Question

Repro Corporation is the leading manufacturer and seller of office equipment. Its most profitable business segment is the production and sale of large copiers. The company is currently organized into two divisions: manufacturing and sales. Manufacturing produces all products; sales is responsible for the distribution of all finished products to the final customers. Each division is evaluated on profits. Market research shows an existing demand for a facilities management service whereby Repro installs its equipment and personnel at a client’s site and operates the client’s copy center. To meet this demand, Repro is considering a proposal to expand its operations to include a service division responsible for contracting with firms to install Repro’s equipment in a copy service agreement. This copy service is named Facilities Management ( FM).
A contract for FM includes the leasing of a complete copy center from the service division, including all necessary equipment and personnel. The client provides space for FM on site.
The value offered by the service division is threefold. The service division will be organized so that a base center in each city covered will be responsible for acting as both an independent copy center and a backup to the FMs contracted in the local area. Any FM processing shortfalls due to equipment failure or shop overflows would result in a transfer of copy needs to the center. Addition-ally, since the equipment used in FM contracts is leased and not purchased, contracting companies are not strapped with showing a return on assets for this equipment (allowing the flexibility of adjusting the lease as company needs vary). Nor are they responsible for equipment maintenance. Finally, the personnel to run the equipment in the FM sites are service division employees, not employees of the client. Thus, no additional headcount is needed by the client. For this complete value- added service, firms are charged based on projected monthly copy volume, with an agreed- upon surcharge for copies processed in excess of the contracted volume.
With the introduction of this new division, Repro would reorganize itself into three divisions: manufacturing, products, and service. The responsibility of selling business equipment (copiers, fax machines, etc.) would be assigned to the products division, and the service division would become responsible for the sale of FM sites ( products and services would utilize separate sales forces). Both divisions would buy hardware from manufacturing at similar costs.
Currently, Repro’s sales comprise approximately 80 percent repeat- purchase customers (who are either replacing existing equipment with similar equipment or upgrading to new Repro products) and 20 percent new customers. It has been estimated that 30 percent of the current market base would, given the opportunity, choose a Facilities Management contract rather than purchase equipment outright.
Repro’s current sales force compensation is a function of a fixed salary plus a commission based on a percentage of sales. The average salesperson’s compensation consists of a $ 25,000 base salary and a 2 percent sales commission. Over the last four years, the average piece of copy equipment from Repro sold for $ 80,000 and the average salesperson sold $ 1 million of equipment (adjusted for inflation). If the proposal for a service division is undertaken, this compensation scheme will be applied to both the products and service divisions’ sales force.

Required:
a. Discuss the conflict that will result if the service division is introduced.
b. Propose a solution to solve this conflict. Source: D Ho lahan, D Lee, W Reidy, A Tom, and E Tufekcioglu.



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  • CreatedDecember 15, 2014
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