R 
OYAL 
M 
ACHINE 
W 
ORKS 
Ltd. 
Ronald Edgerton 
, head of Royal Machine Works Ltd.’s 
valve division 
, tore open 
the confidential memorandum. 
The memo explained that failure to keep expenses in line with declining revenues 
had caused the company to record a loss in the first half of the year. Therefore, it 
would be necessary to impose stringent controls on expenditure, especially in the 
personnel field, during the second half. By the following Friday the division heads 
were to reduce staff by 10% from the level on June 30. A list of those to be made 
redundant must be on the managing director’s desk by next Friday. A total ban was 
imposed on new or temporary hiring and salary increases. Even promotions would 
not carry any rises for the next six months, although the company hoped to make 
“appropriate adjustments as soon as there is a return to reasonable profitability.” 
Before he had completed reading the memo, Edgerton was on his way to see 
Stanley 
Packard 
, the 
managing director 
. “Surely this does n 
ot apply to my 
division,” he said as he was ushered into Packard’s office. 
“I’m afraid it does,” Packard replied. “If I exempt you from these economy measures, 
then everyone will want to be a special case. That was the problem two months ago 
when we told 
everybody to bring spending into line with revenues. It simply didn’t 
work. Everyone had an excuse for why their predicted revenues did not materialize. 
That is why I decided on prescribing action that is certain to reduce our 
expenditures.” 
“My division’s sales are 5% ahead of budget and our profits are on target,” Edgerton 
argued. “In addition, we have a very strong order book and the new butterfly valve 
we have introduced is selling extremely well. We really need to expand both our 
sales force and our production capacity if we are to be able to capitalize on the 
strong demand for this product.”