Group No.- D6Manon GioanMansour Hajbagheri Amit KumarMarie LepoutreEmmanuel Quansah

Prof. Håkan Kullvén 

1. Flaws in Analysis. He did not consider the investment opportunity using a corporate-focused

perspective.

Discount rate used can be misleading since company WACC is pegged at 10%.

Analysis lacked a sensitivity/scenario analysis; this would have taken into consideration both optimistic and pessimistic scenes and given the analysis a more realistic outlook.

He did not take into consideration a UK competitor analysis. This would have given a better idea of the market share to be gained.

NPV is best used in comparison; there was no alternative to compare the NPV and IRR of the UK start up. The fact that it is greater than the company hurdle rate is not enough for decision making.

He might have been spurned on by the bonus to be earned if this project went through, which might have made him over optimistic.

He didn’t look into the possibility of outsourcing production in the UK instead of setting up a plant.

2. Is construction in the UK in the best interest of Axeon? NO because the disadvantages outweigh the advantages.

Disadvantages of construction in the UK:

1. Massive reduction of cost if construction is done in the Netherlands.• Less overhead cost, variable cost and fixed costs.• Less capital investment• Less training cost • Only incremental cost come into play

2. Higher associated risks is involved in the UK startup

3. Better NPV and IRR of Netherlands option:

UK Proposal Netherlands Proposal Net Present Value @ 8% ₤916,000 £1,288,790 Internal Rate of Return 20% 26%

Some advantages:

• Advantage of redundancy• Ability to reach other markets/countries• Possible reduction in shipping costs to countries closer to the UK.

Payback Period-1 ½ Years

NETHERLANDS PROPOSAL

3. Why did Mr. van Leuven behave as he did?

He could have managed the decision-making process in a better way:

Considering the alternatives at the first meeting

Asking for the sensitivity analysis of the calculations

His early approval and later rejection will result in:

Less motivation for UK’s management team

Less Commitment from UK’s management team for later stages

Negative image of the parent faith in autonomy of subsidiaries

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

Different ways of Transfer Policies:

Market price

Most benefit to the Producer, Netherlands.

Cost based

It can be Incremental variable cost to full cost.

Cost plus Mark up

Mark up can be variable or lump sum.

e.g. to compensate the increased working capital to utilize full capacity, in this case for Netherlands. 

Two Book System

Crediting UK Market Price and Charging UK only Variable cost.

Leads both division Happy.

The total contribution per ton of AR-42 is as follows (using figures from year 2 and following):

Selling price £3,700 Variable costs (1,800) Shipping (100) Duty (100)

Contribution per ton £1,700  

Each transfer pricing method allocates this contribution between the UK and the Netherlands.

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

5. What is Axeon's corporate strategy?

• Centralization / decentralization

• Emergent style of corporate strategy

• Lack of rationalization and unity

Centralization / decentralization

• “Axeon’s management seems to talk decentralization, but at the same time they act like emperors”

• Great autonomy of the subsidiary’s managers: make decisions on portfolio of products and make propositions of new product development and plant construction.

• Each proposition has to respect financial performance measures based on the profit of the subsidiary, and not the profit of the company itself.

• The decisions have to be approved by the top management, so subsidiary’s managers can’t make final decisions.

Emergent strategy

“Emphasizes the benefits of letting the strategy emerge as things become gradually apparent.”

Managers are allowed to propose new product developments and new projects: there is no clear strategy made by the central management.

Lack of rationalization and unity

Products can compete with each other.

Each subsidiary is focused on his own profit, nothing is done by the CEO to ensure that managers are doing efforts towards company profit maximization.

Use of transfer pricing method with market-price.

6. What do you believe to be the Critical Success Factors in Axeon?

There’s little indication about CSFs in the Axeon case

Geographical expansion for reaching new markets and

expertise

Proper organizational structure that suits

decentralization strategy

Ability of the manager to integrate the subsidiaries with

the parent company

7. What do you believe are the key recurring activities in Axeon?

Strategic level:

• Global Presence / Decentralization• Acquisition

Supply Chain Management:

• Product Manufacturing • Inventory Management• Product Distribution• Product Marketing /Advertising • Sales

8. Discuss Axeon in terms of its centralization / decentralization.

Axeon decentralized aspects:

Each subsidiary should assume responsibility for sales of Axeon’s products in their territory: managers have autonomy to decide what they want to sell.

They can also produce products that compete with those produced in Netherland: no rationalization of the portfolio.

Managers can propose the development of new products.

BUT…

Final decisions have to be approved by the board of directors:

they have the real power.

8. Discuss Axeon in terms of its centralization / decentralization.

Benefits of decentralization:

“The geographical expertise in the acquired companies”More adapted to fast changing environments and markets.Reduced costs of controlBetter incentives for subsidiaries

Disadvantages of decentralization:

Lack of rationalization and unitySubsidiaries try to maximize their own profits and not the profits

of the whole company.

9. What should Mr Van Lewen do?

Short term decision:

Negotiation with Ian (e.g. bonuses)

Recognition of his work

Eliminate:

The feeling of frustration within the subsidiaryThe possibility that Ian quits

9. What should Mr Van Lewen do?

Long term decision1. Analysis of the effectiveness of the actual results control system

Knowledge of desired results

Main objective: Maximize shareholder value Profit of subsidiary should represent a profit of the entire organization

Controllability

The possibility of manufacturing AR-42 in Netherland: uncontrollable for Ian It should not affect his performance evaluation

Measurement of controllable results effectively

Precise, Objective, Timely, Understandable.

9. What should Mr Van Lewen do?Long term decision

2. Change results control system

Performance dimensions (Revenue growth and economic profit)

Measurement dimensions in alignment with the organization's goals.

Measuring performance

Not only the financial performance of the subsidiary

But also subjective judgments (e.g. innovation skills, problem-solving skills)

Setting performance targets

Define more precisely the annual targets.

Providing rewards

Extrinsic rewards: Comparison of results with the different subsidiaries.

Intrinsic rewards: Emphasis a sense of accomplishment through a tailored

reward packages (e.g. improving promotion possibilities).