The analysis requires you to use course concepts and tools to make sense of a business context and derive evidence-based recommendations for management (your instructor will describe the criteria used to evaluate your submission).
To clarify, the 5 questions at the end of the Danshui case do not need to be answered directly, or at all. However, they provide very useful direction for undertaking parts of your case analysis.
I am sending over a descriiption of the opportunities for improvements on BioImage submissions. These should help you to consider your approach to Danshui.
One common missed opportunity was to use either qualitative OR quantitative analysis. Many submissions only engaged in a financial analysis of the case without paying attention to other qualitative factors that affect decision making on transfer pricing such as effect on managers’ motivation, operational risk of solution, cost of implementation, commitment to decentralization TP policy etc. Other submissions only pointed to these factors without undertaking thorough quantitative analysis. It is essential to do both.
A second common missed opportunity related to the descriiption of context and identification of the managerial problems. A clear descriiption of BioImage’s market, nature of business, etc. was often missing. You need to unpack this quickly before moving onto the internal dynamics.
A careful unpacking of the problem is also necessary. These can include financial but also other strategic concerns and priorities of the organization. You want to gather as much information as possible (doing as many calculations as might be helpful can be effective here).
A third missed opportunity related to consideration of the different alternative ways of addressing the problem. Analysis of any business case should include consideration of alternative solutions, before getting to a conclusion. In this case, it could include: Outsourcing to Display technologies, outsourcing to Bogardus, in-sourcing from Heidelberg at DT price, in-sourcing to Frankfurt at the demanded price, etc. Several had focused on the divisional issues without paying attention to the effect of in-housing and outsourcing on the company as a whole. Analysis should start with checking the implications of each decision for the company’s contribution margin – before moving onto divisional analysis.
Fourthly, there were some common omissions. Several had not paid attention to the implications of Frankfurt operating under full capacity (at 70%) – for the level of transfer prices acceptable to it. Some of you had not paid attention to the issue of comparability between Display Technologies and Frankfurt products (unknown quality of Display Technologies product and also the risk of price increases by DT in near future). For market-based transfer pricing, close attention should be paid to whether the external product/service is comparable in its quality, risk, etc. comparable to the internal product/service. If not, the external price should be adjusted before being used for transfer pricing. Most of you had focused only on this transaction rather than devising a longer-term policy solution. Here a longer-term policy could focus on pushing for market-based transfer pricing (to respect managerial autonomy and also decrease/eliminate the overhead of TP negotiations), while better defining which market prices could be used. Such market price used for transfer pricing should be defined at an “arm’s length” from the company and it should be comparable to the internal product/service in terms of: quality, risk, scalability, durability etc.
Finally, there were some technical mistakes. Several had included fixed cost in analysis. Analyses for outsourcing decisions should include only variable costs – because fixed costs are already incurred and are “sunk costs” and as a result they are not relevant to decision making, especially when there is excess capacity in the divisions.
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