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TheWallaceGroupcasestudy2.docxThe Wallace Group
Laurence J. Stybel
Case 2
Background on The Wallace Group
The Wallace Group, Inc., is a diversified company dealing in the manufacture and
development of technical products and systems (see Exhibit 1). The company currently
consists of three operational groups and a corporate staff. The three groups include
Electronics, Plastics, and Chemicals, each operating under the direction of a Group
Vice President (see Exhibits 2, 3, and 4). The company generates $70 million in sales as
a manufacturer of plastics, chemical products, and electronic components and systems.
Principal sales are to large contractors in governmental and automotive markets. With
respect to sales volume, Plastics and Chemicals are approximately equal in size, and both
of them together equal the size of the Electronics Group.
Electronics offers competence in the areas of microelectronics, electromagnetic
sensors, antennas, microwaves, and minicomputers. Presently, these skills are devoted
primarily to the engineering and manufacture of countermeasure equipment for aircraft.
This case was prepared by Dr. Laurence J. Stybel. It was prepared for class discussion rather than to illustrate
either effective or ineffective handling of an administrative situation. Unauthorized duplication of copyright
materials is a violation of federal law. This case was edited for the SMBP– 9th, 10th, 11th, 12th, 13th, 14th and 15th
Editions. The copyright holders are solely responsible for case content. Reprint permission is solely granted to
the publisher, Prentice Hall, for the book, Strategic Management and Business Policy – 15th Edition by copyright holder, Dr. Laurence J. Stybel. Any other publication of this case (translation, any form of electronic
or other media), or sale (any form of partnership) to another publisher will be in violation of copyright laws,
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2-2 Case 2 The Wallace Group
This includes radar detection systems that allow an aircraft crew to know that they are
being tracked by radar units on the ground, on ships, or on other aircraft. Further, the
company manufactures displays that provide the crew with a visual “fix” on where they
are relative to the radar units that are tracking them.
Exhibit 1
An Excerpt from the
Annual Report
To the Shareholders:
This past year was one of definite accomplishment for The Wallace Group, although
with some admitted soft spots. This is a period of consolidation, of strengthening our internal
capacity for future growth and development. Presently, we are in the process of creating a
strong management team to meet the challenges we will set for the future.
Despite our failure to achieve some objectives, we turned a profit of $3,521,000 before
taxes, which was a growth over the previous year’s earnings. And we have declared a dividend
for the fifth consecutive year, albeit one that is less than the year before. However, the retention of earnings is imperative if we are to lay a firm foundation for future accomplishment.
Currently, The Wallace Group has achieved a level of stability. We have a firm foothold in our current markets, and we could elect to simply enact strong internal controls
and maximize our profits. However, this would not be a growth strategy. Instead, we have
chosen to adopt a more aggressive posture for the future, to reach out into new markets
wherever possible and to institute the controls necessary to move forward in a planned and
orderly fashion.
The Electronics Group performed well this past year and is engaged in two major
programs under Defense Department contracts. These are developmental programs that
provide us with the opportunity for ongoing sales upon testing of the final product. Both
involve the creation of tactical display systems for aircraft being built by Lombard Aircraft
for the Navy and the Air Force. Future potential sales from these efforts could amount to
approximately $56 million over the next five years. Additionally, we are developing technical
refinements to older, already installed systems under Army Department contracts.
In the future, we will continue to offer our technological competence in such tactical
display systems and anticipate additional breakthroughs and success in meeting the demands
of this market. However, we also believe that we have unique contributions to make to
other markets, and to that end we are making the investments necessary to expand our
opportunities.
Plastics also turned in a solid performance this past year and has continued to be a major
supplier to Chrysler, Martin Tool, Foster Electric, and, of course, to our Electronics Group.
The market for this group continues to expand, and we believe that additional investments
in this group will allow us to seize a larger share of the future.
Chemicals’ performance, admittedly, has not been as satisfactory as anticipated during the past year. However, we have been able to realize a small amount of profit from this
operation and to halt what was a potentially dangerous decline in profits. We believe that
this situation is only temporary and that infusions of capital for developing new technology,
plus the streamlining of operations, has stabilized the situation. The next step will be to begin
more aggressive marketing to capitalize on the group’s basic strengths.
Overall, the outlook seems to be one of modest but profitable growth. The near term
will be one of creating the technology and controls necessary for developing our market
offerings and growing in a planned and purposeful manner. Our improvement efforts in the
various company groups can be expected to take hold over the years with a positive effect
on results.
We wish to express our appreciation to all those who participated in our efforts this
past year.
Harold Wallace
Chairman and President
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Case 2 The Wallace Group 2-3
Exhibit 2
Organizational Chart: The Wallace Group (Electronics)
President
VP
Electronics Group
VP Industrial Relations
VP Marketing
VP
Plastics Group
Director
Industrial
Relations
Personnel
Services
Manpower
Planning and
Development
Director
Administration
and Planning
Director
Operations
Production
Manager
Director
Engineering
Maintenance
Engineer
Chief Engineer
VP
Chemicals Group
Director
Advanced
Engineering
Program
Manager
Navy-A
Program
Manager
Air Force-B
Program
Manager
OBT-37
Program
Manager
Army-LG
Product Engineer
Chief Engineer
Microwave
Engineering
Department
Digital
Engineering
Department
Mechanical
Engineering
Department
Electronic
Engineering
Department
Drafting
Test Equipment
Engineering
Department
Engineering
Services
Material
Manager
Plant Engineering
Manager
Customer Service
Manager
Quality Assurance
Manager
Manager
Contracts
Manager
Cost and
Schedule
Administration
Controller
VP Secretarial/Legal
VP Finance
Operations Control
Manager
Exhibit 3
The Wallace Group
(Chemicals) President
H.Wallace
VP
Chemicals Group
J. Luskics
Director
Industrial
Relations
A. Lowe
Director
R&D
V. Thomas
Director
Operations
T. Piksolu
Director
Administration
B. Brady
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2-4 Case 2 The Wallace Group
In addition to manufacturing tested and proven systems developed in the past, The
Wallace Group is currently involved in two major and two minor programs, all involving
display systems. The Navy-A Program calls for the development of a display system for
a tactical fighter plane; Air Force-B is another such system for an observation plane.
Ongoing production orders are anticipated following flight testing. The other two minor
programs, Army-LG and OBT-37, involve the incorporation of new technology into
existing aircraft systems.
The Plastics Group manufactures plastic components utilized by the electronics,
automotive, and other industries requiring plastic products. These include switches,
knobs, keys, insulation materials, and so on, used in the manufacture of electronic
equipment and other small made-to-order components installed in automobiles, planes,
and other products.
The Chemicals Group produces chemicals used in the development of plastics. It
supplies bulk chemicals to the Plastics Group and other companies. These chemicals are
then injected into molds or extruded to form a variety of finished products.
History of the Wallace Group
Each of the three groups began as a sole proprietorship under the direct operating
control of an owner/manager. Several years ago, Harold Wallace, owner of the original
electronics company, determined to undertake a program of diversification. Initially,
he attempted to expand his market through product development and line extensions
entirely within the electronics industry. However, because of initial problems, he drew
back and sought other opportunities. Wallace’s primary concern was his almost total
dependence on defense-related contracts. He had felt for some time that he should take
some strong action to gain a foothold in the private markets. The first major opportunity
that seemed to satisfy his various requirements was the acquisition of a former supplier, a plastics company whose primary market was not defense-related. The company’s
owner desired to sell his operation and retire. At the time, Wallace’s debt structure was
such that he could not manage the acquisition and so he had to attract equity capital. He
was able to gather a relatively small group of investors and form a closed corporation.
The group established a board of directors with Wallace as Chairman and President of
the new corporate entity.
President
H. Wallace
VP
Plastics Group
M. Hempton
Director
Industrial
Relations
R. Otis
Director
Administration
and Planning
B. Blumenthal
Director
Operations
V. Nipol
Exhibit 4
The Wallace Group
(Plastics)
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Case 2 The Wallace Group 2-5
With respect to operations, little changed. Wallace continued direct operational control over the Electronics Group. As holder of 60% of the stock, he maintained effective
control over policy and operations. However, because of his personal interests, the Plastics Group, now under the direction of a newly hired Vice President, Martin Hempton,
was left mainly to its own devices except for yearly progress reviews by the President.
All Wallace asked at the time was that the Plastics Group continue its profitable operation, which it did.
Several years ago, Wallace and the board decided to diversify further because twothirds of their business was still defense-dependent. They learned that one of the major
suppliers of the Plastics Group, a chemical company, was on the verge of bankruptcy. The
company’s owner, Jerome Luskics, agreed to sell. However, this acquisition required a
public stock offering, with most of the funds going to pay off debts incurred by the three
groups, especially the Chemicals Group. The net result was that Wallace now holds 45%
of The Wallace Group and Jerome Luskics 5%, with the remainder distributed among
the public.
Organization and Personnel
Presently, Harold Wallace serves as Chairman and President of The Wallace Group. The
Electronics Group had been run by LeRoy Tuscher, who just resigned as Vice President.
Hempton continued as Vice President of Plastics, and Luskics served as Vice President
of the Chemicals Group.
Reflecting the requirements of a corporate perspective and approach, a corporate
staff has grown up, consisting of Vice Presidents for Finance, Secretarial/Legal, Marketing, and Industrial Relations. This staff has assumed many functions formerly associated
with the group offices.
Because these positions are recent additions, many of the job accountabilities are
still being defined. Problems have arisen over the responsibilities and relationships
between corporate and group positions. President Wallace has settled most of the
disputes himself because of the inability of the various parties to resolve differences
amongst themselves.
Current Trends
Presently, there is a mood of lethargy and drift within The Wallace Group. Most managers feel that each of the three groups functions as an independent company. And, with
respect to group performance, not much change or progress has been made in recent
years. Electronics and Plastics are still stable and profitable, but both lack growth in markets and profits. The infusion of capital breathed new life and hope into the Chemicals
operation but did not solve most of the old problems and failings that had caused its initial decline. For all these reasons, Wallace decided that strong action was necessary. His
greatest disappointment was with the Electronics Group, in which he had placed high
hopes for future development. Thus he acted by requesting and getting the Electronics
Group Vice President’s resignation. Hired from a computer company to replace LeRoy
Tuscher, Jason Matthews joined The Wallace Group a week ago.
As of last week, Wallace’s annual net sales were $70 million. By group, they were:
Electronics $35,000,000
Plastics $20,000,000
Chemicals $15,000,000
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2-6 Case 2 The Wallace Group
On a consolidated basis, the financial highlights of the past two years are as follows:
Last Year Two Years Ago
Net sales $70,434,000 $69,950,000
Income (pre-tax) 3,521,000 3,497,500
Income (after-tax) 2,760,500 1,748,750
Working capital 16,200,000 16,088,500
Shareholders’ equity 39,000,000 38,647,000
Total assets 59,869,000 59,457,000
Long-term debt 4,350,000 3,500,000
Per Share of Common
Stock
Net income $.37 $.36
Cash dividends paid .15 .25
Of the net income, approximately 70% came from Electronics, 25% from Plastics,
and 5% from Chemicals.
The Problem Confronting Frances Rampar
As Rampar finished reviewing her notes (see Exhibits 5–11), she kept reflecting on what
Hal Wallace had told her:
Don’t give me a laundry list of problems, Fran. Anyone can do that. I want a set of priorities I should focus on during the next year. I want a clear action plan from you. And I
want to know how much this plan is going to cost me!
Fran Rampar again drummed her fingers on the desk.
