Bukidnon State University

College of Business
Master of Management Major in Business Management

July 24, 2020

MMBM-1

MM 209- Business Policy and Decision-Making

General Dynamics: Compensation and Strategy A and B

(A Group Case Study Analysis)

I-Facts of the Case

General Dynamics is known for world’s defense contractors where they

manufacture different military powered weapons and crafts. The case started on
September 27, 1989, when General Dynamics publicly announced the next Chairman
and Chief Executive Officer, William Anders after the retirement of the current CEO
Stanley Pace in January 1, 1991. Anders meticulously had his first year with GD
looking a comprehensive evaluation of the company’s operations, functional
organization and the structure of the financial. It was then he sought that the company
is already heading to a serious financial trouble. It was also validated by the Pentagon
that GD revealed to be financially weak and has a possibility to face for bankruptcy.

Anders believed that General Dynamics had not been run efficiently and,
consecutively had not served shareholders’ interests. It was then his goal to transform
GD into a shareholder-driven enterprise, with emphasis on his commitment to
improve the financial performance of the company. In order to give way on this
changes in operation, he believed that he needs to reform the management and
replacing the old culture with the new fundamental one. While Anders have been very
persistent in looking for new and competent people in his team, he faced difficulties of
pulling them because of the declining company’s status. It was this time also that the
defense industry faces problems in retaining its performances because the market had
collapsed; since no more wars are apprehended.
 Bukidnon State University
College of Business
Master of Management Major in Business Management

Despite the fact that Anders spearheaded to change the notion of the GD’s old
culture, he still cannot get the attention of the board of directors and several top
managers emphasizing the need for change. And so he invited a woman from Wall
Street to talk to the top managers and finally got their attention after ignoring the
problems for long way back. Anders’ priority was to maximize the wealth of the
shareholders as he values partnership in management. GD’s existing compensation
packages includes base salaries and bonuses tied to company’s accounting return
equity; which for him inappropriate to rely on the accounting based-bonuses.

While the company is suffering a downside in its financial condition, Anders

have started to lay-off thousands of rank and file employees including attritions. It is
here Anders recommended the “Gain/Sharing Plan”, wherein bonuses will be based
on the stock-price performance and awarded cash bonuses for each $10 increase in the
company’s stock price. Meaning, the top management of GD will receive a bonus
equivalent to 100% of their base salaries if its stock price closed at $35.5625 and stayed
at or above this level for ten consecutive trading days. For Ander, this plan means to
institute his partnership approach to the management of the firm.

At year-end of 1991 and even succeeding years until 1993, the company have
restored its profitability and enjoying top management’s bonuses under the
Gain/Sharing Plan, while the laying-off of several employees are still continuous. This
made outraged by other observers and commenter that the bonuses are too excessive
while there are continued lay-offs. And many argued that 10-day period for the said
plan is not a measure of long-term success.

II- Point of View

 Bukidnon State University
College of Business
Master of Management Major in Business Management

What drives this case is the persistence of William Anders to put back
profitability and maximizing shareholders’ wealth. Management should always go
back to foot of the ladder by assessing these measures of profitability. According to
Gaskill, VanAuken, and Manning (1993), the adversities or failures of a business
enterprise constitute its success. Consecutively, Filley and Pricer (1991) defined several
tools for small business success. These included good management techniques, such as
appropriate operating strategies, leadership and time management.
In the case of William Anders for General Dynamics, he found out that
profitability is behind and will eventually result to financial distress. The potential of
financial analysis in assessing the financial health of the firm and its performance has
attracted considerable attention in recent works (e.g. Kotane & Kuzmina-Merlino, 2012;
Beaver et al., 2010; Kovárík & Klímek, 2012; Brendea, 2014; Lee, 2014; Kubenka, 2016).
To become sensible and logical amidst financial crisis is not an act of selfishness and
greedy rather becoming intuitive to save the organization same with what Anders did.

III- Problems/ Objectives

1. The “Gain/Sharing Plan” was widely criticized for rewarding top executives
for compensating bonuses for the company to achieve its strategic objectives
which is to maximize shareholders’ wealth despite continued lay-offs.
2. The profitability of General Dynamics is no longer “business as usual” and
concluded that based on the figures, it is heading towards serious financial
trouble that will lead to bankruptcy.
3. General Dynamics has excessive human resources which has to be
retrenched when defense industry faces downsizing as the Cold War was
ending in 1991.

IV- Areas of Consideration

 Bukidnon State University
College of Business
Master of Management Major in Business Management

STRENGTHS WEAKNESSES
         Retaining key individuals for a new          General Dynamics is in serious
management team. financial distress.
         Gain/Sharing Plan motivated the          Excessive human resources whose
shareholders to participate with William skills are no longer required.
Anders strategic objectives, attaining
profitability at the end of 1991.
         GD emphasizes on reductions in          GD announces lay-offs of thousand
inventories and working capital to more rank and file including attritions.
efficient levels in order to reduce costs and
improve returns.
OPPORTUNITIES THREATS
         The stock price continued to climb in          Defense industry has collapsed.
the market.
         GD eliminated known risks from the          Difficulty in attracting new talents to
firm’s backlog of business. Through write- a declining industry.
offs over $1 billion in 1990.
         GD received new contracts from South           Pentagon officials expressed
Korea in March 1991 of $5.2 billion order disapproval of the bonuses because of the
for 120 F-16 jet fighters and also from deferment they had granted GD on the
Egypt of $1.5 billion contract for 46 more repayment of progress payments on the
F-16 fighters. cancelled A-12 program.

The areas of consideration above are derived from the identified SWOT analysis
of the General Dynamics based on the given case. These internal and external factors
have greatly affected the decisions-making of the GD management. With the existence
of the analysis, it is evident that the problems of the case are present before William
Anders took over the CEO position. In contrast, several strengths and opportunities
were enormously identified to support our claims in the courses of our action.

V- Courses of Action
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College of Business
Master of Management Major in Business Management

1. Replace Gain/Sharing Plan a fair compensation matrix creating shareholder

value without compromising other employees.
2. The management of General Dynamics has to undertake a comprehensive
assessment of the company’s strategy, its operations and markets and its
financial structure.
3. Reevaluate required human resources, revisit and if necessary modify
corporate strategies to redirect the company’s strategic objectives.

VI- Recommendation

It is true that the main purpose of a business is to maximize shareholders’

wealth. And by doing this, management has to establish good and upright relationship
among its partners and associates. For us, Anders sacrificial act for the thousands of
employees to save the company from financial distress is but rational and practical.
And to become practical and rational in facing the chances of bankruptcy would go
down to that thought that as management we are no longer requiring ourselves a
special obligation and attachments to our employees.

The issue of General Dynamics is all about excessive human capitalization that
had to be retrenched since defense industry is in its downsizing. We also understand
that an organization trains and equips its people and are paid for that training, and
paid them for their capabilities. It is now then a question of What would an
organization do when those capabilities are no longer required? And if we are to think
practically amidst General Dynamics’ financial crisis, we are not going to start making
bridges anymore. That’s how business; should open for the kind of possibilities.

VII- Conclusion

For us, business is not just about generating profit and maximizing
shareholders’ value. Business is considering several aspects to maintain orderliness in
its operations. The General Dynamics case’s problem was not just about of anything
 Bukidnon State University
College of Business
Master of Management Major in Business Management

that has happened right after William Anders took the CEO position but with its
previous organizational culture. Their operations were disoriented when the cold war
in 1991 ended. When you assume a position in an organization, it is significant to
review the assessments in all areas of its functional structure to determine where was
affected and given allocation to fix it. Moreover, in venturing, you made numerous
sacrifices and even if it would mean laying-off your people to save the organization.
What has happened to General Dynamics on retrenching people was a clear actuation
of the management to become practical and rational in the downsizing moment.

Hence, it could have been prevented if an organization has been proactive and
applies exemplary discernment even before the management of William Anders. A
company with well-defined corporate, business and functional strategies will bring
organized directions and provide great business philosophies. That is why having well
defined strategy is a start of good and sustainable business in the long run.

VIII- References

 Beaver, W. H., McNichols, M. F., & Rhie, J. W. (2005). Have financial

statements become less informative? Evidence from the ability of
financial ratios to predict bankruptcy. Review of Accounting Studies,
10(1), 93-122. doi: https://doi.org/10.1007/s11142-004-6341-9
 Bukidnon State University
College of Business
Master of Management Major in Business Management

 Brendea, G. (2014). Financing Behaviour of Romanian Listed Firms in

Adjusting to the Target Capital Structure, Czech Journal of Economics
and Finance, 64(4), 312-329
 Filley, A., and R. Pricer. (1991). Growing companies: Tools for small
business success. Madison: Magna Publications, Inc.
 Gaskill, L., H. VanAuken, and R. Manning. (1993). A factor analytic study
of the perceived causes of small business failure. Journal of Small
Business Management, 31(4), 18-31.
 Murphy, K & Dial, J. (1997). General Dynamics: Compensation and
Strategy (A) and (B). Harvard Business School
 Kotane, I., & Kuzmina-Merlino, I. (2012). Assessment of financial
indicators for evaluation of business performance. European Integration
Studies, 6, 216-224. doi: http://dx.doi.org/10.5755/j01.eis.0.6.1554
 Kovárík, M., & Klímek, P. (2012). The usage of time series controls charts
for financial process analysis. Journal of Competitiveness, 4(3), 29-45
 Kubenka, M. (2016). The strictness of traditional indicators for
creditworthiness measuring. International Days of Statistics and
Economics 2016. Prague: University of Economics, pp. 985-995.
 Lee, M. C. (2014). Business bankruptcy prediction based on survival
analysis approach. International Journal of Computer Science and
Information Technology, 6(2), 103-119. doi:
http://dx.doi.org/10.5121/ijcsit.2014.6207.