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Sarah Farid

November 1st 2015


The Wallace Group Company Analysis
Introduction
The Wallace Group is comprised of three operational groups,
namely Electronics, Plastics and Chemicals. Harold Wallace, founder,
chairman and president of the Wallace Group owns 45% of the
outstanding stock. The latest figures showed that combined, the three
groups had generated sales of $70 million. A brief dive into the history
of the company shows that it started as a sole proprietorship operating
only the electronics segment. Harold Wallace, concerned about the
companys severe dependence on defense-related businesses at the
time, chose to embark on a journey of diversification. As a result, the
company acquired its previous supplier for plastics. This was only
possible through the attraction of investors who bought shares in the
company and subsequently turned it into a closed corporation with a
new Board of Directors with Harold Wallace as Chairman. Several years
later, the company acquired its former supplier for chemicals as a
further step towards its diversification strategy.
The work environment and overall company morale within
Wallace Group have currently hit rock bottom, so much so that a
surprisingly sizeable group of long term employees have recently made
a dramatic, but failed, attempt to force the Presidents resignation, in
an effort to show their dissatisfaction and frustration with the way
things were going in the company. In response to this event and its
underlying causes, Mr. Wallace has appointed Frances Rampar, a
management consultant, to conduct interviews with the companys key
employees to delve deeper into the strategic problems facing the
company, and to produce a list of priorities and an action plan for the
Wallace Group.
1. What is (are) the most important problem(s) facing the
Wallace Group? You dont need to list ALL the issues, only
the one(s) you view as strategic.
The wide assortment of problems facing the Wallace Group ranges
from problems at the corporate level to issues with day-to-day
operations. A thorough analysis of the case brought the following
strategic problems to my attention:

There is an evident lack of a strategic vision that guides decisionmaking in the company. Not only is there a lack of widespread
knowledge and agreement on the companys goals and

strategies at the management and technical employee levels,


but it seems as though the Board of Directors and the President
themselves do not have their eyes set on a specific long-term
vision or mission for the three groups of the company. Even in
those instances where the President has announced top
managements desire to pursuit certain growth strategies such
as reaching out to new markets and (instituting) the controls to
move forward in a planned and orderly manner, there has been
an absence of a solid, clear vision, mission, direction or
objectives as to how to achieve this growth.

The company seems to deal with its issues in a reactive rather


than a proactive manner. Management usually tackles both its
opportunities and threats in an ad hoc, impromptu manner. This
was made obvious in how the company pursued its
diversification strategy. Instead of effectively, systematically
researching market opportunities in different sectors, identifying
those sectors which are most attractive and subsequently
developing a plan of action for diversification into the
aforementioned sectors, the company simply chose to diversify
spontaneously based on the acquisition of a former supplier
whose owner retired (the Plastics Group) and another former
supplier that was on the verge of bankruptcy (the Chemicals
Group). Whether or not these acquisitions would truly be
beneficial in the diversification of the activities of the company
on the long run was not studied or addressed at the time these
decisions were made.

The previous point brings us to another strategic issue. Despite


the companys efforts towards diversification, nonetheless,
Wallace Group is still heavily reliant on defense contracts. The
Chemicals Group supplies the Plastic Group which is a major
supplier of the Electronics Group, which is still majorly dependent
on defense contracts. Because of this series of interdependency
between the three groups, the objective of diversification was
not truly realized. A more detailed analysis of this strategy will be
provided in question three.

The organizational structure of the company seems to be holding


the company back. How the organizational hierarchy is
structured yields inefficiencies and ineptitudes to the company
as a whole. An example of this is displayed in the centralization
of functional departments, such as marketing, at the corporate
level, and the absence of these functional departments at the
group level. Because the Vice President of Marketing depends on

input from each group to develop an overall corporate marketing


strategy at the same time when significant marketing planning is
already being done at each group level, managers and
employees alike become overloaded with irrational workloads,
and inefficiencies and duplication of efforts occur. The
organization design of the business is another issue, it creates
span of control problems and results in poor operations.

It seems as though the general style of management displayed


by the president of the company is an authoritarian one as
described by many of the key employees. Most employees
describe Mr. Wallaces approach to management as a one man
show. This perception of management among employees as
well as employees constant feeling that they have no say in
decision-making has contributed heavily to the deterioration of
employee morale. The suggestions and needs of corporate and
group managers are often disregarded, leading to a lack of
empowerment and in some severe cases, feelings of resentment.

The President appears resistant to the concept of investment in


employees and the human capital of the Wallace Group. It was
noted by the Director of Engineering that the recruitment
process is unnecessarily long and unreasonably complicated
while the company policy dictates that salaries should be paid
below the midpoint average. Ultimately, this combination leads
to the diversion of top talents and candidates away from the
company at a time when recruiting top candidates is crucial to
the businesss success. In addition, top management has refused
the design of a management development program on several
occasions. Instead, technical employees are often promoted to
managerial positions in which they are inexperienced and lack
managerial skills.

On the operational and financial fronts, the company is inefficient


in terms of cost reduction. By requiring the Electronics Group to
source its raw materials from the Plastics Group and by requiring
the latter to purchase its raw materials from the Chemicals
Group, the result is the transfer of raised prices due to
manufacturing issues from the suppliers to the other groups.
Noncompetitive material costs in any of the groups will reduce
competitiveness and ultimately profitability. Some technical
employees are redundant since the automated machines the
company owns require 20% less labor. However, the union nolayoff clause will pose a hurdle in the firing of those employees
that are redundant.

2. Give your recommendations of the strategies suitable to


deal with these issues.

My first recommendation in order to tackle the Wallace Groups


problems is for top management to formulate a clear vision and
mission for the company. In doing so, the President and his Board
need to decide where they see the company in the long term,
and how each of the three groups should be contributing in order
to achieve the company-wide vision. The companys mission
must also be identified in order to articulate the purpose of the
companys existence and how it intends to achieve its vision.

Following a thorough environmental scan and the formulation of


a clear vision and mission, the president and his board must then
formulate corporate strategies that will support the newly
established mission and vision. These strategies will identify
which markets and industries the company wants to be a player
in, and whether it wants to grow, stabilize or shrink its presence
in different industries. Since the Wallace Groups strongest and
most promising subsidiary is the Electronics Group, I would
recommend that the company maintain its strong presence in
the defense sector, but should grow in other non-defense
sectors. This move must be carefully studied and calculated and
extensive market research should take place in order to ensure it
does not backfire, as did the previous diversification strategy. As
for the Plastics and Chemicals Groups, diversification into other
markets is also necessary if these groups are to grow or even to
stabilize. Again, this must be done only after extensive research
into potential markets and identification of opportunities and
threats.

The next recommendation would be to set business strategies


that influence how competitive the company will be within its
selected industries. Embarking on a cost-reduction strategy
seems to be the most suitable business strategy to undertake at
this point for all three groups, since it was mentioned that all
three groups could benefit from cutting costs in certain areas. For
example, the Electronics Group, which sources its supplies from
the other two groups, must be given the autonomy to source its
raw materials from whatever supplier it sees as the proper
combination of good quality and low prices. For the Plastics and
Chemicals Groups, the manufacturing problems that are

forcing the groups to charge high prices need to be tackled and


solved as soon as possible.

Also related to the aforementioned point of autonomy, at the


functional level, marketing and operations departments that
function under the supervision of the corporate Marketing and
Operations VP should be created within each group in the
company. This will allow effective marketing and operations
strategies to be formulated that are specific to the needs and
constraints of each individual group. This activity will make both
functional activities more efficient and will decrease the amount
of redundant information collected and gone to waste that exists
now. This does not mean that there should not be an
overarching, unified marketing and operations plan at the
corporate level, rather, this division of efforts across each of the
three groups will make it much easier for the Marketing and
Operations VP to create their plans with all three groups in mind
without overworking employees.

In order to achieve its aforementioned vision, mission and in


order to implement its strategies, the company should invest
comprehensively in its labor force and human capital. Especially
if it is to grow, the company must invest heavily in recruiting the
top talents by streamlining the recruitment process and being
more generous with salaries.

In relation to the previous point, a management development


program should be designed in order to benefit both employees
and the company. Immediately, the management development
program will generate a team of managers that are more aware,
informed and trained to handle business operations. In the long
term, employee morale will be improved since the employees will
have a sense of empowerment, and hence resentment towards
top management will certainly decrease.

Monthly board meetings with representatives from each


functional area in each group should be conducted in order to
make sure everyone is on the same page, to allow for feedback
from all levels of the company, to assess new plans and projects
and to effectively tackle any threats or opportunities altogether.
Similar monthly meetings should be conducted within the groups
themselves so that the groups representatives have a solid idea
of what issues need to be raised to top management in the

monthly meetings with the board. There should be more


cooperation and enhanced flow of information within and
between all different levels of the organization.

The organizational structure of the company needs to be


reviewed and reassessed. This point was already touched upon in
the discussion about creating functional marketing and
operations departments within each group. Along with the new
organizational structure, a clear definition of the scope of job
responsibilities and rights should be developed in order to give
employees the direction they need while maintaining a certain
level of autonomy. Channels of communication within the
organizational structure must be opened for employees on all
levels to express their concerns and ideas.

3. State your opinion of the company's diversification plan.


Do you think diversifying in the plastics and chemicals
market was a good or bad decision? Explain why your
opinion is as such.
While I believe that the idea and intuition behind the concept of
diversification was not harmful at all (in fact, it could be considered
necessary), the way the diversification plan was carried out defeated
its purpose. As was previously discussed, the decision of diversifying
by acquiring the plastics and chemicals companies was more of an ad
hoc, impromptu decision than it was a calculated, systematically
studied corporate strategy. The decision was made not based on solid
market research or extensive environmental scanning, rather, based
upon the ease and effortlessness of acquiring the companies at the
time. The plastics company was a previous supplier of the Wallace
Group, and at the time its owner was looking to retire and sell the
company. The chemicals company was also a previous supplier to the
Wallace Group, and was on the verge of bankruptcy at the time the
decision was made to acquire it. These circumstances posed as
opportunities that facilitated the acquisition of both of the previous
companies. The decision to acquire these companies, de facto, does
not seem like much of a diversification strategy at all. It could be
labeled as a cost-reduction strategy by means of backward vertical
integration and the control of the supply chain, but even the objective
of cost-reduction is not being realized since manufacturing issues are
causing the Chemicals and Plastics Groups to supply the Electronics
Group with overpriced raw materials that could be sourced from
cheaper suppliers elsewhere. The reason why the diversification
strategy, in my opinion, failed in realizing its objective is because of
the strong interdependency between the three subgroups of Wallace

Group. While it may be the case that the Plastics and Chemicals
Groups serve other private markets, it was mentioned in the text that
their main customer is in fact the Electronics Group, which is still
heavily reliant on defense contracts. This series of interdependence
means that, at least indirectly, the Plastics and Chemicals Groups are
also heavily dependent on defense contracts, which defeats the
purpose.

Weaknesses

Strengths

Cost benefit analysis should

chemical market, the

policy of transfer pricing

Wallace Group became a

where supplies obtained

public corporation, thus

internally to compare internal

can raise equity capital

and external supplies in

easily and in a flexible

terms of product cost and

way versus the long-

profit margin.
Chemical group is adding

term debt that add

department has good

production while it only

repetition and record in

generates 5% profit, it was

manufacturing and

an epic fail decision to

producing

diversify in this area due to

countermeasure

its bankrupt history.


Inappropriate poor

equipment.

resulting in span of control


problems and thus affecting
the 3 groups operations
No management
development programs
offered to unspecialized
technical staff promoted to

burden on business.
The electronic

administration and

management hierarchy

After diversification in

be done for the corporate

costs in terms of

managerial positions
Heavy if not fully dependent
on army governmental
contracts could affect the
corporation financial position
if any conflicts or disputes
occurred.

Threats
Reputation damage to

Opportunities
Existing in this attractive

Wallace group image due to

niche market for

slow response to bid requests


Financial bad performance,

electronics guarantees a

especially in the chemical

contract with the Army

group that affects Wallace

government. And there

overall financial position.


Failure to deliver on current

is expected increase in

stable long term

sales to $56 million over

projects due to shortage in

next 5 years with

qualified engineers and bad

success of the 2

management of the business.

developmental major
projects

As mentioned in the
shareholders report, the
plastic market is
expanding and so there
is potential for future
growth.