BS-Final
BS-Final
BS-Final
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Strategic Thought
In 1968 Boston Consulting Group created this chart to figure out which areas of their
business deserve more resources and investment.
Stars (high share and high growth): Star products all have rapid growth and
dominant market share.
Cash Cows (high share, low growth): Cash cows don’t need the same level of
support as before. This is due to less competitive pressures with a low growth market
and they usually enjoy a dominant position that has been generated from economies
of scale.
Dogs (low share, low growth): Product classified as dogs always have a weak
market share in a low growth market. These products are very likely making a loss or
a very low profit at best.
Questions marks: These parts of a business have high growth prospects, but a
low market share. Question marks must be analyzed carefully in order to determine
whether they are worth the investment required to grow their market share.
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A measurement of the quality of an organization's policies, products, programs,
strategies, etc., and their comparison with standard measurements, of its peers.
Types of Benchmarking:
Strategic Benchmarking: Strategic benchmarking focuses on how companies
compete. This form of benchmarking looks at what strategies the organizations are
using to make them successful.
Functional Benchmarking: This compares a business with partners drawn from
different sectors to find innovative ways of improving work processes. This can lead
to dramatic improvements.
Process Benchmarking: Process benchmarking focuses on day to day operations
of the organization. It is the task of improving the way of processes performed every
day.
Internal benchmarking: comparison of practices and performance between teams,
individuals or groups within an organization
External benchmarking: comparison of organizational performance to industry peers
or across industries
Strategic technique used to evaluate outside competitors. The analysis seeks to identify
weaknesses and strengths that a company's competitors may have, and then use that
information to improve efforts within the company. An effective analysis will first obtain
important information from competitors and then based on this information predict how
the competitor will react under certain circumstances.
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It was developed in 1979 by Michael E Porter of Harvard Business School as a simple
framework for assessing and evaluating the competitive strength and position of a
business organization.
1.Suppliers'
Power
5.Threat of 2.Buyers'
new entry Power
4.Threat of 3.Competitive
Substitution Rivalry
1.Demand
Condition
4.Firm's
Strategy,Structure 2.Factor Condition
and Rivalry
3.Related /
Supported Industry
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Demand Condition:
Home country demand plays an important role.
Enables to understand the needs and desire of the customers.
It shapes the attributes of domestic ally made products and creates pressure for
innovation and quality.
Factor Condition:
Basic Factors: Natural Resources, Climate, Location and demographics.
Advance Factors: Communication infrastructure, skilled labor, research facilities and
so on.
Related/Supported Industry:
Benefit of investment in advance factors by suppliers and related industries can spill
over
Creates cluster of supportive industries, thereby achieving a strong competitive position
internationally.
Firm’s Strategy, Structure and Rivalry:
Long-term corporate strategy is the determinants of the success.
Ability of the company to develop and sustain a competitive advantage.
Presence of domestic rivalry improves a companys’ competitiveness.
Political Factors
Political factors include government regulations and legal issues includes tax policy,
employment laws, environmental regulations, trade restrictions and tariffs, political
stability
Economic Factors
Economic factors affect the purchasing power of potential customers and the firm's cost
of capital which includes economic growth, interest rates, exchange rates, inflation rate.
Social Factors
Social factors includes health consciousness, population growth rate, age distribution,
career attitudes, and emphasis on safety.
Technological Factors
Technological factors includes R&D activity, automation, technology incentives, rate of
technological change.
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Internal Factors Strength Weakness
External Factors Opportunities Threats
Strengths
A firm's strengths are its resources and capabilities that can be used as a basis for
developing a competitive advantage. Examples of such strengths include:
patents
strong brand names
good reputation among customers
favorable access to distribution networks
Weaknesses
The absence of certain strengths may be viewed as a weakness. Examples of such
weaknesses:
lack of patent protection
a weak brand name
poor reputation among customers
high cost structure
lack of access to key distribution channels
Opportunities
The external environmental analysis may reveal certain new opportunities for profit and
growth. Some examples of such opportunities include:
an unfulfilled customer need
arrival of new technologies
loosening of regulations
removal of international trade barriers
Threats
Changes in the external environmental also may present threats to the firm. Some
examples of such threats include:
shifts in consumer tastes away from the firm's products
emergence of substitute products
new regulations
increased trade barriers
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The primary value chain activities are:
Inbound Logistics: the receiving and warehousing of raw materials, and their
distribution to manufacturing as they are required.
Operations: the processes of transforming inputs into finished products and services.
Outbound Logistics: the warehousing and distribution of finished goods.
Marketing & Sales: the identification of customer needs and the generation of sales.
Service: the support of customers after the products and services are sold to them.
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Competitive advantage occurs when an organization acquires or develops an attribute
or combination of attributes that allows it to outperform its competitors.
Cost Leadership: The use of this strategy is primarily to gain an advantage over
competitors by reducing operation costs below that of others competitors in the same
industry. Companies that are successful in achieving Cost Leadership usually have:
Access to the capital needed to invest in technology that will bring costs down.
Very efficient logistics.
A low cost base (labor, materials, facilities), and a way of sustainably cutting costs
below those of other competitors.
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Ansoff's matrix provides four different growth strategies:
Market Penetration - the firm seeks to achieve growth with existing products in their
current market segments, aiming to increase its market share.
Market Development - the firm seeks growth by targeting its existing products to new
market segments.
Product Development - the firms develops new products targeted to its existing
market segments.
Diversification - the firm grows by diversifying into new businesses by developing
new products for new markets.
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Mintzberg identified the following types of strategies:
Intended: An intended strategy is the strategy that an organization hopes to execute. Intended
strategies are usually described in detail within an organization’s strategic plan.
Deliberate: Where the intended plans have been put into action.
Unrealized: Not all planned strategies are implemented.
Emergent: An emergent strategy is an unplanned strategy that arises in response to
unexpected opportunities and challenges. Sometimes emergent strategies result in disasters.
Realized: A realized strategy is the strategy that an organization actually follows. Realized
strategies are a product of a firm’s intended strategy (i.e., what the firm planned to do).
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Systematic & Unsystematic Risk
Systematic risk is due to the influence of external factors on an organization. Such factors are
normally uncontrollable from an organization's point of view. The types of systematic risk are
depicted and listed below:
Unsystematic risk is due to the influence of internal factors prevailing within an organization. Such
factors are normally controllable from an organization's point of view. The types of unsystematic
risk are depicted and listed below:
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Risk management strategies
A risk management strategy involves the selection, implementation, monitoring and review of
suitable risk treatments for each risk identified.
Risk avoidance
don’t invest in the country
Risk reduction
Insist on written assurances from the government that they will not intervene or tax
Ensure the firm has other sources of oil and gas and of earnings
Seek to influence the policy of the government by political lobbying
Invite the government to be part owner of the venture
Retain as many of the venture's assets as possible outside the country
Invest small amounts incrementally
Risk transfer
Insure the assets
Set up the venture as a separate company with own sources of finance
Invite involvement and investment from other oil firms or pipeline owners
Obtain assets using operating leases
Sell the rights to the oil to third parties as soon as possible so they adopt the risk
Use local sources of financing the assets
Enter into joint ventures
Risk retention
Accepting the remaining loss if and when it occurs
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Past Year Questions and Solutions
(a) Responsibility Centers (budget centers) would take more responsibility for budget setting and
might become profit & investment centers instead of just revenue or cost centers. Managers
would be increasingly incentivised by bonuses based on the financial performance of business
units and of the company as a whole. Emphasis on non-financial strategic targets would
increase with less emphasis on short term financial targets.
(b) Capital expenditure would be decentralised. There is a danger that capital expenditure would
become more subject to the desire of the strategic manager.
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The market is changing. In the US, 75% of hotels have a well-known brand, compared with
just 35% in Europe. Lesley Ashplant, a hotels expert at PricewaterhouseCoopers, says:
'Europe is the single largest tourist destination in the world. It has 6m hotel rooms under
fragmented ownership. There are clear opportunities in scale, in taking advantage of
branding and advanced technology.'
Scale
Size is becoming important as expectations rise – international business travellers want internet
connections, widescreen televisions, faxes delivered and push-button blinds in every room. All
of this required investment. Servicing the demands of business customers requires employing
more staff than most independent operators can afford.
Technology
Hi-tech reservation systems are also emerging as a crucial factor. In an industry where 75% of
costs are staff wages, any savings elsewhere are precious. Between a third and half of hotels'
revenue comes from food and drink, but these only contribute 20% to 30% of profit. Attempts to
make hotel restaurants more attractive have generally failed.
Much more profitable are the rooms themselves. The main thrust, therefore, for most
operators, is on improving occupancy. Loyalty card schemes are becoming increasingly
elaborate.
Branding
There will be limits to the creeping internationalisation of European hotels. One CEO says: 'The US is
a wide-open country – if you want a hotel, you can just build it. In Europe, there's much less opportunity
for new-builds so you get a lot of conversions, They're harder to fit into the specific model of the US
chain'.
It is difficult to turn a 17th century Provençal château into a Holiday Inn, so some independent operators
still prosper. This is bad news for the ideal guest of a multinational chain, who likes to wake up
anywhere in the world in the knowledge that the bathroom is on the left, the blinds are blue and the
phone is on the wall, six and a half inches above the bedside table.
Emergent strategy:
Unwittingly pushed into hotel trade by blocking off purchase of rival.
Unrealistic strategy:
Failed purchase of Carlsberg –Tetley
Making hotel restaurants attractive
Deliberate strategy:
Upgrading of rooms
Improved cooking systems
Exclusion of independent operator by enhancing service levels and harnessing of brand and
economies of scale.
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Interactive question 4: Superware products
Superware Products Ltd (hereafter Superware) was formed in 20X9 by three colleagues who
had left a major software house to work on the development of accounting software for small
businesses. Superware currently (20Y4) employs 18 staff at the company's head office in
Chittagong, and a further eight regionally-based salespeople in various parts of Bangladesh.
Company structure
The three directors of Superware are Paul Smith (Managing), Karl Lagerfeld (Sales) and Christian
Dior (Development). They each have a small team reporting directly to them and they meet on a
daily basis if they are in the office, to discuss the business and to brainstorm a little over coffee.
All three directors come from a background of software sales to small and medium-sized
organisations. Chris is responsible for six product development staff and two administrators. His
staff work full time on developing and upgrading the Superware product, and meet regularly with
the sales staff to get feedback from customers and users. In addition to the eight salespeople,
Karl has two sales administrators and a secretary working for him. The sales staff meet at head
office on a weekly basis and the administrators work closely with the financial accountant. Paul
takes responsibility for the remaining staff who perform general administration, reception and
clerical tasks. His only specialist staff member is Zandra who, with her assistant, maintains a high
level of control over the company's financial reporting and accounts.
Planning and control
Once a year the directors, under the guidance of Paul and with assistance from Zandra, agree
a full budget for the next twelve months. The budget is always based on the previous year's
performance, with adjustments for known changes such as inflation, costs and forecasts of
demand from sales staff feedback. During the discussion of the budget Zandra calculates
various ratios to illustrate trends in the company's profitability and liquidity, and the budget is
normally adjusted to ensure that trends are as desired. When the budget is agreed, a copy is
sent to the bank for its records.
Each month throughout the year Zandra produces a management report which shows
performance against budget for every cost and revenue heading. This report, together with a
commentary written by Paul, is sent to each director and they pass copies to their key staff after
removing any sensitive information. Four times each year the remaining periods are reforecast
and the adjusted end-of-year position (or out-turn) is also compared with the budgeted position.
Paul writes an additional commentary in these months which identifies key actions to bring
performance back to budget.
The current position
The directors are presently involved in finalising the budget for 20Y4 and are concerned that the
process of budgeting is becoming increasingly meaningless. The results for 20Y3 show a
significant shortfall in both turnover and profitability against both the budget and third quarter out-
turn for the year, yet Paul is still insisting that the 20Y4 budget should be the 20Y3 budget uplifted
for inflation and known changes. During the 20Y4 audit Zandra mentioned the directors' concerns
to the audit manager who suggested that you, as a recently qualified member of the audit team
with an interest in strategic planning, might be able to advise the company on how to proceed.
The directors have agreed that this would be useful, and have arranged a meeting at which you
can meet them and discuss the role of planning within Superware.
Requirement
Prepare briefing notes to present at a meeting with the directors of Superware at which you will
be expected to discuss the following.
(i) The current planning process.
(ii) Weaknesses of the current planning process.
(iii) Recommendations for improvement of the planning process. Recommendations should be
clearly justified.
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Answer to the above question
To The Directors
From The Auditor
Date Today
Sub The strategic planning process of Superware Products Ltd.
(a) Current planning process:
(b) Weakness:
Use of corporate appraisal at first stage lead to blinkered view of strategy.
Lack of proper environmental analysis.
An incremental planning possibly non achievable.
Plans to meet personal objective, knowing the non-achievability.
Short term nature of planning process.
(c) Recommendation:
Proper external & internal environmental analysis.
Corporate appraisal i.e. swot analysis.
Objective should be agreeable to all interested parties.
Gap analysis, implementation and review of strategy.
Time horizon for the planning process should be extended.
Interactive question 6: McDonnell Douglas
Consider the following:
With $14bn in sales, McDonnell Douglas was one of the US's largest defence companies. It had
done a good job of turning around the C-17 transport plane program, which a few years earlier
was nearly cancelled by the Air Force over technical flaws and delays. However, its commercial
aircraft arm, Douglas Aircraft, was a disaster, caught in the tailwinds of Boeing and Airbus. In
1994, McDonnell Douglas's board shocked investors by bringing in an outsider – a brash,
controversial former GE executive, Harry Stonecipher – as CEO.
At first Stonecipher insisted that the firm was committed to building passenger airplanes. At one
point he said the business was so good that if Douglas wasn't already in it, 'we would be looking
for a way to get in'. Unfortunately, years of under-investment had resulted in planes with little
imagination, and Douglas would need to spend billions to catch up. Ultimately Stonecipher wasn't
willing to make that investment, preferring to focus on short-term stock performance. This involved
the reduction of discretionary spending on things such as research and development, training and
better production equipment. There was also a closer control of costs.
During his tenure as CEO, McDonnell Douglas's stock quadrupled (Stonecipher carries a
laminated copy of the stock chart in his briefcase), but critics say the failure to invest in R&D
would have been disastrous eventually. 'This is a company that would have gone out of business
in five years', says Richard Aboulafia, an analyst at Teal Group, an aviation research firm. 'It was
headed to oblivion.'
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Eventually, McDonnell Douglas merged with Boeing.
What planning horizon would you expect a firm in this industry to follow?
What factors in the competitive environment, pressure from investors or his personal incentive
package could explain the incoming CEO's short-term approach to strategy?
An aircraft manufacturer should have a long term planning horizon because the development
of a new aircraft will take a long time & huge capital costs.
The short term focus could have come from several causes:
The style of the CEO was better at cost cutting rather than longer term strategic focus.
The CEO could realized the shareholders expect regular dividend from their investment
rather than business growth.
To increase the value of stock ready for takeover, it was a deliberate strategy by a large
aircraft manufacturer.
That the CEO was incentivised by the value of stock.
The work of the accountancy profession is crucial to the effective working of various part of the
economic infrastructure of a country like revenue department, capital markets, banking,
financial institution etc. Working to the highest standards of ethics and professionalism allows the
public, investors and regulators to have confidence in the profession. An accountants ethical
behavior can protect not only the accountants own reputation but that to the profession as a
whole.
Self-Test-7:Ashdene Homes
Ashdene Homes is a house builder, having considerable knowledge and experience in the
region around Dhaka where the current housing shortage is centred. The company caters for
the mid to lower end of the market, with prices normally below CU500,000, on relatively small
and individual sites which tend to be too large for the resources of local builders but too small
for the high volume national house builders. Any mass release of land for development in the
South East due to government initiatives is likely to be centred in one area. The development of
any such land would take many years given delays within the planning process.
The company, worth CU67 million, has looked like a takeover target for a while but unfortunately,
the company's reputation for internal control has been damaged somewhat by a qualified audit
statement last year (over issues of compliance with financial standards) and an unfortunate
internal incident which concerned an employee expressing concern about the compliance of one
of the company's products with an international standard on fire safety. She raised the issue with
her immediate manager but when she failed to obtain a response, she decided to report the lack
of compliance to the press. This significantly embarrassed the company and led to a substantial
deterioration in their reputation, especially as there have been more press releases about the
company's failure to adhere to the high welfare, health and safety, financial, marketing and ethical
standards that the founder practiced when he started Ashdene Homes.
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Requirements
(a) Outline the implications of poor ethical standards and damaged reputation on the relationship
between the affected stakeholder groups and Ashdene Homes.
(b) What are the main issues concerned with corporate social responsibility and why might
Ashdene Homes choose to act, or at least claim to act, in a socially responsive way?
(c) Explain, with reference to Ashdene Homes as appropriate, the ethical responsibilities of an
accountant both as an employee and as a professional.
a)Poor ethical standard are likely to affect one or more of the organization’s interaction’s with:
Customers: will expect certain standards of health, safety and ethical behavior from AH, including
treatment of employees. Recent damage to their reputation may reduce their sales.
Shareholders: Investors confidence is important in public companies and any reputation risk is
likely to be reflected in market share.
Senior Management : Poor ethical behavior from them creates a poor perception of the
organisation in the market.
Employees: Poor ethical standards may leave the employee feeling that they no longer have a
worthy association.
Suppliers: They may decide not to deal with with AH.
b)Corporate social responsibility (CSR) is concerned with companies acting in a socially
responsible way. It generally refers to business decision making linked to ethical values,
compliance with legal requirements & respect for people, communities and the environment.
There is a growing view that the best managed companies are those that are aware of their wider
responsibilities to the social community and to the environment.
Five board areas where CSR might be relevant:
To treat employeees fairly & with respect.
To operate in an ethical & with integrity.
To respect human rights.
To sustain the environment for future generations.
To be a responsible neighbour in the community.
c)A professional accountant has two ‘directions’ of responsibility. One to his or her employer &
another to the highest standards of professionalism.
Companies provide a code of ethics that all employees are expected to follow which are stated
as under:
Avoiding conflicts of interest.
Compliance with laws & regulations.
Maintenance confidentiality strictly.
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CHAPTER-2: The Purpose of the Business
Memorandum
To : To Senior Partner
From : Anne Accountant
Date : Today
Sub: : Briefing notes for meeting with Tim Sawbridgeworth
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Competitive strategy:
It concerned with how to compete in each of the market which the business serves.
Tactical & Operational strategy:
It involves acquisition of resources such as finance, manpower, plant & machinery, information
technology and their management & organisation.
3. Preparation of strategic plan:
Approaches for strategic plan may very organisation to organisation, but it is vital that Bransfield
covers the following areas in its development of a plan.
I.Environmental analysis i.e PESTEL analysis: Here technological factors are likely to be of
immediate concern because the firm is currently operating with very primitive equipment.
II.Competitive forces includes:
Threats from potential entrants
Threats from buyers
Threats from suppliers
Threats from substitute products
Threats from existing competitors.
No firm should depend only on few customers who are capturing major portion i.e all of the
output is taken by four customers.
III.Internal analysis includes 5 M’s, i.e. machines, men, money, markets & materials and Ratio
& Value chain.
IV.Objectives: It should be clearly defined in order to monitor the progress.
V.Corporate appraisal includes SWOT analysis & GAP analysis.
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Interactive question 2: Gooseberry Farm Ltd [Difficulty level: Exam standard]
The entire share capital of Gooseberry Farm Ltd is owned by Giles MacDonald and his wife. Its
business is owning and running a 1,200 acre arable farm located five miles outside a small town not
far from Bangkok.
A decline in farm income
In order to cut food surpluses, the basis for determining cereal support prices within Thailand is being
switched from tonnes harvested to hectares cultivated. As a result Gooseberry Farm Ltd faces a sharp
decline in its annual trading profits, which in recent years have averaged CU90,000. Mr MacDonald
is therefore considering using 200 acres to establish a new exclusive 18-hole golf course. Local
businessmen regard this as feasible, since planning permission will readily be forthcoming and
membership waiting lists at the two existing clubs in the area exceed 350.
The golf club company
It is proposed that Gooseberry Farm Ltd will sign a 100-year lease with a new company, Millennium
Golf Club Ltd, which will pay an annual rent of CU25,000 to Gooseberry Farm Ltd for use of the land.
The issued capital of the golf club company will be two CU1 shares, owned by Mr and Mrs MacDonald,
and the remainder of its initial funding will be CU1 million in the form of 15% per annum irredeemable
loan stock. Fifty local businessmen, including Mr MacDonald, have each agreed to purchase CU20,000
of this stock.
Of the funds thus raised CU225,000 will be spent on converting the arable land to become a
landscaped golf course. A further CU25,000 will provide working capital.
The club house company
The remaining CU750,000 will be used to purchase a 25% stake in a separate company, Century
Club House Ltd, to develop and operate a club house. This will have conference facilities, a sports
hall, two bars and a restaurant. A local property company will subscribe the other 75% of the
share capital of Century Club House Ltd. Millennium Golf Club Ltd will pay an annual rent of
CU25,000 for the use of the club house, but Century Club House Ltd will manage and run all
facilities offered there, taking the profits that will be earned.
When ready to commence business in January 20X6, the new golf club will be much better
appointed than the two existing local courses, and the only serious competition for comparable
leisure facilities will come from three hotels in the nearest town.
Budgets of the golf club company
Annual operating expenses of Millennium Golf Club Ltd are budgeted at CU450,000,
comprising the following.
CU
Salaries, wages and professional's retainer 125,000
Course maintenance 50,000
Rent of land and club house 50,000
Administration and other expenses 50,000
Finance cost on debenture loan stock 150,000
Depreciation 25,000
The terms of the debenture loan stock issue prohibit a dividend being paid on the two ordinary
shares, so that any surplus is applied for the benefit of the club and its members.
On the revenue side, Millennium Golf Club Ltd's share of profits on the investment in Century
Club House Ltd is expected to total CU100,000 in 20X6, the first year of operations. Green fees,
chargeable to nonmembers using the golf course, are expected to amount to an additional
CU50,000 a year.
On the assumption that target membership levels are achieved, annual subscriptions are initially
to be set at CU500 for each member. This will be CU100 less than for full membership at the two
rival golf clubs in the area. In addition, no joining fees will be payable in the first year of operation,
but thereafter (as with the other two clubs) they will be equal to one year's subscription.
On this basis Mr MacDonald and his associates are sure that they will be able to recruit around 350
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members from the existing two clubs, including a good number of influential local businessmen and
low handicap players. In addition, the new club expects to recruit most of those currently on the
waiting lists at its two local rivals.
The policies of the club
The policy of the club will be to keep the annual subscription fee for members as low as
possible while maintaining high quality facilities and helping to preserve the countryside. It is
also intended to limit membership to a maximum of 750 players in order to maintain the
exclusive nature of the club.
The constitution of the club will put its overall management in the hands of a committee of 12
persons elected by the membership, but with the proviso that two thirds must be debenture
holders.
Requirements
You are an employee of the firm of accountants used by Mr MacDonald.
(a) Draft a mission statement that might be suitable for Millennium Golf Club Ltd and identify
possible key objectives.
(b) Prepare a memorandum for Mr MacDonald which briefly explains the relationship between,
on the one hand, a mission statement, and on the other, an organisation's objectives and
its strategic, tactical and operational plans.
(c) Prepare briefing notes for Mr MacDonald providing a critical analysis of the financial and
operational arrangements envisaged for the company.
The notes should deal only with the following matters:
Total demand projections (including a break-even calculation)
Downside risk
Upside potential
Conclusions.
The conclusions should comprise a succinct summary of the major factors supporting
your recommendations.
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Requirement (b): Memorandum
To : Mr. Macdonald
From : Consultant
Date : Today
Subject : Mission, Objectives, Strategic tactical & Operational plans
The relationship between the elements of planning can be shown in the following diagram:
Mission:
The mission attempts to define the purpose of a business. It may include information about the
values and methods.
Objectives:
Objectives should be quantifiable and it must have time limit.
Strategic plans:
Strategic plans are long term plans setting out by which the ultimate objectives can be achieved.
Tactical plans:
Tactical plans are generally for one year & represents how the strategy is to be achieved.
Operational plans:
Operational plans are very detailed short run plans showing exactly what steps have to be
achieved.
Operational: If the firm can achieve the 600 members target then it will reach at break-even point.
However, earlier the target was to achieve 750 member, so it is feasible.
2. Downside risk:
Interest burden (150,000-25,000) = Tk. 125,000 can be achieved by recruiting 250 members @
Tk. 500 each.If it is not possible then the interest burden will be arisen & finally it will be turned
into liquidation.
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3. Upside potential:
Income from the arable land CU 90,000/1,200 = Tk. 75 per acre per year
Income if it is for golfing CU 25,000/200 = Tk. 125 per acre per year
=Tk. 50
4. Conclusion:
Target = Tk.750
BEP = Tk. 600
Profit (150 @ 500) = Tk. 75,000
All the profits are to be retained for the benefit of the club & its member. No dividends can be paid
out to the shareholders.
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Answer to the above question
(i) Bangladesh Based employees:
The power of BD employees to stop or moderate any closure decision is limited. If the entire BD
workforce is united, then significant costs can arise from disruptions.
In general existing employees would favour strategy 1 as there will be lower redundancy. If
redundancy payments are sufficiently high some employees may favour redundancy to
continued employment & thus have a positive interest in strategy 2.
(ii) Potential employee in Laos:
Potentially employees have probably not yet been identified but they would have no power to
influence the decision in either case.Once selected they would have a strong interest in strategy
2.
(iii)Shareholders in Supavac: It is very important for supavac shareholders to continue business
with Avold. Supavac shareholders would be strongly interested to continue with Avold even
though the price & volumes are reduced.The shareholders will favour the strategy that achieves
this, having regard to all other factors.The shareholders have the ultimate power to determine
the direction of the company.
(iV) Avold:
Avold has considerable power over Supavac, likely to be in a position to influence the decision of
where should take place.
Avold is interest in the reorganisation as vacum cleaner manufacture is a competitive market,
a range of alternative suppliers may be available if supavac fails to deliver cost reduction.
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Interactive question 2: Oil industry scenarios
Oil producers use scenario planning extensively.
Requirements
(a) Identify the factors that make scenario planning popular with oil industries.
(b) Suggest some alternative scenarios that an oil producer might consider in its strategic planning.
Req-a. Oil producers adopted scenario planning from their original military applications during
the 1970s. This followed the oil price shock when the Arab states then at the centre of OPEC
massively increased the price of oil and caused inflation & recession in industrialized Europe &
North America.
This decision was itself justified in part as a response to the perceived support of oil consuming
western countries for support of the occupation of Palestine & Egypt.
It was a response to the high turbulence (e.g. political shifts, vulnerability to economic factors etc.)
and dynamism (e.g. speed of change of political landscape) in the oil industry.
Furthermore, the very long investment periods in the industry necessitated long term strategic
plans based on assumptions about the future.
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– a 20% fall over the previous thirty years according to leading accountants. The worst affected
by this decline had been the tabloids.
Another argument was that it was done in order to affect Mirror Group Newspapers adversely
during the sale of 55% of its shares in September.
Whatever the reason, the worry was that the price of The Sun would rise again and when it did
the success or failure of the strategy would be shown by how many of the new readers (300,000)
were retained. As the tabloid market is price sensitive, the signs were not good.
The outlook for The Times was slightly different: city analysts felt that a cut in price was necessary
as the paper was on a downward spiral, having lost its previous image. The price cut, they felt,
was there to stay: it was envisaged that more money would flow in from advertisers due to
increased circulation.
Advertising was a major concern for newspapers in the recession: a typical tabloid received
20% of its revenues from circulation, with the rest coming from advertising. Broadsheets, on
the other hand, had a 50:50 split.
The total split on advertising spend had changed dramatically in the previous decade.
1981 1993
Newspapers 66% 51%
Television 20% 36%
Radio 14% 13%
The initial reaction to this was to increase newspaper prices but obviously this had limited effect,
hence the cuts by News International. Rupert Murdoch, it was felt, could sustain initial losses
from profits elsewhere: his competitors would not be able to do so.
In 1993 The Daily Telegraph remained number one in the UK broadsheet market, its revenue
declining by only 1% compared with the previous year. This was achieved by a series of
promotions including discounted holidays, as well as by its readers showing remarkable loyalty
and an unwillingness to move.
The circulation of The Guardian had fallen by 5.6% and its market position had been affected
as The Times overtook it in the race for second position. However, the paper still remained
popular.
The Independent, however, had been hardest hit. It was felt that the strategy of The Times could
potentially squeeze it out of the market. If this were to be the result The Times was sure to benefit.
The situation appeared to be mirroring the experience of the London Daily News a few years
previously when it was driven out of business by the Evening News. Indeed, The Times would
benefit both from increased circulation and increased advertising revenue if The Independent
were to be terminated.
However, The Independent was struggling before The Times cut its price. Its circulation had
declined significantly since 1988 (20%) and it had been perceived as being 'weak' due to the lack
of colour photographs. Although this was corrected it meant that the price of The Independent had
to be increased to compensate. This 5p rise was unfortunate, since it was implemented a matter
of weeks after the reduction by The Times.
The Independent panicked and contacted the Office of Fair Trading, claiming that the price cut by
The Times amounted to predatory pricing and that this was not allowed. This complaint was not
upheld: it would have to be proved that the cut was aimed solely at The Independent and this would
have been difficult to establish.
Furthermore, The Independent was not one of the financially strongest companies, having
made a loss approaching CU500,000 in the previous year. A takeover appeared to be a
logical next step asThe Independent did have a small niche in the market. However,
whoever bought it would have to overcome the recent batterings which had left it with an
image problem.
27
If newspapers had been allowed to expand into TV, then the competitive picture would have
changed completely.
Requirement
Discuss the environmental factors that affected the newspaper industry, using the following
headings.
(a) Political and Economic
(b) Social
(c) Technological
(d) Ecological
(e) Legal
( b) Social:
Individual who are in lower income group want to buy tabloid & higher income group want to buy broadsheet.
Switch would be feasible.
( c ) Technological:
Changes in technology may affect on the newspapers industry such as colour printing, paper up gradation
may increase cost.Since the emergence of on-line service such as news websites & 24 hour-news
programming on radio. TV have increased the competition to newspaper.
( d ) Ecological:
The raw material of newspaper is timber and large water & bleaches is required in production.
The recycling of paper & the carbon emission has an impact on cost on the newspaper industry.
( e ) Legal:
To increase circulation sometimes newspaper industry publishes sensitive news on prominent people
which finally lead to increase law suits & costs.
Conclusion:
The newspaper industry was in a particularly turbulent phase in the 1990s. This was mainly caused by the
recession and the effect this had on disposable income. Moreover, introduction of technology such as
television & internet have increased the competition of Newspaper industry.
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IQ 6: Chinese car industry - May-June’11 Q-1(c)
At the Beijing Auto Show (in November 2006) China's car makers felt confident enough to show
off not just their newest low-cost runabouts, but also luxury and sports models, 'concept cars'
showing future possible designs and even a few hybrid and electric vehicles. Local car makers in
the world's third largest and fastest-growing car market would appear to have come of age.
Until recently many Chinese car makers built thinly-disguised copies of vehicles made by
Volkswagen, GM and Toyota. In the past few years things have changed. In preparation for a
push overseas local firms such as Chery, Great Wall and Geely have proved they can develop
their own vehicles too. Buying designs from international specialists and installing fancy robotic
production lines means more than 100 new models will be introduced in China this year. Their
car makers have captured 27% of the market in China and will export 75,000 vehicles to over 100
countries this year. Foreign car makers are worried by the Chinese firms' ultra-low prices. The
latest Shanghai Maple, for example, with leather seats, anti-lock brakes, air conditioning and a 2
year warranty costs a mere $6,500. Foreign firms grumble that they can-not even buy the steel
needed to make the car for that price.
How much of this miracle is the result of good business sense –rather than special treatment
granted to local firms –is not entirely clear. A lot of early technology was borrowed. The
government also offered support to fledgling firms via direct investments and guaranteed loans.
Universities provided technical help, especially in the development of expensive engines. The
authorities even considered a law that would mandate a 50% share for local firms by 2010. Future
legislation is likely to force foreign firms to do more research and development in conjunction with
Chinese partners to ensure continued access to cutting-edge engineering skills.
In a market where buyers are unashamedly experimental, brands have little value so far, except
in the luxury segment. For most buyers cost is more important. With average retail process falling
by $1,250 a year producers are racing to cut costs, not improve quality. The number of faults per
100 cars made rose from 246 in 2005 to 338 in 2006. Reliability is likely to deteriorate further.
Chinese cars exported today mostly go to Africa, south-east Asia and the Middle East where
expectations are lower and price matters more.
Requirements
a.Identify, using Porter's Diamond, the sources and nature of any competitive advantage enjoyed
by Chinese car manufacturers. 10 Marks
b.Recommend a strategy for Chinese car makers based on this analysis. 10 Marks
29
Answer to the above Questions
Req (A)
i.Demand Condition: China is one of the fast growing largest industrial country in the world. The
reason why they are gaining significant economies of scale. They can make the product as per
customers’ requirements. Due to have a superb infrastructure, they can make the product at lower
price. Demand of the products are thus very high.
ii.Related Industries: For making the product, China get support from related industries such as
they can use the R & D papers from different universities rather develop it in-house which makes
cost efficient. Moreover they get steel and other components very cheaply.
iii.Factor Condition: The educational system of China is technical based. They have adequate
technical personnel, cheap labor, land, etc. for building car plants. Moreover they have good sea
link for freight handling for import and export purpose.
iv.Firm strategy, structure & rivalry: At present 27% market share are captured by three firms.
The Chinese Government wishes to increase it to 50% by 2010.This will give significant
economies of scale and incentive to invest in product and process development. To compete with
the rival the industry seeks to build a me-too version of a foreign car but at a lower price.
Req (B)
The mistakes of the Chinese car manufacturers are to develop unique designs & distinctive
brands for export. The appropriate strategy for the industry is to remain a low cost player because
it has a huge internal market and opportunities to export it’s product in developing countries where
low cost is also important.
The poor quality of it’s products should be addressed. The number of faults is increasing and
giving two years warranty incurs substantial costs of rectifying the products. Moreover it creates
a poor perception about the company and customers will refuse to use the product. So the
company should reduce the faulty products and improve customer’s perceptions at home and
abroad.
30
In the UK Dunvegan Ltd has three main competitors; mahogany is also imported from four
countries in the tropics where it is a valuable export. Some of the wood is from managed
plantations, but some is from natural forest. Recently the price of mahogany has been rising as
supplies become short and plantations have to be renewed. Dunvegan Ltd's accountant has read
an article in a recent edition of Lumber About, the monthly trade paper of the timber business, in
which the economic effects of the Maho spruce were discussed. If around 3,000-4,000 hectares
were planted in the UK, then the price of mahogany would be CU500 per cubic metre at the end
of ten years. If around 2,000 hectares only were planted, then the price would be CU800 per cubic
metre.
Requirement
a) From the viewpoint of an independent consultant, write a memorandum to the directors of
Dunvegan Ltd on the proposed Maho spruce plantation.
b) Your memorandum should include an environmental analysis.
Answer to the above Questions
Memorandum
To : The Director of Dunvegan Ltd.
From : Independent Consultant
Date : Today
Subject : Proposal Maho Spruce plantation
The trading environment:
This is a ten years project & it is necessary to predict how the trading environment may change
by the time. The timber is ready to harvest. The environment can first be analysed under the
heading political, economic , social & technological.
Political:
At present Mehogany comes from four countries. They always willing to sell this irrespective of
local political changes. In the UK due to deforestation & tightening of import legislation they are
worried about the hardwood. I this regard they are planning to find out a substitute product of
Mehogany namely, Maho spruce which will be ecofriendly.
Economic:
Mehogany are generally used in the frames, furniture of the buildings. Both of these are very
sensitive of the health of the economy. It is difficult to predict the economic health after 10 years.
So the project will have considerable risk & uncertainty.
Social:
If home –owning continues to grow then demand for high quality materials will also grow .
Politically Maho spruce may be the correct substitute of trophical hardwoods.
Technological:
Although Maho spruce has been patented but there is no reason other manufacturer could not
produce the similar product . If other manufacturer comes then the cost of seedlings will go down
then it will be very difficult to make the investment pay.
Size of the investment:
This is large investment if it is invested in one time. Therefore, risk could be reduced by planting
over several years & monitored in each phase of investment. Naturally, this approach would
delay the maturity of some of the crop which may reduce the final income.
Summary:
After the judgment of environmental factors Maho spruce should be a popular product . The main
risk if the similar product comes with cheaper rate. However, the economies of the project are
very dependent on the future price of Maho spruce timber, its substitutes and the reaction of rivals.
My advice is as follows:
(i) Attempt to get the suppliers of Maho spruce to regular sales of the seedlings.
Consider spreading out of the investment instead of committing so much expenditure in the first
year
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CHAPTER-4: The Industry & Market Environment
32
Requirements
(a) Identify the factors that have enabled substitutes to cause the financial decline of record stores.
(b) Identify reasons for the apparent continuing success of bookshops.
(c) Suggest strategies that may help the management of record stores to improve earnings.
The above substitutes able to reduce the customer visiting shops, consequences that sales
revenues have fallen from CD’s & others.
(b)
Bookshops may be successful for several reason:
Customers are prepared to put more effort into searching for thr right item.
An enhanced range of services such as coffee shops reading area.
Higher margin.
(c)
Record store (RS) try to differentiate on service & avoid price comparisons,
offering coffee areas, live music, clothing:
Record store should provide digital download service in store.
RS should develop web-based alternatives.
RS should consider adding books to their product ranges.
33
The industry life cycle has 4 very clearly defined stages which are explained as under:
Introduction: When the product is brought into the market. In this stage, there's heavy
marketing activity, product promotion and the product is put into limited outlets in a few
channels for distribution. Sales take off slowly in this stage. The need is to create awareness,
not profits.
Growth Stage: In this stage, sales take off, the market knows of the product; other companies
are attracted, profits begin to come in and market shares stabilize.
Maturity Stage: where sales grow at slowing rates and finally stabilize. In this stage, products
get differentiated, price wars and sales promotion become common and a few weaker players
exit.
Declining Stage: Here, sales drop, as consumers may have changed, the product is no
longer relevant or useful. Price wars continue, several products are withdrawn and cost control
becomes the way out for most products in this stage.
Req (ii)
Restoring Profitability:
34
Our big strength is our chocolate – a lot of our success in the US is based on cracking the
chocolate market there. We sell all sorts of branded chocolates. And your big vice is chocolate!
Did you know that you Brits are the second largest consumers of chocolate in Europe, behind
the Swiss? Last year you ate 8.8 kg per head.
So taking our chocolates into Britain as the first step makes strategic sense. Prior to writing
your preliminary report you undertake some investigation into the nature of the UK chocolate
market.
The products of the chocolate industry
The UK chocolate industry produces three main categories of chocolate.
Blocks which are generally moulded blocks of chocolate with or without any additional
ingredients. These products are sold in standard sizes and are distributed mainly through grocery
outlets.
Countlines which are chocolate products sold by count rather than by weight, e.g. Snickers,
Kit-Kat and Smarties. These, unlike block chocolates, have a wide range of products which are
distinct from each other in size, shape and weight, tend to have a strong brand image and are
distributed mainly through non-grocery outlets such as newsagents and kiosks.
Boxed chocolates which are individually branded products, such as Black Magic, and are
mostly sold as gifts, about 80% in holiday periods such as Christmas and Easter. During these
periods they are mostly sold through grocery outlets, while over the rest of the year sales are
mainly through non-grocery outlets.
35
analysis of the breakdown of the total costs of the 'Big Three' showed the following
components.
Your analysis of the breakdown of the total costs of the 'Big Three' showed the following
Components:
Requirements
Prepare a memorandum for the main board of Horsley Foods Inc which:
o Assesses the nature of the competitive forces (using Porter's Five Forces model so far
as the information allows) which Horsley would face if it were to expand into the UK
chocolate market.
o Identifies the different competitive advantage strategies which Horsley could pursue if
it is to penetrate the UK chocolate market.
o Recommends a strategic way forward for the company in this matter.
Memorandum:
Barriers to entry:
It is very difficult to enter in the market if established brand name has already existed in the
market. All the companies spends heavily on advertisement to differentiate their products.
Besides, other barriers to entry in the market are as follows:
Economies of scale:
Companies must try to lower costs through economies of scale as there is little scope for cost
savings on raw material inputs.
Distribution system:
An efficient distribution network is essential as most of the chocolate products have high inventory
turnover and retail outlets are diversified ( e.g. Supermarket, newsagent)
36
Competition between rivals:
In the Uk chocolate market prices are kept relatively stable, despite fluctuations in the raw
material Costs. The non-price competition can take place in the following forms:
37
Requirements
(a) Explain how conditions in Z land could give Y Ltd a competitive advantage when it starts its
export operations.
(b) The Managing Director of Y Ltd is constantly trying to improve the productivity and quality
of his manufacturing operations and is considering a programme of benchmarking. Explain
why a benchmarking programme would help Y Ltd and suggest how it might be carried out.
Requirement (A)
Porter identifies four elements of national competitive advantage that support the export efforts
of successful firms. These elements and how they can be applied to Y are explained below:
Factor conditions: are the inputs to production, such as human resources, physical resources,
knowledge, capital and infrastructure. Z land appears well-endowed with these advanced factors,
having sophisticated financial markets and industries using modern systems such as JIT.
Demand conditions: Y has reputation at home for quality, innovation, reliability and customer
focus which leading to competitive advantages if it wants to compete globally.
Requirement (B)
The objective of benchmarking is to understand & evaluate the current position of a business in
relation to best practice and to identify areas and means of performance improvements.
At the operational management level, it can improve awareness & processes by which value
is created and they could be improved in the future.
At the Strategic level, it improves awareness of competition in the changing environment and
how the company is responding to it both practically & strategically.
If “Y” Ltd were to undertake a program of benchmarking, it would then be necessary to identify
the areas in which improvement was sought & to decide how the improvement is to be measured.
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Interactive question 5: Catterall Wentworth
Catterall Wentworth is a large firm of accountants based in London with a number of regional
offices. It is divided into four main areas: tax, audit and accounting, corporate finance and
management consultancy. However in addition to the provision of these general services,
additional specific services have been developed. A partners' meeting has been called to
discuss the future strategy of the firm, the accountancy industry and the place of Catterall
Wentworth within it.
Over the past ten years the nature of the accountancy industry has changed significantly. Profits
are lower than they have been for many years and competition is fierce, especially amongst the
larger firms. More is being asked of accountants, and their image has taken a battering following
the demise of some important clients (such as Enron and Parmalat) in the US, the UK, Italy and
Australia. There has been a knock-on benefit. Business has been growing fast in the field of
corporate governance advice and products to assist firms manage the requirements of
Sarbanes-Oxley.
Catterall Wentworth has responded by setting up an Assurance division within the Audit and
Accounting Section. The division, offering specific advice on corporate governance and
Sarbanes-Oxley has shown significant growth and there are plans to recruit more staff to
expand it further, as the market for these services continues to develop.
Meanwhile, new accounting standards are being introduced by international accounting bodies.
These demand far greater expertise from UK accountancy firms. Catterall Wentworth have
earmarked a significant proportion of their training budget to IAS training courses and are
beginning to see a payback as they have won a number of new clients recently specifically
because of their IAS knowledge.
Margins on audit and taxation services are slim. The industry is growing increasingly concerned
about auditor liability. Whilst auditors are hopeful that they should be able to negotiate
proportionate liability with clients within the next few years, a number of firms are facing legal
cases which could result in significant claims against them, and this situation looks set to continue
for some time. Another concern is the Inland Revenue's strict attitude towards tax avoidance.
[Note- The Inland Revenue is the UK equivalent of NBR in Bangladesh] The Inland Revenue has
made plain that specific tax avoidance schemes that it has not vetted will result in the accountancy
firms that sold the schemes being fined. Aggressive tax plans, of the sort Catterall Wentworth
specialised in, are rarely receiving approval.
Another concern is the raising of the audit threshold. Until the end of 2003, any business with a
revenue of CU1m or more had to be audited. However, Government has now raised this
threshold to CU5.6m. For many accountancy firms including Catterall Wentworth, the loss of
these small clients has had a significant impact on their business. In addition, the rules governing
independence have made the provision of non-audit services to audit clients much more
problematic which has further reduced the profitability of the audit side of the business.
Although consultancy is seen by some as the most profitable sector, the firm has seen their
revenue rise by only a modest amount in the area of general consultancy. In an attempt to
generate new business Catterall Wentworth have introduced a new product; tax efficient supply
chain planning, which involves multidisciplinary teams, from consultancy and tax, working
together to help larger clients. As more UK companies source and sell across international
boundaries, the demand for such services is predicted to grow. Catterall Wentworth are one of
the first firms outside the Big Four to offer the service.
Catterall Wentworth's long-established corporate finance department is currently their most
profitable area. The division advises clients looking to raise further funds. They have a number
of listed clients and many more that may well look to list in the future. To support such firms they
have just introduced a pre-list planning service which helps firms prepare for a listing up to
eighteen months in advance. It is early days yet and they are not yet sure how many clients will
take up the service.
39
Answer to the above Questions
To : Partnership Board
From : ANO Accountant
Date : Today
Sub : Product portfolio analysis for a Caterall Wentworth
BCG matrix is designed to consider the products of the firm from two perspectives- how the market
for such a product is growing and what share of the the firm is currently enjoys.Catterall
Wentworth’s product can be analysed as follows:
Stars:
Products in this category are already doing well. Successful market share has been achieved and
market is likely to grow at a faster rate.
Both the Assurance Division & the IAS advice services would be considered stars. In both areas
Catterall have recently won a number of clients which will improve their market share.
Question marks:
Those are the products for which the market is still growing but where the share of the market is
still limited.
Tax efficient supply chain planning & Prelist planning would be considered Question marks. Both
are newly offered products & Catteral do not yet have significant share.
Cash cows:
Cash cow products are the real money earners. Market share is established and a slowdown in
the growth of the market should prevent many new players entering.
Corporate finance department, General consultancy & standard taxation services would be
considered cash cows.
Dogs:
Dog products are those with a low market share with a little growth potential. They make little or
no contribution to profits.Aggressive tax planning & tax services would be considered dogs.
Conclusion:
It is not clear from the information provided what proportion of the firm’s turnover their cash cow
make up. However general consultancy is only earning limited profits which puts pressure on the
corporate finance department to earn enough to fund the whole business.
The star products IAS advice and the Assurance division will make them in time. However
spending on staff and training is probably matching any increase in revenue from them at the
moment.
Dog products are often a drain on a firm’s resources. Whilst the firm may well cease offering
aggressive tax planning, if they continue to offer audit services, these may end up being provided
at an effective loss.Catteral wentworth will need to make some difficult decisions if they are not to
run out of the funds they need to support their current product portfolio.
40
CHAPTER-6: Strategic Options
Hall Faull Downes Ltd has been in business for 25 years, during which time profits have risen by
an average of 3% per annum, although there have been peaks and toughs in profitability due to
the ups and downs of trade in the customers' industry. The increase in profits until five years ago
was the result of increasing sales in a buoyant market, but more recently, the total market has
become somewhat smaller and Hall Faull Downes has only increased sales and profits as a result
of improving its market share.
The company produces components for manufacturers in the engineering industry.
In recent years, the company has developed many new products and currently has 40 items in its
range compared to 24 only five years ago. Over the same five year period, the number of
customers has fallen from 20 to nine, two of whom together account for 60% of the company's
sales.
Requirements: Give your appraisal of the company's future, and use a SWOT analysis to
suggest what it is probably doing wrong?
b)
Strengths Weaknesses
o Many new products developed. o New product life cycles may be shorter.
o Marketing success in increasing. o Reduction in customers.
o Excessive reliance on a few customers.
Threats Opportunities
o Possible decline in the end-product. None identified.
o Smaller end-product market will restrict
future sales prospects for Hall Faull
Downes.
c)Strengths: The market share has been increased in declining market due to growth in
company sales in last five years’. This success may be the result of the following:
Research and development spending.
Good product development programmes.
Extending the product range to suit changing customer needs.
Marketing skills.
Long-term supply contracts with customers’.
Cheap pricing policy.
Product quality and reliable service.
d)Weaknesses:
The products may be custom-made for customers. In consequences, no opportunity for
market development.
Products might have a shorter life cycle than in the past, in view of the declining total market
demand.
The company may fall endanger due to excessive reliance on two major customers.
41
e)Threats: There may be a decline in the end-market for the customers' product so that the
customer demands for the company's own products will also fall.
f) Opportunities: No opportunities have been identified, but in view of the situation, long-term
strategies have to be undertaken.
g)Conclusions: The Company is still in short-term planning. It doesn’t have long-term planning.
A strategic planning programme should be introduced.
h)Recommendations: The Company must look for new opportunities in the longer-term which
may be explained as under:
oIn the short term, current strengths must be exploited to continue to increase market share.
oIn the longer term, the company must diversify into new markets or into new products and new
markets.
oThe company should use its strengths in exploiting any identifiable opportunities.
oObjectives need to be quantified in order to assess the extent to which new long-term strategies
are required.
Market share %
EuroFoods 60
Medley 10
Local producers* 30
T ot a l 100
* These are defined as manufacturers who sell within only one European country.
Distribution has always been a very important aspect of the food industry. However, it is
particularly so in the ice-cream business. This is because the product must be kept refrigerated
from factory to shop, and also whilst it is stored in the shop.
Many of the shops which sell EuroFoods' ice-cream are small businesses and the freezer which
is required for storage is a costly item for them to buy. EuroFoods has therefore developed a
scheme whereby it will install and maintain such a freezer in these shops. The shop owner does
not have to pay for the freezer. The only condition which EuroFoods imposes is that the freezer
must be used exclusively for the sales of its products.
EuroFoods believes that this arrangement has worked well for everybody in the past. EuroFoods'
expenditures on the freezers have ensured that its products have reached the consumer in good
condition and also enabled it to simplify inventory control. It has also played a part in building its
market dominance by enabling shops which otherwise would not be able to do so, to sell its
products.
The European ice-cream business
The peak time of year for sales of ice-cream in Europe is from mid-June to mid-August. These
summer sales are deemed 'impulse' sales by the trade and are traditionally made from small
retail outlets where EuroFoods tends to have its exclusive arrangements. The other sort of sale
is the 'take-home', which are purchases made in larger quantities at supermarkets.
42
These outlets do not have exclusive agreements with EuroFoods.Analysis of European ice-
cream sales in 20X2 is as follows:
Return on sales –
Volume Value
Profit before tax
% CU billion
CU billion
Impulse sales 40 4 0.48
Take-home sales 60 2 0.12
Total 100 6
Medley
Medley would like to obtain its future growth from the impulse sector of the market. It owns 14,000
nonexclusive freezer cabinets, mainly in the UK. However, it is costly to maintain these to sell the
eight products which constitute its product range. Another problem is that in many cases small
shops have room for only one freezer and this has often already been supplied by EuroFoods. As
Medley s UK managing director said: It means only big competitors with a full range of products
can enter the market.
Medley would like to be able to place its products in the freezers provided by EuroFoods.
However, when it tried to do this two years ago in Spain, EuroFoods was successful in a legal
action to prevent this.
Medley has now complained to the European Union that EuroFoods exclusive freezer
arrangements restrict competition and are unfair.
You are presently working for Thunderclap Newman, a merchant bank, as a business
analyst in its Confectionery Division.
Requirement
Write a report to the head of the Confectionery Division of your bank, which
a)Identifies strategies which lead to competitive advantage.
b)Makes recommendations to both companies on their possible future strategy options if the EU
decides that exclusive freezer arrangements are:
o Anti-competitive and, in future, freezers should be available to any manufacturer
o Not anti-competitive and EuroFoods can continue to protect the use of its freezers.
You should include a general explanation of how a firm may attain a competitive advantage.
Req (a):
There are number of different generic strategies which led to competitive advantage for a firms
products which are discussed below:
Cost leadership: Maintain minimum cost of the product to become market leader.
Differentiation: The product must have some extinguishing features by which customers will
be persuaded and willing to pay higher price for the product.
Focus: Either of the above strategy can be combined with greater or lesser degree of
concentration on a smaller number of potential customer. Euro Foods and Medley can consider
this strategy in the market place.
Req (b):
Scenario -1
EU decision outlaws exclusive freezer arrangements
Eurofoods strategic option:
Eurofoods must consider the treat of new entrants. It should provide another facilities to gain
maximum market share. Eurofoods should spent more on market research and product
development to compete with Medley.
43
Medley strategic option:
The removal of freezer arrangement is the opportunities for Medley. To improve the entry barrier
medley can negotiate fees with Eurofoods to use their freezer and finally Medley will be able to
establish their brand name.
Scenario -2
Exclusive freezer arrangement remain
Eurofoods strategic options:
Eurofoods must exploit it’s competitive advantage in the market. There is no threat of competitors
because it’s cost leadership strategy.
Medley’s strategic options:
Medley must continue it’s differentiation and focus strategies. In addition they can provide small
freezer arrangement on the counter, home delivery and multi buy-pack of the same branded
products.
Conclusion:
Both company can follow the above fundamental strategies in different situations.
May-June-11
44
Explain the way in which relationship marketing can be used by the company to attract
and retain its customers.
Introduction
Customer relationship marketing is becoming increasingly more important owing to the increase
in customer education and expectations.
Customer lifetime value
For any organization, the sale should not be considered as the end of the relationship but instead
the beginning of the process to retain that customer.
Relationship marketing
This is a long-term approach to creating, maintaining and enhancing strong relationships with
customers and other stakeholders.
There are five different distinguishable levels with the relationship that can be formed with
customers who have purchased a product or service. These are:
Basic
Selling a product without any follow up.
Reactive
Selling a product with follow up encouraged on the part of the customer.
Accountable
Having sold a product, the follow up occurs a short time afterwards to confirm the customer's
expectations have been met.
Proactive
The sales person contacts the customer from time to time with suggestions regarding improved
products.
Partnership
The company works continuously with the customer to deliver improved levels of value.
Relationship marketing can contribute to an organization in a number of ways. It can establish a
rapport with customers creating trust and confidence.
Price can help to gain market share by using the following methods:
Price skimming: Skimming pricing usually gain smaller market share as price is set very high.
Price Penetration: Penetration pricing usually gain a large marketing share as price is set very
low.
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Explain the difference in both competitor based pricing and demand or market based
pricing.
Competitor-based pricing
This method is where the pricing policy is based upon competing prices in the market. Some of the
methods used for competitor-based pricing are as follows:
Price matching: This is where the company guarantees that the product cannot be bought less
anywhere. If it can be bought for less, they usually refund the difference. Therefore, the is very
much based on the competitors in the market place.
Going rate pricing: Here the pricing policy is determined by the competitors' pricing strat and a
similar price is set (but not guaranteed as above).
Predator pricing: This is where the pricing policy is set low so that the competition has
problems in competing for market share.
Market/demand-based pricing
The final method is more suitable to take into account market needs. Economic issues and the
elasticity of demand are considered here.There are a number of methods which are as under:
Price skimming: Skimming pricing usually gain smaller market share as price is set very high.
Price Penetration: Penetration pricing usually gain a large marketing share as price is set very
low.
Segmented pricing: Companies will often adjust their basic prices to allow for differences
customers, products and locations.
Explain briefly market segmentation and market targeting, and the relationship between
the two.
Market segmentation is the process of identifying groups of buyers with different buying desires or
requirements.
Market targeting is the firm's decision regarding which market segments to serve.
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Interactive question 1 Global automobile market
(a) Explain the concept of marketing segmentation and the benefits that it can bring to a global
automobile business like Toyota, Ford or General Motors.
(b) Identify and illustrate, with examples, SIX criteria that can be used to segment the global
automotive market.
Market Market
Market Targeting
Segmentation Positioning
A global automobile manufacturer will need to consider the variables for segmenting the
market, such as:
Business requirements
Demographic variables
Perceived benefits
Loyalty
Lifestyle and cultural considerations
Requirement (b)
There are a number of criteria that can be used to segment the global automobile market which are as
under:
Fleet car purchases: The UK and Europe customer mainly purchase car for business purposes whereas
rest of the world purchase car for individual purposes through company lease arrangement.
Engine fuel: This choice of engine fuel is an important factors because diesel is very common in Europe
with a cost benefit compared to petrol.
Disposable income: The purchase price is an important factors and personal customers can be
segmented based on disposable income.
Car performance: Based on the customers’ requirement, car performance should be segmented.
Manual or automatic transmission: This is an important factor for many international markets. For
instance, America and Australia use vehicles with automatic transmission whereas the UK has a very high
proportion of manual transmission.
Gender: Products should be segmented considering the requirements of potential female customers
besides male customers because females are now entering the workforce and they may have different
choices.
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Interactive question 2: Rex Ltd
Rex Ltd is a Bangladesh-based nationalized car manufacturer that is going to be privatized in the
next four years. It has suffered from years of poor management and under-investment. This has
resulted in a poor public image and a diverse product range. Details of current models are given
below:
Off-road division
Range Rex. A market leader with a strong image as being the off-road vehicle to be seen in
around town. It enjoys a high profit margin but is starting to face increasing competition in a
growing market.
Land Rex. A leader in the market of 'working' off-road vehicles. Has a huge market share and
faces few competitors in a fairly static market.
Family division
Mindless. A revolutionary design – 30 years ago. This is the original small car. It is now competing
against many larger models including Rex's Matchless in the small family hatchback market. The
Mindless is not a hatchback and, as a result of nil investment over the last 20 years, is regarded
as being an anachronism, bought only by enthusiasts. It is totally unprofitable.
Matchless. An economical and fun to drive small family hatchback. The car is well designed but
poorly built. It has the potential to become market leader but is held back by its poor reputation.
This is a growing but highly competitive market.
Hopeless and Hapless. Two models in the medium-size family market. They are both poorly
designed, poorly built and have astonishingly bad reputations. Neither car has a market share of
any significance. The market is not growing. It is, however, thought vital to have a car aimed at
this market sector.
Executive division
The Rex. What was once a car synonymous with quality has had its reputation somewhat
tarnished lately due to its unreliability. Its existing customer base is loyal but increasingly being
persuaded to buy more reliable imported cars. This is a growing and highly profitable market.
Requirement
As a management consultant you have been asked to comment on the company's existing
products and to provide some advice about future strategy. Write briefing notes for the directors
of Rex Ltd.
Your notes should include
(a)An analysis of the existing product portfolio of Rex Ltd showing its market share and market
growth characteristics – explain fully any technical jargon used in this analysis and suggest how
this analysis may help develop future strategy.
(b)An explanation of what the terms 'product positioning' and 'market targeting' mean and how
these might be applied in developing Rex's strategy.
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Answer to the above Questions
Requirement (a)
Briefing notes
(a) Firstly I will consider the existing products, classify them by using BCG matrix method and
then look at developing future market strategies as a result of these findings.
Portfolio of products
In 1968 Boston Consulting Group created this chart to figure out which areas of their business
deserve more resources and investment. It can be represented as follows:
Range Rex: A Stars (high share and high growth): it has rapid growth and dominant
market share. To stay at the current position in the market it has to invest heavily.
Land Rex: A cash cow (high share, low growth).If it maintains its’ existing quality and reputation
then it can create the barrier for the new entrants.
Mindless: A dog (low share, low growth) As it has no growth and no profit so, it should be
discontinued from the product range.
Matchless: A question mark (low share and high growth) If mindless is discontinued and
matchless has the opportunities to turn into star in the market then the company should invest.
Hopeless and Hapless: These are also two more dogs product with no market share and
reputation so it should be discontinued from the product range.
The Rex: A question mark. As with the Matchless a decision must be taken about this car –
either discontinue for production or invest.
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To summarize my findings from using the BCGM, I suggest you discontinue for production of
the Mindless, Hopeless and Hapless and invest heavily in the Matchless and the Rex, whilst at
the same time investing in the Range Rex. Thought should also be given to developing a new
car for the market now vacated by the Hopeless and the Hapless.
Product positioning that aims to make a brand occupy a distinct position, relative to competing
brands, in the mind of the customer by emphasizing the distinguishing features of their brand to
create a suitable image (inexpensive or premium). Considering quality and price, this might be
represented as follows:
By focusing on the products in the above way Rex Ltd can decide where it wants to position itself.
Market targeting considers how markets can be split into different sectors and then each sector
targeted with a specific product. There are three possible approaches:
Undifferentiated marketing: One product, one market. No attempt is made to segment the
market.
Differentiated marketing: The market is segmented with products being developed to appeal
to the needs of buyers in the different segments.
Concentrated marketing: The market is segmented with the product being specifically targeted
at a particular segment.
As Rex Ltd has different products aimed at different sectors, off-road, small, family hatchback, etc.
it is obvious that it has adopted a differentiated approach.
Interactive question 5: Canal Cruises
Canal Cruises Ltd is 60% owned by Captain Salmon. The company has 60 narrow boats and is
located just off the Kennet and Avon Canal. There are twenty boats of each of the following
lengths, 30ft, 50ft and 70ft. Boats are hired to families and parties of people during the cruising
season, which is April to October.
The narrow boats are regarded generally as being of high quality and their hire charge reflects
this. All boats have a microwave, stereo and colour TV on board. The boats are currently
advertised in Waterways World.
Recently Canal Cruises has been approached by the directors of Welsh Cruisers Ltd who wish
to sell their business. Welsh Cruisers Ltd is located on the Llangollen Canal and has 30 narrow
boats. The boats are of a much lower quality than those of Canal Cruises and over recent years
less than half of the boats have been hired out at any one time during the season.
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Requirements
Prepare briefing notes for Captain Salmon covering the following areas:
(a)Assuming that Welsh Cruisers is to be acquired and using Ansoff's matrix, comment on the
marketing strategies which the company can now pursue, and state with reasons that which you
would recommend.
(b)Suggest how the company may go about promoting the newly-acquired Welsh Cruisers and
increase the number of boats hired.
Briefing notes
To : Captain Salmon
From : J Sayso, Chartered accountant
Date : Today
Subject : Marketing
Req (a)
Marketing strategies
If Welsh Cruisers Ltd is acquired, this will represent growth in the business of Canal Cruises. The
information provided suggests that the quality of Welsh Cruisers' boats is much lower than that of
Canal Cruises. Four possible growth strategies could be adopted. These are discussed below:
Market penetration
Market penetration involves selling existing products in existing markets. To sell more of the
existing product to this market it would have to convert the lower quality Welsh Cruisers' boats
into those of a quality similar to its own.
Market development
Existing products are sold in new markets. Again, conversion of Welsh Cruisers' boats is
necessary and further expense will be incurred in developing new markets (market research,
promotion etc). New markets can be developed by advertising, promotion via channels other than
Waterways World.
Product development
By developing new products targeted to its existing market segments through converting the lower
quality boat into upper quality by incurring some extra promotional expenses.
Diversification
This involves leaving the lower quality boats as they are and selling to potential customers who
are not already in the company's existing market. Marketing research and promotion costs would
be incurred as for 'market development'.
Recommendation
Canal Cruises should pursue a diversification strategy, because Welsh Cruisers already has
some business gained via its existing advertising and promotional channels; the business needs
development which may expensive.
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Req (b)
Promotion
The main promotional objective will be to increase hirings of Welsh Cruisers' boats as like Canal
Cruises. The promotional possibilities are discussed below:
Waterways World
The company could promote all its activities through Waterways World as it does presently. In
addition other channels of promotion can be used. It is recommended that the name 'Welsh
Cruisers' is maintained and separate advertisements used for the differing parts of the business,
otherwise people may begin to associate the lower quality of Welsh Cruisers' boats with those of
Canal Cruises.
Wider promotion
Beside the existing promotion system, advertisements could be placed in the larger circulation
daily or sunday newspapers, radio adverts could also be used. The possibility of online sales
should be investigated. A website could be created and discounts could be offered for online
booking, repeat purchases etc to encourage market penetration and development.
The bank basically serves two markets: the personal sector and the corporate sector. However,
it would perhaps be ill advised to organise the bank solely on that basis because:
(a) The banking needs of customers in the personal sector are likely to be quite distinct. This
market is naturally segmented geographically. Users of the telephone banking service, for
example, will want to speak in their own language. Also, the competitive environment of financial
services is likely to be different in each country.
For the personal sector, a geographic organisation would be appropriate, although with the
centralisation of common administrative and account processing functions and technological
expertise, so that the bank gains from scale economies and avoids wasteful duplication.
(b) For the corporate sector, different considerations apply. If the bank is providing sophisticated
foreign currency accounts, these will be of most benefit to multi-nationals or companies which
regularly export from, or import to, their home markets. A geographical organisation structure
may not be appropriate, and arguably the bank's organisation should be centralised on a regional
basis, with the country offices, of course, at a lower level.
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Self-Test
11 Byron Tuffin
Byron Tuffin is the owner of four hotels. Three of these have been recently acquired; one is in
Rajshahi, one close to Chittagong and the third in Pabna. The original hotel is the Imperial, outside
Cox’s Bazar. The Imperial has been in the Tuffin family for fifty years and was bequeathed to
Byron by his father.
The Imperial has forty rooms. Five of these are de-luxe suites with lounge/ante-room, bedroom
and bathroom. Twenty are double bedrooms and the remainder are single rooms. The hotel has
a beautiful location in ten acres of landscaped gardens and, being on a small hill, the rooms at
the top command impressive views over the shore. The hotel makes good returns and has good
all-year-round occupancy rates. Much more comes from special events like weddings and as a
stopover for honeymooning couples before departure elsewhere the next day.
The Regent in Rajshahi and The Orangery in Pabna are similar to The Imperial. The former has
30 rooms while the latter has only 20 double rooms. The Serpentine hotel near Chittagong has
55 rooms, i.e. 30 double, 5 de-luxe suites and 20 single rooms.
Byron bought the hotels from an old family friend. Each of the hotels needs some refurbishment.
Byron has ten years' experience in managing The Imperial but realises that a four-hotel group is
a different matter. As a consultant brought in by his bankers (who helped in the acquisitions) you
have been called in to assist Byron in developing the company. During the course of your
investigations you conduct many interviews: details from some of these are given below.
Carolyn Reeder (Finance manager, The Imperial)
'I'm a bit overqualified for this job. I'm a CA with four years' post-qualification experience. I've
been here for two years and, although the job is fairly easy, the people here are great to work
with. Byron is absolutely superb with customers: he checks their file (if they have one) before
they arrive and he makes them feel really special. They love him. On the other hand he does not
want to be concerned with detail. He forgets about decisions and he has trouble taking decisions
without consulting everyone else first. He thinks about 'direction of the hotel' etc, so I suppose
he's more strategic. He does interfere sometimes though, by ordering my staff about or
bypassing me to get information from them.'
Rick Fowler (Facilities manager)
'There's a fair amount to do here with the hotel being a grade II listed building. This is a 'special'
occasion hotel and I love the 'pre-war' feel to it. I've an excellent team of tradesmen under me
who are all qualified. They take pride in their work but there isn't always enough to keep them
occupied. Byron is a good enough man but on occasion he's difficult to pin down. He does
occasionally annoy me. He gives his opinion on how one of my staff should carry out a repair. He
orders them about too, overriding my authority. One instance will suffice. Last month he ordered
Angus (a joiner) to repair his office door when I'd told Angus to refit a bathroom door in Room 22.
This door would not close. We had a particularly difficult customer who wanted a room change.
When I remonstrated with Byron his response was '...why didn't you tell me you'd scheduled
Angus for elsewhere ...'. That's not the principle. Byron should only take decisions like that
following consultation with me. I go to Peter (Unwaring) for decisions on most things.'
Peter Unwaring (Operations manager)
'I look after the day-to-day operations of the hotel – bookings, staffing, etc. I only involve Byron if
there is a problem. We have our weekly manager meetings which are fairly easy going. Byron is
a good man to work for – he does think 'big' though. He's always coming up with ideas for the
hotel. He's also astonishing to watch with our regular customers. They adore him.'
Alexandra Thorpe-Watson (Manager, The Regent)
'The acquisition was good news for us. The hotel needs some refurbishment – at the moment it
has a little too much 'faded gentility'. Byron from The Imperial seems an enthusiastic person.
We've agreed that this hotel needs to be re-positioned. I've been here a year, and before I joined
the hotel was losing its direction.'
Niall Gallagher (Manager, The Serpentine)
'This is a good hotel with a good occupancy rate. Our clients are mostly business people in
Chittagong for a few days. We also get tourists, which we need to encourage as our weekend
occupancy needs improving. Byron seems to be fairly open-minded in terms of ideas for the
direction of the group. I'll be interested in what he comes up with.'
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Byron Tuffin (Group owner)
'I'm really excited about our future. The group now has different hotels. We now have different
coverage geographically and in terms of markets. We'll need to invest in refurbishment, though. I
have no problem with that. I fully understand and believe in the importance of the client. You have
to make each guest feel that he is the most important person in the hotel.'
Requirement
Prepare a memorandum covering the following:
a.An appropriate organization structure for the group together with reasons for your
recommendation and the advantages your structure would bring.
b.A review of Byron's management style and your reasoned suggestions for a new management
structure, indicating the advantages of the new structure.
Memorandum
A. Organization structure
This structure is perfectly suitable for a single hotel. However, despite the acquisitions being in
the same area of business (hotels), this structure is no longer available for the following reasons.
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Recommended structure
For the reasons outlined above and below we would recommend the adoption of a divisional
structure. This would be as follows:
a) It is now much easier to assess the performance of each hotel and its manager.
b) Group services can set standards for the whole group
In maintenance
In service
c) The group may benefit from purchasing economies, e.g.
In cleaning services
Laundry arrangements
d) Individual managers feel more motivated because they are directly responsible for the
performance of their hotel.
e) They can adapt more quickly to any changes in their respective markets.
f) Group services can usefully redirect and re-allocate funds to the hotel needing it most.
This structure will also facilitate any potential growth. With group support services in place, extra
hotels could be added as new divisions.
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e) The board is now responsible for group direction; this is preferable to having Byron dictate the
direction and action of individual hotels. The Serpentine, for example, taps a different market
from the other hotels in the group and so requires a knowledge of a different market. It is thus
important that the board take decisions at this level. The non-executive directors will provide
a check on the activities of the directors.
The difference between centralized and decentralized is that in a centralized structure, decision
making is done by the top authority. In decentralized systems, delegation of authority is
segregated throughout the organization. The system used usually depends on the size of the
company.
Mintzberg Organizational Configuration:
a) Operating core: the people directly related to the production of services or products;
b) Strategic apex: serves the needs of those people who control the organisation;
c) Middle line: the managers who connect the strategic apex with the operating core;
d) Techno structure: the analysts who design, plan, change or train the operating core;
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e) Support staff: the specialists who provide support to the organisation outside of the
operating core's activities;
f) Ideology: the traditions and beliefs that make the organisation unique.
Based on the importance of the components, coordinating mechanisms and design decisions five
structural configurations were established:
a. Simple Structure: The key component of the organization in this case would be the
strategic apex, and vertical and horizontal centralization is incorporated in this
configuration.
b. Machine bureaucracy: The key component of the organization here would be the techno
structure and limited horizontal decentralization is used.
c. Professional bureaucracy: The operating core forms the key component and both
vertical and horizontal decentralization is used.
d. Divisionalized form: Standardization of outputs is the coordinating mechanism and the
key component is the middle line. It is characterized by limited vertical decentralization.
e. Adhocracy: Mutual adjustment is the coordinating mechanism in this configuration. The
support staff or the operating core forms the key component. Selective decentralization is
used in this case.
CHAPTER: 9-Risk Management
Interactive question 1: Managing risks in an oil company
A multinational oil company is considering exploiting the gas and oil reserves in a country where
the national government has a history of suddenly seizing control of foreign assets and of
introducing taxes to ensure all the profits are taken away.
Identify risk strategies that could be used by the management of the oil company.
57
Interactive question 3: Risk measurement and evaluation (May-June’11 Q-4)
Your corporate client has purchased the following data which provides scores of the political risk
for a number of countries in which the company is considering investing in a new subsidiary.
Economic Debt in Credit Government Remittance Access
Total
performance default ratings stability restrictions capital
Weighting 100 25 10 10 25 15 15
Gmala 37 13 4 5 5 10 0
Forland 52 5 10 9 16 8 4
Amapore 36 12 2 3 9 5 5
Covia 30 9 3 2 15 1 0
Settia 39 15 4 3 11 4 2
Countries have been rated on a scale from 0 up to the maximum weighting for each factor (e.g.
0-15 for remittance restrictions). A high score for each factor, as well as overall, reflects low
political risk.
A proposal has been put before the company's board of directors that investment should take
place in Forland.
Requirements
Prepare a brief report for the company's board of directors discussing whether or not the above
data should form the basis for:
a)The measurement of political risk, and
b)The decision about which country to invest
To : Board of directors
Prepared by : Accountant
Date : 17 December 20X8
Subject : The evaluation of political risk in investment decisions
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Other methods of evaluation
The directors should also consider some of the other approaches to the evaluation of political risk.
These include:
a)Seeking the views of individuals with direct experience of the countries in question, such as
academics, diplomats and journalists.
b)Social as well as economic analysis The decision about which country to invest in
The evaluation of political risk must obviously form some part of the decision about which country
to invest in. However, the use of this type of data to evaluate political risk in this context can be
misleading for the following reasons.
Microrisks
These scores are valid at the macro level, but they do not measure the risk that is faced at the
micro level by the industry or firm. Certain industries, such as mining and agriculture are more
prone to political risk than are others. Some activities will be welcomed by countries due to the
perceived benefits that their presence can bring. Examples of this can be seen in the UK economy
where the activities of the multinational biotechnology companies are being severely restricted,
while investment by Japanese microchip companies is welcomed and assisted.
Emphasis on political features
It can lead to an over-emphasis on the political features of the host country while neglecting other
vital considerations such as the strategic fit of the new investment with the company's other
operations.
Conclusion
This type of data therefore has relevance to the investment decision, but should not form the sole
basis on which the decision is made. Although Forland comes out best in the overall scores, it
has the worst level of economic performance. If the subsidiary is being developed with a view
to serving primarily the local market, then this factor should receive a higher weighting in the
overall decision making process since it will have a significant impact on the expected cash flow
that will be generated.
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Answer to the above Questions
b)Business Risks:
Operational Risk: Operational risk may arise from regulation and cultural risk.
Way to manage the Risks:
Compliance with regulation
Outsourcing of sensitive operation includes maintenance, staffing, catering, security service etc.
Cultural awareness should be developed among the employees for different countries.
Hazard Risk: Hazard risk may occur from contracts, natural events and suppliers etc.
Way to manage the Risks:
Proper procedure for supplier’s selection.
Avoid to rely on one supplier.
Make a comprehensive disaster recovery plan.
Long-term contract with suppliers.
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Strategic Risk: It may arises from competition, customer changes, industry changes and
customer demand.
Way to manage the Risks:
Monitoring and analysis of competitor.
Acquisition of competitor.
Good quality customer information.
Environmental information for potential industry changes.
Flexible service and maintenance schedule.
Multi-skilled staff to cope up with the situation.
c)Internally Driven Risks: It may arises from liquidity and cash flow, employees and supply
chain, public access and intellectual capital.
Conclusion: This report has been identified a range of risk present in SWA’s environment which
exist it’s internal structure and operations. At present no one is responsible for implementing or
monitoring a risk management strategy at SWA.Some appropriate management controls has
been suggested.
Recommendations: WA should establish a role at board level for risk management by creating
a new post. The first task of the role holder should be to assess internal controls at SWA and on
the basis of this present a risk analysis to the board.
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Risks from continuing to provide cleaning in-house
Operational risks from cleaners not being available (e.g. strike action)
Employment risks of having own staff (e.g. claims for industrial injury, discrimination etc)
Rising wages and other employment costs
Legal costs of negligence claims resulting from poor cleaning
Potential fines for inadequate monitoring of staff
Risk environment and appetite
Potential changes in government policy resulting in contract penalties
Extent of pressure on hospital to cut costs
Management's previous experience of outsourcing agreements
Degree of support management enjoys from influential stakeholders
Azure, a limited liability company, was incorporated in Sepiana on 1 April 20X6. In May, the
company exercised an exclusive right granted by the government of Pewta to provide twice
weekly direct flights between Lyme, the capital of Pewta, and Darke, the capital of Sepiana.
The introduction of this service has been well advertised as 'efficient and timely' in national
newspapers. The journey time between Sepiana and Pewta is expected to be significantly
reduced, so encouraging tourism and business development opportunities in Sepiana.
Azure operates a refurbished 35-year old aircraft which is leased from an international airline
and registered with the Pewtan Aviation Administration (the PAA). The PAA requires that
engines be overhauled every two years. Engine overhauls are expected to put the aircraft out
of commission for several weeks.
The aircraft is configured to carry 15 First Class, 50 Business Class and 76 Economy Class
passengers. The aircraft has a generous hold capacity for Sepiana's numerous horticultural
products (e.g. of cocoa, tea and fruit) and general cargo.
The six-hour journey offers an in-flight movie, a meal, hot and cold drinks and tax-free shopping.
All meals are prepared in Lyme under a contract with an airport catering company. Passengers
are invited to complete a 'satisfaction' questionnaire which is included with the in-flight
entertainment and shopping guide. Responses received show that passengers are generally
least satisfied with the quality of the food – especially on the Darke to Lyme flight.
Azure employs 10 full-time cabin crew attendants who are trained in air-stewardship including
passenger safety in the event of accident and illness. Flight personnel (the captain and co-pilots)
are provided under a contract with the international airline from which the aircraft is leased. At
the end of each flight the captain completes a timesheet detailing the crew and actual flight time.
Ticket sales are made by Azure and travel agents in Sepiana and Pewta. On a number of
occasions Economy seating has been over-booked. Customers who have been affected by
this have been accommodated in Business Class as there is much less demand for this, and
even less for First Class. Ticket prices for each class depend on many factors, for example,
whether the tickets are refundable/non-refundable, exchangeable/non-exchangeable, single
or return, mid-week or weekend, and the time of booking.
Azure's insurance cover includes passenger liability, freight/baggage and compensation
insurance. Premiums for passenger liability insurance are determined on the basis of
passenger miles flown.
Requirements
(a)Identify and explain the business risks facing Azure.
(b)Recommend how the risks identified in (a) could be managed and maintained at an
acceptable level by Azure.
Note: You should assume it is 5 December 20X6.
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Answer to the above Questions
Age of aircraft:
The aircraft being leased is old the reason why it may arises operational, financial and compliance
risk.
High professional expensive seats:
Due to high professional expensive seats and insufficient cheaper seats, azure is operating well
below capacity.
Cargo:
As azure carrying a large amount of horticulture produce which raise various risk; that azure might
be liable to the passengers if their cargo deteriorates in transit.
On board services:
Customers are currently dissatisfied with the food provision because it seems to less appealing to
the passengers.
Pricing:
As sales agent are large thus azure is facing risk if the expensive seats are not sold then it will not
be possible to cover cost against sales volume.
Safety:
Due to insufficiency of staff recruiting for safety azure is facing operational risk.
Fuel:
The aircraft cannot fly without fuel if the price of fuel increases then azure will not be able to meet
the cost of operation.
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Pricing:
Azure should review the pricing policy. They should also establish limits on how many of certain
types of tickets is refundable / non-refundable.
Safety:
The company should appoint a person who will be solely responsible for safety operation.
Fuel:
The company can make a hedging contract with fuel companies against the cost of fuel.
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Answer to the above Questions
Computer security is of vital importance to all organisations. Security is the means by which losses
are controlled and therefore involves the identification of risks and the institution of measures to
either prevent such risks entirely or to reduce their impact.
Requirements
a) Identify the main areas of risk which may arise in relation to a computer system.
b) Describe the different forms of control which should be instituted to safeguard against computer
security risks.
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Answer to the above Questions
Requirement (a):
The main areas of risk to which a computer system is exposed, and some of the factors which
may lead to the exposure are as follows:
(i) Accidental destruction or loss of data by operator or software error.
(ii) The acceptance of inaccurate input data due to inadequate edit.
(iii) A complete systems failure can lead to loss of data.
(iv) Theft or copying of data from a batch processing system by an operator.
(v) Deliberate destruction of the hardware has been known to occur, and where adequate
protection has not been provided.
Requirement (b):
The different forms of control which should be instituted may be sub-divided into three main
headings:
Physical security includes
Physical lock: includes key lock, cipher lock, biometric locks.
Security guard: includes video camera.
Insurance coverage: It should be maintained for computer hardware & replacement costs.
General emergency & detection control: Alarm should be installed at strategic locations for
both safety & security reason.
Periodic backup procedures: includes magnetic tapes, disks, compact disks etc.
Emergency power & UPS: Generator & UPS system should be maintained in case of
emergency supply.
Software security
(i) Effective control over the preservation of information .
(ii) Prevention of unauthorised access by the use of devices such as passwords.
Systems security
(i) Strict control and verification of all input data
(ii) All input should pass through an edit program as the first stage in being entered on to the
computer files.
(iii) Adequate controls should be in force to ensure that amendments to programs are
properly authorised, checked out and validated before use.
(iv) There should be adequate recovery, restart and standby procedures in the event of power
failure or machine breakdowns.
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: Methods of Development
Interactive question 1: Stock market sentiment
The Financial Times published the following market report. Read it and then answer the
questions that follow.
'Share prices in London moved up again to all-time highs yesterday, measured by the stock
market's main indices, the FT-SE Actuaries All-Share and the FT-SE 100.
There were, however, signs that the market's move to record levels could be running out of
steam. Wall Street, one of the prime motivating forces behind the London market's recent rise,
briefly penetrated the 5,000 level on the Dow Jones Industrial Average, shortly after the US
market opened for trading. But it quickly dropped back to the mid-4980s, and around two hours
after London closed for business the Dow was still jousting with the 5,000 mark.
The failure of the US index to move decisively through 5,000 was one of a number of worrying
signals affecting London. Others included the emergence of yet more profits warnings, notably
from Rexam, the paper group, and a decline in international bond markets.
Dealers said London had run into some determined selling pressure when it passed 3,630. 'Above
that level, we ran into some real selling' said one market maker. The FT-SE 100 index finished
the day a net 19.6 firmer at an all-time closing high of 3,628.8, after reaching a record intra-day
peak of 3,639.5. The FT-SE-A All-Share index ended at a best ever 1,776.87, up 7.47.'
(a)What is a 'profits warning'?
(b)What was the sentiment or mood of the UK stock market on this day?
(a) This is an announcement by a company that its profits will be lower than had previously
been expected. A profits warning usually results in a drop in a company's share price, because
it means that the company is less valuable than was previously thought.
(b) The market reached an all-time high, reflecting a mood of optimism about the future of the
economy and business performance. There are some indicators, however, that prices have
gone as high as they will for the moment (or that they may begin to fall).
Worked example: Morrisons buy Safeway (Page 451)
Family controlled supermarket operator Morrisons became the UK's fourth largest supermarket
retailer in 2004 as a result of the acquisition of larger rival Safeway for £3bn. Originally an offshoot
of the US group of the same name, Safeway was established as an independent company in
1987. Its fortunes were bumpy to say the least over the next ten years, but the group finally found
its feet in 2001 with the appointment of a new CEO and an emphasis on fresh food and aggressive
pricing. In a bold move to become a national operator, regional group Morrisons agreed a deal to
acquire Safeway in 2004, despite fierce competition from a number of other, more powerful
supermarkets that also bid for Safeway once Morrisons' offer was made. These later bidders were
precluded by the Competition Commission from buying the company, but their interventions had
the effect of making Safeway more expensive.
Integration of the two businesses proved far more difficult than Morrisons had anticipated, forcing
the group to issue an almost unprecedented total of five profit warnings in just the first six months
of 2005.
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Answer to the Worked Example
The autocratic and hands-on style of the Chairman of the group and grandson of the founder irked
investors who forced the appointment of NEDs against his wishes. Following the 5th profit warning
in 6 months he resigned his Chair of the operating board in May 2005 but retained the overall
Chair of the company. The share price did not fall on this announcement.
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Jim Buxton, the company's main shareholder and managing director, recently visited all branches
in order to promote corporate identity and inspect performance at a local level. He returned
dismayed at the condition of some branch premises and feels overall that, although recent
financial performance has been consistent with previous years, the company does not seem to
have changed or developed since he last visited branches five years ago.Jim believes that he
needs to change the appraisal method for branches so that they fit more closely with what he
expects from the company. He wants the business to develop and grow and become the leading
provider of business training in Bangladesh.
Requirements
Answer the following questions, considering each independently from the others, and supporting
your answers with appropriate calculations.
(a) Outline the problems the business is likely to have from its use of ROI as its sole performance
indicator.
(b) Describe the balanced scorecard approach to performance measurement and how it might
rectify these problems.
(c) Outline possible performance measures which might be used in each area of the balanced
scorecard for AFB.
Answer to the Worked Example
Requirement (a) Problems with using ROI
The use of a single financial measure to judge the performance of branches has the following
problems:
The measure is short-term. They will not invest in the long-term projects, so that the company’s
carrying amount reduces and ROI increases.
Non-financial measures are not considered here.
Controlling cost may be harmful in the long-term success of the business.
The company has few non-current assets and give rent premises which increases ROI as a
result managers will not be motivated to improve performance further.
Other factors including environmental factor are not considered here which will be different for
each branch.
Overall, the use of ROI as the company’s’ sole performance indicator will not help the
business to obtain it’s goal of development and growth.
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It can be seen that the balanced scorecard examines many different stakeholder requirements
which are critical to the success of the business. It does not concentrate solely on financial
measures but recognizes the importance of customer satisfaction, staff motivation, innovation
etc. Using balance scorecard, target can be set of each branch and performance can be
monitored.
Requirement (b) Performance measures
The following is an outline of how the balanced scorecard could be implemented by AFB:
Financial perspective
Critical success factor Performance measures
Return to shareholders ROI
Course profitability Margins per course
Grow/prosper Sales growth
Customer perspective
Critical success factor Performance measures
Satisfaction Individual customer course appraisals (using a
ranking system)
Loyalty % of repeat business
Acquisition % of queries turned into customers
Internal business perspective
Critical success factors Performance measures
Motivated staff Staff turnover ratio
Individual customer course appraisals (using a
Adequate facilities
ranking system)
Efficient use of assets Staff/lecture room utilisation %
Innovation and learning perspective
Critical success factors Performance measures
Introduce new products % of new to old courses
Keep staff up to date Average staff hours on training courses
Adapt to customer needs % of bespoke to standard courses
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Plastic wrapping is obtained either directly from the manufacturer or via an Internet site specializing
in selling surplus wrapping from government and other sources.
Requirement
a) Explain the main characteristics of a Total Quality Management (TQM) programme.
b) Identify the sourcing strategies adopted by PicAPie and evaluate the effectiveness of those
strategies for maintaining a constant and high quality supply of inputs. Your answer should
also include recommendations for changes you consider necessary.
Characteristics:
i.Prevention: Organization should use some techniques to prevent poor quality occurring.
ii.Eliminate Waste: The organization should seek the most efficient & effective use of all it’s
resources to eliminate waste.
v.Participation: All workers should be encouraged to share their views and the organization
should value them.
vi.Teamwork & Empowerment: Worker should be empowered to make decisions as they are in
the best position to decide how their work is done.
Req (B)
Advantages:
i.Easy to develop & maintain the relationship with single supplier.
ii.Supplier product quality assurance program can be implemented easily.
iii.Economies of Scale may be obtained from volume of discounts.
Disadvantages:
i.If the supplier disrupt supply then PicaPie will fall in trouble.
ii.Quality assurance may not be ensured by the supplier thinking PicaPie has no alternative.
Advantages:
i.Ability to switch other supplier to get it.
ii.Competition may help to decrease profit.
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Disadvantages:
Advantages:
i.Supply may be easier.
ii.The third party is responsible for quality assurance.
Disadvantages:
i.If the third party doesn’t concentrate to maintain quality control then operation may hamper.
ii.Keeping confidentiality may be difficult.
Advantages:
i.Supply may be easier because there are two different source of supplier.
ii.There may be some price competition between suppliers.
Disadvantages:
i.Quality assurance program may be difficult to ensure due to more than one source of supplier.
ii.PicaPie must take time to administer & control two different system.
Requirement (a)
Characteristics of information flows at the strategic level are described as under:
Long-term Outlook: Strategic level information should have high quality accurate information
to enable sound long-term decision to be made.
Flexible: In order to maintain control in a constantly changing organization, the strategic
information need to be flexible and able to respond quickly to new demands.
Multi-directional: Information flows at the strategic level facilitates decision making that will
affect the whole organization and provide the framework for long-term strategic plans.
External Component: Strategic level information will include information from external sources.
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Requirement (b)
Strategic information comes from both internal and external sources which are described below:
Internal sources: Internal data needs to be captured from day to day operation and processed
to the required format which is suitable for strategic level.
External Sources: External sources of information can be collected through Official report,
leaflet, press updates, internet and extranet etc.
Data Workers: Data worker organize and store information to be made available when needed
includes book-keepers, clerical workers, and sales personnel.
Knowledge Workers: Knowledge workers create information includes professional peoples such
as engineers, financial and marketing analyst, production planners, lawyers and accountant.
Requirement (b)
The role of a professional accountant as both a data worker and a knowledge worker are
explained as under:
As a data worker:
As a data worker an accountant process all types of data in to the system and distribute
it as and when required.
As a knowledge worker:
As a knowledge worker an accountant support the tasks of planning, acquiring, searching,
analyzing, organizing, storing, programming, distributing, marketing, or contributing to the
transformation of information which is required by the management of an organization.
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Interactive question 3: Information and knowledge management
Increasingly the management of information sharing and group working ventures is a
fundamental part of business management.
Requirements
(a) Discuss how the management of information might differ from the management of
knowledge.
(b) How can an organisation develop a knowledge strategy?
Requirement (a)
Requirement (b)
A knowledge management strategy might take the form shown in the diagram below:
(i) Develop and determine a policy for owning, growing and sharing knowledge within the
organisation.
(ii) Identify critical knowledge functions within each department.
(iii) Audit knowledge to determine its type, location, longevity and whether it is explicit or tacit.
(iv) Store it in a repository where it can be easily updated and retrieved.
(v) Determine ways in which it can be grown and tracked.
(vi) Ensure this valuable organisational asset is kept secure.
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Self-Test:7-Information systems used to collect, generate and manipulate information can be
classified as follows:
(a) Transaction Processing Systems (TPS)
(b) Office Automation Systems (OAS)
(c) Knowledge Work Systems (KWS)
(d) Management Information Systems (MIS)
(e) Decision Support Systems (DSS)
(f) Executive Information Systems (EIS) [also known as Executive Support Systems (ESS)]
Requirement
Describe each of the categories identified above in terms of the functions information systems
perform, and the level they serve in the organisation.
Knowledge Work Systems (KWS) support knowledge workers at the knowledge level of the
organisation. They are information systems that aid knowledge workers in the creation and
integration of new knowledge in the organisation. To do this they need to link the worker to
external and internal (organisation) information.
Examples of KWS include the following:
Computer Aided Design (CAD) systems
Investment workstations – used in the financial industry
Intranet environments include Internet technologies used for communication purposes e.g.-
mail, chat groups, web tools.
Management Information Systems (MIS): An MIS is defined as a system to convert data from
internal and external sources into information, and to communicate that information in an
appropriate form to managers at all levels and in all areas of the business to enable them to make
timely and effective decisions.
Decision Support Systems (DSS): A DSS is defined as a computer-based system which
enables managers to confront ill-structured problems by direct interaction with data and problem-
solving programs. Their aim is to provide information in a flexible way to aid decision-making.
Example-SQL(Structured Query Language).
Executive Information Systems (EIS): Information systems at the strategic level of an
organisation designed to to provide information to make strategic decision effectively. The EIS
has the ability to:
Call up summary data from an organisation s main systems e.g., summary income statement,
balance sheet etc.
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CHAPTER: 14-STRATEGIES FOR CHANGE
Self-Test:13 F Steel
The recently-appointed Chief Executive Officer (CEO) of the F Steel Company is intent on
making the organization more competitive. He has made it clear that he considers current
operational performance to be below acceptable levels. He recently stated, 'Costs are too high
and productivity is too low'.
Demand for steel is growing, particularly in export markets such as countries in the Pacific rim,
and the CEO believes F Steel should capitalize on this. To do this he believes some change to
working conditions at F Steel will be required. A reduction of import duty in some proposed
export markets would also be required for profitable trading.
The trade union that represents the steel workers in F Steel Company is well-organized and has
promised the workers that it will defend their wage levels and working conditions.
Requirement
a)List the forces for change and causes of resistance in the F Steel Company. Classify these
according to whether they can be considered as deriving from internal or external sources.
b)Recommend how the newly-appointed Chief Executive Officer in the F Steel Company might
go about managing the process of change.
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Self-Test (15) Burgermania Ltd (AL-Nov-Dec’10 Q-3)
Company back-ground
Burgermania Ltd (hereafter Burgermania) is the world's largest fast food chain. The company has
30,000 restaurants in over 100 countries, and has been committed to opening over 700 new
restaurants each year in recent times. The company has benefited from consumers wanting quick
and filling foodstuffs, and has met this need with its style of product for both adults and children.
The company has also had many tie-in arrange-ments with sports and films, to encourage
consumers to buy its product range. The range is very limited, focusing mainly on burgers, fries
and soft drinks. There are occasional variations in some countries. This approach has proved
popular with consumers who have conservative tastes and are happy to know that the food will
be of a consistent quality wherever it is sold.
The company operates mainly via a combination of owned and franchised restaurants.
Franchisees sign a 15-year deal in which they are given the right to use Burgermania trademarks,
restaurant decor designs, formulae and specifications for menu items, use of Burgermania's
inventory control systems, bookkeeping, accounting, marketing and the right to occupy the
restaurant premises.
In return the franchisee agrees to operate the business in accordance with Burgermania's
standards of quality, service, cleanliness and value. The company is anxious to avoid any
negative publicity, so it employs 'secret shoppers' who randomly visit and assess restaurants on
the above criteria. The company pays relatively low wages and has high staff turnover; this has
prevented Burgermania being able to recruit high caliber staff, as the image of the jobs offered is
poor.
Recent events
The company has had stagnant profits and sales growth in the last two years. The main reasons
for this are increased health concerns in its major geographical markets. The company's products
are high in both fat and carbohydrate content, and stories in the media about preventable obesity,
heart disease, diabetes and cancer have caused turnover to falter. Furthermore, new style diets,
whilst promoting meat consumption, have discouraged many consumers from eating bread or
fries due to their high carbohydrate content. Initially Burgermania claimed that its products were
nutritious and healthy, but this policy was deemed to be a failure as it did not reverse the
stagnation of sales. Some high profile legal claims against the company from consumers claiming
that Burgermania products caused health problems have also had a negative impact on the
company's image.
The company has decided at board level to respond to this deterioration in its financial
performance by introducing and promoting a healthier menu, with options that include burgers but
no burger buns, chicken and fish based products, grilled rather than fried meats, salads, fruit and
healthier drinks, as well as phasing out extra-large portions of food on its menu. The directors
want to give more autonomy to individual restaurant managers to offer a wider range of products
that will vary between different locations.
In addition, the board intend to change the company name to 'Eatwise' to move away from the
association with burgers and fries. The cost of changing all the company, logos, livery, advertising
campaigns and cooking equipment is expected to be massive. Staff will also will have to be trained
to use the new equipment and promote healthy eating to customers. The company is uncertain
how the public and franchisees will respond to these changes in the business. Moreover,
Burgermania is under pressure to deliver improved financial performance as its share price has
underperformed that of the overall stock market by 20% in the last 18 months.
Requirements
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Answer to the above Questions
Burgermania is going to undertake some changes in the company’s process and pattern as well
as it has to be retrained the employees and rebranded the business to anticipate the reaction of
stakeholders and response their reaction positively.
Franchisees
Franchisees will fear that if the new system is implemented drastically then it may have negative
impact on the company’s revenue.
They may fear that due to changes of name and livery, huge costs will incur and it will be
recovered by Burgermania in the form of higher franchise fees.
Franchisees will be reluctant to change to a new system of delivering food if they are happy
with current products and procedures.
If they don’t like the changes, they may have lack of initiative to add new product in the product
menu.
Restaurant staff
As the staffs are poorly paid and have short periods of employment, therefore they may be
reluctant to be retrained or adopt a pro-active policy with customers in terms of promoting the new
food lines.
Staff may feel that if Burgermania suffers then jobs may be lost.
Staff may fear that management will use the change as a means of introducing new working
practices that could reduce income, overtime, bonuses etc.
Customers
Some customers are concerned with new products rather than whatever it’s quality and some
are conservative so switch new product.
They may feel that the new products are being forced on them.
Req (C)
Draft blueprint
Action required
Introduction of healthier menus and local autonomy
Launch of new name/brand for the company
Purpose
The objective of the changes is as follows.
To reverse the decline in the company's performance.
To adapt to changes in consumer demands and tastes.
To promote the company as a family-friendly and healthy eating place.
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Timing of changes
A change will have to be launched if it wants to maximize publicity for the changes. The
company could try introducing the new menus on a trial basis in selected restaurants.
The transformation will be very time-consuming given the global nature of the company and its
products.
Responsibilities
A committee needs to be formed to co-ordinate the changes, headed by a senior
manager/director.
Evaluation
Market research needs to be undertaken to establish public reaction to both the menu and
name changes.
Performance data can be produced to determine the popularity of the new food products on a
trial basis in selected stores.
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Answer to the above Questions
Unions have already expressed their intention to resist any changes to wages or working
conditions. This could lead to walk-outs and strikes.
B.Managing change
This change management model was created in the 1950s by psychologist Kurt Lewin. Lewin
noted that the majority of people tend to prefer and operate within certain zones of safety. He
recognized three stages of change:
1.Unfreezing: Most people make an active effort to resist change. In order to overcome this
tendency, a period of unfreezing must be initiated through motivation.
2. Change: Once change is initiated, the company moves into a transition period, which may exist
for some time. Adequate leadership and reassurance is necessary for the process to be
successful.
3. Refreezing: After change has been accepted and successfully implemented, the company
becomes stable again, and staff refreezes as they operate under the new guidelines.
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C.Managing the project Objectives
One of the first things the project team will need to establish is the scope, the deadline and the
budget available for accomplishing the project.
Tools
Once they have a clear set of objectives, the team can use tools such as network or critical path
analysis to the project objectives.
Given the current problems, Parsons will no doubt be very keen to see a speedy implementation,
but due to budget constraint it is difficult to achieve the objective at once. Review meeting will
then be required with all the senior managers to adjust scope, deadlines or budget to ensure the
project plan is realistic.
Gantt charts to track project progress and resource histograms to monitor manpower usage will
help to keep the project on target.
Reporting
Regular project reporting will then keep key stakeholders up-to-date. The e-procurement project
will need significant liaison with the overseas suppliers and may involve overseas visits to ensure
the project is fully co-ordinated.
Study
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