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Marshall School of Business
University of Southern California
TECO Electric & Machinery Co. Ltd.
Teaching Note
Purpose of Case
The TECO case was written with two purposes in mind. First, it illustrates the functioning of a
control system in an arguably well-run Taiwanese company. Not many case examples from
Suggested Assignment Questions
2. To what extent has TECOs system been designed to fit the Taiwanese culture? Could
companies in other countries use the TECO system? Why or why not?
Case Analysis and Discussion Questions
1. Describe the TECO Electric & Machinery Co.
TECO was founded in 1956. By 1994 it was one of the 20 largest private-sector companies
in Taiwan with more than 3,500 employees and sales of NT$17.1 billion.64 It started by
making induction motors. More recently, its product focus was shifting toward home
64 At the time of the case, 1 NT$ = U.S.$.04.
Professor Kenneth A. Merchant wrote this teaching note as an aid to instructors using the TECO Electric & Machinery Co. Ltd.
case.
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2. Since 1966, TECOs has used value-added as its primary indicator of corporate
success or failure. What is the difference between value-added and accounting profits?
Some categories of cost that are subtracted from revenues to calculate accounting profits are
3. Why does TECO use the value-added measure of performance?
With value-added, some cost items are not subtracted from the important performance
measure. The company is essentially saying that it does not want managers and other
4. Does the use of value-added make any real difference in the management of the
company?
5. What issues have arisen with respect to the value-added system? How should they
be resolved?
a. One issue is regarding the formula for calculating value-added. Should depreciation and
interest expense be excluded?
The argument here is interesting: These items of cost are becoming larger than in the past,
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
453
b. Should adjustments be made for uncontrollable changes in, for example, Taiwans GDP or
TECOs competition?
This issue is similar to that faced by virtually all companies. Performance measures are
sometimes affected by factors outside the managers complete control. Managers have to
c. What is the optimal sharing of corporate value-added between employees and shareholders?
Should the sharing percentage change with changing conditions (e.g., companys degree of
automation, labor market conditions)?
Many managers debate what their company owes its shareholders and what it owes other
stakeholders. Most U.S. managers, who subscribe to the maximization of shareholder
value theory of corporations, would argue there is no optimal sharing rule. Employees
should earn their fair market value or they will leave the firm. Their value is based on what
d. Is it a problem that some lower-level employees do not understand the system?
TECOs system was judged not to work well with manufacturing personnel in the factory
automation division. These employees, who have relatively little formal education, had
6. Has Taiwanese culture affected the design and implementation of the TECO system?
The TECO value-added system was taken from the Japanese. It is not used elsewhere in
Taiwan. But the system seems to travel well across borders. TECOs U.S. managers, for
example, love the system.
7. A Final Thought
Most students are quite critical of the TECO system. However, they should be left with the
Use of Video
There is a TECO segment on the videotape attached to this instructors manual. The segment,
