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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. It 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 i t 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 at 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 pl a~l ~i i ng 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 at the fee, Henly Coolidge, financial vice president of
the foundation, obtained information on costs from the American Camping
Associatio~x and from two camps i n the vicinity. Although the camp could
accommodate at least 60 children, he decided to plan on only 50 at 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 t he
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 i n 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 at 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 t hat 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 at 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?