McNutt’s Division Relocation Report

Introduction

This case involves making a tough strategic decision for the McNutt. The President, Reed McNutt has to decide whether to relocate its successful Division 1 to a larger and sufficiently convenient building. He also has to decide whether to set up Division 1 as a separate entity. Relocation would result in efficiency. On the other hand, relocation of Division 1 would increase the company’s overhead significantly. Thus, McNutt has to make a significant strategic decision, which would have implications on the company for a long time.

Problem definition

McNutt Service Group is a 20-year old heating, ventilating, and air conditioning (HVAC) installation and service company. Since its inception, McNutt has grown significantly. The service division (Division 1) of the company has experienced a tremendous growth in the past two decades. As a result, the president has decided to relocate the division and run it as an independent entity. This would enhance efficiency, but would increase the cost of running the business.

Reed McNutt had hoped that relocating Division 1 would also lead to the creation of a new entity. Consequently, the manager would have immense authority in making business decisions. McNutt had also anticipated that the relocation would improve operational efficiency, customer service, and employees’ attitudes and reduce staff turnover. In addition, the company would experience a general sense of professionalism.

The two divisions of the company have shared a similar building since inception. This has resulted in operational challenges, poor customer service and interaction, and interruption by technical department personnel.

Relocating the company would result in some advantages. For instance, Division 1 will have a large space and increase revenues by 50 percent within the next three years. Selection of a suitable location shall result in saving time spent on traveling to reach customers by 50 percent.

On the other hand, the decision would affect consultation among employees and challenges and costs associated with running two business entities.

Reed McNutt also has an option of moving the business as a single unit in a large place. This is also a possible option because the current location has an annual lease agreement, which is renewable yearly.

Reed McNutt must evaluate these issues carefully. Any wrong decision would affect the company negatively. Conversely, a well-crafted approach would result in a significant growth to the company.

Case Analysis

Concerns of the decision-makers

The two main concerns for Reed McNutt and other managers are increments in operational costs and feelings of the management team (managing change and fear). Failure to formulate these two concerns may derail the expansion strategies of the company.

Increments in costs

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.

Table 1: Expected rise in costs upon relocation of Division 1

Reed McNutt has raised concerns over such increments in the cost of running Division 1 and the other Division within the year.

Managers feeling less important in McNutt’s long-term goals

Reed McNutt believes that relocation of Division 1 would affect other managers negatively. They would not feel as a part of the McNutt’s company long-term goals because relocation would result in a new and independent Division 1. McNutt Company has developed an effective management system. Most managers have many years of experiences with the company.

The company provides on-the-job training and in-house training to new employees. As a result, the employees’ turnover rate is low with an average of three to four years. Management teams have an average of 12 years with the company. These employees have extensive experiences and operational management. McNutt Company has thrived on ingenuity and synergy of managers and other employees.

However, the relocation would threaten this synergy, ingenuity, and teamwork within the company. Technical staff and Division 1 employees would lose consultation and cohesion within the company. This may affect the company’s objective of providing reliable, quality HVAC services to its customers. The company also depends on negotiated strategies, which the relocation of Division 1 may weaken.

Strategic Planning

Reed McNutt must define the strategy and direction of the company before making any decision to relocate Division 1. This process requires in-depth analysis of the company’s position and available resources for executing the relocation plan.

McNutt must determine the possible avenues the company can take in order to realize its expansion strategy. In this regard, Reed McNutt and other members of the company must understand what to do. This is a process of determining where the company would be in the next five years and beyond. Thus, carefully analysis of McNutt’s position is critical.

Internal Analysis of McNutt

McNutt has been able to use its internal resources to create value for its customers (McEvily and Chakravarthy, 2002). McNutt has developed core competence over the past 20 years and created value to its customers.

Resources and other capabilities of McNutt have offered the company unique competitive advantages in the counties in which it serves (Prahalad and Hamel, 1990). Over the years, McNutt has created core competence by effective use of its resources and capabilities. McNutt has focused on strategic management by determining the industry characteristics and adapting to the existing conditions.

While strategic management focuses on the firm’s position against competitors in the industry, McNutt has not had any real competitors. For instance, there are several firms listed in the directory, but these companies cannot match capabilities and resources of McNutt. However, the company has some six competitors in areas in which it operates, which are small and cannot challenge its dominant position as a market leader.

McNutt must also understand its product-market position together with its core competencies in order to be able to develop competitive advantage in the industry. Clayton Christensen noted, “Successful strategists need to cultivate a deep understanding of the processes of competition and progress and of the factors that undergird each advantage” (Christensen, 2001).

This realization would allow McNutt to realize that it can no longer rely on the past strategies based on its rapid growth trends. Thus, it must formulate new strategies to meet market demands and maintain its position a market leader. McNutt must be aware of its internal strengths by identifying its core competencies. This would allow the company to operate based on its specific strengths, and it must learn about the impending changes in the industry.

Resources

Scholars consider firm’s resources broadly as people, social, and organizational aspects (Eisenhardt & Martin, 2000). McNutt must combine its unique resources in order to create competitive advantage (Berman, Down & Hill, 2002). McNutt has highly skilled technicians than other firms. In addition, it also has financial strengths to run successful operations. Management team consists of experienced managers with over 12 years with the company.

McNutt has thrived on tangible and intangible resources. For instance, the company has several trucks, formal management, and reporting structures as its core tangible assets. Intangible assets of McNutt have developed with time. For instance, skills of the company’s field technicians have developed over time.

Moreover, the company has incurred substantial costs to create its knowledgeable workers. No company can match McNutt intangible assets in the counties in which it operates. Such firms would pay extremely high wages if they wish to attract qualified employees from McNutt.

In addition to knowledge, McNutt has also developed trust among its managers, supervisors, and other employees. As a result, the company has relied on the team’s synergy and ingenuity in order to remain competitive. In this context, financial resources, innovation, relationship with customers, and reputation have contributed to the success of the company. For instance, McNutt’s competitors cannot provide high standards of customer services because of their relatively small sizes.

Capabilities

Capabilities reflect the capacity of McNutt to use its resources to achieve the desired outcomes (Helfat & Raubitschek, 2000). McNutt has been able to demonstrate its capabilities by using its tangible and intangible assets to gain competitive advantage in the industry. These capabilities are evident in the experienced human capital of McNutt.

Thus, inherent knowledge among McNutt managers and field technicians has been critical for creating competitive advantage and capabilities of the organization. These capabilities are also evident in innovation, synergy, administrative operations, computerized operations, detailed schedules of sales booking and job progresses.

McNutt has devoted substantial resources for training and defining career paths for new employees. Researchers have shown that firms can only derive knowledge from their works in changing industry trends (Argote & Ingram, 2000). McNutt should be able to develop, capture, store, and share knowledge from its employees.

In this regard, McNutt must manage its knowledge adequately in order to relocate and maintain product efficiency across all divisions. Overall, McNutt must continue to develop and manage knowledge among its employees in order to create value to customers.

McNutt’s VRIO

Jay Barney introduced the VRIO (valuable, rare, inimitable, and organization) analysis in order to provide a method of evaluating a firm’s resources in terms of financial, human, material, and other intangible resources. It also accounts for competitors’ positions relative to the industry performance. McNutt has resources and capabilities. In this context, such resources and capabilities must have qualities of being valuable, rare, inimitable, and organized.

VRIO serves internal analysis purposes for the company (Barney, 1991). McNutt must identify what has contributed to its success for the last 20 years. McNutt can only achieve solutions to such issues through a thorough VRIO analysis of its internal factors. The VRIO analysis will also show why McNutt has been competitive in the industry for the last 20 years. In fact, McNutt performance varies significantly from competitors due to its massive resources, capabilities, and core competencies, which meet VRIO attributes.

Valuable

McNutt has valuable resources, which have allowed it to exploit opportunities in the three counties and offer outstanding services to its customers. The company’s financial resources are valuable because McNutt can afford to pay high wages than competitors in the region.

This implies that small companies would have to pay high wages in order to get qualified staff from McNutt. For instance, McNutt notes that total expenses from sales, general, and administrative costs have increased significantly. Higher salaries are responsible for the major increment in expenses. It has increased with an average of 2.4 percent for the last five years.

Table 2: Rising costs of employee salaries and benefits

McNutt can afford such constant increments in salaries and benefits of employees because it has valuable financial resources, which no any other competitor has in the industry.

The company can also afford trucks, training opportunities, and computerize its sales and jobs in progress. This created efficiency in operations. Such abilities have made Division 1 to be the service company of choice among customers. These financial resources have allowed McNutt to eliminate cases of competitions, employee attrition, and poaching by other companies. McNutt controls services in affluent counties. Therefore, financial resources have allowed the company to reduce threats and exploit human resources.

Rare

Rare resources are not widely available in other organizations or competitors. McNutt has valuable and rare resources in the industry. As a result, the company has derived competitive advantage from these rare resources. For instance, the company has the most qualified field technicians in the region.

This has minimized the competitive abilities of other firms, but enhanced competitive advantage of McNutt. McNutt has been able to control the industry through its highly qualified field technicians. Consequently, the company can control external threats and exploit the growing opportunities in the three counties.

The company derives its sales from synergy and ingenuity of its staff. Moreover, it is able to negotiate for new contracts at profits. McNutt has also demonstrated good customer service than its competitors. These factors of rarity have contributed to great benefits for the company over other competitors.

Inimitable

Competitors cannot imitate or may experience significant challenges if they attempt to imitate inimitable resources. McNutt possesses resources and capabilities, which other firms cannot easily acquire or substitute. For instance, many firms cannot simply substitute competencies among their managers.

McNutt has created a competent management team with vast experiences in the industry. The company must note that other small firms will also strive to gain rare resources and capabilities it has in order to improve their competitive advantages.

McNutt must strive to acquire resources, which may affect it upon relocation of Division 1. The most important factor to consider here is cost. Costs can be extremely high and may affect long-term financial operations of the company.

Organized

McNutt has organizational capabilities to expand its operations and run Division 1 as an independent entity. With reference to organizational capabilities, Reed McNutt must analyze every aspect of the company, which may be useful for creating competitive advantage. McNutt will focus on compensation structures, customer services, reporting channels, jobs and sales management, and field operations.

The company must exploit its organizational capabilities in order to derive value from other VRIO elements. A functional organization is able to exploit its resources and create competitive advantages than other organizations. McNutt has the necessary resources and capabilities for effective usages like expansion.

In most cases, firms may fail to exploit their organizational capabilities and rare resources. For instance, McNutt can still enhance its customer service across all the Divisions. The company can book many jobs and enhance efficiency in the sales force by reducing their expenses. While McNutt has computerized its operations, it can enhance consultation among Divisions and personnel through technology.

This implies that the company has resources, which it can exploit completely for operational efficiency. McNutt must ensure that it delivers services to customers and increases revenue generation from a single customer. McNutt can restructure its organizational structure and create a linear reporting line. The company has many supervisors. Restructuring can ensure that information reaches the right people at the right time.

SWOT analysis of McNutt

Strengths

McNutt is a market leader and no company can challenge it. It has strong financial strengths, and active, experienced management team. The company relies on ingenuity 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 poor 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 new contracts at high profit margins and minimize rising administrative, staff, and sales costs. It can streamline the organizational structure and deploy other employees to sales.

Threats

Internal wrangles in the divisions can weaken ingenuity and synergy. Rising costs will affect the profit margins. Moreover, volatile sales and profits year-to-year are not healthy for the company of possible decreases in profit margins. There are distractions for technical advice from other department, which slow the work.

Other theories

Resource-based view relates to VRIO analysis (Barney, 1991). This theory also highlights the importance of using organizational resources for creating competitive advantages. There are also strategic management and planning approaches during relocation of a company, which Reed McNutt must consider.

All these theoretical concepts would help Reed McNutt choose the best alternative for the future of the company.

Alternatives

Relocating, cost reduction, and customer service

From the internal analysis, Reed McNutt may relocate Division 1 and establish it as a 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 aim of understanding expensive activities in the organization and formulating cost-effective approaches. The company has increasing costs in employees’ salaries and benefits. This is the best starting point for 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 (Atkinson, Kaplan, Matsumura and Young, 2007).

The company must also focus on improving customer service because Division 1 does not understand its final customers. This is critical for improving operational efficiency and maximizing revenues from a single customer, as well as retaining customers.

Financial Ratios

Gross profit margins

1999: 2,670,567÷8,379,206 = 0.32

1998: 2,650,271÷9,550,675 = 0.277

1997: 2,372,778÷7,689,874=0.308

Currently, McNutt has efficient operations.

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

The projected Gross profit margins show that McNutt will be efficient in operations upon relocation.

Move to a large ground

McNutt may also move the entire company to a single location. This would allow McNutt to operate the company as a single unit, control internal costs, and management fears.

Preparing management team for change

Change is difficult for many organizations and employees. Reed McNutt must realize the business has grown and needs expansion. Consequently, he must relocate in order to serve the growing markets efficiently.

Recommendations

Reed McNutt and other managers must focus on profitability, enhanced customer service, and growth strategies. This would ensure that the company remains competitive by exploiting opportunities and minimizing threats through its internal resources and capabilities.

Relocation would be good for the company because gross profit margins show efficiency in production. 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 to a new location or relocate Division 1 for the growth of future revenues. Reed McNutt and other senior managers must make this decision.

This 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.

Managing change

Managers may resist internal changes of relocating and creating a new independent Division 1 because of the unknown or possible losses for the company or at personal levels. This depends on how managers perceive relocation and changes in the management structure. The most important aspect is to formulate a strategy to handle fears among managers and other employees.

Managers may perceive relocation as bad because they doubt their contribution to the overall goal of McNutt after relocation. Moreover, some employees feel that they would lose synergy, ingenuity, and consultation within the company. Thus, change is relative based on how it will affect managers and other employees.

Reed McNutt must determine levels of managers’ concerns to relocation, their coping abilities, and the support required. Reed McNutt must address causes and concerns of managers, which may lead to resistance. This is necessary to reduce such fears to manageable levels. Reed must establish what will change among managers and causes of their reluctance.

Customer Service

McNutt must formulate a strategy for improving its customer service. Atkinson and colleagues note, “in order to retain customers, excellent customer service and response to customer requests about orders, deliveries, and problems must be a high priority” (Atkinson et al., 2007).

Time line

Time line for relocation focuses on three areas, which involve assessing and planning, managing relocation, and setting up a new location.

1999: Assessing and planning

• Developing guidelines and time frame for relocation
• Prepare management for change
• Defining operational goals for Division as a new entity or in a new location
• Determining relocation costs
• Create a team to manage relocation
• Survey the three counties for a good location
• Determine how to relocate new offices with minimal interruption
• Develop specific time line for specific tasks
• Look and make a decision on the final place, negotiate rates and lease
• Design the new location for refurbishment or building
• Select the best contractors

2000: Managing relocation project

• Develop space for new location
• Purchase require equipment
• Look for service providers and vendors in the region
• Create schedules for installation of equipment
• Set the date of relocation
• Manage transfer of employees
• Hire a new office administrator for McNutt
• Review employees new roles and compensation packages
• Create new business contact details for the new location
• Update customer on the new location

2001: Setting up the new location

• Install the necessary equipment in the new location
• Update employee register
• Employee orientation
• Employees resume their duties in the new location
• Press release about the new location
• Continuous management of internal processes, costs, and customer service

References

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Atkinson, A. A., Kaplan, R. S., Matsumura, E., and Young, S. M. (2007). Management accounting (5th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.

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Berman, S., Down, J., & Hill, C. (2002). Tacit knowledge as a source of competitive advantage in the National Basketball Association. Academy of Management Journal, 45, 13–31.

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