45 "HSBC Chief Ba (September 13, 2008), online (www. Case Study Harwood Medical Instruments PLC Harwood Medical Instruments PLC (HMI), based for product quality and reliability was high. The just outside of Birmingham, England, manufac- divisions varied significantly, however, in terms of tured specialty medical instruments and sold them the degree to which their success depended on, for in market niches that were becoming increasingly example, development of new products, efficiency Bonuses for division general managers were competitive and price sensitive because of pres- of production, and/or customer service. sures to reduce health care costs. HMI was organ- ized into nine divisions each run by a general paid semi-annually. Up to the year 2009, these manager. Over the years, HMI had grown both bonuses were calculated as 1% of division operat- organically and by acquisition. Six of the divisions ing profits. had been acquired by HMI within the past decade. HMI's managing director, Andy Guthrie, had All of HMI's divisions sold medical products to concerns though that the operating profit measure hospitals, laboratories, and/or doctors, so the need was too narrowly focused. He had been reading This case was prepared by Professor Kenneth A. Merchant. Copyright by Kenneth A. Merchant 386 Harwood Medical Instruments PLC If the bonus calculation resulted in a negative was adjusted as follows les about performance measurement and to implement a "more balanced Scorecard amount for a particular period, the manager received November 2009. just before introducing a new no bonus. Negative tumounts were not carried for u plan, Mr. Guthrie explained to his chief ward to the next period colorier that he willing to pay out Exhibit I shows results for two representative improved performance warranted doing so. Argher bonuses than had been paid historically if HMI divisions for the year 2010, the first year under the new bonus plan. The Surgical Instruments The new plan provided a base bonus for division Division (SID), one of HMI's original businesses, general manager of 1 of division operating sold a variety of surgical instruments, including scis. As for the half-year period. This hase bonus sors, scalpels, retractors, and clamps. The markets for these products were mature, so growth was .cd by 15.000 fover 99 of deliveries were relatively slow. Not much innovation was needed. nume by 42,000f 95-994 of deliveries were on but controlling costs was critical. The Ultrasound De or by renof less than 95% of deliveries were Diagnosti Equipment Division (Ultrasound), which was acquired in 2007, sold and serviced ultrasound Increased by 5.000 it sales returns were less than probes transducers, and diagnostic imaging systems, requal to 1st of sales, or decreased by S0% of the The ultrasound market promised excellent growth and ccess of sales retums over 15 of sales profits if the division could keep its sophisticated Increased by 1,000 for every patent application control both product development and production products on the cutting edge technologically and filed with the UK Intellectual Property Office costs effectively. Reduced by the excess of scrap and rework costs ever of operating profit In 2009, the total annual bonuses for the Reduced by 5,000 if average customer satisfaction sound were approximately 85.000 and 74.000 year camned by the managers of SID and Ultra- respectively. et time ratings were below 90% Eat 1 Harwood Medical Instruments PLC Operating results for the Surgical Instruments and Litrasound Diagnostic Equipment Divisions, 2010 fe in 000) Surgical Instruments Ultrasound Diagnostic Division Equipment Division 1st half of 2010 2nd half of 2010 1st half of 2010 2nd half of 2010 29.000 4,060 94.69 Sales Operating profile On time delveries Sales returns Patent applications filed Sors and rework costs Customer satisfaction (average) $42.000 14.620 95.4% 1450 0 E51.1 78% 44,000 4.400 97395 420 1 145.0 $28.600 3,420 98.2% 2291 4 239.7 81% $299 8 282 91% 89% 387 2. Calculate the bonus earned by each manager for each 6-month period and for the year 2010. 3. Evaluate the new plan. Is there any evidence that it produced the desired effects? What changes to the new plan would you suggest, if any