1. Introduction
Galvor had been an independent company in the electronic industry of electronic measuring and test equipment since 1946, under the management of Mr. Latour, who was its founder and president. In 1974, Galvor was sold to Universal Electric (UE). Mr. Latour then became the chairman of the board of Galvor and Mr. Hennessy, from the UE, was deployed as Galvor’s managing director. As parts of the transformation process from a small independent company to a part of a multinational corporation (MNC), Galvor had to change its planning and control system to comply with UE.
2. Planning and control system for Galvor as an independent company:
The essential purpose of a company’s planning and control system is to make managers think long-term strategically, to provide a framework for budgeting, to allocate resources, to facilitate communication and coordination among different departments, and to evaluate managers’ performance. For an independent Galvor company, top management’s needs were quite simple. Management was, in essence, a personal thing. Mr. Latour, was intimately familiar with most aspects of the business, such as production, marketing. He would handle all financial matters, even routine jobs, make pricing decisions, and exercise overall cost control. Moreover, as a founder and owner of the company, he had the motivation to work hard and think long term in the company best interest. Besides, in the small Galvor where there were relatively few employees and the chief executive knew all or most of them personally, compensation administration would be informal. Raises were ad hoc, and merit increases would be based on performance evaluation by impression rather than by explicit ratings on predetermined factors of performance. Thus Galvor would only need simple, informal, and less-staff planning and control practices. Everyone essentially reported to the president because it would prove efficient means of collecting input to make decisions. And the president would shudder at the thought of spending money on people who merely advise others. Specifically, the business plan itself should only cover a few years and should be flexible, not detailed. The business plan summary report should contain information on net income, sales, total assets, total capital employed, percentage return on sales, and return on total assets. Other items in the UE business plan should be combined into a summary strategic objectives and high level action that Galvor will pursue over the next two years to support the overall business planning objects, to include high level management actions, monthly report should focus mostly on reporting of problems areas an the prioritization of areas of concern. More importantly, control should be shared throughout functional areas rather than monopolized by finance. In addition there should be a qualitative balance between trust and control.
3. Planning and control system for Galvor as a part of an MNC Universal Electric:
From UE’s viewpoint, Galvor was a subsidiary of its multinational structure. Thus, there were substantial differences in the planning and control system. Firstly, communication and coordination was significantly needed as top management was remote from the business in Galvor. Senior managers, who were concerned with major strategic, organization, and policy issues, would not be able to monitor every division’s day to day operations. Routine financial matters thus should be handled by financial department, and most pricing and cost control decisions were made far below the top. Thus, the more geographically wide and complicated structure and hierarchies call for effective communication and synchronization. Second, as ownership lost though the acquisition, so did commitment of Latour, as he wanted to devote himself to “family, philanthropic and general social interests”, UE would need a tool to ensure sound behaviors. Third, not sole Galvor, but other 300 divisions were competing for UE resources. Consequently, UE had to rely on detailed plans and budgets to justify their allocation of resources. Next, in a large organization as UE, to ensure fairness in the compensation system, employee administration would need to be prescribed. All of these require a formal, sophisticated planning and control system. Though the implementation may be painful at first as complained by Galvor controller Barsac, UE was aiming to develop Galvor to be planning-and-control-savvy in the future, without which it would not be able to achieve the recent development as today. Moreover, the fact that UE was able to provide Galvor with necessary resource, better staff (reallocation of staffs from other UE divisions to Galvor), and technological add (IBM system), as well as professional help to implement the new practices proved that the imposition of this system was essential and justified. However, the extent to which UE should rely on the current system depends on several factors, as discussed below.
4. Extent to which UE relies on financial reporting and control:
The company’s multinational strategy, and the difference in the culture of doing business in different countries would determine the extent to which it relies on such a comprehensive system of financial reporting and control. MNC may pursuit different strategy for the business units, for different reasons and thus, implies different coordination mechanisms. If the roles of the units are as marketing satellite, local innovator, they would need centralized decision-making, and intensive financial performance control. In the case of multidomestic strategy where units act as miniature replica/implementer, personal reporting and financial performance control are still essential, but less rigorous. For units as product/manufacturing specialists or global innovators, the company will need to rely on centralized decision-making, formal policies and rules, and standard planning and production systems. Finally, if the company is for transnational strategy where units act as strategic independents or integrated players, a combination of formal and informal mechanisms are called for, and relax on formal financial planning and control .
Next, the MNCs should consider the difference in the culture of doing business in its units. The more the discrepancy is, the more such a system is needed to ensure a standard for understanding, and to understand the norm practices or even “games” that the subsidiaries may be playing. Moreover, the organizational structure of the company as well as the physical distance of the subsidiaries from headquarter also play an important part. The more complicated and hierarchal the firm, the more they rely on it. Contrarily, the more the firm emphasis on decentralization, autonomy and entrepreneurship, the less extent it should use the system.
UE to some extent relies heavily on the comprehensive system of financial reporting and control to achieve its strategic objectives. Firstly, UE headquarter was located in Switzerland while Galvor was in France. Thus the financial reporting explains the variances and determines how Galvor was performing, such as earning or losing money. Secondly, UE needed to report to the shareholders and financial reporting shows how each unit performs. In additional, financial statements was the most conveniently and easiest way for outsiders to understand. An informal sources may be incomplete and misunderstood, whereas formal reporting provides a more accurate information and may confirm or cast doubts on the information received from informal sources. Furthermore, formal report provides a basis for analysis because the information from the informal sources may be general and imprecise. Also, apart from the financial reporting, it may be hard for UE to evaluate performances. Next, UE had over 300 product lines and Galvor was being one of it. It may be difficult and impractical for UE to dedicate the time to control all product lines. The financial report shows the variances and UE picks out the product line that was not performing and made necessary changes. Furthermore, UE needed to compensate the employees in the Galvor and the reward systems may also determined by the financial statements since UE was in the business of making profits. Also, the financial reporting exerts certain amount of pressure on Galvor to take corrective actions own their own initiative.
On the other hand, considering Galvor roles as a small, regional focused, rather independent subsidiary, UE should relax in applying the system. This is also consistent with UE’s decentralization policy.
5. Galvor current planning and control process:
Galvor had to fulfill a lot reporting and controlling requirements by headquarter in Geneva after the takeover by UE. First of all, the management of Galvor had to develop the two year business plan to benchmark for the evaluation of the Galvor managers. Every subsidiaries of UE had to prepare business plan during one financial year regardless of the size.
The planning process began in January, when headquarter set the preliminary objectives for the business units in the next two years. These objectives consisted of five key measurements namely sales, net income, total assets, total employees and capital expenditures. Afterwards negotiations on these goals between headquarter and the local management was taking place until April. In May the results were reviewed and approved by headquarter. In the following two months where the business plan was prepared, included the unit’s strategy how to achieve the set objectives in the next two years and a less detailed five year forecast. In the end of July the completed business plan was forwarded to the headquarters. After the business plan had been reviewed, meetings were taking place in the early fall where the business unit managers had to validate their proposals. Before the business plan was finally accepted, adjustments had often been made by the UE top management. The budget for the following year was based on the approved business plan and had to be handed before mid-November. Actually, to get the monthly figures for the budget, the business plan’s annual amounts were divided up on the months.
The business plan started with summary reports, which consisted of actual data, the budget of the current year, one forecast for two and one for five years. Additionally many other figures including the five key figures were included. The next part was financial statements and finally management actions containing major management actions, plans for the functional areas and contingency plans. Next to the long-term business plan, Galvor and all other units had to submit reports during the year. They consisted of fourteen different types, which were due on a monthly basis, including the controller’s monthly operating and financial review, and on top roughly twelve additional reports which were required less often per year.
6. Evaluation of the system as applied to Galvor:
As mentioned earlier, the planning system required Galvor to submit a business plan and report to UE. The planning system is relatively effectiveness in the point of view of UE. Firstly, business plan covers every aspect of the business, which measures the progress of the sales, earnings and return on investment. Also, the reporting system helps Galvor’s to focus their attention on the critical areas, where there is variances between the budgeted and the actual. In the event that the differences are very big, UE can analyze and determine the main causes and eventually make necessary change. In additional, the report system forces Galvor to think about the future and set specific future goals, taking into consideration longer range objectives and strategy. Hence, the reporting system is an effective training and educational device.
The report also helps Galvor to have budgets preparations, which meets the aims of the short-term planning control, as discussed above. The budget forces the managers to plan and fine-tune to strategic plan. Moreover, the budget uses latest available information and the judgments of the managers. In the event that the figures fall outside the budget at the “first cut”, the budget preparation gives an opportunity to improve the performance before committing to a specific way of operating during the year. Also, budgeting helps to ensure good coordination and communication within Glavor since every responsibility center managers in the organization participates in the preparation of the budget. In additional, budget helps to allocate resources by making it clear what each manager is responsible for. The budget also authorizes responsibility center managers to spend specified amounts of money without seeking the approval of higher authority. Lastly, the budget evaluates the performance by benchmarking against the actual performances and provides incentives.
7. Evaluation of the working relationships between Hennessy and the UE executives:
The telex messages between Mr. Hennessey Mr. Poulet revealed some problems with the working relationship. First of all, the content of the messages was hardly understandable, which was manly due to bad language skills. Already this circumstance could lead to a lot of misunderstandings and by this also to ineffective working conditions. Furthermore, Mr. Hennessy seems to be frustrated about the amount of required reports and especially about the repeated explanations he has to give, which implies his losing of autonomy. In exhibit 3, he clarified, after requested by the UE headquarter, the current variances at Galvor by giving three policies introduced at the end of the previous year, saying that UE’s headquarter had already agreed on increases in stock resulting from the adoption of this policy thus should not keep asking for explanations. Mr. Hennessy also wrote that special inventory personnel at UE was aware of the situation, would be informed about further developments and would help out when needed. When Mr. Poulet advised Galvor later to focus aggressively on six topics, Mr. Hennessy referred on all suggestions in only one sentence and replied that they would focus on them aggressively. It seems that he was quite fed up in reporting all the time the same information to headquarter. He also included that Galvor had only one significant variance, which was mainly due to his own decision in completing products which would be billable in the current year, while those in work-in-process were not and would be completed in the next fiscal year.
A major problem that UE faced was the information interchange without human interaction. Mr. Edward M. Hallowell explains in his article “The human moment at work” that employees need to have face-to-face meetings. The human moment needs the physical and mental presence of the participants. It must also be meaningful and in regular intervals. If these preconditions exist, “people begin to think in new and creative ways”. By sending telexes as in the Galvor case, face-to-face interactions had become less and therefore the human moment was getting rare. The missing of body language, tone of voice and facial expressions can lead for some employees in the worst case to paranoia, but in most cases to internal misunderstandings and failures, which is worse as well. For the Galvor case and especially the working relationship between Hennessy and Poulet the same problem arisen on top of the existing language barrier which made an effective working relationship impossible.
8. Recommendations:
The planning system may be change slightly to further improve the performances of UE. Firstly, UE can have a better use of the informational technology (IT) for the customer billing and marketing analysis to reduce the number of people required in the customer billing and accounts receivable operations. Also, IT can help to control the inventory system by determining the profitability of various products, so that UE can place a proper valuation on their inventory. Secondly, mathematical techniques and computers can further enhance the budgetary process. UE can use simulation to constructs a model of real situations and manipulate the model to draw some conclusions about the real situations. Also, UE can use probability estimates where each number in a budget is a point estimates. A computer model is used to substitute a probability distribution of the expected profits.
Moreover, the management system in UE can be further improved. Firstly, the employees need to be trained to write and speak in English, which is a universal language. In this way, it will improve the communication between the UE and Galvor. In 1977, most of the employees in the Galvor’s controller department have a limited ability in English, which may hinder communication and affect the working relationship. The performance for UE will then be affected. Next, UE may use informal control system by incorporating their cultures, management styles, perception and communication into the other subsidiaries. In this way, UE and the other units can be integrated as one. Having the same culture, the organization will then have the common beliefs, shared values, norms of behavior and assumptions that are implicitly accepted and explicitly manifested throughout the organization. The perception and communication enable every employee to know the goals and steps required clearly. However, the informal control system may need to be implemented gradually. Also, Universal can implement formal control system, such as rules through manuals, system safeguard and task control systems.
Furthermore, the management in UE can be involved in the budgetary process for the budget system to be effective in motivating Galvor or other units. When the UE participate in the review and approval of the budgets, there will be less temptation for Galvor to “play games” with the system since some managers may submit easily attained budgets that contain excessive allowances for possible contingencies. UE may want to set up a budget committee to review and approves or adjust each of the budgets submitted by the units. The budget committee will meet with the senior management to review the business units. Furthermore, UE can develop guidelines that govern the preparation of the budgets and disseminate to all the units. Galvor will develop the initial budget proposal, which include the changes in the external forces and internal policies and practices. In the initial budget proposal, the superior in Galvor need to judge the validity of the adjustments. The initial budget proposals will then reach the UE to seek review and approval if the budget will produce satisfactory profits. The approval is recommended by the budget committee to the chief executive officer. The budget can be revised only in a systematic updating of the budgets and under special circumstances after the approval. Also, Galvor can prepare contingency budgets that identify management actions to be taken if certain situations arise.
Appendix 1

Coordination mechanisms in Multinational Corporations:

Multinational strategy Subsidiary Roles Coordination Mechanisms

International
Marketing Satellite
Local Innovator
Centralized decision-making
Financial Performance control
Multidomestic Miniature Replica
Implementer Personal reporting
Financial performance control
Global Product/Manufacturing Specialist
Global Innovator Centralized decision-making
Formal policies and rules
Standard planning and production systems
Transnational Strategic independent
Integrated player Centralized decisions but have subsidiary input. Complex output control
Temporary teams, tasks forces, committees informal managerial communication channels
Strong organizational culture in shared values