Catalytic Solutions, Inc. |
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General Management |
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Organizational Behavior |
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Beginner |
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Available.
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$9.00
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We're a young company, and this is an exciting place to
work. But the work is intense. People are here at work 24 hours a day,
seven days a week. Our employees would probably be motivated even
without our bonus plan. But the plan is still important. It is a tool
to focus people's attention on the right things … Being a young
company, we're still in a “pre-profit” stage of operation. Thus our
performance measures are primarily non-financial. The non-financials
are what we need to pay attention to.
Michael Redard, Vice President of Finance & Administration for
Catalytic Solutions, Inc., was commenting on his company's performance
measurement and incentive systems. Mike was confident that his
company's systems were working effectively, but he also knew that the
systems would have to evolve significantly over time as the company
grew and matured.
Company History and Strategy
Catalytic Solutions, Inc. (CSI) was founded in Santa Barbara,
California in 1996 by Steve Golden and Bill Anderson. Steve, who had a
Ph.D. in material sciences, developed a new coating formulation and
proprietary manufacturing processes that produced catalytic converters
with better performance and substantially lower prices than competing
products. Catalytic converters are used to reduce the pollution caused
by combustion engines. Bill, formerly the CEO of a publicly held
company, had over 30 years of experience as a senior executive. He
became the CEO of CSI shortly after raising seed money to finance the
first few years of operation.
Exhibit 1 presents a timeline of the company's early history. CSI's
first patents were issued in 1999 and its first sales were recorded as
CSI started producing converters for stationary engines. These early
sales proved that the technology was viable. But CSI's managers'
immediate goal was to supply converters to the huge automotive sector
that spent over $7 billion (estimate for 2001) for catalytic
converters, primarily because of tightening worldwide emissions'
regulations.
CSI's technological advantage was mainly due to the fact that its
converters used 50-80% less Platinum Group Metals (DGMs) than did
competitors' converters. Standard converters typically contained large
amounts of DGMs platinum, palladium, and rhodium. As pollution
standards became increasingly stringent (Exhibit 2), the demand for,
and the price of, DGMs had risen dramatically (Exhibit 3). In 2001,
about 60% of the world supply of DGMs was used to produce converters.
Further, there was uncertainty about the supply of palladium, most of
which came from Russia.1 The
average converter cost per vehicle tripled between 1990 and
2001, becoming the third largest automobile component cost after
the engine and transmission. The savings resulting from CSI's lower
usage of DGMs could range from $40 for a small-vehicle converter to as
much as $200 for those used in large sports utility vehicles (RVUs). In
an industry where manufacturers “kill for pennies,” this presented an
enormous cost saving potential. At the same time, CSI's proprietary
technology was shown to have superior performance characteristics. CSI
converters were able to withstand extremely high temperatures in
exhaust systems and meet increasingly stringent emissions standards
worldwide.
Assignment
1. Evaluate the CSI performance measurement and
compensation systems. What changes would you suggest be made to these
systems, if any? Explain.
2. Fast-forward 10 years. Assume that CSI has been
successful. It is now a much larger, public company. It has three
operating divisions (investment centers) that focus on different
markets. What would you expect the CSI measurement and compensation
systems to look like at that time? Why?
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