Introduction

It has been brought to our attention that a product defect in the Ever Last Ovenware line has led to the injury of a Mrs. Farzam. This report has been created with the intent of explaining what went wrong, and possible outcomes which may now occur as a result. After being redesigned to be more profitable, products in the Ever Last product line developed a defect as a result of the new manufacturing process. A small number of products would explode if exposed to a cold surface after cooking. Failure to correct this defect, or warn anyone about it has to a customer, Mrs. Farzam, being seriously injured as a result. It is possible that Mrs. Farzam will bring forth a lawsuit against Rock Cookware, so we have prepared this report to inform you of what may happen.
The report contains a financial report showing what would have happened if the engineers redesign plan worked as intended. After preparing an income statement we discovered that the target number of 25% return on sales would have been exceeded and the redesign would have been a success. We then prepared an income statement based on the idea of recycling all of the defective cookware, returning to the old manufacturing process, cutting the price by 10%, and then adjusting for lost sales and customers. This showed that by choosing that option the 25% return on sales threshold would not be met by a very large margin.
This report also contains information on the possibility of Mrs. Farzam being awarded punitive damages in her potential lawsuit. Assuming a lawsuit is brought forth, the company will lose to the plaintiff, and it is likely that punitive damages will not be avoided. The way the company conducted itself during the sale of knowingly defective cookware, as well as the injuries sustained by Mrs. Frazam, it is very likely that she will be awarded punitive damages in order to deter Rook Cookware from taking this same actions in the future.
In the matter of ethics, we had to question whether or not Rook Cookware acted ethically in shipping out the defective cookware and if the employee who disclosed information about the altered report did as well. After analysis we found that your company did not act in an ethical manner when they shipped out the knowingly harmful product and better steps could have been taken to avoid what happened. Further, we discovered that the employee acted unethically as well. He had full knowledge of the altered report beforehand, and instead waited until an injury occurred.
Finally we looked at where management went wrong using strategic thinking. The report shows that in all 5 steps of strategic thinking the company did something wrong. The report then finishes with our recommendation to you on how to avoid problems like this in the future. We believe that the company should focus on its goal of having high quality products as well as being responsive and focusing on a high level of customer satisfaction.

EXHIBIT ONE Rock Cookware, Inc.
Ever Last Ovenware Product
Income Statement For The Year Ended December 31, 2007

Revenue
Sales $81,000,000 Sales in Units 6,000,000

Cost of Goods Sold
Variable Cost $21,645,000
Fixed Cost $24,033,769.16 Gross Profit $35,321,230.84

Attributable Costs
Marketing $5,670,000
Other (Primarily Fixed Cost) $2,580,475.42
Total Attributable Cost $8,250,475.42

Product Line Profit before General & $27,070,755
Administrational
allocation
Return on Sales 33.42%

EXHIBIT ONE shows the income statement assuming that the engineers’ redesign efforts had worked as originally planned. The product manager would have met 33.42% on return on sale in 2007 which is more than his expected profit target of 25% return on sales for the product line. Return on sales, according to investopedia.com, is a ratio widely used to evaluate a company's operational efficiency. It is also known as a firm's "operating profit margin". Therefore the return rate, 33.42%, means that the company will be in good shape and will grow more efficiently as well as increase in profits.
Also, the company had the selling price of $15 per item from 2002-2006. In 2007, the selling price lowered by 10%, which made it reduce to $13.5 and selling 6,000,000 units. On the other hand, the variable cost was reduced as well by 35%. This made the variable cost reduce from $5.55 to $3.6075.
The fixed cost increased by 35% higher than 2005. The fixed cost is the highest expense among all the expenses for 2007 as shown in Table 1. It takes up about 44.57% of Rock Cookware's expenses. The marketing cost was budgeted as 7% based on the spending of the sales revenue. This made the product line profit before general and administration allocation come up to $27,070,755. Making the return on sale 33.42%.
This would have been an ideal option for the company because it guarantees a high percentage of return on sale. Also, compared to the previous years, the highest the return sale has been reached, in 2004, which was 29.43%. Thus, if the redesign efforts have worked, the company would have reached the highest return on sale percentage so far, as shown in Table 2. Therefore, this option would have been an ideal option if no incidents have occurred.

Table 1. Shows The Highest Expense in 2007.

Table 2 .Return on Sale from 2002-2007 considering 2007 plan has worked as planned.

OPTION ONE

Rock Cookware, Inc.
Ever Last Ovenware Product
Income Statement For The Year Ended December 31, 2007

Revenue
Sales $54,000,000 Sales in Units 4,000,000

Cost of Goods Sold
Variable Cost $18,315,000
Fixed Cost $26,533,769.16
Gross Profit $9,151,230.84

Attributable Costs
Marketing $5,670,000
Other (Primarily Fixed Cost) $2,580,475.42
Total Attributable Cost $8,250,475.42

Product Line Profit before General & $900,755.58 Administrational allocation Return on Sales 1.67%

OPTION ONE shows Ever Last Ovenware's budgeted income statement for 2007 that the production, quality and product managers had first considered. With this option, there would be a delay in shipment that would result in a loss of approximately a third of the year's sales, which equals 6 million units. This would mean that the revenue would be made up of 4 million sales in units which would total to $54 million in sales. Secondly, there would be a 10% price reduction from the original cost structure. The original cost structure included a variable production cost of $5.55 per unit. According to www.investinganswers.com, variable costs are costs that move in direct proportion with the production of a unit, unlike fixed costs which are constant and don't affiliate with the quantity of goods and services produced. This would then result in 35% in savings of variable costs after six months. $500,000 would be charged to the fixed costs due to the recycling of the production, as well as $2 million in design engineering to fix the problem in 6 months.

This resulted in $900,755.58 for the product line profit before general and administrational allocation and the return on sales to 1.67% which is less than their expected profit target of 25%. A product line is a group of products that are similar to each other and is manufactured by one company according to www.investopedia.com. This option would not have been ideal because return on sales is a net profit of sales revenue and 1.67% is extremely low compared to the original 33.42%.

Punitive Damages

If Mrs. Farzam is to file a suit against your company it is likely that she will prevail due to the nature of strict product liability. Strict product liability states that “the defendant is liable even though he/she did not intend to cause the harm and did not bring it about through his/her recklessness or negligence.” To prove strict product liability there must be the following: the product was sold in an unreasonably dangerous condition, the seller expected and intended that the product would reach the consumer without changes to the product, and the plaintiff or plaintiff’s property was injured by the defective product. If you wish to defend the case that might be brought against you must prove that Mrs. Farzam: used the product in a way that she knew could lead to injury, her own careless actions contributed to or were the cause of the injury, or that some other person or evert interacted with the product to such an extent that the product was not the real cause of the injury.
We believe that under the rules of strict product liability Mrs. Farzam has a very strong case and the facts are damning. Any possible from defense from your side would have to be exceptional and we strongly feel that the possibility of successfully defending is very low. Due to the nature of the situation and our assumption that Mrs. Farzam would be successful in the case brought against you, we have assessed whether or not the court would order that punitive damages be paid.
Punitive damages are something that are awarded on top of compensatory damages and are specifically designed to deter the defendant from committing the same behavior. Punitive damages are not commonly awarded and it is only done so in extreme examples. While many seek punitive damage in the case of negligence, it is not often sought and rarely rewarded in cases that solely involve strict liability. We are operating under the assumption that Mrs. Farzam’s suit will be based solely on strict product liability. Using this assumption we can proceed further in analyzing the possibility of punitive damages being paid.
Mrs. Farzam must also prove that Rock Cookware acted egregiously in order to bolster her chances for punitive damages. Egregious conduct is defined as “A deliberate act or omission with knowledge of a high degree of probability of harm and reckless indifference to consequences.” In the case of your company, you have acted deliberately in the cover up of the issue by altering the quality testing report and omitted the fact the product could explode at high temperatures, which you had knowledge of.
In the case of product liability, egregious conduct is defined as “When a manufacturer has knowledge that his product poses a grave risk to the health or safety of its users and fails to take any protective or remedial action.” By this definition, Rock Cookware did have knowledge that the product posed a grave risk to the health and safety of users and you failed to take any actions that would protect the user of remedy the solution. Protection may have been provided if the quality testing report showed exploding as a possible defect of the product, but only cracking is listed as a possibility. When deciding whether or not to punish a company by awarding the plaintiff punitive damage “The types of manufacturer misconduct that courts most often punish include premarketing knowledge of a dangerous defect in a product, coupled with a failure to warn of or correct the defect…” Rock Cookware had knowledge of a dangerous defect in your product and then failed to even attempt to correct the defect, as well as altering to the quality report to take out any possible warning of the defect. Your company also deliberately covered up knowledge of the defect, omitted it from quality testing reports, failed to take any protective action, and you failed to remedy the situation, instead choosing to ship out the products. Rock Cookware conducted themselves egregiously in regards to product liability, the ground on which you may be sued for. Therefore, it is reasonable to conclude that if Mrs. Farzam files a suit on the basis of strict product liability, the court will order that punitive damages be awarded to the plaintiff.
Ethical Analysis
Executives had two potential choices. They could either recall their ovenware and change up the way the product is made to make it safer for the consumer, or they could keep shipping out the flawed product and wait until someone eventually got hurt. Unfortunately, Rock Cookware decided to go with the second option and keep shipping the flawed cookware. Equally unfortunate, a Mrs. Farzam used the product the way it was designed and received second and third degree burn marks on her upper body. This is a classic example of unethical behavior at the corporate level. Rock Cookware new that their ovenware had the potential to explode when it was subjected to large temperature changes in a short period of time. Management decided that it would be to expensive to redesign the product so therefor they put corporate profits ahead of the consumers safety and that is when this situation started to turn unethical. The engineer that finally hired an attorney and went to the newspaper acted ethically in the sense that he let the whole world know what Rock Cookware was doing and was the first whistle blower. It can also be argued that he acted unethically. The engineer was fully aware that Rock Cookware had sent out defective cookware because he was working on the new design. The ethical thing to do would have been to let management know right away that he did not think what they were doing was a good idea. Then if nothing changed, he should have hired his attorney and then gone to the newspaper. That would have been the most thickly sound thing to do.

Rock Cookware’s decision affected a lot of different stakeholders. A primary stakeholder in this situation was Mrs. Farzam, who was burned by the defective product. Management is also a Primary stakeholder because they are the ones that had the power to alter how this situation played out. A better decision would have been to recall the products and they would have only temporally lost money, but could have gained the publics trust and confidence as well. The other employees are consider secondary stakeholders because they could potentially be affected by Rock Cookwares decision. Consumers will no longer want to do business with Rock Cookware once they find out that they knew their product was defective. In turn, the employees could lose their job because sales will decrease and people will need to be laid off in order for Rock Cookware to survive. The CEO of Aspirin Corp, Michael Hackworth, once wrote that poor ethical performance can lead to financial loss and I think Rock Cookware will experience this phenomena. (scu.edu) Also, consumers that used the product but did not experience any explosions are considered secondary stakeholders. There was a small chance that they could have been affected but never were.
Strategic analysis

The five tests of strategic thinking (Lawrence, 1999) depict and support understanding the mistakes made by rock cookware.
“The ability to see the whole picture” depicts that a business system, that will produce errors consistently as a whole system rather than unique errors due to human or random mistakes, if not optimized interdepartmentally. As we know rock cookware found out about the quality issue during production and a very important decision was made by only 3 managers, without even notifying the CEO or asking for legal consulting on the issue. It is obvious that the departments don’t cooperate in solving problems.
“A sense of direction or destiny” is the second test the company fails to pass. Where does the company want to go and how is it going to achieve this could be the questions to answer for this question. The ovenware is known for its function, which is also the core competency of the product. The direction of the company is clearly to sell functional and good looking products, but the decision made depicts a cheap, good looking and dangerous product.
Another test is about the company’s decision making structure, how ideas are involved and how much employees and people within the system can influence and increase the quality of the decisions made within the firm. It is called “openness to new experience” and asks how much you involve any given resource in the firm and take the opportunities given, and rock cookware doesn’t involve anyone. The structure is very rigid and ideas are not empowered but orders and goals are reached, as the 25 percent dictated the strategy implemented.
The fourth is “gap between current reality and future” to illustrate how you are adapting your way of thinking according to your horizon and your foresight. The firm will always be bond to current resources and has to act according to todays limitations, but it can change its circumstances if it knows where it’s headed. Rock Cookware doesn’t look in the past nor does it look in the future to see where it’s headed. The current managerial structures are focusing on the short-term benefits instead of considering their strengths and successes, weaknesses and failures from the past in order to forecast the future of the company.
The last test is about the “use of creative and critical thinking”. You could also say analyzing your situation based on the “what if...” question and taking action after answering and evaluating the “if…then…” phrase. Rock Cookware didn’t ask the worst case scenario rather ‘hoped for the best’ and ended up in a very bad situation.

Recommendations Based on the company’s goal of having high quality and outstanding products, systems and operations should be optimized and the internal communication and collaboration of separate departments should be accomplished. The flow of information and transparency level are key to success on the way to having a functioning organism. This can be supported by implementing the Total Quality Management within the firm. By using one or more methods like TQM, you can improve the efficiency of the company and cut costs at the same time. With the six-sigma and lean approach you will get rid of excess cost, improve your production and increase your responsiveness to the market. These will help in productions, reducing cost and increasing profit by focusing on the ‘whole picture’ and the internal problems. The core competency of the firm is having a functional product that has the ability to endure extreme temperature differences, which should also be the priority of the long term thinking. The quality of these products shouldn’t be the cost driver. Quarterly goals should be considered to track performance but not effect long term goals if not reaching them is better for the quarters afterwards. Being responsive and focusing on high customer satisfaction level will prevent the same issue to happen again. In case of unpredictable problems, the management should not only focus on numbers, but also consider the ethical issues in its decision making and evaluate every aspect of the options given.

Bibliography

Hackworth, Michael. "Only the Ethical Survive." - Resources. Santa Clara University, 1 Mar. 1991. Web. 12 Mar. 2016.

Lawrence, Eton. "Strategic Thinking." (1999): n. pag. Csun.edu. Public Service Commission of
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Key Concept 9: Understand the Differences between Compensatory and Punitive
Damages (n.d.): n. pag. Web. 8 Mar. 2016. <http://www.csun.edu/sites/default/files/blawdamages.pdf>.

Roddy, Nadine. "Punitive Damages in Strict Products Liability Litigation." William & Mary
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