Business Failuire

John Hobson Company:

 The company has been successful in its business undertaking in the last ten years but the in the last six months the situation has changed due to a decline in the demand for its services, the company has however cut down its operation costs in order to break even, the reduction in operation costs has been achieved by laying off workers, two office workers who left have not been replaced and the sale and parking of operation lorries, this has led to a reduction of costs by 20%.

 The cutting down of operation costs is in line with the input output theory of the firm, The input output theory states that a firm can cut down its variable costs when the demand for its products or services decline, in our case the firm has experienced a decline in demand for its services and for this reason it has tried to cut down its variable costs which include reducing administration cost, the company however has not broken even and therefore it is experiencing losses in its operations, the break even point where the total costs are equal to total revenue has not been achieved and this is because the total revenue is less than total cost.

 The three options give the company a chance to improve its business operation in order to achieve high profits; the options include option 1, 2 and 3. the first option requires the company to take over operations of a company that was previously undertaking transportation services, the services that this company undertook is similar to that of the Hobson company. Taking over these operations would mean that the company will increase its demand for services which was the main problem why the company is in present situation.

 The second option is to undertake distribution at the final stage where the company requires buying smaller vehicles; this operation will require the company to buy smaller vehicles to undertake the final distribution undertaking. The third operation requires the company to import, transport and package refrigerated fish, this option will require that the company invert in refrigeration and packaging operation.

 The third option is in line with the transaction cost theory that supports a company to produce other than buy, The transaction cost theory was introduced by Ronald Coarse and it states that a company will determine whether to outsource or to produce goods or services on their own, this theory in making decision on whether to buy or make products, according to this theory the market price are not important to a firm when making this decision and what is important is the transaction costs which include contract costs, search cost and coordinating costs. For this reason therefore the company is justified to undertake this operation because it reduces the transaction costs.

 The third option is also supported by the evolutionary theory of the firm, this theory tends to advocate the possibility of transforming already existing organisation structure, this is because the existing organisation forms are seen as to have emerged from the already existing organisational structures this is for the purpose of resolving existing problems, the Hudson company by choosing the third option will mean that it will be transforming its operations from a mere transport company into an import, packaging and transportation company, this can be seen as a positive option of growth and diversity of operation.

 2. Prepare a reasoned comparison of the three alternative options. This should include:

(i) A decision tree

The tree diagram below summarises the probability of achieving option one and its various possibilities

 To summarise the above tree diagram it follows that option 1 has a 0.43 possibility that there will be a successful bid, and that a profit of 210,000 is achie