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Comparison of Management Control Systems between Texas Instruments and Hewlett-Packard

Management Control Systems of Texas Instruments and Hewlett-Packard

Texas Instruments (TI) and Hewlett-Packard (HP) were two electronics firms that developed, manufactured, and sold electronic products. Although the two firms operated in similar industries, they chose very different management control systems and strategies. While TI’s competitive advantage was mainly based on high volume and low price, HP’s competitive advantage was to manufacture high-value and high-feature products. Given the discrepancies in strategy between the two firms, it is expected that there were also differences between TI and HP in their planning and control systems.

Overview of Texas Instruments and Hewlett-Packard

TI had three main lines of business: components, digital products, and government electronics, which generated 46 percent, 19 percent, and 24 percent of the total TI sales, respectively. HP had two main lines of business: computer products contributed 53 percent, and electronic test and management control systems added 37 percent of the total sales.

Financial Information on TI and HP from 1980 to 1984

When turning to the old financial data from 1980 to 1984, the sales of TI over the years tended to be increasing slowly, compared with the sales of HP, which were rising rapidly. Specifically, TI has an average 9.327% growth rate, while the average increase rate for HP was 18.3848%. HP sales in 1980 were around $3 billion but increased to over $6 billion in 1984. On the contrary, sales of TI were about $4 billion in 1980 and went up to $5.7 billion in 1984. As a result, the revenue of HP was higher than that of TI in 1984, although it was generally lower in previous years.

Historical Stock Price Values of TI and HP

The following chart illustrates the fluctuation of stock prices of TI and HP from January 1980 to March 2016. The two company’s stock prices follow the same pattern as TI and HP are in the same industry. Their stock prices are influenced by the market. However, HP’s stock prices fluctuate more than that of TI.

Comparison of Management Control Systems between Texas Instruments and Hewlett-Packard Stock Prices

The reason for the difference in stock price fluctuation between the two companies can be explained by analyzing TI and HP’s business strategies. TI operates in standard markets based on long-run cost position. In contrast, HP seeks high-value, unique, and small product markets. In other words, TI is a risk-averse company, and HP seems to be a risk-taker. Higher risk leads to greater fluctuation in stock prices of HP. The company is more profitable in a booming economy, and take a more significant loss during recessions.

Organizational Structure and Management Control Systems

Corporate Identification

On the one hand, both TI and HP used related diversification, as their primary business lines were involved in a similar specific industry. First, each business line in both companies is treated as an independent business unit. Nevertheless, there was a high degree of interdependence among the business units. For example, for TI, products in components line can be used by the government electronics line.  Similarly, electronic test and management control systems can be applied to the process of computer products to evaluate whether the computer products met HP’s standards. A related diversified firm’s core competencies decide the strategy of all the business units.

On the other hand, although both TI and HP operated in the same industry, and adopted related-diversification strategy, their target markets are materially different. TI targeted large, standard markets, while HP concentrated on selected small markets that favor high-value/high features products. The difference in target market choice between the two companies leads to a difference in the internal business structure. TI was similar to a conglomerate company, which operates in a single industry. HP was more like a related-diversified company. The width of the market decides the width of the product lines.

Business Unit Identification

Diversified corporations segment into business units. The missions of the business units can be classified as “build,” “hold,” or “harvest.” The purpose influences the uncertainties that the business units have to face, the short-term and long-term trade-offs, and the design of related management control systems. Business units of HP tended to suffer more considerable environmental uncertainty as they managed to create new markets, resulting in a “build” strategy for short-term profit trade-off. TI, however, wanted to maximize its market shares in the mature stage of the product life cycle, took a “harvest” strategy.

Functional Strategy Overview

Marketing: Because TI pursued a long-term and low-cost position, its products were sold in high volume at a low price. In contrast, HP’s products had high value and were sold at a high price.

Manufacturing: TI obtained its cost advantages by applying economies of scale and learning curve. TI also manufactured its products through vertical integration and in great and low-cost locations. Because TI used economies of scale, the company had higher fixed costs. When the economy is in a boom, HP will be more likely to perform well. However, when the economy is in a recession, HP will be more vulnerable. HP, on the other hand, concentrated on delivery and quality-driven products that were manufactured in small and attractive locations through limited vertical integration.

R&D: R&D activities at HP focused on process and product and were driven by cost. HI’s R&D activities focused on products only and were inspired by features and quality.

Financial: While TI relied heavily on debt to finance its business, HP used more equity and no liability in its financial structure. TI would be more vulnerable to market conditions than HP.

Management Control Systems and Strategies of TI and HP

Mission: TI’s mission was to “harvest,” while HP’s mission was to “build.”

Business Strategy: TI pursued a long-term and low-cost position in large, standard markets to create a competitive advantage. On the contrary, HP produced unique, high-value, high-feature products for selected small markets to create a competitive advantage.

Product Life Cycle: TI entered its markets early. When the products matured, the company managed to have dominant market shares. HP, on the other hand, created new markets. When the markets developed, and other cost-driven competitors entered, the company exited its markets. In both companies, the entry-stage accounted for most of the product life cycle. The introduction stage could be the most expensive when launching a new product. The size of the market for the new product is small, which means sales are low, although they will be increasing. TI entered its markets early to look for cost-leader positions, while HP created new markets to be the market leader. Both of them needed to devote a lot of time in the early stage. However, the difference was that TI’s maturity stage was longer than its growth stage. It was the opposite of HP. Again, because TI was pursuing market leader positions, the more prolonged maturity stage indicated that the company successfully achieved leading positions. Concerning HP, whose products were typically high-value and high-feature, the longer the growth stage, the more effort it put in its products.

Costs and Prices (Learning Curve): TI focused on price cuts, cost reductions, and high volume to take advantage of shared experience and learning, while HP focused less on cost reductions, but more on ROI and profit margins by holding prices longer during the initial periods. TI’s strategy in manufacturing is scale economies; by making use of the skills and technology, the unit cost decreased, which benefits to the market in a lower sales price. In return, TI benefited from higher market shares. TI’s strategy resulted in penetration pricing, which was used to secure market shares. On the contrary, HP’s plan was to create new markets and exit when they matured. This strategy led to skimming pricing, which was used to maximize profit in the early stage of the product life cycle.

Product Process Matrix:  Different target markets determined the differences in the product-process matrix. TI paid attention to capital-intensive and cost-effective production processes to meet the needs of its standard and high-volume markets. Conversely, HP paid attention to flexible production processes to meet the needs of its custom and low-volume markets.

Portfolio Analysis: TI used cash from current “cash cows” (low-growth business with dominant market shares) to develop its “question marks” (high-growth companies with low market shares) into new “cash cows.” HP only focused on “stars” (high-growth businesses with dominant market shares). “Stars” often used up large amounts of cash because of their high growth rate. As a result, major resources were reallocated solely to fund new businesses.

The strategies that TI and HP implemented were significantly different. Furthermore, the missions of the corporation and business units of each company were various. The analysis below focuses on the planning and management control systems of the two companies, based on their corporation and business identification.

Strategic Planning Systems of TI and HP

The differences in corporate strategies determine the differences in management control systems.

A single-industry firm, like TI, is more likely to take “harvest” strategies. It has a lower level of interdependencies among business units, but higher certainty due to the mature market it chose to stay. The senior managers at TI may not have significant knowledge or experience in the operation of various business units.

In contrast, a related-diversified firm, like HP, tends to take “build” strategies. It has not only a higher level of interdependencies but higher uncertainty due to new products in new markets. The management of HP may have more knowledge of activities across various business units. HP may require smoother and more effective communication channels across business units.

Strategic Planning

TI’s business units have fewer similarities in products’ features, manufacturing processes, and marketing strategies. The lower level of interdependency among business units and less specialized knowledge of management determines that TI adopts a vertical management control system. Business units prepare their strategic plans and submit them to senior management to approve.

In contrast, HP can use both vertical and horizontal management control systems. The horizontal dimension might be incorporated into the management control system in different ways. For instance, HP can develop a sub-strategic plan for a unit group that explicitly identifies synergies across individual business units.

Importance of Strategic Planning

HP seeks to create a new market and operates in a rapidly changing environment. The higher uncertainty of the environment requires that HP pays more attention to its strategic planning.

Conversely, TI prefers long-term operation in mature markets, so it tends to operate in a relatively stable environment. Therefore, the importance of strategic planning is lower correspondingly, and a broad-brush strategic plan may be enough to control the business operation.

Capital Investment Evaluation

TI’s investment decisions rely more on quantitative, financial, and formal information because TI operates in mature industries. It has more financial information available in its markets and can easily collect useful data for project analysis.  TI emphasizes more on formal discounted cash flows analysis because the stable environment allows TI to predict future cash flows accurately.  Besides, a mature industry does not offer tremendously new investment possibilities; hence the required rate of return may be relatively high in order to motivate managers to search for projects with exceptional performances.

In contrast, HP’s investment decisions rely more on non-financial and informal data because of the uncertainty in the growth stage of its markets. The financial analysis of HP’s projects may be unreliable due to the unpredictability of the future phase of the markets. Also, HP may set a lower required return rate to motivate the managers to come up with new investment ideas and management control systems.

Management Control Systems and Budgeting Systems of TI and HP

The Role of Budget

As the cost leader, and harvest strategy taker, the budget was a control tool for TI. For HP, the budget was more like a short-term planning tool.

HP concentrated more on flexible production processes to meet the needs of its customers and low-volume markets. Therefore, it relied on high control limit in periodic evaluation against budget.  The budget can change every year as the markets change. The greater the uncertainty, the more difficult it is for management to regard subordinates’ budget as firm commitments, and use the variance to evaluate the performance. As a result, the budget is not that important to HP.  However, TI concentrated more on capital-intensive and cost-effective production processes to supply to its standard, high-volume markets. TI’s target markets are less flexible compared to HP’s. As a result, comparing budgeted and actual results to identify favorable or unfavorable variances can determine whether the performance is efficient. Meeting estimated numbers is significantly crucial to TI’s business model.

Functional Budget

As TI was pursuing long-term cost positions in standard markets, it preferred to enter the markets early, then expand quickly to strengthen its cost-leading positions. TI eventually accounted for dominant market shares. In the marketing function, the budget cost should be based on the length of the product life cycle. The product life cycle is longer in both the entry and mature stages compared with the growth stage. Thus, TI devoted more marketing expense in these two stages, in order to fast entry and then take the market-leadership positions.

However, HP’s strategy is to create new markets by introducing unique, high-value/high- features products. In the early stage, including the development period, the product life cycle was longer than the mature and exited stage. The reason was that to introduce new products, HP spends an extended period on research and development typically. When the technology used in production became mature, the product life cycle would be shorter. At the same time, cost-driven competitors entered the markets, these markets matured, and HP exited the markets. Therefore, the budget focused on research and development to create new markets and control growth. When the market was created, HP would be the market leader, which provided a lot of opportunities for it to earn profits and enhance its management control systems.

Management Control Systems and Budgetary Process

For HP, the process was bottom-up. The build managers, including lower-level managers and employees, had more influence in preparing the budget when responding to the rapid changes in the environment. They had more knowledge of these changes than top management.  Moreover, the budget revisions were likely to be more frequent due to the flexible shifts in the environment.

In contrast, the situation was different for TI.  As the harvest company, the budgetary process was top-down. TI aimed at long-term market positions; the individual business unit manager had a profound influence on preparing the budget. However, the feedback from the senior management on the variances and management control systems was frequent.

Reporting Systems of TI and HP and Management Control Systems

The differences of reporting control systems between a “build” company and a “harvest” company lie in two points: the frequency of reporting and contacts with superiors, and the form of communication between superiors and subordinates.

Frequency of Reporting and Contacts with Superiors

HP, which is a “build” business, tends to develop new products and explore new markets. HP likely has less experience to cope with the possible management issues in a new product line. Therefore, building new procedures and policies for each of its specified product line becomes the most crucial part of the company’s reporting system. Consequently, HP’s reporting system takes more informal communication forms and focuses more on policy issues and less on operational matters.

In contrast, TI, which is a harvest business, tends to stay in its markets and tries to expand the market shares. Over time, it has accumulated experience and developed mature operating procedures. Therefore, TI’s reporting system takes formal communication forms and mainly focuses on operating issues rather than policy issues.

The Form of Communication between Subordinates and Superiors

For HP, the management may know the firm’s operation intimately. Thus, the top executives may be able to control the activities of subordinates through informal and interpersonal interactions. Therefore, the reporting form mainly relies on everyday communication.

For TI, the management tends to use more formal documents and procedures to control the subordinate business units. The chief executive officer of TI may not have enough expertise to manage the different business units. Thus, he or she has to rely on the formal form of the reporting system.

Performance Evaluation Systems of TI and HP and Management Control Systems

Texas Instruments Balanced Scorecard

 Strategic GoalsStrategic Measures
FinancialMaximize profits and cash flow Minimize long-term investments, focus on short-term profitsProduct line and customer profitability Unprofitable customers and product lines
CustomerAlign sales and productions Sell quality products to customersBackorders Sales bookings
Internal BusinessMaximize capacity utilization Avoid keeping excess inventory to reduce costCapacity utilization rate Inventory turnover rate
Innovation and LearningImprove technology to reduce costs Improve production processes and productsCost reduction rate Cycle time

Financial perspective: Because the markets that TI has entered no longer guarantee a significant return on investment. The profits from these markets are used to maintain equipment and capabilities and invest in new potential markets, any investment made by TI in those markets needs to be short-term and can maximize cash flows back to the company. Therefore, the financial goals of TI emphasize cash pay-back and not future return on R&D activities.

Customer perspective: To reduce costs and measure customer satisfaction, TI uses backorders to measure the imbalance between sales and production. Besides, TI can predict its sales revenues by measuring sales orders booked.

Internal business perspective: In order to keep its costs low, TI needs to control its capacity utilization and inventory level. Capacity utilization rate and inventory turnover can be useful measures.

Innovation and learning perspective: R&D activities of TI mainly focus on process innovation and cost reduction. These goals can be measured by cost reduction rate and cycle time.

Hewlett-Packard Balanced Scorecard

 Strategic GoalsStrategic Measures
FinancialOffer high-quality, high-feature products to customers Create new marketsThe sales growth rate in new markets Return on Assets, Return on Investment
CustomerSell multiple products to the same customers New customers  Customer retention rate Customer satisfaction index Customer loyalty survey Percentage of new customers
Internal BusinessUnderstand customers’ needs Retain talented and creative employeesProduct development cycle Employee retention rate
Innovation and LearningCreate innovative productsPercentage of sales from new products

Financial perspective: Because HP implements a build strategy, the company focuses on building and expanding new markets, offering new products. For that reason, HP uses the sales growth rate in new markets as a performance measure. In addition, HP also pays attention to how much return new products have generated in exchange for the capital that HP invested in creating those products.

Customer perspective: New products that HP creates must satisfy the demands of existing customers and attract new ones.  Selling multiple products to the same customers and attracting new customers are the company’s goals. Some measures can be used to assess these goals, such as customer loyalty, customer satisfaction, etc.

Internal business perspective: HP needs to retain its skillful employees to introduce new products and build new markets continually. Employee retention is a useful measure to evaluate how well HP does in keeping its employees. Also, HP’s new products need to meet their customers’ needs. The product development cycle helps assess how well HP understands its customers.

Innovation and learning perspective: R&D projects of HP concentrates on creating new products. This goal can be measured by the percentage of sales from new products.

Incentive and Compensation Systems of TI and HP and Management Control Systems

Percent of compensation as a bonus: TI’s business model is relatively safe. This results in a lower proportion of the payment in bonuses compared to salary. On the contrary, HP’s business model is relatively risky. Hence, HP’s management has a higher percentage of their payment in the form of an incentive bonus.

Bonus criteria: TI’s objectives are more short-term, concrete, and easy to measure. The company aims to reduce its costs and increase its market shares. Thus, the company’s bonus criteria concentrate more on financial benchmarks. HP’s objectives, on the other hand, are more long-term, abstract, and difficult to measure. The company produces high-value and high-feature products for selected markets. Therefore, the company’s bonus criteria emphasize more on non-financial criteria.

Bonus determination approach: Because TI emphasizes more on financial criteria, the company’s bonus determination approach is more formula-based. In contrast, HP’s determination approach is more subjective as HP’s management focuses more on the long run.

Frequency of bonus payment: TI’s bonus payment is more frequent because the company wants to motivate its management to focus on short-term performance. Conversely, HP’s payment is less regular because its managers concentrate more on the long run.

Compensation mix: TI should include more restricted stock awards than option awards. There are two reasons for this. First, the markets that TI entered are stable; thus, the company has less risk exposure. Second, option awards can lower profits because the SEC requires companies to treat stock options as expenses. In contrast, because HP’s strategy is to create new markets, the company is exposed to a lot of risks. To motivate managers to take more risk, HP should increase stock options in long-term compensation.

Conclusion about Management Control Systems between HP and TI

TI’s strategy was to manufacture low-cost and high-volume products. Therefore, its approach was similar to that of a “harvest” company. On the contrary, HP planned to create new markets and exit when they matured. This strategy was similar to the approach of a “build” company. The planning and management control systems of TI and HP were directly linked to their strategies. Generally, “harvest” companies face less environmental uncertainty than “build” companies. Thus, the strategic planning process is significantly more important to HP, which is a “build” company, compared to TI, which is a “harvest” company.

Furthermore, the greater the uncertainty, the harder it is for management of HP to use unfavorable budget variances as transparent measures of poor performance. Finally, in terms of the incentive compensation system, for “build” companies such as HP, because it has a riskier strategy, the proportion of management’s compensation in bonus is higher than that of a “harvest” company like TI. Overall, the planning and management control systems at TI and HP are designed with respect to each company’s external environment, technology, strategy, and organizational structure.

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