Purity Steel Corporation

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  • Topic: Rate of return, Earnings before interest and taxes, Investment
  • Pages : 39 (3853 words )
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  • Published : November 13, 2012
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Harvard Business School

9-197-082

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Rev. February 15, 2000

Purity Steel Corporation, 1995

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"I’m no expert in high finance," said Larry Hoffman, manager of the Denver branch for the Warehouse Sales Division of Purity Steel Corporation, to Harold Higgins, general manager of the division, "so it didn't occur to me that I might be better off by leasing my new warehouse instead of owning it. But I was talking to Jack Dorenbush over in Omaha the other day and he said that he's getting a lot better return on the investment in his district because he's in a leased building. I'm sure that the incentive compensation plan you put in last year is fair, but I didn't know whether it adjusted automatically for the difference between owning and leasing and I just thought I'd raise the question. There's still time to try to find someone to take over my construction contract and then lease the building to me when it's finished, if you think that's what I ought to do." Purity Steel Corporation was an integrated steel producer with annual sales of about $4.5 billion in 1995. The Warehouse Sales Division was an autonomous unit that operated 21 field warehouses throughout the United States. Total sales of the division were approximately $225 million in 1995, of which roughly half represented steel products (rod, bar, wire, tube, sheet, and plate) purchased from Purity's Mill Products Division. The balance of the Warehouse Sales Division volume was copper, brass, and aluminum products purchased from large producers of those metals. The Warehouse Sales Division competed with other producer-affiliated and independent steel warehousing companies and purchased its steel requirements from the Mill Products Division at the same prices paid by outside purchasers.

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Harold Higgins was appointed general manager of the Warehouse Sales Division in mid1994, after spending 12 years in the sales function with the Mill Products Division. Subject only to the approval of his annual profit plan and proposed capital expenditures by corporate headquarters, Higgins was given full authority for his division's operations, and was charged with the responsibility to "make the division grow, both in sales volume and in the rate of return on its investment." Prior to his arrival at division headquarters in St. Louis, the Warehouse Sales Division had been operated in a centralized manner; all purchase orders had been issued by division headquarters, and most other operating decisions at any particular warehouse had required prior divisional approval. Higgins decided to decentralize the management of his division by making each branch (warehouse) manager responsible for the division's activities in his or her geographic area. In Higgins's opinion, one of the key features of his decentralization policy was an incentive compensation plan announced in late 1994 to become effective January 1, 1995. The description of the plan, as presented to the branch managers, is reproduced in Exhibits 1, 2, and 3. Monthly operating statements had been prepared for each warehouse for many years; implementing the new plan

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Doctoral Candidate Antonio Dávila and Professor Robert Simons prepared this updated case based on an earlier version. Case material of the Harvard Graduate School of Business Administration is prepared as a basis for class discussion and not to illustrate either effective or ineffective handling of administrative problems. Copyright © 1997 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

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