1. Behavioural Management Control
Seminar
Axeon N.V. Case study
Group D5
Alberto Abugaber
Giuseppe Amenta
Jeremy Laborde

2. There’s no scenario analysis. Just 1 scenario.
1. What do you feel about the initial analysis? Was there anything wrong with it?
There’s no scenario analysis. Just 1 scenario.
There’s no detailed information about fixed and overhead costs
They didn’t analyse the possibility to buy the AR-42 to the Dutch plant: comparison of the both possibilities.
Big expectation on market share and quantity for very few time. No supporting data for such sales numbers.
NPV is a powerful tool, but need to be well sustained to be accurate.
Too simple analysis for such a big project: not enough to convince the Axeon board.
They focused on what was good only for them (Hollandsworth)
A scenario analysis can show us different options in case the plans are not going as expected.

3. 2. Is construction of the new factory in the UK in the best interest of Axeon?
There are no direct benefits for the plant in Netherlands.
They are spreading the knowledge between their subsidiaries
There is a risk of too much independence in the future
The proposed project doesn't seem to be the best of all the possibilities
AR-42 process is complex and Axeon prefers to keep it under control
Axeon is also thinking on getting some direct benefits from the “adventure” of Hollandsworth by introducing AR-42 to the UK Market.
As they say it’s a very complex process, they want to keep in under control and “home-safe”.
They have different

4. 3. Why did Mr. Van Leuven behave as he did?
First, when he learned about the new project, Ian Wallingford was so enthusiastic and subjective that Mr. van Leuven had not the time to really think about the impacts of this project, in terms of costs and risks.
Then, he got the point of view of different managers of the company and was more aware about the negative effects of such a project.
Maybe there are more unspeakable reasons for this refusal:
The leak of knowledge from Netherlands to the UK could be a risk for the company
A new plant could become a new competitor for Axeon in the future, even if they belong to Axeon for now.
The headquarters of Axeon still wants to keep the control on the subsidiaries and refuses to give such a lot of autonomy on the others managers.

5. 4. Discuss what transfer price should be established if AR‐42 is supplied from the Netherlands to the UK
Axeon’s Variable cost would be £1860 per ton
If fixed costs are distributed, it’s £360 per ton
Shipping + Customs = £200 (Unavoidable)
Transfer price range  £ 1860 to £ 2220 (+ £ 200)
Hollandsworth total costs = £ 2000
Total Difference  Min + £ 60 | Max + £ 420
Agreement needed to accept the deal  Bargain
Ideally, transfer price = £ 2220 (+ £ 200)
Transfer pricing is a methodology to price goods and services within a multi-divisional organisation. Transfer pricing has 3 main functions:
price setting for services or goods performed/produced by a division;
a mean to evaluate financial performance of a division;
determine the contribution to net income by profit centres in the organisation.
Born to shifting the profits in low taxes county to reduce overall taxes paid by multinational enterprises, transfer pricing is today used to determine profitability for the single divisions and to show the performance of each department in financial terms, since is not longer permitted use it for tax reduction due to the arm’s length principle introduced by tax authority.
As the case says it, the transfer price is set by Axeon and the subsidiary can try to bargain, but in the end, they just may choose not to sell the product. So it all depends on the price they may agree trying to reach a win-win situation.
If they really treat the subsidiaries as any other company or agent, then the ideal cost should be the full cost, that in this case is £ £200 of S&H and customs.
Actual
New
Savings per ton
NL Savings
WW Savings
NL Production
600 tons
1000 tons
NL Fixed Costs
£ ,000 £
Fixed costs per ton £ £ £
£ ,000
£ ,000
NL Variable Costs per ton
£ ,900
£ ,860 £
£ ,000
£ ,000
Total Cost per Ton
£ ,500
£ ,220 £
£ ,000
£ ,000

6. 5. What is Axeon’s corporate strategy?
EXPANSION
Over the years, Axeon acquired some companies in order to enter new markets.
DECENTRALIZATION
The responsibility for the sales is assumed by each subsidiary company
The subsidiary managers have autonomy to decide what to sale in their territories
There’s no clear strategy as a single group
BONUS PLAN
Axeon provides rewards for managers based on the performance of each subsidiary.
Rewards as a results control given for individual accomplishment: This improves the efficiency of the managers and the performance of the company

7. 6. What do you believe to be critical success factors in Axeon?
Presence in all Europe through subsidiaries
Expertise in the local markets by the subsidiary
Allow the subsidiaries to manage their own product mix
“Free” allowance of creation of new products
Decentralization with decision making to save time
Retained strategical control from Axeon’s board
Respecting the “free” allowance of creation of new products, it is remarked like that because it’s free while the subsidiaries can produce them with their own existing resources (facilities and knowledge). Because if they need knowledge or approval for a new plant or investment, then the decision is not free anymore, but need to pass through Axeon’s board.

8. 7. What do you believe are the key recurring activities in Axeon?
Managerial key recurring activities
Well sequenced meetings
Involvement of all parts in big projects
Rewards system for managers based on the performance of each subsidiary.
CEO
(Anton van Leuven)
VP Research & Engineering
VP Administration
VP Personnel
VP Finance
Senior VP Dutch Operations
(Willem Backer)
Saraceno S.p.A.
Hollandsworth Ltd
(Ian Wallingford)
Manufacturing
Sales & Marketing
R&D
Finance
KAG Chemicals AB
The rewards system improves the efficiency of the managers and the performance of the company. It also helps to create an environment of competitivity.

9. 8. Discuss Axeon in terms of its centralization / decentralization
The apparent strategy of Axeon is to emphasize high degree of decentralization, however it’s not completely true.
There’s a big control based on some decision taking and transfer prices / product making.
Pros:
Delegate responsibilities
Saving times in the decision taking
Taking advantage of the of the geographical position since the subsidiary companies know better their own markets
Cons:
There are not really strategies as a single group
Every subsidiary pursues its own interests
Competition between subsidiaries (cannibalism)
Risk of losing the control of the subsidiary companies
Big projects (like this case) are more difficult to achieve
Complicated communication
Even if apparently there’s a big degree of decentralization, it is clear that they don’t have any clear strategy as a single group. They allow even cannibalism between each of the companies.
However it is, Axeon keeps a lot of control, even if it’s not so apparent.
You can see that the subsidiaries can choose what to sell and what to produce. But in this case, when Hollandsworth is trying to introduce the AR-42, they’re trying to make it by themselves. At the negative of Axeon, they just have the option of buying it to Axeon in NL. With this in mind, Axeon can set the transfer price as they want, leaving the option to accept or reject the price to Hollandswort. Anyways, Axeon will keep the control of the production and the sales, even if it’s indirectly. Maybe not selling, but truly blocking the operation.

10. 9. What should Mr. van Leuven do?
Think in the group wellness
He has the final word
Consensus reach
Loss minimization – Benefit maximization
Try to achieve win-win situation
Reject the original project
Argue Axeon’s true reasons
Expose the benefits to both parts of the alternative project
Manage a Bonus / Incentive to Hollandsworth
Clarify the rules of the game to avoid future disputes
As CEO, Mr. Van Leuven is forced to think in the wellness of the entire group. In the end, he may have the final word in the conflict, but this includes listening to both sides of the conflict and try to reach a consensus where everybody is as happy as possible, or at least try to minimize the losses and maximize the benefits in case an agreement cannot be achieved.
In the end, we think he should say no to the original project, but at the same time, try to convince Ian and impulse the alternative option of producing the AR-42 in NL, and even perhaps give a certain bonus to Ian in order to accept this option, mainly because it was his idea and will be his effort to introduce the AR-42 in the UK market

11. Facts about the project
Original Project
Alternative Option (with transfer price = £ 2060)
IRR = %
Payback time = 4.5 years
NPV = £ 916,000
Sum Net CF after 7 yr = £2,600,000
Market share for Zero NPV = 28.7%
IRR = 120.3%
Payback time = 1.5 years
NPV = £ 1,233,320
Sum Net CF after 7 yr = £1,950,000
Market share for Zero NPV = 17.3%
From the graphics analysis and in general all the numbers analysis, it’s very important to take into consideration that when you have a negative number in the CF before taxes for a year, then, no tax is paid, and also, this has implications on the depreciation because you can only use depreciation on each year and it’s not valid to transfer it to other years.
From our point of view, it’s clear that the alternative of producing the AR-42 has less risk and better NPV than the original one proposed by Hollandsworth.
Specially if you consider you’re reducing fixing and variable costs to Axeon, that Axeon is taking the risk of the production (if product is not sold as expected) and mainly that there’s no big investment to be made, and that money can be used for any other thing (which in the worst case can be on a bank generating interests, and those calculations are not included in this analysis)