Armco Inc.
Case 25-2: Armco Inc.: Midwestern Steel Division* Note: This case is unchanged from the Twelfth Edition.
Approach The Armco case was designed to illustrate a performance measurement system with measures cascading from strategic priorities down to the lowest organization levels. The system is not tightly linked with incentive compensation, although that is being discussed. Still, the focus on measured results promises to change managerial behaviors significantly. The case is particularly interesting because it describes a major change from an old measurement system which was primarily designed for standard financial reporting purposes and was not perceived, at least by top management, to be effective for management control purposes. The new performance measurement system eliminated most of the allocations of indirect costs and helped managers understand the critical success factors in their areas. In this case, then, students can understand two performance measurement systems and the companys reasons for changing from one to the other. They can evaluate the new system and decide whether the division managers have made optimal choices in designing their new system, and they can make a judgment as to whether the system should be used to increase the proportion of total compensation linked to performance. Most of the students will conclude the new system is a substantive change for the better. But then they will get a dose of reality as they see the problems Armco is having getting managers to adapt to the new system. Suggested Assignment Questions 1. What was wrong with the Midwestern Steel Divisions old system? (As part of your analysis, study Exhibit 3 carefully and figure out what the columns tell you, individually and in total.) 2. If the old system was so bad, why did the operating managers seem to like it? This teaching note was prepared by Professor Kenneth A. Merchant. Copyright 1998 Kenneth A. Merchant. * 25-7 Chapter 25 - Reporting and Evaluation 3. 4.
Approach The Armco case was designed to illustrate a performance measurement system with measures cascading from strategic priorities down to the lowest organization levels. The system is not tightly linked with incentive compensation, although that is being discussed. Still, the focus on measured results promises to change managerial behaviors significantly. The case is particularly interesting because it describes a major change from an old measurement system which was primarily designed for standard financial reporting purposes and was not perceived, at least by top management, to be effective for management control purposes. The new performance measurement system eliminated most of the allocations of indirect costs and helped managers understand the critical success factors in their areas. In this case, then, students can understand two performance measurement systems and the companys reasons for changing from one to the other. They can evaluate the new system and decide whether the division managers have made optimal choices in designing their new system, and they can make a judgment as to whether the system should be used to increase the proportion of total compensation linked to performance. Most of the students will conclude the new system is a substantive change for the better. But then they will get a dose of reality as they see the problems Armco is having getting managers to adapt to the new system. Suggested Assignment Questions 1. What was wrong with the Midwestern Steel Divisions old system? (As part of your analysis, study Exhibit 3 carefully and figure out what the columns tell you, individually and in total.) 2. If the old system was so bad, why did the operating managers seem to like it? This teaching note was prepared by Professor Kenneth A. Merchant. Copyright 1998 Kenneth A. Merchant. * 25-7 Chapter 25 - Reporting and Evaluation 3. 4.