Government / Political Views

The story of USA Industries and its new CEO

You have been brought in to run what had been one of the most successful companies in the world, USA Industries.  The previous CEO had made a number of strategic and tactical mistakes the resulted in tarnishing the companies brand, reduced revenues, poor relations with strategic partners, and depressed employees.  Not only that but this CEO committed the company a number of very expensive project that would be hard to get out of but which would add no value to the companies balance sheet and would in fact reduce the balance sheet.  In order to deal with  the short fall in revenue and the increase in expenses the previous CEO borrowed increasing amounts of money.  The money was spent to keep the company going during this difficult but largely self generated times.   They main interest the former CEO had been to keeping his large institutional investors happy.  He did that by throwing lavish parties,  and giving them discounts on the companies products. He was also concerned  with how the top rank of his company saw him.  He did not want them to question his actions so he kept giving them bonuses.  When the old CEO’s contract was up,many members of the  board felt they needed a different kind of CEO.  They wanted someone young  energetic that would break out of the patterns established by his predecessor.  Other members of the board were concerned about making any changes and felt that business would just come back if they just gave it time.  But they also felt that there should be substantial cut backs in the companies spending.  One of the old guard was also considered for the role.  Both candidates presented their ideas to the board.  Enough of the board believed it was time to change course and so the young man was brought in as the new CEO.

He moved with his wife and daughters to the city where the company was headquartered.  The company dominated the city and it could really be said that it was a company town.  The new CEO rapidly found that he knew little about how the company really operated.  To make matters worse, he had almost no experience working in the companies industry and had never really run a company before.  He was more like a staff person and had spent a many years in academia.  He had many ideas about what to do but he lacked confidence in implementing them.  Most of the key employees had been with the company for decades and did not really want to change the way the company operated.  Some of the department heads were close to members of the board and a number of them had direct relationships with large  shareholders.

The new CEO realized that he would have to cut back on expenses and reduce the borrowing or face  the possibility of bankruptcy in the future.  But he was scared that if he took the actions that were required like laying off many employees, killing off some products that were not profitable and getting out of the very expensive long term projects started by the former CEO, the financial markets would react and  both the stock price would go down and the cost of borrowing money would increase.   The company was facing ever increasing competition from an other company.  This company, Asian Enterprises  had been around a lot longer and was going no place for the longest time.  But then there was a management transition.  A much younger and smarter group came to run the company. They believe that there was great opportunity in the market especially since  USA Industries was not really investing in new products and manufacturing processes.  They were right.

The members of the board of directors of USA Industries grew unhappy with the CEO they had chosen.  The members that had not wanted this man as CEO kept telling the other members what a mistake it was to have brought this inexperienced person on.  In the mean time the financial markets began to realize that the company was really in trouble.  The stock price started falling.  Many employees had their retirement funds in 401Ks with large amounts of  company’s stock.  Senior people saw their stock options become valueless.  There was a growing concern that the company would not be able to continue to borrow money and if it could,  it would be at higher rates. The greatest fear was someday the loans would come due and the company would not have the funds to pay them back.  So the new CEO began to cut back.  He started by cutting R&D even though that meant that the company would not have competitive products in the future.  In the past the company was active in bringing in young people and giving them training.  This program was cut.   He cut salaries and benefits for employees but because he was scared of the senior staff, he exempted them and in fact gave many of the salary increases hoping to buy their loyalty.

Things just got worse.  So the CEO sold off some of his factories.  He sold the  real estate the company owned and leased it back.  Over time, Asian Enterprise got even more successful. They were a tough competitor and very focused.  Their employees  were willing to invest in the companies stock which caused it to increase in value.  This allowed Asian to begin to buy other companies and increase its expansion over time.    The board of directors of USA Industries began to realize that they had to replace the new CEO.  But now they were really fighting in the board room.  Many wanted to find someone that could promise to bring the company back to its old position as a leader in its industry.  But others knew that this no longer was possible.  They wanted someone that could reorganize the company. Give it a new mission that was achievable.  Get it scaled down etc.  But one major problem could not be solved if the company went in that direction.  That was the massive debt that could not be paid off including pensions to former employees.  Some members of the board argued that the new CEO should stay.  They said he was still the right person for the job.    But at the same time the board of Asian Enterprises had agreed on a new strategic objective.  It was nothing less than the acquisition of USA Industries.  They key to this plan was that Asian would loan money to USA  making it easier for USA industries not to deal with their problems.  Not only did this make USA less competitive but hasten the day when Asian could call its notes and force USA Industries to sell it massive amounts of  the assets of USA Industries and many the corporation itself.

The only thing that could prevent that is if the new CEO can find the courage to act.  What could he do?  First he could be honest with the board, his employees and his shareholders about the serious problems they face.  He could ask all if the employees to take salary cuts and work longer hours so that the companies products will be more competitive.  He needs to replace many members of his staff with new people how have different ideas about and talents and can help the company increase its revenues.

What ideas do you have for this CEO?

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