IB Business Management HL Unit 1 Introduction to Business Management Questions

The roles of a mission statement include:
- communicating the purpose of the organization to stakeholders
- informing decision making and strategy development
- developing the measurable goals and objectives by which to gauge the success of the organization's strategy.
- Inspiring and motivating both internal and external stakeholders
N.B.: for full marks roles should be linked to some mention of stakeholders

For Benno, the mission statement has provided a way for the business to differentiate itself from its competitors, especially at a time when competition in the healthy soft drinks market is intense.

The mission statement is also a way to attract new investors who may have empathy with the direction of Benno. This is an important role given the need for Benno to be committed to innovation and CSR.

For:
- It fits in well with its mission statement "to produce healthy drinks without damaging the environment" and this may be important in maintaining customer loyalty.
- It fits into its belief in corporate social responsibility, as the current drink rings damage the environment and harm creatures in the seas, such fish.
- Competition in this drinks market is very intense - this could act as a strengthening of its USP for Benno and retain loyal customers and attract customers from rivals. It will strengthen its image as a business that has "green" credentials.
- Sales of Benno's drinks have fallen significantly over the last five years- so it is important that Benno does something to stem this tide.
- Accept any other reasoned arguments.
Against:
- It will cost $\$ 5 \mathrm{~m}$ to buy the machinery to produce the new rings and the business has no accumulated retained profits - therefore the funds will need to be raised, probably externally via a bank loan, which will lead to interest charges and an increase in operating costs. It may take time to find a suitable angel investor to help finance this project. Will the angel investor wish to exert some control over Benno's operations?
- The unit cost increase is 50 %, a rise from 10 cents to 15 cents per ring, and the business only has a net profit margin of 10 %. As the market is competitive and reports suggest that consumers are price sensitive, a price rise - passing on the cost of the new rings - is probably not going to be possible. The result is that Benno's net profit margin will fall.
- Sales are falling, particularly to the 12-18 age group - are they going to be energized into buying a product that is more environmentally friendly, particularly when reports suggest purchases of green products are not increasing?
- In terms of a new way forward for Benno, the introduction of the new rings has a great deal of merit. There are a large number of marketing opportunities available in a competitive market and this idea will strengthen Benno's brand. However, the forecasted financial implications of this idea are not ideal and if sales volumes do not increase significantly then Benno may find itself financially worse off if profits do not increase. One solution may be to wait until some more objective market research via a new untested focus group have given their thoughts on the new ring.
- Accept any other reasoned arguments.
Marks should be allocated according to the mark bands on page 3 with further guidance below.
A balanced response is one that provides at least two arguments for and two arguments against the option.
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].

The difference between a merger and a takeover is that a merger is largely done in a friendly or voluntary manner. The managements and the shareholders of both companies agree to bring both firms together under a common board of directors and create one new legal entity.

In contrast a takeover is commonly hostile or involuntary.
For one company to takeover / take control of another company, the majority of shares has to be bought by the bidder, usually 51 %. (It can be less.)
N.B. The difference does not have to be based on being hostile or not as a takeover can also be friendly. The candidates need to show understanding of the need to buy shares to gain control for a takeover for full marks.

Candidates are not expected to word their description exactly as above.

Economies of scale are the factors that cause a reduction in average costs / cost per unit as the organization increases the scale of production.

Internal growth within the airline industry occurs when the airline itself grows organically by using its own resources to increase its scale of operation / increasing revenue and market share. Typically through investment in more aircrafts, new routes/destinations (or as stated in the stimulus more travel options), by targeting new passenger segments / different classes, heavy promotion, changes and its pricing strategies - to name some examples.

Internal growth will allow each individual airline to maintain full ownership / control of the process in terms of expenditure and speed. Internal growth is often a cheaper strategic option than external.

External growth within the airline industry occurs with interaction / involvement of other airline(s) typically through mergers, acquisition, joint ventures or a strategic alliance. The stimulus provides examples of friendly mergers between American airlines as well as between two European airlines on top of the current proposed takeover (hostile) of Aer Lingus by Ryanair.

External growth will give an airline a faster growth option while reducing competition in the market. American is now the biggest carrier in the US.

External growth is an expensive option. The proposed takeover of Aer Lingus will cost Ryanair £ 560 million.

One possible reason for the Irish government's decision to own 25 % of shares in Aer Lingus is to raise revenue in the form of dividends from the profit of a commercial airline. Owning 25 % of a commercial airline that can generate profit can give the Irish government a substantial sum of money. The Irish government needs revenue to peruse its economic objectives. Dividends shared among all shareholders is one source of revenue. In short, a profit / commercial motive.

However, it is implied in the stimulus that such an expected profit motive / commercial interest was perhaps not a good decision as profit / dividends has not been materialized as yet for the Irish government. Only by selling its shares will the Irish government get its first commercial return.

Another possible reason / positive benefit is to make a capital gain by selling its shares when the government sees fit. It is stated in the stimulus that the Irish government will make a positive return by selling its shares in Aer Lingus. Hence, a commercial success.

However, some citizens and competitors may argue that the decision to buy shares in an airline and waiting for some positive return for such a long time is a waste of tax payers' money. The money could have been spent on perhaps more worthwhile provisions by the government.

Furthermore, some critics may argue that this decision reduced the incentive for Aer Lingus to be a commercial success.

Still, national pride of being part owner of a national airline can be seen as another possible reason. The Irish government might have a strong national interest of enabling an Irish airline to compete with other airlines by providing the funds for investment. There may be significant longer term benefits and future dividends and returns from having an interest in an airline which is able to generate longer term growth through being more competitive.

Candidates may mention security / political reasons and any other relevant reason.

Candidates should look at the issue from two perspectives: Internal, such as from the employees / managers, or any relevant internal stakeholders' point of view. They should also look at the issues from an external stakeholders' point of view such as passengers / customers (see below).

From the customers / passengers point of view:

On the positive side, as indicated in the stimulus, a larger company like American can experience different economies of scale that can benefit the passengers:
- financial economies of scale - a larger airline could raise more finance cheaply to buy new and more comfortable aircraft(s)
- technical economies of scale will enable a larger airline to become more efficient by reducing operating costs per flight, hence the price of a ticket can be reduced.

Analysts suggest that a merger in order to grow will enable the new airline to rationalize and create a possible small monopoly/domination on some routes as well as create some economies of scales, such as operation and purchasing. The new airline is likely to be more cost efficient which is a significant argument especially in the short run given the amount of current losses.

Consequently, customers may experience some price reduction as well as a more comfortable and possibly safer aircraft.

However, given the large size and the larger market share (combined) and the suggested small monopoly/domination, it is unlikely that the prices will be reduced, especially if the bargaining power of the airline is likely to increase. Customers may end up with less choice, a poorer service and higher prices imposed by a large airline that monopolizes the market. The stimulus makes a reference to such a possibility.

Other possible internal stakeholders:

Larger airlines such as the newly created American, is likely to be more cost efficient which is a significant benefit for the operation manager/employees as well as the finance manager. Efficiency due to size with subsequent lower costs and increased profit can significantly increase the motivation of managers and employees. Moreover, a rewards system might be based on such performance.

Managers' objectives for increased power / self-satisfaction of managing a large number of employees may also increase.

On the other hand, one may argue that working for a large airline like the creation of American, the US biggest airline, will reduce employees' motivation given some possible lack of contact with managers and from feeling like a small and insignificant part of a very large group of employees. Customer service, which is an extremely significant issue in a service industry (people, process) might be negatively affected.

Communication barriers may be erected in a large organization which may affect each and every employee negatively.

Internal diseconomies of scale may be created due to the large size which can negatively affect all employees and managers' morale and competencies.

External stakeholders such as competitors and or regulatory bodies.

Competitors:

Being a large airline might be seen by the organization strategists as a necessary action to an increase in global competitiveness of other airline groups like AIG, KLM / Air France etc and many others yet to be faced in the growing global market place.

However, being large might not be sufficient / appropriate to create customer values and global competitiveness which is currently the main problem of the large airlines. Cost efficiency will not solve these deficiencies, hence, a larger airline is unlikely to be successful especially if competitors follow suit. It will become increasingly difficult to create a USP apart from perhaps location or destinations. There is evidence from the stimulus that there are a number of mergers / takeovers.

Regulatory bodies:

Also larger airlines are more likely to catch the attention of the American MMC or any national regulatory body. A reference to such a possibility is also mentioned in the stimulus. These bodies are likely to put some restrictions on the operation of the newly created large airline or any other established large airline. Restrictions may be put on the top management team and decision making in terms of routes, landing slots, pricing etc. Management freedom may be reduced. Moreover, finance managers may spend a large sum of money on legal battles / procedures.

The role of a vision statement for H S is to inform different stakeholders of its preferred ideal future, direction/aspiration regarding life - long healthy eating habits and the recruitment of school leavers.
This will help HS to set long-term objectives regarding life - long healthy eating habits/ recruitment of school leavers.

It is likely to act as an important driver for recruitment, selection and motivation of its young, unskilled workforce made up of school leavers.

Possible economies of scale available to the global fast food restaurants include:
Marketing economies of scale: the global fast food companies are likely through their global reach to experience significant economies of scale in marketing/selling across a whole range of markets. HS is a national chain and will not be able to spread advertising/ promotion costs, for example, across a whole range of markets. Unit costs of marketing will be much lower for the global restaurants.

Bulk-buying economies of scale: to develop and meet global demand and to fill supply chains, global fast food manufacturers are likely to achieve significant economies through the bulk-purchase of raw ingredients (a number of fast food manufacturers have vertically integrated with suppliers to ensure that logistics are in place). Again, unit costs of operations are likely to be lower than HS's.

Financial economies of scale: being present in global markets allows global fast food manufacturers to borrow funds for expansion at much lower rates than a national chain. It is indicated in the stimulus that H S finances its training and professional development through retained profits.