Birch Paper Company Case

Incomplete

OBJECTIVE : To evaluate present organizational structure and management control system of Birch Paper Company particularly on the decentralized operations of its divisions with respect to its overall performance.

PROBLEM : What effective management control system or systems should the Company adopt to attain maximum profitability not only of its divisions’ respective operations but that of the Company as a whole?

AREAS OF CONSIDERATION

1. Company Background

Birch Paper Company is a medium-sized, vertically integrated paper company, producing white and kraft papers and paperboard. It has four producing divisions and a timberland division which supplied part of the company’s pulp requirement; each division is operating independently headed by its respective division managers.

Birch’s division managers normally were free to buy materials or inputs from whichever supplier they wished, and even on sales within the company; so divisions were expected to meet the going market price if they wanted the business.

Early in the year, its Northern Division designed a special retail display box in conjunction with the Thompson Division, which was equipped to make the box. Thompson, as one of Birch’s four producing divisions converted paperboard output into corrugated boxes. It also printed and colored the outside surface of the boxes. Birch’s Southern Division will supply the lineboard and corrugating medium to Thompson Division in the event the latter got the order from Northern.

2. Decentralization Policy

The Company observes the practice of decentralization where the responsibility and authority in all decision-making for the divisions’ operations lie in its respective division managers, except those relating to overall company policy.

For several years, top management felt that the decentralization concept had been successfully applied and that the company’s profits and competitive position had definitely improved.

3. Performance Evaluation

Each division’s performance had been judged on the basis of its profit and return on investment for several years. The said practice creates competition among the company’s divisions because each makes sure that it is more profitable than the others. As such was the case, there was high possibility that one division was enjoying profit at the expense of the other(s).

4. Cost Structure

There was no defined cost structure set by top management for each division. For Northern’s retail display box project in conjunction with Thompson, the two had only an informal agreement that the former had to reimburse the latter of the out-of-pocket cost of its design and development work.