Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Marshall School of Business
University of Southern California
Armco, Inc.: Midwestern Steel Division
Teaching Note
Purpose of Case
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 that was primarily designed for standard financial reporting purposes and
Most of the students will conclude that 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.
This case is supported with a 17-minute videotape segment (on the videotape attached to this
instructors manual). The segment provides excerpts from Bob Nennis (Director of Finance at
the Midwestern Steel Division) visit to MBA classes. On the tape Bob provides an update as to
what happened since the case was written, and he responds to students questions and concerns.
92
Suggested Assignment Questions
1. What was wrong with the Midwestern Steel Divisions old system? (As part of your
2. If the old system was so bad, why did the operating managers seem to like it?
3. Evaluate the new system and the way in which it was being implemented. What changes
would you recommend, if any? Why?
4. What should Rob Cushman do about the two items described in the Remaining Issues
section of the case?
Case Analysis and Pedagogy
1. What factors most determine the success or failure of the Midwestern Steel Division?
In particular, how important is cost control?
Carbon wire rod is a commodity product; so cost control is critical for this line of business.
There is some product differentiation in grinding media. Customers can measure how long
the steel balls last, and they value long-lasting balls. Armco believes it has a superior
manufacturing technology that causes its balls to last longer. Further manufacturing
technology innovations would provide additional profits to the division.
2. How were managers controlling performance with the old system? What were the
strengths and weaknesses of the old system?
Strengths Weaknesses
1. Managers express need for detail so
they can track month-to-month trends.
1. Too much detail. Some numbers didnt
change. Some very small.
93
3. Measured performance was based on
managers ability to control cost above.
3. Source of some of the data is unclear.
4. Reports were delivered 15 days after month-
end. This is too late.
5. System too focused on cost reductions, to
6. Managers performances judged on things
over which they had no control. Many costs
7. System not encouraging managers to work
9. Accounting accruals distort the costs.
Exampleannual August maintenance
shutdown accruals start in January.
It is important to walk students through Exhibit 3. Pick some representative columns and have
students talk about what they mean or dont mean. Among the useful examples to discuss are
nonmetallics, salaries, electricity, lubricants, and loco cranes. Students should see the types of
3. Why did the operating managers seem to like the old system?
Familiarity.
Reports were related to budget.
Managers cant be held accountable because they always had an excuse for poor
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
94
After the students have had their crack at the analysis, if it hasnt come up, the instructor
4. What were the key features of the new system and what improvements did it
promise?
Hit the key design choices and discuss them; for example:
Strategic (not just financial) focus10 key measures.
Priorities must come from the general manager and his direct reports. Priorities
must cascade from above so that everybody is working on the right things.
Everybody agrees with the top four prioritiessafety, productivity, quality, and up-
time.
Safety is the #1 priority because managers do not want people to get hurt. It is not
#1 because it is the largest cost.
5. What are the weaknesses of the new system?
It is not a cost system. Company still needs a cost system. The company does still not
have a handle on what costs are controllable, what are fixed and variable, and so on.
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
95
Uncontrollables still not handled well. For example, what happens if the plant shuts
down for a few hours? Should this be segregated from the managers performance
reports?
6. The implementation process.
Division managers decided to discontinue the old system immediately? What are the
advantages and disadvantages of that decision?
Managers would never adapt to new system if old system was still running. After the
switch to the new system, they were frequently in Rob Cushmans office begging for
Department managers had no input into the design of the new system? Was that wise?
Ideally it should be the operating managers, not the accountants, who identify what is
What can be done to get operating managers to take the lead? Training? Hiring? Should
accountants have a role in measuring quality, on-time delivery, and so on?
Why did Bob Nenni devote so much energy to the performance measurement system
instead of working on, for example, an activity-based costing system, which Armco
does not yet have?
7. Remaining issues:
When should something be considered uncontrollable?
Should larger bonuses be linked to the new system measures?
96
8. What has happened since the case was written?
Many things happened since the case was written. There was significant management
turnover. First, the manufacturing cost manager (Scott Molaro) resigned. The operating
