Enager Industries
Case 22-4 Enager Industries, Inc
Case Background
Enager Industries, Inc. was a relatively young company whom manufactured and produced products/services within three divisions- Consumer Products, Industrial Products and Professional Services. Consumer Products, the oldest among the three divisions in Enager, designed, manufactured and marketed a line of houseware items. Industrial Products built one –of –a– kind machine tools to customer specifications. Professional Services, the newest among the three, provided several kinds of engineering services and this division had grown rapidly because of its capability to perform “environmental impact” studies . At the urging of CFO Henry Hubbard, Enager’s President, Carl Randall, had decided to begin treating each division as an investment center, so as to be able to relate each division’s profit to the assets the division used to generate it profits. However, several issues arose regarding this performance evaluation method and other management control choices. First of all, profitable new project at Consumer Products Division, whose return was 13% calculated from Exhibit 3, could not get approved from upper management because it could not reach the pre-determined universal target return of at least 15 percent, even if all the divisions had completely different line of business. This could potentially discourage product development managers’ incentive to engage in new projects. More importantly, the company could miss out the opportunity on new products in the long-run, although it might not have a large return right away in the short-run.
Secondly, the president of the company, Carl Randall, was both puzzled and disappointed at the discrepancies among the performance evaluation parameters of the company in 1997. Both ROA and gross return dropped from 1996, while return on sales and return on owners’ equity increased. There were also discrepancies across different divisions, as Professional Service easily
Case Background
Enager Industries, Inc. was a relatively young company whom manufactured and produced products/services within three divisions- Consumer Products, Industrial Products and Professional Services. Consumer Products, the oldest among the three divisions in Enager, designed, manufactured and marketed a line of houseware items. Industrial Products built one –of –a– kind machine tools to customer specifications. Professional Services, the newest among the three, provided several kinds of engineering services and this division had grown rapidly because of its capability to perform “environmental impact” studies . At the urging of CFO Henry Hubbard, Enager’s President, Carl Randall, had decided to begin treating each division as an investment center, so as to be able to relate each division’s profit to the assets the division used to generate it profits. However, several issues arose regarding this performance evaluation method and other management control choices. First of all, profitable new project at Consumer Products Division, whose return was 13% calculated from Exhibit 3, could not get approved from upper management because it could not reach the pre-determined universal target return of at least 15 percent, even if all the divisions had completely different line of business. This could potentially discourage product development managers’ incentive to engage in new projects. More importantly, the company could miss out the opportunity on new products in the long-run, although it might not have a large return right away in the short-run.
Secondly, the president of the company, Carl Randall, was both puzzled and disappointed at the discrepancies among the performance evaluation parameters of the company in 1997. Both ROA and gross return dropped from 1996, while return on sales and return on owners’ equity increased. There were also discrepancies across different divisions, as Professional Service easily