Answer on the B question to Preview Company article.
The time I had on investigating this text I can point that there are several factors that have led to and facilitated Harris’s manipulation of inventory in Preview Company’s control environment. According to the information given in text, a new competitor has entered Fabricator’s markets in order to grab market share. Huge companies (business sharks) know that if somebody enters a market, the war of the wars surely to begin, they take the win or they lose to competitor. Competitor has offered substantial price reductions for a variety of standardized parts for small appliances.
Harris has been the general manager for several years, and each year he has been able to improve the profitability of the division. Last year, he made a huge improvement in profitability of the company, by aggressive cost cutting and substantial reduction in control activities over inventory. The company will struggle a lot if his competitor take all the. All those clients will terminate their contracts. More serious actions will be needed to get all clients back if needed. As we know his compensations are based largely on the division’s profitability (the more company makes, the more money he makes) and he needs to make some critical actions to keep his salary and compensations being stable all the time. Even if the Preview Company division goes bankrupt, Harris can lose investments that he had to this company and even lose his job. All that work that he did for this company will disappear and actions that he took plus profit that he made will disappear.
Harris made his move by matching up the price cuts in hope of maintaining market share. Otherwise if he doesn’t do that, the competitor will win everything because of low price, if the quality of both products are the same, the one who has lower price will be always profitable. Despite of company fame and years on the market, competitor can steal everything by entering the market with the same or even better quality of items that Preview Company had. All it matters is the price.
Based on all experience that he had, he makes a new decision. He has decided that the only way to make division profitable is to manipulate inventory. He surely knows that controls over inventory are weak. Harris has an idea, that if he do the cost cutting and substantial reduction again and this time he pays attention on a such thing as inventory controls he will reach success in making price stable and being a good competitor to other company. Harris has an idea, that once the competitor stop cutting prices it means they will start losing money and Fabricator division products will be popular because it has lower price, and if competitor goes bankrupt there will be no other competitors on the market. He will not have nothing to worry about, since the misstatements in inventory can be corrected with little impact on the bottom line. And in future he might even higher the price little bit, as he will be the only one who sells that kind of product on the market.