IB Business Management HL 1.5 Growth and evolution Question Bank

1. 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. L R sells milk, cheese and yoghurts. In 1996, L R started to export some of its dairy products. Profits and cash flow have been improving year on year. L R 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 L R 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. L R '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 L R 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 L R and El Remanzo to allow both companies to combine resources and knowledge. However, the potential economies of scale experienced by L R could be substantial.
Total capital employed at L R is $ 45 million.

Mutombo Window Fans (MWF)

Mutombo Window Fans (MWF) manufactures and sells window fans to wholesalers across eastern Africa. Although the business began small, it experienced rapid internal growth through aggressive, commission-based sales.

Currently, MWF sells 300 window fans per month. Each fan sells at an average price of $ 100.

2. GF
Barbara Johnson manages a small business ( G F ) that produces and sells gluten-free* bread. G F has been recognized for meeting national quality standards for gluten-free bread which has helped increase sales. Local supermarkets sell their own label brands of gluten-free bread which do not meet national quality standards at a price 20 % cheaper than G F. Barbara aims to make national quality standard gluten-free bread more affordable and in larger batches.
G F has 21 employees. Four are gluten-sensitive (intolerant) testers who check the quality of the final bread. This traditional method of quality control is important, but takes significant time and resources.
Several hospitals have asked if G F can provide them with an additional 1200 loaves of gluten-free bread every day for the next year. Barbara is keen, however in a small market like this, becoming larger does not automatically result in economies of scale. GF's suppliers cannot provide larger quantities of gluten-free flour without increasing their prices and consequently G F 's costs.
Barbara has two options:
- Option 1: Increase G F 's production of gluten-free bread and maintain national quality standards by introducing total quality management (TQM) control at a one-off cost of $ 4000. This should also speed up the batch production process.
- Option 2: Buy-in the additional 1200 loaves from the company that supplies the local supermarkets and then sell this bread to the hospitals. However this supplier uses flow production and does not meet national quality standards.
The sales price per loaf of G F bread is $ 6.80 regardless of the option chosen.
Barbara prepared the following figures for each option (in $):
Option 1: Increase GF's production to make the additional 1200 loaves.

Option 2: Buy-in the additional 1200 loaves.
Total variable cost of buying in 12007200 loaves from local supermarkets' supplier

\footnotetext{
* gluten: a protein found in wheat (flour) which causes health problems for those who are sensitive (intolerant) to it
}

2. Sleep Well Limited
Sleep Well Limited is a family-run private limited company. They own a luxurious and prestigious hotel, Sleep Well (SW), which is located in an expensive city-centre location in New York, United States (US). Its customers are international travellers who expect comfort and excellent service and are willing to pay a high price. Capacity utilization of the hotel rooms is 95 % on most days. However, loyal customers are frustrated that sometimes they cannot reserve a room because the hotel is full.
The hotel management is considering extending the hotel with a new building with larger rooms and the most luxurious facilities. The prices of the larger rooms in the new building will be 50 % higher than the rooms in the current building.
Market research commissioned by SW highlighted the following:
- In the short term, the economic environment in many of the home countries of SWs customers will deteriorate. However, the economic environment should improve after two years.
- The US dollar is likely to increase in value in relation to other currencies.
- SW customers' demand is price inelastic and is income elastic.
- Severe shortage of qualified labour is forecasted in the service industry.
The table below shows the Operation Manager's planned activities for legal procedures and the construction of the new building.

However, the Finance Manager is concerned that strict planning regulations imposed on construction in the city centre could create extra costs and cause delays in the completion of the new building. Selling shares is considered as one option for financing the project. The Marketing Manager is worried about the impact on the customer experience during the construction process.

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

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

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

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

3. JP
JP produces electric guitars. It is a cooperative owned by a committed workforce who share in the management and success (or failure) of the company and its profits. Workers enjoy having control over the workplace and are productive. However, JP's continued success is threatened by insufficient finance, which prevents them from spending more on traditional promotional methods.
J P 's guitars are expensive relative to the competition but are known for their quality. Its customers are very brand loyal. The use of social media marketing by many famous musicians influences JP's brand loyalty and awareness. Unfortunately for J P, one especially famous musician using a JP guitar on social media recently received negative publicity about his private life.
JP follows strict quality procedures that include quality circles. JP's management believe that teams of workers employed on the production line know the production process best and are in the best position to make any necessary improvements. Staff turnover at JP is very low.
XYZ, a large company known for its kitchen appliances, is considering moving into the musical instrument market as part of a growth strategy - they want the high gross profit margins on guitars (compared to the low profit margins on kitchen appliances). X Y Z wants to take over JP. XYZ has a strong balance sheet and large cash reserves and is an expert at marketing.
The cooperative has refused to consider the takeover bid from X Y Z. The cooperative has argued that the culture of X Y Z is too different to JP's. XYZ's management are viewed as too controlling. However, increased price competition has led to falling sales, forcing JP to make redundancies. Some cooperative members argue that unless JP accepts XYZ's bid, additional jobs will be lost.

3. Speedy Delivery (SD)
Speedy Delivery (SD) is a private limited company that delivers freshly cooked meals by bicycle. SD only delivers. Restaurants subcontract SD to deliver meals to customers who place orders online and expect quick and efficient delivery. SD has been operating profitably for two years. Currently, it has the highest market share in the city.
SD is now facing two issues:
- It operates at 98 % capacity utilization. Recently, some restaurant owners complained to SD that meals arrived late and cold to customers.
- The market for home delivered, freshly cooked meals is growing quickly and some new delivery companies have just entered the market.
The CEO wants to address the delivery quality issues and the threat of competitors, two of whom recently merged. He is considering an internal growth strategy involving investing in new electric scooters and employing more staff to deliver a greater number of meals more efficiently. SD must raise a large sum of finance. Major shareholders are in disagreement regarding the internal growth strategy.
The financial manager has provided some financial information.

4. Exotice
Exotlce (EI) is a private limited company producing and selling ice cream from a centrally located shop in a large capital city. Lena, the founder and chief executive officer (CEO), owns 80 % of the shares. Her two daughters, who travel the world to find new and exotic natural ingredients for new flavours, each own 10 % of the shares. The family value their freedom in the decision-making process and the collaborative and supportive nature of El's culture.
El's unique selling point/proposition (USP) is based on:
- outstanding quality and a variety of exotic flavours made from fat-free natural ingredients
- excellent service provided by highly trained, committed and efficient employees
- customer involvement - with the use of sophisticated technology and staff support, customers can experiment to create their own flavours of ice cream.
A strong brand name and brand loyalty has led to rapid growth in El's market share. However, long queues (lines) are forming and the number of customer complaints is increasing. Lena is worried about the negative impact on E I.
Lena is considering two strategic growth options:
- Option 1: Opening eight new shops locally and nationally over the next four years. To finance this internal growth, El will sell new shares. After the sale, Lena will own 51 % of the shares.
- Option 2: Franchising El nationally. A small focus group conducted by one of Lena's daughters and made up of local entrepreneurs revealed a strong interest in El's USP. Ten franchises will open each year for the next five years throughout the country.