Group C1

1. Group C1 Mert Camlibel Johan Lundgren Patrik Barthelsson

2. Initial analysis Problems with the proposal • Since the total worldwide market for AR-42 for Axeon is 600 tons a year, it seems a bit unlikely that Hollandsworth alone can sell 400 tons in the UK. • It doesn’t make sense to construct a factory without a test to see how the UK market reacts to AR-42 • Mr. Ian Wallingsford doesn’t propose a plan for the production process in the new factory.

3. Construct the factory or not Manufacturing AR-42 in the Netherlands and shipping to the UK is optimal for Axeon. If Axeon decides to produce the whole 1,000 tons in the Netherlands, then • The fixed cost will be reduced by 1,000 x £240 = £240,000. • A £40 decrease per ton in average variable cost from £1,900 to £1,860 means that Axeon can save 1,000 x £(1,900 – 1,860) = £40,000 in production costs. • Constructing the factory in England would lead to an initial investment cost of £1,400,000 + £160,000 = £1,560,000 (equipment plus working capital). Instead Axeon could expand the production in the Netherlands from 600 tons to 1,000 tons while the capital investment remains unchanged.

4. The behavior of Mr van Leuven Initially, Mr. van Leuven seemed positive to the idea of running the project. After the board meeting, he even said ”the decision seems to be clear”. Also, the Axeon board voted for the construction of the factory. However, after the input of the product and marketing people, and during the following meeting, it seemed like Mr. van Leuven had abandoned the idea to initiate the project. Main areas of concern: • Too optimistic view of the UK market for AR-42 • Complicated and difficult to produce the coating chemical

5. So why did Mr. van Leuven behave so strange after the decision was made? • Perhaps Mr. van Leuven didn’t initially think that it would be unrealistic to sell two thirds of Axeon’s current total worldwide market for AR-42 in only the UK. • Mr. Ian Wallingsford forgot to mention that he needs five trained workers from Dutch Operations and also two people to train the workers in Hollandsworth. This could lead to lower production in the Netherlands. • The management personnel receives a bonus whenever respective division achieves revenue growth and economic profit. Assuming that they have a greater influence on Mr. van Leuven, they could have deceived him to run the project in the Netherlands only to receive the bonus. Obviously, the same goes for Mr. Ian Wallingsford.

6. What transfer price should be established? • Market-based transfer pricesUseful when there exists a perfectly competitive external market.Results in distorted information for decisions and evaluating performance. • Marginal cost transfer pricesPoor information for evaluating the economic performance. • Full-cost transfer prices (with or without markup)Better information of the performance in both Hollandsworth and AxeonEasier to implement (easier to calculate than marginal costs) Not distorting the evaluation purposesNo markup since its produced for the UK market (our proposal) • Negotiated transfer pricesHollandsworth does not have the same bargaining powerNot an appropriate situation to base a negotiation on

7. Axeon’s corporate strategy One way of viewing corporate strategies is to array them along a continuum from related to unrelated diversification. • Axeon and subsidiaries do not stray from the core business activity (related diversification) but they don’t exploit operational synergies (unrelated diversification). There is no high interdependence among the business units. • Decentralization and heavy reliance on financial result controls are common responses to information asymmetry between Axeon and its subsidiaries (unrelated diversification). • Bonuses based on financial performance are another example of unrelated-diversified firm characteristics.

8. Critical Success factors in Axeon • Create a market for AR-42 in the UK through production in Netherlands. • Education and training: i.e. complicated production of AR-42. • Because the production technologies are expected to improve, heavy focus on R&D is necessary to stay competitive in the chemical industry. • Decentralization by allowing the subsidiaries to propose new ideas (does not mean that every project has to be accepted). • Change the bonus plan that provides rewards based on achievement of divisional revenue growth and economic profit to get rid of the competitiveness when it comes to deciding which division is going to run the proposed project. Instead, let the bonus criterions be “Rewards based on achievement of Axeon revenue growth and economic profit.”

9. Key recurring activities in Axeon • The production of the industrial chemicals. • Acquiring foreign companies with local expertise. • Focusing on their target market and less on the subsidiaries markets. • Control the subsidiaries with financial targets. • Encourage development of new products and even manufacturing plants.

10. Centralisation/Decentralisation The mentality of Axeon is high degree of decentralization. This means that the subsidiary managers should be able to • Make their own decisions . • Decide what to sell in their own areas (i.e. produce the mix of products they find most appropriate . • Build own manufacturing plants as long as they can justify the investment in their own markets. However, it seems like the opposite. For example, when Hollandsworth proposed to construct the factory in England, they had to leave a proposal to the board. Another example is that Ian was given false hope when he first presented the proposal. Basically, Mr. van Leuven said it was a done deal but one week later the proposal was denied. This shows that Axeon uses a very inflexible centralisation decision structure.

11. What should Mr. van Leuven do? • Decide that the UK plant should not be built. • Expand the production in the Netherlands from 600 tons to 1,000 tons and ship the additional 1,000-600 = 400 tons to the UK. • Mr. van Leuven should have a meeting with the Hollandsworth board and explain why the process of the project proposal was mishandled. • Create an overall policy which shows clear guidelines for Hollandsworth and the rest of the subsidiaries regarding decision making.