Emerson Electric Company Case in Management Contro l Control ClickStudy to edit Master subtitle Submitted By: style Harold Barlan Euniz Sunga Jackielou Torres
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I. Case Background •
Company Background, Brands, Management & Divisions 3/17/12
COMPANY BACKGROUND •
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Emerson Electric Company was founded in 1890 as a manufacturer of motors & fans. In 1993 the company reported a profit of $708M out of $8.2B sales and additional $2B unconsolidated sales in international joint ventures. Since 1956, Emerson’s annual return to shareholders has averaged 18 percent.
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BRANDS •
Emerson is a major domestic manufacturer.. Brand manufacturer Brand names na mes include:
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electrical
MANAGEMENT •
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In 1973, Charles F. Knight was elected CEO. Under Knight’s leadership, Emerson analyzed historical records & data on “peer companies.” From this analysis they have concluded that the company needed to achieve growth & strong financial results. Management of the company is directed by the Office of the Chief Executive (OCE), which consists of the CEO, the President, two Vice Chairmen, 7 business leaders and 3 corporate officers. The OCE meets 10 to 12 times a year to review division performance. 3/17/12
DIVISIONS •
In 1990, Emerson organized its divisions into eight business segments: ü
Fractional horsepower electric motors
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Industrial motors
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Tools
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Industrial machinery and components
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Components for heating and air conditioning conditio ning
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Process control equipment
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Appliance components Electronics and computer support products and systems.
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II. Emerson Strategy •
Best Cost Producer Strategy 3/17/12
BEST COST PRODUCER STRATEGY •
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To be globally competitive Emerson changed its 20-year strategy of being the “low cost producer” to being the “best cost producer.” producer.” In recent years, the Best Cost Producer Strategy has been fundamental to Emerson’s profitability and its success in global markets. Developed in the early 1980s, the strategy consists of six elements: ü
Commitment to total quality and customer satisfaction.
Knowledge of the competition and the basis on which they compete. 3/17/12 ü
BEST COST PRODUCER STRATEGY ü
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The Best Cost Producer Strategy begins with recognition of customers’ expectations for quality quali ty.. They use the products and the cost structure of their competitors compe titors as the measures against which they assess their own performance. Commitment to capital expenditures is crucial: it’s the only way to improve process technology, increase productivity, gain product leadership, and achieve critical mass 3/17/12
BEST COST PRODUCER STRATEGY ü
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The Best Cost Producer Strategy begins with recognition of customers’ expectations for quality quali ty.. They use the products and the cost structure of their competitors compe titors as the measures against which they assess their own performance. Commitment to capital expenditures is crucial: it’s the only way to improve process technology, increase productivity, gain product leadership, and achieve critical mass 3/17/12
Emerson should be careful on taking the “second-mover advantage”
RECO: MARKET ENTRY ENTRY STRATEGY •
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Studies show that in most cases, being first to the market provides a significant and sustained market-share advantage over later entrants. Still, later l ater entrants entrants can succeed by adopting distinctive positioning and marketing strategies. Pioneers in most industries, once they have reached the status of incumbent, are powerful. Sometimes, however, they get complacent or are not in a position to cater to the growing or shifting demands of the marketplace. In-line with the “Best Cost Producer Strategy,” we recommend that Emerson should also implement the following actions: ü
Offer a more superior level of customer service.
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Offer new technology to provide similar or better service at a lower cost.
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Develop a new way to access the market, with an innovative distribution strategy.
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Pricing aggressively, targeting selected segments by taking advantage of the incumbent's tendency to average pricing across all segments.
3/17/12 Whether a late entrant or a pioneer seeking to foil newcomers, it
III. Emerson Planning Process •
The Value Chart, Sales Gap Chart & 4:The 5-Backby-5-Forward by-5-F orward Chart Char t 3/17/12
PLANNING PROCES PROCESS S •
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At Emerson, rigorous planning has been essential to the company’s success since the 1950s. Each fiscal year, from November through July, selected corporate officers meet with the management of every division for a one- or two3/17/12 day planning conference,
“Best Cost Strategy ”
PLANNING PROCES PROCESS S •
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After review & discussion of the charts, top management listens to division’s view of customers, markets, plans for new products, analyses of competition & reviews of cost reductions, quality, capacity, productivity, inventory levels & compensation. Late in the fiscal year the division meet with top mgt. To present detailed forecast for the coming year & conduct review of current curr ent year’s performance p erformance vs. Budget. 3/17/12
VALUE MEASUREMENT CHART •
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Compares actual performance 5 fiscal years ago, the curr current ent fiscal year’s expected results results and with long-range forecast for the 5th year The chart contains: ü
Capital investment
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Net opera operating ting profit after tax (NOP (NOPA AT)
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Return on average operating capital
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Economic Profit (EVA)
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Exhibit 1: Value Measurement Chart
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Chart
Goal: To determine the extent to which a division’s ROTC 3/17/12 exceeds Emerson’s cost of capital.
Exhibit 2: Sales Gap Chart
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Exhibit 3: Sales Gap Line Chart
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SALES GAP CHART &LINE CHART •
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The sales gap chart and sales gap line chart display current sales and make projections for the next five years based on an analysis of the sources of growth: ü
The market’s natural growth rate
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The division’s change in market penetration
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Price changes
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New products
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Product line extensions
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International growth
Should the projected growth not meet or exceed
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5-YEAR-BACK-BY-5-YEARFORWARD CHART •
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Compares detailed data for current year with 5 prior years and 5 forecasted years Strong points: ü
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Used to detect trends Managers can plan actions for unfavorable trends
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Forward Chart
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IV. MCS Elements •
Structure, Criteria, Reporting & Incentives 3/17/12
MCS: STRUCTUR STRUCTURE E •
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INVESTMENT CENTER – return on total capital (ROTC) (ROTC) targets for divisions Office of the Chief Executive (OCE) – meets 10-12 times a year to review division performance and discuss issues ü
CEO
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2 Vice Chairman
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7 Business Leaders
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3 Corporate Officers
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MCS: STRUCTUR STRUCTURE E •
Business Divisions ü
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8 Business Segments
Division Board of Directors – meets monthly to review and monitor performance ü
Chairman (member of OCE)
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Division President
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Division’s Key Managers
RECOMMENDATION: Aside from preparing and submitting different charts for planning, division heads should also come up proposed activities/projects to be 3/17/12with
WHICH PERFORMANCE IS APPRAISED - POR
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PRESIDENT’S OPERA PRESIDENT’S OPERATING TING REPORT •
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First column shows actual results for the completed quarters or expected amounts for the current & future quarters Second column reports the “prior expected” results. results. So that each month’s updated expectations can be compared with prior month’s mont h’s POR. Forecast column reflects the plan agreed by the division president and top management at the start of the fiscal year. year. 3/17/12
MCS: REPORTING & REVIEW •
POR is submitted monthly to OCE ü
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Compare actual & expected results with forecast Compare current years actual & expected results with last years actual performance
Quarterly, top management and division president and his/her CFO to review the most recent POR ü
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Deviations from forecast gets close attention When results and expectations are weak (column 1 & 2), a shift to contingency plan is ordered
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MCS: REWARDS & INCENTIVES •
Base salary plus “extra salary” based on division performance
Measurable objectives:
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Primary sales
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Profits
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Return on capital capit al
“Extra salary” is computed using a multiplier ranging from 0.35 to 2.0 ü
Better performance, higher multiplier
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MCS: REWARDS & INCENTIVES •
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Other factors in computing compensation ü
Inventory turnover
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Int’l sales
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New Product introduction
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Accounts receivable
Stock options & 5 year performance share plan for top executives
RECOMMENDATION: Set a standard on how the multiplier is assigned. For 3/17/12
example: 0.35 if target is met, 1 if target is example:
Emerson’s Strategic Planning Process •
Summary 3/17/12
SUMMARY
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