- To train Galvor’s management to develop and use internal planning and control systems.
This includes planning systems, financial accounting systems, cost accounting systems, inventory control system, etc.
- To provide information to headquarters those are required by the fiscal accounting and planning activities. For example, tax reports, consolidation financial statements, headquarters planning, etc.
However, in fact, there are different cultural background between UE and Galvor, so it would impact on their management control system activities. There are some differences in both company management control system activities, UE and Galvor, into six (6) which are Planning, Coordinating, Communicating, Evaluating, Deciding the action and influencing the people.
The UE’s planning system is very standardize, complex, detailed system for all unit in the company. This report requires too much time and resources for a business unit such as Galvor that is barely acceptable for the system. So, it will not become effective to be applied to Galvor.
The business plan also contain forecast for the fifth year hence. The fifth year forecast is too long and will become less useful for the business plan scope, especially for the electric and electronic product that has rapidly technological changes.
- Coordinating the activities
Before the Galvor sold to UE, the coordination among Latour and the other managers was not running well because Latour was handling most of all activities and daily operation for Galvor.
In UE, there was a coordination among units in different level (headquarter management and operating management). It was reflected on the business planning process. The completed business plan was submitted to headquarter and the meeting was held to review each company’s business plan. Each plan had to be justified and defended at these meetings, which were attended by senior executives from both Universal’s European and American headquarters and by the general managers and functional managers of many of the operating units.
- Communicating The Information
Before 1974, in Galvor there was no information was given to other department heads concerning sales results, costs, and expenses. Cost accounting, perpetual inventory valuation, inventory control, production control, customer accounts receivable control, budgeting, etc did not exist.
After 1974, Galvor have to submit periodic reports to M. Boudry in Geneva according to a fixed schedule date with essentially as the same reporting system as other units in UE.
- Evaluating The Information
The main focus in most of the reports submitted to Universal was on the variance between actual results and budgeted results, and also the differences between the current year and the prior year also was reported.
The periodic financial reports from Galvor were forwarded to M Boudry in Geneva headquarter. The report then reviewed by one of four financial analysts assistant of M Boudry.
When comparing the performance against budget for the key measures, M Boudry can detect the trouble spot and trends which seem to be developing. The action would be taken if there is something moving unplanned. For example, from the enquiries between Hennessy and Poulet, we can see that there’s variance on Inventories and Sales (see Exhibit 2). Poulet then request the causes of variance and the corrective action to Hennessy. And from the Exhibit 3, Hennessy answer that the variance was caused by the three policies from headquarters that were not suitable for Galvor.
- Influencing People Behavior
EU designed reporting system as a tool to influence people to focus their attention on critical area and to think about their future and to commit themselves especially their future goals.
They should replace nonqualified employees with better-trained and more dynamic people. Reporting system also became an effective training and educational device.
The table below shows the differences in management control system practice between UE and Galvor during the LaTour tenure.
Table 2
The differences in Management Control System
Galvor’s Management Planning and Control System Required by UE
UE wanted a rigid control, and to impose its control over Galvor, they created a discipline system in which Galvor had to report everything to the UE’s headquarters and explained why and how something had gone wrong, and what necessary actions had been taken to solve the problem. The UE’s executives believed that numbers had a great role in revealing the problems. UE believed that accounting’s role is huge to the success of an organization. He believed that if they use the numbers correctly it would tell them what actions they would need to take to improve the areas that would need improvement. For this reason, in addition to the face-to-face meetings, he required managers to provide him a monthly report, and he would review the report very carefully, and he would exam every aspect of the report in order to find the inadequacies.
However, this system of control is in fault. The rigid control system, without using managerial leadership and communication skills may work for a short period of time. Nevertheless, in the long run, the high cost of the system would overcome, and would break the system apart. There were many companies such as ITT, IBM that would use a tight control system to run their organizations. However, none or most of them failed to continue for a long time. Because, a firm control, and a control based on numbers would create distrust and hatred among employees and would force them to leave the company, which is tremendous amount of cost for companies. The cost is one of negative aspects of the tight control system. However, there are so many other factors that are involved, and are very important for the existence of a company that have been forced companies and executives to loosen up, and lean extensively toward leadership-style management.
Thus, UE’s planning system is not effective as it is applied to Galvor. It is a very inflexible, detailed system that requires far too much time and too many resources for a business unit the size of Galvor. Evidence of its ineffectiveness:
(1) Barsac (controller) and his chief accountant spend 80% of their time working the system
(2) Reports not providing value to the operating business unit
(3) Boudry stated that the cost of the system is “barely acceptable” for a business unit the size of Galvor
(4) Even though Galvor is experiencing problems with the system, according to Boudry, headquarters has not given Galvor the help it needs and deserves in data processing
(5) Telex exchanges from HQ staff to Hennessy provide no value to the operating unit. It only points out the variances, which are already obvious, and asks for additional reporting. No causalities are established.
Moreover, there was too much paper works and reporting. The controller, on a monthly basis, submitted 13 additional different reports as follows:
Other 12 reports were required less often, either quarterly, semi-annually, or annually. We cannot eliminate any of the reports. Each is necessary for either accounting consolidation, local management, or control. (The controller’s monthly report could be shorter, perhaps, and many would assert that it should be prepared by the manager.) This will always be true any time a large company acquires a small company, particularly if the acquired company is managed by its owner.
Considering the report that Galvor is required to prepare by UE, our group proposed the modification of Galvor’s reporting requirements:
- A control system must be superimposed on the company to replace the owner-manager’s personal control and decision making. Decisions (such as capital investments) that could be met on the basis of calculation on the back of an envelope must now be formalized. Further plans must be reviewed and approved formally and so forth
- Galvor’s accounting system must be consistent with UE’s accounting system.
- New management techniques (for example: better cost accounting) are often required both to support the control system and to provide manager with better information than is often available in Galvor.
Behavioral Considerations in Performance Evaluation
Condition in the environment has been suggested as major factors influencing budget effectiveness and management performance. Budget effectiveness is a multidimensional concept that may be perceived differently by the involved interest groups. Individual managers have quite different approaches to the exercise of control.
UE has adopted tight control system. It means that budget commitments are firm goals that must be met if at all possible. Tight control is based on the management philosophy that subordinate managers work most effectively when they are required to meet specific short-term goals, typically one-year goals, and that senior management can assist subordinates in solving many day-to-day problems. The rationable behind a tight control system are:
- Divisional management will accomplish more if it is given specific, short-term goals that it is expected to meet
- It allows central management to get into operations and take action where they believe conditions at the operating level could be improved.
- In provides a basis for evaluating the divisional manager.
In this case, there is an element of corporate profit planning. Headquarters wants to know the amount of profits that are expected from the division in time to do something about corporate earnings per share if subsidiary profits fall below expectations. However, there are some consequences that should be paid by UE since it uses the tight system:
- Management initiative and even in the managers there are able to hire and retain. Many managers cannot and will not work under such a system.
- It requires an extensive and expensive financial group at all levels of operations
- It is too much detailed, too much management time, too much staff interference and too much control of operating manager by headquarters.
- It is not enough initiative left to operating management
- It is not enough freedom to plan and execute the strategy.
Referring to the best system could be implemented by Galvor, our group proposed the loose system as the Galvor’s control system. This system is suitable to Galvor, because by using this system the budget is more of a plan than a firm management commitment. However, by applying this system, Galvor should be aware, because this system frequently is not an adequate early warning system. Also it may not be a basis for evaluating management. Under loose control system, the budget is used essentially as a communication and a planning tool.
The working relationships between Hennessy and the UE executives in Geneva
In domestic subunits of a multinational company, communication with headquarters may be extensive but budget may be set by headquarters with no influence by the subordinate managers. By contrast, in highly autonomous foreign subunits of multinational company with a multi-domestic strategy, subordinate managers may have substantial influence over their budgets with only limited communication with headquarters.
In this case, the working relationships between Hennessy and the UE executives in Geneva came from the problem of level of inventory. It can be shown in the telexes between both, Hennessy and Poulet. The summary of the telexes can be shown in table 3 below.
Table 3
Telexes Summary
The working relationships between Hennessy and the UE executives in Geneva are not good. Poulet is making very detailed requests of Hennessy regarding inventory and sales levels compared to budget. Hennessy blames many of the variances on 3 policy changes that appear to be driven by corporate headquarters. Hennessy are just going through the motions, since he is not hear and being over controlled, he is just doing the best he can. This can be seen from his attitude towards responding to the telexes. His “doing the best I can” strategy appears to be working. In the other side, Poulet’s attitude encourages operating management to freeze into a plan once it was approved.
CONCLUSIONS
- The planning system that currently implemented by UE is not appropriate for Galvor Company because of the different size of business unit.
- A control system must be superimposed on the company to replace the owner-manager’s personal control and decision making. Decisions that could be made on the basis of calculations on the back of an envelope must now be formalized. Further plans must be reviewed and approved formally and so forth.
- Galvor’s accounting system must be made consistent with the UE’s. This usually involves considerably more sophistication than was previously necessary.
- Universal Electric is trying to accomplish with tight control system. This means that budget commitments are firm goals that must be met if at all possible.
- The working relationship between Hennessy and Poulet, UE executive in Geneva seems not good. As an autonomy unit, Galvor should have certain degree of independent decision and headquarter should not dictate policy that not suitable with Galvore ability.
RECOMMENDATION
- Galvor should have a much simpler, more streamlined business planning, reporting and control process. The business plan itself should only cover a few years and should be flexible, not detailed. The business plan summary reports should contain information on NI, sales, total assets, total capital employed, %return on sales, and % return on total assets only. Other items in the UE business plan should be combined into a summary of the strategic objectives and high level actions that Galvor will pursue over the next two years to support the overall business planning objectives, to include high level management actions. Monthly reports should concentrate mostly on reporting of problem areas, areas of concern and the prioritization of such.
- In our view the imposition of this system cannot be justified. There are some needed improvements for Galvor over their traditional planning and control process. UE can provide needed expertise to help develop a system that is effective for Galvor and could still meet the needs of the UE Corporation.
- For a large organization the reporting and control system should be more streamlined. The system should be set up to support the autonomy of its various businesses and product lines. The current process focuses on the day-to-day performance and operation of the business units. The business planning process should focus on clearly identifying the overall strategic direction of the business by clearly identifying the growth vs. harvest businesses and which businesses should be shut down and what new business to get into and where. Once strategic focus has been given, budgets should be allocated and the responsible manager should be held accountable for the performance.
- For this company, the strong centralized business controlled organization should be reduced. The relationships between the different business units should be studied. This company skipped the whole structure development section of an effective management control system.
- Top management should review proposed actions of operating managers for correcting underbudget situations with this mind. However, this would not help short-term actions taken by operating management to avoid an underbudget condition. The same is true of changing plans when it is clear that the original plan was suboptimum. Certainly Poulet’s attitude would encourage operating management to freeze into a plan once it was approved.
- Using loose system where the budget is more of plan than a firm management commitment. One of the problems with a loose system is that it frequently is not an adequate early warning system. Also, it may not be a basis for evaluating management.
- There are some needed improvements for Galvor over their traditional planning and control process. UE could provide needed expertise to help develop a system that was effective for Galvor and could still meet the needs of the UE Corporation.