Case #1 The Recalcitrant Director at Byte Products, Inc.

In 200 words or less explain what would you do if you were James M. Elliot. What decision would you take and explain why? Base your logic referring to the readings below.

Byte Products, Inc., is primarily involved in the production of electronic components that are used in personal computers. Although such components might be found in a few computers in-home use, Byte products are found most frequently in computers used for sophisticated business and engineering applications. Annual sales of these products have been steadily increasing over the past several years; Byte Products, Inc., currently has total sales of approximately $265 million.

Over the past six years, increases in yearly revenues have consistently reached 12%. Byte Products, Inc., headquartered in the midwestern United States, is regarded as one of the largest-volume suppliers of specialized components and is easily the industry leader, with some 32% market share. Unfortunately for Byte, many new firms—domestic and foreign—have entered the industry. A dramatic surge in demand, high profitability, and the relative ease of a new firm’s entry into the industry explain in part the increased number of competing firms.

Although Byte management—and presumably shareholders as well—is very pleased about the growth of its markets, it faces a major problem: Byte simply cannot meet the demand for these components. The company currently operates three manufacturing facilities in various locations throughout the United States. Each of these plants operates three production shifts (24 hours per day), seven days a week. This activity constitutes virtually all of the company’s production capacity. Without an additional manufacturing plant, Byte simply cannot increase its output of components.

James M. Elliott, Chief Executive Officer and Chairman of the Board recognize the gravity of the problem. If Byte Products cannot continue to manufacture components in sufficient numbers to meet the demand, buyers will go elsewhere. Worse yet is the possibility that any continued lack of supply will encourage others to enter the market. As a long-term solution to this problem, the board of directors unanimously authorized the construction of a new, state-of-the-art manufacturing facility in the southwestern United States. When the planned capacity of this plant is added to that of the three current plants, Byte should be able to meet the demand for many years to come. Unfortunately, an estimated three years will be required to complete the plant and bring it online.

Jim Elliott believes very strongly that this three-year period is far too long and has insisted that there also be a shorter-range, stopgap solution while the plant is under construction. The instability of the market and the pressure to maintain leader status are two factors contributing to Elliott’s insistence on a more immediate solution. Without such a move, Byte management believes it will lose market share and, again, attract competitors into the market.

Several Solutions
A number of suggestions for such a temporary measure were offered by various staff specialists but rejected by Elliott. For example, licensing Byte’s product and process technology to other manufacturers in the short run to meet immediate demand was possible. This licensing authorization would be short term, or just until the new plant could come online. Top management, as well as the board, was uncomfortable with this solution for several reasons. They thought it unlikely that any manufacturer would shoulder the fixed costs of producing appropriate components for such a short term. Any manufacturer that would do so would charge a premium to recover its costs. This suggestion, obviously, would make Byte’s own products available to its customers at an unacceptable price. Nor did passing any price increase to its customers seems sensible, for this too would almost certainly reduce Byte’s market share as well as encourage further competition.

Overseas facilities and licensing also were considered but rejected. Before it became a publicly-traded company, Byte’s founders had decided that its manufacturing facilities would be domestic. Top management strongly felt that this strategy had served Byte well; moreover, Byte’s majority stockholders (initial owners of the then privately held Byte) were not likely to endorse such a move. Beyond that, however, top management was reluctant to foreign license their goods—or make available by any means the technologies for others to produce Byte products—as they could not then properly control patents. Top management feared that foreign licensing would essentially give away costly proprietary information regarding the company’s highly efficient means of product development. There also was the potential for initial low product quality—whether produced domestically or otherwise—especially for such a short-run operation. Any reduction in quality, however brief, would threaten Byte’s share of this sensitive market.