When in February 1976 Martell received the letter from McElroy, he was not surprised a lot. All the problems that had occurred over time, and punctually postponed, now appeared. When Martell was elected as the new president of PC&D, he brought his “entrepreneurial spirit” that quickly spread across the organization. This had a positive effect on the company, especially in terms of profitable growth. In fact it led to the creation of 11 entrepreuneral subsidiary, of these 4 had successfully been merged into the company.
This allowed to Electric Division, to double its sales, during 1971-75 period going from 193. 6 million to 561. 4 million(of these 179. 2 arising from the new subsidiary),and also the sales of the Machinery Division have been overcome, 440. 6 million in 1975 (Exhibit7) . However, this result had not come without cost. First about 60 million by the end of 1975, of these a small part was achieved through the retained earnings, but much was new money raised in the form of long-term debt.
Further, stock issued to capitalize subsidiaries and to pay bonuses to entrepreneurs had a diluting effect on of PC & D’s shares, due to exchange one-to-one. The situation could worsen if other companies were merged into the company, because the number of shares issued would be significant if you think that the avg. Stock price in 1975 is $ 238. During last years, the company has recorded an impressive growth, as well as in sales than in size. Byside some problems that can affect the future growing of the company arise. The company, as a result of various mergers, has lost flexibility.
Martell’s focus on finding “wild ducks” turned against him. People requested by the president has by nature, an advantage and cons. In fact they can be great challenges’ s lovers and be entrepreneurs of small growing companies, but they are not suitable for large divisions and hardly want to share their ideas. In addition, this caused additional costs. Each Subsidiary has its own functions, it has led to a situation where there is no cooperation and sense of belonging to the company. The company’s growth is not a shared objective, but it is focused only on certain activities.
It would be appropriate to create synergies among subsidiaries centralizing functional areas such as mktg and manifactuing, in order to cut costs and increase the focus on more profitable subsidiary already merged in the Electric Division. The turnover in this way it would be alleviate. It is also necessary to act on employee’s morale. Thus, following unified strategy, which aim is to increase the efficiency on two divisions and to lay strong foundations for the future growth, also the pay system should be reviewed.
The Machionery Division had a compensation schemes based on 90% salary and 10% bonus on ROI while the other division was based received 2/3 of the salary as a bonus based on growth in revenues. A new compensation schemes which its aim is to increase the worker’s responsibility,( in part based on a fixed percentage given by salary plus bonus both general, as an increase in ROI, or specific, such an increase in sales or in the subsidiary’s ROI), could help the future growth of the company.
By creating a common goal, it will be possible to create a collaboration atmosphere among the labor force. Furthermore thanks to a fairly incentive, based on achieving “easily” goals, as bonus in sales, it will be possible to increase employee’s morale. In particular, with regard to R&D’ function, it could be merged into one common area for the two divisions. Whit the union of this area, and leveraging on new incentives to “lock” talents, the company would distribute the degree of innovation and research within the two divisions.
Into this new area could be set up several working team, headed by the most talented, in which they will be assigned different goals such as how to evaluate growth opportunities, or, look for new innovations for the two divisions and so on, but also a task on the control of production, in order to ensure the highest quality. In fact, the Machinery division see more and more seller move elsewhere due to the product’s perceived low quality.
With the introduction of a new common functional area, it will be possible to give a positive impact on the overall costs and also, thanks to small working team, to preserve the “wild duck” spirit. In the recent years, Martell has given a greater focus on growth and the importance of innovating. But, it has created a contradiction on the implementation of the strategy. Concentrating all on the research and development of new ideas, the core business was left out.
These, risk being out of the market, due to the high percentage of defective products, that be gradually abandoned by their sellers. Martell will have to follow a single strategy for both divisions, implementing new functional areas and creating an unique remuneration and incentive plan, based on goals that can be achieved by team, made up of the talents that the company has attracted to itself during the time, it will be possible to create cooperation aimed to support the company’s growth, as whole.
But before, it will be necessary invest in the Machinery Division as required by its VP, 100-125 mil in 2-3 years. In this way, the original division will be able to confirm its dominant market position in the long term. It is important to remember that great part of company’s revenues were recorded just from this division. Martell should also review the Grennan’s position. Since he was put in head of the Electric Division, costs related to mktg, G&A and other engineering expenses are out of line.
Products with estimated time of obsolescence of 4 years show a BEP of 6 years. In addiction new products show losses due to customer returns. Although Grennan has prepared a new plan of action, some decision should be taken regardless. The new opportunities offered by subsidiarie will be put into the background. Before it’s necessary to redefine the company so that it is stabilized on solid basis and it will be able in the future to support further growth plans, also incorporating other subsidiarie.
Courtney from Study Moose
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