Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
P
rofessor Kenneth A. Merchant wrote this teaching note as an aid to instructors using the Formosa Plastics Group case.
Marshall School of Business
University of Southern California
Formosa Plastics Group
Teaching Note
Purpose of Case
The Formosa Plastics Group (FPG) case describes the control system used by the largest private
corporation in Taiwan. The case describes the companys organization and responsibility
centers, budgeting processes and, particularly, methods of evaluating the performances of profit
center managers when profit is to a large extent uncontrollable.
The case can be used for any of three purposes. First, it can be used to motivate a discussion of
the controllability problem and approaches to the solution of this problem. (This is why the case
was included in Chapter 12.) The results of at least some of the FPG divisions are greatly
Suggested Assignment Questions
2. Is the Polyolefin division a profit center?
343
3. Managers at Formosa Plastics Group use subjectivity to eliminate some of the effects of
uncontrollable factors from performance evaluations. Evaluate this choice. Did they have
any alternatives?
4. Are any of FPG managers control choices affected by national or cultural factors? If so,
which choices were affected and which factors affected them?
Case Analysis and Possible Discussion Questions
1. Describe the Formosa Plastics Group (FPG)
FPG is a Taiwan-based conglomerate consisting of more than 10 different companies
1. In 1994, FPG completed a $2.1 billion petrochemical and plastics-making plant in Point
2. Taiwanese law does not include a holding company-type organization. FPG actually has
3. The case does not make it obvious, but the actual running of FPG is in the hands of the
Chairman, not the President. Staff in the Presidents Office take orders both from the
4. As an indication of the centrality of FPG in the Taiwanese economy and of the
2. What are the major types of financial responsibility centers in FPG?
a. Companies and divisions: investment centers (ROI measure)
b. Plants and product groups: profit centers
344
3. What are the major problems facing FPG management in the early 1990s?
Labor shortages and rising wages. At FPG, labor costs are significant, but less than 20% of
total production cost. They are actually much smaller in some divisions (e.g., polyethylene).
Labor costs in the United States are approximately 50% higher than in Taiwan. Taiwanese
4. Describe and evaluate the major elements of FPGs control system
a. Each company and division has a target ROI. ROI is defined as profit before taxes but
after allocation of corporate expenses divided by divisional investment only.
b. FPG uses a target costing (with benchmarking from Japanese companies) approach to
the budget planning. Standard costs are revised promptly when conditions so warrant.
e. Bonus plans. These plans have some unique features:
i. FPG bonus pools are determined at the time of budgeting, not after actual profit
has been measured.
ii. The bonus potentials vary by organization level and role. Workers below section
chief level receive a performance bonus program about 2026% of their base
salaries. Management has a special performance-based bonus fund. Technical
people such as R&D have incentive rewards for good ideas.
iii. Total FPG bonus amounts paid per year did not vary much over time due to the
Reserve Bank system. By creating reserves for bonuses, the company is
smoothing the employees bonus stream.
iv. Every employee automatically gets 35 months of base salary as a so-called bonus
each year. This is cultural. It is traditional in Taiwanese for every employee (even
f. The Presidents Office
The Presidents Office (or Red Guard) is comprised of 15 teams (340 employees) of
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
345
or product group managers. The third level staff usually have experience sewing as
department heads or section chiefs. The President Office staff and some line managers
will rotate every few years.
This Office is a very costly system feature, but it serves three purposes: (1) helping the
(3) serving as the training ground for these staff persons for future higher line positions.
Many Japanese companies also rotate people through different functions in their career,
5. Describe FPGs annual planning process. Is it more a top-down or bottom-up process?
a. Four-month planning process begins in September and ends in December.
b. It starts with a bottom-up planning. Division level managers submitted their sales plan
and production plan. Then the top management made suggested revisions. The revision
process iterates two or three rounds.
c. Top management uses the targeting pricing/costing approach. Continuous improvement
6. Describe FPGs performance evaluation process.
a. Primarily subjective but objective numbers form a basis for the subjective evaluations.
b. The budget is used as the basis for evaluation. The probability of achieving targets is
c. Managers are evaluated by considering controllable factors, both financial and
nonfinancial measures, such as quantity of product sold, production efficiency, meeting
346
7. Is the Polyolefin division a profit center?
Yes and no. Profit of the entity is measured, but the manager, Mr. Hsaio, is not held
8. So what is Mr. Hsaio held accountable for?
He is responsible for all aspects of his divisions performance except material price
variances. In most of FPGs chemical businesses, particularly those that sell in commodity
9. Is FPGs choice to allow high subjectivity in performance evaluations a good one?
10. Are any of FPG managers control choices affected by national or cultural factors? If
so, which choices were affected and which factors affected them?
FPGs control system differs in several significant ways from most Western companies:
a. It is a large company that is substantially owned and dominated by one family. The
large Presidents Office and the detailed monthly performance reviews are two of the
methods the top managers use to while seemingly everyone in FPG was satisfied that
b. The heavy use of subjectivity in performance evaluations is more common in Asian
companies than in Western companies. Most American managers and employees, for
c. FPGs system, with its detailed monthly performance reviews and no long-term
incentive program, appears very short-term oriented. Myopia danger is minimized,
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
347
d. The use of year-end employee bonuses is traditional in Taiwan (and other Asian
11. What happens when the chairman and president retire?
This is a major concern for FPG employees. Here is a representative comment from one
manager:
As long as chairman Wang stays, fundamentally there will be no change. He is the founder,
12. Does anything else threaten FPGs system?
Some managers were also concerned that FPGs success might be threatened, ironically, by
