Question 2: Peter Nicholson proposes to remove two management levels from the Organizational structure and to encourage greater empowerment of the workforce. Do you think that this is a good idea? Justify your view.
This means that Peter Nicholson wants to flatten the organizational hierarchies whereby layers in management are removed and the existing managers’ span of control is broadened. It is believed that flattening hierarchies has numerous benefits but on the flipside, negative effects may be experienced. The rationale or thinking behind delayering or flattening is that it leads to streamlining organizations to enhance efficiency in responding to changes in the market, stay competitive (competitive advantage) and respond to customer needs faster. The implication is that besides reducing or controlling costs, flattening an organization structure’s benefits emanate from changes in governance internally whereby when decision are pushed downwards to kaizen groups, other employees are empowered (can make decisions and feel relevant), responding to customer needs becomes easy and fast , enhances accountability and boosts staff morale. A good example is signing of memos or seeking approvals to refund a customer. If the levels are many, then it could take many hours or even days to refund but when the organization is flat with few levels of management, decision to refund is made there and then.
This means that Peter Nicholson would like a situation whereby changes in the market are responded to faster, respond to customer needs faster, make the remaining managers more engaged and creative and reduce some costs. Kaizen or improvement that is continuous takes effect in Peter Nicholson firm measured by enhanced productivity (increase profits to £ 15M by 2018), increased quality and waste reduction. Emphasis is on Kaizen groups employees with a common interest of the process of production for example designers, installation employees and production manager. To this extent, removing two level of management can be justified but sometimes negative effects could occur. For instance, the managers who will be axed will demand for early retirement pay which will add up to the redundancy costs. Some of them might challenge the process in court increasing costs through legal battles. In addition, people who rise to managerial level possess the required experience, skills and knowledge about the business thus the organization could end up losing such expertise to competitors reducing business performance. It is often said that theory must be applied hence losing about 10 managers could imply loss of much needed expertise and knowledge acquired through experience. For example, a well-seasoned manager or employee understands how to handle difficult customers something which is not taught in schools.
Delayering should be approached with caution since the organization may end up axing the right managers while retaining poor ones or some of the 10 managers could possess expert power and people power such that we they leave, the remaining employees could be demoralized and organization lose the much needed knowledge to remain competitive. In addition, increasing span of control for the CEO and the remaining managers could imply increase pay and allowances due to workload adding up to costs. Sometimes even the increased workload could reduce quality of decision making, reduce morale and lead to more exists for those managers who cannot handle pressure. More importantly, increased pressure from work especially in peak seasons could lead to serious flaws which could cost the organization a lot of money.
Thus, on the overall, traditional levels of management and long hierarchies may not be relevant in this century of advanced technology which has made accesses to data and communication easier and faster.
Question 3: If the electric taxi proposal is accepted, do you think that the production of the electric taxi should commence at the North East factory or at the West Midlands factory? Justify your view.
According to the case, Nicholson plc’s taxis are known for exceptional quality and are reliable and these key values should extend to the new electric taxis or vehicles to be produced. The management is faced with a conundrum thus a cost benefit analysis must be undertaken since the overall objective of Peter Nicholson is to control costs. The Finance Director has raised concerns about the new project’s viability, payback period, rate of return, significant budget, limited financial resources and project riskiness but these would be irrelevant of the proposal is approved or accepted.
Thus, the main areas to address are the Operations manager concerns and the CEOs need to grow business beyond Europe which will mean a cost benefit analysis i.e. benefits and costs of both factories and link it to overall strategy. The advantages of North East factory are close proximity to a suitable port about 20 miles compared to West Midland’s 200 miles; Its nearness to the port fits well in the overall strategy and CEOs dream of exporting the taxis to other European markets beyond the UK; access to specialist technical expertise from an electrical engineering company; labor cost per unit or taxi is low; payback period is 3 years and 1.24 months compared to 3 years and 6.9 months in West Midlands factory; contribution per vehicle is £34,500 compared to £34,000 in West Midlands factory and increased capacity by 50% could increase vehicles produced to 600 and enhance profitability to £9.7M.
West Midlands factory on the other hand has the following pros: highly skilled labor; average return is 16.25% compared to 13%; factory capacity is 500 compared to 400 vehicles; defective products are at 3% compared to 8%; low labor turnover; breakeven is 294 vehicles compared to 319 vehicles hence the factory needs to sell less vehicles to cover fixed costs and start making profits.
Hence, in the short-term, West Midlands factory seems viable especially due to skilled labor and capacity, good quality, low labor turnover and low absenteeism but when the quantitative factors are discounted I think manufacturing in the North East factory is worthwhile compared to West Midlands factory in the long-term and the reasons are as follows: Labor is mobile thus some of the skilled workforce in West Midlands factory could be transferred to North East factory; capacity could be increased by 50%; specialized expertise from the electrical engineering company will come in handy and the deciding factor will be nearness to the port since Peter wants to export to other European markets because the UK taxi market has shrunk (potential for growth). But issues like defective cars, absenteeism, labor turnover and poor quality at North East factory must be addressed immediately. The riding factor is the proposal being approved and both the Finance Director and Operation’s managers concerns are addressed.
- Using all the information available to you, complete the followingtasks:
4.1 Analysis of the key arguments for and against the electric taxi proposal
The electric taxi proposal wants to take advantage of advances in technology and Nicholson PlC’s long history in the taxi manufacturing industry. More importantly, the company has been experiencing declined sells due to fall in demand, competition is stiff and less innovation which has hampered production of new car models. On the overall, the firm wants to move with modern times and embrace new technology and probably increase sells. Analyzing the specific objectives and the market trends, the following arguments are fronted:
Arguments for the electric proposal: The CEO Peter had spent quite some time at the Nissan leaf production where mass production of electric vehicles was being done with great success and has learnt from it; it appears according to the trends in the market that technology driven vehicles have great potential for growth; the forecasts of secondary research shows that by 2020 10% of all global car market will be made up of electric vehicles; changes in consumer tastes and preferences and growth in their awareness levels such that increased cost of fuel has led to consumers going for alternatives that are efficient (fuel consumption is important to consumers); the firm has good reputation which it could use to persuade customers t buy the electric taxis; awareness of the negative externalities of traditional cars in terms of exhaust emissions into the environment; the next few years will see most manufacturers launch a range of electric vehicles; primary research dubbed survey of taxi firms show that 42% of respondents would consider buying electric taxis although 37% were neutral while 21% disagreed but the neutral and those who disagreed could be converted with time.
Arguments against the electric proposal: Besides the pros of the proposal, the arguments against it are price since primary research show that consumers are price sensitive. The electric taxi could cost £10 000 more than the present version and considering price is a key factor in the purchase of vehicles scoring about 66%, it could reduce rate of up take; 66% of the taxi firms are not willing to pay a premium; fixed costs per year are at £11M compared to £10M for the present versions; the Finance Director and Operations manager have raised serious concerns; the CEO is 28 years and in experienced in managing a growing and large firm.
Thus in a nutshell, the proposal is hanging precariously and serious issues need to be addressed. On the positive side, Nicholson has a good reputation in the market known for its quality and it could leverage on this as a competitive advantage to attract more customers and enhance sells. It appears from the primary research potential customers consider reliability as the second most important feature besides price. Nicholson taxis are reliable. In addition, this good and long reputation could be used to persuade the buyers to pay the £10,000 premium for the new taxis.
But if the Finance manager’s sentiments are to be considered, Nicholson has less liquidity and resources to finance such a risky proposal. In addition, the operating profit has been on the decline form £8 in 2012 to £5 in 2013 and the company is highly geared at 60.87% and more borrowings could drive the gearing ratio higher. A highly geared firm is often viewed negatively by potential investors. In addition, it appears that customers do not consider environmental impact as an important factor when buying vehicles (scored 10%).
One of the keys to success and which the firm could use as a marketing gimmick is its reputation in the market, long history and the reliability aspect and may be long-term savings for customers in terms of fuel savings. On the contrary and looking at it critically, the biggest disadvantage is the financial position to support the risky project.
4.2 A justified recommendation on whether the electric taxi proposal should be accepted.
The top management including the CEO are faced with a conundrum to the extent that it is a delicate balancing act between long-term growth, satisfying customers and financial health of the firm. A good strategy should be devised which includes a contingency plan such that if the project fails, they will have a fall back plan. In terms of business strategy and marketing strategy, this proposal fits well in the Ansoff’s matrix new product and market development since the firm is seeking to develop new electric taxis and market it to new markets beyond the UK. The following should be done in order to ensure success:
First, the company must develop a marketing plan and a marketing strategy incorporating the 7 Ps of marketing mix and identifying the unique selling point of the taxis for example reliability gospel, saving on fuel, environmental friendly etc. The marketing department should consider a niche market and undertake STP (Segmentation, Targeting and Positioning) since this marketing strategy runs away from mass marketing and uses target marketing which is efficient and effective and increases sales. Marketing activities could include Integrated Marketing Communication (IMC); use of promotions like warranty and discounts etc.
Secondly, the project should run parallel with the present taxis such that the production manager will monitor the trend in production and advice the CEO on whether to continue producing or not hence Kaizen groups come in handy.
I propose registering the electric taxi business as a separate entity from the present taxi business for ease of monitoring and control. This new business maybe called Nicholson PlC;s electric taxi Inc. separate with new management and employees but under the group.
International markets are tricky hence the Peter could choose an appropriate market entry strategy proposed by practitioners like Root and others ranging from less risky to more risky. The CEO could go into a Joint Venture (JV) with a reputable company, undertake in mergers and acquisitions or register franchises since some methods like franchising require less funds but the company is involved in the operations. Such strategies like franchising or Mergers& Acquisitions could help the firm especially at a time like this when they have fewer resources but are willing to expand.
Hence, considering the trends in the market, the company must invest in the electric vehicles proposal but with a clear strategy. Considering the CEOs less experience in the market, he requires expert advice from within and without. The new venture has great market potential which could give Peter the desired yearly profit of £15M by 2018. Diversification is vital for business growth but it should be done with great care, benefits of the new taxis made clear, advertise well, engage with customers via the internet and social media, address internal shortcomings and outsource some services which are not core to the business.