Case Analysis: Enager Industries, Inc.
La Shawn Early
February 28, 2011
An Enager industry was a relatively young company which had grown rapidly to over $22 million in sales in2003. Enager has three divisions – Consumer Products, Industrial Product division and Professional Services Division. This case presents several issues resulting from the performance measures employed by Enager. These issues revolve around (1) use of an overestimated gross return criterion for approving new investment proposals, (2) comparison of three divisions as investment centers, and (3) erroneous interpretation of current financial results. Enager Industries strategy is to operate as an investment center, which approve only proposals with a 15% return. Current Management Control Systems
Enager use several management control systems in operating this company. Each division was treated as an independent company. Prior to 1992 the company ran as a profit center. After 1992 the company change over to an investment center. Each division performance was measured using ROA, Gross ROA, and ROS. Finally, the company only looked at investment proposal with a return of > 15%. Those were the only projects that were approved by management. The CFO’s target gross return for 1992 and 1993 was 12%, which was based on the cost of capital of their investments. Rejected projects that are below the 15% criterion but exceed the cost of capital were forgone investment opportunities for the company. The Professional Services Division, being in the services industry, is expected to have practically no fixed assets and very little working capital. The Consumers Products Division was operating the manufacturing industry, which has a considerable amount of old fixed assets and working capital. The Industrial Products Division, on the other hand, deals with specialized machines and has a lot of relatively new fixed assets (to be at par with current technology).
Control system effectiveness A breakdown by division would be helpful, as it would allow for deeper analysis and understanding of the performances of each division. When we look at the company- cash flow statement, it was clear that there were some investments that did not have a high enough actual ROA. By having a breakdown of each division, it would help in determining which divisions are making poor investments and which divisions are making financially sound investments. As well, a breakdown would help in determining which divisions are performing the best operationally. Currently the operating section of the cash flow statement indicates that Enager is doing well in managing its day-to-day cash flows and is able to finance its current operations. However, it is likely that some divisions are not performing as well as others in this portion of the cash flow statement, as company-wide ROA has dropped year over year. The accounts receivable increased 14% from 1992 to 1993, which suggests that Enager has been more willing to extend credit in order to attract more customers. The accounts receivable as a percentage of total assets (~21%) also indicates that credit sales is a significant part of Enager’s business. COGS rose by a smaller percentage than sales, which contributed, to the positive change in gross margin. Overall, Enager as a firm seems to rely more on smaller expenses, lenient credit policies and cost cutting rather than growth in order to maintain profitability. Also, the Consumer Products and Industrial Products divisions may be weighing down the explosive growth in the Professional Services division.
Control system does support strategy The shift from profit center to investment center was required because comparing absolute differences in profit is not meaningful. It is difficult to compare profit performance unless assets employed are taken into account. The business unit mangers had two performances…