IB Business Management HL 3.7 Cash Flow Questions

Valdemar Holstein (the son of $RDB$ founder Henrik Holstein) started working at the company in 1951, when he was only twenty-one. He spent his entire career at $RDB$, including several years as a machinist. In 1965, he replaced Henrik as Chief Executive Officer (CEO). Under his leadership, $RDB$ kept thriving, as he successfully implemented several changes. Although the company maintained a tall organizational structure, Valdemar empowered his middle managers. He also adopted management techniques that were fashionable at the time, such as total quality management (TQM), benchmarking and Kaizen. $RDB$ remained profitable and maintained brand loyalty. However, financially, gross and net profit margins were lower than previously, which Valdemar thought was unavoidable. Internally, some maintenance and technological upgrades were being delayed - but Valdemar did not pay attention to this. Externally, some environmental campaigners started to put pressure on $RDB$ because of the high pollution levels in the vicinity of $RDB$ factories - but Valdemar ignored their claims.

Anna had big ideas for $RDB$. A scientific and analytical thinker, she had carefully studied the external environment in which $RDB$ operates. She knew that demand for ball bearings was slowing down in Europe, whereas it was growing substantially in countries such as Brazil, China and India that were going through a phase of strong industrialization. From her research, she also concluded that manufacturing in the twenty-first century would be accomplished in smaller, more flexible factories, instead of the huge modernist structures typical of the late nineteenth and twentieth centuries. Time would be the critical factor; having factories close to customers' locations would reduce response time and improve logistics, including distribution and delivery. This would also shorten the working capital cycle - an important benefit for RDB. Given her international experience, working at $RDB$ made Anna realize that her colleagues in the Engineering Department, and even the entire $RDB$ workforce, needed a better cultural understanding of their customers. The best way to achieve this, she thought, would be through a workforce that resembled $RDB$ 's customers, and increasingly they would be from Asia, India and South America.

She was also convinced that $RDB$ had to focus on "green" technologies and its corporate social responsibility. The company would have to significantly increase its spending on research and development (R&D) and also examine its impact on the environment and on its customers' carbon footprint. The two are linked, Anna reasoned: the ultimate aim of innovation in the ball bearing industry is to save energy, which is fundamentally what ball bearings do by reducing friction. For users, better ball bearings mean less friction and, in turn, less friction means that less energy is wasted. Thus, less energy is needed. Anna's vision for $RDB$ was to make the world's most technologically advanced, energy-efficient ball bearings in small "green" factories located near its customers. This would require selling the two megafactories in northern Germany and Sweden, and significantly downsizing the one in Denmark. RDB's production would be offshored to 12 small factories to be opened around the world, mainly in Brazil, China and India. In terms of workforce planning, each of those new $RDB$ factories would be jointly managed by one experienced $RDB$ senior manager from Europe and one local manager familiar with the language and culture. Some machinists from $RDB$ 's European factories would be offered key positions. Most of the existing jobs in Europe would be made redundant, as most of the new workers would be recruited locally on lower wages.

Northern European countries have generous redundancy payments, largely funded by the employers, and these costs would be significant in the short term. In the long term, however, RDB would lower labour costs. Marketing would also play a major role in the new RDB that Anna imagined. RDB 's marketing department had always been "sleepy", with a small budget and unchallenging objectives.

Advertising and promotion were limited to some trade journals and trade shows. Anna thought that this should change. She believed that RDB should advertise in a wider range of publications, including e-zines (online magazines) and professional web sites for industrial design and architectural robotics. She wanted to use information and communication technology (ICT) to communicate to a wider range of external stakeholders. That way, RDB would create brand awareness in the design community, and not just in the manufacturing community. The marketing department should start carrying out market research, both primary and secondary. Anna also pictured groups of RDB "engineers-turned-salesmen" calling on major manufacturers to generate orders, whilst other staff would pressure politicians for more legislation and incentives to support environmentally-friendly products.

Anna wrote all the details of her ideas in a strategic plan that she named "RDB 2020". She calculated that the transition costs for such a large-scale restructuring would be enormous. In order to generate $50 \%$ of the funds required, RDB would need to sell the two megafactories in northern Germany and Sweden. For the rest of the funds, Anna would list RDB on the Frankfurt Stock Exchange: RDB would become a public limited company, with funds generated from the sale of newly issued shares. Anna was very pleased with her overall strategy for RDB; she found it coherent, consistent and forward-looking.

Valdemar's counterproposals Valdemar was stunned when Anna explained her "RDB 2020" strategic plan to him. Although he recognized that manufacturing was shifting away from Europe, and that $RDB$ had to become more environmentally conscious, he had major objections. "RDB is a Danish company", he insisted, "we managed to expand significantly after the first world war thanks to a major contract from the Danish government". He felt a moral obligation to provide jobs in Denmark. At times, $RDB$ had also formed public-private partnerships with the Swedish and German governments for various projects. The workforce was local and loyal; Valdemar felt like a father to them; a major retrenchment would be a violation of the "social contract" he implicitly had with them. He also despised the idea of $RDB$ going public. Despite Anna's assurances that the Holstein family would still be the major shareholder, he did not want to answer to shareholders who were not family members and had no sense of the company's history or traditions. He had a bad feeling about this. He also did not like the idea of the relocation of the factories. A lifelong industrialist, he loved to see his three megafactories in northern Europe. Their scale of operation was so vast that expansions had been coordinated with the local urban planning authorities; the Swedish factory was so large that railroad lines had been installed in order to deliver supplies and to transport finished products.

It was beyond his imagination that small factories operating in industrial parks on the outskirts of Mumbai or São Paulo could accomplish the same as the European ones. Despite Valdemar's objections, Anna told him that she would speak to other shareholders in the family and could collectively force the company to change. He asked her for time to come up with an alternative proposal that would incorporate "some" of her ideas. A month later he suggested the following to her: - Rebrand the company, changing its name from "Royal Danish Bearings" to "Green Bearings, an RDB Company" and adopt Anna's marketing strategy. Green Bearings would be "green" in name only. - Remain in northern Europe, but divide each of the three megafactories into autonomous cells, each assigned to serve a region of the world and each with its own strategic and tactical/ operational objectives. Local salesmen would be hired, paid low salaries, but with high commissions as an incentive. This would make the company look more international, but the current workforce in Europe would not change. - Form strategic alliances with ball bearing companies in Brazil, China and India.

Valdemar admitted that he had thought about finding a major investor whose financial assistance RDB could use to modernize the current factories and make them environmentally-friendly. The Holstein family could sell a portion of their shares to the major investor. However, Valdemar rejected this idea. Though being "green" was good practice and was socially responsible, he hated the idea of having a shareholder who was not a member of the Holstein family.

Explain why shortening the working capital cycle would be "an important benefit for RDB".

Rox and Inclusive Music (IM)
Rox was a music band managed by Michel Mbappe. The band enjoyed considerable commercial success thanks to Michel's autocratic leadership style. He personally made all decisions. Rox had given generously to local schools and other non-profit organizations. The band received many awards for their acts of corporate social responsibility. Their last CD "Action Not Words" had brought them considerable fame.
In June 2010, Michel was asked to help finance the start-up of a new non-profit music school called "Inclusive Music" (IM). IM's aim was to support young musicians from low income families. At first, Michel was very enthusiastic and prepared a business plan. Unfortunately, he realized that Rox could not afford to finance IM fully. External sources of finance other than contributions from Rox would be needed for IM to grow. Until then IM would only have a limited budget for marketing and market research.
In June 2011, IM opened with the mission statement "Action not words". To support its mission, it offered free lessons and allowed students to borrow musical instruments. Michel asked a popular former singer, Louis Marsaud, to be the school's director. Louis adopted a laissez-faire leadership style, hoping it would allow creativity among students. Initial student attendance was lower than expected and quickly worsened. Within three months, many instruments had gone missing and many students were no longer attending music lessons.
IM's finances were deteriorating, and Louis could not attract external sources of finance. Michel took action and organized a concert by Rox to promote IM. He also examined IM's accounts and discovered a significant liquidity problem. Without consulting anyone, he dismissed Louis. In the music media, Michel received much criticism for dismissing Louis. Journalists argued that the two main problems were, IM's vague mission statement and poor marketing. However, Michel aimed to ensure that IM became sustainable in the long term.

Identify two possible causes of a liquidity problem.

Creative Toys (CT)


Creative Toys (CT) manufactures toys and markets them business-to-customers (B2C) online only. The business operates in a leased industrial site and relies on word-of-mouth promotion only. To make customers believe that CT's toys are better than its competitors, CT sets prices slightly higher than the competition. Production and sales are mostly between 1 October and 24 December. Most of the employees work on temporary contracts during this busy period. For the remainder of the year, CT operates well below capacity utilization.
Table 1 contains selected data for CT, for 2014:

In 2014, the management of CT considered a change of the marketing mix to include above the line promotion, lower prices, and an additional sales method called "toy parties". Toy parties would be hosted by newly recruited CT sales representatives and attended by parents and their children. At the parties parents could see the toys and children could play with them. Sales would be made at the parties by the new sales representatives, who would be paid on a commission-only basis.

Toy parties could be held throughout the year and make CT's total sales less seasonal. Based on market research, management has estimated that the parents' demand for toys is price elastic and is planning to set lower prices for all toys sold online and at toy parties. The management has prepared forecasted financial data for CT, for 2015, based upon the proposed change to the marketing mix, shown in Table 2 below.

The Finance Manager will carry out a variance analysis in order to determine whether the proposed change to the marketing mix has been successful.

Using information from Table 2, prepare an annual cash-flow forecast for CT, for 2015.