Chiquita in colombia case study

Two Case Study Strategic Management

Case study-1

BLOOD BANANAS (Marks: 5)

Every company hates to be blackmailed, but that was exactly what was happening to one of America’s largest fruit growing and processing companies, Chiquita Brands. Carlos Castaño, leader of the United Self Defense Forces of Columbia (AUC), a Colombian paramilitary organization, had just proposed that it would be in the best interests of Chiquita Brands and its subsidiary in Colombia, Banadex, to pay the AUC a few thousand dollars per month for “security” services. The security services were little more than protection from the AUC itself. Unfortunately, the local law enforcement agencies as well as the U.S. government were in no position to offer legitimate protection from paramilitary groups like the AUC. Chiquita was forced to decide whether to pay the AUC for protection or risk the lives of Chiquita employees in Colombia.

Chiquita Brands International Inc., headquartered in Cincinnati, Ohio, was a leading international marketer and distributor of high-quality fresh produce that was sold under the Chiquita® premium brand and related trademarks. The company was one of the largest banana producers in the world and a major supplier of bananas in Europe and North America. The company had revenues of approximately $4.5 billion and employed about 25,000 people in 70 countries in 2006.

Chiquita Brands, formerly United Brands and United Fruit, had been operating fruit plantations in Colombia for nearly 100 years. Chiquita’s Banadex was responsible for 4,400 direct and an additional 8,000 indirect jobs in Colombia, jobs that were almost entirely performed by local (Colombian) workers. The company “contributed almost $70 million annually to the Colombian economy in the form of capital expenditures, payroll, taxes, social security, pensions, and local purchases of goods and services.” Banadex was responsible for managing Chiquita’s extensive plantation holding and was Chiquita’s most profitable international operation.

By the 1990s, Colombia had become a very violent country. Kidnappings and murders of wealthy Colombians and foreigners had become common-place. The U.S. State Department had issued several advisories warning U.S. citizens about the dangers of travel to the country. In 1997, Carlos Castaño, leader of the AUC, met with senior officials of Banadex and offered to provide security services to the Banadex workers and property in Colombia. The AUC, often described as a “death squad,” was one of the most violent, paramilitary organizations that existed in Colombia. Estimated by the U.S. State Department to number between 8,000 and 11,000 members, their activities included assassinations, guerrilla warfare, and drug trafficking. So far the AUC had not been designated a Foreign Terrorist Organization by the U.S. State Department, so it was not illegal to do business with the AUC. The implication of the offer for Banadex employees was obvious. Extortion or not, the implication of non-participation by Banadex would put employees at serious risk.

The options for Chiquita were straightforward: agree to pay, refuse to pay, or exit the country. The ramifications of any of the actions, however, were not pleasant.

Agree to Pay: If Chiquita agreed to pay for “protection” they might forestall killings and kidnappings; however, they would be financing a group of terrorists. The money it paid would be used to further the activities of AUC.

Refuse to Pay: If Chiquita chose to reject the offer of “protection” from Castaño, then there was the real likelihood that Banadex employees would be kidnapped and/or executed. There was ample evidence of the brutality of the AUC and similar organizations currently operating in Colombia. While a legitimate security company might be found to protect the plantations and employees, the cost to hire sufficient men to withstand a force of 8,000–11,000 paramilitary fighters would be inordinately expensive. Only governments had the strength to mount such a protective service and neither the U.S. nor Colombian governments were willing to support such an effort. Furthermore, it was unlikely that the Colombian government would welcome a mercenary force hired by Chiquita into the country.

Exit the Country: If the decision was made to abandon the plantations in Colombia what would happen to the 12,000 individuals whose livelihoods depended upon the work or workers on the plantation? Contributing $70 million annually to the economy, a rapid exit would represent a significant loss to the Colombian people. Further, Banadex exports represented a significant portion of the bananas sold by Chiquita brands. The loss of this supply would not only affect Chiquita Brands’ profitability and shareholder value but also the profitability of numerous Chiquita distributors around the world.

Study Question: (5 marks)

1. What should Chiquita do?

Case study-2

Marks: 5

BOEING BETS THE COMPANY

The Boeing Company, a well-known U.S.-based manufacturer of commercial and military aircraft, faced a dilemma in 2004. Long the leader of the global air frame manufacturing industry, Boeing had been slowly losing market share since the 1990s to the European-based Airbus Industries—now incorporated as the European Aeronautic& Space Company (EADS). In December 2001,the EADS board of directors had committed the corporation to an objective it had never before achieved—taking from Boeing the leadership of the commercial aviation industry by building the largest commercial jet plane in the world, the Airbus 380. The A380 would carry 481 passengers in a normal multiple-class seating configuration compared to the 416 passengers carried by Boeing’s 747—400 in a similar seating configuration. The A380 would not only fly 621 miles farther than the 747, but it would cost airlines 15%–20% less per passenger to operate. With orders for 50 A380 aircraft in hand, the EADS board announced that the new plane would be ready for delivery during 2006. The proposedA380 program decimated the sales of Boeing’s jumbo jet. Since 2000, airlines had ordered only 10 Boeing747s configured for passengers.

Boeing was clearly a company in difficulty in 2004.Distracted by the 1996 acquisitions of McDonnell Douglas and Rockwell Aerospace, Boeing’s top management had spent the next few years strengthening the corporation’s historically weak position in aerospace and defense and had allowed its traditional competency in commercial aviation to deteriorate. Boeing, once the manufacturing marvel of the world, was now spending10%–20% more than EADS (Airbus) to build a plane. The prices it asked for its planes were thus also higher. As a result, Boeing’s estimated market share of the commercial market slid from nearly 70% in 1996 to less than half that by the end of 2003. EADS claimed to have delivered300 aircraft to Boeing’s 285 and to have won56% of the 396 orders placed by airlines in 2003—quitean improvement from 1994, when EADS controlled only one-fifth of the market! This was quite an accomplishment, given that the A380 was so large that the modifications needed to accommodate it at airports would cost $80 to $100 million.

Even though defense sales now accounted for more than half of the company’s revenues, Boeing’s CEO realized that he needed to quickly act to regain Boeing’s leadership of the commercial part of the industry. In December 2003, the board approved the strategic decision to promote a new commercial airplane, the Boeing787, for sale to airlines. The 787 was a midrange aircraft, not a jumbo jet such as the A380. The 787 would carry between 220 and 250 passengers but consume20% less fuel and be 10% cheaper to operate than its competitor, EADS’ current midrange plane, the smaller wide-body A330-200. It was to be made from a graphite/epoxy resin instead of aluminum. It was designed to fly faster, higher, farther, cleaner, more quietly, and more efficiently than any other medium-sized jet. This was the first time since approving the 777 jet in 1990 that the company had launched an all-new plane program. Development costs were estimated at $8 billion over five years. Depending on the results of these sales efforts, the board would decide sometime during 2004 to either begin or cancel the 787 construction program. If approved, the planes could be delivered in 2008—two years after the delivery of the A380.

The Boeing 787 decision was based on a completely different set of assumptions from those used by the EADS board to approve the A380. EADS top management believed that the commercial market wanted even larger jumbo jets to travel long international routes. Airports in Asia, the Middle East, and Europe were becoming heavily congested. In these locations, the “hub-and-spoke” method of creating major airline hubs was flourishing. Using larger planes was a way of dealing with that congestion by flying more passengers per plane out of these hubs. EADS management believed that over the next20 years, airlines and freight carriers would need a minimum of 1,500 more aircraft at least as big as the B747.EADS management had concluded that the key to controlling the future commercial market was by using larger, more expensive planes. The A380 was a very large bet on that future scenario. TheA380 program would cost EADS almost $13 million before the first plane was delivered.

In contrast, Boeing’s management believed in a very different future scenario. Noting the success of South westand JetBlue, among other airlines in North America, it concluded that no more than 320 extra-large planes would be sold in the future as the airline industry moved away from hub-and-spoke networks toward more direct flights between smaller airports. The fragmentation of the airline industry, with its emphasis on competing through lower costs was the primary rationale for Boeing’s fuel-efficient787. A secondary reason was to deal with increasing passenger complaints about shrinking legroom and seat room on current planes flown by cost-conscious airlines. The 787 was designed with larger windows, seats, lavatories, and overhead bins. The plane was being designed in both short- and long-range versions. Boeing’s management predicted a market for 2,000 to 3,000 such planes. Additional support for the midrange plane came from some industry analysts who predicted that the huge A380would give new meaning to the term “cattle class.” To reach necessary economies of scale, the A380 would likely devote a large portion of both of its decks to economy class, with passengers sitting three or four across, the same configuration as most of Boeing’s 747s.Boeing’s strategy to regain industry leadership with its proposed 787 airplane meant that the company would have to increase its manufacturing efficiency in order to keep the price low. To significantly cut costs, management would be forced to implement a series of new programs:_ Outsource approximately 70% of manufacturing. Could it find suppliers who could consistently make the high-quality parts needed by Boeing?

· Reduce final assembly time to three days (compared to 20 for its 737 plane) by having suppliers build completed plane sections. Could this many suppliers meet Boeing’s exacting deadlines?

· Use new, lightweight composite materials in place of aluminum to reduce inspection time. Would the plane be as dependable and as easy to maintain as Boeing’s aluminum airplanes?

· Resolve poor relations with labor unions caused by downsizing and outsourcing. The machinists’ union would have to be given a greater voice in specifying manufacturing procedures. Would Boeing’s middle managers be willing to share power with an antagonistic union?

Which vision of the future was correct? The long-term fortunes of both Boeing and EADS depended on two contrasting strategic decisions, based on two very different assessments of the market. If EADS was correct, the market would continue to demand ever-larger airplanes. If Boeing was correct, the current wave of jumbo jets had crested, and a new wave of fuel-saving midrange jets would soon replace them.

Study Question: (5 marks)

Question -Which company’s strategy had the best chance of succeeding?