The misfortunes of the Joseph Schlitz Brewing Co. present a sobering study in the near-unmaking of a company. With its sales in a slump, its marketing gone flat, top management in a fuddle and federal authorities stirring up lots of legal froth for the firm, the venerable brewer seemed for a time to have, well, to have lost much of its gusto.

Then two years ago, a new chairman took command. He installed several key executives who he said surely would make a difference. At last report, however, sales still were falling. What progress there had been was hardly worth toasting.

Finally, a professor at the harvard Business School chose Schlitz to profile in a case study. The study was the subject of an MBA competition last month. Teams of graduate students from seven business schools sturggled with calculators and graphs to determine what the ailing beer maker should do. The University of Virginia players offered the winning recommendation -- sell the company, they said.

Back in Milwaukee, the people at Schlitz were stunned by the tournament outcome. There had been merger talk, about a year ago, with the R.J. Reynolds Co, the cigarette maker. But the talks came to naught, and Schlitz' managers had since resolved to build up the company without help from the outside.

It should be noted that the University of Virginia was the only team to suggest Schlitz sell out. The suggestions by other teams covered a broad range of choices -- which is simply indicative of the competitive complexities and uncertainties surrounding Schlitz' current position.

Also, the tournament's panel of judges -- made up of top executives from such diverse industries as oil, paper, food and electrical products -- based their decision more on how the Virginia team argued the case than on the specific proposal the team offered. Still, the fact that a group could make such a convincing case for Schlitz' surrender says much about the condition of the company and the current histrionics of the $6 billion U.S. beer industry.

Once an industry filled with stuffy, family-dominated companies, distinguished more by their friendliness and forbearance than by their competitiveness, the beer business is now a world at war. The chief weapons are expensive advertising salvos and an array of new brands targeted at a broader group of consumers. Behind the front lines, the old and time-consuming art of brewing has given way to new mass-production methods that turn out suds more quickly and efficiently, although somewhat less tastefully.

The shot that set the fighting off was fired on June 12, 1969, the date Philip Morris bought a 53 percent interest in the Miller Brewing Co. Within a year, the cash-rich cigarette manufacturer had acquired all of Miller, and the beer industry suddenly found itself up against a challenger of the sort it had never met before.

Philip Morris knew nothing about beer but everything about how to sell a consumer product. It changed Miller's image and its jingle -- from the "champagne of beers" It introduced a 7-ounce bottle and floated the first successful light beer.

All kinds of new brands have come onto the market since, each directed at one group of consumers or another -- the young and the middle-aged, women and blacks, low-income and high-income buyers. Although brand proliferation and market segmentation is taken for granted in the food industry, it was a startling revelation in the beer business.

More important still, beer drinking moved from the bar to the home. Two-thirds of all beer that is drunk in the U.S. is consumed n homes, not bars, and the trend is continuing. The battle for beer sales has shifted to supermarket shelves.

Many small brewers have been unable to compete with the aggressive campaigns of the national brewers. Hundreds have gone out of business. Others have merged. The number of breweries in the U.S. fell from 357 to 97 in the last 25 years, while several of the industry's leading firms became more dominant. The five biggest beer companies accounted for 49 percent of the barrels sold in 1970; last year they had cornered 75 percent of the market. Such increasing concentration has caught the attention of federal antitrust watchdogs, who have moved to block at least one planned merger.

It is against this backdrop that trouble developed at Schlitz. Once number one in the industry, the 130-year-old brewer was shaken off its perch in 1958 by Anheuser-Busch, whose Budweiser brand remains by far the best-selling beer in the world. Still, Schlitz maintained into the early 1970s a reputation as an aggressive marketer with a strong sales growth record.

But in 1974, Schlitz' growth rate dropped sharply. In 1977, Miller zoomed past, bumping Schlitz into third place. In recent months, the company's two major brands -- premium-priced Schlitz and popular-priced Old Milwaukee -- both lost ground. The company has had no product in the fast-growing and highly profitable "super-premium" category to compete against such brands as Anheuser-Busch's Michelov, Miller's U.S.-brands as Lowenbrau and Pabst's Andeker.

And though Schlitz was the second major brewer after Miller to enter the light-beer market, its entry, Schlitz Light, currently trails behind Anheuser-Busch's Natural Light, introduced last year. Only in the malt-liquor market, which accounts for 3 percent of total industry sales, does Schlitz lead.

Company officials this month declined to be interviewed, saying they were preparing the firm's annual report and working on several new projects. One new project was unveiled last week at a company marketing conference in Los Angeles: Schlitz distributed samples of its new super-premium beer. Called Erlanger and served in a brown glass bottle, new the brand will go into undisclosed test markets beginning in mid-March.

What went wrong at Schlitz was a combination of bad management and bad luck. On the marketing side, the company was slow to respond to Miller's blitz. Relations between the company and its distributors worsened.

When Schlitz did leap in last year with a revival of its gusto ads -- once considered the best message in the industry -- the results were disastrous. The new ads had a belligerent tone, featuring folks angrily defending their choice of beer ("You want to take away my gusto?")m abd dud more to hurt sales than to help.

On the production side, Schlitz beer came under criticism for uneven quality. Appaarently, the company had cut the amount of barley malt used in the brewing process because grain prices were high, and that, plus an effort to shorten the brewing cycle, caused serious taste problems.

To top everything off, federal authorities who had been poking around the beer industry, investigating reports of widespread kickbacks from distributors, came down hardest on Schlitx.The Securities and Exchange Commission charged Schlitz whih making illegal payments to the people who handle its products. And last March, a federal grand jury in Milwaukee hit the company with a 747-count indictment, including allegations of illegal payments, falsification of business records and income tax evasion.

As a result of the legal actions, Schlitz lost four of its eight top marketing executives -- three were fired, one resigned -- at a time it could least afford to lose them.

Schlitz is one of the biggest firms in the U.S. today still under family control. The Uihleins have directed the company since 1865. About 500 Uihlein shareholders hold roughly 70 percent of Schlitz's outstanding 29.1 million shares.

When Chairman Robert Uihlein, the fourth generation of the family to head the company, died in 1976, the board of directors passed over Robert's cousin David and selected David F. (Jack) McKeithan, now 43, a likeable North Carolinian with a degree in geology and a background in oil exploration. McKeithan had married a Uihlein but was divorced in 1974.

One of McKeithan's first moves was to lure Frank Sellinger, now 63, away from the right hand of August Busch III, THE CHAIRMAN AND PRESIDENT OF Anheuser-Busch, and to name him president of Schlitz.

Sellinger, who has been described as earthy and plainspoken, is known chiefly for his extensive knowledge of the brewing process. "He's what they call in the industry a real 'beer man'," said one Schlitz official. Since he's come on board, the brewing cycle has been lengthened and the taste complaints have dwindled.

To organize a new marketing campaign, McKeithan raided Coca-Cola and obtained one of its senior vice presidents -- Allin W. Proudfoot, 50, a large and imposing man with extensive experience in the consumer goods field.

In the wake of the gusto debacle, Schlitz fired its ad agency of 17 years, Leo Burnett Inc., and hired J. Walter Thompson Inc. The company's new ads, which started appearing last fall, carry the message, "Beer makes it good, Schlitz makes it great." Also, Schlitz upped its ad budget in the fourth quarter of 1978. And the firm's new product development department, established in 1977, is reported to be in full swing.

Schlitz settled its SEC case in July and, last fall, it reached a compromise out-of-court settlement with government prosecutors in the court case. The government dismissed 754 of the 747 counts in the indictment, and Schlitz, in turn, agreed to pay $750,000 in civil penalties and was fined $11,000 on the two remalining criminal misdemeanor charges.

These developments were all encouraging to Schlitz's management and the Uihleins. But sales continued to lag. Schlitz shipped 19.6 million barrels in 1978, down from 22.1 million in 1977, and the firm's share shrunk another one and a half percentage points to 12.1.

At the end of the third quarter, revenues for the nine-month period were $857.8 million, off 6 percent from the year before, and profits were $13.2 million, down a whopping 46 percent from 1977. Quarterly dividends were cut from 17 cents to 10 cents.

To be sure, Schlitz still has substantial strengths which the company expects to build on. Its breweries are among the most efficient in the industry, thanks to a costly modernization program it undertook in the early 1970s. Though Schlitz's plants are running now at only about 65 percent capacity, company officials see this as a potential advantage. "We're in the position of having facilities in place and paid for," said one Schlitz spokesman. "As our sales increase, we will not be faced with major capital expenditures."

Morecover, the compant makes about 80 percent of its own cans. It also reduced a large portion of debt last year, paying off $47 million during the first nine months.

Proudfoot, the marketing executive, says he intends to make Schlitz the industry leader again. Outer company officials take a less ambitious -- and more realistic -- view. Their plan, simply, is not to make any more mistakes or miscalculations, to develop several new beers and to come out slinging lots of suds.

Any plans to hire MBAs? "We do," said the spokesman. "We're like any other company, we hire them."