1. Evaluate the decision to use “minimum performance standard “ (MPS) targets instead of “stretch” targets. We evaluate the decision to use “minimum performance standard” targets by looking at how good this new target system achieves the four purposes of planning and budgeting processes. First of all, planning and budgeting processes have to enhance management control. Derived from the case, we think corporate managers have too much control on the targets. General managers give corporate managers an estimate of the targets they can achieve but in all the divisions, targets were adjusted. The CEO always has the last call on the targets and in the case of Sealtron we see that this isn’t good. No one believes Sealtron can achieve a PBT of 1milion $ and still the CEO wants that target. For the general manager of Sealtron this was very discouraging. So indeed, management control on targets has increased but maybe too much. On the other hand, division managers now have more control on the bonus pool, they can decide which subordinates share in the bonus pool. That isn’t good either because of the grade of subjectivity. If you’re not in good graces with the general manager, you will not achieve any bonuses. Bonuses are not based on how good you actually work but on how good the general manager believes you work. So maybe the control on targets has to be reduced a little bit and the control on the bonus pool has to be made more objective. Secondly, the planning and budgeting processes have to engage in long(er)-term thinking. In the system of “stretch” targets, some divisions achieved their goals, some not but the company as a whole was consistently missing its targets. In the MPS system they want to improve this. The problem however with the MPS system is that there is too much focus on operational planning, targets are set on short term. Targets are the main focus of the company, even if you have to take measures that are disadvantageous towards the future. For example, in the Sealtron division the general manager hired some people that he thought would be useful for the company on the long term. But because the main focus lays on achieving the targets, Lou Palamara was afraid that he had to lay off some people that he will likely need in the future. So the MPS system still supports rather the short term, there is no engagement in long-term thinking. Then the third purpose is to achieve coordination. The purpose of the company was to create a bottom-up approach. In this approach division managers prepare the budgets and then forward them to the corporate managers for review and approval. Targets that are provided by the division managers tend to be more accurate and have a positive impact on employee morale because they know they can achieve the targets. They also get the feeling of autonomy. In the HCC case however, the implementation of the bottom-up approach goes wrong. Division managers prepare the budgets and feel good about it but in each division the corporate managers adjust the budgets dramatically. The way in which the corporate managers change the budgets is perceived as dictatorial. No general manager feels confident with the new adjusted budgets. And as said before, even some corporate managers doubt whether the proposed budgets are feasible. So the dictatorial adjustments from the CEO are rather perceived as a top-down approach, in which budgets are prepared by corporate managers and imposed on the lower managers. The last purpose of planning and budgeting processes is to establish “challenging-but-achievable” performance targets. In the “stretch” targets system, targets are perceived as “not unreachable, just tough”. The intended probability of achievement was around 75 to 80%. This is just slight below the desired level (80-90%). In the MPS system, the probability of budget achievement was above the desired level (Hermetic Seal and Glasseal) but in the case of Sealtron the probability of...
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