SMA Case Prep

Organizational Design Session #4 Case Readings
SMA: Micro-Electronic Products Division

SMA Overview & Operations
HQ for almost all divisions were in Switzerland
Plants and sales offices established globally but bulk of decision-making occurred in
Switzerland
Face-to-face meetings and informal communications were central to the org culture
Somewhat functional rather than solely product-designed organization. While plants were viewed
as profit centers, major sales transactions and decisions regarding new products were made at a
high level in the organization. Divisions had minor sales forces and limited mkt efforts (due to
nature of product)
Focus on microelectronics and mechanical products with a strong emphasis on the importance of
R&D (more $ as a % of sales than competition)
Growth at an average of 10% due to unique technologies, capabilities, and strength in
manufacturing
Limited competitive threats (SMA advantages: technical know-how, invested capital, patents)
Micro-Electronic Products Division (MEPD) was one of eight divisions in SMA
History of MEPD Timeline
1980s saw demand increase for highly reliable components (particularly with telecom companies
and postal agencies). Expanded one plant and opened another
Mid-1980s saw a shift in demand:
MEPD focused on serving the new commercial electronics mkt as well as other new
markets
Leveraged R&D and mfg abilities to enter markets quickly and establish strong postions
1987 built plant in France
1988-1990 Fierce competition among firms led to falling prices, pressure on costs and quality.
Managers at MEPD felt they were now in a commodity business while having significant pressure
to meet unique customer requirements
1989-1990 Poor performance was a reflection of increased competition coupled with perceived
lower future demand
1990 half of MEPDs sales were to OEMs who bought the components in large volume for their
products while the rest of the sales were to distributors who resold the components in smaller
quantities
MEPD Management Pre-1990
Pre-1988, MEPD was headed by Jacob Amman been with division since its infancy
An entrepreneur who focused on experimentation, the desire to grow, and fostered an
intense work pace
Made almost all of the key decisions
Respected yet feared. Authoritarian manner
Mixed reviews of his style (unnatural group feel, lack of cohesiveness in the group, etc)
Jacob was very interested in the field of Org Behavior (after all, who isnt) he attempted to
implement OB-type programs to improve mgmt styles, group effectiveness, improvement of
interfunctional coordination, etc. Program was supposed to last three years but Jacob died
before full implementation
The new head of the division was Guido Spichty (seriously), a director in corporate R&D he
discontinued the OB programs
MEPD Management in 1990

Guido lacked line experience but had a relevant background in R&D for the entire company,
which included projects for the MEPD division. His promotion to VP of the division was
considered somewhat unusual. Reported directly to SMA president.
Considered bright, articulate, quick-thinking, well-liked
Very open in his decision-making, involved people in the process
Viewed as a poor listener, too soft on people, not involved enough, too wimpy (avoided
conflict)
Ability of division to meet target goals was in question high growth was expected of the division
and people within MEPD looked to new products as a major source of both new volume and
profits
MEPDs Organizaion Structure Under Guido
1200 employees, self-contained multi-functional organization
Two differences b/t MEPD and the other divisions: 1) Guido split out the marketing & sales
functions and 2)MEPD had their own R&D in addition to the company-wide group
Guido also:
Moved division HQ to Bienne, Switzerland with the other divisions
Consolidated the marketing groups - centralization
Replaced key managers and cut the marketing planning function
Improved service to customers via mfg improvements and IT developments
1990 Functional Departments
Manufacturing: Three plants each with manager and full line and staff functions. Plants were
responsible for gross margin and were thus profit centers. Plant managers wanted to be
promoted to head a division. Managers were focused on performance as this was openly
discussed between plants. MEPDs plant managers were upset about poor growth in the division
they had to cut costs to even make declining margins. Plant managers felt a lack of objectives
and direction and put the blame on Sales (too focused on volume), Marketing (lack of ability to
provide direction, generally incompetent), and Product Development (products didnt run well on
their lines)
Marketing: Most important function was market development (forecasting, planning, formulating
strategy). Many new people in the function, often they came from Sales. Marketing felt that SMA
had unrealistic expectations of them, that Product Development wasnt responsive enough, and
that Mfg was too conservative and uncooperative
Sales: MEPD products were sold through a direct sales force of 250 people as well as through
distributors. The sales force served a large set of customers in several markets. Their
performance was not commission-based rather it was evaluated on volume so they tended to cut
price to drive this. Sales disliked Marketing b/c they felt they provided the sales force with poor
information and neither function trusted the other. Sales had a terrible relationship with mfg due
to issues over service for the customer and delivery times
Product Development: Responsible for extensions of the product lines. Dislikes Marketing
(provide group with unclear product specs and dont understand complexity of spec changes),
SMAs R&D group (difficult to coordinate time with them) and Sales (lack of input into new
products)
All that summed up clearly: The functional areas are semi-autonomous and dont like one
another!
New Product Development Process
Focus on extensions of current line
Significant overlap and complications in the process difficult to manage
Functional areas overlapped responsibility and when one area failed to meet goals/deadlines, the
overall project timeline was influenced. General lack of coordination
Problems Looking Forward 1991
Need more growth in the division

Need to achieve budgeted operating margin
Improve moral, communication, and coordination
Meriwether
Basic overview of case:
John Meriwether (JM) becomes head of the arbitrage group at Salomon. Makes tons of cash betting that
prices would converge and had no problem putting up lots of Salomons money to back up the bets. He
was the first Wall Street guy to hire his team from outside of the Street he hired a bunch of PhDs with
new models and lots of calculators. His very nerdy group became incredibly exclusive, obsessive, and
almost cult-like. JM was well-liked in the company. Scandal occurred when someone outside the group
(who indirectly reported to JM) made a mistake and submitted a false bid to the US Treasury. JM
defended him but instead of firing him, let him continue in his job as a rouge trader (or something like
that). Because of lawsuits, controversy, etc, JM was eventually encouraged to quit. He did and while he
was later offered a position with the firm he decided to take most of his team from Salomon and do his
own thing.
If you want all the details, read on.
John Meriwethers Background
Grew up on the South Side of Chicago. Middle class upbringing with strong religious ties and a
focus on discipline both in the home and at school
Bright and popular, guided by a sense of restraint
Loved to gamble from a young age but only when odds were in his favor. Became passionate
about golf and used this to network in college and beyond
Internal conflict between order and custom and developing an edge (see page 6 for more
psycho-babble analysis)
MBA from U of Chicago (a top 10 school) in 1973 and was hired by Salomon upon graduation
JMs Influence on the Bond Market
Until the mid 1960s bond trading had been considered a dull sport. Few investors actively traded
bonds and the notion of managing a bond portfolio for competitive returns was totally foreign
Inflation in the 1960s changed this and more risky trading was introduced
By the end of the 1970s new methods of trading had been established
The computer was introduced to Salomon in 1969
As we know from F220, bonds are traded on a spread. The riskier the bond, the wider the spread
(see page 9 for more info on this). Basically, JM formed an Arbitrage Group inside Salomon in
1977 which bet Salomons capital that spreads would eventually converge, given enough time
and capital to stay the course
JMs Team at Salomon
JM decided that his edge in the market would be to develop a team of traders that were academic
they would build models and trade based on discipline and quantitative measures
He initially hired five academics from lots of top 10 schools, including Lawrence Hilibrand
Hilibrand was extremely confident and tended to redouble bets. The group eventually grew to 12
people
The group became somewhat exclusive they sat together, ate together, socialized together --formed a very strong bond under JM. Trading because all-encompassing for the group they
became addicted to gambling and work
The Group viewed JM as a protector from company politics and a champion for capital to trade
they basically worshipped him. JM put faith in his group and took a hands-off approach to their
deals
JMs Group and the Salomon Relationship
The group was extremely private and tension arose between the group and the rest of the
Salomon bankers
Various issues arose over compensation structures. JMs team wanted to quit but JM tried to
persuade his team to have loyalty to the firm rather than just the Group
JM persuaded upper management to give his team a share of the teams profits. Other
employees of Salomon became angry
The Fall of JM
A pissed off employee who used to work for the Group (Paul Mozer) confessed that he had
submitted a false bid to the US Treasury
JM took the matter to his boss (Gutgreund). They agreed it was a serious matter but did nothing
about it and let Mozer continue in his job
JM had been somewhat nave because he trusted his employees so much, he hadnt done the
due diligence to ensure that basic rules were followed
Gutgreund was forced quit the firm and JM was asked to quit for the good of the firm which he
did
JMs Group remained loyal to him, fought for his return and eventually succeeded in this. JM was
asked to return (by Warren Buffett, acting CEO) albeit not in the role of co-CEO
JM couldnt accept this position he knew hed never become CEO after the scandal plus his ego
had been a bit bruised. He decided to open an independent arbitrage fund and went after his old
Group at Salomon for resources

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What was John Meriwether's background and career path prior to founding Long-Term Capital Management?

How did John Meriwether organize and manage his trading group at Salomon Brothers?

Organizational Design Session #4 Case Readings

SMA: Micro-Electronic Products Division

MEPD Management in 1990

Need more growth in the division

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