RJA & Chaoslord's A2 Business Studies Thread

Should firms accept responsibilities to all of its stakeholders?

Businesses are run by directors which are elected to their posts by shareholders - the owners of the concern. Directors formulate corporate level objectives then appoint middle managers to formulate narrower objectives for each department. All specific tasks undertaken within the business can therefore be traced back to the corporate level - to the directors - who are acting on behalf of the owners of the company. Thus, directors are responsible for the consequences of a business’s actions, and are accountable to the shareholders. Any rational shareholder will aspire to maximise profits in order to maximise personal return from their financial involvement. So it is logical to draw the conclusion that every action a business takes is in the interest of maximising profits.

This view has been undoubtedly adopted as consensus by entrepreneurs throughout history when forming a commercial organisation. However, in the modern era (post Industrial Revolution) some firms have at least on the surface begun to take a different stance toward their operations. They have essentially begun looking past bottom line profits and towards society as a whole as a matter of responsibility. One of the earliest examples of such a change in corporate attitude was that of Henry Ford, founder of the Ford Motor Company in 1903 in partnership with the Dodge brothers.

Ford was revolutionary in his approach to business. During the years of the First World War, he started to pay $5 a day wages, more than double the market rate. And on the retail side, Ford slashed its prices from $900 to $440 in 1916, with Ford himself stating “I do not believe we should make awful profits on our cars”. These strategies obviously show concern for society and to some extent brought extra private benefits along with it - namely the best mechanics in America flocked to Ford due to their extremely generous pay packets. The cut price Model-T was a huge marketing success in a growing market for automobiles in America and fuelled further growth of one of the USA’s most successful companies.

However, some of these strategies were perceived as going too far by investors, namely the Dodge brothers, who in 1913 broke away from Ford and would begin to finance their own brand using the dividends made from their original Ford investment. But, it was decided by Ford that these dividends would be diverted to further price cuts. Enraged, Dodge took Ford to court and won, with the judge stating “a business cannot be run for the merely incidental benefit of shareholders and for the primary purpose of benefiting others”. So the question remains - do (or can) businesses genuinely act socially responsibly? Is this legal? Is this even a moral thing to do?

Milton Friedman, one of the most respected pro-capitalist economists voiced his opinion that “new moralism in business is in fact immoral”. In his article in the New York Times (1970), Friedman states that it is not moral for firms to spend shareholders money on social responsibility unless it is shown to benefit bottom line profits. Peter Drucker, another highly respected business guru, went as far as to say “if you find an executive who wants to take on social responsibilities, fire him fast!” But are these opinions seen as cynical and old-fashioned in the 21st century?

There are two modern day examples of corporate social responsibility (CSR) in action that I will use. One of them is implicit and one of them is explicit. One results in success, the other ultimately results in failure. They are the cases of Pfizer and The Body Shop.

Pfizer is the world’s largest pharmaceutical company, and was formed in Williamsburg, Brooklyn. Today it still has an industrial plant there, and an example is made of how a large business presence can benefit the community around it without making a fuss. Tom Kline, the company’s senior vice president put the first ideas into practice when he was mugged in a subway near the plant. Pfizer therefore installed a security system monitored by guards on their payroll for the subway system. The company has also helped to set up a school in the local area and lends employees to the education system. This is implicit CSR put into practice. The company appears to be doing good deeds, but with no noise about how responsible it is - there are private benefits to be gained, and these probably take priority, but the company is nonetheless doing good, so does it really matter what their reasons are?

Philanthropy may be seen separately from CSR, and may be bordering on illegal if it is not justified to shareholders. Pfizer donates millions of dollars worth of medicine to Africa each year. They justify this by stating the marginal cost of the product is so low that giving it away will not affect profits (compliance with the law). Furthermore, these actions generate large amounts of goodwill (extra private benefit). And finally, these actions benefit society by improving world health (positive externality - the third priority in this case). So the actual benefit to society could be seen as merely a pleasant side effect of normal trading/marketing activities, and therefore, the motivation behind these actions are still profit-motivated. On the other hand, some corporations are founded on principles other than making & retaining profit.

When Anita Roddick started her company, her emphasis was on ethical practice (such as a stance against animal testing on her cosmetics) and to some extent, charitable giving. However, for the company to grow, she needed to float it on the Stock Exchange, which happened in 1986. This did not bode well for Roddick, who quickly came under pressure from shareholders to change the business’ strategy. In the mid-90s, the management of Body Shop was overhauled to promote performance and efficiency. The company was seen to swallow its founder when it refused to allow Roddick to support anti-globalisation protestors against the WTO. She stated that floating the Body Shop was “a pact with the Devil”. Under her authority, conflicting opinions caused the company’s value to slide and it was put up for sale in the new millennium. After a failed takeover by Mexico’s Omnilife, the company was reorganised again and Roddick was reduced to a part time consultant. New CEO Adrian Bellamy stated after this “We believe in social responsibility but we are very hard nosed about profit”. In 2006 the company was eventually bought by L’Oréal.

This case is a perfect example of how genuine social responsibility will conflict with the desire for commercial progress. As soon as Roddick floated the company, she had millions of shareholders to answer to, all of whom wanted to make quick money on their investments. Thus, the pressure for the company to grow became too great, and some of Roddick’s business stances would have to be capped. The Body Shop is very different from Pfizer in that (even now to some extent) it outwardly expresses its social responsibility as a Unique Selling Point. Yet, in the current era as part of a massive conglomerate, the firm takes profits as its priority – it has essentially outgrown Roddick’s original vision of it.

So, is it true that when a socially responsible company reaches a certain size it becomes “two-faced”? There are two examples of companies whose products are seen as producing negative externalities. To cover for this, they adopt a socially responsible stance and comply to industry regulations – especially through marketing. They are Shell and BAT (British American Tobacco). They could both be accused of hypocrisy due to their sheer size.

Recently, Royal Dutch Shell has had a very successful advertising campaign, with the emphasis on their environmental programs run by geologists under their employment. They use the superficial responsible stance as a marketing differential. In the oil industry, there is particular competition about this, with BP (formerly under Lord Browne) relying even moreso on their far sighted environmental vision. Internally however, the company has been lambasted with complaints, lawsuits and controversy over environmental and human rights breaches at their drilling sites and gas pipelines. Even BP has been accused of (and even allowed to) excessively pollute the immediate environment through oil spills and the disposal of waste into US lakes. This is a far cry from what the customer sees on a television advert.

British American Tobacco is in an industry where even more intervention, regulation and bad publicity exists. The company is forced to promote cessation campaigns to limit the sales of its own products, and comply with strict marketing rules. It has also funded the setup of the International Centre for Corporate Social Responsibility at Nottingham University. Yet again though, it has been accused of breaches (of human rights) for acquiring operations in Burma.

So using these examples together with the failure of Body Shop and the relative success of the introverted Pfizer, what can we conclude about the patterns of CSR across different firms? It could be interpreted that breaches of social responsibility are diseconomies of scale and drawbacks of company growth. This can be explained by linking company growth to pressure from shareholders which brings us back to our original point. A large company can appear socially responsible on the outside as a marketing ploy, but in reality – due to difficulties in co-ordinating and controlling large companies – breaches of responsibility are much more likely to happen.

Thus, can this question even apply to modern corporations? Is it even possible to consider every single stakeholder? Surely opportunity costs prevent such harmonisation. A company has so many decisions to make every day that it is bound to neglect something. The reality is, a business has priorities, and the most important things need to be taken care of first. As explained before, genuine benefits to society are pleasant side effects of day to day trading, and therefore they take no priority unless they aid the bottom line. So to answer the question on whether firms should or should not is irrelevant, a corporation is legally obliged to do the most for its shareholders, and therefore every decision (about other stakeholders) will and therefore should be traced back to this.

v. good evaluation point Re: Entrepreneurship Theory

Useful definition: the entrepreneur sees some new commercial opportunity and organises economic activity to meet that opportunity

An advanced stage of capitalism is a stage of corporatism and bureaucracy. In previous stages of capitalism, the entrepreneur was at the top of the tree, making risky business decisions in order to progress the economy. According to Schumpeter, the capitalist loses two functions during development:

1. The capitalist’s managerial function is lost to professional managers. Professional managers are motivated differently to the entrepreneur, and therefore they are distinct and separate - the entrepreneur loses managerial control due increasing bureaucracy resulting from corporate growth.

2. The capitalist’s entrepreneurial function is lost to research and development departments. Schumpeter is quoted as saying:

“Innovation itself is being reduced to routine.”

“Technological progress is increasingly becoming the business of teams of trained specialists who turn out what is required and make it work in predictable ways.”

“The romance of earlier commercial adventure is rapidly wearing away, because so many things can be strictly calculated that had of old to be visualised in a flash of genius.”

This can all be used as high quality evaluation for a question about business growth, divorce of ownership and control, research and development / innovation / technological progress and scientific decision making / over-analysis / strategy. It is essentially a criticism of modern [large] business practice and an advocator of the entrepreneurial structure (therefore these points can also be used as advantages in questions on corporate culture and organisational structure).

Report - Plan
June 2006
Healthcheck Ltd

To: Directors, Ventura Ltd
From:
Re: Recommendations - Healthcheck Ltd
Date: 8th June 2008

1. Main Strengths
2. Main Weaknesses
3. Recommendations

1.1 Turnover has grown quickly, and the company is already turning over about £1m. Encouragingly, Healthcheck’s sales are forecast to increase exponentially over the next 5 years, to a high point of £12m in 2010. Over the period 2006-2009, this is an increase of 800%, compared to the market growth of 22%. If Healthcheck can establish themselves as a leading producer in this market, then they could possess several cash cows in their product portfolio. Cash cows are the most profitable goods, as they have high sales and require only small amounts of investment.
1.2 More importantly, profitability is also forecast to increase from 20% in 2008 to 33% in 2010. The business is predicted to make £4m net profit at the turn of the decade. It is crucial to judge a business on profitability as well as sales. Sales may describe the size of the business, but profitability shows its performance and efficiency. The increasing net profit margin for Healthcheck ltd is an example of economies of scale that are experienced by a growing business.
1.3 The business is attractive as an investment as it already has experience pitching to large companies. Their successful deal with Gates plc is quite an achievement, as they dominate the UK healthcare market. There are positive signs that Healthcheck would be able to present well to European companies. Communication issues should not be a problem, as the managing director speaks French and German fluently.

2.1 Healthcheck ltd is very much a product oriented business. The managing director was approached by (presumably) an inventor who had built a prototype system. There is little mention of market research in the information made available. This may make the business high-risk, although their track record of winning contracts is a good sign.
2.2 As investors, we would like to be certain of where our input is going. Alex and Jamil have mentioned that the majority of the investment is going towards a venture into Europe. This is risky, but it will be discussed later. I would like to point out that they are rather uncertain on what to spend the rest of the money. They mention that they “may want to invest in new product development”, but there doesn’t seem to be a concrete strategy or indeed a budget in place.
2.3 As I said, there are many risks with Healthcheck venturing into Europe. Firstly, the current setup involving credit with their clients Gates plc is probably deteriorating their liquidity. The debtors period is 120 days compared to their suppliers credit period of 20 days. This is a big difference between the time of money going out and the corresponding sales coming in. This liquidity may not allow the business to take large risks. The European venture may count as a large risk for two other reasons. There appears to be no existing patent on the continent, and the strengthening euro makes investment in the EU more expensive.
2.4 Crucially, as investors, the valuation of the company is of utmost importance. If we buy in too high, then we could immediately lose money as the real value of the business is realised. The directors of Healthcheck have valued their company at £2m, compared to last year’s revenue of just under £1m. This a difficult one to call, as the potential of the business may compensate for the higher valuation, although there are certainly risks involved.

3.1 If an investment goes through, I would advise that voting rights are exercised to encourage a more market-based approach to product development in the future. In the short term, I would advise that Healthcheck investigates in detail the European market before making large commitments. Demographically, Europe is very different to the UK, attitudes towards health may be different, and the healthcare system may have a different impact - all of this makes the exact foreign potential of this product uncertain.
3.2 After drawing this information together, I would not advise an investment at this price. If Healthcheck can produce solid evidence of the product’s potential in Europe, then I encourage them to return to us. If they wish an immediate investment, then it would need to be at a lower price (around 40%).

To: The Editor, 21st Century Management
From:
Date: 6th October 2007

Re: Analysis of the changes made at Bret plc since 2001

1. Positive Assessment
2. Negative Assessment
3. Recommended Score for Bret plc

1.1 From the face of things, there has been a significant financial improvement for Bret plc since their organisational changes were made. The new regime has brought the company out of the losses made previously and into a useful £2.8m net profit for the year 2004. This has partly been achieved by a 12% net increase in Bret’s sales revenue.

1.1.1 A lot of this extra revenue has come from Bret’s penetration of foreign markets. Export sales have increased 40% since the restructuring. This jump may be in part caused by the pound falling against the currencies of key export markets, making British exports relatively cheap against foreign competitors, and therefore making Bret goods stand out in value for money on foreign shelves. This would only have a fractional effect - so credit must be given.

1.1.2 Slow growth in the British confectionery market has forced Bret to attract customers away from major competitors. The main objective leading to this was to focus on the manufacturer’s core competencies to increase sales - their existing, established brands. This can be seen by the 40% shrinkage in the product portfolio, significant cuts in research spending and the company’s increased reliance on their cash cows.

1.2 Looking deeper into the books, I observe a significantly higher asset turnover in 2004 than at the last count in 2001. Net profit margins have also increased, and the company is holding less stock. It would be apparent that an increase in productivity is being signalled by these highly positive results.

1.2.1 Firstly, Bret plc has slashed its number of suppliers from 48 to 20. This will generally have been appreciated, as suppliers get a closer, more personal and loyal relationship with Bret, and of course, practical benefits ensue such as trade discounts and decreased transport costs to cover. Bret is keeping its suppliers very happy at the moment, with an extension in trade credit periods.

1.2.2 Capacity has been reduced by the new management team, by all of one million tonnes. On the surface, this is a bad move, but it has in reality pulled in all of the slack left by the previous regime, which only employed 59% of its production facilities, compared to 94% at present.

1.2.3 Quality is another key factor that has also improved. There is a significantly lower proportion of rejected goods, reducing wastage costs. This will be partly due to the larger emphasis on Total Quality Management within the company, and this is illustrated by the company’s policy to increase the number of Kaizen groups fourfold since the organisation change occurred.

1.2.4 The lead time to retailers has fallen from 8 days to 3 days. Because stock is being delivered more quickly from Bret to the vendors, there is less stock kept in storage, reducing costs and making the company generally more efficient.

1.3 A key point that investors can benefit from is decreased reliance on loans, as Bret’s gearing ratio is now just 6% compared to 28% in 2001. This makes investing in the company a lot less risky, as projects are funded by share capital and reserve capital, as opposed to borrowed money, which can become unstable with the economy, or even unaffordable if cash flow goes south.


2.1 To rebound immediately on the previous point to investors, there are other, less attractive changes hidden in the annual reports to take into consideration before adding Bret to your portfolio.

2.1.1 Firstly, the asset base of the company is considerably weaker, with major assets being sold off causing the value of fixed assets to drop by £1.7m. This makes the value of the company much more unstable, and even more worrying, the fact that the impressive net profit figure for 2004 may have been skewed by big asset sell-offs.

2.1.2 To press this issue further, the depreciation policy for these fixed assets has changed. The lifespan is now 17 years as opposed to 10 years, which may mean that in reality the asset base is worth even less, as window dressing of the accounts has attempted to rescue some dignity on the balance sheet.

2.1.3 Despite the lower percentage of loan capital being employed, there is still the issue of liquidity to consider. Bret’s acid test ratio has dropped to 1.2:1. Cash flow and solvency do not appear to be major issues at the moment, but Bret executives will have to wake up and smell the coffee if that ratio drops any further at the next review.

2.1.4 As the value of the company’s fixed assets falls, a lot of the company’s value falls into the hands of the current assets. Debtors play an important, but risky role in the management of working capital in the business. Extending Bret’s collection period for debtors by 50% may look attractive to retailers, as mentioned earlier, but it increases the risk of bad debts, and may exacerbate the cash flow situation that could sneak up on Bret. The same applies to lower stock levels, which will also decrease net current asset figures.

2.2 It has been mentioned in the past that Bret is well known for its record as a good employer. However, since the reorganisation upstairs, there are some worrying figures in relation to human resources.

2.2.1 There are two figures that stand out as matters for concern. The first is labout turnover, which has more than tripled from 5% to 17%. This may be caused by Bret’s increased reliance on casual workers, who now make up 40% of the labour force. This rate of turnover will not be acceptable to the directors, who will have to rethink their job variation strategy to try and keep workers in their jobs for longer, and regain Bret’s once positive reputation in this field.

2.2.2 Industrial action is an occurrence that is new to Bret. They had no such worries back in 2001, but at the last count, they had lost 120 days of work due to strike action and such. This is a more obvious change that will produce negative publicity for the firm on the whole, not just as a recruiter. Once again, managers may need to rethink their styles in order to satisfy their employees.

2.3 The policies adopted by the marketing executives appear to be very short-term focussed. These massive cuts in research spending may leave Bret in big trouble if the confectionery market starts moving faster, as it may need to do in the future due to publicity against its current state. Bret may have no tricks up its sleeve if its current base of cash cows becomes redundant and unprofitable overnight. This is a significant concern that may be Bret’s downfall 5-10 years down the line.


3.1 Overall, I would agree that the changes made at Bret have led to much smoother running of the company operationally, and that financially, the positive results are there to see. However, there are many possible disasters brewing for the firm. The most worrying of these would be the lack of research spending causing Bret to fall quickly behind its competitors should the market change. Secondly, the issue of solvency, which may seem unimportant at the moment, might creep up on them. Similarly, industrial action may be a major threat to the company from the inside.

3.2 My recommended score for the overall effectiveness of the changes that have been made at Bret is 3 out of 5. On paper the company is improving, but the resilience of the company against external threats will be tested, and may not cope, as the protective strategies of the last regime seem to have been weakened or removed.

Re: Supermarket Performance
From:
To: A Retail Journal


Table 1
RATIO ICELAND SAINSBURY TESCO
Gross Profit Margin 9.33% 10.01% 9.32%
Net Profit Margin 3.84% 5.04% 5.57%

1.1 Iceland, looking at gross figures alone, is keeping up with its larger rivals in terms of profitability. The GPM figure of 9.33% is about what you’d expect from a supermarket that relies on quantity rather than markup to make its money. However, that is where the good news ends really. The net figures show a disappointing story for Iceland who seem to fall victim to overly large overheads to push its NPM figure way below that of Sainsbury and Tesco.

1.2 Sainsbury has achieved the highest gross profit margin out of the firms in Table 1. Beating off its two opponents by 0.7%, this is understandable due to the chain’s reputation for having slightly higher prices aimed at the more affluent market. Sainsbury is not keeping its overheads as low as it would like, the NPM still lower than major rival Tesco. However, it definitely has the bargaining power to lower its expenses beyond those of Iceland.

1.3 Tesco has (marginally) the lowest gross profit margin of the three firms in comparison. This can probably be pinned down to the fact that it has been growing rapidly in the last 5-10 years, and prices are likely to be lower in a time of growth than they are in a period of maturity. Because of its sheer size and current reputation, it has managed to negotiate lower (relative) expenses than both Iceland and Sainsbury, and so it has the best NPM figure.


Table 2
RATIO ICELAND SAINSBURY TESCO
Return on Capital Employed 24.6% 16.6% 16.2%
Net Assets Employed £161,972,000 £2,640,900,000 £2,447,000,000

2.1 This is where percentages really don’t show the true meaning of things. By a country mile, Iceland has outstripped the returns of its much bigger competitors. If you look at the actual figures quoted in Table 2, you can see Iceland’s measly value compared to that of Sainsbury and Tesco. Iceland is not worth much as a company, and it has not been splashing out millions on publicity and advertising (only one campaign, focussing on food items and targeting mothers). It is not under so much pressure to unnerve its rivals in the oligopoly, and so it is free to make a larger net profit figure compared to its value as a company.

2.2 Sainsbury and Tesco are very similar as told by these figures. They are very much in the contest for market share, and so in the short term, both firms’ ROCE will be squeezed slightly until a clear leader emerges. In the future, anticipate Tesco’s NAE figure to rise significantly as it undertakes projects to expand its land ownership. Sainsbury is currently focussing on refurbishing its current branches, rather than building more.
Table 3
RATIO ICELAND SAINSBURY TESCO
Current Ratio 0.59 0.57 0.6
Acid Test Ratio 0.25 0.33 0.38
Current Liabilities £193,374,000 £1,468,200,000 £1,003,500,000

3.1 All supermarkets will have seemingly disturbing liquidity figures as shown above. This is because they have no problems in generating a lot of cash in the short run, as they deal in cash all the time. Therefore, the interpretations of these figures are limited, without looking at the significance of the debts of each firm first.

3.2 Now looking at the actual figures for liabilities (and their relative values compared with the NAE figures in Table 2), we can that Iceland has a short term debt that outstrips the entire value of the company by over £30m. This is bad news, especially seeing as Iceland has by far the poorest acid test ratio of all the firms (and is perhaps most likely to rely on the acid test figure, as it is less likely to be able to panic sell all of its stock). These are quite concerning figures for Iceland, and probably the last straw for investors who will have been bemused by the earlier profitability analysis.

3.3 Sainsbury seems to have finished its spell of big spending. There has been a lot of marketing and development expenditure throughout the last 10 years from Sainsbury, and this is shown by its high NAE and high current liabilities, which seem manageable now compared to Iceland. Overall, I would say from these figures that Sainsbury is passed its period of growth and is very much in maturity. Those liabilities will probably fall in the next few years, and there are unlikely to be any major jumps in share prices, so for a long term investment, Sainsbury seems relatively safe, as any changes will be gradual. However, they can gradually fall as well as gradually rise.

3.4 On the other hand, Tesco’s short term debts are quite a bit smaller than Sainsbury at this point in time. But as mentioned before, the strategy at Tesco is very much growth-orientated and centred around globalisation. Expect those debts to rise, and expect the asset figure to rise significantly. It has the best liquidity figures out of the three, perhaps because it needs some contingency, some breathing space in case its international projects get off to a slow start and show signs of haemorrhaging cash above budget. I would say that Tesco is a riskier investment, but definitely one with a large potential return within a short period.



4.1 To conclude, I would suggest Tesco is the better company in which to invest, as I think the risks are limited, and the signs of potential failure should become apparent early on due to the highly publicised nature of Tesco. Sainsbury would be a safe bet for a fair return over 12 months or so, because the time of development seems to have already gone by. Iceland is a definite no-no, and looks as if it might be forced to let itself be swallowed up in the next few years.

Discuss how Gill and Savan could most effectively resolve the human resource issues at the White Hart Hotel. (16 marks)

Human resources issues at the White Hart Hotel refer to ineffective management of the people working for the company. There are several problems mentioned by employees, including a lack of opportunities for promotion and little involvement in decision making. This has caused some employees to press for union recognition, to give workers more negotiating power.

Lack of opportunity is a problem that frustrates a lot of workers, and is probably a key factor in the “discontent” mentioned about the White Hart. An effective resolution to this problem would be to internally recruit the hotel manager (promote them from within the company). This automatically provides the promotion prospects that junior employees want. It gives them something concrete to aim for, and motivates them to be more productive. The staff as a whole will feel more valued, as managers see them as being worth more than the endless number of external applicants out there.

However, there are problems with adopting this strategy. If the manager is internally recruited, then the business becomes more closed to new ideas. It may prove more effective in the long run for someone to look at the business from the outside, make unbiased judgements, and then take the best course of action. A promoted manager may allow the hotel to fall back into old habits.

The second problem that was brought up by employees was a lack of involvement in the decision making process. A solution to this would be to increase employee participation (delegating power to junior workers). This makes the White Hart more attractive as an employer, as a worker is given extra responsibility, which fulfils the self-esteem and self-actualisation needs in Maslow’s hierarchy. Two key HR performance indicators - absenteeism and labour turnover - would improve if this scheme is implemented correctly. White Hart could also gain extra reputation, and have the ability to recruit staff of a higher standard (for example, a celebrity chef).

Profit sharing was a scheme discussed amongst the workers. This involves distributing a portion of net profit to the employees alongside their salaries. This is a system that follows F W Taylor’s approach to motivation - by providing workers with a direct financial reward they will be encouraged to work. It may also encourage workers to be more efficient/less wasteful in order to increase profit, not just revenue.

On the other hand, retaining as much profit as possible is crucial to the viability of the French project. Distributing profit to the employees is essentially diverting funds from this project, and so may not be such a good idea in the long run.

To conclude, I would state that employees at the White Hart are in need of some change and responsibility in the workplace. Therefore, I would advocate the use of employee participation as the most effective resolution. It is inexpensive, but it provides returns in the form of motivation and happiness which is passed on to guests, reducing the number of complaints which has risen significantly.

However, I would also state the hotel and leisure industry employs a lot of young, inexperienced, part-time staff. And therefore they should expect to be confronted with problems such as high labour turnover, high absenteeism. That is not to say that White Hart is without problems, but just to avoid overestimating them.

To what extent will increasing the current level of Research and Development expenditure ensure Topstar's future success. (20 marks)

Research and development is the generation of new ideas for products and production processes. Spending money on research and development allows businesses to innovate - i.e. to put these ideas into practice. Topstar are currently a long way behind their larger competitors on research and development expenditure. Therefore, the R&D budget appears to be correlated positively to the market share. However, this relationship may not be causal, as there are likely to be other factors involved.

Assuming that the link between the two is causal, then increasing the R&D expenditure will cause market share to rise. This would ensure Topstar’s future success. Therefore it is the other variables at work that will determine the true success of this strategy.
Topstar’s retail clients value the company’s “quality image, even though the firm’s products do not have the most advanced technical features”. This statement suggests that a lot of Topstar’s previous success has come from brand building and quality control - hence the low historical budget for product and process development. So were Topstar to radically change their strategy and become innovators on par with their rivals, then clients might become disillusioned with the firm, and Topstar might lose some of the goodwill they have built up from their brand image. Therefore, from a marketing viewpoint, realigning towards new product development is risky.

The business has failed in the past to copy other business’s ideas, such as Daxon’s counter rotating drum. The new products being brought out by the firm appeared to be clones of existing ideas. The research and development director stated that they were “trying to match the best in the industry”. This strategy is referred to as market penetration, and simply involves injecting more existing products into the market. In a technological market as exists for washing machines, this does not have potential for any significant market growth. Therefore, increasing expenditure on research and development increases the likelihood of a new product being launched by Topstar which would boost their market share. In reality, the company seems poised in the right position to do this as well, as their unique vortex technology is in the pipeline, waiting for funds in order to start testing.

Continuing from this point, the launch of a new product would mean Topstar can avoid being pressured into risky loss leader strategies such as the Allport contract. Topstar can utilise market skimming and first mover advantage to charge higher prices for new products, and therefore make better profit margins.

There is one characteristic of this market in particular though that makes it difficult to decide on an R&D budget. Unlike computers and mobile phones, consumer durables such as washing machines are pretty similar. Consumers do not necessarily look for groundbreaking new technology, but rather they base their decision on price, appearance, and lately on energy efficiency. Topstar is already well renowned for price, and with the variations in colour as part of the Allport contract, they seem to have appearance covered as well. The research and development needs to go into energy efficiency. New products need to be steered in this direction, as the efficiency rating is fast becoming the key differential between rival products. The new vortex technology would not succeed in the market if it was inefficient, so perhaps increasing the research expenditure would be advisable in this case.

To conclude, the short term benefits of R&D expenditure are slim. There may be teething problems for the brand and the finances. However, the long term state of the market dictates that producers need to innovate in the area of energy efficiency - which is already a key determinant of a customer’s purchasing decision. Therefore, for the purposes of long term continuity, a little extra expenditure now will probably bring Topstar in line with rivals in the future.

From:
To:
Date:

Re: THIS IS THE SUBJECT OF YOUR REPORT

1. Positive Analysis
2. Negative Analysis
3. Conclusion/Recommendation

1.1 <--- SUMMARISE YOUR FIRST POSITIVE POINT
1.1.1
1.1.2 <--- ELABORATE USING THE DATA IN THESE SUBSECTIONS
1.1.3

1.2
1.2.1
1.2.2
1.2.3

1.3 <--- 3 POINTS FOR AND 3 POINTS AGAINST IS USUALLY ENOUGH
1.3.1
1.3.2
1.3.3

2.1 <--- START POINTS AGAINST HERE
2.1.1
2.1.2
2.1.3

2.2
2.2.1
2.2.2
2.2.3

2.3
2.3.1
2.3.2
2.3.2

3.1 <--- SUMMARISE YOUR OVERALL OPINION

3.2 <--- MAYBE A CONCLUSION/EVALUATION POINT