Lean Conductors Ltd is a mid-sized Public limited company engaged in the manufacture and sale of electrical cables. As a public limited company the organization was performing reasonably well, earning steady profits and declaring a stable dividend of 12-15%.
The CEO was feeling the urge to expand the business and taste the growth of business operations and profits. He started addressing various options and shortlisted 2 options namely manufacture of LED bulbs and solar panels.
He called the Gen Mgr. – Finance for a discussion in this regard to probe the matter further. He also went on to share his dream of making the company a larger one and his belief in people like the GM who needs to stay and grow with the organization.
The GM felt excited at this prospect and started making a project report. He decided in his own mind the solar panel project with a larger profit margin looked to be a better one than LED bulbs which was dealer intensive and lesser in terms of unit margin.
Feeling the need to expand rapidly on the investment of the company and make it bigger and become a CFO in the bargain, he chose the solar panel project which was more capital intensive. An assumption about a capital structure and cost congruent to the existing structure was assumed and the projected financials were prepared.
The board of directors representing the majority of shareholders believing in the recommendations of the report adopted it for implementation.The project faced various hurdles in its implementation such delay in signing collaboration agreements, inflated cost due to poor supply of money in the market, downturn of the economy and so on. The project cost started spiraling up and to fund the expansion the funds of the existing business line were inducted into the new project since no further borrowing could be made.The company slipped into the red and reached a stage of bankruptcy without the new project even taking off.
1. Trace the conflict between the management and the shareholders in this case study.
2. Is the act of the GM Finance an error or sin?
3. Where do you think the CEO went wrong?
2. What according to you is the approach the CEO should have taken?