Thomas J. Lipton, Inc.

Thomas J. Lipton, Inc. wanted to move from a financial reporting system that focused on the company as a whole to one that allowed individual product lines--and their managers--to be measured according to their contribution to profit and their costs. Thomas J. Lipton is a subsidiary of Unilever, a company which also takes inflation and its effects into consideration when looking at the various contributions of its business units. The subsidiary put into place extensive accounting changes more rapidly than it originally planned, and the result was disgruntlement among managers and uncertainty among the plan's developer.

Thomas J. Lipton is a small participant in the highly competitive and mature food processing industry. The company receives most of its revenue from its tea line, but also participates in prepackaged foods and soups, along with other products. Until the accounting changes that were put into place in the early 1980s, the company reported its financial information using actual figures, not taking into account inflation or its effects. The company had seen increases in sales and profits for the previous 28 years, and posted significant increases in sales from 1978 to 1979.

In the mid-1970s, the company switched from return on sales to ATRIC, which measures the return on invested capital and which is calculated by subtracting current liabilities from total assets. This gave Thomas J. Lipton the ability to measure profits against the capital which produced tho

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hniques. Trading profit should continue to be used as a measurement within the company since that is how the company can compare itself to others within its industry, and that is what its managers are most familiar with. As new people are brought in from the outside, the trading profit measurement gives them a standard starting point for determining their productivity and effectiveness. This is not to say that the economic profit that has been introduced should be abandoned. However, the company needs to take the time to develop a thorough understanding of what it is undertaking, and determine the most appropriate ways to implement an economic profit program. Wholesale implementation without understanding and commitment by managers is not in the company's long-term interest, and managers may make decisions (such as increasing prices on competitive brands) that are not in the long-term best interests of the company. What Thomas J. Lipton has learned in the most painful of ways is that changing a financial system is not to be undertaken without careful consideration and education. It is not enough to focus on economic (or even trade) profit or loss. Individual products must be evaluated from a marketing perspective as well t

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