Group 2

For as long as anyone in Blair, Indiana, could remember, the Peerless Starch plant had always been
the biggest thing in town. Built on a slight hill above the sluggish river, and designed to look as much
like the Tower of London as anything in Indiana can, the plant dominated the town spiritually even
more than it did physically.

Peerless was the largest employer in town, employing well over 8,000 men out of a population of
120,000—or every fourth head of a family. It paid the highest wages, if only because most of the men
were rated as skilled workers or technicians. And alone of all
the large businesses in Blair, it was locally managed; the Peerless top management sat on the fifth
floor of the big mill itself, in the “New Building” that had been put up in the 1940s. And from the chief
executive officer—the grandson of the founder—on down, all executives were Blair men who had
started in the mill and worked their way up, and who were more often than not second- or
thirdgeneration Peerless employees.

Peerless had started in Blair during the Civil War when the founder had developed one of the first
methods to extract starch from corn. Until the 1940s, Peerless had only one mill. But the company
had prospered so much that three additional mills were built in rapid succession during the years
after World War II: one in Illinois, one in Texas, and, the biggest yet, in Oregon, built in the late 1950s.

But while Peerless had flourished, the town of Blair had not. During World War II it had boomed. But
then Blair had gradually drifted into being first a run-down and then a depressed area. One after the
other of the town’s factories had laid off people and then finally closed its doors. The Peerless mill in
Blair seemed to be the only exception to this general rule of slow decay and downhill drift. But
appearances were deceptive. Actually, the Peerless mill in Blair was in dire straits and was kept going
only by the success of the new mills in other states.

Blair’s sales were about one-fifth of the entire Peerless Company’[Link] the Blair Mill employed almost
half of Peerless’s hourly rated labor force and three-quarters of Peerless’s managerial and
professional people. Unlike the other mills, Blair did not make its own raw materials but got
intermediates from outside suppliers or from the other mills. It should, therefore, have needed less
labor per unit produced. Instead, it needed up to four times as much.

There were reasons for Blair’s high costs—or at least there were arguments to justify them. The mill
itself was a towering structure built to withstand the Crusaders’ armies but ill-equipped for modern
production. All newer Peerless mills, for instance, were single-story buildings, whereas Blair had five
stories capped by twin towers. Nobody at Blair ever got fired; if a man couldn’t do a job, the word
from the head office was “Find him another one.” If a new process came in, the workers on the old
one were quietly moved to plant maintenance—or, if they had any skills, were made supervisors,
with the ludicrous result that there were whole departments with more supervisors than workers.
Above all, Blair considered itself a “quality mill,” and that apparently meant that nothing could be
produced in quantity. But the central problem of Blair—and the greatest drain in money—was
precisely that Blair did not turn out quality products. Rejection rates at Blair ran almost twice as high
as at the other mills. What the Blair quality-control inspectors accepted provoked angry complaints
from the customers. Indeed, as everyone knew, the salespeople spent little time selling. They spent
most of their time talking customers into not sending the stuff right back to Blair as faulty and
unusable—often by granting the complaining customer a nice rebate. It never appeared in the Blair
direct cost accounts but was charged off to the overhead account “miscellaneous customer service.”

Things had been drifting from bad to worse—and no one in Blair expected that they would ever
change. But then suddenly, in the spring of 1985, a number of circumstances coalesced.

1. The founder’s grandson, the “old man” who had run Peerless for thirty-five years, died.
And it turned out that the founding family owned practically no stock at all. Thereupon
the outside directors, who had not dared speak up while the “old man” was alive, refused
to appoint his son-in-law or his nephew as his successor. Instead they picked an outsider
to become president and chief executive officer: John Ludwig, who was not even a native
of Blair, let alone a chemical engineer or a starch machinist. In fact, Ludwig had been with
Peerless less than four years—and had been imposed on the “old man” by some of the
outside directors. Having started as an industrial psychologist, Ludwig had first taught,
then worked for the Pentagonas a training specialist, then in Industrial Relations for Ford,
where he helped reorganize one of the major divisions and then had become general
manager of one of the smaller Ford Motor divisions. He had come to Peerless in 1981 as
its first “professional manager”—at least the first one in Blair—and as executive assistant
to the president. The“old man” had kept him busy with the affairs of the other plants, so
that he knew very little about Blair. Although he had several times thought of resigning
what he felt was a futile and frustrating assignment, he now found himself in charge.

2. Even before the death of the “old man,” things had turned critical at Peerless, and
especially at Blair. The market had suddenly become competitive. Synthetic starches and
adhesives were flowing onto the market out of the labs of the chemical companies and
the oil companies and the rubber companies—businesses that never before had been
competing in the starch market. Peerless and a few other companies used to have the
field all to themselves—and carefully refrained from hurting each other too badly. But the
newcomers didn’t know what everyone else in the industry knew: you can’t make the
market bigger by lowering the price or improving product performance; all you can do is
spoil the market for everybody. Worse still, the success of the newcomers seemed to
disprove such old “truths.”

3. The new mills in Illinois, Texas, and Oregon had managed to hold their own—indeed
Oregon did phenomenally well and managed to bring out a highly profitable new line of
synthetics (without even telling the folks in Central Research in Blair) that quickly became
industry leaders. But Blair came close to [Link] supply abundant, customers flatly
refused to tolerate the Blair
Quality—or lack of quality—anymore. Despite all the efforts of the sales department, whole carloads
of the stuff came back—often with a curt note: “Don’t bother to call on us anymore; we have
contracted to buy our supply elsewhere.” And Blair, which for years had been
barely breaking even, plunged into the red. By mid-1985 Blair was losing more money than the other
three mills made, so that Peerless no longer showed any profit and, indeed, barely managed to earn
the interest on its fixed debt. Blair, clearly, was bleeding Peerless white.

As soon as Ludwig had become president, he asked the ablest man in Blair management—an assistant
manager of the Blair plant—to study what could be done with Blair. The result was a recommendation
to spend some $25 million on modernizing the Blair plant. For this sum, the assistant manager
promised, Peerless would get as modern a plant as any in the country (to build one from scratch
would cost around $60 million). Employment in the modernized plant would shrink from 8,000 to
2,600.

Ludwig had resolved not to take any action until the assistant manager completed his study. But he
hadn’t been idle during that time. He himself carefully studied the economics of Peerless, which had
previously been kept rather secret. It soon became apparent to Ludwig that, economically, Blair was
untenable. The only economically justifiable course was to close the Blair mill and not replace it. The
existing mills in Illinois, Texas, and Oregon could easily replace Blair’s production volume—at a
fraction of Blair’s cost and at superior quality. Closing Blair would entail very heavy short-run costs,
mainly severance pay. But within six months, the Peerless Company would have absorbed the loss
and would have become profitable again. If Blair was kept going, no matter how successfully
modernized, Peerless could at best hope to break even—and the capital required to rebuild Blair
would use up all the credit Peerless could possibly command—if indeed that much money could be
raised in Peerless’s shaky condition.

Ludwig was deeply disturbed by this conclusion. He knew how much the Peerless Mill meant to Blair;
without it there weren’t going to be any jobs in the town. He himself was old enough to remember
the Depression days when his father, a machinist in a Milwaukee automobile plant, had been
unemployed for three bitter years. Yet Ludwig also knew that he had to make a decision fast. When
he had been made president, he had asked the board of directors to give him six months to study the
situation—and the board had given him that much time only grudgingly. At that time the board had
not really known how bad things were—and at the next Board meeting, in January 1986, he would
have to tell them that the first nine months of 1985 had been catastrophic months. Surely at that
meeting, if not before, the board would expect him to have a definite recommendation.

As a business decision, there was clearly no choice: Blair had to be closed. But what about the
company’s social responsibility to Blair and to the people who depended on the Peerless mill for their
livelihood? The more Ludwig thought about this the more he became convinced that Peerless had
the social responsibility to try to save the Blair mill, and the town with it. There was a fair chance,
after all, that the rescue operation would succeed. He was not at all sure that his board would go
along—indeed, he half-suspected that the board would ask for his resignation rather than authorize
spending $25 million on Blair. Still
he saw no choice in conscience but to try. But before recommending to the board that the Blair mill
be remodeled, Ludwig thought it prudent to discuss the matter with an old acquaintance, Glen Baxter.
Baxter had attended the same college as Ludwig, had wanted
to become a minister, and had actually had a year or two of divinity school, but had then turned to
economics and was now the economist for the very union that represented the Peerless workers.
Ludwig was really more interested in getting Baxter’s support than in getting his advice—privately,
he had always considered Baxter somewhat of a “radical” and an “oddball.” But Ludwig knew that he
needed union support for any plan to rebuild Blair—and that his board would not even listen to such
a plan unless he could give assurances of union support. And surely Baxter would support a plan that
maintained 2,600 jobs for his members!

Much to Ludwig’s surprise, Baxter did no such thing. On the contrary, he became almost violent in
his opposition. “To invest all this money in rebuilding Blair,” he said, “is not only financial folly; it’s
totally irresponsible socially. You aren’t just president of the Blair mill; you are president of the
Peerless Company with its 8,000 employees outside of Blair. And you propose to sacrifice the 8,000
people you employ outside of Blair to the people at Blair. You have no right to do so. Even if you
succeed and Blair survives, Peerless will have lost the capacity both to pay severance pay and
pensions should you have to lay off more people and to raise the money to modernize and expand
the other mills and to maintain the jobs
there. All right, John Ludwig, maybe you’ll be a hero in Blair with your plan, maybe people there will
think you’ve done great things for them. But in my book you’ll be a cheap demagogue—as president
of the company you are paid for doing the right thing and not for
being popular.”

“Of course,” Baxter said, “we in the union will do everything to make closing Blair as expensive as
possible for Peerless—we do have a responsibility toward our members. But for you to jeopardize
the jobs and livelihoods of the workers in the healthy plants just because you have a guilty conscience
about Blair’s mismanagement all these years—that’s the height of social irresponsibility.”