9B08M037 pcs - Case PDF

Preview

Summary

Case...

Description

VICTORIA HEAVY EQUIPMENT LIMITED

Paul W. Beamish and Thomas A. Poynter wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2008, Richard Ivey School of Business Foundation

Version: (A) 2017-05-18

Brian Walters sat back in the seat of his Lear jet as it broke through the clouds en route from Squamish, a small town near Vancouver, British Columbia, to Sacramento, California. As chairman of the board, majority shareholder, and chief executive officer, the 51-year-old Walters had run Victoria Heavy Equipment Limited as a closely held company for years. During this time it had become the second-largest producer of mobile cranes in the world, with 2007 sales of $150 million and exports to more than 30 countries. But in early 2008, the problem of succession was in his thoughts. His son and daughter were not ready to run the organization, and he personally wanted to devote more time to other interests. He wondered about the kind of person he should hire to become president. There was also a nagging thought that there might be other problems with Victoria that would have to be worked out before he eased out of his present role. COMPANY HISTORY

Victoria Heavy Equipment Limited (Victoria) was established in 1917 in Victoria, British Columbia, to produce horse-drawn log skidders for the forest industry. The young firm showed a flair for product innovation, pioneering the development of motorized skidders and later, after diversifying into the crane business, producing the country’s first commercially successful hydraulic crane controls. In spite of these innovations, the company was experiencing severe financial difficulties in 1970 when it was purchased by Brian Walters Sr., the father of the current chairman. By installing tight financial controls and paying close attention to productivity, Walters was able to turn the company around, and in 1977, he decided that Victoria would focus exclusively on cranes, and go after the international market. At the time of Brian Walters Sr.’s retirement in 1990, it was clear that the decision to concentrate on the crane business had been a good one. The company’s sales and profits were growing, and Victoria cranes were beginning to do well in export markets. Walters Sr. was succeeded as president by his brother James, who began to exercise very close personal control over the company’s operations. However, as Victoria continued to grow in size and complexity, the load on James became so great that his health began to fail. The solution was to appoint an assistant general manager, John Rivers, through whom tight supervision

Authorized for use only in the course 472.33 – Small & Family Business Management at Providence University College and Theological Seminary taught by Jeremy Funk from Sep 05, 2018 to Dec 14, 2018. Use outside these parameters is a copyright violation.

9B08M037

9B08M037

could be maintained while James Walters’ workload was eased. This move was to no avail, however. James Walters suffered a heart attack in 1992 and Rivers became general manager. At the same time, the young Brian Walters, the current chairman and chief executive officer, became head of the U.S. operation. When Brian Walters took responsibility for Victoria’s U.S. business, the firm’s American distributor was selling 30 to 40 cranes per year. Walters thought the company should be selling at least 150. Even worse, the orders that the American firm did get tended to come in large quantities, as many as 50 cranes in a single order. This played havoc with Victoria’s production scheduling. Walters commented, “We would rather have 10 orders of 10 cranes each than a single order for 100.” In 1997, when the U.S. distributor’s agreement expired, he offered the company a five-year renewal if it would guarantee sales of 150 units per year. When the firm refused, Walters bought it, and in the first month fired 13 of the 15 employees and cancelled most existing dealerships. He then set to work to rebuild, only accepting orders for 10 cranes or less. His hope was to gain a foothold and a solid reputation in the U.S. market before the big U.S. firms noticed him. This strategy quickly showed results, and in 1998 Walters came back to Canada. As Rivers was still general manager, there was not enough to occupy him fully, and he began travelling three or four months a year. While he was still very much a part of the company, it was not a full-time involvement.

VICTORIA IN THE EARLY 2000s

Victoria entered the early 2000s with sales of approximately $75 million and by 2007, partly as a result of opening the new plant in California, had succeeded in doubling this figure. Profits reached their highest level ever in 2005, but declined somewhat over the next two years as costs rose and the rate of sales growth slowed. Financial statements are presented in Exhibits 1 and 2. The following sections describe the company and its environment in the early 2000s.

Product Line

The bulk of Victoria’s crane sales in the late 1990s and early 2000s came from a single product line, the LTM 1000, which was produced both in its Squamish facility (the firm had moved from Victoria to Squamish in the early 1920s) and its smaller plant in California, built in 2001. The LTM 1000 line consisted of mobile cranes of five basic sizes, averaging $750,000 in price. Numerous options were available for these cranes, which could provide uncompromised on-site performance, precision lifting capabilities, fast highway travel, and effortless city driving. Because of the numerous choices available, Victoria preferred not to build them to stock. The company guaranteed 60-day delivery and “tailor-made” cranes to customer specifications. This required a large inventory of both parts and raw material. Walters had used a great deal of ingenuity to keep Victoria in a competitive position. For example, in 2004, he learned that a company trying to move unusually long and heavy logs from a new tract of redwood trees in British Columbia was having serious problems with its existing cranes. A crane with a larger than average height and lifting capacity was required. Up to this point, for technical reasons, it had not been possible to produce a crane with the required specifications. However, Walters vowed that Victoria would develop such a crane, and six months later it had succeeded. Although the LTM 1000 series provided almost all of Victoria’s crane sales, a new crane had been introduced in 2006 after considerable expenditure on design, development and manufacture. The $975,000

Authorized for use only in the course 472.33 – Small & Family Business Management at Providence University College and Theological Seminary taught by Jeremy Funk from Sep 05, 2018 to Dec 14, 2018. Use outside these parameters is a copyright violation.

Page 2

9B08M037

A-100 had a 70-tonne capacity and could lift loads to heights of 61 metres, a combination previously unheard of in the industry. Through the use of smooth hydraulics even the heaviest loads could be picked up without jolts. In spite of these features, and an optional ram-operated tilt-back cab designed to alleviate the stiff necks which operators commonly developed from watching high loads, sales of the A-100 were disappointing. As a result, several of the six machines built were leased to customers at unattractive rates. The A-100 had, however, proven to be a very effective crowd attraction device at equipment shows. Markets

There were two important segments in the crane market — custom-built cranes and standard cranes — and although the world mobile crane market was judged to be $945 million in 2007, no estimates were available as to the size of each segment. Victoria competed primarily in the custom segment, in the medium- and heavy-capacity end of the market. In the medium-capacity custom crane class, Victoria’s prices were approximately 75 per cent of those of its two main competitors. The gap closed as the cranes became heavier, with Victoria holding a 15 per cent advantage over Washington Cranes in the heavy custom crane business. In heavy standard cranes, Victoria did not have a price advantage. Victoria’s two most important markets were Canada and the United States. The U.S. market was approximately $360 million in 2007, and Victoria’s share was about 15 per cent. Victoria’s Sacramento plant, serving both the U.S. market and export sales involving U.S. aid and financing, produced 60 to 70 cranes per year. The Canadian market was much smaller, about $66 million in 2007, but Victoria was the dominant firm in the country, with a 60 per cent share. The Squamish plant, producing 130 to 150 cranes per year, supplied both the Canadian market and all export sales not covered by the U.S. plant. There had been very little real growth in the world market since 2002. The primary consumers in the mobile crane industry were contractors. Because the amount of equipment downtime could make the difference between showing a profit or loss on a contract, contractors were very sensitive to machine dependability, as well as parts and service availability. Price was important, but it was not everything. Independent surveys suggested that Washington Crane, Victoria’s most significant competitor, offered somewhat superior service and reliability, and if Victoria attempted to sell similar equipment at prices comparable to Washington’s, it would fail. As a result, Victoria tried to reduce its costs through extensive backward integration, manufacturing 85 per cent of its crane components in-house, the highest percentage in the industry. This drive to reduce costs was somewhat offset, however, by the fact that much of the equipment in the Squamish plant was very old. In recent years, some of the slower and less versatile machinery had been replaced, but by 2007, only 15 per cent of the machinery in the plant was new, efficient, numerically controlled equipment. Victoria divided the world into eight marketing regions. The firm carried out little conventional advertising, but did participate frequently at equipment trade shows. One of the company’s most effective selling tools was its ability to fly in prospective customers from all over the world in Walters’ executive jet. Victoria believed that the combination of its integrated plant, worker loyalty, and the single-product concentration evident in its Canadian plant produced a convinced customer. There were over 14 such visits to the British Columbia plant in 2007, including delegations from China, Korea, France and Turkey.

Authorized for use only in the course 472.33 – Small & Family Business Management at Providence University College and Theological Seminary taught by Jeremy Funk from Sep 05, 2018 to Dec 14, 2018. Use outside these parameters is a copyright violation.

Page 3

9B08M037

Competition

As the world’s second-largest producer of cranes, Victoria faced competition from five major firms, all of whom were much larger and more diversified. The industry leader was the Washington Crane Company with 2007 sales of $600 million and a world market share of 50 per cent. Washington had become a name synonymous around the world with heavy-duty equipment and had been able to maintain a sales growth rate of over 15 per cent per annum for the past five years. It manufactured in the United States, Mexico and Australia. Key to its operations were 100 strong dealers worldwide with over 200 outlets. Washington had almost 30 per cent of Canada’s crane market. Next in size after Victoria was Texas Star, another large manufacturer whose cranes were generally smaller than Victoria’s and sold through the company’s extensive worldwide equipment dealerships. The next two largest competitors were both very large U.S. multinational producers whose crane lines formed a small part of their overall business. With the exception of Washington, industry observers suggested that crane sales for these latter firms had been stable (at best) for quite some time. The exception was the Japanese crane producer Toshio, which had been aggressively pursuing sales worldwide and had entered the North American market recently. Sato, another Japanese firm, had started in the North American market as well. Walters commented: My father laid the groundwork for the success that this company has enjoyed, but it is clear that we have some major challenges ahead of us. Washington is four times our size and I know that we are at the top of their hit list. Our Japanese competitors are also going to be tough. The key to our success is to remain flexible — we must not develop the same kind of organization as the big U.S. firms.

Organization

In 2001, a number of accumulating problems had ended Brian Walters’ semi-retirement and brought him back into the firm full-time. Although sales were growing, Walters saw that work was piling up and things were not getting done. He believed that new cranes needed to be developed, and he wanted a profitsharing plan put in place. One of his most serious concerns was the development of middle managers, given a perceived lack of depth. The root cause of these problems, Walters believed, was that the firm was overly centralized. Most of the functional managers reported to Rivers, and Rivers made most of the decisions. Walters concluded that action was necessary: “If we want to grow further we have to change.” Between 2001 and 2004, Walters reorganized the firm by setting up separate operating companies and a corporate staff group. In several cases, senior operating executives were placed in staff/advisory positions, while in others, executives held positions in both operating and staff groups. Exhibit 3 illustrates Victoria’s organizational chart as of 2005. By early 2006, Walters was beginning to wonder “if I had made a very bad decision.” The staff groups weren’t working. Rivers had been unable to accept the redistribution of power and had resigned. There was “civil war in the company.” Politics and factional disputes were the rule rather than the exception. Line managers were upset by the intervention of the staff VPs of employee relations, manufacturing, and marketing. Staff personnel, on the other hand, were upset by “poor” line decisions.

Authorized for use only in the course 472.33 – Small & Family Business Management at Providence University College and Theological Seminary taught by Jeremy Funk from Sep 05, 2018 to Dec 14, 2018. Use outside these parameters is a copyright violation.

Page 4

9B08M037

As a result, the marketing and manufacturing staff functions were eradicated with the late-2007 organizational restructuring, illustrated in Exhibit 4. The services previously supplied by the staff groups were duplicated to varying extent inside each division. In place of most of the staff groups, an executive committee was established in 2006. Membership included the president and head of all staff groups and presidents (general managers) of the four divisions. Meeting monthly, the executive committee was intended to evaluate the performance of the firm’s profit and cost problems, handle mutual problems such as transfer prices, and allocate capital expenditures among the four operating divisions. Subcommittees handled subjects such as research and development (R&D) and new products. The new organization contained seven major centres for performance measurement purposes. The cost centres were: 1. Engineering; R&D (reporting to Victco Ltd.) 2. International Marketing (Victoria Marketing Ltd.) 3. Corporate staff The major profit centres were: 4. 5. 6. 7.

CraneCorp. Inc. (U.S. production and sales) Victco Ltd. (supplying Victoria with components) Craneco (Canadian production and marketing) Victoria-owned Canadian sales outlets (reporting to Victoria Marketing Ltd.)

The major profit centres had considerable autonomy in their day-to-day operations and were motivated to behave as if their division was a separate, independent firm. By mid-2007, Brian Walters had moved out of his position as president, and Michael Carter, a long-time employee close to retirement, was asked to take the position of president until a new one could be found. Walters saw his role changing. If I was anything, I was a bit of an entrepreneur. My job was to supply that thrust, but to let people develop on their own accord. I was not concerned about things not working, but I was concerned when nothing was being done about it. In the new organization, Walters did not sit on the executive committee. However, as chairman of the board and chief executive officer, the committee’s recommendations came to him and “. . . they constantly tried me on.” His intention was to monitor the firm’s major activities rather than to set them. He did have to sit on the product development subcommittee, however, when “things were not working . . . there was conflict . . . the engineering group (engineering, R&D) had designed a whole new crane and nobody, including me, knew about it.” Mr. McCarthy, the VP of engineering and R&D, called only five to six committee meetings. The crane his group developed was not to Walters’ liking. (There had been a high turnover rate in this group, with four VPs leaving since 2005.) Recognizing these problems, Walters brought in consultants to tackle the problems of the management information system and the definition of staff/line responsibilities.

Authorized for use only in the course 472.33 – Small & Family Business Management at Providence University College and Theological Seminary taught by Jeremy Funk from Sep 05, 2018 to Dec 14, 2018. Use outside these parameters is a copyright violation.

Page 5

9B08M037

In spite of these moves, dissatisfaction still existed within the company in 2008. The new organization had resulted in considerable dissension. Some conflict centred on the establishment of appropriately challenging budgets for each operating firm and even more conflict had erupted over transfer pricing and allocation of capital budgets. In 2007-08, even though requested budgets were cut equally, lack of central control over spending resulted in over expenditures by several of the profit and cost centres. The views of staff and the operating companies’ presidents varied considerably when they discussed Victoria’s organizational evolution and the operation of the present structure. Diane Walters, the president of Victoria International Marketing, liked the autonomous system because it helped to identify the true performance of sections of the company. “We had separate little buckets and could easily identify results.” Furthermore, she felt that there was no loss of efficiency (due to the duplication of certain staff functions within the divisions) since there was little duplication of systems between groups, and each group acted as a check and balance on the other groups so that “manufacturing won’t make what marketing won’t sell.” Comments from other executives were as follows: The divisionalized system allowed me to get closer to my staff because we were a separate group. We ended up with sales and marketing expertise that was much better than if we had stayed under manufacturing. If you (run the firm) with a manufacturing-oriented organization, you could forget what people want. In a divisionalized system, there was bound to be conflict between divisi...