Axeon N.V.

Topics: Manufacturing, Net present value, Depreciation Pages: 6 (1844 words) Published: March 13, 2007
Executive Summary This report presents a case involving problems at a chemical manufacturing firm, Axeon N.V. having grown into a multinational Company, problems have emerged; do to ineffective performance measurement systems and lack of strategic control. The following management report describes and analyses those problems and presents solutions and recommendations.

With headquarters in the Netherlands, Axeon N.V. operates three subsidiaries; in the U.K. Scandinavia and Southern Europe. The subsidiaries have considerable autonomy to determine their product mix and the setup of new manufacturing facilities. Case analysis revealed serious defects in the Company's operation resulting from poorly designed performance measurement systems and inefficient strategic control. These defects have led the Company to reward subsidiary managers for focusing solely on their subsidiaries short-term revenue and profit but not for contributing to the long-term optimization of shareholder returns. The case also presents an apparently profitable proposal, made by the U.K. subsidiary, that subsequent an approval by the board of directors becomes a matter of controversy as its alleged profitability is questioned by management at Axeon's headquarters. Case analysis reveals that not only is the proposal incorrectly constructed but is furthermore unprofitable and would not have been presented if proper performance management systems had been in place. This report recommends rejection of the above mentioned proposal and that Axeon implements effective performance management systems to ensure congruency of management and Company goals.

About the Company Axeon N.V is a multinational Company specializing in the manufacturing of industrial chemicals. With headquarters in the Netherlands, the Company has over the years acquired subsidiaries in the U.K., Italy and Sweden. The subsidiaries are responsible for sales in the U.K., Southern Europe and Scandinavia, respectively, accounting for 8%, 14% and 6% of Axeon's total sales. All other sales are handled by Axeon in the Netherlands.

The Company emphasizes decentralization, allowing subsidiary managers considerable autonomy regarding what products to sell in their territories. Products manufactured by one subsidiary are sold to other subsidiaries at the same price as to agents. In some cases, the subsidiaries manufacture products that compete with those produced by Axeon's factories in the Netherlands and little attempt has been made to rationalize the production.

Subsidiaries are allowed to determine their own product mix, propose new products and the setup of new manufacturing plants, if they can justify the investment in their own market.

Management personnel are rewarded with bonuses based on growth of division revenue and for reaching economic profit targets set for the division during the annual planning and budgeting process.

New Product and Plant Proposal In 1998, the Managing Director of Axeon's U.K. division, came up with a plan to set up a manufacturing plant in the U.K. for a chemical called AR-42. Even though the chemical was already manufactured by Axeon in the Netherlands, it had never before been sold in the U.K.

The U.K.'s subsidiary's plan was based on a new technology, designed by the subsidiary, to store and apply AR-42. The U.K. subsidiary manager claimed that with this new technology the subsidiary would rapidly develop a 400 ton annual market for AR-42 in the U.K., almost as large as Axeon's, already existing, 600 ton, worldwide market for the chemical.

Having designed the plant with assistance from the Corporate Engineering Division in the Netherlands, the U.K. Managing Director presented his plans to the U.K. division's board of directors. Since the plans indicated that the endeavor was profitable, the plan was accepted and subsequently presented to the board of Axeon in the Netherlands that voted unanimously to allow construction of the plant. Subsequent...

Bibliography: Harvard Business Review, september- october 1988 - Measuring Cost Harvard Business School - 9-193-070 - Accounting for Indirect Costs Harvard Business School - 9-197-076 - Introduction to Activity-Based Costing
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