Marshall School of Business University of Southern California
Purpose of Case This case was written to illustrate a basic control system choice. Two young and inexperienced MBA graduates purchase a small aviation company that is in financial trouble. If the company will survive, it will do so only with tight management of cash and new accounting and control systems. The company also needs to make better operating decisions. However, the new owners do not know the business well, so they cannot either centralize authority or be very prescriptive to the line managers as to how to run their operations. As a consequence, they design a new control system that ...view middle of the document...
Kenneth A. Merchant and Wim A. Van der Stede, Management Control Systems, 2nd Edition, Instructor’s Manual
numbers can be summarized and annualized as is shown in Figure TN-1. These numbers show that the company is losing about $100,000 on an annualized basis. This analysis can also be done on a cash flow basis. This analysis shows that the company’s cash needs are approximately $100,000 every 4 months, to finance operating losses and reductions in payables. With $515,000 in the bank, there should be no panic. Cash control is important, certainly, but it is not the all-consuming crisis that is implied in the case. Whichever way you look at the results, AirTex needs a new control system. The company is not performing well. The most important focus needs to be on profitability. What is Important in this Company? (Key Recurring Decisions) Early in the class, it is useful to clarify what is important in managing this business. We like to develop this idea by assembling a list of “key recurring decisions” that must be made well. The question that should be asked when trying to judge the completeness of the list of decisions identified is, “If the company makes all these decisions well, is there a good chance that the company will succeed?” If the answer is yes, then the list of decisions is (near) complete. Students can also be asked to identify who is responsible for each of these decisions before and after Ted and Frank take over. This discussion should lead to a creation of a chart such as that shown in Figure TN-2. This figure clearly illustrates the shift of power in the company from the top of the organization, particularly Sarah, to the department managers. This is clear evidence that decentralization has taken place. Ted’s Use of the Control System In the case, Ted says that his key challenges are: - Managing cash; - Installing a control system to support management and provide information to make decisions; - Taking control from Sarah. Ted seems to feel that the primary way to achieve profitability is through better information. It is hard to disagree with this, but some students might argue that such a formal control system is overkill in such a small company. Most managers of companies with only $10 million in annual sales would collect information much less formally. This raises the most interesting ideas in the case: Ted’s view of the management process. Ted also talks about using the control system as the “black hat” in a process where managers have great freedom of action. He says that he doesn’t have time to exercise more direct top-down decision-making. He stresses his role as a teacher. In defense of this style of management, students will make the following points: - A formal system positions the company for growth; - It frees Ted’s time so that he can do more important things; - Decentralization gives authority and responsibility to department heads.
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Kenneth A. Merchant and Wim A....