What Is the Problem Facing Dan Barber and the Management Team?

Qs. 1: What is the problem facing Dan Barber and the management team?

Dan Barber and the Management team are facing many problems, some internal in nature and some external, but all serious and need to be addressed.

By looking at the case study, it is clear to see that the first problem faced by them was the fact that the 3 founders, Dan Barber, Roger Johnston and Don Small decided to sell their remaining equity in the business to the "employee stock ownership plan" (ESOP) . They planned for this to happen by 2012 and this would be by a leveraged buyout in which a bank would loan money to the ESOP trust to buy out the three founders.

To make matters worse however, the company currently did not qualify for the loan and if it was to be able to do so, it would have to establish a strong record of revenue growth and profitability over the next five year period starting from 2008 all the way up to 2012. This would mean that the company would need to produce a revenue growth of about 30% and profits growth of about 10% annually to reach that target.

Another problem which was closely correlated with the above problem was the fact that the current direction of the company was a barrier to this financial goal. For one, the company was too dependent on military contracts. Lockhead Martin which was one of their defense contractors accounted for more than 70% of their earnings in the year 2007. Further adding to this problem was the fact that, the company anticipated a decline in defense contracts over the next few years and they had to cut the companies dependency on such contracts. It was seen that the company had to change its strategy to achieve an ideal mix of approximately, 20% space contracts (NASA), 40% defense contracts and 40 % commercial contracts. This was due to the fact the greatest potential for growth lay in space and commercial applications.

The next problem faced was the fact that with the drastic change in direction, there would be drastic changes to the company. This would lead to great resistance from the management and workers. Even worse, as LightWorks was an ESOP business, they all had a say in the company's direction. If convincing workers on a new direction for a company was hard, convincing a group of very smart people who had a stake in the company to change would be even worse and would lead to strong resistance.

The other problem that LightWorks was facing was in their pricing structure. This was due to the fact that the Defence Contract Audit Agency (DCAA) required its contractors to carefully segregate the direct and indirect cost and the charge all indirect cost to each contract on an "equitable basis". This was hard as they were a business that dealt with building complex prototypes and one-of-a-kind optical devices and could not follow normal pricing structures.

Not forgetting, as they were starting to move towards more manufacturing work, they also faced new sets of problems. For one, they were having resistance from quality assurance inspectors within the company. Initially, in their special projects, everything had to be perfect, and when catering to high volume projects, if one in a hundred is good, then the lot is good. This posed a great problem for these quality assurance inspectors as they could not adapt to this mentality or quality standard. Another problem which arose from this move towards manufacturing work is was the fact that now, the company had to find ways to decrease cost to buffer the bottom line as they were no longer doing one off contracts and had to compete with the general market at whole.

Finally, the last problem faced by LightWorks would be the fact that as they progressed towards a manufacturing direction, they had to or required more space for the high volume production facility. This is turn led to two schools of thought, some which opposed expansion and the other for. Besides this the other problem was the fact that if they expanded and got an offsite location, where would it be, would it be nearby and be more costly, or further away and thus cheaper. This was a great dilemma for the company.

As a conclusion, as there are many problems facing Dan Barber and the management team, there is only really one big problem for them. They have to find a way to work together to deal with all these problems. If they are able to do so, there is no reason why LightWorks would not be able to overcome all the above mentioned problems.

Qs. 2: Examine Exhibit 7 of the case which provides a number of expansion options. Provide a balanced analysis of each of these options presented. Present your answer in the form of a table:

No Option Options benefits Cost Workers For/Against TotalScore

1 Do Nothing 1 $0 1 3

2 DT facility mods + Local office 3 $150k + lease 3 5

3 Optimize existing facility 2 $250k 3 5

4 Expand into building next door 3 $350k 3 6

5 Existing facility + Vista, CA HVPF 5 $400k + lease 2 7

6 Optimize existing + Vista, CA HVPF 5 $600k + lease 2 7

7 Existing office + Local office + offsite 5 $500k + 2 leases 2 7

8 Existing office + Out-of-state HVPF 4 $600k + 2 leases 1 5

*DT facility mods: Diamond Turning facility modifications

* HVPF: High Volume Production Facility

Table: 1.

Based on Table 1 above and the case study, we will now look at the expansion options and the pro's and con's that come with each option. Each option will be given a score rating from 1-5 with 1 being the lowest ands 5 the highest.

Firstly, there is the option of doing nothing. It is safe to say that this option has practically no good merits. It does not help solve any of the problems faced by LightWorks and will not help the organization develop and change. Even if the three founders of the company were not opting for a leveraged buyout, the company still has to adapt to survive the coming times. What is meant by this is that they have to adapt and change their strategic model as it is mentioned in the case study that the company anticipated a decline in defense contracts and currently, those contracts made up for 90% of its contracts.

Secondly, there is the option of upgrading and expanding and expanding their diamond-turning operation in Tustin and renting local office space nearby. The general cost of this option is the least of all but there are many questions to be asked. They might get enough

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