Case 1-4

Motorola Inc.
The controller of Motorola’s newly formed Application Specific Integrated Circuit (ASIC) Divi-
sion sensed that he and his staff could play a significant part in determining the success of
what promised to be an important new business. Not only was his division competing in a new
and dynamic market with unique requirements but it also was radically changing the way in
which it delivered its product. These circumstances led the controller to reassess the most
basic issues involved in designing a management control system: What should be measured?
How should it be measured? Who should measure it? and, For whom should it be measured?

The Company
Founded in 1928, Motorola soon became widely known for its radios and other consumer elec-
trical and electronic products. By the 1960s, it sold semiconductor products, communications
equipment, and components to consumers, industrial companies, and the military throughout
the world.
Headquartered in Schaumburg, Illinois, in 1984, Motorola achieved over $5.5 billion in
sales, employed over 99,000 people, and spent $411 million in research and development. It
was one of the few American companies that marketed a wide range of electronic products,
from highly sophisticated integrated circuits to consumer electronic products.

Organization
The company was organized along product and technology lines. Each business unit was struc-
tured as a sector, group, or division, depending on size.
The Semiconductor Products Sector (SPS) was headquartered in Phoenix, Arizona; sales in
1984 were over $2.2 billion, which was 39 percent of Motorola’s net sales. The sector sold its prod-
ucts worldwide to original equipment manufacturers through its own sales force. Semiconductor
products were subject to rapid changes in technology. Accordingly, SPS maintained an extensive
research and development program in advanced semiconductor technology.

Formation of the ASIC Division

In the early 1980s, the Semiconductor Products Sector produced a large line of both discrete
semiconductor components and integrated circuits. Integrated circuits (ICs) can be thought of
(at least functionally) as miniature circuit boards. For example, the designer of a video cassette
recorder could replace a 12" * 12" circuit board and all its individual components with a single
1" * 1" integrated circuit on a silicon chip, saving space and reducing power consumption. By
1985, worldwide sales of integrated circuits reached $20.2 billion.

This case was prepared and copyrighted by Joseph Fisher and Steven Knight, The Amos Tuck School of Business Adminis-
tration, Dartmouth College.

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 Among integrated circuit manufacturers, Motorola was widely known for its design and
process expertise, and it became a leader in the increasingly popular semicustom integrated
circuits.
Semicustom integrated circuits are designed using predetermined functional blocks. In the
early 1980s, Motorola produced a version of semicustom ICs called “gate arrays.” Each “gate”
on a gate array was a transistor that performed a single operation. These were interconnected
to produce the desired set of functions. One chip could contain a thousand or more gates. Each
was designed to meet the requirements of a specific customer. Gate array customizations were
relatively cheap and quick to manufacture, and they were designed by computer-aided design
systems. By 1984, the market for gate arrays had grown to $455 million. Sales in 1985 were ex-
pected to be $740 million, and the market was estimated to reach $1.4 billion in sales annually
by 1990. The high-performance gate array market totaled $90 million in 1984. Forecasts stated
that the market should grow to $600 million by 1990.
Motorola manufactured high-performance gate arrays using two different semiconductor
technologies: (1) bipolar and (2) complementary metal-oxide semiconductor (CMOS). Bipolar
technology provided increased speeds at which the circuit could perform but at the cost of in-
creased power consumption (and increased difficulty in meeting cooling requirements) when
compared to CMOS technology. For this reason, the demand for CMOS gate arrays was ex-
pected to grow more rapidly than that for bipolar gate arrays. In 1984, CMOS captured 40
percent of the market. This was expected to increase to 70 percent.
Bipolar gate arrays were produced in Phoenix by the Logic Division of the SPS. Under the
Logic Division, Motorola’s bipolar gate array business grew rapidly. Motorola achieved a dom-
inant share of this market and became the acknowledged technological leader.
CMOS gate arrays were produced in Austin, Texas, by the Microprocessor Products Group.
Since Motorola focused on maintaining its position in the microprocessor market, the CMOS
gate arrays did not receive adequate attention in this group. As a result, Motorola had only a
small share of the CMOS gate arrays market and faced stiff competition from such companies
as LSI, Hitachi, Toshiba, Fujitsu, and NEC.
To exploit fully the growing demand for semicustom integrated circuits, Motorola organized
the Application Specific Integrated Circuit (ASIC) Division as part of the Semiconductor Prod-
ucts Sector in 1984. In 1985, the ASIC Division occupied Motorola’s Chandler facility, the
newest of the company’s five Phoenix-area locations. Typically, Motorola worked closely with a
customer to design the semicustom integrated circuit. However, several designs were consid-
ered standard designs and were kept in stock.

Organization of ASIC Division

The division was organized along functional lines (see Exhibit 1).

Product Engineering Department

Product engineering interacted with the customer and assumed the role of a troubleshooter in
dealing with customer complaints. It was responsible for the technical aspects of ongoing prod-
uct manufacturing. Engineers were assigned to one or more products and served the customers

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 EXHIBIT 1 ASIC Division General Manager
Organization of
ASIC Division

New Product Product Production

Development Engineering Planning
Department Department Department

Division Quality
Marketing Manufacturing
Financial Assurance
Department Department
Controller Department

for these products. If a customer had a complaint about an integrated circuit, product engi-
neering responded to the request. Therefore, product engineering was the technical interface
between the company and customer for existing products.
Product engineers designed the manufacturing process for existing products, and they typi-
cally were responsible for customer-driven capital expenditures. If a customer wanted or re-
quired an additional manufacturing process that required a capital expenditure, the process
engineering department made a feasibility study. This study divided costs between nonrecur-
ring engineering expenses (NRE) and the per unit cost of production after the initial NRE. In
addition, an estimate of revenues was made to estimate product profitability. This report was
examined by the marketing department to ensure that the assumptions and estimates made
by the product engineers were reasonable.
Part of the start-up cost of a new product was the nonrecurring engineering cost (NRE). This
cost included design and software development cost but typically did not include investment in
process technologies, unless a very specialized piece of equipment was a unique requirement of
the product’s manufacture. The NRE was billed to the customer in two stages: 30 percent upon
agreement of the development contract and 70 percent upon the shipment of the first proto-
type-units.

Production Planning Department

The production planning and customer service department scheduled orders from the customer.
This department told manufacturing when to start production and when the product run
should be finished. Since Motorola did not have a computerized production planning system,
this work was done with only standard microcomputer software, such as spreadsheets. Orders
had to be tracked manually through the factory floor. When the product was shipped, the de-
partment billed the client and reported this information to the financial controller.

Marketing Department
The marketing department was responsible for identifying initial prospects and making sales
to them. In addition, the department had certain responsibilities for product pricing and accu-
rate forecasting of market demands.

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 Once a prospect was identified, the marketing department acted as a liaison to ensure that
the requirements of the product were accurately communicated from the prospect to the new
products development group. The new products development group then estimated a manu-
facturing cost, and the marketing department calculated a price, using a target margin of
around 60 percent above manufacturing cost. This price was adjusted to take into account the
competitive conditions of the market. The marketing department also forecasted the sales vol-
ume for the product for the next five years.

New Product Development Department

The new product development group was responsible for the translation of customer product
specifications into manufacturable designs and for the production of prototypes. As mentioned
above, this group provided an estimate of the manufacturing cost to the marketing group. After
the design was completed, the cost estimate was refined; it was included in the product imple-
mentation plan, along with yield requirements. Before the product design could be released to
the manufacturing department, the product was produced in the development fabrication area
with production tooling. At this stage the process had to meet minimum yield specifications.
This yield was not the yield estimated in calculating the long-run manufacturing cost of the
product, but simply a yield that would be satisfactory as production moved rapidly down a
learning curve. The learning curve was estimated to be about 70 percent for most products in
the ASIC Division. A 70 percent learning curve implies that unit costs for total production vol-
ume will decrease by 30 percent every time the cumulative production volume doubles.
Each month the new products development group provided the financial controller depart-
ment an updated forecast of future capital expense requirements; this was used in capital
planning by the finance department.

Quality Assurance Department

Quality assurance (QA) was responsible for the outgoing quality of the product. After many of
the processes on the manufacturing floor, QA inspectors sampled the product for quality. These
tests included electrical and visual/ mechanical tests. The electrical tests were straightforward
(i.e., if the product failed to conduct properly, the product was rejected). The visual/mechanical
tests were more subjective. Defects in this area could be misprinting, illegible printing, discol-
ored components, or bent lead wires. Many of these did not affect the viability of the circuit but
only its visual appearance. Quality assurance people knew that the Japanese were very sensi-
tive to visual quality and that the product had to be visually perfect if Motorola was to be com-
petitive in the Japanese market. One of the major responsibilities of QA was to convey to man-
ufacturing what constituted a rejection of the product. One manager in QA said that the group
should assume the role of a pseudo customer.
QA attempted to take a noncombative role with the other departments; it preferred to func-
tion in a preventive role. QA had trainers who discussed with manufacturing operators what
constituted a rejection. This program had two benefits: (1) operators became aware that they
needed to produce to a certain quality level; and (2) if the product was below acceptable qual-
ity at any stage in production, it would be rejected immediately by the operator, thus saving

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 further manufacturing costs. Recently, a procedure was instituted that, if a product was re-
jected, the whole line stopped until QA and the production floor could determine the cause(s).

Manufacturing Department
The manufacturing department consisted of hourly workers, supervisors, and a manufacturing
engineering staff. The hourly workers were directly involved in operating production machin-
ery and inspecting work-in-process. Manufacturing engineering was charged with sustaining
the production processes and methods used in the assembly and test operations. The group’s
focus was on the manufacturing process, rather than on specific products.

ASIC Market
The managers of the new division realized that the semicustom integrated circuit business had
different requirements for success than the commodity-type business from which it grew.
In the semicustom gate arrays market, the customer created a unique design from the
“building blocks” provided by Motorola designers. This involvement by the customer in the
middle of the development cycle was different from that in the other semiconductor products
offered by Motorola. Motorola provided design services to the customer and managed a rela-
tively involved customer relationship. Thus, Motorola’s organization focused on its customers,
rather than on its products.
The customers of the ASIC division were typically computer manufacturers, such as DEC,
Apple Computer, Unisys, Cray, and Prime Computer. These customers competed in markets
characterized by rapidly changing technology and rapid introduction of new products. Short-
ening the product delivery time was a primary concern for them. High quality, quick develop-
ment time, and the ability to achieve volume production rapidly were paramount in capturing
the business of these customers. Compared with these factors, price was of secondary impor-
tance.
Some customers, such as Hewlett-Packard, were developing just-in-time (JIT) manufactur-
ing systems and stated their needs for timely deliveries and high-quality incoming compo-
nents.

Motorola Manufacturing and Accounting Systems

Prior to moving, the ASIC Division was part of another corporate sector. Bipolar production,
prior to moving, used Motorola’s existing manufacturing and accounting systems. In the plant,
machines and workers were organized along functional lines. Each machine was controlled as
part of a functional group, and was in close physical proximity with other machines that per-
formed a similar function. This functional design resulted in large physical movements of prod-
uct over relatively large distances on the factory floor. Each manufactured part had a desig-
nated routing through the factory.
In this factory design, there were 29 cost centers, whose inventory was valued at standard
cost. The inventory was grouped by stage of completion for costing purposes. The routing of the
product through the factory typically included the following steps: (1) piece parts, where the

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 various raw materials were purchased and prepared; (2) wafer fabrication, where the silicon
wafers containing the logic arrays were produced; (3) die, where the wafers were tested and cut
into individual circuits or chips and mounted to the substrate of the package (permanent chip
enclosure); (4) assembly, where lead wires were attached to the chip and the packaging com-
pleted; (5) test, where the packaged chip was tested according to customer specifications; and
(6) finished goods, where the finished products were packaged for shipping.
This system required extensive recordkeeping. An entry was made every time the product
was moved from one cost center to another. A frequent physical audit of inventories was re-
quired to track and verify product amounts.
Material, labor, and overhead standards were updated twice a year. Nevertheless, the stan-
dards were often obsolete, because of the dynamic environment and the steep learning curves.
Overhead was allocated to the product based on direct labor. Direct labor was meticulously
tracked in order to cost labor to the product and to provide allocation of overhead to the prod-
uct. The manufacturing manager estimated that between 8 percent and 12 percent of an em-
ployee’s productive time was spent in recordkeeping.
Direct labor was paid an hourly wage and a bonus. The bonus was largely determined by
comparison of actual direct labor hours to standard labor hours for each employee.
The functional design of the factory caused difficulty in placing responsibility for an indi-
vidual product. Expediters in the production planning department performed a crucial task in
making sure important products were being completed in a timely fashion. Even so, the plant
was plagued with slow throughput times. Management felt that turn-around time on the inte-
grated circuits was too slow, compared with competing Japanese firms.
The functional design also resulted in large inventories and large batch sizes. The large
batch size resulted in work-in-process (WIP) inventories between functional stations and re-
sulted in large finished goods inventories that were effectively produced but perhaps un-
wanted by the customer.
Many people felt that, rather than helping managers cope with the complexity of the manu-
facturing system, the accounting system was actually exacerbating the problem. The division
controller noted, “The first important realization of the accounting department is that we were
sometimes a barrier to progress. The accounting systems resulted in overall dysfunctional ac-
tivities and impeded movement to new manufacturing techniques.”
The standard cost system was cumbersome and not well understood by factory employees. Fac-
tory employees had difficulty in tying a variance to a specific problem. Because a variance did not
highlight the actual problem, an appropriate solution to a variance was difficult to determine.
The typical factory worker thought the variance report was irrelevant and, therefore, ignored it.
The timeliness of reports was also a problem. Standard costs were generated monthly. The
lack of daily or weekly feedback made it difficult to pinpoint the cause of an unfavorable vari-
ance. The monthly variance was an accumulation of many favorable and unfavorable activi-
ties, which variance analysis did not specifically identify. Moreover, the variance reports
were not timely. The books were closed on the seventh working day after the end of the
month. An additional seven working days were required to generate actual costs and the
variance report. By the time the reports were received in the factory floor, the manufactur-
ing department was halfway through another accounting period.

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 Because of the dynamic environment facing a chip manufacturer, the determination of stan-
dards was very difficult. New chip designs were constantly flowing through the factory, and the
steep learning curve contributed to the rapid obsolescence of standards. The standards were
generally perceived as being out of date.
Since the variances were affected by volume, in many cases the way to decrease an individ-
ual variance was to keep the employees and machines fully used and produce large lot sizes.
This had the undesired result of building up WIP inventory between the work stations and pro-
duction of products that were not immediately required by a customer. At the same time, prod-
ucts required by a customer might not be produced. This resulted in a buildup of finished goods
inventory and out-of-stock orders simultaneously.
In the new plant, there was a dramatic increase in overhead costs and a corresponding de-
crease in direct labor costs. The allocation of overhead by direct labor no longer seemed rele-
vant.

Opportunities for Change

The manager of the newly formed ASIC Division realized that the opening of a new production
facility in Chandler represented an opportunity to introduce substantial changes in the divi-
sion’s manufacturing operations. Accordingly, the new plant’s floor layout was designed to be
particularly suited to the JIT philosophy and to the specific processes of the plant. One man-
ager at the Chandler site expressed the opinion that reorganizing an existing functional facil-
ity to accomplish a JIT plant would have been far more difficult.
The factory was organized around nine cells: (1) assembly preparation; (2) 72-pin assembly;
(3) 149-pin assembly; (4) other assembly; (5) sealing, mechanical testing, and marking; (6) heat
sink; (7) burn-in; (8) production testing and packing; and (9) warehousing and shipping. (Ex-
hibit 2 is a diagram of the plant layout.) Not all products went through all cells—for example,
not all chips required heat sinks. However, all of the chips produced at the Chandler plant were
processed in most of the cells.
Products moved from cell to cell in the order shown in Exhibit 2. The wafers (each consist-
ing of a number of chips) were placed in a die cage when they arrived at the plant. From the
die cage, the wafers were taken to the die prep cell, where the gate arrays on wafers that had
not been tested at the wafer fabrication facility were checked with a probe to determine which
arrays were good. Arrays that did not pass inspection were marked, and, when the wafer was
cut into individual chips, the marked arrays were thrown away.
Next, the chips were taken to one of the three assembly cells (72-pin, 149-pin, other), de-
pending on the product family and number of connections that needed to be made to the chip.
In the assembly cells, the electrical connections to the chip were made. In the sealing, mechan-
ical testing, and marking cell, the chips were sealed in a protective package, tested, and marked
for identification. In this cell, some low-volume chips were diverted from the normal product
flow into a special option line. This line was for very-low-volume ICs, which were usually built
for customers who used them for prototypes and testing. The focus of this option line was fast
turnaround time; for new ICs, a dozen or so units could be shipped within three weeks from the

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 EXHIBIT 2
Layout of Burn in
Chandler Mech test Mech
Plant all products test

Marking

Seal all Expansion

products

148 PGA
DB/IB
S.T.C.
All other Test
products
DB/IB
S.T.C.
72 PGA
DB/IB
S.T.C.
Option
test

Die prep Expansion

S.T.C. Pack
Die
case

S.T.C.
Group technology cell

Receiving Shipping Warehouse

time the design was accepted. Higher-volume ICs were routed through the remaining cells. As
noted, not all ICs were sent to the heat sink and burn-in cells, but all went through the testing,
warehousing, and shipping cells.
Most of the processes were machine-paced, and most of the machinery was complex and ex-
pensive. This was particularly true of the assembly and test cells. For example, automated test
machines at the end of the option line cost over $2 million each.
Each of the cells was run by a production team, which was supervised by a team leader.
Work flow was controlled through a pull system, with designated areas where limited inven-
tory was allowed between work stations. (A pull manufacturing system is characterized by
triggering production when inventory is removed from finished goods stock.) If the storage
area before a work station was full, the preceding station had to remain idle. One of the as-
sembly cells is diagrammed in Exhibit 3. In this cell, chips were attached to the bottom por-
tion of the permanent enclosure (package) in the die bond station, and they moved through

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 EXHIBIT 3
Layout of Assembly Cell

Wirebonder Wirebond Wirebonder Wirebond Wirebonder Wirebond Wirebonder

#1 monitor #2 monitor #3 monitor #4

Manual Wirebond Wirebonder

wirebond monitor #5

I.R.
furnace
QA LPO

Inventory
WIP

Oven Die bond Die bond

monitor

the cell as shown by the arrows; the final operation performed in the cell was attaching lead
wires in the wirebond stations. The cell was so designed that the product moved in one di-
rection along a U-shaped path.

The Role of the Management Control System

The controller of the ASIC Division was acutely aware of the tendency of outdated and cum-
bersome control systems to hinder progress in manufacturing operations. He felt strongly that
his office should not merely stand aside but should take a positive position in promoting the
changes throughout the division. However, he wondered what kind of managerial control sys-
tem would complement and even guide the progressive changes taking place in the division’s
operations.

Questions
1. What are the key success factors for Motorola’s ASIC Division?
2. Does a traditional standard cost system address these key success factors?
3. What are good measures of these key success factors?
4. How would you control the plant using these measures and the current structure of the
plant?

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