Case Analysis of: M-Tronics Paper
McKenna Machine Co. Was a family run business with a management team that consisted of mostly older executives. Most of these top executives held positions with McKenna for over 20 years. At the time of acquisition, they had revenue of $600 million and net profit of $12 million. They also held a market share of 40-60%. This positioned them as the market leader. However, the budget for the machine division has become static and new financial requirements needed to increase production quality have not been received since its last investment in the sass.
The organizational structure was that of a centralized chain of command. The leadership style was that of a paternalistic family oriented business. They had a strategy that included economies of scale, having high quality outputs, and a complete line of products offered to satisfy all customer needs. They also have top salespeople who enjoy working for McKenna. They are in a slow moving mature industry and therefore didn’t focus on R; rather concentrating on a follower strategy. To make up for this lack of innovation, they chose to diversify their company through acquisitions of Entrepreneurial Subsidiaries.
They began with several acquisitions in the sass’s anally aqualung Adoration In 1989 at which time they created a new company called M-Troll’s. We now analyses the Adoration Company. Their formation and strategy are quite different from that of McKenna Machine. They began as an entrepreneurial start up when John Marital left his previous Job to begin his own company. Initially, Adoration was founded in 1979 and they were able to survive on government research grants and contracts. They competed in a highly competitive but also high growth potential industry.
In Its beginning, Adoration was able to develop some sophisticated electronic equipment with Industrial applications. Due to much needed capital Limitations, teen Decade open to equally Investments or calculation as a means of getting capital to better exploit their products. Adoration strategy was different from that of McKenna. They focused heavily on R and chose to subcontract their marketing and production of the products. Also, they had a great deal of emphasis placed on growth and innovation. This was evident by their focus on the R. It had reached revenues in excess of $100 million in its first 10 years of existence.
With the analysis of both separate companies, we now look at the culture of M-Tropics after the acquisition. They used an ambidextrous strategy in merging the two companies. They were able to keep the structure of the machine division separate to that of the electronics division. The machinery division was able to continue along their established path and focus highly on production improvements to increase net profit. The profits they were generating were used to fund investments in the electronics division and Entrepreneurial Subsidiaries to improve on innovation and growth.
These subsidiaries would be merged into the company upon proven independent success. The machinery division wasn’t receiving the funding necessary to better its win operations or provide for growth. The electronics division was essentially the old Adoration, started by the highly educated Marital. He retained control after the acquisition. They were able to expand the electronics division quickly; adding offices worldwide, 3 production plants and increasing to $320 million in annual revenues. The management style at M-Tropics was a general hands-off approach, with the idea of promoting autonomy.
Also, the pay of the managers reflected the strategy of the two divisions. Mycology, head of the machine division, received 90% salary and 10% bonus. In comparison, Marten received two thirds of his pay as bonuses based on revenue growth. When M-Tropics was in need off new CEO, they hired an external search and consulting firm to find a candidate. They eventually determined that John Marital was the right candidate for the Job. This was due to his energy and vision which was needed to continue M-Tropics growth. With his vision, he used the profits from the machinery division to invest in high growth ventures.
He was also focused on attracting and retaining talented entrepreneurial type people who he categorized as “wild ducks”. He felt it was necessary to avoid the bureaucracy of a large firm and developed the Entrepreneurial Subsidiaries program to create additional innovation and continued growth. Marital did this in an almost overnight idea with the hopes of offering a personal financial reward for innovating new ideas. There were possibilities of large financial gains for both M-Tropics and the developing researchers using this approach.
Moving forward we will assess the BRINE of M- Tropics. Valuable – Both divisions had products that were valuable, as shown by their revenues increasing over time. Rare – The machine division had products that were animal to many others, however, the electronics division has the possibility of creating innovative, rare, new products. Inimitable – the culture of production improvements would be comparably easy to imitate in the machinery industry. The culture of innovation in the electronics division meant the creation of products that were harder to imitate for competing companies.
Non-substitutable – it’s hard to answer this as were not really given many details as to the exact nature of their products. Exploitable – Yes, through M-Tropics developed sales staff and channels of distribution. Also, with the support of M-Tropics, subsidiary companies possess enough resources Ana opportunities to effectively exploit tenet products with an ambidextrous strategy, the merged M-Tropics company does possess BRINE. The entrepreneurial subsidiary program was the way in which Marital planned to improve innovation at M-Tropics.
The idea would provide a new business for M- Tropics, and not an evolution of an existing product. They would expand if the new product needed capabilities that they currently didn’t have. Also, the entrepreneurs would be accepting considerable career risk. The basic method for this expansion is hat the new subsidiary would issue stock in its name, and M-Tropics would invest 80% and the owners 20%. This would provide the initial capital to develop the new idea. Also, the new venture would have to sign a research contract, and an agreement that specifies the financial obligations.
These agreements would give the basis for what qualifications the new venture must meet, and then gives the opportunity for M-Tropics to the merge the new venture with the existing company. When this happens, the new ventures shares would be merged with M-Tropics, which provides the opportunity for a large financial gain. Example, Grecian who worked on Pro Instruments, the first proposal, earned over $4 million when they were merged with M-Tropics. When this was all completed, the new venture would become a part of the existing business.
Prior to that, as shown by the company structure, the subsidiaries were shielded off as their own business. This program is how they expected to attract and retain entrepreneurial type employees, and improve on their new products development. The entrepreneurial program was a success in the beginning, as 4 were merged, and none of the other programs have failed yet. As ell, in Marten’s first 5 years, revenue growth had averaged about 15% and net profits averaged 35%. The new products from the subsidiaries provided $358. 4 million in sales.
There has been much growth, which led to the need for $120 million in financing for the new subsidiaries, which was mostly financed from long-term debt. External Analysis: There are two major divisions in M-TROPICS. One is the machinery division and the other is the electronics division. Both divisions are in different product life cycles. The machinery division is in a mature stage, where quality and cost have a more important role than innovation. Thus, M-TROPICS is unable to take much benefit from this division since cost control and price competitiveness is the most crucial strategy for this division.
On the other hand, the electronics division is a high growth industry, which is constantly growing and changing. In this industry, innovation became the essential factor to the success in the market. Five Forces Analysis: Force I Power I Reasoning I Degree of Rivalry I Medium I * Largest firm in the industry with 40% – 60% market shares. * High-tech products with an efficient R foundation. * M-TROPICS’ Electronic Division reached almost 60% market share on sales with a keep increasing profits from 1989- 1999. Supplier Powers Low/ Medium I * New supply parts maker could cause a threat to M-Tropics if they enter into the market with relatively low prices. * The M-TROPICS’ subsidiary strategy not only brought the new products for the company but also provided the materials for its production, such as the semiconductor subsidiary. I Buyer Power I Medium I * The demand for heavy machinery has increased. * M-Tropics benefits from economies of scale * I nee market mean Tort electronic products Increased rapidly M- growth from 132. 2 million in 1990 to 1122. Million in 1999. | Threat of New Entrants I Medium I * Investment is the main concern when starting this type of business. This is due too large requirement for resources, capital and contacts. I Threat of Substitutes I Medium I * M-TROPICS spent most of its investment on the R department. I Overall, the attractiveness of this industry is medium. It is relatively easy to start-up only if significant investments are made in this industry. Specialized expertise and capital are needed which can be acquired by hiring top engineers and managers with experience.
Alternatives: Strategy 1): Discontinue or limit the use of entrepreneurial subsidiaries Entrepreneurial subsidiaries may offer opportunities to create more efficient and effective structures but it has caused increased turnover of key talent, decreased loyalty and warring between internal departments. These are problems which cannot be left unresolved. This solution proposes that M-Tropics slow down the use of entrepreneurial subsidiaries and make it much more difficult for employees to become approved for this program.
This will give the electronics division time to regain its focus and implement programs that will properly reintegrate divisions that re currently operating autonomously within their organization. This will also provide to retain key talent. At the same time, M-Tropics would be able to allocate financial resources and begin the process of updating machinery and equipment within the Machinery Division. The machinery division has been the core business of M-Tropics, but not has been given the proper focus it needs to ensure future prosperity.
Strategy 2): Expansion and improvement of entrepreneurial subsidiaries. Marten’s use of entrepreneurial divisions is a profitable idea but it needs to be properly managed. M-Tropics should continue to allow and encourage the pursuit of innovative research because of the profits it generates, however, the agreements being made between subsidiary founders and M-Tropics needs to be re-examined and altered accordingly. M-Tropics needs to focus on how the subsidiaries will be merged back into the organization once they become an existing business.
The idea here is to still provide a large financial incentive for subsidiary founders whilst slightly limiting the expense to M-Tropics to allow for capital disbursement to other areas of the organization. Also, using this strategy, resources will continue to be allocated to the Electronics division while the machinery division continues to improve their processes based on their current budget. The machinery division needs to continue to focus on cost management and remain as a stable source of income for M-Tropics.
Strategy 3): Focus on improving the reintegration process of the Electronics Division while using the entrepreneurial division strategy in the Machine Division. Allowing founders of entrepreneurial subsidiaries to continue research in their area of expertise will be the only way to retain such employees. Wild ducks” need autonomy which has not been given to them in the Electronic Division’s reintegration process. A lack of opportunity for these individuals is causing problems such as high turnover and decreased loyalty.
This process needs to be reassessed and changed to give these employees to independence they need once their subsidiaries are successfully merged with M-Tropics. In this strategy, the machinery division will adopt the techniques that the Electronics Dolls NAS uses In ten past. I Nils may require allocation AT unman resources from the electronic division to the machine division. Also, allow for some of the creative “wild ducks”, who are currently unsatisfied, to help the machinery division to become more innovative and competitive.
Decision Criteria: Our decision as to which strategy to implement is based on the following criteria. We must assess which strategy will provide the M-Tropics organization with sustainable future growth while also allowing the company to meet current financial performance requirements through increased operating efficiency. Recommended Solution and Implementation: Strategy 3 solves the electronic division’s problems and the machine division’s robber simultaneously. The machine division has been limited as of recent because of neglect in regards to capital allocation and low innovation.
Innovation is the perfect way to reshape the machine division. M-Tropics should make it attractive to talented employees in the electronics division to consider a transfer into the machine division. This will allow more “wild duck” type of employees to take hold of the opportunities and challenges presented within the machinery division. Furthermore, M-Tropics would need to hire “wild ducks” externally while replacing the employees thin the machine division who are resistant to future process and product innovations.
Additionally, M-Tropics needs to identify the problems that have occurred in the past pertaining to entrepreneurial subsidiaries and implement strategies which would will mitigate risks and provide for conflict free integration. These strategies will be outlined following this paragraph. The first step is to develop a new incentive package that will be introduced to the entire company across both divisions. This new reward system should place more attention on working to improve employee attitudes, create a sense of empowerment and increase morale mongo workers.
An example of such would be cross-functional training, employee appreciation days, and flexible schedules. A similar style of management enforcing this system will also be implemented. It should also be a goal to increase incentives and career development opportunities. Overall, this system should ensure that new incentives retain current employees and also make M-Tropics attractive to employees of competing companies. The second step is to create a new system for the evaluation and control of financial performance. The system should be based on pre- set revenues and operating earnings.
Moreover, a new focus should be placed on Machinery division improvement as oppose to the current focus on developing subsidiaries. The company’s financial goals should be set at a rate of proven historic growth. Thus far, M-Tropics allocates approximately 80% of their capital investment in the subsidiaries and should reduce that amount to approximately 60% or 70%. This provides the Machinery department and existing merged subsidiaries within M- Tropics with additional focus and capital. The third step is to reduce the size of M- Tropics by slowing its growth.
The high cost of working capital needed to operate its visions is spreading the company’s resources too thinly. The electronics division is not working efficiently and costs have been increasing. Director of the human resource department should work on a method to reduce the company’s payroll. A better rewards system, such as stock bonus rewards over cash compensation, should be implemented. Increasing the priority of the sales department is also needed. This can De In ten Tort AT netter sales promotion Ana Telltale travel expenses. I Nils serve to lower the sales staff turnover ratio, which will lessen the costs for acquirement and training.
Lastly, the fourth step is to increase the quality of the products. The company is losing market share which is cause the poor quality and bad marketing planning. Quality is really important for both machinery and electronics products and is especially important to M-Tropics as they have branded themselves as a high quality producer. Steps must be put in place to correct quality deficiencies before they tarnish brand image. The contingency plan for M-Tropics is to sell the entrepreneurial subsidiaries and forego from entering this avenue in the future.
M-Tropics has many subsidiaries which with unproven products that have a potential for failure. If the subsidiaries do not meet targeted levels of success, substantial loss can occur due to these large investments. A new buy-out or sell option should be made available for all subsidiaries that have not yet been integrated. This strategy will benefit M-Tropics for the purposes of control and profit. M-Tropics will have increased control in its innovations and reduce risk in these upstart companies. It will also allow M-Tropics to be more focused and more effective in the heart of its operations; the machinery aspect.