IB Business Management HL 6.1 Business Management Tools Questions

Royal Danish Bearings

Royal Danish Bearings ( RDB ) is a successful multinational company operating in the ball bearing industry. RDB was set up in 1915, in Denmark, by a Danish machinist called Henrik Holstein. Henrik was a visionary. He foresaw the expansion of the ball bearing industry in the twentieth century, which was largely due to the growth of the automotive sector. Ball bearing technology contributed to engineering progress throughout the twentieth century, especially in the secondary sector of the economy. Today, the outlook of the ball bearing industry is still promising: its market size is predicted to further expand over the next decades. "High-tech industries" such as computer software and artificial intelligence attract considerable attention and capital; however, most global industrial output continues to be mechanical devices. For example, ball bearings are found in all types of vehicles, such as in gearboxes and wheel suspension; there are even ball bearings in fighter jets and space shuttles. RDB has always operated in the business-to-business (B2B) market. Throughout the twentieth century, it expanded by internal/organic growth. Consistent with business thinking of that era, the company concentrated its manufacturing in three megafactories (very large factories) located in Denmark, northern Germany and Sweden, where the workforce had become highly skilled in operating machinery for industrial production. Benefiting from several economies of scale, RDB created thousands of jobs, supporting the "company towns" where they were the main employer, held in high esteem both locally and regionally. In the 1930s, RDB 's market position was determined by the high quality and high price of its ball bearings. RDB's two main competitors were U A B and F I B; U A B 's ball bearings were medium quality and medium price, and F I B 's ball bearings were low quality and low price. Immediately after the second world war, RDB began to face competition from new Japanese companies, which used their low labour costs to gain entry into the ball bearing market. Thanks to its well-established reputation for high quality, RDB maintained its market share. By the 1970s, the competitive environment changed again. As Japan's economy developed, wages rose substantially. To remain competitive, Japanese companies moved to just-in-time production. Using this method, they could respond faster to specific customer needs. Their flexibility became their unique selling point (USP); it represented an important competitive advantage against other companies such as RDB. They also met international quality standards, making it easier to export to different regional trading blocs. Valdemar Holstein's efficient leadership 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. Valdemar was proud of the company's traditions. It remained privately owned by members of the Holstein family. Valdemar, like his father, had a paternalistic leadership style - though he could occasionally be autocratic, especially when the workers' collective bargaining agreements were being renegotiated. Although there were few opportunities for promotion, the employees liked RDB 's corporate culture. They too were proud of working for a well-known, well-established and well-respected company. They were well paid, enjoyed working in a culturally homogeneous environment, and felt that their jobs were secure. Many of the workers' fathers and, in some cases, their grandfathers, had worked for RDB. Work patterns and practices followed the northern European Christian calendar and local traditions. Getting a job at RDB was like "joining a family". The employees all appreciated their job security, their high standard of living and their working environment. A cautious manager, Valdemar always tried to manage risks. He regularly consulted economists and other specialists in order to minimize the impacts of changes in the external environment. Over the years, these efforts proved worthwhile. For example, RDB remained largely unaffected by the 1970s energy crisis. Every year, Valdemar reviewed RDB's contingency plans; this helped him avoid a possible technological disaster in 2000 with the so-called "millennium bug". A crisis that Valdemar had not foreseen was the sudden collapse of Icelandic banks Kaupthing and Landsbanki in 2008; RDB had funds in saving accounts in those two banks. However, it later managed to recover most of these funds. In terms of operations, RDB manufactured standard-sized ball bearings in a flow production process. It sometimes used batch production for deliveries to established customers who used non-standard-sized ball bearings, and sometimes job production for one-off special orders, such as large ball bearing systems for power stations or mines. In all respects, from human resource management to operations, Valdemar felt that RDB was ready for the twenty-first century.

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.

Additional financial information

Selected information from RDB's financial accounts (€000 000):

1965 | 1975
Average stock: 29 | 54
Gross profit: 35 | 56
Net profit before interest and tax: 22 | 34
Total capital employed: 121 | 203
Sales revenue: 113 | 194

Using a SWOT analysis framework, identify two weaknesses and two threats to RDB.

In 2002, RDM produced its last kerosene stove and now primarily manufactures healthcare devices. Jan began to introduce a highly automated manufacturing process in 2006 that was operational by 2009. For most orders, customers enter desired specifications for healthcare devices into a template on RDM’s web page. An engineer then reviews the specifications. Often, engineers will contact the customer if questions arise or the engineers have identified a way of improving the design. RDM has developed several minor adaptations to customers’ products that have made them cheaper to produce or more stable. Once the design is approved, they transmit the information to accounting and marketing, which together determine the price for the customer. A person in marketing then contacts the customer to confirm that they want to proceed with the order. For decades, RDM employed a large unionized labour force, mass produced stoves and sold its product to wholesalers. Because of globalization and fierce competition from Asian manufacturers, which had lower cost structures, in the early 2000s Jan determined that European manufacturers would have to lower costs. Automation, while requiring significant capital expenditures, lowers costs in the long run. In addition, digitized communication between robots allowed RDM to be responsive to customers’ requirements. As RDM improved its automation processes and integrated cloud computing, mobile devices, big data, artificial intelligence and three-dimensional (3D) printing, its ability to customize products improved dramatically regardless of the size of the order. This integration of technologies also meant that RDM was not restricted to manufacturing healthcare devices; it could easily retool to manufacture other products when opportunities arose. RDM’s relationship with stakeholders was profoundly changed by the move to automation. In the 1970s, RDM employed roughly 500 workers, making it the largest single employer in Lobjanec. In 2019, the business employs 117 people, only a small number of whom are involved in manufacturing. Further, most of those involved in manufacturing are not skilled manual labourers but highly trained engineers and computer experts who manage the automated process. Their attitudes, aspirations and motivations differ significantly from the workers who survived the Second World War and had worked under the Communist regime. With this reduction in, and transformation of, RDM’s labour force, the company no longer has the level of local influence that it formerly had. The move to automation also led to changes in the organization of RDM. Traditionally, the business had been hierarchical. Design changes in RDM’s products were infrequent and directed by the CEO. Now, design changes for the healthcare products come with almost every order. Teams composed of individuals from all business functions manage orders. Jan, who replaced his father as CEO in 2001, has a democratic leadership style, which is different to his father’s paternalistic style. Over many years, Jan painstakingly introduced many changes in practices at RDM to create an environment of innovation. When Kristián headed the company, the environment at RDM was orderly, even dull. Jan, however, is constantly seeking innovation in both RDM’s products and its processes. He fosters an atmosphere conducive to creativity, with heavy emphasis on teamwork, diversity, humour and fun. Most employees love this environment, even though it sometimes seems chaotic. The atmosphere has produced positive results. However, some employees have complained that there is insufficient guidance and the business sometimes lacks focus. RDM has always displayed a strong sense of corporate social responsibility (CSR). Today, RDM maintains a full programme of CSR, including sourcing components from businesses who also have good CSR practices, paying fair wages and having a strong emphasis on care for the environment. A component of the cost to customers is delivery costs, which are based primarily upon weight and distance to delivery location. Given the cost of delivery, RDM can generally offer competitive pricing in a 700-kilometre radius of Lobjanec. This 700-kilometre range means RDM can be price competitive in crucially important Germany but less so in such potentially lucrative markets as Scandinavia, the Netherlands, Belgium, France and northern Italy. To continue to grow and access these potentially lucrative markets, the chief financial officer has proposed that RDM build an additional production facility elsewhere in Europe, which would extend RDM’s market area. Given that the entire order/manufacture/delivery process could still be performed in Lobjanec, this new facility would require limited staff and most of the work will be done by robots. Before considering the expansion proposal, Jan knows that RDM’s marketing strategy must be addressed. RDM has no marketing strategy but rather a series of practices that have evolved since the Radeki de Dovnic family regained control of RDM in 1990. RDM has an outdated name, a weak brand identity, no relevant vision or mission statement and no written operations management strategy or human resources plan. The company makes good products at competitive prices and is responsive to customers’ needs. As a result, the company enjoys healthy profits for now.

5. Jan is considering two options for the long-term development of the business: market development and diversification. Option 1: Market development Although Jan, with his strong associations with the US, likes the idea of developing the US market, he has concerns about it. Over the last four years, the exchange rate has fluctuated between $€ 1=\$ 1.40$ and $€ 1=\$ 1.03$. There is some evidence that the US wants to discourage imports and prefers foreign businesses to invest directly in the US. Jan thinks there are other markets in and closer to Europe that could be developed more easily without significant changes to the distribution channels or the culture of the business. He has suggested the United Kingdom (UK) market as an alternative, which has a health service similar to those in other European countries. In most other respects the UK market is similar to other European markets. The main worry is that the UK market would be difficult to enter, as established suppliers are likely to be preferred by the health service and there may be financial constraints on the health service. Option 2: Diversification Jan is also considering a proposal by Heinrik Langer, a business analyst. Heinrik's idea is for diversification. He thinks that RDM should develop a service role. RDM's directors and workforce have all of the skills and experience needed to help other businesses convert from traditional production methods to automated robotic production processes. This service (known as a consultancy) would require recruitment of more engineers and computer specialists as well as highly skilled and experienced consultants. Heinrik's proposal is based on: - the likely low long-term growth prospects for RDM's healthcare products. Population trends in Europe due to the low birth rates (Table 1) will lead to an aging population in the short and medium term. However, in the long term there could be economic and demographic problems arising from the eventual decline in population that is predicted to occur when the birth rate is less than 2.1 - his view that every business should have a service role - possible financial pressures on European governments, potentially reducing healthcare spending - his data market research results on robots and robotics (Table 2). [Source: © International Baccalaureate Organization 2019] Growth in industrial sales of collaborative robots is expected to triple between 2015 and 2025. By 2020, 1.7 million new industrial robots will be installed worldwide. Industries affected by robotics include: - unmanned air, land and sea vehicles - health care - manufacturing. Worldwide spending on robots in 2019: \$135 billion. [Source: © International Baccalaureate Organization 2019] Nikita, RDM's director of corporate strategy, has asked both Jan and Xi to provide data on each option to help her construct a decision tree to present at the next board meeting. The decision tree below summarizes the issues involved in the decision. [Source: © International Baccalaureate Organization 2019] Using the case study and the additional information on pages 4 and 5, recommend whether RDM should choose Option 1 or Option 2.

As demand for kerosene stoves had been declining for many years, in 1993, Adriana decided to add healthcare devices using ergonomic designs to RDM’s product portfolio. The reasoning behind the move to manufacturing medical devices was that, with the baby boomer generation soon to reach retirement age, the demand for goods and services in the healthcare industry would be growing. Though not immune to broader economic trends in Europe, since the Velvet Revolution the Czech economy has fared well. Part of this success stems from the relatively smooth transition to a stable market economy and democracy. Traditionally, educated Czechs speak German in addition to Czech, a situation that has facilitated positive trade relations with Germany, Europe’s largest economy. A small, compact country, the Czech Republic now has an IT infrastructure that ranks among the best in the world. For decades, RDM employed a large unionized labour force, mass produced stoves and sold its product to wholesalers. Because of globalization and fierce competition from Asian manufacturers, which had lower cost structures, in the early 2000s Jan determined that European manufacturers would have to lower costs. Automation, while requiring significant capital expenditures, lowers costs in the long run. In addition, digitized communication between robots allowed RDM to be responsive to customers’ requirements. RDM’s relationship with stakeholders was profoundly changed by the move to automation. In the 1970s, RDM employed roughly 500 workers, making it the largest single employer in Lobjanec. In 2019, the business employs 117 people, only a small number of whom are involved in manufacturing. Further, most of those involved in manufacturing are not skilled manual labourers but highly trained engineers and computer experts who manage the automated process. Their attitudes, aspirations and motivations differ significantly from the workers who survived the Second World War and had worked under the Communist regime. With this reduction in, and transformation of, RDM’s labour force, the company no longer has the level of local influence that it formerly had.

Describe two changes in the external environment that have affected RDM.

Music Mania (MM)


Music Mania (MM) is an independent store selling new and used music compact discs (CDs), DVD films and music vinyl records. It is a sole trader business owned by André, who has 25 years of experience in the retail and music business. MM has loyal customers but its total revenue is falling. The store currently has a low market share in DVDs and vinyl records.
André decided to conduct some primary and secondary market research, as the entertainment industry is changing rapidly. He discovered that:
- the market for DVDs is in rapid decline
- CD sales are declining slowly but new releases still sell well
- MM has had to stock computer games, which are selling out very quickly, and the sales of new vinyl records are growing slowly.
André is accustomed to variations in sales but the current sales forecasts are, in his experience, the most worrying. He has decided to create an e-commerce website to increase his sales of new and used vinyl records and CDs. André is also aware that new free online music streaming and gaming sites are being launched.
André has only limited internal sources of finance to set up the website. Two new tactics to ensure future success for MM being considered are:
- to stop selling DVDs
- to increase below-the-line promotional spending on vinyl records.

Using the Boston Consulting Group (BCG) matrix, discuss the two new tactics André is considering to ensure MM's future success.

Las Migas
Carolina plans to set up a bakery, Las Migas, in a small town. Competition from established bakeries is strong. Carolina has asked for a bank loan because her personal savings are insufficient. The bank manager requested the following information:
- a business plan
- a cash flow forecast for the first four months of operations.
Carolina has no experience with financial forecasts but she estimated the figures for Las Migas for the first four months of operations. These figures are shown in Table 1.

State two elements, other than a cash flow forecast, of a business plan.

Sassy
Sassy, a partnership between fashion designers, produces clothes for teenagers. Capacity utilization is very high.
The partners are considering some strategic changes. After conducting research, they presented three options and outlined the costs and expected revenue. They also predicted that the economy would either improve or stay the same. The probability of the economy staying the same is 0.3 .
The options, costs and expected revenue are given below:

In the months after receiving the K&J report, Alejandra struggled with her decision over which option to choose. The report had been highly scientific and gave her three strategic options. However, she intuitively felt that the strategic analysis had some problems. The K&J report was based on the assumptions that her next steps should be to extend her product life cycle, and that her main objective should be growth: growth of her brand, growth of her business and growth of her profits. She wondered if these assumptions were still appropriate.

She had recently read M Scott Peck's The Road Less Traveled, which made her think about her life (Item 1). She was experiencing a personal crisis. Ever since she began modelling in Miami, her career had gone from success to success, but she now asked herself: "Have I ever really thought about my goals in life? How do I want to be remembered?" She also realized that even though she had made her business more professional by forming LadyA Management Limited (LAM), she had never considered having a vision statement or a mission statement for herself. After all, she is the business.

At the same time that she was experiencing this personal crisis, Alejandra and Rafaele received some exciting news: she was having a baby. They were delighted, and Alejandra knew that her parents too would be very happy with the news. She asked $K \& J$ to examine how having a baby and motherhood could influence her strategic options (Item 2).

As Alejandra reconsidered her options, she realized how important it was to her to be more than a singer, dancer and performer. She knew how fragile the career of a media personality could be. In the United States (US), for example, Martha Stewart had created a very powerful company, Martha Stewart Living Omnimedia. However, in the last 10 years, Martha Stewart had almost gone bankrupt (Item 3). This story made Alejandra aware of the risks of trying to increase the scale of her business too quickly.

Item 1: Extract from M Scott Peck, The Road Less Traveled (1978) "To proceed very far through the desert, you must be willing to meet existential suffering and work it through. In order to do this, the attitude toward pain has to change. This happens when we accept the fact that everything that happens to us has been designed for our spiritual growth."

Item 2: Memo from K\&J examining how having a baby and motherhood could influence LadyA's strategic options To: $\quad$ LadyA From: K&J After reviewing all three options and considering that you are having a baby, we believe all three options remain feasible. In each case the fact that you will soon be a mother may add value. However, you must consider the following issues: Option 1: This would require either that your baby travels with you, or that you are prepared for extended periods of time when you and your baby will be apart, while you work in South America. Option 2: You could delegate far more to the Managing Director who would manage the development of a global market and the new distribution channels. You may have less time for the regular meetings with the Managing Director or to keep such a close interest in all the decisions. Option 3: This would require your willingness to include your baby as part of your media profile. In many ways, this option suits the fact that you are having a baby. Becoming a mother may strengthen your attempts to re-brand yourself. However, from the beginning, K&J has considered re-branding as the riskiest option. We predict that the chances of success and potential profits from the three options are as follows (figures are given in millions of \$):

Item 3: Extract adapted from USA Today, 12 December 2013 on Martha Stewart Living Omnimedia Martha Stewart Living Omnimedia, the media company that owns the Martha Stewart Living magazine and other digital and television ventures branded with the founder's name, will make about 100 employees redundant next Thursday, according to the New York Post. The number of jobs eliminated amounts to about a quarter of its workforce, the Post report said. In its most recent annual report earlier this year, the company said it had about 497 employees as of February. The downsizing comes about a month after the company named Daniel Dienst as its new Chief Executive Officer (CEO). In an October statement announcing his appointment, Stewart, who founded the company and serves as non-executive chairman, said Dienst was appointed to the job partly due to his "strong operating and financial discipline".

Examine two driving and two restraining forces that have influenced changes at LadyA Management Limited (LAM).

Dean West Tutoring (DWT)
Dean West was an International Baccalaureate (IB) business management teacher in a developing country (country X). He also offered private tuition to students in need of additional support. Five years ago, he decided to leave teaching and set up Dean West Tutoring (DWT).
DWT has grown in the last five years and now employs ten tutors offering face-to-face tuition in a range of IB subjects. The tutors work part-time. DWT takes a percentage of the fees that students pay for the tutoring. To establish positive branding for DWT, Dean expects all tutors to follow a strict code of conduct. He also reviews each tutor's performance and student feedback every week. Some tutors are feeling demotivated.
With the worldwide growth of online learning in the last few years, Dean saw an opportunity to expand DWT. He discovered a large market in Asia, particularly in China. Online one-to-one tuition in Asia is charged at an hourly rate that is three times higher than that usually charged in country X. DWT would need to hire agents in Asia to find potential students who want to learn online.
As the new school year is starting soon in China, Dean will need to act quickly. He is considering drawing up a Gantt chart to assist his planning.
However, DWT's existing tutors are concerned about the expansion due to their lack of experience and equipment for online tutoring.
Dean is now considering two options to ensure that DWT has enough suitable tutors for expansion to online tuition:
- Option 1: Offer training and support to the existing tutors.
- Option 2: Recruit new tutors from anywhere in the world with online teaching experience.

Explain one advantage and one disadvantage for Dean of drawing a Gantt chart to assist his planning for the expansion to online tuition.

The business grew rapidly over the next four years. Its growth was based on its innovative use of social media and other technologies, the youthful enthusiasm of its owners, its rapid response to customers and the strong word-of-mouth promotion from customers. In 2017, the partners converted MM to a private limited company. They became the majority shareholders, each owning a quarter of the shares, with the remaining quarter owned by their families. MM has strong ethical objectives, including in its choice of customers. It will not accept business from organizations without robust equal opportunities policies or those that do not actively work to reduce their carbon footprint. It will not work with businesses that exploit employees and it considers freedom of expression important. The owners try to reflect their cultural diversity in everything the business does. MM aims to respond to customers more quickly than others in the industry, with customer service at the centre of everything it does. The Bengaluru branch of MM has sales, design and customer care teams serving Asia. There is now the possibility of relocating more of the business to India in 2022. Rachel thinks that the opening of the Bengaluru office has provided an opportunity for a major reorganization of MM. The Indian office has been successful so far, with excellent premises. Some London employees moved to India, with the remainder recruited locally. Recruitment of highly qualified employees was difficult, so MM had to attract new workers with high salaries and generous benefits. The HRM problem concerns Clare, a highly successful marketing manager. Her drive and enthusiasm inspired her team, resulting in a 50 % increase in revenue by the department over the last 12 months. Customer satisfaction is very high and some marketing strategies designed by Clare’s team won awards. Clare consults and delegates but is prepared, where necessary, to be autocratic, particularly when targets must be met. Staff complained about unrealistic deadlines and bullying. Clare was rude to them, blocked their pay rises and threatened them with less interesting work. These employees asked for Clare to be dismissed for harassment. The Bengaluru office is responsible for customers in Asia. In 2021, this region will account for 30 % of MM’s business, but it is expected to account for 60 % by 2025. Rachel would like to move all of MM’s operations to Bengaluru. Bengaluru is a rapidly growing city with high-tech businesses, high-quality education and training facilities, its own film industry and potentially lower rents than in the UK. Javed could see operational difficulties: London has a stronger creative industry, and many creative employees are unlikely to want to relocate to India.

MM's growth has been helped by its unique selling point/proposition (USP) of rapid response to customer needs and by its high-quality customer service. New employees undergo detailed training to become skilled in:
- finding out what a customer's objectives are
- helping the customer work towards a marketing plan
- working closely with the customer as MM develops a marketing strategy for them
- maintaining links with the customer to provide an effective after-sales service.

The business takes a multicultural approach to its customers, employees and other stakeholders. MM's approach to diversity is one of the features that stakeholders say they like about the business. The company also ensures that it accommodates many cultural differences.

According to a business service that provides measures of social behaviour for every country, in British businesses:
- employees are accustomed to working in a competitive, individualistic society
- employees often take individual responsibility for their own actions and decisions
- competition is high between both employees and customers
- customers are accustomed to changing contracts when service is bad or competitors offer a better deal.

In comparison, Indian businesses:
- are based on power structures with a greater focus on teamwork than individuality
- are more likely to be hierarchical
- have greater loyalty from their customers
- have greater formality with their customers
- place importance on building business relationships
- are subject to greater variety in culture between businesses and regions.

Maintaining high levels of customer service is expensive. MM has increasing costs. Rachel is concerned about MM's finances and is examining the latest accounts for the company for 2019 and 2020 (Table 1) to identify problems.

Discuss how cultural differences within M M may influence employer-employee relationships.

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).

Explain how Porter's generic strategies may provide Martin Kimathi with a framework for building competitive advantage.

Jill Anderson


Jill Anderson operates a restaurant. Although Jill's meals are viewed as being excellent quality, sales are slowing. Jill is considering replacing existing meals with gluten-free meals. The following financial and forecast information is for the month of May 2018. Jill's restaurant can only produce either existing or gluten-free meals.

A local gluten-free manufacturer, which is not part of Jill's existing supply chain, has offered to supply already prepared gluten-free meals at $\$ 8$ per meal. Jill is unsure whether to make or buy the gluten-free meals.