HCC Industries case

1. Evaluate the decision to use MPS targets instead of “stretch” targets

- Reasons for the change in philosophy
- Reasons for MPS failure (and possible improvements)

The stretch target is an aggressive target would motivate the managers to perform at their
highest possible levels. However, it was proved that it doesn’t work every time (for instance,
in case of small companies). In case of HCC Industries, we notice a success in some divisions
but for some teams stretch targets do not work. Indeed, stretch targets are too optimistic. In
addition, managers have bonus paid on annual performance. All these reasons push to a
change in philosophy.

The MPS is the Minimum Performance Standard. This change of philosophy implies that
managers need to submit realistic and achievable budget. If a manager has a wrong estimated
budget, it can cost him his job. In addition, managers are worried about the bonus. The goal is
to set a performance target.

In the case of HCC Industries, managers did their budget in such a way to have bonus. They
submitted realistic budget without plan a big performance of their divisions. Finally, corporate
managers change the budget of managers to predict more performance. For the division which
did a high expectation of profit, it was rejected too. To conclude, none of divisions achieved
all its targets.

Corporate managers have always the last word. However, they do not manage divisions, so
they are not operational managers. We can suppose that they do not understand problematics
of divisions. To resolve this issue, corporate managers should be train by division manager to
understand all the division’s process.

At HCC Industries, the main problem is the lack of relevant and accurate market information.
Therefore, the second solution may be investing in the creation of a good marketing team or
hiring a marketing agency that would conduct good marketing research, but this would
require large expenses

2. How would you treat uncontrollable influences? If a mayor government contract

was canceled after a division’s performance targets were set that adversely
affected revenues by 20%, what would you do? At the extreme: (i) fire the
manager; (ii) provide incentive compensation.

In our point of view, it is not necessary to fire the manager. Indeed, if the company fired the
manager, the company needs to hire a new manager. In the case of a recruiting an external
manager, this manager won’t know the company and will have difficulties to manage the
division. He won’t be efficient the first year. The new manager needs to have time to
understand the business and to manage efficiently. In this theory, the company will not
perform the budget.
To conclude, we think it is better to provide incentive compensation. In effect, with more
money the manager will work more for the company and will find other contracts to
compensate the loss.

3. Should HCC managers have expected that the MPS target setting philosophy
would be equally effective in all four operating divisions described? Point out the
peculiar aspects in each division.

Like for stretch targets, the new MPS budget system has both advantages and
disadvantages, which don’t have effect on each division to the same extent and thus result
in the difference of the effectiveness of the MPS target in all 4 divisions. HCC managers
have not expected that this new philosophy would be equally effective.

In the division Hermetic Seal, Mike Pelta wants to achieve his goal to feel proud. To
achieve the goal and get a large bonus, Mike did a conservative budget He deliberately
lowered the budget target that he usually compiled in order to ease the pressure to achieve
goals, so at the same time he lowered the motivation to fight for more difficult goals.
Mike felt confidence to achieve targets between 95% and 98%. In the other side, the COO
and the CFO were very confident. Since Hermetic Seal's clients were mainly military
customers, respectively, their contacts and sales did not change significantly depending on
economic fluctuations and were relatively stable. Therefore, we can conclude that the
MPS budget system is relatively suitable for this division

The division Glasseal is sensible to the change of the market. For example, in 1987,
Glasseal took shares of one of the competitors, so it increases sales. However, for the
fourth quarter of 1987 sales decreased. Carl Kalish, the manager, considered this but not
the corporate managers. Targets were modified by corporate managers and the budget
target has become challenging but quite achievable. And Carl Kalish felt confidence to
achieve budget targets around 90%. That is why the MPS budget system is definitely
suitable.

Lou, the Sealtron manager, was upset with the MPS budget system. However the
performance of the division has improved under the new system and achieved most
budgeting targets that were considered as impossible when making the budget and even
exceeded some of them.

MPS budget system encourages staff to be more efficient. whereas with a stretch target the
staff of the division used to be lazy, when they didn’t have to achieve the budget

lan Wong, the general manager at Hermetite, submitted a high budget. Corporate
managers did not accept it and reduce previsions. After this reduce, Alan Wong thinks that
probability to reach the budget goal is 80% and only 5% for the MPS goal.

Unlike the other three units that respond positively to MPS budget system, for Hermetite
this is death. The division had poor financial performance during its growth period and
 needed to focus more on long-term development, so it was unfair and wrong to judge and
evaluate Hermetite's performance using financial criteria.

4. Why do managers not play it straight in setting budget targets?

Managers of the divisions are principally interested by outperform the targets. In this case, it’s
not interesting for them to submit the real forecast budget. In addition, if they outperform the
budget, they will have a bonus. Another thing is that division managers are worried to lose
their job if they don’t reach the target.