Analyse why businesses grow or remain small, how scale changes costs and how mergers, acquisitions, alliances and franchising shape growth decisions.
EkoLogiczne Ltd. (EL)
EkoLogiczne Ltd. (EL) is a packaging company owned 60 % by Marek Kowalski and 40 % by his father. EL is a private limited company. Marek founded the company when he realized that the rise in e-commerce would mean the demand for packaging would always increase.
Originally, Marek imagined that EL's unique selling point/proposition (USP) would be to offer recyclable packaging. However, the eco-friendly market was dominated by one large company, Big Boxes (BB), which enjoyed economies of scale. Marek reimagined his USP: EL would have small factories that enabled customized orders to be fulfilled quickly.
Over time, EL opened four factories across Poland and the Czech Republic. Its customers, which included online retailers and small manufacturing companies, placed orders online; if the factory nearest the customer was too busy with other orders, the order would be shifted to another factory. Many customers chose EL rather than BB for this reason. With growth, however, EL began to experience diseconomies of scale and increasingly failed to fulfil orders on time.
Marek is now considering bidding on a large five-year contract for all the packaging solutions for WszystkoMart (WM), a huge traditional retailer trying to expand its e-commerce presence. The contract would require building a huge factory and focusing almost exclusively on keeping costs low. In terms of scale, EL would be almost as big as BB, the large company dominating the eco-friendly packaging market.
To finance the new factory, Marek would either have to sell many shares and reduce his and his father's combined ownership to 40 % or take a 30 -year loan from a bank.
Explain two diseconomies of scale that EL may have experienced.
Discuss whether EL should enter into the contract with W M if they have the winning bid.
Trestle Z PLC (TZ ), a specialist coffee roaster, operates in the secondary sector. Its instant coffees are sold worldwide in a very competitive market. Consumers in this market have strong brand loyalty.
Option 1: Take over a specialist coffee business TZ is considering taking over Green Glass (GG) for $600 million. GG owns 1000 cafés in the USA that sell speciality products at high prices. It also has an e-commerce subscription service that sells its coffee beans to consumers. In 2020, GG’s net profits were $120 million. GG has a well-organized distribution channel and strong brand awareness in the USA. TZ would operate the cafés using the GG branding.
Trestle Z PLC (TZ ), a specialist coffee roaster, operates in the secondary sector. Its instant coffees are sold worldwide in a very competitive market. Consumers in this market have strong brand loyalty. Although demand for instant coffee has not grown in many richer countries, it is growing in emerging markets and Eastern Europe. TZ has no control over the price of its raw material (coffee beans), as prices are determined by world markets.
Trestle Z PLC (TZ)
Trestle Z PLC (TZ), a specialist coffee roaster, operates in the secondary sector. Its instant coffees are sold worldwide in a very competitive market. Consumers in this market have strong brand loyalty.
Although demand for instant coffee has not grown in many richer countries, it is growing in emerging markets and Eastern Europe. TZ has no control over the price of its raw material (coffee beans),
as prices are determined by world markets.
The directors of TZ want to increase the company's gross profit margin and net profit margin and grow the business. Table 5 gives selected financial information for the company for 2019 and 2020.
Table 5: Selected financial information for TZ
TZ's directors are considering two options.
Option 1: Take over a specialist coffee business
TZ is considering taking over Green Glass (GG) for million. GG owns 1000 cafés in the USA that sell speciality products at high prices. It also has an e-commerce subscription service that sells its coffee beans to consumers. In 2020, GG's net profits were million. GG has a well-organized distribution channel and strong brand awareness in the USA. TZ would operate the cafés using the GG branding.
Option 2: Launch its own chain of cafés
These cafés would compete against established chains of cafés serving the mass market. Initially, the launch would be in three EU countries but would then, if successful, be launched across the world. TZ would produce a range of freshly ground coffees for sale in the cafés.
Recommend whether TZ's directors should choose Option 1 or Option 2.
The Burnt Tomato (BTO)
In 2003, Ben opened a street-food stall selling vegan food. The food stall was successful. Ben spent little on marketing, mainly advertising on the food stall itself and relocating it to places or events where many consumers would pass by.
In 2008, Ben used the profits from the food stall to open a restaurant, The Burnt Tomato (BTO), which initially employed 16 people. In the following years, labour turnover was low. Employees received an annual bonus, which increased with each year of employment.
In 2015, Ben created a website and began to use social-media marketing. Customers were encouraged to rate their BTO experience online. Their reviews consistently rated BTO's experienced staff highly and showed that they thought the food was exceptional value. Ben replied to all reviews. Many BTO customers also joined a BTO social media group and communicated with each other and BTO regularly. For many customers, the total BTO experience of vegan food and social networking was like being in a club.
Unfortunately, high labour costs, reasonable profits and the use of high-quality ingredients meant that BTO's gross and net profit margins were below industry averages.
Aware of the growing demand for vegan food, Ben borrowed money from a family member in 2018 and opened two more BTOs in different cities, hiring 32 new employees. However, in January 2019, a long-time customer of the original BTO ate at one of the new restaurants and wrote a negative review. The review went viral and sales at all three BTOs declined.
Discuss Ben's decision to enlarge the scale of BTO from one restaurant to three restaurants.
Ace Industries (AI) manufactures plastic containers, mostly for the soft and fruit juice industries. The operations management department uses flow production for its standard-sized products and batch production for its customized products. AI’s sales are growing rapidly. It currently has a 6 % share of the plastic container market. However, it has recently struggled to meet customized orders on time. Some customers have complained about product quality. Currently, AI is organized by region, which allows the company to have strong relationships with customers, who feel that AI knows them and cares about their interests. The human resource department is proposing restructuring the organization by function. Not everyone at AI agrees with this change. Many think that the problems of late delivery and poor quality could be solved through greater delegation.
Ace Industries (AI)
Ace Industries ( AI ) manufactures plastic containers, mostly for the soft and fruit juice industries. The operations management department uses flow production for its standard-sized products and batch production for its customized products.
AI's sales are growing rapidly. It currently has a 6 % share of the plastic container market. However, it has recently struggled to meet customized orders on time. Some customers have complained about product quality. Currently, AI is organized by region, which allows the company to have strong relationships with customers, who feel that AI knows them and cares about their interests. The human resource department is proposing restructuring the organization by function. Not everyone at AI agrees with this change. Many think that the problems of late delivery and poor quality could be solved through greater delegation.
Lloyd Rinnegrat, Chief Financial Officer, has suggested that AI's management think more deeply about their rapid growth. Except Lloyd, most people at AI believe that rapidly growing sales are good - that by increasing its market share AI will, in the long run, benefit by being a large organization. However, Lloyd argues that being a small organization has many merits, as shown by the changes in AI's recent gross profit margins and net profit margins.
Table 1: Selected financial data for AI
The marketing department has predicted that the soft and fruit juice industries are moving away from major mass-produced drinks and toward niche products, such as exotic fruit drinks and speciality beverages for very particular markets.
With reference to A I, discuss Lloyd's view that being a small organization has merits.
AFA’s growth created diseconomies of scale, declining gross and net profit margins, management unhappiness and concerns about recruitment. Sam and Finn disagreed about fringe payments, a worker cooperative and a possible takeover. The potential international retailer could provide fresh capital, online presence and intangible assets, but might not retain employees or managers and could threaten AFA’s fair-trade mission and stakeholder relationships. The existing financial data and takeover details in this question’s root must remain available to the user.
AFA was at a critical point. Sam and Finn had not fully resolved their disagreements. They seemed to be constantly arguing but Sam could also see that new issues were emerging. At their most recent meeting in early 2018, Finn provided the following financial information to illustrate the declining trend in gross profit margin.
Table 1: Selected financial information for A F A
In addition, the recruitment of new staff was becoming a problem, as the wages that AFA offered were much lower than fair trade competitors. In a meeting between Sam and Finn, they argued over the best way to financially reward and motivate newly recruited workers, given the lower wages paid by AFA.
Finn argued for a reward system based on fringe payments (perks), as this was being offered by AFA's main competitors, the supermarkets. Sam countered that AFA should form a cooperative involving all physical stores. He argued that creating a worker cooperative could give all members a sense of community and fulfillment and motivate them so that all members of the cooperative would benefit. There would also be additional stakeholder benefits. Finn argued that a worker cooperative was too difficult to organize and operate and would not solve the problem of recruiting staff.
In the meantime, AFA was continuing to attract a good deal of publicity. Sam had appeared on a national television show about young, innovative entrepreneurs. After the television show ended, one very large international retailer with a strong online presence contacted Sam about the possibility of a takeover. Sam initially refused, but as the details of the takeover became clear he started to seriously consider the opportunity. By selling the business Sam would have enough fresh capital to start new, innovative businesses and make some of his other visions and ideas into reality. In addition to the corporate social responsibility (CSR) AFA was generating, the takeover would give AFA access to other intangible assets. However, the international retailer had indicated that it could not guarantee keeping all existing and newly recruited employees and managers. Finn and Kim were both very worried that Sam would even contemplate the takeover, which they felt was an act of betrayal to all the stakeholders of AFA.
Discuss whether Sam should accept the offer of a takeover.