Formosa Plastic Group FPG is a diversified chemical company headquartered in Taipei, Taiwan providing a broad range of products including plastic products, carbon fiber, processed PVC products among its many products. FGP is organized into three main corporations each is composed of multiple divisions responsible for a product line. The division managers were given autonomy to make production and marketing decisions of their business within the scope of approved authorization.
However, administrative functions such as accounting, finance, legal and public relations were centralized to take advantage of the economies of scale. Formosa is in a rapidly changing environment where uncontrollable events such as prices of raw materials fluctuation and political/economic events (i. e. Golf War) affect the performance of the business. In its competitive market, FPG strategy was to be the low cost producer in their market segments and operate at full capacity Major Issue The need to evaluate the performance of divisions and managers in the presence of uncontrollable factors (e. g. raw material price, fires caused by lightening) which obscures the ability to evaluate the desirability of the actions taken.
In addition, it also faces the need to establish a reward system that will compensate managers for bearing the risk of operating divisions in a rapidly changing industry. Financial Control System •Divisions were measured on a return on investment basis Plant and product groups were considered a profit center while production processes and group machines were cost centers •Detailed accounting and financial system with standard cost for each aspect of manufacturing as result the company manufacturing processes tended to be stable and had extensive historical records •Company produced extensive performance reports that allowed management to attack problems quickly •Performance bonus plans were given to compensate and motivate employees.
For example bonuses were given every 3-5 months and were based on base salary. Other bonuses were based on the ability to meet performance targets, chief employees were evaluated and given bonuses based his/her own performance and the performance of the division •Employees were evaluated subjectively making adjustments for factors that deemed to be beyond the employee’s control. The effect was that bottom-line profit was not even considered in the evaluations of employees.
Performance Standards and Evaluations •Yearly profit, revenue, and cost targets were set every year by corporate managers which enabled division managers make planning assumptions as to selling price and key raw material costs •Each division was expected to engage in continuous improvement and reduce its costs every year •Division managers were found to be conservative when it came to figures as result top managers had to revise their estimates on profit targets several times before being approved.
Corporate annual plans had proven to be accurate with a division of less than 3% between budgeted and actual •Corporate accounting departments performed a detailed analysis of each department to understand where the profit came from and factored out things that were deemed uncontrollable such as prices of products sold, raw material prices, atypical events