Introduction
Bankruptcy has often been viewed as an opportunity for an otherwise failing business to reorganize and bounce back to life. In fact, companies like Delta and American Airlines have filed for bankruptcy protection and used the opportunity to come back into the corporate world stronger and to be thriving. Nevertheless, bankruptcy does not always signal a second chance for businesses. In 2008, Lehman Brothers inc. The fourth-largest investment back in the US filed for bankruptcy protection. However, the bankruptcy filing did not protect the company from collapse. Consequently, bankruptcy may as well signal the end of a business.
Hertz Corporation is an American car rental company that has headquarters in Estero, Florida (Hertz, n.d). The company was founded in 1918 in Chicago, Illinois, and is a subsidiary of the Hertz Global Holdings. In 2005, the company was incorporated in Delaware. As of 2018, the company was the second-largest car rental company with operations in over 150 countries. Moreover, the company had 38,0000 employees (n.d).
In May 2020, the company filed for bankruptcy protection due to growing debt. The company’s CEO said that the decision to file for bankruptcy was due to the Coronavirus. Following the travel restrictions as well as unemployment and lockdown instituted in the US due to the virus, vehicle sales plunged since no one was leaving their houses to buy cars. Moreover, the restricted movement also led to a halt in vehicle renting. Consequently, the company experienced a lack of profits and low revenue in the wake of the Coronavirus Pandemic and was unable to make payments (Chokshi, 2020). For a company that had registered a 6% revenue after four years of losses, the virus was a big blow. Moreover, the company’s debt currently stands at approximately $19 billion against $1billion cash at hand. Even after filing for bankruptcy protection, analysts have expressed doubt that the company will be able to redeem itself. Even though Hertz cites the pandemic as the reason for its troubles, companies that are filing for protection today are those that had underlying issues even before the Pandemic (Naughton, Wirz & Lombardo, 2020). The purpose of the capstone essay, therefore, is to conduct a case study into the issues leading to the bankruptcy of Hertz.
Analysis
The analysis section will dig deeper into the internal and external environment of Hertz using frameworks like the Pestle analysis, VRIO analysis, SWOT analysis, and Porter’s five forces model to find threats that may have led to the downfall of the company and opportunities that the company can leverage to save itself if any.
Pestle analysis
The pestle analysis is one of the best tools that businesses can use to evaluate their external business environment. By analyzing political, economic, socio-cultural, technological, legal, and ecological factors, the tool allows companies to identify threats and opportunities that need to be addressed (Rothaermel, 2018).
Political
Businesses operate in a regulatory environment. Consequently, the political element of the Pestle analysis evaluates government actions and processes and how these may impact the operations of a given business (Rothaermel, 2018). In the US the political aspect is mainly visible in terms of regulations passed by both state and federal government to regulate the car rental industry. Over half of the states have rules for the car rental industry. However, laws from state to state differ and may include regulations on advertising, price quotes, and terms of vehicle loss or damage, among others. Such rules may either pose a threat or an opportunity for car rental companies.
One of the regulations that pose a threat to the operations of Hertz corporation is the Racheal and Jacqueline Houck Safe Rental Act of 2015. The act prohibits rental companies from renting out cars that have recalls, which disrupts business operations for Hertz. Another regulation is Article 2A of uniform commercial Code, which governs leases of tangible property, which include rental cars (SEC, 2020).
Hertz Corporation has operations outside the US (Hertz, n,d). Besides the regulations that may affect the company, political processes in the countries where the company operates may also impact on the business. For instance, the exit of the UK from the European Union popularly known as Brexit negatively impacted and is expected to continue impacting the operations of the companies that operate in the UK (Hertz, 2020).
Economic
Businesses are prone to interruptions from the external economic environment. The economic factors that may disrupt the market include inflation, recession, and unemployment levels, among others. The Hertz corporation relies mainly on airlines and the existence of internal and external flights to bring an income. The company specifically gains profit from leisure travels in Florida, Hawaii, California, and New York (Hertz, 2020). Unfortunately, the ongoing Coronavirus resulted in cessation of movement and lockdowns, which meant that traveling reduced drastically. As a result, the corporation lost its biggest source of revenue. Moreover, since most people are locked indoors, the company experienced a lack of payments as there is no one to rent their vehicles (Naughton, Wirz & Lombardo, 2020).
Unfortunately for Hertz, the International Monetary Fund (IMF) has predicted a recession and projected that the economy would decline by 3 % (Jones, Palumbo & Brown, 2020). A decline in the economy negatively affects Hertz and puts the company at risk of liquidation. Moreover, market reports indicate low growth, low inflation or deflation, and low-interest rates (Srinivas, Ramsay, Scoeps, 2019). Also, even before the pandemic, the strategic position of Hertz corporation was already under threat seeing as the car rental market share in the US decreased drastically (Ibis World, n.d).
Fig 1: Car Rental in the US Market Size 2002–2026. Source Ibis World
Social Cultural
Socio-cultural factors of the pestle address how culture, values, and norms of a people, as well as demographic trends and behavior, affect a business (Rothaermel, 2018). In recent years, consumer trends have shifted towards demand in luxury cars. Unfortunately for the Hertz corporation, it was not able to capitalize on the opportunity that came with the shift. For example, Hertz acquired a large fleet of Sedans even though consumer trends were showing a shift towards SUVs, which were more comfortable than the Sedans (Naughton, Wirz & Lombardo, 2020). As a result, the company lost a huge chunk of its customers to its competitors, who quickly seized the opportunity to acquire the vehicle type that customers wanted.
Demographic trends show that the US has become more and more diversified with the increase in the population of people of Hispanic origin. The diversity presents an opportunity for Hertz Corporation to target marketing to the diverse communities and increase the market share of the company (Llopis, 2015). Research has also shown that millennials are less likely to buy a private car and prefer other options like car-sharing and renting (Business Wire, 2020). Hertz and other car rental companies can capitalize on by tailoring their services to meet the needs of the millennial customer.
Technological
Technological advancements have brought with them opportunities and threats for the car rental industry. For instance, the introduction of car rental software to aid in management ad renting has provided a way for rental companies to streamline services for their customers and make it easy for fleet management (Elliot, 2020). Instead of walking to a car rental office, a client can log on to the website of a rental company and choose the car they want to rent and make payments through online services.
Unfortunately, technology has also brought a threat of cybersecurity and data and privacy breaches. Even though car rental companies are allowed to collect data about their customers, the use of the data is limited and regulated by cybersecurity laws. A breach of these laws results in lawsuits and litigations, which lead to losses for the company involved (Hertz, 2020). Moreover, the advent of online platforms like Trust pilot poses both a threat and opportunity for car rental companies depending on the nature of reviews that clients post on the platform. For companies in the car rental industry, technology also poses a threat to their existence due to the advent of ride-sharing apps, which are supported by mobile phone apps and which have already contributed to a fall in market share of the car rental industry (Hertz, 2020). The introduction of electric vehicles both in existing and emerging markets has also resulted in disruption in the car rental industry and presents an opportunity for car rental companies (Transparency Market Research, 2019).
Legal
As observed earlier, the rental car industry in the US is subject to both state and federal regulations. A breach of the rules leads to litigations and investigations that could lead to losses for a company. An example of rules that companies are expected to follow is taxation laws. Hertz corporation has been a victim of legal processes due to tax exemption, which led to a settlement with the securities exchange commission that cost the company a huge sum of money (Naughton, Wirz & Lombardo, 2020).
Ecological
Climate change is one of the issues that impact the operations of car rental companies. In the US various states have passed environmental regulations that affect the functioning of the car rental industry. For instance, one of the laws in California is that cars bought after 2018 must be zero-emission vehicles (ZEV) or a mixture of ZEV and hybrid to achieve environmental sustainability (Hertz, 2020). Such laws force car rental companies to only acquire and rent out vehicles that meet environmental regulations to avoid lawsuits.
Porter’s Five Forces Analysis
One of the aims of the case study was to gauge the level of competition in the car rental industry and see how this has affected Hertz corporations or how it may affect the company in the future. The five forces model was designed by Michael Porter and had five elements that collectively help to measure the level of competition in a given industry (Rothaermel, 2018). When a firm ranks low in the five forces of the model, then it means that the firm does not have a competitive advantage and is at the risk of being pushed out of the market by other firms in the same industry. On the other hand, higher ranking shows that the firm occupies a good strategic position and possesses a competitive advantage (Rothaermel, 2018).
One of the indicators of high competition in an industry is the threat of substitutes. The more the number of alternatives, the higher the competition. Substitutes are products that meet the same need as the product or service of a given company but which are different. Substitutes in the US car rental industry include public transportation like trains and buses, private cars, and ride-sharing companies (Hertz, 2020). Companies in the US have had to compete for market share with the different substitutes that exist in the transport sector.
Rivalry
Every business organization aims to attain a competitive advantage and make a profit. Consequently, businesses adopt different measures to ensure that they can achieve the top position in the market. The degree to which companies are willing to go to gain a competitive advantage is called rivalry (Rothaermel, 2020). In the US, Hertz corporation faces competition from various companies, which include Alamo, Enterprise Holdings, and Avis Budget Group. Competition is thus intense in the car rental industry in the US.
Enterprise Holdings is the largest company in the car rental industry in terms of revenue and the number of employees. Besides income and workforce, Enterprise also ranks high in other areas. For instance, in 2018, the company ranked best in terms of customer satisfaction, a position that the company has held for the last five years. Hertz corporation was ranked second, which was two steps higher from previous rankings. The ratings indicate that there is intense rivalry in the car rental market, which intensifies completion (Martin, 2018). Competition in the car rental industry has been high even historically, which has prompted the major players in the industry to pursue differentiation strategies in a bid to achieve competitive advantage (Noriega, Senser & Lunsford, 2016).
Barriers of entry
Barriers of entry refer to the difficulty of new companies to enter into the car rental industry. Barriers of entry are determined by such factors as capital, experience, and at times market regulations, among others (Rothaermel, 2018). New entrants eyeing the car rental industry face the threat of high capital as well as experience gained by the existing companies. Moreover, existing companies in the industry like Enterprise have a loyal customer base and have already saturated the market. Saturation makes it hard for new entrants to gain a foothold into the market. Consequently, competition for existing companies like Hertz is reduced. Moreover, existing companies often make it hard for new entrants to enter the market through different measures. For instance, even though car-sharing rides and car rental companies may be in various industries. The two see each other as rivals. Consequently, companies like Enterprise have been pushing for regulations that may limit the number of new entrants into the car-sharing market and thus reduce competition (Elliott, 2018).
Buyer Bargaining power
The buyer bargaining power refers to the ability held by customers of a company to influence price reduction and quality improvement. Buyer bargaining power is high when there are low switching costs and different options that buyers can explore. In monopoly markets, buyer bargaining is often weak, while the same is high in perfect competition markets (Rothaermel, 2018).
In the US, buyer bargaining power for car rental customers is high because customers have over four different companies to choose from. Moreover, customers do not incur high costs when they move from one company to the other. Consequently, companies are always trying to find new ways to make their customers stick.
Unfortunately, Hertz has underestimated the bargaining power of buyers, which has led to losses for the company. For instance, when the company bought Sedans, clients of the company moved to competitors who were offering SUVs for rent leaving Hertz with an aging fleet and counting losses
Supplier Bargaining Power
Almost like buyer bargaining power, supplier bargaining power refers to the level of control that suppliers have on their clients. Suppliers in the auto-car industry include employees. Before the virus, the US was already experiencing low unemployment levels, which gave employees the ability to lobby for better working conditions and higher pay, especially from unionized employees (Hertz, 2020).
Other suppliers of the car rental industry include the manufacturers of car rental software and automakers. There are different automakers and software makers in the US that car rental companies can choose them. Consequently, the supplier bargaining power of automakers is reduced.
From the Five Forces Framework, it is clear that Hertz corporation operates in a perfect competition market. Consequently, competition is bound to be high. Nevertheless, the company has adopted a differentiation strategy that has enabled it to consistently rank amongst the top three car rental companies in the US.
VRIO Analysis
The VRIO framework is one of the tools that helps understand a firm’s internal environment. The framework is based on the premise that firms with valuable, rare, and inimitable resources can achieve a competitive advantage in their respective fields. Consequently, the framework aims to identify the competencies that firms can leverage to improve strategic positioning and attain competitive advantage (Rothaermel, 2018).
Valuable
A valuable resource is one that enables an organization to leverage opportunities and mitigate threats (Rothaermel, 2018). Again, Hertz does not have such a resource, which makes it hard for the organization to leverage opportunities like those presented by technology and innovation. The lack of such a resource makes the company prone to threats both within and outside the company.
Rare
A rare resource is one that is owned by only a few companies in the market (Rothaermel, 2018). Unfortunately for Hertz corporation, it does not possess any resource that it is rare and consequently cannot be able to achieve a competitive advantage. Before the bankruptcy filings, Hertz appeared to have rare financial capability as one of the three major companies in the car rental industry. Unfortunately, the bankruptcy filing revealed that the company was in a poor financial position with over $6 billion in debt and only one billion in cash, which makes it easier for Hertz to be toppled by competitors (Naughton, Wirz, & Lombardo, 2020).
Inimitability
Inimitability refers to the ability of a firm’s resource to withstand imitation by other companies in the market either because the resource is expensive to imitate or because other companies may not be able to buy or make the said resource (Rothaermel, 2018). Unfortunately for Hertz, it does not possess such a resource which makes it hard for the firm to achieve competitive advantage
Organization
Organization refers to how a firm is organized to capture value (Rothaermel, 2018). The history of the Hertz corporation points to the poor organization of the company. For instance, the company bought Dollar Thrifty even though it had not made any plans on how it was going to integrate the two companies. Moreover, the company was unable to capture the value and potential offered by technology and by SUVs, which gave a chance to competitors to gain a higher market share than Hertz (Naughton, Wirz, & Lombardo, 2020).
SWOT Analysis
The SWOT analysis evaluates both the opportunities and threats in the internal and external environments of a company
Strengths
Strengths are internal resources that a firm can leverage to attain a competitive advantage. As observed in the VRIO analysis, the company may not possess many strengths. However, one of the strengths of Hertz corporation is its partnerships and Franchises, which enable the company to get income from different parts of the world (Hertz, 2020). Unfortunately, Coronavirus has affected business in the whole world, which means that even the revenue from the Franchises cannot save the company from its debts.
Another strength of the corporation is that it has been ranked as one of the most ethical companies which help with image and corporate social responsibility (Hertz, 2020). Even though the company still has some ethical issues, they are spread far apart and not popularized in the media.
Finally, the company has been able to use the resources it has to offer the best service it can to its customers, which has made the company rank second in the most satisfying company in the US car rental industry (Martin, 2018).
Weaknesses
A weakness is an internal factor that jeopardizes a company’s chances of attaining a competitive advantage. One of the weaknesses is the company’s poor leadership, which is indicated by the poor management as well as poor accounting policies of the company.
Poor leadership saw the company acquire Dollar Thrifty at a hefty price. To meet the price, the leaders passed the decision to take a loan from bond markets, which raised the company’s debts almost by half (Naughton, Wirz, & Lombardo, 2020). The Dollar Thrifty acquisition increased the indebtedness of Hertz by over 50%. While borrowing from bond markets is a good idea, it may be harder to negotiate with creditors in these markets than it is with traditional creditors like banks, which puts Hertz in its current predicament. Unfortunately for Hertz, the government rejected a request to bail the company out (Naughton, Wirz, & Lombardo, 2020).
Besides the high price of acquiring Dollar Thrifty, the company’s car tires were thinner than what was allowed by the Hertz Corporation. Therefore, Hertz had to replace the tires at the cost of $ 30 million, which further hurt the company’s financial position (Welch, 2020). The fact that Hertz did not conduct due diligence before buying Dollar Thrifty showed carelessness on the part of the firm’s leadership. To make matters worse, once the acquisition was complete, it became hard to integrate the two firms, which ended up costing the firm more money (Welch, 2020).
Another weakness is the lack of an innovative culture in the company and failure to adopt the technology. As Hertz was busy buying a fleet of older cheap and available Sedans that consumers did not want, competitors like Enterprise and Avis were replacing their fleets with SUVs, which consumers wanted. Moreover, competitors adopted technology and rebalanced their offerings (Naughton, Wirz, & Lombardo, 2020).
Besides the fact that consumer trends were showing a preference towards SUVs as opposed to Sedans, Hertz flouted ethics by acquiring the fleet of Sedans. Some of the cars bought had covered about 50,000 miles, which is way above the industry standard of 30,000 miles (Welch, 2020).
Management problems in Hertz went far beyond poor fleet management to disagreements in the leadership. Since 2014, the company has had four CEOs, all of whom left after failing to improve the company’s financial status. The most recent CEO to leave was Kathryn Marinello, who retired after clashing with the board of directors over corporate strategy (Naughton, Wirz, & Lombardo, 2020). The short leaved stays of CEOs at the company reduces the chances of the company developing relationships with investors and other industry players, which could make it easier for the company during negotiations.
Hertz accounting policies are also another weakness that led to the company’s piling debt and are, by extension, the reason why the company faces the risk of collapse. Besides the unwise spending and borrowing practices, a tax misnomer in 2019 led the SEC to fine Hertz a total of $ 16 million, which further weakened the financial position of the company. The company has misstated its pretax income in several business units due to accounting errors for the period between 2012 and 2014 (Naughton, Wirz, & Lombardo, 2020).
Finally, from the company’s current predicament, it appears that Hertz corporation does not have a disaster management plan. Even though the entire car rental industry in the US has been adversely affected by the Coronavirus, Hertz competitors like Avis and Enterprise will survive the pandemic, which shows that the companies had made arrangements for disaster preparedness (Chokshi, 2020). Unfortunately for Hertz, such plans were not there, and thus when the virus hit, the company lost all its revenue and ability to pay its debts, prompting it to sink.
Opportunities
Opportunities refer to externally occurring factors that a firm can leverage for competitive advantage. At the moment, there may not be any opportunities that the Hertz corporation can leverage soon due to the uncertainty surrounding Coronavirus, which makes it hard for the company to get back to its feet any time soon. However, should the company manage to avoid liquidation, there are various opportunities that the company can utilize once the pandemic is over and normalcy returns.
Forecasts in the car rental industry indicate that by 2025 the industry will reach an estimated $ 120 billion (Globe Newswire, 2020). One of these opportunities is to embrace technology. Hertz should use technology to improve user experience through the digitization of fleets and the rental process.
Another opportunity for Hertz is to update fleets by adding or acquiring more green cars as part of corporate social responsibility and legal compliance to reduce emissions. Moreover, Hertz corporation can pursue the idea of adding autonomous or self-driving vehicles to its fleet instead of hiring a driver, which would reduce costs for the company and be in line with trends in the car rental industry (Globe Newswire, 2020). Acquiring autonomous vehicles (AVs) may not be hard for Hertz, as it already has a partnership with Aptiv, which develops AVs for commercial purposes (Hertz, 2020).
Threats
Threats, just like opportunities, occur in a firm’s external environment. However, unlike opportunities, threats endanger a company’s strategic position in the market. Hertz corporation faces threats related to cybersecurity due to the increased use of technology in the car rental business. Another threat facing the company is economic conditions. The Coronavirus has adversely affected the global economy. There are no flights, both domestic and international, and there are no people hiring cars, which means that Hertz has lost all its sources of income.
The company also faces threats from the legal environment through the passing of laws that make the operations of Hertz difficult. For example, the Racheal and Jacqueline Houck safe Rental act of 2015 prohibits companies from using vehicles that have a safety recall, which may lead to the grounding of a whole fleet and affect the operations of a car rental company (Hertz, 2020).
Another threat facing Hertz is the intense rivalry and stiff competition in the US transport sector. Hertz faces competition both from car rental companies like Avis Budget as well as substitutes like Uber and Lyft, among others. With increased innovation and technological advancement, the risk of substitutes is likely to increase.
Yet another threat that Hertz corporation faces is the delisting of its stocks from the New York Stock Exchange. In the aftermath of the Coronavirus, Hertz resorted to selling its shares on a large scale. Unfortunately, the company has since received a notice from the NYSE warning it of potential delisting of its stocks (Winck, 2020). Even though the company countered the notice with an appeal to retain its position on the exchange, the threat is still looming. In the days after Hertz filed for bankruptcy, its stock prices skyrocketed fueled by demand from high-risk investors (Winck, 2020). However, following the notice on May 26, the stock prices declined. Should the stocks be delisted from the NYSE, Hertz stocks would lose equity, which would drastically reduce their demand threaten the company’s ability to pay back its debts and bounce back into the market. As a result, the company’s option will be a liquidation of assets to pay back its debts.
Strategy
Business leaders have a role in steering their companies and enabling growth. Consequently, leaders form a strategy that allows them to achieve growth in their companies. Strategy can allow leaders to specify how companies should compete and where businesses should compete in terms of product and geographical location. The current section addresses both the corporate and business strategy pursued by Hertz Corporation.
Business Strategy
Business strategy refers to measures adopted by a company to guide it on how it can compete in its given market or industry to attain a competitive advantage. Most of the time, companies use one or more of Porter’s generic strategies. However, it is not easy for a firm to use more than one of the three strategies.
Hertz has adopted a differentiation strategy. Companies that choose differentiation develop products that are tailored to meet the needs of a specific segment of the population. Hertz has differentiated its products and services according to the needs and wants of its target customers and their geographical location. Hertz then uses one of its business divisions to meet the needs of each segment.
The US Rent a Car (RAC) divisions of Hertz serves the population in the US through vehicle rental and sale of value-added services. The international RAC is like the US RAC but serving international audiences. The third division, Donlen business, offers integrated vehicle leasing and fleet management in the US and Canada (Hertz, 2020).
The US RAC is further divided into various segments, which are served by Hertz corporation under Hertz and its subsidiaries Dollar and Thrifty. Each of the three brands serves a specific group of customers based on the purpose of travel and the amount of money that the customer is willing to spend. Most of Hertz operations in the US depend on the airport vehicle rental market. (Hertz, 2020).
Corporate Strategy
While a business strategy specifies how a business is going to compete, the corporate strategy defines where the company is going to compete. The corporate strategy determines what business or service the business will offer and where the operations of the business will be based. Leaders formulating a corporate strategy make decisions based on the dimensions of vertical integration and diversification of products and geographical scope.
Vertical Integration
Firms always aim to achieve efficiency at the most minimal costs possible. Consequently, firms have to decide between buying raw materials or making them in house. When the cost of outsourcing is higher than producing in house, firms are forced to vertically integrate and control the supply chain (Rothaermel, 2018). However, the nature of the car rental industry is that companies have to rely on the market for the supply of labor, cars to rent, and software, which would be hard to manufacture.
Consequently, Hertz only participates in a few stages of its supply chain since its role involves connecting customers with cars for rent. Hertz has therefore pursued other options. One of these options is franchising. Hertz runs operations in different countries and has salespeople and shops in over 160 locations. To be able to serve its clientele in these locations, the company has used franchising, where it allows other companies to operate under their brand name and make money from them (Hertz, 2020).
Besides franchising, Hertz corporation has also pursued strategic alliances and partnerships. Some of the company’s partners include airlines. In 2018, Hertz and its subsidiary Donlen which deals with fleet management struck a partnership with Aptiv. Aptiv is a global technology whose main aim is to encourage mobility. The goal of the partnership was to enable Hertz to help Aptiv manage its fleet of autonomous vehicles. Moreover, through the partnership, the two companies aimed to find ways to introduce Aptivs autonomous cars to the market on a large scale (Hertz, 2020).
Diversification
As mentioned earlier, diversification can be in terms of geographical location and product. Hertz has also pursued geographic location on a large scale. Besides the franchises in different countries, Hertz also has operations in different places, including Europe, Asia-Pacific, Latin America, and parts of Africa. Nevertheless, the US remains the highest income earner for Hertz.
Acquisitions
Firms can use various techniques to manage their corporate strategy. One of these strategies is Acquisitions. Purchases occur when one firm buys another firm. Firms pursue acquisition to fight competition, reduce costs, or improve integration. For instance, to impose integration and reach a wider audience, Hertz acquired Dollar and Thrifty in 2012. While acquisitions may be advantageous most of the time, they are not. For instance, at times, more than one company has its eyes set on purchasing another company. In such a situation, the companies battle and the company with the highest bids resulting in what is called the winner’s curse (Rothaermel, 2018).
The winners curse is one of the reasons why Hertz corporation run into financial problems and my debts that led to the company filing for bankruptcy. In 2010, Hertz started a process of acquiring competitor Dollar Thrifty. Unfortunately, Avis, one of Hertz’s main competitors, also expressed interest in acquiring Dollar Thrifty. Consequently, the two companies battled out for the acquisition before Avis bowed out, and Hertz agreed to buy the company at the hefty price of $2.3 billion, which experts now say was overpriced (Nuaghton, Wriz, & Lombardo, 2020).
To pay for the acquisition, Hertz had to borrow large amounts of money from asset-backed securities adding to the existing debts that the company already had (Nuaghton, Wriz, & Lombardo, 2020). Moreover, the history of Hertz with the acquisition also contributes to the situation of the company. In 2005, Hertz was owned by Ford Motor. However, in 2005 private equity firms bought the company. The new owners awarded themselves huge dividends, which crippled the company’s finances. By the time the company was acquiring Dollar Thrifty, it was still reeling in the aftermath of the dividends (Welch, 2020).
Ethical Considerations
Ethics is an integral aspect of a business. An ethical code provides guidelines for what to do when a company is facing an ethical dilemma. The Hertz Corporation is a member of the car rental association and is therefore bound by the ethical code of conduct stipulated by the association. Some of the principles in the code include that members should treat the public with absolute courtesy and respect and should protect them from unethical practices. Hertz seems to have mastered this principle as it has been voted one of the most satisfying companies in the US car rental industry (Hertz, 2020).
Unfortunately, Hertz is also wanting in other areas of ethics. For instance, the corporation has come under fire severally for its treatment of employees. Employees complain of a toxic work environment and point out to poor company culture and management values. Moreover, Hertz has been accused of discriminating against people with disabilities. For example, in 2017, Hertz corporation was sued by the Equal Employment Opportunities Commission (EEOC) for alleged discrimination against a candidate who had mobility issues. The man had applied for the position of the salesperson at the company’s Englewood office. According to the lawsuit, even though the litigant had ten years of sales experience, the sales manager of Hertz claimed that he had concerns over the litigant’s mobility and could thus did not hire him. (Osher, 2017). Following the lawsuit, Hertz was ordered to pay $45,000 to the litigant, putting another dent into the company’s finances (Osher, 2017).
Leadership and Collaboration
Even though leadership is not a component of the strategic plan, the success or failure of a company depends on the company’s leadership. Leaders are responsible for the formulation of the strategic plan, its implementation, the release of resources to support the implementation of the plan, evaluation of the plan, and overseeing revisions where necessary (Rothaermel, 2020). In other words, leadership is an integral part of the strategic plan, and by extension, the operations of the company. More often than not, companies that fail have experienced management problems before failure. The current section analyzes the leadership of Hertz corporation and tries to draw a link between the company’s leadership over the years and the current problems that the company faces.
The highest official at the Hertz corporation is a CEO under whom are various other leaders heading the various departments. The company also has a board of directors and various committees whose work is to ensure the smooth running of the various departments in the organization (Hertz, n.d). One of the problems that led to the piling debt at Hertz was poor leadership in the company, evidenced by the various poor decisions that the company has made in the past.
A good leader must be able to think critically and make the right decisions. One of the mistakes that Hertz made was the overpriced acquisition of Dollar Thrifty in 2012, which pushed the company further in debt. The decision by then CEO Mark Frissora failed to foresee the implications that the purchase would have on the company’s financial health (Naughton, Wriz, & Lombardo). Moreover, the company under Frissora’s leadership was unable to fully integrate Dollar Thrifty and Hertz corporation, especially because the two companies had different operating systems that were proving hard to combine. Also, Hertz failed to conduct diligence before acquiring Dollar Thrifty (Welch, 2020). Only after the acquisition was complete did the company realized that Dollar Thrifty’s cars had thinner tires than what Hertz preferred. Consequently, the purchase brought loss instead of the expected profit and saving of costs (Welch, 2020).
Another mistake that cost the company a lot of money was poor accounting, which led to errors when the company was filing its tax returns. The errors attracted a fine of $ 16 million. Interestingly the errors span between 2012 and 2014 (Welch, 2020).
The fact that these errors were not caught for two years shows a lack of oversight, which is evidence of leadership failure.
More evidence of management problems is evidenced by the fact that the company has had four CEOs since 2014. All four CEOs have either been fired or resigned after failing to turn around the company’s fortunes. The latest CEO to resign was Kathryn Marinello, who left in 2019. Marinello did not seem to agree with the board of directors or enjoy their support, and the two clashed more than once. For instance, before the virus, Hertz had the option of using the cash at hand to make a significant partial payment to creditors and clear some of the company’s debt or hold on to the money at hand (Naughton, Wriz, & Lombardo). While the CEO preferred to make the partial payment, the board insisted that the company hold on to the cash at hand. Unfortunately, their decision led the company to file for bankruptcy after Hertz lost all means of income due to the virus. Marinello was the first CEO to help the company make a profit in 2020 after registering losses for four consecutive years (Naughton, Wriz, & Lombardo).
The contingency theory of leadership states that there is no right style of leadership because leaders have to change their style to meet the changing demands of the business environment. The theory suggests that a leader knows his leadership style so he can adjust where need be. Leadership that is people-oriented and relies on the relationship of others for the betterment of the organization has a high Least Preferred Worker scale and is likely to deliver top results while the reverse is true. Within the years, the leaders of Hertz had failed to adapt to changes both in the internal and external environments, as seen by their purchase of Sedans when the market was moving towards SUVs. Moreover, leadership was also slow in steering the company towards the adoption of new technologies in the auto industry, which made it easy for companies like Uber to gain entry into the market and immediately gain significant market share. Also, leadership disagreements between the CEO and the board of directors showed a lack of willingness between the company’s leaders to work together to improve the financial position of the company.
Summary of Issues
From the external and internal environment analysis, it is clear that Hertz had many problems that led to its bankruptcy protection filing. The study reveals that even though the company appeared to be doing fairly well and registered a profit in 2020 for the first time in four years, the company had a lot of problems.
The external environment reveals that Hertz faces threats from the legal and political processes both inside and outside the US. Moreover, Hertz faces economic treats that have played a big role in the company’s current situation. The Coronavirus affected the ability of customers to travel, and thus Hertz lost a major source of income. Unfortunately, Hertz has failed to diversify its business, only relying on car rental, which led to the company’s clash.
The advent of technology also played a big role in the company’s problems. While the company should have utilized technology as an opportunity to grow ad improve its position, the company was slow, and competitors who adopted technology ended up getting a large share of the customers who were from Hertz. Moreover, demographic trends at one point showed that customers preferred SUVs. However, Hertz went ahead and bought Sedans, which customers frowned upon, thus triggering migration from the company to rival companies.
While the external environment poses significant challenges to the company, the internal environment is largely responsible for the downfall of Hertz. One of the main problems that have led to the demise of Hertz is poor management. Over the years, since Hertz became a publicly-traded company, the administration has made one mistake after the other, which has culminated in the company’s downfall.
The first mistake that management made was to rely on security backed markets for loans instead of going to traditional creditors like banks. While securitization may seem like a good and secure source of loans for companies, it’s unfortunately hard for companies to negotiate with lenders in case the company is unable to pay its debts. Currently, Hertz is having a hard time negotiating with lenders, and some are calling for the company to liquidate its assets. Management quarrels have also played a part in the company’s inability to pay the bank. For instance, the former CEO, Kathryn Marinello, had suggested that the company make a huge partial payment to creditors before the Coronavirus stuck. Such payment should have allowed the company to buy the trust of lenders and negotiate for more time to explore options. However, the company’s board of directors rejected the idea.
Another problem is that the company’s leadership seems to have neglected its oversight role. For instance, between 2012 and 2014, the company made errors in reporting its taxes. The errors were not noticed in the time leading to a hefty fine from the SEC. The lack of oversight and critical thinking is also reflected in the 2012 acquisition of Dollar Thrifty. For starters, the company agreed to acquire the company even though the asking price was higher than Hertz could afford. Moreover, once the company was acquired, the company had to replace the tires of Dollar Thrifty cars at the cost of $ 30 million, and even then, it became hard for the two companies to integrate. Consequently, the acquisition ended up becoming a mint for Hertz’s finances.
The management problems at Hertz also made it impossible for the company to obtain help from investors. Since 2014, Hertz has had four CEOs. None of the CEOs stayed long enough to establish a good relationship with investors, and thus it was hard for the company to get help from them. Moreover, Hertz appears to have been slow in innovation. Innovation is one of the ways that enable a company to create new products and services or repackage existing ones to differentiate the services and products for different market segments and thus attain a competitive advantage and a loyal customer base. Unfortunately, Hertz seemed to have shunned innovation and was slow in introducing new services and offerings for its customers. In fact, Hertz does not even have an innovation budget, which shows that the company does not take innovation seriously. The impact of lacking innovation is seen in the VRIO analysis, where the company does not have any rare or inimitable resource.
Finally, Hertz has had huge operating costs over the years, mainly from the directing and operating costs of its vehicles and also from the depreciation of its rental cars. The costs could be attributed to the fact that the company bought an aging fleet of sedans that ended up bringing little money as customers preferred SUVs. Unfortunately for Hertz, in US car manufacturers can’t repurchase old cars, and thus the company got stuck with an old fleet that no one was buying. Even then, management did not pursue other options like cutting costs. The company should have reduced its administrative costs and cut back on its fleet. Moreover, the company should have cut back on advertising costs to at least have some money to pay some of its debt. Unfortunately, Hertz continued running a big company that was largely ineffective, judging from the fact that it registered losses for four consecutive years.
In early 2020, when the coronavirus hit and the car rental industry was adversely affected, Hertz tried to take some measures by halting the buying of new vehicles, furloughing employees and cutting marketing and advertising costs. While the measures were commendable, they did little to help the company’s position mainly because the company took the steps when it was a little too late, and the company was not getting any income. Moreover, investors and creditors were starting to get impatient, and it became hard for the company to renegotiate. Recommendations
Recommendations
In May 2020, Hertz corporation filed for bankruptcy protection. Under chapter 11, bankruptcy protection allows a company time for reorganization. However, other outcomes may ensure from a bankruptcy filing. For instance, the bankruptcy filing may be dismissed, after which Hertz will be unprotected, and creditors will be free to take the company’s property to repay their debts. The other outcome is bankruptcy under chapter 7, which would mean that Hertz would have to sell all its assets and the money distributed among stakeholders. While Hertz is looking for protection, the latter two outcomes, though, undesirable are possible and should be expected. The position of Hertz is difficult, and it may be impossible to save the company for various reasons. First, companies in the position of Hertz usually have an option to claw back dividends or stop paying dividends all together until they are out of the woods. Unfortunately, Hertz does not pay dividends and thus does not have an option to claw back dividends. Secondly, the debt of Hertz is almost 95 % of the company’s assets. Before the virus, it would have been possible for the company to ask arrangements on how it was going to pay its debts over a certain period. Unfortunately, the pandemic has affected the economy, and it’s hard to predict when the situation will get better. As a result, Hertz may not be making income for a long time. Nevertheless, there are still a few options that Hertz can explore.
One of the possible ways would be to sell a big percentage of its cars to raise the money required for debt repayment. In other words, the company can try and downsize. The company has been trying to sell its cars since filing for bankruptcy protection. Hopefully, it can raise enough money to at least offset a significant amount of its debt.
Another option would be the sale of shares. For the last few months, the company had been able to sell a significant amount of its shares, especially to high-risk investors. Unfortunately, a notice to delist the company from the NYSE saw the company’s fortunes turn round as the company’s stocks plummeted. Finally, the company has had to halt the sale of its shares. Hopefully, the NYSE accepts the company’s appeal to remain on the exchange so that the company can continue selling its shares.
A third option would be to reduce the salaries of employees. In the wake of the bankruptcy filing, Hertz restored employee salaries to pre-pandemic levels. The decision may not have been wise considering that the company has n source of revenue, and it’s trying to cut cots sin every manner possible in its bid to raise money to pay its debts.
The last pion that Hertz can explore would be to attempt to renegotiate with its creditors. Unfortunately, renegotiations may be a long shot since the company has not given investors any reason to trust it. Moreover, the financial outlook of the company is not encouraging since the company has not been making a profit, and it may be hard to convince investors that the company can raise money to pay its debts.
While Hertz can explore the above options, it will still not be easy for the company to bounce back. The bankruptcy protection may still be dismissed, and the company forced to liquidate. Moreover, the above options may still not work, especially if Coronavirus continues until the end of the year. Consequently, the only way that Hertz can pull itself out of its self-engineered mess is to liquidate its assets
The Coronavirus pandemic has adversely affected the global pandemic. Most industries have been hit as income levels have gone down. The car industry in the US mostly relies on leisure travel and airline operations. However, with the restriction of movement in the wake of the virus, airlines have been grounded, and there are no people renting vehicles for leisure travel/. Consequently, car rental companies have been counting losses.
Besides the external environment challenges that have impacted the car rental industry in the US as a whole, Hertz corporation has also faced a myriad of internal challenges that have led to the company’s downfall.
One of the issues that led to the downfall of the Hertz corporation was poor accounting policies, which saw the company take multiple loans from security backed creditors. Unfortunately, it is hard to negotiate with such creditors. Moreover, the company’s management made poor decisions more than once that saw the company’s debt increase. Unfortunately, over the years, the company management did little to help with the situation and only took measures when it was too late. Even though there are still a few options that Hertz can pursue to avoid liquidation, there is no guarantee that these options would work. The situation is made worse due to the high debt and uncertainty posed by Coronavirus, which makes it hard for Hertz to predict when it can start erasing income again. Consequently, the company’s only option is to liquidate.