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Marshall School of Business
University of Southern California
Tsinghua Tongfang Co. Ltd.
Teaching Note
Purpose of Case
This case was written to illustrate the control systems used at upper management levels by a
Chinese high-technology company. The case describes a number of bureaucratic controls that
limit the autonomy of the companys managers. It also describes the companys performance
Suggested Assignment Questions
1. Evaluate the Tsinghua Tongfang control, performance evaluation, and incentive systems.
What changes would you suggest, if any?
2. Should the company implement the proposed employee stock option plan?
Case Analysis
It is useful to begin class by highlighting some of the key factors in the environment in which
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The Current Business Environment in China
The emergence of Chinas socialist market economy is quite recent. Here are some key dates:
Early 1990s Start of reorientation from centralized, planned production economy to a
socialist market economy
December 1990 Reopening of the Shanghai stock exchange
October 1991 Opening of the Shenzhen stock exchange
The Company
In some ways, Tsinghua Tongfang (THTF) is not much different from young, high-technology
companies in other parts of the world. It needs to develop a steady stream of new ideas with
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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However, in other ways, the close link to the university is a hindrance. University personnel
play important roles in the management of the company. Although it is not described in the
case, the bureaucratic controls, described in the case as management control mechanisms, are
largely derived from the universitys control system. The university is a government not-for-
Performance Evaluations
Most of the performance evaluation system is not unusual. THTF uses a 360° evaluation system,
with the superiors evaluation weighted the highest. All the evaluations are subjective, which is
Incentive Systems
The performance evaluations are linked to salary increases. The performance criterion is given
the highest importance weighting: 50%.
The discretionary bonus feature is typically Chinese. Workers in Chinese companies historically
have been given a 2-week bonus at the end of the year. But this is a bonus in name only; there
28 These qualities articulate with the Four Key Principles of Confucian Teaching, which are as follows:
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THTF managers would like to add a stock option plan. They see it as a valuable tool for attracting
and retaining employee talent, a major challenge for the company. At the time of the case, stock
Addressing the Suggested Assignment Questions
The first suggested assignment question asks students to evaluate the companys systems and to
suggest changes. Here are some possible evaluative comments:
1. The subjective evaluation system, which includes 360° evaluations, evaluations every 6
months, and semi-explicit importance weighting for salary increase purposes, is quite
sophisticated. But:
2. Not much information is provided as to why the bureaucratic controls might be needed, but
some students might venture some of the following evaluative comments:
Strengths:
a. Enforces continuous communication between the parent company and subsidiaries.
b. Helps ensure that no subsidiary is unduly creating large amounts of risk and exposure.
c. Provides structure for subsidiaries that thrive on guidance from upper management by
Weaknesses:
a. Costly. Perhaps requires too much communication between the parent company and
subsidiaries, making either party, or both, less efficient.
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b. Perhaps having standardized controls and limits based on the same percentages does not
make the best sense for all subsidiaries in all stages of the product life cycle and with all
types of product.
c. Are these controls inhibiting innovation? In ensuring that there is no undue risk, the
e. Fixed asset control encourages managers to pad their asset budgets in order to enable
purchase decisions later in the year.
f. The controls perhaps encourage a group-think mindset, which is not generally
conducive in arriving at creative solutions.
3. As with most of the compensation system cases, it is useful to make sure that students
understand that compensation systems can, and usually do, serve multiple purposes,
including:
a. Attraction and retention of the right people.
b. Motivation of behaviors that serve the organizations interests.
c. Wealth sharing with employees, which can provide cultural benefits.
d. Income and cash flow smoothing.
e. Compensationprovide a living wage.
Sometimes compensation system features are included to make the payments tax efficient
and/or to ameliorate political pressure that might be brought upon the company.
The THTF system serves most of the purposes listed above, but the bonus system,
particularly, is immature.
a. It is based on ROI measured at the corporate and subsidiary company levels. While it is
easy to understand, ROI is a short-term, backward-looking measure that would seem to
b. We do not know much from the case as to how performance targets are set except that
approximately 80% of the subsidiaries achieve their targets in a typical year. Since
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The second suggested assignment question focuses on the stock option plan. The THTF
proposed stock option plan is typical for upper management levels and, with the unlimited
upward reward potential, it can be highly motivating. But,
a. Why push the plan down further in the organization when lower-level employees rarely
have a significant effect on the performance of the overall corporation? The answer here
Pedagogy
In teaching this case, instructors have to make a decision as to how structured to make the
discussion. With an experienced, well-prepared class, our preference is to be quite unstructured.
Start the class by clarifying some facts, and then ask the suggested assignment questions in
