Chapter 13 Controls for Diferentiated Strategies 597

Case 13-3 Texas Instruments and Hewlett-Packard Texas Instruments (TI) and Hewlett-Packard (HP) developed, manufactured, and sold high-technology electric and electronic products. Texas Instruments had three main lines of business in 1984: components, which included semi- conductor integrated circuits, semiconductor subassemblies, and electronic control devices; digital products, which included minicomputers, personal com- puters, scientific instruments, and calculators; and government electronics, which included radar systems, missile guidance and control systems, and in- frared surveillance systems. The three businesses generated 46 percent, 19 percent, and 24 percent, respectively, of TI'S sales in 1984. Hewlett-Packard operated in two main lines of business: compu.ter products, which included factory automation computers, engineering workstations, data terminals, per- sonal computers, and calculators; and electronic test and measurement sys- tems, which included instruments that were used to evaluate the operation of electrical equipment against standards, instruments that would measure and display electronic signals, voltmeters, and oscilloscopes. These businesses gen- erated 53 percent and 37 percent, respectively, of HP's 1984 sales. Summaly financial information for each company is presented in Exhibit 1.

Although Texas Instruments and Hewlett-Packard competed in similar industries, the strategies chosen by these two firms were very different. Exhibit 2 sun~nlarizes five major concepts related to the content of strategy for

EXHIBIT 1 Texas instruments Summal-y Financial 1980 1981 1982 1983 1984 Information Assets $2,414 $2,311 $2,631 $2,713 $3,423 ($ i n Millions) Equity 1 ,I 65 1,260 1,361 1,203 1,541

Sales 4,075 4,206 4,327 4,580 5,742

Operating profit 3 79 253 236 (288) 526 ROI 32.5940 20.1% 17.3% n.a. 34.1%

Hewlett-Packard

Assets Equity Sales

Operating profit 523 567 676 728 860 ROI 33.8% 30.1 % 28.8% 25.2% 24.2%

Somcc: Steven C.wheelrigh~. "Strategy, bManagomcnt, and Strategic Planning Appronchcs:' I~lterfaccs, January-Febnlary 1984.

Reprinted by permission of Steven C. Wheelright, "Strategy, Management, and Strategic Planning Approaches," Interfaces, fanuary-February 1984, pp. 19-33. Copyright 1984 by the Operations Research Society of America and The Institute of Management Sciences, 290 Westminster Street, Providence, Rhode Island 02903, USA.

598 Part Three Va,riations i n Management Control

EXHIBIT 2 Contrasting Strategies of TI and HP Texas instruments Hewlett-Packard

Business Strateqy Competitive advantage for large, Competitive advantage for selected standard markets based on - small markets based on unique, long-run cost position high-value/high-features products

Functional Strategy Marketing: High volume/low price High value/high price

Rapid growth Controlled growth Standard products

Manufacturing: Scale economies and learning curve Vertical integration Large, low-cost locations Process and product Cost driven Design to cost

Financial: Aggressive Higher debt fight ship

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)

both Texas Instruments and Hewlett-Packard. Perhaps the most significant distinction between TI and HP was their generic business and functional strategies (Exhibit 2). They pursued very different approaches. TI preferred to pursue competitive advantage based on larger, more standard markets and a long-term, low-cost position. HP, on the other hand, sought competitive advan- tage in selected smaller markets based on unique, high-value, high-feature products. The functional strategies used to support those desired competitive advantages also differed.

With regard to the product life cycle (Exhibit 3), TI favored early entry, fol- lowed by expansion and consolidation of its position, resulting in a dominant market share when the product matured. HP, on the other hand, tended to cre- ate new markets, but then exited (or introduced other new products) as cost- driven competitors entered and the market matured. I t is not surprising that the two firms viewed prices and costs, the third area, differently. TI empha- sized continual price cuts to parallel cost reduction in order to build volume and take advantage of shared experience and learning. HP, on the other hand, put less emphasis on manufacturing cost reductions and held prices longer so that profit margins expanded during the initial periods. The early returns gen- erated allowed early exit from the market with good returns on investment and provided funds for further product research and development.

A fourth concept that highlights their differences in strategy is the product process matrix, which matches the product life cycle with its production coun- terpart, the process life cycle. HP concentrated on more flexible production processes (such as job shop and batch operations) to meet the needs of its cus- tom and low-volume markets, while TI concentrated on more capital-intensive and cost-effective production processes (assembly lines and continuous flow operations) to supply its more standard, high-volume markets.

Chapter 1 3 Controls for Differentiated Strategies 599

EXHI BIT 3 Differences in Strategy between Texas Instruments and Wewlett-Paekard A TEXAS INSTRUMENTS

Product life cycle

Time 15me 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 it matured.

C Costs and Prices (Learning Curve) I3

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

E Product/Process Matrix F Standard Standard

Custom - High volume Custom - High volume J o b i h o p L l J o r ~

Continuous Continuous 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.

G Portfolio: Positioning and Resource Movement H

Annual growth rate

Hig Low Relative market share 1

Low High Relative market share

TI sought a balanced portfolio of businesses where mature, large businesses provide resources for young, high-growth businesses. HP sought all lligh-growth, high-margin businesses that met their own resource needs. largely on an individual basis.

600 Part Three Variations irz ~Vfunugement Cotztrol

A fifth concept, portfolio analysis, further highlights differences in the firms' strategies. TI looked for a portfolio that included low-growth businesses with dominant market shares to provide cash for a select group of high-growth businesses with lower market shares but with the prospect of becoming domi- nant, high-growth businesses, and eventually "cash cows." HP, on the other hand, wanted all high-growth businesses with dominant market shares, and to reallocate major resources only to fund new businesses. In fact, the tradi- tional solution to any profit problem a t HP had been new products and new businesses.

Given the differences in strategy between the two firms, what ~7ould you expect would be the differences between TI and HP in their pla~l~iing and con- trol systems: strategic planning systems; budgeting systems; reporting sys- tems; performance evaluatioxl systems; and incentive compensation systems?

Chapter 14 Service Orguczizutio~zs 647

Case 14-3 Harlan Foundation Harlan Foundation was created in 1953 under the terms of the will of Martin Harlan, a wealtlly Minneapolis benefactor. His bequest was approximately $3 million and its purpose was broadly stated: Income from the funds was to be used for the benefit of the people of Minneapolis and nearby communities.

In the next 35 years, the trustees developed a wide variety of services. These included three infant clinics, a center for the education of special needs chil- dren, three family counseling centers, a drug abuse program, a visiting nurses program, and a large rehabilitation facility. These services were provided from nine facilities, located in Minneapolis and surrounding cities. Harlan Foundation was affiliated with several national associations whose members provided similar services.

The foundation operated essentially on a break-even basis. A relatively small fraction of its revenue came from income earned on the principal of the Harlan bequest. Major sources of revenue were fees from clients, contributions, and grants from city, state, and federal governments.

Exhibit 1 is the most recent operating statement. Program expenses in- cluded all the expenses associated wit11 individual programs. Administration expenses included the costs of the central office, except for fund-raising

EXHIBIT 1 Revenues: Operating Fees from clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 91 7,862 Statement for Grants from government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,792,968 the Year Ended Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 683,702 June 30,1986 Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426,300

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues.

Expenses: Program expenses:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rehabilitation Counseling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infant clinics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Education

Drugabuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Visiting nurses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total program expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Support:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dues to national associations

Fund-raising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Totatsupport Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Netincome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

This case was prepared and is copyrighted by Robert N. Anthony, Harvard Business School.

648 Part Three Vuriatiorzs in hfa7tagement Control

expenses. Seventy percent of administration costs were for personnel costs. The staff members (excluding two senior officers) earned an average of $18,000 per year in salaries and fringe benefits.

In 1987, the foundation decided to undertake two additional activities. One was a summer camp, whose clients would be children with physical disabili- ties. The other was a seminar intended for managers in social service organi- zations. For both of these ventures, i t was necessary to establish the fee that should be charged.

Camp Harlan The camp, which was renamed Camp Harlan, was donated to the foundation in 1986 by the person who had owned it for many years and who decided to retire. The property consisted of 30 acres, with considerable frontage on a lake, and buildings that would house and feed some 60 campers a t a time. The plan was to operate the camp for eight weeks in the summer and to en- roll campers for either one or two weeks. The policy was to charge each camper a fee sufficient to cover the cost of operating the camp. Many campers would be unable to pay this fee, and financial aid would be provided for them. The financial aid would cover a part, or in some cases all, of the fee and would come from the general funds of the foundation or, i t was hoped, from a government grant.

As a basis for arriving a t the fee, Henly Coolidge, financial vice president of the foundation, obtained information on costs from the American Camping Associatio~x and from two camps in the vicinity. Although the camp could accommodate a t least 60 children, he decided to plan on only 50 a t a time in the first year, a total of 400 camper-weeks for the season. With assured financial aid, he believed there would be no difficulty in enrolling this number. His bud- get prepared on this basis is shown in Exhibit 2.

CooIidge discussed this budget with Sally Harris, president of the founda- tion. Harris agreed that it was appropriate to plan for 400 camper-weeks and also agreed that the budget estimates were reasonable. During this discussion, questions were raised about several items that were not in the budget.

The central office of the foundation would continue to plan the camp, do the necessary publicity, screen applications and make decisions on financial aid, pay bills, and do other hooldceeping and accounting work. There was no good way of estimating how many resources this work would require. Ten staff members worked in administration, and as a rough guess about half a person- year might be involved in these activities.

EXHIBIT 2 Staff salaries and benefits : . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,000 Budget for Camp Food ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,000 Harlan Operating supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000

Telephone and utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance 75,100

Rental of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 Contingency and miscellaneous (5%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,200 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $151,300

Chapter 14 Service Organizaliorzs 649

Tliere were no plans to hire an additional employee in the central office. The work load associated with other activities usually tapered off somewhat during the summel; and i t was believed that the staff could absorb the extra work.

At the camp itself, approximately four volunteers per week would help the paid staff. They would receive meals and lodging, but no pay. No allowance for the value of their services was included in the budget.

The budget did not include an amount for depreciation of the plant facilities. Lakefront property was valuable, and, if the camp and its buildings were sold to a developer, perliaps as much as $500,000 could be realized.

The Seminar The foundation planned to hold a one-day seminar in the fall of 1987 to discuss the effect on social service organizations of the income tax act passed in 1986 and other recent regulatory developments. (Although these organizations were exempt from income taxes, except on unrelated business income, recent legis- lation and regulations were expected to have an impact on contributions, in- vestment policy, and personnel policies, among other things.) The purposes of the seminar were partly to generate income and partly to provide a service for smaller welfare organizations.

In the spring of 1987, Harris approved the plans for this seminar. The fol- lowing information is extracted from a memorandum prepared by Coolidge a t that time.

It is estimated that there will be 30 participants in the seminar. The seminar will be held at a local hotel, and the hotel will charge $200 for

rental of the room and $20 per person for meals and refreshments. Audiovisual equipment will be rented a t a cost of $100. There will be two instructors, and each will be paid a fee of $500. Printing and mailing of promotional material wiU cost $900.

Each participant will be given a notebook containing relevant material. Each notebook will cost $10 to prepare, and 60 copies of the notebook will be printed.

Coolidge will preside, and one Harlan staff member will be present a t the seminar. The hotel will charge for their meals and for the meals of the two instructors.

Other incidental out-of-pocket expenses are estimated to be $200. Fees charged for one-day seminars in the area range from $50 to $495. The

$50 fee excluded meals and was charged by a brokerage firm that probably viewed the seminar as generating customer goodwill. The $495 fee was charged by several national organizations that run hundreds of seminars annually throughout the United States. A number of one-day seminars are offered in the Minneapolis area a t a fee in the range of $150 to $250, including a meal.

Except for the number of participants, the above estimates were-based on reliable information and were accepted by Harris.

1. What weekly fee should be charged for campers? 2. Assuming a See of $100, what is the break-even point of the seminar? 3. What fee hhould be charged for the seminar?