A Cost-Saving Case Study

Scenario

In previous years, Smartchester City College has received income from the Mordenvia Bank, which has its head office in Smartchester and sends many of its employees to the college for management training.

Three years ago, the college opened a new training facility (known as the Mordenvia Building) with a generous grant from the bank. 

The Mordenvia Bank has now informed the college that it is moving its head office to the Bahamas, and that employees will in future receive all their management training online. The college is invited to submit a proposal for the provision of this training, but it is clear that the bank expects this to be significantly cheaper than traditional training.

Taking into account other projects and grants from the bank, the college expects to lose around 5% of its annual income, and must reduce its costs by an equivalent amount.

However, there were some special costs associated with satisfying the bank's training requirements. The bank trainees followed a customized training programme, and did not share lectures with other students.

The loss of training business from the bank may therefore create an opportunity to rationalize training provision and remove inefficiencies.

The college must therefore consider the following cost-saving measures.

• Reducing the number of lectures, or reducing the number of hours.

• Reducing the amount of time lecturers are allocated for non-teaching work (including developing new courses).

• Closing the Mordenvia Building, or converting it to other uses

• Reducing or eliminating the financial support given to impoverished students.

Some of these measures may involve short-term costs (such as redundancy payments) or may negatively impact future income. Some of these measures may be reversible, others irreversible.

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Questions

• How would you evaluate the different options? 

• What extra information would you need?

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Further Analysis

Cost Identification/Classification

• Where are the costs?
• What things (and what kinds of things) are the costs associated with?
• How do costs vary?

Cost Algebra

• How do we add, subtract, multiply and divide costs?
• Understanding interactions and indirect costs

Cost Optics

• Which lens do we use to view costs? E.g. accounting versus architecture.

Cost Control

• Where does the responsibility for costs lie?
• What are the control loops? What dynamic system behaviour do they produce – e.g. damping, oscillation, hunting?

Cost Motivation

• Where is the motivation for cost control? Where will any cost savings be distributed?
• What theory of incentives is espoused / in use? How does this affect cost outcomes?

Cost Outcomes

• Are cost savings reversible?
• Do we expect cost savings to be permanent or temporary? (In other words, will the costs revert to previous levels?)
• What other consequences?

Marks and Spencer

Marks and Spencer is one of the best-known companies in the UK, and combines a strong corporate identity (including management values and style) with serious questions about corporate viability.

The recent take-over approach by retailer Philip Green represents a powerful challenge to the management team and its recent attempts to balance the conflicting demands of identity and viability.

Green's proposition can be distilled down to this message: Allow me to impose my retail and management style, and watch me deliver higher and more sustainable profits.

The directors of Marks and Spencer have rejected this proposition, claiming that they can restore the fortunes of the company without the wholesale destruction of M&S values that Green was feared to be planning. Green has withdrawn, unwilling or unable to fund a higher offer. No doubt the large shareholders and affected banks have had private words with both sides, but the small shareholder has been left (as usual) without a voice.

The stakes are raised. M&S management now has to deliver results for the shareholders that are significantly better than accepting the Green offer, and this means they are going to have to take bold risks. Meanwhile Green's other companies are going to be competing hard. And it's all going to be played out in public, with frequent comments in the business press. Over the next year or so, we have a great opportunity to watch how the identity and viability of a large company develops or unravels.

> more on Marks and Spencer

BSkyB

In Feb 2004, students submitted an assignment on BSkyB.

For full details and feedback, see BSkyB Case Study page (updated June 2004)

A detailed critical report on the Murdoch media empire has just been published by CorporateWatch (May 2004). http://www.corporatewatch.org.uk/profiles/news_corp/newscorp.htm

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Update August 4th 2004.

BSkyB publishes its annual results today, recent subscriber growth is a little below expectations, group sets new new long-term growth strategy and long-term operating targets, and the share price falls by nearly 20%.

See Financial Times Data

Read what James Murdoch is saying, and compare this with the City reaction.

BTR / Invensys

Brief History

Late 1960s. Owen Green gets the top job in BTR, then a very small company with an indifferent history. Embarks on a series of take-overs.

1980s. BTR regarded as one of the best investments of the decade.

1990-1993. While the rest of the stock market is laid low by recession, BTR shares rise by 60%.

1993. BTR reaches the top of the FTSE 100, with a market capitalization of £14bn.

1993-1998. BTR shares fall by 75%.

1999. BTR merges with Siebe to form Invensys. Invensys shares have fallen a further 90% since the merger.

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Business Drivers

BTR was dominated by the desire to deliver profit, focusing on accounting measures such as costs and return on sales.

BTR generally avoided capital expenditure, and preferred take-over targets with profitable product lines, usually in niche markets. It then increased the prices of these products to the maximum, to generate exceptionally high margins.

BTR’s growth depended on finding a continual stream of take-over targets, and managing them more effectively

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Analysis and Discussion Questions

As BTR grew, it became increasingly difficult to find acquisitions large enough to maintain that level of growth. In the 1980s, someone estimated that if BTR continued to grow at the same rate, it would become larger than the whole UK economy by about 2003. What do you think of a business model that depends on unlimited growth?

"Throughout the 1980s, BTR was held in a position of pre-eminence by investors, other managers, commentators in the press and academia for the effectiveness of its management style." [Alistair Blair] The share price increased dramatically during this period. Can share price and City opinion ever be a good indicator of the true viability of a company?

"Invensys shares … have fallen because the managers and directors … valued profits above products or services that customers would continue to want." [Alistair Blair] In 2003, Lord Marshall, who was chairman of Invensys after the merger of BTR and Siebe, told the Financial Times that managers at Invensys failed to understand the need for investment on new products and capital equipment. Discuss the relationship between short-term viability and long-term viability.

This case was originally written in 2003/2004. Take a look at the more recent history of Invensys. Is there any evidence that it has learned any lessons from the past? Is there any evidence that it has failed to learn?

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Source

Alistair Blair, "Farewell Invensys". Investors Chronicle, 25th April 2003.

Cisco and the Perils of Outsourcing

At one time, Cisco Systems Inc was expected to become the world's first trillion-dollar company. Its business model was based on a virtual supply chain with apparently limitless capacity, and an emphasis on high customer reliability. Cisco referred to this approach as global virtual manufacturing.

But when the telecoms industry hit a downturn, Cisco was one of the worst affected - perhaps in part because of the high gearing that had served it well on the way up. Customer orders fell, production orders continued to go out, raw-parts inventory increased by more than 300% between the third and fourth quarter of 2000. Cisco was forced to write down $2.25 billions.

According to Lakenan, Boyd and Frey, "Cisco simply wasn't able to scale up or down as quickly as it thought it could."

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Discussion Questions

Economics -- How does outsourcing affect profit: (a) in an expanding market, (b) in a contracting market.  
Social Patterns  -- What business relationships are implied by such concepts as the virtual supply chain or global virtual manufacturing? What is the nature of these relationships in the Cisco case?

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Sources

Source: "Why Cisco Fell: Outsourcing and its Perils", by Bill Lakenan, Darren Boyd and Ed Frey, Strategy+Business Third Quarter 2001.

Case Study - Longwall Mining

Description

In the years immediately after the Second World War, researchers at the Tavistock Institute carried out a number of studies of work organization, including a classic study of deep-seam coal mining. They found two very different forms of organization, which they labelled "conventional" and "composite", both operated within the same seam and using identical technology.

The conventional system combines a complex formal structure with simple work roles. The miner is committed to a single part-task, enters into a limited number of unvarying social relations, and has no sense of loyalty or responsibility outside his particular task group. The composite system combines a simple formal structure with complex work roles. The miner has a commitment to the whole group task, and consequently finds himself drawn into a variety of tasks in co-operation with different members of the total group.
 

	Conventional system	Composite system
Number of men	41	41
Number of segregated task groups	14	1
Mean job variation for members:
task groups worked with	1.0	5.5
main tasks worked	1.0	3.6
different shifts worked	2.0	2.9
Productive achievement	78	95
Ancillary work at face (hours per man-shift)	1.32	0.03
Average reinforcement of labour	6	0
Shifts with cycle lag	69%	5%
Consecutive weeks without losing a cycle	12	65
Absenteeism
without reason	4.3%	0.4%
sickness or other	8.9%	4.6%
accidents	6.8%	3.2%
total	20.0%	8.2%

 

Questions

 

What theories of management and organization are illustrated by these data? What are the possible consequences for management action? 

 

Sources 

The original research is described in a number of papers by Eric Trist, Ken Bamforth, Fred Emery, and others.