Granger Stokes, managing partner of the venture capital firm of Halston and Stokes, was dissatisfied with the top management of PrimeDrive, a manufacturer of computer disk drives. Halston and Stokes had invested $20 million in PrimeDriver, and the return on their investment had been below expectations for several years. In a tense meeting of the board of directors of PrimeDrive, Stokes exercised his firm's rights as the major equity investor in PrimeDriver and fired prime's chief executive officer (CEO). He then quickly moved to have the board of directors of PrimeDrive appoint himself as the new CEO.
Stokes prided himself on his hard-driving management style. At the first management meeting, he asked two of the managers to stand and fired them on the spot, just to show everyone who was in control of the company. At the budget review meeting that followed, he ripped up the departmental budgets that had been submitted for his review and yelled at the managers for their "wimpy, do nothing targets." He then ordered everyone to submit new budgets calling for at least 40% increase in sales volume and announced that he would not accept excuses for results that fell below budget.
Keri Kalani, an accountant working for the production manager at PrimeDrive, discovered toward the end of the year that her boss had not been scrapping defective disk drives that had been returned by customers. Instead, he had been shipping them in new cartons to other customers to avoid booking losses. Quality control had deteriorated during the year as a result of the push for increased volume, and returns of defective disk drives were running as high at 15% of the new drives shipped;. When she confronted her boss with her discovery, he told her to mind her own business. And then, in the way of a justification for his actions, he said, "All of us managers are finding ways to hit Stoke's targets."
1. Is Graner Stokes using budgets as a planning and control tool?
2. What are the behavioral consequences of the way budgets are being used at PrimeDrive?
3. What, if anything, do you think Keri Kalani should do?
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1. Granger Stokes is using budgets as a weapon of mass destruction instead of as a planning and control tool. A solid sales budget can provide the company with several pieces of pertinent information including supply chain considerations (how much and of what type of goods to purchase), human resource considerations (how many people to hire or lay off), and compensation considerations (at what level to offer bonuses based upon performance).
2. When budgets are falsely inflated just for the sake of looking good at the beginning of the year, several bad behaviors follow. First, additional staff are hired and/or kept on board increasing sales and admin expense thereby decreasing profitability. In addition, customers become ...
The solution describes how a tight budget might actually encourage bad corporate behavior instead of simply keeping costs under control.