Texas Instruments

and Hewlett-Packard
Agida * Dantes * de Leon * Estanislao * Lope * Ronquillo
Case Context
 Texas Instrument (TI) and Hewlett
Packard (HP) are two companies famous
for introducing electric and electronic
products. Although competing in similar
industries, their strategies and
management control are very much
different.
Point of View
 The group will be taking on the point of
view of a “Third Party Observer/Analyst” in
order to take away any bias towards any
of the two companies which will not help
us in analyzing the case.
Problem Definition
 Given the differences in strategy between the
two firms, what would you expect would be the
differences between TI and HP in their planning
and control systems; strategic planning systems;
budgeting systems; reporting systems;
performance evaluation systems; and incentive
compensations systems?
 What are the management controls that befit
each company’s strategies?
Framework for Analysis
 Identify and contrast the business and functional
strategies of each firm
 Identify and discuss each firm’s “tendencies” in
terms of:
 Planning and control systems
 Strategic planning systems
 Budgeting systems
 Reporting systems
 Performance evaluation systems
 Incentive compensation systems
Framework for Analysis
 Compare the expected “tendencies” to the
actual controls used by each firm during
the time period 1980 – 1985
 Formulate conclusion and
recommendation
Analysis

Build Harvest
Differentiation Low-cost
Hewlett-Packard Texas Instruments
 Analysis Texas Instruments Hewlett-Packard
Business Strategy
Competitive advantage for large, standard markets Competitive advantages for selected small
based on long-run cost position markets based on unique, high
value/high features products
Functional Strategy
Marketing High volume/low price High value/high price
Rapid Growth Controlled growth
Standard Products Custom features
Manufacturing Scale economies and learning curve Delivery and quality-driven
Vertical integration Limited vertical integration
Large, low-cost locations Small, attractive locations
R&D Process and Product Product only
Cost driven Features and quality driven
Design to cost Design to performance
Financial Aggressive Conservative
Higher debt No debt
Tight ship Margin of safety (slack)
Analysis
 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 it when matured.

Product Life Cycle

TEXAS INSTRUMENTS HEWLETT-PACKARD

Stay Exit

Volume
Volume

Enter Create

Time Time
Analysis
 TI emphasized aggressive cost improvements, with equally aggressive price cuts.
 HP desired cost improvements but sought higher margins and held prices longer.

Costs and Prices (Learning Curve)

TEXAS INSTRUMENTS HEWLETT-PACKARD

$/Unit
$/Unit

Price

Price
Cost Cost

Cumulative Cumulative
Volume Volume
 Analysis
 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.
Product/Process Matrix
TEXAS INSTRUMENTS HEWLETT-PACKARD
Standard Standard
Custom High volume Custom High volume
Job shop Job shop

Continuous Continuous
Analysis
 TI sought a balanced portfolio of business where mature, large businesses provide
resources for young, high-growth businesses.
 HP sought all high-growth, high-margin businesses that met their own resource needs
largely on an individual navy.
Portfolio: Positioning and Resource Movement
TEXAS INSTRUMENTS HEWLETT-PACKARD

High (New unique

products)

Annual
growth
rate Annual
growth
rate

High Relative Market Share Low Low Relative Market Share High
Analysis Implications for Strategic Planning Process

Criteria Hewlett Packard Texas Instrument

Importance of strategic Relatively high importance due to
planning uncertainty of environment in a “build”
strategy
Formalization of capital Less formal DCF Analysis; longer
expenditure decisions payback
Less reliable due to uncertainty
Relatively low, Planning is lax
compared to HP due to stable
environment of “harvest” strategy
More formal DCF Analysis; shorter
payback
More reliable because of stable
environment

Capital expenditure More emphasis on nonfinancial data More emphasis on financial data (cost
evaluation criteria (market share, efficient use of R&D efficiency; straight cash on cash
dollars, etc.) to encourage development of incremental return); required earnings
new products; products are on a growth rate are high since it is operating in a
stage mature industry

Discount rates Relatively low to motivate new investment Relatively high to motivate exceptional
ideas returns
Capital investment More subjective and qualitative More objective and quantitative
analysis
Project approval at the Relatively high Relatively low
business unit level
Analysis Implications for Budgeting
Criteria Hewlett Packard Texas Instrument

Role of the budget Short-term planning tool Control tool

Business unit manager’s
influence in preparing the
budget
Business unit’s managers operate in a Business unit’s managers have
fast changing environment and have a relatively low influence in preparing the
better knowledge of these changes budget but they need to start from
therefore they greatly influence the scratch every year and justify the budget
budget preparation thoroughly.

Revisions to the budget duringBudget is not constrained for a certain Budget is too difficult to revise. It is set
the year year because the company is from the start and needs to be spent
investing primarily in R&D. wisely to reflect efficiency in operations.

“Control limit” used on periodicHP is also concentrated on more The control limit used is relatively low.
evaluation against the budget flexible production processes and this
will imply relatively high control limit.

Importance attached to meeting Meeting the budget is not an issue Meeting the budget is very important as
the budget with HP since budget might be revised this will measure the company’s
during the fiscal year as it engaged efficiency in the resource allocation
with R&D activities process.
 Analysis Implications for Reporting

Criteria Hewlett Packard Texas Instruments

Frequency of informal reporting
and contact with superiors
Concentrated more on reporting the policy Concentrated more on reporting the
issue as the company is more involved in operating issue as the company major
developing new products. It Reporting activities are in operations (manufacturing
operating issues is less frequent. and assembly). Reporting policy issues is
less frequent.

Frequency of feedback from
superiors on actual performance
versus the budget
Frequency of feedback or reports from
superiors on actual performance versus
the budget is less often
Progress was reviewed at successively
higher levels in the organization in both
modes. Monthly status reports of each
tactical action program were distributed at
all levels.
 Analysis Implications for Incentive Compensation
and Performance Evaluation
Criteria Build - HP
Percent compensation as bonus Relatively high
The company gives special incentives to
innovations/discoveries and the successful
market acceptance of these new products.
Relying greatly on R&D puts a lot of uncertainty
on the company, thus management expects
higher compensation. “high risk, high returns”
Harvest - TI
Relatively low
The company’s profit margin may be low, but
sales, in general is consistent. This entails lower
risks thus, special compensations are limited.
Management are likely to be less reliant on
bonuses and more on regular salaries and
compensation

Bonus criteria More emphasis on non-financial criteria More emphasis on financial criteria
Market development, New product development, Short-term parameters such as cost control,
and HR development are given much operating profit and cash flow, and ROA or EVA
importance since target sales are very dynamic promote efficiency and productivity. The harvest
and are highly dependent on new innovations. strategy’s goal is to be consistently cost effective
to complete at lower prices. These criteria steers
management towards the same direction.

Bonus determination approach More subjective More formula-based

Such criteria are difficult to measure objectively The criteria is very applicable to day-to-day
since the effects are long-term and not readily operations and can have engineered
realized. MDev and NPDev takes a long time measurements.

Frequency of bonus payment Less frequent More frequent

Bonuses are not to be expected as regularly This encourages focus on day-to-day operations
since the nature of assessment is long-run. and realization of short-term goals. Time bound
Higher percentages are of course expected. (monthly, quarterly, annual) targets are often
rewarded consistently
Conclusions
 The HP (“build”) has a more flexible but higher risk strategy. They require
constant innovations to lead the market and these new products demand a
premium price. Budget flexible and there is greater dependent in constant
updates and reporting. Management performance is measured on long-
term, non-financial parameters and they are motivated by higher, but less
frequent, special compensations.

 TI (“harvest”) has a more structured, lower risk strategy. They require

efficiency and productivity to keep maintain low cost and sell at low prices.
Budgets are very important forms of control and actual performance are
expected to adhere to the budget. Management performance is measured
on short-term, financial parameter and they are motivated by more frequent
but, relatively lower, special compensations
Conclusions
BUILD STRATEGY
 Planning and control systems encourage the development of new products
 Strategic planning systems are more critical to survive the uncertain environment
 Budgeting systems are used as short term planning tools that are flexible to adapt to a fast-changing
environment
 Reporting systems are concentrated on policy issues
 Performance evaluation systems are focused on non-financial criteria.
 Incentive compensations systems highlight the uncertainty in the environment; thus the higher risk
involved translates to higher compensation that are less frequent.

HARVEST STRATEGY
 Planning and control systems encourage the driving down of costs (minimize inventory cost and benefit
from scale economies)
 Strategic planning systems are less critical and necessary only to effectively balance cash flows as a
result of being in a stable environment
 Budgeting systems are used as strict control tools set at the beginning of the year to measure efficiency
at the end of the year
 Reporting systems are concentrated on operating issues.
 Performance evaluation systems are focused on financial criteria
 Incentive compensations systems are formula based and have engineered measurements based on day-
to-day operations. Percent compensation are relatively lower but more frequent.
Recommendations
As a third party observer, we recommend
firms to use the management control tools
above as they correspond to a build or
harvest strategy. The use of these expected
control systems are crucial for the strategies
of HP and TI to work and for them to
achieve their goals
Thank You!!!