Formosa Plastics Groups

Topics: Cost, Management, Cost accounting Pages: 16 (3675 words) Published: February 21, 2012
Case 25-3 Formosa Plastics Group

For many years, managers at Formosa Plastics Group (FPG) used a management control system with an element that was somewhat unique for a large corporation – all employees were evaluated subjectively. In making their judgments, evaluators looked at objective performance measures but subjectively made many adjustments for factors they deemed to be beyond the employee’s control. One effect of this system was that bottom-line profit was not even considered in the evaluations of some profit center managers: These managers were evaluated only in terms of the controllable factors driving profit, such as meeting production schedules, efficiency, cost control, and quality.

The FPG system seemed to work; the company had grown and thrived over the years. A sample of FPG mangers who were interviewed in November 1991 were virtually unanimous in their praise of the company’s control system. For example, Mr. C. T. Lee (senior vice president and general manager of the Plastics Division) said, “We are as close to perfect today as we can be. If we have good ideas, we implement them. We are continually refining our system.”

Company History, Organization and Strategy
FPG was a diversified chemical company headquartered in Taipei, Taiwan (R.O.C.). It produced and sold a broad range of products, including high density polyethylene (HDPE), chlorofluorocarbons, finished plastic products (e.g., shopping bags, garbage bags), intermediate raw materials for plastics production (e.g., polyvinyl chloride, caustic soda), carbon fiber, acrylic acids and esters, processed PVC products (e.g., flexible and rigid film, pipes, window frames), processed polyester products (e.g., polyester staple fiber, polyester chips, polyester preoriented yarn), electronic products (e.g., copper-clad laminate, printed circuit boards), plasticizer, and textile products (e.g., rayon staple fiber, rayon and blended yarn and cloth, nylon tire cord yarn). It also ran a 6,000-bed hospital, a medical college (500 students), a nursing school (1,333 students), and a technical college (1,700 students).

Founded in 1954 with a capitalization of NT$5 million, FPG had grown over the years into the largest private company in Taiwan, with over 47,000 employees. Exhibit 1, which presents operating highlights for 1992, shows that 1992 revenues for the total FPG group exceeded the US$ 6.7 billion. Mr. Y. C. Wang (FPG’s current chairman) still owned a significant proportion of FPG’s stock.

FPG management was projecting relatively difficult times in the early 1990s because of “the shortage of quality labor, rising wages, and the radicalization of the environmental movement.” But the company had earned a profit for 30 consecutive years, even through some difficult periods, such as the 1973 oil embargo which had a major negative effect on FPG and other petrochemical producers.

|EXHIBIT 1 Formosa Plastics Group 1992 Operating Highlights | |Unit: USS 1,000 | | | | | | | |Company |


FPG was organized into three main corporations – Formosa Plastics, Nan Ya...
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