The Wallace Group

""""'III

2

The Wallace Group Laurence]. Stybel

F

rances Rampar, President of Rampar Associates, drummed her fingers on
the desk. Scattered before her were her notes. She had to put the pieces
together in order to make

an effective sales presentation to Harold Wallace.

Hal Wallace was the President of The Wallace Group. He had asked Rampar
to conduct a series of interviews with some key Wallace Group employees,
in preparation for a possible consulting assignment for Rampar
Associates.

During the past three days, Rampar had been talking with some of these
key people and had received background material about the company. The
problem was not in finding the problem. The problem was that there were
too many problems!

I Background of 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, microwave, and minicomputers.
Presently, these skills are devoted primarily to the engineering and
manufacture of countermeasure equipment for aircraft. 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.

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.

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 5MBP-9th Edition. Reprinted by permission.

2-1



I

~llr I

L

SECTION A

CORPORATE GOVERNANCE, SOCIAL RESPONSIBILITY, AND ETHICS

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 tearn 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 old.er,
already installed systems under Army Department contracts.

1n 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 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

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 exist.

ing aircraft systems. '

The Plastics Group manufactures plastic components utilized by the
electronics, automo. tive, and other industries requiring plastic
products. These include switches, knobs, keys, insu. lation 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 suppli~ 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.



Exhibit 2

Organizational Chart: The Wallace Group (Electronics)

VP plastics Group

VP Finance VP Secretarial/Legal VP Marketing VP Industrial Relations

President

VP Electronics Group

VP Chemical Group

Director Industrial Relations

Director Administration and Planning

II

Personnel Services

,

Manpower Planning and Development

N I C.:I

Manager Contracts

Manager Cost and Schedule

Administration

Controller

Director Operations

Production Manager

Director Engineering

Director Advanced Engineering

Product Engineer Chief Engineer

Material Manager

Operations Control Manager

Microwave Engineering Department

Maintenance Engineer Chief Engineer

Program Manager

Navy-A

Plant Engineering Manager

Digital Engineering Department

Program Manager

Air Force-B

Engineering Services

Customer Service Manager

Program Manager Army-LG

Test Equipment Engineering Department

Program Manager

OBT-37

Quality Assurance Manager

Mechanical Engineering Department

Drafting

Electronic Engineering Department

President H. Wallace

~

' 2-4 SECTION A CORPORATE GOVERNANCE, SOCIAL RESPONSIBILITY, AND
ETHICS

Exhibit 3

The Wallace Group (Chemicals)

/'./

VP

Chemical Group J. Luskics

Director Industrial Relations

A. Lowe

Director Administration B. Brady

Director Operations 1: Piksolu

Director R&D V. Thomas

I 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 by 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

Exhibit 4

The Wallace Group (Plastics)

President H. Wallace

VP

Plastics Group M. Hempton

Director Industrial Relations

R. Otis

Director

Administration and Planning B. Blumenthal

Director Operations V. Nipol

2-5

CASE TWO

THE WALLACE GROUP

acquisition of a former supplier, a plastics company whose primary
market was not defenserelated. 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.

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 two-thirds

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 payoff 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.

I 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
among themselves.

I Current Trends

Presently, there is a mood oflethargy and drift within The Wallace Group
(see Exhibits 1-11). 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.



~

II

SECTION A

CORPORATE GOVERNANCE, SOCIAL RESPONSIBILITY, AND ETHICS

Last week, Wallace's annual net sales were $70 million. By group they
were:

Electronics Plastics Chemicals

$35,000,000 $20,000,000 $15,000,000

On a consolidated basis, the financial highlights of the last 2 years
are as follows:

Two Years

Ago

$69,950,000

3,497,500

1,748,750

16,088,500 38,647,000 59,457,000

3,500,000

Net sales

Income (pre-tax)

Income (after-tax) Working capital Shareholders' equity

Total assets

Long-term debt

Per Share of Common Stock Net income

Cash dividends paid

Last Year

$70,434,000 3,521,000

2,760,500

16,200,000 39,000,000 59,869,000

4,350,000

$.37

.15

$.36

.25

Of the net income, approximately 70% came from Electronics, 25% from
Plastics, and 5% from Chemicals.

Exhibit 5

Selected Portions of a Transcribed Interview with H. Wallace

Rampar: What is your greatest problem right now?

Wallace: That's why I called you in! Engineers are a high-strung,
temperamental lot. Always complaining. It's hard to take them seriously.

Last month we had an annual stockholder's meeting. We have an Employee
Stock Option Plan, and many of our long-term employees attended the
meeting. One of my managers-and I won't mention any names-introduced a
resolution calling for the resignation of the President-me!

The vote was defeated. But, of course, I own 45% of the stock!

Now I realize that there could be no serious attempt to get rid of me.
Those who

voted for the resolution were making a dramatic effort to show me how
upset they are with the way things are going.

I could fire those employees who voted against me. I was surprised by
how many did. Some of my key people were in that group. Perhaps I ought
to stop and listen to what they are saying.

Businesswise, I think we're O.K. Not great, but OK Last year we turned
in a profit of $3.5 million before taxes, which was a growth over
previous years' earnings. We declared a dividend for the fifth
consecutive year.

We're currently working on the creation of a tactical display system for
aircraft being built by Lombard Aircraft for the Navy and the Air Force.
If Lombard gets the contract to produce the prototype, future sales
could amount to $56 million over the next five years.

Why are they complaining?

Rampar: You must have thoughts on the matter.

Wallace: I think the issue revolves around how we manage people. It's a
personnel problem. You were highly recommended as someone with expertise
in high-technology human resource management.

I have some ideas on what is the problem. But I'd like you to do an
independent

investigation and give me your findings. Give me a plan of action.

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!

Other than that, I'll leave you alone and let you talk to anyone in the
company you want.

2-6

CASE TWO

THE WALLACE GROUP 2-7



Exhibit 6

Selected Portions of a Transcribed Interview with Frank Campbell, Vice
President of Industrial Relations

Rarppar: WhatJs your greatestprobler!l rlgbt now?

Campbell: Trying to contain my enthusiasm over the fact that Wallace
brought you inl

Morale is really poor here. Hal runs this place like a one man
operation, when it's grown too big for that. It took a palace revolt to
finally get him to see the depths of the resentment. Whether he'll do
anything about it, that's another matter.

Rampar: What would you like to see changed?

CarpPlJell:Qthw than a.new Prf:1sident?

Rampar: Uh-huh.

Campbell: We badly need a management development program for our group.
Because of our growth, we have been forced to promote technical people
to management positions who have had no prior managerial experience. Mr.
Tuscher agreed on the need for a program, but Hal Wallace vetoed the
idea because developing such a program would be too eXpensive,;!. tbink
itis too expensive not to move ahead on this.,

Rampar: Anything else?

Campbell: The IEWU negotiations have been extremely tough this time
around, due to excessive demands they have been making. Union pay scales
are already pushing up against our foreman salary levels, and foremen
are being paid high in their salary ranges. This problem, coupled with
union insistence On a no-layoff clause, is causing us fits. How can
we~eep !:ill our V!fork~rsV!fben V!ff:1 have productiqp equipment on
order tbat will eliminate 20% Of our assembly positions?

Rampar: Wow.

Campbell: We have been sued by a rejected candidate for a position on
the basis of discrimination. She claimed our entrance qualifications are
excessive because we require shorthand. There is some basis for this
statement since most reports are given to secretaries in. handwritten
form or on al.ldio cassf:1ttes. In fact, we /lave always required it and
our execUtives Ward their ~ecfetaries to have skilFiptaking dictation.
Not only is this case taking time, but I need to reconsider if any of
our position entrance requirements, in fact, are excessive. I am sure we
do not want another case like this one.

Rampar: That puts The Wallace Group in a vulnerable position,
considering the amount of government work you do.

Campbell: We have a tremendous recruitingbac! engineering positions. Either our pay scales are too lOw, ourjob specs
are t<)(),pigh, or we are using the wrong recruiting channels. Kane and
Smith [Director of Engineering and Director of Advanced Systems] keep
rejecting everyone we send down there as being unqualified.

Rampar: Gee.

Campbell: Being head of human resources around here is a tough job. We
don't act. We react.



IH

SECTION A

CORPORATE GOVERNANCE, SOCIAL RESPONSIBILITY, AND ETHICS

Exhibit 7

Selected Portions of a Transcribed Interview with Matthew Smith,
Director of Advanced Systems

Rampar: What is your greatest problem right now?

Smith: Corporate brass keeps making demands on me and others that don't
relate to the job we are trying to get done. They say that the
information they need is to satisfy corporate planning and operations
review requirements, but they don't seem to recognize how much time and
effort is required to provide this information. Sometimes it seems like
they are generating analyses, reports, and requests for data just to
keep themselves busy. Someone should be evaluating how critical these
corporate staff activities really are. To me and the Electronics Group,
these activities are unnecessary.

An example is the Vice President, Marketing (L. Holt), who keeps asking
us for supporting data so he can prepare a corporate marketing strategy.
As you know, we prepare our own group marketing strategic plans
annually, but using data and formats that are oriented to our needs,
rather than Corporate's. This planning activity, which occurs at the
same time as Corporate's, coupled with heavy work loads on current
projects, makes us appear to Holt as though we are being unresponsive.

Somehow we need to integrate our marketing planning efforts between our
group and Corporate. This is especially true if our group is to
successfully grow in nondefenseoriented markets and products. We do need
corporate help, but not arbitrary demands for information that divert us
from putting together effective marketing strategies for our group.

I am ge,tting too old to keep fighting these battles.

Rampar: This is a long-standing problem?

Smith: You bet! Our problems are fairly classic in the high-tech field.
I've been at other companies and they're not much better. We spend so
much time firefighting, we never really get organized. Everything is
done on an ad hoc basis.

.I'm still waiting for tomorrow.

Exhibit 8

Selected Portions of a Transcribed Interview with Ralph Kane, Director
of Engineering

Rampar: What is your greatest problem right now?

Kane: Knowing you were coming, I wrote them down. They fall into four
areas:

1. Our salary schedules are too low to attract good, experienced EEs. We
have been told by our Vice President (Frank Campbell) that corporate
policy is to hire new people below the salary grade midpoint. All
qualified candidates are making more th(!.n that now and in some case
are making more than our grade maximums. I think our Project Engineer
job is rated too low.

2. Chemicals Group asked for and the former Electronics Vice President
(Tuscher) agreed to "lend" six of our best EEs to help solve problems it
is having developing a new battery. That is great for the Chemicals
Group, but meanwhile how do we solve the engineering problems that have
cropped up in our Navy-A and OBT-37 programs?

3. As you know, Matt Smith (Director of Advanced Systems) is retiring in
six months. I depend heavily on his group for technical expertise, and
in some areas he depends heavily on some of my key engineers. I have
lost some people to the Chemicals Group, and Matt has been trying to
lend me some of his people to fill in. But he and his staff have been
heavily involved in marketing planning and trying to identify or recruit
a qualified successor long enough before his retirement to be able to
train him or her. The result is that his people are up to their eyeballs
in doing their own stuff and cannot continue to help me meet my needs.

4. IR has been preoccupied with union negotiations in the plant and has
not had time to help me deal with this issue of management planning.
Campbell is working on some kind of system that will help deal with this
kind of problem and prevent them in the future. That is great, but I
need help now-not when his "system" is ready.



2.9

CASE TWO

THE WALLACE GROUP

Exhibit 9

Selected Portions of a Transcribed Interview with Brad Lowell, Program
Manager, Navy-A

Rampar: What is your. . .?

Lowell: . . . great problem? I'll tell you what it is. I still cannot
get the support I need from Kane in Engineering. He commits and then
doesn't deliver, and it has me quite concerned. The excuse now is that
in "his judgment," Sid Wright needs the help for the Air Force program
more'than I do. Wright's program is one week ahead of schedule, so I
disagree with "his judgment:' Kane keeps complaining about not having
enough people.

Rampar: Why do you think Kane says he doesn't have enough people?

Lowell: Because Hal Wallace is a tight-fisted S.O.B. who won't let us
hire the people we need!

Exhibit 10

Selected Portions of a Transcribed Interview with Phil Jones, Director,
Administration and Planning

Jones: Wheel spinning-that's our problem! We talk about expansion, but
we don't do anything about it. Are we serious or not?

For example, a bid request came in from a prime contractor seeking help
in developing a countermeasure system for a medium-range aircraft. They
needed an immediate response and concept proposal in one week. Tuscher
just sat on my urgent memo to him asking for a go/no go decision on
bidding. I could not give the contractor an answer (because no
decisionc~l')1e from Tuscher), so they gave up on us.

I am frustrated because (1) we lost an opportunity we were "naturals" to
win, and (2) my personal reputation was damaged because I was unable to
answer the bid request. Okay, Tuscher's gone now, but we need to develop
some mechanism so an answer to such a request can be made quickly.

Another thing, our MIS is being developed by the Corporate Finance
Group. More Wheel spinningl TheY are telling us whatiRformation we need
tatherthan asking us what we want! E. Kay (our Group Controller) is
going crazy trying to sort out the input requirements they need for the
system and understanding the complicated reports that came out. Maybe
this new system is great as a technical achievement, but what good is it
to us if we can't use it?



2-10

SECTION A

CORPORATE GOVERNANCE, SOCIAL RESPONSIBILITY, AND ETHICS

Exhibit 11

Selected Portions of a Transcribed Interview with Burt Williams,
Director of Operations

Rampar: What is your biggest problem right now?

WilliaQls: One6t the bi.ggest problems we face rigl1t now stems from
corporate policy regarding transfer pricing. I realize we are
"encouraged" to purchase our plastics and chemicals from our sister
Wallace groups, but we are also committed to making a profit! Because
manufacturing problems in those groups have forced them to raise their
prices, should we suffer the consequences? We can get some materials
cheaper from other suppliers. How can we meet our volume and profit
targets when we are saddled with noncompetitive material costs?

Rampar: And if thaflssue was settled to your satisfaction, then woUld
things be O.K.?

Williams: Although out of my direct function, It occurs to me that we
are not planning effectively our efforts to expand into nondefense
areas. With minimal alteration to existing production methods, we can
develop both end-use products (e.g., small motors, traffic control
devices, and microwave transceivers for highway emergency
communications) and components (e.g., LED and LCD displays, pqlice radar
tracking devices, and word process!!1g systernmemory andc6ntrol
de,lices) with largepotentialrnarkets,

The problems in this regard are: .

1. Matt Smith (Director, Advanced Systems) is retiring and has had only
defense

related experience. Therefore, he is not leading any product
development efforts

along these lines.

2. We have no marketing function at the group level to develop a
strategy, define

marketsi~rJd reseiilrc.h arJ(jdevelqpgroduct()pportul'1iFe~. i

3. Even if we had a marketil')g plan and products for
industrial/commercIal application,

we have no sales force or rep network to sell the stuff.

Maybe I am way off base, but it seems to me we need a
Groups/Marketing/Sales function to lead us in this business expansion
effort. It should be headed by an experienced technical marketing
manager with a proven track record in developing

such products and markets,

Ral')1pa.r: Have y6u discUssed yoUrconcem5 with others?

Williams: I have brought these ideas up with Mr. Matthews and others at
the Group Management Committee. No one else seems interested in pursuing
this concept, but they won't say this outright and don't say why it
should not be addressed. I guess that in raising the idea with you I am
trying to relieve some of my frustrations.

I 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.