Decision Making at the Top: The All Star Essay

Sunru Yong prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the narration. Copyright  © 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. M I C H A E L B E E R S U N R U Y O N G TerraCog Global Positioning Systems: Conflict and Communication on Project Aerial Emma Richardson squinted at the TerraCog GPS (Global Positioning System) prototype in her hand. She zoomed in until the display showed a clearer satellite photo of the lake 200 feet in front of her and into which her Labrador had already happily bounded. Most weekends, Richardson made the hike to the lake to clear her mind and, on occasion, to test new GPS models from her employer, TerraCog, Inc. Unfortunately, with the â€Å"Project Aerial† launch meeting scheduled for the next day, it was difficult to enjoy this particular hike. Emma wondered how to get all parties to reach an agreement on the price point for Aerial. TerraCog had started losing share to a competitor, Posthaste, and it was imperative to get the new product to market. Arriving at the lake, Richardson gave in to the urge to check her phone and grimaced as she noticed two new voicemails. The first message was from Allen  Roth, the director of design & development (see Exhibits 1 and 2 for an organizational chart and brief biographies of key managers): â€Å"Emma, it’s Allen. Listen, Tony and I have been over these cost numbers on Aerial. We cut all that we could and we ended up with only a 7% or 8% reduction to cost. Unfortunately, I don’t think this will get us to the price point that Sales is looking for. But I don’t need to remind you that we gave Sales the features and functionality they wanted in Aerial, so I’m not going back now to ask my team to do the impossible. We’ll hash it out tomorrow, but I figured it best you hear it from me.† The second message was from her boss, Richard Fiero, the company president: â€Å"Emma, I wanted to check on Aerial. I heard grumbling from Ed and the sales team on Friday. They seemed frustrated with Tony Barren’s production team. Make sure Production has its act together. Tony should know he’s on thin ice after the recent production fiasco on that sonar project-he’s got to succeed on Aerial. We need to have Aerial on shelves at the start of Q3. Some board members are worried, so Aerial will be near the top of the agenda at the board meeting next month.† 2184 A P R I L 1 1 , 2 0 0 8 For the exclusive use of B. Shi This document is authorized for use only by Bixi Shi in Organizational Behavior- Fall 2014 taught by Elaine Wong University of California – Riverside from October 2014 to December 2014. 2184 | TerraCog Global Positioning Systems: Conflict and Communication on Project Aerial 2 BRIEFCASES | HARVARD BUSINESS SCHOOL Neither message was encouraging. The Aerial meeting the next day, involving  the sales, design & development, and production departments, was now guaranteed to be contentious. It was March 2008-only two months since Richardson had been promoted to executive vice president. Fiero had tasked her with moving TerraCog toward greater operational alignment and increasing cross-departmental cooperation. Richardson had already been tested by both inventory problems and quality issues, which had led to significant tension between the U.S. headquarters in Chicago and the production team in Shenzhen, China. Now, disagreement over the proposed price point for Aerial threatened to derail the launch of the prototype in her hand. Company and Industry History TerraCog was a privately held company specializing in high-quality Global Positioning System (GPS) and fishing sonar equipment. Founded in 1977, TerraCog got its start manufacturing high-end sonar equipment for serious sport fishermen and boaters. In the late 1990s, the company had introduced its first GPS products, marketed specifically to hunters, hikers, and campers. Management believed that it was the company’s skill at translating retailer and user feedback into exceptional product design and functionality that fueled the growth of its GPS business. Through attentive channel management and, as Fiero put it, â€Å"a deep understanding of what specialty retailers needed,† TerraCog had developed strong relationships with its key accounts. Fiero also believed that TerraCog’s grasp of its consumers’ preferences and usage had given it an edge over GPS manufacturers whose core business was in automotive applications. The firm had built its GPS line for the serious outdoor enthusiasts’ market, and the products had won plaudits for durability and value-added features like the integrated compass and barometric altimeter. Moreover, industry reports indicated that the TerraCog GPS outperformed competing products on navigation. TerraCog’s proprietary firmware-a custom computer program embedded into hardware that â€Å"ran† functions-optimized the GPS chipset’s Wide Area Augmentation System  capability, which provided more precise navigation. The company was not always first to market. In fact, TerraCog had found it was free to lag in technological innovation with little risk because, when the company finally introduced new products, they surpassed those of competitors in addressing customer needs. Customer word-of-mouth recommendations had given TerraCog strong momentum with its handheld GPS. In early 2007, TerraCog prepared to enter new, underserved GPS sub-markets, including cycling and fitness applications. â€Å"Google Earthâ„ ¢ for your GPS† At the Summer 2006 Outdoor Retailer Show-the biggest trade show for vendors of outdoor goods-a competitor, Posthaste, had unveiled a GPS prototype called â€Å"BirdsI† that displayed satellite imagery. The imagery was not live, but rather static satellite photographs that had been â€Å"stitched† into a single view. This was a marked improvement on the simple, vector-based graphics used by the rest of the industry (see Exhibit 3 for a comparison). This did not impress the TerraCog team. The imagery was crisp and had a certain visual appeal, but TerraCog’s research showed that BirdsI technology did not offer substantive performance improvement over the standard maps in TerraCog’s GPS system. Furthermore, the TerraCog team was convinced that Posthaste’s receiver lagged TerraCog’s product in both accuracy and reception quality. While the TerraCog team dismissed the Posthaste concept, a number of key buyers and product reviewers found it an exciting innovation. One magazine reviewer observed, â€Å"Imagine having For the exclusive use of B. Shi This document is authorized for use only by Bixi Shi in Organizational Behavior- Fall 2014 taught by Elaine Wong University of California – Riverside from October 2014 to December 2014. TerraCog Global Positioning Systems: Conflict and Communication on Project Aerial | 2184 HARVARD BUSINESS SCHOOL | BRIEFCASES 3 Google Earthâ„ ¢ built into your GPS-it’s much more compelling to look at an actual satellite image than to have yellow for land, blue blobs for water, and grey squiggles for roads.† Based on the buzz, TerraCog’s executives debated whether to upgrade to satellite imagery. However, they realized that adding the feature to the existing GPS platform required upgrades to processor speed and memory, as well as new firmware. After some deliberation, the company dropped the idea as a non-essential fad. TerraCog’s management remained confident that the company’s core customers were discerning purchasers who would value durability and performance over dressed-up graphics. In October 2006, with much fanfare, Posthaste introduced BirdsI as â€Å"the only handheld GPS with satellite imagery.† BirdsI had an exclusive launch at two major national outdoor retailers, both of which were key accounts for TerraCog. Within two months, TerraCog’s sales representatives in the field reported impressive sell-through rates for BirdsI nationwide. While the product’s success surprised TerraCog, management attributed it to the ebullience of the holiday shopping season. The TerraCog team was confident that the popularity of BirdsI wouldn’t last. Project Aerial However, by spring 2007 TerraCog’s sales reps were noticing increasing customer demand for a GPS with satellite imagery like BirdsI. Ed Pryor, vice-president of sales, began pressing for a reversal of the decision not to develop the product. â€Å"It’s embarrassing to have no answers for our retailers when they ask for our version of this,† he said. â€Å"Look at it from our perspective. We’ve changed the compensation plan for the whole Sales team-including me-so we take a real hit if we don’t reach our sales targets. Customers now want something different, and I can’t tell my reps we have no  plans to develop the product they need to hit those targets.† In response to these repeated requests, TerraCog’s president, Richard Fiero, changed his mind on satellite imagery, if only to satisfy the â€Å"gadget† appeal of such an innovation. The initiative was dubbed Project Aerial. In order to speed development and avoid the costs of new moldings and major reconfiguration, the team decided to redesign within the existing GPS platform. Shortly after making the decision to proceed with Aerial, Fiero and Pryor met with Allen Roth, director of design & development. Roth brought his key managers to the meeting: Cory Wu, who oversaw software and firmware, and Alice Gorga, who managed hardware design. RICHARD FIERO: Allen, we’re obviously in a hurry to get to market. But we don’t want something slapped together – let’s make sure we get this product completely right the first time. Our reputation for quality is paramount. ALLEN ROTH: Understood. Are we including all the same features that we have in our current GPS line? ED PRYOR: Yes. We plan to offer Aerial at approximately a $50 retail premium to the current top- of-the-line GPS, so it’s important to maintain the same high-end functionality. ALLEN ROTH: What about speed? Satellite imagery requires a lot of processing power, so without some serious juicing, Aerial might run slower than you’d like. ED PRYOR: I think we’ll be okay there, Allen. Our consumers are tech-savvy-they know there’s an inherent trade-off to get more sophisticated graphics. As the meeting ended, Roth indicated that they would have to do some careful planning to keep costs as low as possible, but he was sure the product design could be completed by year’s end. At that point, they could hand it off to production to develop detailed cost estimates, which would allow the  sales team, in consultation with finance, to determine pricing and develop a go-to-market plan. For the exclusive use of B. Shi This document is authorized for use only by Bixi Shi in Organizational Behavior- Fall 2014 taught by Elaine Wong University of California – Riverside from October 2014 to December 2014. 2184 | TerraCog Global Positioning Systems: Conflict and Communication on Project Aerial 4 BRIEFCASES | HARVARD BUSINESS SCHOOL Given the manufacturing lead-time, TerraCog expected to get Aerial to stores by the 2008 holiday season (see Exhibit 4 for timeline of events). The product development team members did not greet the Aerial decision with enthusiasm. First, they felt that a redesign of the total platform-including firmware, external case, internal components, and TFT (thin-film transistor) display-was feasible if management could extend time to market by six more months; the resulting product would be superior and the project would be more stimulating technically to the team members. Second, they had several other ideas for new products that they believed would position TerraCog to capitalize on growth in cycling and fitness GPS applications, and Project Aerial was forcing them to put aside these more exciting projects. Finally, with company co-founder Harold Whistler preparing for retirement, Roth was eager to prove his readiness to be the next VP of design & development. The Aerial project impeded his building of a product line he could truly call his own. Aerial Pre-Launch Meeting As promised, the design team completed Aerial by the end of 2007. Late in January 2008, the production team received the design specifications it  needed to establish production methods, conduct a pilot run, and estimate costs. As the new executive vice president, Emma Richardson was tasked with overseeing the product launch. She scheduled a launch meeting in early March with sales, production, and design & development. In the past, Fiero and Whistler had been very involved in new products and tended to make quick decisions. TerraCog’s growth forced Fiero to take a step back from the launch process, while Whistler had cut back to part-time hours. There were many more employees involved in Aerial than in past product launches, and Richardson worried that the size of the group might threaten the focus and thwart decision making. She needed to finalize decisions on costs, pricing, and initial production volume. At the start of the pre-launch meeting on March 7, Richardson looked down the table, seeing Ed Pryor, Allen Roth, production director Tony Barren, Cory Wu representing software and firmware, and Alice Gorga representing hardware. Richardson opened the meeting by asking Barren to present his cost estimates. Barren looked around grimly and did not mince words: â€Å"This thing’s expensive to build. It looks the same, but Aerial’s got higher-end components and it’s more complex to manufacture.† He gave a high-level overview of product-cost breakdown and concluded by saying, â€Å"I’ll be blunt. You’re going to have to sell this product for a lot more than you thought. If anything, we have been too aggressive in our cost estimate. We can’t lower it beyond what I’ve presented.† ED PRYOR: I know you think your estimates are sound, but that isn’t going to help us. With these numbers, we would have to sell Aerial for $550 to maintain our margin. We’d be two years late to market with a price point $100 over BirdsI. CORY WU: Tony, those cost estimates are surprisingly high. We tweaked the firmware without overhauling it, so it’s basically the same components. It doesn’t seem justified that the costs should come out as you say. ALICE GORGA: I’m not sure, Cory. Those costs look realistic, given how my  team upgraded the hardware. Sales probably just needs to reconsider how to position this thing. I think – ED PRYOR: Wait, are we here to talk about positioning or pricing? Fiero and I already figured out how we’ll position the product, so let’s just get the pricing straightened out. For the exclusive use of B. Shi This document is authorized for use only by Bixi Shi in Organizational Behavior- Fall 2014 taught by Elaine Wong University of California – Riverside from October 2014 to December 2014. TerraCog Global Positioning Systems: Conflict and Communication on Project Aerial | 2184 HARVARD BUSINESS SCHOOL | BRIEFCASES 5 TONY BARREN: Well, we don’t perform miracles. The cost won’t change, and I’m not going to cut corners in production. I had my head handed to me the last time we had quality issues. ED PRYOR: Allen, your designers must be able to tweak something, right? Hate to say it, but maybe you guys need to go back to the drawing board and figure out how to solve this problem. ALLEN ROTH: Ed, we’re well into a couple of other projects now. Frankly, I don’t think this is Sales’ call to make. We already put other projects on hold for Aerial, and we’ve given you what you requested. The discussion continued, but it became clear the group was at an impasse. Richardson suggested ending the meeting: â€Å"Why don’t we wrap it up for now and meet again next week? In the meantime Tony and the Design team should look for opportunities to cut these costs.† As the meeting adjourned, Pryor announced to the room, â€Å"If we can’t lower these costs and fix the finances on Aerial, I can’t sell it. I won’t try.† Resumption of Aerial Pre-Launch Meeting One Week Later Roth and Barren had spent much of the intervening week reviewing the cost estimates. When the team re-gathered on March 14, the participants seated themselves around the conference table (see Exhibit 5 for a seating chart). Becky Timmons, the CFO, was in attendance. At the last minute, Harold Whistler also decided to join the meeting. As Emma Richardson passed out copies of the new cost estimates, she explained that Roth and Barren had agreed to make minor changes to the Aerial prototype, and that they now felt it could be produced for approximately 8% less than the prior week’s estimate. On this basis, the Aerial could be priced at $475, about $100 more than the current full-featured TerraCog GPS. A long silence followed, then Cory Wu spoke up. â€Å"Eight percent-that’s all? I don’t understand it. I’d like to know where the differences lie between our costs and PostHaste’s on BirdsI. There’s got to be room for more cuts.† Barren snorted derisively. â€Å"You can’t wish away the costs,† he said. â€Å"We’ve cut what we can. Last time we got pressured into being too aggressive on cost estimates and then we got burned when the price of plastic went through the roof. I’m not making that mistake again.† Allen Roth concurred, pointing to the drivers of the cost increase: â€Å"Incorporating the satellite imagery requires five times as much memory as our standard graphics. That increases cost-but if you cut it, you undermine Aerial’s value proposition. Then we also did some reconfiguration internally, and that increases the labor required to put one of these together.† He paused, surveying the frustrated faces around him. â€Å"I don’t like the situation any more than the rest of you do, but we’ve got to be realistic. Look at the numbers in front of you-there’s nothing we can do to further reduce costs.† As everyone scrutinized the new cost estimates, the meeting broke into several conversations. Ed Pryor and Richardson huddled together, while Allen Roth and Tony Barren carried on a conversation with Harold Whistler. After several minutes, Richardson realized she needed to get the discussion back on track. She addressed the entire group, saying, â€Å"We have the estimates, so we just have to set a price that makes sense for the company. What do you think, Ed?† ED PRYOR: We have to consider the selling price of the Aerial relative to competition. Posthaste is selling at around $250 to dealers, which means they retail for around $400. Garmin just announced For the exclusive use of B. Shi This document is authorized for use only by Bixi Shi in Organizational Behavior- Fall 2014 taught by Elaine Wong University of California – Riverside from October 2014 to December 2014. 2184 | TerraCog Global Positioning Systems: Conflict and Communication on Project Aerial 6 BRIEFCASES | HARVARD BUSINESS SCHOOL their satellite-image version, which will hit shelves at somewhere around $395 MSRP. You all are talking about $475 retail, and that’s too high. We have to be in the ball park with our list price or we’ll be shut out of the game. EMMA RICHARDSON: What should list price be? ED PRYOR: $425 tops-but we should be lower than that if we are going to be aggressive at recapturing lost share. Let’s not kid ourselves. The way we’re trending, same-store sales will be down 10% this year. And this is with the GPS handheld market growing. HAROLD WHISTLER: What if we relax our margin requirements for once? BECKY TIMMONS: Absolutely not. We’re cutting it close already. HAROLD WHISTLER: Okay, then how about a redesign? Let’s go to market with what we have, and I’ll have my team take another look at possible changes that we can incorporate later. ALLEN ROTH: I’m afraid that’s wishful thinking, Harold. Given the product requirements the sales team called for, the cost is as low as it will get. CORY WU: I don’t know about that. The changes we made to meet sales’ requirements were not enormous. Why would they contribute to such a large increase in projected labor costs? TONY BARREN: Cory, you and Harold can run the numbers for yourself. Then you’ll see that these high costs are real. BECKY TIMMONS: I’d still feel more comfortable if we could price it at $500 retail. With fuel costs still rising, the cost to get these here from Shenzhen will only increase, and we run the risk of our margins really getting squeezed. ED PRYOR: Becky, you don’t understand how competitive this market is! Even at $475, why would anyone give us shelf space? We are late to market and we’d be pricing at a substantial premium. And is the product superior enough to justify that premium? I’ve been trying out our prototypes and I’m concerned about the speed. The update speed is terrible, and switching between functions is just – ALLEN ROTH: Come on, don’t start talking speed now. We were clear from the start that we would trade some speed to get new functionality and features. ED PRYOR: Well, my sales managers are going to be fuming. Fiero told them  Aerial would be available at $400, and now you are talking about a minimum of $75 more than that. I still want to see Cory or Harold take a crack at reducing unit cost. Emma Richardson took a deep breath. The company needed a â€Å"go/no-go† decision on the existing Aerial, and whether to do so at a competitive price in the hope that costs might be cut in the future, or at a high price. She wondered fleetingly what the consequences might be if the company abandoned Aerial altogether. As things stood, the arguments and finger-pointing were bound to continue, and the group would never come to a decision on its own.