Chapter

15 M ultina iont Or anizations

697 ,:

Case 15-1

AB Thorsten

You will see from my report that the XL-4 project shows an e~cell nt rate of return on the Skr 700,000investment an~ is also a logical ekte~sio of our product development and growth strategy here In Sweden. My mahag".me t and I strongly recommend this project.

I :

-Anders

Ekstrom, Managing DirectO}~ Th rsten, Stockholm (100 percent-owned ub idi ry of Roget S. A.)

Any extra XL-4'which Ekstrom might sell in Sweden can ~e P~OdUed in our existing plant in Gent for no addi~ional investment. Ekstrom iSI no~onl very optimistic about the sales potential, he IS also underestimating the man faot rmg problems and costs he will face. I recommend that you inform Ekstrbm ~hat it is in Roget's best interest for him to import from Belgium any XL-4 he ban lell~n Sweden. -Pierre Lambert, Vice President for Domektic and Export Sales and Manufacturing, Industrial Products d ou~, R !getS. A. Brussels

Roget S. A.

bI--I

Roget S. A.I was one of the largest industrial compani~s i9 Betium. The company was incorporated in 1928 by merging three smalle~ fir s that all produced industrial chemicals for sale in Belgium. By 19811 Roget ad expanded to produce 208 basic and specialty chemical products ih 2~ ttories, for sale throughout Europe. / I Until the mid-70s, Roget was organized with one large ma ufacturing division and one large sales division in Belgium. A departrr1en~oft e sales division was devoted to export sales. However, in the late 70s, ekpo.trts~,ew so fast, and domestic markets became so complex, that the comp~ny;1re ted three main e product divisions (Food, Industrial, and Textile), eac~ with i s own manufacturing plants and sales organization. In addition, the qombanf created foreign subsidiaries to take over the businesses in certain areas./ Fo~ example, in Industrial Chemicals the company had two subsidiarteSTon in the United Kingdom and one in Sweden (Thorsten), which served all Scandinavia. At the same time, the Domestic Department of the Industrial C emicals Division exported to the rest of Europe. The United Kingdom aJd Swe en accounted for 9 percent and 5 percent, respectively, of sales in that IDivikio . lVIr.Gillot (see Exhibit 1) was responsible for pr~fit~ fr m all industrial chemicals; lVIr.Lambert was responsible for profits f 'omldo restic operations (manufacturing and sales of industrial chemicals) and exPlortfales to countries where the company did not have subsidiaries or factories; rnd lVIr.Ekstrom was responsible for profits in Scandinavia. The coipahy tilized a rather liberal bonus system to reward executives at each level, ~ase on the profits of their divisions.

This case is adapted from AB Thorsten (A), (B), and (C) cases, which 1ere prep C. E. Summer and G. Shillinglaw and are copyrighted by the Institute or ~ana Lausanne, Switzerland. l"AB" and "S,A." are abbreviations . in the United States,

red by Professors ement Development, or "Inc."

'I.
used in Sweden and Belgium that are sirl)ila to "Corp."

698

Part Three

Variations in Management

Control

EXHIBIT 1

Roget S. A. Organizational

Chart
Director General Andre Juvet

Vice President Finance Eric BoIs

Senior Vice President Industrial "Chemicals Michael Gillot

Senior Vice President Textile Chemicals

Vice President Domestic and Export Operations Pierre Lambert

Managing Director Roget Ltd. (U.K.) :

Managing Director AD Thorsten (Scandinavia) Anders Ekstrom

Nine Plant Managers

Director Marketing Research Director Paper Industry Sales Director By-Product Sales Di rector Export Markets Director Applications Labs

Manager Appl. Laboratory

I!

This, together with a policy of promotion from with n, helped stimulate managers in Roget to a degree not enjoyed by some of it competitors. It also helped the company to retain key people in an industry here experience was of great importance. Many of the company's executives h d been in the starch chemicals business all of their business lives. It w~s J qo plex business, and it took many years to learn it. I Certain policies-rules of the game-governed relati nships with the subsidiary companies. These policies were intended 0 mai tain the efficiency of the whole Roget complex, while at the same time giving subsidiary managers I autonomy to run their own businesses. For exaF,ple, 1 subsidiary manager could determine what existing Roget products to sell in th~ local market. Export sales would quote the same price as they quote agel ts in I countries. Of course, all prices were subject to bargaining on both sides. Second subsidiaries were encouraged to propose to division management in Brudse s the development of new products. If these were judged feasible, new p oduJts were manufactured in

II

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..

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Chapter 15

MUUi~ti,t

It,

rganizations

699

Belgium for supply to world markets. Third, the subsidiar[ m naging director could build manufacturing plants if the investment in tile 10 al market were adequately justified. I

AB Thorsten

AB Thorsten was purchased by Roget S. A. in 1972. Since Ja time, Thorsten's board of directors had consisted of four persons: Mr. Mich 11 illot, senior vice president in charge of Roget's industrial chemicals ~ivi ion; Mr. Ingve Norgren, a Swedish banker; Mr. Ove Svensen, a Stockho} i]' dustrialist; and the managing director. Swedish law required any com~~n incorporated in Sweden to have at least two outside directors, and the Rdgkt anagement felt fortunate in finding two men as prominent as Norgren ani: ~v nsen to serve on the Thorsten board. II During the first four years of Roget's ownership, Thorsl 1n' sales fluctuated between Skr. 5 and 7 million, but hit a low in 1976.2 The .'~a d decided at that time that the company was in serious trouble, and that ti1 0 ly alternative to selling the company was to hire a totally different managrm nt group to overhaul and streamline company operations. On the advice of the Swedish directors, Mr. Anders EIt trom, a 38-year-old graduate of the Royal Ins~itute of Technol0fS!" as ~jred w 111anaging director. He had 16 years of expenence as a production engmeer for large paper machinery company and as division manager responsible for rofits in a large paper company. I Ekstrom joined AB Thorsten in January of 1977. Since h t time, sales had increased to Skr. 20 million and profits had reached level~ at Roget's managerrient found highly satisfactory. Ekstrom said that at the time he joined Thorsten, he kne it was a risk:

4~
I

I liked the challenge of building a company. If! did a goodjoplhe e I would have the confidence of Norgren and Svensen as well as of the Rog management in Brussels. I felt that succeeding in this situation would teach le~bhingSthat would make me more competent as a top executive. So I chll t is job even though I had at the time (and still have) offers from other c 1/ p nies.

Initial Proposal for Manufacture of Xl~

In September of 1980, Ekstrom h.a~ ~nformed the ~hors Efnfoar.d or-directors the manufacture of XL-4, a starch-based adhesive cherrhc 1 used in drying paper. He explained that he and his customer enginebts had discovered a new way of helping paper mills adapt the dryer sectio Islo their huge paper machines at very low cost so that they could use XL-4 i ste d of competitors' products. Large paper mills would realize dramatic ~a\[ings in material handling and storage costs and also shorten drying time kubstantially. Shortened drying time increases the effective capacity of a e machine. It was Ekstrom's judgment that his innovation would allow him to develop a market

J~
I
/

2Most monetary

amounts

in this case are stated

in Swedish

kronor (Skr).

700

Part Three

Variations in Management

Control

in Sweden almost as big as Roget's present worldwide m product was currently being produced in Roget's Domestil rate of 600 tons per year, with none going to Sweden. Eks

At that meeting, Mr. Gillot and the other directors seemed e It iastic. During the next six months, we did the analysis. My marketing dire' t ~ sed modern market research techniques to estimate the total potential inl I den at 800 tons .ofXL-4 per year, using the custom engineered approach we re proposing. We interviewed important customers and conducted trials in th~ ~l of three big s companies which proved that with the introduction of our m! i e designs, the large cost savings and capacity expansion would indeed mat' .Jl ze. We determined that if we could sell the product for Skr. 1,850 per could capture at least one-half of the market within a three-year period, o! tons a year. At the same time, I called the head of the corporate enginee . g ivision in Belgium and asked for his help in designing a plant to prod' 00 tons ofXL-4 per year and in estimating the cost of the investment. This i a outine thing. The central staff divisions are advisory and always comply I . equests for hel~. He assigned a project. manager and f~ur other engineer work o.nthe design of factory and machinery and to estimate the cost. Al hf same time I assigned three men from my staff to work on the project. In t r e months this jointtask group reported that the necessary plant could be ii for about Skr 700,000. All of this we summarized in a pro forma calculati xhibit 2]. This calculation, together with a complete written explanatt n as mailed to Mr. Gillot in early April 1981. I felt rather excited, as did fmy staff. We all know that introduction of new products is one ofthe ke s t? our continued growth and profitability. The yield on this investment was II bove the minimum 8 percent established as a guideline for new investm p the Roget vice president of finance. We also knew that it was a good anal 'Iss! sing modern tools of management. In the cover letter, I asked that it be p ~ n the agenda for the next Thorsten board meeting. ~

stated:

tod ~

0'

jt

The minutes of the next board meeting held in Stoc I, on April 28, 1981, quoted Ekstrom's remarks as he explained the proposal 01 ther directors:
You will see from the summary table [Exhibit 2] that this W ~Iet is profitable. Gentlemen, it seems clear from these figures that we can jn ti this investment

'These working capital investment amounts are net of tax credits. "Taxes are calculated after depreciating Skr. 700,000 over a 5-year period on straight-line basis. ISales value, net of appropriate taxes, assuming plant will be closed at end of seven years.

701

in Sweden on the basis of sales to the Swedish market. The gror p .ce president for finance has laid down the policy that any new investment s 'd yield at least an 8 percent return. This particular proposal exceeds that, sjh stantially, using a very conservative seven-year, life. My management and s ,rongly recommend this project.

I Ii
1/

Ekstrom later recalled Gillot's reactions Thorsten board:

III

his role a I c
II II

of the

'j

Gillot said that it seemed to him to be a clear case. He asked tions, mainly about the longer-term likelihood that we couldls 400 tons a year, and about how we would finance any further x explained that we in Sweden were very firm in our judgment h reach 400 tons a year even before one year, but felt constraindd servative estimate of a three-year transition period. We alsol sro we could finance any further expansion by borrowing in swedtn. Roget would furnish the, initial capital, and if the 400 tons go' 11 quickly, any further expansion would easily be financed by 10 two Swedish directors confirmed this, The board voted unan~ construct the plant. II

11 'd
I

ansion. I t we would 0 show a coned him how That is, if ere reached anks. The sly to

Disagreement about the XL-4 Proposal

, d

About a week later, Gillot telephoned Ekstrom:

I have been through some additional discussions with the prod ctl,ionand marketing people here in the Domestic Department. They thin the engineering design and plant cost is accurate, but that you are too optimist c] n your sales forecast. It looks like you will have to justify this more. 1111

Ekstrom said:
I pushed him to set up a meeting the following week. This was at ended by myself and my marketing and production directors from Swed n, and four people from Belgium-Gillot, Lavanchy (director ofmanufactu-inr), Gachoud (director of sales), and Lambert (vice president for domestic a d xport). That was one of the worst meetings of my life. It lasted all daY'Gac~o d said that they had sales experience from other countries and that in his 'u1gment the market potential and our share were too optimistic. I told him oVfr and over how we arrived at this figure based on our custom engineeref ~ roach, but he just kept repeating the over-optimistic argument. Then Lav11P' said that the production of this product is complicated, and that he had dif cUties producing it in Belgium, even with trained workers who had long experi ncl .I told him I only needed five trained production workers and that he could send me two men for two months if he liked, to train Swedes to do the job. I impres ed on him that they could oversee manufacturing for us in Sweden until we 1 ar ,if they did not have confidence in Swedish technology. He repeated that t e difficulties in manufacturing were enormous. Lavanchy then said that since the whole world market ~of I get was only 600 tons a year, it was inconceivable that Sweden alone co~llki:rake 400 tons. Gillot ended the meeti~g withou~ a decision, and said t?at.,~i ~oped all concerned would do more investigation of this subject. He mdlc'j'te that he would think about it himself and let us know when another, eting would be held.
I

I
702
Part Three

Variations in Mtinagement

Control
/11

Ekstrom returned to Stockholm and reported and to the two Swedish members of his board:

the m et ng to his own staff,

/1

They, like I, were really disgusted. Here we were, operati g with initiative and with excellent financial techniques. Roget managem t had often made speeches in which they emphasized the necessity for del tfalized profit responsibility, and for authority and initiative on the p b foreign subsidiaries. One of my men said that they seem to talk delc nt alization and act like tin gods at the same time. Mr. Norgren, the Swedish b~nker on Thorsten's board, expressed surprise. I considered this carefully. IJ i s und business for AB Thorsten, and XL-4 will help to build one more groJ, I ompany in the Swedish economy. Somehow, the management in Brussel h s failed to understand this. I dictated a letter to Mr. Gillot telling him that I didn't know why the project was rejected, that Roget has a right to its r asons, but that I was prepared to resign as a director. It is not that I am 4n/fY, or that I have a right to dictate decisions for the whole worldwide Roge organization. It is simply that if I spend my time studying policy decisions, ws ich are not appreciated by parent company management, then it id I aste of my time to continue.

0f~

Finally, Ekstrom

stated:

While I certainly wouldn't bring these matters out in a p lif meeting, I think those Belgian production and sales people simply want to bUJild their empire and make the money in Belgium. They don't care about Thors e9 and Sweden. We have the ideas and initiative, and they take them and gkt th payoff.

Further Study
II

Mr. Gillot received Norgren's letter in late May 1981. H t~en contacted Messrs. Lavanchy, Gachoud, and Bols (VP. finance, Roget) fildl. told them that the Swedish XL-4 project had become a matter of key imporiaiice for the whole Roget Group, because of its implications for company profijj~ ah.d for the morale and autonomy of subsidiary management. He asked them 0 ktudy the matter very carefully and report their recommendations in one mo th Meanwhile, he wrote Ekstrom, "Various members of the Corporate Head& ~~ters are studying the proposal very seriously. You will hear from me within aboit six weeks regarding my final decision."

Lavanchy's Response
A month after he was asked to study the XL-4 projJc gave Gillot a memorandum explaining his reasons fi r
I

ore closely, Lavanchy pposing the proposal:

At your request, I have reexamined thoroughly all of t~ IcJt figures that bear on the XL-4 proposal. I find that manufacture of this pr dt ct in Sweden would be highly uneconomical, for two reasons: (1) overhead co t would be higher, and (2) variable costs would be greater. As to the first , we can produce XL-4 in Gent in our e iS1ng plant with less . . I' I overhead cost. Suppose that Thorsten does sell 400 tons a ear so that our total worldwide sales rise to 1,000 tons. We can produce the ih le 1,000 tons m Belgium with essentially the same capital investment II ave now. Ifwe

II

II

Chapter l S Multinational.

JI
!~

izations

703

produce 1,000 tons, our fixed will decrease by Skr, 120 a tan.' mean, Skr. 72,000 in savings on production for domestic and export to co n n s other than Sweden (600 tons a year), and Skr. 120,000 for worldwide pro~ Ic'ton including Sweden (1,000 tons). Second we could also save on variable cos s we were to produce the extra 400 tons in Belgium, the total production of 1,00~0 s a year would give us longer production runs, lower average setup costs, at ger raw material purchases, thus allowing mass purchasing and material ! ing and lower purchase prices. My accounting department has studied thi nl concludes that our average variable costs will decrease from Skr. 950 a ton td 930. This Skr. 20 per ton difference means a savings of Skr. 12,000 in Belgia estic production and a saving of Skr. 20,000 for total worldwide production I ~ ing that Sweden takes 400 tons a year. Taxes on these added profits are abd e same in Belgium and Sweden-about 50 percent of taxable income. In cone i n, a new plant should not be built. Ekstrom is a bright young man, but he d:. slot know the adhesives business. He would be caught up in costly productio I I. takes from the very beginning. I recommend that you inform the Thorsten mJ, Ig ment that it is in the Company's interest that they must buy from Belgium.

eo,"

I~ I~ fa
It

,t

BoIs's Response
The same week, Gillot received the following memoranduJ Roget's financial vice president:

t~ III

I am sending you herewith estimates ofthe working capital requir m nts if Roget increases its production ofXL-4 in our Belgian plant from 6:0 I ~ 1,000 tons a year [Exhibit 3]. Initially, we will need Skr. 54,000, for additionil in entories and accounts receivable. By the end of the second year, this will hi I ncreased to Skr. 74,000. The working capital amounts shown in this exhibit a~ Jsed on the

'Working capital amounts are net of tax credits. tvariable cost per ton SKr. 1,380 Manufacturing 930 Shipping from Belgium to Sweden = 50 Swedish import duty 400 Total variable cost 1,380

3Total fixed cost in the Gent factory was the equivalent of Skr. 180,000 a year. [)i idf.d by 600, this equals Skr. 300 a ton. If it were spread over 1,000 tons, the average fixed cost II II be Skr. 180.

704

Part Three

Variations in Management

Control

applicable law which permits businesses to deduct inventory costs from taxable income. I have also lookedI a vahchy's calculations for the fixed and variable manufacturing costs, afj r- in ~ull agreement with them. In conclusion, I see no reason to spend Skr .. o/~,o to build a factory in Sweden when we have excess capacity in our Belgia ~k t 1hich can produce the incremental tons at lower cost and with lower man I f dt ririg risk.

6fley -P
IIII

Gillot's Response

In early July 1981, Gillot sent a letter to Ekstrom in ,I i inJ that the XL-4 proposal was turning out to be more of a problem than ad ~nticipated. He included copies ofthe memos from Lavanchy and Bolsi :~ sa* he was not yet in a position to give final approval. He said he would 1 f' strom know his decision as soon as possible. I
I
1

I~

t'J.
~;!

Ekstrom's Thoughts
Ekstrom expressed some impatience with the way tt, i I
need developing for ThorsteJ range planning takes much time and energy. Also, just normal operating problems of the business we already ~l time. Sometimes I feel like telling them to go and sell Xi

ihave other projects that

Ii
J

were going:

this kind oflonging on top of the takes up a lot of my hemselves.

Questions

IIII

1. Using the numbers from Exhibit 2, what is you I 8 percent) for the Swedish proposal. Also, what is 2. What is the NPV (at 8 percent) and IRR of the Bel . 3. What are the key arguments for and against the the contending parties from Belgium and Sweden 4. Is everything that is being expressed by Ekstrom ment above board? What are the respective hiddel ticipated for each party, and in what way do they i they be expected to diverge? 5. If you were in Gillot's shoes, would you support tf proposal? Why? 6. Ignoring your answer to question 5, if the plant W ucts were shipped from Belgium to Sweden, wh I
1

t i
I

tl

mateof the NPV (at IRIl? pro~osal in Exhibit 3? e natives presented by

d the Belgium manageendas that can be an,idJ? In what way can

1

$ edish or the Belgian I

ot built and the prodtr nsfer price would be

I

~~~~

7. What are the competitive advantages of Roget S. .?I at is Roget's strategy in the industrial chemicals business? Are the II a agrment control systerns designed to support this strategy? ld (You recommend to 8. What changes in the management control system
Gillot?

/11

Chapter 15 MUltinatlo

I
IOr,anizations

725

Case 15-5

Xerox Corporation (B)

There is no real process difference between our internation 1 n domestic transfer pricing systems. The breadth of the issues, howevet ar greater for the internationaL Transfer pricing and currency translation ar1 t a problem for us. I manage the process and resolve potential conflicts very aslwe operate under clear and simple guidelines. I

~5

-Raghunandan

"Sach" Sacli'd,

corporate controller ting and frustras+multinational ted the specifics

I
0

Sach was explaining the process by which Xerox takes I tion out of two very volatile topics for many global corpor transfer pricing and currency trading. He further ill I of the system.

.--rI ,
, I

Transfer Pricing
As Sach described the transfer pricing policy, purely

~lllstic transfers

lized a full standard cost price method while foreign trI'~.i l length market price method. This was the general rul , ~ quite flexible, which enabled a quick response to chand I The document processing industry was extremely compe:~~. agement realized that they must respond to various glJ and competitive challenges. A manager from the xer9f asserted the following: "The transfer pricingjsystem ] the marketplace. We drive the products in the marketP~'1 the source of the revenue is the customer." I I The domestic transfer pricing was less complicated ' situation. The controller for the US customer operation,'!!

uti-

f'

~k

rs fUsed an arm'st the system was arket conditions. e, and Xerox manmarket pressures azilian operation esigned to attack and Xerox knows the international lained.

We purchase copiers from one of the Webster, New York, fa~~1 s, part of the Office Documents Products division. Normally, the transfe i ade on a full standard cost basis, which includes a small percentage for I nistration. If we need to respond to a competitive pricing threat, we are una e renegotiate. The manufacturing unit cannot sell below cost as they are 4t~IIU1tured at a to, minimum, cover their costs. In this case, the respective uni trollers would discuss possibilities of cost savings and the volume imPlicali if Jricing erodes unit sales. The corporat~ cor:troller would step in, as appro~ ta e, tb help facilitate a solution. The aggressive business targets and the fiet-~.Ie mpetition made ~ I for some very heated and hard meetings. We were both unde e same legal entity with the effects oftransfer pricing balanced at consolidr The primary concern was the influence of transfer pricing on achieving t erformance targets. II I In the past, this (t:a~s~er pricin~) would .hav~been a b~gIP ,o~~em.We were totally focused on our individual busmess units given the tIgr 1- It performance targets. Today, we know the value of market share and thellI , to respond to competition. We learned that the performance comes from. ff~ to external customers. Besides with TQL [total quality leadership] the f ~try has become very sensitive to their costs.

9 1~1

~f'.

Prepared by Lawrence P. Carr, Associate Professor, Babson College. Cop

ld Ht by Jawrence P. Carr.

L.

726

Part Three

Variations in Management

Control

Transfer pricing between foreign units was a litN ore complicated due to a greater breadth of issues. There were different If~a entities, two different sets of regulatory authorities (for tax, duty, etc.), aid t 0 different currencies. In this situation Xerox used a market-based trans~ Irl ric/k(market price less a discount). This method conformed to the US tax l~ s and to the rules of most of the other taxing authorities. In addition,ilma "ket price followed the OEeD guidelines. The transfer price denominatioi (cur}ency) varied based l on the product value added (explained in the next]1 on?,.The market-based . transfer price provided a margin to the selling un~t wEfllas sufficient margin to the buying unit. This enabled the buying ul be [competitive in their local market. I The buying unit was responsible for duty and r g1latory compliance. The geographic sales offices cooperated with the facto+ s nd kept them well apprised of their country regulations and routinely e m unicated changing requirements to the factories. They also ensured tha p oduction facilities were aware of the competitive pressures. Xerox sales Jnit constantly encouraged quality and price improvements (part of the TQL p ant). The new Xerox culture enhanced the awarenesJ91ft e customer. The selling unit knew that they must respond to their interna au tomer (the buying unit). At the same time, they understood that the source f uccessful business was the satisfaction of the outside customer. The financial impact of transfer pricing on perro~mance plans concerned managers from both the buying and selling unitJI ~fJqternalfactors such as a change in duty rates or country regulations (i.e.11 q'llbtak, etc.) may have an adverse effect on performance. The pressure easeh s ewhat with the recent incorporation of more operating statistics to evalh t unit and manager performance. Sach points out:

Cl

JJ

Weknow what is going on and do not just manage py tpe financial numbers. Our regular controller conversationspermit an open di~cussionof potential prob~emsand offer a vehicle to expl~realternative IF' lu ions. This is where the financial manager can help the line manager unfe stand the full range of the business implicationsof their decisions.We 1 0 void surprises at corporate. The arm's-length market price preserved the intlependence of the legal entity, ?ut, a~ the same ~ime, required managers to fbre cl?sely consid~r the economic variables. A unit manager from South AmeTiClll1 the followmg: sa1d The financial measures are fair. Sometimes,howe le~, here are events beyond I our control,like a devaluation or unanticipated loda~ ,flation or an uncertain i regulatory environment,which can alter our perfo}ra ceoI feel it is unfair that management sometimesdoes not take this int9 a~count.Weneed financial measures which have a longer time horizon [greatr than one year]. As with the domestic transfer pricing, mUlti~lti, nal transfer prices were negotiated if there were changes in the curre1tl competitive situation or changes in the economic variables such as curin ,tax, duty, and country regulations. In this case, they employed a market- ased transfer price as a reference point for negotiation. The corporate C0 t oller resolved conflicts or impasses between entities.

I[
Chapter 15

Multinati n.a Or anizations

727

Currency exposure can create major swings in .the pricing and was critical in the consolidation of foreig plains the Xerox policy as follows:

I I

0 cs of transfer p ra ions. Sach ex-

All units are responsible for their transaction currency expos r . T ere are no exceptions. The managers must manage. For product sourc : It rou h our manufacturing units the rule is simple. If manufacturing adds I, re tha one-third of the product value, then the manufacturing unit is respon i 11 for managing the currency hedging. Note that the transfer price uses the, Y 's urrency to calculate the price. If the manufacturing units add less tha n -thi' d ofthe product value, then the buying unit is responsible for the cu .~ Y ~edging. Note that the transfer price uses the seller's currency to cal! la e t~e price. In this case, the value passes through the marketing organizaf h or recovery. In essence, we determine the denomination of the transfer priC\11 the value added y to the product based on the cost and the final selling price. Xerox management used both local and US currencie formance measures. The foreign manager, however, rea] dation currency was US dollars, and dollar reporting

thft the consolias the basis of the

iO fo~eign unit per-

:J~~~~:;~~:'r!':~:~::~:~::~~:~mt:d~!~~i~{:;c' m t:~~t~~h:o~:::~ sure to manage local currency changes was clearly on thd or igf manager. Sach explains the tra [ation exposure currency policj Is ollows: Normal changes in the foreicy, from 3 to 5 percent, Ie he lesponsibility of the foreign unit management to cover. We consolidate a d eport the company's results in dollars, and we expect the managers to deliiflr heir plan. It is up to the local managers to oversee their translation curreno ex os+re. If the currency swings vis-a-vis the dollar is [sic] greater than 3 to I ~e cent, then the translation exposure becomes a corporate issue. We will peg I t e sbandard (PDR) and coordinate and share the managing of the exposur th the foreign operation. We regularly discuss the currency topic during ou'l e kl~11 informal controller talks. , I I Sach indicated that if the currency goes in a favor a foreign operation, then corporate discounts the boosted 1 unit performance measurement purposes. In this inst agement may authorize the foreign operation to investlt portion of their profits back into their unit, depending 01 of the proposals. Sach said, 'We regularly discuss the currency and tra I the FEC and on the telephone between controllers. We trus comfortable discussing the topics. This is how we prevedt A subunit manager said the following: for the for e, corporate mane cutrency-driven It e ~ttractiveness ..\ fep~icing topic at e ch other and are ea -end surprises." [ [ e

h nc~~l results

irection

l
.

In the Americas Customer Operations [Central and South ,ri a], the US dollar is our functional currency.! We make all our trades in; la s ahd our accounting based performance measures are in dollars. We Jb k ff alPDR . (plan development rate), which is our reference point for all t'i ns ations . . We update the transfer prices on a quarterly basis. [

lThe local currency is the functional

currency for all other parts of the wor!

728

Part Three

Variations in Management

Control

EXHIBIT 1 Venray Plant Reporting Organization

I
Direct Report Performance Measurement Operational Reporting Venray Plant

G~

I.

I
I

r
translation,

Controller

An example of the complexity of the transfer pricing, c}c/lJ

and performance measurement system is the following. The Venray, Netherlands, facility regularly sold or transfr~re copiers to the US marketing unit. The Venray plant was legally part of ~an Xerox, but for performance purposes the general manager reported to M~n facturing Support (MS), a central corporate function. Corporate manage" e t explained the following: The Venray site director currently reports to MS through the Ran Xerox Manufacturing Operations organization. We are currently working bJ r commendations on how to align and transition focus factories to report to h business teams/business divisions. The Venray product array does, ho eve, support more than one business division. There will be areas that are not in u ed in the focus factories and that will remain reporfirig to MS. 1/ Note that within the Venray site (Exhibit 1) there were funeti ns that reported to the Venray site director as well as to organizations i e Manufacturing Support. . Performance measures were driven by the Manufact~1n: Support orgamzation with Supplies and the Materials and Supply fun~ro s being driven by the respective organizations managing them as indicated 0 the organization chart. This responsibility will transition to the divisionis i line with the reporting structure referenced above with ongoing suppor f om MS, Supplies, Integrated Supply Chain, and Customer Operations orJani ation. In essence, central support organizations provided services for the I ~si ess divisions and sustained the performance measures as appropriate.

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Chapter 15

Multinational Organizatio

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Questions
has asked for your help. A major California bank with over 200 brandhles has chosen to cancel the Xerox copier contract (annual lease revenu~1 ver $1 million per year) due to pricing. The competition with a West 9o!as assembly plant has made an offer 27 percent less than yours. You cLl. ake up 5-7 percent of the difference without materially affecting YOU~I *u get. If the customer is to be preserved, you need pricing help from the fa ory. You call the US Customer Operations controller because the loss/IJf ales revenue will significantly affect your budget. What are the options f?rJI rox, X and how will Sach resolve the issue? II 2. The Venray plant transfers copiers to the US Customer Operati~ s or a FOB EC port price. If the US customer price is 100 percent and th~ nray transfer price is 60 percent, answer the following: a. What currency is used to value the trade? b. Who is responsible for hedging? c. As the Venray controller, what is your currency exposure? d. How does this influence your performance measures? e. Does this system seem fair to you? What, if anything, would YON change?
1. You are the Western regional sales controller, and the sales manJJer

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