A case Study of the Wallace Group

Introduction

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.

Identification of key Issues

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. The apparent problems are only the symptoms of the
real problems which will be detailed below:

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 is 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.
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

Analysis and Evaluation

Internal Environment
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
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 suggests solid future sales.

Strengths
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.

Capital structure

• Financial ratios
Solvency ratio CY PY Analysis
Debt-to-assets ratio 35% 35% 35% of company’s assets are financed with debt. Generally, higher debt, higher
financial risk and thus weaker solvency
Debt-to-equity ratio 54% 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.

Recommendations

Corporate Governance.

Develop a new organizational chart, best suited for a large corporation, with clearly defined job responsibilities so that the
Wallace group can operate effectively as a corporation, giving equal importance to all divisions and not as a sole
proprietorship company.
Hire a new President/CEO who can create a stronger management team that will help to continue to provide a growing EPS for
the shareholders. Mr. Wallace must focus his attention on being the Chairman of the Board and let his managers manage.

Formulate the corporate strategy involving all division directors, detailing the goals and objectives of the company as a whole
not as three separate entities.

Establish objectives for each division where Inputs from the various directors expressing each divisions need for more
qualified personnel, better communication, and cost effective production must be greatly considered

Evaluation and control will be important to the Wallace group because it monitors actual performance and compares it to
desired performance. It is through this process that management is able to take corrective action and resolve problems.

Personnel management

1. Determine what motivates employees through a survey. Gauge the areas of importance in career development,
leadership, praise, recognition, status, task accomplishment, problem-solving achievement, and guiding others.
2. Review the recruitment process and identify what causes the slow turn-over of hiring staff
3. Review the salary structure, & conduct economic or cost of living study to come up with sound company salary
philosophy.
4. Identify the staffing needs first before entering to business expansion. Promote trained and skilled staff if there is a
problem in hiring new staff
5. Develop a staff career development to help employees advance their work lives within a specific organization. The
focus of such programs was to provide the information, assessment and training needed to help employees realize
their career goals while attracting and retaining highly talented people.
6. Establish performance standards and evaluate output in order to arrive at objective human resource decisions as well
as to provide procedures to support those decisions.

Reports management:

1. Management should set a standard reporting format or standard reports needed for decision making. This will give
the staff guide on what they what to deliver in a monthly/quarterly/annually basis
2. Team-building should be done to build rapport between departments and all staff. This is one way of creating a
culture of unity and cooperation which consequently will address the problem on value chain.

Information Technology

1. Conduct system survey among staff to determine their need and wants in terms of MIS. This will also help identify the
capacity of staff in terms of MIS.
2. Environmental scanning will be important because it monitors, evaluates and disseminates information from the
internal as well as the external environments and provides this information to the right people within the
organization. This is currently needed since there is currently some problems within the Wallace group with obtaining
needed information by department

Corporate policy on transfer pricing

1. Competitive analysis on purchases should be done and will be a basis of procurement. The transfer pricing policy
must be reviewed, revised and updated to cope with the existing demands.
2. Clarify transfer pricing policy. Make sure that all managers understand that it is a team effort. The overall profitability
of the corporation is what is important. This policy needs to be weighed in terms of overall profitability to corporation
and not individual departments.

Diversification
1. Diversify product mix and customer base to hedge against loss of large customers. Allocation of sufficient and proper
resources must be given priority

Financial and Accounting issues

1. Unprofitable chemical division needs new management or it needs to be analyzed and sold off based on
Cost/benefit analysis to corporation.