Harvard Case - Assuming Control at Altex Aviation (A)
"Assuming Control at Altex Aviation (A)" Harvard business case study is written by Neil C. Churchill, Kenneth A. Merchant, Edmund M. Goodhue. It deals with the challenges in the field of Accounting. The case study is 32 page(s) long and it was first published on : Aug 16, 1982
This case study solution recommends a comprehensive restructuring plan for Altex Aviation, focusing on improving financial performance, operational efficiency, and corporate governance. This plan involves a combination of strategic, financial, and operational changes, including a shift to activity-based costing, a revised budgeting system, and a new approach to employee incentives.
2. Background
Altex Aviation is a privately held company specializing in the manufacture and sale of aircraft parts. The company has experienced declining profitability and is facing increasing competition from foreign manufacturers. The case study focuses on the arrival of a new CEO, John Thompson, who is tasked with turning the company around. Thompson inherits a company with a fragmented organizational structure, outdated cost accounting system, and a lack of strategic direction.
The main protagonists are John Thompson, the new CEO, and the existing management team, who are resistant to change. The case study highlights the challenges of implementing change in a company with a strong internal culture.
3. Analysis of the Case Study
Strategic Analysis:
- Competitive Landscape: Altex faces intense competition from foreign manufacturers with lower labor costs and government subsidies.
- Market Position: Altex's core competency lies in its niche market of specialized aircraft parts. However, the company lacks a clear growth strategy and has not effectively leveraged its expertise in emerging markets.
- Financial Performance: Altex's profitability has been declining due to inefficient cost structures, outdated manufacturing processes, and a lack of investment in research and development.
Financial Analysis:
- Accounting Procedures and Policies: Altex's traditional cost accounting system fails to accurately capture the true cost of manufacturing and selling its products. This leads to inaccurate pricing decisions and a lack of visibility into profitability by product line.
- Financial Statements: The company's financial statements reveal a declining trend in profitability, high inventory levels, and inadequate cash flow.
- Budgeting: The budgeting process at Altex is outdated and lacks flexibility. It does not adequately account for changing market conditions and fails to incentivize cost-efficiency.
Operational Analysis:
- Manufacturing Processes: Altex's manufacturing processes are inefficient and lack automation. This leads to high overhead costs and delays in production.
- Organizational Structure and Design: The company's organizational structure is fragmented, with multiple layers of management and unclear lines of responsibility. This hinders communication and decision-making.
- Employee Incentives: The current employee incentive system is not aligned with the company's strategic goals and does not encourage innovation or cost-efficiency.
Corporate Governance:
- Boards: The board of directors lacks the necessary expertise and independence to effectively oversee the company's operations and strategic direction.
- Management Control: The lack of a robust management control system allows for inefficiencies and potential financial irregularities.
Key Issues:
- Outdated Cost Accounting System: Altex's traditional cost accounting system is inadequate for today's competitive environment.
- Lack of Strategic Direction: The company lacks a clear vision for the future and has not effectively responded to changing market conditions.
- Inefficient Operations: Altex's manufacturing processes are inefficient, leading to high costs and delays.
- Weak Corporate Governance: The company's board of directors lacks the necessary expertise and independence to effectively oversee the company's operations.
4. Recommendations
1. Implement Activity-Based Costing (ABC):
- Objective: To accurately capture the true cost of manufacturing and selling each product line.
- Action: Implement ABC to allocate costs based on the actual activities involved in production and distribution.
- Timeline: Phase 1: Implement ABC for key product lines within 6 months. Phase 2: Implement ABC for all product lines within 12 months.
2. Revise Budgeting System:
- Objective: To create a more flexible and accurate budgeting system that aligns with the company's strategic goals.
- Action: Implement a rolling budget that incorporates market trends and allows for adjustments throughout the year.
- Timeline: Implement the revised budgeting system within 6 months.
3. Improve Manufacturing Processes:
- Objective: To reduce production costs and improve efficiency.
- Action: Invest in automation and lean manufacturing techniques to streamline production processes.
- Timeline: Implement automation upgrades within 12 months.
4. Restructure Organizational Structure:
- Objective: To create a more streamlined and efficient organizational structure.
- Action: Eliminate unnecessary layers of management and consolidate key functions.
- Timeline: Implement the new organizational structure within 6 months.
5. Implement Performance-Based Incentives:
- Objective: To align employee incentives with the company's strategic goals and encourage cost-efficiency.
- Action: Implement a performance-based incentive system that rewards employees for achieving key performance indicators (KPIs).
- Timeline: Implement the new incentive system within 6 months.
6. Strengthen Corporate Governance:
- Objective: To improve the board's oversight and accountability.
- Action: Appoint independent directors with relevant industry expertise and experience.
- Timeline: Implement the new board structure within 6 months.
5. Basis of Recommendations
These recommendations are based on a comprehensive analysis of Altex's current situation, taking into account the following factors:
- Core Competencies and Consistency with Mission: The recommendations focus on leveraging Altex's core competency in specialized aircraft parts while aligning with the company's mission to provide high-quality products and services.
- External Customers and Internal Clients: The recommendations aim to improve customer satisfaction by providing more competitive pricing and faster delivery times. They also aim to improve employee morale and engagement by implementing a performance-based incentive system.
- Competitors: The recommendations address the competitive threat from foreign manufacturers by improving efficiency and reducing costs.
- Attractiveness: The recommendations are expected to improve profitability, increase cash flow, and enhance shareholder value.
- Assumptions: The recommendations assume that the company has the necessary resources to implement the changes and that there is a willingness among employees to embrace change.
6. Conclusion
By implementing these recommendations, Altex Aviation can improve its financial performance, operational efficiency, and corporate governance. This will enable the company to compete effectively in the global marketplace and achieve sustainable growth.
7. Discussion
Alternative Options:
- Merger or Acquisition: Altex could consider merging with or acquiring another company to gain access to new markets or technologies. However, this option carries significant risks and requires careful due diligence.
- Outsourcing: Altex could consider outsourcing some of its manufacturing processes to reduce costs. However, this option could lead to a loss of control over quality and intellectual property.
Risks and Key Assumptions:
- Resistance to Change: The recommendations require significant changes to the company's culture and operations. There is a risk of resistance from employees and management.
- Financial Resources: The recommendations require significant financial resources to implement. The company must ensure that it has the necessary funding to support these changes.
- Market Conditions: The recommendations assume that the market conditions will remain favorable. If market conditions deteriorate, the company's turnaround efforts could be jeopardized.
8. Next Steps
Timeline:
- Month 1-3: Conduct a detailed assessment of Altex's current situation and develop a comprehensive implementation plan.
- Month 4-6: Implement the new cost accounting system, revise the budgeting system, and restructure the organizational structure.
- Month 7-12: Implement the new employee incentive system, invest in automation, and strengthen corporate governance.
- Month 13-24: Monitor the progress of the implementation plan and make adjustments as needed.
Key Milestones:
- Completion of ABC implementation: Month 12
- Completion of revised budgeting system: Month 6
- Completion of organizational restructuring: Month 6
- Implementation of performance-based incentives: Month 6
- Completion of automation upgrades: Month 12
- Appointment of new board members: Month 6
By following this plan, Altex Aviation can successfully navigate the challenges it faces and achieve its strategic goals.
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Case Description
Two young and inexperienced MBAs buy a virtually bankrupt company. They design a decentralized control system organized around profit centers.
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