Fair Profit Scenarios

The eight scenarios that follow raise questions about what constitutes a fair profit. Each scenario presents a situation where some party makes a profit. Your task consists in determining whether or not it was a fair profit.
    Some Questions for Further Thought follow after the presentation of each scenario. These questions should deepen your understanding of the moral issues that may be involved.
    You will be considering these scenarios from the perspectives of   various moral frameworks presented in the course. Each week during this part of the course, you will be working with only one scenario. Since the different  scenarios have some relation to one another and an overall perspective of the scenarios is helpful, you should go over all the scenarios in a first reading.

Week 2 - Scenario 2
Week 3 - Scenario 3
Week 4 - Scenario 5
Week 5 - Scenario 7
Week 6 - Scenario 6
Week 7 - Scenario 4

    You will find links to the various moral frameworks at the end of the scenarios.

Scenario 1

    Joan and Jack Jones have been operating an appliance-electronics business for twenty years in Worthyville. Jack started out as a repairman but then took advantage of an opportunity to go into business for himself. They jointly run the business and give good service. Joan handles the bookkeeping, much of the ordering, and some of the sales work. Jack concentrates on the technical side of the business, keeping up on the latest technical developments and managing the repair service; he also does sales work occasionally. They are now in their late forties, with two children they're putting through college.
    Besides themselves, the business has four employees, two who work in repairs and two in sales.
    They usually have semi-annual sales and participate in their suppliers' special sales promotions. Over the years, they've averaged about a ten percent return on sales, about $70,000 in recent years before taxes. They also enjoy a few "perks" that go along with being in business (such as merchandise discounts and use of the business van for personal purposes).

• Are they making an fair profit? Why or why not? How do you go about deciding what a fair profit is?
• If their return was 30 percent instead of 10 percent (that is, $210,000 on the same total sales), would they still be making a fair profit?
• If you reject a 20-30% return as a fair profit, aren't you failing to recognize the risks and instability associated with a free market system--which requires that you maximize profit while you can? Couldn't a small operation be put out of business in as little as 18 months by a national discount chain?
• If you fairly can charge whatever the market will bear (including prices that provide a 20-30% return), does this mean that you can take advantage of special situations such as natural disasters and medical necessity to charge much higher prices? For example, after a hurricane struck South Carolina one year, some retailers in Charlestown marked the price of a bag of ice from 75 cents up to $10.
• What evidence is there that being more concerned with "profit" rather than a "fair profit" is really that harmful in business--especially when we are concerned with what happens in the long-run and some people seem to have accumulated great wealth by not worrying much about ethical niceties?

Scenario 2

    About two years ago, Joan and Jack Jones ran into some really big trouble. Giant Go-Getters, a national appliance-electronics chain, came to town. The chain blew in with a blizzard of advertising and weekly sales discounts. Moreover, with its national, volume buying power, it could sell merchandise at prices the Joneses could not match. Customers started flocking over to Giant Go-Getters. To make a long story short, they were driven out of business in eighteen months.
    So, instead of reaping the rewards of 20 years dedication to building up a business they thought they could rely on until retirement, a middle-aged Joan and Jack find themselves out of business and in need of some new line of work. And yes, they still have two children who need money to finish college and four former employees who need to find other work.
    Whatever profits they were making from selling appliances and electronics equipment now seems to be in the hands of Giant Go-Getters, a large corporation headquartered in another state.

    Questionsfor Further Thought:

• Is Giant Go-Getters making a fair profit? Why or why not?
• Is the Joneses' going out of business basically their own fault, due to their inability to compete with Giant Go-Getters, so that they cannot complain about the fairness of the profits going to the the national discount chain?
• If life isn't fair in this case and the Joneses just have to live with that, what are the guidelines that determine an obligation to treat others fairly? After all, if life just isn't fair, why should we try to make it so? And if the Joneses are just victims of a system in which they have no individuals to blame, why can't we say the same of all sorts of other actions as well?
• Does Giant Go-Getters have any responsibility at all to consider the moral significance of their depriving the hard-working Joneses of their presumably honest profits?
• If Giant Go-Getters reduced their prices in Worthyville below their nationally advertised prices with the specific intent to drive competitors like the Joneses out of business, would the chain still be making a fair profit?
• If Giant Go-Getters, in order to lower costs, used its size and volume selling power to pressure local government to come up with tax increment financing before opening a store in Worthyville, is the chain still making a fair profit? (Presume that there never was any tax increment financing available to the Joneses.)
• If Giant Go-Getters would not be making a fair profit, what lengths are you prepared to go to in order to stop the chain from setting up a store in Worthyville? If consumers in Worthyville do not have the opportunity to choose whether or not to buy at Giant Go-Getters, with its lower prices, does this taint the profits of the businesses that are able to charge  higher prices because of the absence of competition from Giant Go-Getters?

Scenario 3

    Elaine DeLeo is the manager of the large Layton's Department Store in Worthyville. In the past, her department store had been content to compete with the Joneses on about the same level, thereby making a pretty handsome profit in the appliance-electronics department. When Giant Go-Getters came to town, however, something obviously had to be done.
    So Elaine slashed prices considerably, thereby producing a much lower profit margin. While the prices were not quite as low as Giant Go-Getters, they were low enough to hold many customers who liked to shop at Layton's. And since it was a large enough store, sales in other department could cover for any lower profits in appliances and electronics.
    About three years after Giant Go-Getters came to town and after the Joneses were out of business, Elaine DeLeo got lucky. Giant Go-Getters went bankrupt. Lo and behold, the Giant Go-Getters store in Worthyville closed!
    Now Elaine has to decide what to do about the prices for appliances and electronics. Should she leave them where they are? Should she raise them the next day to a level comparable to where they were before Giant Go-Getters came to town? Should she raise them very gradually to the pre-Go-Getters level? Or should she raise the prices to some mid-point between where they are now and where they were?

    Questionsfor Further Thought:

• Can Elaine choose any one of these options and still claim to produce a fair profit? Why or why not? If she chooses to raise prices very gradually, does this deceptive practice show in itself that there is something tainted about the profit that will be made when prices return to the pre-Go-Getters level? Why or why not?
• If Layton's was making a fair profit in the appliance-electronics department before Giant Go-Getters came to Worthyville, why wouldn't it be fair to raise prices back to the pre-Go-Getters level?
• If raising prices back to the pre-Go-Getters level gradually is desirable, does this mean that the perception of seeking a fair profit is more important than actually seeking a fair profit? And if manipulation of perceptions is most important, where does the manipulation stop? For example, is it alright to jack up the retail price of an item and then sell it on sale at what would reasonably be the regular price?
• Can the standards of what constitutes a fair profit change due to circumstances like those described? That is, can it be the case that what constituted a fair profit before Giant Go-Getters arrived is no longer a fair profit once it has been established that a reasonable profit can be made at a lower price?

Scenario 4

    Elaine DeLeo has another decision to make at about the same time. A local importer, Western Imports, has established a connection in Bolivia to acquire high quality, locally produced goods such as baskets and woven cloth. For each dollar paid to local crafts people, the importer expects that a retailer in the U.S. could sell merchandise for $30. For example, a basket bought for $1. could be sold for $30. Western Imports proposes to charge DeLeo's Layton's store $6. for each $1. it spends in buying the Bolivian goods; it also agrees to pay the shipping charges and any import duties.
    Accepting the Western Imports offer can produce considerable profit, since the sale price will be six times the basic acquisition cost.
    Western Imports hopes that Elaine DeLeo also will bring this proposal to upper management so it can sell large quantities of these goods to the whole Layton's Department Store chain.

    Questions for Further Thought:

• If she agrees to the Western Imports proposal, is everyone concerned making a fair profit? Why or why not?
• If Western Imports pays the native workers what they expect to get and what other workers in Bolivia normally expect for their labor, isn't the company merely operating within the accepted standards of Bolivian culture? And if so, doesn't everyone benefit by getting what they want--the Bolivians who earn money, the U.S. consumers who get products they want, and Western Imports and Layton's who get to maximize profits handsomely?
• Isn't Western Imports entitled to be rewarded handsomely for its ingenuity in establishing this Bolivian connection?
• If native workers in Bolivia are unaware of the prices of their goods in the U.S. and are more desperate for work in order to provide a livelihood for themselves and their families than Western Imports, is it the case that they are not free and equal bargainers in making a deal with Western Imports, in which case the importer may not be making a fair profit? (Where does this line of thinking end: If consumers take advantage of the desperation of a business in trouble that has to slash prices, are they being unfair?)

Scenario 5

    Ben Lesko is a senior vice-president with Layton's Department Stores, charged with making a recommendation for promoting a local store manager to Regional Supervisor. One of the candidates is Elaine DeLeo.
    Elaine has a solid record of success throughout her career with Layton's. She has excellent managerial skills, getting along well with her superiors as well as with any employees working under her supervision. The Worthyville store she manages is doing quite well financially and maintains a high reputation in the community.
    There are just two problems that have arisen. Layton's likes to give its store managers considerable leeway to make their own decisions. And two of Elaine DeLeo's decisions have been called to Ben's attention.
    First, there was her decision not to raise prices significantly on appliances and electronics when it was no longer necessary to keep them low to meet competition from a discount retailer, Giant Go-Getters, because the company went bankrupt. She justified her decision by saying that Layton's was producing good profits without the need for an increase and that it was good public relations with customers not to be seen as taking advantage of every market opportunity to maximize profit.
    Secondly, there is a letter from a company called Western Imports, complaining that Elaine DeLeo is a communist and doesn't understand the free enterprise system. The company is upset because of DeLeo's response to a proposal that would have assured handsome profits to the Layton's Department Store chain. Instead of accepting the proposal (already described), she said that, in conscience, she could not accept a proposal that seemed to involve exploitation of poor, native workers in Bolivia and also exploited people in the U.S. by producing exorbitant profits for Western Imports and Layton's. As a counterproposal, she suggested that Western Imports should pay native workers $2.50 instead of the previously planned $1., that Western Imports would still make a reasonable profit by selling to Layton's at $6., and, in return, she would hold Layton's profits down in her store by not charging more than $13.50 for each original $2.50 expenditure.

    Questions for Further Thought:

• Should he refuse to recommend Elaine DeLeo for the promotion because she doesn't satisfy normal expectations with regard to producing fair profits for Layton's? Why or why not? Would it be generally accepted business practices both to raise prices to the pre-Go-Getters level and to make as much profit as possible through the Bolivian connection?
• If Elaine DeLeo has higher ethical standards and seeks a fairer profit in comparison with generally accepted business practices, should she be punished for this? Is it possible to be too morally scrupulous in seeking a profit--either because a person is naive about moral standards or unwilling to face the realities of the business world?

Scenario 6

    Remember that Giant Go-Getters went bankrupt. It was a subsidiary of Megacompanies International that got into trouble for two major reasons.
    The first reason was the effect of a takover attempt by the corporate raider Sir Ian Jakelad. Jakelad put himself in a win-win situation. If he succeeded in taking over Megacompanies, he could reap an enormous profit by selling off valuable subsidiaries and then selling his stock before the harmful effects of servicing the heavy debt incurred in the takeover became too burdensome. If he did not succeed in the takeover, the mere threat would be enough to force Megacompanies to buy out his stock at an inflated price, thereby guaranteeing him a huge profit.
    Megacompanies decided to buy him out and, in doing so, took on a heavy debt that put it into financial trouble. To raise cash, it sold off Giant Go-Getters which, in turn, ran into problems leading to bankruptcy. Sir Ian walked away with a 120 million dollar profit.

Questions for Further Thought:

• Did Sir Ian make a fair profit? Why or why not?
• If he had taken the first course and actually taken over Megacompanies, would he have made a fair profit? Why or why not? So long as Sir Ian Jakelad was willing to take over and run Megacompanies International, if the takeover attempt was successful, don't we have to agree that he was making an honest attempt at a takeover within the free market system rather than blackmailing the conglomerate into buying him out?
• Wasn't Jakelad just interested in making a profit so that it didn't make much difference whether he was really motivated by an interest in blackmail? Basically, Jakelad would resort to any measure he could get away with to make a profit? Wouldn't he have been quite willing to run the conglomerate into the ground so long as he could make a profit? Is all this productive of fair profits?
• Does an honest takeover attempt require some sincere concern for its effect on employees of a corporation and some desire to improve a corporation by developing new products and services that would be of some use to people? If so, does it follow that Jakelad was not making a fair profit?

Scenario 7

    Another reason for Giant Go-Getters' problems was a public relations debacle regarding a defective circuit breaker in its own Clarista brand of electronic products. Under conditions of high temperature and humidity, the circuit breaker occasionally sent an additional electrical surge that created an even greater fire hazard. Giant Go-Getters found out about the defect only after millions of units had been sold.
    The hazard only occurred under unusual conditions and, even then, there was no guarantee of an actual fire. Giant Go-Getters executives considered recalling all the products with the defective circuit breaker. But their fiscal affairs department informed them that no recall contingency had been built into the pricing for Clarista products so that the company would suffer a huge financial loss with a recall, while their legal department informed them that it would be hard to prove that the circuit breaker was the cause in any particular fire. So instead, they decided to stop using the circuit breaker and handle any possible lawsuits as best they could. Besides, they didn't want everyone who bought a Clarista brand electronic product and then had a fire in their home or workplace to place the blame on Giant Go-Getters and then sue for compensation.
    The policy didn't get the company into trouble, although there was a series of consumer complaints and rumors--until there was a house fire in which three children died and suspicion about the cause focused on defective electronic components. At that point Don Gleski, an accountant at Giant Go-Getters, made public a copy of a memo outlining the company's knowledge about the circuit breaker defect and its policy decision not to have a recall.

    Questions for Further Thought:

• Was Giant Go-Getters making a fair profit, although it did not order the recall? Why or why not?
• Since no proof has turned up yet that consumers have really suffered harm in fires due to the defective circuit breaker itself, can Giant Go-Getters be accused of making an unfair profit by not ordering a recall? Without proof, is their decision not to order a recall lacking in nobility but not really a unfair way of gaining a profit? Is their intention really important here?
• Is the deception of the public by Giant Go-Getters in itself sufficient to establish that the company sought to make an unfair profit?

Situation 8

    Another problem for Giant Go-Getters arose when eight veteran technical experts and account managers (each with more than eight years experience with the company) came up with an idea for a more advanced digital laser stereo system but decided to get independent financial backing and establish their own company rather than seek development of the stereo system by Giant Go-Getters.
    Some of their early ideas for the new stereo system came up while at work; but, early on, the breakaway team decided to plan their moves at meetings after working hours and away from company grounds. They also relied heavily on their new company's labs to further develop the product.
    Their new company has been doing very well financially, especially in competition with Giant Go-Getters stereo systems. The contacts the breakaway team made while with Go-Getters have been very helpful in promoting the new company.
    Giant-Go-Getters filed a lawsuit against the company, alleging that trade secrets and contacts developed at Go-Getters were the basis for the new company's product and demanding compensation. Although all the breakaway team members had signed a non-compete agreement with Giant-Go-Getters at some time or other, technical flaws in the agreements left them legally questionable. The bankruptcy ended the litigation.

    Questions for Further Thought:

• Is the breakaway team making a fair profit? Why or why not?
• Are they making a fair profit because employees should be free to break away from a corporation, especially to develop their own business? Why should a corporation be able to interfere with employees' opportunities to make a living in their chosen occupations?
• Since Giant Go-Getters underwrote the training and funds for the technical experts and account managers, is the corporation entitled to any financial fruits explicitly tied to this training and funding so that the new company is not making a fair profit? Would the employees have come up with the ideas for the more advanced digital laser stereo system without that training and research?
• Does all the breakaway team members having signed a non-compete agreement, even if it was legally flawed, show that the new company is not making a fair profit?

    To consider any one of these scenarios in terms of moral frameworks, click appropriately below:

Popular Moral Frameworks I (Week 2)

Popular Moral Frameworks II (Week 3)

Free Market Moral Frameworks (Week 4)

Two Basic Philosophical Moral Frameworks (Week 5)

Further Moral Frameworks I (Week 6)

Further Moral Frameworks II (Week 7)

© 2006 by Ron Yezzi