Mock 1

Business
Analysis
P3BA-MK1-X11-A

Answers & Marking Scheme

Accountancy Tuition Centre Ltd

1 YELLOW HORN PLC

(a) Sources of information for pricing

Both internal and external sources of information can be used to assist in the setting
of prices for the future integrated digital services of Yellow Horn plc. If Yellow
Horn is to halt the erosion of its market share, then sound pricing decisions, based
on high-quality information, will be required.

External sources of information

The economy

Yellow Horn plc has relied heavily on its home market in the past. This means that
the state of the economy in its home country will be an important consideration
when pricing decisions are being made. In addition, because Yellow Horn plc is has
recently moved into international ventures, the economic picture beyond its national
boundaries will also be crucial to its decision-making.

If the country is in a recession or if a recession is imminent, then there will be a fall

in overall demand for services in the communications and entertainment businesses
and Yellow Horn plc will have to take this into account when pricing.

In times of recession, consumers will prefer cheaper alternatives over more

expensive ones. Consumers will want to know whether a large cost is involved
when the service is taken up and what the periodic costs are going to be.

Yellow Horn will have to ensure that its pricing policy is consistent with the overall
economic situation. Present employment levels, interest rates, inflation rates and
other economic indicators will have to be known, along with reliable forecasts for
future trends.

Yellow Horn will have little experience of making pricing decisions in its current
environment as, until the recent deregulation of the telecommunications market, it
had monopolistic power. The days of Yellow Horns automatic 90% market
share are gone forever.

Government

The government of Yellow Horns home country will be able to provide

demographic information on, inter alia, the size and age distribution of the
population, the number of households and the average per capita income. Future
trends should be examined. Such factors will affect the pricing of the digital
services. Yellow Horn may, for instance, decide to opt for a low price/ high volume
approach or Yellow Horn may try niche pricing.

Information on house and infrastructure building will be useful. If the new systems
can be installed along with the infrastructure or when a house is built, then initial
costs will be lower and the service will be made more attractive.

Accountancy Tuition Centre (International Holdings) Ltd 2011 2

 Competitors

Yellow Horn will need to consider the pricing strategies adopted by its competitors.
Even if Yellow Horn manages to convince its customers and its potential customers
that it is providing a differentiated service, there will always be others who are
providing something similar. This means that Yellow Horns prices must not be too
far out-of-step with its competitors. If they are, then Yellow Horns original
investment may not be recovered from sales.

The intense competition now being faced by Yellow Horn in its home market makes
information about the actions of competitors very important when prices are being
set. The fact that Yellow Horns information systems have always been internally
focused makes information concerning competitors more crucial.

Yellow Horn must not forget that its services are in competition with other forms of
entertainment such as the cinema. Developments, as well as pricing, in such areas
should be monitored.

Market research

Yellow Horn is facing competition in its home market and it is finding it difficult to
obtain information about that market. Market research could be one way of starting
to address these problems. Customers and potential customers of Yellow Horn can
be asked their views, eg what services and combinations of services do they require:
how much are they willing to pay.

Internal sources of information

Financial and accounting systems

Investment appraisal will need to take place. The cost of the investment that needs
to be made, the cost of capital, the required rate of return on the investment and the
risks involved will, inter alia, be variables when what if analysis is carried out.

Yellow Horn now operates in deregulated markets. It is a significant player in those

markets, however, and so it may be subject to government controls in respect of its
pricing. It must ensure, therefore, that there are no cross-subsidies or loss leaders in
its pricing structure.

Yellow Horn must ensure that its prices do not become out-of-step with its costs.
This will apply to each of its services. Yellow Horn will need to consider the effect
that high initial investment costs should have on its pricing structure: what should
the balance be between a standing charge and the charge made for using the
service?

Customer information

Current customer demand can be examined: what do customers require and what are
they prepared to pay? Variations in demand patterns will need to be considered:
peak demand is, by definition, exceptional but the infrastructure has to be capable of
allowing for it and this may prove expensive.

Since deregulation, Yellow Horn has paid little attention to domestic competition or
investment. This needs to be addressed now that market conditions have changed
drastically.

Accountancy Tuition Centre (International Holdings) Ltd 2011 3

(b) Effects on employment

The numbers employed in certain jobs, eg video-shop staff or cinema staff , could
be drastically reduced over time. A shift will occur towards an increase in the
numbers required in such jobs as communications engineers.

The Integrated Digital Service will provide greater opportunities for people to tele-
commute by working from home. This will benefit, inter alia, people who are less
able to travel to and from work and people with family responsibilities.

The virtual organisation may become more common. Such organisations have
few fixed assets: they rely on clicks not bricks. They often employ staff on a
short-term contract basis. This will greatly effect employment patterns in the years
to come.

Effects on society

Society will suffer from even greater information overload than is currently the
case. The availability of hundreds of television channels, the Internet, interactive
television, films on demand and other, as yet undreamed of, services will mean that
individuals will find it difficult to filter out the information that they need.

Despite falling costs, the services provided by Yellow Horn and others may still be
beyond the financial reach of many people. This may lead to a feeling of have
not compared to have within society. In addition, where the costs are being met
by individuals, this may place a strain on household budgets.

People may become couch potatoes who sit in front of a screen all day, with a
handset in one hand and a mouse in the other. This may lead to physical and, even,
mental health problems. Stress levels may increase for certain individuals, as they
feel that they are drowning in information.

The increase in home entertainment and home working could take the strain off of
the transport systems and infrastructure of large cities, as fewer people need to
travel into the city centre each day.

It is likely that, world-wide, organisations who provide the Integrated Digital

Services will be relatively few in number. This could be socially disadvantageous
as those organisations would have an enormous effect on the views and opinions of
the people who use their services.

(c) Problems and solutions

The problems which Yellow Horn is facing because its business systems are not sufficiently
supporting the business strategy of re-focusing onto the home market, along with the actions
which should be taken to attempt to overcome those problems, are discussed below.

Customer needs

Since deregulation, Yellow Horn has focused on the overseas market. Its IT strategy
and its information systems have thus neglected the home market. Yellow Horn plc
does not know what the home market requires and is thus unable to meet its needs.
As competition is now very fierce, unlike the monopolistic situation which Yellow
Horn once enjoyed, this neglect of the home market is likely to lead to a decline in
sales and a huge loss in revenue, if no action is taken.

Accountancy Tuition Centre (International Holdings) Ltd 2011 4

 Yellow Horn must, therefore, refocus its IT strategy onto the home market and
ensure that its information systems support effective decision-making in this area.
The use of market research, to determine what the home market requires and what it
is prepared to pay for services, would be a first step in this direction.

Yellow Horns analogue communications network has served it well in the past but
it is now out-of-date. Competitors have invested in fibre-optic lines, which are
superior to the technology used by Yellow Horn. It is thus crucial that Yellow Horn
formulates an IT strategy for the home market which allows it to provide integrated
digital services. No one organisation currently offers all services as a
comprehensive package and this presents a business opportunity to Yellow Horn.

Competitors

Because Yellow Horns information systems have not been sufficiently focused on
the home market, it is not in a position to know what its competitors are planning to
do in the future. If a competitor launches an attractive package at a low price, then
Yellow Horns strategy for the home market could be rendered useless. Yellow
Horn thus needs both current and future information concerning its competitors.

Information systems within Yellow Horn

Yellow Horns Executive Information Systems (EISs) have focused on the overseas
markets, so as to support its international ventures. There will thus be a lack of
information available about domestic operations. This will make it difficult to
evaluate the effect of decision-making in this area.

Yellow Horn must enhance its EISs so that these shortcomings are rectified and so
that the four autonomous business units within IT are given adequate information
concerning the domestic market.

Critical Success Factors (CSFs) and Key Performance Indicators (KPIs) must be set
out for each business unit and the EISs and other information systems must support
these.

Yellow Horn should use its current IT systems as a basis for data warehousing.
Large database systems, measured in gigabytes or even terabytes, could be set up
containing data on the millions of sales transactions involving Yellow Horns 20
million customers. This data could then be analysed so as to improve the marketing
and financial performance of Yellow Horn.

Data mining could identify relationships between variables, for example the
characteristics of those customers who opt for a particular package, so that
improved decision-making results. By using such business intelligence software,
Yellow Horn could thus focus effectively on the residential market and become
more competitive.

The investment in IT which Yellow Horn plc is required to make is going to be very
costly. Developments in IT are very rapid and involve high risk. Yellow Horn will
require a large investment in new technology to bring its domestic strategy into
being.

It is thus imperative that a carefully thought-out domestic IT strategy, which

supports the business strategy of refocusing onto the home market, is implemented.

Accountancy Tuition Centre (International Holdings) Ltd 2011 5

2 DARBY

(a) Export problems

Darby has apparently never been involved in exporting before. He has only considered this
strategy because he needs to increase his throughput so as to take advantage of the offer on
royalties. There is no compulsion to increase sales by such an amount, although it may seem
to be financially attractive. The current domestic market cannot accommodate the growth
required and if Darby should attempt to move into additional segments within this market it
might adversely affect his current position. His decision to move into the three largest
national markets in the world might, at first sight, seem to be a sound strategy. However this
will require tremendous effort in terms of resources and effort for such a small company. All
three countries have different languages and cultures so it is doubtful if any cost-saving,
uniform approach can be adopted. This approach exposes Darby to two initial problems.
Firstly to attack the three markets simultaneously will over-stretch his limited resources. In no
way will he be able to make any significant impact in these three large markets. Each market
requires careful analysis and planning before entry. One market alone would be a challenge
but to seek growth in all three would be foolhardy. Initially the increased costs of entry could
jeopardise his cash flow position. Secondly Darby has a limited knowledge of marketing and
no expertise at all in overseas marketing. All the company staff are employed on the
production and distribution side of the business. Darbys limited marketing exposure was in
the initial stages when he advertised in art magazines and direct mail, but now he appears to
react to demand rather than initiate it. This cannot work in the proposed new venture where
his products and company are unknown.

An additional problem is the lack of finance. Although the company has proved to be
profitable it is obvious that the annual royalty payment will be high. It is currently 125,000.
If he expects and needs to increase his output by 100% then it is likely that he will have to pay
almost 250,000 in an annual royalty. This itself will probably require loan finance. If he then
needs to invest in an infrastructure that will market his products to these three large markets
this will increase his debt considerably. It is doubtful, given the risks associated with foreign
market entry, whether he will be granted sufficient funds, and if he is it will be very
expensive.

Apart from these problems which can be seen as internal weaknesses, there are threats over
which Darby has no control. He must consider the volatility of foreign currencies. There has
been a recent history of significant movements of the yen, the $US and the Euro. A small
unfavourable change in one currency could significantly affect the financial position of
Darbys company. It might be argued that trading with a spread of countries minimises this
risk, but it will not compensate for the additional expenses of operating in the three areas.
Darby will also have to consider the additional cost associated with freight and insurance.
These are calculable costs but they could be significant. The effect of trade barriers could also
be influential. Although the trend has been towards freer trade there is still evidence that some
specialist imports can be discriminated against. This may not be relevant to Darby but it is a
danger which he must be aware of. However the critical problems he may face concern the
structure and composition of the markets. He currently knows nothing about the potential
customers. Do they exist? If so, in what numbers? Do they have similar tastes and buying
habits as in his domestic market? In addition he is unaware of the competitive framework.

His decision seems to have been taken without any thought or analysis. He may be successful,
but a more gradual approach could be recommended and there needs to be much more
research carried out on the project before any decision can be taken.

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(b) Marketing mix change

If Darby insists upon tackling the three separate countries at the same time it is obvious that
their different cultures and infrastructures will require him to pursue a non-standardised
approach to the marketing of the products. This means that the elements of the marketing mix
product, price, place and promotion will be changed to suit the relevant market conditions.
Factors such as the intensity and type of competition will require a different marketing
approach to be used, as will the position in the product life cycle. Within the domestic market

Darby has currently been relying on customers contacting him. With a new market the
promotional campaign will have to be much more proactive, and given the enormous size of
these economies the promotion will have to be much more focused and selective.

It would be useful to examine how environmental conditions influence the way a product
should be marketed. The social, legal, economic, political and technological factors (SLEPT)
are all likely to be different or have varying influences in the three proposed geographic
markets. This will inevitably change the focus and emphasis in the key elements of the
marketing mix. With reference to the product it may be that the style of print has to be
different. The range of paintings may have to be more customised. What may be attractive to
American customers may not have the same appeal to Japanese people. The problem is that
the paintings on which Darby has committed royalty payments may not appeal to such a
diverse set of markets. Consequently the company may have to select a range of paintings
which appeal to specific country markets. The products may have to be segmented into
specialist areas seascapes, landscapes, portrait paintings, historical paintings, religious
paintings and after adequate research the appropriate paintings are matched with the
appropriate geographic market. In addition to subject matter factors such as size and type of
frame would also need to be considered as each market might have its own preference.

Promotion will inevitably need to be adapted. This is because the competitive framework may
require more effective differentiation. The overseas markets may differ from the domestic
market. Whereas the current business focuses on commercial sales hotels and office
buildings the overseas markets may need to concentrate on the private market sales to
families and house owners. If this is the case then the promotion targeting may have to be
spread wider. Regulations on promotion, media availability and different cost structures may
preclude Darby pursuing a standardised approach, even if the target markets were similar. It is
difficult to imagine a scenario in which the current promotional campaign, limited as it is,
could be transferred to the proposed new markets. Consequently both message and media will
have to be adapted to meet the changed requirements in these overseas areas.

Place could also be affected by the proposed strategy to move overseas. Although the
intention may still be to deal directly with the customer, and not change the mode of
distribution, this might not be feasible given the distances involved along with the associated
delivery times and the relative ignorance Darby has of the markets. It may be attractive for the
company to use agents, who know the business, to act as distributors. A possible option could
be for them to use commercial art galleries near key centres of the target populations. Here
there would be easier access to the potential customers and, additionally, the paintings could
be displayed in an attractive environment which would appeal to buyers. A use of relevant
exhibitions in these countries may also be appropriate for Darby, and this would help in both
his distribution and promotion.

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 Finally the price strategy will have to be adjusted. The increased costs which overseas
marketing entails will have to be recovered somewhere. It may be that the increased volume
of business may reduce the fixed costs, but if not then there should be every effort made to
recover the additional charges. If there is vigorous competition this will reduce the option for
premium pricing. However if these prints prove to be a desirable product with the customers
and are seen as a foreign status symbol then prices may have to be increased so as to conform
to the image perceived.

It is unlikely that any entry into the foreign markets can be successfully achieved using a
standardised marketing strategy. One or all of the elements of the marketing mix may have to
be adjusted to meet the changes in environments experienced by Darbys small company.

3 JEROME SYKES

(a)

The situation at the Sykes Engineering Group should never have been allowed to reach this
unfortunate state of affairs. There are several actions that could have been taken to avoid this
situation. Firstly it is not wise for one person to hold both offices of Chairman and Managing
Director. There is too much concentration of power and it is difficult for lesser
managers/directors to challenge someone in Jerome Sykes position. The UK Cadbury Report
on corporate governance warned of the dangers of centralizing power in too few hands and
proposed a stronger role for non-executive directors of the Board. Sykes should have had to
surrender one of his posts, allowing a director with similar powers to be appointed so that
he/she could challenge/question Sykes decision-making.

The non-executive directors have also failed in their responsibilities. Action should have been
taken before such an unfortunate situation arose. What have they been doing?

The embracing culture of the organization is tainted. Managers have been able to ride
roughshod over employees sexual and racial harassment. Part of corporate governance
requires that companies are answerable to other stakeholders and not just to shareholders. It
would appear that managers have been breaking the law. Why are there no systems in place to
prevent this? What has happened to supervisory management?

Bribery is a more contentious issue. It is often difficult to define and circumstances in

different countries do require different approaches. However hints of bribery can harm the
reputation of a company and can have adverse effects on a companys performance.

[The following is for information only and is not expected in the answer. The World Bank has
reported that. . . higher levels of corruption are associated with lower levels of growth.
Admittedly this refers to macro level corruption (country-wide) and not corruption at a local,
business level, but a general perception is that bribery is not beneficial in the long run. The
USA has a Foreign Corrupt Practices Act and there is an organization, Transparency
International, which has an integrity pact, requiring bidders in international tenders to reject
bribery.]

It is worrying that the auditors have not uncovered the irregularities within the companys
accounts. Is this another example of an audit company being too closely involved in the
strategy of the firm or just its failure to do a competent job? Furthermore it is of concern that
the main institutional shareholders have only acted when share prices have fallen. They have
a stronger duty to monitor all activities of the company and if they were aware of unsavoury
activities, action should have been taken earlier, not now when the share price is falling.

Accountancy Tuition Centre (International Holdings) Ltd 2011 8

(b)

It is obvious that the current dysfunctional culture of the Sykes Engineering Group needs to
be changed. Change cannot be achieved immediately because behaviour is embedded within
an organization and the work-force needs to be re-trained to accept and believe in a more
positive culture. There is a mix of strategies which can help to facilitate the acceptance of
change. Among the most obvious are participation, education, communication and
negotiation. With reference to participation any effort to involve employees in decision-
making is likely to increase motivation and reduce any resistance to change.

Education and communication explains and shows why any change is needed. It must be
remembered that many staff fear change and consequently resist it. The negotiation process is
required to avoid any future problems, and to show the workforce that it is not only they who
have to submit to change, and, to demonstrate any benefits that will be achieved through the
proposed changes. Any change system should have the support of the senior management (if
any survive at Sykes!) with appropriate systems and processes put in place. It will also be
beneficial to have someone to take the role of change agent, someone who is untainted
internally and externally and who has the trust of both employees and external stakeholders.

There are a number of change processes which can be employed here such as the Systems
Intervention Strategy (involving diagnosis, design and implementation stages), the Gemini
4Rs framework (reframing, restructuring, revitalizing and renewal) and force-field analysis.
Any one of these would be an appropriate framework but the most readily available model to
most candidates is probably Lewins unfreeze, change and refreeze model.

In the first stage the present unacceptable practices must be abandoned with an explanation as
to why they were unacceptable. Staff have to be convinced as to why the current practices are
undesirable. This is where the education element is so important. The change process
identifies the new and acceptable behaviour. Attitudes and culture need to change.

Having accomplished this change then rewards praise and career development must be
utilized so as to embed (re-freeze) this new culture and so prevent a reversion to the old, bad
practices.

Above all there is a need for strong leadership. It is probable that someone, untainted, will
have to be brought in from outside to remove Sykes from his dominant position. A
professional chief executive/managing director will have to be appointed to initiate the
changes and to ensure that the break from the unsatisfactory past is actual and transparent.
Only a new start at the top will enable the Group to move forward satisfactorily.

4 SPECIALIST CLOTHING COMPANY LTD

(a)

The management of The Specialist Clothing Company Ltd (SCC) could use the Boston
Consulting growth share matrix in order to assess its divisions companies in terms of their
rate of market growth and relative market share. The model is based on the premise that the
market position of a strategic business unit (SBU) i.e. division, can be assessed by reference
to its growth rate and that its relative market share best indicates the strength of an
organisation. The model uses four categories, these are:

Accountancy Tuition Centre (International Holdings) Ltd 2011 9

 Stars

A star product has a relatively high market share in a high growth market. The fashion
division is experiencing strong growth in a rapidly growing market. It is forecast to have a
market share of 10% by the end of 2007 and therefore it seems reasonable to categorise the
Fashion division as a star.

Problem children (sometimes called question marks)

The distinguishing feature of a problem child is that they have a relatively low market share in
a high-growth market. The Childrens division would appear to fall into this category. The
market leader enjoys 33% of the market whilst SCC Ltd appears to be struggling to achieve
any growth in turnover and hence profits and therefore cash flow remain relatively static.
Similarly, the Industrial division would appear to be a problem child since it operates in a
relatively high-growth market but appears unable to achieve a reasonable market share. It
would appear that the introduction of sales of industrial clothing via mailorder has not been
successful.

Cash cows

A cash cow is characterised by a relatively high market share in a low growth market and
should generate significant cash flows. The Leisure division appears to be a cash cow since it
has a very high market share (70%) in what can be regarded as a low-growth market.

Dogs

A dog is characterised by a relatively low market share in a low growth market and might
well be loss making and therefore have negative cash flow.

The Footwear division would appear to fall into this category since its market share is
relatively low and forecast to fall during each of the next two years in what is a low-growth
market.

The forecast situation of SCC Ltd is far from ideal. It has a dog (the Footwear division) and
two problem children (Industrial and Childrens divisions) that require the immediate
attention of management. The dog classification of the Footwear division is precarious to say
the least. Competitors within low growth markets will invariably offer high levels of
resistance to any attempts to reduce their share of a low-growth or declining market. As far as
the problem children are concerned, management need to devise appropriate strategies to
convert them into stars since at the present time they appear to be in high growth markets but
are unable to capture a reasonable market share. The cash generated by the Leisure division
should be applied to ensure the continued upward trend of the only current star (the Fashion
division) and then applied to assist in the development of the problem children.

(b)

The four quadrants of the Boston-growth share matrix summarise expected profits and
resultant cash flows and recommends an outline strategy to follow which rather simplistically
may be summarised as invest in stars, scrutinise the problem children, milk the cows and
divest the dogs.

Value Chain Analysis

It is vital that the management of SCC Ltd undertake a value chain analysis of each of its
divisions in order to identify and eliminate all non-value added activities, thereby improving
profitability and cash flow without necessarily increasing turnover or market share.

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 Divestment of the Footwear division

Serious consideration should be given to the divestment of the Footwear division. This will
enable resources to be redirected to divisions categorised as problem children i.e. the
Industrial and Childrens divisions.

Support the Stars

As far as the Fashion division is concerned, it is obviously in a growth market and currently
performing well. It is vital, given the forecast performance of the other subsidiaries that the
management of SCC Ltd do not concentrate on the poor performers to the detriment of its
only star.

(c)

There are numerous criticisms that have been made regarding the BCG growth share matrix.
Two such criticisms are as follows:

It is a model and the weakness of any model is inherent in its assumptions. For
example many strategists are of the opinion that the axes of the model are much too
simplistic. The model implies that competitive strength is indicated by relative
market share. However other factors such as strength of brands, perceived
product/service quality and costs structures also contribute to competitive strength.
Likewise the model implies that the attractiveness of the marketplace is indicated by
the growth rate of the market. This is not necessarily the case as organisations that
lack the necessary capital resources may find low-growth markets an attractive
proposition especially as they tend to have a lower risk profile than high-growth
markets.

There are problems with defining the market. The model requires management to
define the marketplace within which a business is trading in order that its rate of
growth and relative market share can be calculated. This can prove problematic in
comparing competitors since if they supply different products and services then the
absence of a consistent basis for comparison impairs the usefulness of the model.

Other valid criticisms include the following:

The application of the BCG matrix may prove costly and time-consuming since it necessitates
the collection of a large amount of data. The use of the model may also lead to unfortunate
consequences, such as:

Moving into areas where there is little experience

Over-milking of cash cows

Abandonment of potentially healthy businesses labelled as problem children

Neglect of interrelationships among businesses, and

Too many problem children within the business portfolio largely as a consequence
of incorrect focus of management attention.

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 Marking Scheme

1 YELLOW HORN PLC

(a) 3 marks per full point (1 for explanation, 1 for relating to LT) max 20

(b) 3 marks per point. max 15

(c) 2 marks per full point (1 for explanation, 1 for relating to LT) max 15
__
Total 50
__

2 DARBY

(a) 2 marks each valid point max 12

(b) 2 marks each valid point, at least two for each group max 13
__
25
__

3 JEROME SYKES

(a) Separation of functions of M.D and Chairman up to 3 marks

Role of non executive directors up to 2 marks
Management culture with reference to harassment, bribery up to 3 marks
Role of auditors up to 2 marks
Role of financial institutions up to 2 marks
maximum 12 marks

(b) Need for use of: up to 2 mark each

participation
education
communication
negotiation

Need for good leadership up to 2 marks

Use of appropriate change model i.e. Lewin up to 6 marks
maximum 13 marks

Total 25

4 SPECIALIST CLOTHING COMPANY LTD

(a) Assessment of the company according to the matrix 3 4 marks 12

(b) 1 mark per strategy, 1 mark per idea 8

(c) 2 3 marks per criticism, up to 5 marks in total 5

Total 25

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