Evaluate the operational, financial and strategic trade-offs of growth, scale and external growth methods in IB Business Management HL cases.
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.
Possible economies of scale available to the global fast food restaurants include:
Marketing economies of scale: the global fast food companies are likely through their global reach to experience significant economies of scale in marketing/selling across a whole range of markets. HS is a national chain and will not be able to spread advertising/ promotion costs, for example, across a whole range of markets. Unit costs of marketing will be much lower for the global restaurants.
Bulk-buying economies of scale: to develop and meet global demand and to fill supply chains, global fast food manufacturers are likely to achieve significant economies through the bulk-purchase of raw ingredients (a number of fast food manufacturers have vertically integrated with suppliers to ensure that logistics are in place). Again, unit costs of operations are likely to be lower than HS's.
Financial economies of scale: being present in global markets allows global fast food manufacturers to borrow funds for expansion at much lower rates than a national chain. It is indicated in the stimulus that H S finances its training and professional development through retained profits.
Accept any other relevant economy of scale.
Mark as a 2+2.
Do not credit just a definition of the term.
Award [1] for identification/ description of an appropriate economy of scale and an additional [1] for an explanation and application to the stimulus. Application may not be merely nominal. It is expected that the candidates refer to lower costs per unit rather than just lower costs.
Maximum award per economy of scale: [2]
Creative Bleu (CB)
Creative Bleu ( C B ) is an Australian media private limited company which has produced many innovative television (TV) commercials. Jennifer Joyce, the Chief Executive Officer (CEO), set up the company with three college friends. C B now employs 24 people.
The organizational culture is technological, collaborative, innovative and task-orientated. Flexible project teams of four are created and rotated to generate new and creative ideas. On occasions, decisions are made intuitively. All employees have equal input into the decision-making process. C B has an employee share-ownership scheme, and profits are shared among all of the shareholders. Jennifer has a democratic leadership style. Staff turnover at C B has been very low.
C B has received a substantial contract to produce a TV commercial. The commercial will be for a new product. The commercial will also help C B gain entry into a new international market: South Korea. The long-term financial benefits for C B could be significant, but Jennifer is worried that C B will use all its working capital on this operation. Moreover, C B does not have a Korean speaker amongst its staff.
Jennifer and the staff see the production of the TV commercial as an opportunity for C B to enter a new market and grow. Jennifer has two strategic options for C B :
- grow internally by producing the TV commercial in Australia. CB would finance the whole operation and employ additional staff: translators, local Korean actors, and technical support staff.
- form a joint venture with a Korean media company. C B would share the costs of the operation with them. The TV commercial would be produced in Seoul, South Korea. Given the size of the operation, C B would relocate one of their teams to Seoul.
Recommend which of the two strategic options C B should pursue.
(e) Recommend which of the two strategic options CB should pursue.
The internal growth by producing the TV commercial presents a very important strategic move for C B. Growing internally may seem like the easier option given the current success resulting from a strategic fit between the culture and the democratic leadership style of Jennifer.
By choosing the first option, C B capitalizes on their strengths and possibly their unique selling point to take advantage of some opportunities. The effective / important culture, structure and the leadership will be maintained.
The above can be judged as very significant arguments for this option as due to their creativity, employees' motivation, and flexibility, C B was given the contract.
However, it represents a significant short-term financial risk given the need to solely finance the TV commercial and the current short-term working capital issues. Many organizations go into liquidation due to short-term liquidity problems and Jennifer has to be very careful that she finds ways of raising short-term finance.
Perhaps internal growth limits the long-term potential for growth for C B.
Moreover, South Korea is an unknown market with C B having to employ additional staff of whom they may not know. In addition, they will need inducting into CB's organizational culture. There will be a period of transition required - true in fact if either option is chosen. This argument may be judged as less significant compared to the issues above, as the above issue is really just applicable for both options, but less for option 1 .
N.B. accept any relevant, applicable argument for option 1 .
The joint venture allows C B to share the risk and cost. C B will be able to gain local knowledge to produce an innovative commercial. Sharing costs and risk can reduce, or even eliminate the current worries about the working capital of C B. A significant short-term argument in favour of the joint venture option.
However, the scale of operation for C B will increase dramatically and Jennifer may have to modify her democratic leadership style as inevitably spans of control will widen. The current very effective structure of flexible project teams might be stopped, or Korean employees will have to participate as well. Large size and possible cross-cultural issues may negatively affect CB's USP / creativity. The relocation of one of her teams may impact on some of the long standing relationships Jennifer has created. The current low staff turnover at C B and relocating trusted and valued colleagues may create some short-term tensions.
However, a success in South Korea can open many a new opportunity for CB. If the option is successful, Jennifer can look for other joint venture opportunities in different countries. Opportunities that Jennifer may desire.
Conclusion/judgment
The decision will depend on the degree to which Jennifer wishes to change her business to take up this new opportunity. Assuming that revenues from the TV commercial will be the same if either C B grows internally or externally, the deciding factor may be initial costs, Jennifer's concern about using up all her working capital and the degree to which C B 's culture will change if she works alongside a new partner. If these restrainers can be minimized, C B should look to the joint venture as the financial opportunities from creating this TV commercial in a new market are considerable.
It is expected that one option is recommended and that candidates produce a substantiated recommendation / judgment.
Accept any other relevant issues with a substantiated recommendation / judgment.
For one relevant issue that is one-sided, award up to [3 marks]. If the response is a one-sided relevant approach with no discussion award a maximum of [4 marks].
For a fully balanced answer, candidates are expected to provide 2+2 arguments.
Award a maximum of [5 marks] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.
Candidates cannot reach the [5-7] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.
Marks should be allocated according to the markbands on page 4.
The Burnt Tomato (BTO)
In 2003, Ben opened a street-food stall selling vegan food. The food stall was successful. Ben spent little on marketing, mainly advertising on the food stall itself and relocating it to places or events where many consumers would pass by.
In 2008, Ben used the profits from the food stall to open a restaurant, The Burnt Tomato (BTO), which initially employed 16 people. In the following years, labour turnover was low. Employees received an annual bonus, which increased with each year of employment.
In 2015, Ben created a website and began to use social-media marketing. Customers were encouraged to rate their BTO experience online. Their reviews consistently rated BTO's experienced staff highly and showed that they thought the food was exceptional value. Ben replied to all reviews. Many BTO customers also joined a BTO social media group and communicated with each other and BTO regularly. For many customers, the total BTO experience of vegan food and social networking was like being in a club.
Unfortunately, high labour costs, reasonable profits and the use of high-quality ingredients meant that BTO's gross and net profit margins were below industry averages.
Aware of the growing demand for vegan food, Ben borrowed money from a family member in 2018 and opened two more BTOs in different cities, hiring 32 new employees. However, in January 2019, a long-time customer of the original BTO ate at one of the new restaurants and wrote a negative review. The review went viral and sales at all three BTOs declined.
Discuss Ben's decision to enlarge the scale of B T O from one restaurant to three restaurants.
Discuss Ben's decision to enlarge the scale of BTO from one restaurant to three restaurants.
Advantages of expansion include:
- Leveraging its brand and USP to reach a larger market.
- Potential economies of scale.
- Potentially increased revenue and profits.
Accept any other relevant advantage.
Disadvantages of expansion include:
- Loss of control, especially with respect to quality.
- Potential diseconomies of scale.
- BT loses its "small community feel."
- Increased costs for recruitment, induction, and training.
- New employees may not have the same attention to quality as long-time employees.
Accept any other relevant disadvantage.
It is expected that candidates provide a conclusion with a substantiated judgment.
Marks should be allocated according to the markbands on page 3.
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].
If a candidate addresses only advantages of expansion, award a maximum of [4].
If a candidate addresses either two advantages of expansion and only one disadvantage, or only one advantage of expansion and two disadvantages, award a maximum of [5].
A balanced response is one that provides at least two advantages of expansion and two disadvantages of expansion. However, if the candidate does not provide substantiated judgments, maximum award of [6].