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Al Dunlap at Sunbeam Case Solution

Solution Id Length Case Author Case Publisher
2773 1409 Words (6 Pages) Carleen Madigan Harvard Business School : 899218
This solution includes: A Word File A Word File

The agency problem at Sunbeam before the hiring of Al Dunlap was caused by a disconnect between the management team and the company's shareholders. The management team was focused on maintaining the status quo and preserving the company's reputation rather than maximizing shareholder value. This led to a lack of innovation and a failure to adapt to changes in the market. As a result, the company's financial performance suffered, and shareholders did not see the expected returns.

To solve this problem, Dunlap was hired as CEO to turn the company around and maximize shareholder value. He implemented cost-cutting measures, such as layoffs and divestitures, and increased transparency and communication with shareholders. These actions led to an initial improvement in the company's financial performance and an increase in the stock price. However, this improvement was short-lived, and the company eventually shifted toward failure. Its stock prices fell, and Dunlap was blamed for the company's decline.

Critics argue that Dunlap's focus on short-term gains and cost-cutting measures negatively impacted the company's long-term growth and sustainability. Additionally, some of his methods, such as accounting fraud and manipulation, were unethical and ultimately led to his dismissal. Despite the initial improvement in the company's financial performance, it was clear that Dunlap's methods were not sustainable and ultimately led to the company's downfall.

Following questions are answered in this case study solution

  1. Please analyze Sunbeam's agency problem and its sources (e.g., the ways Sunbeam was not maximizing their stock price and why) right before Dunlap was hired. 

  2. Describe the different parts of the first compensation package offered to Dunlap and discuss: 

  • What type of behavior(s) it was designed to incentivize 

  • Whether it helped to solve the agency issues you discussed in Q1.

Case Analysis for Al Dunlap at Sunbeam Case Solution

1. Please analyse Sunbeam's agency problem and sources (e.g., how Sunbeam was not maximizing its stock price and why) right before Dunlap was hired. 

The agency problem at Sunbeam before the hiring of Al Dunlap was primarily caused by a disconnect between the management team and the company's shareholders. The management team, led by CEO Jerry Levin, was focused on maintaining the status quo and preserving the company's reputation rather than maximizing shareholder value. This led to a lack of innovation and a failure to adapt to changes in the market. One of the main sources of the agency problem at Sunbeam was the company's lack of focus on cost-cutting and efficiency. The management team was more concerned with maintaining the company's reputation and preserving jobs rather than finding ways to reduce costs and increase profits. This led to a lack of competitiveness and a failure to keep up with the changing market.

Another source of the agency problem at Sunbeam was the company's lack of transparency and communication with shareholders. The management team was not providing enough information to shareholders about the company's performance and plans, making it difficult for shareholders to make informed decisions about the company. This lack of transparency and communication also led to mistrust and dissatisfaction among shareholders. The company also had a high level of debt, making it difficult to invest in new opportunities or pursue growth strategies. The management was not taking any steps to reduce the debt or invest in the company's future growth.

All these factors together led to a lack of confidence in the management team among shareholders and a decline in the company's stock price. This is where Al Dunlap came in, and he was hired as the CEO of Sunbeam to turn the company around and maximize shareholder value. Dunlap implemented a series of cost-cutting measures, including layoffs and selling underperforming assets, and increased transparency and communication with shareholders. These actions led to an improvement in the company's financial performance and an increase in the stock price. Still, they also led to a controversial reputation of Al Dunlap as a "downsizer" and raised ethical questions about his leadership style.

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