Case analysis: "Texas Instruments and Hewlett-Packard".

University Degree Business and Administrative studies

Management Control Systems

Group Case Assignment

CASE ANALYSIS:

“TEXAS INSTRUMENTS AND HEWLETT-PACKARD”

By:

(Anugrah Pratama, S.Si, Cherpy Dyano, ST, and Riezky Danang S, ST)*

Inferred from the case, we expect some differences in planning and control system between Texas Instruments and Hewlett Packard. This paper will discuss and propose some strategic planning systems, budgeting systems, reporting systems, performance evaluation systems and incentive compensation system for each company.

Strategic Planning Systems

In term of corporate level strategy, both firms have the same definition of business in which the firm will participate. TI and Hewlett-Packard (HP) are both in high-technology electric and electronics. But, the second aspect of corporate level strategy, which is deployment of resources among the business, may be different for each firm depends on the objectives that they want to achieve and competitive advantages that they have.

TI is well known for its first to entry, stay and tries to achieve market leadership by cost leadership strategy. Meanwhile, HP is well known for offering unique, high value, high featured products. In addition, both firms use related diversification as they operate main business lines which connect to each other and may achieve operating synergy. For example, TI’s business lines, each business line can act as both suppliers and consumers for others (e.g.: digital products line acts as consumers for component business line and suppliers for the government electronics business line). The same condition may apply in HP.

Deployment of resources will be explained in the later sections.

Budgeting Systems

Budgeting systems deal with how the financial resources are deployed in the company. The budgeting system covers the corporate levels, functional levels and business levels. The case does not mention anything about each company organizational structure, or the competition environment in business level; therefore we focus only on functional levels and business levels. In term of functional levels systems, we evaluate marketing, manufacturing, R&D and financial functions.

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Texas Instruments

TI with its cost driven strategy which may requires these functions to operate as efficient as possible. Its objective of being first to entry, high volume production and dominant market share will impose the marketing budget to be varied according to products’ life-cycles. Higher budget will be needed in introduction stage and mature stage (to defend the market leadership position).

This is a preview of the whole essay

Texas Instruments

For R&D function, budget will be focused for researching and developing new process of manufacturing instead of inventing new products. However, this is not a fixed strategy. Whenever the product decline stage is unavoidable, marketing budget should be lowered and reallocated to R&D function. The R&D function then aligned to focus on inventing new products to be introduced as new offerings. After introducing the new offering, budget for marketing and R&D functions should use fist strategy. This strategy is taken to make sure the first to entry and become the market leader.

The budget for the manufacturing function should be focused on achieving economies of scale, for example maintenance budget. This strategy is done to ensure that the manufacturing resources (plant, machine, tools, equipment, etc) reach their maximum production capacity. Hopefully, TI can produce high volume of products to meet its business strategy. But, whenever new products should be introduced, the budget should be reallocated to invest in manufacturing resources.

Hewlett Packard

HP with the product differentiation strategy should focus their marketing budget on introduction and growth stage product life-cycle. Introduction stage is critical as HP always try to create new market. During growth stage, marketing is use to boost the sales so HP can cover the investment cost of the products and have excess profit to be reinvested in new product offering. HP in mature stage always exit from the market, therefore marketing is no longer needed in this stage. R&D focus on the invention of a new product, thus the budget should be more allocated on this effort. HP must allocate most budgets on R&D due to nature of research conducted which has uncertainty of the occurrence of successful result. Furthermore the R&D division must provide a new product whenever needed (as the old product exit from the market).

HP should be careful in deciding strategy in manufacturing. It must consider whether to buy, to lease, or to outsource the manufacturing resources. The reason behind this strategy is that the company has set the differentiation strategy. This strategy implies rapid changing product offering, which might need different manufacturing resources.

Reporting Systems

Reporting system is designed to give information about progress on strategy implementation and resources used (e.g.: profit, inventory and materials used and manpower usage).

Texas Instruments

Due to its objective to achieve cost leadership by mass production, TI needs reporting system to control the coordination among divisions to achieve overall low cost objective. Therefore, each division must report to higher level that has the capability to coordinate the resources. This means that TI should adapt more centralized organization

Hewlett-Packard

In contrast, HP with its product differentiation strategy needs to give more authority to lower levels divisions to achieve at their best. This means that each division may has its own responsibilities toward resource usages. As the consequence, the reporting system in the higher level may not be as detailed as TI’s. The most important thing to be reported to higher level is the profit in order to evaluate the performance of the division and possibility to cross subsidize the development of new product in other division.

Performance Measurement and Incentive Compensation System

Ideally performance measurement should consist of the mix of financial and non financial measure, viewed from the internal and external factors.

Texas Instrument

TI’s performance measurement in term of financial should cover the both amount of sales and cost reduction. With the cost leadership strategy the company will able to sell the product at low product so they only get a low profit margin. Thus they huge amount of sales is crucial to maintain profit. Cost reduction in every aspect of the company is also important in order to achieve high effectiveness and higher profit margin.

This performance measurement strategy will affect the incentive compensation system. Incentive compensation system should be tied to the sales performance and cost reduction achievement. For example a salesman or distributor with higher sales will receive higher incentive compensation than those of lower sales. In term of cost reduction, division that can save more money and achieve higher efficiency will receive higher incentive compensation than those of lowers.

Hewlett Packard

In contrast HP performance measurement should be based on inventiveness of every component. This will stimulate the internal competition and increase the chances for new ideas and new products. But in marketing (sales) function the measurement will be the same the TI’s, in which the amount of sales achieved is used as an indicator. HP needs large amount of sales during the growth stage to make sure that HP makes profit that is sufficient to cover existing product investment and new product development.

The consequence of this strategy is the incentive compensation system should be tied to amount of applicable and profitable ideas generated and the amount of sales will be realized. This mean that the sales force with higher sales will receive higher incentive compensation than those of lowers. The division that is more productive and creative will receive higher incentive compensation than those of stagnant.

In term of nonfinancial measures, both TI and HP should satisfy their stakeholders’ interest. Costumers’ satisfaction, retention and loyalty are example of indicators that can be used to measures the nonfinancial performances.

Conclusions and Recommendations:

From the analysis above, we conclude that:

TI and HP have different objective that they want to achieve. This difference leads to different strategies to be applied.
In general, different strategies require different systems (e.g.: strategic planning systems, budgeting systems, reporting systems, performance measurement systems and incentive compensation systems).
TI’s strategic planning focus on related diversified firms and cost leadership. Therefore, we expect/recommend the budgeting system should be focused on marketing and R&D functions. The reporting system should be more centralized and detailed, while the performance measurement and incentive compensation system should rely on amount of sales and cost reduction achievement.
HP’s strategic planning focus on related diversified firms and product differentiation. Therefore, we expect/recommend the budgeting system should be focused most on R&D functions to invent new products. However some budget must be spent on early stage and growth stage of product life-cycle. Reporting system should be more decentralized than TI’s to give more possibilities to divisions to improve at their best. Performance measurement and incentive compensation system should be based on productivity and creativity of each division and amount of sales achieved by sales force.

*This analysis is prepared by CEOs of independent consultant firm, as assigned in MCS class ☺