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Answers

6D–ENGAA
Paper 3.5

Part 3 Examination – Paper 3.5


Strategic Business Planning and Development December 2006 Answers

Tutorial note: These model answers are considerably longer and more detailed than would be expected from any candidate in the
6D–ENGAA
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examination. They should be used as a guide to the form, style and technical standard (but not in length) of answer that candidates
should aim to achieve. However, these answers may not include all valid points mentioned by a candidate – credit will be given to
candidates mentioning such points.

1 (a) The Shirtmaster Group is performing poorly by any standards and this reflects the poor strategic position of a major part of
the group – namely the Shirtmaster division. Using a 5-forces and value chain analysis we can see that the chosen strategy
of being an integrated shirt manufacturer carrying out all the activities needed to design, manufacture and distribute its shirts
is now seriously open to question. Most of its UK competitors have recognised the need to source shirts from low cost
manufacturing countries. Shirtmaster, in the shape of Tony Masters, seems to be alone in thinking that by maintaining a UK
manufacturing capability this will give it some competitive advantage. The economics of the industry have changed
dramatically with foreign shirt makers able to supply both the quality of shirt required in the premium shirt market and at
prices that would enable Shirtmaster to radically improve its profit margins. The division seems to be in the classic ‘stuck in
the middle’ position having neither the volumes to achieve cost leadership or the skills to differentiate itself in the market as
it has in the past. Its strategic choice has been to concentrate on the premium end of the shirt market but this focus strategy
is now under considerable challenge.
The two key forces at work seem to be the intensity of rivalry between the shirt makers and the increased buying power of
their customers – the retail outlets for their shirts. The Shirtmaster division has remained heavily dependent on its small
independent retailers, who themselves are under threat from the specialist clothing retailers and the supermarkets. There is
a pressing need to analyse the changes taking place in the value chain underlying the shirt business. There is no evidence
to suggest that Shirtmaster is willing to make shirts under the own label brands of the dominant retailers.
The Shirtmaster division’s reliance on small independent clothing retailers is having significant cost effects on its value chain.
In terms of in-bound logistics Tony’s expensive trips to buy cloth from foreign suppliers is resulting in large stocks of expensive
cloth. Meeting the individual demands of its many small customers must have a real impact on its manufacturing and
distribution costs. Marketing expenses supporting the Shirtmaster brand are both significant and yielding decreasing returns.
In terms of the support activities, questions need to be asked at the infrastructure and HR levels in terms of Tony’s influence
over strategy and operations, at the technology level in terms of their apparent lack of investment in CAD/CAM systems
compared with the Corporate Clothing division and the procurement strategy has already been questioned.
The net result of these problems is revealed in the financial performance compared to the Corporate Clothing division:
Shirtmaster division Corporate Clothing division
Sales growth declining increasing
Manufacturing efficiency/gross margin low and falling higher and sustained
Labour productivity/sales per employee modest improving
Marketing expenditure relatively high relatively low
Stock holding relatively high modest
Net margins low/negative modest/positive
Market share minimal small but growing
Innovation – product stalled customer driven
Innovation – processes little evidence significant
Divisional co-operation and learning minimal minimal
Customer segment declining growing
The measures above reflect a balanced scorecard approach to overall performance and clearly the Corporate Clothing
division’s results bring the problems of the Shirtmaster division into even more focus – comparisons are odious! Corporate
Clothing is operating in a more attractive market and through close attention to its customers’ demands is enjoying modest
growth and profitability. Looking after a small number of large industrial customers and integrating its value chain with theirs
has had positive results. All parts of its value chain/system seem to be involved in providing a superior service to its customers.
One could point in particular to the link between its technology and its manufacturing operations as a critical area for success,
and its willingness to hold stock the customer wants and has paid for, shapes its outbound logistics with workwear supplied
to the individual employee.
Overall the performance of the Shirtmaster Group is a composite of two very different performances achieved by the separate
divisions. These divisions are operating in very different markets with very different strategies. At present there is little or no
synergy between the two divisions and they add very little value to one another.

(b) Johnson, Scholes and Whittington define a strategic alliance as ‘where two or more organisations share resources and
activities to pursue a strategy’. There are a number of types of alliance ranging from a formal joint venture through to networks
where there is collaboration but no formal agreement. The type of strategic alliance will be affected by how quickly market
conditions are changing – swift rates of change may require flexible less formal types of alliance and determine whether
specific dedicated resources are required or whether the partners can use existing resources. Johnson, Scholes and
Whittington argue that for an alliance to be successful there needs to be a clear strategic purpose and senior management
support; compatibility between the partners at all levels – this may be complicated if it is a cross-border alliance; time spent
defining and meeting performance expectations including clear goals, governance and organisational arrangements; and
finally trust both in terms of respective competences and trustworthiness.

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The advantages that may be gained by a successful strategic alliance include creating a joint operation that has a ‘critical
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mass’ that may lead to lower costs or an improved offer to the customer. It may also allow each partner to specialise in areas
where they have a particular advantage or competence. Interestingly, alliances are often entered into where a company is
seeking to enter new geographical markets, as is the case with both divisions. The partner brings local knowledge and
expertise in distribution, marketing and customer support. A good strategic alliance will also enable the partners to learn from
one another and develop competences that may be used in other markets. Often firms looking to develop an e-business will
use an alliance with a partner with experience in website development. Once its e-business is up and running a firm may
eventually decide to bring the website design skills in-house and acquire the partner.
Disadvantages of alliances range from over-dependence on the partner, not developing own core competences and a tendency
for them not to have a defined end date. Clearly there is a real danger of the partner eventually becoming a competitor.
In assessing the suitability for each division in using a strategic alliance to enter European markets one clearly has to analyse
the very different positions of the divisions in terms of what they can offer a potential partner. The earlier analysis suggests
that the Shirtmaster division may have the greater difficulty in attracting a partner. One may seriously question the feasibility
of using the Shirtmaster brand in Europe and the competences the division has in terms of manufacturing and selling to large
numbers of small independent UK clothing retailers would seem inappropriate to potential European partners. Ironically, if
the management consultant recommends that the Shirtmaster division sources some or all of its shirts from low cost
manufacturers in Europe this may provide a reason for setting up an alliance with such a manufacturer.
The prospects of developing a strategic alliance in the Corporate Clothing division are much more favourable. The division
has developed a value added service for its corporate customers, indeed its relationship with its customers can be seen as a
relatively informal network or alliance and there seems every chance this could be replicated with large corporate customers
in Europe. Equally, there may be European workwear companies looking to grow and develop who would welcome sharing
the Corporate Clothing division’s expertise.

(c) The Shirtmaster Group has decided to structure itself using two divisions who are dealing with very different markets,
customers and buying behaviours. In so doing the intention is to provide more value to the customer through a better
understanding of their needs. The existence of the two divisions also reflects the origins of the two family businesses.
Mintzberg in his work on organisation design and structure sees divisional configurations as being appropriate in relatively
simple and static environments where significant strategic power is delegated from the ‘strategic apex’ to the ‘middle line‘
general managers with responsibility for the performance of the division. Indeed one of the benefits cited for divisionalised
companies is their ability to provide a good training ground in strategic decision making for general managers who can then
progress to senior positions at company headquarters. Tony Masters’s reluctance to delegate real strategic decision making
power to the senior managers in the Shirtmaster division may be preventing those managers developing key managerial skills.
Using the Boston Box model one could classify the Shirtmaster division as a ‘dog’ with low market share in a market exhibiting
change but little growth. The Corporate Clothing division, by contrast, can be regarded as a ‘problem child’ having a small
share but of a growing market. Porter’s ‘better-off test’ needs to be met – are the two divisions better off being in the same
Group? As it stands there seems little synergy between the two divisions – there seems to be little evidence of the two divisions
sharing resources or transferring skills or learning between the two divisions. Their two value chains and systems are both
separate and different though on the face of it there are many activities that are similar. Operating independently may
encourage healthy competition between the two divisions and consequently better performance through better motivated staff.
Specialised competences such as Corporate Clothing division’s on-line response to customer orders and design changes are
more easily developed within a divisionalised structure. Performance can be clearly identified and controlled and resources
channelled to those areas showing potential. However, this may be at the expense of costly duplication of resources and an
inability to get the necessary scale to compete in either of their separate markets. Certainly, the lack of co-operation between
the divisions in areas such as information systems may lead to higher costs and poorer performance.

(d) Much has been written on the links between leadership and culture and in particular the influence of the founder on the
culture of the organisation. Schein actually argues that leadership and culture are two sides of the same coin. Tony’s father
had a particular vision of the type of company he wanted and importance of product innovation to the success of the business.
Tony is clearly influenced by that cultural legacy and has maintained a dominant role in the business though there is little
evidence of continuing innovation. Using the McKinsey 7-S model the founder or leader is the main influence on the
development of the shared values in the firm that shapes the culture. However, it is clear from the scenario that Tony through
his ‘hands-on’ style of leadership is affecting the other elements in the model – strategy, structure and systems – the ‘hard’
factors and the senior staff and their skills – the ‘soft’ factors – in making strategic decisions.
Delegation has been highlighted as one of the problems Tony has to face and it is a familiar one in family firms. Certainly
there could be need for him to give his senior management team the responsibility for the functional areas they nominally
control. Tony’s style is very much a ‘hands-on’ style but this may be inappropriate for handling the problems that the company
faces. Equally, he seems too responsible for the strategic decisions the company is taking and not effectively involving his
team in the strategy process. Style is seen as a key factor in influencing the culture of an organisation and getting the right
balance between being seen as a paternalistic owner-manager and a chairman and chief executive looking to develop his
senior management team is difficult. Leadership is increasingly being seen as encouraging and enabling others to handle
change and challenge and questioning the assumptions that have influenced Shirtmaster’s strategic thinking and development
to date. The positive side of Tony’s style of leadership is that he is both known and well regarded by the staff on the factory
floor. Unfortunately, if the decision is taken to source shirts from abroad this may mean that the manufacturing capability
disappears.

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Tony should be aware that changing the culture of an organisation is not an easy task and that as well as his leadership style
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influencing, his leadership can also be constrained by the existing culture that exists in the Shirtmaster Group. Other models
that could be useful include Johnson, Scholes and Whittington’s cultural web and Lewin’s three-stage model of change and
forcefield analysis. Finally, Peters and Waterman in their classic study ‘In search of excellence’ provides insights into the close
relationship between leadership and creating a winning culture.

2 (a) To: Good Sports Limited


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From:
E – Business strategy
Clearly, the markets that Good Sports operates in are being affected by the development of e-business and its experiences to
date are mixed to say the least. In many ways the advantages and disadvantages of e-business are best related to the benefit
the customer gets from the activity. Firstly, through integrating and accelerating business processes e-business technologies
enable response and delivery times to be speeded up. Secondly, there are new business opportunities for information-based
products and services. Thirdly, websites can be linked with customer databases and provide much greater insights into
customer buying behaviour and needs. Fourthly, there is far greater ability for interaction with the customer, which enables
customisation and a dialogue to be developed. Finally, customers may themselves form communities able to contact one
another.
There is considerable evidence to show how small operators like Good Sports are able to base their whole strategy on
e-business and achieve high rates of growth. The key to Good Sports survival is customer service – in strategic terms they
are very much niche marketers supplying specialist service and advice to a small section of the local market. The nature of
the business means that face-to-face contact is crucial in moving customers from awareness to action (AIDA – awareness,
interest, desire and action). There are therefore limits to the ability of e-business to replace such contact.

Yours,

(b) Good Sports has pursued a conscious niche or focus differentiation strategy, seeking to serve a local market in a way that
isolates it from the competition of the large national sports good retailers competing on the basis of supplying famous brands
at highly competitive prices. Does it make strategic sense for Good Sports to make the heavy investment necessary to supply
goods online? Will this enhance its ability to supply their chosen market?
In terms of price, e-business is bringing much greater price transparency – the problem for companies like Good Sports is
that customers may use their expertise to research into a particular type and brand of sports equipment and then simply
search the Internet for the cheapest supply. Porter in an article examining the impact of the Internet argues that rather than
making strategy obsolete it has in fact made it more important. The Internet has tended to weaken industry profitability and
made it more difficult to hold onto operational advantages. Choosing which customers you serve and how are even more
critical decisions.
However the personal advice and performance side of the business could be linked to new ways of promoting the product
and communicating with the customer. The development of customer communities referred to above could be a real way of
increasing customer loyalty. The partners are anxious to avoid head-on competition with the national retailers. One way of
increasing the size and strength of the niche they occupy is to use the Internet as a means of targeting their particular
customers and providing insights into the use and performance of certain types of equipment by local clubs and users. There
is considerable scope for innovation that enhances the service offered to their customers. As always there is a need to balance
the costs and benefits of time spent. The Internet can provide a relatively cost effective way of providing greater service to
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their customers. There is little in the scenario to suggest they have reached saturation point in their chosen niche market.
Overall there is a need for Good Sports to decide what and where its market is and how this can be improved by the use of
e-business.

3 (a) The dilemma faced by Clyde shows the complex nature of strategic decisions, even within a small firm like Concrete Solutions.
There is a need for Clyde to undertake a strategic appraisal, and identify the various stakeholders affected by his decision and
their relative power and interest. The appraisal should involve both a PESTEL and stakeholder analysis to identify the key
environmental factors affecting the opportunity – as shown in the table.
Factors: Stakeholder analysis:
Political – local council – opposition Council: High interest and moderate power
Rival council – support Rival council: as above
Economic – reduced disposable income
Social – higher local unemployment Employees: High interest/low power
Council: as above
Technological – not significant
Environmental – higher pollution Council: as above
Legal – limits on noxious emissions Environmental agencies: High interest/moderate power
For Concrete Solutions the move into the new product can be viewed as a related diversification – namely new market and
new product with the attendant risk involved. Clyde will have to assess the resource implications of the move. A considered

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SWOT analysis, including his personal liability to manage the strategic change would be useful. There may be a significant
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investment in new technology and employee training to make the new blocks. In effect he will be forming a strategic alliance
with the international company and making significant changes to both the value chain and value system. There will be no
need to invest in sales and marketing as this will be the responsibility of its larger partner. As a major strategic option there
is a need to address issues of its suitability, acceptability and feasibility. In terms of suitability the option seems to address
many of the strategic problems attached to his current product range. It is a product that can be sold all year round and into
a much wider geographical market area. It is in terms of acceptability that the dilemma reveals itself and the impact on the
different stakeholders involved – he may find stakeholder mapping and scenario building useful in coming to a decision. As
the owner of the business he needs to assess the risk involved against the likely returns. Feasibility looks reasonably sound
– new resources and skills will be needed but affordable and achievable with the support of the partner.

(b) Recent corporate scandals have increased the critical awareness of the need for business to operate ethically and in a socially
responsible way. This is seen largely in the context of large firms and their governance but as the Concrete Solutions scenario
shows small owner-managed firms are not immune from taking difficult decisions that have differing and significant impacts
on the firm’s stakeholders and their expectations. Johnson, Scholes and Whittington see corporate social responsibility as
‘concerned with the ways in which an organisation exceeds the minimum obligation to stakeholders specified through
regulation and corporate governance’. They argue it is useful to distinguish between contractual stakeholders including
customers, suppliers and employees, who have a legal relationship with an organisation and community stakeholders – such
as local communities – who do not have the same degree of legal protection as the first group. Clyde’s local community and
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its representatives will face a dilemma – jobs v pollution – not an easy choice! Clearly there will be considerable negotiation
between the key stakeholders and Clyde as the owner/manager should act ethically and with integrity in reaching a decision
having profound effects for all parties concerned.

4 (a) To: David Silvester


From:
Funding strategy for Gift Designs Ltd
Clearly, you have identified a real business opportunity and face both business and financial risks in turning the opportunity
into reality. One possible model you can use is that of the product life cycle which as a one-product firm is effectively the life
cycle for the company. Linking business risk to financial risk is important – in the early stages of the business the business
risk is high and the high death rate amongst new start-ups is well publicised and, consequently, there is a need to go for low
financial risk. Funding the business is essentially deciding the balance between debt and equity finance, and equity offers the
low risk that you should be looking for. As the firm grows and develops so the balance between debt and equity will change.
A new business venture like this could in Boston Box terms be seen as a problem child with a non-existent market share but
high growth potential. The business risks are very high and consequently the financial risks taken should be very low and
avoid taking on large amounts of debt with a commitment to service the debt.
You need to take advantage of investors who are willing to accept the risks associated with a business start-up – venture
capitalists and business angels accept the risks associated with putting equity capital in but may expect a significant share
in the ownership of the business. This they will seek to realise once the business is successfully established. As the business
moves into growth and then maturity so the business risks will reduce and access to debt finance becomes feasible and cost
effective. In maturity the business should be able to generate significant retained earnings to finance further development.
Dividend policy will also be affected by the stage in the life cycle that the business has reached.

Yours,

(b) David even at this early stage needs to identify the critical success factors and related performance indicators that will show
that the concept is turning into a business reality. Many of the success factors will be linked to customer needs and
expectations and therefore where David’s business must excel in order to outperform the competition. As an innovator one of
the critical success factors will be the time taken to develop and launch the new vase. Being first-to-market will be critical for
success. His ability to generate sales from demanding corporate customers will be a real indicator of that success. David will
need to ensure that he has adequate patent protection for the product and recognise that it will have a product life cycle.
There look to be a number of alternative markets and the ability to customise the product may be a CSF. Greiner indicates
the different stages a growing business goes through and the different problems associated with each stage. One of David’s
key problems will be to decide what type of business he wants to be. From the scenario it looks as if he is aiming to carry
out most of the functions himself and there is a need to decide what he does and what he gets others to do for him. Indeed
the skills he has may be as an innovator rather than as someone who carries out manufacture, distribution, etc. Gift Designs
may develop most quickly as a firm that creates new products and then licences them to larger firms with the skills to
penetrate the many market opportunities that are present. It is important for David to recognise that turning the product
concept into a viable and growing business may result in a business and a business model very different to what he
anticipated. Gift Designs needs to have the flexibility and agility to take advantage of the opportunities that will emerge over
time.

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Part 3 Examination – Paper 3.5
6D–ENGMS
Paper 3.5

Strategic Business Planning and Development December 2006 Marking Scheme

Marks
1 (a) Shirtmaster Group position and performance; Up to 3
Static sales
Low margins
Little synergy in Group
Shirtmaster division: Up to 10
‘Stuck in the middle’ – brand performance
Sourcing strategy
Customers segment served declining
High stocks and distribution costs
Value system declining in importance
Corporate Clothing division: Up to 10
Differentiated product
Growing market
Positive profit margins
Value chain integrated with customers’ value chains
Use of models Up to 3
maximum 20

(b) Advantages of successful strategic alliances: Up to 2 per point


Economies of scale and scope
Co-specialisation and synergies
Attaining ‘critical mass’
Learning from partners and developing competences
Disadvantages of strategic alliances: Up to 2 per point
Over dependency on partner
Failure to develop own core competences
No end date to partnership
Creation of a competitor
maximum 15

(c) Costs of divisions operating independently: Up to 2 per point


Duplicated costs
No sharing of resources/transfer of skills
No shared learning
Competition for resources
Benefits of divisions operating independently: Up to 2 per point
Development of necessary competences
Ability to serve distinctive market needs
Motivation and accountability
Risk reduction
Allows measurement of divisional performance
maximum 15

(d) Models linking leadership and culture: Up to 3 per model


McKinsey 7-S model
Cultural web
Lewin’s change model
‘Excellence’ model
maximum 10
Total 60

15
Marks
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2 (a) Advantages of Good Sports developing an e-business strategy: Up to 7


Improved processes allowing better customer service
Opportunity to develop information based new products and services
Greater insight into customer behaviour
Greater interaction and customisation
Customers creating own communities
Disadvantages of developing an e-based strategy: Up to 7
Costs exceed benefits
Inappropriate to nature of service provided
Lack of in-house skills and competences
External Internet ‘experts’ use inappropriate language and systems
maximum 12

(b) E-strategy supporting Good Sports’ niche strategy: Up to 3 per point


Better levels of service possible
New niches developed
Better understanding of customer needs
Focused promotion and communication
maximum 8
Total 20

3 (a) Assessing the opportunity:


Environmental appraisal and stakeholder analysis Up to 5
SWOT analysis
Criteria for assessing option – suitability, acceptability and feasibility Up to 3 per criterion
maximum 12

(b) Social responsibility dimensions; Up to 3 per point


Stakeholders – power, interest and conflict
Governance issues – purpose of the business; short v long term
Corporate social responsibility – compatibility with business strategy
maximum 8
Total 20

4 (a) Identification of key issues: Up to 3 per issue


Linking business risk to financial risk – start-up finance, growth, maturity and decline
Developing an appropriate funding strategy – debt v equity, dividend policy
Using appropriate models – product life cycle, BCG etc
maximum 10

(b) Critical success factors and performance indicators: Up to 2 per point


Stages of growth – Greiner’s model – own role in business
make v buy
value chain and value system
growth matrix – market development, market penetration, product development and diversification
maximum 10
Total 20

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