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ACCA P3 Business Analysis

Tuition Note June2015

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CONTENT CHAPTER 1 BEFORE SETTING UP STRATEGIES ............................... 6 Corporate governance ..................................................................................................................................................... 6 Culture ................................................................................................................................................................................... 9 Stakeholder analysis: .....................................................................................................................................................14 Ethics:...................................................................................................................................................................................17 Absolutism VS Relativism .............................................................................................................................................17 Relativism ...........................................................................................................................................................................19 Corporate social responsibility ..................................................................................................................................23

CHAPTER 2 STRATEGY ................................................................. 25 WHAT IS A STRATEGY? ................................................................ 26 Definition of strategy .....................................................................................................................................................26 Johnson and Scholes looks at classification of strategy using another way:3 lenses .............................26 Johnson and Scholes has classified strategy into 3 levels(types): .................................................................27

CORPORATE STRATEGY ............................................................... 28

BUSINESS STRATEGY (HOW) ....................................................... 40 Step1: review your current strategic position ......................................................................................................41 Step2, Make strategic choices .....................................................................................................................................46 Generic strategic options ..............................................................................................................................................46 Ansoff’s growth vector matrix ....................................................................................................................................47 Step3, Strategic evaluation ...........................................................................................................................................55 Integrated reporting.......................................................................................................................................................73


OPERATIONAL STRATEGY ............................................................ 74

PROJECT MANAGEMENT: .............................................................. 75 Stages for project management: [IRBPPP] .............................................................................................................75 Business case in detail ...................................................................................................................................................76 Costing techniques: .........................................................................................................................................................77 Forecasting ...................................................................................................................................................................... 101 Ratios: ............................................................................................................................................................................... 109 investment decision..................................................................................................................................................... 110

CHANGE MANAGEMENT .............................................................. 142 Lewin’s three steps ...................................................................................................................................................... 142 Factors affecting whether people would accept change: ............................................................................... 143 Turnaround Strategy: ................................................................................................................................................. 144 How to manage change? ............................................................................................................................................. 144 Facilitate the change: .................................................................................................................................................. 145

BUSINESS PROCESSES .............................................................. 152 Business process resign options: ............................................................................................................................ 152 Business process re-engineering (BPR): ............................................................................................................. 153 Harmon’s process-strategy matrix ......................................................................................................................... 154 Business change lifecycle[AIDID] ........................................................................................................................... 155 Supply Chain ................................................................................................................................................................... 159

E BUSINESS ............................................................................... 167 E-business and E-commerce ..................................................................................................................................... 167 4 ACCA APC P3 Study Note www.globalapc.com

E-commerce forms: ...................................................................................................................................................... 167 Benefits and drawbacks of using E-business: .................................................................................................... 167 Information & IT security .......................................................................................................................................... 168 IT Security ....................................................................................................................................................................... 171

PEOPLE ...................................................................................... 172 Management & Leadership ....................................................................................................................................... 172 Job Design ........................................................................................................................................................................ 178

KNOWLEDGE MANAGEMENT SYSTEM ......................................... 184 Data, Information and knowledge.......................................................................................................................... 184 Knowledge flow systems ............................................................................................................................................ 185 knowledge management strategy: ......................................................................................................................... 186 Knowledge management comment: ...................................................................................................................... 186

ORGANIZATIONAL STRUCTURE: ................................................ 187 Types of structures: ..................................................................................................................................................... 187 Power structure: ........................................................................................................................................................... 188 Mintzberg: ....................................................................................................................................................................... 188

MARKETING ............................................................................... 191 Definition of marketing .............................................................................................................................................. 191 Market segmentation .................................................................................................................................................. 192 Marketing mix (7p’s) ................................................................................................................................................... 193

VIDEO REVISION: ...................................................................... 204


Chapter 1 Before setting up Strategies

Corporate governance This means to make directors work in the best interest of the company rather than of their own. This is based on agency theory, ie, separation of duties between owner and manager. And in order to make directors work in the best interest of the company, company has to incur agency costs, ie, salary, corporate governance, audit fees etc.

Best practices:

1. The board of directors

An effective board of directors should: ● Lead company strategy, with prudent controls and risk management, to maximise sustainable long term success of company. ● Should meet regularly, with a formal agenda. ● Should detail its membership (including Chairman, CEO, Senior Independent Director, Committee members) and work in the Annual Report. ● Should ensure Chairman and Non Executive Directors (NEDs) meet without the Executives, to consider their performance. ● Should ensure NEDs meet without Chairman annually, to consider the performance of the Chairman. 2. Chairman and Chief Executive Officer

Issues that relate to the Chairman and CEO: ● Should not be the same person. 6 ACCA APC P3 Study Note www.globalapc.com

● Chairman leads Board, and sets agenda for Board Meetings ensuring there is enough time for important matters and all directors contribute. ● Chairman is key contact for shareholders. ● CEO runs the company. 3. Board composition

● No one person, or group, should be able to dominate the Board. ● Should be an appropriate size, and right balance of skills and experience. This includes diversity, including by gender.

4. Appointments to the board

● Have objective merit-based criteria for selection of new Board members. ● Oversee induction and training for all directors (likely to be organised by Chairman, assisted by Company Secretary).

5. Annual performance review

● Board, its committees, and individual directors should have performance appraised at least annually.

6. Re-election of board members

● At 1st AGM after appointment to Board, and at least every 3 years afterwards, by shareholders (note, for FTSE 350 companies, all directors are up for reelection every year). ● If not annual re-election for all directors, sensible to “retire by rotation” and avoid potentially losing all the Board in one go.

7. Remuneration of directors

● Significant proportion should be performance-related. ● Should consider industry pay levels.


● Enough to attract, retain and motivate. ● Notice periods no longer than 1 year.

8. Internal control

● Board should ensure a sound system of Controls. ● Annual review of effectiveness of Controls, and report this in Annual Report. ● Audit Committee of at least 3 Independent NEDs. ● Main role is liaison with the internal and external auditors on all matters.

9. Relations with shareholders

● Regular dialogue with shareholders. ● Chairman to ensure shareholder views communicated to Board. ● Communicate with investors and encourage debate through AGM. ● Separate resolutions on each issue.

10. Institutional shareholders

● Should themselves ensure dialogue with directors. ● Should make considered use of their considerable voting power.


Culture

What Firstly, what is culture? Culture is the way people do things around here. Organisational culture consists of the beliefs, attitudes, practices and customs to which people are exposed during their interaction with the organisation.


Culture Web

Secondly, we can build up our culture or analyse what sorts of contents of culture within our organization by analyzing these aspects using culture web: Johnson and Scholes said the culture within a company is made up of 7 elements: We can build up our culture or analyse what sorts of contents of culture within our organization by analyzing these aspects using culture web:

Rituals and routines: Day to day procedures, ie, innovation company staff would have 45minutes per day to place games with collegues.

Symbols: Eg, offices; status; cars etc.

Control systems: Eg, managers are measured based on profit then this company may be risk aggressive?

Organizational structures: How tall / flat is the organisation?

Power structures: How much centralization is there?

Stories: Does news within the organization focus on successes or failures?

The paradigm: What assumptions are taken for granted? 10 ACCA APC P3 Study Note www.globalapc.com

Types of cultures Thirdly, depending on which company or industry you are in, Charles Handy said there are 4 types of cultures within a company, they are:

Power culture Heavily centralised with few decision-makers. Allows quick responses to changes in the environment.

Role culture Lots of formalised procedures. Can be very useful in an environment that is stable.

Task culture Emphasis on getting the job done rather than following rules. Works well in complex, unstable environments.

Person culture Purpose is purely to look after the individuals (found where self-employed people are the norm).

Strategic cultures Fourthly, if a company is going to make a decision then it will be affected by the culture within the company as well. Miles and Snow also identifies 4 Strategic cultures:

Defenders – like strategic options that have worked in the past / low risks /secure markets. Prospectors – like options that could deliver results even if they entail high risk. Analysers – will move into new areas but only after someone else has proved they work. Reactors – do not plan ahead.


Past exam questions[Culture]: DEC2010 Q3(a) about culture web (industry: electronical components) (a) Analyse Frigate Ltd using the cultural web or any other appropriate framework for understanding organizational culture. (15 marks)

Answer to DEC 2010 Q3(a) Frigate Co Cultural Web Symbols Organisations are represented by symbols such as logos, offices, dress, language and titles. Symbols at Frigate that indicate how the managing director wishes the company to be perceived and run include: 1 Ron’s nickname ‘The Commander’ 2 Ron’s use of naval terminology 3 The naval inspired name of the company Ron’s motor cruiser is the main symbol of his success. Power structures Power structures look at who holds the real power within an organisation. At Frigate the power comes from one person, Ron, whose leadership style is based on his strong opinions and beliefs. Organisational structures The structure of the organisation often reflects the power structure. There is little formal structure at Frigate, and the attempt to install a formal organisational structure failed. Control systems Organisations are controlled through a number of systems including financial systems, quality systems and rewards. The areas that are controlled closest indicate the priorities of the organisation. The focus in Frigate is on cost control and the emphasis is on punishment (such as wage deductions for being late) rather than reward. There are few formal process controls at Frigate, and the attempt to install such controls proposed by ANN was heavily resisted by Ron. Routines and rituals The daily behaviour and actions of staff signal what the organisation considers to be ‘acceptable’, expectations and management values. At Frigate, there is one rule for the managing director (flexible hours, extended holidays etc) and another for everyone else (minimum holiday, no flexibility, wage 12 ACCA APC P3 Study Note www.globalapc.com

deductions for arriving late). Stories The people and past events talked about in an organisation can illustrate the values of the organisation and the behaviour it encourages. Stories at Frigate relate to the managing director as ‘The Commander’. He is the hero of the organisation who constantly has to deal with numerous villains – lazy staff, poor quality suppliers, customers who delay paying, the tax authority, and society in general (who he believes all need to do a stint in the navy).

Paradigm The paradigm signifies the basic assumptions and beliefs that an organisation’s decision makers hold in common and take for granted. It summarises and reinforces the rest of the cultural web. The paradigm at Frigate shows a company run for the personal gratification of the managing director and his family. Ron believes that his lifestyle and benefits are the reward for taking risks in a hostile environment.


Stakeholder analysis:

We know there are a lot of people in or outside the company and certainly they have influence over the company’s overall decision making process. So how can we classify stakeholders? In p3 exam, Medlow has come up with a model to classify these stakeholders using Mendlow’s Mapping model.

Stakeholders can be divided into:  High Interest with High Power = Key players  Low Interest with High Power = Keep satisfied  High Interest with Low Power = Keep informed  Low Interest with Low Power = Minimal effort. Stakeholders matter because objectives should be geared towards the needs of those with high power. Stakeholders matter because any strategy followed will need to be acceptable to the key players and keep satisfied.

Although company can set their objectives, mission statement, cultures, analyze stakeholders well but most organisations fail within a very limited time span (100 years ) and research has suggested that a significant factor contributing to that has been the failure to act with social responsibility.


Past exam question[Stakeholder Analysis]: DEC2009 Q1(c) about stakeholders analysis (industry: training company) (c) In November 2009 ABCL acquired Ecoba Ltd. Gillian Vari agreed to stay on for two years to assist the management of the ownership transition. However, her business partner became seriously ill and ABCL have agreed, on compassionate terms, for her to leave the company immediately. ABCL, from experience, know that they must manage stakeholders very carefully during this transition stage. Identify the stakeholders in Ecoba Ltd and analyse how ABCL could successfully manage them during the ownership transition. (10 marks)

Answer to DEC 2009 Q1(c) ABCL ltd Stakeholders Analysis Mendlow Mapping will be used to identify stakeholders within ABCL ltd which looks at the levels of power and interest of each stakeholder group and recommends an approach for managing them based on those levels. Customers – Corporate Power and interest: These customers are key players as they have both a high level of power, in that they could move their business to the competition, and high interest due to the high value of the contracts. Approach: They could be managed would be appointing a dedicated account manager to each of the corporate clients. Lecturers Power and interest: They have some level of interest as the way they carry out their job may be affected, but a high level of power as they could move to a competitor. Approach: These stakeholders will need to be kept satisfied to prevent them leaving the company. Paying their invoices more quickly may help to keep them onside. Admin staff Power and interest: High level of interest as the way they carry out their job may be affected, but little 15 ACCA APC P3 Study Note www.globalapc.com

power because it’s very easy to recruit these people again from the outside market. Approach: These employees will have to be kept informed about the proposed changes. Individual Student Power and interest: Low levels of both power because they can’t have a significant impact on the whole organization and interest as they are largely unaffected. Approach: These stakeholders require very little management as they are mostly unaffected by the take over. Certifiers – EIoBa Power and interest: The accreditation body has a high level of power as it could withdraw the accreditation at any time, significantly affecting the reputation and student numbers of Ecoba. The level of interest is low as long as Ecoba operate it propery and it is accredited. Approach: This stakeholder needs to be managed carefully and the main approach should be to keep them satisfied. However, they are stakeholders with high power and are capable of developing higher interest levels if they become concerned about the new ownership and becoming a key player. If this happens, this group will require much more active management.


Ethics:

There are many definitions of ethics. Generally, we can talk about ethics from Absolutism VS Relativism’s perspective. Within Absolutism there would be either Deontology or Teleology.

Absolutism VS Relativism 

Absolutism means there would be a set of rules regulating what you should do, ie, SOX act.



Relativism means there would not be a set of rules regulating what you should do, ie, UK corporate governance code (comply or explain approach).


Deontology VS Teleology Scenario: employ child labour to work in a factory with safe environment(outside the factory and it’s not safe because of wars and when children work then they can earn money and feed their family.)

Teleological



Its known as consequentialism.



It will make their decisions based on the future benefit it can obtain.

Future benefit may include: Self interest [Egoism] Money is important to children as well so it seems that employing child labour is ethical. Impacts on stakeholders[utilitarianism] Eg, using a child labour it will befit for their family because this will contribute a source of income to them so it’s right to use child labour.

Deontological



It will make their decisions based on the sense of duties.



Sense of duty includes:

Legal obligation But because employing child labour is allowed in the country so it seems that it’s ethical to use child labour. Human rights By using child labour then children are not given the right to get access to education so it’s wrong. But they are working in a safe condition so using child labour is right.


Relativism This will depend on Code of ethics like ACCA code of ethics, other company specific code of ethics or ethical Stages 

Corporate code of ethics would include:



Value and beliefs of organization;



Policies to different stakeholders;



Employees’ safety and no discrimination.



Quality service to customers and courtesy;



CSR to local communities;



Use ethical suppliers;



Being environmentally friendly;



Accountable to shareholders.


Ethical stages: Kohlberg model Famous case study: A’s wife has cancer and is about to die. A does not have money to buy the specific drugs to help his wife. Actions: Action1: will not steal drugs because it’s not allowed by law[pre conventional stage] Action2: steal drugs and will accept any sentence[conventional stage] Action3: steal drugs and will not accept any sentence[post conventional]

It’s important to identify which stage that company is in according to Kohlberg and hence that company would have different actions (to stakeholders etc).


Preconventional Obey/discipline Individuals will make ethical decisions depending on whether he/she will be punished and if yes then he/she will not do that. Instrumental Individuals will make ethical decisions depending on whether it would be beneficial to them, ie, to be instrumental.

Conventional Follow peers Individuals will make ethical decisions if people around them are making ethical decisions. Follow society They will make ethical decisions if society at large are making ethical decisions as well, ie, uphold laws.

Post conventional Individual rights Individuals will make ethical decisions if they think it’s right for them to do so. Universal principles They will make ethical decisions if they think it’s right for the society to do so as well.


Grey, Owen & Adams 1, Pristine capitalist Only care about shareholders for profit purpose.

2, Expedients Not only care about shareholders but also other stakeholders such as employees and customers because want to make more money.

3, Social contract Acre about other stakeholders because they have an expectation of you, ie, for TOYOTA cars they would expect those cars are safe and then you are going to produce safe cars.

4, Social ecologist Company would consider their impact on environment and appropriate actions.

5, Socialist Company believe that everyone should be treated fairly and equally.

6, Radical feminists Company should co-operate with other stakeholders.

7, Deep ecologist Company believes that any objectives prior to social and environmental are not ethical.


Corporate social responsibility

What is it? CSR means you can turn that duty into opportunity. For example:  Employees- they want to see how business changes the outside and hence they work with company with delight.  If company can contribute to the actual environment and improve it and hence employees would be happy to work with this company (perform duties within company).  Shareholders- if they want the company to improve social issues and environmental issues and hence they invest their money into the company to turn that into an opportunity, ie, opportunity that after company using money invested by shareholders, company would improve social and environmental issues. So it’s important for company to hold accountable to different stakeholders by telling them how it contribute to social and environmental issues by using Triple Bottom Lines.

CSR reporting

Triple Bottom Lines include 3Ps:  Profit  People (Social)  Planet (Environmental)-environmental footprint(what we have left after we’ve gone) 23 ACCA APC P3 Study Note www.globalapc.com

Can social responsibility improve shareholders returns? Any strategy that conflicts with the needs and values of society is unlikely to survive in the long term Reducing waste and pollution and saving energy and recycling resources may lead to lower overheads, which in turn can help to improve profits. Could attract socially conscious consumers Increase corporate image and have a positive effect on share price


Chapter 2 Strategy


WHAT IS A STRATEGY?

Definition of strategy Pathways that company uses in order to arrive at vision.

Johnson and Scholes looks at classification of strategy using another way:3 lenses 1 Strategy as experience. Here the strategy is basically repeating what has been done in the past. A Strategy as experience often results in the emergent approach. Emergent strategy means that a strategy emerged even though it was never specifically planned.

2 Strategy as ideas. Here the strategy aims to encourage innovation. Culture will be very important here. A Strategy as ideas can lead to the opportunistic approach. Opportunistic strategy is a strategy to exploit an opportunity in the external environment.

3 Strategy as design. Here the strategy is driven from the top in order to meet the objectives of the organisation. The process is very similar to that given earlier in this chapter. A Strategy as design ties up with the planned approach. The strategic planning model states that managers: - Analyse the strategic position (resources and competences; opportunity and threats; stakeholders etc). - Consider various strategic options and choose one (porter’s generic strategy; Ansoff growth matrix, SFA etc). - Implement the required changes (Lewin etc).


Johnson and Scholes has classified strategy into 3 levels(types): Corporate, business and operational strategy.


Corporate strategy Within corporate strategy there are 4things:

1. Vision, mission and values Vision: final destination of company, ie, be a leader in the industry. Mission: how to do that? Ie, provide high quality services. Values: core characteristics, ie, fair. The mission would usually be documented with a mission statement: A mission statement will commonly contain the following: - Purpose of the organisation. - Overall strategy of the organisation. - The core values of the organisation. In order to realize the mission, company would usually set lots of objectives to ensure it can meet with the mission. Objectives are more specific and seek to translate the mission into a series of mileposts for the organization to follow. So company should firstly identify what are the most important things for company to succeed(CSF) before setting any specific objectives(KPIs).

Critical success factor(CSF): Critical success factors are those elements that an organization must perform properly in order to succeed. These often link with competences. For example, punctuality for train. Customer satisfaction. We often use balanced scorecard to help us generate into ideas of what CSFs that company should maintain: Financial Non-financial Customers Internal Innovation and learning

Key Performance Indicator(KPI) KPIs are set to measure the CSR.

Objective[KPI] setting criteria:


(SMARTIE) Specific – clear statement, easy to understand; Measurable – to enable control and communication down the organisation; Attainable – It is pointless setting unachievable objectives; Relevant – appropriate to the mission and stakeholders; Timed – have a time period for achievement. Innovative – come up with new ideas Environmentally friendly

2. Which industry should company go into or leave

3. Portfolio of company: Parental company [step by step teaching sub; allow sub to use parent’s resources] Synergy creator Portfolio manager [hands off approach]

4. Possible strategies: Hold Build up Harvest Divest


But the above strategies are based on 3 theories:

1. Lifecycle theory

2. BCG matrix

3. Ashridge portfolio matrix High Ballast

Heartland

Feel Value trap

Alien

Low Low

Benefits

High


Ashridge portfolio matrix is used to evaluate the attractiveness of potential acquisition target or existing business to the parent. This matrix has two variable according to which the attractiveness of businesses is to be judged. One is Benefit and the other is feel. In practice, other variables, like previous experience, management attitudes and culture, stakeholders expectations, may also influence the decision regarding potential acquisitions to be included in the portfolio of the business. All the relevant factors needs to be considered taking the decision. Let discuss each of the above variables. Benefits. It is the value business can add to potential business by utilizing their resources and competencies. Business may have many resources and capabilities, but only those resources and capabilities are counted towards benefits which the potential business needs to grow. In other words, benefits are the opportunities to help. More the business can help, more it can add value. Ex. If parent has strong finance department than it can help business needs financial services to add value. Feel. Feel is the similarity between Parent and the potential business. Similarities can be determined by industry, organization structure, culture and law. There can be many other elements need to be considered. Feel is about critical success factors (CSF) related to the elements stated above. If the business understands how to makes potential business successful as it know its CSF, it can use its resources and capabilities more effectively. Ex(continued), business needs to know how financial services are provided in context of particular industry. The combination of Benefits and Feels gives the following types of business acquisition targets which varies in attractiveness according to situation. 

Alien Businesses. These are the business outside the industry of the business considering takeover or merger proposal, so business has no knowledge of internal and external factors affecting the business operating in that industry, needed to make it successful. It can be said that it has low feel. There are no opportunities for the parent to add value by helping it because potential business has the skills necessary for its success. It can be said that it has low benefits.



Value Trap Businesses. These are the business outside the industry of the business considering takeover or merger proposal. It can be said that it has low feel. There are opportunities for the parent to add value by helping it because the business possess resources and capability to help the potential acquisition target lacks the skills necessary for its success. It can be said that it has high benefits. 31

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

Ballast Businesses. These are the business inside the industry of the business considering takeover or merger proposal. It can be said that it has high feel. There are no opportunities for the parent to add value by helping it because potential acquisition target has the skills necessary for its success. It can be said that it has low benefits.



Heartland Businesses. These are the business inside the industry of the business considering takeover or merger proposal. It can be said that it has high feel. There are opportunities for the parent to add value by helping it because potential business lacks the skills necessary for its success. It can be said that it has high benefits.


Dec 2008Q1(c) about strategy lenses National Museum (industry: museum) (c) Johnson, Scholes and Whittington identify three strategy lenses; design, experience and ideas. Examine the different insights each of these lenses gives to understanding the process of strategy development at the National Museum. Note: requirement (c) includes 2 professional marks.

(10 marks)

Answer to DEC 2008 Q1(c) national museum Strategy as design Definition The strategy is driven from the top in order to meet the objectives of the organisation. Senior management responsibility The design lens considers that it is senior management’s responsibility to come up with the strategy for an organisation, leaving lower levels of management to deliver the operational actions required by the strategy. Clear objectives The design lens assumes that an organisation has clear and explicit objectives, and that it uses strategy and objective setting to move towards those objectives. In the case of the National Museum, the government has taken a much increased role in objective setting, by linking the museum’s funding budget to the achievement of certain objectives(eg, number of tourists) Lack of consultation The new Director General was responsible for trying to establish a strategy within those objectives. And it appears he has done this in a top-down manner, in which he has not consulted his staff. For example, staff were particularly critical of the lack of consultation, feeling that the proposals had just been handed down from on high with no input from them. Strategy as experience Definition Strategy is basically repeating what has been done in the past. No change in paradigm One of the key features of this lens is that sees strategy as being based in the experience and assumptions of influential figures in an organisation, thereby fitting within the paradigm. Change The major changes being imposed by the government suggest that a change in the 33 ACCA APC P3 Study Note www.globalapc.com

museum’s cultural paradigm is needed, meaning that strategy as experience is no longer an appropriate approach. Strategic drift Given the change of paradigm, it is unlikely that the existing management would have been able to deliver a strategy that meets the government’s requirements. This is why a new Director General needed to be brought in to develop a new strategy. And because a new strategy was needed, the strategy as experience approach would have been unsuitable for him to follow. Strategy as ideas Definition The strategy aims to encourage innovation. These ideas can emerge from all levels of an organisation, not just from senior management. Culture However, for an organisation to be successful at generating ideas there must be a culture and context which encourage staff to generate ideas and to embrace change. But this does not appear to be the case at the museum. The museum appears to be dominated by a small number of section heads who are more interested in protecting their own interests and preserving their own symbols of power, than cultivating new ideas. No drivers for change Another factor which has reduced the need for new ideas has been the protected economic environment in which the museum has historically operated. Because the museum has been largely government funded, there have been no incentives to develop new ideas to increase revenue.


DEC2008 Q2: Ashridge Portfolio Model (industry: mineral) (b) Assess the extent to which the proposed acquisition of InfoTech represents an appropriate addition to the MMI portfolio. (10 marks)

Answer to DEC2008 Q2 MMI (b) ·Position of MMI MMI’s portfolio only contains three businesses, they are strategically quite diverse. MMI has consolidated its position in the quarrying marketplace by acquiring two of its smaller competitors, and its market share has increased from 20% (2002) to 28% (2008). ·MMI’s acquisition strategy First Leisure has turned out to be a very successful acquisition, due to the unexpected synergies between it and MMI given the increase in revenue from 2002 to 2008. But the Boatland acquisition, which was expected to deliver synergies with First Leisure, has not been successful, and has actually destroyed value rather than creating it given the decrease in revenue from 2002 to 2008. ·ways Following the acquisition of the two smaller mining and quarrying companies in 2004, MMI introduced its own managers to run the businesses, and this resulted in a spectacular rise in revenues. MMI has left the day-to-day management of the business to First Leisure’s own, experienced, managers but not for boatland. Since MMI did not really understand the boat industry, so it appears MMI may better to adopt a hands-off approach to corporate management, except for acquisitions directly related to its own core business (quarrying and mining) if MMI acts as a portfolio manager. InfoTech Current financial position Although the information technology solutions market has grown by nearly 25% between 2002-8, InfoTech’s revenues have actually fallen, meaning it has suffered a significant decline its market share. InfoTech’s low market share in a growing market means it is a question mark business unit (BCG matrix). Moreover, InfoTech has suffered a marked decrease in both its gross and net profits, especially over the two year period from 2006-8. The decline in profitability 35 ACCA APC P3 Study Note www.globalapc.com

means that InfoTech actually made a net loss of $0.2m in 2008. Difficulty: 1, Industry experience However, MMI needs to appreciate that the information technology solutions industry is very different to the quarrying and mining industry. Therefore despite the CEO’s comments about MMI’s corporate management capabilities, it is unlikely that MMI can successfully make up this new management team from within its existing staff. 2, significant capital requirement InfoTech’s classification as a question mark also suggests it could require investment in order to try to increase its market share so a considerable capital investment will be needed. 3, role of parent company However, MMI doesn’t have any experience of acquiring a failing company and turning it round. This suggests InfoTech is not an appropriate choice for acquisition, especially if MMI basically adopts a portfolio manager role due to its lack of experience in the information technology industry.


June2012: Q1(c) about mission (industry: shoes and boots) (c) Advise the Hammond family on the importance of mission, values and objectives in defining and communicating the strategy of Hammond Shoes. (12 marks)

Answer to June2012 Q1(c) Vision, mission and values Mission is the way that the company use to arrive at that destination(vision), eg, keep customers happy whenever they walk into the shop. Values such as integrity and enthusiasm will help company arrive at the final destination(vision). Objectives are set from the mission. One of the problems at Hammond Shoes appears to be that the core values of the organisation are implied, but not explicitly stated. Originally, these were provided by the beliefs of the founding brothers – provision of education and housing for employees, secure jobs and good working conditions. Its core values include the provision of fair employment opportunities for the people of Petatown and the reaction of the family to removing this central mission illustrates that this value remains core to the continued existence of the company. Thus the Hammond family should explicitly state their core values, perhaps as a detailed expansion of a short, clear mission statement. This would allow the family to articulate its beliefs and communicate these to customers, suppliers and employees. A mission statement will normally contains: 1,Purpose of the organisation. 2,Overall strategy of the organisation. 3,The core values of the organisation.

A “SMART” objective should be set in order to help company reach its goal. Hammond Shoes does appear to have certain objectives, such as keeping production in Petatown and providing educational opportunities for employees. But these are too vague and they are not measurable such as it doesn’t state how many educational opportunities it will provide. The core value of treating suppliers fairly could have been remembered within an objective of paying all suppliers within 30 days. Evidence suggests that they now stand 37 ACCA APC P3 Study Note www.globalapc.com

at over 60 days, so the company is failing to meet one of its core values – fairness to suppliers. Hammond Shoes does not have a clearly defined mission or explicitly stated values. Its objectives are restricted and rarely quantified and they need to be improved.


DEC2011 Q1(c) about CSR and KPI (industry: railway )DEC2011: (c) Critical Success Factors (CSFs) and Key Performance Indicators (KPIs) are important business concepts in the context of franchising rail services. Explain and discuss these concepts in the context of GET and the rail industry. (10 marks)

Answer to DEC2011 Q1(c) CSF & KPIs Critical success factors (CSFs) are product features that are particularly valued by customers. These are therefore the areas in which the organisation must excel in order to outperform their competitors. GET’s current marketing campaign centres around the message ‘safe and on time’. But customers may also value other aspects such as cleanliness, affordability, environmental impact, timetabling etc. It is likely that different groups of customers will value certain features higher than others, for example leisure travellers may value safety and affordability whereas business travellers may value punctuality. Key performance indicators (KPIs) are quantifiable measurements that management can use to monitor and control progress towards achieving its CSFs. GET may class a train as ‘on time’ if it arrives in the station within 5 minutes of the planned arrival time and so would consider it had achieved the KPI wherever this was met. The other CSF currently used by GET relates to safety and this could be measured in terms of the number of accidents or fatalities that have occurred on their tracks. The balanced business scorecard was established to help focus companies on non-financial, as well as financial measures of performance. Many companies may have KPIs relating to the other three besides customers. Eg: - Financial: A target of 10% of return on capital employed - Internal business processes: asset utilisation – trains should be used for a target number of hours per day(eg, 15hours) - Learning and growth: Targets money spent for improving the skills of the workforce via training and development(eg, 1% of total profit as being spent as training expense)


Business strategy (How) Three Steps: This means how company would compete with different competitors. There are three steps for this: Step1: review your current strategic position We are focusing on SWOT of the company. Internal: resources and competences; value chain External: PESTEL/Porter’s five forces. International business: Porter’s diamond Stakeholders analysis using Mendlow’s mapping. Step2: make strategic choices generic strategic options Ansoff’s growth vector matrix Ways to grow business Step3: evaluate those choices SFA test.


Step1: review your current strategic position

We are going to use SWOT analysis to summarise strength, weaknesses, opportunities and threats of the company.

[Internal] strengths and weaknesses(SW) Resources and competences The resources and competences would stand for the strengths and weaknesses that company has and this is also referred to as strategic capability defined by Johnson and Scholes. But what is the difference between resource and competence? Resource is something that company has and competence is things the company does. So we can identify different resources and competences that company has such as following: Machinery Money Materials Men and Women Makeup (culture) Markets (products) Management information Management Methods (processes).


Porter’s value chain analysis

The five primary activities are: Inbound logistics: buying raw materials and storage; customer access; Data collection. Operations: work in progress; Assembly; Component Fabrication. Outbound logistics: order processing; distribution of product/service; Report preparation. Marketing& Sales: marketing campaign and face to face selling to customers;website After sale service: installation; customer service: deal with compliant/maintenance The four secondary(support) activities are: Firm infrastructure: Financing, planning; Investor relations Human Resource Management: Recruiting; Training; compensation System Technology Development: Product/Process design; market research; research and development Procurement: getting materials for the company not the individual products, like electricity. Machines.

Porter suggests that for each cost in the business which is either value adding or non value adding. Value-adding: extra benefit > extra cost Non value-adding : extra benefit < extra cost. Porter suggests than non value-adding activities could be outsourced. 42 ACCA APC P3 Study Note www.globalapc.com

[External] opportunities and threats[OT] Identify opportunity that company has: (model: PESTEL) Political – includes government policies on education and infrastructure. Economic – includes the state of the economy, interest rates and tax levels. Social – includes attitudes, demographics and household structure. Technological – includes new technologies making current products obsolete. Environmental – includes the move towards environmentally cleaner products. Legal – includes changes in law making it e.g. harder / more expensive to operate.


Identify threats that company is facing: (model: porter’s 5 forces)

New Competitors [threat of new entrants] New entrants always drive down profit margins (as companies have to spend more on marketing or lower prices to keep customers). New competitors are only kept out by barriers to entry. These barriers include: High fixed costs, High capital requirements.

Existing Competitors [current rivalry] If there is a lot of rivalry in an industry then profit margins will be lower as companies constantly fight to retain their customers. There will tend to be higher rivalry (and lower profits) when A Market growth is slow.

Customers [power of custoemrs] Powerful customers prevent companies from putting prices up or implementing other changes. Customers will be powerful if there is standardisation within the industry (making it easier to switch to another supplier).

Suppliers [power of suppliers] Powerful suppliers might put their prices up or impose other changes on the company. Suppliers will be powerful if there are high switching costs or there are a limited number of suppliers.

Substitutes If there are many substitutes for a product then it becomes harder to raise prices. There are three main kinds of substitute:

Direct substitute: where the customer buys the same product from a different manufacturer Indirect substitute: where the customer buys a product from a different industry to meet the same need

Monetary substitute: where different industries are competing for the same part of a customer’s income. 44 ACCA APC P3 Study Note www.globalapc.com

Porter’s diamond :( International businesses) If you are going to invest in another company which is based in a foreign country, you need to consider extra factors as well. So a model called “Porter’s diamond” may help us below: Companies based in certain countries seem to be more competitive than companies from other countries. Porter’s diamond looks at why. Porter comes up with 4 reasons for this: Factor conditions includes Natural resources, infrastructure, Knowledge bases and logistics systems.

Climate,

Communications

Firm strategy, structure and rivalry includes attitude to short-term profit, national culture and Level of domestic rivalry. Demand conditions includes Market segmentation of home market, Sophistication of buyers, Position within product life-cycle in home market and Anticipation of buyer needs. Related and supporting industries include strength of suppliers and quality of suppliers.


Step2, Make strategic choices

Generic strategic options Michael Porter comes up with three generic strategic options that company may use, they are: Option1: to be a cost leader Option2: to be a product differentiator Option3: to focus on a particular group of customers(niche strategy)


Ansoff’s growth vector matrix Another way of coming up with strategic choices would be to use “Ansoff’s growth vector matrix”.

Each option would be detailed below:

1, Market penetration:    

Increasing market share in existing markets utilising existing products. The main aim is to increase market share using existing products within existing markets. Data and information should already have been captured making this the least risky option. Couple this with the experience of the markets and products and knowledge should be present.

Approach: First, attempt to stimulate usage by existing customers – new uses advertising / promotions / sponsorships / quantity discounts Then attempt to attract non-users and competitor customers via – Pricing / Promotion and advertising / Process redesign e.g. Internet/E- commerce


2, Market development:   

Entering new markets and segments using existing products. This aims to increase sales by taking the present product to new markets (or new segments). Entering new markets or segments may require the development of new competencies which serve the particular needs of customers in those segments.

E.g. cultural awareness / linguistic skills. Movement into overseas markets often quoted as good example as the organisation will need to build new competencies when entering international markets.

Approaches:

Direct exporting – selling directly to overseas customers. - Advantages – the company gets to know the needs of the final customer - Disadvantages – it may be costly to build up customer awareness. Indirect exporting – selling to intermediaries such as retailers who then sell to final consumer. - Advantages – the company gets access to the local company’s knowledge - Disadvantages – the company will not see all of the profits. Overseas production[offshoring] – the company manufactures and sells the products in the target country. - Advantages – distribution costs will be reduced/skills - Disadvantages – may require a large capital investment/loss of control/quality issue

Strategic alliance: Contract manufacture (licensing) – the product is made abroad by another company. - Advantages – lower risk since no need to build manufacturing plant - Disadvantages – may lose control over areas such as quality. Joint ventures – the company goes into partnership with a local company. - Advantages – lower risk since local knowledge gained and costs shared - Disadvantages – lower returns since profits shared.


Franchising Franchising is a method of expanding the business on less capital than would otherwise be possible,because franchisees not only pay a capital lump sum to the franchiser to enter the franchise but they also bear some of the running costs of the new outlets. For suitable businesses, it is an alternative business strategy to raising extra capital for growth. Probably the most well-known franchisers are McDonalds, but other franchisers include Budget Rent-a-car, Dyno-rod, Express Dairy, Holiday Inn, Kall-Kwik Printing, Kentucky Fried Chicken, Sketchley Cleaners and Body Shop. The franchiser and franchisee each provide different inputs to the business. (a) The franchiser (i) Name, and any goodwill associated with it (ii) Systems and business methods, business strategy and managerial know-how (iii) Support services, such as advertising, training, research and development, and help with site decoration (b) The franchisee (i) Capital, personal involvement and local market knowledge (ii) Payment to the franchiser for rights and for support services (iii) Responsibility for the day-to-day running, and the ultimate profitability of the franchise

Advantages of franchising (a) Reduces capital requirements. Firms often franchise because they cannot readily raise the capital required to set up company-owned stores. John Y. Brown, the former president of Kentucky Fried Chicken, maintained that it would have cost KFC $450 million to establish its first 2,700 stores if it had run them as company-owned stores, and this was a sum that was not available to the corporation in the early stages of its life. (b) Reduces managerial resources required. A firm may be able to raise the capital required for growth, but it may lack the managerial resources required to set up a network of company-owned stores. Recruiting and training managers and staff accounts for a significant percentage of the cost of growth of a firm. Under a franchise agreement, the franchisees supply the staff required for the day-to-day running of the operation. (c) Improves return on promotional expenditure through speed of growth. A retail firm's brand and brand image are crucial to the success of its stores. Companies often develop their brand through extensive advertising and promotion, but this only translates into sales if they have a number of stores that customers can visit after seeing their advertisements. 49 ACCA APC P3 Study Note www.globalapc.com

To reap the benefits of its national or regional advertising efforts, the company needs to attain the minimum efficient scale, in terms of number of stores, as quickly as possible. Because franchising provides quicker access to capital and managerial resources, a firm can expand more quickly through franchising than through opening new company-owned stores. Faster expansion through franchising, in turn, should allow companies to achieve a favourable return on their promotional campaigns. (d) Benefits of specialisation. Because the franchisee and the franchiser both contribute different resources to the franchise, franchising provides an effective way of reducing costs: each party concentrates on their core areas, and increases their efficiency in those areas. In general, franchisers are more cost-efficient than franchisees in performing functions that decrease in cost with a substantial level of output. By contrast, franchisees are more efficient in performing functions which are more efficient at a smaller scale. For example, in the fast-food business, product development and national promotion are more efficiently handled on a large scale (by the franchiser), whereas the production of food itself is handled better on a relatively smaller scale (by the franchisee). (e) Low head office costs. The franchiser only needs a small number of head office staff because there is a considerable delegation of operational responsibility to the franchisees. For example, in the fast-food business, the franchisees provide the staff who work in the restaurants, and so the franchisees incur the HR and payroll costs associated with that. (f) Reduced supervision costs. Company-owned retail stores are run by employee managers who may often perform poorly if they are not supervised. A company, therefore, has to supervise its store managers, and this will result in central overhead costs. However, under a franchise arrangement, because franchisees have invested capital in their own stores, and because their earnings come from the profits of those stores, they are motivated to work hard to maximise the success of the stores. Consequently the franchiser will have much lower supervision costs. (g) Risk Management. When opening new stores, a corporation does not know with certainty the business potential and the chances of success of different locations. Under a franchising arrangement, the franchiser can judge the profitability potential of different sites without incurring a significant business risk. If a particular store fails, the franchisee bears the brunt of the failure. However, franchising also helps franchisees reduce their risks. Franchised stores typically open more quickly, and become profitable more quickly, than independent company-owned stores. The franchisee benefits from the franchiser's managerial experience and from the established brand name. In effect, when a franchisee enters a 50 ACCA APC P3 Study Note www.globalapc.com

lease agreement with the franchiser, it is leasing managerial know-how and brand recognition, as well as the physical store it is operating.

Disadvantages of franchising (a) Profits are shared. The franchisee receives the revenue from the customer at the point of sale and then pays the franchiser a share of the profits. (b) The search for competent candidates is both costly and time consuming where the franchiser requires many outlets (eg McDonald's in the UK). (c) Control over franchisees. (McDonald's franchisees in New York recently refused to co-operate in a marketing campaign). (d) Risk to reputation. A franchisee can damage the public perception of a brand by providing inferior goods or services. (e) Potential for conflict. There may be disagreement over the respective rights and obligations of the franchiser and franchisee, for example over the level of support to be provided or the fees payable. These terms need to be clearly set out in a contact when the franchise is granted to reduce the chances of conflict arising. Conflict may also occur if either side is acting in bad faith, for example if the franchisee is providing inferior goods or services which risk damaging the franchiser's brand.


3, Product development: 

Developing new products to serve existing markets.



This focuses on the development of new products for existing markets.



It offers the advantage of dealing with known customer/consumer bases.



Company needs to be innovative and strong in the area of R&D and have an established, reliable marketing database.



Constant innovation allows for the developing sophistication of consumers and customers and ensures that any product-related competitive advantage is maintained.



Products of the company can be balanced by classifying each products based on their market share and market growth. So here introduces the model of BCG matrix (Boston consulting group matrix)

BCG matrix uses two criteria: 1, Relative market share This seeks to relate the market share of our SBU in relation to the market share of our largest rival. This will be expressed as a multiple. BCG suggests that market share gives a company cost advantages from economies of scale and learning effects. Thus market share is seen as a strategic asset of sorts. The dividing line is set at 1 - A figure of 4 suggests that SBU share is four times greater than the nearest rival. 0.1 suggests that the SBU is 10% of the sector leader. This is something that can be improved upon by management action and strategy and can be used as a performance measure. 52 ACCA APC P3 Study Note www.globalapc.com

2, Market growth rate This represents the growth rate of the market sector concerned. Management often have to react to this as it is difficult to influence High growth industries offer a more favourable competitive environment and better longterm prospects than slow-growth industries. The dividing line is set at 10% though this is often modified to “high growth” and “low growth”

For different products: 1, Cash cows are in the mature or decline stage of the life cycle: The threat of new competitors is low and the high market share makes the threats from substitutes and existing competitors low as well. This product should be earning reasonable profits. The product cannot grow any further (since the market is already mature). 2, Stars also have a high market share: The market is growing (introduction or growth stage of the life-cycle) so new competitors will be attracted into the market Prices may need to be kept low to maintain market share Marketing costs might also need to be high to keep sales up Profits may not be high. 3, Question marks(problem child) have a lot of potential due to the high growth. Decision is whether to: Spend money to build up market share Spend money to hold market share Leave market. 4, Dogs have low market share and low growth. They should be closed unless needed by one of the other products. Could be ‘niched’ – small segment but focused product ensures success Over time a resurgence possible and new life cycle started May require investment just to keep product in portfolio, especially if the company is offering a ‘one stop shop’ or is using the product as a ‘loss leader’.


4, Diversification This involves taking new products to new markets – the riskiest option? Critics argue that it is madness to take resources away from known markets and products only to allocate them to businesses that the company essentially knows nothing about. This risk has to be compensated for by higher reward which may or may not exist. Brand stretching ability is often seen as being the critical success factor for successful diversification. The new business and its strategy may well have ‘teething problems’ with its implementation and this may damage brand reputation. Thus there is significant risk.

Reasons suggested for diversification:  Objectives can no longer be met in known markets – possibly due to a change in the external environment restricting the business in some way.  Company has excess cash and powerful shareholders.  Possible to ‘brand stretch’ and benefit from past advertising and promotion in other SBUs;  Diversification promises greater returns and can spread risk by removing the dependency on one product.  Power base increases as presence in more markets - buying power.  Efficiency gains – spreading costs.  Greater use of distribution systems and corporate resources such as research and development, market research, finance and HR leading to synergies. Referred to as “stretching corporate parenting capabilities”.

Synergy – the idea that value can be added by combination of units. The value of the whole being greater than the value of the individual parts Diversification can take two main forms: 1. Related diversification (concentric diversification) Growth into similar industries where there is some linkage ie, selling clothes + shoes. Vertical Integration – Backward – secure materials supply, ie, a manufacturing company acquires a company supplying raw materials. – Forward-secure the sale of product by acquiring a shop. Horizontal Integration – In order to sell similar products, ie, sell ACCA courses as well as CIMA courses; selling shoes as well as glasses. 2. Unrelated diversification (conglomerate diversification) Completely new areas with which the business shares no common ground and so seen as the last of the growth strategies, ie, selling shoes + selling ACCA courses. 54 ACCA APC P3 Study Note www.globalapc.com

Step3, Strategic evaluation After considering all of the potential strategic choices that we are going to choose, the next thing we can do is to evaluate these choices to see if choices are reasonable. So we can use a test called “SFA” test derived by Johnson and Scholes.

Suitability-fit in to strategy? Will it meet organisational objectives? – financial & non-financial Will it take advantage of opportunities? Will it build on our strengths?

Feasibility – will it work? Enough resources including capital and other recourses such as human resources.

Acceptability-will it be accepted by stakeholders? Risks and rewards.


Past exam questions[Business Strategy]: New pilot paper Q4(a): about value chain (industry: Electronic Services ) (a) Draw the primary activities of DRB on a value chain. Comment on the significance of each of these activities and the value that they offer to customers. (9 marks)

New Pilot paper Q4(a) Porter’s value chain Primary activities: Handling

and

storing of fully

Re-branding

of

Local advertising

Back to base support

Web

On-site technical support

products

configured inbound equipment Quality

Re-packaging

inspection

products

Inbound

Operations

of

Technician delivery

and

based

enquiries

installation logistics

Outbound

Marketing

logistics

sales

and

service

1, Inbound logistics Quality inspection is essential for pre-configured equipment where customers have high expectations of reliability of using the product. High quality reduces service costs, and contributes to customer satisfaction. 2, Operations The re-branding and re-packaging operations add little value to the customer. They are a relatively minor component in DRB's value chain. They are currently being undertaken in a relatively high cost country – despite adding little value. DRB should re-consider the current arrangement. 3, Outbound logistics Customer feedback shows that the installation service is greatly valued. And most of DRB's larger competitors cannot offer an equivalent service so this is currently a source of competitive advantage for DRB 4, Marketing and sales Sales and marketing are currently only minor activities at DRB. They will have to be 56 ACCA APC P3 Study Note www.globalapc.com

developed if the company is to achieve its growth targets. The limited functionality of the website offers very little value to customers or potential customers. 5, Service Customer feedback shows that after sales service is particularly valued by customers. Most of DRB's large competitors only offer an impersonal, off-short call centre service, so DRB's personal service is currently a source of competitive advantage.


DEC2007 Q1 ONA about strength and weakness (industry: airline) (a) Using the information provided in the scenario, evaluate the strengths and weaknesses of ONA and their impact on its performance. Please note that opportunities and threats are NOT required in your evaluation. (20 marks)

DEC2007 Q1 ONA (a)

Strength and weakness

Strength 1 Brand ONA has a strong brand identity, particularly with the citizens of Oceania. This is a strength because this brand strength should help create customer loyalty, and in turn sustain customer demand. 2 Safety record ONA has an excellent safety record, and has had no fatal accidents. This is a strength because safety is the threshold competence of the ONA and this can help ONA attract more customers. 3 Customer service ONA provides excellent customer service, and has won industry awards for both its customer service and its in-flight meals. This is a strength because this excellence helps ONA differentiate itself from some of its competitors, and may allow it to charge premium pricing. 4 Employees ONA is perceived as an excellent employer in Oceania. As a result, it employees are highly motivated and courteous. This is a strength because this helps maintain the high levels of customer service it offers and will attract more customers to the ONA as a result. 5 Passenger occupancy in business class ONA has very high passenger load factor for business class customers in the regional sector than average. This is a strength because this suggests ONA are strong in the lucrative business class market and attract more revenue. 6 Receivables collection. ONA's trade receivables is low (2006: 29 days; 2004: 31 days), which is beneficial for cash flow. This is a strength because this suggests there is an improvement in credit control function in ONA. 58 ACCA APC P3 Study Note www.globalapc.com

7 Gross profit margin. ONS's gross profit margin has remained relatively constant from 2004 to 2006. (2004: 37.04%; 2006: 36.98%). This is a strength because this suggests the business class fares of ONA which is higher than the average and this is a strength and it will attract more lucrative revenue for ONA and hence put the revenue figure up. Weaknesses 1 High cost base ONA pays above industry average salaries, offers excellent benefits and has a very generous pension scheme. This is a weakness because these features are likely to make ONA's cost base less competitive than its rivals. 2 Ageing fleet. The average age of ONA's fleet is much older than that of its low-cost rivals. This is a weakness because the older fleet is likely to require more maintenance – again suggesting that ONA's costs are likely to be higher than their rivals. 3 Fleet utilization ONA uses its planes for less hours per day than the low-cost airlines. This may be due its scheduling arrangements, or because ONA's planes need more maintenance time. This is a weakness because lower asset utilisation rates are another indication that ONA's cost base is likely to be less competitive than its rivals. 4 Limited functionality of website. Although ONA allows customers to book flights on-line, it does not allow them to check in on-line, whereas some of its competitors do. This means that customers who value the convenience of being able to check in on-line may choose not to fly with ONA. 5 Passenger occupancy in standard class ONA's average passenger load factors in standard class are much lower than its low-cost competitors, especially in the international sector. This is a weakness because if load factors decline, ONA's margins will also decline, because it will still incur the costs of the flight (fuel, flight crew etc) but will not be earning revenue from the empty seats. 6 commission sales 50% of the ONA’s sales revenue is from commission sales while there is only 4% of the low-cost competitor. This is a weakness because travel agents retain part of the revenue from commission sales as their commission hence reduce the revenue received by ONA.


7 liquidity ONA's current ratio has fallen from 1.24 (2004) to 1.05 (2006). This isi a weakness because a falling current ratio may indicate that the company will struggle to meet its debts when they fall due.

8 Declining net profitability ONA's net profit before tax has fallen 25% over the period 2004-6 (2004: 80; 2006: 60), despite gross profit has increased. This is a weakness because this may suggest the increased in cost of wages and salaries may cause ONA profitability problems.


PESTEL: new pilot paper Q1(a)(industry: computer technology ) (a) Evaluate the macro-environment of NMS using a PESTEL analysis. (15 marks)

New pilot paper Q1(a) PESTEL Political NMS is located in a prosperous country and is operating within a stable political framework, It’s an opportunity because company can grow better in this stable environment rather than turbulent one. Governments in industrialised countries look to promote technology as a source of competitive advantage. It’s an opportunity because company can offset its expenses using tax credit given by the government. Economic In 2010 the country suffered an economic downturn, and this led to many companies postponing technological investment. The economic cycle and business confidence will affect demand in the economy, and, in turn, demand for NMS's goods. SOCIAL Recent years have seen significant increases in levels of communication, information exchange and social networks, and it is likely that these increases will continue. This means that the demand for companies supplying communication products and network systems will also continue to grow. So new social uses for telecommunications networks will provide opportunities for growth in the industry sector as a whole. Technological The hi-tech sector is extremely innovative, with new and improved technologies constantly emerging. NMS needs to be aware of this, and realise that the product life cycles for its existing products may be quite short. NMS also needs to be constantly aware of any new technologies which competitors are introducing, and how this might affect the future of their own products. NMS should also consider how they can use new technologies in their own products. Legal NMS must work within the constraints of legislation relating to employer responsibilities and employee rights and so will have to evaluate the costs and benefits of doing so. Compliance costs could be saved by relocating to a country with less strict requirements in these areas. This could be beneficial given the number of international competitors, some of which may be operating in countries with less legislation 61 ACCA APC P3 Study Note www.globalapc.com

surrounding employment and other relevant areas. Political This technology has to be delivered through equipment that meets certain standards of reliability and compatibility. The government has put an approval process in place to ensure such standards and success comes from providing reliable components at relatively low price. Government approval may act as a barrier to entry for potential new entrants into the industry, although it may also be designed to protect domestic suppliers from foreign competition. It’s an opportunity for company because it can face less competitors. The government's support for technological innovation through the awards for technology which they make each year and it’s an opportunity because by winning the award that they can further build up their brands, Environmental Waste disposal may be a particular issue for NMS because they are dealing with electrical items. Regulation around the disposal of electrical items is becoming stricter, and this is increasing the cost of disposal. It’s an opportunity for NMS to save costs to perform as an energy saver.


Porter’s five forces DEC2009 Q1(a) (industry: training company): (a) Xenon usually analyses an industry using Porter’s five forces framework. Using Porter’s framework, analyse the business analysis certification industry (BACTI) in Erewhon and assess whether it is an attractive market for ABCL to enter. (20 marks)

DEC2009 Q1 (a) ABCL Ltd Porter’s 5 forces Model Threat of new entrants: If a new supplier enters the market, existing suppliers may lose market share and profitability. ABCL is the new entrant in this case, and will have to overcome the following barriers to entry: 1, Dominant providers: The market is dominated by three suppliers who are powerful enough to have forced a similar new entrant out of the market. They will be likely to retaliate if ABCL attempts to enter the market in its own right and it’s supported by a campaign to discredit CEO of Megatrain. 2, Employer contracts: 60% of student fees are paid by their employers. These employers have contracts and existing relationships with the already established firms. ABCL would have to work especially hard to attract these clients away from their current provider. 3, Accreditation: The existing providers hold Gold certification from accrediting body EIoBa. It would be difficult for ABCL to compete in this market without that level of accreditation to assure customers of tuition standards. In addition, obtaining such certification will not only be costly, but will take over a year to achieve. This is long enough for ABCL to have already been forced out of the market. 4, Well established brands: The big three providers in the industry have well established brands, supported by extensive marking. Lots of investment would be required for ABCL to build a brand which could compete and attract loyal customers away from those established brands. Threat of substitutes: Substitutes reduce demand and can potentially lead to the product/service becoming obsolete. The substitutes in this market are: 1,Other tuition providers The training industry is dominated by the big 3 and other small tuition providers 63 ACCA APC P3 Study Note www.globalapc.com

accounting for 20%of total revenue. They are the substitutes for ABCL because students can choose them rather than ABCL to study. 2, WAC WAC recently bought one training provider to provide in-house training courses and this become an indirect substitute for ABCL because student can choose WAC to learn the basic knowledge of business and prepare for their exams rather than choosing ABCL. 3, Self Study: 40% of students attend no training at all and study alone, as there is no legislative requirement to study with an accredited provider. Training providers can therefore be substituted by self study. 4, E-learning and blended learning One of its small tuition provider has provided e learning and blended learning courses and this will become a direct substitute for ABCL because students may choose them to prepare for the exam rather than go to the classroom in ABCL. Bargaining power of customers: If customers a have high level of bargaining power, then they have the ability to drive down prices or improve quality by playing suppliers off against each other. There are two kinds of customers here: individual and corporate customer. 1, Corporate contracts: There are 15 major corporate clients making up approximately 60% of the market. These mostly use the big three training providers, and the case study indicates that they are starting to play them off against each other in order to drive down their prices. This indicates a high level of customer bargaining power. 2, Purchase of provider: One of the large clients recently purchased one of the smaller training providers and is now able to carry out all its training in-house. This shows high customer power and raises the threat that suppliers will be purchased by customers. 3, Low switching costs: Neither corporate nor individual students appear tied-in with the training providers and the cost of switching between them is relatively low. This gives the customers high power. Individual students can easily move elsewhere if they are not happy with the training they receive, and corporate clients can move to another company if they are not getting value for money or are unhappy with the pass-rates of their employees.


4, Standardised products: The training firms all provide a very similar service, and so it is easy for customers to change providers. The levels of certification provides assurance over standards, however, all three large firms all hold Gold certification meaning there is little to differentiate them from each other. Again, this places the customer in a strong bargaining position. Bargaining power of suppliers: If suppliers have high levels of bargaining power, they can raise their prices, or reduce the quality of their service. The suppliers are the lecturers, their power is determined by the following: 1, Limited supply: Competent lecturing staff are limited and so hard to find even with attractive salary and bonuses.

2,Supplier choice: The lecturing staff have choice of who to work for and can easily move between rival training providers. Threat of existing competitors: The number and size of existing rivals, and the way they react to each other and to new entrants must be understood before moving into a new market. 1, Dominant suppliers: There are three dominant suppliers who are on good enough terms to co-ordinate a response to any new entrant. They will protect their market and ABCL can expect a strong fight-back if it attempts to enter the market organically. 2,Smaller providers There are 20 other providers in this market, accounting for approximately 20% of the market share. This indicates that the dominant suppliers are tolerant of these smaller rivals. 3, Differentiation: The service provided by the existing suppliers is very similar, and once Gold certification has been awarded to the suppliers there is little to differentiate them from each other, and so little to prevent customers moving between them.


Porter’s diamond: june2010 Q2(b)(industry: transportation ) (b) Porter’s Diamond can be used to explore the competitive advantage of nations and could be a useful model for Joe Swift to use in his analysis of countries that he might move his company to. Examine using Porter’s Diamond (or an appropriate alternative model/framework) the factors which could influence Swift’s decision to move a large part of its logistics business to Ecuria. (10 marks)

June2010 Q2(b) Porter’s diamond 1, Factor conditions These are factors, such as skilled labour and infrastructure, that are necessary for firms to compete in a given industry. Significant factor conditions in Ecuria are the work ethic of the people, and the government investment in the transport infrastructure. 2, Demand conditions The home demand conditions are how firms perceive, interpret and respond to buyer needs. In Ecuria, there has been a rapid growth in the transport of goods due to the moved to a market economy. The people of Ecuria are traditionally demanding and have a passion for promptness and precision which has shaped the operations of EVM. 3,Firm strategy, structure and rivalry It often includes attitude to short-term profit, national culture and Level of domestic rivalry. There were few competitors initially and raising finance is difficult due to the structure of the capital markets in Ecuria. As a result, most of EVM’s competitors are small, family run firms that offer a local service. There is little evidence of rivalry in Ecuria. When there is little domestic rivalry, firms are generally happy to rely on the home market. 4, Related and supporting industries Competitive success in one industry is often linked to success in related industries. The case study does not provide any evidence that there are internationally competitive industries related to logistics. The absence of internationally successful related and supporting industries is an important factor to take into account when Swift decide whether to move a large part of its logistics business to Ecuria. 66 ACCA APC P3 Study Note www.globalapc.com

DEC2007 Q1 (c)ONA about strategic options (industry: airline) (c) Identify and evaluate other strategic options ONA could consider to address the airline’s current financial and operational weaknesses. Note: requirement (c) includes 2 professional marks (10 marks)

DEC2007 Q1(b) (i)ONA Strategic Choices A no frills low-cost strategy combines low price with low perceived value added, and focuses on price-sensitive market segments. A no frills strategy may also provide a means for new entrants to enter a market segment. The new players can achieve market entry through a no frills strategy, and use it to build volume (market share) before moving on to other strategies and challenging the established players. A no frills strategy is a cost leadership approach, and this is the case in the airline industry where no frills airlines such as Easyjet or Ryanair (in the UK) or SouthWest (in the USA) adopt a low cost pricing strategy. A no frills strategy also requires very tight management; efficiency levels must be kept high so that the cost base remains low. Suitability ONA's structure is not suited to a no-frills strategy. Many of the airline companies which have used the 'no frills' strategy have been new entrants to the market. A key element in their strategy is achieving a low cost base to sustain their low cost strategy. The evaluation of ONA's strengths and weaknesses in (a) has identified that ONA does not have a low cost base. It pays wages above the industry average and maintains overheads such as a catering department that its low-cost competitors do not have. ONA prides itself on its safety record it will be reluctant to reduce maintenance expenditure at the risk of compromising safety. ONA's aircraft utilisation rates are lower than its competitors, it suggests that its costs are relatively higher than its competitors and it’s not efficient. ONA creates its competitive advantage through the quality of service it offers customers, rather than through low costs and so using a low frill strategy does not fit in the brand of the company. 67 ACCA APC P3 Study Note www.globalapc.com

ONA prides itself on its in-flight customer service, winning the Regional Airline of the Year award. If ONA moved to a 'no frills' strategy, it would need to abandon its tradition of excellent customer service. This is unlikely to be a suitable strategy for ONA because it damages one of its core competences. And if ONA's existing customer does not satisfy with the level of service provided by ONA then this will lead to a fall in the load factor as well. A strategy which leads to a fall in load factors would not be acceptable for ONA. Moving to a no frills strategy would not only require a major cultural change at ONA, sacrificing the strengths of the organisation and the competences of its employees, but it would also lead to redundancies. There would be significant redundancies in ONA. And this will in turn damage the existing reputation of ONA. So using a low frill strategy is not suitable. Feasibiliy Using a low frill strategy which means to reach economic of scale. ONA currently only has, on average, one flight per day to each city in the international sector and ONA would have to extend its flight network, flight frequency and fleet size significantly. Given the decrease in liquidity ratio and profit figure and we question whether ONA are feasible to do that and it needs to be investigated. Acceptability If ONA chooses low frill strategy, then they may try to fly into airports that offer cheaper taking off and landing fees. but these are often relatively remote from the cities they serve. This remoteness may be acceptable to leisure travellers, but not to business travellers – and business travellers are ONA's key customers in the regional sector. Given that one of ONA's strengths is the high passenger load factors is achieves for regional business travel, a strategy which involves moving to airports which are less convenient for business travellers is unlikely to be suitable or acceptable. Conclusion It would require major changes in the structure, cost and culture of the company which would be difficult to justify, and which do not appear suitable, acceptable or feasible for ONA. The extent of the changes required would represent a revolution rather than an evolution of existing processes. However, a revolution is normally only required when a company is facing a crisis and needs to change direction quickly. It can be argued that a more incremental approach to change will be more beneficial, building on the strengths of the organisation, its existing brand, and the competencies of its 68 ACCA APC P3 Study Note www.globalapc.com

employees. If ONA really wants to move into the no frills sector it would be better advised to set up a new low cost brand to do this – rather than trying to restructure its existing business model.


DEC2007 Q1(C) Two alternative strategies ONA might consider are differentiation and focused differentiation. Differentiation By adopting a differentiation strategy, ONA can seek to provide service that offer different benefits from those offered by its competitors. If these benefits such as free in-flight food and drinks,allocated seats are valued by customers they will lead to an increase in passenger numbers. This will improve ONA's market share and seat utilisation. The success of the no frills airlines shows that not all passengers do value these premium products; instead some want to fly as cheaply as possible rather than paying extra for in-flight hospitality. So basic differentiation strategy may not be suitable for ONA given the two separate markets it serves – standard class and business class in which business class travellers will be more receptive to the premium service than the standard class travellers. Focused differentiation A focused differentiation strategy looks particularly suitable for the regional sector. ONA already has a strong market presence in this sector, and this strategy would allow it build on these strengths. ONA should consider the following initiatives to improve its product offering for the regional business class market: 1, Faster check in arrangements. ONA should look to speed up the process of booking and checking in because business class travellers are likely to value easier and quicker checking in. In this respect, ONA should investigate the possibility of introducing automated self-service check-in kiosks in the airport departure areas, or an on-line check-in facility. 2, Supporting services. ONA should look to provide passenger lounges for its business passengers with internet and fax facilities so that they can work while waiting for their planes. In the international sector, low flight frequency would also be a problem even if ONA is trying to adopt a differentiation strategy. The key to address this problem is to ally with established airlines which already serve the same countries as ONA such as signing Code share agreements to increase flight frequences. 70 ACCA APC P3 Study Note www.globalapc.com

Cost Finally, Management of costs is important, even though ONA is not using cost advantage as a competitive strategy. Such as careful monitoring of wages and salaries expenditure to ensure that these do not exceed revenue increases. The alternative option that ONA could consider is to use Ansoff growth vector matrix. There are 4 possibilities: market penetration; market development; product development and diversification. Option1: Market penetration ONA can introduce an online check in system where people can check in online and by doing so people may choose to fly with ONA rather than its competitors. ONA can also penetrate the market by lowering down its cost such as cutting down the number of sales agent and by doing so it can in turn cut down the commission fees charged by them. Evaluation So it’s suitable for ONA because ONA is famous for providing good customer service and so providing these extra service will fit in the overall strategy of ONA. Given the healthy financial position that ONA has and to set up such an online checking system will probably be feasible for ONA. After setting up this online checking system will be acceptable by customers because this will be more convenient from the customers’ point of view. Option2: Market development ONA can expand its market overseas by including more fight to overseas location. ONA can also expand its regional market by offering more flights in the cities. Evaluation This is suitable as long as ONA can keep the same customer service offered in the new market. Given the investment into the new market is significant and the worsening financial health of ONA and this might question the feasibility of the strategy. This is acceptable from the shareholders of ONA’s point of view because by moving into the new market which can generate into more revenue and reduce the total cost down given the economic of scale it reaches. Option3: Product development ONA can expand its products by offering more class such as first class seat which is more expensive than the business class.


Evaluation It is suitable because ONA compete by offering a high level of customer service rather than adopting low frill strategy. It is feasible given ONA can use its spare seats to develop more service like offering more first class to business people. It may be acceptable for business people to flight because of the current service level that ONA offers and they are also more care about the service rather than the price they are charged. Option4: Diversification ONA can diversify its business by offering hotel service together with the flight. Evaluation But it may not be suitable because ONA may not know how to run the hotel given a lack of experience. And given the decrease in liquidity ratio and profitability in the financial statement we might question their feasibility of running the hotel if it is to grow organically. Maybe ONA can ally with other hotel such as for the customer who fly with ONA can enjoy a discount when living in the hotel and this may be acceptable by the customer in turn.


Integrated reporting The aim is to create transparency of the company and also consistency(applying integrated reporting to companies from all around the world).

Content:       

Organizational overview Governance Opportunities and risks Strategy and resource allocation Business model Performance Future outlook

Implications: IT costs

The introduction of integrated reporting will most likely require significant upgrades to be made to the organisation's IT and information system infrastructure. Such developments will be needed to capture KPI data. Due to the broad range of business activities reported on using integrated reporting (customer, supplier relations, finance and human resources) it is likely the costs of improving the infrastructure will be significant.

Time/staff costs

The process of gathering and collating the data for inclusion in the report is likely to require a significant amount of staff time. This may serve to decrease staff morale if they are expected to undertake this work in addition to existing duties. This may require additional staff to be employed.

Consultancy costs

Organisations producing their first integrated report may seek external guidance from an organization which provides specialist consultancy on integrated reporting. Consultancy fees are likely to be significant.

Disclosure

There is a danger that organisations may volunteer more information about their operational performance than intended. Disclosure of planned strategies and key performance measures are likely to be picked up by competitors.

ACCA integrated report sample download: http://www.accaglobal.com/content/dam/acca/global/pdf-agm/ar2011-12.pdf 73 ACCA APC P3 Study Note www.globalapc.com

ACCA P3.PDF - APC providers ACCA and CIMA approved online

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