Introductory notes

Management Communications course at MBS in September 2010

T he Management Communications course consists of two sessions: Business Writing &

Management Graphics (Dr. Nick Strange) and Presentation Skills (Dr. Elaine Clarke). To
minimise the time required for reading case materials, most of the working group exercises
and overnight assignments connected with both sessions refer to a single, deceptively simple
case: RH plc. These notes introduce the RH case. Please read them carefully.

Y ou, as the new Manager of Strategic Planning at RH plc, will give a very short
presentation to the executive Board of RH. You want to get the Board’s permission to
start a detailed analysis of the feasibility of divesting the Gastronomy Division of RH plc.
You need Board permission to do this because the investigation probably cannot be kept
secret. Even analysing divesting Gastronomy could be wrongly interpreted by many different
stakeholders (employees, shareholders, customers etc.) in RH.
RH plc consists of three operating divisions (Kettle, Coffee Pot and Gastronomy
(equipment for fast food outlets)) with their own manufacturing, R&D, marketing, sales force
and some personnel functions and one central Administrative Division (finance, controlling,
most personnel and nearly all logistics functions).
The Kettle and Coffee Pot Divisions are profitable and their divisional contributions
(division sales minus variable product costs (CGS) = gross divisional profit minus all other
direct divisional costs = divisional contribution) grew strongly between 2005 and 2010 (latest
estimate). Gastronomy, on the other hand, nowadays makes only a modest contribution. If the
costs of the administrative division are “traditionally” allocated to the operating divisions (as
in RH’s financial reports), Gastronomy makes a reported (full cost) loss.
Until now the Board of RH plc has not wanted to divest or close Gastronomy Division
on the grounds that it still makes a positive divisional contribution. As most of the costs of the
Administrative Division are both fixed (i.e. do not vary much with the level of RH plc
activity) and difficult to influence, divesting Gastronomy would lose all of its contribution
without reducing central administrative cost significantly. So RH plc profits, already low,
would fall.
However, a very recent McKinsey overhead value analysis (OVA) in the Administrative
Division has not only found significant potential cost savings but has also, as a by-product,
shown that 58% of central administrative costs are caused purely by Gastronomy.
Gastronomy’s contribution does not even cover the costs that it causes in the Administrative
Division, so divesting Gastronomy would apparently increase, not decrease, RH plc profits.
But would it? Would it really be possible, after divesting Gastronomy, to reorganise
responsibilities, processes and capacities in the central administration so that all, or most of,
that 58% could be saved? This is what you want to find out by launching a detailed analysis
of how the Administrative Division would look without Gastronomy.
Don’t forget that the Board members (3 men (including RH’s two founders), 2 women)
know RH better than you do (so explanations can be kept short), though they may not fully
understand, or like, the implications of the information from the OVA project.

Y ou will have understood the situation at RH if you can answer the following questions
based on the Summary of Financial Results overleaf:
1. Why (two main reasons) did RH operating profit stagnate between 2005 and 2010?
2. By how much would central administrative expense have to be reduced, as a result of
closing/divesting Gastronomy Division, to justify the closure?
3. If the OVA leads to a 10% reduction (€8m) in central administrative overhead, should
RH still divest Gastronomy Division?
Summary of RH plc Financial Results 2005 - 2010
2005 2006 2007 2008 2009 2010E '05-'10
€m % of €m Δ% % €m Δ% % €m Δ% % €m Δ% % €m Δ% % CAGR
RH '05-'06 of RH '06-'07 of RH '07-'08 of RH '08-'09 of RH '09-'10 of RH % p.a.
Sales RH plc 217 100% 232 7% 100% 271 17% 100% 286 6% 100% 295 3% 100% 318 8% 100% 8%
by division: Kettles 44 20% 59 34% 25% 82 39% 30% 101 23% 35% 119 18% 40% 144 21% 45% 27%
Coffee pots 55 25% 59 7% 25% 68 15% 25% 72 6% 25% 75 4% 25% 77 3% 24% 7%
Gastronomy 118 54% 114 -3% 49% 121 6% 45% 113 -7% 40% 101 -11% 34% 97 -4% 31% -4%

CGS* & divisional expense** 113 52% 114 1% 49% 124 9% 46% 155 25% 54% 168 8% 57% 177 5% 56% 9%
by division: Kettles 23 11% 29 26% 13% 36 24% 13% 50 39% 17% 59 18% 20% 70 19% 22% 25%
Coffee pots 28 13% 28 0% 12% 28 0% 10% 34 21% 12% 35 3% 12% 33 -6% 10% 3%
Gastronomy 62 29% 57 -8% 25% 60 5% 22% 71 18% 25% 74 4% 25% 74 0% 23% 4%

Contribution 104 48% 118 13% 51% 147 25% 54% 131 -11% 46% 127 -3% 43% 141 11% 44% 6%
by division: Kettles 21 10% 30 43% 13% 46 53% 17% 51 11% 18% 60 18% 20% 74 23% 23% 29%
Coffee pots 27 12% 31 15% 13% 40 29% 15% 38 -5% 13% 40 5% 14% 44 10% 14% 10%
Gastronomy 56 26% 57 2% 25% 61 7% 23% 42 -31% 15% 27 -36% 9% 23 -15% 7% -16%

Contribution in % of sales 48% 51% 6% 54% 7% 46% -16% 43% -6% 44% 3% -2%
by division: Kettles 48% 51% 7% 56% 10% 50% -10% 50% 0% 51% 2% 1%
Coffee pots 49% 53% 7% 59% 12% 53% -10% 53% 1% 57% 7% 3%
Gastronomy 47% 50% 5% 50% 1% 37% -26% 27% -28% 24% -11% -13%

Central admin. expense*** 44 100% 44 0% 100% 57 30% 100% 60 5% 100% 69 15% 100% 80 16% 100% 13%

Operating profit 60 100% 74 23% 100% 90 22% 100% 71 -21% 100% 58 -18% 100% 61 5% 100% 0%
in % of sales 28% 32% 15% 33% 4% 25% -25% 20% -21% 19% -2%

* CGS = cost of goods sold = variable product cost in period - stocks at end of period + stocks at beginning of period
** Divisional expense = all other direct divisional costs (i.e. ex cluding costs allocated from central administrative division)
*** Central administrative expense = all costs of the central Administrative Division