Question
KA
$K A$ is a public limited company that designs, manufactures and sells air conditioners. $K A$ ‘s unionized employees are motivated and efficient despite not being involved in any decision making. However, they are resistant to change.
The market and competition for air conditioners are growing rapidly. KA operates at full capacity but stock turnover has slowed.
Primary market research revealed that:
- consumers do not differentiate KA air conditioners from those of its competitors. All products are perceived as medium price and medium quality
- KA’s customer service is rated as poor
- customers demand energy-efficient products using ecologically sustainable production methods.
To exploit opportunities and overcome weaknesses and threats, $K A$ ‘s management has decided to redesign its products so that they are energy efficient. $K A$ is considering two options:
- Option 1: Implement lean production methods, which includes investing in ecologically sustainable machines that will increase capacity by 10 \%. Total quality management (TQM) will also be implemented. However, the financial manager is worried about $K A$ ‘s ability to meet high initial costs. The forecasted payback period is three years and average rate of return (ARR) is $4 \%$.
- Option 2: Outsource the production to QS, a company known for its reliability and high capacity to produce excellent quality air conditioners using cradle to cradle manufacturing principles. However, QS refuses to sign an exclusive long-term contract with $K A$, insisting instead on renegotiating the contract every two years. KA will have to close its production facility and will use the cost savings to improve customer service and to reposition and differentiate its air conditioners.
Employees have heard rumours of both options and fear for their jobs. Strike action is being considered.
a. Define the term public limited company.[2]
b. With reference to $Q S$, explain two features of cradle to cradle manufacturing.
c. Explain two possible human resource strategies that $K A$ management could use to reduce employees’ resistance to change.[4]
d. Evaluate the two options that $K A$ is considering.
▶️Answer/Explanation
Ans:
a. A public limited company is an incorporated organization listed on a Stock exchange with a legal right to sell shares to the general public.
Candidates are not expected to word their definition exactly as above. Eg may omit mention of Stock Exchange if another feature of incorporation is present.
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full, clear definition that conveys knowledge and understanding similar to the answer above.
b.
Cradle to cradle is a sustainable form of manufacturing. QS seeks to create manufacturing principles that attempt to use production techniques that are efficient but also sustainable and waste free. Two features of using cradle to cradle with reference to QS are as follows:
As its name suggests, QS will design and produce its air conditioners in such a way that most, if not all, of the materials used are recyclable. These materials (like glass, metal, plastic) that form parts of the air conditioners will be recyclable and used again for the production of future models. This will minimise waste.
Cradle to cradle manufacturing with also allow QS to reuse some of the ready components of the old air conditions in the new models instead of disposing of those parts. QS might have to offer some financial incentives for the customers to return their old/outdated air conditioners.
The air conditioners will also be built with biodegradable materials if QS cannot recycle the materials: for example, the carton for packaging of the air conditioners. This aspect will allow QS to reduce the environmental impact of its air conditioners.
Accept any other relevant examples and explanation.
Application here is very difficult – all of the stimulus info is about KA and gives no real links to QS – hence I believe to avoid generic responses, candidates should at least make reference to ‘air-conditioners” ie if responses just refer to QS and this could be replaced with any other company – then this is generic and only [1].
Mark as 2 + 2.
Award [1] for each relevant feature explained and [1] for appropriate application to the organization/type of products to a maximum of [2].
[2] cannot be awarded for the difference if the response lacks either explanation and / or application.
For example:
For an identification or a description of a feature with or without application [1].
For explanation of a feature with no application [1].
For explanation of a feature and application [2].
c.
Two possible change management strategies as part of overall HR strategies that can be used by KA management to reduce the impact of employees’ resistance to change.
The employees are currently not involved in any decision making, so it can be assumed that there is not much communication between employees and management; as such, open and clear communication with the employees can be seen as one possible change strategy. The management should be honest and fully explain the reasons for the change. The management should emphasize the positive outcome of outsourcing as a way to overcome some of the weaknesses of KA, like an opportunity to improve customers’ perceptions. The possibility of new opportunities for employees in the marketing department should be emphasized as a new and motivating challenge. The management should not lie about some of the negative outcomes, like job losses of those who are not going to be employed in the marketing department.
Before a final decision is taken, KA management should change the non-participative way/culture/lack of involvement in decision making and encourage bottom-up participation and consult with the employees and listen to their suggestions and opinion. Some of the more motivated employees might come up with some alternative strategies and/or express their preferences.
Management should acknowledge the fear of the unknown and the possibility of resistance to change due to fear of inability to cope with new challenges. A promise of training should be provided for those who are going to be employed in the marketing department if option 2 is chosen or for all employees if option 1 is chosen.
Another strategy is to appoint a change champion among the employees to encourage those employees who are reluctant to change to see the benefits of both option 1 and 2. Perhaps inviting the Trade Union to put forward solutions to minimizing the negative effects or in fact making the union the change champion.
Do NOT accept – “raising salaries/wages” unless tied to Option 1. Clearly this strategy is not feasible for those laid off in Option 2.
Accept any other relevant change HR strategy.
Award [1] for a relevant generic HR (change management) strategy identified or described and [1] for any additional explanation in context.
[2] cannot be awarded for the chosen (change management) HR strategy if the response lacks either explanation and / or application.
For example:
For an identification or a description of an HR strategy with or without application [1].
For explanation of an HR strategy with no application [1].
For explanation of an HR strategy and application [2].
Do not credit non-HR strategies. Analysis of strategies is not required.
d.
Refer to Paper 2 markbands for May 2016 forward, available under the “Your tests” tab > supplemental materials.
Given the fact that KA redesigned their product, both options will have the same starting point of being more energy efficient.
Some of the possible arguments for option 1:
Option 1 will not result in redundancy and possible negative impact on the motivation of the remaining employees. Moreover, with appropriate training in order to implement the TQM and lean production practices, employees might enjoy the new challenge and motivation might even increase further, resulting in more efficiency and cost saving.
The implementation of TQM/lean production should result in KA becoming considerably more environmentally friendly and by adapting to the market pressure/customers demand. KA might be able to capture part of the increase in demand. Moreover, KA should further be able to benefit from a growing demand in the market due to increase capacity of 10 %.
However, the capacity will only increase by 10 %. One may argue that this is a relatively small percentage for a growing market and perhaps suits KA well in the short run but it will face a major strategic decision again in the medium term. Still, with increasing competition perhaps a 10 % increase is sufficient.
The financial return, albeit forecasted, seems reasonable (do not penalise if candidates argue the opposite) although we do not have information on the current interest rate for comparison. Three years of payback also seem reasonable but technology is changing very rapidly and KA might have to replace the machine quite soon afterwards.
The current lack of finance perhaps should be judged as of less significance, as KA is a PLC and shares can be issued, especially to ethical and ecologically sustainable minded investors, who may also be encouraged to purchase given the stated market growth.
Some of the possible arguments for option 2:
With outsourcing, KA should be able to capture the growing markets and satisfy the growing demand with excellent quality sustainable air conditions and production process. One may judge this argument as highly significant for this option.
The excellent quality should enable KA to differentiate itself in a current undifferentiated market and create a strong USP. The customer service – which is possibly one of the reasons for a fall in demand in a growing market – should also improve significantly. Making the marketing of KA its core activity with the money saved should enable KA to be successful. KA now has the finance to do so.
However, the shareholders might disagree with such a risky strategic move as KA will move away from its current core activity of manufacturing air conditioners This move might be perceived as too risky. There might be other ways of improving customer service especially if TQM is to be implemented, as customers are constantly listened to.
Moreover, closing down the production facility is a significantly risky decision. It will be very difficult to rebuild one. Perhaps KA should not rely on QS especially given the fact that every 2 years the contract has to be negotiated. Terms and conditions could be changed in favour of QS when KA lost its bargaining power. KA’s management needs to pay attention to a potential loss of control.
Overall, both options can potentially enable KA to become a more environmentally and ecologically sustainable organization. The second option will enable KA to achieve this in the short term, however the possibility of strike action is real and this will require some significant conflict resolution strategies by KA’s management. Some of the good will enjoyed by KA will be undermined by this move.
Accept any other relevant argument for each option.
Accept any other substantiated judgment.
It is expected that candidates provide a conclusion with a substantiated judgment.
Marks should be allocated according to the paper 2 markbands for May 2016 forwards.
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].
If a candidate evaluates / addresses only one option, award a maximum of [5].
A balanced response is one that provides at least one argument for and one argument against each option.
Candidates may contrast one option with another for a balance as long as at least two arguments are given for each option.
Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.
Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.