AXEON N.VAXEON N.VCASE STUDYCASE STUDY

Group C2 :Group C2 :Fabio FerlaFabio Ferla

Capanni LiviaCapanni LiviaGulomjon SobirovGulomjon Sobirov

Fehim Alper KonukFehim Alper KonukAndrea Rodriguez piñeroAndrea Rodriguez piñero12th of

November 2008

Question 1Question 1 What do you feel about the initial analysis? What do you feel about the initial analysis? Was there, in your opinion, anything wrong Was there, in your opinion, anything wrong with it?with it?Analysis considering Rate of return, Cash Flow, Variable Analysis considering Rate of return, Cash Flow, Variable costs, Price, Working Capitalcosts, Price, Working CapitalAnalysis not considering: Directors initial participation in the Analysis not considering: Directors initial participation in the project, Competitors (price strategies), Sensitivity Analysisproject, Competitors (price strategies), Sensitivity AnalysisHowever workers performances are incentivised but they However workers performances are incentivised but they don’t have complete freedom in their choicesdon’t have complete freedom in their choicesDiscount Rate 8% less than Cost of Capital 10% (NPV Discount Rate 8% less than Cost of Capital 10% (NPV effects)effects)

Question 2Question 2 The construction of the new factory in The construction of the new factory in the UK is the best interest of the UK is the best interest of Hollandsworth because:Hollandsworth because:

Notoriety of the brand in UKNotoriety of the brand in UKPersonal interest of the people involved in the Personal interest of the people involved in the projectprojectOpportunity to compete directly with Axeon Opportunity to compete directly with Axeon NetherlandsNetherlandsOne growth company in the English economyOne growth company in the English economy

Question 2Question 2 But it’s not the best interest of Axeon because:But it’s not the best interest of Axeon because:

Project not viable: forecast sales too optimistic and AR-Project not viable: forecast sales too optimistic and AR-42 production too complicated42 production too complicatedAxeon Netherlands wants to be the only one in the Axeon Netherlands wants to be the only one in the group manufacturing AR-42 (Monopoly)group manufacturing AR-42 (Monopoly)They can use the market research done by They can use the market research done by Hollandsworth to enter the UK marketHollandsworth to enter the UK marketIf production of 1,000 tons instead of 600 to supply UK, If production of 1,000 tons instead of 600 to supply UK, reduction of both fixed and variable costs reduction of both fixed and variable costs => Economy of scale=> Economy of scale => Competitive sale prices=> Competitive sale prices => Possible to win market share => Possible to win market share

Question 3Question 3 Mr Van Leuven did behave like that in the Mr Van Leuven did behave like that in the meeting becausemeeting because ::

He kept silence in the meetings because he He kept silence in the meetings because he did not do any calculations before the meeting.did not do any calculations before the meeting.He wanted Ian to be able to explain and He wanted Ian to be able to explain and support his idea without back-upsupport his idea without back-upHe didn’t want to influence other membersHe didn’t want to influence other membersHe did not tell anyone to evaluate the project He did not tell anyone to evaluate the project before, even to VP Finance in Netherlandbefore, even to VP Finance in Netherland

Question 4Question 4 Transfer Price of AR-42 from the Netherlands to the UKTransfer Price of AR-42 from the Netherlands to the UK ::

Axeon can establish transfer price based on 3 alternatives: Axeon can establish transfer price based on 3 alternatives: 1.1.Full cost transfer price Full cost transfer price

2.2.Full cost plus markup transfer priceFull cost plus markup transfer price

3.3.Marginal cost transfer price.Marginal cost transfer price. We will discuss this alternative because it is the We will discuss this alternative because it is the most appropriate for the corporate strategy of Axeon . And from the investment most appropriate for the corporate strategy of Axeon . And from the investment center point of view it gives higher ROI than manufacturing in the UK)center point of view it gives higher ROI than manufacturing in the UK)

Estimated manufacturing Variable cost of AR-42 (additional 400 tons) Estimated manufacturing Variable cost of AR-42 (additional 400 tons) in the Netherlands to the UK in the Netherlands to the UK

Question 4Question 4 Marginal cost transfer price Marginal cost transfer price ::

Transfer price is £ 2000 per ton. Transfer price is £ 2000 per ton. Axeon can produce additional 400 tons annually with its existing capacity so Fixed Cost Axeon can produce additional 400 tons annually with its existing capacity so Fixed Cost per ton can be considered as 0. per ton can be considered as 0. Axeon is an expense center. Axeon is an expense center. Hollandsworth earns profit (before promotion costs and tax)of £ 1700 per ton. Hollandsworth earns profit (before promotion costs and tax)of £ 1700 per ton. Hollandsworth is revenue center.Hollandsworth is revenue center.We advice to shareWe advice to share the profit between companies.Ian must be rewarded because of his incentive. And reward Ian must be rewarded because of his incentive. And reward will encourage him to sell the will encourage him to sell the product and get the bonus depending on the achievement of subsidiary's revenue growth.product and get the bonus depending on the achievement of subsidiary's revenue growth.

Question 5Question 5 Axeon’sAxeon’s corporate strategy corporate strategy::

Axeon highly decentralized company: Axeon highly decentralized company:

Subsidiary managers have autonomy to decide what to sell in their own territories.Subsidiary managers have autonomy to decide what to sell in their own territories.

Subsidiaries are allowed to produce whatever mix of products they deemed appropriate.Subsidiaries are allowed to produce whatever mix of products they deemed appropriate.

Subsidiaries are allowed to build their own manufacturing plants if they could justify.Subsidiaries are allowed to build their own manufacturing plants if they could justify.

Subsidiaries can bargain for the price.Subsidiaries can bargain for the price.

Subsidiaries can change their own production methods, marketing strategy, financial planning. Subsidiaries can change their own production methods, marketing strategy, financial planning.

Economic targets were defined by parent company as part of company’s annual planning Economic targets were defined by parent company as part of company’s annual planning and budgeting process.and budgeting process.

Producing high volume in order to produce at lower cost per unitProducing high volume in order to produce at lower cost per unit

Axeon has good management control which relies on financial results control build around Axeon has good management control which relies on financial results control build around profit center structure: profit center structure:

Bonus plan. Rewarding management personnel based on achievement of divisional Bonus plan. Rewarding management personnel based on achievement of divisional

revenue growth and economic targets.revenue growth and economic targets.

Question 6Question 6 Critical success factors in Axeon:Critical success factors in Axeon:

2 .Decentralization: 2 .Decentralization: autonomy and product mix autonomy and product mix decision.decision.

3. Good training of the 3. Good training of the employeesemployees

““activities required for ensuring the success your business”activities required for ensuring the success your business” 1 .Geographical location of the subsidaries that provides a 1 .Geographical location of the subsidaries that provides a good Distribution Networkgood Distribution Network

Question 7Question 7 Key recurring activities in AxeonKey recurring activities in Axeon::

PlanningPlanningSalesSalesPurchasingPurchasingProductionProductionMeeting of board directorMeeting of board director

Question 8Question 8 Discuss Axeon in terms of its centralisation Discuss Axeon in terms of its centralisation decentralisation: decentralisation:

Centralisation of important decisions, strategic Centralisation of important decisions, strategic decisions (in Netherlands, with administrative decisions (in Netherlands, with administrative constraints and cultural control giving the feeling of constraints and cultural control giving the feeling of conflict of interests)conflict of interests)

Decentralisation of operative work (subsidiaries Decentralisation of operative work (subsidiaries decide the products that they want to sell, with action decide the products that they want to sell, with action accountability)accountability)ACTION CONTROL SYSTEMACTION CONTROL SYSTEM

Question 9Question 9 What should Mr. Van Leuven do?What should Mr. Van Leuven do?He must decide to increase production in He must decide to increase production in the Netherlands and distribute through the UK the Netherlands and distribute through the UK subsidiary.        subsidiary.        He must apologize for not supporting Ian in He must apologize for not supporting Ian in the previous meeting.         the previous meeting.         He must try to explain to Ian that producing He must try to explain to Ian that producing in the Netherlands more profitable for the in the Netherlands more profitable for the company (reasons are clearly explained in the company (reasons are clearly explained in the 2nd question)       2nd question)       

Question 9Question 9 What should Mr. Van Leuven do?What should Mr. Van Leuven do?  He must also tell him that by producing in the He must also tell him that by producing in the Netherlands, company does not need to take Netherlands, company does not need to take loan and factory in the Netherlands can work at loan and factory in the Netherlands can work at full potential.      full potential.       He must award Ian for his initiative and He must award Ian for his initiative and based on achievements of UK subsidiary based on achievements of UK subsidiary revenue growth in the future.  revenue growth in the future.  

Thank you for your Thank you for your attention!attention!