Falcon Inc Case Study

Reviewed by
Dhaval Doshi
11413

Global Appliance Industry: A

Glimpse
A consolidated industry with less than 10 companies
controlling 50% of the total market.
Slow growth pace hence making competition tougher
Three major segments: Low price, Mid price, Very high
price
Major players:Electrolux,G.E,Maytag,Whirlpool,
Matsushita, Bosch Siemens.
Remaining 50% market was local

Falcon Inc: A Brief Profile

A Publicly held U.S Co
A Global player in home appliance industry
Wide range of products including refrigerators,
kitchen appliances, washers, dryers etc
Presence in all three segments low price,mid price
and high price
Sales 1.1 Billion USD
Three foreign subsidiaries in Mexico,Denmark &
Japan

Falcon Inc: A Global presence

Falcon Inc Subsidiaries

Mexico
Product

Refrigerators

Production

Mexico

Sales

Mexico

Differentiator

Growing
demand

Denmark
High priced
kitchen Appliances
U.S
Denmark
No
competition

Japan
Low cost laundry
machines
Japan
U.S
Low cost

Question 1
Under the current performanceevaluation system (PES) at Falcon, how
would you assess the financial
performance of the division managers in
Mexico, Denmark, and Japan?
Which manager should be awarded the
highest bonus, and which should be
awarded the lowest bonus?

Current PES: Each Subsidiary is responsible for

budgeted US Dollar profit.

Year 2004

Mexico

Denmark

Japan

Budgeted
Profits( US $ )

14,910,000

8,282,640

20,420,825

Actual profits
( US $ )

14,937,721

9,691,788

17,839,177

27,721

14,09,148

(2,581,648)

Difference

Highest Bonus

Lowest Bonus

Question 2
Using the approach outlined in Appendix A, calculate the
nominal and real changes of exchange rates for Mexico,
Denmark and Japan during 2004?
In light of your calculations what revisions if any would
you make in the 2004 dollar budgets at the time of
tracking them?
How would you assess the financial performance of the
three country managers of Falcon?
Which manager should be awarded the highest bonus?
Why?
Evaluate appropriateness of the three country managers
responses to the changes in exchange rates?

Nominal and Real exchange rate

Exchange rate
(LC per US $ )

Mexico

Denmark

Japan

2003

10.72

6.88

119.8

2004

10.985

6.47

111.8

Real Exchange rate

Mexico: 10.72*1.05/1.023

11.00

Denmark : 6.88*1.043/1.023

7.014

Japan : 119.8*1.0225/1.023

119.74

Presently Budgets have been evaluated by 2003 exchange

rates and performance of 2004 by the rates prevailing in
2004.
A common metric should be used for subsidiary evaluation,
Hence 2004 budgets should be recalculated by using 2004
exchange rates.
ROI method should be used to evaluate the performance of
managers.

Mexicos ROI:14937721/149100000*100=10%
Denmark's ROI:9691788/20706600*100=47%
Japans ROI:17839177/510520625*100=3%
Hence Denmark should be awarded highest bonus and Japan
the least

Question 3: If ROI, rather than profit

margin were used as the performance
measure would the performance
ranking of three subsidiary be
different?

Describe the advantages and

limitations of using ROI as a
performance indicator?

Would you consider ROI as a superior

measure?

Advantage

1. Better Measure of profitability

2. Achieving goal congruence
3. Comparative Analysis
4. No new accounting measures are
required to calculate ROI
5.Comprehensive measure: Anything that
affects financial statements is reflected in
this ratio
6.Simple, easy to calculate and understand
7.Can be used to compare performance of
different units

Limitations

Creates problems when same

accounting principles and policies are
not used.
Influences a manager to select only
higher return investments
Long term profitability is ignored.
May use existing resource to reduce
investment.

Question 4 : Evaluate the

appropriateness of Falcons use of the
beginning of the year exchange rate for
budget setting, and average-of-the-year
rate for budget tracking.

Describe the approaches for preparing

country managers to better respond to
inflation and exchange rate changes

This system need to be changed.

Subsidiary managers should not be
held responsible for the low
performance and common metric
should be used for comparison
Tools such as hedging of currency
should be used so as to safeguard
forex risks

Question 5 : Assume that for each of

the past five years, the Japanese
subsidiary has reported lower than
budgeted profit margins and ROI in
dollar terms.If adjustments are made
for the real exchange rate changes
however its performance in each of
those five years turns out to be better
than the revised budget.

Would you recommend closing

Japanese subsidiary? Why or why not?

No it should not be closed.

Japan manufacturers high quality but
low cost products.
So we cannot see a significant increase
in ROI or profits year to year but since
the performance in increasing that
means the profit are increasing.

Describe the strengths and weaknesses of the

current PES for foreign subsidiaries at Falcon. What
Changes in the PES would you recommend

Current PES has the flow of using different rates for

forming and tracking budget.
A common metric should be used to do it.
However ROI can also be done simultaneously to have
a comparative view about both the measures.
Many a times exchange rates and incidents that affects
the overall sale of the country should also be
considered

Thank you