Business strategy ICAEW

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PROFESSIONAL LEVEL EXAMINATION lta nts WEDNESDAY 10 DECEMBER 2014 (2½ hours) BUSINESS STRATEGY This paper consists of THREE questions (100 marks) Ensure your candidate details are on the front of your answer booklet Answer each question in black ballpoint pen only Answers to each question must begin on a new page and must be clearly numbered Use both sides of the paper in your answer booklet The examiner will take account of the way in which answers are presented When the assessment is declared closed, you must stop writing immediately If you continue to write (even completing your candidate details on a continuation booklet), it will be classed as misconduct Co ns u The questions in this paper have been prepared on the assumption that candidates not have a detailed knowledge of the types of organisation included in the paper No additional credit will be given to candidates displaying such knowledge IMPORTANT A Question papers contain confidential information and must NOT be removed from the examination hall You MUST enter your candidate number in this box GC DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO BEGIN WORK Copyright © ICAEW 2014 All rights reserved Page of Confo plc (Confo) is a listed company, operating in the packaged confectionery products (boxes of sweets) industry lta nts Confo was established in 1968, manufacturing boxes of sweets in its factory and selling them in its own shops throughout the UK Since 1983, some of the 240 shops have been operated under exclusive franchise arrangements, while the remainder are still owned by Confo All products sold at Confo shops (both owned and franchised) are produced in Confo’s factory The company was structured as two separate divisions, Manufacturing and Retail, until 30 September 2013 (Exhibit 1) Recovery plan Co ns u After a difficult period of trading, a new board was appointed in December 2012 and, following a detailed review, it implemented a radical three-year recovery plan from October 2013 The recovery plan included: the closure of 70 owned shops; the opening of 30 franchised shops; and the creation of two new sales channels, commercial sales (to UK supermarkets) and export sales (to overseas retailers) As a result, Confo now has two additional divisions, Commercial and Export, and a revised system for pricing transfers (Exhibit 2) Following preparation of the management accounts and operating data for the year ended 30 September 2014 (Exhibit 3), a board meeting was called to review progress in implementing the three-year recovery plan, and to consider whether any changes to the plan are needed Board meeting The chief executive complained: “This year’s results are disastrous This was supposed to be a recovery plan, but performance seems to have got worse, not better Profit has fallen compared with last year.” The marketing director disagreed: “I believe that we have great potential for future growth from the commercial and export sales that we started this year However, we need to give them time to get established and show their potential You cannot judge performance on one year’s figures.” An ethical issue GC A From October 2013, the sales manager of Confo’s Commercial Division, Kirsty Keller, met regularly with John Drake, the procurement manager of a large customer, Lenton Supermarket (Lenton) In November 2013, John asked if he could have two small boxes of sweets for his family for Christmas This type of small gift to customers’ staff is common in the sweets industry In December 2013, Kirsty delivered some Confo sweets, with a total value of £10, to John’s home as a gift to promote good relations between Confo and Lenton She informed Confo’s commercial director about what she had done and he was happy with this action From January 2014, John made further requests for gifts of sweets, gradually increasing in both value and frequency In order to keep a good business relationship with John, Kirsty continued to provide these gifts, but she stopped disclosing them to the commercial director in March 2014 when the value of the gifts reached £30 per week In July 2014, when John started asking for gifts valued at £100 per week, Kirsty refused Copyright © ICAEW 2014 All rights reserved Page of In September 2014, Lenton stopped purchasing from Confo Kirsty never made any personal gain from the gifts and there is no documentary evidence relating to them lta nts Requirements (a) Compare and evaluate Confo’s pricing of transfers before and after the changes made by implementing the recovery plan on October 2013 Suggest and justify alternative methods of pricing transfers that Confo could have adopted on October 2013 (9 marks) (b) Analyse and evaluate the performance of the Manufacturing Division and the Retail Division in the year ended 30 September 2014 compared with the year ended 30 September 2013 Highlight any problems in comparing the data and set out any additional information that would assist your analysis (15 marks) (c) As part of the appraisal of the first year of the recovery plan, write a report which: (ii) (d) Reviews the strategies adopted by the Export Division and the Commercial Division, and evaluates their performance Include any relevant strategic models in your appraisal Evaluates the success of the recovery plan for Confo to date (15 marks) Co ns u (i) Explain the ethical issues for Kirsty, and for Confo, arising from the matters occurring with Lenton and John Drake Set out, and justify, the actions that Kirsty and Confo should now take (7 marks) Total: 46 marks Exhibit 1: Company structure and pricing of transfers – pre 30 September 2013 A Up to 30 September 2013, both Confo divisions, Manufacturing and Retail, were profit centres The factory’s output was transferred by the Manufacturing Division to all Confo shops (owned and franchised) at the same price, full cost plus 20% In addition to the Retail Division’s profits from the owned shops, Confo also earned a total of £1.2 million annually from the fixed fees it charged to franchisees for use of the Confo brand name and for operational and management support Consumers are charged the same list prices at all Confo shops Franchisees are also required to charge these list prices in order not to undercut the prices charged by owned shops, and to avoid cheapening the Confo brand GC The setting of the same prices for transfers from the factory to both owned and franchised shops caused some internal debate The Retail Division management claimed that prices for transfers to owned shops were too high and should be lower than the prices charged to franchisees They also believed that the annual fixed fees paid to Confo by franchisees were too low Confo products are unique and valid comparison with the prices charged by rival manufacturers and retailers cannot be made easily Copyright © ICAEW 2014 All rights reserved Page of Exhibit 2: Company structure and pricing of transfers – post October 2013 Changes in the Manufacturing Division lta nts Since the commencement of the recovery plan on October 2013, Confo has operated with four divisions: Manufacturing, Retail, Commercial and Export From October 2013, the Manufacturing Division became a cost centre It transfers all its output at full cost to the Retail Division, to franchisees, and to the new Commercial and Export Divisions The reduction in the price of transfers was, in part, intended to increase the volume of sweets purchased by existing franchisees and to encourage more franchises to be taken up To offset the lost revenue, Confo increased the fixed fee charged to each franchisee These fixed fees now total £2.5 million Changes in the Retail Division Co ns u Confo continues to make UK retail sales via owned and franchised shops The Retail Division still comprises owned shops and remains a profit centre The review by the new board identified that many owned shops in the retail network were under-performing On October 2013, as part of the recovery plan, 70 poorly performing owned shops were closed Of these closed shops, 30 were immediately reopened under the management of new franchisees The new Commercial and Export Divisions The Commercial and Export Divisions were opened on October 2013 as separate profit centres The Commercial Division makes sales to UK supermarkets The products are all made in Confo’s factory, but are packaged by Confo in the client’s brand and wrapping (ie ‘own labelled’) in order to minimise the loss of sales at Confo shops, and to make price comparisons by consumers more difficult Prices charged by the Commercial Division are negotiated separately with each client The supermarkets sell the products at retail prices that are lower than the list prices in Confo’s owned and franchised shops GC A The Export Division sells only Confo branded products, in bulk, to overseas retailers It has taken some time to establish relationships with new clients and develop brand awareness, but sales have started to grow Copyright © ICAEW 2014 All rights reserved Page of Exhibit 3: Management accounts and operating data Manufacturing £’000 Retail £’000 Total £’000 8,100 18,000 (13,050) (8,700) 4,350 24,000 (18,000) (2,400) (4,000) (400) 8,100 24,000 (15,450) (12,700) 3,950 1,200 5,150 Co ns u Transfers to franchised shops by Manufacturing Division External sales Divisional transfers Variable costs Fixed costs Divisional profit Fixed franchise fees Operating profit lta nts Confo: Management accounts for the year ended 30 September 2013 Confo: Management accounts for the year ended 30 September 2014 Manufacturing Transfers to franchised shops by Manufacturing Division External sales Divisional transfers Variable costs Fixed costs Divisional profit Fixed franchise fees Operating profit Retail Commercial Export Total £’000 £’000 £’000 £’000 £’000 7,500 13,000 (12,300) (8,200) 14,400 (9,000) (1,080) (3,000) 1,320 4,320 (3,000) (720) (300) 300 1,760 (1,000) (320) (240) 200 7,500 20,480 (14,420) (11,740) 1,820 2,500 4,320 A Confo: Operating data for the years ended 30 September GC Number of boxes of sweets sold externally: Retail Division (owned shops) (000s) Franchised shops (000s) Commercial Division (000s) Export Division (000s) Total products sold externally Number of Confo shops: Owned shops Franchised shops Copyright © ICAEW 2014 All rights reserved 2013 2014 12,000 5,400 17,400 7,200 6,000 2,400 800 16,400 150 90 80 120 Page of Radar Traditional Radios Ltd (RTR) is a family-owned company which manufactures high quality portable radios at a factory in the UK The particular styling of the radios, which appeals to UK market tastes, means sales are made in the UK only lta nts Radio broadcasting In the UK, radio stations broadcast radio programmes via two main platforms:  Analogue, using traditional analogue frequencies (AM/FM)  Digital, using newer digital audio broadcasting (DAB) Digital broadcasting was publicly launched in the UK in 1995 The broadcasting industry is encouraging digital radio broadcasting as it offers a wider choice of radio stations than analogue, is easier to use, and is resistant to localised signal interference Radio listening Co ns u However, on the negative side, the overall audio quality on digital is poorer than analogue, and digital reception is restricted in certain areas of the UK, so a lower percentage of the population can receive digital, compared with analogue Digital reception was available to 80% of the UK population in 2004 and to 90% by 2014 Analogue reception is available to 99% of the UK population In 2013, 35% of radio listening hours in the UK were on digital, 60% on analogue and 5% on other platforms Radio programmes that are broadcast on the analogue platform can be listened to only on analogue radios Digital radio broadcasts can however be listened to on a variety of devices The devices used to listen to digital audio broadcasts in the UK in 2009 and 2013 were as follows: A Radio listening to digital broadcasts by device 2009 2013 % % Digital television 25 27 Digital radios 23 25 Internet 15 22 Smartphones 10 20 Other devices 27 GC In 2009, there was significant optimism about the future of digital radio broadcasting The UK government predicted that it would switch off the analogue platform in the UK by 2015 As a result, in 2011 a major UK electrical retailer announced that it would shortly stop selling analogue radios In spite of this early optimism, however, growth in sales of digital radios has been much lower than anticipated Digital radios are currently owned by a little less than half of UK households The government is now expected to require the switch-off of analogue radio frequencies in the UK by 2019, at the very earliest Some industry analysts believe that digital may take many years to overtake analogue due to the modest levels of ownership of digital radios Copyright © ICAEW 2014 All rights reserved Page of Radio manufacture lta nts The manufacture of radios is a global industry with some multinational companies producing radios as part of a wide range of consumer electrical products There are however many small national companies, like RTR, specialising in radio manufacture only for their home markets Some companies have stopped making analogue radios Most companies in the industry, however, currently manufacture both analogue and digital radios, though some have plans to greatly reduce, and then cease, the production of analogue radios, as analogue is being switched off in an increasing number of countries The price of radios to consumers in the UK varies widely Analogue radios are significantly cheaper than digital radios, retailing from around £25 The cheaper digital radios retail at £35, and mid-market digital radios are typically £50 to £100, while top-of-the-range models are considerably more expensive Co ns u With advances in technology, some radio manufacturers are adding additional features to digital radios including, for example, internet access They have also added ‘Bluetooth’ technology, which allows the user to stream music wirelessly through a digital radio from other devices such as MP3 players and smartphones Company information - RTR RTR manufactures both digital and analogue radios Its radios contain up-to-date technology and are known for their quality, but they deliberately feature old-fashioned styling This gives RTR a niche market, but there is continued pressure in the industry to keep the technology up-to-date to compete, not just with other radios, but also with the other devices, such as smartphones, which can receive digital broadcasts RTR radios are only distributed through upmarket stores in the UK, and are at the top end of the market RTR’s analogue radios sell for an average of £150 and their digital radios average £200 Over the past few years, RTR’s annual sales volumes have remained constant at 100,000 radios, as follows: RTR sales (units) Analogue radios Digital radios 2009 65,000 35,000 2013 60,000 40,000 A RTR has always had a policy of investing in research and development (R&D) to ensure its radios are innovative in function, as well as being distinctive in style Recently it has added Bluetooth to one model in its digital range, but further investment is needed to introduce Bluetooth across the digital range and develop additional technology features GC It has become difficult for RTR to compete with larger manufacturers given rapidly advancing technology, both in radio broadcasting and in listening devices RTR needs to decide whether to cease R&D and marketing expenditure on analogue radios, effectively phasing out their production over the next two to three years, so that all the R&D and marketing budgets can be focussed on digital radios A board meeting was arranged to discuss these issues Copyright © ICAEW 2014 All rights reserved Page of Board meeting lta nts The R&D director was pessimistic: “We are a small company in a big industry We need to focus our R&D expenditure on digital products or the budget will just be spread too thin.” The marketing director disagreed: “We cannot abandon analogue, which is still our largest market I agree we need to focus our resources However, I would try to focus marketing expenditure at our target consumer groups for both analogue and digital radios, not just concentrate on one type of product I agree the digital radio market is more challenging, so I have provided some data (Exhibit) to help us decide on a marketing strategy for digital radios.” Requirements Using Porter’s Five Forces Model, explain the impact on competitiveness in the radio manufacturing industry, for the UK market, of the following TWO forces only:   substitutes competitive rivalry amongst existing firms Co ns u (a) (10 marks) (b) Explain how market segmentation can be used by RTR to identify target groups of consumers for its digital radios, and discuss how each of the components in the marketing mix (4Ps) can be used by RTR to promote its digital radio product range to these groups (12 marks) (c) Discuss and evaluate the factors to be considered by the RTR board in determining whether, and if so when, it should decide to abandon the manufacture of analogue radios to focus resources on developing and selling only digital radios (9 marks) Total: 31 marks Exhibit – Analysis of UK consumers for digital radios RTR radios 55 £37,000 45% male GC A Age of consumer Average annual income Gender UK industry average 45 £23,000 60% male Copyright © ICAEW 2014 All rights reserved Page of The Norgate Bank plc (NB) is a bank whose customers are small businesses and individuals living in either the UK or France It has no physical branches for customers to visit Internet banking is therefore important to NB, but also its telephone call centres are key to communication and to building customer relationships lta nts Until last year, NB had only one telephone call centre, which was near London and served all its existing customers Call operators included fluent French speakers to serve French customers In December 2013, a major new investment was made in a new call centre in Vietnam, where some of the local population speak French At that time, Ron Terry was appointed as the director in charge of all call centre operations Under the new arrangement, the UK call centre serves only UK customers French customers are served by the call centre in Vietnam, where call operators are from the local, French-speaking population Property costs and staff costs are much lower in Vietnam than in London At both call centres there are two groups of call operators: one for business customers and one for individual customers Co ns u Ron wants to conduct a post-implementation review of both call centres to ensure that physical and human resources are being used efficiently Over the past year, Ron has used three Key Performance Indictors (KPIs) to measure call centre performance (Exhibit) These are:  Average time taken to answer a customer call  Average length of a customer call  Scores from customer satisfaction surveys for handling calls (where: = poor; = excellent) Ron is concerned about the validity of these KPIs, and he is unsure whether they are the most appropriate means of measuring performance He is also unsure how they might be utilised to improve the efficiency of the call centres Wendy West, a senior manager reporting to Ron, used to work at a call centre in a large insurance company She believes that NB’s KPIs are poor by comparison to those of her previous employer Requirements Evaluate the validity of the three KPIs used for measuring the performance of NB’s call centres and suggest alternative measures (12 marks) (b) Explain the benefits and problems of NB using benchmarking to evaluate performance, and to improve efficiency, in its call centres Refer to different types of benchmark and use the data in the Exhibit where relevant (11 marks) A (a) Total: 23 marks GC Exhibit – data for the year ended 30 November 2014 Number of calls in the year (000s) Number of call operators Time to answer a call (minutes) Length of call (minutes) Average customer satisfaction score Copyright © ICAEW 2014 All rights reserved UK call centre (UK customers) Busines Individuals s 120 1,200 20 100 2 10 3.9 4.1 Vietnam call centre (French customers) Business Individuals 90 12 3.1 600 30 1.2 3.3 Page of Business Strategy - Professional Level and Stage – December 2014 MARK PLAN AND EXAMINER’S COMMENTARY Question – Confo plc General comments lta nts The marking plan set out below was that used to mark these questions Markers were encouraged to use discretion and to award partial marks where a point was either not explained fully or made by implication More marks were available than could be awarded for each requirement This allowed credit to be given for a variety of valid points which were made by candidates This is the mini case worth 46 marks and also the main data analysis question Co ns u The scenario is based on a manufacturer of confectionery products, Confo, which also owns and franchises retail outlets, which sell the company’s products Following a period of difficult trading, Confo implemented a three-year recovery plan which: closed a number of owned outlets, reopening some of these as franchised outlets; opened a new commercial division; and opened a new export division There was also a change in the way the manufacturing division priced transfers to owned and franchised outlets The change was from cost plus 20% to full cost, with franchisees also paying an increased fixed annual fee One year into the recovery plan, the board undertook a review of progress This review showed that the overall performance of the company had deteriorated An additional ethical issue has arisen whereby the procurement manager of a major customer had been asking for gifts of sweets from a Confo sales manager These requests were small in value at first, but increased in amount and frequency over time Their eventual cessation by Confo led to the customer withdrawing its custom Candidates were required to: (i) Compare and evaluate the methods of pricing transfers before and after the implementation of the recovery plan (ii) Analyse the performance of the Manufacturing and Retail Divisions in 2014 and 2013, explaining any problems in comparing the data and setting out any further information needed (iii) Review the strategies of the new Export and Commercial Divisions and evaluate the success of the recovery plan for the company overall (iv) Explain the ethical issues arising from the requests for gifts (a) A transfer price (TP) is the price at which one division in a group sells its products or services to another division in the same group The transfer prices will be important for Confo as they have a number of implications: They determine the profits of divisions If the Manufacturing Division charges a high transfer price then most of the total profit from company sales will be attributed to it, with less to the other divisions This will give a false measure of performance for all divisions  As the price to franchisees is the same as the transfer price to the owned shops, this may impact upon the willingness of third parties (favourably or unfavourably) to take up franchises and the volume of goods they purchase whilst a franchisee  If high transfer prices are passed on to ultimate customers then sales volumes may fall and overall profits may be distorted GC A   Inappropriate transfer prices can lead to internal conflict between divisions As shops only sell Confo’s confectionery, the Retail Division cannot access outside markets to obtain lower cost products from third parties The Manufacturing Division is therefore a monopoly supplier to owned shops and to franchisees and, from October 2013, to the Commercial and Export Divisions Pre-1 October 2013 transfer pricing system The transfer pricing system pre-1 October 2013 was on a full cost plus 20% basis Copyright © ICAEW 2015 All rights reserved Page of 19 Professional Level – Business Strategy – September 2014 lta nts (v) Ensure that key strategic knowledge is kept secure and confidential within Forsi and does not leak to competitors or is not lost when staff leave eg ensuring all scientists have confidentiality clauses in their contracts, protecting IP wherever possible Some knowledge will be explicit e.g particular forensic science procedures or protocols Other knowledge may be tacit (in the heads of the scientists and/or founders and therefore invisible) It is more difficult to harness the tacit knowledge and the informal networks and communities or practices that exist within an organisation However encouraging increased collaboration between scientists would help Forsi to transform tacit knowledge into explicit knowledge Forsi needs to try and break down the barriers to sharing e.g scientists may be protective of their knowledge and feel reluctant to give away their value or feel that they are losing their position of influence or professional respect if they share their expertise with everyone Co ns u Encouraging increased collaboration between scientists and creating a culture of openness where knowledge sharing is rewarded, would help Forsi to transform tacit knowledge into explicit knowledge In a field such as forensic science negative knowledge is also important A company with an effective knowledge management process will be able to build a permanent body of awareness of "negative knowledge" which provides information to improve on - those approaches that didn't work out as hoped or anticipated, or the reasons why a particular tender was lost A KM strategy is likely to place significant reliance on information technology and systems and Forsi may need to invest more money in this area Electronic tools such as online bulletin boards, blogs, intranets and wikis may all facilitate knowledge sharing A Requirement (c) asked candidates, on the assumption that the business was not taken over, to explain why knowledge management is important to Forsi and recommend steps to implement a knowledge management strategy Answers to this requirement, which was the least well done of all the paper, were very polarised and only a small minority of candidates scored the maximum marks The weakest candidates knew very little about knowledge management or misinterpreted the requirement and wrote about the need for a management information system Better candidates identified that scientific knowledge was a key strategic asset for Forsi and a source of competitive advantage They went on to discuss how IP might be protected and the steps Forsi could take to capture and disseminate the knowledge that its scientists and founders possess GC Total possible marks Maximum full marks Copyright © ICAEW 2014 All rights reserved Page of 22 Professional Level – Business Strategy – September 2014 (d) Integration and change management Marks Forsi will also have greater access to funding lta nts Choice of operating structure Irrespective of the structure chosen, ownership by Aussi is likely to provide Forsi with additional administrative support and may reduce the need for outsourcing Better financial controls and a focus on efficiency and returns may prevent acceptance of unprofitable or unacceptable projects Combined organisational knowledge is likely to increase as the businesses differ in geography, culture and operating practices, so sharing experience and best practice may enhance activities for both Aussi and Forsi However: The need for central sign-off of projects by Australia may delay the speed of response so Forsi could lose tenders to competition Co ns u Rejection of a project purely on financial grounds may overlook the fact that it leads to repeat business or other more profitable work Ownership by a larger global company inevitably brings more bureaucracy which could stifle Forsi’s innovation and research culture Specific issues relating to the two different options for structuring the management of Forsi: Integration of Forsi within the existing division of Aussi If Forsi is fully incorporated into Aussi as part of its forensic science operating division, then its strategy and operations will be formalised centrally This may help with knowledge sharing etc – Aussi is likely to have procedures in place Forsi may be able to increase efficiency by benchmarking its activities against the rest of the division Integration may also generate economies of scale The parts of the business will be geographically separate but there may be economies in areas like procurement A However, having too great a technostructure would seem to run counter to the needs of an innovative business and direct supervision is unlikely to be welcomed by scientists, who are used to working independently Decision making could become slower and inflexible and barriers between scientists and clients may increase GC Some UK clients may have a negative attitude to Australian ownership, especially those in the public sector Conversely being part of the acknowledged market leader in Australia/Asia may give Forsi credibility at tenders and help win more business/public sector projects Aussi’s forensic division may be more conservative in their attitude to risk which might affect the nature of projects undertaken Aussi’s main activities are in Australia and Asia so it may not make sense to have European activities integrated in the same area when markets, regulations etc may be quite different It will be harder for Aussi to assess how Forsi is doing if its activities are subsumed within the existing division – Forsi will only be a very small part of the existing activities Copyright © ICAEW 2014 All rights reserved Page of 22 Professional Level – Business Strategy – September 2014 lta nts Separate subsidiary company Forsi would have more freedom to operate as it has done before, retaining its researchcentred culture Forsi’s founders may continue to negotiate its own projects and have more flexibility re pricing and margins, although it will still be subject to Aussi’s project screening procedures so will not be completely autonomous Objectives of the subsidiary may become more determined by financial considerations and the need to meet Aussi’s targets Forsi’s culture could change and this may affect the behaviour of the workforce who appear happy with the current loose informal structure Australian ownership may be less visible to clients if Forsi continues to operate as a separate subsidiary Recommendation: Co ns u Forsi would be a very small subsidiary compared to Aussi’s existing division Forsi should be operated as a subsidiary Aussi needs to create some overarching management principles to guide activities but not overemphasise rules, regulations and procedures, otherwise research and innovation will be stifled ROCE and margin targets may need to be different than for the existing division to take account of the different market place, clients etc Change management The acquisition will involve rapid one-off change to the culture and structure of the organisation and is likely to be viewed by Forsi’s employees as transformational It is likely to involve changes to the way activities are carried out, new management structures and new reward systems The change is likely to be greater if Forsi is to be incorporated within the division of Aussi than if it is to continue as a stand-alone subsidiary.The way in which Aussi manages the change will affect the future success of the business Integration will require a careful change management programme A If the founders have agreed to sell then they may encourage and support the change programme, particularly if they are involved in any sort of earn-out The founders may therefore be able to help break down any forces resisting change GC Intelligent staff such as the scientists employed by Forsi will want to feel like they are being offered the chance to participate in the change process One danger of consultation however is that should they provide input which is ignored they might become demotivated Thus some careful negotiation and trade-offs may be required to accommodate the wishes of all parties involved in the change Open communication as to the reasons for the change in structure may help Forsi’s staff to accept it, although care needs to be taken that such education is not done in a patronising way Power, coercion or manipulation are unlikely to work with the majority of the scientists and may result in the loss of key staff Copyright © ICAEW 2014 All rights reserved Page 10 of 22 Professional Level – Business Strategy – September 2014 lta nts The assumption in requirement (d) was that Forsi’s founders did agree to be taken over by Aussi Candidates needed to discuss whether Forsi should be operated as a subsidiary or as part of Aussi’s forensic science division, and to recommend how Aussi should manage the change when the takeover is announced Again this requirement was well attempted Most were comfortable discussing the choice of operating structure, in the light of Aussi’s desire to retain Forsi’s research-centred culture Better candidates discussed the impact the choice might have on performance monitoring, given Aussi’s project screening process and requirements for target returns, and provided a preliminary recommendation as to the best option However some weaker candidates seemed to overlook the fact that the two businesses were very dissimilar in size and geographic location As in previous sittings, candidates were well versed in the technical knowledge for the change management requirement but an inability to apply this knowledge was again evident on the part of the weaker candidates A key issue here was that the nature of the change, the likely barriers and the appropriate change management practice were dependent on the choice of structure, a fact that the better candidates identified 16 14 GC A Co ns u Total possible marks Maximum full marks Copyright © ICAEW 2014 All rights reserved Page 11 of 22 Professional Level – Business Strategy – September 2014 Question lta nts General comments This question was also well attempted The scenario concerns ToyL, a provider of educational toys which will be sold to individual customers (parents, grandparents, children) and wholesale purchasers (schools and daycare centres/nurseries) ToyL is a start-up business which has developed three distinct educational toys that use interactive technology to teach young children number skills, alphabet skills and phonics The company has been founded by Pavel and Rosemary, a team of husband (IT specialist) and wife (educational consultant).The toys are in prototype form but functionally complete The product line is expected to grow over time as new ideas are generated While prototypes will be designed and manufactured in-house, production will be outsourced A website will be used as the key marketing tool ToyL hopes to be profitable by the end of year one and expects a steep increase in sales for the next few years ToyL is in the process of producing a business plan to attract funding and a draft version is included in the scenario Candidates were required to: b) c) write a report for Pavel and Rosemary which critically assesses the content of the draft business plan and makes recommendations as to how the document may be improved in order to attract the necessary investors explain the benefits of outsourcing as a production model for ToyL explain how the information requirements of Pavel and Rosemary as managers will be different from the information requirements of the additional private investors, once the business is operational (a) Business Plan Co ns u a) Marks Report on draft Business Plan To: From: Date: Rosemary and Pavel Bochev AN Accountant September 2014 This analysis is done in two parts: (i) the quality and completeness of the existing sections of the plan (ii) additional sections or information that would be relevant The current plan is lacking in critical financial detail and this is discussed further below Quality and completeness of existing plan A Executive summary GC One of the most important sections of a business plan is the executive summary The executive summary should grab the attention of potential investors, help them understand what ToyL is about and the implications for their investment, and make them want to read the plan in more detail Pavel and Rosemary have correctly identified that although it is the first thing that will appear in the plan, it should be the last thing to be written It will need to highlight the key points from the other sections:  Overview of the business  Why it will be successful  What finance is being sought  What financial performance an investor can expect  Any major risks and how they can be mitigated Copyright © ICAEW 2014 All rights reserved Page 12 of 22 Professional Level – Business Strategy – September 2014 Introduction and management team lta nts This section should introduce the business and the owners’ vision for its future Anyone investing in ToyL needs to have faith in Pavel and Rosemary’s management skills and commitment to the business There is insufficient detail about the management team The business is clearly going to be very dependent on the two directors and a prospective investor is likely to want more information to assess the risk that this creates:  Ages  Personal objectives  Financial management experience  CVs (include in an Appendix)  Other personnel that the business is planning to employ to address any skills gaps – a key concern for any investor would be Rosemary and Pavel’s apparent lack of financial expertise Products Marketing Co ns u This section clearly explains ToyL’s products However since the business is at a very early stage, it will be important to provide evidence about how realistic the idea is:  USPs compared to existing products on the market  Evidence of field testing  Feedback on prototypes and modifications required  Cost and time required to get product ready for market  Details of who will manufacture the products  Details of toy safety regulations and ToyL’s compliance  Outline of ideas for future products The target market is clear but the language used to describe its nature and size (‘we think’, ‘about 3.3 million’, ‘around 8% pa’) is vague and does not inspire confidence Evidence to show that it is a viable market is required; as it stands some of the figures seem optimistic, especially in relation to growth in the target market The plan needs to describe the factors that drive this growth A more detailed marketing plan is necessary It seems unlikely that reliance on the website will be sufficient A More information is needed on pricing:  What is the pricing strategy?  How will prices compare to competitors?  What level of price discount will be offered to/expected by wholesale clients? Details of any market research undertaken should be included in the Appendix GC Competition This section should explain how ToyL believes it is going to compete effectively The information about competitors is not sufficiently detailed It is not clear whether ToyL intends to take on the global market leaders or the regional manufacturers More information about the customer base and market share of main rivals would be helpful Evidence is required to support the superiority claimed for ToyL’s products Copyright © ICAEW 2014 All rights reserved Page 13 of 22 Professional Level – Business Strategy – September 2014 lta nts Strategy and operations The title of this section does not really match the content which is a mixture of strategy and financial information In relation to strategy, this section could include the business’ overall mission and objectives It should also evaluate the alternative strategies open to the business in terms of market positioning More information could be included on supply chain management and the plans to outsource production The figures include projected revenue but there is no information on costs or prospective margins The expectation that the business will break-even in the first year seems quite optimistic and more evidence is required to substantiate the projected sales of £367,000 in year two and £475,000 in year three (see below) Additional sections or information that would be relevant :  Financial information As this is primarily a plan to attract additional finance this is a critical section and needs to be comprehensive It should clearly identify: What the finance needs are Co ns u  How much money is being sought from investor(s) and in what format? How has any initial capital been spent (e.g what is the breakdown of the £24,000 set-up costs) and how will any new funds be used?  What the financial future of the business might look like The plan needs to include detailed profit projections and cash flow forecasts covering a period of at least years  The business plan should have a clear statement of underlying assumptions An investor will be keen to assess the realism of the business plan and forecasts It is important not to be over-optimistic Since the future is uncertain, it is important to include here anything that might change the forecasts or mean that things don’t quite go to plan A prospective investor will ask “What if?” questions e.g What will happen to the expected profit if sales fall by 5%? What sales will need to be achieved to break even?  Risks and mitigation/ contingency plans A Some business owners are reluctant to include information on the business’ weaknesses or on business threats However, a prospective investor will want to know that the owner has considered the risks facing the business and that there is a plan to manage them Risks facing ToyL include: Reliance on two owner directors  Toys aimed at young children – onerous health and safety requirements  Highly competitive market, lots of substitutes, easily copied  Products rely on technology which is rapidly changing, so they are likely to have a short life and need to be updated/amended frequently  Environmental/industry issues (PESTEL/5 forces analysis) GC  Copyright © ICAEW 2014 All rights reserved Page 14 of 22 Professional Level – Business Strategy – September 2014 Appendix of supporting documentation lta nts  So that the plan is concise and focussed, any detailed information should be included here, rather than in the main body of the plan This section should also include any other information necessary to present a full picture of the business/its owners:  Statement of owners’ personal wealth  Copies of personal tax returns  CVs of Pavel and Rosemary  Details of any market research undertaken  Copies of any patents/product safety certificates  Letters of intent or contracts with suppliers/wholesalers Total possible marks Maximum full marks Co ns u Requirement (a) asked candidates to critically assess the content of the draft business plan and make recommendations as to how the document may be improved in order to attract the necessary investors Although many candidates were clearly familiar with the knowledge required (the pro-forma contents of a business plan), weaker candidates struggled to apply this in the context of a plan to attract potential investment Candidates who appreciated the need to focus their content on the end user of the document, and who wrote in an appropriate style, structuring their answer using the headings from the draft plan, scored very highly The key here was to appreciate that the draft plan made a number of claims about the superiority of the proposed products but that the lack of substantive data/evidence in relation to the products/markets, and the absence of any real detail about the amount of finance or the expected future performance needed, would be of major concern to a prospective investor This needed to be addressed as a priority It is likely that an investor might also want more information on the directors with whom they were establishing a relationship, and on how Rosemary and Pavel intend to handle their lack of financial expertise Weak answers often spent far too long appraising the existing sections of the plan, sometimes with little structure, and then identified the need for more financial information almost as an after-thought at the end Key elements which should have been included in the business plan, such as a focused executive summary plus financial forecasts, were ignored by many candidates (b) Appropriateness of outsourcing 17 15 Marks A An outsourcing model is likely to be appropriate for ToyL for a number of reasons Neither Pavel nor Rosemary has any experience of manufacturing operations/supply chain An outsource company may provide greater expertise GC Outsourcing will keep overhead costs to a minimum, making all production costs variable and reducing operating gearing This will allow the management team to focus on marketing and new product development which makes best use of their skills Financial risks will be reduced by not committing to the expense of a manufacturing facility An outsourcing model will allow greater flexibility Outsourcing will increase the scalability of the business model, which will be particularly important if ToyL succeeds in attracting a number of wholesale clients Copyright © ICAEW 2014 All rights reserved Page 15 of 22 Professional Level – Business Strategy – September 2014 On the face of it outsourcing would seem sensible, however ToyL will need to consider: the impact on variable costs of production  control over quality  bargaining power as ToyL may be small relative to suppliers lta nts  In requirement (b), candidates were requested to explain the benefits of outsourcing as a production model for ToyL The majority of candidates were clearly well prepared for and scored very highly on this requirement Total possible marks Maximum full marks 6 (c) Information requirements of different users Marks Management team Co ns u The information requirements will depend on the purpose for which the information is required Pavel and Rosemary will be managing the business on a day-to-day basis As a result they will require information for planning, control and decision making Internal information Quite a lot of the information for control purposes is likely to be operational in nature They have identified that the implementation of strict financial controls is a critical success factor – they will need to monitor the company’s performance in terms of profitability, cost control and working capital management This means that typically they will find management accounting information more relevant than financial reporting information as they will require: Detailed analysis of costs and revenues  Reports comparing actual performance and budget, showing variances  Detailed monthly information, analysed by product and type of customer  Development costs incurred on various products A  External information GC Pavel and Rosemary will need to decide which product lines to pursue and how to price them, what distribution channels to use, and how to promote the products To this they will need to analyse information on the market they are operating in: competitors, market share, new products launched, educational trends etc They will need to collect data on the effectiveness of different marketing initiatives Non-financial information Information should also focus on non-financial measures and the CSF’s identified e.g customer feedback Copyright © ICAEW 2014 All rights reserved Page 16 of 22 Professional Level – Business Strategy – September 2014 Equity investors lta nts Private investors will be focussed on the quality of their investment and the returns they can expect The extent of the information they require may depend on the size of their stake and the nature of the role they decide to take e.g whether they are involved in some non-executive capacity They are likely to want information about the performance achieved by ToyL in summary or overview form Typically this will be more like financial reporting information It will also relate to the longer term strategic picture, including future expected returns and value on exit An investor will want to monitor the overall profitability, liquidity and gearing of the business They will also want to assess the quality of the management team (Pavel and Rosemary), their strategy and their ability to manage the risks attached to the investment Co ns u Data about Toyl is likely to be benchmarked against other investments/sector/economy norms Requirement (c) asked candidates to explain how the information requirements of Pavel and Rosemary as managers will be different from the information requirements of the additional private investors, once the business is operational Surprisingly this was one of the least well attempted requirements The key here was to identify the purpose for which any information was to be used Most candidates appreciated that whilst Rosemary and Pavel would be interested in information to manage the day-to-day operations, private investors would probably be more interested in evaluating the return on their investment Having done so however, weaker candidates talked in generic terms and did not go on to give sufficiently detailed examples of the type of information that would be useful to each party Only the best candidates identified that the exact requirements of the investor(s) may depend on the size and nature of their investment and therefore risk, and the extent to which they are involved in the business eg in a non-executive capacity Some candidates started by applying Mendelow’s stakeholder matrix, but often, having identified the likely interest and power of the investor, were unsure of the implications for the information needs of managers and investors 10 GC A Total possible marks Maximum full marks Copyright © ICAEW 2014 All rights reserved Page 17 of 22 Professional Level – Business Strategy – September 2014 Question lta nts General comments The third question, worth 25 marks, was the least well attempted overall, largely as a result of requirement (b) The scenario relates to a social enterprise “Ontap” Its founder, Nala, is a keen athlete who was fed up with the amount she was spending on bottled water and the level of plastic bottle waste The Ontap concept involves a water bottle, made from recycled aluminium foil for use by athletes, commuters and students Once purchased from Ontap, the bottle can be taken to a range of participating cafes and shops (currently only in central London) and re-filled with tap-water for free The Ontap website provides a list of tap locations and there is also a free mobile app showing refill sites, all of which prominently display the Ontap logo 70% of the business’ profits are donated to fund clean water projects in India and used to raise awareness of the damaging effects of bottled water on the environment The business has been successful and is keen to expand Two options are being considered: (i) a corporate scheme whereby companies will purchase co-branded Ontap bottles to replace the water cooler and plastic cups typically found in most offices; and (ii) geographical expansion outside London Information was also provided in the scenario about the marketing activities of the bottled water companies and supermarkets Co ns u Candidates were required to: a) discuss the extent to which Ontap is a sustainable enterprise b) compare and contrast the ethics of the marketing activities of Ontap with its competitors in the bottled water industry c) discuss the problems Ontap will face in any expansion of the business and evaluate the two proposed options (a) Sustainable enterprise Marks A sustainable enterprise is one that takes account of social and environmental returns as well as financial ones As a social enterprise, on the face of it Ontap would appear to be such a business A key issue is the concept that a sustainable organisation is one that has a long term orientation and does not just focus on short-term results and measures when making decisions As a social enterprise, Ontap’s objectives will be wider than just financial Its goals will be externally as well as internally focussed and will include taking account of customers’/partners’ business objectives and meeting the needs of the Indian communities it is serving Ontap will want to optimise its profits (rather than maximise them), in order to give more money away to fund water projects and raise educational awareness A To be financially sustainable (i.e to survive in the long term), a business needs an understanding of the changing external environment so that it can respond and adapt to the opportunities and threats presented by it So for example Nala has developed a product in response to society’s changing attitudes to bottled water and environmental waste GC Sustainability is therefore an issue for any business in relation to risk mitigation, innovation and the development of new skills and capabilities to create and sustain competitive advantage over rivals One question over Ontap’s financial sustainability will be whether refillable bottles prove to be a fad and/or whether other businesses copy the idea, although in a sense this would help Ontap in its desire to persuade individuals to move away from bottled water in order to protect the environment In the context of environmental sustainability, an organisation should only use resources at a rate that allows them to be replenished in order to ensure they will continue to be available Ontap’s whole concept is aiming to protect the environment by persuading individuals to move away from bottled water, thereby reducing the volume of bottles that end up in landfill It donates profits to education campaigns and clean water projects and its own bottle is made from recycled foil Copyright © ICAEW 2014 All rights reserved Page 18 of 22 Professional Level – Business Strategy – September 2014 lta nts A socially sustainable organisation is one where decision making is linked to respect for people, communities and the environment An increased focus on sustainability should support investment in human capital, engaging in innovation and establishing more reliable supply chains even if these not maximise short-term financial performance A key issue for Ontap will be ensuring that the supplier(s) of its bottles and the cafes and restaurants it partners with also act in a socially responsible manner Conclusion In social and environmental terms, Ontap would appear to constitute a sustainable enterprise The steps Nala is proposing to capitalise on the success of the business may help ensure it is also a financially sustainable one Total possible marks Maximum full marks (b) Ethics of marketing Co ns u In requirement (a) candidates were asked to discuss the extent to which Ontap is a sustainable enterprise A significant number of candidates started their discussion with the Brundtland definition of sustainability but did not necessarily explore how this related to the concept of a sustainable enterprise Many candidates then limited their discussion by concentrating on either the environmental aspects or the financial aspects of Ontap’s sustainability and it was extremely rare to see a discussion of all three aspects of sustainability: economic, social and environmental Clearly, Ontap is striving for environmental sustainability, but the extent to which it is financially sustainable as a model may be more questionable Disappointingly, despite having been asked to assess the extent of Ontap’s sustainability, candidates often failed to reach a conclusion on this matter 7 Marks Bottled water manufacturers An ethical argument sometimes raised against marketing is that it wastes resources by selling people things that they don’t want or using promotional techniques to persuade people that they are dissatisfied without them This criticism could perhaps be levied at the bottled water manufacturers, who have spent significant resources on advertising to create brand/lifestyle images (eg Evian roller babies) in order to persuade consumers to buy water which they could otherwise choose to get free from our taps A Some would argue that charging money for something that is freely available or certainly cheap to obtain in order to make a profit for shareholders is unethical and does not demonstrate corporate responsibility However marketing is undertaken by most organisations so is a reality in the commercial world GC One aspect of the marketing mix is “Product” The bottled water product itself could also be argued to lead to environmental pollution The financial costs to both the consumer and the environment are high: - The cost of the actual product - Energy required in production - Pollution created as a result of the production process - Transportation costs - Packaging material that has to be discarded (75% of the 18bn bottles end up in landfill) The way marketing is carried out may also sometimes cause ethical concerns Information about the content and effects of products needs to be clear otherwise there is an issue of transparency, particularly if the manufacturers, either deliberately or by omission, suggest their product is something that it is not Hence the example given in the scenario of the UK supermarkets being criticised when it became apparent that some of their own-brand bottled water was simply filtered, purified tap water Copyright © ICAEW 2014 All rights reserved Page 19 of 22 Professional Level – Business Strategy – September 2014 lta nts However most businesses will abide by industry and voluntary codes of practice in how they promote their products and would argue therefore that they are behaving responsibly in marketing their products The bottled water companies might also argue that consumers have a free choice and, provided they are given clear information, it is up to the buyer to decide whether to buy or to choose not to buy if they think the product is unethical Such companies might also argue that there is an ethical good that comes from the marketing of their product in the form of creating employment and jobs Some of the bottled water companies have also started to try and address ethical criticisms by donating funds to promote clean drinking water in the developing world or selling more ecologically responsible products, using recycled bottles e.g Volvic’s Drink give 10 campaign or the One Foundation Ontap Co ns u Marketing will be undertaken by Ontap in relation to: (i) Sale of water bottles (ii) Promotion of business in order to attract cafes and restaurants as partners (iii) Education relating to environmental impact of buying and drinking bottled water Ontap’s product is not a luxury good - it is aiming to fill a distinct need, saving customers money and protecting the environment at the same time, so it is unlikely to be subject to the same degree of criticism In promoting a more ecologically responsible product, aimed at persuading its target audience to voluntarily change behaviour and revert to tap water, Ontap’s marketing could be argued to reduce waste and save resources Also it is aimed at steering people to products that are helpful to them and to society However Ontap will face a conflict between spending resources on marketing and generating more profits to donate to good causes By harnessing social media, the use of logos in cafés and restaurants and on bottles to build its brand image, Ontap may be able to keep its marketing spend to a minimum A possible criticism of Ontap might be that, like the bottled water companies, it is also trying to sell consumers a product (in this case a bottle) when they could just ask for free tap water Also if Ontap’s business model proves not to be sustainable, customers will have wasted £8 on a bottle that they may not then be able to refill for free if there are no longer participating cafes GC A Overall Ontap’s marketing is likely to be seen as more ethical and transparent than some other companies in the bottled water industry Certainly, since Ontap is a not–for-profit organisation, society is likely to be less cynical about its motives compared to the for-profit bottled water companies Copyright © ICAEW 2014 All rights reserved Page 20 of 22 Professional Level – Business Strategy – September 2014 Total possible marks Maximum full marks Co ns u lta nts Part (b) asked candidates to compare and contrast the ethics of the marketing activities of Ontap with its competitors in the bottled water industry This is only the second time that ethical marketing has been specifically examined (it was last set in September 2012) and the requirement was poorly done by many candidates Some did apply the transparency, fairness and effect decision-making approach, which tended to at least ensure they were talking in ethical terms and applying a structured thought process Only the best candidates provided an initial discussion of ethical marketing principles and the arguments for and against marketing in the context of the activities of Ontap and the bottled water companies (providing choice/ raising awareness/promoting responsible products vs wasting resources/persuading consumers to buy products they don’t need/attempting to portray products as something they are not) Better answers pointed out that, whilst attempting to sell tap water as bottled mineral water lacked transparency, attempts to strengthen brand image through marketing is common place and legal and not necessarily unethical, providing industry advertising standards are adhered to A small minority did question whether Ontap’s own marketing activities were in reality that different, since under the umbrella of corporate social responsibility they were also hoping to make money by marketing a product that in theory people could obtain for free, and that if their business model is not financially sustainable, people will have wasted £8 on a bottle they cannot then use for its intended purpose Answers to the ethics requirement, which is a consistent feature of the exam, continue to be variable and – as has been said before - candidates wishing to score well are advised to adopt some form of framework for their answer and to produce a balanced argument rather than a one-sided discussion (c) Expansion strategies Marks Nala’s desire to expand - general factors to consider          Expansion will require finance which may not be available given that a significant proportion of Ontap’s profits are donated It is likely to be harder for Nala to control a bigger business Ontap will need to be sure it can source sufficient supply of water bottles from ethical suppliers The business is likely to need to expand by taking on more staff There is a limited market – once a consumer has bought a bottle they don’t need to replace it Will the Ontap concept prove to be a passing fad? Product concept is very easy for others to copy If you are an existing customer in the restaurant/café/bar you don’t need a water bottle Also Ontap cannot prevent people refilling their own bottles and containers Ontap may face reaction/competition from bottled water companies GC A Corporate sales scheme  This will generate significant volumes from persuading one company to buy (less time, cost and effort) although fulfilling the order may be problematic  Ontap needs to target businesses which want to be more environmentally responsible Companies who are keen to improve their image may be prepared to sign up  A partnership with a large blue chip company will enhance Ontap’s reputation and co-branded bottles will raise awareness  This idea may be popular with staff – Ontap could get existing customers to lobby their employers on Ontap’s behalf  The downside is that Ontap will be relatively small in relation to a large corporate buyer, which may insist on a substantial volume discount Ontap’s image and reputation could be badly affected if the wrong “partner” is chosen, and Ontap’s ability to source sufficient bottles may be a problem  Perhaps Ontap could offer a corporate customer a trial scheme to start with Copyright © ICAEW 2014 All rights reserved Page 21 of 22 Professional Level – Business Strategy – September 2014       lta nts Geographical expansion It would be easiest achieved by targetting national and regional chains eg pizza restaurants Getting first mover advantage and wider national coverage may create barriers to entry for the competition Cafes can also act as sales outlets for the bottles which would increase the potential market Ontap should be able to find appropriate partners as the cafes benefit from: a page on the Ontap website, increased footfall, free marketing via Ontap’s app They can also attract additional customers rather than replacement ones as they will still also be selling bottled water to other consumers Again Ontap will need to be careful about the image/ethics of the cafes and restaurants it chooses to partner with This option is likely to be harder for Nala to control than the corporate option and would result in slower growth, at least initially Recommendation: Co ns u The options may not both be mutually exclusive – Nala’s ability to pursue them will be limited by Ontap’s resources in terms of people and finance, and its ability to source bottles Both are probably sensible ways of expanding Requirement (c) requested candidates to discuss the problems Ontap will face in any expansion of the business and evaluate the two proposed options Although this was the last requirement on the paper it was generally well attempted Most candidates pointed out the expansion issues for Nala in relation to control, limited resources and available funding Better candidates went on to then discuss the two proposals in the light of these and to reach a conclusion on which strategy might be more suitable A number pointed out correctly that neither were mutually exclusive and that it might be feasible to pursue both options 12 10 GC A Total possible marks Maximum full marks Copyright © ICAEW 2014 All rights reserved Page 22 of 22 ... revenue has been a deliberate rescaling within the recovery strategy Copyright © ICAEW 2015 All rights reserved Page of 19 Business Strategy - Professional Level and Stage – December 2014 lta... listening theme Copyright © ICAEW 2015 All rights reserved Page 12 of 19 Business Strategy - Professional Level and Stage – December 2014 Price lta nts RTR has a premium pricing strategy Necessarily,... context of an overall marketing strategy for the firm Total possible marks 13 Maximum full marks 12 Copyright © ICAEW 2015 All rights reserved Page 13 of 19 Business Strategy - Professional Level
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