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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 Groups 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 Wallaces 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 Wallaces 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 Wallaces
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 managements part.
External Environment
A. Favorable market niche in electronics. Long standing reputation of reliable government contracts.
Potential for increased sales due to administrations 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 ratioCY
PY
Analysis
Debt-to-assets ratio 35% 35% 35% of companys 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 companys 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.