IB Business Management HL 3.9 Budgets Topic Practice

Initially, the MiniC compressor was sold only in ELE’s gasoline station stores, but Lucas realized another distribution channel was needed. Within a year, the MiniC was on sale in thousands of retail outlets across the EU. Gasoline station retail stores were later refurbished, floor space increased, and point-of-sale stock management software installed. In 2010, ELE set up a car rental business financed by retained profits and external finance. Giselle wanted to grow the division. Car rentals could be booked online, over the telephone and face to face at counters in gasoline stations or airports. ELE was considering launching a smartphone booking app. The car rental division adopted graduate recruitment and annual training. Giselle encouraged internal recruitment and wanted employees with ambition and initiative, employees who shared her belief in embracing change, and internal promotion when management vacancies arose. The gasoline station compressor market is saturated but consistently profitable. The Zeat factory will not require additional investment for another five years. Sales of the MiniC were consistent despite increased competition from cheap imports. Gasoline station revenues face the challenge of declining gasoline sales as governments and car companies move away from gasoline and diesel cars. Giselle’s presentation highlighted that most car rental businesses in India are small and local, own 20–50 cars and operate in only one or two cities. Only 4 % of cars on roads were rental cars, foreign and domestic tourism was growing, urbanization was rapid and public transportation was basic but cheap. Monica recommended a fundamental change to the European car rental division: to gain first-mover advantage, she wanted to launch a new technology-enhanced brand, In3T. All cars would be electrically powered, customers would sign up as members, membership would be free, and members would book and locate cars using a smartphone app. Cars would be hired by the hour and could be left at designated city locations. The service would have few overheads and no booking offices.

In 2010, ELE owned 4.5 % of the European Union (EU) car rental market. In 2019, ELE's car rental division had revenues of EUR 0.9 billion in a market worth EUR 16.8 billion. Initially, ELE only provided car rentals in its gasoline stations in Belgium. By 2014, ELE had expanded the service to its stations in France, Spain and the UK.

In 2016, Giselle also reorganized ELE's car rental offices so that each office operated as a profit centre. An entrepreneurial approach was adopted. Office teams received substantial bonuses if they exceeded profit targets, but only offices that met their targets qualified for these bonuses. These targets were set, without consultation, by Giselle. Over a five-year period, targets were met by 85 % of offices. Giselle's reorganization was not welcomed by employees.

In 2021, Monica recommended that ELE trial the business model she had proposed for the new In3T brand in two major cities in the EU for one year: if successful, the brand and its model could then be launched in all major cities in the EU. Monica said, "We must do it. I'm convinced that our rivals will adopt this business model within two years. If we don't act now, we will be left behind and our rivals will beat us to it."

Giselle, however, disagreed strongly. She had built the car rental division from its inception. She believed high levels of customer service and well-trained staff were two reasons why the car rental division remained successful. She was also unhappy with the EUR 100 million cost and payback of three years.

Define the term profit centre.

As details about "RDB 2020" spread, several stakeholder groups began to express their concern. One stakeholder group was the workers, who were upset because of the planned closure of their workplaces. Another stakeholder group was the governments of Denmark, Germany and Sweden who wanted RDB to continue manufacturing in northern Europe. The three governments agreed to offer two incentives for RDB to remain.

1. All three governments promised to pay 25 % of the budgeted cost of making the RDB factories "green", if RDB chose to be a real "green" company. The budget for the renovations would have to be approved by the three governments before the work on the factories could begin. With this money from the government, RDB would not have to sell shares. Details of the governments' assistance and some of the implications were explained to Valdemar Holstein in a memo from Sofia de Carvahlo, RDB's Chief Financial Officer (Item 1).

2. In addition, the Danish government promised to feature the story of "Green Bearings, an RDB Company" (Valdemar's rebranding suggestion) as the lead article in the Danish Global Business Directory for 2015. This directory is well respected and is published annually by the Danish government. The directory is mostly purchased by public libraries and embassies. Gloria Woolrich, a marketing consultant, informed Valdemar that this would not be sufficient for RDB to successfully rebrand (Item 3).

Valdemar produced a simple decision tree framework to visualize the three strategic options:

Option A: "RDB 2020"
(Anna Holstein's original proposal).
Option B: Valdemar Holstein's counterproposal with
government incentives:
- stay in Europe
- cell production
- "green" factories
- government grants
- form strategic alliances with ball bearing companies in
Brazil, China and India.
- Option C: Valdemar Holstein's counterproposal:
- stay in Europe
- "green" in name only
- "groduction strategic alliances with ball bearing companies in
- Brazil, China and India.

Item 1: Memo from RDB's Chief Financial Officer to Valdemar Holstein From: Sofia de Carvahlo, Chief Financial Officer, $RDB$ To: Valdemar Holstein, Chief Executive Officer, $RDB$ Subject: Implications of the governments' $25 \%$ grant for "green" conversions Below are key financial data related to the upgrade of the three European factories instead of "RDB 2020". Budgeted cost of converting the factories: $€ 300000000$. Financed by grants from the governments of Denmark, Germany and Sweden, which total $€ 75000000$ and in long-term loans, which total $€ 225000000$ : The $€ 75000000$ from the three governments will be recorded as retained profit on the balance sheet. The impact on $RDB$ will be significant. Financial data is given in Items 2.1 and 2.2. Of particular note is the impact that the conversion will have on gearing. Even though the governments will provide $€ 75000000$ for the conversion, $RDB$ will still have to borrow significant funds.

Item 3: Memo from Gloria Woolrich to Valdemar Holstein From: Gloria Woolrich, Marketing Consultant, Maia Marketing Associates To: Valdemar Holstein, Chief Executive Officer, $RDB$ Subject: Proposed article in the 2015 edition and issues related to rebranding The proposed article in the 2015 edition of the Danish Global Business Directory will be about 10000 words and will narrate the history and "green" practices of "Green Bearings, an RDB Company". A focus will be on why Green Bearings is a company of which Denmark is proud. As you know, the publication format is printed (2000 copies). Generally the authors of these articles do not say much about the nature of a company's product or its competitive position, as that would make it appear as though the publication and the Danish government were promoting particular businesses over other Danish businesses. Danish Global Business Directory wants to be neutral. I do not think that the article will be adequate for $RDB$ to successfully rebrand as "Green Bearings, an RDB Company"...

With reference to the renovations to the RDB megafactories in Europe, describe a budget.

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.

Define the term variance analysis.