Goldcrust's offer: Goldcrust plc wants Lena's sourdough on its shelves. It is the biggest order the bakery has ever been offered, and it has one catch.
The offer
- Who. Goldcrust plc, which has tried twice to buy Lena's Bakery Ltd. Now it wants something smaller.
- Where. On the shelves of its 400 shops.
- How much. 10,000 loaves a week, at $2.00 a loaf.
- The catch. At $2.00, the bakery barely covers its costs, unless Lena changes how the bread is made.
Lena's Bakery Ltd has several objectives at once. It wants to make a profit and to grow. It also has two ethical objectives Lena set herself: pay every baker a living wage, above the legal minimum, and buy flour milled from Valley Grain's wheat at a fair price to the farmers.
Most weeks those objectives sit side by side. Goldcrust's offer is the week they do not. When reaching one objective makes another harder, the objectives conflict. Getting more of one means giving up some of the other (a trade-off).
| One loaf | Made the way Lena bakes now | Made to Goldcrust's price |
|---|---|---|
| Flour | $0.60: Valley Grain wheat at a fair price | $0.35: cheaper imported flour |
| Bakers' pay | $0.90: a living wage | $0.75: the legal minimum, on a night shift |
| Energy and packaging | $0.40 | $0.40 |
| Cost of one loaf | $1.90 | $1.50 |
| Profit at $2.00 a loaf | $0.10 | $0.50 |
| Profit in a year (10,000 loaves a week) | $52,000 | $260,000 |
Why ethics costs money now: Ethical objectives nearly always raise costs today: dearer flour, higher pay, cleaner ovens. So in the short run, every step towards the ethical objective is a step away from the most profit.
Here the gap has a number. Keeping both promises costs Lena's Bakery $208,000 of profit a year on the Goldcrust order.
What pulls towards the deal
- $208,000 more profit a year, if the flour and the pay change
- Lena's bread in 400 shops: a name known across the country
- Money for new shops without borrowing
What pulls against it
- Bakers moved down to the legal minimum, the pay Lena promised to beat
- Valley Grain loses a buyer that paid its farmers a fair price
- Customers who pay $3 for local, fairly made bread may stop believing it
Where the two can meet later
- Bakers who are paid well stay, so less is spent hiring and training
- Customers pay more, and come back, for bread they trust
- One story about cheap flour in 'local' bread could cost more than the order earns
That third column is why the conflict is sharpest in the short run. Over several years, ethics and profit can pull the same way: the social responsibility Lena already practises is part of why people pay $3 for her loaf. So the real question is rarely profit or ethics. It is how much profit now, against how much trust later.
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Marco wants his dividend: Lena's Bakery Ltd made $60,000 of profit last year. Marco and Lena want to use it in two different ways.
Marco: pay it out
- Paid as dividends, his 33% would be $20,000.
- It is a return on the savings he put in.
Lena: keep all of it
- She wants it to open a fourth shop.
- A new shop loses money in its first year.
- If it works, it adds about $30,000 of profit every year after that.
Both are real objectives. Marco is asking the company to protect shareholder value: to give its owners a return and keep their shares worth more. Lena is asking it to grow. Neither is wrong.
They conflict because of timing. Profit can be spent once. Paid out today, it cannot also build the shop that makes more profit tomorrow.
Four clashes of now against later
A dividend now, or growth later
Profit paid to the owners is profit not spent on a new shop. The owners are better off this year, or possibly better off in five.
Profit this year, or profit in five
The fourth shop cuts this year's profit and may raise every later year's. Judge it on this year alone and it always looks like a mistake.
Growth against the profit on each loaf
Cutting the price of a loaf to win customers from Goldcrust grows sales, but each loaf earns less. More customers do not always mean more profit.
A tactical target against a strategic one
A short-term target for one part of the business (a tactical objective), like cutting ingredient costs by 10% this quarter, can undercut a long-term one for the whole business (a strategic objective), like being the bakery people trust most. Cheaper butter shows in the croissants.
Why a plc feels this most: Goldcrust has thousands of shareholders who can sell their shares any morning. They expect a dividend every year and a share price that rises. That pulls its managers towards profit this year, even when a slower plan would earn more in the end.
Why Lena can wait: Lena answers to three shareholders who sit in the same kitchen, so she can argue for the long run.
| Pay the $60,000 out | Keep it for the fourth shop | |
|---|---|---|
| This year | Lena $30,000, Marco $20,000, the cousin $10,000 | Nothing paid out, and the new shop loses money |
| In three years | Still three shops and about $60,000 a year | Four shops and about $90,000 a year, if the new one works |
| The risk | The bakery stands still while Goldcrust grows | The shop may never earn, and the owners waited for nothing |
| The objective it serves | Protecting shareholder value | Growth |
Most real companies do something in between: pay a smaller dividend and keep the rest. The conflict does not go away. It is settled by choosing how much of each objective to give up.
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Five years of Lena's bakery: Lena's objectives today are not the ones she started with. The bakery is the same; what it needs is not.
So when two objectives conflict, the one that wins depends on when you ask.
Which objective came first, and when
Year one: survive
Bills were paid weekly and customers paid monthly. Any sale that brought in cash was a good sale, and Lena paid her bakers what she could.
Years two and three: grow
Lena and Marco formed Lena's Bakery Ltd and opened a second and a third shop. Profit went back into ovens, not out as dividends.
Year five: ethics it can afford
With steady profit, Lena made the living wage and Valley Grain flour into objectives, and customers now pay $3 for bread they trust.
Next year: survive again?
If Goldcrust cuts its loaf to $1.20 in Lena's town, cash could come first again, and the ethical objectives would face their hardest test.
Objectives change for two kinds of reason. The business changes: it gets older, bigger, steadier, or gains new owners. And the world around it changes: the economy, rivals, the law, and what customers expect.
When objectives conflict, the business puts first whatever it needs most at that moment. Then the moment passes, and the order changes.
| What changes | At Lena's Bakery | Which objective moves up |
|---|---|---|
| The business grows steadier | Three shops with a regular profit | Ethical objectives, because they can now be paid for |
| The owners change | Converting to a plc would bring shareholders who want dividends | Profit and shareholder value |
| A recession | Sales fall by a third as people buy cheaper bread | Survival and cash; growth plans wait |
| A rival cuts its price | Goldcrust sells a loaf for $1.20 in the town | Survival, or a price cut for growth in sales |
| Customers care more about how things are made | Shoppers ask where the flour comes from | Ethical objectives, because they now help sales |
| The law changes | The legal minimum wage rises to near the living wage | The ethical objective costs less, so the conflict shrinks |
Reading a conflict in a case: Ask three questions. Which objective does each choice serve? What does it cost now, and what might it bring later?
And what does this business need most right now, given its mission, its money and its market? The answer to the last one decides which objective should win this time.
How this comes up: Mostly in the long questions at the end of a case study. Shorter questions come up too.
Long questions
- Discuss whether a business should accept an offer, run an event or sign a contract.
- The money points one way.
- The business's ethical objectives, its mission or its reputation point the other.
Shorter questions
- Explain one reason why two objectives conflict, for two marks.
- Give the reason, then what it means for the business in the case.
The ten-mark pattern
- Name the decision and the objectives it touches. Profit and growth on one side, an ethical objective or the mission on the other.
- Argue for it, with the case's numbers. What it adds to profit, sales or growth, and how soon.
- Argue against it, with the case's facts. Which promise it breaks, and what that could cost later: staff, customers, reputation.
- Weigh them. Money now against trust later, and how certain each figure is.
- Decide, with a condition. Say what you would do, what would change your mind, and what the case does not tell you.
Two traps: One side only. An answer that argues only for the deal, however well, stays at three marks or fewer. The other side is half the question.
No case. 'Ethics matter to customers' with no number or name from the case stays at four or fewer. Every argument needs something only this business has.
Discuss whether Lena's Bakery Ltd should accept Goldcrust's offer.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.