Marshall School of Business
University of Southern California
Diagnostic Products Corporation
Teaching Note
Purpose of Case
This case illustrates the control system used in a field service engineer (FSE) setting. The case is
particularly interesting because the company, Diagnostic Products Corporation (DPC), is in the
midst of a significant change. Formerly, company managers controlled FSE inputsthey paid
FSEs for hours worked. Now they are attempting to measure FSE outputs, or results, and to
provide performance-dependent compensation.
Suggested Assignment Questions
We have used this case both for class discussion and exam purposes. As an exam, we used the
following set of questions:
1. Evaluate both the design of the DPC Performance Bonus Program for US-based field
service engineers (FSEs) as it currently exists and the way in which the program is being
implemented. What changes would you suggest, if any? Explain.
2. Instead of using a results-control system like the Performance Bonus Program could DPC
control its US-based FSEs effectively using only action and/or personnel/cultural controls?
If so, what would such a system look like? If not, why not? Explain.
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3. In answering the question posed below, assume the following hypothetical facts:
In February, Joe, a DPC FSE, was called to a large laboratory in a small Midwestern US
city to perform a repair job on an Immulite 2000 instrument. Soon after he arrived, he told
the laboratory client personnel that he thought he could complete the job in 2 hours.
However, he encountered some significant difficulties and the job took 2 days. Harvey, the
laboratory manager, was quite upset because the laboratory could not afford to have the
instrument down for that long in such a heavy workload period.
Question: How would you analyze the ethics of Joes behavior? Your conclusion as to whether
Joe acted ethically is not of critical importance. What is important is how you structure your
ethical analysis.
Case Analysis
Clarification of Facts
Before starting the system-evaluation discussion with the students, it is useful to clarify some of
the facts in the case. Hit the high points about the corporation, its business, the roles of the
FSEs, and the old and new systems for compensating the FSEs. In particular, it is useful to
clarify the importance weightings placed on the various performance areas in the new incentive
system. These facts can be developed in a format as shown in Table TN-1:
Table TN-1
Performance areas and their importance weightings
Performance area Importance weighting
2. PM completion Points
3. Teamwork 12% of base salary + points
6. Administration Points
Total 213% of base salary + points
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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System Evaluation
After the facts are clarified, the evaluation discussion can begin. The following set of questions
can be used to guide the evaluation, although some of these answers might already have come
out while the facts were being clarified.
1. What was the goal in establishing this new incentive program?
2. What are the desired behaviors? What makes a good FSE?
Good FSEs:
Keep their customers satisfied, as much as is possible. But the goal is not 100%
3. Does the program include the right measures, and are they weighted properly?
This is a critical question. It seems clear that keeping customers satisfied is the FSEs
primary goal. Most of the measures included in the Performance Bonus Program are
intended to be among the most important drivers of customer satisfaction. Controlling
service costs is an important secondary concern. And feeding the companys information
system is also deemed important. An FSE cannot be rated excellent without superior
performance in all three of these areas.
It is useful to raise and discuss a number of measurement issues:
Why include the teamwork factor, which is not highly controllable by individual FSEs?
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
In DPCs case, there are possible end-of-quarter games, games that focus excessive
attention on the IMMULITE instrument rather than on the more complex IMMULITE
2000; games that involve direct calls from customers to FSEs to avoid the dreaded
call-backs; games to avoid certain types of calls from the dispatchers; and games that
lead to inventory build-ups to ensure complete first visits. Can DPC managers detect
and control these games?
Can the evaluations in the administrative area be made less subjective, or is subjectivity
not a problem? The answer to this question depends on whether the evaluators are
informed and unbiased. Or should some of the administrative areas be removed from
the bonus program entirely, based on the belief that these are just routine tasks the FSEs
must perform?
Are the problems with the direct measurement of customer satisfaction significant? The
25% response rate seems low. How can this be improved?
What are the drivers of customer satisfaction? DPC has impounded their assumptions
about these drivers in this system. Do any look suspect? Can these be tested
empirically? If so, how?
The best FSEs are qualified on the 2500 and SMS, but they are not rewarded for this
work. Is this a flaw in the system?
4. Is the reward portion of the program well designed? In particular,
Are the rewards large enough to attract attention? The rewards are not large here, but
5. Do the benefits of this program exceed its costs?
6. Was the deliberate, gradual implementation approach wise? Because they were not
7. This is a system designed for US-based FSEs. Would this same system work for non US-
based FSEs?
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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territory were operational. And some students will raise points related to the values that should
be attached to the points earned, the high point weighting assigned to the administrative
Control Alternatives
Question 2 in the suggested assignment raises the question as to whether there are control
alternatives than can be effectively used here. The various forms of controls often serve as
substitutes. Maybe a combination of action and personnel/cultural controls could be made to
The Hypothetical Ethics Question
Question 3 in the suggested assignment can be omitted unless the instructor wishes to devote a
portion of the class to an ethical discussion. Ethics is not discussed in the textbook until Chapter
Determine the facts:
Joe, an FSE, told his client that he could complete a repair in 2 hours, but it took him 2
days.
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Define the ethical issues:
Major ethical principles:
Utilitarianism (greatest good for the greatest number of people)
Fairness
Duties and obligations
Virtues.
Each of these ethical principles or models suggests that this example raises an ethical issue. The
corporation and some of its stakeholders (e.g., shareholders, managers, other FSEs) might be
harmed if Joes actions bias the clients customer satisfaction ratings. The bias would not be fair
Identify the decision alternatives and their probable consequences:
Apologize to the client but leave the customer satisfaction survey for the client to complete
on his/her own time, as is normally done.
Try to manipulate the customer satisfaction ratings as was done in this hypothetical
example.
Compare the alternatives with the ethical principles and choose the best
alternative:
Pedagogy
This case presents the instructor with a number of options. By itself, a system evaluation
discussion can easily consume an entire 75-minute class. If the instructor wishes to discuss the
other issues, minutes will have to be apportioned. Here is a reasonable time budget for a class
that attempts to raise all of the issues discussed in this teaching note:
Clarification of facts 10 minutes