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ACG 6425 Strategic Cost Management

Emerson Electric Company Case Study Hints

The actual questions to be answered in this case are qualitative in nature, so the numbers are
important, but only as far as they relate to the qualitative analysis of the case. You are not
required to provide any in-depth analysis of the financial information presented in this case.
You may want to provide summary information of any financial trends observed in the financial
exhibits. Overall, the case is not as daunting as it may first appear. The questions asked in this
case are the following:
1. Evaluate CEO Knights strategy for the Emerson Electric Company. In view of the
strategy, evaluate the planning and control system described in the case. What are the
strong and weak points?
2. What changes, if any, would you recommend to the CEO?
3. What role should the eight business segment managers have in Emersons planning and
control system?
Use the 6 elements of the best-cost producer strategy as a lens to view the entire planning and
control process.
1. Commitment to total quality and customer satisfaction.
2. Knowledge of the competition and the basis on which they compete.
3. Focused manufacturing strategy, competing on process as well as design.
4. Effective employee communications and involvement.
5. Formalized cost-reduction programs, in good and bad times.
6. Commitment to support strategy through capital expenditures.

Make sure that you have a thorough understanding of the planning and control process so that
you can effectively comment on what occurs at Emerson Electric to answer the three questions
above. There are three major elements in the planning and control process:
1. Planning process
a. Scheduled meetings what, who, when
b. Documents required
c. Who prepares what and who is responsible for what
2. Monthly reporting what reports are used to control the operational results
3. Compensation of division management how does it work and is measured? Tied to
strategy?

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Areas to review in the textbook
To help answer the required questions in the case study format it will be helpful to review the
following areas in the textbook. These are suggested areas; you may pull in other areas as well.
Chapter 10 Behavior Issues in Budgeting
a. Budgetary slack
b. Goal congruence
c. Authoritative or participative budgeting
d. Difficulty level of the budget target
e. Linkage of compensation and budgeted performance
Chapter 18
a. Performance Measurement and Control
i. Performance measurement
ii. Management control
iii. Objectives of management control
iv. Employee contracts
b. Design of Management Control Systems for Motivation and Evaluation
i. Formal and informal control systems
ii. Decentralization
iii. Types of strategic business units
Exhibits Financial numbers
There should be no in-depth analysis of the numbers except gaining an understanding of the
numbers so you can analyze how they affect the qualitative issues. For these exhibits, the
expectation is just a global overview of what is presented and the trends that may be represented.
Keep in mind who is preparing the numbers in each of the reports i.e. the division managers
prepare the sales budgets, but top management produces the expected sales increase percentage
for the future year forecasts, which creates the sales gap in Exhibit 2.
Exhibit 1 The Value Measurement Chart Assesses Value Creation at a Glance
a. Concentrate on the following items (Page 826 in the textbook):
i. NOPAT = after tax operating income. This measure shows the total pool
of cash available to suppliers of capital.
ii. Economic profit = EVA (economic value added). It is the estimate of the
businesss economic profit generated during a given period.
2. Exhibit 2 Sales Gap Chart
a. Review the current total consolidated sales figures and trends from prior years to
future years. Compare to top managements 15% growth targets.
3. Exhibit 3 Chart for information contained in Exhibit 2
4. Exhibit 4 Profit and Loss Measures
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a. Look at the trends based on the percentages from prior years through the future
years to see if the forecasts seem appropriate
5. Exhibit 5 Presidents Operating Report Division
a. What are they tracking on a monthly basis and does it match their overall
strategy?