MG112A Business Policy & Strategy CASE ANALYSIS By: Group 2 Group Members: Derama, Grace T. Guintibano, Clarice I. Aguila, Christian Dave O. I.
Title of the Case: Case 2- The Wallace Group
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Time Context: at present time
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Central Problem: Cause: Most managers feel that each of the three groups functions as an independent company. Electronics and Plastics are still stable and profitable, but both lack growth in markets and profits.
Symptoms: The most important problem facing the Wallace group is leadership. The Wallace group may have a Board of Directors but lacks Corporate Governance because there seems to be no transition from a single proprietorship to corporation thinking and management which very much evident in lack of cohesiveness between the three divisions. Rather than operating as a team, the three are more like rivals competing for resources and personnel. Corporate Governance 1. Stage one management in a stage three corporation. Harold Wallace is trying to micromanage all three divisions 2. Lack of a corporate strategy, company has no mission and no definite goals. 3. Poor organizational design creates span of control problems and results in poor operations. Personnel management: 1. Morale is poor
2. Recruitment backlog 3. Salary structure – not commensurate and updated based on the current demand. 4. Experienced staff/ personnel are retiring and no one is heading the business expansion effort. 5. There is no management development program in-placed. 6. No performance standard and evaluation of employees Reports management: 1. There are no standard reports required by higher management. 2. There is no value chain or coordination in between departments Information Technology 1. Un-standardized methods of collecting data and presenting information MIS being develop is not a users’ need- based system. No consultation has been made to users as to what benefits they could get from the new system. Corporate policy on transfer pricing 1. Cannot meet volume and profit targets when saddle with noncompetitive material costs. 2. The corporate policy of transfer pricing needs to be addressed in terms of product cost and profit margin. Diversification 1. Heavy dependence on government contracts could put the corporation in financial difficulty if further sales diversification cannot be found. Financial issues 1. Unprofitable chemical division needs new management or it needs to be analyzed for sale to someone else. Marketing 1. No clear marketing strategy IV.
Viewpoint: Frances Rampar, President of Rampar Associates
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Statement of Objectives: Must Objectives: Want Objectives:
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Areas of Consideration The Wallace Group is a product of diversification strategies taken upon By Mr. Wallace, who originally just wanted his, then defense-related dependent, Electronics Business gain a foothold of the private market within the electronics industry. Mr. Wallace and the Board embark a vertical integration into plastics and chemicals, by acquiring previous Supplier companies, in order to lessen production cost for Electronics group so that finances may be channeled towards product development and line extensions. The acquisition required a public stock offering that would channel most of the funds to pay off debts incurred by the 3 groups especially the Chemicals Group’s debt. Mr. Wallace ended with 45% of the Stocks, Jerome Luskics, former owner of the Chemicals Company with 5% and rest of the 50% distributed among the public. The company now consists of a corporate staff and the three operational groups, running as three independent companies: Plastics, Chemicals and Electronics, each managed by a Group Vice President with Harold Wallace serving as both Chairman and President and keeps sole control all of the three entities, generating sales of $70 million with a net income of $1,760,000. Presently, the morale within the company has deteriorated to the point where some of the employee stockholders made an attempt to force Wallace’s resignation. Mr. Wallace has hired Frances Rampar, a management consultant, to conduct a management survey into the problems facing The Wallace Group. Her task is to develop a series of priorities for Wallace’s consideration.
INTERNAL ENVIRONMENT STRENGTHS
WEAKNESSES
A The company is able to supply many of its own component parts and raw materials because it is well-integrated. B Solid performance from the plastics and electronics divisions in the past. The electronics group has a good track record in developing and manufacturing countermeasure equipment. C Being a public corporation provides the firm with flexibility to attract equity capital vs. long or short term debt.
A Tremendous dissatisfaction among management and employees. This resulted from Wallace’s failure to delegate to subordinates and a lack of clear strategies or long term plans, goals, or objectives. B Lethargy and lack of direction on top management’s part.
EXTERNAL ENVIRONMENT OPPORTUNITIES A Favorable market niche in electronics. Long standing reputation of reliable government contracts. Potential for increased sales due to administration’s commitment to a strong military with the latest technology. B Auto industry on an upward trend with high sales volume
THREATS
suggests solid future sales.
Capital structure Financial ratios Solvency ratio Debt-to-assets ratio: 35% of company’s assets are financed with debt. Generally, higher debt, higher financial risk and thus weaker solvency Debt-to-equity ratio: 54% higher ratio indicates weaker solvency Financial leverage: 1.54 Measures the amount of TA supported for each one money unit of equity. This means, 1.54 of total assets is supported for every $1 unit of equity. The higher the financial leverage ratio, the more leveraged the company is in the sense of using debt and other liabilities to finance assets. Profitability ratios Net profit margin 4% 3% This measures the better view of a company's potential future profitability. Comparing the PY and CY performance, it is positively increasing its profit. Return on Equity 7% 5% This measures the return earned by the company on its capital. In current year, 7% was the return earned on its capital and 5% in prior years. The above capital structure of The Wallace Group depicted how financially sound the company is. The company is earning, and solvent thus, the decision of Harold Wallace to undertake diversification to reduce exposure to risk was a good portfolio strategy. To address the identified key issues and problem of the company, money is not a problem. Merely revisiting the company’s policy and structure is needed to strengthen its internal capacity for future growth and development. VII.
Alternative Courses of Action
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Final Decision
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Detailed Action Plan The company should undertake the following courses of action: TIME PERIOD WITHIN 30 DAYS
30-90 DAYS
90 DAYS-OVER
RECOMMENDED ACTION
