Evaluate the operational, financial and strategic trade-offs of growth, scale and external growth methods in IB Business Management HL cases.
Tom Donat started Healthy Start (HS), a national chain of stores preparing and selling healthy snacks, which are produced in batches. HS’s target market is teenagers and young adults. Tom was concerned about high levels of fast food consumption and youth unemployment. His vision statement for HS is: “To encourage life-long healthy eating habits and to train school leavers (drop outs) in acquiring work skills”. HS hires many school leavers without qualifications. Because of the valuable social service that HS provides, an independent online media provider will feature HS in a new online reality TV show. All employees, including managers, start at the lowest level of the organizational hierarchy and train on the job. Job enlargement, job enrichment and intrapreneurship opportunities are available. 20 % of all profits earned are put back into HS to finance these opportunities. Staff turnover is lower than the industry average.
Healthy Start (HS)
Tom Donat started Healthy Start (HS), a national chain of stores preparing and selling healthy snacks, which are produced in batches. HS's target market is teenagers and young adults. Tom was concerned about high levels of fast food consumption and youth unemployment. His vision statement for HS is: "To encourage life-long healthy eating habits and to train school leavers (drop outs) in acquiring work skills".
HS hires many school leavers without qualifications. Because of the valuable social service that HS provides, an independent online media provider will feature HS in a new online reality TV show.
All employees, including managers, start at the lowest level of the organizational hierarchy and train on the job. Job enlargement, job enrichment and intrapreneurship opportunities are available. 20 % of all profits earned are put back into HS to finance these opportunities. Staff turnover is lower than the industry average.
Competition from global fast food restaurants has intensified. Their economies of scale mean that HS struggles to increase its market share. Online reviews indicate that some customers perceive HS's snacks as healthy but overpriced and with small-sized portions.
Tom is considering two options:
- Option 1: Implement flow production. HS will buy new technology and assign each employee to a specific job on the production line. HS will increase portion sizes and keep prices the same.
- Option 2: Implement a new social media marketing campaign linked to the new online TV show. The campaign will focus on the health benefits of HS's snacks.
Explain two possible economies of scale available to global fast food restaurants but not H S.
Mutombo Window Fans (MWF) manufactures and sells window fans to wholesalers across eastern Africa. Although the business began small, it experienced rapid internal growth through aggressive, commission-based sales.
Currently, MWF sells 300 window fans per month. Each fan sells at an average price of $100.
Mutombo Window Fans (MWF)
Mutombo Window Fans (MWF) manufactures and sells window fans to wholesalers across eastern Africa. Although the business began small, it experienced rapid internal growth through aggressive, commission-based sales.
Currently, MWF sells 300 window fans per month. Each fan sells at an average price of .
Table 1: Forecasted fixed costs for 2020 (all figures in \$)
Table 1: Forecasted fixed costs for 2020 (all figures in \$)
Table 2: Variable costs per fan for 2020 (all figures in \$)
Define the term internal growth.
In the months after receiving the K&J report, Alejandra struggled with her decision over which option to choose. The report had been highly scientific and gave her three strategic options. However, she intuitively felt that the strategic analysis had some problems. The K&J report was based on the assumptions that her next steps should be to extend her product life cycle, and that her main objective should be growth: growth of her brand, growth of her business and growth of her profits. She wondered if these assumptions were still appropriate.
She had recently read M Scott Peck's The Road Less Traveled, which made her think about her life (Item 1). She was experiencing a personal crisis. Ever since she began modelling in Miami, her career had gone from success to success, but she now asked herself: "Have I ever really thought about my goals in life? How do I want to be remembered?" She also realized that even though she had made her business more professional by forming LadyA Management Limited (LAM), she had never considered having a vision statement or a mission statement for herself. After all, she is the business.
At the same time that she was experiencing this personal crisis, Alejandra and Rafaele received some exciting news: she was having a baby. They were delighted, and Alejandra knew that her parents too would be very happy with the news. She asked to examine how having a baby and motherhood could influence her strategic options (Item 2).
As Alejandra reconsidered her options, she realized how important it was to her to be more than a singer, dancer and performer. She knew how fragile the career of a media personality could be. In the United States (US), for example, Martha Stewart had created a very powerful company, Martha Stewart Living Omnimedia. However, in the last 10 years, Martha Stewart had almost gone bankrupt (Item 3). This story made Alejandra aware of the risks of trying to increase the scale of her business too quickly.
Item 1: Extract from M Scott Peck, The Road Less Traveled (1978) "To proceed very far through the desert, you must be willing to meet existential suffering and work it through. In order to do this, the attitude toward pain has to change. This happens when we accept the fact that everything that happens to us has been designed for our spiritual growth."
Item 2: Memo from K\&J examining how having a baby and motherhood could influence LadyA's strategic options To: LadyA From: K&J After reviewing all three options and considering that you are having a baby, we believe all three options remain feasible. In each case the fact that you will soon be a mother may add value. However, you must consider the following issues: Option 1: This would require either that your baby travels with you, or that you are prepared for extended periods of time when you and your baby will be apart, while you work in South America. Option 2: You could delegate far more to the Managing Director who would manage the development of a global market and the new distribution channels. You may have less time for the regular meetings with the Managing Director or to keep such a close interest in all the decisions. Option 3: This would require your willingness to include your baby as part of your media profile. In many ways, this option suits the fact that you are having a baby. Becoming a mother may strengthen your attempts to re-brand yourself. However, from the beginning, K&J has considered re-branding as the riskiest option. We predict that the chances of success and potential profits from the three options are as follows (figures are given in millions of \$):
| If successful | If unsuccessful | Predicted outcome | |
|---|---|---|---|
| Option 1:<br>Chance of success: 90\%<br>Cost: $10m | $10m per year for five years | per year for five years | x |
| Option 2:<br>Chance of success: 75\%<br>Cost: | $40m per year for five years | -$10m per year for five years | y |
| Option 3:<br>Chance of success: 50\%<br>Cost: $5m | Zero profits for three years, $15m in year 4 and in year 5 | Zero profits for three years, per year in year 4 and year 5 | $14.5m |
Item 2: Predicted outcomes for strategic Options 1, 2 and 3
Item 3: Extract adapted from USA Today, 12 December 2013 on Martha Stewart Living Omnimedia Martha Stewart Living Omnimedia, the media company that owns the Martha Stewart Living magazine and other digital and television ventures branded with the founder's name, will make about 100 employees redundant next Thursday, according to the New York Post. The number of jobs eliminated amounts to about a quarter of its workforce, the Post report said. In its most recent annual report earlier this year, the company said it had about 497 employees as of February. The downsizing comes about a month after the company named Daniel Dienst as its new Chief Executive Officer (CEO). In an October statement announcing his appointment, Stewart, who founded the company and serves as non-executive chairman, said Dienst was appointed to the job partly due to his "strong operating and financial discipline".
Using your answers to part (b), information contained in the case study and Items 1 to 3, discuss LadyA's three strategic options now that Alejandra is having a baby.
Kodak
Kodak, after decades as the leading American camera and photography company, went bankrupt in 2012. Despite its large research and development (R&D) budget, Kodak concentrated on products related to its film-processing business, a market that Kodak had long dominated. However, digital technology had changed photography dramatically, and Kodak, unlike its competitors, failed to innovate.
At least three times, Kodak misunderstood consumer desire to interact with photos and the external environment:
- Digital cameras - In 1975, Kodak invented the first digital camera but did not sufficiently develop this technology. Its cameras were always perceived as satisfactory products, but "nothing special". Competitors innovated with features such as face-and-smile detection. Kodak only followed trends, never led them.
- Photo viewing - In 2002, Kodak entered the market of low growth, small margin products, such as digital photo frames. Kodak's products did not have a unique selling point (USP) and were unsuccessful.
- Photo sharing - In 2005, Kodak developed the first WiFi camera, but sales were disappointing. Shortly thereafter, a new business opened, Eye-Fi, which proved Kodak wrong about WiFi. Eye-Fi created a successful business based on WiFi memory cards for cameras - the concept that Kodak had abandoned and not patented.
The conclusions from Kodak's bankruptcy are clear:
- "Cannibalism" - do not be afraid to develop a new technologically advanced product even if it causes the decline of your existing products.
- Innovation - do not be afraid to take risks. Kodak's inability to give any of its digital products a USP shows its failure to take advantage of inventions. Innovation also requires strategic vision.
- New product design - do not be afraid if sales do not happen immediately. Kodak withdrew its WiFi cameras simply because the first model sold poorly.
As the evidence shows, not taking risks in new inventions will reduce profit margins in the long run. Small, innovative business start-ups such as Canon can often successfully penetrate markets dominated by big companies unless those companies use their resources to keep up-to-date.
With reference to Kodak and one other organization of your choice, evaluate the merits of small versus large organizations.
Las Rosas (LR) is a large commercial dairy farm owned and managed by the D’Aremberg family since 1986. It has 3800 cows. LR sells milk, cheese and yoghurts. In 1996, LR started to export some of its dairy products.
LR’s unique selling proposition (USP) comes from the organic quality of its products as they are made without chemical additives. The cows’ diet does not include hormones and other supplements. The farm’s products also meet national and international quality standards.
Las Rosas (LR) is a large commercial dairy farm owned and managed by the D’Aremberg family since 1986. It has 3800 cows. LR sells milk, cheese and yoghurts. In 1996, LR started to export some of its dairy products. Profits and cash flow have been improving year on year. LR has no outstanding loans and therefore its current gearing ratio is zero.
LR’s corporate culture encourages innovation and the use of cell production. To stay ahead of the competition LR has increased its spending on research and development (R&D) and workers are given the opportunity to create new products, or to add value to existing ones. LR’s financial manager, however, believes that the R&D budget is too high and needs to be cut. He also argues that there are too many legal constraints limiting the development of new products.
LR’s management is considering buying El Remanzo, a large sheep farm located nearby. This acquisition will cost $24 million and LR will need to cut its R&D budget to zero and organize a new loan to finance the takeover. A significant restructuring would need to occur at both LR and El Remanzo to allow both companies to combine resources and knowledge. However, the potential economies of scale experienced by LR could be substantial.
| Year | Discount factor at 8% |
|---|---|
| 1 | 0.9259 |
| 2 | 0.8573 |
| 3 | 0.7938 |
| 4 | 0.7350 |
| 5 | 0.6806 |
Discount factors (reference only)
Las Rosas (LR)
Las Rosas (LR) is a large commercial dairy farm owned and managed by the D'Aremberg family since 1986. It has 3800 cows. LR sells milk, cheese and yoghurts. In 1996, LR started to export some of its dairy products. Profits and cash flow have been improving year on year. LR has no outstanding loans and therefore its current gearing ratio is zero.
LR's unique selling proposition (USP) comes from the organic quality of its products as they are made without chemical additives. The cows' diet does not include hormones and other supplements. The farm's products also meet national and international quality standards.
LR's corporate culture encourages innovation and the use of cell production. To stay ahead of the competition LR has increased its spending on research and development (R&D) and workers are given the opportunity to create new products, or to add value to existing ones. LR's financial manager, however, believes that the R&D budget is too high and needs to be cut. He also argues that there are too many legal constraints limiting the development of new products.
LR's management is considering buying El Remanzo, a large sheep farm located nearby. This acquisition will cost million and LR will need to cut its R&D budget to zero and organize a new loan to finance the takeover. A significant restructuring would need to occur at both LR and El Remanzo to allow both companies to combine resources and knowledge. However, the potential economies of scale experienced by LR could be substantial.
Total capital employed at LR is million.
Analyse two costs to LR resulting from the acquisition of El Remanzo.