John Deere Harvard
Case A
a. What was the competitive environment for the John Deere Component Works (JDCW) prior to the 1980s? sales increase through 1980’s
Served as a product differentiator, niche markets
b. What was the competitive environment for the JDCW after the 1980s? saw slowing sales, agriculture economy crashed turned towards cutting costs (labor, downward decision making) encouraged sales to outside to utilize capacity started just in time manufacturing
c. What was JDCW’s role as part of the vertically integrated John Deere & Company? What problem(s) did it encounter?
Hydraulics, Drive Trains, Gears and special products
Allowed JDCW to control majority of the tractor production.
Had to produce many different products, meaning low volumes.
Machines were most effective at high volumes (difficult setups)
d. What are JDCW’s problems in its dealings with outside suppliers and the other divisions in their own company?
JDCW required divisions to purchase from within the company, but on a full cost basis rather than direct costs. Each division looked out for their own best interests. Full cost transfer pricing causes division managers to make decisions that do not fall in congruence with the company’s goals overall.
e. Please consider JDCW’s transfer pricing system (page 3 of the case): i. What were its features? full cost transfer price. If direct (variable) costs were less than competitors prices, the division had to purchase from JDCW. But the receiving division would end up losing out because they had to purchase at full cost. ii. Should transfer prices be at direct cost or full cost?
Direct costs, allows a decentralized environment to make decisions based on whats good for the whole company. Long term decisions should be based on full cost. iii. What adverse incentives did this transfer pricing system create?
Receiving divisions didn’t have an incentive to buy from within the company.
f. Please examine Table A (page 5) in the case. What
a. What was the competitive environment for the John Deere Component Works (JDCW) prior to the 1980s? sales increase through 1980’s
Served as a product differentiator, niche markets
b. What was the competitive environment for the JDCW after the 1980s? saw slowing sales, agriculture economy crashed turned towards cutting costs (labor, downward decision making) encouraged sales to outside to utilize capacity started just in time manufacturing
c. What was JDCW’s role as part of the vertically integrated John Deere & Company? What problem(s) did it encounter?
Hydraulics, Drive Trains, Gears and special products
Allowed JDCW to control majority of the tractor production.
Had to produce many different products, meaning low volumes.
Machines were most effective at high volumes (difficult setups)
d. What are JDCW’s problems in its dealings with outside suppliers and the other divisions in their own company?
JDCW required divisions to purchase from within the company, but on a full cost basis rather than direct costs. Each division looked out for their own best interests. Full cost transfer pricing causes division managers to make decisions that do not fall in congruence with the company’s goals overall.
e. Please consider JDCW’s transfer pricing system (page 3 of the case): i. What were its features? full cost transfer price. If direct (variable) costs were less than competitors prices, the division had to purchase from JDCW. But the receiving division would end up losing out because they had to purchase at full cost. ii. Should transfer prices be at direct cost or full cost?
Direct costs, allows a decentralized environment to make decisions based on whats good for the whole company. Long term decisions should be based on full cost. iii. What adverse incentives did this transfer pricing system create?
Receiving divisions didn’t have an incentive to buy from within the company.
f. Please examine Table A (page 5) in the case. What