[SOLVED] Mestral is a highly successful company

Mestral is a highly successful company manufacturing a range of quality bathroom fittings. For the past fifteen years production has been carried out at three locations: Northern town in the North East of England; at Western town on the Severn estuary; and at Newtown, thirty miles outside of London. Each plant is of more or less equal size and equipped with the same technology. The similarity between Mestral’s three operations does not end here. As a result of policy decision made years ago, each plant also produces the same range of products.
As well as providing a measure of cost savings in terms of supplying different UK markets, this arrangement has provided a basis for a measure of healthy interplant competition, to the benefit of both customers and company. A hybrid organization structure has evolved in the company. Each of the three plants is managed by a General Manager who is member of the Mestral board, and who reports to the Managing Director. At each plant there is a Human Resources Manager, a Plant Manager, an Operations Manager and, more recently, a Quality Manager.
All four report to their respective General Managers. The company’s head office is located at the Western site. A further three management functions are based here: finance, marketing, as well as information and communications, each headed by a director to whom the relevant plant level heads report. The Director of Corporate Affairs is also based here and holds the position of Assistant to Managing Director.
There are three non-executive directors on Mestral’s board, one of whom acts as the company Chairman, while a second is the Director of Western Business School. For many years Mestral has sought, with some success, to create a flexible management team. Management trainees have a wide range of academic backgrounds. Their training is structured in order to allow them to gain experience across the whole range of functions and in all three plants. In most cases trainees identify in which particular function they wish to pursue the next stage of their management development. The company is very supportive of studying for professional qualifications, and in due course pursuing an MBA or similar management qualification. In exchange, the company expects that the managers will remain geographically mobile into their mid-30s. Consequently, most of the company’s senior managers have a wide-ranging experience of Mestral’s activities. For example, the General Manager at Newtown was previously Human Resources Manager at Northern town site whilst his counterpart at Northern town had served as both the company’s Director of Information and Communications at headquarters, and as an Operations Manager at the Newtown plant. The company is non-unionized.
A strong staff association has evolved in the past decade, receiving both significant organizational and financial support from the company. Industrial relations have been excellent for the past fifteen years, during which time earnings have been relatively high, partly as a consequence of the operation of a company-wide annual profit related bonus system. There has never been any history of lay-offs, short-time working or redundancies, nor has the size of the workforce increased since the mid-1980s. Such is the reputation of the company that a growing proportion of the current workforce has secured employment with the assistance of longer serving family and friends. Despite this, a section of Mestral’s management is concerned that recent improvements in the labor market in some parts of the country may eventually be to the detriment of the company.
The Problem
Mestral is currently in need of a major refurbishment of its manufacturing equipment for two reasons. First, its existing machinery is now coming to the end of its useful economic life in each of its plants and requires replacement. Second, a new generation of technology, one capable of delivering a much higher level of quality across the industry, is imminently available. One of the reasons why the company has not invested in new technology earlier has been that, like most of its competitors, it has been awaiting a new generation of machinery. Funds for purchasing new equipment are readily available within the company.
Indeed, Mestral has been rather too cash rich in the past couple of years, and the board has been increasingly concerned that its healthy balance sheet might attract unwanted attention from predators. As well as promising a significantly increased quality of product, the new technology also promises to increase productivity by almost 50 per cent.
This is not welcome news for the company because it means that one of its plants will inevitably have to close to take the maximum benefit from the proposed refurbishment programmed. Because Mestral has been so successful in its marketplace, there seems little or no opportunity to grow the business to match the increased capacity that three refurbished plants would provide. It is possible that competitors who buy the new technology might soon be able to match the impressive product quality levels that Mestral has achieved in recent years. While price may not be of paramount importance in the case of the company’s product range, it would be commercially naïve to contemplate operating the three plants at a reduced capacity in the short to medium term while searching for an alternative long-term use of the excess capacity. At best it might be possible to identify which of the three plants will be the least profitable after introducing the new machinery, then explore the case for producing a different product range at this location.
Board Meetings
It is usual for Mestral’s board to meet on the third Wednesday of each month to discuss the previous month’s performance, and how this impacts current and future operations. Strategic matters are considered in the second half of the meeting, following a short break for tea and biscuits. Custom and practice is that the latter matters, and associated papers are not provided to board members in advance of the meeting, necessitating a measure of brainstorming among those in attendance. The opportunity to contribute more reasoned thoughts is afforded by means of a restricted access website, an arrangement that also has the benefit of promoting strategy formulation by communication, cooperation and consent. At the November board meeting the Finance Director is to present the findings of an analysis of the relative profitability of the company’s three plants, both currently and following the introduction of the new technology. In the light of this, he will also outline the options that appear to be available to the company.
The Meeting
Following the customary break for tea and biscuits, the Chair called the meeting to order. He indicated that there was only one item for discussion on this occasion, the future pattern of operations following the imminent investment in manufacturing technology by the company. The Finance Director began with the announcement that the company had finally identified the supplier of its much-needed new equipment. He thanked colleagues for their participation in what had been a lengthy process of evaluation and expressed confidence in the company’s choice of supplier. Funding the new investment remained unproblematic. In truth, he added, it has been more of a problem to have concealed the fact that we are able to contemplate such a massive outlay of funds from competitors and potential predators.
After a brief pause the Finance Director continued by revealing that there was a serious downside to the proposed refurbishment. Because the company had been largely concerned with identifying a supplier that would offer machinery capable of improving the quality of its product range, and to do so in a cost effective way, very little attention had been paid to the question of productivity. The new technology promises to increase productivity by almost 50 per cent. Normally this would be regarded as a positive situation, but not in this case.
The Marketing Director has identified that it is unlikely that the company can increase its market share in the short to medium term. While prices might hold up, there is a reasonable chance that those competitors who might also make similar investments in technology may be successful in challenging the company’s market share. On this basis it would be commercial suicide to re-equip all three plants with the new technology. One plant has to close.
In order to identify which plant is to be closed, the finance group at headquarters has found itself involved in a novel set of investigations: determining the relative profitability of the three plants before and after the introduction of the new machinery. All three plants have been profitable for many years, generating healthy cash flows. Market share has been rising, aided partly by the flexibility afforded by the decision to continue a policy of undifferentiated production at three locations. The investment in a quality programmed has added significantly to the health of the business. Taken together, all of these indicators of commercial health have obscured the possibility that old-fashioned profitability might have become a problem of late.
There was now an increasing sense of unease around the table, particularly among the three General Managers. The Financial Director continued. All three plants remain profitable. Two continue to produce almost identical results, but there is clear blue water between them and the third site. At this point the Managing Director, in a well-rehearsed man oeuvre, intervened to name the unfortunate location.
The least profitable plant was at Northern town. On all the evidence currently available to those who had been involved in these investigations, the long-awaited move to the new technology seemed likely to see an end of company operations at Northern town. The Managing Director invited Northern’s General Manager for his reaction to this shock revelation. He began by observing that he had only returned to Northern town 18 months previously. As a local, this was the place at which he had started his career with Mestral, a career that had seen him spending time in the other two plants, as well as at a fourth plant some 20 years ago.
Most recently he had been the Director of Information and Communications at headquarters, a post he had occupied for a number of years following his return from his MBA studies at Harvard Business School. He had hoped to end his time with Mestral at Northern town plant, but not like this. It was ironic that in its attempts to keep abreast of contemporary developments in management accounting, sight had been lost of the need to monitor profit levels. He felt particularly for his workforce. It had consistently demonstrated its loyalty to the company. Of course, the great majority would cope with the closure if that were the reality for them. People in this region have had to get used to coping with such shocks.
At this point Newtown’s General Manager intervened. He began by suggesting that his colleague was painting a rather romantic picture of commitment at the plant. Equally, things weren’t so bad jobwise nowadays. There was plenty of investment funding available, which possibly had something to do with the number of local MPs who now found themselves sitting around the cabinet table. He and his family had certainly enjoyed themselves there. They know how to have a good time, and don’t let very much get in the way of this. He felt that it was important that members recalled what they had all learned in their various accounting courses, namely that you can’t argue with hard accounting numbers. Indeed, they come no harder than profit measures, and it was unhelpful to suddenly begin to worry about the hard outcomes that might ensue. Western town’s General Manager was then invited to offer his thoughts.
He began by saying that he felt a little uncomfortable. He too had greatly enjoyed his time in Northern town but wondered whether his colleague from Newtown had actually worked with the same people he himself had. He continued by observing that the numbers look compelling enough and that he was sure that colleagues in finance and marketing had worked them every way possible. Reluctantly he had to conclude that they conveyed a truth that must be faced. This said, were there any other possibilities, had the accounting people looked at alternative scenarios? The Director of Corporate Affairs responded first.
One solution was to try to dispose of the Northern town operation. It was a profitable venture, although there was clearly a problem of overcapacity across this segment of the market given the potential afforded by the newly available technology. This was not the ideal time to try to sell even a profitable business unit with a loyal workforce and an enviable commitment to customer satisfaction. On the other hand, interjected the Managing Director, there is always the option of trying something new at the Northern town site. If we are able to continue to satisfy demand from two plants, and if we can successfully segment our markets, then the company might be able to switch its production to a different product range. He continued by observing that this might prove to be an expensive venture.
There would still need to be significant investment in machinery, as well as in marketing. Additionally, it was difficult to estimate how much it might cost to move down market given that forgetting, like learning, could never be a costless process. In his view, pursuing such a diversification strategy could prove disastrous. If it was unsuccessful, it would inevitably mean that the company as a whole would have to bear significant losses, and then, in the last analysis, still be in a position of having to make redundancy payments. Northern General Manager replied that he was confident that his workforce would readily respond to such an opportunity, and that it would quickly become a profitable operation. He added that nobody could deny that they had earned the chance to show what they could do for the company in the coming years. His final observation had a certain logic to it. It was not as if Northern town’s plant had contributed a succession of losses to the company, so why should it begin now? Newtown’s General Manager was not persuaded.
His case was simple. First, Mestral had not considered diversifying for the past decade. Second, the company was now entering a period of uncertainty, which was not a time for contemplating change on many fronts. Third, while agreeing that the Northern town plant had contributed a stream of profits, this could be wiped out very quickly if the proposed diversification venture failed. Finally, it was unreasonable to expect the other two General Managers to feel fully motivated knowing that there was a reasonable chance that their profits were to be used to shore up an already less profitable operation. In other words: hard numbers, hard choices, hard outcomes. While all of this was happening, the Managing Director’s secretary knocked and entered the room. She approached the Chairman and discreetly placed a short note in front of him. When the Newtown General Manager ended his contribution, the Chairman brought the proceedings to an abrupt halt. He asked the three General Managers to leave the room, together with the Marketing and Information and Communications Directors. After a brief discussion involving the six remaining directors, they were invited back only to be informed that the meeting was now adjourned, and that they would receive further information tomorrow morning. Somewhat perplexed, they left to make their ways home.
The Message
At ten o’clock promptly, every board member received a short message from the Chairman. For whatever reason, the information on relative profitability provided to members was incorrect. It was the Newtown plant that was less profitable than the Western and Northern town plants. The figures were correct, it was the files that had been mixed up. Consequently, members were now requested to attend a continuation of the previous meeting on Wednesday next at 1.30pm. The Newtown General Manager was devastated by this news. Having convinced himself that the Finance Director’s people couldn’t possibly have got it wrong again, he summoned his most senior managers to an emergency meeting. Now that it was their plant that was to be the focus of attention it was vital that they were able to construct a business plan that would be sufficiently convincing for the board to allocate the necessary funds to pursue it. Everyone with any accounting knowledge was drafted into this working party. When they got down to it, it soon became apparent that there were plenty of opportunities to make savings in the operating plant. This didn’t unduly encourage the General Manager as he was sure that much the same was probably likely across the company: an issue for the future. The immediate problem was to assemble a watertight case for supporting what he had only recently identified as an unnecessary set of financial risks. And by 9.00pm the following Tuesday evening, he was convinced that his operation had a viable future.
The Settlement
As he entered the head office building, the Newtown General Manager noticed that there was a small group of people sitting quietly in one of the meeting rooms. He thought he recognized one of them as a financial journalist but couldn’t be sure. When he got to the boardroom, he found that he was the first member to arrive. He had slept well the previous night, the drive from Newtown had gone well, and he now had plenty of time to look through his papers. A positive outcome was surely on the cards!
At 1.30pm the Chairman opened the meeting, thanking his colleagues for their understanding and patience since their last meeting. He had two announcements to make before members continued their unfinished discussions of Wednesday last. First, he was delighted to be able to tell members that John Fotherglen, the General Manager at Northern town plant, had accepted the post of Director of the Northern University Business School. Second, a firm offer had been received to purchase the Northern Plant from the company.
The buyer had assured the Managing Director and himself that all jobs at Northern were safe, and that in fact it was the plant's workforce that was the principal attraction to them. Consequently, there was now no necessity to discuss closures or diversification any further. The difficulties in installing an effective system of cost management at the Newtown plant, in the first instance, was their new priority. The meeting did not last too long. The Chairman closed the meeting by tabling a press release. He indicated that it contained no reference to their recent administrative blunder. Nevertheless, he warned members to be careful when talking to the press after the meeting. In times of rapid change, the market situation of even the strongest players can easily be undermined. It is important to put the most positive spin possible on the disposal of the Northern plant. On leaving the meeting, the Newtown General Manager was cornered by the familiar face he had noticed before the meeting. He asked about the substance of rumors that the sale of the Northern town business had extracted him from a very difficult situation. He couldn’t resist offering the following response: nobody could surely believe that it was a realistic option to close down an operation in his part of the world.
Required:
1. Identify and discuss the various ways in which accounting information is enrolled by the members of Mestral’s board.
2. Outline the way in which the Newtown General Manager might have presented his case to the board, in the event that no buyer had emerged for the Northern plant. In terms of the theory introduced in the chapter, how might his modified stance be described?
3. Consider the value of a continuum approach in understanding the various roles or purposes that accounting can have for different organizational participants.
4. Burchell et al. (1980) (see Bibliography in text) observed that: ‘Accounting, it would appear, is made to be purposive rather than being inherently purposeful.’ (p. 13). In what ways is this borne out in the Mestral case?

Question: Mestral is a highly successful company