1. Prepare the Report that you feel Amy Shultz should present to Mr.Park.
2. Put yourself in the position of the following six managers: general manager(EM); marketing manager (EM); manufacturing manager (EM); general manager (EI); marketing manager (EI); manufacturing manager (EI). These six managers compete for a share in the company’s bonus pool. For each of the six, how would you make a case for your obtaining a share of the bonus pool? Six managers, three from the EM division and three from the EI division compete for a share in the company’s bonus pool. For the purpose of this analysis, we take into account different variances within each division,
From the EM side, the General Manager could argue that his business unit must without a doubt follow the strategy of low cost, as he is dealing with a mature product. Because of this, he lowered his selling price compared to his competition by $ 10, resulting in a $ 1.4MM profit loss. However, he can strengthen his position by saying that thanks to his lower price, he was able to penetrate the market even more, achieving an additional $ 2.6MM in profit from changes in market share. Furthermore, he can argue that the lower price also got him an increase in volume, which earned him $ 679k more in profits. Clearly, the general manager’s decision to lower his selling price was more than beneficial for his business unit.
The Marketing Manager would argue that thanks to his efforts, he was able to go from a 10% market share to a 16% market share, becoming partially responsible for the additional $ 2.6MM in profits. Although industry demand affected the division negatively, losing the division $ 724k, the positive effects of the increased sales were advantageous for the division. Furthermore, the Marketing Manager can say he is partially responsible for the savings in marketing fixed costs for the company, amounting to $ 416k.
The Manufacturing Manager for the division must defend his increase in cost from $ 20 to $ 21. His argument can be perhaps that he was focusing more on quality of product, and that because his product was now of better quality he also is partially responsible for the increase in sales volume. He can also say that he is partially responsible for saving the company $ 342k in fixed manufacturing costs.
From the EI General Manager’s point of view, the fact was that he was able to sell his product at a much higher price, earning his division an additional $ 1.6MM in profits. Although unfortunately he lost $ 689k from a lower sales volume, he clearly made it up to his division by earning them $ 6.9MM from market share changes, and an extra $ 4.9MM from changes in industry demand. As opposed to the EM division, the EI Division strategy must be one that follows differentiation and that focuses on building and penetrating market share in a fast growing industry.
EI’s Marketing Manager can argue that thanks to his efforts, he was able to end the year with a 9% market share. Despite the fact that this is a lower percentage than what was budgeted, the Marketing Manager can argue that the size of the market is growing by the minute, therefore defending his 9% and proving that he earned $ 6.9MM from being able to own a larger piece of the pie (or the market). Because industry demand for the product is also increasing, the product is hot, a factor that also allowed his division to sell above standard prices. Like the EM Marketing Manager, he can finally also argue he is partially responsible for the important savings in fixed marketing expenses.
The Manufacturing Manager for the EI division can claim that like the EM manager, he was also partially responsible for the savings in fixed manufacturing costs. Because his division is focusing on a differentiation strategy, he could claim that the increase in variable cost per unit comes from value-added features that will allow the company to have a better product than its competitors.
3. As Mr. Park, how would you feel about the 1997 performance of each of the six managers who are competing for a share of the bonus pool? Taking into account the fact that the EM business is a “Harvest” business dealing with a mature product, Mr. Park should seriously consider getting rid of the division by slowly discontinuing the product, as it is performing worse than budget and losing $ 4MM in profits for the company as a whole. If Mr. Park decides to maintain the division, the best way for it to compete will be by following a low cost strategy. Based on the characteristics of a “Harvest” business, EM managers should be strictly held to budget, and total compensation should be based more on base salary and less on performance measures.
In analyzing each manager’s performance, Mr. Park should feel positively about granting the bonuses to both the Marketing Manager and the General Manager, but not the Manufacturing Manager, as his variable costs per product increased, going against the low cost strategy discussed. In terms of the EI division, this is a high potential market segment that is growing exponentially and the company is doing well in this business. This division follows a “Build” strategy and therefore he should be more flexible with his managers, acknowledging that their strategy of differentiation and growth is risky. These managers should be evaluated less according to budget and more according to long term criteria such as R&D spending, product development, and market development.
Manager salaries should be more based on performance bonuses and less on base pay so they are more willing to take risks in their strategy. In analyzing each manager’s performance, Mr. Park should feel positively about granting the bonuses to the Marketing Manager, who had a positive variance for the department in terms of market share (aside from industry demand factors). Similarly, the Manufacturing Manager increased his variable costs by a large percent, but this could be defendable from the point of view of creating a better and more differentiated product. However, Mr. Park should feel negatively about the General Manager, since he could have offered the product at a slightly lower price and attained more sales volume and advantages from product mix as well.