Co-Ordination of Internal Transactions at Hoogovens Steel: Struggling with the Tension between Performance-Oriented Business Units and the Concept of an Integrated Company

Abstract

Hoogovens Steel is a vertically integrated steel company, which until 1995 was functionally structured. During the eighties the steel market became saturated and more heterogeneous. In order to remain a flexible, market-oriented company, HS changed it organisational structure, introducing business units responsible for their own financial results. Questions were then raised about the cost-based transfer pricing system which was in use, and in particular its impact on performance measurement. A business unit structure implies a decentralisation of authority and the delegation of certain activities to the units, but vertically integrated production requires close relations between all the units involved in various stages of production.

This paper discusses the way in which the tensions between decentralisation and integration were resolved through the co-ordination of internal transactions. After introducing some relevant theoretical concepts, the issues which emerged in discussions about the co-ordination of internal transactions in HS are examined. This longitudinal case study demonstrates that issues of transfer pricing cannot be studied independently of the broader systems used to co-ordinate internal transactions, and that such systems are embedded in the linkages between the organisational structure and management control systems. Furthermore, it emphasises that systems for the co-ordination of internal transactions have to be located within the organisational context and history, and that organisational learning can have an important impact on the development of such systems.

Keywords: Internal transactions; Transfer pricing; Performance measurement; Integrated production; Hoogovens Steel

JEL Classification: M40, M46