Practise applying expectancy and other motivation theories to business decisions using IB Business Management HL questions and mark schemes.
At 54 years old, Kos was nervous about the risks of increasing the scale of operation of his business. He enjoyed the job security at the officers’ dining hall. His salary and the profits from selling produce to the UWP Mission were sufficient to provide for himself and his family. However, Kos realized that he was entirely dependent on the UWP Mission for his income. What would happen if the UWP Mission withdrew from Loyka when he was 60 or 62, when it would be more difficult for him to start over again?
He knew that he could increase the scale of his business operations with the UWP Mission without any additional marketing. This would also allow for significant economies of scale, but the logistics would be more complex. He would have to drive and collect produce using dangerous remote unpaved roads outside the protection of the UWP Mission. These remote communities might perceive Kos as collaborating with the UWP troops. He would also have to dedicate all his time to his business and would no longer be able to work in the officers' dining hall. Although that job did not pay particularly well, it was in a safe environment and provided a regular source of income.
To collect larger quantities of produce in remote areas, Kos would need to purchase a large lorry (truck). He discussed potential sources of finance with his bank. The bank manager indicated as a condition for the granting of a loan that the bank would require the lorry as collateral. Secondly, the poor quality of the roads meant that the lorry would lose value quickly.
Kos prepared a business plan and compiled information comparing his current income to his forecast income if he increased his scale of operation (Appendix 5). The income comparison showed that the expansion of his business would be very profitable - as long as the UWP Mission remained in Loyka. However, even after a number of conversations with Colonel Donovan, Kos was still unsure how long the UWP Mission would remain in Loyka.
Consequently Kos drew up three possible options for his produce distribution business:
- Option 1: No change. Keep the same scale of operation and stay working at the UWP Mission.
- Option 2: Increase the scale of operation of his business. Sell more produce to the UWP Mission and to the university or hospital. Kos would need to leave his job at the officers' dining hall and lose his regular source of income.
- Option 3: Maximize the scale of operation. Supply produce not only to the UWP Mission and to the university or hospital, but also to retailers in Beral. In Beral there is no city-wide wholesaler for the produce that Kos distributes. Becoming a wholesaler would require setting up and managing supply chains, employing staff, increasing working capital and adopting a new business structure.
As part of his evaluation of Option 3, Kos Palouk consulted Sami Taibi, who owned and operated a medium-sized grocery store. Sami said that Beral had no reliable produce suppliers and there was a business opportunity if someone could make reliability their unique selling point (USP). However, the deterioration of the situation outside of the UWP-protected area was making reliable purchase and distribution of produce difficult (Item 1).
To ensure reliability, Kos would require a loan of \$ 42000 to:
- Purchase two lorries (2 at \$ 15000=\$ 30000 ). Because of the poor quality of the roads, the lorries would require frequent maintenance. One lorry could still deliver produce while the other was being maintained.
- Increase working capital (\$12000) for higher stock levels.
Unfortunately, the bank will loan Kos a maximum of \$ 30000, as they do not wish to loan funds for working capital as well as for the purchase of the lorries (Item 2).
Kos had an idea. He proposed to Sami that they merge his grocery store with Kos' wholesale produce business. The combined operation would be organized as a private limited company and Kos proposed a 50-50 share ownership. It would also have the following advantages:
- It would have two revenue streams: wholesale (from Kos' operations) and retail (from Sami's grocery store).
- The grocery store would acquire produce at wholesale prices.
- The combined operation would always guarantee supply to the grocery store before other customers.
However Sami was reluctant to give up 50 % ownership of his grocery store for an unproven operation. Sami made a different proposal: Kos would merge his wholesale operation into Sami's grocery store in exchange for 25 % of the shares of the new private limited company. The merger would also result in a new contract and management structure (Items 3 and 4).
Additional Information
Item 1: Extract from Beral Courier, a local newspaper
Rumours of increased violence outside the UWP-protected area were recently confirmed by the office of the local governor. Attacks against vehicles on roads near Bosca, Boussena, Saura and Gana have been confirmed by local police. One driver, who was returning from Saura, was seriously injured.
In another instance, there was severe damage to a road, causing vehicles to take a different route, which doubled the travel time. The local governor announced an increase in police patrols in the area.
The impact of the increased violence has had an immediate impact on local Beral shops, which reported shortages of produce.
| Loan amount: | $30 000 |
|---|---|
| Interest rate: | 8% (fixed) |
| Repayment schedule: | 7 years, payments monthly |
| Monthly payment amount: | $475 (principal and interest) |
| Collateral: | all assets of business, including the two lorries, and Kos’ personal residence |
Item 2: Bank loan offer to Kos
| Kos’ ownership: | 25% |
|---|---|
| Sami’s ownership: | 75% |
| Kos’ monthly salary: | $650 |
Item 3: Sami’s proposal for a new contract — 3.1: At start of new (merged) business
If there are dividends, Kos would receive 25 % of the dividends.
The new private limited company would take out the $30 000 bank loan. Sami’s grocery store would provide the additional $12 000.
3.2: Potential change in ownership structure
Sami has set Kos a target of annual sales of $96 000 ($8000 per month on average) for the wholesale operation for 2 consecutive years (this figure would not include “sales” to Sami’s grocery store).
- If the wholesale operation did not reach the annual sales target for 2 consecutive years within 7 years (the duration of the loan), Kos would remain a 25 % owner with his original salary of $650 per month (no change in ownership structure).
- If the wholesale operation meets the two-year performance target, Kos would receive an additional 24 % ownership in the private limited company. His salary would be adjusted so that it was always equal to 96 % of Sami’s salary. He would also be entitled to 49 % of any dividends.
Item 4: Management structure if Sami’s proposal is implemented
New (merged) business — General manager: Sami
Grocery store — Profit centre manager: Sami
Wholesale operation — Profit centre manager: Kos
Using Vroom's expectancy theory of motivation, or any other motivation theories, examine Sami Taibi's proposal.
If candidates choose to use Vroom then they would be expected to include the three main points:
- what workers value
- what workers think they can succeed in doing
- what rewards they will get from the business if they succeed.
Vroom's expectancy theory fits well with Sami's proposal. Kos gets a 25 % share of the new business - clearly this is what Kos values - he likes owning his own business and would want to be part-owner of the new business. Sami has set Kos targets and if these are met then Kos receives an additional 24 % share in the business (Item 3.2) - Kos probably believes he can meet these targets. If he does, the rewards he gets are what he wants, which again fits well with Vroom's expectancy theory.
At the higher markbands candidates would be expected to also refer to three terms used by Vroom - expectancy, instrumentality and valence. If Kos works hard there is a high expectancy that he will succeed. The agreement between Sami and Kos gives instrumentality - if the targets are met then Kos' share of the business increases by 24 %. Kos is highly likely to value the extra 24 % ownership and therefore valence is likely to be high.
Candidates can consider other theorists to examine Sami Taibi's proposal. The following is a guide of the theories that could be used with further examination:
- Adams - equity clearly may be an issue here, not just with the issue of the shares allocation, but the owner/employee aspect too.
- Herzberg - hygiene factors are not necessarily motivators but they can be demotivators.
- McGregor - is Sami a theory x manager? Does he not trust Kos enough?
- Maslow - security needs should be addressed but there are positive and negative aspects for Kos.
- Mayo - the human element is important here because the focus seems to be on management by objective (MBO) and so it is lacking.
- McClelland - clearly Kos has less power and also affiliation even if he achieves the goal set for him. Sami is still the power player and Kos the subordinate.
- Taylor - pay and Kos' salary and share option are relevant, but how would Sami be motivated?
Accept any other relevant examination.
Marks should be allocated according to the markbands on page 5.