AXEON N.V CASE STUDY 12th of November 2008 Group C2 : Fabio Ferla Capanni Livia Gulomjon Sobirov Fehim Alper Konuk Andrea Rodriguez piñero Question 1 What do you feel about the initial analysis? Was there, in your opinion, anything wrong with it? Analysis considering Rate of return, Cash Flow, Variable costs, Price, Working Capital Analysis not considering: Directors initial participation in the project, Competitors (price strategies), Sensitivity Analysis However workers performances are incentivised but they don’t have complete freedom in their choices Discount Rate 8% less than Cost of Capital 10% (NPV effects) Question 2 The construction of the new factory in the UK is the best interest of Hollandsworth because: Notoriety of the brand in UK Personal interest of the people involved in the project Opportunity to compete directly with Axeon Netherlands One growth company in the English economy Question 2 But it’s not the best interest of Axeon because: Project not viable: forecast sales too optimistic and AR- 42 production too complicated Axeon Netherlands wants to be the only one in the group manufacturing AR-42 (Monopoly) They can use the market research done by Hollandsworth to enter the UK market If production of 1,000 tons instead of 600 to supply UK, reduction of both fixed and variable costs => Economy of scale => Competitive sale prices => Possible to win market share Question 3 Mr Van Leuven did behave like that in the meeting because : He kept silence in the meetings because he did not do any calculations before the meeting. He wanted Ian to be able to explain and support his idea without back-up He didn’t want to influence other members He did not tell anyone to evaluate the project before, even to VP Finance in Netherland Question 4 Transfer Price of AR-42 from the Netherlands to the UK : Axeon can establish transfer price based on 3 alternatives: 1.Full cost transfer price 2.Full cost plus markup transfer price 3.Marginal cost transfer price. We will discuss this alternative because it is the 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) Estimated manufacturing Variable cost of AR-42 (additional 400 tons) in the Netherlands to the UK Question 4 Marginal cost transfer price : Transfer price is £ 2000 per ton. Axeon can produce additional 400 tons annually with its existing capacity so Fixed Cost per ton can be considered as 0. Axeon is an expense center. Hollandsworth earns profit (before promotion costs and tax)of £ 1700 per ton. Hollandsworth is revenue center. We advice to share the profit between companies. Ian must be rewarded because of his incentive. And reward will encourage him to sell the product and get the bonus depending on the achievement of subsidiary's revenue growth. Question 5 Axeon’s corporate strategy: Axeon highly decentralized company: 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 build their own manufacturing plants if they could justify. Subsidiaries can bargain for the price. 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 and budgeting process. Producing high volume in order to produce at lower cost per unit Axeon has good management control which relies on financial results control build around profit center structure: Bonus plan. Rewarding management personnel based on achievement of divisional revenue growth and economic targets. Question 6 Critical success factors in Axeon: “activities required for ensuring the success your business” 1 .Geographical location of the subsidaries that provides a good Distribution Network 2 .Decentralization: autonomy and product mix decision. 3. Good training of the employees Question 7 Key recurring activities in Axeon: Planning Sales Purchasing Production Meeting of board director Question 8 Discuss Axeon in terms of its centralisation decentralisation: Centralisation of important decisions, strategic decisions (in Netherlands, with administrative constraints and cultural control giving the feeling of conflict of interests) Decentralisation of operative work (subsidiaries decide the products that they want to sell, with action accountability) ACTION CONTROL SYSTEM Question 9 What should Mr. Van Leuven do? He must decide to increase production in the Netherlands and distribute through the UK subsidiary. He must apologize for not supporting Ian in the previous meeting. He must try to explain to Ian that producing in the Netherlands more profitable for the company (reasons are clearly explained in the 2nd question) Question 9 What should Mr. Van Leuven do? He must also tell him that by producing in the Netherlands, company does not need to take loan and factory in the Netherlands can work at full potential. He must award Ian for his initiative and based on achievements of UK subsidiary revenue growth in the future. Thank you for your attention!