Harvard Business School 5-198-104
March 10, 1998
ALCON LABORATORIES, INC.5
Purpose of Case
The Alcon Laboratories case was written to illustrate a control system in a research laboratory,
one of the most difficult control settings. Control is difficult in research laboratories because the
use of action controls is sharply constrained; the individuals being controlled know as much or
more about the desirability of the actions they are taking than do their superiors. In addition,
results controls have limited effectiveness. It is often 15 (or more) years before the company
Suggested Assignment Questions
1. How would you characterize the control strategy used in the research and development area
of Alcon Laboratories?
2. Evaluate the control strategy. What, if anything, would you suggest Alcon managers do
differently?
1. Evaluate the control environment and control system at Alcon Laboratories, Inc. What are
the strengths, weaknesses, and dangers inherent in the control systems?
2. What changes, if any, would you suggest to Mr. Leone and Dr. Raval? How would your
suggestions improve control at Alcon Laboratories? Specifically address the concerns of
3. How can the productivity of research and development be measured?
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4. On what basis should Nestle S.A. evaluate the management of Alcon Laboratories, Inc. and
the performance of the subsidiary?
Copies of two of the better student answers to these questions are attached to this note.
Case Analysis and Pedagogy
It is useful to start first by thinking about Alcon Laboratories, Inc., which is a subsidiary of
Nestle S.A. Students should understand that the subsidiarys purpose is to generate value for
Nestle. The case does not provide much information on Alcons strategy, but part of the strategy
is clearly to develop new breakthrough products.
I like to have the students characterize what they know of the strategy in terms of either
the companys critical success factors or key recurring decisions. Among the critical success
factors are:
Develop new products. These products should be salable and, hopefully, unique (breakthrough
products). This development provides the company with its competitive advantage.
Productive use of resources (money and time).
Among the key recurring decision/actions are:
How much to spend on R&D;
If Alcon effectively controls all its important critical success factors or key recurring decisions
well, it is likely to be successful.
What is unique about this control environment?
very long lags between investment/activities and start of payoff
low chance of success on any one project
payoff unpredictable
* breakthrough?
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
* non-conformists
What control problems does Alcon face?
1. lack of direction. Do scientists forget that profit is the raison detre? (Sometimes.)
2. lack of motivation. Are the scientists lazy? (Sometimes.)
Alcons control system consists of a number of elements:
1. planning and budgeting (annual process). (I find it useful to diagram this process over time
2. budget analyses (quad)
3. cost reports
project
4. achievements
5. incentive plans
scientists
managers
In the evaluation, this control system should be related back to the critical success factors or the
key recurring decisions. Do these controls effectively address the CSFs or KRDs? I think
2. Should Alcon allow for more bottom-up input into its resource allocation?
3. Should there be a stronger link between scientists personal objectives and incentives?
Salary increase only?
1. Some students will conclude that it is impossible or that it is counterproductive because
such measurement might cause a shift to minor modifications instead of major breakthroughs.
2. Some imperfect measurements can be suggested, such as:
percent of projects tabled (as a negative indicator of performance)
3. Productivity is clearly easier to measure for projects in later stages of development. Alcon
can see which technical milestones have been met and at what costs. If budgets are revised
to reflect scope/timing changes approved by management, productivity can be assessed
by tracking the achievement of milestones and performance vs. budget. Total company
productivity can be the aggregate performance over all projects.
2. Auditors would have to make evaluations every period as to whether intangible (research-
in-progress) assets had future value.
3. This accounting policy might increase total R&D spending because managers would not
have to take an immediate hit to profits.
For a conclusion, I like to highlight to students that R&D operations provide an example of the