Part I: Answer each question thoroughly, read over each problem, discuss the pros and cons of each option, and select the best option including your justification and your own opinion.

H & I Advanced Technology, Inc.

H & I Advanced Technology, Inc. (HIAT) is a small high-technology business specializing in advanced electro-optics research and custom instrument design located in California, north of Los Angeles. Except for its specialty, HIAT's establishment and evolution are similar to several other high-tech entrepreneurial ventures in the area.

Some of the products developed and manufactured by HIAT are radiometers, holographic projectors, optical data acquisition systems, and process control optical data acquisition systems, and process control optical sensors. These are usually unique products for a specific customer manufacturing process and for process control, such as calibration of lasers, quality control holography, or nondestructive testing. The products have had a wide variety of applications from the field of medicine to technology demonstration action exhibits and military demonstration and training equipment.

Designing and developing instruments primarily on exclusive contract means that HIAT has limited competition. Another advantage is that the effort expended for one project can lead to patentable products, processes, or procedures that may have other applications, provided the current customer does not impose restrictions on sale of the product or application of the technology in order to control his own competition or restrict access to militarily critical information. These advantages are modified by a fairly limited market and the relatively small number of specific products purchased by the customer.

Because it is pioneering research and development (R & D), HIAT's business by nature is risky, as is recognized by some government customers in awarding development contracts in phases. Nevertheless, HIAT's costs are similar to many other technical businesses. Product costs include personnel (especially brainpower in the R & D area), raw materials (often small in quantity but some can be expensive state-of-the-art components), assembly (machining and subassembly of electrical or assembly (machining and subassembly of electrical or optical subunits), testing verification and documentation, and user manuals. Because HIAT is often developing a single product or a limited number of units, there is little opportunity to benefit from economies of scale. Profits are not a one-time calculation of manufacturing cost versus selling price but must be recalculated for each job and are highly dependent on past experience, judgment, and current circumstances. HIAT's products are priced in three major ways: fixed price, cost plus fixed fee, or cost plus incentive (positive or negative) fee. Either method can be advantageous depending on circumstances and how accurately HIAT can gauge unknowns in estimating development costs. That is, when many factors in an R & D effort are unknown, a fixed price contract poses the most risk to HIAT, while a cost plus fixed fee arrangement poses the least risk.

HIAT succeeded by finding a niche in the market for advanced custom-designed instrumentation. It is competing in a specialized instrumentation field in which high volume production is dominated by much diversified national or multinational firms such as Perkins-Elmer. Also, foreign competition is not a significant problem when government contracts and military classified R & D projects are involved.However, it could pose a threat for higher volume production items. The market for HIAT's custom-designed instruments is relatively small, but the specialized products have a height per unit price tag. Electro-optics has the capability of carrying a large volume of information over a wide bandwidth. Thus, the industry offers an increasing variety of potential applications within or even linking the expanding modern fields of electronics, communications, and computers. HIAT is a young company seeking to capture a share of these expanding markets.

Marketing for HIAT, in general, does not require the cost of extensive advertising of a tangible product but of convincing potential customers that HIAT has the expertise to produce what the customer desires - that is, marketing of reputation and capability.The company's products are a combination of two key factors: raw materials in the form of electronic and optical components and the human resource capability to assemble them innovatively. Although the raw materials are not required in large quantities, certain items can have long procurement lead times if they are limited production items for a supplier. Electronic components and printed circuit boards are available locally, while such items as lenses and lasers are usually ordered from other regions.

HIAT is located near several government military or space installations and in the midst of a high concentration of aerospace and defense contractor firms. It is a climate that encourages and supports entrepreneurial ventures. There is a large population of highly trained professional engineers and scientists, many of whom continue to pursue their professional interests during their leisure time. In addition, there is usually a sizeable population of skilled technical laborers.Both of these labor groups tend to command relatively high salaries and wages. Total compensation is one of the competitive factors with which HIAT must deal, scarcity or abundance of applicants, of course, is directly related to the economic health of the local high-tech community.

Recruitment also varies with the category of worker. HIAT's human resource needs for technical skills comprise four major types, characterized briefly in Table 3.1. Engineers and physicists tend to be similar in terms of recruiting and compensation.If they are satisfied with their job assignments and job relationships, and salaries are competitive, their retention presents few problems. If job assignments do not capture their imaginations or they do not feel properly recognized, retention can become difficult.

Technicians and machinists are similar in terms of recruiting and compensation. They appear to have stronger interest in hours worked and whether "overtime" pay is available. Retention of these workers is imperative if acquired skills for a given process, test, or assembly are to be preserved.

In addition to technical human resource needs, clerical, accounting, and management skills are required.In the evolution of a small company, as in the case of HIAT, the founders often handle many varied duties that in time will be handed over to other personnel.

Ken Hendrickson (the "H" of HIAT) and Melvin Ingram (the "I" of HIAT) founded the company eight years ago following several years of part-time collaborative consulting work during evening and weekends. They are middle-aged, family men. Both have graduate academic degrees and had held responsible full-time technical or managerial positions with local companies. Ken Hendrickson is a physicist who was fortunate to have acquired valuable experience in holography when this field was in its infancy. His expertise was an excellent complement to Melvin Ingram's solid background in electrical engineering. The two friends first became associated because Hendrickson needed some electronic design assistance for one of his part-time theoretical studies, and Ingram needed expert advice on optics for some of his design work. The association resulted over a two-year period in several successful garage or basement cooperative projects completed during off-duty hours. The two soon saw that there was a market for what their partnership could offer and eventually left their full-time jobs to incorporate as HIAT.

HIAT is a closely held private corporation; all shareholders are full-time employees. Ken Hendrickson, the president and CEO, controls 63% of the shares of stock. Ken had several patents to his credit and brought into the new company an established reputation in physics and electromechanical and optical systems.His contribution in conceptual studies has been significant in HIAT's success thus far.

Melvin Ingram, together with his son, Dennis, owns another 27% of the stock. Melvin Ingram, vice-president and technical director, brought excellent engineering experience to the corporation and has had the main responsibility for electronic design and abdication for which HIAT has gained a reputation for high quality products. His son, Dennis, was brought into the corporation in its early stages and serves as the financial manager. Dennis has had some training and practical experience but lacks an academic degree and a technical background. Although he has few business contacts outside the company with customers and lending institutions, he now occupies an important position within the company in that he is responsible for all bookkeeping operations and is very closely involved with daily administrative and personnel decisions.(An outside CPA firm prepares tax reports, quarterly and annual reports, and other routine accounting services.)

The remaining 10% of the stock was set aside initially for expansion. All corporate shares are restricted and can be held only by employees of HIAT. Ownership of this portion of the shares has varied from time to time as key employees have changed.

In such a small company with two strong principal shareholders, decision making sometimes appears to be a joint process. HIAT when originally organized was a three-person operation including the secretary.(The position of Treasurer was added later to include Dennis Ingram.) Decision making was done in an environment in which Hendrickson and Ingram consulted each other and functioned essentially as equal partners rather than the system represented by a formal organizational hierarchy and chain of command in which decisions are usually made in a larger organization. The decision making process at HIAT has retained some of its initial flexibility, and often it is difficult to identify a clear-cut unilateral decision that is best for the company where there are at least two principal shareholders involved, each of whom has strong and sometimes different interests. The functional organizational chart in Figure 3.1 represents the general organizational structure at the beginning of HIAT's ninth year.

HIAT was capitalized with less then $5,000 and founded during a period of economic uncertainty, high inflation, and high interest rates. These conditions compounded for HIAT the typical problems of small entrepreneurial companies: undercapitalization and cash flow crises. Also, like many small businesses of its type, HIAT management has had to operate in a competitive climate in which uncertainty is a large factor in many decisions and the demands on the principals' time have been almost total.Despite these disadvantages, however, HIAT has overcome most developmental difficulties, primarily because of the owners' dedication and willingness to sacrifice most of their time and to assume considerable personal financial obligations to keep the business operating. It now appears poised for future expansion. In the past two years it has experienced steady growth in sales and workforce. The initial staff of 4 has increased to 20, one-fourth of who are professionals and the remainder technician, production, and clerical. Recent emphasis on defense and space development projects (i.e., Strategic Defense Initiative or Star Wars) by the U.S. government appears to offer considerable potential for increased markets now and well into the future.

In the recent personnel additions you have been hired by Mr. Hendrickson for a staff position. Because he has a strong technical background, but a limited background in management and business administration, he will be looking to out for advice on a number of important decisions.

Problem 3.1

Now at the beginning of its ninth year, HIAT has weathered a few normal financial crises but is gradually building a viable operation. The company has an opportunity with several new products to expand considerably and take on a broader base of customers. However, funds are needed for product research and development, cash flow for increased capital necessitated by increased contracts and marketing efforts.Hendrickson and Ingram consider the monetary value of potential contracts, analyze their prospects and needs, and decide that $250,000 must be raised to meet their requirements and that $325,000 would be desirable ($175,000 for R & D and manufacturing, $75,000 for cash flow management, and $75,000 for advertising and marketing, although the marketing portion could be temporarily postponed if other contracts are bringing in anticipated revenue).

Although both principals at HIAT work toward securing new customers and contracts, much of this activity is done by Ken Hendrickson, especially when Melvin Ingram's time is demanded on projects requiring an instrument's completion on a close time schedule. The primary responsibility for securing funds from financial institutions has been by mutual consent Hendrickson's. The principal shareholders strongly prefer to retain ownership and control, but in the present situation are willing to at least consider other options in order to secure capital. Now that the amount of capital needed has been estimated, a decision must be made as to the best source from available alternatives. Four different options are being considered and Hendrickson asks you for advice.

Option 1

Private stock offering.A private offering limits contacts of potential investors to no more than 10 people a year. A private (or public) offering to nonqualified purchasers would require modification of corporate documents to change the current restriction of shares to HIAT employees only. Since there are 20 employees, an offering to all employees would violate the state securities law; only 10 can be contacted. There are presently three shareholders who own all authorized and outstanding shares (90% of the currently authorized 5,000 shares). The remaining authorized, but not outstanding shares, in effect, can be offered to seven additional employees since the three current shareholders would be the first ones most likely to purchase shares to maintain their present relative ownership.

Option 2

Public (over-the-counter) stock offering. A full prospectus for the Securities and Exchange Commission filing would have to be prepared for an offer to more than 35 people (cost: Approximately $35,000 to $40,000). (Less restrictive disclosure requirement would permit making an offering from 10 to 35 people by presenting a plan for approval to the California Securities Commission (cost: approximately $4,000).

Option 3

Joint venture.Collaboration with a manufacturing concern would reduce the amount of capital required since HIAT would be responsible for the design only.

Option 4

Loan. Collateral would be required in the form of contracts, accounts payable, and furniture and equipment; or, alternatively, commitment of the principal's personal assets such as second mortgages on homes and personal loan guarantees. The current personal borrowing power for Hendrickson and Mel Ingram for secured loans is about $50,000 each.

Problem 3.2

As a result of the ComCo agreement six months ago and other similar contracts, HIAT is increasingly making limited runs of several of its products. Such limited scale production has necessitated hiring several skilled technical employees, particularly designers. Because of its small size, HIAT faces strong recruitment and retention competition from the large firms in the area, especially for certain employee specialties in demand or scarce supply. One of the difficult areas for competition for a small business is employee benefits. While HIAT provides a satisfactory working environment, it must also offer a reasonable benefits package in order to retain employees. It offers an average or better leave plan and makes the normal contributions to Social Security and workers' compensation coverage. However, in the early years HIAT employees had to carry individual insurance because the firm's size prevented participation in reasonable group plans. Now company growth has increased the need for offering adequate benefits as well as making more group insurance opportunities possible. Other possibilities for attracting employees include stock ownership (purchase) and retirement plans.

Hendrickson and Ingram believe HIAT's salaries are competitive but realize that benefits must be above average to attract the key people neededbenefits that equal those offered by at least 50%of area firms. It is now mid-year and they feel that the beginning of the New Year is an appropriate time to revise HIAT employee benefits, and they are considering the best type of package to offer. To assess the competition, HIAT has surveyed the benefits offered by 28 firms in the area likely to compete with HIAT for certain critical skills.The results of the survey are presented in Table 3.2.

The costs of benefits (in terms of percentage of total compensation) in Table 3.2 are averages for all firms surveyed. Consultation with HIAT's insurance percentages would be generally in line with these figures. Hendrickson and Ingram review their situation and settle upon several options they could pursue. Hendrickson must now choose the best plan for HIAT, and he asks you for your advice.

Option 1

Accident and health insurance plus dental coverage fully paid by the company; stock option for key employees; retirement pension fully paid by the company.

Option 2

Accident and health insurance plus dental coverage fully paid by employees; stock purchase plan for all employees; retirement pension pain 50-50 by employer and employee.

Option 3

Accident and health insurance plus dental coverage fully paid by the company; stock option for key employees; retirement pension paid 50-50 by the employer and employee.

Problem 3.3

One factor enabling HIAT to offer more attractive benefits is the favorable outlook for the company.It entered the New Year (its tenth) in a good position. There is a backlog of contracts totaling approximately $1 million. Almost $2 million more in new business is anticipated from proposed contracts, and employment has doubled to 40. The company has been fortunate to hire and maintain a staff adequate for current needs, but a critical situation arises at mid-year. Dr. Canard, who is a key employee, informs Hendrickson that he is considering an attractive offer he has received for a university research position in his home state.During their discussion Hendrickson detects that the potential prestige of the position seems to be almost as important to Canard as the salary.

Dr. Canard is recognized for his work in a highly specialized area of optical physics, and HIAT was pleased to recruit him partially as a result of offering a stock option of 100 shares at $10 per share after one year of employment. HIAT currently has two contracts valued at more than $150,000 each for unique instrumentation for which Dr. Canard is the primary designer.His contribution is valuable for the future and is crucial for the work in progress; his leaving could seriously impact the design capability and delivery schedules.

In a meeting with Melvin and Dennis Ingram (and yourself) to review the impact of the new benefits program, Hendrickson takes the opportunity to discuss the possibility of losing Dr. Canard. Hendrickson and Melvin Ingram agree that Canard's contribution is vital. Dennis Ingram concedes reluctantly that "he sure has us over a barrel right now" but ads that he personally feels Canard "is interested only in his projects and is not a team player." Several possible solutions are discussed in the meeting.

Option 1

Increase Canard's management role by having him devote 40% of his time to marketing electro-optical systems, his area of design specialization.

Option 2

Increase Canard's technical responsibility by adding electromechanical systems design to his current duties in electro-optics design.

Option 3

Motivate Canard through enhanced position and title change by making him technical director of optics studies and design.

Option 4

Increase Canard's benefits by doubling his original stock option in return for an additional year's extension of the option period.

Option 5

A combination of Options 1 & 2

Option 6

A combination of Options 3 & 4

Problem 3.4

Dr. Canard was persuaded to remain with HIAT. The company's growth trend has continued uninterrupted through the year.Hendrickson and Ingram are proud of the history of HIAT, a company that started as a garage and basement workshop laboratory. It prospered and soon moved to a small leased office complex where the employees were housed in a large suite. By its tenth year, the company occupied two entire wings in two different building of the complex.

HIAT currently leases 4,000 square feet of space at an annual cost of $4.25 per square foot (excluding utilities cost). The addition of new employees and laboratory equipment has created extremely crowded conditions for HIAT. At least another 1,000 square feet could be utilized but additional space is not available in the same complex. In addition, the lesser has already notified HIAT that annual rent next year will be $5.25 per square foot.

The stockholders (Hendrickson, Mel and Dennis Ingram, and Canard) meet to discuss the company's housing needs and options. Based on work in progress and anticipated projects, they know that HIAT must have at lest its current amount of space (4,000 square feet). In fact, with increasing numbers and complexity of contracts, HIAT is requiring more and more laboratory and equipment assembly space, ad the stockholders foresee a future need for a small amount of manufacturing space (at least 1,000 to 1,500 square feet). Hendrickson, Mel Ingram, and Canard would like to consolidate the company under one roof.Dennis Ingram expresses his opinion that HIAT is spending money for rent that could be better spent for building corporate equity in property. With these needs in mind, they must choose and alternative soon to solve the space problem. You are asked for your advice.

Option 1

HIAT can continue to lease space. Suitable space probably can be located with an appropriate commitment of HIAT management's time for a search and evaluation. Based on available information, the cost for adequate space will be at least $5.25 per square foot.

Option 2

The company can attempt to locate an adequately sized building of a type suitable to HIAT's needs that can be purchased. Evaluating available property will require some time commitment. Unless the company is willing to locate fairly well beyond the urban area where most customers are concentrated, the price per square foot for commercial buildings is approximately $50.

Option 3

HIAT can build its own building. Two acres of land that would be suitable for building a small office complex are known to be available for $30,000 per acre. It is somewhat more remote that the currently leased space, but it is located on a major thoroughfare so that access and convenience are not major drawbacks.Based on other structures the management has seen, they feel that a suitable and attractive customer designed prefabricated structure of 5,500 square feet can be erected for approximately $90,000 and equipped for an additional $20,000. At the current interest rate of 12%, the monthly payment over a 15-year period would be approximately $2,050.

Option 4

The employees of HIAT, on a voluntary basis, can form a new and separate corporation to purchase the land and build the office complex, which the new corporation can then lease to HIAT. An advantage for HIAT would be that rent is a reimbursable expense for any government cost-plus contract, but interest and mortgage payments are not considered reimbursable items. The advantages for owners of the new corporation would be building equity and potential future benefits as well as current tax advantages.

Situation Continues

Seven HIAT employees (including Hendrickson, Mel Ingram, Dennis Ingram, and Canard) form a new corporation, HIC. After putting up their personal funds to purchase the land, they use it as collateral for HIC to borrow the funds for the new building and furnishings. The new facility is completed in time for HIAT to move in before having to renew its old lease. The move occurs at the beginning of HIAT's eleventh year.

Problem 3.5

Almost immediately upon moving into the new building, a new situation has to be considered. HIAT has formerly met its machine work needs for design prototypes with extremely limited in-house equipment and skills or, primarily, by contracting with local machine shops for production lots of 10, 20, or 30 units and generating from 20 to 30 hours of machine shop work during some weeks. Contracting out is time consuming (especially for minor changes on prototype items), it is of variable quality (a critical factor for HIAT), and it is becoming a less satisfactory factor for HIAT), and it is becoming a less satisfactory solution for HIAT's needs for custom machine work.

A preliminary investigation yielded the following data for consideration in reaching a solution to the machine shop problem:

Cost of Required Shop Equipment:

Metal lathe with accessories $ 3,250

Vertical milling machine with accessories 6,175

Power hacksaw 875

Micrometers and gauges 1,250

Bench grinder 350

Shaper 2,350

Air compressor 750

Total $ 15,000

Master Machinist Hourly Rate: $11.95

Apprentice Machinist Hourly Rate: $ 6.95

Area Required for Shop: 900 square feet @ $5.25 per square foot annual rent

Assuming 50% division of machine shop labor on 25 hours per week average between Master Machinist and Apprentice:

Direct Labor: 12.5 hours @ $11.95/hour

12.5 hours @ $6.25/hour

Hendrickson and the other HIAT managers are considering several options for the problem. Mr. Hendrickson asks you for your advice.

Option 1

Develop an in-house machine shop capability by purchasing all basic items of shop equipment and hiring one or two qualified machinists to operate it, relying on bringing in some outside jobs to maintain full utilization.

Option 2

Purchase only the major items of equipment (lathe, milling machine, and micrometer and gauges) and lease the shop space to a machinist possessing his own hand tools at a reduce rate in exchange for guarantees of first priority on work for HIAT.

Option 3

Continue to subcontract machine shop work to two or three shops as the need arises.

Problem 3.6

HIAT's reputation for quality work and the recognized technical expertise of its key employees have been primarily responsible for its sales. Although it usually deals with the contracts for custom products or services (a key means of remaining innovative and competitive), the company has developed some hardware that has been well received by customers on the local level; it continues to develop a small but growing list of products that should be desirable or attractive to other governmental agencies, universities, and commercial laboratories working with electro-optical and mechanical-optical systems. With readily available machine shop capability and the need to fully utilize it, the company appears to have a ready-made opportunity to market some of its products.

Three months later, Hendrickson, Melvin Ingram, and Dr. Canard discuss the potential for increased sales and are convinced there is a wider market but are not sure how to reach the potential customers. In an informal meeting they discuss several plans. Dr. Canard suggests the HIAT needs to narrow its focus to the local market to save much lost time in having people "scurrying all over the country trying to hawk HIAT's wares." He favors "building better mouse traps and letting the customer find us." Melvin Ingram states that he has little time to spend on marketing products because of the pressing schedules for design and production of new products and asks why HIAT does not hire "a marketing manager to put some order and direction into our marketing effort." Ken Hendrickson suggests that perhaps HIAT could obtain the services of an established marketing representative to sell HIAT's line.However, Melvin Ingram questions whether a general representative will devote priority effort to HIAT's products.Dennis Ingram, who is present during only a brief part of the discussion, expresses his opinion that whatever the outcome, it is going to cost "some big money." And, on leaving the room, he warns Hendrickson, "Just remember, Ken, you'll have to get this money somewhere!"

The other three continue discussing possibilities for selling products and services, reaching the consensus that their products are good but potential customers are not aware of their availability. Believing that HIAT sales will flourish with the right strategy, they narrow the alternative courses of action and Hendrickson asks you for your input.

Option 1

Redouble marketing efforts but restrict them initially to the local area, that is, present management should continue its current method of marketing but increase its time and effort.

Option 2

Employ a marketing specialist who could devote his entire time and effort to marketing HIAT's products and services, including personal contacts with customers as well as developing mail and other advertising campaigns tailored to HIAT's needs.

Option 3

Contract with outside technical representative already marketing related products to sell HIAT's products and services on the basis of commission plus reasonable applicable expenses.

Option 4

Develop an advertising campaign directed toward the specialized market HIAT desires to reach, using direct mailing of brochures on HIAT products and services and advertisements of HIAT's capabilities in key technical journals.

Situation Continues

The addition of a marketing specialist and a concentrated marketing effort are proving advantageous.Within six months noticeable increases in contracts have occurred. This is a dynamic period for HIAT. Although the corporate debt is still large, future business prospects look good.

Problem 3.7

The company's line of credit for operating expenses alone has now been extended to $250,000, but the large and variable volume of business (that is, payments for contract completions versus start-up expenses for new contracts) at times causes the treasurer to draw near the credit limit to meet monthly payroll and operating expenses.There is some stress in the company related to the workload, but it is not excessive, and employee motivation remains fairly high as HIAT enters its thirteenth year of operation.

Despite these seemingly optimistic conditions, a latent problem soon surfaces which, in retrospect, seems to indicate that more emphasis should have been given to defining and clarifying the roles of key employees at the time Dr. Canard was named technical director of optics studies. Dr. Canard's contributions are primarily theoretical studies and prototype design. In order for HIAT to build the optical systems, he relies on designers and draftsmen who are in the fabrication area (prototype lab) under Mel Ingram's direction to design and document the mechanical systems to implement the optical design. HIAT did not begin with a rigidly defined organizational structure, but rather the initial functional areas evolved naturally into specialized sections. Because the Electronics Design area has the greatest need for the type of support provided by the prototype lab, as the lab evolved it naturally developed informal but strong ties to the electronics design part of the company and looks to this area for direction. However, the prototype lab's present function is to serve the two theoretical studies areas as well as electronics design. An approximate representation of the current organization is shown in Figure 3.2. Competitive friction is beginning to develop between Canard's area and the fabrication/manufacturing personnel, who resent having to design one-of-a-kind items for Canard's prototypes. Such work does not contribute significantly to the overall output of the manufacturing area (that is, it does not involve production work for the machinists and technicians, and they complain about interruptions to work in one of "Canard's widgets").

The developing friction becomes evident as the result of a study contract that HIAT has with one of the country's largest suppliers of optical equipment to design and build a feasibility demonstration prototype for a particular electro-optical system. Dr. Canard is to do the study. In order to complete prototype development he has to make large company expenditures for optical devices (lens, etc.) to be used in the prototype. These ties up large amounts of operating funds during the period of the contract, whereas the period between invoicing and receipt of payment is much shorter in the manufacturing area. Cash flow problems are frequent anyway because of the volume of contract being handled, and the treasurer, Dennis Ingram, considers Canard mainly responsible when periodic financial crises arise. This adds another dimension to developing role conflict.

Since HIAT's formation, the policy has been that Ken Hendrickson, as company president, negotiates and signs the final agreement for all of HIAT's contracts. HIAT has an opportunity to make a considerable profit when the customer on Canard's study contract seeks a follow-up contract for another study and sends a proposed contractual agreement directly to Canard.Dr. Canard reviews and signs the agreement, but it is intercepted before it is sent out. Hendrickson, knowing that the contract is in HIAT's best interest, makes no changes in the terms Canard has reached but does change the agreement approval for his own signature as president. The matter does not end here. In a discussion several days later, Mel Ingram criticizes Canard for "executing his own personal agreements" that affect the manufacturing area and demands autonomy for his section and authority for the section to execute its own contracts.

When a heated argument ensues between Canard and Ingram, Hendrickson persuades them to let reason prevail. However, the matter of changing the contractual signature is another element added to the increasing criticism from the fabrication section and the treasurer.Unfortunately, these events coincide with new and strong interpersonal conflict and lead to a decision by Canard to leave the company upon completion of the current contract. As a result of the confrontation and Canard's resignation, HIAT management must deal with two important issues: Canard's interest in the company and how to eliminate future internal friction. Since Canard hold HIAT and Hi-Tech shares as well as being a guarantor of a portion of the line of credit for HIAT, his departure has major implications for the future direction and structure of the company.

The corporation has first right of refusal on repurchasing shares of stock of departing employees.Hendrickson, Mel, and Dennis Ingram choose to act on this to buy back and retain Canard's stock. Once this is decided, the organization of HIAT must be reviewed. Although he continues as majority stockholder, and theoretically could control a decision, Hendrickson knows that to be successful there must be some mutual agreement among the shareholders, all of whom favor a rapid resolution of problems and continuation of the company's momentum. Several options to resolve the problem are considered, and you are asked for your advice.

Option 1

Establish a subsidiary corporation for electronics design and manufacturing to give clear lines of separation and a distinct control structure in order to eliminate friction between the theoretical studies and the manufacturing areas.

Option 2

Establish a new corporation to separate the manufacturing function from the theoretical studies function.This would be a totally separate entity with no continuing relationship with HIAT, which would retain the theoretical studies and design function.

Option 3

Reorganize the company internally into an organization consisting of theoretical studies and design division, a financial and administrative division, and a manufacturing division with clearly defined avenues of control. Assign someone to production control to coordinate work requests in the prototype lab for all company requirements.

Option 4

Leave the organizational structure and policy essentially as it is. Have Hendrickson assume temporary direction of optics studies and design until a replacement for Canard can be hired. Assign someone in the prototype lab to coordinate all work requests.

Situation Continues

The reorganization that followed Dr. Canard's resignation resulted in formal procedures for operational control of support work between divisions. In addition, mutually agreed upon changes were made in procedures for bidding on new work. Formerly, Hendrickson, who was primarily responsible for bringing in new work, had collected estimates for the time required to design, develop, document, and manufacture each item or project and then had developed a proposal for the job.Because the reorganization had resulted at least partially from Mel Ingram's demand for more independence in handling the fabrication area work, Hendrickson decided to allow each division to do its own quotations on new work but he, as president, would review all quotations over $35,000 before they were submitted to potential customers. If appropriate, he would modify the quote.

Problem 3.8

The new policy on bidding had been in effect for two months when Mel Ingram prepared estimates and bids for an eight-month fixed-price contract to build 30 units of an automated electronic testing device. Based on the prior prototype development costs, Hendrickson felt that Ingram's cost estimate of $10,000 per unit was far too low. Even though he was not successful in convincing a reluctant Ingram of his reasons, he increased the estimate to $18,000 per unit. However, at Ingram's insistence, when the contract was awarded the project account was set up initially for only the $300,000 for Ingram's division. Three months into the contract, the work was 40% complete, but the project account was almost depleted. It was obvious that the contract was going to exceed Ingram's estimate. At this point Hendrickson authorized additional expenditures up to $240,000 more to complete the job.

The project is now 90% complete, and a substantial cost overrun appears inevitable. All project funds have now been expended, and additional funds required to complete the project are estimated at $54,000. The impact on the cash flow situation from this crisis, coupled with the increased obligations resulting from the company's purchase of Canard's stock, is creating stress for everyone. The problem is particularly acute for Dennis Ingram because of his close involvement in paying the bills and handling the payroll. He feels that Hendrickson is not doing an adequate job in securing the funds for HIAT's needs and begins to criticize him in conversations with other employees.Hendrickson quickly learns of this.About the same time Dennis Ingram refuses to continue compiling the weekly finding projections and other information needed for management control and for approaching potential lending institutions. He considers these reports, which at this time are showing his father's division in a very unfavorable light, to be "useless and too time consuming."

Faced with this situation, Hendrickson asks you for advice. You identify alternative courses of action.

Option 1

Ignore the problem, hoping that if the current crisis can be resolved and the stress level reduced, rational thinking will prevail.

Option 2

Since the source of the problem is complex and appears to involve Mel Ingram also, meet with the Ingrams and bring the problem into the open.

Option 3

Give Dennis Ingram an official letter of reprimand and warning.

Option 4

Schedule a personal conference with Dennis Ingram to discuss the matter and insist that the open criticism cease immediately; try to convince him of the importance of providing the required financial information.

Situation Continues

The contract was within one month of completion when the problem between Dennis Ingram and Hendrickson occurred. Hendrickson decided to meet privately with Dennis immediately. In their discussio0n, Ingram somewhat grudgingly agreed to resume making fund projections and to cease public criticism of Hendrickson. However, while he did not deny the fact that his father's project was having large cost overruns, he refused to abandon his opinion that much of the blame should be placed on Hendrickson for not bringing in adequate funding.

Problem 3.9

While work continued on the project, it was clear that the tensions had not disappeared. During a discussion with Mel Ingram the following week, Hendrickson discussed this and the detrimental effect it was having on morale and productivity. He asked Ingram why he had not attempted to silence the criticism. Ingram replied that he did not totally disagree with the criticism. "As a matter of fact," he added, "if as much time had been spent on getting the project out as was devoted to project management, we'd be in better shape now."

A week later the two are going over the operation and maintenance manual for the new equipment.The project is to be completed the next week, with a $50,000 loss instead of a $60,000 plus profit that had been anticipated. Ingram and Hendrickson begin discussing how such losses could be avoided in the future.Hendrickson suggests the company needs to concentrate more o its theoretical studies (usually based on an hourly rate that guarantees a known percentage profit) which have proven to be profitable. However, Ingram disagrees. He feels HIAT should continue and increase the manufacturing capability because repeat manufacturing business gives a potential for greater profit. "It also gives a potential for greater loss," says Hendrickson. "There is a wide margin for error in our estimates, and we have to allow for this in our quotes, especially on fixed-price contracts." Ingram retorts, "Ken, your approach is to price us out of the work!" The continued disagreement and conflict reach the point where Ingram suggests that their business goals and methods are now so divergent that one of them should buy the other out as soon as some of the current projects can be finished.

During the next few weeks, Hendrickson considers what should be done and asks you for your opinion.

Option 1

Delays, hoping the climate will improve as the principals become more removed from the recent unpleasant events.

Option 2

One of the HIAT principal shareholders buys the other out.

Option 3

Liquidate the business.

Option 4

Separate into two companies by dividing the assets and forming a new company.

Situation Continues

After deep deliberation, Hendrickson concludes that Ingram's buy-out suggestion indicates that the mutual respect and trust required for HIAT to successfully do business have degenerated too far. The decision to set up a new company and then divide HIAT's personal property, functional lines poses many challenges. After much evaluation and considerable difficulty, an agreement is reached whereby HIAT buys the outstanding shares owned by the Ingrams by exchanging assets (primarily manufacturing equipment) in return for shares. Mel and Dennis Ingram submit their resignations as directors, officers, and employees. Hendrickson remains as sole shareholder of HIAT, which now consists of the optics and theoretical studies functions plus necessary administration. The bulk of the electronics design and fabrication functions go with the newly formed manufacturing oriented company know as IngCo.This leaves the matter of housing.The current design of the building occupied by HIAT (owned by HIC) is more useable as an office complex than a manufacturing facility. Thus, the new company decides to move to new quarters after the matter of ownership of the building is settled. This is accomplished by Hendrickson buying the HIC shares owned by the Ingrams and three other employee shareholders, all of whom are going with IngCo.

Problem 3.10

Over a period of three months, IngCo locates new space, work in progress at HIAT is completed or resolution agreement are reached for completing outstanding contracts, responsibilities for equipment warranties are assigned, and numerous other problems and details are finalized. Removal of most of the manufacturing equipment and almost thee-fourths of the personnel leaves a considerable void in HIAT. Hendrickson must now determine the direction of the company following the changes. He has several options, and he asks you for advice.

Option 1

Compete with IngCo, by rebuilding HIAT, gradually adding personnel and manufacturing capability to return the company to its original purpose.

Option 2

Change HIAT's direction by concentrating on theoretical special studies and consulting service contract work rather than manufacturing.

Option 3

Cooperate and work with IngCo in a complimentary arrangement in which HIAT provides technical support to the new company and it provides manufacturing support for HIAT.

Table 3.1

H & I Advanced Technology

Major Human Resource Needs

Salaried

Engineers

Highly trained professionals

Not likely to be union members

Leisure activities tend to be professionally related

Tend to be hardware and software oriented

Physicists

Highly trained professionals

Not likely to be pro-union

Hobbies related to vocation

Interested in theoretical problems and solutions

Sometimes lack strong interest in the economic or practical application of theory

Hourly

Technicians

Significant laboratory or practical experience with hardware and software

Somewhat independent but may join with others in a union

Often apply job skills to hobbies

Must know the operation and how to repair and test hardware and software

Machinists

Highly skilled in prototype production of mechanical apparatus

More union oriented

Practical and methodical in machining and assembling parts

Must correctly interpret drawings and instructions for manufacture

H & I Advanced Technology

Selected Benefits Programs

Plan	% of Firms Providing Benefit	% of Total Compensation
Accident & Health Insurance	80	3
Including Dental Coverage	50	2
Fully Paid by Employer	41
Life Insurance	96	1
Fully Paid by Employer	78
Retirement Pension	83	4.5
Fully Paid by Employer	70
Paid Leave
Holiday	99	2.3
Vacation	99	3.4
Sick	72	0.8
Stock Option*	24	6
Stock Purchase Plan	46

*Generally restricted to high-level professional or managerial employees. (Previously HIAT had paid leave for holidays and vacations; this will continue).