Garrett Production makes movies and music videos. It has three divisions: Filming, Sound, and Editing. Steve Mason, president of Garrett Production, feels it is best to keep his divisions independent and lean, so he allows each division to go after its own business. Sound does not have to cooperate with Filming, nor Editing with Sound or Filming.

Each division is freestanding and held accountable for its ROI. Over the last year, the three divisions have worked together less and less. While Sam has okayed these choices, he is beginning to feel that he is losing some economies of scale by not having the divisions work together more closely.

The question is: How does he make this happen?

Steve decides to hold a meeting with the heads of the three divisions to see if they can come up with some way to make it in everyones best interest to work together on projects. Brenda Wallace, head of Filming, is first to arrive. She immediately begins lobbying Steve to make Sound and Editing work with her.

Filming is having to purchase these services from the outside and the market is tight right now---everyone is very busy so the prices for these services keep going up. Filmings ROI is suffering as a consequence, leading Brenda to look toward her sister divisions to help shore up the filming part of the business.

Their conversation goes like this:

Brenda: Steve, nice to see you. I was wondering about something, if you have a few minutes to chat before the meeting begins. We in Filming are getting our clocks cleaned by having to buy our sound and editing services outside the corporation. Wouldnt it be in everyones best interest to work together? Wed keep the costs on a film down and keep the profits inside!

Steve: I dont know Brenda. I think it would be great to see the divisions working together more, but I really dont want to interfere too directly in decision making. I like seeing everyone strive to do the best with the assets Ive entrusted to them. With the market as busy as it is, Sound and Editing are doing very well. They probably would want to be paid the going market prices for any work that they do for you.

Brenda: I dont see why they need market. If they work with us in Filming, the dont have the same costs. We can cooperate and make the workload light for them. And the profits would all stay in the corporation, so everyone wins.

Steve Im not sure theyll see it that way Brenda. They are doing very well selling at market prices. If I tell them they have to work with your group at reduced prices, its going to directly impact their ROL, and, hence, their performance evaluation.

Brenda: Well, Steve, what if you credited their income statement at market, but allowed us to be charged only cost on internal transactions? Since the profit is a wash for the corporation, wouldnt we be better off keeping more of the work internal?

Steve Lets see what we come up with during the meeting, Brenda. Ill float a few ideas and well see if there isnt something that can be done to keep more of our internal services available for Filming. My guess is youre going to have to pay close to market, though perhaps with a discount for not having to pay commissions to salespeople and other marketing cost reductions.

What do you think about Brenda's plan to use market prices for the supplying division and cost of this approach.

Are there other incentives or measurements that might lead to more cooperation between the divisions? Pease explain and be specific.

Is the corporation better off as it is currently run or would it be better off if the divisions worked together? Please explain your answer.