Axeon N.V. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Decentralization

PRO

The company had been using the decentralization approach in the past which proved to be quite successful for the company. By providing freedom to foreign subsidiaries to decide the products they wanted to sell. It also helped the company in attracting appropriate personnel for the company who were willing to apply their experience to improve the overall performance of the company. Apart from this it also saved the company from additional cost and cultural differences that could have been a hurdle in the way of development.

Cons

However there are certain disadvantages align with the decentralization approach, it can create internal competition and rivalries between the companies and could lead to a dispute on the basis of conflict of interest, making it difficult to control the subsidiaries and the disputes.

Transfer price

Netherland currently have the capacity of producing 600 tons. If the company decides to reject the proposal presented to invest in UK, the capacity is expected to increase to 1000 tons. A benchmark to identify the opportunity cost associated with the decision. If Netherland contains a spare capacity that is not being utilized currently than the opportunity cost will be equal to zero.

Quantity	Variable cost per ton	Total variable cost
1000	1860	1860000
600	1900	1140000
		720000
Minimum transfer price		1800

If the company decided to produce in Netherland than AR-42 will be supplied from Netherland to UK in that case a transfer price need to be decided. Furthermore, at the minimum the transfer price would be $1800.

Transfer price is highly dependent on the strategy to be adopted by management. In case Netherland decided wants to build a strong business foundation it must decide the transfer price to be higher than $1800 and it should be lower than the price being offered in the market. Otherwise the UK Company can face a loss.

The director of the Axeon objected and raided question regarding the assumptions made regarding the manufacturing and the cost required for the manufacturing. The cost related to fixed expanse are already sunk therefore the comparison is made on basis of variable cost. The incremental variable cost is comparatively more relevant while comparing the two proposals for the investment.

	UK Option	Netherlands Option
NPV (8%)	916000	$1,252,186
IRR	20%	28%

It can be seen that both of the options are able to generate positive NPV and the impact of the startup complication is not that significant as being assumed by the manager of Axeon. In addition to this the fixed cost will only be irrelevant in the case of Netherland if they had excess capacity for producing the chemical.

Recommendation

After analyzing the situation it is advised that Mr. Van Leuven should increase its current production and should distribute through its subsidiary in UK. He should justify the decision to Ian by giving evidence supported through appropriate facts and figures and the appropriate market research. He must also appreciate Ian for his proposal and the initiative taken by him by rewarding him and acknowledging the achievement. He should also make a reasonable offer to buy their patent and determine a reasonable price that should be beneficial and is in the mutual interest of both the parties.

In order to prevent similar problem in future the company should create a decent balance between decentralization and centralization. It should adopt a centralization approach in case of manufacturing related decisions and should provide the autonomy to the managers when it comes to sales.

Exhibits

Exhibit 1

Year	0	1	2	3	4	5	6	7	total
equipment
working capital	-120000	-20000	-20000
operating profit		76800	211200	339600	339600	339600	339600	339600
salvage value								160000
Total	-120000	56800	191200	339600	339600	339600	339600	499600	1486400

Year	1	2	3	4	5	6	7	total
sales	200	300	400	400	400	400	400	2500
variable cost per ton	1860	1860	1860	1860	1860	1860	1860
sales price per ton	4000	3700	3700	3700	3700	3700	3700
variable profit margin per ton	2140	1840	1840	1840	1840	1840	1840
total variable profit	428000	552000	736000	736000	736000	736000	736000	4660000
shipping cost	20000	30000	40000	40000	40000	40000	40000	250000
import duty	20000	30000	40000	40000	40000	40000	40000	250000
promotional cost	260000	140000	90000	90000	90000	90000	90000	850000
net operating cash flow	128000	352000	566000	566000	566000	566000	566000	3310000
Tax (40'%)	51200	140800	226400	226400	226400	226400	226400	1324000
Net cash flow after tax	76800	211200	339600	339600	339600	339600	339600	1986000