Management Control System

Case Analysis on Texas Instruments and Hewlett-Packard

Written by:
Giordan Berwyn Tanoto
Hapsari Athaya Mulyanissa
Nabila Azzah Shafy Arkabintaan
Nadhira Azzah Shafy Arkabintaan
Elrica Meliany Wibowo
(17/408237/EK/21201)
(17/415854/EK/21594)
(17/411412/EK/21383)
(17/411413/EK/21384)
(17/408234/EK/21198)

INTERNATIONAL UNDERGRADUATE PROGRAM

FACULTY OF ECONOMICS AND BUSINESS
UNIVERSITAS GADJAH MADA
2019
Overview
Texas Instrument and Hewlett Packard are two big companies famous for producing electric
and electronic products. They have a similar business industry, develop, produce, and sell
electronic products with high quality. They are both successful company that has a significant
improvement and compete strictly and fairly. However they have their own segment, , Texas
instrument aim for the lower cost production while Hewlett Packard focuses on a more high
technology with price as a successful factors.

Although they are in the same industry, they both have very different strategies. TI has a
competitive advantage that based on broader market standard and low-cost. On the other side,
Hewlett Packard looking for a competitive advantage in a selected smaller market that are
based on a high fitur technology, high value and unique. The success of both companies are
based on different market strategy.

Problem Identification
Although there is difference in strategy between both firms. There are differences in their
planning and control system, strategic planning system, budgeting system, reporting system
and
what would you expect would be the differences between TI & HP in their planning and control
system; strategic planning systems; budgeting systems; reporting systems; performance
evaluation systems and incentive compensation systems.

This paper will discuss some differences in planning and control system between Texas
Instruments and Hewlett Packard. This paper will discuss some aspects which are strategic
planning systems, budgeting systems, reporting systems, performance evaluation systems and
incentive compensation system for both companies, TI and HP.

Contrasting Strategies
Firstly, this paper will analyze the low-cost system that TI implemented. Texas Instruments
focuses on reducing costs at large volumes of production. The plan will involve takeover of
suppliers, Strict cost control measures and plans to make the production process more efficient
will be the object of the control systems. Market penetration plans for new export markets will
require large increases in production. While for Hewlett-Packard, the planning will focus on
introducing new products. There will be plans to skim the markets for new products introduced.
The control system will focus on timely deliveries and strict quality control .The export plans
will focus on small but premium markets. Financial plans will focus on ensuring the liquidity.

In terms of strategic planning systems, 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. 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.

Further Differences in Strategies

Each of the strategies implemented by the two companies tells us each of the company’s
tailored business unit strategy. Typically, business units choose from four missions: build, hold,
harvest, and divest. In this case, the companies tend to constitute a continuum with “pure build”
by Hewlett-Packard and “pure harvest” by Texas Instruments. harvest strategy means the
company makes as much money as possible with the product by means of the Cash Cow. This
can be achieved by improving or renewing the product or by manufacturing by-products. On
the other hand, build strategy are undertaken in the growth stage of the product life cycle and
the objective of the strategy is to increase market share. The business unit has two generic ways
to compete and develop a sustainable competitive advantage: low-cost and differentiation
Regarding the product life cycle, Texas Instruments implement harvest strategy, by favoring
early entry, followed by expansion and consolidation of its position. On the other hand,
Hewlett-Packard uses build strategy, where they tend to create new markets, but then exited as
cost driven competitors entered followed by market maturity.
Both firm view cost and prices differently too. Texas Instruments focuses on low-cost strategy,
emphasizing continual price cuts to parallel cost reduction in order to build volume and take
advantage of shared experience and learning. On the other hand, Hewlett-Packard focuses on
price differentiation, they put less emphasis on manufacturing cost reductions and held prices
longer rather than cutting prices like Texas Instruments in order to encourage profit margin
expansion during initial periods.

In the product/process matrix, since Texas Instruments uses low-cost strategy, they concentrate
more on capital-intensive and cost-effective production processes (assembly lines and
continuous flow operations) to supply its more standard and high volume markets, while
Hewlett-Packard, due to their differentiation strategy, concentrates more on flexible production
processes (such as job shop and batch operations) to meet the needs of its custom and low-
volume markets.
Further highlights in the difference between the two firms strategies is the portfolio analysis.
Due to its harvest strategy, Texas Instruments is always looking for a portfolio that includes
businesses with dominant market shares but with the prospect of becoming dominant, high-
growth businesses, and eventually cash cows. Hewlett-Packard, on the other hand, wanted all
dominant and high-growth market shares, reallocating major resources only to fund new
businesses or projects. Any profit problem in Hewlett-Packard is solved by introducing a new
product and new business.

Implication
1. Implication for Strategic planning process

Criteria Hewlett Packard Texas Instrument

 Importance of strategic Relatively high
planning Because HP’s position is on
the growth stage of the
product life cycle.
Formalization of capital Less formal DCF analysis;
expenditure decisions longer payback
Capital expenditure More emphasis on
evaluation criteria nonfinancial data. For
example, provided funds for
further product R&D
Discount rate Relatively low to motivate the Relatively high to motivate the
managers to forward more
ivestment ideas to corporate
office
Capital investment More subjective and
analysis qualitative
Project approval limits at The approval limits are
the business unit level relatively high or more
flexible since HP focus on
creating new markets
2. Implication for Budgeting
Criteria Hewlett Packard
Role of the budget A short - term planning tool
Business unit manager’s The influence of the manager
influence in preparing the is relatively high because they
budget operate in rapidly changing
environments and have better
knowledge than senior
Relatively low
Because they operate in a more
stable environment and/or operate
in a mature industry
More formal DCF analysis;
shorter payback
Put more emphasis on financial
data. For instance, continual price
cuts to parallel cost reduction.
manager to search for projects
with truly exceptional returms
More objective and quantitative
The approval limits is relatively
low because TI preferred early
entry, followed by expansion and
consolidation of its position.
Texas Instrument
A control tool
The influence is relatively low
since there are not many changes
in the environment. Nevertheless,
they have to prepare the budget
every year and justify the budget
 management
Revisions to the budget The revision is easier since
during the year HP is focusing on product
research and development
“Control limit” used on HP require relatively high
periodic evaluation against control limit because they
the budget focus more on their flexible
production process
Importance attached to HP do not put their focus on
meeting the budget reaching the budget since they for Texas Instruments since it will
still can revise it.
3. Implication for reporting
Criteria Hewlett Packard
Frequency of informal The company gives more
reporting and contact with focus on reporting the policy
superiors issue as the company is more
involved in developing new
products. Its reporting
operating issues is less
frequent.
Frequency of feedback The frequency of feedback
from superiors on actual from superiors on actual
performance versus the performance versus the
budget budget is less often in this
company.
4. Implication for incentive compensation and performance evaluation
Criteria Build - HP
Relatively high
throughly.
The revision is relatively difficult
since they already set it from the
start and they have to spent it
wisely .
The control limit is less flexible
Meeting the budget is very crucial
measure how the company’s
efficiency in allocating their
resources.
Texas Instruments
The company gives more focus on
reporting the operating issue as
the company is more involved in
operational activities such as
manufacturing and assembly . Its
reporting policy issues is less
frequent.
Review of the company’s
progress is always conducted by
the higher levels in the
organization. Monthly status
report of each action program
were distributed to all levels.
Harvest - TI
Relatively low
Percent compensation as Incentives are given to
bonus innovation/discoveries and
successful market acceptance
of the new products. Relying
on research and development
will put a lot of uncertainty
on the company, therefore
management expects higher
compensation.
Bonus criteria Non-financial criteria
As the company is very
dependent on new
innovations and target sales
are more dynamic, thus
market development, new
product development and HR
development are considered
very important.
Bonus determination Subjective
approach The criteria are difficult to
measure objectively as the
effects are long-term.
Frequency of bonus Less frequent
payment Since the nature of
assessment is long-run,
therefore bonuses are not
expected to be given
regularly.
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 more
reliant on regular salaries and
compensation than bonuses.
Financial criteria
The harvest strategy’s goal is to
be consistently cost effective to
complete at lower prices.
Therefore, cost control, operating
profit and cash flow, and ROA or
EVA are all seen as important
because they promote efficiency
and productivity. .
Formula-based
The criteria is very applicable to
day-to-day operations.
More frequent
As the criteria can be realized in a
short period and focus on day-to-
day operations, therefore time
bound targets (monthly, quarterly,
 and annually) are often rewarded
consistently.

Conclusion and Recommendation

Texas instrument and Hewlett Packard are two giant companies that run their business in the
same industry. However, both companies must have different strategies as the objective that
they would like to achieve is very different as well. Generally, different strategies require
different system such as strategic planning system, budgeting system, reporting system,
performance measuremaent system and incentive compensation system. In this case, since TI
is in the harvest phase, it faces a relatively stable and less critical business environment. Thus,
its strategic planning is necessary only to effectively balance cash flows as a result of being in
a stable environment. Nevertheless, First of all, In order to achieve the objective, budgeting
should be the control tools in the company. Then, performance management is evaluated based
on its performance in achieving a short term objective and evaluation based on financial
criteria. To a lesser degree, Incentive is given regularly but not in at a significant amount since
the company doesn’t face a hard challenge.

Meanwhile, HP is in the Build phase which means that it faces more uncertainty in the business
environment and leads to the high risk. Likewise, strategic planning is the focus of the
management to survive the uncertain environment. In addition, Constant innovations is the
determination in the success of the company to lead the market hence infestation in research
and development are taking a significant portion of the company’s development. Budgeting is
becoming flexible to support the R&D since it is only used in facing massive business changes.
Therefore, performance management evaluation is based on non-financial criteria and long-
term achievement. Not to mention that incentive is also applied however not very often.

Since TI’s strategic planning focuses on related diversified firms and cost leadership, thus, as
a third party, we recommend the budgeting system should focus on marketing and R&D
functions and the reporting system should be more centralized and detailed while the
performance measurement and incentive compensation system should rely on the amount of
sales and cost reduction achievement. Meanwhile, Since HP’s strategic planning focuses on
the related diversified firms and product diversification, thus, as a third party, we recommend
the budgeting system that focus on R&D functions to invent new products, reporting system
should be decentralized than TI’s to give more possibilities to divisions to improve at their best.
Moreover, Incentive should be based on the productivity and creativity of each divisions and
amount of sales achieved by sales force.