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 “preprofit” stage of operation. Thus our performance measures are primarily nonfinancial. The non-financials are what we need to pay attention to. Michael Redard, Vice President of Finance and Administration for CSI, 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
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 CSI converters with better performance and substantially lower prices than competing products. CSI converters are used to reduce the pollution caused by the 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) on CSI converters, primarily because of tightening worldwide emissions regulations. CSI’s technological advantage was mainly due to the fact that its converters used 50% to 80% less Platinum Group Metals (PGMs) than did competitors’ converters. Standard converters typically contained large amount of PGMs platinum, palladium and rhodium. As pollution standards became increasingly stringent (Exhibit 2), the demand for, and the price of, PGMs had risen dramatically (Exhibit 3). In 2001, about 60% of the world supply of PGMs was used to produce converters. Further, there was uncertainty about the supply of palladium, most of which came from Russia. 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 PGMs could range from $40 for a small vehicle converter to as much as $200 for those used in large sports utility vehicles (SUVs). 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. For years, three companies had dominated the supply of CSI converters to the automobile market. However, CSI managers thought that the risk of one of these companies being able to appropriate CSI’s technology was relatively low, for several reasons. First, CSI had patent protection. CSI had been issued two patents, and three others were pending. (Each patent establishes a protection period of 17 years). Second, CSI had developed some innovations, such as the coating composition and proprietary manufacturing processes that CSI managers thought would be hard to imitate, even based on a finished product analysis (reverse engineering). Third, CSI continued to expend significant resources to improve its technology and to maintain its lead. And finally, suppliers to the automobile...
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