Case Analysis: Chadwick Inc. case analysis Hamzah. Najib, Mustapha, Syed Hasan Background of Case 6: CHADWICK, INC. : THE BALANCED SCORECARD (ABRIDGED) Chadwick. Inc was a diversified producer of personal consumer products and pharmaceuticals. The Norwalk Division of Chadwick developed, manufactured and sold ethical drugs. The company was respected for the high quality of its products. Norwalk sold its products through several key distributors who supplied local markets. Norwalk relied on its excellent relations with the distributors who promote Norwalk’s products to customers and also received their feedbacks about new products desired.
Chadwick’s long-term success depended on how much money distributors could make by promoting and selling Norwalk’s products. But, recent inroads by generic manufacturers had been eroding distributors’ sales and profit margins. With regards to its Research and Development, The development of ethical drugs was a lengthy, costly, and unpredictable process. The development and testing processes had many stages, starting with the discovery of compound, extensive and tedious testing, and documentation.
Norwalk’s profitability during the 1980s was sustained by one key drug discovered in the late 1960s.
However, no smash hit drug had emerged during the 1980s, and the compounds going through development, evaluation and test was not as Norwalk management desired. Scientists in the R&D lab are pressured to increase the yield of promising new products, reduce the time and costs of the development cycle. Scientists were currently exploring new bio-engineering techniques to create compounds that had the specific active properties desired rather than depending on an almost random search through thousands of compounds.
However, the bio-engineering procedures were costly.
A less expensive approach was to identify new applications for existing compounds that had already been approved for use. Suggestions for possible new applications from existing products could be obtained from Norwalk salesmen in the field who were now being trained not only to sell existing products for approved applications, but also to listen to end users feedbacks. Norwalk’s manufacturing processes were considered among the best in the industry as they can quickly and efficiently produce drugs once they had cleared governmental regulatory processes.
Challenging financial targets were set for divisions to meet, which were expressed as Return on Capital Employed (ROCE). As a diversified company, Chadwick wanted to be able to deploy the returns from the most profitable divisions to those divisions that held out the highest promise for profitable growth. Bill Baron, Comptroller of Chadwick, had been searching for improved methods for evaluating the performance of the various divisions as division managers complained about the continual pressure to meet short-term financial objectives.
He liked the idea of a Balanced Scorecard as it balances short-run financial objectives with the long- term performance of the company. John Greenfield, the Division Manager at Norwalk was sceptical of how much freedom he had to develop and use such a scorecard. Divisional Controller, Wil Wagner, who was involved in the process for creating Balance Scorecards for Norwalk Division lamented that he did not have a clear understanding of the vision and business strategy for Norwalk, which serve as a foundation to build the scorecard.
Major Issue: The major issue of the case is with regards to company’s current processes in its R&D to develop new products which were lengthy, costly and unpredictable. There is the need to make significant investments in R&D to improve the current processes so as to enable the company to sustain and achieve success in the long run. Another major issue is that the company has inadequate or poor performance measurement to ensure managers’ efforts are rewarded for meeting the long term, strategic objectives of the company.
Presently, the company only sets Return on Capital Employed (ROCE) as the challenging financial target for the divisions to meet, which places continual pressure on division managers to meet short-term financial objectives at the expense of long-term, strategic objectives in business that requires extensive investments in risky projects to yield long-term returns. Hence, the idea of Balance Scorecard was introduced to the company. SWOT analysis Strength 1)Good reputation: Chadwick Inc. has been established for more than 50 years and it has been known for its high quality products.
The quality factor provides the competitive advantage for the company in the pharmaceutical industry. 2)Manufacturing process: The company’s manufacturing process is considered one of the best in the industry. The production process also includes producing separate batches of new products specifically for testing and evaluation purposes. 3)Excellent distributor relationship: This is the main factor that affects the company’s product success. Apart from making the products available in the local markets, the distributors of Chadwick Inc. lso serves the purpose of spokesperson. They will promote the company’s new products and increase the awareness among people about the existence, functions and benefits of the products. They also listen to customer opinions and this enables Chadwick Inc. to receive timely customer feedbacks about their products through their distributers. Weakness 1)Extensive and tedious testing process: In Chadwick Inc. , 30,000 compounds have to be tested before certain products are approves for sale.
Although this extensive testing procedures has positive impact towards the product quality and durability, it also causes the production process to be lengthy and costly, resulting in increase of manufacturing and overhead expenses. 2)Challenging financial targets based on ROCE: The top management in Chadwick Inc. has been setting challenging financial targets for the division managers. The financial targets have been set based on Return on Capital Employed (ROCE), which is considered inappropriate for a pharmaceutical company.
Due to the desperateness to meet the specified target, there is tendency for the division managers to try to manipulate the actual data to reduce the gap between the budgeted results and the actual results. 3)Pressure to increase yield: The top management has also been pressurizing the scientists of Chadwick Inc. to increase the yield of the products and to reduce the time and cost of production. Generally, if the top management emphasizes on reducing the cost, it may have negative effects on the quality of the products. Therefore, it may result in customer dissatisfaction or loss of customer loyalty.
Opportunities 1)Bio-engineering techniques: The bio-engineering mechanism can help the scientists to identify only the active compounds which desired and useful applications, instead of the random search process currently employed by the scientists. Then, they will perform tests on each and every one of them to find useful applications on the compound. This traditional search process results in wastage and very time-consuming since only one or two compounds may have beneficial applications out of ten compounds developed.
On the other hand, the bio-engineering mechanism can save time and cost for testing process. Although it requires a huge amount of investment, in the long-run, it will result in reduction on cost of production and more efficient production process as it can eliminate wastage and other irrelevant testing procedures. 2)Changing global environment: Chadwick Inc. ’s products have only been sold in the domestic markets, despite its good reputation and period of existence of more than 50 years. Nowadays, the awareness about healthcare has been increasing all over the world.
This indicates the increased global demand for pharmaceutical products. Therefore, it is best for Chadwick inc. to seek opportunity to enter into the global market. Since it has a good reputation as an established pharmaceutical company, it would be rather easier to venture into the global markets and thus, gaining more customers and higher revenue. Threats 1)Recent inroads by generic manufacturers: Generic products are products which are not patented and therefore, it can be produced by many manufacturers.
These products usually have higher demand and since there are many manufacturers, it is competitively-priced. The recent inroads by generic manufacturers may affect Chadwick Inc. ’s competitive position in the industry and one of the new entrants may emerge as a bigger player in the industry compared to Chadwick. 2)Too dependent on the distributors: Chadwick Inc. ’s product success mostly depends on the distributors’ effort in promoting them and increasing the awareness among people. They currently do not have an alternative promotional strategy rather than relying on the distributors.
In the long run, this may cause the distributors to have higher bargaining power and make expensive demands to Chadwick Inc. in order to promote their products. Critical Success Factors for Chadwick Inc. •Customer’s satisfaction-Being in the pharmaceutical industry where the competition is mostly based on differentiation and the customers value the product based on the quality and not its cost, the most important critical success factor for a company is customer satisfaction. This is related to the quality of the product.
So, the company should focus on value added processes to ensure high quality of its product that meet customers’ requirement and fulfil their satisfaction •Research and Development- To stay competitive in the long run and meet constantly changing expectations from customers, the company should invest significantly in research and development . Proper investment in R&D will ensure efficient subsequent business processes and development of high quality products that meet customers’ expectations, and thus fulfil their satisfaction. Products- Being in the pharmaceutical industry, it is very important that every new drug that has been developed and approved to be unique from other competitors’ and patented. Patented drug could generate enormous revenues to a company as it prevents other companies from selling the same drug, thus making the company who produced such drug to be the sole distributor or seller. •Internal Business Process- Internal business process is very critical to the a company’s success.
The processes, especially in manufacturing, should be cost-efficient and speedy enough to reach the customers. •Information and communication system- Sound information and communication system is critical to a company’s long-term success since it facilitates exchange of information within the company and between the company and the outside parties. Useful information such as suggestions from employees or feedbacks of customers that are communicated in a timely manner will enable the company to make decision more effectively.
Problem Identification From the case, Chadwick Inc. faces several problems within the company which can potentially harm its long-term sustainability and profitability unless the top management do something to address these problems swiftly. Among the problems are: 1) Vision and Mission: As complained by the Divisional Controller of Chadwick, the company currently does not have clearly defined business vision and strategy.
Without clear understanding and communication of business vision and strategy across all levels and members of the company, the employees or managers, especially, may commit and direct their efforts or the company’s resources in a way that may be deviated from the vision and strategic objectives of the company. By having clear business vision and mission, it will provide goal congruency, which align manager’s fforts with the company’s strategic objectives 2) Research and Development: With regards to its R&D, the problem is that the development of ethical drugs was a lengthy, costly and unpredictable process that involves extensive and tedious testing and documentation. This problem may explain why the company has not been able to produce any blockbuster drug in 1980s since the discovery of one key drug in late 1960s. Besides, scientists are pressured by management to develop promising drug and to reduce cycle time and cost. As a result, the new drug quality may not meet the criteria and approved by government.
The current process in development cycle is considered obsolete and needs to be replaced by new systematic technique such as bio-engineering technique that can significantly reduce time and costs, and enhance the potential of developing new promising product. 3) Performance Measurement: Currently, Chadwick only has one financial measure to evaluate the performance of its various divisions, which are Return on Capital Employed (ROCE). The challenging financial targets set for the various divisions to meet may lead to unnecessary cost cutting measures which can undermine the quality of products.
Besides ROCE, does not address long term objective of the company, in which divisions’ managers may disregard critical long-term investments such as buying new equipment or replacing the old obsolete assets if their minimum rate of return is less than the divisions’ current ROCE. This is because, making such investment will reduce their ROCE, which can give negative impression in the performance evaluation Recommendations: The main problems faced by the Chadwick as discussed earlier are particularly in the aspect of goal congruency and the performance measurement.
To solve such problems, the company is recommended to adopt a strategic performance measurement system that takes into account “What gets rewarded, really counts; what counts, get measured; what gets measured get done; what gets done, get rewarded” Therefore, we recommend the company to use Balance Scorecard which provides comprehensive measure of performance for each division and to ensure each business activities of the company are directed towards achieving the strategic objectives of the company . But firstly, the company should establish clear and proper business vision and mission for the Balance Scorecard to work effectively.
By having clear business vision and strategy, efforts and resources will be committed towards achieving such vision. For example, the company’s vision could be “We strive to be the most valued company to customers, employees, investors and business partners”. The company’s vision will provide broad guidelines on how Balance Scorecard is to be designed and is communicated in terms of goals which will be identified in the Balance Scorecard. Balance Scorecard basically provides a four perspectives framework to translate strategy into operational terms.
The four aspects of Balance Scorecard are financial, customer, internal business process and learning and growth. These aspects are critical success factors, on which the performance of organizational units can be assessed, which also function to achieve the company’s vision and mission. Balance Scorecard links strategy to operations, serves as a record of results achieved, indicates expected results and focuses on drivers of future performance In each of the perspectives, the main objective will be defined, along with measures to be taken, specific targets and initiatives to be carried out to achieve this objective.
Performance will be measured based on how effective the division’s or manager’s efforts and activities in achieving the objectives in each of the four perspectives. Financial perspective of Balance Scorecard how the company’s financial position or performance will be looked by the shareholders. In this aspect, the main indicators of performance is the company’s profitability, cost reduction, and the shareholder value. For example, the company, instead of just using ROCE, can also use Residual Income(RI) and Economic Value Added (EVA) as a basis of performance evaluation for financial perspective.
Since RI and EVA are based on monetary value, not in term of percentage as in ROCE, the managers may be motivated to accept investments (which may be critical to the company’s success) as long as they provide positive net income, although the minimum rate of returns of such investments are lower than the current ROCE. Customer Perspective relates to how a company serves the needs of customers and fulfil their satisfaction to be successful. The issues to be addressed are to identify market, how to attract new customers and retain existing customers.
Among the important criteria to in relation to this perspective are price and quality of products, service, customer relationship, and reputation. For example, one specific measure to evaluate the performance could be the response time to customer’s inquiry Internal Business Process basically addresses how a company can improve its internal business processes that will satisfy and add value to customers or shareholders. Among the key performance indicators are reduced cycle time, cost per unit, and increase in productivity.
For example, the objective could be to improve the quality of work place and the specific measure could be the percentage of employee who report that they are satisfied, while the target set is 80% of employee report that they are satisfied, and the initiative to be taken to achieve this objective is to establish comprehensive HR plan. As internal business process is important aspect of company’s long term success and included in the performance measurement, manager may be motivated to improve the current business processes by making new investments.
For Chadwick case, for example, manager may switch to bio-engineering technique to replace the current process in R&D as this initiative will ensure the company’s sustainability and profitability in the long run, which are in line with the long term strategy or vision of the company. Learning and growth perspective commits a firm to continually learn to excel and be flexible in their process to adapt to changing economic environment, and to meet changing customer demands and shareholder expectations.
Among important aspects of this perspective are new skills acquired by employees and intellectual assets. In this aspect, a firm identifies the infrastructure that an organization must build to create long-term growth and improvement. For example, Chadwick may invest in information technology and systems such as Enterprise Resource Planning (ERP) to facilitate exchange of critical internal and external information such as distributors’ feedback about the customers or suggestion from employees that will improve the overall process and satisfy customers.