Question

 

What are your thoughts on performance based pay systems at DDI? Does their current culture need to be updated prior to implementing a new performance based pay system?

 

DESIGNING AND IMPLEMENTING A REWARD SYSTEM AT DISK DRIVES, INC.* D

isk Drives, Inc. (DDI) is a specialty electron-ics firm that designs, markets, and distrib-utes disk drives for the computer industry. DDI began in 1980 by manufacturing and

marketing large-format disk drives for mini-computer firms, such as Digital Equipment Corporate (DEC) and Data General, as well as for complex, large-scale word-processing systems offered by Xerox and Wang. DDI’s first products were quite successful and the company grew to revenues of $119 million by 1985. A strategic decision to integrate different technologies inside the disk drive for a differ-ent type of customer resulted in a newer and smaller product line with lower costs and lower prices. Unfortunately, DDI was late to market and its products did not have the performance features these customers wanted or needed. Thus, despite the new customers and higher product volumes, sales and profits plummeted as its original products faded and its new prod-ucts faltered.

One of DDI’s subsidiaries, however, was designing and selling different and even smaller disk drives to personal computer original equip-ment manufacturers (OEMs). Following a dif-ferent business model, they had outsourced their manufacturing capacity to a Japanese plant. The subsidiary—over the 1985–1989 time frame—saved DDI from failure. By 1988, DDI announced it would stop developing and manufacturing all of its larger disk drives and focus on the smaller ones for PCs. It also phased out its domestic manufacturing opera-tions and began sourcing its drives exclusively from the Japanese plant. Whereas two-thirds of DDI’s 1988 revenues had come from large drives manufactured domestically, by the end

*This case was derived and adapted from materials found in C. Christensen, “Quantum Corporation—Business and Product Teams,” Harvard Business School Case 9-692-023 (Boston: Harvard Business School, 1992); S. Mohrman, “Computer Components,” Center for Effective Organizations (Los Angeles: University of Southern California, 2012).

of 1989, 100 percent of its revenues were from the small drives manufactured in Japan. The question facing DDI management was how to maintain the momentum. It required a careful look at the existing organization and determin-ing its fitness for the future. The head of HR at DDI, who was quite

knowledgeable in organization change and development, convinced the executive team to go through a systematic process of diagnosing the organization’s current operating model and redesigning the company to handle the pro-jected growth and the increased complexity it was facing.

THE CURRENT DDI ORGANIZATION

At the macro level, competition in the disk drive market was characterized by fast-paced tech-nology change and product evolution as well as a number of equally sized competitors. First, customers—the OEM manufacturers of PCs, such as IBM, Dell, Toshiba, and HP—were not only designing newer, faster, and more sophis-ticated computers, they were demanding and expecting newer, faster, and more sophisticated disk drives. Although management was confi-dent in the firm’s technical ability to offer the best price/performance products in the indus-try, they realized that the period during which a new DDI drive could retain a performance edge before being leapfrogged by a competitor was getting shorter and shorter. Second, when an OEM announced a new computer model, all of the disk drive manufacturers competed aggres-sively to get the business. The disk drive firms had a limited amount of time—usually less than a few months—to make their bid, and it was often based on yet untried technological capabilities. Moreover, the sales process had a “gold rush” or “winner take all” feel. If a disk drive manufacturer could win a contract with an OEM manufacturer, it usually meant that a whole line of disk drives, including follow-on models, would be part of the deal. As a result, quality, speed of customer response, and cost were increasingly important dimensions to be managed. Quality was necessary to win the con-fidence of the OEMs and increase the chances of winning follow-on business, speed of response was necessary given the narrow time frame, and cost vigilance was necessary to produce a profit. In this environment, the company was clear about the processes for adding value (Figure 1). The key work processes included:

1. Working with appropriate technical support, it was important to bid and win on new accounts. A Request for Proposal (RFP) provided by the OEM detailed the technical specifications for the disk drive in its new computer model.

2. The disk drive was then designed to fit the technical specifications and to meet quality and cost targets.

3. The resulting design was then prepared for transfer to the manufacturing facility.

4. The drive was manufactured in Japan. 5. The drive was then released to the OEM to be incorporated into the computer, and support issues were handled.

DDI was growing fast and new models were

being continually released that embodied tech-nology advances, new capabilities, and enhanced designs. The life cycle for a disk drive (once a con-tract was signed with the OEM) was about six to eight months for development, first-run production, and field distribution and service. Even including a second release (follow-on) product, the entire life cycle for the model was generally about 12 to 16 months. The company was handling about five to six disk drive designs at any particular time and that number was expected to increase significantly.

As described above, DDI had signed a longterm,

exclusive contract to outsource manufacturing to a Japanese company that promised, in turn, to con-tinually retool and upgrade its manufacturing capa-bilities as DDI grew. To manage this process, DDI had experienced manufacturing engineers, quality assurance, process optimization, and distribution staff to plan the movement of the disks into the contracted factory and to manage its introduction into the field.

In line with this functional structure and work process, the organization was governed by the executive committee, composed of the CEO and trusted colleagues who had “grown up” together in the industry. Each took responsibility for certain functional tasks (Figure 2). Each hired people to carry out the functions they managed as the com-pany achieved success and grew rapidly. The executive team was also responsible for

the planning, coordination, and integration of the activities of marketing and sales, technical devel-opment, and managing operations and field distri-bution and support. That is, decision making, goal setting, and strategic direction were centralized to this group. Similarly, the organization’s performance management system was centralized and traditional. Managers and functional employees were given overall company targets for revenue and each func-tion was expected to translate those goals into spe-cific objectives for their group. Functional supervisors gave annual performance appraisals that provided the basis for merit pay increases. In addition, all DDI employees were eligible for a profit sharing bonus that had been running at about 5 percent of salary. Executives were eligible for stock options as well.

ENGAGING IN A REDESIGN OF DDI Although happy with the recent success of the

company, the executive team realized that it could not continue to grow and be successful as it was currently designed. It was not effectively coordinat-ing the complexity that came with rapid growth, and it was having trouble keeping up with demand. It had experienced several delays and quality inci-dents, including one major field warranty problem due to a disk drive failure. The executive team was highly involved in ongoing operational issues, and the CEO was concerned that they did not have time to attend to the strategic decisions required in the rapidly developing computer industry. He also believed that the executive team had become a bot-tleneck and was slowing product decision making. The CEO recalled being in an executive committee meeting and asking about why a particular product had not yet shipped to the customer. After collect-ing a variety of data and information about compo-nent inventories, capacity planning, forecasts, and other details, he realized that management—in particular, the executive committee—was part of the problem. “We were trying to manage details we weren’t knowledgeable about. We had a band-width problem—the executive staff just didn’t have enough time or brain capacity to keep making all the key decisions.”

The executive team decided that they needed to assume a more strategic role in the organization and decentralize cross-functional integration and operational decision making about new product development, manufacturing, and field support. Although they wanted insight into product devel-opment progress and milestone achievement, they also understood that to decentralize this integra-tion and decision making, they needed to be clear about the roles, responsibilities, and accountabili-ties for success. They believed such a change would create and build a cadre of future leaders for the organization. Based on the diagnostic data and the executive

team’s requirements, the head of HR led the team through a systematic redesign of the organization.

Commitment to Strategic Direction The executive team first recommitted itself to the basic strategy of rapidly advancing the technology through aggressively bidding on and delivering disk drives to computers that required increasing oper-ating speed, flawless quality, and continual new functionalities.

Structure Modification

The executive team believed that the existing func-tional structure provided important advantages. There was a clear focus on technical excellence and clear technical career paths. However, to achieve the cross-functional integration and speed objec-tives and to begin building leadership skills, they decided to implement cross-functional product teams as a lateral structure to coordinate the devel-opment of each disk drive. Functions would remain the core units of the company, but the management of each disk drive model would be carried out by a team, established as soon as a contract was signed, to manage the product over its life cycle (see the dotted horizontal lines in Figure 3). The members of each product team would be functional managers at the director or senior man-ager level—moving the operational crossfunctional coordination and management lower in the organi-zation and freeing up the executive team to concen-trate on more strategic issues. The teams were to consist of seven members,

one from each function (although there was no member from the sales organization). They were to be collectively responsible for the general manage-ment of their product and not just represent their

functional point of view. In general, the engineer-ing team member was to be the leader during the initial phases of the program, but as the product approached commercial launch, the marketing member would assume more leadership responsi-bilities. The engineering team member would also lead a dedicated group of engineers assigned to develop the drive and to work through any product design problems encountered during manufactur-ing and in the field (see the solid vertical lines in Figure 3). The engineering member was the only person with a functional group dedicated to the product; all other functions would allocate personnel to a product team based on the project’s stage of development and need. Each team member would continue to have management responsibilities within their function. In other words, working on a team was considered an “overload” responsibility in addition to their regular functional responsibilities.

Management Processes The executive team was careful to delineate which issues were the responsibility of the product teams,

the functional organizations, and the executive staff. The product team would be empowered to make all decisions relating to developing and bringing a specific product into the field—and it would be incented to bring the product to market on time, within cost, and with high levels of quality and customer satisfaction. Teams were responsible for the revenues and gross margins generated by the product and for the inventories required to support the revenues. The product teams were responsible for achieving faster and faster development cycle times. Each product team was given clearly defined milestones that were derived from the contract, including cost, quality, and profitability targets. Functional groups, on the other hand, were

charged with managing ongoing functional activi-ties and expenses, providing effective career paths and skill-building programs, executing the plans, and staffing the programs initiated by the product teams. For example, the engineering organization was responsible for maintaining DDIs overall technical edge, dedicating a group of engineers to a specific product, and defining professional development. In addition, each function was divided into discipline groups that carried out specialty tasks. For example, the quality function had a group that specialized in design quality, prototype testing, and manufacturing quality specifications and monitoring (the latter work-ing closely with the contract manufacturing facility). The responsibilities of the product teams and the functional organizations are summarized in Table 1. Finally, the executive team controlled mile-stone reviews for each product, including prototype

design completion, design completion/release to manufacturing, release to customer, and the three-week release to field.

Performance Management The executive team next considered the question of performance management and incentives.

 

 

Answer 1

Following was the pay structure of any regular employee at DDI:

• Salary
• Profit sharing (5% of net salary)
• Employee stock option

The appraisal was based on merit and was given by Functional head.

Fuctional heads played key role in the appraisal process. The entire organization was highly centralized as a result this system was flourishiung. But, the industry dynamics was changing rapidly and need of the hour was to make the organization more agile and decentralized. As a result of this it was decided to create product teams with each having cross functional members. This was completely opposite to the earlier system oof functional teams.

Functional heads on the other hand were sked to perform more strategic roles which included ensuring product in the market, strategic relationships with OEMs and so on. As a result it was not possible for the functional heads to monitor performance of each employee under his/her domain.

Therefore the appraisal process at DDI needs a makeover.

One of the way in which appraisal can be made is by having a look into the success of the individual prooduct. Since now the teams were product centric, as such success or failure of the product is a team responsibility. This gives team a more responsible approach towards the product development and ensuring its success, since product success in now linked to their success.