Question One - Howard Equipment Company (HEC) manufactures heavy construction equipment. The company's primary product, an especially powerful bulldozer (PD10), is among the best produced in Europe. The company operates in a very price-competitive industry, so it has little control over the price of its products.
A Porter's five-forces analysis reveals the following:
1. The PD10 model faces severe competition based on price, timely delivery, and quality. Companies in the industry have persistent pressure to reduce selling prices and utilize capacity fully. Robert Benson, the HEC's president, has stated that to be successful, the company has to keep production costs in check by operating as efficiently as possible, must provide a very high-quality product and meet its delivery commitments to customers on time.
2. The threat of new entrant is low due to small profit margin and high capital costs.
3. Customers, such as Parker Co and Global Power, negotiate aggressively with HEC and its competitor to keep prices down because they buy large quantity of product.
4. HEC tailors the PD10 to customers' needs and lowers price by continuously improving design and processes to reduce production costs. This reduces the risk of equivalent products or new technologies replacing PD10.
5. To produce PD10, HEC requires high-quality materials and skilled employees. The high level of skills required of suppliers and employees give them bargaining power to demand higher prices and wages.
Required: Recommend to the management the generic strategy (i.e. cost leadership or differentiation) that HEC should pursue. Support your recommendation with clear reasoning drawn from the analysis prevalent in this industry.
Question Two - John Travor, the managing director of Global Horison Inc., plans to implement participatory budgeting processes in the next budget cycle as he recognizes its importance for planning, control, and motivation. He believes that a properly implemented process of participative budgeting will motivate the managers within his company to improve productivity within their particular division. Furthermore, the participation will add credibility to the budgeting process and creates greater commitment and accountability toward the budget. However, he feels anxious that participative budgeting will give the managers a chance to introduce budgetary slack into their budgets. The company has been providing bonuses for its managers for achievement of budget targets.
Required:
1. What is budgetary slack? Identify three reasons for budgetary slack?
2. Suggest five ways to reduce the problem of budgetary slack. Explain your answer.