Home Décor(HD) is a private limited company that sells garden furniture. The company owns 10 stores nationwide. Five members of David’s family own all the shares. Home Decor has a very good reputation for quality and service and is highly profitable. HD’s objective is to grow and increase its national market share by 12% in the coming two years. The market for garden furniture is growing but competition is intensifying. The task of Ray (the Finance Director) is to decide which growth path the company should take. Two growth options are currently being considered:
· Set up a franchising operation that would allow 10 new stores to be opened each
year for the next five years.
· “go
public.” This would mean a float of 49 % of the company on the stock market.
This should raise $10 million to fund five new stores a year for the next five
years.
Despite
being profitable, HD lacks sufficient internal capital to finance the desired
growth
Questions:
a)
Define a private limited company [2
marks]
b)
Identify and explain the importance of
setting objectives in managing an organization like Home Décor [4 marks]
c)
Identify and explain two internal
economies of scale for HD if they expand the store [ 4 marks]
d) Evaluate the two growth options being considered by HD and recommend which of them is most suitable for the company [ 10 marks]
Suggested answers
Define a private limited company [2 marks]
A private limited
company (Ltd) is a business entity where ownership is divided into shares,
which are privately held and not available for public trading. Shareholders
have limited liability, meaning their personal assets are protected, and they
are only liable for the amount they have invested in the company
Identify and explain the importance of
setting objectives in managing an organization like Home Décor [4 marks]
Setting clear objectives is crucial for managing an
organization like Home Décor (HD), as it provides a foundation for
decision-making and growth. Here are two key reasons why setting objectives is
important:
Guides Strategic Direction: Objectives offer a clear roadmap for where the company wants to go and how it plans to get there. For HD, its objective to grow and increase national market share by 12% over the next two years provides a specific target for the company’s expansion efforts. This focus helps management make decisions about which growth strategy—such as franchising or going public—aligns best with the company's long-term goals.
Measures Performance and Accountability: Objectives serve as benchmarks to measure progress. For HD, tracking whether the company achieves the 12% market share growth will indicate whether the chosen strategies are successful. Additionally, having clear objectives allows for better performance monitoring and accountability, ensuring that each department, such as Finance or Marketing, contributes effectively toward achieving the set goals.
These objectives help
HD navigate competitive market conditions, enabling it to stay focused on
sustainable growth.
Identify and explain two internal
economies of scale for HD if they expand the store [ 4 marks]
Two internal economies of scale that Home Décor (HD)
could benefit from if they expand their stores are:
Purchasing Economies:
As HD expands and opens more stores, it can purchase garden furniture and other
materials in bulk from suppliers. This larger volume allows them to negotiate
better discounts and lower prices per unit, reducing overall costs and
improving profitability.
However, as HD expands, managing multiple stores
across various locations may become challenging, risking inefficiencies and
inconsistent service quality.
Managerial Economies: With
expansion, HD can afford to hire specialized managers for different areas of
the business, such as marketing, operations, and finance. These skilled
professionals can increase efficiency, streamline processes, and make better
decisions, enhancing overall operational effectiveness.
However, expansion requires significant capital, and
if sales don’t grow as expected or competition intensifies, HD could face
financial strain despite potential economies of scale.
Evaluate the two growth options being
considered by HD and recommend which of them is most suitable for the company [ 10 marks]
The stimulus presents decision-making
dilemma for Home Décor (HD), a private limited company, with the challenge of
deciding between two different growth strategies ( internal a Vs external) The
Finance Director, Ray, must decide between franchising, which offers rapid
growth with lower capital, or going public to raise $10 million, which provides
funding but introduces shareholder influence and regulatory demands.
Each option has its own
set of benefits/opportunities and risks/challenges that will affect the
company’s ability to meet its objective of increasing market share by 12% over
the next two years. The opportunities and challenges of each option are
discussed and evaluated below:
Option 1: Setting up a
Franchising Operation ( external growth)
Faster Expansion:
Franchising allows for rapid expansion since individual franchisees invest
their capital to open new stores. This can help HD achieve its objective of
increasing market share by opening 10 new stores each year for the next five
years.
Reduced Financial
Burden: Franchisees bear the initial investment costs and
ongoing operational expenses of their stores, easing the financial burden on
HD's internal capital.
However, the challenges
are:
Control and Consistency:
Maintaining consistent quality and customer experience across franchise
locations can be challenging. HD needs to establish strict operating standards
and ensure effective franchisee training and support.
Brand Reputation: HD's
reputation is tied to the performance of its franchisees. Any negative
experiences or subpar service at a franchise location could impact the overall
brand image.
Option 2: Going Public - IPO ( internal growth)
Capital Infusion: Going
public can raise a substantial amount of capital, as indicated by the target of
raising $10 million. This funding can be used to finance the opening of new
stores and support HD's expansion plans.
Prestige and
Visibility: A successful IPO can increase HD's
visibility, brand recognition, and reputation, potentially attracting more
customers and business opportunities
However:
Loss of Control: Going
public means HD will have to answer to public shareholders, which may result in
increased scrutiny and pressure to meet short-term financial targets.
Regulatory Compliance:
As a publicly traded company, HD will need to comply with various regulations
and reporting requirements, incurring additional costs.
Shareholder
Expectations: Public shareholders may prioritize
short-term profitability, potentially impacting HD's ability to focus on
long-term growth and quality.
Hence, considering HD's
objectives, the competitive market for garden furniture, and its financial
situation, the franchising option seems more suitable for the company. Because,
it allows HD to expand quickly with
minimal capital investment ( as mentioned in the stimulus lacks internal
capital) while preserving ownership within the family. Although franchising
comes with challenges such as maintaining quality control, these can be managed
with strong oversight and clear operational guidelines.
Although franchising is
recommended as the best option for HD, it’s important to note that additional
information, such as detailed financial forecasts for both franchising and
going public—covering expected revenues, costs, and profits over the next five
years—and an assessment of HD’s internal capacity to manage franchise
operations, including support, training, and quality control, would have
enabled a more informed decision.
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Notes:
· You
need not write the answer in this much length.
· There
may be other ways to structure the response to reach the goal.
· The
answer does not make use of business management tools, theories and key
concepts (Change, Creativity, Ethics and Sustainability)
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