Marshall School of Business
University of Southern California
Puente Hills Toyota
Teaching Note
Purpose of Case
This case can be used to motivate discussions of a number of topics, including financial
responsibility centers, performance measurement, transfer pricing, and incentives. The setting is
an automobile dealership, a business about which all students have some interest and
understanding. And the setting is real, so students can benefit from secondary learning about the
industry and business.
Because the incentives provided in this company, and the US automobile dealership sector in
general, are quite substantive, a significant portion of the case discussion can be usefully
devoted to examining and critiquing this companys performance measurement and incentive
The Puente Hills Toyota case can also be used in conjunction with the Kooistra Autogroep case
study, which is also included in this textbook. Kooistra Autogroep and Puente Hills Toyota are
both automobile retailers with highly similar organization and industry characteristics. But that
is where the similarities end. Kooistra Autogroep is based in the Netherlands where incentive
This note was prepared by Professors Kenneth A. Merchant (University of Southern California) and Wim A. Van der Stede (London
School of Economics) for the sole purpose of aiding classroom instructors in the use of the Puente Hills Toyota case. It provides
analysis and questions that are intended to present alternative approaches to deepening students’ comprehension of business issues
and energizing classroom discussion.
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Suggested Assignment Questions
1. Evaluate the performance measurement and incentive systems used at Puente Hills Toyota.
What changes would you recommend, if any?
2. At Puente Hills Toyota, most employees variable incentive pay increases linearly with
performance, however performance is defined; that is, the higher the performance, the larger
the bonuses that are paid. In most large companies, however, particularly at managerial
levels, no bonuses are paid until a minimum level of performance, such as a budget goal, is
exceeded. What are the advantages and disadvantages of using a reward/performance
function like Puente Hill Toyotas?
3. (When used in conjunction with Kooistra Autogroep.) When comparing the use of
incentives in the Puente Hills Toyota and Kooistra Autogroep cases, do you believe that
incentive pay is truly effort-inducing; that is, drive employees to perform at their best? If
you believe incentive pay is not, in whole or part, effective in making employees work
harder, then what other potentially useful purposes does variable incentive pay provide for
organizations relying on it, if any?
Case Analysis
Responsibility Centers
The case illustrates clearly that financial responsibility centers exist in great variety. While
textbooks describe the possible generic responsibility centers as cost centers, revenue centers,
profit centers, and investment centers, this case shows some of the variance that can exist within
these generic categories. The general sales manager is held accountable for net profit.
Obviously, the dealership also keeps track of balance sheet items, but the dealership general
managers incentives do not seem to consider them. So is the general manager an investment
center manager?
Similarly, the departments are profit centers, but not all costs are allocated to them. They are
It is useful to discuss why some seemingly uncontrollable indirect costs are allocated to
departments (see Exhibit 3). These allocations are mandated by Toyota, so that they can
compare dealership departments on a common basis that treats each department more or less as
a stand-alone business. Allocating the costs also gives the department managers information as
to what services are being provided for them and it gives them some power to complain if the
size of the allocations becomes too high.
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Transfer Pricing
Transfer pricing of service jobs done for internal customers (particularly the Used Car
department) is done at market prices. The alternative would be to give the internal customer a
discount, or perhaps even to transfer at cost. What would happen under that alternative? It
Performance Measurement
The measurement focus in this business is on profit measures. Do profit measures provide a
good indication of value creation in the car retailing business? The answer here is probably yes.
This is primarily a short-term business. Dealerships are not making many investments that
involve large lags between time of investment and payoff (such as R&D), and they are not
creating many intangible assets. The one exception is customer goodwill, so it is not surprising
that Toyota mandates that considerable effort also be devoted to the measurement of customer
satisfaction (CSI).
It is apparent in the case, however, that some of the measures can be gamed. Puente Hills
Incentive Plans
Useful class time can also be devoted to a discussion of the structure of the incentive plans.
Depending on the focus of the class and the class time available, the instructor can have the
students complete an incentive plan matrix. On a whiteboard, list any or all of the key incentive
plan elements. With adequate time, instructors can address the following:
Eligibility (i.e., who is included in the plan?)
Form of payment
Frequency of payment
Measure(s) and their importance weighting
Performance standards
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In an array of columns, list the roles for which the instructor wants to clarify the incentive
system. In this case, these might include the general manager, general sales manager, service
manager, salespeople, service advisors, or service technicians.
Among other things, this analysis will show that:
The payments are all in cash.
The payments are timely (monthly).
The first assignment question asks students for an evaluation of the performance measurement
and incentive system, which requires them to identify good and bad points about it. In addition
to the points raised above, students might mention the following:
2. This is an incentive system that would require the company to pay sizable bonuses even if
the company is losing money.
3. There is no bonus for teamwork. How much teamwork is necessary? The case mentions one
4. Is the company paying too much? Answering this question would require knowledge of
5. The bonuses are all formula-based. Would it be useful to allow some subjectivity in case
unforeseen events unfold or to reward otherwise hard-to-measure aspects of inherently
multitask jobs?
Generally, however, this measurement and incentive system probably must be considered as
The second assignment question asks students to evaluate the features of linear incentive pay
increases with performance, as opposed to incentive schemes with a floor where no bonuses are
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performance) create temptations for gameplaying.3 Therefore, compared to kinked or hurdle–
type incentive schemes, linear or commission-type incentive schemes remove these temptations.
A potential disadvantage of linear incentive schemes, however, is that they also remove the
motivational effects of performance targets. In other words, the company pays bonuses from the
first dollar of profits earned (or sales booked) even though overall performance during the
period may be poor or mediocre at best (i.e., profits or revenues fail to meet target).
We address the third assignment question in the Teaching Note for the Kooistra Autogroep
case study.
Pedagogy
As with most case classes, instructors must make a decision as to how structured to make the
discussion. However, we recommend following roughly the same structure, as presented in this