Choosing Between Two Growth Routes
A regional courier firm, Pace Logistics, has 22 vans and turns over £2.4m with a 5% net margin. It faces two growth options. Option A: buy a rival's customer list and contracts for £300,000, adding £700,000 revenue at the firm's existing margin, but the rival's customers are concentrated in one sector (retail) and contracts are annual. Option B: invest £300,000 in electric vans and route-optimisation software, cutting fuel and maintenance costs by an estimated £90,000 a year and winning 'green' contracts from large corporates, though the firm has no experience selling to them. The firm has £120,000 cash and can borrow at 7%. Staff are already working at capacity in peak periods, and the operations manager warns that both options will strain scheduling.
1. Compare the two options financially and operationally, and recommend one.
Read the worked answer
Financial comparison (both cost £300,000):
- Option A: extra revenue £700,000 × 5% margin = £35,000 annual profit, plus acquisition risk. Payback ≈ 8.6 years on profit alone - slow, and the £300,000 buys no assets.
- Option B: cost saving £90,000 a year is profit before any new revenue. Payback ≈ 3.3 years, and the vans are assets with resale value. Green contracts could add further revenue.
Financing. With £120,000 cash, either option needs £180,000 of borrowing. At 7%, interest is about £12,600 a year - Option B's £90,000 saving covers this comfortably; Option A's £35,000 profit is much tighter after interest.
Operational and risk factors:
- Option A concentrates risk in one sector with annual contracts - losing a few customers could wipe out the gain. It also adds volume into an already capacity-constrained operation.
- Option B reduces cost per delivery, easing the capacity strain rather than worsening it, but requires a new sales capability (corporate green contracts) the firm lacks.
Judgement: Option B is stronger on payback, asset backing, interest cover and capacity. Its main risk is execution - selling to corporates - which can be mitigated by hiring one experienced salesperson or partnering. Option A's return is too thin for its concentration risk. A strong answer quantifies payback and interest cover, and recognises that 'profit per pound invested' favours B.
2. The operations manager says both options strain scheduling. How should this constraint affect the decision?
Read the worked answer
Why it matters: The firm is already at capacity in peak periods. Growth that adds volume without adding capacity can damage service quality, triggering penalties or lost contracts - turning a profitable option into a loss-making one.
Effect on each option:
- Option A adds £700,000 of volume into a constrained network. Without extra drivers and vans, on-time performance will fall. The £35,000 profit is small relative to the service risk.
- Option B reduces cost per delivery and, via route optimisation, can increase effective capacity. It is more compatible with the constraint.
Judgement: The capacity constraint strengthens the case for Option B and weakens Option A. However, a complete answer notes that even B requires implementation capacity (training, charging infrastructure, software rollout) and that peak-period staffing may still need investment. The constraint should be treated as a decision criterion, not an afterthought: the best option is the one that relieves rather than adds to the bottleneck. A strong answer may recommend sequencing - implement B first, then reassess A once capacity is freed.