Should McNutt Relocate Division 1 An Entrepreneur’s Critical Division Case Study Solution
Growth Strategy:
McNutt is focusing the market development growth strategy. In which it is introducing its product and services in the new market by relocating its service division. Along with the entrance in new division, company is also entering in the new market which have lead towards an increase in 50% of its overall revenues in next three years.
Location Strategy:
The reasons to choose the new location for the company to operate its main functions of production are
- To increase its capacity of production
- Attract new customers to increase profitability
- High growth for the company
- Reduce the operational cost
- Increase customer services to retain them
- And to increase the efficiency
The selected location is meeting on these criteria. That is why company have chooses this to relocate its functions because it will increase the 50% yearly revenue for three years along with the additional expense of 102,300 dollars which will increase the gross profit margins from 32% to 40% in the year 1999.
Decision Criteria:
- The highest net profit margin
- Increase in customer services
- To minimize the costs (cost reduction)
- Increase in the capacity to produce services
- Retain customers for future benefits
- Increase revenue from a single ultimate customer
Alternatives:
Relocation of Division 1, Cost Reduction and Customer Service Techniques:
After the detailed internal analysis, the president and owner of the company has an option to relocate division 1 by establishing the separate building for it in order to make the different entity. McNutt can exploit its resources and capabilities in order to enhance efficiency, cut costs, and increase revenues for the company.
Cost reduction strategies are necessary for McNutt upon relocation to a new place. Cost reduction will affect the relocation plan significantly. McNutt must analyze its general and administrative expenses with the purpose to understand the affluent activities in the organization and formulating cost effective approaches. The company has increasing costs by increasing the employee’s salaries and benefits. This is the best starting point for the cost reduction.
McNutt should introduce performance management and compensation strategies for exceptional performances. An analysis of financial performance is critical when assessing internal strengths of an organization for realignment and growth. It would show efficiency in terms of revenues and expenses. For instance, McNutt has internal problems with regard to increasing costs of general and administrative expenses(Anthony A. Atkinson, 2012).
The company needs to focus on the improvement of customer services because the service division 1 has not a clear understanding about its ultimate customers. This is the critical situation to improve the operational efficiency of the company to maximize the revenues from a single ultimate customer as well as to retain it for future benefits.
Expand the Capacity of the Company:
McNutt may also move the entire company to a single location. This would allow McNutt to operate the company as a single unit which benefits the company to control its internal costs and management fears. Along with that, the company should prepare the management team for change. Although, the change is difficult for many organizations and employees. Reed McNutt must realize the business has grown and needs expansion. Consequently, he should need to relocate in order to serve the growing markets efficiently.
The major concern for Reed McNutt is the potential increment in costs upon relocation. The financial analysis estimates show that costs of running Division 1 would increase upon relocation of the company. In the first year, the company will incur an additional cost of $102,300. This cost consists of other expenses related to setting up a new entity. While the benefits to relocate the division 1 has increased from 32% to almost 40% to 43% in next three years.
Recommendations and Conclusion:
By using the decision criteria matrix, Reed McNutt and other managers must focus on profitability by enhancing customer service and grabbing growth opportunities and leave the other morality issues because the main reason of the company is to increase its profit margin which cannot be better generated by using the separation strategy. The separation strategy of the company will loss the consultation for division 1 as well as the less cohesion which will lead towards the lower profitability than relocation. This would ensure that the company remains competitive by exploiting opportunities and minimizing threats through its internal resources and capabilities. For this purpose, relocation would be a good option for the company because gross profit margins show the efficiency in production of services.
Along with that, the cost reduction strategies for McNutt would involve effective formulation of cost reduction strategies. The company must begin with formulating ways of generating revenues to support the business. McNutt must determine management priorities and long term business objectives. The company must formulate an approach, which will have limited impacts, but relocate Division 1 to a new location for the purpose to grow future revenues. Reed McNutt and other senior managers need to take this decision.
The financial analysis shows that salaries and benefits are too high and increase every year. The company should not retrench staff, but reduce benefits, gradually, to avoid staff attrition. Moreover, it should introduce benefits based on an employee’s contribution. However, this must not lead to attrition of highly qualified field technicians.
Exhibit 1: SWOT Analysis
Strengths:
- McNutt is a market leader and no other company can challenge it because all other competitors of the company are small in size and cannot compete with it.
- It has strong financial strengths and active and experienced management team.
- The company relies on originality and synergy of the team which has high levels of in house and on the job training in a supportive work environment.
- There is a clear career path for employees, which has led to low rates of staff turnover.
Weaknesses:
- There is a weak customer relationship management in Division 1. The company is unable to control rising costs.
- Moreover, there are too many reporting lines or many supervisors.
Opportunities:
- McNutt can improve customer relationships as it expands to a large space and increase operational efficiency.
- The three counties have rapidly growing affluent populations.
- McNutt can negotiate for new contracts with high profit margins and by minimizing the rising administrative, staff and sales costs.
- It can also streamline the organizational structure and deploy other employees to sales.
Threats:
- Internal arguments in the divisions can weaken originality and synergy. Rising costs will affect the profit margins.
- Moreover, volatile sales and profits year to year are not healthy for the company for the possibility to decreases in profit margins.
- Also, there are distractions for technical advice from other department, which slow the work.
Exhibit 2: Financial Ratios
Gross Profit Margins
| 1997 | 2,372,778 / 7,689,874 | 0.32 |
| 1998 | 2,650,271 / 9,550,675 | 0.277 |
| 1999 | 2,670,567 / 8,379,206 | 0.308 |
Projections Gross Profit Margins
| 1999 | 1,480,000 / 3,700,000 | 0.4 |
| 2000 | 1,722,000 / 4,100,000 | 0.42 |
| 2001 | 1,935,000 / 4,500,000 | 0.43 |
Exhibit 3: Rise in Total Overhead Cost through Relocation
| Increase in Annual Expense | |
| Investment (65,000) | 13,000 |
| New facilities lease expense | 26,300 |
| One new office employee for McNutt | 24,000 |
| Property insurance | 3,000 |
| Utilities, including a computer connection | 7,000 |
| Facilities maintenance | 8,000 |
| Three additional trucks within the first year These are necessary to increase the revenue at $105,000 |
21,000 |
| Increase in Annual Expense | 102,300 |
Exhibit 4: Decision Criteria Matrix
| Separation | Expansion / Shifting | |
| highest net profit margin | 3 | 4 |
| Increase in customer services | 3 | 4 |
| To minimize the costs (cost reduction) | 2 | 5 |
| Increase in the capacity to produce services | 3 | 5 |
| Retain customers for future benefits | 3 | 4 |
| Increase revenue from a single ultimate customer | 5 | 3 |
| Total | 19 | 25 |
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