International General Certificate of Secondary Education

Emerson Electric Company was founded in 1890 as a manufacturer of motors and fans. Today, Emerson is a major domestic electrical manufacturer. It manufactures a broad range of electrical, electromechanical, and electronic products for industry and consumers. In 1993, Emerson reported $708 million profit, which marked the 36th consecutive year of improved earnings per share. In addition, Emerson had $2 billion in unconsolidated sales in international joint ventures. International sales have grown to forty-percent of total sales and present a promising growth area for the company.

Organizational Structure Emerson was organized into forty decentralized divisions consisting of separate product lines with the goal to be number one or two in the market for each product line. After 1990, Emerson reorganized its forty divisions into the following eight business segments: 1. Fractional Horsepower Motors 2. Industrial Motors 3. Tools 4. Industrial Machinery Components 5. Heating and Air Conditioning Components 6. Process Control Equipment 7. Electronics and Computer Support System This new structure exploits common distribution channels, organizational capabilities, and technologies.

To encourage open communication and interaction among all levels of employees, Emerson does not publish an official organizational chart but we have created a chart that might closely represent the structure at Emerson, which can be found in Appendix A. Corporate staff in 1993 consisted of 311 people; the same number as in 1975, when the company was one-sixth its current size in term of sales. Staffs are kept to a minimum because top management believes a large staff will create more work for the divisions. We have depicted this difference in Appendix B.

Strategy and Strategic Objectives Corporate-Level Strategy Emerson Electric up until the early 1980’s focused on being a low-cost producer within its industry, however due to a lack of competitiveness globally across its product lines the company required a new strategic direction. Emerson Electric transitioned to a Best Cost Producer Strategy in order to compete well in both the domestic and international marketplaces. This new strategy not only focused on cost-reduction through the planning process but also in continuous quality improvements of the products.

There are six elements vital to this strategy: 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 product design 4. Effective employee communications and involvement 5. Formalized cost-reduction programs, in good times and bad 6. Commitment to support the strategy through capital expenditures Emerson is a related diversified producer of products related to electrical manufacturing, either electromechanical or electronic.

Emerson’s growth strategy is through acquisitions (primarily foreign) and international joint ventures, in combination with strategic periodic divestitures, to find the appropriate or complementary mix of products. All corporate-level strategies work towards the common goal of stockholder wealth maximization. Business Unit Level Strategy Based on the Boston Consulting Group (BCG) matrix, see Appendix C, Emerson Electric’s international mission is placed in the “question mark” or build quadrant. This is because market growth rate is high, while relative market share is low.

Emerson’s domestic mission is placed in the “star” or hold quadrant. This means that Emerson should focus on protecting its business unit’s market share and competitive position. Both of these missions are further explained under the BCG section of this report. Situational Analysis In this section, we have performed a few relevant situational analyses to demonstrate Emerson’s current competitive position. Porter’s 5 Forces Analysis Intensity of Rivalry among Existing Competitors: Competition is stiff within the industry. Domestically, the major competition is General Electric, Westinghouse, and Honeywell.

Internationally, competition includes Siemens and Hitachi. Emerson’s future success requires beating not only the domestic competitors but also the large global Japanese and German manufacturers. Emerson must differentiate itself from the competition using its cost-reduction, quality improvement, and superior marketing and distribution channel strategies. Bargaining Power of Customers: The stiff competition leads to customers having strong bargaining power. Customers can choose the product based on cost, quality, availability, and performance specifications.

This is evident as switching costs are low for customers as it is as easy as choosing General Electric products over Emerson products. Emerson must continuously enhance its position in these dimensions to create and enhance its name in global marketplaces, and prove to be the superior option in the minds of customers. Bargaining Power of Suppliers: Penetrating international markets means access to the best supplies at the lowest cost. Additionally, strategic international joint ventures can be used to obtain supplies in the most beneficial arrangements. Since raw materials are scarce bargaining power of suppliers is also strong.

Fewer suppliers and a greater number of manufacturers gives suppliers the power to set prices. Threat from Substitutes: There are no direct substitutes for Emerson’s products because they produce motors. There are threats of consumers purchasing one brand over another but not actually substituting the product. Threat of New Entry: Difficult to compete as a new entrant within this industry due to high capital requirements, limited access to distribution channels, economies of scale, and the technological complexity of the products and processes. Key Success Factors (KSFs)

Emerson’s key success factors are its quality (measured in defective products per million produced), cost reduction strategies, delivery of products (superior distribution channels), and growth through acquisition of related companies. A differentiation advantage is obtained by imitating competitor’s products, producing them at lower costs, and passing on the cost savings to the consumer. Boston Consulting Group (BCG) Matrix The Emerson Electric Company has been growing many facets of their business such as revenues, profits, and in turn earnings-per-share consistently over the past 36 years without fail.

With this in mind, we would put Emerson’s domestic mission in the “Star” or “Hold” quadrant of the Boston Consulting Group Matrix, see Appendix C. A business that has had four decades of consistent growth is definitely a “Star”. In terms of their international divisions, they would be placed in the “Question Mark” quadrant for the sole reason that they need to build their market share and profitability overseas. As Emerson has realized, there is a finite amount of years that they can have with continuous growth in one market and they are coming close to that point.

But before that point is reached, Emerson Electric is going international and can become a powerhouse in other markets by building their image and market share. Emerson requires effort and resources to market to itself in the global playing field and it needs to build distribution channels and other infrastructure required for success. Management Control Systems Controls Needed To Meet The Best-Cost Producer Strategy 1. Quality Control (ISO900), Delivery: The case does not mention if management has any quality control measures in place to ensure that quality standards are being met.

However, since Emerson attempts to reduce defects to 100 rejects per million motors produced. This demonstrates that Emerson follows industry standards for quality. 2. Diagnostic Control Systems to measure Emerson’s performance against competition: Emerson performs intensive research on competition before producing new products. It even employs reverse-engineering on a competitor’s product to find ways to reduce cost and introduces its version of the product later in the market, ensuring the best cost.

In addition to the research performed on the competitors, Emerson has several conferences and meetings held throughout the year to compare results of performance. There are several reports than allow the President, Division Presidents, Mangers and other members to compare results from the current year, actual and budgeted, to the prior year, and also with forecasted results. These various reports work as a diagnostic control to measure performance from year to year and allow Emerson to meet its best cost producer strategy.

Although Emerson has various measurement tools that allow users to compare results and situate the company in the industry, it seems that the source for the information found in the charts may not be appropriate. For example, top management sets sales growth and return on total capital targets for the division. As seen in the “Sales Gap Chart” on page 373, Emerson’s target growth rate was fifteen-percent, however forecasted growth rate for the next five years (1995-1999) fall below this target. This demonstrates that the set targets may not be realistic and that top management needs to better understand the actual growth of the company.

This could be due to a lack of understanding for what the various charts represent or that the corporate goals place unattainable targets during the conferences. 3. Boundary Systems to stimulate innovations for processes and designs: In a quote found on page 369, Charles F. Knight, CEO, said, “Once we fix our goals, we do not consider it acceptable to miss them…we identify business investment opportunities. ” This idea of not just conducting their business but proactively searching for business investment opportunities as their business strategy is brilliant.

It creates the perfect foundation for any business organization to build and flourish. In terms of a boundary system associated with innovations for processes and designs, we can see the need and desire to set new goals and to reach those goals. This, in itself, is setting a boundary system. It’s telling everyone involved in the organization that once we have set a goal, we must reach it, either through current clients, new clients, current processes or new business processes. If new processes are necessary then what do we need to create (innovate) in order to attain these goals in a profitable and efficient manner.

It is also implicitly stating that there will be negative consequences if the goals that are set are not achieved. So, by telling employees what not to do, that is not to miss target goals, Emerson sets boundaries allowing for innovation and growth. 4. Interactive Control Systems: Emerson emphasizes much of its operations on communication. It believes that its strategies can be achieved if all key players communicate with each other. To ensure that this occurs, there are several meetings and conferences that take place throughout the year.

At times confrontational, these meetings allow managers at all levels and executives to express their opinions on operational activities. These meetings also help reduce costs as managers can share their methods, creating synergy as divisions can share the resource of knowledge. 5. Boundary Systems because plant personnel were required to identify specific actions to reduce costs: Emerson Electric Company has prided itself on their open channels of communications in order for any new revelations to be reported to the people who can act on them. Such as a new way to cut costs while maintaining the best-cost producer strategy and mentality.

The boundary system in place with reducing costs if very similar across many different companies in that if a division goes over budget and brings down the profit margin there will be negative consequences for that divisional manager. Along with this, management is required to look for any opportunity to reduce costs, make production lines more efficient, or improve any other business process possible. Upper management knows that their business is not perfect and they are willing to keep communication lines open in order to be constantly improving and evolving with the market. 6. Budgeting and Planning Process:

The budgeting process falls under the planning process and is a yearlong and very rigorous task for Emerson Electric. Since the year end is October 1st the process begins around then each year and until July the CEO and several corporate officers meet with management of each division for a few days to engage in planning conferences. These meetings are designed to be almost confrontational in order to inspire innovations and push the boundaries of the business. Before each meeting, all divisional presidents must submit 4 exhibits: (1) Value Measurement Chart, (2) Sales Gap Chart, (3) Sales Gap Line Chart, and (4) 5-Back by 5-Forward P&L.

Meetings will consist of discussing customers, markets, plans for new products, analyses of competition, and reviews of cost reductions, quality, capacity, productivity, inventory levels, and compensation. In August, all information gathered are consolidated and reviewed at headquarters and in September an annual corporate planning conference is attended by top management and officers of each division. Corporate and divisional forecasts for the next year and strategic plans for the next five years are then discussed and finalized.

This process is effective because of the strong belief system in place throughout the organization which facilitates all areas of the company meeting targets for organizing, managing, and remunerations. These are all translating into Emerson’s new business investment opportunities. The main performance measures which upper management will investigate in terms of determining incentives for divisional managers are sales, profits, and return on capital which is an extremely important management control system. Although this process is

efficient in that it achieves its purpose of increased communication and setting targets and goals, it has its flaws as well. For one, as mentioned, it is a very lengthy process. It takes approximately eight months to prepare for and attend the division planning conference. By the time the conference has concluded, the process begins almost immediately making the eight months of work nearly obsolete. All levels of staff are involved in the process and therefore take up much of everyone’s time. The focus of this conference is to set goals, which are higher than the industry, and to set out action plans for each level of the organization.

Not only are all managers and staff involved in this process, the CEO spends sixty-percent of his time at these conferences. This shows the amount of time and effort needed to initiate these conferences and implement the outcomes. Conclusions Emerson electric is a thriving and growing enterprise, which has proven to be a big player in the electrical market. Since the growth in North America is projected to plateau, Emerson is looking to expand internationally in order to maintain the growth for which they are well known.

With steady cash flows from North America and growing market share and profits from overseas, this company can and will continue to be a major player in all of their current and future business investment opportunities. Although Emerson has excellent management controls in place, such as the interactive system and the boundary systems, its planning process can be shortened to allow for more concentration on the production of quality products and also to reduce costs by reducing the amount of labour hours spent on the preparations for the conferences.

In addition, improving the communication to enhance the understanding of reports will enable Emerson to achieve targets set by top management. Appendix A – Organizational Structure Office of the Chief Executives consists of the CEO, the President, two Vice Chairmen, seven business leaders, and three corporate officers. Board of Directors of each division consists of one member of the OCE, who serves as chairman, the division president, and key managers Appendix B – Staff Size Compared to Company Size

Appendix C – Boston Consulting Group (BCG) Matrix Domestic – “Star” or Hold Position International – “Question Mark” Bibliography 1. Management Control Systems: Twelfth Edition. Robert N. Anthony and Vijay Govindarajan. McGraw-Hill Irwin 2007. 2. The Strategy Concept 1: Five Ps for Strategy. Henry Mintzberg. California Management Review 1987 3. The Strategy Concept 2: Another Look at Why Organizations Need Strategies. Henry Mintzberg. California Management Review 1987.