BEHAVIOURAL MANAGEMENT CONTROL SEMINAR

Group D9:

Anto SihombingAntonio MazzitelliEugene KoharPeter Jacobsson

1. WHAT DO YOU FEEL ABOUT THE INITIAL ANALYSIS? WAS THERE, IN YOUR OPINION, ANYTHING WRONG WITH IT?

The initial analysis of new plant development of AR-42 in UK: A financial sound project Too optimistic sales forecastDue to decentralization, the analysis accounted was for only Hollandsworth and not the entire Axeon group

2. IS CONSTRUCTION OF THE NEW FACTORY IN THE UK IN THE BEST INTEREST OF AXEON?

Not in the best interest of Axeon High and unnecessary risks

Building new factory in UK involves high costs Solely for the production of one product AR-42 is not yet tested on UK market  The Netherlands factory is likely to be able to

increase production to meet UK’s demand of AR-42

Risk is too high compared to increase in return

3. WHY DID MR VAN LEUVEN BEHAVE AS HE DID?

On the initial proposal, he initially thought it made good business sense

He became more objective after listening to opinions of the parent company management

He stayed impartial and listened to both sides

Overall, he tried to deal with the problem tactfully in order to maintain the faith of the UK subsidiary

4. Discuss what transfer price should be established if AR-42 is supplied from the Netherlands to the UK.

Variable cost of manufacturing AR-42 per ton (in Netherlands with shipment to UK) is £ 2,060 and the sales price per ton in UK is £ 4,000 Transfer price per ton: £ 2,060 – 4,000 Transfer price must be less than agent price Fairness: the profit margin should be divided into

two (both for Hollandsworth and Axeon) Introduce result control by implementing

variable price based on AR-42 sales in UK, i.e. higher sales is rewarded with reduced transfer price

5. WHAT IS AXEON‘S CORPORATE STRATEGY?

Take advantage of the geographical expertise by acquiring companies

High-degree of decentralization Subsidiaries decide and responsible for their sales of

all Axeon products in their territory Subsidiary managers were encouraged to propose the

development of new products and allowed to build their own manufacturing plants if they could justify the investment

Axeon Dutch sales organization quote the subsidiaries the same prices as they quoted agents in all countries

Subsidiaries may face price competition of products produced by Axeon in Netherlands

Rewards for management personnel based on achievement of divisional revenue growth and “economic profit”

6. WHAT DO YOU BELIEVE TO BE THE CRITICAL SUCCESS FACTORS IN AXEON?

A strong position on the domestic market that allowed them to make acquisitions abroad and expand in new markets.

The use of geographic and market advantages from their acquisitions.

A large product line makes them a complete supplier for customers.

A high degree of technical knowledge in process development and manufacturing.

7. WHAT DO YOU BELIEVE ARE THE KEY RECURRING ACTIVITIES IN AXEON?

Worldwide sales Manufacturing Development of new products Acquisitions

8. DISCUSS AXEON IN TERMS OF ITS CENTRALIZATION / DECENTRALIZATION

Subsidiaries in Italy, UK, Sweden have been given autonomy to take advantage of their know-how, resources, market coverage and geographical expertise;

The subsidiaries are held responsible for sales of all Axeon products in their assigned territory; management personnel are included in a bonus plan that provides rewards based on revenue growth and “economic profit”;

The subsidiaries are also allowed to produce whatever mix of products they deem appropriate and to propose the development of new products;

HIGH DECENTRALIZATION (with its consequent results control implemented; some problems with rationalization of the whole company’s production)

But CENTRALIZATION of key decisions such as investment activities to preserve control by the parent firm on market and production

9. WHAT SHOULD MR VAN LEUVEN DO?

Acknowledge the good innovative idea, but delay the establishment of the new factory in UK since this could imply bearing to many risks connected to uncertainty in possible sales in UK;

Hollandsworth has to prove UK sales does match up with forecast in 1st year;

At the meantime, production of AR-42 will be increased in Netherlands and sold to the subsidiary in UK at a favourable price;

Diplomatic solution - save the relationship and confidence between the parent firm and UK subsidiary; profits could be divided with the UK subsidiary, if the UK sales increase the transfer price could be reduced to reward the efforts.

THANK YOU FOR YOUR ATTENTION!

QUESTIONS?