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'- 7'31"er :1": Case StUdy -" ---'-'---"-----'-= "' PEI; A Breakdown in the Enforcement of Management Control J_. '...

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  1. Analyze the challenges faced by PCL in reducing returned sets and NFF returns.
  2. Aside from the recommendations put forth by PCL, what other actions might improve the return rate of TV sets?
  3. What challenges can PCL draw from its exercise in controlling the high rate of returned TV sets to inform its execution of internal control mechanism in the future?

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PCL 1.jpeg

— '- 7‘31“er :1“: Case StUdy -" — --———-‘-‘---“-----‘-= "' PEI; A Breakdown in the Enforcement of Management Control J_._:I__'. ' -"'"" POL: A Breakdown in the Eniorcament ol Management Control 9.31. was a leading European consumer electronics,
lifestyle. and healthcare company that had entered
the Chinese market in 1985. While its consumer
electronics business grew steadily in China, the costs
of returned sets in its TV division amounted to 5%
of the division’s total sales in 2008. Even more
worrying was that 37% of the returned TVs were of
good quality and had been returned without good
reason. PCL taskforces set up to study the situation
found that control measures designed to handle
returns were simply not being carried out by staff and
third-party after-sales service centres. What could
PCL do to remedy the situation? THE CONSUMER ELEETHDNIGS INDUSTRY
Ill CHINA With a population of 1.3 billion and rising dis-
posable incomes. China had become the second-
largest market for consumer electronics in the
world.' Analysts forecasted a compounded annual
growth rate of 9.8% through to 2014 for consumer
eiectronics, with growing demand for TV sets and
computers in smaller cities and rural areas being
the main driver.2 As the market in the big cities had
become saturated, market competition had moved
increasingly to smaller cities and rural areas. Sales
of consumer electronics products in these markets
were further enhanced by the government’s subsidy nine provincial areas since 2009 had also helped to
stimulate demand. The television market in China it was no surprise that China, a country that pro-
duced 42% of the world’s total shipment of TV sets.3L
had a strong TV market. Domestic manufacturers
alone accounted for three-quarters of its liquid-
crystal display (LCD) TV market in 2009':1 Driven
by consumers’ preference for large-sized TVs and
by falling prices, China was forecasted to surpass
North America as the largest LCD TV market in the
world, with sales reaching 29 million units in 2010,
translating to more than 30% in growth year-on-
year.5 The growth would be driven by consumers
replacing their cathode ray tube (CRT) sets with
LCD sets. especially in third— and fourth-tier cities.°
International brands faced fierce competition from
domestic brands, which enjoyed advantages in both
cost control and distribution. and price wars were
common as domestic brands lowered their prices
to increase their market share. Large retail chains
played a critical role in the retail market for consumer
electronics in China, and competition for shelf space
in such chains was fierce. Manufacturers became
involved with the promotions, marketing, and supply
chain management of these chain stores in order to measure. which Ofiemd rebates for thm5 0f 3 It. Zhang, “China "W Market to Enjoy Solid Growth in 2014,"
consumer electromc goods in anal areas. Another isuppn {April 25, 2010). online. www.isuppli.comfl)isplay- government progranune that allowed consumers to ”3‘“Tia]S'3"d'53Slemme‘watcnipafiesiChl“‘“W‘M”k¢" trade in old electronic appliances for new ones in 4 {1:}:er Sflhdflmwfl] m 2014351“ (accessed 20mm 2010}. 5 “Coming: China to Become World‘s Biggest LCD TV Market.“
SinoCasr Business Bear (April 14, 2010]. online. www.
tradingmarkets.con1lnewslstock-alerllglw_dtek_corning-
china-to-become-world-s-biggest-lcd-tv-marltel-910387.html
[accessed 20 June 2010). i' “Overview of China's LCD Market." GjK Retail and Technology
(March 29. 20101 online. www.gtkn.conunews_eventsnnarket_
news}sing]e_sitesl005606fu1dex.en.htrnl [acccssed 30 June 2010). F ' Tauumer Electronics in China." Eammem’ror (April 2009),
online. www.curornonitor.conu’Consumer_Electronlcs_in_China ‘ [accused 201m: 2010]. ' ”Guns Cetuumer Electronics Report 03 2010." Business Monitor
international (2010) online. www.pr-inside.comfchina—consumcr—
electronics-repen-q-rlilfl5491.hnn (accessed 10 June 2010]. “Iii case was prepared by Grace Loo under the supervision of Professor Neale O‘Connor.
Watt 0 by The Asia Case Research Centre. The University of Hong Kong. 181

PCL 2.jpeg

Chapter 4 . liontrol System Trghtness build relationships with them.7 Others opened their slow-moving 30095 that were not supposed
own branded stores so they could have a direct hand returned (see Exhibit 2). to be in shaping consumers' purchase experience. POL Consumer Electronics - background PCL was a high-tech multinational company based
in Europe. Since its establishment in the late
nineteenth century, it had diversified into multiple
industry segments. The diversification strained its
resources and consequently PCL reshaped the
organization to focus on the healthcare and elec—
tronics sectors. In 2010, it had a sales and service
presence and manufacturing sites in more than
100 countries around the world. PCL's consumer electronics division (PCL Con-
sumer Electronics) was a global player in digital and
electronic devices, bringing the latest technology and
human-centered designs to the market. Its product
portfolio included colour TV sets, DVD players,
audio products, PC monitors, and PC peripherals.
PCL Consumer Electronics had a sales and service
presence in more than 50 countries and manufactur-
ing sites in France, Hungary, Belgium, Brazil, Mexico,
and Argentina even though it outsourced its produc-
tion heavily. PCL Consumer Electronics placed a
strong emphasis on emerging markets such as China
and India. It entered China in 1985, and by 2008 its
sales organization on the mainland had grown to
550 people with annual sales of US$752 million. (See Exhibit 1.} REPAIRING THE BROKEN SYSTEM Returned sets The TV return process
After—sales service for PCL’s TV division was
by authorized service centres {ASCs}, which “Org third~party service centres authorized and by PCL’s after-sales service team. Under m1
consumer law, consumers could return a (lemma
TV set to the retailer from whom they Infidel:
purchase within five days or exchange it foranew
one within 15 days. Retailers sent PCL sets MUM
by customers to the company’s ASCs, which Winn
decide whether to accept the return and IBpaiy “Em
If the defect was serious, the ASC would send Ills
set back to PCL’s factory for repair. Investigation In response to the high volume of returned sets and
high NFF returns, PCL’s management W
the product marketing manager of the TV divisimj
who was also familiar with the return process, to
look into the matter so appropriate actions couldbe
taken. He formed a taskforce that brought together the sales operation manager, the service manager, and
the financial controller of the TV business. The team
set out to investigate the situation and uncovered; number of causes fer the problem.
Neither retailers nor ASCs had been helped in educating customers about product performers:
or the criteria for accepting returns. Retail stuns usually used high-definition signals for product
demonstrations, but most consumers used cable TV at home. As a result. consumers often been: In 2008, the handling of retumed TV sets cost PCL dissatisfied with the picture quality after they tacit
an average of U556 million, equal to about 5% of the TV set home and would try to exchange it fora
its annual TV sales. The costs covered freight from new set or simply return it. While PCL had esul}
the dealer to PCL’s warehouse. repair, and tefurbish- lished return criteria that were as stringent as those
ment at the factory workshop. While PCL spent a of its competitors, retailers and ASCs often failed
hefty sum each year servicing returned goods, about to execute them properly, accepting returns without
37% of the returned goods were no—fault-found {NFF'J proper screening. returns, translating to a loss of US$2.2 million Chain retailers were significant playersinCit'ma'S
for PCL. NFF returns also included demo sets and consumer electronics market, and consumer cler-
tronics companies could not maintain their tnatltt’i
share without selling through them. Because no
international TV brand possessed unique profile"
features or technical advantages that differentialsd its products in the market, the manufacmmfi' ”5' T I. B. Von Morgenstem and C. Shu. "Whaling the Battle for the
Gripes: Cortsurner Electronics Market," (September 2006), online.
wurw.mcltinseyquarterly.conuHighhTecbeardwareflVinning_
die_battle_for_the_ChirIese_consumer_etectronit:s_marltet,_1855
[accessed 20 June 2010).

PCL 3.jpeg

0pm“ was to make concessions in their negoti-
aliens with chain stores in order to maintain good
relatiOHShiPS with them and in turn receive higher
visibility at the point of sale. PCL, for instance.
cut 35 profit margins and accepted returns of slow-
mo'ring models and demo sets in order to secure
prominent display locations in the stores. in addi~ flan, PCL salespeople had to meet sales targets and
required the support of dealers to achieve these
targets. This made it hard for many salespeople to
say no to unreasonable remrns because doing so
might jeopardize their relationship with the dealers.
Moreover, they put little effort into investigating
the returns, despite established approval procedures
for returned goods. PCL’s after-sales service team, which was respons-
ible for overseeing the ASCs. did not report to the TV
division directly, but instead reported to the general
manager of the organization, a line of reporting that
reduced the incentive for the after-sales team to
control TV returns or to monitor the third-party ASCs
stringently. Not only did the ASCs fail to inspect the
returned sets carefully, they sometimes faked their
inspection records instead of rejecting the return of
TV sets. The situation was further aggravated by the
fact that PCL had no punishment policy for fraud or
incompliance on the part of A503. Action The team came up with a series of actions based on
their initial assessment of the situation. The sales team‘s atmual performance appraisals would be linked
with TV returns and the cost of servicing returns,
and this new measure was communicated by the
TV sales director to all the salespeople. The service
manager also communicated to ASCs a new policy whereby they would be fined three times the labor
charge for each fake inspection record discovered. The project team forecasted that their plan would
reduce the return rate to 3.5% and the NFF rate to 20% within two months, but their projection did not
materialise. In fact, the NFF return rate went up to 40% after two months. Upon further investigation,
the general manager and the production manager
of the TV division discovered two reasons for the
rising rate of NF retruns, despite their efforts. First,
the sales team was under enormous pressure to meet
their sales targets, which was set at 132% of the sales
of the previous year, a rate that exceeded actual PUL: A Breakdown in the Enforcement of Management Control market growth. In order to reach their targets, they
put pressure on the dealers to increase their pur-
chase volumes, leading to higher inventory levels
and tighter cash flow. To counter these problems.
dealers negotiated with salespeople to accept returns
and to allow exchanges of demo sets and slow-
moving goods for new models. The second reason
was that the after-sales service team had failed
to take punitive action against the ASCs for fake
inspection records. There was little incentive for the service team to respond to the A305’ uansgres-
sions, as it did not report to the TV division and
its performance indicators were not linked to the
amount of goods returned. Second try Dissatisfied with the outcome, the general manager
of PCL Consumer Electronics appointed the service
director. who reported directly to him. to lead the
taskforce. The service director was also given the
authority to handle issues that did not usually fall
within his scope of responsibilities in order to tackle
the problem. Once appointed. the service director
put together a new cross-functional team, with each
member responsible for a specific area for improving
the return rate and NF return rate, as follows: I service director — served as team leader, 0 service manager — managed the ASC network; I chief financial officer— responsible for the financial
results of the team; 0 TV sales operation manager — engaged in dealer
management; I service financial controller — performed service cost
computation and analysis; e TV product manager — ooncemed with process imple-
mentation and improvement. The team set specific targets: 0 TVNFFretumratetobereducedfromtl-O‘lhtolfl‘i’n; I TV return and exchange rate to be reduced from
5% to 3.5%; I total savings of US$1 .13 million within six months. The service director also applied for some
US$4,500 as a bonus for the team, to be used for
an outing or teambuilding exercise if it could meet
its targets. The general manager of the consumer electronics division endorsed the proposal and also
183

PCL 4.jpeg

Chapter 4 - Control System lightness incorporated the project targets into the bonus scheme PCL’s regional service managers and engineers Would
of the team members such that they would lose their also visit the top 10 ASCS for returned goods H which annual bonuses if the targets were not met.
The team analyzed the situation and the following actions were drawn up to remedy the situation: 0 Given that both the sales team and the ASCs were
failing to enforce the established criteria for accept-
ing returned goods, PCL had ended up being more
accepting of returned geods than its competitors. To
manage the situation, the TV sales operation man-
agar was put in charge of rotating the regional sales managers and salespeople geographically in order to
prevent the sales team from becoming too friendly
with the dealers. o The'I'Vsalesoperationmanagerand service director
were put in charge of ensuring that no models that had been phased out for more than six months would
be accepted for return. I The TV sales operation manager and service direc-
tor were also put in charge of defining clear and
sound criteria for the inspection and acceptance of
returned merchandise. 0 The TV product marketing manager and service
director were put in charge of organizing training
on the return process and criteria for all individuals
involved in making decisions in the return process. The team quickly get to work, defining the criteria
and monitoring measures to control the retum process: a For goods that were defective upon arrival at the
dealers’ warehouses, PCL would accept return only
if they were functionally defective or there were
serious cosmetic failures vis-a-vis PCL's standards
for finished goods. 0 For defective goods returned within 15 days after
purchase by consumers, only functional failures
would be accepted as grounds for return. 0 Retumed goods were to be accepted only after
approval by cross-functional personnel. 0 Returned goods would be required to come in
their original PCL packaging, with all the original
accessories. 0 Models that had been phased out for more than six months would not be accepted for return or
exchange. together were responsible for 40% of mom“ returns — and provide training sessions With deficits:
working instructions to the ASCs. A new imam“
and penalty scheme for ASCs was also drawn up
with the following mandates: ‘ 0 increased labor charges for inspection of returns;
a penalties for NFF returns; 0 quarterly bonuses to those with the highest levels
of compliance. On the sales team side, the TV sales operation man-
ager worked closely with the TV sales directors to
draw up a detailed rotation plan. Field salespeop1e
were required to visit top dealers within their respec—
tive regions on a weekly basis to solicit feedback
and to implement follow-up actions. The plan was
fulfilled after seven months and extended to 52% of the salespeople. The project team met every two weeks for reviews
as remedy measures were implemented. Immediate
actions were taken to correct any weaknesses that
had materialized and warnings were issued to those
responsible for them. The team was able to adhere
closely to the project schedule. After six months, the NFF return rate was reduced
to 12%, surpassing the team’s target of 20%. The
return and exchange rates dropped to 3.2%, surpass-
ing the team‘s 3.5% target. The team did not meet
the target of US$1.13 million in savings, though it
came quite close at US$1.1 million, and thus the
team was awarded its bonus. EPlLl'lGUE After the hard work of PCL‘s two taskforces, PCL
finally managed to bring the issue of the high retum
rate of its TV sets under control, The work of the
two taskforces had revealed a major issue in enforce-
ment within the organization. Even the best strategy
or business plan could only be effective if it was
properly executed. What could PCL do to ensure that
internal control measures would be enforced properly
to achieve organizational objectives in the future?

PCL 5.jpeg

t
PCL‘ A Breakdown in the Enforcement of Managemefl Gl- consume! Electronics in China: organization chart Efiilflfi‘ P
PCL Consumer Electronics China Service &
Supply Chain Peripheral &
. Accessory Audio & Video ales and returns E1013": HoWoiTiis 3395 1-5.3 9??! [“H. 59.1959? _ . I After-sales service team - 2299?]? fl‘iiyfflf’: - - -
o Faiied to inspect the returned Sets --_.§'_ .F.a_k£ B_e.tyfl:l§--- caireiulh,r ____§_=!%i%91999¥_9?9'5_m1
15 days exchange ‘6
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GR
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3. E.
=
"I" ............... TVsaIes ———P W returns ------ * .
' Note: Dealer Hetums = Demo sets + Slow moving disgursed as TV returns

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