Marshall School of Business
University of Southern California
Harwood Medical Instruments PLC
Teaching Note
Purpose of Case
The Harwood Medical Instruments case was written in response to requests from instructors
who want more short cases. This case can be used in the classroom or in an exam setting where
the instructor wants to use multiple cases to test different subject materials.
Suggested Assignment Questions
1. What was the purpose of the change?
3. Evaluate the new plan. Is there any evidence that it produced the desired effects? What
changes to the new plan would you suggest, if any?
Case Analysis
Question #1: The change was made because managers believed that operating income was not a
good summary measure of short-term financial performance. It was incomplete and excessively
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Question #2: The calculation of the bonuses earned in each division is shown in the tables
below.
Surgical
Instruments
Ultrasound
Diagnostic
Equipment
(£000) 1 2 Total 1 2 Total
Base bonus 46.2 44.0 28.6 29.0
Supporting calculations:
Sales returns:
Surgical
Instruments
Ultrasound
Diagnostic
Equipment
(£000) 1 2 1 2
Std.: 1% sales returns 420 440 286 290
Scrap/rework:
Surgical
Instruments
Ultrasound
Diagnostic
Equipment
(£000) 1 2 1 2
Std.: 1% of operating profit 46.2 44.0 34.2 40.6
Question #3: Undoubtedly both managers are upset with the new plan. The bonus of the
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Guthrie might have wanted to provide a strong signal that performance in certain areas needed
to be improved.
There is evidence that the plan is producing some of the desired effects. In both divisions,
perhaps as managers have gotten accustomed to the new bonus plan (second half of 2010), sales
returns have declined, patent applications have increased, scrap and rework costs have declined,
Could the system be improved? There are advantages (e.g., simplicity, perceptions of fairness)
to having one system that applies equally to all divisions. But these two divisions seem to be so
different. Someone should consider whether the same factors should apply to both divisions and
in the same weightings of importance. Should the system be built around the critical success
factors unique to each division?
Each of the individual factors should be subjected to critical scrutiny. For example, should the
sales returns measure capture only returns due to company faults (e.g., poor quality), rather than
also merely customer capriciousness (e.g., customers changing their minds after shipment)?
Should the sales returns measure be eliminated as redundant, as customer unhappiness is
reflected in the customer satisfaction figures? Is customer satisfaction measured effectively?
Does it/should it reflect the potential unhappiness of prospective customers who never became
customers? Are patents important in a division that sells such mundane products as scissors and
clamps (Surgical Instruments)? And, for that matter, is patent applications a good performance
measure? Might including this measure in a bonus plan just encourage patent applications that
never get approved, or even if they do, that never provide any real economic benefit to the
division and company?
Several of the factors have very specific performance constraints. Should the payoff functions
be linear, rather than based on perhaps arbitrary performance constraints, such as 95% deliveries
on time or 90% average customer satisfaction? Such hard cut-offs often produce gameplaying.
The performance targets seem arbitrary. The targets, or performance constraints if they are used,
should be based on an analysis of what is possible in each division. They could be based on a
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between profit and each of these other factors? Should the bonus be paid just as the result of a
numerical calculation, or should the plan allow some room for subjective judgment?
Pedagogy