AQA Paper 1 25 Mark Example Answer - Value of a Flexible Organisation

Here is an example answer to a 25 mark question on the value of a flexible organisation.

QUESTION:

A business is losing market share to competitors who are more efficient. To what extent would a change to a more flexible organisation help the business regain its lost market share? (25 marks)

These days, many businesses are recognising the value of moving to a more flexible organisation, often because they are finding themselves at a competitive disadvantage against more efficient firms. However, as I will argue, it won’t always be the case that moving to becoming a flexible organisation will be effective in helping a business regain lost market share. Let’s explore why.

In most situations were a business has lost market share to more efficient competitors, there are several potential reasons why becoming more flexible won’t necessarily solve the problem.  A loss of market share caused by a lack of efficiency could have causes not directly linked to factors such as organisational structure or methods of working. For example, a business may have become inefficient because it has failed to invest in automation, whereas competitors have invested heavily in this and have gained more productive efficiency. This might be the case in industries such as textiles and car manufacturing that have moved from being labour intensive to be capital intensive, with significant efficiency gains in the long-term for firms that have invested in automation. This has little to do with the number of layers in the hierarchy or whether employees use flexible working. To give a different situation – a business may have become less efficient than competitors due to a poor choice of location for production. Have those competitors become more efficient due to the use of offshoring, moving production to lower-cost economies such as China, enabling them to produce at lower unit cost and therefore gain market share by offering lower prices? Of course my arguments here depend to some extent on an assumption that the reason for a loss of market share is due to inefficiency and not also to other factors such as a lack of innovation, poor management decisions or other reasons not related to unit costs.

So why are many businesses trying to move towards a more flexible organisation? Because in some situations it can help the business become more competitive, including reducing unit costs, and therefore possibly help a business regain market share. A good example that illustrates this strategy is the UK supermarket sector. The industry is highly competitive and market shares changes have a significant effect on profits and share prices. Supermarket groups (like Morrison's and Asda) that have lost market share to more efficient competitors (like Aldi & Lidl) have tried to become more flexible by implementing delayering. This involves removing layers of middle management from the organisational hierarchy, which lowers the fixed costs of stores because management positions are typically-well paid. Lower fixed costs are spread over store sales, thereby reducing unit costs. Other benefits of delayering in this situation include enabling more staff to be “closer” the customer and achieving faster decision-making. Another strategy towards becoming more flexible has been greater use of flexible working practices such as job-sharing, where employees have more say over how and when they work. Flexible working can also benefit efficiency and productivity by improving employee engagement and motivation at work, thereby potentially closing the gap on competitors who are more efficient. Of course the extent to which becoming more flexible can help a business improve efficiency will to a large extent depend on the nature of the business. A labour-intensive business may achieve much bigger improvements in efficiency as a result of delayering, for example, than one where labour costs are a small part of total costs.

As I hinted in my introduction, my overall view is that, whilst becoming more flexible can help improve efficiency, on its own it is not likely to be effective in helping a business regain market share. I justify this view because of the complexity of reasons why businesses lose market share, particularly to more efficient competitors.  A sustained loss of market share implies something fundamental is wrong with a business. It is more likely to be caused by a competitive disadvantage such as lack of scale, poor management or lack of investment in automation and than by factors such as whether a business has implemented flexible working or cut costs through delayering. Indeed, it might be that the competitors who are more efficient are already flexible organisations and will continue to benefit from this. Simply copying them, on its own, is unlikely to be enough to regain market share. That is not to say that a business shouldn’t try obtain the benefits of flexibility, particularly in markets where demand is price-sensitive and efficiency is a requirement to be competitive.  In labour-intensive industries there are probably still lots of opportunities to reduce fixed costs by delayering or improve motivation and engagement with flexible working. However, to regain and then hold onto market share against more efficient competitors is likely to need more than just being flexible.