The Case of the Million-Dollar Decision

The Case of the Million-Dollar Decision

Today, it is every company’s wish to remain innovative and sustainable while still preserving its ethical values and reputation. For firms in the technology sector, the problem seems even bigger, especially because of the increasing competition and innovation from not only existing companies but also start-ups. Besides just the disruptive nature of new technologies, local tech companies are also faced with the challenge of stiff competition from external companies, which often enjoy the benefit that comes with economies of scale because of mass-producing their products. This makes these foreign products a better choice for customers because of their cheap prices. For that reason, most companies are now devising ways to increase their income and expand their brand, and the most obvious and simple way is to enter new territories. This not only presents a means of attracting new customers and growing the brand but also an opportunity to grow revenues significantly. However, this is often easier said than done because exploring new territories, which often have their own market principles, comes with a bigger challenge. Sometimes, the new challenge can threaten to contradict the existing values, morals, principles, and ethical standards of a company. This usually poses an ethical dilemma as the company can be torn between expanding and increasing its revenues or foregoing the strategy to safeguard the existing values and culture it holds dearly, as well as its reputation.

In that regard, this case study focuses on the ethical dilemma facing Pegasus International Inc., which is one of the leading firms producing computer chips (integrated circuits) and their related software, specifically for mass storage and communications sectors. The company also manufactures PC-based multimedia, video, and audio products. The company has established itself as a tech leader and has been distinguished by its ability to anticipate market needs as well as make software and hardware before the market truly needs them. The firm’s wireless business branch has been doing well in Europe, Japan, and the United States. However, with the desire to grow further to potential markets, Pegasus has identified China as a viable market because of the country’s new demand for wireless products and services. However, Pegasus’ chief executive, Oswald Tom, is concerned with the reports emerging in China, in which acquiring a license requires giving local authorities payoffs or bribes. Oswald is worried that engaging in these underhand dealings might contravene the company’s long-standing ethical and moral principles of integrity. However, the benefits associated with accepting this challenge cannot be negated, especially because the firm stands to gain close to $ 100 million in revenues annually. This case study, therefore, identifies the existing dilemma in this situation, how the stakeholders would be impacted by various solutions to the dilemma, and the pros and cons of different courses of action. The last part provides a recommendation for the best solution/decision for the company based on ethical theories and principles.

The Ethical Dilemma(s)

The ethical dilemma that Pegasus’ CEO, Tom Oswald, and other executives face is either choosing to venture into China and forego the company’s long-standing ethical values but maximize shareholder value as well as grow the firm or refusing to expand into China but lose the financial gains and new customers as well as a potential investment increment from Japanese investors that come with expanding in the Asian region, including additional $100 million revenue. Subsequent studies by Pegasus’ wireless executives have shown that China assigns communication frequencies and makes company decisions region by region, district by district. A payoff or bribe is, however, the condition of getting a license. The report released by the company’s managers revealed that all the firms doing business in China are doing so by contracting local agents to act as their representatives and secure the licenses. However, these businesses are less concerned with how these licenses are secured or what transpires. This strategy has been effective since the CEOs of these firms have managed to sign disclosure statements as demanded by law, denying any unprofessional conduct. Preliminary market research shows that, in spite of this challenge, expanding into China presents new market opportunities, with Pegasus likely to net roughly $100 million every year, in addition to the expanding brand and prospective Japanese investors that are likely to commit a sizeable capital investment.

Contrarily, expanding into China means that the company has to go against its long-standing corporate culture, which is typified not only by aggressive R&D but also by growth, respect for people, teamwork, honesty, and integrity. This has played an integral role in building Pegasus’ reputation as an ethical firm among its suppliers and clients. For that reason, the company’s workforce is also motivated. The million-dollar decision dilemma, therefore, is between setting up in China (which comes with the benefit of more business, increased shareholder value, and more sustainability) or sticking by the firm’s long-standing ethical principle but missing out on these opportunities and bump-ups.

Which/How the Stakeholders Would be Affected by Various Solutions to the Dilemma

Admittedly, several stakeholders stand to lose out differently if the company opts to take any of the two directions, including the shareholders, employees, suppliers, management, and the Chinese authorities and contractors. For example, if Oswald and the executives opt to go with the first decision (which is to expand into China), the shareholders will likely benefit from the added stake value of the company. Furthermore, the extra $100 million in business in China means that shareholders or investors earn more dividends each year. For CEO Oswald and his team of managers, more profits translate to successful strategic implementation. These come with more trust from the board and shareholders, which typically means more stipends and additional years at the helm of the company. This is also a win-win situation for the Chinese government (in terms of more tax and licensing revenues, foreign direct investment, an increase in the gross domestic product, reduced unemployment rates, and a lower inflation rate) as well as contractors (who get kick-backs for acting as the company’s representatives during the securing of licenses). The Chinese nationals are also likely to benefit from this arrangement, with most potentially going to secure employment. This implies a better living standard for Chinese nationals. Regardless of these advantages, all the stakeholders directly attached to the company (the shareholders, executives, suppliers, and employees) would lose from Pegasus’ damaged reputation. A tainted brand name might impact the global reputation of the company as well as dent business in other regions like the U.S., Europe, and Japan. Allowing corruption might also set a bad precedent in the organization, allowing unprofessional and unethical practices to set in the future. Damaged integrity because of dishonesty might also break the existing teamwork and morale among employees. Suppliers might also distrust the firm in the future and, thus, may be forced to look out for moral and ethical ones.

On the other hand, refusing to move to China means that the company will maintain its reputation as an ethical and honest entity. For the shareholders, this might be a bad business decision because of the possibility of losing out on the additional $100 million in revenue. This will mean lower dividends. For Oswald and his co-executives, this might mean low payouts and less distrust with the board, especially if other divisions in Europe, the U.S., and Japan fail to meet the company’s financial expectations and goals. For the Chinese government, the decision by Pegasus not to expand means fewer tax revenues, reduced direct investment, poor GDP growth, a weaker currency, more unemployment, and high unemployment rates. Chinese nationals are also likely to suffer from high inflation and unemployment rates, with the prices of products likely to jump up and the general cost of living.

The Pros and Cons of Alternative Courses of Action

Just like other ethical dilemmas, choosing either side of this case comes with its fair share of pros and cons. For example, if Pegasus opts to expand into China, it stands to reap all the benefits that come with market or industry expansion. The first advantage is that the company is likely to reap the new revenue potential. By extending its wings into China, the company will pocket an extra $100 million in business. In addition, this company stands to gain from a larger customer base, which comes with increased sales, revenues, and profits. The second benefit is that globalizing ventures means that Pegasus can access a wider pool of talent and skills. In addition, venturing into markets benefits businesses because they can access a broader pool of the labor force with unique mindsets, values, and skills. Besides, expanding to China will present Pegasus with the opportunity to explore new cultures as well as expose it to more foreign direct investment opportunities. Expanding to China will make the firm more culturally diverse and well-rounded, increasing its perspective on customers and relations, which can also aid the company works well with local partners and clients. Finally, entering China will not only play a central role in diversifying the company’s portfolio and market but will also boost the business’s reputation and global presence. Diversifying the company’s market is an efficient and critical way of spreading the risks, meaning that if the divisions in the U.S. and Europe register losses in a particular financial year, Pegasus might rely on China to augment its revenues. Therefore, by choosing the second option, which is refusing to expand to China, Pegasus stands to lose out on all these benefits. The company is also likely to damage its reputation as an ethical firm.

The disadvantages of Pegasus advancing to China (which conversely serve as the consequent advantages of the second option) include the potential loss of the firm’s long-standing identity and reputation as an ethical, honest, and respectful organization. Being labeled a ‘corrupt’ entity, in case its underhand dealings get exposed, is likely to come with adverse financial ramifications, with customers likely to distrust the firm not only in China but also in other regions, including the U.S., Europe, and Japan. This ability to retain its integrity and reputation is an added advantage if the firm denounces the financial incentives that come with the promising Chinese market. This can help the firm build a sustainable competitive advantage through corporate social responsibility.

Recommendation Based Upon the Ethical Theories/Principles

Based on the ethical theories and principles, the most appropriate decision for Pegasus is to turn down the $100 million financial enticements as well as the potential investment boost from Japanese investors by refusing to expand into China. This decision not only upholds the company’s ethical corporate culture and is deeply rooted in honesty, respect, and integrity but is also justified or supported by almost all ethical principles. For example, the Rights Approach suggests that ethical action is one that respects and protects the moral rights of the entities impacted, which can be people, institutions, laws, countries, or businesses. In this context, by refusing to take part in corrupt dealings, the company will respect Chinese laws as well as the country’s laws. Similarly, this decision seems to enjoy the support of The Justice/Fairness Theory (which requires that all equal entities be treated as equals), The Common Good Approach (which advocates for the common conditions that enhance the welfare of everyone), as well as the Virtues Approach (which suggests that moral actions must be in line with particular ideal virtues). All these theories point to one thing – doing what is right to everyone.

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The Case of the Million-Dollar Decision
by Michael L. Hackworth and Thomas Shanks

Pegasus International Inc. is a leading manufacturer of integrated circuits (chips) and related software for such specialty markets as communications and mass storage, as well as PC-based audio, video, and multimedia. With a focus on innovation, Pegasus is committed to “technology leadership in the new millennium.” Its long-standing strategy has been to anticipate changes in existing and emerging growth markets and to have hardware and software solutions ready before the market needs them. The company has also made significant strides in wireless communications.

The systems and products of Pegasus’ wireless business have been selling well in its already existing markets in the United States, Japan, and Europe. But, like any company, Pegasus is eager to grow the business. At a strategy session with the Wireless Division, Pegasus CEO Tom Oswald and division managers decided to explore the potential of expanding their business to China.

Initial research indicates that China is likely to develop into a huge wireless market because its people do not currently have this capability, and the government has made wireless spending a priority. Wireless is really the only choice for China because of the high cost of burying the communications cables necessary in wired systems; further, in underdeveloped countries, copper wires are often stolen and sold on the black market.

Subsequent research does raise one concern for Pegasus wireless managers. They tell Oswald, “We have this problem. China allocates frequencies and makes franchise decisions city by city, district by district. A ‘payoff’ is usually required to get licenses.”

The CEO says, “A lot of companies are doing business with China right now. How do they get around the problem?”

His managers have done their homework: “We believe most other companies contract with agents to represent them in the country and to get the licenses. What these contractors do is their own business, but apparently it works pretty well because the CEOs of all those companies are able to sign the disclosure statement required by law saying that they know of no instance where they bribed for their business.”

“I wonder if paying someone else to do the crime is the same as our doing the crime,” Oswald says. “I’m just not very comfortable with the whole question of payoffs. So, let me ask you, if we don’t expand into China, how much business will we lose, potentially?”

His Wireless Division manager responds, “It will be huge not to do business in all the countries expecting payoffs. China alone represents easily $100 million of business per year. It’s not life and death, but it is a sizable incremental opportunity for us, not to mention potential Japanese partners who will make significant capital investments. All we have to do is add our already-existing technology. When you consider all that, we have a lot to gain. What will we really lose if our local contractors are forced to make payoffs every now and then?”

Oswald wants his company to succeed, maximize shareholder value, keep his job, and model ethical leadership. He has made an effort to build a corporate culture characterized not only by aggressive R&D and growth but also by integrity, honesty, teamwork, and respect for the individual. As a result, the company enjoys an excellent reputation among its customers and suppliers, employee morale is high, and ethics is a priority at the company.