwarders and logistics companies,

and visited local government officials and customs agencies.

Asia Calls, Spincent Answers

On the flight home, tired but charged, Knepper realized that his misgivings

about exporting had been unfounded. There were risks, but

the opportunities outweighed them. Exporting was no longer an option

for SpinCent—it was an imperative. Besides a new sense of

commitment, Knepper had a bit more confidence, given the newly

signed distributors in the Philippines and Taiwan as well as promising

sales leads there and in Hong Kong.

Back in Philadelphia, Knepper tested the Asian market a bit

more, advertising in trade publications as well as running banner

ads on trade sites in tandem with his newly signed distributors (he

handled the English ads, they, the Mandarin versions). In addition,

he began working with an agent from Commercial Services on an

export plan. This work helped SpinCent secure its largest overseas

partner to date, a distributor in Hong Kong who served the fast-growing

Chinese market. Commercial Services arranged meetings with

others, eventually signing a distributor in Singapore and generating

leads in Australia.

Allied with strong partners, SpinCent continues tapping the support

provided by government agencies. The more he has dealt with

them, the more Knepper appreciates a friend’s advice: “Let the government

do what it can for you. This is their niche and they’re the

best at it.” Now, with an export plan in hand, Knepper has begun

working with the Export-Import Bank to secure financing options for

overseas distributors and customers.4 And, with a gleam in his eye,

he’s set to attend a U.S. Commercial Service’s profile of the emerging

markets of sub-Saharan Africa.

Going Forward

Steadily, as SpinCent gains experience in Taiwan, the Philippines,

Hong Kong, and Singapore, look onward and upward. Although exporting

creates challenges, it helps SpinCent boost productivity and

profitability. Indeed, overseas sales provided the firm with a growing

stream of business during the economic downturn in the United

States, while rivals who had not diversified via exports struggled.

More important, exporting taps a low-cost, high-return opportunity to

leverage SpinCent’s centrifuge technology.

This experience reflects Knepper, has straightforward lessons:

“If you are thinking about exporting internationally, do it. Get going,

do your homework, utilize low-cost resources, participate in trade missions, learn about business cultures, and build relationships.

Always verify your potential business partners. Gather as much

information as you can. Stress-test your assumptions; the wrong

guess costs you time and money. Above all, no matter the problems

that you’ll run into, stay committed. All of these seem tough,

but they only cost pennies on the dollar and the returns can be

substantial.”

Questions

14-1. Analyze two challenges that SpinCent overcame in developing its export activity. Describe how it overcame them.

14-2. Based on its Asian experiences, map a sequence to guide SpinCent’s export expansion to sub-Saharan Africa.

Discussion: What constraints and qualitative characteristics in the conceptual framework are raised in the article below? Please discuss.

SOURCE: CPA JOURNAL
Tallying the Cost of the Sarbanes-Oxley Act
By Jill M. D’Aquila

Although the Sarbanes-Oxley Act (SOA) was enacted two years ago, some of its provisions are still being implemented. One such provision is SOA section 404, which requires companies to file a management assertion and auditor attestation on the effectiveness of internal controls over financial reporting, starting with fiscal years ending on or after November 15, 2004. Section 404 is just one of several provisions of the Sarbanes-Oxley Act related to internal control.

The new provisions that emphasize the importance of internal control have obvious benefit. Internal control is defined by the Committee of Sponsoring Organizations (COSO) as a process designed to provide reasonable assurance regarding the reliability of financial reporting, among other things. A standard rule of thumb for internal control, however, is that the benefits should outweigh the costs. While it is too soon to determine with certainty the full costs associated with Sarbanes-Oxley compliance, they will certainly be considerable.

Audit fees are expected to increase approximately 38% during the first year of compliance with section 404, according to a survey of public companies by Financial Executives International (FEI) in January 2004.

The survey also reveals that total costs of first-year compliance with section 404 could exceed $4.6 million for each of the largest U.S. companies (companies with over $5 billion in revenues). Medium-sized and smaller companies will also incur significant additional costs to comply with section 404, the survey finding an average projected cost of almost $2 million. Interestingly, the projected costs are higher than originally anticipated based on an FEI survey conducted the previous year.

This projected increase is consistent with PricewaterhouseCoopers’ June 2003 survey of 136 U.S.-based multinational corporations, which revealed that the number of senior executives describing SOA compliance as costly had nearly doubled since its enactment, from 32% to 60%.

In a speech to the National Press Club in July 2003, SEC Chairman William H. Donaldson said, “These are landmark rules; they will require hard work and significant expenditures in the short run by corporations,

but in the long term they will result in sounder processes and more reliable financial reporting.” On the other hand, almost half of the Pricewater-houseCoopers survey respondents believe SOA is a “well-meaning attempt, but will impose unnecessary costs on companies.” To consider the cost-benefit relationship, it is helpful to determine the areas where the costs of the compliance may be borne.

Direct Costs

Accounting and audit fees. Probably the most obvious costs are accounting and auditing fees. The projected $2 million first-year cost of compliance with section 404 reported by FEI in January 2004 is based on the following estimates (the lower and upper ranges represent annual revenues of less than $25 million and over $5 billion, respectively):

• Approximately 12,000 hours of internal work, ranging from 1,150 to 35,000 hours;
• 3,000 hours of external work, ranging from 846 to 6,197 hours;
• Additional audit fees of $590,000, ranging from $52,000 to $1.5 million.

Barry S. Augenbraun, senior vice president and corporate secretary of Raymond James Financial, Inc., a worldwide financial services firm, stated:

In our own case, informal conversations with our outside auditors as we began preparations to comply with the requirements of Section 404 of [SOA] indicated that we could anticipate the costs for the “attest” report to add anywhere from 20% to 30% to our audit fees. The expansion of that engagement to a comprehensive audit will likely significantly increase that cost. Furthermore, it is likely that the costs that will be incurred by our internal staff will equal or exceed the payment to our outside auditors. Additional audit cost is not a “free good.” It adversely impacts the profitability—and therefore the competitiveness—of American companies, and can adversely affect the functioning of our business system at a time when American business is already under significant pressure.

A specific accounting-related function that is taking on new meaning is the internal audit, given the heightened focus on internal controls. A nationwide survey of 300 CFOs at publicly held companies, conducted by Protiviti Independent Risk Consulting in 2003, indicates that many companies are hiring additional personnel or either outsourcing or co-sourcing a number of important internal audit functions. Approximately 38% of CFOs surveyed indicate that they do not have an internal audit department. Even those who have an internal audit department indicate they are looking outside the company to perform some of the work.

The PricewaterhouseCoopers survey noted above indicated an approximate 3 to 1 ratio of internal to external new compliance costs. The following aspects of compliance were rated as at least somewhat costly:

• Documentation (mentioned by 74% of respondents);
• Legal requirements (72%);
• Detailed policy development (65%);
• Self-assessment (62%);
• Attest requirements and certifications (59%);
• Staff training (56%); and
• Technology (41%).

Documentation—the most frequently cited aspect of compliance—has been a big focus for Christopher Baudouin, of Jupitermedia Corp.:

Documenting internal control is the major thing. Initially, there’s work being done writing manuals. Of course, we will have to continually update them and maintain them. We are careful how we allocate manpower within the department. We have increased the staff. We’ve also purchased software to assist us. The cost of the audit will increase since there will be more testing.

Boards of directors and audit committees. A 2004 PricewaterhouseCoopers survey of CFOs and managing directors indicated that boards and board audit committees had increased the time and effort spent on corporate governance over the past year. Directors are expected to have more input on company issues. Approximately half of audit committees are holding longer meetings and are meeting more frequently. Compensation paid to board members is rising, but only modestly. In fact, only 29% of boards that reported spending more time were rewarded with increased compensation. Only 10% of boards plan to increase compensation over the next year.

More important than the modest increase in compensation, other costs, such as liability insurance and outside consulting fees, are also rising. Liability insurance, which insures against personal liability for a wrongful act, will increase with the escalation of claims over the last few years. Boards are hiring outside lawyers and consultants for advice on their expanded role. In fact, new SEC requirements specifically give audit committees the authority to engage independent counsel and other advisors that they determine necessary to carry out their duties. The 2004 PricewaterhouseCoopers survey reported that 31% of audit committees have engaged outside advisors to assist in meeting new requirements. Similarly, KPMG Audit Committee Roundtable discussions with approximately 2,400 audit committee members and other executives in 2003 disclosed that 44% of audit committee members had or would retain external advice over the next year.

Indirect Costs

Going public. According to a study conducted last year by the law firm Foley & Lardner, senior management of public middle-market companies expect costs directly associated with going public to increase by almost 100% as a result of new compliance provisions. Not surprisingly, the number of companies going private in the one-year period after the enactment of SOA has increased. Although the absolute dollar costs are higher for large companies, the cost burden appears to fall disproportionately on smaller companies. If young, growing companies must seek alternative sources of financing to going public, their cost of capital will likely rise.

Decision-making and productivity. Will companies become more cautious and risk-adverse in the post-SOA environment? If it takes longer to review major decisions, will companies be less likely to make deals? Will the increased focus on compliance affect productivity? The answer to all of these questions: Probably. If employees are spending additional hours on things such as fine-tuning internal controls, evaluating and reevaluating financial reports, and compiling more information for their board of directors, other important activities are likely to suffer.

The “independent” director. A more indirect cost associated with directors may stem from the new emphasis on the role of the “independent director.” SOA section 301, which is also effective starting in 2004, stipulates that all audit committee members be independent, defined as “not receiving, other than for service on the board, any consulting, advisory, or other compensatory fee from the issuer, and as not being an affiliated person of the issuer, or any subsidiary thereof.” In addition, a majority of the board of directors must be independent. The benefit of independent board members is their objectivity in providing general oversight of the company. Independent directors are in a sense, however, part-timers; their knowledge of the company is more limited than that of the senior executives they oversee. They also lack direct access to financial information, which they must obtain from management. Some audit committees are hiring individuals who can help them more fully understand company dealings.

Small and mid-sized companies, which often lack internal audit departments or in-house counsel, will most likely feel the costs of SOA compliance more than large companies. For example, while the Protiviti survey indicates that 38% of CFOs polled report they do not have an internal audit department, only 9% of CFOs working for large companies (more than $500 million in annual revenues) do not have an internal audit department. Smaller companies will have to hire more staff or outsource such services. According to the Price-waterhouseCoopers 2003 survey, 58% of executives at smaller companies (annual revenues of under $1 billion) believe compliance is costly, versus 38% of executives at larger companies (annual revenues of over $1 billion).

Costs and Benefits

COSO’s Internal Control—Integrated Framework suggests that companies consider the relative costs and benefits when establishing internal controls. In the section on cost/benefit relationships, COSO states the following: “The challenge is to find the right balance. Excessive control is costly and counterproductive.” Much of the accounting profession believes that changes were needed. When asked if the benefits of Sarbanes-Oxley are worth the cost, Frank Brown, partner and leader of global assurance and business advisory services at PricewaterhouseCoopers, notes that “Five years from now, if there’s an improvement in confidence by the market, improvement of the veracity of financial info, etc., then any costs will be worth it.” Time will tell.

Jill M. D’Aquila, PhD, CPA, is an associate professor of accounting at Iona College, New Rochelle, N.Y

Please review the following below and provide , one-page reaction to this budget proposal.

1. Budget

The President’s Budget and Health Care

While the president’s budget is not likely to be acted upon by Congress, it does signal what the administration’s priorities are—as well as what policy initiatives they might push.

Repeal the Affordable Care Act: The administration’s budget includes a plan that is based upon the plan put forward by Sens. Lindsey Graham (R-SC) and Bill Cassidy (R-LA) last fall which relies on block grants for state-based programs. It also would have placed a per-person spending cap in Medicaid. The Graham-Cassidy plan was projected to save $215 billion in federal health spending over 10 years and would have led to 20 million fewer individuals’ having health insurance in 2026 than under the Affordable Care Act. The administration’s proposal creates deeper cuts for Medicaid by using the Consumer Price Index instead of the medical CPI for the block grants. In the president’s budget the result is a spending cut of $675 billion by 2028.  

Ironically, the proposed HHS budget would spend $812 million in fiscal 2019 to fully fund the risk corridors, which has drawn criticism from conservative members of Congress. Some believe that this proposal likely reflects the costs of exempting the program from sequestration.

Medicaid Cuts: The budget contains substantial Medicaid cuts including:

·         Deny benefits to people who cannot prove their immigration status ($2.2 billion in cuts over 10 years)

·         Increase beneficiaries’ copayments for improper use of the emergency room ($1.3 billion in cuts over 10 years)

·         Allow asset testing, which adds up all the value of a person’s property and belongings, in addition to income as a test of Medicaid eligibility ($2 billion in cuts over 10 years)

Overall, the budget reduces federal Medicaid spending by 22 percent.

Drug Prices and Federal Programs: The budget contains several proposals on lowering drug prices. Some have been proposed before. However, there are a few new proposals.

Medicaid programs would be allowed to establish drug formularies. Massachusetts has a waiver pending before CMS to establish a formulary. However, Congress would need to act to permit such a change.  

The budget proposes changes in Medicare Part D that include:

·         Create an out-of-pocket maximum; above a certain threshold, seniors would not have to pay any more of their drug costs

·         Require private Medicare Part D plans to share the rebates they receive from manufacturers with beneficiaries

·         Give Medicare Part D plans more flexibility to set their formularies, which should give them more negotiating leverage with drug makers

·         Allow for certain drugs to be moved from Medicare Part B, where there is a set formula for drug payments, to Medicare Part D, where there are some negotiations between private Part D plans and drug companies

·         Move drugs from Part B to Part D

·         Create more expansive Part D formularies

These proposals save approximately $6 billion.

There are an additional $266 billion in Medicare cuts proposed though they are largely cuts in provider payments rather than cuts in eligibility or benefits.  

The president’s budget also proposes $16 million in user fees to help the Health Resources and Services Administration administer the 340B drug discount program. The budget proposes to tie Part B payment for 340B drugs to charity care. Nonprofit hospitals and other facilities that purchase 340B drugs would pay the user fees under the proposal, which amount to 0.1 percent of each 340B drug purchase. User fees would more than double HRSA’s budget for the program.

Opioids: The budget provides $10 billion for efforts to prevent opioid abuse and expand treatment, however there is not much detail in the budget.

Reducing Key Parts of the Health Care Establishment: The budget would reduce the size of the Department of Health and Human Services and key programs, saying they are duplicative of other functions or programs of the government including:  

·         Agency for Healthcare Research and Quality, which is tasked with evaluating best health care practices

·         Community Services Block Grant, $700 million in annual grants for health care, food and workforce programs

·         Health care workforce programs, which help train medical students and fund their education, etc.

FDA: Should the president’s budget increase for FDA get ratified, FDA would spend the extra $400 million on:

·         Creating Centers of Excellence for compounding and digital health,

·         Researching continuous manufacturing,

·         Standing up third-party certification of medical device quality,

·         Advancing near-real-time evaluation of real-world evidence,

·         Expanding the digital health precertification program,

·         Conducting natural history studies for rare disease, and

·         Creating new internal agency systems for knowledge management and generic drug submission.

2. Congress

House

Ways and Means Committee Holds Hearing on Budget  

On Feb. 14, HHS Secretary Alex Azar testified before the House Ways and Means Committee concerning the president’s budget. Democratic members of the committee attacked HHS Secretary Alex Azar for the administration’s nearly $2 trillion in proposed budget cuts to Medicare and Medicaid, while Republicans promoted increased funding to fight opioid addiction and cuts to regulations. The lawmakers also discussed predictive modeling, the ban on new doctor-owned hospitals, telehealth, durable medical equipment reimbursement, biosimilars and Idaho’s plan to allow exchange plans that violate federal insurance rules.

The hearing was Azar’s first appearance before Congress as HHS secretary.

The secretary also defended the administration’s proposal to use bids to determine pay rates for durable medical equipment in rural parts of the country. Rep. Adrian Smith (R-NE) said the proposal worries him and asked if CMS is prepared to sufficiently pay the higher cost of delivering medical equipment in rural areas. Azar promised to make the program work in rural areas and said he supports paying equipment suppliers what they bid, instead of paying the median price, which can cause problems when the median price is lower than prices that suppliers bid.

To view the hearing, click here.

The House Energy and Commerce Committee also held a hearing on Feb. 15 with Secretary Azaar as the sole witness.  

At the hearing HHS Secretary Alex Azar seemed to open the door to expanding federal gun violence research. Azar said that a provision passed two decades ago limiting the CDC’s work on gun violence only prevents it from taking an advocacy position—not from doing research.

The CDC’s ability to study gun violence has been limited by a 1996 amendment that prevented the agency from collecting data to advocate for gun control. President Barack Obama signed an order in 2013 directing the CDC to resume its research, but its work has remained limited.

“My understanding is that the rider does not in any way impede our ability to conduct our research mission,” he said. “We’re in the science business and the evidence-generating business, and so I will have our agency certainly working in this field, as they do across the broad spectrum of disease control and prevention.”

Azar committed to encouraging the study of gun violence within the department, when pressed by Rep. Kathy Castor (D-FL).

To view the Energy and Commerce hearing, click here.

Senate

Azar Goes Before Senate Finance Hearing

Senate Finance Committee held a hearing on the president’s health care budget on Feb. 15. At the hearing—as in others—Azar was asked about the governor of Idaho’s permitting plans to be sold that are not compliant with the Affordable Care Act.

Secretary Alex Azar agreed to look into the legality of Idaho’s plan to significantly change the Affordable Care Act’s marketplace after Democratic lawmakers pushed the secretary on the issue. While Azar said he did not want to take enforcement action before officially receiving notice of Blue Cross of Idaho’s non-ACA compliant plans, he pledged to closely monitor the situation and report back to the Finance Committee in 30 days.

Azar’s comments came one day after he was questioned by Rep. Sander Levin (D-MI) about the issue at the Ways and Means budget hearing, and Azar signaled there has been little HHS oversight of the state’s policy, since the state had not made a request. But Democrats continued to press the question in the HHS budget hearings.

During the Senate Finance hearing, ranking Democrat Ron Wyden (OR) asked Azar if he would approve Blue Cross of Idaho’s recently announced (Feb. 14) five new state-based plan options in response to GOP Gov. Butch Otter’s controversial executive order. Wyden noted that numerous health care experts and organizations say this move would be a violation of federal law and puts the company at risk of federal penalties. He encouraged Azar to crack down on such activity and requested Azar to report back to the committee in 10 days with a plan.

Wyden and Azar eventually agreed to a 30-day time frame for the secretary to get back to the Finance Committee about his plans to deal with Idaho’s marketplaces. In contrast, Idaho Sen. Mike Crapo (R) defended Blue Cross Idaho’s move and the governor’s executive order, arguing that the plan deviations allowed for state autonomy and consumer choice.

Azar agreed with Crapo, noting that the rising cost of premiums has led states to explore all options.

“I think what we are seeing here is a cry for help,” Azar said. “It’s saying that where we are right now with our individual market because of the structure we have is not serving enough of our citizens. There are too many Americans who simply cannot afford the insurance packages we have in our program because of the way the statute is designed and the way it has been implemented.”

Finance and Judiciary Chairs Ask IRS About Oversight of Nonprofit Hospitals

On Feb. 15, Senate Finance Committee Chairman Orrin Hatch (R-UT) and Chairman Chuck Grassley (R-IA) sent Acting IRS Commissioner David Kautter a letter today asking, among other things, how the IRS reviews information hospitals submit on their charitable giving and what guidance the IRS has given hospitals on their obligation to aid their communities. The senators cite reports from Politico to raise questions about whether the hospitals are fulfilling their requirements as a nonprofit.

“Given the importance of these institutions to their communities, and the forgone federal revenue associated with their tax-exempt status, it is important that both Congress and the IRS conduct oversight to ensure their activities are in line with the benefits they enjoy under the Internal Revenue Code,” the senators wrote.

These issues have been longstanding ones for Grassley who has since 2005 been reviewing the charitable giving of the nation’s nonprofit hospitals.

Please review the following below and provide a short, one-page reaction to this budget proposal.

1. Budget

The President’s Budget and Health Care

While the president’s budget is not likely to be acted upon by Congress, it does signal what the administration’s priorities are—as well as what policy initiatives they might push.

Repeal the Affordable Care Act: The administration’s budget includes a plan that is based upon the plan put forward by Sens. Lindsey Graham (R-SC) and Bill Cassidy (R-LA) last fall which relies on block grants for state-based programs. It also would have placed a per-person spending cap in Medicaid. The Graham-Cassidy plan was projected to save $215 billion in federal health spending over 10 years and would have led to 20 million fewer individuals’ having health insurance in 2026 than under the Affordable Care Act. The administration’s proposal creates deeper cuts for Medicaid by using the Consumer Price Index instead of the medical CPI for the block grants. In the president’s budget the result is a spending cut of $675 billion by 2028.  

Ironically, the proposed HHS budget would spend $812 million in fiscal 2019 to fully fund the risk corridors, which has drawn criticism from conservative members of Congress. Some believe that this proposal likely reflects the costs of exempting the program from sequestration.

Medicaid Cuts: The budget contains substantial Medicaid cuts including:

·         Deny benefits to people who cannot prove their immigration status ($2.2 billion in cuts over 10 years)

·         Increase beneficiaries’ copayments for improper use of the emergency room ($1.3 billion in cuts over 10 years)

·         Allow asset testing, which adds up all the value of a person’s property and belongings, in addition to income as a test of Medicaid eligibility ($2 billion in cuts over 10 years)

Overall, the budget reduces federal Medicaid spending by 22 percent.

Drug Prices and Federal Programs: The budget contains several proposals on lowering drug prices. Some have been proposed before. However, there are a few new proposals.

Medicaid programs would be allowed to establish drug formularies. Massachusetts has a waiver pending before CMS to establish a formulary. However, Congress would need to act to permit such a change.  

The budget proposes changes in Medicare Part D that include:

·         Create an out-of-pocket maximum; above a certain threshold, seniors would not have to pay any more of their drug costs

·         Require private Medicare Part D plans to share the rebates they receive from manufacturers with beneficiaries

·         Give Medicare Part D plans more flexibility to set their formularies, which should give them more negotiating leverage with drug makers

·         Allow for certain drugs to be moved from Medicare Part B, where there is a set formula for drug payments, to Medicare Part D, where there are some negotiations between private Part D plans and drug companies

·         Move drugs from Part B to Part D

·         Create more expansive Part D formularies

These proposals save approximately $6 billion.

There are an additional $266 billion in Medicare cuts proposed though they are largely cuts in provider payments rather than cuts in eligibility or benefits.  

The president’s budget also proposes $16 million in user fees to help the Health Resources and Services Administration administer the 340B drug discount program. The budget proposes to tie Part B payment for 340B drugs to charity care. Nonprofit hospitals and other facilities that purchase 340B drugs would pay the user fees under the proposal, which amount to 0.1 percent of each 340B drug purchase. User fees would more than double HRSA’s budget for the program.

Opioids: The budget provides $10 billion for efforts to prevent opioid abuse and expand treatment, however there is not much detail in the budget.

Reducing Key Parts of the Health Care Establishment: The budget would reduce the size of the Department of Health and Human Services and key programs, saying they are duplicative of other functions or programs of the government including:  

·         Agency for Healthcare Research and Quality, which is tasked with evaluating best health care practices

·         Community Services Block Grant, $700 million in annual grants for health care, food and workforce programs

·         Health care workforce programs, which help train medical students and fund their education, etc.

FDA: Should the president’s budget increase for FDA get ratified, FDA would spend the extra $400 million on:

·         Creating Centers of Excellence for compounding and digital health,

·         Researching continuous manufacturing,

·         Standing up third-party certification of medical device quality,

·         Advancing near-real-time evaluation of real-world evidence,

·         Expanding the digital health precertification program,

·         Conducting natural history studies for rare disease, and

·         Creating new internal agency systems for knowledge management and generic drug submission.

2. Congress

House

Ways and Means Committee Holds Hearing on Budget  

On Feb. 14, HHS Secretary Alex Azar testified before the House Ways and Means Committee concerning the president’s budget. Democratic members of the committee attacked HHS Secretary Alex Azar for the administration’s nearly $2 trillion in proposed budget cuts to Medicare and Medicaid, while Republicans promoted increased funding to fight opioid addiction and cuts to regulations. The lawmakers also discussed predictive modeling, the ban on new doctor-owned hospitals, telehealth, durable medical equipment reimbursement, biosimilars and Idaho’s plan to allow exchange plans that violate federal insurance rules.

The hearing was Azar’s first appearance before Congress as HHS secretary.

The secretary also defended the administration’s proposal to use bids to determine pay rates for durable medical equipment in rural parts of the country. Rep. Adrian Smith (R-NE) said the proposal worries him and asked if CMS is prepared to sufficiently pay the higher cost of delivering medical equipment in rural areas. Azar promised to make the program work in rural areas and said he supports paying equipment suppliers what they bid, instead of paying the median price, which can cause problems when the median price is lower than prices that suppliers bid.

To view the hearing, click here.

The House Energy and Commerce Committee also held a hearing on Feb. 15 with Secretary Azaar as the sole witness.  

At the hearing HHS Secretary Alex Azar seemed to open the door to expanding federal gun violence research. Azar said that a provision passed two decades ago limiting the CDC’s work on gun violence only prevents it from taking an advocacy position—not from doing research.

The CDC’s ability to study gun violence has been limited by a 1996 amendment that prevented the agency from collecting data to advocate for gun control. President Barack Obama signed an order in 2013 directing the CDC to resume its research, but its work has remained limited.

“My understanding is that the rider does not in any way impede our ability to conduct our research mission,” he said. “We’re in the science business and the evidence-generating business, and so I will have our agency certainly working in this field, as they do across the broad spectrum of disease control and prevention.”

Azar committed to encouraging the study of gun violence within the department, when pressed by Rep. Kathy Castor (D-FL).

To view the Energy and Commerce hearing, click here.

Senate

Azar Goes Before Senate Finance Hearing

Senate Finance Committee held a hearing on the president’s health care budget on Feb. 15. At the hearing—as in others—Azar was asked about the governor of Idaho’s permitting plans to be sold that are not compliant with the Affordable Care Act.

Secretary Alex Azar agreed to look into the legality of Idaho’s plan to significantly change the Affordable Care Act’s marketplace after Democratic lawmakers pushed the secretary on the issue. While Azar said he did not want to take enforcement action before officially receiving notice of Blue Cross of Idaho’s non-ACA compliant plans, he pledged to closely monitor the situation and report back to the Finance Committee in 30 days.

Azar’s comments came one day after he was questioned by Rep. Sander Levin (D-MI) about the issue at the Ways and Means budget hearing, and Azar signaled there has been little HHS oversight of the state’s policy, since the state had not made a request. But Democrats continued to press the question in the HHS budget hearings.

During the Senate Finance hearing, ranking Democrat Ron Wyden (OR) asked Azar if he would approve Blue Cross of Idaho’s recently announced (Feb. 14) five new state-based plan options in response to GOP Gov. Butch Otter’s controversial executive order. Wyden noted that numerous health care experts and organizations say this move would be a violation of federal law and puts the company at risk of federal penalties. He encouraged Azar to crack down on such activity and requested Azar to report back to the committee in 10 days with a plan.

Wyden and Azar eventually agreed to a 30-day time frame for the secretary to get back to the Finance Committee about his plans to deal with Idaho’s marketplaces. In contrast, Idaho Sen. Mike Crapo (R) defended Blue Cross Idaho’s move and the governor’s executive order, arguing that the plan deviations allowed for state autonomy and consumer choice.

Azar agreed with Crapo, noting that the rising cost of premiums has led states to explore all options.

“I think what we are seeing here is a cry for help,” Azar said. “It’s saying that where we are right now with our individual market because of the structure we have is not serving enough of our citizens. There are too many Americans who simply cannot afford the insurance packages we have in our program because of the way the statute is designed and the way it has been implemented.”

Finance and Judiciary Chairs Ask IRS About Oversight of Nonprofit Hospitals

On Feb. 15, Senate Finance Committee Chairman Orrin Hatch (R-UT) and Chairman Chuck Grassley (R-IA) sent Acting IRS Commissioner David Kautter a letter today asking, among other things, how the IRS reviews information hospitals submit on their charitable giving and what guidance the IRS has given hospitals on their obligation to aid their communities. The senators cite reports from Politico to raise questions about whether the hospitals are fulfilling their requirements as a nonprofit.

“Given the importance of these institutions to their communities, and the forgone federal revenue associated with their tax-exempt status, it is important that both Congress and the IRS conduct oversight to ensure their activities are in line with the benefits they enjoy under the Internal Revenue Code,” the senators wrote.

These issues have been longstanding ones for Grassley who has since 2005 been reviewing the charitable giving of the nation’s nonprofit hospitals.

Try the following:

• get some stuff:
• • a small ball (or some kind of object that will roll - a golf ball or marble or toy car is great, but an empty soup can will do in a pinch)
  • get a tape measure (a yardstick or a ruler will also work. You can also stretch a piece of string and mark off ruler lengths on the string to get the total length.)
  • around ten coins
• Measure the distance from a tabletop or kitchen countertop down to the floor. Record the height in meters. (If you measured the height in inches then convert to meters by dividing the height by 39.36)
• Calculate the time it would take any object to fall from the edge of the tabletop to the floor. Use the y-direction displacement formula: y = v_yot + 1/2 a_y t² where
  • y = the height you measured DOWN to the ground
  • v_yo = the initial vertical velocity - should be zero since an object that rolls off the tabletop will not initially be moving up or down, but only sideways
  • a_y = the acceleration of gravity DOWN = 9.8 m/s²)
  • t = the time

Your Answer:Question 1 options:

Answer

Question 2 (1 point)

Try the following:

• place the small ball on the tabletop, a foot or so from the edge
• get one of the coins
• give the ball a small push so that it rolls off the edge of the table and place the coin about where the ball lands on the floor
• Roll the ball off the tabletop again, this time giving a more forceful push so the ball has more horizontal velocity and again mark its landing spot with a coin
• repeat pushing the ball off the table and marking its landing position several times, each time with a little more force so as to give the ball a higher horizontal velocity when it leaves the tabletop

What is true of each recorded fall? MARK ALL THAT APPLY!

Question 2 options:

	A) No matter how fast the ball leaves the table horizontally, it still takes the same amount of time to fall from the tabletop to the floor
	B) Even when the ball leaves the tabletop with a higher horizontal velocity it always travels the same distance in the x-direction
	C) When the ball leaves the tabletop with a higher horizontal velocity it travels farther in the x-direction

Question 3 (1 point)

Try the following:

• gather all the coins off the floor
• On top of the table, make a small ramp out of a thin board or a magazine. Have the bottom edge of the ramp directly on the table about a foot from the edge. Use a couple books to support the top of the ramp closer to the middle of the table
• Place a ball at the top of the ramp and allow it to roll down the ramp, across the foot of tabletop to the edge and go over the edge. Mark where the ball lands with a coin
• Without changing the angle or position of the ramp, repeatedly release the ball from the top of the ramp and mark each landing spot with a coin

What is true of each recorded fall? MARK ALL THAT APPLY!

Question 3 options:

	A) If all factors could be perfectly controlled the ball would hit in the same spot everytime
	B) The landing spots are pretty uniform and the coins are very closely grouped on the floor.
	C) Everytime a ball rolls off the table, the table itself gets a little bit taller

Question 4 (1 point)

• Go to https://phet.colorado.edu/sims/html/projectile-motion/latest/projectile-motion_en.html
• Click the first square that reads "Intro"
• You should see a cannon

Just to make sure you're in the right place, what color is the cannon?

Question 4 options:

	A) blue and yellow
	B) red and blue
	C) shades of gray
	D) red and yellow

Question 5 (1 point)

With all the original default settings (height = 10 m, angle = 0 degrees, vo = 15 m/s), press the red "Fire" button to shoot the cannon. There are three ways to measure the distance the projectile travels in the x-direction. any of the following will work:

• click and drag the red and white target on the ground over to the landing spot so that the center of the target is at the end of the trajectory
• click and drag the tape measure from the toolbox in the top right of the screen. Place the flat leading edge of the tape measure box on the ground directly below the "+" of the cannon and drag the end of the tape to the impact spot
• click and drag the blue time/range/height tool from the toolbox in the top right of the screen. Place the crosshairs over the impact spot and a small yellow dot should appear. This is probably the best tool, since you can also read the time the projectile spent in the air and the range and the height above the ground.

Which of the following is closest to the actual distance the projectile travels in the x-direction?

Question 5 options:

	A) 23.8 m
	B) 21.4 m
	C) 19.2 m
	D) 15.0 m

Question 6 (1 point)

• Find the time that it takes a stone to fall 13 m by using the y-displacement formula.
• Set the cannon at 13 m and fire horizontally and use the blue time/range/height gauge to fine the time

How much time does it take to fall 13 m?

Question 6 options:

	A) 15.96 s
	B) 5.8 s
	C) 1.63 s
	D) 0.90 s

Question 7 (1 point)

If a cannon shoots a ball horizontally at 8 m/s, and the ball starts out 11 m above the floor, how far away from the gun will the ball land?

• Solve the formula using the y-displacement formula to find the time and the x-displacement formula to find the range
• Sent the cannon height at 11m and the initial speed at 8 m/s. Use the blue time/range/height gauge to find the range

What is the horizontal distance the projectile travels?

Question 7 options:

	A) 5.2 m
	B) 12 m
	C) 2.67 m
	D) 15 m

Question 8 (1 point)

Predict the horizontal distance a cannon on a 15 m cliff will shoot if it's horizontal initial velocity is 140 m/s .

Question 8 options:

	A) 207 m
	B) 245 m
	C) 1052 m
	D) 1089 m

Angle Shot

When the cannon is not horizontal, but is aimed either upwards or downwards, several additional considerations have to be made.

• we have to find the x and y components of the inital velocity
  • v_ox = v_o cos θ
  • v_oy = v_o sin θ
• we have to get the signs of the y components of velocity and acceleration and displacement correct. If the gun is angled up and gravity pulls down and the displacement is down. You can pick the y-coordinate sysytem either positive up/negative down OR positive down/negative up. It makes no difference which way you pick, but once you pick everything has to conform to that coordinate system. If we arbitrarily pick positive up
  • the upward initial velocity, v_oy would be up, so it would be a positive number
  • the gravity, a_y pulls down, so it would be a negative number
  • the rock falls down, so the vertical displacement, y points down, so it would be a negative number
• When we use the y-displacement formula to find time, since v_oy is no longer zero, as it was in the horizontal shot, we can't cancel the first right hand term. That means we have to solve the quadratic. Typically using the quadratic formula is the best choice for doing that. The quadratic formula gives two possible solutions - choose the one that makes sense (the positive answer)

For example: A cannonball leaves a cannon at 15 m/s from 10 m above ground, fired at an upward 30 degree angle. Find the time to hit the ground and the horizontal range.

Step 1: Y-direction to find Time	Step 2: X-direction to find Range
voy = vo sin θ = 15 sin 30 = 7.5 (positive since aimed UP) ay = -9.8 m/s^2 (negative since pulls DOWN) y = -15 m (negative since DOWN) t = the time we're looking for y = voy t + 1/2 ayt2 -15 = 7.5 t + 1/2 (-9.8) t2 0 = -4.9 t2 + 7.5 t+15 Get the coefficients for the quadratic formula a = -4.9 , b = 7.5 , c = 15 t = (-b ± √(b2 - 4 a c)) / (2 a ) t = (-7.5 ± √(7.52 - 4(-4.9)(15))) / (2 (-4.9)) t = -1.14s OR 2.67 s	vox = vo cos θ = 15 cos 30 = 13 ax = 0 (gravity doesn't pull sideways, no air resistance) t = whatever we got from Step 1 = 2.67 s x = the range we're looking for x = vox t + 1/2 axt2 x = (13 m/s)(2.67 s) + 1/2 (0) (2.67)2 x = 34.8 m

Question 9

Set up the cannon so that

• the height is 10 m
• initial speed is 15 m/s
• the angle is 0 degrees, horizontal
• fire the cannon!

Tilt the barrel upwards to 30 degrees and FIRE!

Now, tilt the barrel downwards to 30 degrees and - 3, 2, 1 - FIRE!!!

You should see all three paths that the projectile took. You might need the blue measuring device, but MARK ALL THE APPLY THINGS:

Question 9

	A) When you tilt the gun higher, the shot spends less time in the air
	B) More angle = more time
	C) More time = more range
	D) Since the initial velocity and the height is the same for all three shots, the time in the air is the same.

Question 10

A cannonball leaves a cannon at 7 m/s from 4 m above ground, fired at an upward 25 degree angle. Find the time to hit the ground.

Do this by solving the quadratic and by shooting the virtual cannon

Your Answer:

Question 11

A cannonball leaves a cannon at 15 m/s from 5 m above ground, fired at an upward 30 degree angle. Find the horizontal diistance the shot travels.

Do this by solving the quadratic and by shooting the virtual cannon to compare.

Your Answer:

Problem 1: python

For the first problem of this homework, we’re going to try something a little different. I’ve created the start of a file, which you’ll edit to finish the assignment: count_words_in_the_raven.py

The program has three functions in it.

1. I’ve written all of break_into_list_of_words()--DO NOT CHANGE THIS ONE. All it does is break the very long poem into a list of individual words. Some of what it's doing will not make much sense to you until we get to the strings chapter, and that's fine--that's part of why I wrote it for you. :)
2. There’s a main() which you’ll add a little bit to, but it should stay pretty small -- some print statements and some function calls
3. There’s a definition of a function called count_how_many_words(), which takes two arguments. (Don’t change the arguments.) You’ll write the entire block for this.
   1. Note: My return statement is definitely not what you want; it’s just there so that the program runs when I give it to you. You will want to change what the function returns!

I want you to complete the count_how_many_words() function, and then call it (multiple times) inside main() to find out how many times Poe used the word “Raven” (or “raven”) and how many times he used “Nevermore” (or “nevermore”) inside the poem “The Raven.” You may not use list.count().

Don’t add any global variables or constants (besides the one I’ve declared, which could be moved into main() but would be even uglier there).

Example output (with incorrect numbers):

The word "Raven" (or "raven") appears 42 times in Edgar Allen Poe's "The Raven."

The word "Nevermore" (or "nevermore") appears 48 times in Edgar Allen Poe's "The Raven."

# a constant
THE_RAVEN = '''
Once upon a midnight dreary, while I pondered, weak and weary,
Over many a quaint and curious volume of forgotten lore—
While I nodded, nearly napping, suddenly there came a tapping,
As of some one gently rapping, rapping at my chamber door.
“’Tis some visitor,” I muttered, “tapping at my chamber door—
Only this and nothing more.”

Ah, distinctly I remember it was in the bleak December;
And each separate dying ember wrought its ghost upon the floor.
Eagerly I wished the morrow;—vainly I had sought to borrow
From my books surcease of sorrow—sorrow for the lost Lenore—
For the rare and radiant maiden whom the angels name Lenore—
Nameless here for evermore.

And the silken, sad, uncertain rustling of each purple curtain
Thrilled me—filled me with fantastic terrors never felt before;
So that now, to still the beating of my heart, I stood repeating
“’Tis some visitor entreating entrance at my chamber door—
Some late visitor entreating entrance at my chamber door;—
This it is and nothing more.”

Presently my soul grew stronger; hesitating then no longer,
“Sir,” said I, “or Madam, truly your forgiveness I implore;
But the fact is I was napping, and so gently you came rapping,
And so faintly you came tapping, tapping at my chamber door,
That I scarce was sure I heard you”—here I opened wide the door;—
Darkness there and nothing more.

Deep into that darkness peering, long I stood there wondering, fearing,
Doubting, dreaming dreams no mortal ever dared to dream before;
But the silence was unbroken, and the stillness gave no token,
And the only word there spoken was the whispered word, “Lenore?”
This I whispered, and an echo murmured back the word, “Lenore!”—
Merely this and nothing more.

Back into the chamber turning, all my soul within me burning,
Soon again I heard a tapping somewhat louder than before.
“Surely,” said I, “surely that is something at my window lattice;
Let me see, then, what thereat is, and this mystery explore—
Let my heart be still a moment and this mystery explore;—
’Tis the wind and nothing more!”

Open here I flung the shutter, when, with many a flirt and flutter,
In there stepped a stately Raven of the saintly days of yore;
Not the least obeisance made he; not a minute stopped or stayed he;
But, with mien of lord or lady, perched above my chamber door—
Perched upon a bust of Pallas just above my chamber door—
Perched, and sat, and nothing more.

Then this ebony bird beguiling my sad fancy into smiling,
By the grave and stern decorum of the countenance it wore,
“Though thy crest be shorn and shaven, thou,” I said, “art sure no craven,
Ghastly grim and ancient Raven wandering from the Nightly shore—
Tell me what thy lordly name is on the Night’s Plutonian shore!”
Quoth the Raven “Nevermore.”

Much I marvelled this ungainly fowl to hear discourse so plainly,
Though its answer little meaning—little relevancy bore;
For we cannot help agreeing that no living human being
Ever yet was blessed with seeing bird above his chamber door—
Bird or beast upon the sculptured bust above his chamber door,
With such name as “Nevermore.”

But the Raven, sitting lonely on the placid bust, spoke only
That one word, as if his soul in that one word he did outpour.
Nothing farther then he uttered—not a feather then he fluttered—
Till I scarcely more than muttered “Other friends have flown before—
On the morrow he will leave me, as my Hopes have flown before.”
Then the bird said “Nevermore.”

Startled at the stillness broken by reply so aptly spoken,
“Doubtless,” said I, “what it utters is its only stock and store
Caught from some unhappy master whom unmerciful Disaster
Followed fast and followed faster till his songs one burden bore—
Till the dirges of his Hope that melancholy burden bore
Of ‘Never—nevermore’.”

But the Raven still beguiling all my fancy into smiling,
Straight I wheeled a cushioned seat in front of bird, and bust and door;
Then, upon the velvet sinking, I betook myself to linking
Fancy unto fancy, thinking what this ominous bird of yore—
What this grim, ungainly, ghastly, gaunt, and ominous bird of yore
Meant in croaking “Nevermore.”

This I sat engaged in guessing, but no syllable expressing
To the fowl whose fiery eyes now burned into my bosom’s core;
This and more I sat divining, with my head at ease reclining
On the cushion’s velvet lining that the lamp-light gloated o’er,
But whose velvet-violet lining with the lamp-light gloating o’er,
She shall press, ah, nevermore!

Then, methought, the air grew denser, perfumed from an unseen censer
Swung by Seraphim whose foot-falls tinkled on the tufted floor.
“Wretch,” I cried, “thy God hath lent thee—by these angels he hath sent thee
Respite—respite and nepenthe from thy memories of Lenore;
Quaff, oh quaff this kind nepenthe and forget this lost Lenore!”
Quoth the Raven “Nevermore.”

“Prophet!” said I, “thing of evil!—prophet still, if bird or devil!—
Whether Tempter sent, or whether tempest tossed thee here ashore,
Desolate yet all undaunted, on this desert land enchanted—
On this home by Horror haunted—tell me truly, I implore—
Is there—is there balm in Gilead?—tell me—tell me, I implore!”
Quoth the Raven “Nevermore.”

“Prophet!” said I, “thing of evil!—prophet still, if bird or devil!
By that Heaven that bends above us—by that God we both adore—
Tell this soul with sorrow laden if, within the distant Aidenn,
It shall clasp a sainted maiden whom the angels name Lenore—
Clasp a rare and radiant maiden whom the angels name Lenore.”
Quoth the Raven “Nevermore.”

“Be that word our sign of parting, bird or fiend!” I shrieked, upstarting—
“Get thee back into the tempest and the Night’s Plutonian shore!
Leave no black plume as a token of that lie thy soul hath spoken!
Leave my loneliness unbroken!—quit the bust above my door!
Take thy beak from out my heart, and take thy form from off my door!”
Quoth the Raven “Nevermore.”

And the Raven, never flitting, still is sitting, still is sitting
On the pallid bust of Pallas just above my chamber door;
And his eyes have all the seeming of a demon’s that is dreaming,
And the lamp-light o’er him streaming throws his shadow on the floor;
And my soul from out that shadow that lies floating on the floor
Shall be lifted—nevermore!'''

# this is what quick-and-dirty data cleaning looks like, friends
def break_into_list_of_words(string):
"""takes a long string and returns a list of all of the words in the string"""
# vvv YOU DO NOT HAVE TO CHANGE ANYTHING IN HERE vvv
list_of_words = []
# break by newlines to get a list of lines
list_of_lines = string.split('\n')
# remove the empty lines
while '' in list_of_lines:
list_of_lines.remove('')
# split the line up
for line in list_of_lines:
# we have a few words run together with dashes
# this breaks the line up by dashes (non-ideal, but eh)
maybe_broken_line = line.split('—')
# now we will take the line that might be split, and we'll split again
# but this time on spaces
for a_line in maybe_broken_line:
list_of_words = list_of_words + a_line.split(' ')
# if blank spaces crept in (they did), let's get rid of them
while ' ' in list_of_words:
list_of_words.remove(' ')
while '' in list_of_words:
list_of_words.remove('')
# removing a lot of unnecessary punctuation; gives you more options
# for how to solve this problem
# (you'll get a cleaner way to do this, later in the semester, too)
for index in range(0, len(list_of_words)):
list_of_words[index] = list_of_words[index].strip(";")
list_of_words[index] = list_of_words[index].strip("?")
list_of_words[index] = list_of_words[index].strip(",")
list_of_words[index] = list_of_words[index].strip("!")
# smart quotes will ruin your LIFE
list_of_words[index] = list_of_words[index].strip("“")
list_of_words[index] = list_of_words[index].strip("”")
list_of_words[index] = list_of_words[index].strip("‘")
list_of_words[index] = list_of_words[index].strip(".")
list_of_words[index] = list_of_words[index].strip("’")

# all we have now is a list with words without punctuation
# (secretly, some words still have apostrophes and dashes in 'em)
# (but we don't care)
return list_of_words
# ^^^ YOU DO NOT HAVE TO CHANGE ANYTHING IN HERE ^^^

# this is the function you'll add a lot of logic to
def count_how_many_words(word_list, counting_string):
"""takes in a string and a list and returns the number of times that string occurs in the list"""

return None # this is just here so the program still compiles

def main():
count = 0
words = break_into_list_of_words(THE_RAVEN)
# a reasonable first step, to see what you've got:
# for word in words:
# print(word, end = " ")

if __name__ == "__main__":
main()