IB Business Management HL 5.3 Lean Production and Quality Management Questions

Emma, a marketing graduate at a public relations office, has always wanted to have a more creative and independent role. Falit works in the production planning department of a large multinational oil company. He likes his job but hates the bureaucracy. Ahmed is a charismatic, self-confident project manager at a construction company. The group decided that Ahmed was the right person to manage the project and the group because of his management and leadership skills. They decided to call the app "IBAT" (insect bite analysis test). Regular online meetings would take place to develop the idea. By September 2015, the group agreed that they would go ahead with the business idea in their spare time. They had all talked to friends, relatives and anyone they knew working in healthcare. All of these people liked the idea. The six friends decided to call the business Medimatters. IBAT would consist of a paid-for app that, with a smartphone, would: - take a good quality photograph of the insect bite - send the photograph to IBAT's online automated database. The automated database would then: - compare the photo with the online library of scanned images - produce a report on the findings of the comparison for the IBAT user as well as, if possible, medical professionals such as doctors. After consultation with some doctors, Carlo discovered a technical problem. The image quality of smartphones varies. To obtain the necessary detail of the insect bite, a separate magnifying lens attachment which would convert the smartphone's lens into a microscope would be required. A different design of lens for each make of smartphone would be required. The need for a lens means that IBAT would not be a conventional app that is purchased from an online app store. Customers, who could be members of the public or people in the healthcare profession, would purchase a physical product (the lens) and a password for downloading the app. IBAT would therefore be a service and a product/good that has implications for both marketing and operations management. Ahmed acted decisively. He assigned to each group member tasks to complete within three months. In January 2016, they met face to face and reported their findings and progress (Appendix 1). Emma considered who to target. She told the group during a further online meeting that the best approach to marketing was to concentrate on particular market segments. It would be easier to focus on healthcare professionals, such as doctors. Emma suggested that the best approach to contact these potential customers was through conferences and relevant medical magazines and journals. She was also investigating other potential market segments and distribution channels. Identifying these potential customers was going to be a major challenge and required market research. Could the general public be targeted through large chains of shops that sell health-related products? Ahmed thinks that they should concentrate on launching the product in Brazil before going global, but this might result in competitors copying the idea in other countries. In many areas the project was going smoothly, but frustrations were beginning to show. Bella was keen to make a lot of progress quickly. She thought that the project should be launched as soon as possible and then refined later based on customers' experiences. Didi was clear that they had to get the product absolutely right before it was launched. He also stated that Medimatters would need finance in order to start trading. Carlo was worried about where the lenses should be produced. Ahmed has a lot of work to do to sort out these frustrations. \begin{tabular}{|l|l|}
\hline Group member & Findings and progress \\
\hline Ahmed
Project manager & \begin{tabular}{l}
- Draft business plan: complete \\
- Potential investors: identified \\
- Application for copyright/patents: in progress \\
- Size of market: unclear, believes that there is huge national and global potential
\end{tabular} \\
\hline Bella
IT & \begin{tabular}{l}
- Prototype of image-taking software: written and tested \\
- Medical diagnosis software development: in progress
\end{tabular} \\
\hline Carlo
Medical expert & \begin{tabular}{l}
- Insect bite images: $75 \%$ collected and catalogued on database \\
- Communication channels with healthcare professionals: no progress \\
- Reporting format for medical diagnosis: some progress \\
- Approval for the use of the app for medical purposes: cannot be granted by health authorities until lens design finalized
\end{tabular} \\
\hline Didi
Accountant & \begin{tabular}{l}
- Production costs for app and lens: to be determined \\
- Further financial information for business plan: in progress \\
- Set-up cost: $\$ 60000$
\end{tabular} \\
\hline Emma
Marketing & \begin{tabular}{l}
- Market research: no progress, except for discovering a device/app that measures skin colour to help choose cosmetics and another that helps identify skin cancer \\
- List of potential market segments and target markets: complete \\
- Promotion strategies targeting medical profession: ongoing \\
- Marketing plan: in progress
\end{tabular} \\
\hline Falit
Production & \begin{tabular}{l}
- Lens production: investigate where to produce the lenses, possible manufacturer identified \\
- Production method: investigate batch or flow
\end{tabular} \\
\hline All of them & - Ahmed, Bella and Carlo could each invest $\$ 2000$, the others could
invest $\$ 1000$. $\$ 51000$ extra would need to be found. The list of
problems is getting longer! \\
\hline
\end{tabular} Additional terms not in the guide Copyright/patents Companies, products, or individuals named in this case study are fictitious and any similarities with actual entities are purely coincidental.

Define the term lean production.

Production of oil is suffering because oil is a fossil fuel and worldwide demand for petroleum and other oil products is declining as part of a major trend towards reducing carbon emissions. Oil fields have passed their peak production levels, meaning production costs are increasing. MM is reducing operations in Alberta in response to concerns about impacts on indigenous peoples and the environment. MM is trying to improve its image by developing energy-efficient production methods, supporting research into more efficient uses of energy, offsetting carbon emissions by funding reforestation and other environmental projects, researching diversification into alternative fuels such as hydrogen, and strengthening ethical values throughout the business, particularly in oil production. The demand for palladium has been falling over the last 20 years. Governments are discouraging the use of diesel and petrol cars for environmental reasons, and sales of electric cars, which do not use palladium, are increasing. Although palladium from MM’s South African mine is highly profitable, cash flow can be a problem. MM’s gold mine in Egypt has technical problems and some areas are unsafe, with a risk of flooding if heavy rains fall. Some lorry drivers have threatened strike action because of safety and pay issues. MM is exploring ways to reduce costs. The fastest growing section of the mining industry is lithium extraction. The current rapid growth in demand for lithium has been caused by increased use of lithium-ion batteries, which are essential for electric vehicles, smartphones and other electronic equipment. MM’s board sees opportunities for major growth in this sector, but members disagree about whether to seek a license for a new lithium mine, take over an existing lithium producer or enter a joint venture.

MM uses just-in-time (JIT) production in its Oil Production Division.

The long-term demand for oil is usually predictable, and production is reliable unless major problems occur. In 2020, however, there was an unexpected decrease in demand for oil. Uncertainties in the world economy and responses to climate change now make predictions more difficult.
MM has prepared a sales forecast for its oil production for 2022 and 2023 (Table 2).

§ calculated using a four-quarter moving average based on six years of historic data
† calculated by comparing actual sales with a four-quarter moving average

In 2020, MM had some major problems:
- A catastrophic fire occurred at one of its oilfields.
- The gold mine in Egypt collapsed, trapping 23 miners.
- It experienced a cyber-attack on its computer network.
- An earthquake in Chile damaged the country's transport system.

In response to these problems, MM had to rely on its contingency planning and its crisis management procedures.

JG Mining (JG) wants to buy MM's tar sands mining operation for $50 million, but the board of directors are divided. MM recently invested $15 million in their tar sands operation in addition to the original $\$ 30$ million set-up cost in 1986 . Production is at designed capacity, and, although the long-term average rate of return (ARR) for the tar sands operation is below those of most of MM's other investments, it provides a reliable source of income. However, MM has difficulty selling sulphur, a by-product of tar sands production.

Employees at the tar sands operation are against selling the operation to JG. However, the income from the sale would help MM finance other investments, such as lithium mining, and the sale could help improve MM's corporate image. MM's Finance Director, Ethan, estimates that the net present value (NPV) of the tar sands operation is $46 million.

Define the term just-in-time (JIT) production.

KA
KA is a public limited company that designs, manufactures and sells air conditioners. KA's unionized employees are motivated and efficient despite not being involved in any decision making. However, they are resistant to change.
The market and competition for air conditioners are growing rapidly. KA operates at full capacity but stock turnover has slowed.
Primary market research revealed that:
- consumers do not differentiate KA air conditioners from those of its competitors. All products are perceived as medium price and medium quality
- KA's customer service is rated as poor
- customers demand energy-efficient products using ecologically sustainable production methods.
To exploit opportunities and overcome weaknesses and threats, KA's management has decided to redesign its products so that they are energy efficient. KA is considering two options:
- Option 1: Implement lean production methods, which includes investing in ecologically sustainable machines that will increase capacity by 10 %. Total quality management (TQM) will also be implemented. However, the financial manager is worried about KA's ability to meet high initial costs. The forecasted payback period is three years and average rate of return (ARR) is 4 %.
- Option 2: Outsource the production to QS, a company known for its reliability and high capacity to produce excellent quality air conditioners using cradle to cradle manufacturing principles. However, QS refuses to sign an exclusive long-term contract with KA, insisting instead on renegotiating the contract every two years. KA will have to close its production facility and will use the cost savings to improve customer service and to reposition and differentiate its air conditioners.
Employees have heard rumours of both options and fear for their jobs. Strike action is being considered.

KA
KA is a public limited company that designs, manufactures and sells air conditioners. KA's unionized employees are motivated and efficient despite not being involved in any decision making. However, they are resistant to change.
The market and competition for air conditioners are growing rapidly. KA operates at full capacity but stock turnover has slowed.
Primary market research revealed that:
- consumers do not differentiate KA air conditioners from those of its competitors. All products are perceived as medium price and medium quality
- KA's customer service is rated as poor
- customers demand energy-efficient products using ecologically sustainable production methods.
To exploit opportunities and overcome weaknesses and threats, KA's management has decided to redesign its products so that they are energy efficient. KA is considering two options:
- Option 1: Implement lean production methods, which includes investing in ecologically sustainable machines that will increase capacity by 10 %. Total quality management (TQM) will also be implemented. However, the financial manager is worried about KA's ability to meet high initial costs. The forecasted payback period is three years and average rate of return (ARR) is 4 %.
- Option 2: Outsource the production to QS, a company known for its reliability and high capacity to produce excellent quality air conditioners using cradle to cradle manufacturing principles. However, QS refuses to sign an exclusive long-term contract with KA, insisting instead on renegotiating the contract every two years. KA will have to close its production facility and will use the cost savings to improve customer service and to reposition and differentiate its air conditioners.
Employees have heard rumours of both options and fear for their jobs. Strike action is being considered.

With reference to QS, explain two features of cradle to cradle manufacturing.

Todos os Mercados (TM) and a day in the life of Henri Trouvé, Tuesday 26 January 2016 06:32, Henri Trouvé is driving to work. He is already tired. Last night he studied late at an MBA class. He hoped the qualification would lead to a better job or promotion. He is miserable and reflects on why this is. In 1965, his father set up a small hardware business in St Laurent, near Tillon in southern France. The business was set up as a sole trader. His father made personal customer service, especially free delivery to customers' homes and workplaces, the unique selling point (USP) of the business. As a child, Henri helped his parents at the store and worked there when he finished school. At 32, when his parents retired, he became the owner and manager of the business for what he thought would be the rest of his working life. However, two years later that all changed. Todos os Mercados (TM), a South American multinational company (MNC), opened a TM hypermarket just outside St Laurent. TM is a public limited company. TM's hypermarket had a huge impact on the Trouvé business as it could not compete with it. The Trouvé business went into liquidation when Henri failed to attract any external sources of finance. Desperate and with no income, Henri applied to work at TM. He was appointed manager of the hardware section. The job title was more impressive than the job itself - he was little more than a salesperson with minimal management responsibility. TM's stated main aim, based on its mission statement and expressed in all of its promotional material, is to have the lowest prices in the market. TM uses lean production methods including just-in-time (JIT) and outsourcing to cut the cost of sales. TM also keeps wages to a minimum and strictly controls all aspects of employee performance. These approaches enable TM to sell goods at much lower prices than its competitors. The rest of TM's marketing mix supports its low-price strategy. As TM grew, it was able to impose more favourable purchasing terms from suppliers, which allowed TM to lower its prices even further. High market share and market leadership are important for TM. Historically, TM has used internal growth. TM's attempts at external growth through franchising were unsuccessful. TM opened new stores both in France and in many other regions around the world. It expanded the range of goods it sold and eventually entered the services market. Now every TM store sells hardware, home appliances, electronics, furniture, automotive parts and office supplies. TM has recently started offering banking facilities, insurance, pharmacies, opticians and mobile phone services. TM is truly a "one stop" shopping destination and is successful in many regions of the world. It is actively investigating development of new markets in Asia. TM has a regimented autocratic and centralized approach to human resource management. Employees are not empowered and have to follow detailed work instructions and procedures produced at headquarters in South America. Strict practices prevent employees talking to each other while at work, and unscheduled breaks are not allowed. Employees who complain find themselves in trouble. TM has an inflexible organizational structure. In 2013, labour turnover at the hypermarket in St Laurent was much lower than expected. This was due to the economic recession which meant that there were few employment opportunities in the local area.

The impact of TM on communities, including St Laurent, is mixed. On the one hand, the hypermarkets provide much-needed employment. It also allows customers to buy many kinds of goods at very low prices - analysts estimate that families could typically save between $2000 and $\$ 5000$ a year by shopping at TM. On the other hand, when TM opens a hypermarket in a town many small shops in that town go out of business, just like Henri's. TM has a poor record of corporate social responsibility (CSR), and many pressure groups are urging TM to adopt ethical behaviour. 06:45, Henri arrives at work. He reports to Delphine Jacques, his line manager and superior in the chain of command, who checks his arrival time. Although Henri resents this process, he knows Delphine is only following company policy. He likes Delphine: she has a warm personality and encourages him in his work. She, too, is grateful for the work because she is a single mother with two children. She is hard-working and efficient and never complains. She is one of the few employees to have been promoted internally. 06:50, Henri is at his work station ready to check arrival times of the employees in his team. 07:00, the hypermarket opens. Henri is ready for the tedious day ahead. 11:30, Henri goes to the managers' staffroom for his official lunch break. He is tired. TM insists that managers eat separately from non-managerial employees. Even managers are discouraged from eating together - TM does not want them expressing collective opinions about TM. Henri thinks that TM's workers are beginning to talk more about worker's rights and protests. Henri sits there alone. He thinks about this week's reading material for his MBA - Daniel Pink's "Drive: The surprising truth about what motivates us" - it gets him wondering why TM uses motivational strategies that are so completely different from Pink's ideas. 12:00 noon, when Henri returns to the stockroom, he sees two young employees writing graffiti protesting the wages and management style. He is angry, but unsure what to do. He is a paternalistic leader so his instinct is to talk to the two young employees and get them to remove the offensive words. However, according to TM policy, he must report them to a senior manager, who would immediately dismiss them. Henri thinks, "this is too harsh as they would have no chance of getting another job". He feels the need for worker solidarity. He knows that he, himself, might be disciplined for not reporting this behaviour, but he pretends not to see anything. 14:07, Henri has to deal with an extremely rude customer. 15:02, Henri is exhausted - he wishes it were the end of the day. His mind wanders to tonight's MBA class. At least he'd be allowed to think aloud there. He "stole time" from TM by checking his homework on his smartphone. He is shocked - the next case study is about TM. This is another blow: now he has to think about TM all the time. 16:00, Henri records the finishing time of his team and reports his own finishing time to Delphine. 16:10, Henri arrives at the public library. He reads the TM case study carefully. The case study mentions various external factors - the lack of jobs in France has increased demand for university places as young people delay starting their careers and middle-aged people, like Henri, try to strengthen their qualifications. Data in the case study shows very weak economic conditions in France and demographic trends that are hindering economic recovery. The case study also states two significant threats to TM's position in the market - the increasing use of e-commerce by global competitors and customized production - and one significant weakness: a workforce that is treated badly. The case study contains financial information for TM, which Henri uses to calculate financial ratios. He is shocked. 18:15, he phones his wife. She, too, is exhausted. As well as managing the household and looking after the children, she has a full-time job as a dental assistant. She feels overwhelmed. Henri reassures her that he will help her and that once he gets his MBA things will be better. Even with an MBA, she worries that he would struggle to get a better job.

Define the term quality control.

When appointed manager, Martin had to address a long-term problem: the fact that over the years, the competitive position of The Imperial as Mombasa's premier seaside hotel had slowly deteriorated. New luxurious hotels were opening in the vicinity; with their spas, themed restaurants and fast WiFi Internet access, they offered better facilities and better services than The Imperial. They had a modern, high-tech feel; in comparison, the colonial charm of The Imperial looked old-fashioned. Its market share was shrinking. Because GP's interest in The Imperial was solely for profits, Martin was only given a limited budget each year for improvements and renovation. The long-term trend for The Imperial was worrying: there was a steady decline in room bookings, at a time when ironically tourism in Kenya was doing rather well. The number of tourists travelling to Kenya was increasing annually, and other hotels were experiencing a general trend of increasing, not decreasing, occupancy rates (Appendix 1). Martin read statistics from the Kenya National Bureau of Statistics and other sources of secondary market data. He conducted a marketing audit, constructed a position map and realized that The Imperial could attract new types of traveller interested in safaris or in cultural tourism. Besides his long-term marketing challenges, Martin had found that managing the working capital sometimes proved difficult in the short term, especially because of the seasonality of hotel operations. The Imperial occasionally had problems to follow its month-by-month budget. Now that he was manager, and not just Head of Reception, Martin had to design and implement strategies for dealing with those liquidity problems. His accountant recommended that The Imperial use separate profit centres for the hotel itself, for the restaurant and for the special events services. Non-revenue producing departments, such as housekeeping, would be established as separate cost centres. Martin also had to organize the preparation of final accounts for GP (profit and loss accounts, balance sheets) as he was accountable to $GP$ for the financial performance of The Imperial. A particular challenge came from the Catering Department overseeing the restaurant. The Head of Catering struggled both to manage the actual stock and to make the appropriate calculations of closing stock values. Martin also had a problem of human resources: how to improve his working relationship with Susan Chapman, the Head of Housekeeping. Susan's grandfather, Craig Chapman, had travelled to Kenya from Liverpool (UK) in the early 20th century to open and operate an orphanage near Nairobi. Unlike Roger Williams, who was already wealthy before he left England and went to Kenya to make even more money, Craig Chapman had a humanitarian motivation. When Kenya became independent, Craig stayed and continued to work for other non-profit organizations. His whole family lived in Kenya; his grand-daughter only left the country to study Hotel Management in the UK. In 2002, she came back and began working at The Imperial. The problem between Susan and Martin began when he was appointed as manager. Susan, too, had applied for the position. When she was not selected, Susan was very angry. Even three years later, she could not get over her feeling that she had been discriminated against.

Martin and Susan had similarities: they were the same age, had similar university educations, and neither fitted perfectly well in Kenyan society. They had, however, an important difference: their leadership style. Susan, though efficient, hard-working and committed, was very task-oriented.

She liked bureaucracy, formal accountability, and a clear chain of command. She had a scientific approach to decision-making. Her staff found her cold, official and impersonal. Martin, on the other hand, had a much more laissez-faire style. He believed in empowerment and delegation. Though he felt anxious when he saw there were minor problems that he knew he could fix quickly, he was always careful to let supervisors resolve problems. He was also warm, friendly and outgoing. Susan liked The Imperial very much; however, she still resented the fact that Martin had been appointed manager instead of her. As a result, she wanted others to think that GP had made a mistake in selecting Martin instead of her. She focused harder than ever on her job. She demanded more of the employees and was intolerant of even minor mistakes. The hotel, she was determined, should always be absolutely spotless and shining. However, as she became more demanding, the employees perceived her as too autocratic. They began to complain amongst themselves. The networks of informal communication amongst the employees enabled gossip and messages to move quickly through the hotel, such as stories and anecdotes of Susan acting overly autocratic.

Fearing that the situation would soon become a major problem, Martin suggested that she should soften her leadership style. However, in every appraisal meeting, she resisted any discussion about how she managed staff. Martin did not want to dismiss her; he highly regarded her as a valuable member of staff, whose role in the Housekeeping Department was essential. A French travel journalist who had recently stayed at The Imperial had written an article praising the high quality of its housekeeping: "We reach here the top of the highest international standards", he wrote, "in terms of benchmarking, The Imperial is très magnifique". Martin fully appreciated the professional importance of Susan. However he believed that, professionally, she needed leadership training. In November 2013, a particular situation brought these tensions to the surface. One employee in the Housekeeping Department, Guthoni, was frequently calling in sick and did not come to work. Rather than enquiring about the reason, Susan dismissed Guthoni for repeated absenteeism.

What Susan did not know is that Guthoni had been diagnosed with a terminal illness and required frequent medical treatment. Upon news of her dismissal, the other employees were outraged.

They decided to go on strike in December, one of the busiest months of the year for The Imperial. When Martin heard of the planned strike, he was very worried. If it occurred in December, The Imperial would not be able to reach its annual target profits. He started negotiations with employee representatives. He realized that the collective action was giving the employees a sense of solidarity that they previously never displayed. He also noticed that many other frustrations were coming out into the open - and he ironically saw the threat of strike action as empowering for the employees. They seemed to be taking responsibility for the operations of the hotel to a far greater degree than before. Martin wanted to channel their frustrations toward constructive ends.

He believed that The Imperial would emerge stronger from the conflict. He knew that he needed the full commitment and support of all the employees because big changes were on the horizon.

Equally important, he had to address the long-term external issues facing The Imperial because of changes in the external environment. Strategic decisions were necessary. He considered three options for The Imperial. Option 1: Make the case to GP that The Imperial needs to close for a whole year to allow for mass renovations in order to upgrade the hotel and reposition it to its former place as the premier hotel in Mombasa. Martin had recently travelled to Dubai and Muscat to see the most luxurious hotels in these regions. He understood that The Imperial had reached the decline phase of its product life cycle and needed rejuvenation. He believed that it was possible, although this would require substantial investment: - in the physical condition of the hotel almost to rebuild it entirely - in its marketing in order to relaunch it, maybe even with a new brand name. The new hotel would attract the same customer types, but the product would be much improved.

It would also need an improved workforce to match its new vision. Martin sketched out two possible approaches for a Human Resources Strategic Plan (Appendix 3). Option 2: Change the nature of the hotel by transforming all the rooms into self-contained apartments with small kitchens. The target market for these apartments would be business travellers staying at least one week. The marketing audit had revealed that: - there is an increasing demand for such apartments - very few hotels in Mombasa offer such apartments - the market is still small - the market has high growth potential. The revenue from these apartments would almost match the revenue from the current hotel operations; it would be more stable, with fewer seasonal fluctuations; both fixed costs and variable costs for cleaning and maintenance would be much lower. The apartments would be serviced once a week, rather than daily. According to Martin's workforce planning, this option could reduce the housekeeping staff by $70 \%$. Option 3: Form a strategic alliance with the famous safari tour company KenSafar. Together they would offer a two-week package tour. Customers would arrive in Mombasa, spend three nights at The Imperial, go on a seven-day safari tour, and then return to The Imperial for four more nights.

This would allow tourists to go on a safari, first getting adjusted to the time zone and climate and later rest for four days before returning home. The owner and manager of KenSafar was Kamau Onyango, a spontaneous, dynamic and charismatic Kenyan who had many networks and contacts, and intuitively knew market trends, even without market research. Kamau insisted that if the strategic alliance were to go ahead The Imperial would have to: - make some improvements to the appearance of the hotel - pay KenSafar a $20 \%$ commission for all hotel guests staying at The Imperial and booking through KenSafar - undertake a marketing audit. Which option was best? Martin was unsure...

Appendix 2: Excerpt from The Constitution of Kenya, 2010 Equality and freedom from discrimination. 27. (1) Every person is equal before the law and has the right to equal protection and equal benefit of the law. (2) Equality includes the full and equal enjoyment of all rights and fundamental freedoms. (3) Women and men have the right to equal treatment, including the right to equal opportunities in political, economic, cultural and social spheres. (4) The State shall not discriminate directly or indirectly against any person on any ground, including race, sex, pregnancy, marital status, health status, ethnic or social origin, colour, age, disability, religion, conscience, belief, culture, dress, language or birth. (5) A person shall not discriminate directly or indirectly against another person on any of the grounds specified or contemplated in clause (4).

Describe two features of benchmarking.

KA
KA is a public limited company that designs, manufactures and sells air conditioners. KA's unionized employees are motivated and efficient despite not being involved in any decision making. However, they are resistant to change.
The market and competition for air conditioners are growing rapidly. KA operates at full capacity but stock turnover has slowed.
Primary market research revealed that:
- consumers do not differentiate KA air conditioners from those of its competitors. All products are perceived as medium price and medium quality
- KA's customer service is rated as poor
- customers demand energy-efficient products using ecologically sustainable production methods.
To exploit opportunities and overcome weaknesses and threats, KA's management has decided to redesign its products so that they are energy efficient. KA is considering two options:
- Option 1: Implement lean production methods, which includes investing in ecologically sustainable machines that will increase capacity by 10 %. Total quality management (TQM) will also be implemented. However, the financial manager is worried about KA's ability to meet high initial costs. The forecasted payback period is three years and average rate of return (ARR) is 4 %.
- Option 2: Outsource the production to QS, a company known for its reliability and high capacity to produce excellent quality air conditioners using cradle to cradle manufacturing principles. However, QS refuses to sign an exclusive long-term contract with KA, insisting instead on renegotiating the contract every two years. KA will have to close its production facility and will use the cost savings to improve customer service and to reposition and differentiate its air conditioners.
Employees have heard rumours of both options and fear for their jobs. Strike action is being considered.

Evaluate the two options that K A is considering.

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 $\$24$ 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.
Total capital employed at LR is $\$45$ million.

Explain two benefits for LR of meeting quality standards.