ACCA paper p3 business analysis EXAM KIT

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Professional Examinations Paper P3 Business Analysis EXAM KIT P AP ER P : BU SIN E S S A N AL Y SI S British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by: Kaplan Publishing UK Unit The Business Centre Molly Millar’s Lane Wokingham Berkshire RG41 2QZ ISBN: 978-1-78415-234-5 © Kaplan Financial Limited, 2015 Printed and bound in Great Britain The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties Please consult your appropriate professional adviser as necessary Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials All rights reserved No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing Acknowledgements The past ACCA examination questions are the copyright of the Association of Chartered Certified Accountants The original answers to the questions from June 1994 onwards were produced by the examiners themselves and have been adapted by Kaplan Publishing We are grateful to the Chartered Institute of Management Accountants and the Institute of Chartered Accountants in England and Wales for permission to reproduce past examination questions The answers have been prepared by Kaplan Publishing ii KA PL AN P U BLI SH IN G CONTENTS Page Index to questions and answers v Analysis of past papers xi Exam technique xiii Paper specific information xv Kaplan’s recommended revision approach xix Kaplan’s detailed revision plan xxiii Section Practice questions Scenario-based questions Answers to practice questions 163 Answers to scenario-based questions 381 99 Key features in this edition In addition to providing a wide ranging bank of real past exam questions, we have also included in this edition: • An analysis of all of the recent new syllabus examination papers • Paper specific information and advice on exam technique • Our recommended approach to make your revision for this particular subject as effective as possible This includes step by step guidance on how best to use our Kaplan material (Complete text, pocket notes and exam kit) at this stage in your studies • Enhanced tutorial answers packed with specific key answer tips, technical tutorial notes and exam technique tips from our experienced tutors • Complementary online resources including full tutor debriefs and question assistance to point you in the right direction when you get stuck You will find a wealth of other resources to help you with your studies on the following sites: KA PL AN P U BLI SH IN G i ii P AP ER P : BU SIN E S S A N AL Y SI S Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to with full details, or follow the link to the feedback form in MyKaplan Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions iv KA PL AN P U BLI SH IN G INDEX TO QUESTIONS AND ANSWERS INTRODUCTION The P3 examination starts with a strategic case study (see the scenario based questions) and strategic implementation has formed the majority of the option questions However there has been a slight change in the way that the syllabus has been examined – strategic implementation has begun to feature as one part of the scenario question, whilst strategic analysis (such as the value chain) has begun to appear in the option questions The exam kit tries to reflect this by having all three strategic planning areas (analysis, choice and action/implementation) reflected in both the scenario based questions section and the option question section Note that the majority of the questions within the kit are past ACCA exam questions – though, since the change of the examiner in 2007 and the change in syllabus this year, some new topics have been introduced to the syllabus and there are fewer past exam questions in these areas KEY TO THE INDEX PAPER ENHANCEMENTS We have added the following enhancements to the answers in this exam kit: Key answer tips Most answers include key answer tips to help your understanding of each question Tutorial note Most answers include more tutorial notes to explain some of the technical points in detail Top tutor tips For selected questions, we “walk through the answer” giving guidance on how to approach the questions with helpful ‘tips from a top tutor’, together with technical tutor notes These answers are indicated with the “footsteps” icon in the index KA PL AN P U BLI SH IN G v P AP ER P : BU SIN E S S A N AL Y SI S ONLINE ENHANCEMENTS Timed question with Online tutor debrief For selected questions, we recommend that they are to be completed in full exam conditions (i.e properly timed in a closed book environment) In addition to the examiner’s technical answer, enhanced with key answer tips and tutorial notes in this exam kit, online you can find an answer debrief by a top tutor that: • works through the question in full • points out how to approach the question • how to ensure that the easy marks are obtained as quickly as possible, and • emphasises how to tackle exam questions and exam technique These questions are indicated with the “clock” icon in the index Online question assistance Have you ever looked at a question and not known where to start, or got stuck part way through? For selected questions, we have produced “Online question assistance” offering different levels of guidance, such as: • ensuring that you understand the question requirements fully, highlighting key terms and the meaning of the verbs used • how to read the question proactively, with knowledge of the requirements, to identify the topic areas covered • assessing the detail content of the question body, pointing out key information and explaining why it is important • help in devising a plan of attack With this assistance, you should then be able to attempt your answer confident that you know what is expected of you These questions are indicated with the “signpost” icon in the index Online question enhancements and answer debriefs will be available on MyKaplan vi KA PL AN P U BLI SH IN G IN DE X TO Q UE S T ION S A N D A N S WE R S PRACTICE QUESTIONS STRATEGIC ANALYSIS Page number Question Answer Past exam CTC Telecommunication 163 – 3C Pharmaceuticals 166 – EEE Flavourings 169 – Swift 171 Jun 10 Bowland 174 Dec 95 McGeorge Holdings plc 176 Jun 03 NESTA 178 Jun 13 ISD 182 Dec 11 Moor Farm 11 186 Dec 12 10 ATD 13 189 Dec 13 11 One Energy plc 15 193 Jun 09 12 Independent Living 17 197 Dec 09 13 Noble Pets 19 201 Dec 14 STRATEGIC CHOICE 14 Graffoff 21 204 Dec 12 15 Environment Management Society 23 208 Pilot 11 16 MMI 24 211 Dec 08 17 Bluesky 26 216 – ORGANISATIONAL STRUCTURE 18 ALG Technology 29 219 Dec 01 19 ICC Organisation 30 222 Dec 96 20 Frigate Limited 31 224 Dec 10 BUSINESS PROCESS CHANGE 21 Country Car Club 32 228 Jun 08 22 Stella Electronics 34 232 Dec 14 23 TMP 36 235 Dec 10 24 Institute of Analytical Accountants 38 238 Jun 11 25 Flexipipe 39 242 Jun 12 KA PL AN P U BLI SH IN G v ii P AP ER P : BU SIN E S S A N AL Y SI S INFORMATION TECHNOLOGY Page number Question Answer Past exam 26 Perfect Shopper 41 246 Dec 07 27 Jayne Cox Direct 42 251 Jun 12 28 Protech-Public 44 255 Jun 10 29 Good Sports 45 258 Dec 06 30 Cronin Auto Retail 46 259 Jun 11 31 ARG 48 263 – 32 Bridge Co 49 264 Jun 14 MARKETING 33 AEC 51 268 Jun 08 34 HGT 53 276 Dec 13 35 BA Times 55 281 Dec 13 36 IAA 56 285 Dec 10 37 Chemical Transport 57 288 Jun 13 38 iTTrain 59 292 Jun 14 PROJECT MANAGEMENT 39 HomeDeliver 60 298 Dec 11 40 ASW 61 301 Dec 08 41 LDB 64 305 Dec 09 42 8-Hats Promotions 65 309 Jun 11 43 Institute of Independent Analysts 67 313 Jun 14 44 TKP 69 317 Dec 14 45 A clothing company 70 320 Dec 07 46 PAA 72 324 Jun 12 FINANCING 47 Woods Educational Institution 74 328 – 48 Potato-to-go Inc 75 332 – 49 David Silvester 77 334 Dec 06 50 Satellite Navigation Systems 78 336 – 51 X plc 79 339 – 52 World Engines 80 341 Dec 12 53 CoolFreeze 82 345 Pilot 11 54 PES 84 348 – v ii i KA PL AN P U BLI SH IN G IN DE X TO Q UE S T ION S A N D A N S WE R S STRATEGY AND PEOPLE Page number Question Answer Past exam 55 Rock Bottom 86 350 Jun 09 56 ARC 87 355 Jun 13 57 Grumit 88 359 Jun 95 58 National College 89 361 Jun 10 59 Global Imaging 91 363 Jun 06 MANAGING STRATEGIC CHANGE 60 PSI 92 365 Jun 08 61 iCompute 93 371 Dec 11 62 Zoomba 95 375 – 63 Strategies 97 378 – SCENARIO-BASED QUESTIONS 64 Oceania National Airline (ONA) 99 381 Dec 07 65 The National Museum 103 392 Dec 08 66 Shoal plc 107 402 Dec 10 67 AutoFone 110 410 Jun 08 68 WET 114 418 Jun 10 69 ReInk Co 119 427 Jun 14 70 Roam Group Co 123 434 Dec 14 71 Hammond Shoes 127 441 Jun 12 72 Hair Care Ltd 130 448 Jun 03 73 ABC Learning 133 455 Dec 09 74 GreenTech 137 463 Jun 09 75 GET 141 471 Dec 11 76 MidShire Health 145 479 Jun 13 77 MachineShop 149 487 Dec 13 78 EcoCar 153 495 Jun 11 79 Network Management Systems 156 503 Pilot 11 80 POTS 159 509 Dec 12 KA PL AN P U BLI SH IN G ix P AP ER P : BU SIN E S S A N AL Y SI S x KA PL AN P U BLI SH IN G P AP ER P : BU SIN E S S A N AL Y SI S Examiner’s comments For part (a) many candidates produced excellent answers that helped them pass the examination as a whole Most used PESTLE and Five Forces and structured the answer well, leading to many getting all four professional marks on offer However, despite this praise, specific comments have to be made about the way that many candidates addressed this part question • PESTEL is about the future and about external influences largely beyond the control of the organisation (EcoCar) Too many answers strayed into internal strengths (technology used by the company) and weaknesses (problems in budgeting) Furthermore, too many answers focused on issues that were relevant in the past The existence of a skilled work force was significant when the company was established, but that was in the past The problem now is finding skilled labour (due to retirement) and so labour pay rates have increased This could have been identified within the Five Forces analysis, considering the power of suppliers Too many answers included long, irrelevant social and political observations • Too many answers listed all the elements of PESTEL and Five Forces and then tried to find aspects of the case study to fit When those aspects were missing, answers were simply made up As a candidate, if you find yourself writing something like 'the case study scenario did not include much information on', then you are probably going down an irrelevant path There is no reason why a case study scenario should have all elements of the model under consideration, or that those elements should be equally weighted This was certainly true in the EcoCar scenario • Finally, time management for this question appeared to be dreadful It was only worth 16 marks (20 if you include the professional marks – although no professional marks are given for length) but many answers filled more than half the answer booklet It seems likely that time pressures later on in the paper were mainly caused by over-answering this part of the question For example, the examiner marked one script which gained full marks for this question However, the answer also contained a further four pages of discussion of strengths and weaknesses and a repetition of earlier points, now explored within the context of Porter’s Diamond The candidate only just scraped a pass overall Time management is particularly important when answering a question you like and recognise The examiner is aware that many candidates felt that the paper was time pressured, but he believes that much of this was self-inflicted through poor time management In Part (b) many answers were too general, giving text book answers which were largely irrelevant in the context of the case study scenario Little credit could be given for answers that just listed the advantages and disadvantages of outsourcing Context is critical here For example; what effect will this decision have on regional sales which are currently boosted by consumer’s pride in a locally produced product? Will ‘green consumers’ still want to buy from a company who have used a significant amount of non-renewable energy to transport cars from the production plant to the primary market place? Some candidates tried to use the Harmon process/strategy grid when answering this question, but this was largely irrelevant in this context Many candidates also failed to exploit the financial data that was made available in the question scenario Most recognised that outsourcing was financially attractive because the cost of outsourced production was cheaper than the variable cost of the EcoLite model Most also suggested that the Ecolite was the best candidate for outsourcing as it produced the lowest contribution However, this assertion 50 KA PL AN P U BLI SH IN G AN S WE R S T O S CE N A RIO - BA SE D Q UE ST ION S : S EC TI ON failed to recognise the production time of each car When this was taken into account the EcoPlus has a lower contribution per machine hour than the EcoLite, and its lower demand might make it a better candidate for outsourcing Similarly, many candidates recognised the extent to which production capacity was a limiting factor However, very few performed a calculation to show that even the optimal production mix only produced a modest profit and so this was a powerful argument for outsourcing to meet demand Furthermore, when EcoLite is taken out of the mix, the Lags Lane production plant makes a loss and has unused production hours, factors that could undermine its long-term future and so could be used in the argument against outsourcing Overall, marks were disappointingly low for this part question In part (c) many answers were too general and superficial (for example; get everyone together to have a meeting, improve the effectiveness of the training) and so failed to score the marks on offer The concept of proper budgeting was the key to answering the first issue considered in this part question Similarly, human resource development (succession planning, learning organisation, perceiving training as an investment rather than a cost) was the key to the second issue under consideration The issue of risks and risk management was better answered, perhaps reflecting the overlap between P3 and P1 learning It was their answer to this issue which lifted many candidates to a pass mark in this part question 79 NETWORK MANAGEMENT SYSTEMS Key answer tips In part (a), it is clear which model should be used – the PESTEL Do not use any other models In answering the question you should ensure that you are not simply highlighting issues, but that you are also consider how they impact on NMS and its growth prospects There are no marks for describing/explaining the model, so don’t waste time on this In parts (b), there is less guidance as to which model to use But there is a hint that it is one of the external tools in that it wants an ‘industry’ or ‘environment’ analysis It also mentions the word ‘competing’ When you put these factors together you should come to the conclusion that Porter’s forces is required Follow the same technique points as used in part (a) In part (c), focus as much on what the numbers tell us as you in performing calculations In part (ii) consider using some of the Ward and Daniel analysis on project appraisal (a) PESTEL analysis The PESTEL framework may be used to explore the macro-environmental influences that might affect an organisation There are six main influences in the framework: political, economic, socio-cultural, technological, environmental and legal However, these influences are inter-linked For example, political developments and environmental requirements are often implemented through legislation Candidates will be given credit for defining the main macro-economic influences that affect NMS, rather than the strict classification of these in the PESTEL framework KA PL AN P U BLI SH IN G 50 P AP ER P : BU SIN E S S A N AL Y SI S Political The political environment in which organisations operate is very significant Political parties may encourage or discourage economic activity through taxation policies and legislative programmes NMS is based in a stable, prosperous country, where successive governments have valued and encouraged technology Tax incentives and grants are given to companies that invest in technology and in research and development Tax credits are also provided to companies that invest in research and development These incentives are open to NMS, its domestic competitors and its domestic customers The government has also promoted the use of technology through a well-publicised awards scheme NMS is a recent beneficiary of such an award – for 'technological innovation in data communications' The scenario suggests that the government itself is a major investor in communications technology This technology has to be delivered through equipment that meets certain standards of reliability and compatibility The government has put an approval process in place to ensure such standards Such a process should ensure that technically inferior goods not make it into the market place The current political environment wishes to protect its citizens who are employees, by enacting legislation concerning employment hours, conditions and reward Economic The stage or phase of the economic or business cycle clearly affects customer buying decisions The case study suggests that 2010 saw a downturn in the domestic economy which resulted in a reduction of customer commitment to long-term investment Customers may postpone their buying decisions, although if innovative products bring cost and communication advantages then they will eventually have to invest in them Despite worsening economic conditions, labour costs remain high in Elsidor and the company may have to re-consider their commitment to manufacturing in the country Socio-cultural It appears that electronic communication and information exchange will continue to increase with implications for companies supplying products and systems to meet these growing needs All evidence suggests that the social use of services on such networks will increase Hence, although demand appears to be currently dropping off, new social uses for telecommunication networks might spark off a new wave of investment Technological Technology is a significant factor in shaping the life cycles of existing products and the introduction of new ones The technology sector is extremely innovative, with new and improved technologies constantly emerging NMS must scan the external environment for such technologies and identify how they might affect the future of their current products NMS must also consider how such emergent technologies might be used in their own products The forecast that increased sales will come from currently installed networks rather than from the installation of new networks is also relevant here 50 KA PL AN P U BLI SH IN G AN S WE R S T O S CE N A RIO - BA SE D Q UE ST ION S : S EC TI ON Environmental issues Green issues have an increasing impact on organisations, particularly in prosperous developed countries The reduction of emissions and improvement of re-cycling are likely to be reflected in socio-cultural trends and enshrined in legislation The cost of waste disposal is also increasing All these issues combine to increase the costs of manufacture and affect the competitiveness of the company in its market place Legal NMS operates in a country where there are laws defining employer responsibilities and employee rights It is likely that such regulation will continue and NMS, like all companies working in Elsidor, have to evaluate the benefits and costs of working within such constraints Some organisations seek to gain competitive advantage by moving to countries where regulation is more lax and hence avoid the compliance costs incurred by their competitors The case study scenario suggests that NMS has significant international competitors It is likely that some of these will be based in countries where employment and other legislation are less onerous Summary In the context of the case study scenario, it is political, legal and economic factors that significantly affect NMS However, as a technology company with significant investment in research and development, NMS must continue to scan the technological environment to identify trends that could undermine, enhance or replace their products (b) Michael Porter provides, through his five forces framework, a useful way of analysing the competitive environment of NMS Analysis suggests that the following key factors are shaping this environment Other appropriate models and frameworks could be used and appropriate credit would be given Bargaining power of buyers NMS is competing in two discrete market places In the data communications component market it where it has less than 1% of the market share it is, at best, a supplier of marginal significance The customers are OEMs, large industrial buyers who are likely to demand a testing combination of low prices, high quality and reliability They are unlikely to tolerate the late delivery of orders It appears that alternative sources of supply are readily available and that switching costs are relatively low This combination of circumstances suggests that OEMs have significant bargaining power in this market place This is particularly true for the OEM who currently accounts for 40% of NMS’ current sales In the second market place, where network management systems are supplied to large end users, the buyers appear to have less bargaining power NMS is catering for each customer’s specific needs and so each solution is, to some degree, a bespoke solution This makes it much harder for buyers to compare products and prices of potential suppliers, unlike in the commodity-like data communication component market Alternative sources of supply are much more difficult to find as there only two or three companies in this specialist marketplace Furthermore, the product purchase is likely to represent a relatively small part of the buyer’s overall investment in information and communication systems Reduced bargaining power makes this product less price sensitive and so provides an opportunity to generate good margins Large international customers are likely to be cautious about moving to new suppliers KA PL AN P U BLI SH IN G 50 P AP ER P : BU SIN E S S A N AL Y SI S The bargaining power of suppliers It seems unlikely that NMS will be able to exert much influence on it suppliers They are purchasing semiconductors and microprocessors from major global companies, who probably have well-known and powerful brands NMS, as a small company, will not have the power to exert buyer pressure on its suppliers, either in terms of price or delivery Current problems associated with the delivery of components are having a significant impact on the company’s ability to meet customer deadlines and expectations Clearly an audit needs to be made of supplier performance and the opportunity, or otherwise, for NMS to concentrate on suppliers able to deliver on time However, for a small company like NMS, the supplier appears to be in an excellent bargaining position If labour is seen as a supplier, then evidence again suggests that NMS is in a relatively weak position The scenario notes the difficulty of finding high calibre staff with NMS’s 'small size and location making it difficult to attract the key personnel necessary for future growth' Threats from new entrants NMS is operating in an industry where the costs of entry are significant because it is capital and knowledge intensive NMS has shown that there is a place for smaller innovative companies able to identify and exploit specialist market niches Economies of scale compel new entrants to enter at significant output levels or suffer a cost disadvantage The products are complex and there is likely to be a significant learning curve with costs only falling as volume builds up over time The need for government approval of new data communications components creates an approval process that is both lengthy and expensive and so creates a significant barrier to new entrants New entrants may be discouraged by the uncertainty surrounding the industry, in terms of technology, user acceptance and the R&D investment necessary to create components and systems compatible with OEM’s equipment and end user systems Furthermore, the need to offer comprehensive after sales support, although a problem for NMS, does also create a significant barrier to new entrants Finally, the exit costs and barriers to exit in the shape of industry-specific knowledge, skills and assets reduce the attractiveness of the marketplace to new entrants Threats from substitutes High technology industries are, by their very nature, prone to new technologies emerging that threaten and then eventually replace the established technology Hence it is very important that companies in such industries constantly scan the external environment to identify and anticipate such threats There is evidence that large, successful, high technology companies are particularly vulnerable to ignoring the challenge from disruptive new technologies However, the small size of the NMS may give it a competitive advantage in its ability to respond quickly and flexibly to change Rivalry amongst competitors Very different levels of competition are being experienced in the two market places NMS is operating in Unfortunately the financial data given does not separate out the revenue and costs for each market place However, it is clear that the high-volume, low-margin component business offers intense competition with buyers who are able to use their size to extract favourable prices NMS has less than 1% of the home 50 KA PL AN P U BLI SH IN G AN S WE R S T O S CE N A RIO - BA SE D Q UE ST ION S : S EC TI ON market and there are over twenty competing suppliers, some of whom have significant international presence, with a dedicated, geographically distributed support team The ability of NMs to generate better market share and volumes through product innovation in this market seems highly unlikely Competitive rivalry is high when there are many competing firms and the costs of leaving the industry are high The intensity of rivalry in the network management systems market is significantly less because there are only two or three competitors in this specialist market NMS is dealing with a small number of large end users, designing products specific to their needs In Porter’s terms, NMS are adopting a focused differentiation strategy In these low-volume, high-margin markers the emphasis has to be on increasing the volume side of the business, but at the same time making sure that they have the resources to handle new customers (c) (i) The financial data shows revenue climbing to a peak in 2009, before falling away (by about 10%) in 2010 During this period the percentage of sales from international contracts remained fairly constant NMS is still overwhelmingly dependent on the domestic market, accounting for about 92% of revenue Although 2009 was a record year for revenues, increased cost of sales meant that gross profit declined slightly Indeed the gross profit margin has declined every year in the period under consideration, and the reasons for this need to be investigated Gross profit margin (gross profit/revenue) 2010 2009 2008 2007 30.42% 34.04% 38.24% 40.63% Unfortunately the financial data does not distinguish revenues and cost of sales between the three distinct product/service areas However, the scenario suggests that gross profit margins of 40% are being achieved in the network management systems area If this is so, then the gross profit margin on data communication components is clearly significantly lower In 2010, overhead costs were reduced, but at a slower rate than the fall in revenue This led to a dramatic fall in the net profit margin Again, analysis shows that the net profit margin has also declined every year in the period under consideration In general, this fall has mirrored the decline in the gross profit margin However, the rapid fall in 2010 suggests that operating costs have not been brought under control to reflect the sudden sales decline Net profit margin (net profit before interest and tax/revenue) 2010 2009 2008 2007 2.29% 7.52% 10.29% 11.46% The number of staff employed in 2010 was exactly the same as the previous year This has meant a rapid fall in the sales revenue per employee Sales revenue per employee KA PL AN P U BLI SH IN G 2010 2009 2008 2007 90 101 113 107 50 P AP ER P : BU SIN E S S A N AL Y SI S Finally, the companies order forward order book has also reduced over the period In 2007 it stood at 73% of sales revenue This has declined to 37% by 2010 The overall financial picture is of a company that failed to control costs as it sought increases in revenue This appeared to work relatively well whilst revenues were increasing (the company was profitable in 2007, 2008 and 2009) but it was a problem as soon as revenues dropped Costs were not cut at the same rate as revenue decline, leading to a trading loss in 2010 (ii) Ray Edwards has effectively undertaken an informal time to payback calculation His assertion that the machine will pay for itself after five years is correct A more formal representation of the approach is given below All figures in $000s Year Brought forward Cost of the machine Maintenance costs Reduced staff costs Reduced wastage Energy savings Carried forward 76 90 15 2 76 60 42 22 15 60 15 42 15 22 15 10 There are two issues that need further consideration The first concerns the approach to investment appraisal Time to payback is a legitimate approach, but Ray has to be sure that it is a reasonable way of evaluating project investment in the context of NMS It does not take into account the time value of money and so future cash flows are not discounted, unlike the Net Present Value (NPV) approach This is significant here, because most of the cash outflows of the project are almost immediate (half of the costs are incurred in year zero), whilst significant benefits not accrue until years three and four If time to payback is acceptable, then Ray has to consider whether the payback time (five years) is acceptable and, more importantly, whether there other investments within the company which might pay back sooner, given that projects will be competing for limited resources Secondly, the costs of buying the new machine are very tangible However, Ray’s classification of benefits requires further consideration Although all three categories of benefit have been given a financial value, these values are not of the same degree of reliability Ray has already calculated that less labour is needed to use this machine and has estimated a reduction of $15,000 per annum based on observed performance This appears to be a relatively tangible financial benefit In Ward and Daniel’s term this is a quantifiable benefit, because sufficient evidence exists to forecast how much benefit should result from the change Wastage is currently being measured in NMS, but there is a risk of transferring the manufacturer’s claims of savings of ‘up to 10%’ directly to the NMS environment It is impossible to predict how much will be saved in advance in the specific context of NMS It will be possible to measure reduced wastage once the machine has entered into service, but it is difficult to predict accurately in advance In Ward and Daniel’s terms this is a measurable benefit for which a reliable measure currently exists and the improvement can be measured once the machine is working 50 KA PL AN P U BLI SH IN G AN S WE R S T O S CE N A RIO - BA SE D Q UE ST ION S : S EC TI ON ACCA marking scheme (a) Up to three marks for each element of the PESTEL analysis (b) Customer analysis Supplier analysis Substitute analysis New entrant analysis Competitor analysis Recognising and defining the three market places that NMS compete in Professional marks are awarded as follows – up to one mark for clarity, up to one mark for structure and up to two marks for justifying and explaining an appropriate framework for the analysis (c) (i) (ii) Up to two marks for the calculation and interpretation of each of the following ratios – – gross profit margin – net profit margin – revenue per employee Up to one mark for further appropriate points payback issues identifying drawbacks and suggesting alternatives identifying issues about benefit identification and quantification Total 80 Marks 15 marks Up to marks Up to marks Up to marks Up to marks Up to marks Up to marks Up to marks Maximum 20 marks Up to marks Up to marks Up to marks Up to marks Maximum marks Up to marks Up to marks Up to marks Maximum marks 50 POTS Key answer tips This is a challenging question for students Part (a) covers portfolio analysis which was also examined in this form in December 2010 and students who attempted that particular question would have found lots of similarities between the questions Part (c) covers benchmarking which had been the subject of a recent exam article which well prepared students would have read Part (b) covers contextual features of change which has been a regularly examined area So the areas should all have been revised by students, though students may be thrown by the combination of the topics, the lack of further strategy evaluation and the appearance in the compulsory section of topics which have previously been the remit of option questions KA PL AN P U BLI SH IN G 50 P AP ER P : BU SIN E S S A N AL Y SI S (a) Power of the Sun (POTS) Co The growth of the EA Group (EA) was largely made possible by the profits produced by POTS Co in the decade 1995–2005 It provided the funding for such acquisitions as ENCOS and Neach Glass Since 2005, the company has become steadily less profitable Gross profit has fallen in each of the last four reported periods (from 25% to 21%) Net profit has fallen in line (from 11.04% to 7.00%) and is now less than half that of the company’s heyday Market growth has slowed considerably as alternative forms of energy have become available However, POTS market share remains high as many of its competitors have either ceased business or scaled down their operations In the last two years, when the market has grown by only 0.5%, the company has increased its market share from 25% to 30% In Boston Box terms, POTS is probably a cash cow, with its high market share and presence meaning that it should be able to maintain unit costs below that of its competitors However, there is concern within the Group that the company is being neglected and this is being reflected in its profitability The best managers have been taken out of the company to work in new acquisitions and this has had a demoralising effect within the company There is also evidence that the brand has grown tired and is not well recognised or respected This is probably one of the problems with the cash cow How can managers in the company be motivated when they see their hard-earned profits invested elsewhere in the Group? If EA is still committed to solar energy as an important energy source, then it would probably be beneficial for it to revisit the brand, review its operation and publically reaffirm its commitment to it Neach Glass Neach Glass was an important supplier of POTS Co in the latter’s formative years The managing director, Kevin Neach, became a close personal friend of Ken Nyg, the managing director of POTS (and later the CEO of EA Group) When Neach was on the brink of going into administration it was purchased by EA to preserve the supply of high quality glass It also allowed Ken Nyg to help out a personal friend However, in the past five years substantial financial investment and the transfer of some of POTS’ best managers have failed to improve performance Although market share has increased in the last four years (from 7% to 9%), Neach remains a relatively small player in a declining market (reduced by 2% in the last year) Gross and net profit margins are improving (gross profit from 16.98% to 18.26%; net profit from 7.14% to 9.07%) but, in terms of performance within the Group, they remain stubbornly low Despite using some of the Group’s best managers, net profit has risen less than 2% since acquisition In Boston Box terms the company is probably a dog It seems to have inherent problems which the EA Group cannot solve It was understandable that EA bought the company to preserve the supply line But, in retrospect, this should have been a short-term response whilst POTS found a new supplier and the company should have then been sold There are no obvious similarities between energy management and glass manufacture Divesting this company from the portfolio remains the most appropriate response 51 KA PL AN P U BLI SH IN G AN S WE R S T O S CE N A RIO - BA SE D Q UE ST ION S : S EC TI ON ENCOS Acquiring ENCOS appeared to make sense It was clear that other renewable alternatives to solar energy were becoming more common and that a more rounded approach to alternative energy management was required ENCOS had expertise in energy control systems, but had little marketing expertise and lacked contacts with the large public sector organisations that were seeking to install such systems EA could bring this knowledge to the company, together with more experienced managers and a higher profile The acquisition appears to have been successful It has an increasing market share (19% to 25.93%) in a growing market (15.71% growth in the four years under consideration) Furthermore, the growth of the company is outstripping the growth of the market Gross and net profit margins are both growing (net profit margin up from 12.41% to 15.95% in the four years under consideration, gross profit up from 19.17% to 23.81%) In absolute terms, these returns are the highest of the companies considered here and net profitability continues to grow disproportionately, suggesting that operating costs appear to be falling In Boston Box terms the company is a potential star, although further information would be required to confirm this It has clear synergy with POTS and EA appear to have brought significant competencies to bear It could be argued that it is performing much better under EA’s guidance than it would have as an independent company Steeltown Information Technology If the industry Steeltown Information Technology is competing in is defined as ’public sector technology’, then it seems reasonable to suggest that the potential market growth is relatively high The present government is committed to privatising noncore services, so it can be expected that many councils will follow the example of Steeltown City Council and outsource information technology It could be argued that Steeltown Information Technology enjoys a very high market share in this new sector, so again potentially qualifying (in Boston Box terms) as a star No conventional financial figures are available and although the cost plus contract agreed with the council does mean that profits will be reported for, at least, the last five years, these will be relatively modest The real question with this acquisition is whether it makes sense EA does have experience of gaining contracts within the public sector, but in energy and control technology, not information technology and systems It has no experience of acquiring a public sector organisation and creating the degree of change required to move its culture to a profit-driven private sector company Overall, EA is trying to broaden its product base, and the acquisition of Steeltown Information Technology is its vehicle for pursuing this strategy Acquisition is an acknowledged way of entering a new market, but usually the acquired company is established in that market, which is not the case with the newly formed Steeltown Information Technology Whether the perceived synergies with ENCOS will emerge is debatable The two companies work in different markets ENCOS is focused on technical control systems in the energy sector In comparison, Steeltown Information Technology develops commercial information processing systems in a public sector environment The drivers are quite different ENCOS is focused on complex mathematical algorithms with little user intervention Steeltown Information Technology deals with developing systems for end users who have difficulty in both defining and implementing the systems they commission KA PL AN P U BLI SH IN G 51 P AP ER P : BU SIN E S S A N AL Y SI S (b) The issues explored in this question are four of the eight contextual factors, identified by Balogun and Hope-Hailey, which significantly influence strategic change Time refers to the amount of time available for EA to implement the changes at Steeltown Information Technology In some circumstances, time is a very critical factor, because the perilous financial nature of the organisation requires action to be taken quickly to arrest a decline in turnover or profitability, or indeed just to ensure its short-term financial viability This was the situation at Neach Glass when it was acquired by EA However, at Steeltown Information Technology the ten year contract with the city council, only reviewed after five years, means that there is no obvious need for the speedy implementation of change Sufficient profitability is guaranteed for the next five years to maintain present levels of resources at Steeltown Information Technology and this, potentially, gives EA a long elapsed period to implement the changes that they envisage The Scope of change can be considered as either largely realignment, or largely transformational Realignment can usually be accommodated within the current culture of the organisation, whilst transformational change requires a significant cultural shift It seems reasonable to suggest that the change at Steeltown Information Technology will be transformational Current work is inwardly focused, budget rather than profit-driven, run by managers with little experience of the private sector There will have to be a fundamental change in the core assumptions of the organisation Fortunately, there is no need to quickly implement these changes and so an incremental approach to change can be adopted In the Balogun and Hope Hailey model (adapted by Johnson, Scholes and Whittington) this suggests an evolutionary approach to change, where paradigm change is required, but over a relatively long time period Capability refers to what experience there is of managing change in the organisation Does the organisation have managers who have successively managed change in the past? Is the workforce used to change and have they readily accepted changes in their work practices? In the context of Steeltown Information Technology, evidence suggests that employees have little experience of change In fact, established work practices written into trade union agreements have tended to restrict change and this is one of the reasons why the city council decided that they wanted to separate off the information technology department Employees have been very concerned and anxious throughout the whole process of outsourcing, from the initial decision, through tender evaluation, to agreeing the sale of the organisation to EA On the other hand, EA does have experience of implementing change in the organisations that they have acquired This is probably one of the competencies it perceives that it is bringing to Steeltown Information Technology However, it has to be recognised that this capability has not appeared to be successful at Neach Glass and so some concern might be expressed about the validity of such a claim Readiness for change concerns the organisation’s attitude towards change Is it likely to embrace it or is there widespread opposition to change within the organisation or, indeed, significant pockets of resistance exist? There is little doubt that, initially, there is evidence that there was considerable opposition to change However, once the proposal was agreed and the sale made to EA, there appears to have been a greater acceptance of the need for change Perhaps it is best illustrated by the manager who stated that ‘he was against outsourcing in principle, but now the sale has been agreed, let’s get on with it’ The resignation of the IT director and his deputy has removed a significant pocket of resistance to change and it should make EA’s task easier 51 KA PL AN P U BLI SH IN G AN S WE R S T O S CE N A RIO - BA SE D Q UE ST ION S : S EC TI ON (c) Benchmarking is an attempt to assess the relative performance of an organisation It is understandable that EA wants to benchmark Steeltown Information Technology Although the contract with the city council is guaranteed for at least the first five years, it is important for EA to understand the performance of the organisation it has bought and the opportunity for driving out improvements and, hence, profitability There has been a tendency for organisations to increasingly attempt to benchmark themselves against the industry or sector they compete in, rather than against their historical performance However, such historical benchmarking was traditionally used when Steeltown Information Technology was part of the City Council Examples given in the scenario are the reliability of software as measured by reported faults and the satisfaction of users as measured by internally developed and analysed questionnaires This evidence suggests that the software produced by the organisation is becoming more reliable However, this may reflect the fact that fewer new systems were developed in the past two years as the council arranged for the technology department’s transition to the private sector Established software tends to have fewer faults than recently released software Furthermore, the measure is an absolute one, not a relative one The apparent improvements in user satisfaction may also reflect the hiatus associated with the transition from public to private sector Furthermore, the overall figures not seem very high even though the questions were set, collected and analysed by the technology department In general, externally measured satisfaction surveys are to be preferred Benchmarking against competitors is problematic in the context of Steeltown Information Technology because of choosing what sector to compare it with It is possible to make comparisons, using published government statistics, with other public sector organisations and indeed it seems to compare relatively well, reporting greater user satisfaction and software reliability However, again these figures have to be treated with care Did the user satisfaction surveys in the other councils use the same assessment criteria? Now that it has been privatised, the uniqueness of the Steeltown Information Technology experiment makes it almost impossible to find IT companies providing exclusive services to a public sector client against which it might be benchmarked EA has suggested benchmarking it against the performance of ENCOS However, the technology it provides and the nature of the client it serves make such comparisons very tenuous The focus of development has been quite different ENCOS reports on profit per contract, but Steeltown Information Technology currently only has one contract and is unlikely to have any relevant data, as profitability was not an objective of the organisation In any case, a major concern with such industry comparisons is that the whole industry might be performing badly and, in some circumstances, losing out to industries or technologies that can satisfy customers’ needs in a different way For example, poor performing companies providing bespoke software solutions may lose out to an organisation providing a standard off-the-shelf software package solution The shortcomings of industry norm comparisons have encouraged organisations to seek best practice wherever it can be found Johnson, Scholes and Whittington comment that ‘the real power of this approach is shaking managers out of the mindset that improvements in performance will be gradual as a result of incremental changes in resources or competencies’ They give an example of a police force studying a call centre as a way of improving their response to emergency telephone calls However, software development is quite specific and it will be difficult to think of any appropriate, innovative comparisons KA PL AN P U BLI SH IN G 51 P AP ER P : BU SIN E S S A N AL Y SI S Finally, benchmarking has been criticised on a number of accounts Firstly, it can lead to a situation where you get what you measure, which may not have been the intended strategic outcome If the strategy is flawed, then the benchmarking will encourage the organisation to continue, perhaps even accelerate, in the wrong direction For example, a focus on measuring the certification of staff is only valid if there is a proven causal link between certification and software quality Secondly, since benchmarking compares inputs, outputs or outcomes, it does not, itself, identify the reasons for good or poor performance The benchmark does not directly compare competencies As mentioned earlier, improvements may be due to external environmental factors, not directly linked to what the organisation is striving to achieve Although benchmarking seems superficially attractive, it appears quite difficult to use effectively at Steeltown Information Technology EA might be better focused, in the short term, on successfully implementing change and improving employee motivation and processes rather than trying to establish and measure sensible benchmarks ACCA marking scheme Marks (a) (b) (c) Total 51 mark for each relevant point up to a maximum of marks for analysing the strategic position of each company and mark for assessing what to with each company as part of the portfolio of the EA Group Four companies in the portfolio giving a total of The mark allocation may include, for each company, where appropriate: Percentage analysis of decline/growth: Market share calculation: Market growth calculation: Correct portfolio classification: Professional marks are allocated as follows: Up to marks for the clarity of the answer Up to marks for the structure of the answer mark for each relevant point up to a maximum of mark for each relevant point up to a maximum of 0.5 0.5 0.5 0.5 ––– 24 2 12 10 ––– 50 ––– KA PL AN P U BLI SH IN G AN S WE R S T O S CE N A RIO - BA SE D Q UE ST ION S : S EC TI ON Examiner’s comments In part (a) most candidates recognised that this question was concerned with portfolio analysis and so used appropriate analysis models The provision of market share and market growth data made the use of the BCG matrix (Boston Box) particularly appropriate Some candidates did use alternative models (SWOT in particular) and still scored relatively well However, there was insufficient data to undertake a SWOT analysis for each of the four firms in the scenario Many candidates scored very well in this part question Indeed, in some respects, some answers were too comprehensive, with candidates making more points than the marks on offer Sometimes this led to time problems later on in the paper A few candidates scored very heavily on this part question (over 20 marks) and yet still failed the examination overall, probably due to poor time management caused by spending too much time on this part question In contrast, the second part of question one was poorly answered This asked candidates to evaluate the potential influence of time, scope, capability and readiness for change at Steeltown Information Technology on any strategic change proposed by the EA Group Too many answers did not concern themselves with strategic change but instead focused on changes in the type of systems developed at Steeltown and the fact that there was a backlog of applications and that user departments found it difficult to specify system requirements in advance Furthermore, too few candidates commented on the competencies that the EA Group would bring to the problem, concluding that Steeltown would not have the ability to implement strategic change itself This is probably true, but the scenario makes it clear that responsibility for strategic change lies with the EA Group ‘They (the EA Group) want to explore these (contextual) factors before they firm up their proposed strategy for the newly acquired company.’ The final part of the first question concerned benchmarking It was clear that many candidates had read the relatively recent Student Accountant article on this and so scored relatively well It also appeared that some candidates were not prepared for this subject at all and omitted it completely Overall, this part question was fairly well answered (5 or marks out of ten was typical) by those who answered it KA PL AN P U BLI SH IN G 51 P AP ER P : BU SIN E S S A N AL Y SI S 51 KA PL AN P U BLI SH IN G ... of real past exam questions, we have also included in this edition: • An analysis of all of the recent new syllabus examination papers • Paper specific information and advice on exam technique... for all ACCA Qualification examination papers is 50% READING AND PLANNING TIME Remember that all three hour paper based examinations have an additional 15 minutes reading and planning time ACCA. .. conditions and could be: • a mock examination offered by your tuition provider, and/or • the pilot paper in the back of this exam kit, and/or • the last real examination paper (available shortly afterwards
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