TEAM DIGBY

Bausch & Lomb Case Study

MANA 6383

Daniel E Gill held the position of CEO of Bausch & Lomb from 1981 onwards, being described as Tenacious, demanding and very numbers-oriented. Due to this style of leadership, the tremendous pressure pumped down the line from Gill to make the numbers indirectly fostered this environment of improper revenue recognition. This also launched the Bausch & Lomb brand into the media forefront with bad press that inevitably damaged the brands equity, as witnessed in its stock price decline and decreased believability from its stockholders. One of the major strategic issues Bausch & Lomb is faced with is to determine whether Gill should be removed as CEO and who should be put in place to ensure the company is able to rid itself of the current tarnished image and restore its brand back to its dominant pre-scandal days. Bausch & Lomb has some major internal issues it must first address. The first major issue is that Gill has imposed a numbers oriented, work environment that has led to managers across all divisions to work and ensure the agreed numbers are met. There was tremendous pressure on all departments through the company to achieve double digit increases in revenues each year, which led to unscrupulous accounting practices by upper level management. Second, the manner in which Bausch & Lomb implemented its promotional programs led the company to see tremendous growth in its sales figures at the turn of the year through channel stuffing. The September and December promotion programs along with the generous credit terms offered enticed distributors to take on excess inventory that had no chance of being sold in order to boost Bausch and Lombs year-end figures. Third, the LAMEX and Hong Kong Division scandal had changed and damaged the reputation of Bausch & Lomb. Bausch & Lomb had falsely accounted for revenues and sales for, and the press coverage that followed was negative especially after the Hong Kong Division scandal. Finally, management failed on all parts to audit the integrity of all data being reported back to them. The increased figures during the turn of the year should have been a major alarm bell for management to try and spread the sales throughout the year instead of having hikes, especially as the product is not seen to be seasonal or have seasonal fluctuations. Consequently, by the time that senior management began to realize these indescrepencies, the problems had already been exasperated through the media. Externally, Bausch & Lomb was seen to be a very financially attractive company to investors, however the investment community has begun to criticize its internal practices and current shareholders are beginning to question the CEOs tactics and practices. Secondly, the scandals that confronted Bausch & Lomb have led the media to pursue persistent attacks on the manner in which Bausch & Lomb conducted its business activities. The company was forced to release press releases in June 1994 in regards to the balloon payment plan, as many distributors were forced to send back additional stock to Bausch & Lomb. It was just a few months earlier that Kiplinger Personal Finance Manager magazine covered the story of the $70 a pair lenses being the same as the $8 a pair (rebranded as SeeQuence 2 and Medalist), and those being offered soon for $3 a pair. This led to angry consumers auctioning lawsuits. Business Week had also been reporting on the financial mismanagement that had been taking place at Bausch & Lomb. Improper revenue recognition and accounting irregularities saw the financials skew in favor of the firm. In regards to the competitive landscape, the contact lens market was highly competitive. Johnson & Johnson were a major threat to Bausch & Lomb in the soft contact lens division. Johnson & Johnson were innovators and leaders by creating extended-wear lenses two years ahead of Bausch & Lomb. Johnson & Johnson in 1987 developed the first disposable contact lens and this caught Bausch & Lomb totally off guard forcing them to falsely advertise an existing obsolete product, to be revolutionary which in the long run bought Bausch & Lomb into trouble. Finally, the new distribution plan that was imposed meant that many distributors were being forced to carry excess inventory. In some cases, the distributors were asked to carry inventory over the value of their own businesses net worth. Bausch & Lomb also angered optometrists and opticians by cutting them out the distribution channel, and choosing instead to go with optical retailers for the distribution of the extended-wear contact lenses. This cut led the optometrists and opticians to see a sharp cut in their revenues and in turn this affected their offices profits. The press attacks were directed towards Bausch & Lomb and were mainly due to the manner in which Bausch & Lomb had been conducting its accounting practices. This is tied to the leadership style by Gill, as he expected high returns from his managers and departments, which resulted in violation of ethics and financial mismanagement to achieve the high double-digit growth. The press
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TEAM DIGBY

Bausch & Lomb Case Study

MANA 6383

attacks also were linked to the negative media that surrounded the scandals at LAMEX and the Hong Kong Division. The Channel Stuffing practices adopted by Bausch & Lomb are tied to the distributors being forced to carry excess inventory during the promotional end of year campaigns. This led Bausch & Lomb into positions where it could report financial gains for the end of the year. The lawsuits filed by customers against Bausch & Lomb for the SeeQuence 2 and Medalist were driven by the managements unethical procedures and practices which can also be tied to the focus being drawn in on numbers and achieving continuous growth year after year for all departments. The first alternative could be to remove Gill as CEO of Bausch & Lomb and hire a new management team. He has already been identified by the representative of a major shareholder as the contributor to the downfall. This may help build public and shareholder confidence in the company as they see that change is occurring. He can be replaced with someone with a proven record who can take the company forward. This can also lead to the stock price increasing in the long run and the company culture changing based on ethical values. The downside to this is the stock price may fall even lower as Gill was seen as the one to drive superior growth. The replacement may also not be an ideal fit and attracting the best candidate is going to be difficult due to the companys current position. The culture change may be difficult to enforce and may further drive the companys investment appeal negatively. The financial implications are that the replacement may be costly, and the removing of Gill may also cost the company money. A new management team could cost the company more financial investment in the short-run, but lead to long-term benefits such as an increase in stock price. Another alternative is to attempt to change the company culture by placing a higher emphasis on ethics and ethical practices. This will allow the company to build its brand back up and regain investor faith, leading to an increase in the stock price. Ethics will be the foundation and emphasis of the companys objectives in the short term and they will achieve all their other goals around being ethical and conducting ethical practices. However, adopting this method requires time and could take a while for employees to get fully on board. It also requires correct management and if done incorrectly could have an adverse effect on Bausch & Lomb. It may also be hard to sell the new compensation package to managers in various departments, as the focus will be drawn away from the numbers. In theory, the financial implications should not be too costly to implement. However, if implemented incorrectly or the employees fail to adhere it will drive the company into a worse position. With full employee support and renewed faith coupled with effective implementation, it will lead the stock price to increase as the changes can be seen by the public and stockholders alike. The recommended strategic course of action would be to remove Daniel Gill from his current position as CEO because ultimately, it was his unvigilant ways of senior management that bred and fostered this unethical environment. Furthermore, the C-suite should also be replaced and the new management team should consist of experienced executives who have solid reputations for respecting ethical ideologies and practices. This is the most viable option to restore trust in the brand and is critical for Bausch & Lomb to try to recover from its long-lasting slump. With the addition of the four new independent directors, the firm should consider creating an ethics and compliance committee to ensure transparency, compliance, consistency, as well as conformity across its entire firm. This committee should be able to audit internally and it will create a sense of checks and balances for the C-suite, to ensure that senior management is making strategic issues that benefit the company without jeopardizing its brand. A reevaluation and overhaul of the senior management compensation package needs to be implemented as well. Under the old compensation package, there was no indication of being rewarded for actual realized revenues- instead it was merely based on account receivables. This inadvertently created a hostile environment for employees to demonstrate unethical practices just to meet the numbers due to the stress from senior managers. The new compensation package should account for employee satisfaction and place heavy emphasis on actual revenues. The obvious limitations of the strategic recommendation would be to sell the public on the C-suite overhaul and change in corporate culture and practices. Even with the most strategic tactics in place, it is ultimately up to the stockholders- employees included- to decide if they will restore their trust in the new senior management. The alternative to them not buying into it may ultimately cause this recommendation to fail.
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