Texas Instruments and Hewlett-Packard

Shaila singhania (22/2010) Varsha chandra (2/2010)

Case Context

Texas Instrument (TI) and Hewlett Packard (HP) are two companies famous for introducing electric and electronic products. Although competing in similar industries, their strategies and management control are very much different.

Point of View

The group will be taking on the point of view of a Third Party Observer/Analyst in order to take away any bias towards any of the two companies which will not help us in analyzing the case.

Problem Definition

Given the differences in strategy between the two firms, what would you expect would be the differences between TI and HP in their planning and control systems; strategic planning systems; budgeting systems; reporting systems; performance evaluation systems; and incentive compensations systems? What are the management controls that befit each companys strategies?

Framework for Analysis

Identify and contrast the business and functional strategies of each firm Identify and discuss each firms tendencies in terms of:
Planning

and control systems Strategic planning systems Budgeting systems Reporting systems Performance evaluation systems Incentive compensation systems

Framework for Analysis

Compare the expected tendencies to the actual controls used by each firm during the time period 1980 1985 Formulate conclusion and recommendation

Analysis
Build Harvest Differentiation Low-cost Hewlett-Packard Texas Instruments

Analysis
Texas Instruments Hewlett-Packard Business Strategy Competitive advantage for large, standard markets based on long-run cost position Competitive advantages for selected small markets based on unique, high value/high features products Functional Strategy

Marketing

High volume/low price

Rapid Growth Standard Products

High value/high price

Controlled growth Custom features Delivery and quality-driven Limited vertical integration Small, attractive locations Product only Features and quality driven Design to performance Conservative No debt Margin of safety (slack)

Manufacturing

Scale economies and learning curve Vertical integration Large, low-cost locations

R&D

Process and Product Cost driven Design to cost

Financial

Aggressive Higher debt Tight ship

Analysis

TI tended to enter early in a products life cycle, and stayed through maturity. HP tended to create a new product and then replaced it when matured.

Product Life Cycle

TEXAS INSTRUMENTS HEWLETT-PACKARD

Stay Volume Volume

Exit

Enter Time

Create Time

Analysis

TI emphasized aggressive cost improvements, with equally aggressive price cuts. HP desired cost improvements but sought higher margins and held prices longer.

Costs and Prices (Learning Curve)

TEXAS INSTRUMENTS HEWLETT-PACKARD

$/Unit

$/Unit

Price Cost Cumulative Volume

Price Cost Cumulative Volume

Analysis

TI concentrated on more capital-intensive, cost effective production processes to match high-volume standard product needs HP concentrated on flexible production processes to match low-volume, more custom product needs.
TEXAS INSTRUMENTS Standard Custom High volume HEWLETT-PACKARD Custom Job shop Standard High volume

Product/Process Matrix

Job shop

Continuous

Continuous

Analysis

TI sought a balanced portfolio of business where mature, large businesses provide resources for young, high-growth businesses. HP sought all high-growth, high-margin businesses that met their own resource needs largely on an individual navy.
HEWLETT-PACKARD (New unique products)

Portfolio: Positioning and Resource Movement

TEXAS INSTRUMENTS High

Annual growth rate

Annual growth rate Relative Market Share Low Low Relative Market Share High

High

Analysis
Criteria Importance of strategic planning Formalization of capital expenditure decisions

Implications for Strategic Planning Process

Hewlett Packard Relatively high importance due to uncertainty of environment in a build strategy Less formal DCF Analysis; longer payback Less reliable due to uncertainty More emphasis on nonfinancial data (market share, efficient use of R&D dollars, etc.) to encourage development of new products; products are on a growth stage Relatively low to motivate new investment ideas More subjective and qualitative Relatively high Texas Instrument Relatively low, Planning is lax compared to HP due to stable environment of harvest strategy More formal DCF Analysis; shorter payback More reliable because of stable environment More emphasis on financial data (cost efficiency; straight cash on cash incremental return); required earnings rate are high since it is operating in a mature industry Relatively high to motivate exceptional returns More objective and quantitative Relatively low

Capital expenditure evaluation criteria

Discount rates Capital investment analysis Project approval at the business unit level

Analysis
Criteria Role of the budget Business unit managers influence in preparing the budget

Implications for Budgeting

Hewlett Packard Short-term planning tool Business units managers operate in a fast changing environment and have a better knowledge of these changes therefore they greatly influence the budget preparation Budget is not constrained for a certain year because the company is investing primarily in R&D. HP is also concentrated on more flexible production processes and this will imply relatively high control limit. Meeting the budget is not an issue with HP since budget might be revised during the fiscal year as it engaged with R&D activities Texas Instrument Control tool Business units managers have relatively low influence in preparing the budget but they need to start from scratch every year and justify the budget thoroughly. Budget is too difficult to revise. It is set from the start and needs to be spent wisely to reflect efficiency in operations. The control limit used is relatively low.

Revisions to the during the year

budget

Control limit used on periodic evaluation against the budget Importance attached to meeting the budget

Meeting the budget is very important as this will measure the companys efficiency in the resource allocation process.

Analysis
Criteria Frequency of informal reporting and contact with superiors

Implications for Reporting

Hewlett Packard Concentrated more on reporting the policy issue as the company is more involved in developing new products. It Reporting operating issues is less frequent.

Texas Instruments Concentrated more on reporting the operating issue as the company major activities are in operations (manufacturing and assembly). Reporting policy issues is less frequent.

Frequency of feedback from superiors on actual performance versus the budget

Frequency of feedback or reports from superiors on actual performance versus the budget is less often

Progress was reviewed at successively higher levels in the organization in both modes. Monthly status reports of each tactical action program were distributed at all levels.

Analysis
Criteria Percent compensation as bonus

Implications for Incentive Compensation and Performance Evaluation

Build - HP Relatively high The company gives special incentives to innovations/discoveries and the successful market acceptance of these new products. Relying greatly on R&D puts a lot of uncertainty on the company, thus management expects higher compensation. high risk, high returns Relatively low The companys profit margin may be low, but sales, in general is consistent. This entails lower risks thus, special compensations are limited. Management are likely to be less reliant on bonuses and more on regular salaries and compensation More emphasis on financial criteria Short-term parameters such as cost control, operating profit and cash flow, and ROA or EVA promote efficiency and productivity. The harvest strategys goal is to be consistently cost effective to complete at lower prices. These criteria steers management towards the same direction. More formula-based The criteria is very applicable to day-to-day operations and can have engineered measurements. More frequent This encourages focus on day-to-day operations and realization of short-term goals. Time bound (monthly, quarterly, annual) targets are often rewarded consistently Harvest - TI

Bonus criteria

More emphasis on non-financial criteria Market development, New product development, and HR development are given much importance since target sales are very dynamic and are highly dependent on new innovations.

Bonus determination approach

More subjective Such criteria are difficult to measure objectively since the effects are long-term and not readily realized. MDev and NPDev takes a long time

Frequency of bonus payment

Less frequent Bonuses are not to be expected as regularly since the nature of assessment is long-run. Higher percentages are of course expected.

Conclusions

The HP (build) has a more flexible but higher risk strategy. They require constant innovations to lead the market and these new products demand a premium price. Budget flexible and there is greater dependent in constant updates and reporting. Management performance is measured on longterm, non-financial parameters and they are motivated by higher, but less frequent, special compensations. TI (harvest) has a more structured, lower risk strategy. They require efficiency and productivity to keep maintain low cost and sell at low prices. Budgets are very important forms of control and actual performance are expected to adhere to the budget. Management performance is measured on short-term, financial parameter and they are motivated by more frequent but, relatively lower, special compensations

Conclusions
BUILD STRATEGY Planning and control systems encourage the development of new products Strategic planning systems are more critical to survive the uncertain environment Budgeting systems are used as short term planning tools that are flexible to adapt to a fastchanging environment Reporting systems are concentrated on policy issues Performance evaluation systems are focused on non-financial criteria. Incentive compensations systems highlight the uncertainty in the environment; thus the higher risk involved translates to higher compensation that are less frequent. HARVEST STRATEGY Planning and control systems encourage the driving down of costs (minimize inventory cost and benefit from scale economies) Strategic planning systems are less critical and necessary only to effectively balance cash flows as a result of being in a stable environment Budgeting systems are used as strict control tools set at the beginning of the year to measure efficiency at the end of the year Reporting systems are concentrated on operating issues. Performance evaluation systems are focused on financial criteria Incentive compensations systems are formula based and have engineered measurements based on day-to-day operations. Percent compensation are relatively lower but more frequent.

Recommendations
As a third party observer, we recommend firms to use the management control tools above as they correspond to a build or harvest strategy. The use of these expected control systems are crucial for the strategies of HP and TI to work and for them to achieve their goals

Thank You!!!