HOR ftonaized case studies present problems facad by Tsades in ral companies and offer eoltons from experts This one le based on the HBS Case Study "Hawk Electronics, Ina” (ease na. 8I8821-PDF-ENS, by Richard @ Hemafmesh CASE STUDY. When One Division Makes Allthe Money but the Other Gets All the Attention by Richard G. Hamermesh FAGLE HO, MONDAY, 8:30PM {twas the tone of the email that bothered Sarah Chan the most. (efelt ike a threat. Alone in her office at the end ofalong day, Sarah, the CEO of Eagle Electronics, pened up her laptop to read itagain. Jorge Martine, the president of Eagle's largest and ‘most profitable division, had written: ‘The board gave you amandate to revitalize the compary, and youve instilled the entrepreneurial spirit we sorely needed. The Disruptive Initiative has repositioned usin te tech sector, and our stock price ‘as increased significantly. Nonetheles, by harvesting =ash flow from nay unit to lavish funding on your pet brojcts, [believe you have endangered Bagle's future. ‘My unit has long been own for selling good sroducte at fairprices and offering top-quality service snd support. That is no longer the case. We are now 152 ninicue 9 | | | ‘and John Laas wiih is eelabe st HERO struggling, My best customers are rrunming tothe competition, as aresome of) top emplévyees. [fear others may soon follow. My division needs $300 milion over, thenext three years, and continued investment after that, toremain ‘competitive. CGiveni how formal the email ‘was, she couldn'tbelievehe hadnt cc’d anyone. Jorge was ‘well-nownin their industry, and sheimagined itwas onlyamatter oftime before he sharedhis, opinions more widely she didn't completely disagree with the factsashe'd laid them out, Founded in the early 1980s, Eagle Electronics originally derived its revenue exclusively rom the ‘manufacture and sale of personal ‘computers and peripheral devices. Intheearly 2000s, it got outofthe PCbusiness because the founders reilizedit couldn't compete with Dell and other firms. Butperiph- crals remained the largest share ofthe company's revenueand ‘earnings, and Jorge had led that division for close to 10 years, with great success. He was known for his fiscal discipline and for making smartstrategic decisions, such as expanding into emerging markets ‘with lower-cost produts. ‘And Sarah had, in fact, been using the cash flow from the peripherals unitto fund new ‘yentures.1Soon afterbeing named CHO, in2012, she had started ‘the Disruptive initiative unit, ‘an investment model for new- product development. ‘She'd created itout ofneces- sity when one of herrising-star designers, Jennifer Yu, told her she was leaving to starter own. data management software company and asked Sarah ifshe ‘wanted to be an angel investor. Because she wanted to keep “Jennifer, and since there wasn't irectoverlap between the start-up and Eagle's portfolio, Sarah proposed that the firm fund the initiative with an option to buy fit developed aminimum ‘viable productand laid out path, tomarket.2 Jennifer did just that, and Baglebought the ventures4 months later, with Jennifer real- iginga significant financial gun. ‘The arrangement becamea model forother investments. Employees ‘were allowed to submit product proposals, and if approved, Eagle ‘would fund 7596 of the start-up costs, The firm also offered other assistance tohelp start-upsmect their goals and deadlines. Employ- ces initially left the company to uetrations by RYAN GARCIA‘workon their ventures, but Eagle ‘had an option tobuy within ‘months and often did, folding the employees back into the division that Jennifer nowled. So far, Hagle had invested in 13 ‘ideas, seven of which were stillin start-up mode, and five of which had been acquired. Only onehad fizzled out ‘Theinitiative had received slowing attention inthe financial ‘and technology press. Butitwas {farless popular internally. While rich of Eagle's growth was attributable toits acquisitions, rating thenew ventures had ‘been problematic, and profitability ‘varied.4 Plus, Sarab’stimeand attention, not tomention the firm's resources, had been so focused on them that the compa- y's bread-and-butter products— allpart of Jorge’ division—were oftenignored. The favored child was suddenly feeling ikea stepchild, and that had led to high ‘ummover and morale problems, ‘As Sarah reread Jorge's email, she winced athisuse of the word “endangered” Her intention hadn'tbeen tohurt any partof Eagle, Her goal was to prepare ‘the company for the future. But his commenthad hitanerve. She ‘hadn't yet proved that thenew ‘business lines could generate sig nificant profits or dominate their markets. The peripherals unit was Eagle's lifeblood. And she couldn't help wondering whether she had inadvertently damaged, EAGLE HO TUESDAY 10:05AM CHECKING IN. Thenext moming, Sarah met with Jennifer to go over her divi- sion’s P&L. She knew she couldn't divulge exactly what. said, butshe did wantherstar ‘employee's perspective. She'd Iongadmired notonly Jennifer's confidence butalso her ability, tothink strategically, and the two women had become close. Sarah mentioned that Jorge was upset by what he saw as uneven, treatment, ‘What else isnew?" Jennifer asked, rolling her eyes. {know Jorge bas had com: plaints before, but thisis differ: ent” Sarah sai. Case Study Classroom Notes +. According to the BCG groweh- share mati, Jorg’ ni Is ‘sh cow t requires ito senerate cash 2. fms ae often seen 36 too tureauoree and rsk-svese te innovate. But reeearoh from iin Business ‘School revels that fm with more than 600 employes do reac ema a5 much R&D 2s 3. on average only 25% of Vo bed star-ups retum tale Investod capt Should Sarah research affrts Inatooo? business mod they to become fan engine of ‘growth? Or are the integration challenges too ‘eurtng? wontons 1535.Coul : resentrerk be coloring o's iow of his unis uation? G.isJorge fle rik What would t mean for Eagle, an for Sorat hel? 7.What would be the ramifications forcompeny performance It Soroh funded fener new ventures and Upped Jorge budgot? “Isit? He's probably stil disap- ppolnted that he's not the CEO." Jorge and Sarah had been the two leading candidates backin 2011 when Eagle's founder-CEO ‘announced he was leaving, Sarah ‘had joined Fagle two years earlier asthe head of strategic planning and business development at the same time that Jonge was ‘promoted to head up the periph- erals division. Therumors were that Jorge wasn't picked as CEO because he had proven himself ‘invaluableto the unit.s “Whether that’s true ornot, he's great atisjob,soTowe him ahearing” “Jennifer went quiet as Sarah brought up her division's dash- board on her screen so that they could review the nmumbers together, Performance continued tobemixed. The six ventures were ringingin $340 milliona ‘year in sales and $35 million in total earnings before interest and 154 pehigue tax. although the division wasn Jongerloss-making, represented less than 30% of Eape'ssales, ‘Thepercentage was fovingin theright direction, bt the unit struggled with quality issues and costoverruns, which were starting tw affect profitability. Sarahand Jennifer spent he hour discussing the most pressing problems and potential solutions. Asthey wrapped up, Jennifer sald, “Tnow we'renot where we ‘want tobe, but withalittle more runway we're going tobeableto hit our targets. Also” sheadded, “youl figure ut what todo about ‘Jorge. Youalways da” ‘SARAH'S HOUSE, TUESDAY, 65 PM ‘SPINNING OFF ‘When Sarah got home later that night, her usband, Bo, was chop- ping vegetables in their kitchen. ‘She handed him herphoneand sald, “Read this?” ‘Bo paused and scanned Jorge's email. “Oh, brother” he ‘said, picking his knife backup. “That'll you're going to sy?” Sarah asked, laughing ruefully, ‘Bowasa venture capitalist and was taking time off before raising capital for hisnext fund. “What else should I say? He's ‘grump. Ignore him” “Ignore him? Bo, thisis Jorge ‘we're talking about. Iwouldnrt put itpast him to forward this email ‘tothe board in 48 hoursifT don’t respond. Or quitoverthis?s “Maybeit’s time he goes. ‘Wouldn't yoube relieved? He's always resisted change. And “Eagle has always been a follower. ‘Eyouwanttolead the market, ‘you're going to have to take some risks, Maybe letting Jorge leave ofhis own volition s exactly the ‘Kind of isk you should take” “Bo, Jorge isthe peripherals division, and it accounts for 70%ofsales and 80% ofprofits. rhe leaves, half the staff and most of our customers will follow, taking all that cash with them, Tknow he and I dort always see eye to eye, ‘ut maybe he has apointhere"7 “Then what’sholding youbacke from making the investment?” “Dumping money intoa mature, low-growth division just seems like the wrong thing todo.e'That'sarecipe tostay exactly where we are, which ‘means continuing to fall behind, ‘We wouldn't be able tomake the same level of investments we're ‘making in new products?” “Why don’t you justsell the peripherals division and use the ‘cash to fund the products you're ‘excited about? Or spin it offand sive Jorge the GEO job he’s always wanted?” ‘Sara's firstreaction was that Bohad lost his mind, butbefore she could accuse him ofthat, she reconsidered. Maybe it wasn’t such atersbleidea. td be hard— maybe impossible—to getthe board to agree tot, but it would solvealotof problems. And she'd finally be running the kind of company she wanted to. LOCAL CAFE, WEDNESDAY; NOW OR NEVER Sarah asked Jorge to meet her ata café. fewblocks from the office. Having sucha sensitive conversation in the building, didw't seem prudent. Either one—or both—of them might lose their cool. Jorge skipped the pleasantries “don't want tonegotiate. Pve made clear whatIneed to make my division succeed” he said. “Three hundred milion isn't asmallamount—” “But wehavelt. You've just gottostop siphoningit off of my divisionand let mereinvestitin ‘ourbusiness.” 2PM Sarahand Jorgehad been having discussions like this for thepast few years, buthe seemed ‘more fired up and resolute than he everhadbefore. “{won't deny thatthe growth ‘from the ventureshas been impressive over the past five years, but given how things are ‘going over there, that’s not going ‘tocontinues” sald Jorge. “Iwant to behonest with you. [think your affinity for Jennifer—the fact that ‘you see yourselfin her—ishinder- ingyour judgment here”? ‘Sarah didn’t want toelieve that, butshe wasn't ready to fully | deny iether. “But that’s not the point” Jorge continued. “The points the health of our business. You've gotto stop stranglingus. You claim that we're not positioned ‘to compete in new product categories, butyou don't give us the money weneed todo that. ‘You have to see how unfair that 8.The na of mobile cbmputer devas rd fang démand fordesktop POs has nagntvoly Impacted the merkot forcomputer peripheret ‘ulpmont according Nasdagcom, ‘9.1 Sarah nfl favored serio? thelr fondship atfocting hor business Judgment? fener yeaugaataer9 100is? The board had been harping onthe fact that Eagle had no pplansto enter the rapidly growing 3-D printing market, and Jorge yhad been countering that f the peripherals division had any research budget, itcould come up ‘with a compelling product, given. its deep experience with printers. “ave you seen this quarter's ‘engagement results from the pulse survey?” he wenton. “I've gota serious talent issue. Two of ‘mybest people leftlast week, and ‘we're fielding calls from custom- cers who are considering other ‘options. rs time tostanch the bleeding? A ‘She understood wheré Jorge ‘was coming from. Heandevery- ‘one else in peripherals feltunap- preciated—Iike fallen stars. But ‘she wouldn’tbe forced into giving ‘hem more resources unless she ‘was sureit was theright decision not ustfor his unit but for the company as whole. "You know as wellasTdo that ‘Bagle is done without peripher- als? Jorgetold Sarah as she paid thebill. "Youmayberight that someday these ventures will and on aproduct that will be therevenue engine my unit snow. Butthat’salong way (off-and fer from certain. You'll never get there without a strong, peripherals division. You know ‘what weneed” RICHARD G. HAMERMESH Is ‘a senior fellow at Harvard usiness School 156 isu 2009