ATH CASE SOLUTION

It is impossible to evaluate precisely a company, but the company value has three drivers:

1. EFFICIENCY IN THE CURRENT OPERATIONS  maximising the cash flow, and this is
reflected in the sales and earnings targets
2. INNOVATION AND GROWTH  maximising future cash flow  reflected in the target of
tech superiority incentive
3. RISK MANAGEMENT  the discount rate! This is reflected by the target of the approval
from FDA

Scepter with the 281 mln is buying efficiency, growth and risk plus the associated synergies.

How to use the PMS to this situation?

This is a start up situation , with a new owner and 2 main goals. We applicated the methodology of the
financial statement analysis and arrived to the consideration that the cash generation is poor and that
they are investing to grow . The size and the economies of scales here are an issue and a trade off
between growth and long term solvency is present , because the higher the size and the investment of
ATH , the higher the loss the more negative is ROE. The pressure on EBIT and the gross margin is high
and the one of the new investment as well (even though discretionary expenses).

ATH needs to grow in volume, market share and in gross margin%.

In this case we see that we need to balance profitability, growth and control, moreover short term and
long term goals and capabilities and even the performance expectation of the stakeholders. In the earn
out structure there are some limitations, relative to the efficiency in current operations , there are
independent targets between the sales and earnings, moreover if looking at the innovation and
learning driver, there is no guidance about how much spending in market R& D, there is absence of
KPIs dedicated to the stakeholders and the absence of a long term plan. When it comes to new
investments , usually you have two ways to reach goals and define objectives:

1. Propose incentives and use PMS ex post (ATH CASE)

What is the message from ATH case? How to deal with the risk and sustainability . The PMS have to be
strategically aligned (it is about the linkage). The 7 key business performance drivers and the 4Ps model
have to be used in order to achieve so . And effective PMS should be about to measure effective
 communication between strategy and operations . A clear communication from top down strategy to
processes could generate emergent strategies .

1) Does the earn‐out structure focus on the right performance goals?

Scepter had acquired ATH to increase its presence in the market. So, we can infer that it wanted to
increase its market share through new product development. However, from the earn-­­out structure it
looks like sales and earning goals are independent. It may be right to have no connection between sales
and earning goals, if sales are sustainable. However, if these two goals are independent, it can be inferred
that profit is not a major concern as there is no control in expenditure. So, the current earn­out structure
is not aligned with ATH strategy selling low cost and high-quality product. Moreover, in the earn-‐‐out
structure the bonus is mentioned, but the bonus does not link to the market share growth. So, I think
that the earn-‐‐out structure is not focused on the right performance goals.

(a.) Should Scepter Pharmaceutical put additional controls on this entrepreneurial firm?

From the case above, we can see Scepter had put only diagnostic control on ATH. The case does not
suggest operating synergy between ATH and Scepter. From the case, it seems that ATH is operating
autonomously or the managers from the ATH has the autonomy to take the decisions. So, the potential
for control failure is high and there is a need to add the three other essential levers of control on ATH.
Being in a crucial domain such as medical, it is important for Scepter Pharmaceutical to put additional
controls on ATH such as belief system, boundary system and interactive control system. Lack of Process
controls is very risky in the pharmaceutical sector. Though Diagnostic control such as the earn-‐‐out
structure will help keep critical performance variables within present limits and help track profitability
and goals. However, diagnostic control system alone can lead to control failures and crisis.

2. If you were president of ATH Micro Technologies, how would you communicate and motivate
employees to achieve profit and performance goals?

From the case, earn out structure is in place. However, the organization does not seem to have a belief
system. In order to communicate and motivate employees, first of all, I would create a belief system such
that it communicates mission and core values, for example -‐‐customer satisfaction and quality, and
inspire all participants to commit to the organization's purpose. I would design an incentive program
that aligns to the core values and mission of the company. For example, certain percentage of bonus
would be related to quality control, certain percentage of bonus for profit and customer satisfaction.
Likewise, it is also important to establish an Interactive control system to track strategic uncertainties. In
order to do this, it is important to open organizational dialogue to encourage learning. Since ATH is
operating in a medical technology industry that is constantly changing, it is critical for the managers in this
industry to have an insight into the changing industry conditions and identify specific vulnerabilities,
opportunities and the source of any problems that require proactive responses. So, the compensation of
the manager should be linked to these measures in order to motivate them.

(a) What are the appropriate performance goals for employees to focus on?

The appropriate performance goals for employees to focus on would be a combination of qualitative and
quantitative measure together. Since ATH is a product-‐‐based company, employees should focus on
qualitative measures such as product quality, customer satisfaction and product innovation but at the
same time, employees should also focus if the sales goals are being met and if the cost to produce the
product is under control in order to attain profitability. So, it is important to tie the qualitative and
quantitative measures together and employees should focus on both of these goals together rather than
solely on one.

(b) How would you communicate and control events and employee actions that could put business
objectives at risk?

I would communicate and control events and employee actions that could put business objectives at risk
through the boundary system. I would identify actions and pitfalls that employees must avoid and
establish them as a boundary system. I would make the ATH employees aware about the various
regulations that need to be followed in the industry such as adherence to FDA regulations through this
system.

3. What are the best financial measures to assess ATH MicroTechnologies’ performance? Why?

The best financial measures to assess ATH MicroTechnologies’ performance are Profit and Return on
Investment (ROI). Profit is the difference between Sales and Cost. Considering ATH’s strategy of selling
low cost and high quality product, it is essential for ATH to measure both Sales and Cost. The current
earn-‐‐out structure does not consider profit so the earn-‐‐out structure is not aligned with ATH strategy.
Considering profit as a financial measure aligns with ATH Strategy. Likewise, Scepter had acquired and
invested on ATH for market penetration. So, it is important for Scepter to measure the Return on
Investment (ROI) in order to assess ATH MicroTechnologies’ performance so as a stakeholders’ measure.
TENSIONS

1. The earn out clauses are not coherent with the strategy, because they are about just some years,
so there is a tension between short term and long term objectives.
2. The revenues grow but the NI decrease, the more it sells the more lose. The earn out and sales
objectives are not connected between themselves and this cause a tension between growth and
profit. There is also a problem of tension between profit and control, because the manager go in
the direction of the earn out but not of Scepter, that forgot to insert clauses about the way of
doing profit. There is tension between growth and control tied to the fact that Scepted has
decided to manager the operation with a wide delegation that generates tension, managers are
brought to make decisions different from the ones wanted by Scepter.
3. Tensions between different stakeholders emerge, because the top manager has short term
objective, while Scepter long term.

Scepter’s performance measurement framework is too tied to the accounting part , all the KPIs are
about financial measures.