Organizational Design 601according to marginal cost is essential for efficient coordination within the
multidivision firm.^20(^20) As noted in Chapter 6’s appendix, if the firm’s supplying division also sells its output to the exter-
nal market, the appropriate transfer price is simply the market price. Transfer pricing is not the
only means of ensuring coordination. Setting coordinated budgets for the divisions can accomplish
the same end.
(^21) This account is based on “DHL Worldwide Express,” Harvard Business School Case, 1997.
In the mid-1990s, DHL Worldwide Express was the leader in international doc-
ument and parcel delivery, claiming over 40 percent of the worldwide mar-
ket.^21 The company achieved annual revenues of over $2 billion and before-tax
profits of more than $110 million. Recognized for its premium services (speedy
delivery, package customs clearance, and tracking), the company also charged
premium prices. However, corporate headquarters was concerned that its pric-
ing structure was inconsistent. Regional managers exercised wide discretion in
offering discounts (small or steep) to particular customers for different types
of deliveries. Indeed, some multinational customers complained of widely dif-
ferent rates for deliveries of comparable distance.
Should DHL move to greater centralization of pricing decisions? Consider
the economics of the global delivery market. First, demand conditions (and
cost conditions) varied significantly in different parts of the world. Some routes
experienced much higher volumes of shipments than others. Competition was
absent in some parts of the world, cutthroat in others. DHL held a virtual
monopoly in many parts of Africa but faced a price war with two strong com-
petitors (TNT and FedEx) on some Southeast Asian routes. In addition, the
market consisted of various different services. Because of customers’ urgent
need for documents, the document segment is typically less price sensitive than
the package segment and therefore commanded higher markups. Demand
also varied by customers. For example, banks and financial institutions sending
documents typically displayed much less elastic demand than a wholesaler mak-
ing regular high-volume shipments of spare parts.
In light of these facts, DHL headquarters acknowledged that optimal pric-
ing required careful case-by-case decisions and that regional managers had the
best information to make these decisions. Thus, headquarters endorsed a
decentralized decision approach with two limitations. Large discounts from
the list price by local managers would first require higher-level approval.
Second, to ensure consistency and customer goodwill, local managers would
have only limited pricing discretion on important multinational accounts.
The company implemented a centralized scheme with respect to one
aspect of regional pricing. Headquarters implemented a sophisticated infor-
mation system to estimate delivery costs anywhere in the world. Using the new
centralized information system, regional managers can now access data on mar-
ginal cost by route and mark up price accordingly.
DHL Worldwide
Express
c14AsymmetricInformationandOrganizationalDesign.qxd 9/26/11 11:03 AM Page 601