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July 10, 2007

Case Study II
(UGBA 178, Mefford

Etch-A-Sketch Ethics
[1] Was it ethical of the Ohio Art Co. to move production to China? What were the
economic and social costs and benefits of this decision? What would have happened if
production had not been moved?
The decision to close and move a plant raises important issues about the social
responsibilities of a corporation. To make an ethical judgment, one must look at the impact the
decision has on various stakeholders. On a macroeconomic level, both the US and China
benefited. The US gained lower prices and subsequently an increase in disposable income;
poor Chinese villagers gained higher paying jobs and were able to move from the countryside to
the city. Social costs to domestic OAC workers were high. The city of Bryan, Ohio, population
8000, lost a key employment base; as a result, a community was destroyed. The former OAC
workers were left jobless and had no income stream. They were unable to pay their mortgages,
which resulted in many home foreclosures and auctions. Many were forced to leave the town
and look for work in other parts of the country. The city lost a steady tax stream. From a
business perspective, OAC didnt break any prevailing laws. OACs decision to offshore
stemmed from an inability to lower production costs and reverse two years of losses and
sluggish sales (p160).
In the short term, OAC may have been able to preserve jobs, but eventually the losses
would have amounted to a larger restructuring costing more job losses. The issue behind the
cuts was the fact that retailers wanted to keep the product under $10, this pressure in unison
with high worker wages and operations costs forced the company into a hard decision. Raising
the cost of the product would reduce demand from consumers and retailers, this hits the bottom
line and we have a case of shrinking margins. The long term viability of the corporation comes
to center stage. If it cannot survive (i.e. profit), job losses will inevitably occur.
Thus it can be argued that OAC made the ethical decision in this case to maximize profit
and shareholder value (p138), while also maintaining a sense or moral responsibility by
gradually off shoring production activities. Though devastating to the town, these moves allowed
people to move on and hopefully find other modes of employment.
[2] Assuming that the description of working conditions given in the NY Times is correct,
is it ethical for the Ohio Art Co. to continue using Kin Ki to manufacture Etch-A-Sketch
toys?
Given that the news from the NY Times is correct, OAC must weigh the situation from a
broad spectrum of ethical and economic theories. The text highlights many different ethical
paradigms. Two opinions seem to take pertinence: the nave immoralist and the righteous
moralist. Viewing the situation from the standpoint of a nave immoralist one would argue that
since Chinese factory owners as whole have been known to break laws and run sweatshops, it
would be ethically okay for a foreign company such as OAC, to follow in suit and not follow local
laws as culture prevails. A righteous moralist would argue that ones home country
standards are the right ones to follow. Hence a company such as OAC should stop doing
business with Kin Ki because of it gross human rights violations. I think that in either paradigm
there are obvious flaws. The righteous moralist fails to take into account that by applying
standards that are applicable in the developed nation may nullify the very reason for going into
the developing nation. The nave immoralist seems brazenly irresponsible and would lead to
extremely poor publicity. Immanuel Kant highlighted the view that human rights are undeniable,
people should be treated as ends rather than purely a means (p142). From a business
standpoint we see that OAC made the decision to go into China was based on the advertised
human rights conditions of Kin Ki; happy worker, good meals, pension, competitive wages, and
these standards are the same for the region, and are widely accepted. Kin Kis failures to meet
these minimum standards are unacceptable, as such; OAC should review and enforce its

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Case Study II
(UGBA 178, Mefford

contract with Kin Ki and make sure the factory is being run in a legal manner, if not they should
terminate their relationship.
[3] Is it possible, as Mr. Killgallon claims that the Ohio Art Co. had no knowledge of labor
problems at Kin Ki? Do you think company executives had any knowledge of the working
conditions?
It is possible, but unlikely, that Mr. Killgallon and the other executives didnt have
knowledge of the labor problems at Kin Ki, if true, this admission shows gross negligence of the
responsibilities entrusted to the executive board. The key decision makers would have had to
be in the dark about the reasons behind the low costs, conditions, salary levels, costs to the
subcontractor, etc. This can be understood if this was the companies first time in China, as
business practices come through experience, but OACs move to China for the Etch-A-Sketch
product was not their first time dealing with Kin Ki, in fact they had in business together for a
decade producing a pocket sized version of the same product (p160). This fact reveals that for
almost a decade, OAC had been selling products produced through sweatshop labor.
In this case, the executives at Ohio Art Company are to blame for not taking the
appropriate steps to know all the information about a supplier prior to engaging in a business
venture. They are to blame for not asking the right questions and all the necessary questions.
They are also to blame for not investigating the suppliers operations both prior to the start of
operations and during operations.
Further, the management of the company had a responsibility to make the best
business, moral, and legal choice for all the companies stakeholders. In their hands lay the
jobs of hundreds of OAC workers who were most likely convinced on the fact their layoff was
inevitable but that the company that they had put so much hard work into would continue to
represent their core values and beliefs (Whats a business for? p3).
[4] What steps can executives at the Ohio Art Co. take to make sure they do not find the
company profiled in the NY Times again as an enterprise that benefits from sweatshop
labor?
There are multiple steps OAC can take to improve its image and ensure that it is not
profiled again in The NY Times or another major news source as a firm that profits from the use
of sweatshop labor. First and foremost, the company needs to clean up its act at Kin Ki and
make its improvements known to the public. This damage control, at the very least, should
include:

Increasing worker salaries to at least minimum wage

Enforcing 40-hour work weeks
Providing pension plans, medical coverage and employment contracts to all workers
Allowing at least four breaks per day in addition to lunch and dinner
Improving worker meals and accommodations
Allowing freedom of expression and workers to unionize

The company should establish a code of conduct for all subcontractors and institute, at
the very least, annual monitoring by independent investigators and auditors of all
subcontractors. The company should also employ in-house regional managers to be in charge
of subcontractor relations and reviews. These managers should be trained in local cultural
practices and be well-versed in typical contract infringements in their review areas. This review
should not be limited to employment conditions. Mangers should be aware of environmental
practices, accounting methods, and any other possible violation areas. They should establish a

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Case Study II
(UGBA 178, Mefford

zero tolerance policy. Although improvements are not limited to the aforementioned
amendments, these changes will clearly help eliminate the fear of public damage by the press.