Nice Essay

Historical Analysis

There have been many changes in legislation concerning equal employment opportunities. These are mostly an attempt to protect minorities from discrimination in the workplace. In this paper we will examine some of the laws that have been put in place, their purpose, origins and limitations. The United States of America is a country in which there exists, in theory, an environment where people are free to own their own businesses without government intervention. There are however, various exceptions where the government steps in. One way in particular is with regards to the protection of minority groups.

One of the barriers against employee discrimination came in the form of the Civil Rights Act of 1964, which prohibited employment discrimination because of race, color, religion, sex, or national origin. One of the earliest movements towards the advancement of this cause occurred in 1962, when a man named Cesar Chaves decided to organize the migrant laborers of the California grape farms. Most, though not all of the farm workers he rallied, including himself, were Hispanics. These families had to subsist on average yearly salaries of about $2000 per year, barely enough to survive. It took this ragtag group of migrant worker about three years to make themselves heard, and in 1965 they finally went on strike in a movement known as La Causa . This nonviolent strike lasted three years, and it culminated in the creation of the Farm Workers Union.

Around this same time sanitation workers in Tennessee went on strike to protest the unfair treatment they felt they were receiving. They felt they were being mistreated because during a period of bad weather, a group of black workers was sent home without pay, while white workers were permitted to continue working and receiving compensation. Despite the efforts of the striking workers, no resolution was reached. This case was to become an enormously famous situation, world renown, when the revered Dr. Martin Luther King, Jr., arriving in Memphis to lead a march on the sanitation worker’s behalf, was assassinated at his motel.

Years later, the Civil Rights Division in California filed a suit against the San Diego Fire Department seeking resolution against employment discrimination against women. These efforts of the Civil Rights Division resulted in opening doors for women in fields traditionally held by men, such as police officer and correctional officer .

It is greatly on the part of these motivated groups of people that much of the legislation against discrimination has been enacted. In charge of fighting this sort of discrimination against minorities is the Department of Justice. The Equal Employment Opportunities Commission (EEOC) is in charge of regulating the work environment. The EEOC is responsible for enforcing the laws that have been passed into effect which apply both to private employers as well as the Federal Government. Various laws have been put into effect to prevent prejudicial discrimination to minorities including areas such as race, religion, disability, etc. But is this freedom, or merely oppression of the majority? Do private businesses really have the obligation to hire people merely because they belong to a minority group? The EEOC says they do, but some researchers in the field disagree.

Equality under Employment Discrimination Acts

Law professor John J. Donohue III from the University of Michigan Law School argues that over time, the development of employment discrimination law has come out of changing conceptions of equality in the U.S. He argues that there are three concepts of equality, and the way in which a worker’s labor is valued, which are the catalysts of changes in U.S. employment discrimination law :

·A worker’s wage should equal the value of the individual’s labor as determined by the market.

·Workers’ value depends on discrimination against the group.

·A worker’s price depends as much on the market’s attitudes about the worker (or worker’s group) as the work itself.

“So, rather than a worker’s wage being determined by his or her productivity, the wage is also contingent on such things as employers’ and other employees’ attitudes about race, gender, age, religion, and so on. In efficient capital markets the price of an asset will equal its value, even in the face of bias or discriminatory attitudes. Capital markets are more thoroughly efficient than labor markets. Because of this efficiency a capital market is able to set the price of stock at the intrinsic value of that stock. Because of labor market inefficiencies, a worker’s productivity (or intrinsic value) and a worker’s price (wage) are often not equal. This conception moves beyond the protections of a perfectly competitive capital market. Constructed equality demands that employers pay all employees equally, regardless of the true value (to the market) of their differing productivity.”

According to Donohue, the original goal of these employment laws was basically to ensure that the protected groups maintain equality with non-protected groups. However, this special treatment of minorities is contrary to the premises of a capital market, which is how a labor market should operate (pricing is depended on supply vs. demand.) As with all capital markets, government intervention means lengthy processes and legal red tape which results in high costs and inefficiency.

“While U.S. conceptions of equality have developed further than intrinsic equality, the logic of market processes staunchly resists the institution of constructed equality. While the realization of intrinsic equality is at least in theory attainable, argues Donohue, the movement of U.S. society toward a goal of constructed equality leads to an unclear objective. Additionally, this objective can be attained only through the political conflict of multiple special interests all claiming a right to preferential treatment.”

Historical Timeline of American Civil Rights Laws

1776 – Declaration of Independence “We hold these truths to be self-evident, that all men are created equal, that among these are Life, Liberty, and the pursuit of happiness.”

1865 – 13th Constitutional Amendment abolished slavery, but did not give blacks equality.

1866 – Civil Rights Act “all persons shall have the same rights…to make and enforce contracts, to sue, be parties, give evidence, and to the full and equal benefit of all laws…”

1868 – 14th Constitutional Amendment “All persons born or naturalized in the US…are citizens…nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person…the equal protection of the laws.”

1920 – 19th Amendment “The rights of citizens…to vote shall not be denied or abridged…on account of sex.”

1963 – Equal Pay Act prohibits sex-based pay differentials on jobs.

1964 – Civil Rights Act Title VII prohibits employment discrimination based on race, sex, national origin, or religion. Title VI prohibits public access discrimination, leading to school desegregation. Title VIII is the original “federal fair housing law,” later amended in 1988.

1965 – Executive Order 11246 affirmative action requirements of government contractors and subcontractors.

1967 – ADEA prohibits age discrimination for 40-65 year olds, amended in 1986 to remove the 65-year-old age cap.

1968 – Architectural Barriers Act requires accessibility for disabled in buildings and facilities financed with federal funds.

1973 — 504 of the Rehab Act bars federal contractors or subcontractors from employment discrimination on the basis of disability.

1988 — Fair Housing Amendments Act disabled access required for multi-family housing intended for first occupancy after March 13, 1991.

1989 – Air Carriers Access Act disabled access required in construction of terminal facilities owned or operated by an air carrier.

1990 – Americans with Disabilities Act Title I prohibits disability discrimination by employers. Titles II and III require disability access in all places of public accommodation and business for first occupancy after January 26, 1993 or for occupancy for new alterations, and all state and local government facilities, after January 26, 1992.

1991 – Civil Rights Act adds provisions to Title VII protections, including right to jury trial.

Americans with Disabilities Act

The Americans with Disabilities Act (ADA) provides for equal employment opportunities for persons with various degrees of disabilities. Under the ADA, it is unlawful for employers to discriminate against a qualified individual with disabilities. This act even prevents discrimination against a non-disabled individual on the grounds of his/her association with a disabled person, as long as the individual can perform, with or without reasonable accommodations, the required functions of their job. Reasonable accommodation means that an employer must accommodate a disabled individual’s needs as long as this does not pose undue hardship upon the employer. This legislation applies to all companies with 15 or more employees .

Those that are disabled in this country find themselves in a situation that many are not subjected to. They were not considered a unified group. Disabilities vary greatly from person to person, so this may prevent closeness among the groups. The lack of continuity of the problem led to many barriers for the disabled community as a whole. Their power and came in unification. As a focus group, those that were disabled found their strength in numbers, and made a significant impact on business. It wasn’t until the disabled community focused their attentions to the government as a group, or many groups, that they received aid in the form of social reforms and the passing of laws. Their coming into the lime light was a result of social reforms of the post World War II era.

“Although the disability rights movement developed in the tradition of 1960′s social movements, Disability as a class did not share the same cohesive forces manifest with race and gender.”

The differences among them doesn’t allow for cohesion of their collective strengths. The same shift of focus occurred in the early stages of the ADEA to more attractive topics of race and sexual discrimination. Laws in this country are made for the protection of its inhabitants. It is the way our system is designed. A situation arises and must have a stifling effect on a majority or a minority group for social reform top be enacted. This is a trend that has and will remain prevalent in this society. The situation is the exclusion of this group of individuals whom only seek an equal opportunity to perform their rights as citizens of this country. It is difficult however, when dealing with a group of individuals that is by definition or category, disabled. So should a separate law be enacted? It is not clear as to whether using a separate law might, “ironically reinforce discrimination by underscoring the separateness of people with disabilities.”

The valid argument being that why enact a law that might only potentially isolate this group of individuals as unequal. No matter the situation however, in this country, making an employment decision without having consideration for those that are disabled is just wrong on many levels. If a CEO of a large corporation falls victim to paralysis, but still retains full use of all mental abilities, is he not still a valuable asset to the corporation? As for those that actively seek employment and are disabled, they no longer can be discriminated against for their disability per the Americans with Disabilities Act.

Growing Success and Barriers

With power comes responsibility. The disabled community was empowered when the ADA took effect. This doesn’t mean that they went out suing everybody. However the battles fought in court that gained them federal funding apparently become concurrent with the growing sentiment that, to add these changes would be too costly.

“The need for information and technical assistance continues to grow, outstripping federal and state resources.”

“The disability community has generally, in these early days of the ADA, taken an ADA implementation strategy of educate and negotiate, and litigate as a last resort.”

The movement the ADA sparked faced opposition just as every other reform that focuses on a specific group. So wouldn’t it be found ironic that the collectivism they achieved as a group isolated them as a burden to those in opposition? The opposition was faced as the initial success was also being felt. The most relevant point is that the movement was justified by the freedoms guaranteed in the Bill of Rights. The United States government found itself compelled to do what was morally and contractually right.

Cost and Effect on Business

The bottom line is just that. When the smoke clears, and the day is at an end, many factors incorporate into the final success of a business. In the capitalist society which embraces and grants the freedoms given to such groups by reforms such as the ADA, the ultimate benefit is received when it is determined that it helped the business. Did it increase moral? Did it in increase productivity? Basically did it increase market share plus the profitability of the business?

“A recent study based on the experience of Sears, Roebuck, and Company in making reasonable accommodations reported that the average accommodation cost the company $121.00.”

“The study also reported the 69% of accommodations cost nothing, 28% cost less than $1000.00, and only 3% exceeded $1000.00.”

The statement that reasonable accommodations don’t require great expenditures is relevant in more ways than one. The accommodation of those with needs based reforms, such as the elderly, disabled, and those whom are victim of racism and sexism have a greater interest in change than that of percent increases and turnover margins.

Age Discrimination in Employment Act

The Age Discrimination in Employment Act (ADEA) is the primary federal statute, which prevents employers from discrimination against individuals on the basis of age. This act covers people who are 40 years of age or older, unless there is a bona fide occupational qualification, in other words, reasonably necessary for the business to operate normally. The regulations recognize that “no precise and unequivocal determination can be made as to the scope of the phrase ‘differentiation based on reasonable factors other than age.’ Whether such differentiations exist must be decided on the basis of all the particular facts and circumstances surrounding each individual situation.” In the case of the ADEA, companies must have 20 or more employees in order to be bound by this legislation.

The discussion of discrimination on the basis of age is based on the premise that as age advances, progress and productivity decline. The United States government has prided itself on the virtue of equality. In doing so, it has enacted its powers over this stigma to ensure that discriminatory practices on the basis of age do not plague American business firms. The basic argument over the issue rests on an individual with the ability to perform but has been neglected the opportunity to advance or participate in the workforce. Rather than get enraptured in a heated social commentary, the issues discussed here will focus on why the need arose for enforcement and regulation by analyzing the advancing needs for the latter over a time-frame from proposal to present, the effects it has had on current business practices and law-making bodies, and the possibilities of adjustments that may lie in future laws if any.

“More than eighty million Americans now living were born during the two decades following World War II.”

The need for legislation arose as an issue of equality and opportunity, but what else? The nature of protection rests in the need for security, specifically, security from persecution when advancing in age. The generation that rose from the ashes of post World-War II raged with social reform and added to the growing nation wide sentiment in regards to progress and job security in the latter part of life.

“Until the 1950′s, age bias occurring in the workplace was not a matter addressed by the laws of most states, and it was not until 1967 that Congress that ageism was outdated and irreconcilable with civilized society and American cultural values.”

In passing The Age Discrimination in Employment Act of 1967, a means was found to end discrimination on the basis of age in the workplace. It provided assistance to those who needed it. Laws however, do not remove ideological community blinders. The belief that those above the age of forty cannot compete (which is important because that’s what that the workplace of today has become and has always been), rests in the minds of many business managers who engage in physical or manual labor. The importance of those above the age of forty and their irreplaceable experience has long been a virtue upheld and applauded by big business. Baby boomers after all, started what the current version of what business community knows as big business. It’s the fast paced world of movers and shakers. Why would they in any way desire to stagnate their progress as the new generation of workers seeks advancement in a work environment they designed and implemented?

“The oldest baby-boomers – those who turned fifty in 1996- will be fifty-five in 2001 and sixty-five in 2011.”

Relevance to Current Legal and Business Environments

Suits filed and won against employers that have engaged in legal wrong doing are the trophies upheld by the group that enacted the laws safeguarding those above the age of forty. After all, what’s the use of enacting a law if it’s not to be enforced?

“Between 1970 and 1989, the number of filings of employment discrimination cases in the federal courts increased almost 2200 percent, while all other types of cases rose 125 percent.”

The need for this excess in litigation has had significant impacts on two major groups, lawyers and businesses. An increase in the need for legal assistance can be inferred from such a large increase cases filed, but it only signifies the trend in society to seek legal action against wrongdoing. Companies will find it very costly to engage in ageism, and in the spirit of the almighty dollar, will be more than willing to adhere to governmental regulations. Gender aside, companies cannot afford to engage in discriminatory practices not only for economic reasons, but because they have advanced in the mentality that denying the opportunity to anyone, would be denying their respective business the opportunity to hire or advance a productive individual. The productive individual lies in the heart of the issue and is the one to gain from this legislation. The natural human tendency to believe that productivity decreases as age increases is what’s called into question, and it is that question that strikes the need for security in the workplace.

“Currently in this country nearly 20 percent of male college graduates over sixty-five continue to work, while less than 10 percent of workers that age without a high-school diploma remain in the workforce.”

“Similarly, 49 percent of female workers in age group fifty-five to sixty-four were still working in 1995,and this figure is expected to grow to 56 percent by 2005″

Barriers, Possible Future Trends, and Recommendations

As the initial period after the enactment of a law passes, its strength, and the fervor that gathered the strong emotions of public opinion behind it slowly die out, and so does the leniency of the courts that uphold that law. What happens is that in the public eye, other matters derive a sense of urgency above that of the previous movement that was passed. Not to say that it’s aftermath is not felt by and upheld across the nation’s borders, but rather that public opinion sways back and forth on unresolved matters. The foreground for upholding discriminatory practices is not very clear, and does leave room for speculation, so its passing into law was felt by many as its passing to the backseat in favor of other reforms.

“Despite Congress’s declared interest in banning age discrimination from the workplace, some courts appear less than enthusiastic about enforcing the provisions of the ADEA.”

“The nation’s commitment to end age discrimination is not as strong as its commitments to other public policy ends, such as race, and sex discrimination.”

The focus of litigation tends to flow in the direction of occurrence. If it’s happening in one area more than another, the public eye also shifts in that direction because that’s what they feel is happening to the greater majority. Since the passing of the ADEA, the focus of age has shifted to the skilled laborer.

Equal Pay Act of 1963

The Equal Pay Act of 1963, EPA for short, is an employment discrimination deterrent of very limited scope. It was passed as an amendment to the Fair Labor Standards Act, and it is very similar to that act. The EPA protects against sexual discrimination regarding wages only, and only in regards to executives, administrators and professional employees. The vast majority of EPA cases are filed by women, even though the EPA protects both men’s and women’s rights. The EPA is enforced by the Equal Employment Opportunities Commission, and not by the Labor Department. The EPA differs from other discrimination act, because it does not require plaintiffs to submit claims to the Equal Employment Opportunities Commission or any other state agency before filing a lawsuit.

To recover damages from pay discrimination, the person must show that he/she performed the equal amount of work as the other employees for less pay. According to Mr. Bruce D. Fisher and Michael J. Phillips the equality of the work is based on four factors (1) equal effort, (2) equal skill, (3) equal responsibility, (4) similar working conditions. Effort is defined as the amount of physical and/or mental labor required for the job. Skills are explained as the abilities required to perform the tasks, these include experience, training, education and the ability to perform the job. Responsibility refers to the accountability of the job, or how important the decision made by that particular position. Mr. Fisher and Mr. Phillips use the example of, bank employees whose loan decisions must be reviewed by a superior when the loan exceeds $10,000 probably are not equal to bank employees who can approve loans of up to $50,000 at their own discretion , to define Equal Responsibility. Working conditions is the physical area around the employees; this includes the hazards of the job, the environmental factors such as heat, cold, fumes, radiation and such. Interestingly enough the environments of the positions being compared only have to be similar, not identical.

Rarely do the courts consider these factors separately, as was shown in the case of Fowler v. Land Management Group, Inc. . The Land Management Group, Inc. hired Barbara Fowler in 1987 as a project manager; her starting salary was $32,000 a year. Fowler worked for the company for three years, attaining the position of Vice?President of Building Development. When she was laid off her salary was $60,000 a year, the other Vice?President was being paid $73,500. Fowler sued the company under the Equal Pay Act in a federal district court. Land Management Group, Inc. stated that the other Vice?President, Bruce Reese, had certain professional qualifications that Fowler did not possess, those being that Reese had an engineering and surveyor’s license. They also stated that Reese had greater practical experience and that he generated greater profits than Fowler. The Land Management Group, Inc. claimed that Reese was more vital to the company than Fowler. The jury did not believe that there was an overwhelming difference between Fowler and Reese’s positions. The court gave Land Management Group, Inc. a motion for judgment notwithstanding, even though the jury ruled in Fowler’s favor. Fowler then appealed this ruling, and the appellate court agreed with the previous jury’s decision. Thus Fowler won the appeal.

Under the Equal Pay Act, the plaintiff has to establish that his/her employer pays him/her less that their counterpart, for the exact same level of work. The employer then must prove that this wage difference was not based on sex, but on some other relevant factor. These factors may include seniority, level of output, quality of output, or any other factor that is not based on sex. The employer can protect the company and himself by using organized and precise criteria for evaluating each of their employees.

Sexual Discrimination

Sex discrimination is defined as treating an employee or employees differently just because of their gender. Whether or not this discrimination affects the “terms or conditions of employment”, it is illegal. The “terms or conditions of employment” mean just about anything relating to someone’s job: their position, pay, title, hours, vacations, most everything is a term or condition of employment. Whether or not a person is hired is also considered a term or condition of employment. The provisions against sexual discrimination were added to the Civil Rights Act of 1964 as a last minute amendment to Title VII, because of this there very little legislative interpretation history.

There are two types of sexual discrimination: Disparate Treatment and Disparate Impact. Disparate treatment is when a person is treated differently based solely on their gender, which is straight out discrimination. Desperate impact is when one or more company policies exclude certain people from qualifying for promotions or from obtaining the position. An example of this treatment arose often in city fire department, where strength was required and applicants were tested. These strength requirements were set too high for women to qualify, thus excluding otherwise qualified women from being firefighters. Victims of sexual discriminations must file a charge with the Equal Employment Opportunity Commission before any private lawsuits can be filed, it also must be filed 180 days from the alleged violation. Sexual discrimination is composed of several related topics: Sexual stereotyping, Pregnancy discrimination and finally Sexual harassment.

Sexual Stereotyping

Sexual Stereotyping is when an employer’s behavior discriminates against a gender either male or female. An example of this is when an employer assumes that all women will act just like the “female stereotype”, or if he requires all female employees to behave in such away. The employer may also violate this section of Title VII if he denies a promotion based on this stereotyping. According to the article Empowering Women in Business by the Feminist Majority Foundation:

“Many women have been discouraged from “going for the top” by a set of myths suggesting women are not suited for top management and that any problems are being solved gradually. These myths work to keep women “in their place” and to justify the lack of progress for women. Worse yet, these myths often place blame on women rather than on sex discrimination.”

These myths include that women will have conflicts between their family and the business and that female executives will cost the company more than male executives. These myths and stereotypes come from outdated ideas of gender, ideas that originated in the 1920s and 1930s, and have no place in Twentieth century business.

Pregnancy Discrimination

Pregnancy discrimination is when a woman is fired or refused a job based solely on her pregnancy. The Pregnancy Discrimination Act amended Title VII, and made it illegal to discriminate based upon pregnancy, childbirth, or any other related medical conditions. The act also made companies treat pregnancy and other related conditions like any other affliction, which would affect an employee’s ability to work, such as the flu. According to the Equal Employment Opportunity Commission’s web site , an employer cannot refuse to hire a woman because of her pregnancy as long as she is able to perform the major functions of her job. It also states that: If an employee is temporarily unable to perform her job due to pregnancy, the employer must treat her the same way as any other temporarily disabled employee. This means that policies regarding a female employee’s sick leave, disability insurance and health insurance must treat her pregnancy like any other affliction. This act became effective in 1978.

Sexual Harassment

The Equal Employment Opportunity Commission defines sexual harassment as: Unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature constitutes sexual harassment when submission to or rejection of this conduct explicitly or implicitly affects an individual’s employment, unreasonably interferes with an individual’s work performance or creates an intimidating, hostile or offensive work environment . Mr. Fisher and Mr. Phillips claim that there are two types of sexual harassment: Quid pro quo sexual harassment and Work environment sexual harassment.

Quid pro quo sexual harassment happens when an employer suggests to an employee a link between sexual favors and consequences to their job. This connection may be implied or stated. These consequences could be termination, promotion, raises, or better evaluations. For sexual harassment to occur there must be some tangible effect on the employee’s job, such as being fired. Many courts require the plaintiff to show proof that the plaintiff’s job was negatively affected. This conduct is mostly done by people who need to feel power over someone else, because they probably feel inadequate in some other respect. If a supervisor’s sexual advance is rejected, and nothing happens to the employee or her job, it is not considered sexual harassment. This harassment can come from numerous sources: a supervisor, an agent of the employer, a supervisor in another area, a coworker, or a non?employee. Sexual harassment is not limited to just the victim, as was the case in EEOC v. Tanimura & Antle , one of the largest lettuce growers/distributors in the United States.

The EEOC alleged that a production manager at Tanimura & Antle subjected a Blanca Alfaro, female employee, to quid pro quo sexual harassment. The EEOC alleged that Ms. Alfaro was then subjected to hostile work environment conditions, which included constant unwelcome sexual advances by that production manager and another management employee. It was further alleged that Ms. Alfaro was discharged in retaliation shortly after she complained about the unwelcome advances. The EEOC also alleged that other workers were subjected to similar types of harassment by managerial and supervisory personnel and were retaliated against for complaining about the repeated harassment. The company’s retaliations included the creation of a hostile work environments and discharging some of the employees. The EEOC also alleged that Tanimura & Antle unlawfully retaliated against Elias Aragon, a male employee, when he complained about the harassment of Ms. Alfaro. Mr. Elias alleged that Tanimura & Antle’s retaliation included verbal abuse and suspension without cause, until he was ultimately discharged. The case was settled for a $1,855,000 voluntary settlement; this settlement through a Consent Decree avoids further protracted litigation by the EEOC. It was approved by US District Court Judge James Ware in San Jose, California. The behavior against Mr. Elias just shows how far some managers will go to protect themselves, and why filing with the EEOC quickly is such a good idea.

Work environment sexual harassment is when a group, or individual, creates an environment that is hostile or intimidating in the work place. This type of harassment must be severe and/ or pervasive for the company to be liable. Examples of this would be a supervisor bombarding a female employee with sexual proposition, or touching. Another example this type of sexual harassment would be co-workers who constantly bombard a female coworker to raunchy jokes, ass grabbing, or any other general abuse. This type of harassment comes about even if the employee is treated fairly when it comes to payment, promotion or other benefits. The most important element is that the behavior must be unwelcome, meaning the employee cannot take part in or instigate the behavior. This means that the female employee cannot tell a “dirty” joke to her coworkers, and then turn around an file for sexual harassment when her other coworkers join in and tell raunchier jokes. Hostile work environment is not limited to just jokes, comments, or physical touching, it can also be printed materials or writing on the walls. This was proven when in 1998 the EEOC charged Foster Wheeler Constructors Inc. with racial and sexual discrimination in Chicago . The charges arose from complaints EEOC received regarding racial and sexual harassment at a Foster Wheeler construction project in Robbins, Illinois. This harassment came in the form of racist and sexist graffiti in portable toilets at the Robbins site. Foster Wheeler Constructors, Inc. settled the case by Consent Decree and had to pay $1.3 million to over one hundred employees.

This case was important because according to Gregory Gochanour, the EEOC Trial Attorney in Chicago responsible for the government litigation, “This case,” Gochanour said, “ought to serve as a lesson to the construction industry at large. Racial and sexual harassment, including racial and sexual graffiti, is no more acceptable at construction sites than at other places of business. It’s illegal, and construction industry employers who permit it may be looking at costly litigation.” This case was vital because challenged a problem in the construction industry, harassment in the form of graffiti. It expanded Work Environment sexual harassment to include graffiti, and probably any other written material found in the work place.

Sexual harassment, of any type, is not limited to opposite sex, it can also include same sex, as the decision in Oncale v Sundowner Offshore Services Inc. [U.S. Supreme court 523 US 75(1998)] proved. Joseph Oncale worked for Sundowner Offshore Services on a Chevron oil-drilling platform in the Gulf of Mexico. On several occasions certain members of crew, in front of other crewmembers, subjected Mr. Oncale to sexually related and humiliating conduct. He was even threatened with rape and was physically assaulted. Oncale filed complaints with his superiors at Sundowner, who took not action to alleviate the situation. When Mr. Oncale eventually quit his job, he asked that his pink slip show the reasons for his departure. Oncale sued Sundowner in federal district court, for alleged sexual harassment. The district court said that because he was male, he had no cause of action under Title VII. Oncale appealed this decision to the US Supreme court, which found that same?sex sexual harassment is protected under Title VII.

Title VII of the Civil Rights Act of 1964

Title VII of the 1964 civil rights act may be viewed as the single “most important federal employment discrimination statue” Enacted in a period vast discriminations both in and outside of the workplace, this act proved to have a profound affect on this country and its citizens. Title VII applies to and covers all private and public employers, state and municipal governments, employment agencies, worker unions, and educational institutions with at least 15 employees or more. It protects against discrimination on the basis of race, religion, national origin, and sex in all aspects of employment. This includes hiring or firing employees; assigning, classifying, or compensating employees; transferring, promoting, layoff or recall of employees; job advertisements; recruiting and testing of employees; use of company facilities by employees, training employees, fringe benefits, payment of employees; retirement plans and disability leaves; and other terms and conditions for employees.

“Discriminatory practices under these laws also include: harassment on the basis of race, color, religion, sex, national origin, disability, or age; retaliation against an individual for filing a charge of discrimination, participating in an investigation, or opposing discriminatory practices; employment decisions based on stereotypes or assumptions about the abilities, traits, or performance of individuals of a certain sex, race, age, religion, or ethnic group, or individuals with disabilities; and denying employment opportunities to a person because of marriage to, or association with, an individual of a particular race, religion, national origin, or an individual with a disability. Title VII also prohibits discrimination because of participation in schools or places of worship associated with a particular racial, ethnic, or religious group.”

Certain groups are excluded from Title VII coverage. Groups such as Indian tribes are excluded by the Indian sovereignty immunity, which covers all corporations where board is represented by at least two tribal leaders. Legitimate tax-exempt groups are except from the Title VII provision well. For example an all men’s not-for-profit group may not be required to allow women into their association under Title VII as long as there are no business transactions taking place. Religious educational institutions are allowed under Title VII to discriminate based on religion since it is the basis of their institution. Similarly, entertainment purpose gathering can also discriminate by height, age, appearance, sex, and so on, based on the fact that it is the basis for their gathering. The question is where one draws the line between specific institutions that are covered by Title VII and others, which may get away with discrimination claming exclusion from coverage.

Once one is clear on who is covered under the Title VII statue and whom it protects, there is a set procedure that must be followed if there is a violation of the statue. For instance “parties alleging a violation cannot simply sue their employer at any time desired.” Generally, the complaint must be presented to the Equal Employment Opportunity Commission (EEOC) in order for the dispute to be settled. The EEOC in turn deems what is necessary to resolve the matter, and may file suit on behalf on the complainant. If the settlement is not within satisfaction of the complainant then the EEOC eventually issues a right to sue letter allowing the complainants to sue on their own behalf.

There is also a strict statue of limitations in regards to violations under Title VII. Violations must be charged no later than 180 days of the incident in order for the claim to be legitimate. These strict time frames and procedures, by which one must file a violation, may arguably constitute a violation of civil rights on its own. Victims that may not be aware of such procedures or time restriction, may be excluded form any remedies they may rightly deserve. In addition certain victims may opt not to take the matter to the agency because of fear or ignorance, and rather deal with the mater individually also disqualifying them from due remedies. Although such procedural constraints may appear to be barriers for victims, they do in fact ensure the exclusion of frivolous claims and promote integrity.

A successful claim to a Title VII violation does not in itself entail a violation. In order for there to be a violation, the burden of proof lies on the complainant or plaintiff, and the agency (usually EEOC) which is filing suite. The plaintiff must prove that the employer’s decision on the subject was based on discriminatory reasons outlawed by Title VII. Such proof is not easy to come by since there is usually little to no evidence showing if that employers did in fact act in a discriminatory manner. As result two different methods have been established to prove violations of the statue, Disparate Treatment and Desperate Impact.

The Disparate Treatment theory is used when a single person or small group is claiming a violation and is usually used to describe intentional discrimination. There are three stages this theory encompasses in order to prove a violation. First there must be an establishment of a prima facie case. “A case strong enough to require some rebuttal by the defendant.” In order for a claim to be considered a prima facie case the following must be proven: Plaintiff must be a part of the protected class under Title VII; plaintiff applied and was qualified for the opening they applied for; plaintiff was denied the job; institution continued to search for applicants after plaintiff was denied.

If the plaintiff successfully proves a prima facie case, the burden of proof switches over to the defendant’s party. The defendant must now prove that a legitimate hiring decision was made without any discriminatory intent; if they fail to prove a legitimate defense they automatically loose and award is granted to the plaintiff. However, if the defendant successfully shows the court that the plaintiff was turned down because they did not fit the occupational qualifications, the complainant has one final opportunity to show “the employers given reasons is only a pretext and that discriminatory intent actually motivated the employers decision.”

Disparate Impact (adverse impact) theory is used in cases involving a large number of complainants, usually as a result as unintended discriminatory acts based on qualification tests. First the plaintiff must show that the tests or practices being challenged have an adverse effect on one of the protected classes of Title VII. Such practices may include educational requirements, strength requirements, and height or weight restrictions. Once the plaintiffs prove this adverse effect, the employer must prove that the practice is not only job related, but also a business necessity. If the employer is successful in proving a business necessity toward its requirements, the plaintiffs have one last chance to try to amend the practice in order for it to be more favorable to a specific protected class.

One such example would be the previously mentioned case in which a female claimed a sexual discrimination violation against the New York City Fire Department. The NYFD argued that it did not allow women into the force because of the excruciating conditions the fire fighters were exposed too, claiming a defense of business necessity. The United States Supreme Court ruled in favor of the women stating that physical qualification tests rather than gender should be the basis for recruitment. In addition they lowered certain weight lifting type exercises to 150 lbs form the previous 200 lb requirement. One argument to this theory could be the issue of effectiveness vs. fairness. Lowering the limit to 150 lbs certainly promotes fairness by giving women a chance to be recruited but what does it do to the effectiveness of the NYFD. Does this suggest that the life of a victim that weighs over the specified 150 lbs could be compromised for the exchange of equal employment rights? The basis of the courts decisions was that the average weight of an adult was 150 lbs so it was irrational for the NYFD to test for anything above that weight.

It is clear to see the multitude of arguments that can be derived from such ambiguous issues such as employment discrimination. Although the previous two theories of thought are the leading methods of proving a violation of Title VII, it is evident that proving such violations could be much easier said than done. “Even if a violation is proven, an employer still emerges victorious if it can establish one of Title VI various defenses which basically break up into three groups.” The first of such defenses is referred to as the Bona Fide Occupational Qualification (BFOQ), also know as Business necessity. This defense protects the employers from liability if they can prove that the discriminatory act in question was based on a qualification needed in order for the organization to conduct business. This defense is common within organizations in the entertainment industry, which are granted permission to discriminate based on the assumption that such decisions may be critical to their success.

The BFOQ, however, does not apply in cases of racial discrimination. One such example was a case concerning a male server and the Hooters restaurant chain. The server claimed a violation of Title VII on the grounds that Hooters war discriminating against him for being a male. Hooters was able to prevail in this case claiming that having only female servers was a business necessity for their organization and that altering this qualification would seriously jeopardize their business. Another such example would be “a women’s clothing boutique hiring only female attendants if part of the attendant’s job is assisting clients into the dressing room, or the FAA imposing age limits for its airline pilots.”

The second defense, which exempts employers from Title VII, is the Seniority System. This system allows employees that have been with the company for long periods of time first consideration for promotions. This system is legitimate as long as it is used equally among all employees and was not established with discriminatory intent. Lastly the Various Merit Defense may also be used to escape liability from discrimination. This allows employers to discriminate based solely on a “bono fide merit system, which measure earnings by quality and quantity”.

Given the multitude of complications within filing, charging, convicting, and collecting on a Title VII violation, it is no wonder why there is such a wide range of remedies available to these victims. Most common remedies for these violations are compensatory damages which include “back pay, hiring, promotion, reinstatement, front pay, reasonable accommodation, attorneys’ fees, expert witness fees, court costs, or other actions that will make an individual ‘whole’ (in the condition s/he would have been but for the discrimination).” The victim may also attach punitive damages if it can proove an intentional infliction of emotional distress. “Punitive damages also may be available if an employer acted with malice or reckless indifference. These damages are not available against the federal, state or local governments .” These types of awards are isued as punishment towards the guilty party usually resulting in larger sums of money. “The sum of the plaintiffs compensatory and punitive damages may not exceed certain ammounts as stated by the staute, wich vary depending on the size of the employer”.

This may be of little or no consequence given that most employers facing such claims are from large corporations, allowing a substantial award to be granted. This may bring up a question of ethics concerning the alterior motives of an individual in search of these large awards. The employer also may be required to take corrective or preventive actions to cure the source of the identified discrimination and minimize the chance of its recurrence, as well as discontinue the specific discriminatory practices involved in the case. “Title VII may also give courts discretion to formulate equitable remedies apprpriate to the violation.”

After defining Title VII under the 1964 Civil Rights Act , examining its coverage, procedures, exemptions, and understanding what type of remedies are available to a victim of a violation; it is very important to take a closer look at the protective classes which are included in this statute. All races, nationalitys,and religious entities, male or female , are included as a protected calss under Tittle VII.

Race and Color Discrimination

“Title VII prohibits employers from discriminating against employees or job applicants on the basis of color or racial ethnicity.” This extends to both intentional and unintentional forms of discrimination. Unlike other groups under the protected class, there are no exceptions to racial discrimination since there is no reason why a person will not qualify for a job because of their color and race. For this reason this type of violation may arguably be the easiest to claim, but hardest to prove. In the case McCullough v. Real Foods, Inc. (United States Court of Appeals, Eighth Circuit, 1998. 140 F.3d 1123) Cynthia McCullough (a black female) filed charges against Real Foods Inc. for racial discrimination for promoting less qualified white women instead of her. Real Foods defense was that since McCullough couldn’t work after 3:00pm, they decided the other candidate would be better suited for the job, claiming no discriminatory intent. McCullough initially lost the case but appealed it to the eighth cicuit court where she won the case.

The judgment claimed that the employer used their reasoning as a pretext and that they truly acted in a discriminatory manner. This may be argued from both sides; on one hand Real Foods may have needed someone who can fulfill the position without time constraints, therefore eliminating McCullough as an option. On the other hand it may argued that regardless of the time retsraints, McCullough was undoubtedly the better qualified of the two and should have received the promotion. Both sides have a legitimate point but the job of the courts is to decide which has the most compelling argument. Would this have happened if both women who were applying were white? This brings up yet another ethical question concerning employment discrimination. Whose rights are we willing to compromise in order to promote equality?

Perhaps the most controversial issue in regards to racial discrimination is that of Affirmative Action programs. “These programs are designed to make up for the past patterns of discrimination by giving members of protected class preferential treatment in hiring and promotion.” This type of program has unsuprisingly brought up much controversy, particularly in regards to “reverse discrimination.” In the case Regents of the University of California v. Bakke,( 438 U.S 265, 98 S. Ct. 2733, 57L.Ed.2d 750. 1978) “Allan Bakke, who had been turned down by the Universitys Medical School, sued the university for reverse discrimination after he discovered that his academic record was better than those of some minority group that had been admitted into the program.”

The U.S. Supreme court, under the use of intermediate scrutiny, found in favor of the University of California on the grounds that giving favorability to minority students would enhance the cultural diversity of its student body. This case is a perfect example of an abuse of Tittle VII, using it to deprive the rights of an individual with the excuse of promoting civil liberties to a minority group. This type of ruling is detrimental to our society by taking a statute that was established to enable minorities to be chosen based on ability, and completely taking it to the other extreme resulting in the basis of qualification to again rely on ethnicity rather than qualifications. Although these programs have their downside, they have proven to be effective in improving the amount of minorities in the workplace.

National Origin

“National origin discrimination includes discrimination based on the persons country of origin, their ancestors country of origin, or their physical and cultural characteristics of a particular origin.” This differs from racial discrimination by protecting an Anglo-looking individual from Hispanic origin regardless of their racial appearance. In the same manner it protects an individual with characteristics of a specific origin regardless of there actually country of origin. For this reason an employee proof of citizenship has been proven to be in violation of Title VII and banded from employment applications. Instead of proving citizenship, one must just prove legal right to work in this country.

An exception to this rule is the Indian Sovereignty Immunity, which allows American Indian tribes sovereignty by having and Indian origin as a prerequisite. In the case Pink v. Modoc Indian Health Project (157 F3d. 1185. 9th circuit, 1998) , the issue of what types of organizations are actually protected by this statute was in question. The court ruled that any corporation whose board was composed of two or more tribal members is protected under the Title VII exception. This may raise the possibilities for reverse discrimination once again. Does this implicate that an organization that has little or nothing to do with the Indian community has power to discriminate against non-Indian individuals who may be fully qualified for a particular job?

Tamiami Partners, Ltd. V. Miccosukee Tribe of Indian of Florida (63 F3d, 1050. 11th cir. 1995) courts ruling stated that claims of discrimination can be charged against individuals of a tribal organization. In actuality, although Indian organization themselves may be exempt from Title VII National Origin Discrimination, individuals of these corporation may still be held accountable for there discriminatory actions.

Religious Discrimination

The term religion may have a very broad meaning within a legal context. Although every state and local agencies may hold different views on the matter, the EEOC defines religion as “any moral beliefs that are sincerely held with the strengths of traditional religious views.” An employer must reasonably accommodate the religious practices of its employer. For example, if an individual’s religion prohibits them from working certain days, then the employer must make a reasonable attempt to adhere to such requirement. As decided by Frazee v. Illinois Department of Employment security (489 U.S. 829,109 S Ct. 1514, 103 L.Ed.2d914, 1989) , “employers must also reasonably accommodate an employees religious beliefs even if the belief is not based on tenets or dogma of a particular church, sect, or denomination. The only requirement is that the belief be sincerely held by the employee”.

The statute also protects on the absence of any religious views (atheist). There are certain exceptions to this statute as mentioned before. Religious institutions (schools, churches, organizations) are allowed to discriminate based on religion on the grounds of BFOQ. It is clear that religious opinions would be considered a legitimate prerequisite for such organizations that are based on certain religious principles. The employer may also not comply with specific religious requirements if it would cause undue hardship to the employer’s business.

This issue of religious discrimination has been put in a whole new perspective in the wake of the September 11th attacks on our country. These recent terrorist attacks have put the country in a high state of alert, resulting in levels of prejudice we haven’t seen since World War II. Clearly the fact that nearly 100% of all recent terrorists have been from the Islamic religion may constitute this stereotypical view towards Muslims. This frame of thought however, poses an imminent threat to our constitutional rights for which this country was founded. Nevertheless, with legislations such as the patriot act, the thought of marshal law is lingering among the minds of many Americans. It seems that the president’s call for “War on Terror” is slowly translating into a war on Islam. Employers now find themselves with a very difficult challenge. They must remove their ideological blinders and not give in to this discriminatory force that has seized the mind of so many Americans.

References

www.usdoj.gov/kidspage/crt/emp.htm

Ibid.

Donohue, J. J. III. (1994). Employment discrimination law in perspective: Three concepts of equality. Michigan Law Review, 92, 2605. Pp. 2605-2607

Ibid.

Ibid.

http://www.withylaw.com/history.htm

http://www.elinfonet.com/fedindex/5

Dan Stormer and Anne Richardson, “The Graying of America: Age Discrimination in the Nineties, ” University of West Los Angeles Law Review 26 (1995): 189, 191

Dan Stormer and Anne Richardson, “The Graying of America: Age Discrimination in the Nineties, ” University of West Los Angeles Law Review 26 (1995): 21

Statistical Abstract 1998, table 645 at p.403

Judy and D’Amico, Work Force 2020, 103

Public opinion polls reveal that racial profiling is a concern to a clear majority of Americans. A recent Gallup poll found that 81 percent of Americans thought racial profiling to be wrong and that 59 percent felt that racial profiling was widespread (Ludwig, 2003). The poll also revealed the expected differences between the perceptions of Whites and African-Americans, a solid majority of White (56 percent), and more than three out of four African-Americans (77 percent) survey respondents indicated that they believed the practice was widespread. Even President George W. Bush has weighed in on the subject. In a 2001 address to a Joint Session of Congress, Bush said: “Racial profiling is wrong, and we will end it in America. In so doing, we will not hinder the work of our Nation’s brave police officers. They protect us every day, often at great risk. But by stopping the abuses of a few, we will add to the public confidence our police officers earn and deserve” (Bush, 2001). Chief Russ Leach of the Riverside California Police Department commented that “The practice of racial profiling has no place in law enforcement. It is an activity that undermines the public trust vital for an effective community policing organization. Police must be perceived as both providers of public safety and deferential to the civil liberties of those that they have sworn to protect and serve. While the majority of police officers serve their communities in a professional and ethical manner, the debate over the reality of racial profiling as a practice in law enforcement is loudest on the side of its existence on a national level” (Leach, 2006).

It is easy to see from reviewing these polls and quotes that many people believe that racial profiling exists and is practiced by some law enforcement officers. As such, the International Association of Chiefs of Police (IACP) has said that “However prevalent racial profiling actually is, public perceptions implore police executives to address it (IACP, 2006).

The question that I will attempt to answer in this paper is; is racial profiling a widespread problem amongst law enforcement agencies in the United States and if so, what are the ethical implications?Of course, to answer the question about the prevalence of racial profiling, the first challenge is to determine exactly what racial profiling is. While, on its face, this may seem to be a relatively simple task, I found many definitions of racial profiling. It seems that police officers, attorneys, civil rights activists, and the average citizen all have differing opinions of what, exactly, constitutes racial profiling.

Racial profiling initially emerged out of concerns that African-Americans and Hispanics were more likely to be stopped by police and were being treated differently by police during those stops than other citizens. In the 1980s, some interdiction efforts targeted African-American and Hispanic drivers on the presumption that they were more likely to be involved in drug trafficking. Indeed, at the very beginning of my law enforcement career in 1986, I was in a narcotics enforcement unit. While a member of this unit, I received training from reputable instructors who taught us the “profile” of a typical drug currier. One of the indicators of a courier was, in fact, the suspects’ race. However, I think it is important to mention that race, in and of itself, was simply one indicator of many indicators related to drug traffickers. More recently, concerns over racial profiling have extended beyond the African-American and Hispanic race categories. For instance, since the 911 attack on the World Trade Center, Muslims and Arabs For the purpose of this paper, the definition that I will use concerning racial profiling is: “Any police-initiated action that relies on the race, ethnicity, or national origin rather than the behavior of an individual or information that leads the police to a particular individual who has been identified as being, or having been, engaged in criminal activity” (Ramirez, McDevitt, & Farrell, 2000).

Much of the evidence regarding the existence of racial profiling is anecdotal. The most common complaint by members of communities of “color” is that they are being stopped for petty traffic violations such as under-inflated tires, failure to properly signal before switching lanes, vehicle equipment violations, speeding less than 10 miles per hour over the posted speed limit, or having an illegible license plate.flying on aircraft have often been subjected to profiling. Racial profiling initially emerged out of concerns that African-Americans and Hispanics were more likely to be stopped by police and were being treated differently by police during those stops than other citizens. Because this evidence is anecdotal in nature, it is impossible to verify or study the evidence surrounding these individual cases. However, some of these cases of alleged racial profiling have resulted in lawsuits being filed against various police agencies for their discriminatory practices.

One of the earliest of these lawsuits was the case of Wilkins v. Maryland State Police (1993).

The case arose after Maryland State Police (MSP) troopers stopped Mr. Wilkins, who is African-American, as he returned home from a relative’s funeral in a rented Cadillac in May, 1992.

Mr. Wilkins, a Harvard Law School graduate and a public defender in Washington, D.C., was stopped for speeding while driving 60 miles per hour in a 55-mile-per-hour zone of the interstate. During the stop, Wilkins and other family members traveling with him were forced to stand on the side of the highway in the rain for an extended period of time while troopers and drug-sniffing dogs searched their car. Nothing was found. Wilkins, represented by the American Civil Liberties Union, filed suit and received a settlement from the state of Maryland. (Wilkins v Maryland State Police, 1993)One of the most important aspects of the Wilkins case was the fact that part of the case’s settlement details mandated that the MSP conduct an analysis of police searches along I-95 in Maryland. The settlement required that the results of that analysis must be released to the public. The MSP retained Dr. John Lamberth, a professor of psychology at Temple University, to conduct the required analysis. In 1995 and 1996 Lamberth compared the population of people searched and arrested with those violating traffic laws on Maryland highways. He constructed a violator sample using both stationary and rolling surveys of drivers violating the legal speed limit on a selected portion of the interstate. His violator survey indicated that 74.7 percent of speeders were White, while 17.5 percent were Black. (Lamberth, 1999) In contrast, according to MSP data, Blacks constituted 79.2 percent of the drivers searched. Lamberth concluded that the data revealed “dramatic and highly statistically significant disparities between the percentage of Black I-95 motorists legitimately subject to stop by the MSP and the percentage of Black motorists detained and searched by troopers on this roadway.” (Lamberth, 1999)Another case of note occurred in Gloucester County, New Jersey in 1994. In the late 1980s and early 1990s, Black drivers were reporting that they were being stopped disproportionately by New Jersey troopers. In response to these complaints, the Gloucester County public defender’s office, while representing Pedro Soto and others, filed a motion to suppress evidence obtained in a series of searches, alleging that the searches were unlawful because they were part of a pattern and practice of racial profiling by New Jersey troopers (State of New Jersey v. Pedro Soto et al. 1996). As part of that litigation, the defendants received traffic-stop and arrest data compiled by the New Jersey State Police (NJSP) in selected locations from 1988 through 1991. Professor Lamberth served as the statistical expert for the defendants and conducted a comparative violator survey to weigh the percentage of Blacks stopped and arrested by New Jersey troopers against a comparative percentage of Blacks who violated traffic laws on New Jersey highways. His analysis found that Blacks comprised 13.5 percent of the New Jersey Turnpike population and 15 percent of the drivers speeding. In contrast, Blacks represented 35 percent of those stopped and 73.2 percent of those arrested (Lamberth, 1999). In other words, in New Jersey, Black drivers were disproportion ally more likely to be stopped and arrested than White drivers. The Superior Court of New Jersey relied on Lamberth’s study in its decision to suppress the evidence seized by New Jersey troopers in 19 consolidated criminal prosecutions and concurred with his opinion that the troopers relied on race in stopping and searching turnpike motorists.

Recent data collection efforts in New Jersey and New York have confirmed the independent findings used in the above-described court cases. In April 1999, the Attorney General of New Jersey issued a report indicating that New Jersey troopers had engaged in racial profiling along the New Jersey Turnpike (Verniero, P., Zoubek, P. 1999). This report tracked the racial breakdowns of traffic-stops between 1997 and 1998. The information indicated that people of color constituted 40.6 percent of the stops made on the turnpike. Although few stops resulted in a search, 77.2 percent of those individuals searched were people of color. An analysis of the productivity of these searches indicated that 10.5 percent of the searches that involved White motorists resulted in an arrest or seizure and that 13.5 percent of the searches involving Black motorists resulted in arrest or seizure. The New Jersey report demonstrated that minority motorists were more likely to be involved in consent searches than non-minority motorists. 80 percent of consent searches involved minority motorists (Verniero, P., Zoubek, P. 1999)In December 1999, New York Attorney General Eliot Spitzer released the results of an investigation by his office of the “stop and frisk” practices in New York City. It showed that Blacks and Latinos were much more likely to be stopped and searched even when the statistics were adjusted to reflect differing criminal participation rates in some neighborhoods (Flynn, K., 1999).

After reviewing 175,000 incidents in which citizens were stopped by the police during the 15-month period that ended in March 1999, the attorney general found that Blacks were stopped six times more often than Whites, while Latinos were stopped four times more often. Blacks made up 25 percent of the city population but 50 per cent of the people stopped and 67 percent of the people frisked by the New York City Street Crimes Unit (New York Attorney General, New York City Police, 1999)In 2000, Doctors James E. Lange, Mark B. Johnson, and Robert B. Voas conducted two studies in an effort to develop benchmark values with which to compare police stop data (traffic-stops) to assess racial profiling (Lange et al., 2005). Lange et al. felt that some of the prior methods used to measure racial profiling, specifically, measuring the differences between the racial distribution of traffic stops and the racial distribution of individuals residing within the regions, often inaccurately indicate that some racial or ethnic groups are being stopped at a rate disproportionate to their representation in the region. Lange, et al. questioned whether these regional or local population estimates were the appropriate benchmark for comparison and reasoned that a more appropriate benchmark for assessing racial profiling would be to estimate the racial composition of those who exceed the speed limit and compare that to the composition of individuals stopped and cited for that offense. Lange, et al. set out to do an even more comprehensive study than was done by Lamberth in Maryland and New Jersey.

The first of their studies, which they refer to as the tollbooth survey, extended Lamberth’s study in two important ways. First, the survey was conducted along the entire New Jersey Turnpike not a regional section (north, central or south). Second, the survey relied upon self-reports of race and ethnicity, thus eliminating measurement error due to unreliable observations. (Lamberth’s measurement of race and ethnicity involved stationing observers by the side of the road to count the number of cars and the race of the occupants)According to Lange et al., the tollbooth survey used two strategies: one to assess the race and ethnicity of drivers, and the other to create reliable and general population estimates for different sections of the turnpike. Researchers positioned themselves inside tollbooths and had face to face contact with drivers, reducing measurement error particularly for Hispanic drivers. A total vehicle count of all vehicles traveling on the turnpike was also obtained in this manner.

As stated by Lange et al., interviewers contacted 4,656 drivers at the tollbooths and 4,039 (86.8%) agreed to participate. For those who did not agree to participate, the driver’s race/ethnicity and age based upon observation was recorded in the analysis. The researchers believed that if refusals were excluded this would introduce more bias than using interviewer’s estimates.

The data was recorded from four 6-hour time blocks: 4 a.m. – 9:59 a.m.; 10:00 a.m. – 3:59 a.m.; 4 p.m. – 9:59 p.m.; 10 p.m. – 3:59 p.m. This choice of timeframes ensured that rush hours were contained within a single shift. Weekends were defined from Saturday at 4 a.m. – Monday at 3:59 a.m. The field procedure featured researchers at selected turnpike exits and two tollbooths, positioned behind the toll collector. A timing mechanism inside a handheld PC told researchers’ when to contact a vehicle for participation and would select vehicles at random without regard for ethnic or racial identification. After the toll collector had collected the driver’s toll ticket, the surveyor would lean out of the booth, explain the survey, assuring that it would remain confidential and was voluntary, and then give the driver an envelope with a $5 bill inside along with information regarding the survey to include a phone number the driver could call if he or she wanted to learn more about the survey. Participants were asked the following: their age, where they entered the turnpike; their ethnic group (White, Black, Hispanic/Latino, Asian, American Indian or Other); sex was observable by the surveyor. The vehicle license plate number, state of registry, exit number and time of interview were also recorded. According to Lange et al., researchers obtained data of police stops along the New Jersey Turnpike during May 2000 (time period tollbooth survey was conducted). This data was mandated by a Consent Decree between the State of New Jersey and the United States Department of Justice and included the demographic characteristics of individuals stopped and searched by police. When an officer initiates a car stop, he or she contacts their Communications Division by car radio and gives the dispatcher the following information: description of the stopped car and its occupants (to include the number of occupants), their apparent race and ethnicity and their apparent gender. For the purposes of this study researchers who obtained the data did not distinguish between a moving or non-moving violation and included only stops along the turnpike. The data included 7,559 stops of which 7,296 contained sufficient information to be included in the survey.

Their second study, dubbed the turnpike speed survey, was conducted with the intended purpose of determining whether the racial composition of drivers varied as a function of speed. Speeds were measured by capturing high-resolution photographs of a sample of vehicles on the turnpike. Trained coders examined each photograph to determine the race and ethnicity of the driver, and vehicle speeds were used to determine whether the driver was a speeder or nonspeeder. A total of 38,745 photographs were taken; 21,536 were nonspeeders, and 17,209 were speeders who were defined as those individuals traveling 15 mph or more above the posted speed limit. This was based upon the fact that New Jersey State Troopers would initiate a traffic stop at 15 miles per hour over the posted speed limit.

The turnpike speed survey showed a 68 % case reliability factor based on speed; 96.6 % of the cases have reliable age estimates (45 and younger and older than 45); there was no statistically significant differences in the proportion of Black and White drivers between the tollbooth survey and the turnpike speed survey (Lange et al. 2005). Lange et al., state that there appears to be a uniform race/ethnicity effect across all parts of the turnpike where the speed limit is 65 mph; the average driver is very similar for each racial/ethnic group; Black drivers are stopped more often in 65 mph zones as opposed to 55 mph zones where Whites were more likely to be speeders. The study revealed that Blacks were more likely to be stopped at approximately 77 mph.

The results of the research closely mirrored the results obtained by Lamberth, namely, Black drivers were stopped more often than represented in the population. While Lange et al. took a different approach of measuring the existence of racial profiling than did Lamberth; they too concluded that racial profiling was a reality, at least in New Jersey.

Other researchers have conducted studies that indicate that improper racial profiling is not as prevalent as it may seem. Some scholars, such as Kenneth Arrow, argue that if police are not racially prejudiced, yet still use race as a cue to predict the likelihood of criminality among those they stop, they practice statistical discrimination (Arrow, 1973). Their preference is to make successful stops, where success is indexed by obtaining evidence of criminal behavior, and they stop more of given racial or ethnic group because they have found that group more likely to be engaged in criminal behavior. Evidence for statistical discrimination would be the equivalence in the average evidence of guilt across stopped citizens from each identifiable racial or ethnic group. Arrow further argues that officers who are prejudiced against a given racial or ethnic group would be willing to stop a member of that group even if the expected evidence of guilt that might be obtained were lower than that expected from the stop of a member of a different group. Evidence for such preference-based discrimination would be a lower average of evidence of guilt across stopped citizens of the discriminated against group.

Ian Ayres puts forth the argument that the most useful benchmark for assessing the meaning of police practices would reflect the rate at which persons of different races engage in behaviors that legitimately place them at risk for police interventions-traffic violations, crimes, or disorderly activity. While Ayres makes note of the prior research done by Lamberth and others, he feels that their research has a variety of limitations. Ayres thinks that another form of data collection, systematic observation of police, is a more effective and accurate method of determining the extent of racial profiling by patrol police officers across the full range of situations these officers encounter, not just traffic stops. Rather than benchmarking the police practices observed in the field according to estimates of the rates at which citizens of different races engage in at-risk practices for police intervention, Ayres uses the outcomes of these police encounters to make judgments about how race may have entered into the judgments police officers made to exercise their authority to intrude into the citizen’s affairs. Ayres research focuses on the two forms of police intrusion that have proven most problematic for police in sustaining a sense of legitimacy in the public: stops and searches. Ayres research was conducted in Indianapolis, Indiana in 1996 and St. Petersburg, Florida in 1997. Ayres data collection focused on officers assigned to 12 patrol beats in each city. Beat samples were matched as closely as possible according to the degree of socioeconomic distress, measured as the sum of percentages of families with children headed by a single female, the adult population that is unemployed, and the population below 50 percent of the poverty level. Field observers were graduate students and honors undergraduates who had received a semester’s training in systematic observation of the police, plus on-site orientation rides. Researchers accompanied patrol officers assigned to the selected neighborhoods throughout a matched sample of work shifts. Observers noted a large number of features of police-citizen interactions, including characteristics and behavior of the citizens and officers, the nature of the location, and the circumstances surrounding the event. Observers took brief field notes, transcribed them into detailed accounts, and coded them according to a protocol. Approximately 240 hours of observation were conducted with officers assigned to each of the selected neighborhoods. Researchers guaranteed that officers’ identities would not be reported according to the limited protection from legal process afforded by federal statute and case law governing research sponsored by the funding agency.

Observers recorded police contact with approximately 6,500 citizens in Indianapolis and 5,500 citizens in St. Petersburg. Of these, 992 in Indianapolis and 671 in St. Petersburg were coded as persons suspected of a crime or illegal activity that the police elected to stop on their own initiative. In Indianapolis, 698 of 992 officer-initiated stops of citizens (70 percent) were of Black citizens, and only 30 percent were of White citizens. In St. Petersburg the numbers were 381 Black citizens stopped and 290 White citizens, or 57 percent of those stopped were Black. In the Indianapolis neighborhoods, that were the focus of Ayres research, 49 percent of the residents were Black. In St. Petersburg neighborhoods, 37 percent were Black.

The results of Ayres research suggested that police of neither Indianapolis nor St. Petersburg engaged in racially preferential treatment in deciding whom to stop. With regards to police searches, Ayres compared the treatment of Black and White suspects according to the race of the officer, using the logic that the absence of police preferential bias will be demonstrated when officers of the same race as the suspect exhibit the same likelihood of searching the suspect as would an officer of a different race. Ayres found statistically significant evidence of a substantial racial preference, although not in a direction anticipated. Ayres found that Black officers were much less likely to search White suspects than were White officers, and that the difference in search rates of Black suspects between Black and White was statistically indistinguishable. Ayres stated that he found the absence of the expected race effects in both cities to be striking. Ayres concluded that Black citizens do not appear to be the victims of racial profiling in these two cities (Ayres, 2001).

The most recent research, as reported by the U.S. Bureau of Justice Statistics statisticians Matthew R. Durose, Patrick A. Langan and Erica L. Smith, shows that in both 2002 and 2005, White, Black, and Hispanic drivers were stopped by police at similar rates. While the majority of stopped drivers (86.2%) felt police had a legitimate reason for stopping them, driver opinion was not consistent across racial/ethnic categories. White (87.6%) and Hispanic drivers (85.1%) were more likely than Black drivers (76.8%) to feel the stop was legitimate. Driver opinion also varied depending on the reason for the traffic stop. A smaller percentage of Black drivers stopped because of a vehicle defect (66.5%) felt they were stopped for a legitimate reason compared to White drivers pulled over for the same reason (90.5%). Opinions about the legitimacy of the traffic stop were relatively uniform among White, Black, and Hispanic drivers when the reason for the stop was a roadside check for drunk drivers, a seatbelt violation, or an illegal turn or lane change (Durose, M., Langan, P., Smith, E., 2007).

The same research showed that Blacks and Hispanics were more likely than Whites to be searched by police (Durose, et al). At the same time, more than half (57.6%) of all searches conducted were by consent. Consent searches occurred because either the officer asked permission to perform a search and the driver than granted it, or the driver told the officer he/she could conduct a search without the officer first asking for permission (Durose, et al, 2007).

There are also those who argue that, while racial profiling does exist, it may not always be a bad thing. The following is an overview of research done by Sean B. Trende and reported in the journal article “Why modest proposals offer the best solution for combating racial profiling”, taken from the Duke Law Journal (2000). Trende attempts to strike a middle ground between his unreserved condemnation of profiling and defending, basically, the indefensible. According to Trende, there is some argument in support of profiling and it may prove to be an effective anti-crime tool, however it runs against the grain of modern American ideals of fairness and equality. According to Trende, and as I personally experienced as mentioned before in this paper, the Drug Enforcement Administration (DEA) uses a “drug courier” profile to assist in the prevention of drug smuggling, mainly at airports. There are several characteristics used by DEA agents that have been helpful in apprehending drug suspects, including: being the first off the plane, being the last to deplane, holding a one-way ticket, using a round trip ticket, paying for the ticket in cash, traveling alone and with a companion, and acting too nervous. Trende, states that profiling has proven successful by the number of large drug seizures made frequently as opposed to random stops. I participated in the use of this “profiling” at Palm Beach International Airport (PBIA) in 1986. My partner and I were at the airport to pick up a suspect; however the suspect never showed so we decided to spend a few minutes profiling potential traffickers that may be present at PBIA. After only a few minutes, we saw a Black female and Black male in line to purchase a one-way ticket to Atlanta. We noted that the plane was already in the process of being boarded and was due to leave within several minutes. We also noted that the female did not have any checked baggage and had only one carry-on bag. We further noted that she paid for the ticket in cash. All of her actions, as well as her race, were consistent with the DEA drug courier profile. What really “sealed the deal” in our minds was when her male companion said only “see you next time” as he parted ways with the female. At that point we approached the female and identified ourselves. We asked her if she would mind answering questions, being careful to explain to her that she was not being detained. After examining her ticket, we asked her if she could provide us with a driver’s license or any other form of identification (ID) to confirm that the name on the ticket matched her identification. She stated that she did not have any ID with her, unlikely for someone boarding an aircraft, even in 1986. She advised that she had been in town for several days visiting “friends” whose names, addresses and phone numbers she could not recall. Further, she could not explain why she had no luggage that would be consistent with someone visiting for several days. At that point, we requested her permission to search her carry-on bag. She refused, saying that she needed to board her plane. We told her that we were detaining her bag but that she was free to leave. After obtaining a search warrant, we discovered that the bag contained 3 kilograms of cocaine. We later learned that the female never boarded the flight to Atlanta. Technically, we had just used “racially profiling” on the Black female. In this case, the racial profiling led to the seizure of a sizable amount of cocaine. Was it improper to racially profile this suspect?As a 22 year police officer, the courts have always given the police discretion when applying police procedures. A recent article in the Palm Beach Post, May 4, 2007 in which County Court Judge Barry Cohen questioned whether members of the Palm Beach County Violent Crimes Task Force (VCTF) making a minor marijuana arrest, based upon a early morning traffic stop for a tag light violation of a black male, was appropriate to combat recent gang violence in palm Beach County, shows that not everyone agrees with the discretion used. Cohen questioned whether the drug war has led to an increasing perception among blacks that they can be stopped in their vehicles for merely “driving while black”. Cohen’s comments raised concerns among me and members of the VCTF and the “Gangbusters” tactical component who made the stop and issued the subject a notice to appear in court on the minor drug violation along with a traffic citation for the tag light defect. The Palm Beach County State Attorney, Barry Krischer issued a rebuttal to Cohen’s decision supporting the role of police in using whatever lawful means available to fight gang violence and the war on drugs. Traffic stops is one tool that members of “Gangbusters” use on a daily basis to make further inquiry into a vehicle and receive verbal consent from occupants to look for drugs and weapons. To date, 1200 arrests have been made, almost 100 illegal firearms have been confiscated and gang related shootings and murders have dropped off significantly. The reason I include this commentary in this paper is to illustrate that, in my opinion, the courts will continue to balance the authority of police and the right of civilians to feel safe and secure when they move about in public.

Trende argues that if racial profiling was determined to be illegal, then police would have oneless tool to effectively fight crime. Los Angeles Police Department Chief Bernard Parks, himself Black, supports profiling but states that police are more interested in identifying criminal behavior than profiling but adds that it is not the fault of police when they stop minority males or put them in jail.

Trende provides discussion from scholars who agree and disagree with racial profiling but agree on the fact that profiling is effective in fighting crime. He posits that if liberals are wrong in refusing to weigh the costs of ending racial profiling then conservatives are wrong for ignoring the costs of allowing profiling to continue.

I think that is nearly impossible to make an accurate assessment at this time as to how widespread the problem of racial profiling. As noted above, there are conflicting studies showing both the presence and the absence of racial profiling. It is hard to even get scholars to agree as to what improper racial profiling is. After conducting this research, I think that there is little doubt that some forms of racial profiling do, in fact, occur at some law enforcement agencies. However, in order to determine the prevalence of this profiling, much more research must be done.

I would next like to discuss the ethics of racial profiling. In my opinion, there is no ethical dilemma for those police officers that practice what Arrow described as statistical discrimination. Those officers are not prejudiced and use a subject’s race merely as an indicator of the likelihood of criminality among those they stop. They base their stops, not on a personal dislike of any particular race or ethnicity, but rather on statistics that show that a particular race is more likely than another race to be involved in criminality under a given set of circumstances. The challenge, as I see it, is being able to identify those officers that participate in statistical discrimination for the purpose of fighting crime, and those officers that discriminate based on their own personal bias towards minorities.

Dr. Lee Brown, a former chief executive of several major police agencies, believes that ferreting out those officers that improperly discriminate begins with a clear message from the top of the police organization. According to Brown, “The leadership of a police organization ultimately will determine the character of the organization. Line officers must know and understand the core values of their organizations. These values must become the guide for police officer’s so they can judge right from wrong and acceptable from unacceptable behavior. They must understand that their mission is to protect the constitutional rights of each citizen, regardless of race, creed, color, sexual preference, or gender” (Brown, L., 1997). Police Chief Edward Flynn notes that “The police profession attracts individuals who are seeking moral clarity and who have a strong desire to correct the wrongs of society.” He believes that it is the responsibility of police executives to take advantage of this situation and “…create an environment in which young, morally strong officers can actualize their idealism” (Flynn, E., 1997).

The next level of the police department that needs to be addressed is middle managers, the sergeants and lieutenants that have contact with individual officers on a day-to-day basis. According to Police Chief Elizabeth Watson, “A major problem with police integrity is middle managers who do not understand or are unwilling to embrace the moral goals of the police department.” She goes on to say that “Supervisors need to be taught what it means to make core values part of the department’s operations and how to translate those values to apply them to judgments of subordinates’ behavior. Unfortunately, said Chief Watson, there are still those supervisors who see no conflict in acting on their own personal values, imbedded with prejudices and biases, rather than responding on the basis of the department’s core values” (Watson, E., 1997).

While providing an atmosphere and culture of unquestionable ethics and professionalism, a police department must, at the same time, hold individual officers accountable for acts of improper racial profiling. In my opinion, once it has been established that an officer has breached the police code of ethics, whether by improperly racially profiling or any other identified ethical breach, that officer must be made an example of. His or her punishment must be swift and certain.

In summery, it is my belief, based on my research and personal experiences, that improper racial profiling does exist in some police agencies. However, without more research being done, it is impossible to know for sure just how widespread that profiling is. When improper profiling is exposed, it may be a symptom of a breakdown in the communication of the department’s values and ethics between the department’s leadership and the line officer. That type of breakdown cannot be allowed to exist and must be addressed at all levels within the department.

References: Arrow, K., (1973). The theory of discrimination. In Ashenfelder, O. and Rees, A., eds., Discrimination in labor markets, pp.3-33. Princeton, NJ: Princeton University Press.

Ayres, I., (2001). Pervasive prejudice? Unconventional evidence of race and gender discrimination. University of Chicago Press.

Brown, L. Dr., (1997) Police Integrity, Public Service with Honor: A Project for the United States Department of Justice. P. 26. Washington, DC: U.S. Government Printing Office.

Bush, George W. Address before a Joint Session of the Congress on administration goals. Washington, DC. February 27, 2001.

Durose, M., (2007). Contacts between Police and the Public, 2005. United States Department of Justice, Bureau of Justice Statistics Special Report. Washington, DC: U.S. Government Printing Office.

Flynn, E., (1997). Police Integrity, Public Service with Honor: A Project for the United States Department of Justice. P. 27. Washington, DC: U.S. Government Printing Office.

Flynn, K., “State cites racial inequality in New York Police searches,” New York Times, December 1, 1999, at 22.

International Association of Chiefs of Police. (2006). Addressing racial profiling: Creating a comprehensive commitment to bias-free policing. Washington, DC: Author.

Lamberth, John., Driving while Black: A Statistician proves that prejudice still rules the road,” Washington Post, August 16, 1999, at C1.

Lange, J., Johnson, M., Voas, R., (2005). Testing the racial profiling hypothesis for seemingly disparate traffic stops on the New Jersey Turnpike. Justice Quarterly, 22, 193-221.

Leach, Russ. International Association of Chiefs of Police. (2006). Addressing racial profiling: Creating a comprehensive commitment to bias-free policing. Washington, DC: Author.

Ludwig, Jack. Americans see racial profiling as widespread. May 13, 2003. The Gallup Poll. Retrieved on May 29, 2007 from http:// www.poll.gallup.com.

New York Attorney General, New York City Police “Stop and Frisk” Practices: A report to the people of New York from the Office of the Attorney General, New York, NY: December 1, 1999, at 95.

Ramirez, D., McDevitt, J., Farrell, A., United States Department of Justice (2000) A resource guide on racial profiling data collection systems, promising practices and lessons learned. Washington, DC: U.S. Government Printing Office.

State of New Jersey v. Pedro Soto et al., Superior Court of New Jersey, 734 A.2d 350, 1996.

Trende, S., (2000). Why modest proposals offer the best solution for combating racial profiling. Duke Law Journal, 50, 1 – 29.

Verniero, P., Zoubek, P., New Jersey Attorney General’s Interim Report of the State Police Review Team Regarding Allegations of Racial Profiling (N.J. Interim report), April 20, 1999.

Watson, E. M., (1997). Police Integrity, Public Service with Honor: A Project for the United States Department of Justice. P. 29. Washington, DC: U.S. Government Printing Office.

Wilkins v. Maryland State Police, Civil Action No. CCB-93-483, Maryland Federal District Court (1993).

APPLE COMPUTER

CASE ISSUES

Core Competency (CI#1) : Apple design, develop and market numerous product and service lines. They sell their products to education, consumer creative professional, business and government customers. While apple seems to display numerous products and conduct business on different segments, it is legitimate to wonder what the company is really good at? Too much diversity is exactly what crushed Apple during the John Scully days.

Cannibalization (CI#2): Through January 2005, Apple has opened 102 retail stores. Although these launches are potentially beneficial, Apple stores are hurting the resellers’ business and not all of them will survive. Considering that the company’s resellers still account for more than 50% of its domestic sales, the company is facing the risk of cannibalization and might deeply suffer.

High Cash (CI#3): Why is Apple holding so much cash? Having too much cash in reserve might either mean that the company does not know yet how to allocate it or that they may have some risk concerns about future potential investment.

Succession (CI#4): Apple is clearly one of the handful of companies where the fortunes are seen to be intricately tied to the person in charge. The star quality and the visionary talents associated with Steve Jobs are certainly contributed to the success of the company. So the news of Jobs’ cancer surgery might lead to a succession problem and compromise the company’s future.

I. CURRENT SITUATION

A.CURRENT PERFORMANCE

Apple achieved a solid performance for the first quarter of 2005 compared to the same quarter 2004 with strong net sales in the Americas segment (+77%) in Europe (+63%) and in Japan (+18%). The Americas segment represents approximately 47% of the company’s total net sales. The increase in net sales in the Americas, Europe and Japan was primarily driven by increased demand of the iPod and the consumer-oriented iMAC. Demand for the iBook products were especially high for the Americas, while peripherals and other hardware were more popular in Europe.

The retail segment’s net sales grew to $561 million as compared to $273 million in the same period in 2004, this represents a remarkable 105% increase.

B. SRATEGIC POSTURE

Mission

Apple strives for continuous improvement in our environmental, health and safety management systems and in the environmental quality of our products, processes and services.

Apple’s Guiding Principles

Ø Meet or exceed all applicable environmental, health and safety requirements.

Ø Where laws and regulations do not provide adequate controls, Apple will adopt their own standards to protect human health and the environment.

Ø Support and promote sound scientific principles and fiscally responsible public policy that enhance environmental quality, health and safety.

Ø Advocate the adoption of prudent environmental, health and safety principles and practices by their contractors, vendors and suppliers.

Ø Communicate environmental, health and safety policies and programs to Apple employees and stakeholders.

Ø Design, manage and operate our facilities to maximize safety, promote energy efficiency and protect the environment.

Ø Strive to create products that are safe in their intended use, conserve energy and materials and prevent pollution throughout the product life cycle including design, manufacture, use and end-of-life management.

Ø Ensure that all employees are aware of their role and responsibility to fulfill and sustain Apple’s environmental, health and safety management systems and policy.

Goals

Ø Innovation above everything else.

Ø Increase sales in the education segment.

Ø Produce user friendly, good appearance products to get customers “think Different” and “think Digital”.

Ø Developing new digital lifestyle consumer, and professional software application

Ø Investing in new products area such as rack-mount servers, RAID storage system and wireless technologies.

Ø Provide a high quality sales and after sales support experience.

Strategy

Trough the design and the development of its own operating system, hardware and many software application and technologies, Apple strives to bring to its customers compelling new products and solution with superior ease-of-use, seamless integration and innovative industrial design.

Apple currently focus on:

Ø Increasing marketing and advertising investment in order to improve product and brand awareness.

Ø Vertical growth strategy: expand the retail segment by opening more retail stores. (CI#2)

Ø Market opportunities related to digital music distribution and consumer electronic devices, including iPod.

Ø Implement a cost leadership strategy to keep up with the competition and be more affordable for the educational segment.

Ø Continue to be the leader in innovation for new technology by implementing a product differentiation strategy.

Policies

“Employee diversity “: This policy is a key component and contribute to the success of the company.

“We respect these differences and threat them as an additional value that we incorporate in the way we treat other and approach our customers.”

Therefore, Apple apply that each employee is fully responsible for understanding and following this policy.

“Substance policy”

Ø Apple comply with applicable substance legislation worldwide.

Ø monitor and assess new scientific findings on the environmental impact of substances used in Apple products.

Ø educate our supply chain partners and drive innovations within our supply chain to find alternative materials that improve environmental performance.

“Product Take-Back and Recycling Policy”

Ø Producers should provide a means to facilitate environmentally friendly recycling of their products at the end of electronic products’ useful life.

Ø Consumers should select a disposal method for end-of-life electronics products that does not adversely impact the environment.

Ø Governments should develop a legal framework and public policies to promote appropriate end-of-life management, including environmentally friendly disposal and recycling.

Ø Materials generated from the recycling of our products should be used as feedstock for new products whenever possible.

II. CORPORATE GOVERNANCE

A. BOARD OF DIRECTORS

The Board consists of 6 members, of which 5 are external directors:

Board Member-Occupation Audit and Finance committee Nominating Committee Compensation Committee

William l V. CampbellChairman Intuit, Inc C Ccc

Millard S. DexlerChairman and CEOJ. Crew C C

Albert Gore, Jr.Former Vice President of the US C C

Steve JobsCEO and Co-founderApple ComputerChairman and CEOPixar

Arthur D. LevinsonChairman and CEOGenentech, Inc C Ccc

Jerome B. YorkCEOHarwinton Capital Corporation Ccc

cc=Chairperson C=Member

*Audit and committees members are used to ensure feedback and monitor implementation and compliance.

Steve Jobs

Co-founder of Apple in 1976, he has played an important role in the development of the personal computer. He also co-founded NeXT Software, inc. and served as CEO until 1997 when NeXT was acquired by Apple. Director since 1997 and currently CEO of Apple and Pixar Animation Studios, Jobs is viewed as a key character for the company. However his strong voice and personality within the company could give him the power to sway the board. (internal) (Advantage/Conflict?) CI#4

William V. Campbell

Director of Apple since 1997, he was also the former CEO and president of Intuit, Inc. Mr. Campbell also serves on the board of directors of Opsware, Inc. His experience and knowledge in business, finance and technology might be valuable for the company, however, he is in direct competition with Apple in the sale of software such as Quickbook. (External) (Conflict)

Millard S. Dexler

Director of Apple since 1999, he has been Chairman and Chief Executive Officer of J. Crew Group, Inc. since March 2003. Previously, Mr. Drexler was Chief Executive Officer of Gap Inc. from 1995 and President from 1987 until September 2002. (External)

Albert Gore, Jr

Director since 2003, he was a former Vice President of the United States of America. He has remained an active leader in technology, launching a public/private effort to wire every classroom and library in America to the Internet. Therefore, Gore plays a key role in the implementation of Apple’s products in the educational segment. (External) (advantage)

Arthur D. Levinson

Director since 2000, he has been President, Chief Executive Officer and a

director of Genentech Inc. since July 1995. Mr. Levinson’s experience could benefit apple but his interest may be somewhere else. (External) (Advantage/Conflict?)

Jerome B. York

Director since 1997, he is also a director of Tyco International Ltd. and Metro-Goldwyn-Mayer, Inc. Previously, Mr. York was Chairman and Chief Executive Officer of MicroWarehouse, Inc., a reseller of computer hardware, software and peripheral products and he also served as a Senior Vice President and Chief Financial Officer of IBM Corporation. Mr. York’s experience in the computer industry might be a big pro for the company.(External) ( Advantage)

The Board of Apple is composed of a very diverse group of professionals who bring valuable expertise in the areas of technology, biotechnology, finance, turnaround strategies, retail business management, etc. The backgrounds and current “independent” positions of these members provide a wealth of knowledge and a variety of business perspectives for Apple. However the external activities of some of the members of the board might also be a source of conflict for the company.

B. Top Management & Management Style

1) Fred D. Anderson-Executive Vice President and CFO

2) Timothy D. Cook-Executive Vice President, Worldwide Sales and Operations

3) Nancy R. Heinen-Senior Vice President, General Counsel and Secretary

4) Ronald B. Johnson, Senior Vice President, Retail

5) Peter Oppenheimer, Senior Vice President of Finance and Corporate Controller

6) Jonathan Rubinstein, Senior Vice President, Hardware Engineering

7) Philip W. Schiller, Senior Vice President , Worldwide Product Marketing

Vertrand Serlet, Ph.D.-Senior Vice President, Software Engineering

9) Sina Tamaddon, Senior Vice President, Applications

10) Avadis Tevanian, Jr., Ph.D.-Senior Vice President, Chief Sofware Technology Officer

C. Management Style

Despite the fact that the company claims to have a partnership management style, I personally believe that Steve Jobs is leading an entrepreneurial style and highly influence the company. (CI#4)

III. EXTERNAL ENVIRONMENT SCAN

A. SOCIETAL ENVIRONMENT

1) Political-Legal Forces

Ø Different countries have different legislations and these in some ways restrict the companies or give opportunities to the company.

Ø NAFTA, European Union and other regional trade open doors to market in Europe, Asia, Latin America that offer enormous potential.

Ø Political uncertainties caused by terrorism activities are directly impacting the overall business of the company.

Ø The company relies on access to patent and intellectual property obtained from third parties. The company might unknowingly encounter infringe issues with existing patents of others.

Ø Beatles lawsuit against the company may negatively affect the company’s reputation.

Ø The company has to comply with the environment regulations such as environment safe disposal or recycling.

2) Socio-Cultural Forces

Ø The computer and internet usage is growing worldwide and is a good source of opportunities for the computer industry.

Ø Customers had become more experienced and computer literate.

Ø Education has become a primordial issue for the new generation, which is a key factor for the company’s business.

3) Economic

Ø In the past year, the industry has been affected by the slow economic and that resulted in low consumer spending. However the current economy shows some sign of improvement, consumer spending and investment might increase as well.

Ø Due to weak economic conditions, the U.S. educational is encountering large budget deficits in many states. This factor has a negative impact over Apple’s sales in the educational segment.

Ø Sales of products that include components obtained from foreign suppliers can be adversely affected by currency exchange rate fluctuations and by international trade regulations (tariffs and antidumping penalties).

4) Technology

Ø Technology is evolving at a rapid pace today ,and people appreciate more & more advances in their systems and are switching over to new information appliances.

Ø Internet availability and usage is growing and leads to good opportunities for the industry.

Ø The traditional desktop might become outdated by the entrance of new revolutionary products.

Ø Increasing demand for new technology in schools and professionals.

B. TASK ENVIRONMENT

Threat of New Entrants:

Ø Medium to High – In the PC market any firm that discovers a new technology that is efficient in terms of price & performance is an immediate threat to the industry. However, Established standards, start-up costs and established brands names (Intel, Windows) are difficult to overcome for a new entrant.

Threat of substitute products:

Ø High – The new forms of Information appliance like Digital TV / HDTV Digital set- top box & Internet screen phones are gaining increasing popularity this might hamper the growth of the PC industry as a whole.

Bargaining power of suppliers:

Ø High – Since the industry is highly dependent on component suppliers, a powerful supplier could exert pressure on the market, by supplying components at a higher price to increase his profits. Since Apple is working only with few selected suppliers, the company is running at a higher risk than the average.

Bargaining power of buyers:

Ø Low – Due to high number of other suppliers in the industry the customer has the options to take the cheapest and the best.

Rivalry among competition:

Ø High – Competition among the giants is fierce, everyone aiming for a larger market share ,intensive price cuts & changes.

IV. INTERNAL ENVIRONMENT SCAN

A. CORPORATE STRUCTURE

Apple is organized along functional lines.

Apple is structured primarily on a geographic basis. The company’s reporting operating segment are comprised of:

1. The Americas

2. Europe, Middle East and Africa

3. Japan

4. Other: Asia-Pacific (Australia, Asia, and the subsidiary FileMaker, Inc.)

B. CORPORATE CULTURE

Ø Commitment to innovation and product quality

Ø Dedication to hard work and education

Ø Commitment to diversity and to empowering employees

Ø Commitment to safety and conservation of the environment/energy

Steve Jobs has a huge impact in the company’s culture. Since Job’s return in 1997, the company has reinvented itself with an array of different colors and styles of computers. The introduction of the Ipod and Itunes largely position the company as an innovative leader.

C. CORPORATE RESOURCES

1.) Marketing Mix

a.) Product

Apple is committed to sell original, good looking products that have an easy-to-use interface. The company offers a range of personal computing products, related devices and peripherals, and various third party hardware-products. In addition, the company offers software products (Mac OS X), server software and related solution; professional application software; and consumer, education and business oriented application software.

Apple has been very innovative by finding new usages for its Macintosh computer, such as desktop publishing and strong graphics/animation capabilities. The Macintosh’s functionality for managing multimedia files from cameras, DV recorder and MP3 devices has been very popular and successful.

The new introduction of Apple’s iPod and the iTune has revolutionize the digital music industry.

b.) Place

Apple’s operating segment are comprised of:

Ø U.S.

Ø South America

Ø Europe

Ø Japan

Ø Australia.

Recently Apple chose to implement a vertical growth strategy and began expanding their own retail stores. (CI#2) The company also sells its product via third-parties dealers, or via internet through their own website or through the iTune online music stores.

c.) Promotion

In 2003, Apple formed a strategic alliance with PepsiCo. The Pepsi iTune Music promotion calls for people to use the winning code found under the Pepsi’s bottle caps products to redeem songs from Apple’s iTunes Music Store. This promotion has already been successful for both companies and increased the awareness of the iTune presence in the market.

In 2003, Apple also announced a marketing partnerships With America Online that are aimed at driving iTunes use deeply into the mainstream. Apple and America Online have agreed to put iTunes “buy this song” buttons next to every song that’s listed in AOL’s music service, which its 25 million subscribers can access. Clicking the button will automatically launch the iTunes music jukebox and begin downloading the song; billing will be handled through the customer’s existing arrangement with AOL.

Apple has a joint venture with Hewlett Packard. Apple has produced an iPod for PC users and the success of this product was a good way for the company to capture non-MAC users.

The company’ also drew on endorsements from music stars. U2 singer Bono, rap artist Dr. Dre and Rolling Stones singer Mick Jagger each gave a live endorsement of the iChat videoconferencing software. Singer Sarah McLachlan also appeared live to sing several songs and to talk about how she used the iPod.

In 2005, Apple Computer has initiated a partnership with Wal-Mart that will soon see the iPod shuffle featured at Wal-Mart discount locations around the country.

d.) Price

Apple price is know to be above average in the industry. The company is using a differentiation strategy and focus more on innovation, and quality. This strategy is justifying their premium prices. Lately, however, their new technology and their high cash flow allowed them to lower their price and to offer more discount to certain markets such as the education market. (CI#3) This new pricing strategy may help Apple to better compete with the non-Mac user market but might cause some issue with the brand image/recognition.

2.) Finance

The financial results for the fiscal 2004 fourth quarter ended September 25, 2004.

For the year 2004, the Company reported net income of $276 million on revenue of $8.28 billion compared to net income of $69 million on revenue of $6.21 billion in 2003. Their net income has increased 400%!

Sales to the education market grew 11 percent, bringing its highest quarterly total for that market in seven years.

Apple has a strong balance sheet with a lot of cash (CI#3), their inventories have almost double compared to the year 2003. Apple short-term debt and long-term debt have been completely paid, which is a very good advantage for the company.

Apple’s activity ratios are very good and improved a lot compared to year 2003. However their ROE and ROI ratios are still low compared to the industry.

Income Statement Sep 04 Sep 03 Sep 02

Revenue 8,279.0 6,207.0 5,742.0

Cost of Goods Sold 5,870.0 4,386.0 4,021.0

Gross Profit 2,409.0 1,821.0 1,721.0

Gross Profit Margin 29.1% 29.3% 30.0%

Net Income After Taxes 276.0 69.0 65.0

Balance Sheet Sep 04 Sep 03 Sep 02

Cash 2,969.0 3,396.0 2,252.0

Net Receivables 774.0 766.0 565.0

Inventories 101.0 56.0 45.0

Total Current Assets 7,055.0 5,887.0 5,388.0

Total Assets 8,050.0 6,815.0 6,298.0

Accounts Payable 1,451.0 1,154.0 911.0

Short-Term Debt 0.0 304.0 0.0

Other Current Liabilities 1,229.0 899.0 747.0

Total Current Liabilities 2,680.0 2,357.0 1,658.0

Long-Term Debt 0.0 0.0 316.0

Total Liabilities 2,974.0 2,592.0 2,203.0

Total Equity 5,076.0 4,223.0 4,095.0

Ratios 2004 2003 Industry

Liquidity Ratios

Current Ratio 2.58 2.89 1.33

Quick Ratio 2.3 1.44 1.1

Profitability Ratios

Gross Profit Margin 29.47% 27.52% 20.43%

Net Profit Margin 5.20% 1.11% 4.53%

Return on Equity (ROE) 8.8% 1.63% 20.3%

Return on Investment (ROI) 8.8% 1.01% 19.1%

Activity Ratios

Inventory Turnover 56.2 110.84 81.4

Asset Turnover 1.2 0.9108 1.8

Leverage Ratio 1.62 2.47

3.) Research and Development

Apple consider that R&D are critical for the activity of the company. therefore, they are willing to increase investment in R&D to keep a sustainable competitive advantage in the industry. According to the company’s Annual Report in 2004:

“In order to remain competitive, the Company believes that increased investment in research and development (R&D) is necessary in order to maintain and extend its position in the markets where it competes. The Company’s R&D spending is focused on delivering timely updates and enhancements to its existing line of personal computers, displays, operating systems, software applications and portable music players; developing new digital lifestyle consumer and professional software applications; and investing in new product areas such as rack-mount servers, RAID storage systems, and wireless technologies.”

New products are a necessity in this industry and seems to be a priority for Apple. New products are not always a success, though. This might explain why Apple seems to be so hesitant in investing its high cash flow into new projects, the company might be afraid by the potential failure of the outcome. (CI#3)

4.) Operation and Logistics

Apple heavily rely on third-parties in the manufacturing and logistics sector. Therefore, the company’s overall performance is greatly dependent on the performance of its distributors. In order to have more control over the quality of the buying experience, Apple has done continual effort to become vertically integrated during these two passed years.

Apple work only with suppliers that meet the criteria from their policy (involve commitment to environment, safety and diversity.)

At each period the company performs a detailed review on demand forecasts, inventory, product lifecycle status.

5.) Human Resources Management (HRM)

Apple has over 13,000 employees world wide.

Apple believe that employee’s diversity is a key component for the company success. The company expects that all employee will respect the background or cultural differences of their peers.

Apple offer great benefits to its employee such has competitive pay, and compensation, insurance coverage, bonuses, substantial product discount, stock purchase and saving/investment plan.

The company offers all-level of position such as internship, part-time and entry-level for college student.

6.) Information Systems

Apple has encountered a substantial success by introducing a new digital music device called iPod that can store 1,000 songs and copy a CD in 10 seconds. The continual heavy investment in R&D allowed the company to be on the edge of new technology.

Online store distribution channel has been very powerful for the company.

V. SWOT/TOWS ANALYSIS

A. SWOT ANALYSIS

Strengths Weaknesses

1. Ease of use 2. Established in the personal computer market3. High Corporate reputation 4. Control over the product (manufacture both the computers themselves and also the operating systems which they run)5. Leader in innovation and product differentiation6. Employee diversity 7. Strategic Alliance (HP)8. Joint venture with Pepsi9. Strong Top management10. Loyal customer base11. Creative style 1. The ease of use has led to some image issues, with some business people regarding the Macintosh as a toy.2. High inventory3. Distribution problems4. high prices5. Not IBM compatible, though great strides have been made in connectivity the Macintosh is not transparently compatible.6. Declining share in educational market7. Too many product lines

Opportunities Threats

1. Internet2. Growing industry3. Creating new software markets and selling the hardware into these markets.4. Demand for innovation5. Employee benefit programs6. Growing educational market (In both higher education and schooling, the Macintosh ease of use and low maintenance costs are attractive.)7. Music downloads from Itune 1. Very intense competition among the industry2. Price competition3. loss of market share4. Potential litigations5. Budget deficits in education6. Technological and prices discontinuity7. Potential increase in supply’s costs

B. TOWS ANALYSIS

SO1. Focusing on innovation and product differentiation will contribute to the customers satisfaction (S5, O3, O4)2. The diversity of the employees and the employee benefit programs contribute to the high corporate reputation (S3, S6, O5)3. Joint venture with Pepsi and strategic alliance with HP respond to the demand for music download. (S7, S8, O7) WO1. The growing educational market should increase Apple’s market share in this segment (W6, O6)2. The growing industry should allow the company to decrease prices (W4, O2)

ST1. The high corporate reputation might suffer from the potential litigations. (S3, T4)2. Strong management might overcome the potential litigations. (S9, T4)3. Focus on innovation and product creative style might offset the low prices of competitors. (S11, T1, T2)4. Innovation will depend on the technological -prices conditions and changes. (S5, T6) WT1. The image issues concerning the ease of use of the machine might contribute to the loss of share. (W1, T3)2. The discontinuity in technology and prices might create some forecasting problems, which could result in excess or shortage of inventory. (W2, W3, T6)3. Competition might take advantage of Apple’s high price. (W4, T1, T2)4. Apple’s high price might lower the amount of educational contracts (W4, T5)5. Not being IBM compatible might lead to loss in market share (W5, T3)6. The broad product line might be endangered by the technology and prices discontinuity. (W7, T6)

VI. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY

A. STRATEGIC ALTERNATIVES

1.) Turnaround

The company could stop the expansion of their own retail segment in order to maintain a healthy relationship with its third-party distributor and avoid lawsuit. This strategy would also reduce the risks and costs tied to the stores investment. Apple could use its high cash to implement a product development strategy within the market segment they are currently serving. The company could also keep selling its products at a premium price in order to maintain the company’s reputation as an upscale and innovative brand.

PROS

Ø Improve relationship with resellers. (CI#2)

Ø Reduce risks

Ø The allocation of the high cash into a product development strategy might ultimately increase the revenue of the company(CI#3)

Ø The premium price might be profitable and the upscale image brand of the company is respected.

CONS

Ø No control over the quality of the buying experience procured by the third-party distribution (CI#2)

Ø Potential loss of market share because of the premium selling price

Ø Broad product lines might lead to confusion and extra overhead costs. (CI#1)

2.) Pause and Proceed with Caution

In the Annual Report for 2004, the company saw an increase in revenue and profitability. The introduction of iPod or Itune items have largely contributed to the company’s successful year. The retail segment growth has increased the brand awareness of the company but has led to some conflicts with the resellers. This strategy has to be taken with caution because Their lower price strategy is allowing the company to attract some non-Mac users.

During the mid of this year (2005), the company could consider to primarily focus on: the music segment market and the education segment. Apple could also implement a succession plan for the eventual departure of Steve Jobs. The company’s growth strategy has to be taken with caution and compromises with resellers have to be done.

PROS

Ø Good financial results

Ø More control over the quality of the buying experience (CI#2)

Ø Better brand awareness

Ø Less confusion among core competency. (CI#1)

Ø Sufficient cash flow to support the discounted prices. (CI#3)

CONS

Ø Cannibalization risk is still present (CI#2)

Ø The low prices might discredit Apple’s upscale brand image.

3.) Vertical Growth

The company could decide to do a forward integration, by expanding its own retail store. Apple could use its high cash to finance this investment. The stores are a critical way to leverage Apple’s brand and showcase newfangled digital wares to affluent consumers.

PROS

Ø Total control over the quality of the buying experience (CI#2)

Ø High cash can support the investment for the retail segment (CI#3)

Ø Better brand awareness

CONS

Ø Dissatisfaction of the resellers(CI#2)

Ø Potential loss of revenue due to cannibalization (CI#2)

Ø The high cash investment is risky, and might have been allocated in a more safety way. (CI#3)

B. RECOMMENDED STRATEGY

Pause and Proceed

The last fiscal year has seen improvement for Apple. Profits have increased and the focus has been on innovation, especially in the music segment market.

Using the high cash to implement a price strategy appears to be a good idea to compete with the non-Mac users. (CI#3) The brand image might slightly suffer from this strategy, therefore marketing incentive should be increased in order to sustain Apple’s reputation for high quality and innovative products.

The retail segment growth should be implemented with a lot of caution. Apple needs to ease the pain of the resellers by coming up with programs to encourage these longtime partners to help it accomplish goals it can’t achieve on its own. (CI#2)

Apple should also primarily focus on the music segment market and the educational segment market in which they have good opportunities. This focus would allow Apple to be more competitive and profitable. (CI#1)

Least but not Last, the company should prepare a succession plan in response to the eventual departure of Steve Jobs. (CI#4)

VII. IMPLEMENTATION

A. WHO? The top management should narrow their focus to two market segment.

B. WHAT? Apple’s core competency should focus on the music segment market and the educational segment market in which they have good opportunities. (CI#1)

C. HOW? The company has to invest more into these 2 segments and cut some product lines that are not very profitable to the company.

D. WHO? As Steve Jobs initiated, the company should keep focusing on a price strategy

E. WHAT? By lowering the prices, the company will be able to be more competitive and increase market share.

F. HOW? The company can use its high cash to support discounted prices. (CI#3)

G. WHO? The top management should decide to expand the retail store.

H. WHAT? Improve the quality of the buying experience by having control over the salesperson and collaborate with the resellers. (CI#2)

I. HOW? The company can use its high cash to invest in the retail store expansion. The company should also tightly work with the resellers by supporting them through programs and bonuses.(CI#2) (CI#3)

J. When? During mid 2005.

K. HOW MUCH? The Company’s current strong financial condition and low debt-to-equity ratio will provide the means to accomplish these implementation initiatives in the short-term. In the long-term these measures will be well worth the cost in increased revenue and market share.

L. WHO? The board of directors and the top management should prepare a succession plan. (CI#4)

M. WHAT? The company has to deal with Steve Jobs eventual departure.

N. HOW? Steve Jobs has to delegate some of his power to the top management and he should also implement some training programs. Tim Cook might be a good potential successor.(CI#4)

P.WHEN? Right now.

VIII. MAINTENANCE AND CONTROL

A. The company’s strong financial position should allow the implementation of the strategies stated above. However the investment related to the retail segment growth is very costly and might be risky. Therefore, the company should:

Ø Increase gradually the opening of retail stores.

Ø Assess performance by having Finance and Marketing reviewing “the numbers “monthly”.

Ø Spot and immediately address any negative trends

The top management should periodically visit stores and gather feedback from line employees. They should also gather feedback from resellers to address expansion issue.

B. The company’s focus on the music segment market and the education segment market has to be tightly monitored.

Ø Top management should evaluate on a weekly basis overall performance. (Revenue, Profit, ROI)

Ø Feedback forms should also be given to customers to maintain good relations and to spot market trends early.

Works Cited

10-Q for Quarterly Period Ended December 25, 2004

http://www.apple.com/investor/

Apple Governance

http://www.apple.com/investor/

Apple Financial Analysis

http://www.hoovers.com/

Diverse Articles on Apple

http://www.businessweek.com

Executive Summary

Dell Computer Corporation was established in 1984 and today ranks among the world’s largest computer systems companies. Dell pioneered the concepts of selling personal computer systems directly to customers; offering build-to-order computer systems; and providing direct, toll-free technical support and next-day, on-site service. The company designs and customizes products and services to end-user requirements, and offers an extensive selection of peripherals and software.

Dell’s complete range of high-performance computer systems include: Dell Dimension and OptiPlex desktop computers, Latitude notebook computers, and PowerEdge network servers. The company’s products and services are sold in more than 140 countries and territories to customers extending from major corporations, government agencies and medical and educational institutions to small businesses and individuals. The company employs approximately 11,000 people. Headquarters are located in Round Rock, Texas, with manufacturing facilities in Austin, Texas; Limerick, Ireland; and Penang, Malaysia.

History

At age 13 Michael Dell was already a successful businessman. From his parents’ home in Houston, Dell ran a mail-order stamp-trading business that, within a few months, grossed over $2,000. At 16 he sold subscriptions to the “Houston Post,” and at 17 Dell bought his first BMW. When he enrolled at the University of Texas in 1983, he was thoroughly bitten by the business bug.

Dell started college as a pre-med student, but found time to establish a business selling random-access memory (RAM) chips and disk drives for IBM PCs. Dell bought his products at cost from IBM dealers, who, at the time, were required to order from IBM large monthly quotas of PCs, which frequently exceeded demand. Dell resold his stock through newspapers (and later through national computer magazines) at 10-15% below retail.

By April 1984 Dell’s dorm room computer components business was grossing about $80,000 a month — enough to persuade him to drop out of college. At about that time he started making and selling his own IBM clones under the brand name PC’s Limited. Dell sold his machines directly to end-users rather than through retail computer outlets, as most manufacturers did. By eliminating the retail markup, Dell could sell his PCs at about 40% of the price of an IBM.

The company was plagued by management changes during the mid-1980s. Renamed Dell Computer, it added international sales offices in 1987. A year later it started selling to government agencies and added a sales-force to serve larger customers. That year Dell went public in a $34.2 million offering.

Dell tripped in 1990, reporting a 64% drop in profits. Sales were growing, but so were costs, mostly because of Dell’s efforts to design a PC using proprietary components and RISC chips. Also, the company’s warehouses were oversupplied. Within a year Dell turned itself around by cutting inventories and coming out with eight new products.

Dell entered the retail arena by letting Soft Warehouse Superstores (now CompUSA) in 1990 and office supply chain Staples in 1991 sell its PCs at mail-order prices. Also in 1991 Dell opened a plant in Limerick, Ireland.

In 1992 Xerox agreed to sell Dell machines in 19 Latin American countries. That year Dell sold a new line of PCs through Price Club (now Price/Costco). Dell opened subsidiaries in Japan and Austria in 1993 and began selling PCs through Best Buy stores in 16 US states.

The computer maker abandoned retail stores in 1994 to refocus on its mail-order origins. The company took a $40 million charge to retool its troubled notebook computer line and later that year released its Latitude notebook to general acclaim. The company also introduced a line of servers.

In 1995 the firm offered Pentium-based notebooks, and hastened the interest in its desktops by cutting prices and releasing a dual-processor PC. The following year Dell ramped up its efforts in the Asian computer market with new mail-order service in Hong Kong, Japan, and Singapore; a new Asia/Pacific Customer Center in Malaysia; and direct-sales operations in South Korea and Taiwan.

In 1997 Dell and Toronto-based Newcourt Credit Group formed Dell Financial Services, a joint venture that will provide financing for Dell customers. That year Dell also announced plans to enter the market for engineering, analysis, and design computers called workstations. Dell built up its consumer business in 1997 by separating that operation from its small-business unit and beginning a leasing program for individuals.

Current Situation (1997)

Computer Industry and Market Prediction

It is hard to believe that another year has gone by in an industry that used to live by Moore’s law. Moore’s law states that technology doubles every 18 months. While that maxim still works, at least when it comes to semiconductors, it doesn’t accurately depict the greater changes the computer industry is going through at this time. The Internet seems to speed ahead in 1997, while the market is expanding in leaps and bounds. Last year at this time, market researchers predicted that we would see at least a 12% growth in PC sales. However, thanks to high demand in sub-$1000 PC’s this Christmas, It is likely to see unit sales for 1997 at 20% or higher. Of course, with lower priced PC’s gobbling up as much as 40% of retail, revenues may actually be down for this same time period.

At the beginning of the year, many thought that the New Computer (NC) was going to start taking off. At best, it is finding a niche in corporate offices where repetitive tasks are essential to productivity. The beginning of the year also saw many predict that information appliances would gain ground, and while Web TV and smart phones have debuted, they have not made any real impact in a market aimed at mainstream consumers.

Many also started out 1997 thinking that Microsoft just might have met their match from the Larry Ellison, Scott McNealey and the Java crowd, but as we head into 1998, Microsoft looks more in control of the market then ever. Indeed, Windows 98 upgrades should bring them great profits in 1998 and Windows NT 5.0 is on track to become a sturdy OS in all phases of corporate computing. With the introduction of two new mainstream user platforms for Windows CE in 1998, Microsoft could end up owning the standards for the consumer market as well.

The only predictions from the beginning of 1997 that has been accurate were the ones dealing with Apple Computer. While very few predicted that Steve Jobs would end up running the company, most market researchers did say that Apple would continue to lose ground in 1997. In fact, they have actually lost as much as 3% of their market share this year alone as Apple confused their developers and turned their backs on cloning partners.

1997 also saw the Internet become an important draw for consumers. Although the sub-$1000 price point got their attention, the Internet has become the reason they are going out and buying these low-cost PCs in such large numbers. The lure of the Internet as a tool for school age kids and its role as an information source for even mom and dad has finally turned the tide for many families that had resisted buying a PC up to now. 1997 will also be remembered as the year that the Justice Department put the heat on Microsoft and tried to rein them in a bit. They are currently being challenged over their monopolistic practices, and this fight over the inclusion of Internet Explorer 4.0 in current versions of Windows will continue to keep them under the scrutiny of government officials as well as the industry at large. So, with 1997 clearly behind us, what is in store for 1998?

The first prediction is that Intel will get the low-cost religion in a big way. While they have already made moves in this direction, Intel competitors such as National Semiconductor/Cyrix and AMD will force them even lower when it comes to semiconductor pricing for consumers. In fact, many analysts predict that by next Christmas, we will be talking about fully loaded PC’s with a 200 MHz processor and 16 Megs of DRAM and at least a 12X CD ROM drive with a street price of around $500, without monitor. Add the monitor and a 2 gig hard drive and we are still talking about a complete system for about $750-$800. According to the Computer-World, the magazines for IS professional, Customers will be able to get the system above and a 600 dpi color inkjet printer all for around $900-$1000 by next Christmas’98.

The second prediction is that there will be a move to make CD-RW the next floppy. Although the DVD RAM camp will try and make this the re-writable standard, the backward compatibility of CD-RW and then DVD RW that comes out of the HP camp is more likely to get the lion’s share of at least the business mindset by the end of 1998. 1998 will also bring the introduction of something that will be called the Auto PC. At last fall’s Comdex, IBM took the lead and showed a network PC embedded into the dashboard of a sport utility vehicle. However, Microsoft and others will start touting their own version of an Auto PC with Internet connections and by this time next year we will even see some autos with a PC based Internet architecture built right into to some luxury vehicles.

Analysts expect to see the fight for the digital living room between PC and consumer electronics vendors heat up significantly. Microsoft and their Web TV Plus will lead the charge, while NCI and their Internet TV concept will also gain some ground. Indeed, at the end of 1997, Scientific Atlanta chose the NCI software for their digital set-top box and it would not surprise me if their main competitor, General Instruments, decides to go the way of Windows CE.

At the same time, digital media reference designs from AMD/Cirrus Logic and National Semiconductor / Cyrix will catch the attention of mainstream PC vendors who are also lusting after the digital living room. This design includes 3D surround sound stereo, DVD ROM, 32 Megs of DRAM, a 1.6 gig hard drive and MPEG video in a single box that connects to the TV. While it does not deliver enhanced TV like Web TV does, it would give the user quite a powerful system for the living room that could be used for various purposes.

Another interesting trend for 1998 will be the purchase of sub-$1000 PC’s as dedicated Internet access devices in upscale homes. We are starting to see people who normally use the PC in the den for productivity look for a second PC that could be dedicated for Web surfing and email. The reason for this is that they do not want their productivity PC to catch any possible virus or infections from Internet and Web data transfers. Dedicating a PC for this type of Web access guarantees that their important PC has no conflicts and protects their work from outside influences.

Another thing that 1998 will bring will be the introduction of a Web based phone into the home. Cidco, Sanyo, Brother and others will take aim at the kitchen by providing an all-in-one device that can make voice calls, do email and use the Web as a telephone directory.

As for industry growth, most market researchers still see a strong US market, with about an 18% increase in 1998. Europe will also be around 18-20% but Asia should see a slow down due to their current economic problems. Growth there may be only about 10% in 1998.

With 1997 behind us and the market moving at lightning speed, the outlook for the PC industry does look pretty good. While there could be some hiccups, 1998 seems to be on track to be a banner year with some exciting new products paving the way for PC technology to gain more ground in both the office and the home.

Inside Dell Computer, Inc.

It’s amazing to see how this small company does grow bigger in Texas. Austin area-based Dell is the world’s leading direct seller of computers, with international sales accounting for an ever-growing portion of revenue. Dell makes its own line of desktop PCs, notebook computers, and servers. More than 90% of them are sold to businesses and government entities. It also markets a variety of compatible peripherals and software from other manufacturers.

With the industry standard Wintel platform (Microsoft Windows operating system and Intel microprocessor) as its foundation, Dell beats the competition by offering custom-built products directly to computer users. Customers can order by phone or over the World Wide Web, where the company is selling as much as $6 million worth of computers daily and expects to be processing half of its transactions by the year 2000.

Dell’s built-to-order boxes mean lower inventories, so the company can offer the latest technologies. Lower inventories also translate to lower costs and, therefore, higher margins for the company. Looking to apply its winning strategy in a new theater, Dell introduced its first line of workstations, based on the Windows NT operating system. Founder and Chairman Michael Dell, who despite his youth is the longest-tenured CEO at any major US computer firm, own 16% of the company. (#190 in FORTUNE 500 & #226 in Hoover’s 500)

Officer and Employees (Source: Hoover Online)

Chairman and CEO: Michael S. Dell, age 32, $1,993,371 pay

VC: Morton L. Topfer, age 60, $1,575,898 pay

VC: Kevin B. Rollins, age 44, $828,150 pay (prior to promotion)

SVP and CFO: Thomas J. Meredith, age 46, $928,779 pay

SVP; General Manager, Europe: Martyn R. Ratcliffe, age 35, $990,908 pay

SVP Desktop and Workstation Business: G. Carl Everett Jr., age 47

SVP Law and Administration: Thomas B. Green, age 42

SVP, Server Group: Michael D. Lambert, age 50

SVP Relationship Group: Joe Marengi

SVP, Desktop Business Unit: D. Scott Mercer, age 46

President, Europe, Middle East, and Africa: Jan Gesmar-Larsen, age 37

VP; General Manager, Japan: Hiroshi Fukino, age 55

VP and Chief Information Officer: Jerome N. Gregoire, age 45

VP; General Manager, Asia/Pacific: Phillip E. Kelly, age 39

VP; General Manager, Preferred Accounts Division: John Kinnaird

VP World Procurement: John K. Medica, age 38

VP Human Resources: Julie A. Sackett, age 53

VP Finance and Corporate Controller: James M. Schneider, age 44

VP and Treasurer: Alex C. Smith, age 37

VP Value-Added Services: Bill Waas, age 49

Auditors: Price Waterhouse LLP

1997 Employees: 10,350

1-Yr. Employee Growth: 23.2%

Location and Market (Source: Hoover Online)

Headquarters: One Dell Way, Round Rock, TX 78682-2244Phone: 512-338-4400Fax: 512-728-3653

Web Site: http://www.dell.com

Dell sells its products in more than 140 countries. The company has manufacturing facilities in Ireland, Malaysia, and the US.

1997 Sales

$ Mil. % of total

Americas 5,279 68

Europe 2,004 26

Asia/Pacific 476 6

Total 7,759 100

Product and Operation (Source: Hoover Online)

1997 Sales % of total Desktop systems 78

Notebooks 18

Servers 4

Total 100

Selected Products:

Computer peripherals

Desktop computers (Dimension, OptiPlex)

Notebook computers (Inspiron, Latitude)

Servers & workstations (PowerEdge, WorkStation)

Service and support

Software

Competitors (Source: Hoover Online)

Acer

Apple Computer

Canon

Compaq*

Digital Equipment

Fujitsu

Gateway 2000*

Hewlett-Packard IBM*

Machines Bull

Matsushita

Micro Warehouse

Micron Technology

NCR

Oki Electric

Packard Bell

Philips Electronics Tandy

Toshiba

Unisys

Siemens

Sony

Sun Microsystems

Sharp

Hyundai

Hitachi

* Note: The big-bold-italic-red printings are the main competitors for Dell.

Financials (Source: Hoover Online)

Ticker symbol: DELL 1998 Revenue ($ mil.): 1998 Net Income ($ mil.):

Exchange: NASDAQ 12,327.0 944.0

Fiscal year-end: January

1-Yr. Revenue Growth: 1-Yr. Net Income Growth

58.9% 82.2%

Dell Computer Corporation

NASDAQ: DELL Fiscal Year-End: January

Data Definitions

Market Data | Comparison Data | Detailed Annual Financials | Detailed Quarterly Financials | Historical Financials & Employees | Real-time SEC Filings | Investor Resources

Year Revenue

($ mil.) Net

Income

($ mil.) Income

as %

of sales Stock Price ($) P/E Per Share ($) Empts.

FY

High FY

Low FY

Close High Low Earns. Div. Book

Value

1997 7,759 518 6.7% 18.09 3.34 16.53 27 5 0.68 0 1.16 10,350

1996 5,296 272 5.1% 6.17 2.47 3.42 18 7 0.34 0 1.30 8,400

1995 3,475 149 4.3% 2.98 1.20 2.66 15 6 0.20 0 1.03 6,400

1994 2,873 (36) — 3.07 0.87 1.38 — — (0.07) 0 0.78 5,980

1993 2,014 102 5.0% 3.12 0.94 2.89 18 6 0.17 0 0.63 4,650

1992 890 51 5.7% 1.51 0.84 1.33 17 9 0.09 0 0.48 2,970

1991 546 27 5.0% 0.97 0.19 0.94 16 3 0.06 0 0.24 2,050

1990 389 5 1.3% 0.40 0.19 0.19 20 10 0.02 0 0.18 1,500

1989 258 14 5.6% 0.53 0.32 0.40 13 8 0.04 0 0.17 1,175

1988 159 9 5.9% — — — — — 0.06 0 0.07 –

1997 Year-End Financials

Debt ratio: 2.2%

Return on equity: 64.3%

Cash ($ mil.): 115

Current ratio: 1.66

Long-term debt ($ mil.): 18

Shares Outstanding: 692

Dividend yield: –

Dividend payout: –

Market value ($ mil.): 11,442

Main Competitor’s financial comparison

Company Ranking for: (Source: CorpTech, Technology Company Information)

Company Employment Growth in 1997 Growth projected for 1998 Annual Sales Revenue Sales per Employee

Dell 18 of 3,011 123 of 2,777 N/A 12 of 2,966 178 of 2,952

Compaq 14 of 3,011 N/A N/A 4 of 2,966 108 of 2,952

IBM 1 of 3,011 738 of 2,777 N/A 1 of 2,966 422 of 2,952

Gateway 2000 25 of 3,011 802 of 2,777 N/A 17 of 2,966 158 of 2,952

Description and Financial Review for: (Source: Hoover Online)

1. Compaq Computer Corp

Compaq Computer, Corp. leads the PC market and still isn’t satisfied. The Houston-based company is logging experience in handheld systems and other new fields in efforts to become the top global computer company. Compaq is the world’s leading PC maker with about 10% of the global market, and it’s churning out more new products than ever before (PCs account for about half of sales). Other Compaq products include servers that run distributed networks of computers, consumer systems, and communication tools.

Compaq’s planned purchase of Digital Equipment Corp. and its purchase of struggling Tandem increase its depth in the high-end hardware market. (The deal for Digital, the biggest acquisition in the history of bits and bytes, would create the world’s second-largest computer firm, behind IBM.) Compaq also acquired modem maker MicroCom to boost its remote-access business.

The firm’s latest products emphasize diversity, such as clustered, high-end PC servers that link several systems’ resources, and machines that compete with low-end UNIX systems. The expansion has its price — an entry into the home information appliance market, its PC theater developed with Thomson S.A., was killed after less than a year due to bad reception in the marketplace. What the company lacks in analysts’ eyes is competitive delivery and network service. The majority of Compaq’s revenues come from sales to corporate customers, but it also markets products to home users, governments, schools, and students. (#60 in FORTUNE 500 & #41 in Hoover’s 500). Source: Hoover Online

Compaq Computer Corporation

NYSE: CPQ Fiscal Year-End: December

Data Definitions

Year Revenue

($ mil.) Net

Income

($ mil.) Income

as %

of sales Stock Price ($) P/E Per Share ($) Empts.

FY

High FY

Low FY

Close High Low Earns. Div. Book

Value

1997 24,584 1,855 7.5% 39.78 14.20 28.25 33 12 1.19 0 6.21 32,656

1996 18,109 1,313 7.3% 17.43 7.18 14.88 20 8 0.87 0 4.49 18,900

1995 14,755 789 5.3% 11.35 6.23 9.60 19 10 0.60 0 3.45 17,055

1994 10,866 867 8.0% 8.43 4.83 7.90 12 7 0.68 0 2.90 14,372

1993 7,191 462 6.4% 5.05 2.78 4.92 505 278 0.01 0 2.10 10,541

1992 4,100 213 5.2% 3.32 1.48 3.25 20 9 0.17 0 1.67 11,300

1991 3,271 131 4.0% 4.95 1.47 1.76 50 15 0.10 0 1.53 11,600

1990 3,599 455 12.6% 4.52 2.36 3.75 13 7 0.34 0 1.44 11,400

1989 2,876 333 11.6% 3.75 1.97 2.65 14 8 0.26 0 0.99 9,500

1988 2,066 255 12.4% 2.19 1.40 1.99 10 7 0.21 0 0.70 6,900

1997 Year-End Financials

Debt ratio: 0

Return on equity: 19.7%

Cash ($ mil.): 6,418

Current ratio: 2.31

Long-term debt ($ mil.): 0

Shares Outstanding: 1,519

Dividend yield: –

Dividend payout: –

Market value ($ mil.): 42,912

2. IBM (International Business Machine Corp.)

IBM’s safety net turned out to be a web — the World Wide Web. Armonk, New York-based International Business Machines is the world’s top provider of computer hardware, software, and services. Not long ago the bottom had dropped out on sales of IBM’s mainstay mainframe and midrange computers. But with airlines, insurance companies, and banks relying on mainframes for their vast databases, and with the booming Internet business demanding big servers, business has been on an upswing.

Software and service revenues are also strong. Notes software from IBM’s Lotus Development subsidiary has more than nine million users worldwide. And services, once a freebie for big customers, now account for one-fifth of IBM’s sales.

Big Blue’s shedding of its longtime image as the quintessential button-down establishment was engineered by CEO Louis Gerstner, who became head of the ailing firm in 1993. Gerstner cut the workforce, shook up entrenched management, resuscitated the mainframe, and refocused the company on selling systems and support services.

Gerstner is betting IBM’s future on the networked world. The company is making every piece of hardware network-ready and has released the industry’s first network appliance, the IBM Network Station. Software units, Lotus and Tivoli (systems management software), focus on products for corporate intranets and new Web technologies. Acquisitions are also expanding IBM’s Web presence; for example, it recently purchased a majority stake in NetObjects, which makes Web site development software. (#6 in FORTUNE 500 & #6 in Hoover’s 500). Source: Hoover Online.

International Business Machines Corporation

NYSE: IBM Fiscal Year-End: December

Data Definitions

Year Revenue

($ mil.) Net

Income

($ mil.) Income

as %

of sales Stock Price ($) P/E Per Share ($) Empts.

FY

High FY

Low FY

Close High Low Earns. Div. Book

Value

1996 75,947 5,429 7.1% 83.00 41.56 75.75 17 8 5.01 0.65 21.04 240,615

1995 71,940 4,178 5.8% 57.31 35.13 45.69 16 10 3.53 0.50 20.24 225,347

1994 64,052 3,021 4.7% 38.19 25.69 36.75 15 10 2.51 0.50 19.00 219,839

1993 62,716 (8,101) — 29.94 20.31 28.25 — — (7.11) 0.79 16.04 256,207

1992 64,523 (4,965) — 50.19 24.38 25.19 — — (4.35) 2.42 24.17 301,542

1991 64,792 (2,827) — 69.88 41.75 44.50 — — (2.48) 2.42 32.40 344,396

1990 69,018 6,020 8.7% 61.56 47.25 56.50 12 9 5.26 2.42 37.48 373,816

1989 62,710 3,758 6.0% 65.44 46.69 47.06 20 14 3.24 2.37 33.50 383,220

1988 59,681 5,491 9.2% 64.75 52.13 60.94 14 11 4.64 2.20 33.36 387,112

1987 54,217 5,258 9.7% 87.94 50.00 57.75 20 11 4.36 2.20 32.04 389,348

1996 Year-End Financials

Debt ratio: 31.3%

Return on equity: 25.4%

Cash ($ mil.): 7,687

Current ratio: 1.20

Long-term debt ($ mil.): 9,872

Shares Outstanding: 1,016

Dividend yield: 0.9%

Dividend payout: 13.0%

Market value ($ mil.): 76,959

3. Gateway 2000, Inc

Gateway 2000 is one of the leading direct marketers of personal computers in the world. The company develops markets and manufactures and supports a broad line of big screen PC/TVs, desktops and portable PCs used by businesses, individuals, families, government agencies and educational institutions.

Gateway 2000 thrives in the fast paced environment of the PC industry, one of the most competitive businesses in history. Gateway 2000 wants corporate America to see spots. The North Sioux City, South Dakota-based maker of IBM-compatible PCs is the US’s #2 direct marketer of computers (behind global leader Dell). Known for packaging its PCs in boxes spotted like Holstein cows and then shipping them straight to consumers, Gateway is now targeting big businesses as the recipients of more of its systems.

European operations are based in Dublin, Ireland. Active European markets now include the United Kingdom, Ireland, France, Germany, Belgium, Luxembourg, Switzerland, Austria, Sweden and the Netherlands. Along the Pacific Rim, the company has sales and support operations in Japan and Australia, and manufacturing in Malaysia.

Gateway has expanded its revenues more than 35% annually by offering products directly to computer users ordering by phone or Web site instead of through resellers, a tactic that cuts costs by avoiding profit markups. It also lets the company get the latest technology to market faster:

Gateway was among the first PC makers to add color monitors, Pentium microprocessors, and CD-ROM drives as standard features. To correct its traditionally weak corporate standing (the majority of its business clients are small and medium-sized companies), Gateway has doubled the sales and service staff and worked to become more global itself (expanding Pacific Rim sales, among other things). The initial products in the new business line include the first NetPCs, stripped-down computers that cost under $1,000 (without a monitor).

Pony tailed chairman and founder Ted Waitt and his brother Norm own 46% and 9% of Gateway, respectively. (#284 in FORTUNE 500 & #288 in Hoover’s 500). Source: Hoover Online.

Gateway 2000, Inc.

NYSE: GTW Fiscal Year-End: December

Data Definitions

Year Revenue

($ mil.) Net

Income

($ mil.) Income

as %

of sales Stock Price ($) P/E Per Share ($) Empts.

FY

High FY

Low FY

Close High Low Earns. Div. Book

Value

1996 5,035 251 5.0% 33.13 9.00 26.78 21 6 1.61 0 5.31 9,700

1995 3,676 173 4.7% 18.75 8.00 12.25 17 7 1.10 0 3.73 9,300

1994 2,701 96 3.6% 12.38 4.63 10.81 20 8 0.61 0 2.60 5,442

1993 1,732 151 8.7% 10.75 8.38 9.81 15 12 0.71 0 1.94 2,832

1992 1,107 106 9.6% — — — — — — — — 1,369

1991 627 39 6.2% — — — — — — — — 657

1990 276 17 6.2% — — — — — — — — 303

1989 71 4 5.6% — — — — — — — — 150

1988 12 0 2.7% — — — — — — — — 40

1987 2 — — — — — — — — — — 11

1996 Year-End Financials

Debt ratio: 0.9%

Return on equity: 30.7%

Cash ($ mil.): 516

Current ratio: 1.65

Long-term debt ($ mil.): 7

Shares Outstanding: 154

Dividend yield: –

Dividend payout: –

Market value ($ mil.): 4,111

Key Issues

SWOT Analysis

Strengths

* High performance and Low price

* Direct marketing

* High sensitivity of the customer needs (because it sells direct and has direct contact with its customers)

* Custom Configured product

* Catalog/mail out database of customer

* Its commitment to sold relative high quality, relative low price products that are custom configured

* Have the best customer satisfaction in the industry: warranty packages, installation, maintenance, repair services, and user support

* Service Innovation & Recognition

* Value added service

* The second largest PC manufacture in the U.S. market and the third largest PC in the world, rank at 190 position in the Fortune 500

* Efficient distribution channel keep the production cost low

* A substantial cost advantage coming from the reseller’s markup, the costs and risks associated with carrying large inventories of finished goods.

* High growth (look at the competitor comparison)

* Service and Support as the ultimate competitive weapons in this maturing industry / customer satisfaction strategy. (Source: “Making the right choices for the new customers”)

* Outsource the unnecessary component and the component that doesn’t give big added value

* Keep its product open to the change or upgrade and adjustable or doesn’t need change on the software application/ system. (open architecture)

Weaknesses

* Not have much indirect distribution / Under-distribution

* Stock Keeping Unit / Inventory

* Not have so many product lines (2 for desktop, 2 for laptop/notebook and 2 for workstation)

* Lacked of / neglected laptop computers / Notebook, which is the hottest bit of the PC market

* Lack of diversifying distribution channel (too much focus on the direct channel)

* Its stock control and product forecasting systems could not keep up with its growth

* Dependent too much on the Wintel architecture. Dell Computer is the only manufacture that uses no other brand processor except Intel and the only manufacture who offers an operating system from Microsoft for all of its broad range of product.

* Not have so many resources in the computer networking, system and network integrators, which are combination of software, hardware, and peripherals. This market is more likely safer compare to the PCs and promising much higher profit margin. (This market has boomed by 20% every year).

* Unclear segmentation target customer

* Negative effect of direct marketing strategy. Because of this strategy, Dell lost the opportunity to gain the first buyer customer.

* Not have so much Financial Resources for developing its own project development. Ex: build its own monitor or build its own modem.

Opportunities

* Fastest Growing market in the Notebook segment

* International Growth opportunity; Japan (Dell is the ninth largest local vendor in Japan), Korea, Europe, Asia, Africa

* To be the most leading computer industry in terms of efficiency, profit margin, return on equity (ROE) and innovation

* PC’s is a huge market (Every person buys approximately 3 PCs every 10 years, The U.S. statistics)

* Huge opportunities to enter the derivation of the PC market, such as software, printer, scanner, and peripherals.

* Develops and markets its own operating systems that built based on the order of its customer

Threats

* Wintel Architecture

* Currency Exchange (36% revenues from international sales)

* Government Regulation, such as Recycling, EPA

* Because of its main customer is large company, it means they have a buying power and this could squeeze its profit margin

* Gateway 2000 is the closest competitor which has the same strategy (direct marketing, cut mark up cost, custom build computer and target the same segment customer; such as middle size and big corporation customers). In addition, Dell has to face head to head competition with Gateway 2000 in the same country; because both of them have the plants in the same country: Ireland & Malaysia.

* Short product life cycle of the semiconductor from 5 years to 3 months (Rapid technology cycles).

* Operating in one of the most competitive business in the history.

* Product Transitions.

* Production Forecasts / high degree of uncertainty demand.

* Technology standards and Key licenses.

* System Implementation (the risk of implement the new system).

* Credit Risk

* Year 2000 Compliance

Objectives

1. The most efficient and effective company in the computer industry

Dell is best known for establishing a direct distribution system. The traditional distribution system, indirect distribution system was very inefficient, because the reseller stores charge a 25-30 per cent mark-up for a computer. Beside that most salespeople do not know much about computers they sell.

2. Provide the best customer satisfaction in the computer industry

Satisfying customer involves meeting their specific needs, which makes segmentation and customization necessities.

3. The most profitable company in the computer industry that produce high ROE, ROI and profit margin

So far Dell has lead the great financial performance in the computer industry. This competitive strength is gained from the combination of its strategies above; the most efficient and effective company and provide the best customer satisfaction in the computer industry.

Marketing Strategy

1. Focus on high margin customers: Large Customer, such as large companies, Government and Education and Midsize companies and Small Business.

2. Stay on direct marketing and not rely on traditional retailing

3. Outsourcing the PC’s component to the independent manufactures and outsourcing the after sales service, then integrate and treat them as if they are inside the company (this will be explain in the next section).

Action Plans

Target Markets

From the data “Customer Group” (Dell Computer Corporation: Formulation Strategy), most of Dell Computer sales comes from Major corporate, Government, and Education Accounts. This data could support the strategy choice to focus chiefly on corporate customers while de-emphasizing consumers. In turn, Dell should allocate a substantial portion of its marketing resources to reaching customers through conventional retail distribution.

In order to make the segmentation success, Dell Computer should make it as clear as possible. Here is the example that we got from the article “The Power of Virtual Integration: an Interview with Dell Computer’s Michael Dell”.

Segmentation lets Dell Computer tailor its program to meet the customer’ needs. Moreover, Segmentation allows Dell Computer closer to its customer and it allows Dell to understand their needs in a really deep and real time way. This closeness gives the company access to information that is absolutely critical to its strategy. In addition, it also helps the company to forecast what the customers are going to need and when. And good forecasts are the key to keeping the cost down.

Target Segments

Dell’s direct marketing strategy made Dell PCs more interesting for novice /advance computer buyers (not first time buyer). Dell use World Wide Web to market its products, instead of 800 number and catalog / mail. Dell’s research profiled its typical customers as knowledgeable about computers, up to date on new systems, and specific about the product they want. These kinds of customers do not need or want the hand holding assistance provided at retail outlets.

Internal Operations

To accommodate its customer profile, Dell developed flexible manufacturing techniques. These techniques enable the company to build a customer’s computer virtually to order (custom build PCs through World Wide Web, instead of mail and catalog or telephone). Using different components for each order in Dell customs configured computers to meet customers’ specifications.

Instead of developing FMS, Dell also built a virtual integration between several strategies including customer focus, supplier partnerships, and mass-customization, just in time manufacturing. The virtual strategy itself means a technique how to combine that piece of strategies in the highly innovative way: technology is enabling coordination across company’s boundaries to achieve new levels of efficiency and productivity, as well as extraordinary returns to investors. In a simple way, it means Dell basically stitch together a business with partners that are treated as if they are inside the company.

Virtual integration harnesses the economic benefits of 2 very different business models. It offers the advantages of a tightly coordinated supply chain that have traditionally come through vertical integration. At the same time, it benefits from the focus and specialization that drive virtual corporations. Virtual integration as Michael Dell envisions it, has the potential to achieve both coordination and focus. (Source: “The power of Virtual Integration:”, Harvard Business Review, March-April 1998).

Beside that Dell marketing department are finding that data base strategies help them to better serve its customers. In dealing with large number of customers, it is difficult for marketers to serve them adequately. But, with a data-base strategy, they can gather insights and better understanding their customers’ expectations. In fact, Dell Computer Corp. has identified at least US $ 100 million in revenue opportunities within existing accounts by using a relationship data base strategy when it started in 1994.

To gather data for the project, Dell used a telemarketing procedure that could keep customers on the line long enough to give a lot of information. The ultimate goal was a 27-minute conversation (Direct contact and gather information). And the resulting data base includes planned purchased, Dell’s projected share of those purchases, and the timing of purchases so Dell could determine how often to call customers.

Cost Control

In order to gain high profit margin, the cost should be kept in line. Dell has already implemented this by carrying fewer inventories (35 days’ worth versus 110 days for Compaq Computer Corporation). Such flexibility allows Dell to uses its mail order expertise to introduce new and more expensive models faster that it could through the longer manufacturer to distributor to retail channel. Moreover, by reducing operating costs (Dell’s is 5.4 % of revenues versus 13 percent for Compaq) and by eliminating the middleman markup, there are more opportunities for marketing and sales to undercut the major brands after tapping other strategy options. Look at the chart below:

1. The dominant model in the personal computer industry – a value chain with arms-length transactions from one layer to the nest

2. Dell’s direct model eliminates the time and cost of third part distribution

3. Virtual Integration works even faster by blurring the traditional boundaries and roles in the value chain

Channel Innovation

Dell marketers recognize that getting comfortable with their current direct channel approach could limit expansion, especially in global markets that lack the sophisticated communications and delivery systems of North America. So by experimenting with the new distribution channels, managers at Dell continue to investigate new distribution concepts such as interactive mall and marketing via Internet.

According to the InfoWorld (Tebbe, Mark), Dell Computer Corporation shows that Web-based business is not just a dream. In fact, the company now sells more than US $ 1 million worth of computing equipment per day via the Internet. This revenue is growing by 20 percent each month. Dell has quickly created a sales channel that should deliver more than $400 million this calendar year.

Controls

Performance Metrics. These metrics are financial measurement, such as balance sheet and the Profit & Loss of the company. These tools are used to manage operations.

From the balance sheet we may track:

- How many days of inventory turnover; Higher means better.

- Account Receivables and Payables.

The real time performance measures in the P&L. We may split P&L by segments, by product and by country.

Feedbacks are being collected from four sources. Feedbacks come from the customers, from suppliers, and one from employees and the others from information system. The key to manage this work is how to release the information flows in the way that enhances the speed, either directly or indirectly.

Platinum Council and Team account. These teams are formed to serve large account customers only such as Boeing, MCI, etc.

BIBLIOGRAPHY

“Channeling their energies”; by Paley, Norton; Sales and Marketing Management magazines.

“THE POWER OF VIRTUAL INTEGRATION: AN INTERVIEW WITH DELL COMPUTER’S MICHAEL DELL”; by Magretta, Joan; Harvard Business Review edition March-April 1998.

“Dell shows that Web-based business isn’t just a dream”; by Tebbe, Mark; Infoworld.

“Dell hopes to up channel business by going after regional resellers”; by Zarley, Craig; Computer Reseller.

“Dell Computer Corporation”; Hoover’s Company Profiles; WWW.HOOVERS.COM

“Compaq Computer Corporation”; Hoover’s Company Profiles; WWW.HOOVERS.COM

“IBM Corporation”; Hoover’s Company Profiles; WWW.HOOVERS.COM

“Gateway 2000 Corporation”; Hoover’s Company Profiles; WWW.HOOVERS.COM

“Making the right choices for the new consumer”; by Dell, Michael S; Managing Service Quality.

“1997 Warp-Up and 1998 Predictions”; by Creative Consumer Marketing

“Service sells”; by Dell, Michael S; Executive Excellence magazines.

http://www.dell.com

http://www.compaq.com

http://www.ibm.com

http://www.gateway.com

http://www.hp.com

INTRODUCTIONIn 2001, Dell Computer became the world’s largest personal computer vendor, continuing togain market share and post profits in an industry struggling with slumping sales and billions ofdollars in losses. Dell sells 90% of its PCs directly to the final customer, largely bypassing thereseller channel that accounts for most of the world’s PC sales. This direct customer relationshipis the key to Dell’s business model, and provides distinct advantages over the indirect salesmodel. Dell’s direct relationship with the customer allows it to tailor its offerings to customerneeds, offer add-on products and services, and use the Internet to offer a variety of customerservices. In addition, Dell’s PCs are built to customers’ specifications upon receipt of an order,giving Dell additional advantages over indirect PC vendors who must try to forecast demand andship products based on those forecasts. Dell’s direct sales and build-to-order model has achievedsuperior performance in the PC industry in terms of inventory turnover, reduced overhead, cashconversion, and return on investment (Kraemer, et al., 2000).

Dell’s business model is simple in concept, but very complex in execution. Building PCs toorder means that Dell must have parts and components on hand to build a wide array of possibleconfigurations with little advance notice. In order to fill orders quickly, Dell must have excellentmanufacturing and logistics capabilities supported by information systems that enable it tosubstitute information for inventory.

The demands of Dell’s model have led it to adopt a new organizational structure referred to as avirtual company or value web (Figure 1). It is marked by a focus on a few key strategicactivities, and extensive outsourcing of non-strategic activities. Dell works closely with externalpartners to produce its PC products and to offer its customers an array of additional products andservices that add value and allow Dell to capture a larger share of the customer’s IT spending.

To manufacture its products, Dell coordinates a global production network that spans theAmericas, Europe and Asia, combining in-house final assembly with heavy reliance on outsidesuppliers and contract manufacturers. Manufacturing of printed circuit board assemblies(PCBAs), subassemblies (box builds), and some final products (mainly notebook PCs) is handledby contract manufacturers or original design manufacturers such as SCI, Solectron, Celestica,Hon Hai, Quanta and Arima. Like other PC makers, Dell relies on outside suppliers forcomponents and peripherals such as disk drives, CD-ROM drives, semiconductors, add-on cards,monitors, keyboards, mice and speakers. Its PCs can be bundled with standard software such asMicrosoft Office or with specialized software requested by corporate customers.

Dell relies on outside partners for services such as system integration, installation, on-site repairsand consulting. Partners include Wang, Unisys, IBM and BancTec. It also works with resellerswho support Dell hardware and receive referral fees for recommending Dell to customers.

3FIGURE 1. Dell’s Value Web ModelDell Custome rSystemintegratorsLogisticscompaniesCMs/OEMsComponentsuppliersThird partyHW and SWsuppliers DistributorsRepair andsupportcompaniesPhysical flows, including products and servicesInformation flowsAs Dell has moved beyond its home market in the U.S., it has had to adapt its business activitiesand organizational structure to the different markets in which it operates. In effect, Dell has hadto create similar but distinct value webs in each of the major regions, and to further customize itsmarketing and service functions for individual countries. The process of globalization hasshaped Dell’s own structure, but Dell’s success has conversely helped to reshape the globalstructure of the PC industry.

This paper looks at how Dell organizes its activities globally, regionally and within regions, andwhat factors determine its location decisions. The focus is on the PC manufacturing value chainincluding procurement, manufacturing, distribution and the logistics involved throughout thevalue chain. This includes Dell’s own assembly operations and the location of its suppliers inresponse to Dell’s decisions. We will also briefly discuss the organization and location ofmarketing, sales and service functions as they relate to Dell’s overall global organization.

GLOBAL ORGANIZATIONDell is a global company operating in 34 countries in three world regions, with about 35,000employees and $30 billion in sales. Dell is organized along geographic lines into the Americas,Asia-Pacific and Japan, and Europe/Middle East/Africa (EMEA). Corporate headquarters is inRound Rock, Texas, which is also the regional headquarters for Dell Americas. Each of theregions has its own regional headquarters and its own assembly plants and supply network.

Regional headquarters include Bracknell, U.K. for EMEA, Hong Kong for Asia-Pacific andKawasaki for Japan (Table 1).

4Dell’s business activities are organized in each region around different customer segments.

These vary somewhat, but generally include: (1) relationship (large corporate) customers; (2)home and small business (sometimes called transaction customers); and (3) public sector(government and educational) customers.

Product development is largely centralized in the U.S., and the same base products are soldworldwide. These products are customized for different regional and country markets withappropriate power supplies, keyboards, software and documentation. Other functions such as ITand e-commerce applications usually originate in the U.S., and then are adopted with necessarymodifications in the other regions. Manufacturing processes are always being upgraded, and thenewest plant is usually the most advanced wherever it is located. Improvements developed fornew plants are implemented in existing plants as much as possible.

Table 1Dell’s Worldwide Locations, With Employment and Sales, End of 2000Country City Employees Sales(FY2000)HQ ManufacturingWORLDWIDE 40,000 $25.3BTHE AMERICAS 27,200 $17.9BUnited StatesRound Rock and Austin TX 20,800 World and Americas YesNashville, TN area 2712 YesBrazil Eldorado do Sul 200 YesCanada n.a.

Chile n.a.

MexicoASIA-PACIFIC 3,200 $1.8BHong Kong (PRC) 25 A/PAustralia n.a.

China 330Xiamen 200 YesIndia Bangalore n.a.

MalaysiaPenang 1600 YesNew Zealand n.a.

Singapore 130Taiwan n.a.

Japan Kawasaki 700 JapanSouth Korean.a.

EUROPE, MIDDLEEAST AND AFRICA9,000 $5.6BUnited KingdomBracknell 500 EMEAIreland Limerick 3,400 YesBray 600• Dell has subsidiaries in 16 other EMEA countries, not listed here.

• Source: Dell web site and various news reports5LOCATION OF MANUFACTURINGWhile Dell does not manufacture its own components or subassemblies, it does handle finalassembly for nearly all of its desktop PCs and servers. Notebook PCs are manufactured byTaiwanese manufacturers Quanta and Compal. In some cases the notebook PCs are shippedcomplete to the final customer. However, Dell is increasingly ordering base units from itssuppliers and doing final configuration of notebooks in order to offer more configuration optionsto customers.

Dell organizes manufacturing by region, operating one or more assembly plants to serve itsmajor markets. Plants in the Austin, Texas and Nashville, Tennessee areas serve North America;Eldorado do Sul, Brazil serves Brazil and South America; Penang, Malaysia serves the Asia-Pacific region; Xiamen, China serves China and Japan; and Limerick, Ireland serves Europe, theMiddle East and Africa (Table 1).

Dell began manufacturing its own brand of PCs in Round Rock, Texas in 1985. It subsequentlyexpanded to new production sites outside the United States as follows (from Dell’s web site):1990: Opens manufacturing plant in Ireland1996: Opens manufacturing plant in Malaysia1998: Opens manufacturing plant in China1999: Opens manufacturing plants in Tennessee and BrazilIn addition, Dell has greatly expanded its production capacity in the Austin/Round Rock areaover the years, and now operates four facilities there. These plants produce the full line of Dellhardware products. Until the Tennessee plant opened, they supplied the entire North Americanmarket. Similarly, Dell has expanded its production capacity in Limerick, Ireland and nowoperates two plants there.

Employment worldwide is closely correlated with sales (Table 2). The Americas account for72% of Dell’s revenues and 68% of employment; EMEA has 20% of sales and 22% ofemployment; Asia-Pacific equals 8% of sales and 10% of employment. The only slight surpriseis the lack of bias toward the home country, even with the presence of corporate functions inTexas. An explanation could be that the large size and homogeneity of the U.S. market allowDell to achieve economies of scale in its production sites, call centers and other operations, andthus have a higher revenue per employee than other markets.11 We heard this explanation several times in interviews with Dell people in the EMEA region. They pointed out thatDell EMEA deals with 13 different languages, 18 different currencies, and 18 different tax rates whereas Dell NorthAmerica deals has only 3 different languages, currencies, and tax rates.

6TABLE 2Sales and Employment by Region (End of 2001)Americas EMEA Asia-PacificSales (last 4 quarters) $22.2B $6.6B $3B% of total sales 70 21 9Employment 21,600 8,250 4550% of total employment 63 24 13Revenue/employee $1,027,000 $800,000 $659,000Source: Dell web siteDELL’S LOCATION DECISIONSDell’s decisions about where to locate are driven by the need to minimize costs while extendingthe build-to-order, direct sales model around the world. Given the need to have production andsupport capabilities in the major markets, Dell selects specific locations based on a combinationof factors including labor costs, transportation and information infrastructure, market access,proximity to markets and government incentives. The role of these factors can be seen bylooking at particular locations of Dell facilities.

The AmericasTexasDell’s original headquarters was in Austin, Texas, where Michael Dell founded the company in1984. In 1994, Dell was offered a package of incentives from the neighboring city of RoundRock that Austin did not even try to meet. After collecting the usual 2% tax on Dell sales, thecity rebates 31% of those tax collections to Dell for 60 years; property tax abatement of 100%for 5 years; 75% for 5 years; 50% for 50 years (Schnurman, 2000). Dell moved its headquartersto Round Rock, built other facilities there, and eventually had over 12,000 workers in the formerbedroom community.

Dell maintains manufacturing facilities in Austin, including its high-volume Metric 12 plant thatassembles an estimated 4 million PCs per year. Overall, Dell has about half of its 36,000employees in central Texas, owing to incentives, a relatively low-cost workforce (compared toother U.S. locations), and a tendency to expand existing capacity rather than look elsewhere asthe company grew.

TennesseeDell opened its first North American manufacturing facility outside of Texas in 1999, inNashville, Tennessee. Nashville was chosen for very generous state and local tax incentives,good transport infrastructure, good labor supply and location central to East Coast markets.

Tax and other incentives from the state of Tennessee included:Infrastructure assistance (road improvements and utilities to service the facility totaling about$12 million7Job training assistance for Dell employees, which could range from $12 million to $20million over five years based on the employment projects of the companyJobs tax credits of $2,000 per employeeThe local Nashville government offered even more lucrative incentives, including:The gift of 100 acres of airport-area property valued at $6.5 million, and the leasing ofanother 600 acres for 40 years at fair marketAbatement of all property taxes on the facilities for 40 years$8 million in infrastructure improvements (beyond the state’s $12 million), and $1.5 milliontoward demolition of old buildings on the site (Locker, 1999)Dell now has two manufacturing facilities in Tennessee: one in Lebanon making consumerdesktop PCs and one in Nashville making consumer notebook PCs. It also has a sales andsupport call center in Nashville.

BrazilIn 1999, Dell began manufacturing at a facility in Eldorado do Sul, Brazil. The decision wasmotivated by the need for production to supply the South American market. Locating in Brazilenabled Dell to avoid tariffs that can nearly double the price of an imported $1,000 PC,according to Dell. Our own research (Dedrick et al., 2001) shows that tariffs on PCs can reachabout 30% of the price, so perhaps Dell is also including transportation or other costs into thisestimate. In any case, Brazil is by far the largest market in South America, and it would beimpossible to compete there with such a price disadvantage. Also, PCs produced in Brazil canbe exported without tariff to other Mercosur countries, which include Argentina, Uruguay andParaguay.

The specific choice of Rio Grande do Sul state was somewhat surprising, as most of Brazil’scomputer industry and supplier base is located near Sao Paulo. However, there were reportedlyfinancial concessions offered by the state government, and the southern state is centrally locatedto supply the other Mercosur countries. Michael Dell said in a statement that the region is a”phenomenal opportunity” for Dell. “Rio Grande do Sul is an excellent base of operationsbecause of its sophisticated labor force, its economic incentives to attract technologymanufacturingcompanies to the region and its strategic location as an export hub to other SouthAmerican countries,” (Mahoney, 1999).

Europe/Middle East/Africa (EMEA)Dell’s EMEA headquarters are in Bracknell, United Kingdom. It also operates a sales andsupport call center there for consumer and small business (transaction) customers in Europe.

Dell opened an assembly plant in Limerick, Ireland in 1990 to serve the European market, andsubsequently opened a second plant and administrative center there as well. It also operates asales and customer support center in Bray, Ireland to support larger corporate and otherinstitutional (relationship) customers. Dell located in Limerick initially because of the low costand high quality of labor. Today labor costs are much higher, but the work force is still highly8skilled and non-union. Dell has received good cooperation from technical schools anduniversities in the area to develop the skills Dell needs. Now 50% of the people working forDell in Limerick have at least a bachelor’s degree.

Another advantage of Ireland is its low corporate tax rates. In addition, Ireland is part of theEuropean Community, so products made in Ireland can be shipped to Europe without paying thevalue-added tax. Also, because Ireland is now adopting the Euro, Ireland will have currencystability with the rest of Europe, eliminating the exchange rate risk within Europe. This is amajor factor in Dell’s decisions to expand production in Limerick (Loughran, 2000).

Another factor was the tax incentives and other support offered by the Irish DevelopmentAgency. The agency helped Dell find land, set up its facilities, and assisted with job training.

More recently support has been provided in the form of per capita grants for each Dell employee(Kennedy, 2000a). Finally, Ireland is attractive due to the presence of suppliers such as Intel andMicrosoft, the presence of contract manufacturers such as SCI, and the quality of its freight andtransportation infrastructure (Kiely, 2000).

In addition to Ireland and the U.K., Dell operates subsidiaries in 16 other countries aroundEMEA, mostly for sales and local technical support. It also operates five logistics hubs wherePC units are brought together with monitors, peripherals and other add-ons for distribution to endcustomers. Furthermore, these hubs also provide repair services.

Asia-PacificDell opened its first manufacturing center in the Asia-Pacific region in 1996 in Penang Malaysia.

Malaysia was chosen for its central location in the region, proximity to suppliers, reasonablewage rates and attractive incentives. When Dell built its factory in Penang, it received a five-yeartax holiday. High-tech companies investing in Malaysia are entitled to five years without havingto pay the country’s 30% corporate income tax. Projects that the government thinks will have asignificant impact on the economy can qualify for strategic-project status, which provides for a10-year tax exemption, so Dell began working to get a better deal according to Phil Kelly, Dell’spresident for Asia-Pacific operations at the time (Arnold, 1997). Evidently, Dell got what it waslooking for. In 2000, the company announced it would more than double its capacity in Penangby opening a new facility that will produce notebook PCs for the Asia-Pacific and U.S. markets.

In 1998, Dell opened a new manufacturing facility in Xiamen, China. The plant is directlyacross the straits from Taiwan, and is home to a number of Taiwanese computer and componentsmakers. This provided Dell with a base of suppliers and other support services. Having a plantin China was necessary to sell in the main land China market. With China’s tariffs and taxes,importing is not a viable strategy, and if Dell hopes to sell to government agencies and stateenterprises, it needs to have production in China. In 2001, Dell announced it would beginproducing desktop PCs for the Japanese market in Xiamen, shifting production from Penang.

General Location FactorsLooking across the regions and sites, the following are the major factors affecting Dell locationdecisions. As was suggested by each of the vignettes above, no one of these factors is sufficient9by itself to determine a location decision. Rather they seem to operate in a nested hierarchy withmarket considerations first, followed by labor and infrastructure, and then by governmentincentives.

Market access: Texas is central to all of the U.S; Tennessee to the East Coast. Malaysia iscentral to the huge Asia-Pacific region. Ireland is offshore but close to the big markets of theUK, Germany, and France. Also, as part of the European Union (EU), Ireland providestariff-free access to EU markets. Brazil and China plants are set up for market access and toget around tariffs and taxes that would make PC prices uncompetitive if imported.

Labor costs and quality: Texas and Tennessee are cheaper than Silicon Valley. Malaysia ischeaper than Singapore (although more expensive than Thailand or Indonesia). Ireland isstill cheaper than most other EU countries (although more expensive than Portugal orGreece). Eastern Europe is cheaper than Ireland and more centrally located within Europeand, as a result, many of Dell’s contract manufacturers and suppliers are locating there andcreating speculation that Dell will follow (Kennedy, 2000b). The quality of labor is high ineach of these locations as well. Besides having well-educated workers, engineers andtechnicians, each location has little or no labor union activity.

Transportation and telecommunications infrastructure: Logistics is a bigger cost thanmanufacturing labor according to Michael Dell, so transport infrastructure is very important.

The Tennessee locations, for instance, are in close proximity to major highways and to amajor Federal Express distribution center. Telecommunications bandwidth, cost, and qualityare also factors, especially for call centers and data centers.

Government incentives: Major incentives were offered by Round Rock to get headquartersand call center operations. Dell also received valuable incentives in Tennessee. Apparentlyfinancial incentives were offered in Brazil by the state government, and also in Malaysia inthe form of tax holidays. It is unclear what was offered in Xiamen, China, but it is commonfor local governments to offer incentives in China. Ireland’s low corporate tax rate was amajor incentive, but Dell also received support in finding land, building facilities and trainingemployees; today it received per capita grants for each employee.

Industry clusters: Dell generally avoids existing industry clusters, preferring to locateproduction where labor markets are not as tight. For instance, it avoided industry clusters inSao Paulo (Brazil) and Shenzhen (China). Its locations in Penang and Ireland were decidedbefore those locations had developed into IT industry clusters. Most of Dell’s operations donot rely on access to research universities and high concentrations of specialized engineeringtalent, so it can avoid the higher costs associated with such locations. It also does not need tobe very close to suppliers’ manufacturing facilities; rather it requires that suppliers simplyship to supply hubs close to Dell’s assembly plants.

SOURCINGUnlike other PC makers, Dell has avoided outsourcing final assembly of its products. Itoutsources subassemblies, such as motherboards and bare-bones PCs, and outsources nearlycomplete assembly of notebook PCs, doing only limited final configuration in its own assemblyplants. Also, in 2001, Dell outsourced production of a standard, non-configurable PC called theSmartStep to Taiwan’s Mitac, which is manufacturing the product in its plants in China(Commercial Times, 2001). But in general, Dell prefers to keep control over the key final10assembly and configuration processes for the bulk of its products. One reason is a concern thatby outsourcing its manufacturing completely, Dell might be creating its own competitors, as U.S.

television makers did when they outsourced to Japanese suppliers. Also, unlike some of itsmajor competitors (IBM, HP, Compaq), Dell’s main business is PCs, and it feels it cannot affordto give up its capabilities in PC production (Louise O’Brien, 2001).

A network of suppliers and contract manufacturers supports each production facility. Sourcingdecisions are made by worldwide procurement and product development in Austin with inputfrom the regions. Most sourcing is global, which means that Dell sources major components forall locations from their headquarters. This allows Dell to consolidate its buying power and getbetter terms from suppliers.

While sourcing of materials for PCs (major components and systems) is done centrally, sourcingof consumables is local (box and shipping material, printing of keyboards, printing of manuals,etc.). The majority of sourcing is from low cost suppliers in Asia, but some sourcing is fromlocal producers. For example, monitors for the EMEA region are purchased from Sony,Samsung and Acer, and shipped by sea from Asia, but monitors are also purchased locally fromPhillips and Nokia. This might be due to product specifications, need for backup supply or price.

For major components, Dell looks for suppliers with global capabilities such as Intel, SCI, IBM,Samsung, Toshiba, Sony and Seagate. For each major component, it usually works with only afew suppliers, e.g., with Seagate, Maxtor, Western Digital and IBM for disk drives. Localsuppliers in each region provide other parts.

Suppliers are required to maintain inventory near or in Dell plants to support Dell’s build-toorderproduction. They can produce elsewhere and ship to supply hubs, or they can set upproduction nearby. For EMEA and the Americas, Asian suppliers increasingly do both. In someplants, components are actually kept in trucks backed up to shipping docks, and are pulled off asneeded. Suppliers are required to maintain ownership of that inventory until it is actually pulledoff the truck and onto the assembly line (Intel is the exception; its market power allows it to setits own terms, which require PC makers to take ownership as soon as the product leaves Intel’sfacilities).

Impacts of Dell’s Location on Supplier/Partner LocationWith so many different suppliers and partners involved, the location decisions of thesecompanies naturally vary by company and location. Many parts and components aremanufactured in Asia and shipped to distribution centers near Dell facilities. This is usually thecase for hard disk drives, floppy drives, power supplies, CD-ROM drives, cables and connectors,and many add-on cards such as modems, sound cards and video cards. On the other hand, alarger share of motherboard production is located regionally. For instance, Solectron and SCIsupply Dell’s U.S. plants from their plants in Guadalajara, Mexico, and from plants in the U.S.

In Europe, Dell’s Ireland plants are supplied from Asia and from local plants. Many of Dell’ssuppliers came to Ireland at Dell’s insistence. After opening the first Limerick plant, Dell gave11Irish suppliers eight months to show they could meet Dell’s demands. When local supplierscould not do so, Dell brought in outside suppliers (Kennedy, 2000a). The outsiders bought someIrish companies, consolidated others, and took over much of the supply industry. The companiesthat came in were global companies that were already serving the PC industry. They included,for example: Fullerton — a Scottish company from Glenrothes that does work for Dell and forIBM in Raleigh, NC; Lightening Beech — a U.S. company that supplies sheet metal; Trend Tec–a company that does metal and plastics in the U.S. and serves Dell and Compaq; and APW,which bought two Irish companies and does chassis, plastics, and metal. In addition, contractmanufacturers already in the UK or Ireland supply Dell: Jabil supplies Dell with PCBAs fromScotland, SMS from Wales, and SCI from Fermoy, Ireland (Kennedy, 2000a). One Irishsupplier, Keytech, did make the grade. Keytech is located in Shannon near Dell’s Limerickplants, and made cases, chassis and subassemblies (Kennedy, 2000a,b).2For the Ireland plant, the breakdown of supplies by region is as follows:Asia 65%Europe 25%US 10%For some specific components and peripherals, the locations are as follows:Monitors Europe and Asia (Phillips, Nokia, Samsung, Sony, Acer)PCBs Asia, Scotland, and Eastern Europe (SCI, Celestica)Drives Asia, mainly Singapore (Seagate, Maxtor, Western Digital)Printers Europe (Barcelona)Box builds Asia and Eastern Europe (Hon Hai/Foxteq)Chassis Asia and Ireland (Hon Hai/Foxteq)SCI (now owned by Sanmina) makes 90% of the motherboards used by Dell in Cork. However,a new deal with Hon Hai to supply motherboards globally may change that. Three differentsuppliers provide the chassis. The suppliers’ truck, located on the inbound side of the plant, isthe local warehouse, and the suppliers’ people deliver chassis to the production cells as needed.

Overall, not much actual manufacturing is located very close to Dell’s plants, except inMalaysia, and much of that was already there. But more components are produced regionally assuppliers and CMs organize their own production regionally. For instance, PCB assembly andbox builds are done in Mexico and Europe as well as in Asia to supply much of Dell’s demand inthe U.S. and EMEA. It is hard to attribute any of this to Dell alone, as Compaq, Apple andGateway are all in either Ireland or Scotland and in either Malaysia or Singapore, so CMs cansupply multiple PC customers from one location. Dell’s BTO model clearly does not requirehigher value components to move closer, nor do very low value components such as powersupplies and keyboards need to move closer. It’s the mid-level components such as box builds,motherboards and other PCB assemblies that seem to be moving closer to Dell’s assemblyplants. This is particularly the case for large, bulky items such as box builds (nearly completesystems) that would be expensive to ship by air to meet volatility in demand, and at the same2 While Key Tech was successful in surviving the initial shakeout, it is no longer a supplier to Dell. Key Techindicated that it stopped bidding on Dell procurements because Dell kept driving down prices. Key Tech hasfocused on building higher value-added storage products that better fit its cost structure.

12time are too expensive to risk holding in inventory. Although light in weight, motherboards tendto be assembled locally because the build-to-order model does not allow sufficient time for themto be assembled in Asia and then shipped. However, baseboards for PCB assemblies aremanufactured in Asia and shipped in by air.

DELL’S OTHER OPERATIONSDell’s other operations tend to follow the location of its production facilities, but they do notfollow in a simple pattern, as each operation seems to have its own organizational logic andlocation considerations. This is illustrated by looking at a few of Dell’s other operations:logistics, call centers, marketing and sales and data centers.

LogisticsDell’s organization of logistics in EMEA provides a good illustration of the general logic forlogistics. All of Dell’s inbound logistics for material needed in assembly of PCs are handled bysuppliers who must have supply hubs or production facilities located within 30-minutes’ traveltime of the Limerick plants. Third parties operate some hubs for a number of suppliers.

On the outbound side, Dell has five distribution hubs in EMEA to take advantage of locationclose to major markets, transportation networks and logistics expertise. These distribution hubsare as follows in EMEA:Limerick for Ireland, Eastern Europe, Middle East and Africa (except South Africa);Liverpool for UK;Tillberg, Netherlands for middle Europe;Gottenberg, Sweden for Nordic countries; andJohannesburg for South AfricaA different logistics partner operates each hub. Similar outbound staging areas and arrangementswith logistics partners exist in the Americas and Asia-Pacific.

Call CentersDell makes extensive use of call centers, both for sales and for technical support. Dell generallyorganizes its call centers around its major customer segments with different call centers forrelationship and transaction customers. It tends to locate call centers regionally to optimizetelecommunications and language considerations, but customers may at different times be routedto call centers in different locations. Regional call centers are located as shown below. TheEMEA call centers illustrate the complexity within any one region.

U.S.: Round Rock and Nashville. A new call center is planned in Fort Worth, Texas.

EMEA: Limerick, Ireland; Bracknell and Bray, U.K. Relationship customers are handledthrough Bracknell, whereas HSB customers are handled through regional centers inMontpelier, France for France, Spain, Italy and the southern countries; Amsterdam for themiddle and central countries; Copenhagen for the Nordic countries; and Bray, Ireland for theUK, Ireland and other English speaking countries. The Limerick call center specializes in13higher-level technical issues, and also operates as a backup call center whentelecommunication problems occur or call volume is exceptionally high.

Asia-Pacific: Bangalore, India.

Marketing, Sales and SupportDell’s marketing function is directed from global and regional headquarters with specialmessages targeted for the different country markets. However, the sales, service and supportfunctions are located in the individual countries because these activities must be close to endcustomers. To compete for large contracts from corporate and public sector customers, Dell’sdirect sales force must be on the ground in each country in order to be aware of salesopportunities, interact with procurement personnel and negotiate through the competitive biddingprocess. Moreover, since many Dell contracts are large and Dell hopes to expand its businesswith every customer, the account executives assigned to each large customer must be within easyreach. Similarly, although telephone technical support is centralized in regional call centers,field service and support require location close to the customer. As a result, Dell has sales andservice offices in 34 countries around the world, usually in a large urban area and with multipleoffices in some countries.

IT and Data CentersA network of data centers supports Dell’s sales, manufacturing, logistics and other operations.

The data centers are regionalized and have their own development as well as operations staffs.

Global applications such as online sales tools, order management, and supply chain managementgenerally are developed or first implemented in Austin. The regional data centers are thenresponsible for transferring these applications and adapting them to the local markets. Datacenters are as follows:Americas IT and data center is in Austin/Round RockThe EMEA data center, located in Bracknell, England, is the Internet hub for Europe,including intranets, extranets and Internet. It was located there despite the fact that Limerickis Dell’s production hub because Ireland did not have adequate telecommunications facilitiesfor these functions whereas England did. There are also major data centers in Limerickserving the two production facilities and an administrative center, which includes finance,administration, tech support, customer service, and Dell online.

Asia-Pacific data center and IT operations are in Singapore, which has the besttelecommunications infrastructure in the region.

Dell’s Service PartnersRather than do everything itself, Dell has made extensive use of business partners to help serveits customers, especially as it has moved into producing servers and targeting the small andmedium business market. Three functions – systems integration, service and repair, andconsulting – all have to be located very close to the customer, as they involve direct contact withthe customer. Dell partners with companies that can deliver these services globally – or at leastregionally.

14System integration: Dell partners for procurements with integrators like Electronic DataSystems (EDS) who will install Dell servers and link them up with end user devices.

Service and repair: Dell also partners with firms like IBM, Unisys, Wang and Banctec forfield service and repair. While 90% of service incidents are handled by telephone in Dell’scall centers, about 10% involve field calls, which Dell has outsourced to these partners.

Their field service units are tied to Dell electronically, and get the orders for field servicewithin an hour or two of a call coming in to Dell.

Consulting: Dell partners with Arthur Andersen and Gen 3 in the U.S. to provide consultingservices to companies that seek to emulate Dell’s success with the direct model and InternetbasedIT.

Reaction to Market Slowdown in 2001Like all PC makers, Dell’s sales were affected by the decline in PC demand that started in late2000 and continued throughout 2001. Dell was the only PC maker to show any growth in salesin 2001, as it made major gains in market share, but it still saw much slower growth than the 30-50% annual gains it was used to. It also saw its margins reduced by the price war that itlaunched to gain market share.

In order to cut costs, Dell laid off about 5,000 workers, mostly in the Austin, Texas area. Theseincluded cuts in headquarters staff and some other functions. Smaller cuts of a few hundredemployees were made in Tennessee. About 600 workers were laid off in Europe. Theconcentration of layoffs in the U.S. appears to be due to the focus on cutting corporate staff morethan a shift of production or other activities away from the U.S.

CONCLUSIONSAlthough Dell only entered the PC business in 1985, it has become a global company with globalproduction networks spanning the three major world regions: Americas, EMEA and Asia-Pacific. These networks, which are complex and multi-level, are able to take advantage ofcapabilities that serve the entire PC industry. In many cases, the capabilities were first createdby with the introduction of the IBM PC when IBM sourced parts and components globally inorder to break into the PC market fast (Dedrick and Kraemer, 1998). The networks weresubsequently expanded and enriched by both traditional computer makers such as IBM, Hewlett-Packard and DEC, and by newer PC companies such as Compaq, Gateway and Acer.

Broadly speaking, market potential is the driving force behind Dell’s general location decisions,while costs and capabilities are the driving forces behind the specific location of Dell’s activities.

In other words, Dell targets markets that appear receptive to its business model. To serve thosemarkets, Dell sources from locations that have the production capabilities and cost structure itneeds to be competitive in the targeted markets.

The markets in which Dell operates vary by global region and by countries within these regions,and so Dell has organized its operations by region and by country. Headquarters offices,assembly production and call centers are centralized within each region (although not all in thesame country), whereas sales, service and support are decentralized to individual countries.

15Supply/logistics hubs are organized by sub-regions covering several countries. The choice ofspecific sites for production within a region is discussed below.

Dell’s location decisions are not based upon any single factor, but rather upon an array of factors.

The best way to understand how these factors come into play is to view them as multi-tiered.

The first tier involves market considerations. These include the character and potential growthof prospective markets and country requirements for market access. For example, when Dellwent into Europe, it went into the English speaking markets of Ireland, UK, and Sweden, whichwere similar to the U.S. in language and business culture, before venturing into the large Germanand French speaking markets. Likewise in Asia-Pacific, Dell concentrated on English-speakingmarkets such as Australia, Singapore and Malaysia first, followed by Japan, the second largestPC market in the world. Having built a regional infrastructure, it later entered China to gainaccess to its rapidly growing and potentially very large market.

Once a decision has been made to enter a market, then second tier considerations of labor andinfrastructure come into play when deciding where to locate production activities. These areused to narrow location choices to several countries. The primary consideration with regard tolabor is cost or wages, but skill levels, quality and availability also enter into decisions.

Theoretically, the ultimate factor should be cost relative to productivity, and it appears that this isthe case, as Dell has located facilities in places with a combination of low (but not the absolutelowest) cost and high quality workers. Infrastructure considerations include transportation,logistics expertise and telecommunications quality and cost.

At the third tier, factors such as government incentives come into play and affect the choice ofone country, state, or even city, over another. Such incentives usually include land, facilities,export processing flexibility, and/or employee per capita grants.

Dell has a major impact on its supplier location decisions in three ways. First, Dell requires thatsuppliers locate material within a specified delivery time from its assembly plants. Asiansuppliers (and U.S. suppliers producing in Asia, such as disk drive makers) maintain supply hubsnear Dell assembly plants worldwide, where material is pulled as it is needed for production.

Second, Dell requires that its suppliers continually reduce the price they are charging Dell; inexchange it agrees to reward these suppliers with larger orders and longer-term contracts. Thisrequirement causes suppliers to continually seek lower wage production sites in order to meetprice pressure from Dell (and other PC makers as well). Third, Dell requires that suppliers haveadequate inventory to supply the needs of its direct, build-to-order production model. Demand ishighly volatile, and consequently suppliers cannot meet Dell’s fluctuating demand totally fromAsia. Material must be produced regionally, so suppliers and contract manufacturers must alsoorganize regionally. Thus, within the EMEA region, some Asian suppliers have built localmanufacturing capability, initially close to production hubs in Ireland, Scotland and Wales butincreasingly in lower cost sites in Eastern Europe.

Both the American CMs and Asian suppliers are moving to lower cost production sites: EasternEurope for EMEA, Mexico for the Americas, and China for the Asia-Pacific region. It is saidthat they are often moving at the insistence of the computer makers. It is unclear whether Dellwill follow its suppliers to low cost production sites or outsource final assembly to its contract16manufacturers. Dell has already gone to China, mainly for market access, but is now producinga line of non-configurable PCs in China for sale in other markets (including the U.S.).

Dell makes extensive use of outsourcing, but claims it will never outsource the final assembly ofconfigure-to-order products. Dell insiders argue that execution of the build-to-order model isstrategic to the company; therefore, final assembly/configuration for different markets andcustomers will not be outsourced. “Dell doesn’t want to pass on the secrets of the direct modelto subcontractors. Dell is bringing in more of the box with more stuff in it from suppliers, butkeeps control of the complex and proprietary parts of the process. Dell’s model is very good andvery unique in the industry. The focus is on execution. There will always be boxes needed inthe market. Dell doesn’t have to move away from making boxes. It simply needs to keepfocused on quality, price, and delivery” (Corkery, 2000). They further argue that Dell plants aremajor showcases that help sell large corporate customers on Dell as their supplier (Freake, 2000).

They leave open the question of whether they will eventually move to lower cost sites for finalassembly.

In summary, the organization of Dell’s production network is changing. Whereas the networkwas previously located mainly in Asia, today it is increasingly being regionalized in order tobetter target markets with the direct model and to respond to rapid changes in markets. Theseregional production networks involve a combination of Asian suppliers and U.S. contractmanufacturers. Regional suppliers are also playing a role. Sales and employment across worldregions are generally in line with one another, with the Americas showing somewhat greaterproductivity. More than two-thirds of Dell’s employees are in the Americas, and mainly theUnited States, where Dell continues to expand its operations through new plants and call centers.

Dell maintains control over its value network by a new model of organization–the virtualorganization–wherein Dell’s ownership of the customer relationship gives it the power andleverage to coordinate the entire network.

REFERENCESArnold, Wayne. 1997. Two major PC firms stand to save big in Malaysia. The Asian Wall StreetJournal, 21 January: 6Corkery, Sean. 2000. Interview with Sean Corkery, General Manager, EMF3, Limerick Ireland,November.

Commercial Times. Taiwan’s Mitac Wins Desktop PC Orders from Dell. October 31.

Dedrick, Jason and Kraemer, Kenneth L. 1998. Asia’s Computer Challenge: Threat orOpportunity for the United States and the World? New York: Oxford University Press.

Dedrick, Jason, Kraemer, Kenneth L, Palacios, Juan J, Tigre, Paulo Bastos. 2001. Economicliberalization and the computer industry: Comparing outcomes in Brazil and Mexico.

World Development, 29(7):1199-1214.

Freake, Reginald. 2000. Interviews with Reginald Freake, Industry Relations, Dell Computer.

Limerick, November.

Kennedy, Tom. 2000a. Interview with Tom Kennedy, Enterprise Ireland, October.

Kennedy, Tom. 2000b. Interview with Tom Kennedy, Enterprise Ireland, November.

Kiely, Stephen. 2000. Interview with Stephen Kiely, Dell Computer Ireland. December.

17Kraemer, Kenneth L., Dedrick, Jason and Yamashiro, Sandra. 2000. Dell Computer: Refiningand extending the business model with IT. The Information Society, 16(1):5-21.

Locker, Richard. 1999. Nashville wins Dell Computer with hefty incentives, thousands of jobspromised. The Commercial Appeal, 7 May: A1.

Loughran, Declan. 2000. Interview with Declan Loughran, Manager, Logistics IT Development,Dell Computer, Limerick, Ireland, October.

Mahoney, Jerry. 1999. Dell Computer to open factory in Brazil today, KRTBN Knight-RidderTribune Business News: Austin American-Statesman – Texas, 3 November.

O’Brien, Louise. 2001. Interview with Louise O’Brien, Dell Computer, April.

Greenwich School of ManagementExecutive MBAModule: Accounting and Financing For ManagersTutor:“A Report Evaluating Financial Information Pertaining to West Kent NHS Health & Social Care Trust’s 2004/5 Accounts”Student Name: Graham BlackmanStudent No: HSK008PESubmission date: 9th March 2006Word Count: 4,83962%ContentsPage No.

1.Introduction32.Background Information on Trust and Author33.Purpose of Accounting Standards44.Statement of the Chief Executives and Directors65.Statement of Internal Control 86.Independent Auditors report97.Income and Expenditure Account 78.The Balance Sheet 169.Cash Flow Statement2110.Who Will Be Reading the Accounts?25AppendicesA.Pro Forma Statement on Internal Control27B.Notes 3 and 4, Income from Activities29C.Note 5.1, Operating Expenses 30D.Notes 8 and 9, Disposal of Fixed Assets & Interest Payable 31E.Note 10, Intangible Fixed Assets32F.Note 11.1, Tangible Fixed Assets33G.Notes 12 & 13, Current Assets34H.Note 15, Creditors35I.Note 22, Public Capital Dividend36J.Note 17, Reserves37K.Note 18.1, Operating Activities Cash Supplies38Tables1.Income and Expenditure Statement122.Balance Sheet173.Cash Flow Statement22Boxes1.Deprecation Rates For Tangible Assets12References391.IntroductionThe following report is an evaluation of financial information produced at the end of the 2004/5 financial year for West Kent NHS and Social Care Trust. The author shall initially give brief background information on himself and his organisation followed by an overview of the purpose of accounts and the bodies and panels affecting accounting. A review of the information submitted in the reports by the chief executive and directors, together with a review of the statement of internal control and the independent auditors report will then be presented. After which the report will discuss the three main areas of the accounts. Firstly the income and expenditure accounts, secondly, the balance sheet for the organisation, and thirdly, the cash flow statement, analysing each element in turn. Finally the author will then discuss 3 stakeholders who may wish to gain information from the accounts.

2.Background2.1I currently practice as a ward manager within an Assessment and Intervention Service for individuals who have a learning disability and a concomitant mental health or forensic need.

2.2The service is part of West Kent NHS Health and Social Care Trust, (West Kent), which is an integrated health and social care trust that specialises in the provision of mental health services to the people of West Kent. The Trust operates through four clinical areas and from approximately 150 sites.

3.Purpose of Accounting Standards3.1Inconsistency between company accounts prompted the accountancy profession to introduce standardised procedures known as Accounting Standards (Black 2002). Today, Accounting Standards are known as Financial Reporting Standards or (FRSs). Standards issued by previous bodies were known as Statements of Standard Accounting Practice or (SSAPs). These are still in use and are in constant review by the Accounting Standards Board (ASB), some have been withdrawn and others superseded by FRSs.

3.2According to (Black 2002) it is a legal requirement that the financial reports provide a ‘true and fair view’ of the transactions made by the company during the course of a year. Accounting Standards outline the specific procedures required to produce consistent and functional reports. Their purpose is also to improve the quality and the usefulness of the financial statements. The following bodies were set up in response to the Dearing Report (Blake 1987) and replace the original Accounting Standards Committee (ASC).

3.3The Financial Reporting Council (FRC),The FRC provides a general policy function and oversees the accounting standard setting, giving guidance and support to the Accounting Standards Board in developing financial information in the correct manner and advising on broad policy issues. The FRC has two operational bodies-the Accounting Standards Board (ASB) and the Financial Reporting Review Panel (FRRP).

3.4The Accounting Standards Board (ASB), From its outset in 1990, the ASB has been responsible for issuing accounting standards, recognised under the Companies Act 1985. The aims of the ASB are to provide a lawful framework for financial accounts through the setting of standards, the focus being to work on the concept of principles rather than detailed rules. The ASB have developed a “Statement of Principals for Financial Reporting” in order to define specific and consistent accounting standards.

3.5The Financial Reporting Review Panel (FRRP), The FRRP is an independent body which investigates discrepancies or deviations from the accounting requirements of the Companies Act 1985, which requires the company to give an explanation of a deviation and the reason why. If a failure is identified, (Blake 1987), the panel try to come to an agreement to revise the documentation. This pertains only to large Companies, where the panel will ask the Company concerned to explain and give the reasons why. If the panel does not accept its explanation, (Black 2002) then it has the power to apply for a court order and the company must then issue amended reports which must then reflect a true and fair view. This is all at the personal expense of the director(s) of the company and could potentially be quite harmful.

3.6The Urgent Issues Task Force (UITF), a sub- committee of the ASB who bring issues to light that may not be covered by an Accounting Standard, eg. It may be a new issue or may not be relevant or applicable. Its role is also to identify where a contentious issue has arisen over an accounting standard. Its aim is to assist the ASB, (Black 2002) in the formulation and continuity of appropriate standards and correct reporting procedures. The ASB gives the UITF, (Black 2002) ultimate responsibility to reach an agreement on a particular issue and will generally not challenge the outcome.

3.7ASB Recognised Bodies, These are committees who work with specific industries and sectors, reviewing Statements of Recommended Practices (SORPs). SORPs are guidelines that are relevant to a particular industry and although are not accounting standards in their own right, they work on the basis of best practice.

3.8International Accounting Standards Committee (IASC), Set up in 1973 the IASC’s purpose was to give unanimity to Accounting procedures worldwide. There are 70 member countries. One problem that has been encountered is that due to differing economic systems, (Black 2002) there is no generally agreed framework in which to concur the objectives of financial reporting.

4.Statement of the Chief Executives and Directors Responsibilities4.1The Secretary of State has directed that the Chief Executive should be the Accountable Officer to the Trust. The relevant responsibilities of Accountable Officers, including their responsibility for the propriety and regularity of the public finances for which they are answerable, and for the keeping of proper records, are set out in the Accountable Officers’ Memorandum issued by the Department of Health (2003a).

4.2The National Health Service (NHS) Act of 1977 requires the Directors to prepare accounts for each financial year that gives a true and fair view of the state of affairs of the Trust and of the profit or loss for that period. In preparing those accounts, the Directors are required to:•select suitable accounting policies and apply them consistently;•make judgements and estimates that are reasonable and prudent;•state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; and•prepare the accounts on the going concern basis unless it is inappropriate to presume that the group will continue in business.

4.3The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Trust and to enable them to ensure that the accounts comply with the direction from the secretary of state as set put in the NHS Act 1977. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.

5.Statement of Internal Control5.1Accounting Officers are required to make an annual statement – the “Statement on Internal Control” (SIC) – this should be in accordance with the guidance given by the Department of Health (DoH) (2003, 2005) using the pro forma suggested by Her Majesties Treasury (2005) (see appendix A). The pro forma requires a high-level summary of the ways in which staff are trained to manage risk and of how risk has been identified, evaluated and controlled. It also requires a confirmation that the effectiveness of the system of internal control has been reviewed and that the results of the effectiveness review have been discussed by the Accounting Officer with the board, the Audit Committee (and the risk committee if one exists in the body) (DoH 2003). In addition, disclosure is required in relation to any “significant internal control issues”. West Kent in their statement on internal control set out the main areas in accordance with the above guidance which include;5.2Scope of responsibility, The Chief Executive (CE) of the trust identifies that he is personably responsible for maintaining a sound system of internal control5.3The purpose of the system of internal control, In the statement the CE discusses risk, and states that his purpose is to minimize but not eradicate risk. He goes on to state that these risks would be evaluated so they may be managed efficiently, effectively and economically.

5.4Capacity to handle risk, A very short statement stating that the CE has responsibility for risk management within the trust. Although he also mentions where information pertaining to guidance and local policy is available there is no statement regarding the trusts actual capacity to handle risk5.5The Risk and control framework, In this statement the CE discusses how risk is managed within this trust and identifies that there are several gaps within some clinical areas. He also highlights the fact that the trust have a counter fraud policy and counter fraud specialists employed within the organisation that seek out and investigate fraudulent activity5.6Review of effectiveness, Here the CE explains that the trust has improved the risk management structure, although does not mention if this has been effective. Indeed he mentions that further steps have been taken to address weaknesses, the CE does not give any information concerning the actual weaknesses or how they will be addressed. The trust has achieved level 1 of the clinical negligence scheme for trusts (CNST), although doesn’t mention that this is the lowest level.

6.Independent Auditors report6.1An auditor’s report states that the financial statements that were audited for a specific period of time are the responsibility of the company’s management. It will also state that the responsibility of the chartered accountant is to express an opinion on those financial statements based upon his or her audit (Dyson 2004)6.2Her Majesty’s revenues and Customs (no date) inform us that, an independent audit is conducted in accordance with generally accepted auditing standards (UKGAAP). Those standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation (Atrill & Mclaney, 2001)6.3The auditor must include a statement that he or she believes that the audit provides a reasonable basis for his opinion. If the audit cannot provide a reasonable basis for an unqualified opinion, the auditor must explain the reasons and qualify his or her opinion (Dyson 2004)6.4The Auditor does not comment on the effectiveness of the organisation’s corporate governance, risk management or internal control procedures (Davis & Pain, 2002).

6.5The independent auditors for the trust (PricewaterhouseCoopers) concluded that the financial statements gave a true and fair account to the state of affairs, it did remark on the fact they it could not comment on risk management within the trust and made reference to the 1998 audit commission act and the SIC (2003), issued by the Department of Health. It did not, however mention the updated 2005 SIC or the Auditing Practices Board (2006) International Standards on Auditing.

7.Income and Expenditure Account7.1An income and expenditure account is an official annual financial document published by a public company, or in this case West Kent, showing income (earnings), expenses, and retained surplus or deficit (net profit). Retained surplus or deficit is determined from this financial report by subtracting total expenses from total income (revenue). The Income (profit) and Expense (loss) statement and the balance sheet are the two major financial reports that every public company publishes (Dyson 2004). The difference between this statement and the balance sheet deals with the periods of time that each one represents. The income (profit) and expenditure (loss) statement shows transactions over a given period of time (usually quarterly or annually), whereas the balance sheet gives a snapshot of holdings on a specific date. (Davis and Pain 2002).

7.2West Kent’s Income and expenditure accounts have seven elements to then (see Table 1) 5 of which have notes. Although one could argue that NHS Trusts “sell” their services to Primary Care Trusts (PCT), and Strategic health Authorities (SHA) etc, the first line of the statement is still referred to as income from activities, as opposed to earnings.

INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED31 March 20052004/052003/04NOTE£000£000Income from activities3100,70290,563Other operating income47,5819,312Operating expenses5-7(104,379)(96,681)OPERATING SURPLUS (DEFICIT)3,9043,194Cost of fundamental reorganisation/restructuring00Profit (loss) on disposal of fixed assets85(20)SURPLUS (DEFICIT) BEFORE INTEREST3,9093,174Interest receivable 114109Interest payable9(13)(15)Other finance costs – unwinding of discount(111)0Other finance costs – change in discount rate on provisions00SURPLUS (DEFICIT) FOR THE FINANCIAL YEAR3,8993,268Public Dividend Capital dividends payable(3,871)(3,244)RETAINED SURPLUS (DEFICIT) FOR THE YEAR2824The notes on pages 6 to 42 form part of these accounts.All income and expenditure is derived from continuing operations.

Table 17.3Notes 3 and 4 (see appendix B) gives the reader an indication as to where income has been generated. Income from the PCT is by far the greater contribution with 2004/5 income exceeding the previous years by more than 10%.

7.4The Department of Health’s contribution has increased nearly 7 fold, possibly due to the agenda for change intiative.

7.5Within other operating income it should be noted the monies allocated for education training and research, £2,187,000. The only recorded expense identified with the accounts is £600,000 for training (see note 5, operating expenses, appendix C). There is no explanation to where or if the other, substantial, monies have been spent.

7.6Operating expense reflects the increase in income (approx. 10%) with the greater increase in staffing costs, again probably the cost of agenda for change. Staffing costs are considered a semi-variable cost which consists of both fixed and variable elements (Atrill & Mclaney 2001). One of the reasons for this is could be that, although the labour costs remain the same, occasionally staff may be get paid for doing overtime.

7.7There are two other types of costs that appear on the operating expenses. Fixed costs are costs that constantly remain the same. An example of a fixed cost is rent; even if the premise isn’t being used the rent would still have to be paid. West Kent identifies this as premises (see note 5.1 appendix C). Variable costs are costs that change depending on how much of the resource is being used. An example of this would be electricity bills, telephone bills as well as raw materials; each of these costs will change depending on the usage (Atrill & Mclaney 2001). West Kent entitles these supplies and services.

7.8Operating surplus or deficit is made up from the difference between the income (£100,702,000) and the operating expenses (104,379,000) namely £3,904,000.

7.9It interesting to see a zero value attached to the cost of fundamental reorganization/restructuring, should costs for agenda for change fit under this heading?7.10The profit or loss from the disposal of fixed or fixed tangible assets is noted next. These could be the sale of buildings (surplus), this is demonstrated in this years accounts. Or the early depreciation of a piece or machinery etc, which is indicated in last years accounts (see note 8 appendix D).

7.11The aforementioned items in 7.8 & 7.9 are then added to the operating surplus to achieve the surplus or deficit before interest.

7.12Before we achieve a balance for the financial year intereste is added/subtracted. Because West Kent had a surplus of £3,909,000 the interest receivable amounts to £114,000 in interest for the year 2004/5 a similar amount to the year before. The interest payable again is comparable to last year and is for the leasing of goods. It should be highlighted that the mount indicated in the notes (see note 9 appendix D) has been given in black and not bracketed I.E. indicating a surplus, but the amount indicated in the account statement is in red and bracketed I.E. rightfully a deficit. The accounts department within West Kent explained that this was because that this was “interest payable” only in note 9 so it may appear in black.

7.13A major difference between the 2004/5 accounts and the 2003/4 accounts is the unwinding discount payment. Unwinding discount refers to the future provision of pensions. This takes into consideration the net present value, which Langley & Harden (1994), Atrill & Mclaney (2001) & Davis & Pain (2002) describe as the future stream of benefits and costs converted into equivalent values today. This is done by assigning monetary values to benefits and costs, discounting future benefits and costs using an appropriate discount rate, and subtracting the sum total of discounted costs from the sum total of discounted benefits. In other words West Kent needs to predict the value of the pound in the future and put this amount aside now. Previously (2003/4) the percentage of growth was estimated at 3.5% in 2004/5 this percentage has decreased to 2.2% requiring West Kent to allocate £111,000 more than in previous years. This may be reflected in the increased income from the Department of Health (see note 3 appendix B).

7.14Before the final figure (retained surplus) on the income and expenditure account is reached the trust have to deduct the Public Dividend Capital Payable dividend (PDCD). PDCD is calculated by the Government in the form of a percentage (currently 3.5%) applied to the monies received in income by the trust (DoH 2005a). The Public Dividend Capital (PDC) is likened to an equity stake rather than a loan that has to be compensated by dividend rather than fixed or variable interest (Her Majesties Treasury 2005).

7.15West Kent has shown a retained surplus (or profit) of £28,000 for the year 2004/5. Although this was £4000 more than the previous year it did have approximately an £8000 increase in its income and raised £5000 from the sale of properties as opposed to the £20,000 loss made in this area in the previous year. However West Kent did have to finance the increased pension cost of £111,000 this year and not last.

8.The Balance Sheet8.1Dyson (2004) suggests that a balance sheet is a quantitative summary of a company’s financial condition at a specific point in time, including assets, liabilities and net worth. West Kent’s balance sheet (see table 2) consists of the following;8.2Fixed assets refer to intangible and tangible assets as well as investments (Dyson 2004). West Kent has no current investments.

BALANCE SHEET AS AT31 March 200531 March 200531 March 2004NOTE£000£000FIXED ASSETSIntangible assets1014985Tangible assets11128,935103,120Investments14.100129,084103,205CURRENT ASSETSStocks and work in progress12304219Debtors1311,55011,669Cash at bank and in hand18.330529612,15912,184CREDITORS: Amounts falling due within one year15(12,217)(12,256) NET CURRENT (LIABILITIES)(58)(72) TOTAL ASSETS LESS CURRENT LIABILITIES129,026103,133CREDITORS: Amounts falling due after more than one year15(100)(114)PROVISIONS FOR LIABILITIES AND CHARGES16(2,653)(3,401) TOTAL ASSETS EMPLOYED126,27399,618FINANCED BY:TAXPAYERS’ EQUITYPublic dividend capital2286,99078,803Revaluation reserve1738,05419,293Donated asset reserve171,1551,153Government grant reserve1700Other reserves178181Income and expenditure reserve17(7)288TOTAL TAXPAYERS EQUITY126,27399,618Table 28.3Intangible Assets are non-physical assets such as copyrights, franchises and patents (Dyson 2004). To estimate their value is very difficult because they are intangible. Often there is no ready market for them. All of West Kent’s intangible assets software licenses (see note 10 appendix e). The trust has amoritsed the cost of this licenses, at a cost of £14000 per year8.4Atrill & Mclaney (2001), tell us that tangible assets are divided into three categories. Property, plant, and equipment include furniture, computers, and so on. In order to keep track of all the assets from this category each company usually uses subcategories for a particular item or items of similar nature. Land is classified as a separate category for one major reason: land is not a subject to depreciation or depletion. Land is considered to have an infinite life. Although land can suffer impairment, as in West Kent’s note on tangible land assets (see note 11.1 appendix f) showing a £9000 impairment. An Impairment loss results from a short term change in price that is considered to be recoverable in the longer term (Blake 2002)Box 1 – Deprecation Rates For Tangible AssetsPlant and Machinery5- 15 yearsTransport Equipment7 yearsInformation Technology5-8 YearsFurniture and fitting7 – 10 Years8.5 The process of expense recognition for property, plant, and equipment is called depreciation (Dyson 2004). Depreciation is the process of allocating the original purchase price of a fixed asset over the course of its useful life. It appears in the balance sheet as a deduction from the original value of the fixed assets (Atrill & Mclaney 2001).

8.6West Kent depreciates its equipment etc at a standard rate set by NHS guidelines (see box 1). Two issues that may be highlighted from these rates 1. West Kent is predominantly a mental health and learning disabilities servicing trust and as such tends to have patients and clients that display aggressive and violent behaviors, which, in turn will inevitably lead to more that the average use of furniture and fittings. 2. Is 5 – 8 years is too long a period in an ever-changing IT world?8.7Fixed assets are very important to a company because they represent long-term liquid investments that a company expects will help it generate profits Davis & Pain 2002).

8.8Current assets (see notes 12 & 13, appendix G) are assets that a company has at its disposal that can be easily converted into cash within one operating cycle. An operating cycle is the time that it takes to sell a product and collect cash from the sale (Langley & Harden 1994). West Kent’s current assets are made from Stocks and work in progress, which are raw materials and consumables, and Debtors, with an allowance of £156,000 for unpaid debt and cash8.9West Kent’s creditors are separated into two categories the first, falling before the total assets less current liabilities, are the amounts that are owed that fall due within one year .These are liabilities that are owed in the short-term (Dyson 2004), and consist of loans, overdrafts, tax and social security costs and other creditors (see note 15 appendix H). The second category, falling after the total assets less current liabilities, are the creditors that are due to be paid after one year. These liabilities are owed in the long term (Dyson 2004), West Kent only currently has £100,000 owed to long term creditors. It is interesting to note that a loan of £608,000 was taken for the implementation for agenda for change although this is only half as much as the previous year.

8.10Provisions for liabilities and charges are amounts levied against the surplus so to provide for any expected liability or loss or claim (Davis & Pain 2002). West Kent predicts £2,653,000 of expense in this area, mainly made up from pensions and legal claims. This also includes the unwinding discount highlighted in paragraph 7.13.

8.11Taxpayer’s Equity is a misleading title according to Her Majesties Treasury (2005a), who would like the title change as it implies that these are funds that are available for the taxpayer to distribute. Taxpayer’s equity, also called capital, is any debt owed to the Trust. In West Kent’s case their annual PDC is considered a debt which has had more than a 50% increase on last years increase (see note 22, appendix I). Other reserves contribute to the financing of the balance sheet, (see note 17 appendix J) including the £28,000 retained surplus for 2004/5 as mentioned in paragraph 7.15.

8.12The total taxpayer’s equity should always, as in West Kent’s sheet equal the total assets employed I.E. a “balanced sheet” (Tracy & Barrow 2001).

9.Cash Flow Statement9.1Davis & Pain (2002) inform us that a cash flow statement (see table 3) is a financial report that shows incoming and outgoing money during a particular period. The statement shows how changes in balance sheet and income accounts affected cash and cash equivalents and breaks the analysis down according to operating, investing, and financing activities. As an analytical tool the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills (Dyson 2004).

9.2Two different ways exist to present information on a statement of cash flow. The predominant way of presenting information is the indirect method (Atrill & Mclaney 2001). The indirect method provides information about the company’s cash flow by focusing on changes in the non-cash operating accounts on a balance sheet. This type of presentation takes the net income and then adjusts changes from non-cash accounts to derive the cash flow statement. The direct method of cash flow presentation uses the direct change in cash accounts to determine the flow of the cash (Atrill & Mclaney 2001).

9.3Direct method presentation starts with cash received from customers and then takes expenses from that amount to determine the net cash provided by operational activities (Marshall et al, 2004). In addition to these differences, the presentation of operational activities on the statements is different. When a company uses a direct method, a separate section for reconciling net income along with net cash from operational activities is necessary. In the indirect form of the cash flow statement, the reconciliation is part of the operational activities section (Marshall et al, 2004).

9.4The separate reconciliation section in the direct method creates another area to the cash flow statement and essentially creates more information that the user must analyze to determine the net cash from operational activities. The reconciliation is a replica of the non-cash operating account activities used in the indirect form.

9.5The indirect form of the cash flow statement, while not directly focusing on cash transactions, presents a clear and accurate representation of the cash transactions of the company (Marshall eat al 2004).

9.6The indirect method is preferable over the direct method because of its simplicity and straightforwardness. Instead of having two separate sections devoted to operational activities, the indirect method has the one section and provides the same answer for net cash from operational activities as the direct method would (Dyson 2004). West Kent uses the indirect method in their cash flow statement.

Table 3CASH FLOW STATEMENT FOR THE YEAR ENDED 31 March 20052004/052003/04NOTE£000£000OPERATING ACTIVITIESNet cash inflow/(outflow) from operating activities18.14,6054,694RETURNS ON INVESTMENTS AND SERVICING OF FINANCE:Interest received114109Interest paid0(2)Interest element of finance leases(13)(13)Net cash inflow/(outflow) from returns on investments and servicing of finance10194CAPITAL EXPENDITURE(Payments) to acquire tangible fixed assets(10,984)(6,449)Receipts from sale of tangible fixed assets2,0501,187(Payments) to acquire intangible assets(65)(9)Receipts from sale of intangible assets00(Payments to acquire)/receipts from sale of fixed asset investments00Net cash inflow/(outflow) from capital expenditure(8,999)(5,271)DIVIDENDS PAID(3,871)(3,244) Net cash inflow/(outflow) before management of liquid resources and financing(8,164)(3,727)MANAGEMENT OF LIQUID RESOURCES(Purchase) of current asset investments00Sale of current asset investments00Net cash inflow/(outflow) from management of liquid resources00 Net cash inflow/(outflow) before financing(8,164)(3,727)FINANCINGPublic dividend capital received8,1873,349Public dividend capital repaid (not previously accrued)00Public dividend capital repaid (accrued in prior period)00Loans received00Loans repaid00Other capital receipts00Capital element of finance lease rental payments(14)(14)Cash transferred (to)/from other NHS bodies00Net cash inflow/(outflow) from financing8,1733,335Increase/(decrease) in cash9(392)9.7Cash provided by operating activities (see note 18.1 appendix K) equals net income (or in West Kent’s figures the operating surplus, see paragraph 7.15) plus depreciation, amortization (£2,210,000), and the write-down of intangible assets (£31,000), minus the gain on sale of a subsidiary and deferred taxes (£859,000) and decreased creditors (£ 689,000) minus the change in current assets (£85,000), and plus the change in current liabilities (£112,000) (Davis & Pain 2002).

9.8Returns on investments and servicing of finance relates to interest received on the operating surplus for 2004/5, (see table 1 income and expenditure), the monies paid for leasing equipment (see note 9 appendix D).

9.9Capital expenditure relates to the amount used during a particular period to acquire or improve long term assets such as property, plant, equipment or long term licenses (Langley & harden 1994). It appears West Kent has paid £10,984,000 for tangible assets I.E. land and dwelling and recoup £2,050,000 on the sale of the same. They have also paid £65,000 for intangible assets mainly software licenses (which will amortise over a 5-8 year period).

9.10Dividends paid concerns the PDC for 2004/5 (see paragraph 7.14 & 8.11). Liquid resources are resources that can be readily turned into cash (Dyson 2004), West Kent has no such assets9.11The financing of the cash flow statement comes from the increased PDC (see note 22 appendix I) for 2004/5 minus the capital element of finance lease rental payments, which, in West Kent’s case relates to software licenses (see note 10 appendix E).

10.Who Will Be Looking at the Accounts?The general term used for these people are stakeholders, but who exactly are these people? The people who read these accounts depend upon which accounts are being read. For example people who read the accounts of a health service, like West Kent, will be looking for different indicators of success as compared with people who would read Vodafone’s accounts. Three stakeholders that may be interested in these accounts might be:Managers, the Board of Directors and Employees Managers and the board of directors of West Kent will read the accounts to make judgements on how well they and their staff have performed. This is why employees, managers and directors are stakeholders because if the organisation has performed worse than expected then changes are likely to take place in the effort to improve and this could involve, restructuring, job losses, promotions, demotions, pay cuts or rises. Employees may require information on the ability of theTrust to meet wage demands and avoid redundancies, especially in the current enviroment (Jones & Hall, 2006)The Inland Revenue and the government will be keen to judge their performance to ensure that they are paying all dues owed e.g. taxes etc. The government itself would take an active interest in the financial reports of West Kent and would be keen to monitor their business actions. West Kent is a major source of employment and should it perform poorly and make staff cuts, this would leave the government with unemployment problems. The Department of Health obviously has an invested interested to ensure financial policies and the “bigger” budget are adhered toClient, patients and society, Clients and patients may require information relating to the financial position, capabilities of the trust in terms of its position in regard to, technology, supply chain management and other capabilities so that they can be reassured that the Trust will support them with uninterrupted supply of services. Society or the community in which the Trust operates, would require information regarding the trust’s ability to manage capicity of services whilst be prudent with monies e.g ensuring that the community is not effected by “post code lotteries” and that it’s business and processes to comply with environmental requirements in terms of waste disposal etc. as well as its contribution or potential contribution to the community.

Appendix A – Pro forma Statement on Internal ControlThe wording which is not in italic script in this pro forma Statement of Internal Control (SIC) should be replicated in every SIC, the words in italic script being amended as appropriate to the body in question. Bold script indicates a rubric which should be fulfilled in a way appropriate to the actual processes in place in the body to which the SIC relates.

Scope of responsibility1. As Accounting Officer, I have responsibility for maintaining a sound system of internal control that supports the achievement of [Department Yellow's] policies, aims and objectives, whilst safeguarding the public funds and departmental assets for which I am personally responsible, in accordance with the responsibilities assigned to me in Government Accounting .

(Accounting Officers should add to this paragraph to provide an explanation of the accountability arrangements surrounding their role. In particular, they should comment on:a.processes in place by which they work with/involve ministers on managing risk;b.inter-relationship of department/executive agency/NDPB ).

The purpose of the system of internal control2. The system of internal control is designed to manage risk to a reasonable level rather than to eliminate all risk of failure to achieve policies, aims and objectives; it can therefore only provide reasonable and not absolute assurance of effectiveness. The system of internal control is based on an ongoing process designed to identify and prioritise the risks to the achievement of departmental policies, aims and objectives, to evaluate the likelihood of those risks being realised and the impact should they be realised, and to manage them efficiently, effectively and economically. The system of internal control has been in place in [Department Yellow] for the year ended 31 March [200X] and up to the date of approval of the annual report and accounts, and accords with Treasury guidance.

Capacity to handle risk3. [Describe the key ways in which:a.leadership is given to the risk management process;b.staff are trained or equipped to manage risk in a way appropriate to their authority and duties. Include comment on guidance provided to them and ways in which you seek to learn from good practice.]The risk and control frameworkAppendix A Continued4. [Describe the key elements of the risk management strategy, including the way in which risk (or change in risk) is identified, evaluated, and controlled. Include mention of how risk appetites are determined.3][Describe key ways in which risk management is embedded in the activity of the organisation.](This section should only be inserted by those bodies to which it is relevant:[Describe the key elements of the way in which public stakeholders are involved in managing risks which impact on them.])Review of effectiveness5.As Accounting Officer, I have responsibility for reviewing the effectiveness of the system of internal control. My review of the effectiveness of the system of internal control is informed by the work of the internal auditors and the executive managers within the department who have responsibility for the development and maintenance of the internal control framework, and comments made by the external auditors in their management letter and other reports. I have been advised on the implications of the result of my review of the effectiveness of the system of internal control by the board, the Audit Committee [and risk committee, if appropriate] and a plan to address weaknesses and ensure continuous improvement of the system is in place.

6.[Describe the process that has been applied in maintaining and reviewing the effectiveness of the system of internal control, including some comment on the role of:a.the boardb.the Audit Committeec.if relevant, the risk committee/risk managers/risk improvement managerd.internal audite.other explicit review/assurance mechanisms.

Include an outline of the actions taken, or proposed to deal with any significant internal control issues, if applicable.]Appendix B – Notes 3 and 4 – Income from Activities3. Income from Activities2004/052003/04£000£000Strategic Health Authorities4264NHS Trusts23266Primary Care Trusts91,08785,061Foundation Trusts0Local Authorities8,5294,963Department of Health66291NHS Other0Non NHS:- Private Patients00- Overseas patients (non-reciprocal)00- Road Traffic Act00- Other150318 100,70290,5634. Other Operating Income2004/052003/04£000£000Patient transport services00Education, training and research2,1871,921Charitable and other contributions to expenditure00Transfers from donated asset reserve 1919Transfers from government grant reserve00Non-patient care services to other bodies3,7435,027Other income*1,6322,345 7,5819,312The main areas of other income are: Rent £267kLease car contributions £177kSale of non -capital; equipment £110kStaff secondments £187kFee income £137 kAppendix C – Note 5.1 – Operating Expenses5. Operating Expenses5.1 Operating expenses comprise:2004/052003/04£000£000Services from other NHS Trusts3,3803,475Services from other NHS bodies840Services from Foundation Trusts0Purchase of healthcare from non NHS bodies2,2443,154Directors’ costs1,059932Staff costs75,76768,048Supplies and services – clinical5,4945,239Supplies and services – general1,3441,587Establishment3,1393,540Transport823720Premises5,9786,319Bad debts100Depreciation and amortisation2,2101,955Fixed asset impairments and reversals310Audit fees174143Other auditor’s remuneration120Clinical negligence12664Other2,5041,505 104,37996,681The main areas of other operating expenses are :Training courses £600kRecharges for home support £384kProfessional fees £348kSubstance misuse £293kPrivate placements £120kClients’ expenses and allowances £95kPatients travel and expenses £79kAppendix D – Notes 8 & 9 – Disposal of Fixed Assets & Interest Payable8. Profit/(Loss) on Disposal of Fixed AssetsProfit/loss on the disposal of fixed assets is made up as follows:2004/052003/04£000£000Profit on disposal of fixed asset investments00Loss on disposal of fixed asset investments00Profit on disposal of intangible fixed assets00Loss on disposal of intangible fixed assets00Profit on disposal of land and buildings90Loss on disposal of land and buildings0(10)Profits on disposal of plant and equipment00Loss on disposal of plant and equipment(4)(10) 5(20)The most significant disposal relates to Woodside which was sold for £1.555 million9. Interest Payable2003/04£000£000Finance leases1313Other02 1315 Appendix E – Note 10 – Intangible Fixed Assets10. Intangible Fixed AssetsSoftware TotalLicences £000£000Gross cost at 1 April 2004294294Indexation 00Impairments 00Reclassifications7878Other revaluation 00Additions purchased 6363Additions donated00Additions government granted 00Disposals (14) (14)Gross cost at 31 March 2005 421421Amortisation at 1 April 2004209209Indexation 00Impairments 00Reversal of impairments00Reclassifications00Other revaluation 00Provided during the year 7777Disposals (14) (14)Amortisation at 31 March 2004 272272Net book value- Purchased at 1 April 2004 8585- Donated at 1 April 200400- Government granted at 1 April 200400- Total at 1 April 20048585- Purchased at 31 March 2005149149- Donated at 31 March 200500- Government granted at 31 March 200500- Total at 31 March 200514914911.1 Tangible fixed assets at the balance sheet date comprise the following elements:Land Buildings excluding dwellingsDwellings Assets under construction and payments on account* Plant and Machinery Transport Equipment Information Technology Furniture & fittings Total£000 £000 £000 £000 £000 £000 £000 £000 £000Cost or valuation at 1 April 200439,18859,6611262,6015231,4262,3801,593107,498Additions purchased 1001,31909,788101472452511,634Additions donated 000000000Additions government granted 000000000Impairments 000000000Reclassifications402,4290(2,571) 00024*(78)Indexation 2,8354,706101931131347,820Other in year revaluation 173391600000228Disposals (1,392) (569) (60) 00(150) 00(2,171)National Revaluation Exercise8,2372,145840000010,466At 31 March 2005 49,18169,73017610,0115441,4542,6251,676135,397Depreciation at 1 April 2004 0004139711,8231,1714,378Provided during the year 01,694334972041012,133Impairments 92200000031Reversal of Impairments 000000000Reclassifications00000000Indexation 0008212655Other in year revaluation 00000Disposals 0000(135) 00(135)Depreciation at 31 March 200591,716304559542,0271,2986,462Net book value – Purchased at 1 April 200438,67059,0351262,601110446557422101,967- Donated at 1 April 20045186260009001,153- Government Granted at 1 April 2004000000000Total at 31 March 2004 39,18859,6611262,601110455557422103,120- Purchased at 31 March 200548,70267,33517310,01189494598378127,780- Donated at 31 March 20054706790006001,155- Government Granted at 31 March 2005000000000Total at 31 March 200549,17268,01417310,01189500598378128,935*The reclassification of £78K from AUC to Intangible Assets relates to the EROS supply system which came into use in 2004/05.

Appendix F – Note 11.1 – Tangible Fixed AssetAppendix G – Notes 12 & 13 – Current Assets12. Stocks and Work in Progress31 March 200531 March 2004£000£000Raw materials and consumables304219Work-in-progress00Finished goods00TOTAL 30421913. Debtors31 March 200531 March 2004£000£000Amounts falling due within one year:NHS debtors3,4501,811Provision for irrecoverable debts(156)(147)Other prepayments and accrued income1,351785Other debtors3,1765,216Sub Total7,8217,665Amounts falling due after more than one year:NHS debtors1,9302,118Provision for irrecoverable debts00Other prepayments and accrued income1,7921,882Other debtors74Sub Total3,7294,004TOTAL11,55011,669Appendix H – Note 15 – Creditors15. Creditors15.1 Creditors at the balance sheet date are made up of:31 March 200531 March 2004£000£000Amounts falling due within one year:Bank overdrafts00NHS creditors3,6482,330Non – NHS trade creditors – revenue – other2672,706Non – NHS trade creditors – capital00Tax and social security costs1,6751,457Obligations under finance leases and hire purchase contracts1414Other creditors1,079649Capital Accruals1,690Accruals and deferred income3,8445,100Sub Total12,21712,256Amounts falling due after more than one year:Long – term loans00Obligations under finance leases and hire purchase contracts100114NHS creditors00Other00Sub Total100114 TOTAL12,31712,370 Other creditors include;-£900k outstanding pensions contributions at 31 March 2005 (31 March 2004 £525k).

NHS creditors include;-£39k to Pension Agency re early retirements(31 March 2004 £56k).

Other Creditors:- £608k for Agenda for Change (31 March 2004 £1132K)Appendix I – Note 22 – PDC22. Movement in Public Dividend Capital2004/052003/04£000£000Public Dividend Capital as at 1 April 200478,80375,454New Public Dividend Capital received (including transfers from dissolved NHS Trusts)8,1873,349Public Dividend Capital repaid in year 00Public Dividend Capital repayable (creditor)00Public Dividend Capital written off00Public Dividend Capital transferred to Foundation Trust0Other movements in Public Dividend Capital in year00Public Dividend Capital as at 31 March 200586,99078,803Appendix J – Note 17 – Reserves17. Movements on ReservesMovements on reserves in the year comprised the following:Revaluation ReserveDonated Asset ReserveGovernment Grant ReserveOther ReservesIncome and Expenditure ReserveTotal£000£000£000£000£000£000At 1 April 2004 as previously stated19,2931,153081288288Prior Period Adjustments000000At 1 April 2004 as restated19,2931,15308128820,815Transfer from the income and expenditure account2828Fixed asset impairments0000Surplus on other revaluations/indexation of fixed assets18,43821018,459Transfer of realised profits (losses) to the Income and Expenditure reserve73800(738)0Receipt of donated/government granted assets000Transfers to the Income and Expenditure Account for depreciation, impairment, and disposal of donated/government granted assets(19)0(19)Other transfers between reserves(415)0004150Other movements on reserves [specify]00Reserves eliminated on dissolution000000 At 31 March 200538,0541,155081(7)39,283Appendix K – Mote 18.1 – Operating Activities Cash Supply18. 1 Reconciliation of operating surplus to net cash flow from operating activities:2004/052003/04£000£000Total operating surplus (deficit)3,9043,194Depreciation and amortisation charge2,2101,955Fixed asset impairments and reversals310Transfer from donated asset reserve(19)(19)Transfer from the government grant reserve00(Increase)/decrease in stocks(85)(19)(Increase)/decrease in debtors1122,942Increase/(decrease) in creditors (689)(3,315)Increase/(decrease) in provisions (859)(44) Net cash inflow/(outflow) from operating activities before restructuring costs4,6054,694Payments in respect of fundamental reorganisation/restructuring00Net cash inflow from operating activities4,6054,69418.2 Reconciliation of net cash flow to movement in net debt2004/052003/04£000£000Increase/(decrease) in cash in the period9(392)Cash inflow from new debt00Cash outflow from debt repaid and finance lease capital payments1414Cash (inflow)/outflow from (decrease)/increase in liquid resources00Change in net debt resulting from cashflows23(378)Non – cash changes in debt00Net debt at 1 April 2004168546Net debt at 31 March 2005191168ReferencesAtrill P & Mclaney E, (2001) Accounting and Finance for non specialists Prentice Hall LondonBlack.J. (1997) Accounting Standards 6th ed Pitman, LondonBlake,G (2002)Accounting and Financial Reporting Standards. 8th ed. Pearson Education Ltd, EssexDavis T & Pain B, (2002) Business Accounting and Financing McGraw Hill publishing LondonDepartment of Health (2003) Statement of Internal Control 2002/2003 HMSO, LondonDepartment of Health (2003a) Corporate Governance Framework Manual for Primary Care Trusts Hmso London http://www.dh.gov.uk/assetRoot/04/08/27/23/04082723.PDF accessed on 27/02/06Department of Health (2005) Statement of Internal Control 2004/2005: Disclosures HMSO, LondonDepartment of Health (2005a) PDC financing for NHS foundation Trusts HMSO London http://www.dh.gov.uk/assetRoot/04/11/51/30/04115130.pdf access on 22/02/06Dyson J R (2004) Accounting for Non-Accounting Students 6th ed Prentice hall LondonHer Majesties Treasury (2005) The Government Accounting 2000 manual The Stationary Office http://www.government-accounting.gov.uk/current/frames.htm accessed on 16/02/06Her Majesties Treasury (2005a) Financial Reporting Advisory Board Paper Exposure Draft: Statement of Principles for Financial Reporting – Proposed interpretation for Public Benefit Entities. General Consultation HMSO London http://www.hm-treasury.gov.uk/media/53B/ED/FRAB_(76)_06A_Exposure_Draft_Statement_of_Principles_for_Financial_Reporting_-Proposed_Interpretation_for_Public_Benefit_Entities_-_General_Consultation.pdf accessed on 01/03/06Her majesty’s Revenues and Customs (no date) International Accounting Standards – The UK tax implications Crown copyrighthttp://www.hmrc.gov.uk/practitioners/int_accounting.htm#1 accessed on 28/02/06References ContinuedJones G & Hall C (2006) “Wards closed and staff cut as NHS cash crisis bites” The Telegraph 9th March http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2006/03/09/nhs09.xml&sSheet=/news/2006/03/09/ixnewstop.html accessed on 09/03/06Langley F P & Harden G S (1994) Introduction to Accounting for Business Studies (sixth ED) Butterworth LondonMarshall, D., McManus, W., and Viele, D. (2004). Accounting: What the numbers mean 6th ed. New York: McGraw-Hill.

The Audit Commission Act (1998) HMSO LondonThe Auditing Practices Board (2006) International Standards on Auditing FRCPublishing Londonhttp://www.frc.org.uk/images/uploaded/documents/ISA%20230%20Web%20optimised.pdf accessed on 21/02/06The Companies Act (1985) HMSO LondonThe National Health Service (NHS) Act (1977) HMSO LondonTracy J A & Barrow B (2001) Understanding Business Accounting for Dummies John Wiley & Sons LTD West Sussex

Pablo Picasso, Spanish painter, died in 1973 at the age of 91. But I really think he was the world “youngest” artiest, it is because when he picked up palette and brushes pencil even was at his nineties, everything into his eyes, just like the first time he saw them, so we have always found his work very interesting and unique. He has a style all his own and, I believe that this was what made him so famous and at the same time controversial.

Among Picasso’s many contributions to the history of art, his most important include pioneering the modern art movement called cubism, inventing collage as an artistic technique, and developing assemblage (construction of various materials) in sculpture. All of these proofs that he is and has to be the most important artist of the 20th Century.

§Early life and work

Picasso was born Pablo Ruiz in Malaga, Spain. He later adopted his mother’s more distinguished maiden name-Picasso-as his own. Though Spanish by birth, Picasso lived most of his life in France.

Picasso’s father, who was an art teacher, quickly recognized that his child Pablo was a prodigy. Picasso studied at first privately with his father and then at the Academy of Fine Arts in a city of Spain, where his father taught. At the age of 10 he made his first paintings, his early drawings, such as Study of a Torso, After a Plaster Cast (1894-1895) demonstrate the high level of technical proficiency he had achieved when he was 14. In 1895 his family moved to Barcelona, Spain, after his father obtained a teaching post at that city’s Academy of Fine Arts. Picasso was admitted to advanced classes at the academy after he completed in a single day the entrance examination that applicants traditionally were given a month to finish. In 1897 Picasso left Barcelona to study at the Madrid Academy in the Spanish capital. Dissatisfied with the training, he quit and returned to Barcelona.

§The Blue Period

During his lifetime, the artist went through different periods of characteristic painting styles. Shortly after moving to Paris from Barcelona, Picasso began to produce works that were suffused in blue. This particular pigment is effective in conveying a somber tone. The psychological trigger for these depressing paintings was the suicide of Picasso’s friend Casagemas. Between Blue Period 1901 and 1902, Picasso made three trips to Paris, finally settling there in 1904. He depicted the world of the poor. He found the city’s bohemian street life fascinating, and his pictures of people in dance halls and cafés show how he learned the postimpressionism of the French painter Paul Gauguin and the symbolist painters called the Nabis. The Blue Period work is quite sentimental, but we must keep in mind that Picasso was still in his late teens, away from home for the first time, and living in very poor conditions. Picasso’s Blue Room (1901, Phillips Collection, Washington, D.C.) shows his evolution toward the Blue Period, so called because various shades of blue dominated his work for the next few years.

These melancholy paintings (such as The Old Guitarist, 1903; Art Inst. of Chicago) are among the most popular art works of the century.

§The Rose Period

Rose Period Shortly after settling in Paris in a shabby building known as the Bateau-Lavoir (“laundry barge,” which it resembled), Picasso met Fernande Olivier, the first of many companions to influence the theme, style, and mood of his work. With this happy relationship, Picasso changed his palette to pinks and reds; the years 1904 and 1905 are thus called the Rose Period. Many of his subjects were drawn from the circus, which he visited several times a week. His subjects are saltimbanques (circus people), harlequins, and clowns, all of whom seem to be mute and strangely inactive. At the time, Picasso’s Parisian studio attracted the major figures of the avant-garde at this time, including Matisse, Braque, Apollinaire, and Gertrude Stein. He had already produced numerous engravings of great power and began his work in sculpture during these years.

One such painting in this period is Family of Saltimbanques (1905, National Gallery, Washington, D.C.).

§Sculpture

Picasso discovered ancient Iberian sculpture from Spain, African art, and Gauguin’s sculptures. Slowly, he incorporated the simplified forms he found in these sources into a striking portrait of Gertrude Stein, finished in 1906 and given by her in her will to the Metropolitan Museum. She has a severe masklike face made up of emphatically hewn forms compressed inside a restricted space. (Stein is supposed to have complained, “I don’t look at all like that,” with Picasso replying, “You will, Gertrude, you will.”) This unique portrait comes as a crucial shift from what Picasso saw to what he was thinking and paves the way to Cubism.

§The Beginning of Cubism

In late 1906, Picasso started to paint in a truly revolutionary manner. Inspired by Cézanne’s flattened depiction of space, and African art, working alongside his friend Georges Braque, he began to express space in strongly geometrical terms. These initial efforts at developing this almost sculptural sense of space in painting are the beginnings of Cubism.

§The Cubism Period

We can see the change from his early paintings, he distorted real objects into flat planes and cubes. He wanted us to see all sides of an object in space. He used the elements of color, shape, and line, and repeated the cubes, lines, and colors with variations. Other painters used construction paper and oil pastels to construct their art. Picasso used oil paint and canvas to make his. People stared to cognize this kind of sculpture as a name “cubism”.

Cubism is broken down into two distinct styles: Analytical and Synthetic.

ØAnalytical Cubism (1907-1912)

By 1907,Picasso and Braque had developed Cubism into an entirely new means of pictorial expression. In the initial stage, known as Analytical Cubism, objects were deconstructed into their components. In some cases, this was a means to depict different viewpoints simultaneously; in other works, it was used more as a method of visually laying out the FACTS of the object, rather than providing a limited mimetic representation. The aim of Analytical Cubism was to produce a conceptual image of an object, as opposed to a perceptual one.

At its height, Analytical Cubism reached levels of expression that threatened to pass beyond the comprehension of the viewer. Staring into the abyss of abstraction, Picasso blinked…and began to start putting the pieces of the object back together

An example of this is Houses on the Hill , 1909.

ØSynthetic Cubism (1912-1914)

Picasso marked the change into the second stage of Cubism, Synthetic Cubism in 1912, he took the conceptual representation of Cubism to its logical conclusion by pasting an actual piece of oilcloth onto the canvas. This was a key watershed in Modern Art. By incorporating the real world into the canvas, Picasso and Braque opened up a century’s worth of exploration in the meaning of Art.

Some of the finest Synthetic Cubist work, both visually and conceptually, are the collages. These works were characterized by a wider usage of color and decoration, although shapes in the paintings remained flat and fragmented.

Creation of his first collage, Still Life with Clair Caning, 1912

In this period, Picasso also created several Cubist sculptures, like Head of a Woman, 1909, along with various constructions made from different materials.

The Cubist movement in painting became a major influence on Western art. Every progressive painter, whether French, German, Belgian, or American, soon took up Cubism, and the style became the dominant one of at least the first half of the 20th century. In 1913, in New York, the new style was introduced at an exhibition at the midtown armory – the famous Armory Show – which caused a sensation. The Cubist was a movement that transformed the history of twentieth-century art. And, as we say, Cubism — after Picasso — the world never looked the same again.

§During the war

The collaboration between Picasso and Braque was ended by the First World War. After the war, Picasso, reflecting society’s disillusionment and shock with the technological horrors of the war, reverted to a Classicist mode of representation. At the same time, however, he was continuing to push Cubism into new paths. During the ’30s Picasso became tangentially connected with the Surrealist movement.

§Picasso and Guernica

At the outbreak of the Spanish Civil War, Picasso was appointed the director of the Prado. In January, 1937, the Republican government asked him to paint a mural for the Spanish pavilion at the world exposition in Paris. Spurred on by a war atrocity, the total destruction by bombs of the town of Guernica in the Basque country, he painted the renowned oil painting in monochrome. With no doubut,this is the artist’s landmark painting Guernica, a protest against the barbaric air raid against a Basque village.Guernica. is composition was a grouping of human and animal forms being destroyed by bombs during the war. He was so outraged by the death of these innocents that he put his soul into this enormous work. People can look to this painting as an expression of sorrow for the tragic loss of life in all wars. In Guernica, Picasso used symbolic forms as well.

§Conclusion

Pablo Picasso created thousands of works in his lifetime. And he was not only a very prolific printmaker, but also a very diverse one in the use of a great variety of different techniques. He created lithographs, etchings, dry points, lino cuts, woodcuts and aquatints. Always on the search for something new, he experimented a lot with these techniques. Some of Picasso’s graphic works are combinations of several techniques.

Through out history, never have a painter has so many kinds of forms, from naturalism to expressionism, from classicism to romanticism, then turned back to realism; Never have a artist created so many kinds of art, sculpture, ceramic, lithography, play writing, and poetry. As a special honor to him, on his 90th birthday, many of Picasso’s works were displayed in the Louvre, Paris. This was the first time that a living artists works had been hung in the famous museum.

Pablo Picasso had backward view on life and people. He saw things out of order, or upside down. He painted this way and influenced people to paint, this type of influence could have only came from one person, Picasso. His paintings in every-day life to enrich our lives. We also use them to enjoy ourselves, and to see how this man’s imagination made art just that much better.

Picasso described himself as a poet who had gone wrong: “When I was a child, my mother said to me, become a soldier you’ll be a general. If you become a monk you’ll end up as the Pope. Instead, I became a painter and wound up as Picasso.” But I think the last sentence should have changed and also the recognized truth is “I became a painter and would always to be the most important artist in 20th century as Picasso”.

References:

Brassai Conversations With Picasso

Patrick O’Brian Picasso: A Biography

Herbert Read A Concise History OF Modern Painting

www,webmuseum.com