Texas Instruments and Hewlett-Packard

Agida * Dantes * de Leon * Estanislao * Lope * Ronquillo

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 company’s strategies?

Framework for Analysis Identify and contrast the business and functional

strategies of each firm Identify and discuss each firm’s “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 Differentiation

Hewlett-Packard

HarvestLow-cost

Texas Instruments

AnalysisTexas 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 High value/high price

Rapid Growth Controlled growth

Standard Products Custom features

Manufacturing Scale economies and learning curve Delivery and quality-driven

Vertical integration Limited vertical integration

Large, low-cost locations Small, attractive locations

R & D Process and Product Product only

Cost driven Features and quality driven

Design to cost Design to performance

Financial Aggressive Conservative

Higher debt No debt

Tight ship Margin of safety (slack)

Analysis

Product Life Cycle

Time

Vol

ume

TEXAS INSTRUMENTS HEWLETT-PACKARD

TimeV

olum

e

ExitStay

Enter Create

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

Analysis

Costs and Prices (Learning Curve)

Cumulative Volume

$/U

nit

TEXAS INSTRUMENTS HEWLETT-PACKARD

$/U

nit

PriceCost

Cumulative Volume

Price

Cost

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

Analysis

Product/Process MatrixTEXAS INSTRUMENTS HEWLETT-PACKARD

Job shop

Continuous

CustomStandard High volume

Job shop

Continuous

CustomStandard High volume

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.

Analysis

Portfolio: Positioning and Resource MovementTEXAS INSTRUMENTS HEWLETT-PACKARD

High

High LowRelative Market Share

Annual growth rate

(New unique products)

Low Relative Market Share

Annual growth rate

High

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.

Analysis Implications for Strategic Planning Process

Criteria Hewlett Packard Texas Instrument

Importance of strategic planning

Relatively high importance due to uncertainty of environment in a “build” strategy

Relatively low, Planning is lax compared to HP due to stable environment of “harvest” strategy

Formalization of capital expenditure decisions

Less formal DCF Analysis; longer paybackLess reliable due to uncertainty

More formal DCF Analysis; shorter paybackMore reliable because of stable environment

Capital expenditure evaluation criteria

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

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

Discount rates Relatively low to motivate new investment ideas

Relatively high to motivate exceptional returns

Capital investment analysis

More subjective and qualitative More objective and quantitative

Project approval at the business unit level

Relatively high Relatively low

Analysis Implications for Budgeting

Criteria Hewlett Packard Texas Instrument

Role of the budget Short-term planning tool Control tool

Business unit manager’s influence in preparing the budget

Business unit’s managers operate in a fast changing environment and have a better knowledge of these changes therefore they greatly influence the budget preparation

Business unit’s managers have relatively low influence in preparing the budget but they need to start from scratch every year and justify the budget thoroughly.

Revisions to the budget during the year

Budget is not constrained for a certain year because the company is investing primarily in R&D.

Budget is too difficult to revise. It is set from the start and needs to be spent wisely to reflect efficiency in operations.

“Control limit” used on periodic evaluation against the budget

HP is also concentrated on more flexible production processes and this will imply relatively high control limit.

The control limit used is relatively low.

Importance attached to meeting the budget

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

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

Criteria Hewlett Packard Texas Instruments

Frequency of informal reporting and contact with superiors

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

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 Implications for Reporting

AnalysisCriteria Build - HP Harvest - TI

Percent compensation as bonus Relatively high Relatively low

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”

The company’s 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

Bonus criteria More emphasis on non-financial criteria More emphasis on 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.

Short-term parameters such as cost control, operating profit and cash flow, and ROA or EVA promote efficiency and productivity. The harvest strategy’s goal is to be consistently cost effective to complete at lower prices. These criteria steers management towards the same direction.

Bonus determination approach More subjective More formula-based

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

The criteria is very applicable to day-to-day operations and can have engineered measurements.

Frequency of bonus payment Less frequent More frequent

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

This encourages focus on day-to-day operations and realization of short-term goals. Time bound (monthly, quarterly, annual) targets are often rewarded consistently

Implications for Incentive Compensation and Performance Evaluation

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 long-term, 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

ConclusionsBUILD 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 fast-changing

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.

RecommendationsAs 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!!!