HBS Case Presentations Visionary Design Systems

2005-12-03

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HBS Case PresentationsVisionary Design Systems

學生 :何子福（ 59327210）周佳欣（ 59327223 ）

指導教授耿念豫博士

2005-12-03

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Contents

1.Company Profile Page 3 ~17

2.The CAD industry Page 18~25

3.The Compensation System Page 26~52

4.PDM:A test of VDS’s philosophy Page 53~67

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1.Company Profile(1/15)

◎VDS was founded in June 1990◎Location : Sunnyvale California◎Business : System integration CAD hardware & software reseller◎Founders: Doug Tyson President & CEO HP’s prior No. 1 CAD salesman Jerry Cohen Midwest Sales Manager HP’s prior employee Gerald Stark Director of Engineering HP’s prior employee Donald Conway CFO Tyson’s college friend

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◎The reasons of foundation: Tyson:”suggested to HP’s CAD managers that HP provide systems integration consulting along with the CAD products”. HP’s mangers:”suggested that Tyson start his own company and guaranteed VDS a supply of HP’s products and enabled he to take a few of his customers and some other HP employees to the new company”. With no need for production facilities or inventory and a supply contract with HP, VDS was able to start up with a few salespeople and almost no outside financing.

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◎Initial Concept and Strategy: Long-term goal: to become a systems integrator Tactics: 1.To provide customers with a new interface for the CAD software. 2.To customize the to company’s specific design. 3.CAD package: engineering analysis tools and WorkManager (VDS’s Product of Data Management system). 4.In order to help clients to use these tools, VDS provided both training and consulting. 5.Consulting was done on-site by evaluating company’s situation.

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◎Initial Concept and Strategy: Company’s corporate strategic plan: Vision 2000TM

Vision 2000TM :

VDS’s conception for the coming generation of mechanical engineering processes. Highlighting : the steps necessary to bring their client into the forefront of mechanical engineering processes and technology.

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◎Founding Beliefs: 1.Tyson: “People are the greatest and the most wasted resource in most companies”. 2.A different style of managing employees. 3.To envision a company in which management and employees respected one another and worked together as a team. 4.Everyone would be an owner, share in the profit, and take responsibility for making the company succeed. 5.Employees referred to the Founders: “Founding Fathers”.

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◎Founding Beliefs: 6.To preserve teamwork and cooperative spirit, everyone hired into VDS was interviewed by the entire regional office. 7.Offices work as independent teams to fulfill their goals. 8.One employee commented”There is a family feeling here and a great sense of ethics and morals. If HP gives us a lower price, the Sales Reps pass the savings on to the customer. That’s the kind people who work here, they work hard and care a lot”.

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◎Mission, Goals, Tactics & Objectives: Mission: 1.Each founder served in a distinct role at VDS, so having a thorough understanding of their common goals was necessary to coordinate their decision. 2.After the first 3 years of surprising rapidly growth, Conway suggested that the founding 4 come together and outline the company’s priorities and strategies for the future. 3.It took 8 months to carve out who VDS are, but we wanted to make sure that all employees were involved.

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◎Mission, Goals, Tactics & Objectives: Mission: 4.VDS put their beliefs on paper, now everyone knows who we are as a company, what we stand for, and where we are going. 5.Everyone in this company is a partner, it’s at the foundation of our values. 6.These beliefs would be sustained through our growth and hopefully keep us focused. 7.VDS want employee’s decisions to be consistent with the overall goals of the company. 8.VDS want to continue empowering employees.

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◎Mission, Goals, Tactics & Objectives: Each category within the document(Customer Goal, Employee Goal, Financial Goal, Technology Goal) was discussed in 3 sections: Goals, Tactics, and Objectives. 1.The Goals section laid out the primary goal in each category. 2.Tactics:VDS hoped to use to achieve each goal. 3.Objectives:these would yield the fulfillment of each goal. 4.There was an action plan for each point in the Tactics and Objectives section.

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◎Mission, Goals, Tactics & Objectives: 5.Managers used the action plan to aid them in directing and motivating their subordinates.

6.The Missions, Goals, Tactics and Objectives document laid out a 5 year strategy plan, but VDS made annual adjustment to the action plans to keep on top of project completion and industry movements.

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◎Empowerment: 1.Empower – Developing a knowledge base in each employee of company, mission, goals, tactics, and plans that enables them to take action and make decisions consistent with the company’s strategy and values. 2.Decisions to be made by the people who were closer to, and most knowledgeable about, the issues involved in the decision. But not creating large decision-making hierarchies, management also hoped to stay closer to the customers.

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◎Empowerment: 3.In order to let employees to make substantive decisions, management tried to align employee interests with those of the firm.Three methods were applied. A.By giving stock to each full-time employee and by providing additional stock options through the bonus plan. B.By using commissions and bonuses to link cash rewards directly to desired performance goals. C.VDS established an atmosphere of friendliness and respect, hoping that people would work to build and maintain a workplace they enjoyed.

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◎Empowerment: 4.How to ensure that employees had sufficient information to make the “right decisions”: A.Management provided training and education to all employees. B.Business fundamentals such as how to read balance sheets and income statements. C.Through educational lectures and group discussions in week-long sessions 3 times a year. D.Only by not stepping in when they make mistakes will they learn and become better decision makers.

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◎Employees: Job category Number Sales Representatives 20 Applications Engineers 25 Administration 20 Specialists 7 Software Engineers 3

Total 75◎Offices: 11 satellite offices that were accounted for as separate Profit center.

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1.1

5.5

9.8

17.8400.0%

81.6%78.2%

70.0%

120.0%

170.0%

220.0%

270.0%

320.0%

370.0%

420.0%

1990 1991 1992 19930.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0Revenues Growth Rate million

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2.The CAD industry(1/8)

◎Step 1: Before CAD was available to mechanical engineers,designers stood at 3x4 foot drawing boards using rulers and compasses to design products. Any changes in the product’s design required altering large numbers of drawings. ◎Step 2: The introduction of Computer Aided Design in the early 1970s automated the measuring lines and angles, significantly reducing the amount of time it took to draw actual objects and making alterations easier and more timely.

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◎Step 3: By the early 1980s CAD producers developed 3-D wire modeling programs which, when coupled with the proliferation of PC’s, brought affordable wire modeling technology to the market.◎Step 4: Three dimensional solids design, the newest CAD technology, included many new capabilities and provide clear discernible pictures with shading and depth.

Type HandsearlierCAD

3-D solidmodeling

Yearearly1970s

19881989~1994

Times weeks 4 days 4 hours @Price $150,000 $15,000 $7,500

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3-D solids modeling

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2-D

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Recent Development in CAD industry◎Concurrent engineering-simultaneously designing, testing and manufacturing a product, work toward this goal.◎Engineering Analysis Tools 1.It automated the physical testing of parts created by a CAD system. 2.Analysis tools identified weaknesses and flaws in early product design, greatly reducing the time and cost of the testing period. 3.A full 80% of a product’s life cycle cost was borne before the product went into production, shortening the design phase yielded high returns.

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Recent Development in CAD industry◎Product Data Management(PDM) 1.It emerged in the early 1980s to store CAD document in an organized manner. 2.PDM’s capabilities expanded to included storing other information such as marketing information or the current prices of input materials. 3.All business divisions can share the resources of PDM system. 4.The ability to document, communicate, and change product information on-line opened countless opportunities to restructure old design process.

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Recent Development in CAD industry◎Product Data Management(PDM) 5.These process changes enabled companies to re-engineer their design flow, maximizing the efficiency of the organization and their communications structure. ◎Prediction and Need 1.In many new fields, no one could predict when the market would take off. 2.Plenty of entrants were loosing their investment as customers scaled down their requirements and delayed implementing their PDM programs.

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2.The CAD industry(8/8)Exhibit 2

The effect of an integrated CAD system on the design process.

Old Design Process

New Design Process enabled 3-D Solids design with PDM and Analysis Tools

Source: Company Document

Many iterations

Prototype

Concept Design Document Build Test Release

Concept

Simulate

Design Document

Release

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Company’s Revenues

Commissions

Bonuses

3.The Compensation System(1/27)

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Table 1. Table 4.

Estimated Income Components by Job Type 1994 Commission Plan for PDM Specialists

Position Base Salary Commission Bonus

Sales Representatives 40% 50% 10%

Applications Engineers 60% 30% 10%

Specialists 65% 25% 10%

Administration 85% 5% 10%

◎Guiding philosophy 1.People make as they produce. 2.The pay scale was based on output rather than position or seniority.

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◎Base salaries 1.Everyone within a job type earned almost the same base salary. Experiences were made a significant differences. 2.VDS preferred to alter compensation via commission and bonus. 3.For the past 4 years salaries at VDS had not been raised for anyone but administrative people. 4.Compensation towards commissions and bonuses rather on base salaries.

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◎Commissions 1.Qualification: Every full time employee. 2.Total commission payment on any sale was spread across a number of job types. 3.Management set payment estimates to aid them in establishing commission schedules and not as promises or commitments to the employee. 4.To link commissions to whichever revenue flows an employee worked with, and his or her daily tasks.

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3.The Compensation System(6/27)Table 2. Table 3.

1993 Commission Plan for Sales Representatives' Personal Sales 1994 Commission Plan for Sales Representatives' Personal Sales

Sales Revenue(A)

Commission Rate(B)

Commission Paid(C=A X B)

ComulativeCommissions

0.0 ~ 1.0M 2.0% $20,000 $20,000

1.0 ~ 1.5M 3.0% $15,000 $35,000

1.5 ~ 2.0M 4.5% $22,500 $57,500

2.0 ~ 2.5M 6.0% $30,000 $87,500

>2.5M 10.0% *

6.0% **

* Individual gross margin is greater than 40.0% ** Individual gross margin is less than 40.0%

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◎Commissions The differences between the Commissions Plan of the year 1993 and 1994. 1.Total commissions = Total Bookings + Hardware revenues + Software revenues. 2.To encourage Sales Reps to focus on higher margin business. 3.Sales Reps received 4% of the total training and consulting revenue from their office. 4.VDS’s total benchmarks for commission rate increases did not change. HP’s benchmarks were routinely bumped up as performance improved. Sales people’s success only begat higher goals.

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3.The Compensation System(8/27)Table 3.

1994 Commission Plan for Sales Representatives' Personal Sales

TotalBookings

CommissionRate

HardwareRevenues

CommissionRate

SoftwareRevenues

CommissionRate

0.0 ~ 1.0M 1.00% 0.0 ~ 600 K 0.50% 0.0 ~ 400 K 1.75%

1.0 ~ 1.5M 1.50% 600 ~ 900 K 0.50% 400 ~ 600 K 3.00%

1.5 ~ 2.0M 2.25% 900 ~ 1,200 K 1.00% 600 ~ 800 K 4.25%

2.0 ~ 2.5M 3.00% 1,200 ~ 1,500 K 1.00% 800 ~ 1,000 K 6.50%

>2.5M 3.00% > 1,500 K 3.00% * > 1,000 K 9.00% *

1.00% ** 6.00% **

Note: Total commission = Total Bookings + Hardware Revenues + Software Revenues * Individual gross margin is greater than 40.0% ** Individual gross margin is less than 40.0%

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3.The Compensation System(9/27)Table 4.

1994 Commission Plan for PDM Specialists

Commissions: 10.0% of personal consulting revenue

3.5% of consulting delivered by all other AEs in Specialist's region

8.0% of 1/2 of total training revenue

8.0% of non-PDM training personally delivered

Commission Plan for Applications Engineers

Commissions: 8.0% of personal consulting and training revenue

1%~4% of total office hardware and software sales revenue

To pool the commissions on hardware and software sales and split them evenly.

Commission Plan for Administrative Employees

Commissions: All corporate and administrative employees earned commissions according to how

they supported the company and contributed to sales.

Contracts: To receive $10 for every contract that a customer subsequently renewed.

Receptionists To receive a commission of 0.1% of office revenue.

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http://www.fotosearch.com/comp/ICL/ICL102/BUC_006C.jpg

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◎Bonuses 1.Qualification: Every full time employee. 2.Basically, 10% of an individual’s income. 3.The actual amount depended on office, company and personal performance during the years. 4.Sales Reps received bonuses determined by a formula, whereas administrative staff bonuses were subject to supervisory discretion. 5.Periods: Monthly, Quarterly, and Annually.

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Monthly bonus plans

Sales Representatives

100 Share options to the Sales Rep who books the most business each month.

50 Share options to the Sales Rep who books the most New Business (over 50K).

50 Share options for "Great Ideas" or suggestions that will save VDS money or

make VDS more profitable.

Applications Engineers

100 Share options to the AE who books the most business each month.

50 Share options to the AE who delivers the most Consulting.

50 Share options for "Great Ideas" or suggestions that will save VDS money or

make VDS more profitable.

Specialists amd Administration

50 Share options for significant advancements in an individual's area of expertise

or "Great Ideas" that will save VDS money or make VDS more profitable.

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3.The Compensation System(13/27)Quarterly Bonuses Plan

Position Paid or not Qualification

AEs & Sales Reps ○

Specialists X

Administration X

The "Strategic area" to be rewarded would be changed quarterly andannounced at the beginning of every quarter.

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◎Bonuses Annual Bonuses Plans Sales Reps: 1.Everyone’s annual bonuses were awarded for surpassing performance benchmarks set by management at the beginning of each year. 2.The profit goals of company and office were set, everyone received bonuses when the company or office surpassed its goals. 3.Individual bonus quotas varied among Reps according to the sales opportunity and their territory and their experience in the company.

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◎Bonuses Annual Bonuses Plans Applications Engineers: 1.AEs were rewarded for generating new business above and beyond a specified quota. 2.The bonus plans for AEs set office quotas which equaled the sum of the quotas for the Sales Reps within that office. 3.The quotas could vary according to location. 4.AEs also received bonuses when the company surpassed its company and office goals.

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◎Bonuses Annual Bonuses Plans Specialists and administration: 1.They had to be customized according to each individual’s duties, goals and upcoming tasks. 2.The Missions, Goals, Tactics and Objectives document was frequently referred and evaluated how each person could contribute toward those goals and objectives. 3.This was frequently a highly subjective and judgment-filled process. 4.Donald Conway:”Evaluating them and their plans is often not black and white”.

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3.The Compensation System(17/27)Appendix A. Sample Annual Bonus Plans in 1994

Annual Bonus Plan: Jason Waggoner, Sales Representative

Quota: Bookings 1,946,000$

Consulting & Training 165,000$

1. Bookings 120% Quota at 40% Gross Margin (individual) 750$

2. Bookings 160% Quota at 40% Gross Margin (individual) 1,000$

3. Consulting & Training 120% Quota 750$

4. Consulting & Training 160% Quota 500$

5. Office Profit Before Tax Exceeds 14% 1,500$

6. 3 Rasna & WorkManager Software Deals 750$

7. VDS Profit Before Tax Exceeds 120% of plan 750$

8. 120 companies to Attend Vision 2000 Seminars 750$

9. Deliver 2 Audits (minimum 20K total) 750$

10. 200 shares to each person on the local team whose office exceeds 12% profit before tax.

(minimum 1994 office net revenues of $2,000,000))

Total(1+3+5+6+7+8+9+10) 6,000$

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Annual Bonus Plan: Dana Walton, Applications Engineer (AE)

Quota: Bookings (office) 5,930,000$

Consulting (office) 215,000$

Training (office) 264,000$

1. Bookings 120% Quota at 40% Gross Margin (individual) 500$

2. Bookings 160% Quota at 40% Gross Margin (individual) 1,000$

3. Consulting 120% Quota 500$

4. Consulting 160% Quota 1,000$

5. Training 120% Quota 1,000$

6. Office Profit Before Tax Exceeds 14% 1,000$

7. 25 new Customers on VDS Support (office) 500$


9. 12 New Business Accounts (office) 750$

10. Deliver 2 Audits(minimum 20K total) 750$

11. 200 shares to each person on the local team whose office exceeds 12% profit before tax.

(minimum 1994 office net revenues of $2,000,000))

Total(1+3+5+6+7+8+9+10+11) 5,500$

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Annual Bonus Plan: Dan Maxwell, Accounting Manager

1. VDS Total Net Revenues Exceed 30 M 500$

2. 6 of 12 Months - A/R Days 45 or less 500$

3. 9 of 12 Months - A/R Days 45 or less 750$


5. Smooth Transition Through Growth 500$

6. Project Work: 2,100$

A.COS Report Improvement

B.Commission Report

C.Other Custom Reports

D.1995 Plan Process

E.Continued Update of Platinum

F.Implement Hiring Plan and Build Accounting / OP Team

Total(1+2+4+5+6) 4,350$

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Annual Bonus Plan: Kate Cassal, Contracts

Quota: Support Revenue 2,626,000$

1. Exceed 1,450,000 in Support Revenue 500$

2. Exceed 200 Support Contracts 500$

3. Exceed 1,6000,000 in Support Revenues 500$


5. Smooth Transition Through Growth 500$

6. 1994 Renewal Percent-95% 500$

7. June and Year End Support Reconciliation < $10,000 per reconciliation 500$

8. Three Arbitrary Contract Checks per Year with Less than 5 outstanding contracts $300/ea.

for shipped complete P.O.'s

200 Shares to everyone on support team if profit before tax and after allocation exceeds $200,000

Total(1+2+4+5+6+7+8) 3,300$

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Annual Bonus Plan: Fred Bulatao, PDM Specialist

Quota: Ideal Deals(individual) 10

Easterm PDM Consulting 194,000$

PDM Training(VDS total) 50,000$

1. Number of Ideal Deals 120% Quota 500$

2. Number of Ideal Deals 160% Quota 1,000$

3. Revenue from PDM Consulting 120% Quota 500$

4. Revenue from PDM Consulting 160% Quota 1,000$

5. Revenue from PDM Training 120% Quota 500$

6. Revenue from PDM Training 160% Quota 1,000$

7. Develop PDM Expertise in VDS AEs 1,000$

8. One VDS WorkManager Integration Product Delivered 1,000$

9. VDS Profit Before Tax Exceeds 2,100,000 1,000$

10. 200 shares awarded at the end of the year if 11 ideal deals are completed and over 200K in

Easterm PDM Consulting is produced.

Total(1+3+5+7+8+9+10) 4,500$

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Sequence of Sample Annual Bonus Plans in 1994

Sequence Position Cash Stock

1 Sales Representative 6,000$ 200 shares

2 Applications Engineer (AE) 5,500$ 200 shares

3 PDM Specialist 4,500$ 200 shares

4 Accounting Manager 4,350$ None

5 Contracts 3,300$ 200 shares

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◎Stock Ownership 1.Most of VDS’s equity held by management and the employees. Every employee owned equity in the company. 2.Management’s desire to reward those who were will to take the risk of joining unknown. 3.Management relied on employees’ sense of ownership when giving individuals significant decision rights. 4.Management believed that equity was an effective motivator that would inspire employees to work together toward a common goal.

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◎Stock Ownership 5.Almost 100% of the employees earned additional options each year. 6.Employees of VDS owns about 10 times the amount of stock that employees in similar firms own.

? Employees did not really understand what the stock was about or what it was worth. 　　 Option’s exercise price 75¢ 〓 The value of a share

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◎Performance Reviews 1.The performance reviews were deliberately separated from the compensation system. 2.The purpose of reviews is purely educational, VDS don’t give total ranks or tie any rewards or incentives to it. 3.To open communication and provide feedback on how people are doing their jobs. 4.Reviews were done annually for every employee on the anniversary of their start date. 5.Both managers and employee filled out a 7 page questionnaire that discussed both general skills and product knowledge.

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4.PDM: A test of VDS’s Philosophy(1/15)

◎Brief Account 1.Top management had spent a significant amount of time thinking about how to structure compensation and incentive plans to align employee’s interests with those of the firm. 2.They wanted the employees to act like owners and they were frustrated when that did not happen within the PDM program. 3.The incentives of PDM Specialists: both their commissions and bonuses were tied to the development of a profitable program.

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◎Brief Account 4.The empowerment and incentives did not seem to be working –progress in PDM was slow and management was playing too great a role. 5.Both management and the PDM Specialists were frustrated as VDS failed to capitalize on the opportunities in this area.

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◎Product Data Management 1.Platform suppliers:HP, IBM and Digital had begun designing PDM software through their CAD program. 2.System integrator:Anderson consulting and EDS had private suppliers of PDM, whose programs they supplied with their own systems implementations. 3.Independent PDM suppliers:They had burgeoned under the growing demand.

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◎Product Data Management 4.During the first 3 years, PDM revenues fell below quota by 40%, and failed to cover PDM costs. 5.Nor was VDS recognized throughout the field as a PDM supplier. 6.Donald:”Responsibility is the sticking point. Management expect empowerment to mean that we don’t have to manage it. They hear the empowerment message, but don’t take us up on it”.

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◎Product Data Management About Fred Bulatao: 1.He had established himself at HP as the “database guy”, an early specialists in PDM whose reputation was growing in the industry. 2.VDS hired Fred to lead they into the market and to head-up their PDM program. 3.Fred and Bill Braxton are the only PDM resources in the company both currently available and fully trained.Fred had cover the East Coast region. 4.He acquired significant decision making autonomy.

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◎Product Data Management About Fred Bulatao: 5.Many people at VDS are unfamiliar with PDM language that waste me lot of time deal with it. They often don’t looking for PDM deals. 6.Increasing Sales with Zero Credit or Commission:The PDM program is becoming a profit center based on consulting and we are only getting commissions on our consulting hours, and not on PDM software. No matter how largest deal was done, but I got minimal credit.

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◎Product Data Management About Fred Bulatao: 7.Consulting gets cut:The products VDS sells often cost more than the customer wants to pay, so they look for things to cut. Sales Reps will cut the number of consulting days if it’s need to make a sale. He asked Tyson to add PDM consulting to Sales Reps’s quota, but there’s no financial incentive. He have had verbal support from VDS’s management, but there was no commitment. actually, we don’t control our resources.

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◎Product Data Management About Fred Bulatao: We have tried to educate the Sales Reps on how PDM improve the design process and why consulting and training are important, so that they can sell them better. We submit what we want in sales training session and hear back“sorry there’s no time for PDM”. If I can’t get in front of the Sales Reps, we can’t be expect to meet our goal. 8.Gerald Stark:”Fred seemed to ask permission or get consensus too much of the time”.

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◎Product Data Management About Bill Braxton: 1.He was an expert in PDM with degrees in both mechanical engineering and computer science. he was technically focused. 2.He had written PDM software for his previous employers before there was either an industry or a name for PDM. 3.In the past his bonus was tied to completing specific tasks. 4.Customers don’t really want to do the integration, which sets up a great opportunity for us.

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◎Product Data Management About Bill Braxton: 5.Aside from Fred and I, we don’t have the staff or manpower to properly support customers if sales grow. 6.Management are committed to allocate the resources of software group, but not for another 12 months. 7.If I bring in revenue then I don’t have time to invest in the future, but if I don’t bring in revenue, then I can’t get the resources to invest.

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◎Product Data Management About Bill Braxton: 8.A new Sales Reps probably wouldn’t generate profit for a year and Doug Tyson’s plan requires breaking even on day one. 9.Science I’ve been here I’ve only had 2 meetings with management and none with all 4 founders. I have no budget, no support, and a culture that is totally focused on CAD. 10.I’ll know I have concurrence when I don’t have to drive it, when they’re driving it as part of the team.

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Documents

HBS Case Presentations Visionary Design Systems