M-TRONICS (A) Case Analysis

Group HMichael Cheung

Femi Bode-GeorgesDaryna KulyaAmanda ObeidPaul Schlosser

04-75-498-02Dr. Jonathan Lee

Submitted: March 28, 2011 via Turnitin.com

Key Issues

            The main issue facing M-TRONICS is that the company is diversifying its products and

product line offerings too quickly using the Entrepreneurial Subsidiary program in the

Electronics Division, with not enough capital to strongly support it, as it leaves little to no money

for ensuring growth and innovation in the core business, the Machinery Division.  The format of

Entrepreneurial Subsidiaries programs must be reassessed and reconfigured in order to

simultaneously benefit from the synergy between M-TRONICS ’ two Divisions as a whole, and

not just the sum of the Electronics Division and Machinery Division as distinct separate entities.

            Several secondary issues also exacerbate the problem facing M-TRONICS and will be

discussed as follows.  Firstly, as a company with two strong and definitive divisions, both

Machinery and Electronics, using a “hands-off” management style approach will make it quite

difficult for the company to maintain alignment throughout the firm as a whole, ensuring both

divisions are both headed in the same strategic direction towards accomplishing the same vision. 

This “hands-off” approach seems to be harming not helping the firm.  A policy should be

developed to outline when executives can interfere to openly discuss concerns they may have

with managers without taking power and autonomy away from them.  Therefore, the

management style and level of autonomy Martell allows his managers to have must be

reassessed.

            Secondly, increasing turnover rates over the past few years in both the Electronics and

Machinery Divisions have caused serious reasons for concern within the firm. The talented

engineers that the Entrepreneurial Subsidiaries were meant to attract were leaving the firm. 

Possible factors that may have led to the significant turnover rates include a growing dislike for

cliques, difficulty adjusting to the company’s demands, a lack of monetary incentives, as well as

reservations of particularly challenging projects for those working on the Entrepreneurial

Subsidiaries.

            Furthermore, conflicts developing within the Electronics Division (more specifically, the

Research & Development sector) as well as between research and various other departments

caused Martell concern, as he feared these heightening tensions would stunt product

development.

            Lastly, operating problems in the Electronics Division must be addressed, and a need to

decrease costs and increase operating efficiency here must be analyzed.  This is so that new

avenues for securing financial resources can be attained to ensure innovative success for the

Machinery Division, which has not had an increase in its budget since 1994, stunting its growth

and causing stagnancy. 

2

Analysis

            McKenna Machine Company

The strengths of the company are the rapid industrial growth and the resulting high

demand for heavy machinery. McKenna benefited from economies of scale in both production

and distribution and the company grew emphatically in the first 50 years. 

           The reason the company is the market leader is because of their excessive line of

products, which mostly comprised of heavy industrial machine parts, which came with a wide

variety of different configurations of standard and custom parts. The high quality products that

McKenna offered attracted high-grade salespeople. McKenna Machine is the leader in the

market and leader in quality and breadth of its product line as well. McKenna Machine copied

products instead of using R&D and they produced a totally revamped product to incorporate new

composite plastic materials, and this product innovation led to rapid growth of revenues and

market share. 

            The weaknesses of McKenna Machine Company however, was that they weren’t a leader

in innovation and they left expensive R&D to other companies. This is actually a smart strategy

because McKenna used other company’s successful product innovation and eventually added it

into their own product. This could actually be both a strength and a weakness, because the

weakness is that McKenna will always need to wait for companies to do the R&D and test out

the product to see if it is accepted and successful, and then go on to implement it as a ‘copy’ into

their own products. The strengths of this strategy are obvious. McKenna obviously wouldn’t

need to spend money on expensive R&D. Another weakness of the company is that they are too

stagnant and considerably stubborn. The company hasn’t changed since it was founded.

            Datronics Company

The strength of the Datronics Company is their ability of innovation of high technology

products. The company developed several types of sophisticated electronic equipment with

industrial applications. Another strength that would prove to help McKenna out in the acquisition

of Datronics is that Datronics is highly focused on Research and Development. This is something

that McKenna doesn’t bother doing in the past, due to the expensive cost of R&D, so this is a

great way to help McKenna out now with that problem and McKenna won’t need to ‘copy’

products anymore. Datronics Company developed a new product that promised to sell extremely

well in the commercial markets. 

            The weakness of Datronics is that their growth was limited due to its lack of focus on its

commercial opportunities and the lack of control over marketing and production. The company

also needed to subcontract their marketing and production because they were lacking that

component to continue to grow. The new product that Datronics developed would have been a

great opportunity to build internal production and marketing capabilities and then eventually

grow the commercial business, but there was another issue with capital that would be needed to

bring the product to the market, build a sales force, and begin volume production. The company

3

couldn’t really exploit the full potential of its business opportunities due to their lack in funding.

M-TRONICS

The company employed a ‘hands-off’ managerial approach, which was both a weakness

(lack of accountability and responsibility from employees) and a strength (autonomy of

employees). The entire Machinery Division was itself a weakness of the company as it wasn’t

receiving any funding – unfair distribution of funds between two divisions was a great issue in

the company.

Let’s apply the VRINE model to M-TRONICS (as of 1999):

Value: M-TRONICS creates value for its shareholders because it possesses a unique

combination of capabilities. Firstly its benefits from the economics of scale in production and

distribution, which enables the firm to minimize its production cost and expand on its product

depth. It also possesses high quality human capital, in the form of highly knowledgeable sales

representatives. The firm’s rapid growth is of great value as it generates increases in revenue.

This growth is facilitated by its Entrepreneurial subsidiaries that provide M-TRONICS with

access to new markets through innovative new products 

Rarity: The mature slow growth industry in which the machinery division competes forces M-

TRONICS to focus on quality, customization and product depth rather than on innovation. The

firm uses a strategy in which it lags behind competitors that have invested heavily in R&D and

then simply imitate their products. This strategy saves M-TRONICS the expensive and time-

consuming R&D involved in product development. On the other hand the firm’s Electronics

division and its entrepreneurial subsidiaries specialize in R&D and focus on the development of

new products with promising opportunities for growth.

Inimitability and Non Substitutability: once again the current mature state of the machinery

business creates opportunity for both imitations and substitutability. As customers have the

option to purchase equipment and parts from the competitors of MTRONICS. But the level of

imitability and substitutability is limited due the high quality of products and the extensive

customization available in M-TRONICS product line. On the other hand it’s Electronics division

products would be highly difficult to imitate or substitute due to the time it would take to reverse

engineer the innovative products developed by the Electronics division. It’s hand-off corporate

strategy towards its divisional operations and its development of its entrepreneurial subsidiaries,

would almost be impossible to duplicate in the short run due to the complex factor of 

entrepreneurial human capital  involved in the strategy, but it is duplicable in the long run. 

Exploitability: M-TRONICS capabilities and competitive advantages of economics of scale and

consistence in production have given it the opportunity to possess the largest market share across

most of its machinery products. The firm also exploits the growth opportunities brought on by

the R&D provided by the Electronics division and the new products developed by its

entrepreneurial subsidiaries have further potential to be exploited with the assistance of M-

TRONICS.

4

Ratio Analysis

Data given in the case provides us with several important insights for our analysis.

EBIT Margin (Operating Profit Margin) that indicates how effective a company is at controlling

the costs and expenses associated with normal business operations has been steadily growing for

M-TRONICS ever since 1990. After 1995 when subsidiaries started being bought back this

metric was high as ever and in 1999 the Operating Profit Margin for Entrepreneurial Subsidiaries

exclusively was 12.3% - higher than 12.0% cumulatively with the Machinery Division. Another

important ratio that showed a great growth rate – ROCE (Return on Capital Employed) – went

from 14% in 1990 to 20% in 1999 with the help of Entrepreneurial Subsidiaries. ROE (Return

on Equity) went up as well from 1995 to 1999 by almost 50% - from 9 to 13%. All three (3)

metrics indicate that the Entrepreneurial Subsidiaries are in fact high-growth areas that drive M-

TRONICS’ revenue, so getting rid of them would not be a feasible idea.

Alternatives & Recommendations

1) Eliminate All Entrepreneurial Subsidiaries Programs

            The first alternative is to eliminate the entrepreneurial subsidiary programs all together.

This will free up much needed capital, which can be invested in other areas such as machinery.

M-TRONICS stressed that they were low on funds that are needed to acquire new ventures. By

halting all acquisitions, they will have freed up capital, which will allow M-TRONICS to invest

internally and improve its existing operations. It seems that the company (specifically the

machinery division) is not being reinvested into which is affecting quality of output. By

eliminating Entrepreneurial Subsidiaries the company should focus on internal development

instead of growing by entrepreneurial mergers. Internal development will allow for a stronger

company foundation for which future acquisitions could be built upon. The main problem when

focusing on internal development is that M-TRONICS will quickly fall behind in the technology

sector because it will no longer attract innovative entrepreneurs, which will cause future R&D

problems.

2) Strengthen Entrepreneurial Subsidiaries Programs

            The second alternative of strengthening the Entrepreneurial Subsidiaries Programs will

leads to benefits over internal development such as speed and critical mass. In a dynamic

industry like the electronic one, the quicker a company can get settled and become operational,

the sooner they can become competitive. A second benefit M-TRONICS has by strengthening

this program is critical mass. The venture companies are typically large enough that they are

already independently sustainable and profitable which means that the acquiring firm is entering

into a business with sufficient size and competitive strength.

            While M-TRONICS Entrepreneurial Subsidiaries Programs have lots of strengths,

acquisitions are plagued with many setbacks. One such drawback is being more expensive. A

company is often sold for more than its market value, which means M-TRONICS must pay steep

5

premiums for the new ventures. Another is that assessment is only made at the point of purchase

whereas internal development has many opportunities where the project can be reevaluated. And

finally, just as M-TRONICS is currently experiencing, merging two entities can cause cultural

clashes between the two bodies. 

3) Use Entrepreneurial Strategy Programs in Machinery Division 

            The third alternative is to eliminate entrepreneurial strategies from the electronic division

and use them in the machine division instead.  Many benefits of acquisitions will be transferred

to the machinery division. The Machinery Division has been experiencing difficulties because of

poor product quality and innovation coupled with a high turnover rate of its salespeople.

Salespeople pride themselves in selling the best and they therefore do not want be associated

with M-TRONICS’ failing quality.

             Furthermore, adding an entrepreneurial aspect to the machinery division will attract the

"wild ducks" and breath new life into this struggling division as well as reducing turnover and

increasing job satisfaction. Hiring more “wild ducks” has never been more important because the

top executive team has become stale which means the company is no longer an industry leader

with the most dynamic products. Each executive has spent over twenty years in the same position

and are known for being risk adverse. This is not the type of lead management needed when the

firm is trying to reposition themselves to become a more dynamic player.

            This third alternative is therefore strongly recommended over the first two options. 

Unlike the first alternative, which suggests for internal investment, this option calls for

investment through entrepreneurial programs.  This will spur the creation of dynamic ideas

opposed to further idea development (or lack thereof) by the stale machinery management team.

Lastly, the nature of machinery division is not as volatile and dynamic as the electronic industry.

E.g. screwdriver technology has not changed as much in last 20 years as electronics have. This

means that new innovations and changes in this otherwise stagnant industry will have a much

more influential impact compared to changes in the ever evolving electronics industry.

Implementation

The recommended alternative of introducing an Entrepreneur Subsidiary program in the

Machinery Division would be implemented on the following three (3) levels:

1. Talent

a. Rotational programs

Engineers and leaders from both divisions would be encouraged to sign up for the rotational

program that would allow them to explore the other division – network with colleagues, learn

about new and upcoming technologies being developed and understand the key processes in each

division.

b. Entrepreneurial culture

Creating an entrepreneurial culture in the Machinery Division would require more than a

6

rotational program, it would require additional steps such as a leadership training program, a

revised rewards system for M.D. employees and more training programs.

2. Market Performance

a. Industry Analysis

Current secondary data about industry situation as well as performance metrics have to be

evaluated and certain performance benchmarks for the M.D. have to be set. A market research

firm may be appointed at this stage.

b. New Product Development - insights

Certain teams within the Machinery Division have to be assigned to monitor new product trends

in the industry – these teams would be working side-by-side the Manufacturing and

Development departments and providing industry insights and trends.

3. Capital Investments

a. Equity Investments

Decrease the amount of equity investments in subsidiaries - from 80% to 60-70%. This would

free up some finances and capital for the Machinery Division while still leaving place for

innovation and new product development to drive revenues.

b. Working Capital

Decrease required working capital for both divisions to make sure divisions aren’t spreading

themselves too thin across subsidiaries.

When considering costs, revenues and controls first two levels – Talent and Market

Performance – drive additional expenditures, which would be invested to enhance revenues. On

the Capital Investments level the main goal is cutting M-TRONICS’ costs by establishing a less

risky capital structure for the company when dealing with Entrepreneurial Subsidiaries.

Timeline

Due to the fact that the concerns expressed by John Martell have a sense of urgency the

solution together with the entire plan have to be implemented immediately. Tasks 1a, 1b and 2a

could be started right away – Rotational Program, Leadership Training and Market Research. 2b,

3a and 3b initiatives would emerge upon completion of the other ones. In a best case scenario the

total elapsed time of the implementation would be 4 months. Worst-case scenario would result in

a 6-8 months plan.

7

03/01/00 04/01/00 05/01/00 06/01/00Task 1a - Rotational Program        

Task 1b - Leadership Training        

Task 2a - Market Research        

Task 2b - New Product Development        Task 3a - Equity Investments        

Task 3b - Working Capital        Figure 1 - Gantt Chart

Contingency Plan

In case the suggested plan doesn’t work, there is a backup plan that would be considered.

Introducing Entrepreneurial Subsidiaries in the Machinery Division would be much easier if M-

TRONICS would generate stronger ties between two divisions. Therefore a great suggestion

would be to invite several leading engineers from Machinery Division to shadow entrepreneurs

and technologists from Electronics Division and learn how Machinery Division could benefit

from Entrepreneurial Subsidiaries. This way both divisions would be able to establish a stronger

connection as well. This non-risk solution would be a great test case for M-TRONICS.

How Practical Is Our Implementation?

Current CEO of M-TRONICS, John Martell, is an entrepreneur and, as mentioned in the

case, a ‘wild duck’, so he constantly gathers entrepreneurs around him. Due to his appointment

in the Electronics Division, he hasn’t been fully familiar with how the culture in another division

differs. If Martell were able to create a culture of entrepreneurship in one division, he would be

capable of taking a lead and developing it in the Machinery Division as well. Therefore, the

implementation plan is relatively practical – it is based on (in a rather significant matter) a

previous success of the currently appointed CEO.

8