Hanson Manufacturing Company
In February 1993 Herbert Wessling was appointed general manager by Paul Hanson, president of Hanson Manufacturing Company. Wessling, age 56, had wide executive experience in manufacturing products similar to those of the Hanson Company. The appointment of Wessling results from management problems arising from the death of Richard Hanson, founder and, until his death in early 1992, president of the company. Paul Hanson had only four years’ experience with the company, and in early 1993 was 34 years old. His father had hoped to train Paul over a 10-year period, but the father’s untimely death had cut short this seasoning period. The younger Hanson became president after his father’s death, and had exercised full control until he hired Mr. Wessling.
Paul Hanson knew that he had made several poor decisions during 1992 and that the morale of the organization had suffered, apparently through lack of confidence in him. When he received the 1992 income statement (Exhibit 1), the loss of almost $200,000 during a relatively good year for the industry convinced him that he needed help. He attracted Mr. Wessling from a competitor by offering a stock option incentive in addition to salary, knowing that Wessling wanted to acquire financial security for his retirement. The two men came to a clear understanding that Wessling, as general manager, had full authority to execute any changes he desired. In addition, Wessling would explain the reasons for his decisions to Mr. Hanson and thereby train him for successful leadership upon Wessling’s retirement.
Hanson Manufacturing Company made only three industrial products, 101, 102, and 103, in its single plant. These were sold by the company sales force for use in the processes of other manufactures. All of the sales force, on a salary basis, sold the three products but in varying proportions. Hanson sold throughout New England, where it was one of eight companies with similar products. Several of its competitors were larger and manufactured a larger variety of products. The dominant company was Samra Company, which operated a plant in Hanson’s market area. Customarily, Samra announced prices, and the other producers followed suit.
Price cutting was rare; the only variance from quoted selling prices took the form of cash discounts. In the past, attempts at price cutting had followed a consistent pattern: all competitors met the price reduction, and the industry as a whole sold about the same quantity but at the lower prices. This continued until Samra, with its strong financial position, again stabilized the situation following a general recognition of the failure of price cutting. Furthermore, because sales were to industrial buyers and the products of different manufacturers were similar, Hanson was convinced it could not unilaterally raise prices without suffering volume declines.
During 1992, Hanson’s share of industry sales was 12 percent for type 101, 8 percent for type 102, and 10 percent for 103. The industry-wide quoted selling prices were $9.41, $9.91, and $10.56 respectively.
Wessling, upon taking office in February 1993, decided against immediate major changes. Rather, he chose to analyze 1992 operations and to wait for results of the first half of 1993. He instructed the accounting department to provide detailed expenses and earnings statements by products for 1992 (see Exhibit 2). In addition, he requested an explanation of the nature of the costs including their expected future behavior (see Exhibit 3).
To familiarize Paul Hanson with his methods, Wessling sent copies of these exhibits to Hanson, and they discussed them. Hanson stated that he thought product 103 should be dropped immediately as it would be impossible to lower expenses on product 103 as much as 76 centers per hundredweight (cwt.). In addition, he stressed the need for economies on product 102.
Wessling relied on the authority...