Coordination of internal transactions at Hoogovens Steel

Hoogovens Steel (HS) 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 its organizational structure, by introducing business units responsible for their own financial results. Nevertheless, it remained a vertically integrated steel producer. With the functional structure HS had used cost-based transfer prices. But following the introduction of the business units the question was raised as to whether the transfer pricing system should be changed. A business unit structure implies a decentralization of authority and the delegation of certain activities to the units, but vertically integrated production requires close relations between the various stages. This paper discusses the extent to which the tensions between decentralization and integration can be resolved through the coordination of internal transactions. After introducing the relevant theoretical concepts, the issues which emerged in discussions about the coordination of internal transactions at HS are discussed. Some possible solutions are evaluated on the basis of criteria derived from the theoretical concepts, and the choice made within HS is described. Finally, some conclusions are drawn regarding the significance of the theoretical concepts.