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PRACTICE & REVISION KIT

CA SRI LANKA CURRICULUM 2015


First edition 2015

ISBN 9781 4727 1064 2

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past examination questions in which the Association holds
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©
BPP Learning Media Ltd
2015

ii
Contents

Page
Question Index iv
Introduction vii
How to use this Practice & Revision Kit viii
Exam techniques x
Action verbs checklist xii
Questions 3
Answers 51
Mock exam 151

Contents iii
Question index

Time Page
Marks
Title allocated
allocated Question Answer
(Minutes)
Part A: Introduction to Business Value Creation
1 PW 10 18 3 51
2 OD Company 10 18 3 52
3 Y Corporation 10 18 4 53
4 Service Company Value Chain 25 45 5 55
Part B: Role of Supply Chain in Value Creation
5 Chains 10 18 7 58
6 Cronin Auto Retail (CAR) 10 18 7 59
7 Jayne Cox value chain 10 18 8 60
8 Jayne Cox supply chain 10 18 9 62
9 Perfect Shopper 25 45 10 64
10 Supplying 25 45 12 69
11 QW 10 18 13 74
Part C: Creating Value Through Operations
12 HT Consumer Goods 10 18 15 76
13 Quality Costs 10 18 15 77
14 F company 10 18 16 78
15 Netcrit 10 18 16 79
16 S Company 25 45 17 80
17 P Company 25 45 17 82

iv KB5 Business Value Creation


Time Page
Marks
Title allocated
allocated Question Answer
(Minutes)
Part D: Marketing and Value Creation
18 Thermo Plastics 10 18 19 86
19 EW 10 18 19 87
20 Snack Pack 10 18 19 89
21 SPS 10 18 20 90
22 PG University 25 45 21 92
23 HMC Motors 25 45 22 95
24 M plc 25 45 22 98
25 Publishing company 25 45 24 100
26 Accounting Education Consortium 25 45 25 102
Part E: People and Value Creation
27 Dr Strong 10 18 28 108
28 Delegation 10 18 28 109
29 KCC 10 18 29 110
30 TS Consultants 10 18 30 111
31 TR 10 18 31 112
32 T Aerospace 10 18 31 114
33 PCC Co 10 18 32 115
34 S Company 10 18 32 116
35 ABC 10 18 33 117
36 Recruitment and selection 10 18 33 118
37 NGV 25 45 34 119
38 FPC Co 25 45 35 122

Question Index v
Time Page
Marks
Title allocated
allocated Question Answer
(Minutes)
Part F: Value Creation Through Technology and Innovation
39 MST 10 18 37 126
40 AAA 10 18 38 126
41 Gardening Services 10 18 38 127
42 KPG Systems 10 18 39 128
43 LM Recruitment 25 45 40 130
Part G: Strategy for Value Creation
44 T Venture 10 18 42 133
45 SBU 10 18 42 134
46 J plc 10 18 42 136
47 N Airline 10 18 43 137
48 DLC 10 18 43 139
49 JSW 10 18 44 140
50 Soft drinks 10 18 45 141
51 TDM 25 45 46 141
52 GHK Restaurants 25 45 46 143

vi KB5 Business Value Creation


Introduction

Welcome to this first edition Practice & Revision Kit for the Institute of Chartered
Accountants of Sri Lanka professional examinations for curriculum 2015.
One of the key criteria for achieving exam success is question practice. There is
generally a direct correlation between candidates who revise all topics and practise
exam questions and those who are successful in their real exams. This Practice &
Revision Kit gives you ample opportunity for such practice in the run up to your
exams.
The Practice & Revision Kit is structured to follow the modules of the Study Text, and
comprises banks of non-complex mini scenario and simple functional scenario
questions as appropriate. Suggested solutions to all questions are supplied.
We welcome your feedback. If you have any comments about this Practice &
Revision Kit, or would like to suggest areas for improvement, please email
learningdevelopment@casrilanka.org.
Good luck in your exams!

BPP LEARNING MEDIA

Question Index vii


How to use this Practice & Revision Kit

This Practice & Revision Kit comprises banks of practice questions, mostly in the style
that you will encounter in your exam. It is the ideal tool to use during the revision
phase of your studies.
Questions in your exam may test any part of the syllabus so you must revise the
whole syllabus. Selective revision will limit the number of questions you can answer
and hence reduce your chances of passing. It is better to go into the exam knowing a
reasonable amount about most of the syllabus rather than concentrating on a few
topics to the exclusion of the rest. You should at all costs avoid falling into the trap of
question spotting, that is trying to predict what are likely to be popular areas for
questions, and restricting your revision and question practice to those.
Practising as many exam-style questions as possible will be the key to passing this
exam. You must do exam-style questions under timed conditions and ensure you
write full answers to the discussion parts as well as doing the calculations.
Planning your revision
When you begin your course you should make a plan of how you will manage your
studies, taking into account the volume of work that you need to do and your other
commitments, both work and domestic.
In this time, you should go through your notes to ensure that you are happy with all
areas of the syllabus and practise as many questions as you can. You can do this in
different ways, for example:
 Revise the subject matter a module at a time and then attempt the questions
relating to that module; or
 Revise all the modules and then build an exam out of the questions in this
Practice & Revision Kit.
Using the practice questions
The best approach is to select a question and then allocate to it the appropriate time,
based on the real exam. All the questions in this Practice & Revision Kit have mark
allocations, so you can calculate the amount of time that you should spend on the
question.

viii KB5 Business Value Creation


Using the suggested solutions
Avoid looking at the answer until you have finished a question. It can be very
tempting to do so, but unless you give the question a proper attempt under exam
conditions you will not know how you would have coped with it in the real exam
scenario.
When you do look at the answer, compare it with your own and give some thought to
why your answer was different, if it was.
If you did not reach the correct answer make sure that you work through the
explanation or workings provided, to see where you went wrong. If you think that
you do not understand the principle involved, go back to your own notes or your
study materials and work through and revise the point again, to ensure that you will
understand it if it occurs in the exam.
Our suggested solutions are comprehensive, but in some discursive questions it may
be that you have made points that are not included in the suggested solution that are
equally valid. In the real exams you should be given credit for such points.

How to use this Practice & Revision Kit ix


Exam techniques

Using the right techniques in the real exam can make all the difference between
success and failure.
Here are a few pointers:
1. During the 20 minute reading time at the start, read through the questions and
decide in what order you are going to attempt the exam. You have to write
your answers in the order set out in the question and answer booklet, but you
can attempt the questions in any order that you like.
Some candidates like to attempt the easiest questions first, on the basis that will
enable them to gain the easiest available marks quickly, and build up their
confidence.
If you select a question on a topic area about which you feel confident, and do
that first, you will build up your confidence right at the start, which will help to
calm you if you are nervous and set the tone for the rest of the exam. You should
decide what approach is best for you.
2. Having established the order that you are going to do the exam, allocate the
time available to the questions and work out at what time you will need to
stop working on one question and move on to the next. When you reach the end
of the allocated time for the question that you are working on, STOP. It is much
easier to gain the straightforward marks for the next question than to spend a
long time working on the previous question in the hope of gaining one or two
final marks.
3. Read the question. Read it carefully once, and then read it again to ensure that
you have picked everything up. Make sure that you understand what the
question wants you to do, rather than what you might like the question to be
asking you.
4. Answer all parts of the question. Even if you cannot do all of the calculation
elements, you will still be able to gain marks in the discussion parts.
5. Don’t worry if you think that you have made a mistake in a computational part
of a question. You will not earn the mark for that particular part, but you will
still be able to gain credit for correct application in the later parts of the
question, even if you are using the wrong figure.
6. When starting to read a question, especially a long case study, read the
requirement first. You will then find yourself considering the requirement as
you read the data in the scenario, helping you to focus on exactly what you have
to do.

x KB5 Business Value Creation


7. Plan your answer before you start to write your response, especially for longer
case studies. This will help you to focus on the requirements of the question and
to avoid irrelevance.
8. Try to make sure that your answer relates to the specifics of the question
itself. If you are asked to consider the impact of the scenario on someone named
in the question, make sure that you do that, so your answer is as relevant as
possible.
9. If you finish the exam with time to spare, use the rest of the time to review your
answers and to make sure that you answered every requirement of every
question.

Exam techniques xi
Action verbs checklist

Knowledge Process Verb List Verb Definitions


Tier - 1 Remember Define Describe exactly the nature, scope or meaning
Recall important Draw Produce (a picture or diagram)
information
Identify Recognise, establish or select after
consideration
List Write the connected items one below the other

Relate To establish logical or causal connections

State Express something definitely or clearly

Tier - 2 Comprehension Calculate/Compute Make a mathematical computation


Explain important Discuss Examine in detail by argument showing
information different aspects, for the purpose of arriving at
a conclusion
Explain Make a clear description in detail revealing
relevant facts
Interpret Present in understandable terms or to translate

Recognise To show validity or otherwise, using knowledge


or contextual experience
Record Enter relevant entries in detail

Summarise Give a brief statement of the main points (in


facts or figures)

xii KB5 Business Value Creation


Knowledge Process Verb List Verb Definitions
Tier - 3 Application Apply Put to practical use
Use knowledge in a setting Assess Determine the value, nature, ability or quality
other than the one in which
Demonstrate Prove, especially with examples
it was learned/solve close-
ended problems Graph Represent by means of a graph

Prepare Make ready for a particular purpose

Prioritise Arrange or do in order of importance

Reconcile Make consistent with another

Solve To find a solution through calculations and/or


explanations
Tier - 4 Analysis Analyse Examine in detail in order to determine the
Draw relations among ideas solution or outcome
and to compare and Compare Examine for the purpose of discovering
contrast/solve open-ended similarities
problems
Contrast Examine in order to show unlikeness or
differences
Differentiate Constitute a difference that distinguishes
something
Outline Make a summary of significant features

Action verbs checklist xiii


Knowledge Process Verb List Verb Definitions
Tier - 5 Evaluate Advise Offer suggestions about the best course of
Formation of judgments and action in a manner suited to the recipient
decisions about the value of Convince To persuade others to believe something using
methods, ideas, people or evidence and/or argument
products
Criticise Form and express a judgment

Evaluate To determine the significance by careful


appraisal
Recommend A suggestion or proposal as to the best course
of action
Resolve Settle or find a solution to a problem or
contentious matter
Validate Check or prove the accuracy

Tier - 6 Synthesis Compile Produce by assembling information collected


Solve unfamiliar problems from various sources
by combining different Design Devise the form or structure according to a plan
aspects to form a unique or
Develop To disclose, discover, perfect or unfold a plan or
novel solution
idea
Propose To form or declare a plan or intention for
consideration or adoption

xiv KB5 Business Value Creation


KB5 | Questions

2 CA Sri Lanka
Questions

Part A questions: Introduction to Business Value Creation


Questions 1 to 4 cover Introduction to Business Value Creation, the subject of
Chapter 1 of the Study Text.

1 PW
PW has been asked by her local management accountants' forum to present a
paper at the annual conference on the subject of social responsibility. She has been
asked to do this as her company has recently won a national award for its socially
responsible initiatives including its success in recycling methods, community
based projects and reducing its carbon footprint.
PW has decided that her presentation should start by setting out what is meant by
the concept of social responsibility since she feels there are often misconceptions
surrounding the term. She also wants to emphasise through her presentation the
key benefits that companies can gain from developing strategies which are socially
responsible. PW is aware that there will be some cynics in the audience who view
socially responsible business driven strategies as unrealistic, that they conflict
with the achievement of healthy profits and detract from creating shareholder
value.
Required
Discuss the points that PW should include in her presentation on social
responsibility.
(LO 1.1.1) (10 marks)

2 OD Company
OD Company is in the business of designing, manufacturing and retailing outdoor
equipment including hiking boots, rucksacks, tents and other associated products.
The company's headquarters, including its manufacturing function, is in LM town
where it is one of the major employers. It also has a chain of 25 retail shops in
Country A.
The company is still owned by its founder J, who has been hugely successful in
building up the OD brand, which now has global recognition. J has recently
received a takeover bid from ZZ Company, which is based in another country. ZZ
Company is particularly interested in buying the brand and design capability of
OD Company. If the bid was accepted, then ZZ Company would close down the
manufacturing activity in LM town and would outsource this to other parts of the
world where production and labour costs are significantly lower. This would

CA Sri Lanka 3
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mean the loss of over 800 jobs in LM town, and the trade union has already stated
it will fight any job cuts.
J is contemplating whether or not he should accept the bid.
Required
Assess the power and interests of the different stakeholder groups who are likely
to be affected by the takeover bid.
(LO 1.3.1) (10 marks)

3 Y Corporation
Background
The Y Corporation is based in the United States of America (US). It was founded in
the early part of the last century when Mr Y produced cartoon films. These soon
proved very popular as a form of family entertainment and the characters in the
films became household names.
The Corporation established a theme park (based around the film characters) in
the southern US, where there was a warm and mainly dry climate. The theme
park, known as Y-land, proved to be an immediate success, attracting millions of
visitors each year. A whole range of family entertainment flourished, based on the
original theme of the cartoon characters. These included shops, restaurants, hotels
and amusement rides.
Following the success of Y-land in the US, the directors of the Corporation
established another Y theme park based in Northern Europe. The rationale behind
this was that although many Europeans visited Y-land in the US, the cost of travel
made visiting the attraction very expensive. The directors believed that
establishing a Y-land in Northern Europe would enable European people to visit
the attraction without incurring high travel expenses. Y-land Europe was built in a
highly-populated area of Northern Europe which is easily accessible. A factor
which differentiates Y-land Europe from the theme park in the US is that it is
located in a region which is frequently affected by rain and it does not enjoy a
guaranteed warm climate.
Y-land Europe did not in fact attract the volume of visitors that were expected and
almost went bankrupt before receiving a massive cash injection from a wealthy
donor who took part shares in the theme park.
Further strategic development
The T Corporation is now considering building another theme park, this time in a
tropical area in the Far East. Y-land FE will be part-funded by the host government

4 CA Sri Lanka
Questions

in the Far East, which will take a 60% share in the park. The Y Corporation will
fund the remaining 40%. Profits and losses will be shared in direct proportion to
the shareholding of each of the joint venture partners. It is believed that local
tourism and related sectors of the entertainment industry will benefit from the
development as the theme park will attract more visitors to the region. Similar to
the other two Y-land theme parks, the development will include many facilities
such as hotels, bars and restaurants as well as the entertainment attractions.
Required
Apply Porter's Diamond Theory (the Competitive Advantage of Nations) to help
the directors of the Y Corporation determine whether or not it should proceed
with establishing Y-land FE.
Note: It is not necessary to draw a diagram of the Diamond Theory.
(LO 1.4.1) (10 marks)

4 Service Company Value Chain


C is a manufacturer of test equipment for electronic circuits. In the past, C was a
dominant player in the international market. However, over the past three years,
the company has found that its profits have declined as it has lost market share to
other companies in the market.
C's business model consists of the following stages:
1 C's highly skilled engineers first visit client sites and, after discussions with
the client's engineers, identify and design the appropriate testing equipment
to meet the client's requirements. C's engineers are still recognised as the
best in the industry, and customers agree that they produce the most
effective solutions to the increasingly complex problems presented by C's
clients. This stage of the process is seen as a very collaborative process
between the engineers employed by C and the engineers employed by its
clients.
2 In the laboratories at C, the equipment design goes through a fairly
complicated process. Prototypes are developed, based on the discussions in
stage 1. These prototypes are then tested. Once a final design is agreed, the
plans are passed to the manufacturing department for production.
3 The manufacturing department of C then produces the appropriate
equipment to the desired specification and installs it at the client's site.
4 After the equipment has been installed, C conducts maintenance on an
annual basis.

CA Sri Lanka 5
Questions

It is standard practice within the industry for clients to pay a total price for design,
manufacture and initial installation of the equipment and an annual maintenance
charge after that. Total prices are quoted before design work commences. It is
unusual for companies in the industry to maintain other manufacturers'
equipment.
Although clients recognise the high quality of the solutions provided, they are
increasingly complaining that the overall prices are too high. Clients have said that
although other suppliers do not solve their problems as well as C, they do charge
less. As a result, C has reduced its prices to compete with other companies. There
is a suspicion that the manufacturing and installation stages of the business are
not contributing sufficiently to the business because the costs may be too high.
Some of the Board of Directors of C have recognised that this situation cannot
continue and have recommended that a value chain analysis be conducted, to
identify the way forward for C. The Board feels that it is important that it identifies
which activities in the current business model actually add value and whether all
of them should be continued. One of the directors has suggested that C should
actually be a solutions provider and not a manufacturer.
Although most directors are in agreement with the proposed value chain analysis,
the managing director has argued that value chain analysis is a bad idea. He says
that he has heard a number of criticisms of the value chain model.
Required
(1) Explain the benefits that C might gain from conducting a value chain
analysis. (12 marks)
(2) Explain the criticisms of Porter's value chain model that could be relevant to
C. (8 marks)
(3) Explain the role of the accountant in the value chain. (5 marks)
(LO 1.2.1, 1.2.2, 1.5.1) (Total = 25 marks)

6 CA Sri Lanka
Questions

Part B questions: Role of Supply Chain in Value Creation


Questions 5 to 11 cover supply chain management, the subject of Chapter 2 of the
Study Text.

5 Chains
Your managing director remarks to you that he is aware of a number of business
initiatives about which he knows embarrassingly little. He mentions in particular
that a management consultant keeps talking to him about the supply chain and the
value chain, and how they should be managed to add value. He is vaguely aware
that initiatives such as e-procurement and outsourcing are examples of
improvements the consultant has in mind.
Required
Advise what is meant by the terms 'supply chain' and 'value chain', and the
purpose of supply chain management and value chain management. As part of
your explanation, suggest how e-procurement and outsourcing are initiatives that
might feature in supply chain management as a means of improving performance.
(LO 1.1.1, 2.1.1, 2.4.2, 2.5.2) (10 marks)

6 Cronin Auto Retail (CAR)


Cronin Auto Retail (CAR) is a car dealer that sells used cars bought at auctions by
its experienced team of buyers. Sales records show that 90% of all sales are to
customers who live within two hours' drive of CAR's base.
CAR is keen to expand the service and mechanical repair side of its business. It
would particularly like customers who have purchased cars from them to bring
them back for servicing or for any mechanical repairs that are subsequently
required. However, although CAR holds basic spare parts in stock, it has to order
many parts from specialist parts companies (called motor factors) or from the
manufacturers directly. Mechanics have to raise paper requisitions which are
passed to the procurement manager to review, agree and source. Most parts are
ordered from regular suppliers, but there is an increasing backlog and this can
cause a particular problem if the customer's car is in the garage waiting for the
part to arrive. Customers are increasingly frustrated and annoyed by repairs
taking much longer than they were led to expect. The procurement manager only
works from 10.00 to 16.00. The mechanics work on shifts and so the garage is
staffed from 07.00 to 19.00. Urgent requisitions cannot be processed when the
procurement manager is not at work. The backlog of requisitions is placing

CA Sri Lanka 7
Questions

increased strain on the procurement manager who has recently made a number of
clerical mistakes.
The managing director is aware of the problems of the requisitioning system but
refuses to appoint a second procurement manager because he is trying to keep
staff overheads down during a difficult trading period.
Required
Outline the principles of e-procurement and evaluate its potential application to
CAR.
(LO 2.4.1, 2.4.2) (10 marks)

7 Jayne Cox value chain


Jayne Cox Direct is a company that specialises in the production of bespoke sofas
and chairs at a cost that compares favourably with standard products available
from high street retailers. It sells furniture directly to the end customer. Its
website allows customers to select every feature of the furniture from a wide
number of options. A price is then given and if this price is acceptable to the
customer, then an order is placed and an estimated delivery date is given. Most
delivery dates are ten weeks after the order has been placed. This relatively long
delivery time is unacceptable to some customers and so they cancel the order
immediately.
Jayne Cox Direct orders wood, upholstery and textiles from long-established
suppliers. Purchase orders with suppliers are placed by the procurement section.
Purchase orders are emailed to suppliers. Recently, an expected order was not
delivered because the supplier claimed that no email was received. This caused
production delays.
The sofas and chairs are built in Jayne Cox Direct's factory. Relatively high
inventory levels and a relaxed production process means that production is rarely
disrupted. Despite this, the company is unable to meet 45% of the estimated
delivery dates given when the order was placed, due to the required goods not
being finished in time. Consequently, a member of the sales team has to telephone
the customer and discuss an alternative delivery date.
Telephoning the customer to change the delivery date is difficult and costly. Also,
many customers are disappointed that the promised delivery date can no longer
be met. Customers often get less than one week's notice of the new date and so
they have to defer delivery to later than the revised completion date. This means
that the goods have to remain in the warehouse for longer.

8 CA Sri Lanka
Questions

About 30% of intended deliveries do not take place because there is no-one at the
address to accept delivery. Consequently, furniture has to be returned and stored
at the factory. A member of the sales staff will then negotiate a new delivery date
but, again, contacting the customer by telephone can be difficult and costly.
The company's original growth was primarily due to the innovative business idea
behind specifying competitively priced bespoke furniture. However, established
rivals are now offering a similar service. In the face of this competition the
managing director of Jayne Cox Direct has urged a thorough review of the supply
chain. She feels that costs and inventory levels are too high and that the time taken
from order to delivery is too long. In a recent customer satisfaction survey there
was major criticism about the lack of information about the progress of the order
after it was placed.
When the managing director of Jayne Cox Direct saw the results of the survey she
understood 'why our customer retention rate is so low'.
Required
Analyse the existing value chain, using it to highlight areas of weakness at Jayne
Cox Direct.
(LO 2.1.1, 2.2.1, 2.3.1) (10 marks)

8 Jayne Cox supply chain


Jayne Cox Direct is a company that specialises in the production of bespoke sofas
and chairs at a cost that compares favourably with standard products available
from high street retailers. It sells furniture directly to the end customer. Its
website allows customers to select every feature of the furniture from a wide
number of options. Jayne Cox Direct orders wood, upholstery and textiles from
long-established suppliers. About 95% of its wood is currently supplied by three
timber suppliers, all of whom supplied the company in its first year of operation.
Purchase orders with suppliers are placed by the procurement section via email.
Recently, an expected order was not delivered because the supplier claimed that
no email was received. This caused production delays.
Although suppliers like working with Jayne Cox Direct, they are critical of payment
processing. On a number of occasions the accounts section at Jayne Cox Direct has
been unable to match supplier invoices with purchase orders, leading to long
delays in the payment of suppliers.
The factory holds relatively high inventory levels but often goods are rarely
finished in time. Consequently, an alternative delivery date needs to be agreed.

CA Sri Lanka 9
Questions

Many customers are disappointed that the promised delivery date can no longer
be met. Customers often get less than one week's notice of the new date and so
they have to defer delivery to later than the revised completion date. This means
that the goods have to remain in the warehouse for longer.
About 30% of intended deliveries do not take place because there is no-one at the
address to accept delivery. Consequently, furniture has to be returned and stored
at the factory. A member of the sales staff will then negotiate a new delivery date
but, again, contacting the customer by telephone can be difficult and costly.
Delivery of furniture is made using the company's own vans. Each of these vans
follows a defined route each day of the week, irrespective of demand.
The company's original growth was primarily due to the innovative business idea
behind specifying competitively priced bespoke furniture. However, established
rivals are now offering a similar service. In the face of this competition the
managing director of Jayne Cox Direct has urged a thorough review of the supply
chain. She feels that costs and inventory levels are too high and that the time taken
from order to delivery is too long. In a recent customer satisfaction survey there
was major criticism about the lack of information about the progress of the order
after it was placed. People were also critical about after-sales service.
When the managing director of Jayne Cox Direct saw the results of the survey she
understood 'why our customer retention rate is so low'.
Required
Evaluate how technology could be used in both the upstream and the
downstream supply chain to address the problems identified at Jayne Cox Direct.
(LO 2.1.1, 2.4.1, 2.4.2) (10 marks)

9 Perfect Shopper
Local neighbourhood shops are finding it increasingly difficult to compete with
supermarkets. However, three years ago, the Perfect Shopper franchise group was
launched that allowed these neighbourhood shops to join the group and achieve
cost savings on tinned and packaged goods, particularly groceries. Perfect Shopper
purchases branded goods in bulk from established food suppliers and stores them
in large purpose-built warehouses, each designed to serve a geographical region.
When Perfect Shopper was established it decided that deliveries to these
warehouses should be made by the food suppliers or by haulage contractors
working on behalf of these suppliers. Perfect Shopper places orders with these
suppliers and the supplier arranges the delivery to the warehouse. These
arrangements are still in place. Perfect Shopper has no branded goods of its own.

10 CA Sri Lanka
Questions

Facilities are available in each warehouse to re-package goods into smaller units,
more suitable for the requirements of the neighbourhood shop. These smaller
units, typically containing 50–100 tins or packs, are usually small trays, sealed
with strong transparent polythene. Perfect Shopper delivers these to its
neighbourhood shops using specialist haulage contractors local to the regional
warehouse. Perfect Shopper has negotiated significant discounts with suppliers,
part of which it passes on to its franchisees. A recent survey in a national grocery
magazine showed that franchisees saved an average of 10% on the prices they
would have paid if they had purchased the products directly from the
manufacturer or from an intermediary – such as cash and carry wholesalers.
As well as offering savings due to bulk buying, Perfect Shopper also provides, as
part of its franchise:
(a) Personalised promotional material. This usually covers specific promotions
and is distributed locally, either using specialist leaflet distributors or
loosely inserted into local free papers or magazines.
(b) Specialised signage for the shops to suggest the image of a national chain.
The signs include the Perfect Shopper slogan 'the nation's local'.
(c) Specialist in-store display units for certain goods, again branded with the
Perfect Shopper logo.
Perfect Shopper does not provide all of the goods required by a neighbourhood
shop. Consequently, it is not an exclusive franchise. Franchisees agree to purchase
specific products through Perfect Shopper, but other goods, such as vegetables,
fruit, stationery and newspapers they source from elsewhere. Deliveries are made
every two weeks to franchisees using a standing order for products agreed
between the franchisee and their Perfect Shopper sales representative at a
meeting they hold every three months. Variations to this order can be made by
telephone, but only if the order is increased. Downward variations are not
allowed. Franchisees cannot reduce their standing order requirements until the
next meeting with their representative.
Perfect Shopper was initially very successful, but its success has been questioned
by a recent independent report that showed increasing discontent amongst
franchisees. The following issues were documented.
(a) The need to continually review prices to compete with supermarkets
(b) Low brand recognition of Perfect Shopper
(c) Inflexible ordering and delivery system based around forecasts and
restricted ability to vary orders

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As a result of this survey, Perfect Shopper has decided to review its business
model. Part of this review is to re-examine the supply chain, to see if there are
opportunities for addressing some of its problems.
Required
(a) Outline the primary activities of the value chain of Perfect Shopper.
(5 marks)
(b) Advise Perfect Shopper how it might re-structure its upstream supply chain
to address the problems identified in the scenario. (10 marks)
(c) Advise Perfect Shopper how it might re-structure its downstream supply
chain to address the problems identified in the scenario. (10 marks)
(LO 1.2.1, 2.1.1, 2.5.1, 2.5.2) (Total = 25 marks)

10 Supplying
C is a major pharmaceutical manufacturing company producing and supplying a
variety of prescription drugs in its home market. C currently uses its own fleet of
vehicles to deliver to the wholesalers. There are six competitors who supply drugs
which can be used to treat the same diseases as those produced by C.
Up until three years ago, the supply chain for the industry consisted of the
manufacturers, and a group of ten wholesalers which covered the whole country
and which supplied approximately 4,000 independent pharmacies. These
independent pharmacies are all small companies which source their drugs from
the wholesalers.
Traditionally, patients would see a doctor who would write a prescription for the
correct dose of the required drug which the patients had to take to the pharmacy
to get their supply. This was the only way they could obtain their medication.
Because of a government subsidy, regardless of the medication prescribed, all
prescriptions are charged at a fixed rate.
Three years ago, the legislation changed and for the first time supermarkets were
allowed to employ a qualified pharmacist and to supply prescription drugs.
Because of their size and buying power, the supermarkets are now refusing to deal
with the wholesalers and are insisting on being supplied directly by the
pharmaceutical manufacturers.
These changes have not been well received by the independent pharmacies. There
has been a significant volume of comment in the press about pressure groups
which see this as another encroachment by 'big business' on the small

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independent traders. Some government ministers have also expressed concern


about the increasing market power of the supermarkets.
C is considering changing its distribution network so that it no longer supplies the
wholesalers but will sell directly to all the independent pharmacies and will share
the wholesalers' margin with them.
Although the transport manager has said that he believes the arrangements can be
dealt with in-house, some of the Board of Directors feel that it might be better to
outsource all the transport function.
The Board of Directors recognises that there would need to be significant changes
in the way the company operates were either, or both, proposals to be
implemented. These changes would also have a significant effect on the
stakeholders of the business.
Required
(1) Discuss the advantages and disadvantages, to C, of the proposal to supply
directly to the independent pharmacies. (10 marks)
(2) Discuss the advantages and disadvantages, to C, of the proposal to outsource
the transport function should the proposal to directly supply independent
pharmacies be adopted. (8 marks)
(3) Advise the project team how C might best communicate the decision, to
directly supply independent pharmacies, to each of its principal
stakeholders. (7 marks)
(LO 2.1.1, 2.3.1, 2.5.2) (Total = 25 marks)

11 QW
QW is a company that manufactures machine parts from sheet metal to specific
customer order for industrial customers. QW is considering diversification into
the production of metal ornaments. The ornaments would be produced at a
constant rate throughout the year. It then plans to sell these ornaments from
inventory through wholesalers and via direct mail to consumers.
Presently, each of the machine parts is specific to a customer's order.
Consequently, the company does not hold an inventory of finished items but it
does hold the equivalent of one day's production of sheet metal so as to reduce the
risk of being unable to produce goods demanded by customers at short notice.
There is a one day lead time for delivery of sheet metal to QW from its main
supplier though additional supplies could be obtained at less competitive prices.

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Demand for these industrial goods is such that delivery is required almost
immediately after the receipt of the customer order. QW is aware that if it is
unable to meet an order immediately the industrial customer would seek an
alternative supplier, despite QW having a reputation for high quality machine
parts.
The management of QW is not aware of the implications of the diversification for
its production and inventory policies.
Required
(1) Compare and contrast QW's present production and inventory policy and
practices with a traditional production system that uses constant production
levels and holds inventory to meet peaks of demand. (5 marks)
(2) Discuss the importance of a Total Quality Management (TQM) system in a
just-in-time (JIT) environment. Use QW to illustrate your discussion.
(5 marks)
(LO 2.2.1, 3.2.1, 3.3.2) (Total = 10 marks)

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Part C questions: Creating Value Through Operations


Questions 12 to 17 cover value and operations management, the subject of
Chapter 3 of the Study Text.

12 HT Consumer Goods
HT manufactures and sells consumer goods. The market in which it operates is
highly competitive and HT is constantly designing new products in order to
maintain its market share. The life cycle of products in the market is extremely
short with all of the manufacturers constantly introducing new products or
variations on existing products.
Consumers consider two main factors when buying these products: price and
quality. HT uses a penetration pricing policy when launching its products and is
always striving to improve its quality from product design stage through to
customer care. As a result it has a 15% market share, and its largest competitor
has a 6% market share with around 30 other companies sharing the remainder of
the market.
Required
(1) Compare and contrast
(i) Costs of quality conformance; and
(ii) Costs of quality non-conformance. (3 marks)
(2) Discuss the relationship between quality conformance costs and product
selling prices in HT. (4 marks)
(3) Explain how Kaizen principles could be used by HT to extend the life of its
products. (3 marks)
(LO 3.2.1, 3.3.2) (Total = 10 marks)

13 Quality Costs
The Managing Director of a manufacturing company based in Eastern Europe has
recently returned from a conference on modern manufacturing. One of the
speakers at the conference presented a paper entitled 'Compliance versus
Conformance – the quality control issue'. The Managing Director would like you to
explain to her some of the concepts that she heard about at the conference.

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Required
Outline the quality costs and their significance for the company in a report,
addressed to the Managing Director. Your report should include examples of the
different quality costs and their classification within a manufacturing
environment.
Note: 2 marks are available for report format
(LO 3.2.1, 3.3.1) (10 marks)

14 F Company
F Company is a medium sized business that manufactures electrical kitchen
appliances including food processors, toasters, juicers and coffee makers. In the
last 12 months the company has lost market share to its competitors and has
underperformed on most of its key performance indicators. Its future survival is
threatened as new entrants are taking market share and the customers are
demanding new product and design features.
Percy, the company's management accountant, suggests that the company should
assess how sustainable competitive advantage can be achieved through using its
unique combination of resources, skills and capabilities.
Required
Explain how F Company can gain competitive advantage through its operations.
(LO 3.1.1) (10 marks)

15 Netcrit
Necrit Ltd is about to undertake a project about which the following data is
available.
Activity Preceded by activity Duration Workers required
Days
A – 3 6
B – 5 3
C B 2 4
D A 1 4
E A 6 5
F D 3 6
G C, E 3 3

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Required
(1) Calculate the duration of the critical path for this project. (4 marks)
(2) Calculate the minimum number of staff that will be required on day 6 of the
project, assuming the critical path is not extended. (6 marks)
(LO 3.4.1) (Total = 10 marks)

16 S Company
S Company is a major retailer selling mobile phones. In recent years the Company
has opened new outlets and taken on more support staff at the head office. As a
result the Company has outgrown its existing headquarters and so the decision
has been taken to relocate to a larger purpose-built building.
Although the building work is complete, there are a number of different initiatives
associated with the relocation. These include making sure that the premises are
ready to move into on time and within budget and setting up a customer service
contact team to support the retail outlets dealing with customer enquiries and
complaints. In addition, an upgraded office IT support system is to be designed and
must be ready for installation in the new premises.
P, the Head of Property Management, has decided to establish a project team to
ensure that all of the activities associated with the move to the new premises are
co-ordinated and within budget. She has the formal role of overseeing the project
on behalf of the Board and has appointed D to manage the project.
Required
(1) Explain the activities that D would need to undertake in the planning phase
of the project for re-location. (15 marks)
(2) Compare and contrast the roles of P, as the Board representative and D, as
the project manager. (10 marks)
(LO 3.4.1, 3.5.1) (Total = 25 marks)

17 P Company
P Company manufactures and sells a range of children's clothing through its retail
shops and is currently designing a website in order to allow customers to
purchase products online. The project is a major investment for P Company and it
is seen by the Board of Directors as being a critical strategic development to
ensure the continued success of the business in a highly competitive market.

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The project team consists of staff from different departments of P Company. This
is seen to be important by the Board of Directors, as a number of different
business areas in P Company are dependent on the new website going live
successfully and on time. The Board of Directors has also appointed G to be the
project manager responsible for the development and implementation of this new
website. G only joined P Company six months ago as an IT Manager, and she has
never previously taken on the role of a project manager. She was chosen by the IT
Director to be the project manager on the basis of her strong technical knowledge
and experience in website development.
However, G has expressed concerns to the Board of Directors about her
appointment as project manager on this strategically important project. She feels
that she has a very limited understanding of the roles and responsibilities of a
project manager. She is used to the day to day operations of the IT Department
and is most comfortable with the technical aspects of the project, but feels that she
does not have the range of skills necessary to lead such an important project.
Required
(1) Explain how the characteristics of the website development project in P
Company differ from the characteristics of 'business as usual' work.
(10 marks)
(2) Explain to G the role and responsibilities of the project manager for the new
website development project. (15 marks)
(LO 3.4.1) (Total = 25 marks)

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Part D questions: Marketing and Value Creation


Questions 18 to 26 cover marketing and value creation, the subject of Chapters
4 and 5 of the Study Text.

18 Thermo Plastics
Thermo Plastics makes moulded plastic products. Until recently the best-selling
products of the company have been plastic tables and chairs for garden furniture.
Increasingly, however, customers are wanting more natural products for their
garden furniture, specifically, wooden and cane furniture.
Required
(1) Analyse the relevance of the Product Life Cycle concept to this company's
plastic garden furniture products. (5 marks)
(2) Outline three ways in which this company could use the Product Life Cycle
concept in developing its future marketing plans. (5 marks)
(LO 4.7.1) (Total = 10 marks)

19 EW
Emily Waters has decided to go into business providing an interior design service
to households in her local town.
Emily is a very experienced and talented interior designer but has little or no
business experience or training. However she is aware that effective marketing
will be particularly important to the success of the new business.
Required
Apply the concept of market segmentation to Emily's new business indicating
how a knowledge and understanding of this element of marketing will help the
new business.
(LO 4.2.1, 4.2.2) (10 marks)

20 Snack Pack
Snack Pack is a medium sized company that manufactures and distributes snacks
in Sri Lanka.
The snack industry is dominated by two large American companies, OC Snacks
(OC) and EP Snacks (EP), which each have equal market share. These companies

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also control most of the vending machines in Sri Lanka which are used to sell
snacks. Vending machines were originally introduced into workplaces, but there
an now an increasing number of machines in schools and colleges as well, and
schools and colleges can earn a commission from having the machines on their
premises. Over 90% of the sales from vending machines are snacks, and both OC
and EP have been reluctant to let any products other than their own be sold from
the branded vending machines.
OC Snacks has approached Snack Pack about an arrangement so that its products
can be sold in foreign countries. This deal could include Snack Pack products
being included within the OC product range for vending purposes. One Snack Pack
director is, however, concerned about losing independence.
Required
(1) Outline the advantages and disadvantages of an arrangement with OC
Snacks. (5 marks)
(2) Analyse the different types of relationship that could exist between Snack
Pack and OC, and whether such relationships would affect the director's
concerns and the relations with staff and consumers. (5 marks)
(LO 4.5.1) (Total = 10 marks)

21 SPS
SPS is a medium-sized retailer of sports equipment and leisure clothing. SPS was
established in 1991, and currently operates from three retail shops in town centre
locations.
The management team at SPS is very careful about how it recruits staff. In
addition to the specific skills required to do the job, any applicant must also have a
'passion' for sport. This has resulted in SPS gaining a reputation for excellent
customer service and enthusiastic staff.
A large proportion of staff time is also devoted to training, both on the product
range and customer service techniques. According to a recent survey conducted
by the store managers, the customers believe that SPS employees are 'helpful and
knowledgeable'. The customers also praised the SPS shops for being 'well
designed' and said that it was 'very easy' to find what they were looking for.
Another feature of SPS that is appreciated by the customers is the range of goods
stocked. By developing close relationships with the major manufacturers of sports
goods and clothing, SPS is able to stock a far wider range of items than its rivals.
Control of this stock was made easier, last year, by the development of a
sophisticated computerised stock control system. Using the system, any member

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of staff can locate any item of stock in any of the shops or the warehouse. If the
required item is not 'in stock' at SPS, it is also possible to automatically check the
availability of stock with the manufacturer.
At a recent management meeting, one of the store managers suggested that SPS
consider developing its very basic website into one capable of e-retailing. At
present, the website only gives the location of stores and some very basic details
of the range of stock carried. Although the development of the website would be
expensive, the managers have decided to give the suggestion serious
consideration.
Required
Identify four activities in the value chain of SPS that may be affected by the e-
retail investment, explaining whether the value added by each of them may
increase or decrease as a result of the e-retail investment.
(LO 4.1.1, 4.7.1) (10 marks)

22 PG University
PG is a university. It is a 'not for profit' organisation. PG earns its income from
charging fees to its students: these fees are set by central government. PG
university has several categories of student. There are undergraduates of studying
for first degrees and research students preparing for higher degrees.
Within these groups there are domestic students and foreign students who are
attracted by the reputation of the country's university system. There is also a mix
of students who have come to PG more or less straight from school, alongside
more mature or post-experience students who tend to be at least 30 years old.
PG is not the only university in the market, and there are other educational
institutions, whose prices are also controlled by the government. These
institutions are competing with each other, as they all search for a bigger market
share.
Required
(1) Explain how PG can use the marketing mix as a tool of strategic
management. (15 marks)
(2) Explain how PG can establish the extent to which its users are satisfied with
its services. (10 marks)
(LO 4.1.1, 4.9.1) (Total = 25 marks)

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23 HMC Motors
The H Motor Corporation (HMC) builds passenger motor cars in a South Asian
country. It is able to produce these cars at considerably lower cost than car
makers based in Europe and North America. HMC has attempted to export its cars
for sale in Europe and North America but has not been successful. Customers in
these countries recognise that the cars are of adequate quality but they find them
to be boring and indistinctive. As one reviewer put it 'they get you from one place
to another but they don't have anything special that makes me want to buy them'.
A market analysis of these export markets has revealed that the more successful
car makers have aimed versions of their cars at particular market segments
instead of relying on customers to decide whether the car is the right car for their
needs.
The private motorist is the largest buyer of new cars in these markets. These are
persons and households choosing and buying cars themselves and paying for them
with their own money.
The same market analysis points out that about 30% of new cars are bought by
fleet buyers to be offered as company cars, ie a car that an employer provides to a
worker to help them do their job or as a benefit. Usually the worker is offered a
choice of five or six types of car and they choose the one that they prefer.
Required
(1) Apply the use of market segmentation to the problem HMC faces in selling
its motor cars. (10 marks)
(2) Assess the difference between the likely buying behaviour of private
motorists and of fleet buyers when considering buying motor cars from
HMC. (15 marks)
(LO 4.2.1, 4.2.2) (Total = 25 marks)

24 M plc
M plc maintains 200 websites and access to these is currently free of charge. M
plc's most important website supports the 'Daily News' newspaper which is
published seven days a week in Sri Lanka This website has been operating for five
years and normally receives 100,000 visits (hits) a day. The business model is that
all M plc's websites generate income from advertising.
Current advertising revenue
The Daily News website currently carries five pages of advertising each day for
which it charges advertisers Rs. 1.2Mn per page. M plc's Business Development

22 CA Sri Lanka
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Director, X, has identified a decline in advertising revenue from the Daily News
website. X knows that the advertisers are attracted by the number of visits the
website receives. However, the visitors come from a wide background with
different social characteristics and economic resources. The advertisers would
prefer to deal with a more tightly focused readership. This has led advertisers to
reduce their spending to the current level of five pages per day, seven days a week.
X has commissioned market research which indicates that advertisers would:
(i) Increase the number of daily pages of advertising they buy if the Daily News
website was subscription-only
(ii) Not pay the current price per page if the number of subscribers was fewer
than 60,000
(iii) Expect to pay a decreasing amount per page as the number of subscribers
decreased
Move to subscription base
X believes it would be beneficial if the Daily News website ceased to be free and
became available only by subscription. This would generate an additional revenue
stream for the Web Division. She has discussed this idea with the Web Division's
Managing Director, Y, who has asked her to provide detailed advice about the
consequences of such a change.
Forecast subscription revenue
X will offer subscribers a choice. They could either pay a daily subscription giving
access for one 24 hour period or they could pay a weekly subscription giving
access for seven days. X has estimated the number of subscribers for three
possible pricing strategies. Each strategy has a daily price and a weekly price. The
strategies are totally independent. Details of the strategies are shown in the table
below.
Strategy Daily Daily Weekly Weekly
subscriptions subscriptions subscriptions subscriptions
Price per day Forecast Price per week Forecast
number of number of
subscribers subscribers
each day each week
1 Rs. 50 4,000 Rs. 100 17,000
2 Rs. 100 3,500 Rs. 150 15,000
3 Rs. 150 1,500 Rs. 300 6,000

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Forecast advertising revenue


The pricing strategies for the subscriptions in the table above would give rise to
the total subscriptions shown in the table below. In addition, the table below
shows the expected advertising revenue for each page sold and the expected
number of pages sold for each subscription strategy.
Strategy Total number of Forecast advertising Forecast number of
subscribers each revenue per page pages sold per day
week sold

1 45,000 Rs. 800,000 7


2 39,000 Rs. 750,000 9
3 16,500 Rs. 500,000 10
Required
(1) Analyse the impact of each of the THREE possible pricing strategies
suggested by X on the Web Division's weekly income. (12 marks)
(2) Outline the other factors that X consider before deciding to change the Daily
News website to a subscription-only basis. (13 marks)
(LO 4.4.1, 4.5.1) (Total = 25 marks)

25 Publishing company
TMP (The Management Press) is a specialist business publisher; commissioning,
printing and distributing books on financial and business management. It is based
in a small town in Arcadia, a high-cost economy, where their printing works were
established fifty years ago. 60% of the company's sales are made through
bookshops in Arcadia. In these bookshops TMP's books are displayed in a custom-
built display case specifically designed for TMP. 30% of TMP's sales are through
mail order generated by full-page display advertisements in magazines and
journals. Most of these sales are to customers based outside Arcadia. The final
10% of sales are made through a newly established website which offers a
restricted range of books. These books are typically very specialised and are
rarely featured in display advertising or stocked by general bookshops. The books
available on the website are selected to avoid conflict with established supply
channels. Most of the online sales are to customers based in Arcadia. High selling
prices and high distribution costs makes TMP's books expensive to buy outside
Arcadia.
Business changes
In the last decade costs have increased as the raw materials (particularly timber)
used in book production have become more expensive. Paper is extremely

24 CA Sri Lanka
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expensive in Arcadia and the trees used to produce it are becoming scarcer. Online
book sellers have also emerged who are able to discount prices by exploiting
economies of scale and eliminating bookshop costs. In Arcadia, it is estimated that
three bookshops go out of business every week. Furthermore the influential
journal 'Management Focus', one of the journals where TMP advertised their
books, also recently ceased production. TMP itself has suffered three years of
declining sales and profits. Expenditure on marketing has been reduced
significantly in this period and further reductions in the marketing budget are
likely because of the weak financial position of the company. Overall, there is
increasing pressure on the company to increase profit margins and sales.
The marketing director is keen for the company to re-visit its business model. He
increasingly believes that TMP's conventional approach to book production,
distribution and marketing is not sustainable. He wishes to re-examine certain
elements of the marketing mix in the context of the opportunities offered by e-
business.
The marketing director is convinced that investing in e-business is essential for
the survival of TMP. 'We need to consider what unique opportunities it offers for
pricing the product, promoting the product, placing the product and providing
physical evidence of the quality of the product. Finally, we might even re-define
the product itself'. The marketing director feels that if the company fails to grasp
these opportunities, then one of its competitors will, and 'that will be the end of
TMP'.
Required
Discuss how e-business might help TMP exploit each of the five elements of the
marketing mix (price, product, promotion, place and physical evidence) identified
by the marketing director.
(LO 4.1.1, 4.7.1) (25 marks)

26 Accounting Education Consortium


The Accounting Education Consortium (AEC) offers professional accountancy
education and training courses. It currently runs classroom-based training
courses preparing candidates for professional examinations in eight centres
worldwide. Three of these centres are also used for delivering continuing
professional development (CPD) courses to qualified accountants. However, only
about 30% of the advertised CPD courses and seminars actually run. The rest are
cancelled because they do not have enough participants to make them
economically viable.

CA Sri Lanka 25
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AEC has developed a comprehensive set of course manuals to support the


preparation of its candidates for professional examinations. There is a course
manual for every examination paper in the professional examination scheme. As
well as being used on its classroom-based courses, these course manuals are also
available for purchase over the internet. The complete set of manuals for a
professional examinations scheme costs US$180 and the website has a secure
payment facility which allows this to be paid by credit card. Once purchased, the
manuals may be downloaded or they may be sent on a CD to the home address of
the purchaser. It is only possible to purchase the complete set of manuals for the
scheme, not individual manuals for particular examinations. To help the student
decide if he or she wishes to buy the complete manual set, the website has extracts
from a sample course manual. This sample may be accessed, viewed and printed
once a student has registered their email address, name and address on the
website.
AEC has recently won a contract to supply professional accountancy training to a
global accounting firm. All students working for this firm will now be trained by
AEC at one of its worldwide centres.
Website
The AEC website has the following functionality:
Who we are: A short description of the company and its products and services.
Professional education courses: Course dates, locations and standard fees for
professional examination courses. This schedule of courses is printable.
Continuing professional development: Dates, locations and standard fees for CPD
courses and seminars. This schedule is also printable.
CPD catalogue: Detailed course and seminar descriptions for CPD courses and
seminars.
Downloadable study material: Extracts from a sample course manual. Visitors to
the site wishing to access this material must register their email address, name
and address. 5,500 people registered last year to download study material.
Purchase study material: Secure purchase of a complete manual set for the
professional scheme. Payment is by credit card. On completion of successful
payment, the visitor is able to download the manuals or to request them to be
shipped to a certain address on a CD. At present, 10% of the people who view
downloadable study material proceed to purchase.
Who to contact: Who to contact for booking professional training courses or CPD
courses and seminars. It provides the name, email address, fax number, telephone
number and address of a contact at each of the eight worldwide centres.

26 CA Sri Lanka
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Marketing strategy
The marketing manager of AEC has traditionally used magazines, newspapers and
direct mail to promote its courses and products. Direct mail is primarily used for
sending printed course catalogues to potential customers for CPD courses and
seminars. However, she is now keen to develop the potential of the internet and to
increase investment in this medium at the expense of the traditional marketing
media. Table 1 shows the percentage allocation of her budget for 20X8, compared
with 20X7. The actual budget has only been increased by 3% in 20X8.
Table 1
Percentage allocation of marketing budget (20X7–20X8)
20X8 20X7
Advertising 30% 40%
Direct mail 10% 30%
Sponsorship 10% 10%
Internet 50% 20%
Required
(1) Explain, in the context of AEC, how the marketing characteristics of
electronic communication methods differ from those of traditional
marketing media such as advertising and direct mail. (10 marks)
(2) Evaluate how the marketing manager might use electronic marketing
(including the internet) to vary the marketing mix at AEC. (15 marks)
(LO 4.6.1, 4.8.1) (Total = 25 marks)

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Part E questions: People and Value Creation


Questions 27 to 37 cover people and value creation, the subject of Chapters 6
and 7 of the Study Text.

27 Dr Strong
The C Pharmaceutical Company is in a state of crisis. The development of new
drugs and treatments on which the vary survival of the organisation depends has
slowed dramatically in recent years. An investigation into the operation of the
organisation's research and development (R&D) unit has revealed that the slow
rate of innovation has much to do with the way the department has been
managed.
The head of the unit, Dr Strong, regards it as his duty not to exceed the unit's
budget allocation and has introduced strict controls to avoid this happening.
Members of the R&D unit are set clear targets with time limits and expected to be
working in the laboratory or office on a 9–5 basis every working day. This system
of control is not to the liking of research staff and several of the most innovative
members have left. The morale of the remaining staff is very low and further
resignations are expected.
Required
(1) Evaluate the reasons why the problems in the R&D unit of the C
Pharmaceutical Company might have developed.
(2) Recommend actions that could be taken to encourage creativity and
innovation.
(LO 5.3.2, 5.8.1, 5.8.2) (Total = 10 marks)

28 Delegation
YT is the Finance Manager of SBM Magazine Publishing Company. He has recently
had his appraisal and was expecting that he would get a good review, since he felt
that he had met all of his targets for the year, although at a personal cost of
working exceptionally long hours. YT was therefore surprised when his line
manager, RP, suggested to him that he was not using his staff effectively and
should be delegating more work to his team. Whilst RP commented that YT had
achieved the department's objectives, he suggested that delegating more would be
mutually beneficial to YT and his team as well as being in the long term interests
of the company.

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Required
Analyse the benefits of delegation from the point of view of YT, the Finance
Manager, and also his team.
(LO 5.3.2) (10 marks)

29 KCC
CT established her business, KCC, specialising in making handmade cakes, six
years ago. Initially CT worked from her home, developing new recipes and cake
designs. The business thrived on the creative talents of CT and her staff. In fact, the
business became more successful than CT could have hoped for with a number of
upmarket supermarkets now stocking her products.
Six years on, CT is reflecting on her success. She does feel that things have changed
significantly since the early days when her business was run from her home
kitchen. To satisfy increasing demand, three years ago she bought a factory for the
production of her cakes, and in the last year she has opened five shops to sell the
company's products.
KCC currently employs over 450 staff and the company has significantly changed
compared to when it was first established. It now has a formal functional structure
and the culture has more of the feel of a large bureaucratic organisation. CT feels
that she has lost the passion and enthusiasm she once had for her business and
feels that far too much of her time is spent on management issues rather than
creating designs for cakes. She has a senior management team made up of the
managers looking after different functional areas of the business. They make
decisions about the running of the business, but seem to be focused on achieving
efficiencies, control and bottom line performance, and have little interest in the
creative side of the business. CT used to be on first name terms with her staff, but
this is no longer the case. She was particularly saddened when she overheard an
employee comment that he just felt he was a robot on a production line rather
than a craft worker and that his ideas for new cake designs do not get heard.
Required
Explain the difference between the characteristics of KCC's culture when it was
first set up and the culture the company is likely to have now.
(LO 5.7.1) (10 marks)

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30 TS Consultants
TS Consultants has been asked to investigate the issues underlying the
underperformance and low staff morale of the Finance Department in YR Hospital.
The consultants have access to various sources of information such as the recent
staff satisfaction survey which shows that staff morale in the department is low. In
addition, statistics from the HR Department reveal that both absenteeism and staff
turnover are exceptionally high in the Finance Department. There have also been
many complaints from other areas of the hospital about both the management and
staff working in the department. However, staff enjoy competitive salaries and
other excellent working conditions such as free car parking, a subsidised canteen
and access to sports facilities.
The consultants have run some focus groups with members of staff working in the
department to try to gather more information to help them better understand the
causes of underperformance and low staff morale. The findings suggest that there
appears to be very much a 'them and us' culture between management and staff,
with the managers in the department exerting power based on their position and
status. Staff say that they are only allowed to undertake the specific activities
included in their narrow job descriptions and feel unable to fully contribute as a
result of the chain of command in the Finance Department. Staff also say that they
are not involved in decisions regarding the department's activities, and many say
they have not had any training. They mentioned that there are very few career
progression opportunities because of this. They feel their contributions are not
recognised by management and that they never receive feedback on their
performance. Staff characterise the leadership and management of the
department as task-focused, with tight controls and close supervision.
Having undertaken the review, the consultants are preparing the
recommendations on how to improve the poor performance and low staff morale.
Required
Discuss the recommendations TS Consultants could make to help improve
performance and staff morale in the Finance Department of YR Hospital, with
reference to Hertzberg's motivation theory and management styles.
(LO 5.1.1, 5.3.2) (10 marks)

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31 TR
TR has recently been promoted to his first management position. In the past, he
very much enjoyed working as part of a team, but is having some difficulty in
adapting to his new role as leader of a team. In his recent appraisal he has
acknowledged that his style of management is not effective in all instances. In
particular, he feels that he has not been very flexible in dealing with some of the
issues that he has faced. He has identified that he would benefit from leadership
training to help him better understand the alternative styles of management that
he could adopt to help him develop to become more effective in his role.
Required
Advise TR, with reference to theory, on the different management/leadership
styles he could adopt to help him to become more effective in his role.
(LO 5.8.1, 5.8.2) (10 marks)

32 T Aerospace
The T Aerospace Company is in the early stages of planning the development of its
latest commercial jet, the 007. The aircraft industry is a fiercely competitive one,
dominated by a few large global players who operate at the forefront of
technology. In this industry, competitors quickly copy any advance in technology
or new management technique that might provide them with a competitive edge.
Some of the T Aerospace Company's competitors have adopted team working as a
means of speeding up their development and production processes.
The T Aerospace Company is thus considering the adoption of team working in
its operations, but some of the traditionalists in the company are doubtful.
They are concerned that the benefits of work specialisation will be lost. Some
of the managers have had negative experiences with team working and so have
strong reservations about the proposed changes.
The company is about to embark on a restructuring programme which will mean
significant changes to the roles and responsibilities of staff in the Finance
Department. It is anticipated that there will be some resistance to the proposed
changes, so the Board has asked KK, a senior manager in the department, to lead
the changes. The board has chosen KK because she is generally well liked and
respected by her colleagues. She is also held in high regard for her expert
knowledge and her interest in, and support she gives to, all those who work for
her.

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Required
Explain the different sources of power KK possesses, that could help her to
manage the changes in the Finance Department.
(LO 5.7.2) (10 marks)

33 PCC Co
The Board of PCC Company, which operates in the investment and risk
management industry, has determined that in order to 'take the company to the
next stage of its growth' there will need to be significant changes in its internal
operations and in the way staff work. The Managing Director feels that whilst the
company has built a strong organisational culture, this is now becoming a barrier
to realising the company's future aspirations, particularly since future
developments may involve a merger with another company.
Required
Explain how the organisational culture of PCC Company might influence, both
positively and negatively, its performance.
(LO 5.7.1) (10 marks)

34 S Company
S Company has for many years been a long standing household name, designing
and manufacturing electrical appliances for use in the kitchen. It has developed a
strong culture over the years which can be best typified as a role culture.
However, this culture is now acting as a barrier to the company's ability to adapt
to become more flexible so that it is able to respond quickly to changes in the
environment and initiatives taken by its competitors in product design.
In particular, the company is falling behind its new competitors when it comes to
innovations in new product development and design. Effective new product
development requires staff to work together across functional boundaries but this
is becoming hard to achieve in S Company where people now fiercely protect their
functional specialism and will only work on the tasks specified in their job
descriptions.

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Required
(1) Explain the key characteristics of a role culture, including why this type of
culture is no longer appropriate for S Company. (6 marks)
(2) Recommend, with reasons, the type of culture to which S Company now
needs to change. (4 marks)
(LO 5.7.1) (Total = 10 marks)

35 ABC
ABC is a medium-sized accounting firm with 150 offices in nine countries
employing over 300,000 full-time staff. Of these 25% are employed in support
roles, including IT, building management and administration. 40% are qualified
accountants who want career progression either within ABC or with other
organisations, if they cannot progress within ABC. 20% are part-qualified
accountants still studying for their professional exams. The remaining 15% are
management and senior management responsible for running regional offices,
handling key client accounts, and developing the business.
The HR Manager at ABC has been asked to produce an HR plan for ABC.
Required
Explain the reasons for having formal HR planning at ABC.
(LO 5.2.1) (10 marks)

36 Recruitment and selection


KM is a new manager and has been asked to undertake her first recruitment
process for a particular vacancy. She is not sure about how to go about this and
has asked for help.
Required
Explain the recruitment and selection process.
(LO 5.3.1) (10 marks)

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37 NGV
NGV is a government department which researches biotechnology which has been
defined as:
'Any technological application that uses biological systems, living organisms, or
derivatives thereof, to make or modify products or processes for specific use'.
[Source: United Nations.]
NGV was formed in 1980 and since then it has been operated as a cost centre. Each
year the Director of NGV agrees a budget with the government minister to whom
he is responsible. If there is a deficit or a surplus at the end of the year this is not
carried forward to the next year. NGV normally has a deficit at the end of the year.
NGV receives no income other than its budget which, for the current year (20X1),
is Rs. 4,000Mn. Within NGV there are 180 cost centres which spend the annual
budget. NGV does not have a management accounting function but the Director
knows approximately, on a monthly basis, the total spending which has taken
place within NGV. There is no formal system in place for forecasting spending. The
Director thinks that NGV will probably spend between Rs. 4,000Mn and Rs.
5,000Mn in 20X1. NGV has no record of its capital equipment as this is purchased,
on its behalf, by a central government ministry and, therefore, appears on that
central government ministry's balance sheet.
Often the work done by NGV results in an innovation which can be developed
commercially. When this happens, other government departments are responsible
for patenting the innovation and its subsequent commercial exploitation. NGV
does not pay any of the costs associated with patenting and commercial
exploitation but neither does it receive any revenues generated from the patents
or their commercial usage. Some of the past innovations developed by NGV have
been extremely successful commercially and have generated significant revenues
for other government departments and commercial organisations.
NGV currently employs 320 staff: 25% of these are regarded as being amongst the
world leaders in their research expertise. In the past, when NGV staff have
produced an innovation with commercial potential they have frequently left NGV a
short time later and moved to a much better paid position in the private sector.
Sometimes staff leave in the middle of a research project which cannot then be
completed because of the loss of their expertise. The Director is worried about
what he calls a 'brain-drain' and he is concerned that there is no system for
capturing tacit knowledge ie the 'know-how' of the individual member of staff.
However, many of NGV's staff are long-serving employees who have not yet
produced any significant research 'breakthroughs'.

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The Director of NGV has been told by the government minister to whom he
reports that NGV is going to have to 'Join the real world, produce an adequate
return on investment (ROI) and produce a strategy showing how this will be
achieved'. From the next financial year NGV will not be allowed to run at a deficit
but will be allowed to carry forward and use any surplus.
Required
(1) Analyse the extent to which the Director of NGV could use financial ratio
analysis to exercise financial control and assist NGV in producing an
adequate return on investment (ROI). (12 marks)
(2) Outline how NGV should implement a knowledge management strategy.
(13 marks)
(LO 5.5.1, 5.6.1) (Total = 25 marks)

38 FPC Co
PR has recently joined FPC Company as the new Finance Director. He is required
to work towards getting the finance staff to play a fuller role in the company,
becoming more integrated into the strategic and business activities of the
organisation. However, PR is aware that this will not be an easy task since his
impression is that the Finance Department has a very poor reputation in the
company, and current relationships between the finance staff and other
departments are not good.
Having discussed the poor perception with other department heads, it is clear that
the finance staff are generally viewed as being unhelpful. Many of the complaints
surround poor communications. A consistent comment made is that messages
received from the Finance Department are too complicated and that too much
financial jargon is used. Another common observation is that at inter-department
meetings, the finance team use 'financial speak' which other members of staff find
hard to understand. The finance staff have an obsession with financial indicators,
and do not appreciate that there are other factors which inform decisions. It is also
felt that too many emails are sent from the Finance Department, and it is often
difficult to find the relevant information on some of the financial spreadsheets
circulated which are supposed to help in decision making.
PR has noted that many of the staff in the Finance Department are de-motivated.
None of them appear to have clear targets and objectives, and they have told him
that they have had no feedback on their performance and staff development
simply has not existed. PR has established that, whilst there is a company-wide
staff performance appraisal system in place, none of the staff in his department
have had an appraisal in recent years.

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PR has identified a number of immediate actions to improve the performance of


the Finance Department. He has decided that all staff in the Finance Department
need training to improve their communication skills. He also intends to make sure
the company's appraisal system is implemented and that all staff in his
department will have an appraisal in the next three months.
Required
(1) Outline what should be covered in the series of training sessions to help
members of staff in the Finance Department improve their communication
skills. (15 marks)
(2) Analyse how implementing FPC Company's staff appraisal system in the
Finance Department could help improve the performance of staff.
(10 marks)
(LO 5.4.1, 5.5.1) (Total = 25 marks)

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Part F questions: Value Creation Through Technology and Innovation


Questions 39 to 43 cover technology, innovation and value creation the subject
of Chapter 8 of the Study Text.

39 MST
MST is a research company operating in the computer hardware industry. It has
been established for three years. The company employs 30 scientists and
engineers working in three research teams. One of those teams has invented an
innovative processor which is significantly faster than any processor that is
currently available commercially. It is likely that the new processor will be usable
in computers used for industrial and, possibly, gaming purposes. The other teams
are working in similar areas, developing processors.
The company is privately funded by an entrepreneur (Mr G).
Although all of the researchers have done new and innovative work, which has led
to a number of published academic papers, no patents have been filed since the
company started. Therefore, none of MST's innovative products has ever become
commercially available.
Mr G has, to date, allowed his research staff to conduct research which is focused
on creativity rather than commercial viability. He does not want to lose any of the
current research staff but now wants to encourage them to be more commercially
aware.
Mr G has decided that the company must now capitalise upon the innovative
computer processor that one of the MST teams has invented. He intends that some
of the focus should shift to the development of commercially available products
rather than purely research activities.
Mr G recognises that this will be a significant change in strategy and culture for
the company and that the change will require significant planning and
management. Mr G intends to hire marketing staff and five additional engineers to
bring the processor, and any other potential products, to market as soon as
possible.
Currently there is no performance measurement system in place within the
company. Mr G believes that the Balanced Scorecard might be the best
performance measurement system for MST.

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Required
Explain, with reasons, two measures that MST should use in the internal business
and innovation and learning components of the Balanced Scorecard model.
(LO 6.4.1, 6.5.1) (10 marks)

40 AAA
AAA is a small manufacturer of replacement machine components for machinery
used in the mining and oil exploration industries. The sales manager of AAA has
noticed that customers are increasingly mentioning that they would like to be able
to order online. He knows that there has been a significant growth in business-to-
business (B2B) e-commerce in recent years. The sales manager has recognised
that in order to grow and to make a move into e-commerce possible, AAA's
accounting system will have to be updated to a computerised one.
Having spoken to a number of potential suppliers, the sales manager has now
received a proposal from SSS, a local company, to supply tailored 'off-the-shelf'
systems for both accounting and e-commerce. SSS has provided a detailed
breakdown of its proposal.
The sales manager believes that, following implementation of the new systems
(likely to be 12 months from contract agreement) e-commerce should lead to an
increase in the company's turnover of 10% in its first year of operation.
Thereafter, the turnover resulting from e-commerce should grow at a rate of 10%
each year for the foreseeable future.
The sales manager also thinks that any increase in indirect costs as a result of this
higher volume of business will be fully offset by a reduction in administration
workload as a result of the new computerised accounting system.
Required
Discuss how a new Information System (IS) strategy might impact upon
corporate, business and functional strategies.
(LO 6.1.1, 6.2.1) (10 marks)

41 Gardening Services
GS is the proprietor of a small business which provides gardening services. It has
been established for three years. GS does not currently employ anyone in her
business in order to keep her business simple and to minimise the amount of
administration.

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GS has established a list of ten key customers. She frequently gets requests from
potential new customers because of her excellent reputation for creativity and
reliability. However, she will only take on a new client if an old client leaves; and
this rarely happens.
GS has invested very little in information technology. She has a mobile phone
which has all her customers' numbers entered in the memory. She also maintains
a large diary each year which records the work she has done and which is the
basis for her invoicing. GS writes her invoices by hand and thinks that all her
customers pay her regularly, although she never checks if there are any amounts
outstanding. She does not currently own a computer.
GS is aware that a contract for the maintenance of a large luxury hotel's grounds
will be up for tender in the near future. The hotel contract will run for the next
two years, with the possibility of a rolling annual extension, dependent upon GS
meeting the high levels of quality and service expected by the hotel. The hotel has
a reputation for excellence and will be a very demanding client. However, the
hotel pays premium prices to its suppliers which it monitors very closely for
adherence to contract specifications.
If she secures the contract, and continues to service the ten existing customers, GS
would need to employ at least three gardeners and an administrative assistant to
deal with the hotel's requirements.
Required
Explain to GS the purposes and benefits of using in her business:
(i) An information systems strategy
(ii) An information management strategy
(LO 6.1.1, 6.2.1, 6.3.1, 6.3.2) (10 marks)

42 KPG Systems
KPG Systems was set up ten years ago by its owner, a computer specialist, Michael
Banda. Michael is an entrepreneur with a high degree of technical ability and no
fear of taking risks in emerging high-tech markets. In the last ten years, the
business has grown from Michael's original ideas to one employing 100 people.
KPG Systems provides network management systems to large international
companies. The approach of the business, which has appealed to potential
customers, is to recognise that no two information systems are the same and to
customise its products and service to meet their individual needs. In addition to
providing these systems, technical support has become another key business

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element, although there have been some problems with providing a national
network of service support.
KPG Systems is a very small player in this market and its success has been due to
Michael Banda's drive, initiative and risk taking. One particular problem that has
been noted is the lack of creative marketing strategies and plans compared to the
heavy investment of its largely much larger competitors in market, product and
competitor research. This has resulted in problems with suppliers, as KPG has
sometimes found it difficult to predict sales accurately and therefore has had
disruption to its manufacturing due to lack of components.
A further problem facing all players in this market has been the start of a major
global downturn in the economy, which has meant fewer orders being placed by
large companies and pressure being put on the business by its providers of
finance.
The business is still run on a day-to-day basis by Michael but there are now
various functional departments in operation, including manufacturing; sales and
marketing; research and development; and administration. Michael is now at the
point of not really knowing where the business is going in the future.
Required
Prepare a corporate appraisal of KPG Systems and discuss one way in which the
results of the SWOT analysis can be used by the company.
(LO 6.1.1, 7.3.1) (10 marks)

43 LM Recruitment
LM is a recruitment agency which has experienced very rapid organic growth
since it was established in 20X1. Currently, it has an annual revenue of US$15
million and employs 90 staff, the majority of whom are recruitment consultants.
LM is organised into three divisions: Executive Recruiting, Medical Consulting and
Financial Services. Each of the divisions has a managing partner who is a member
of the Board of LM. The three divisions operate in very different niche markets
and each managing partner has a great deal of autonomy in the way he manages
his own division. This autonomy is reflected in the information technology and
systems (hereafter IT) used by each of the three divisions. As LM has grown
rapidly and organically, so has its information requirements.
LM is managed by an Executive Board which consists of a Chairperson, a Finance
Director and the three divisional managing partners. All the partners have an
equity stake in the business. In 20X4, LM appointed a new Finance Director with
considerable experience of IT. The Finance Director decided to review LM's

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increasing reliance on IT. LM's spending on IT in 20X4 was US$1 million, the same
as its forecast profit for 20X5.
Following the review of LM's use of IT, the Finance Director identified the
following aspects of LM's IT provision:
• LM does not have a central IT department: IT is the responsibility of each
managing partner within his own division and each managing partner has
different levels of expertise and interest in IT.
• No member of LM's Board has a designated responsibility for IT.
• There is no recognition within LM of the potential strategic significance of IT
for its business. LM does not have an IT strategy.
• Within LM and its divisions, there are very different standards for IT. This
means that hardware, such as PCs and laptops are not standard and there
are different replacement policies. LM does not use a common suite of
software so there are often difficulties in transferring information within LM.
• LM has a corporate website which was designed by an external consultant in
20X2. The front page of the corporate website displays LM's identity.
However, if users navigate to the divisions' pages, these have a variety of
styles and degrees of maintenance. For example, the Executive Recruiting
pages are always up to date; however, the Financial Services pages are
currently 'Under Construction'. No one within LM has the responsibility for
maintaining the corporate website.
Required
(1) Explain to the Board why LM should have a common overall strategy for its
Information Technology and Information Systems. (10 marks)
(2) Advise the Board what the strategy should include. (15 marks)
(LO 6.1.1, 6.3.1, 6.3.2) (Total = 25 marks)

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Part G questions: Strategy for Value Creation


Questions 44 to 52 cover strategy for value creation, the subject of Chapters 9
and 10 of the Study Text.

44 T Venture
T is seeking investment funds for his new venture to open a chain of fast-food
restaurants. Despite the competition in this sector, having undertaken market
research amongst his target market T is convinced that he can succeed with his
fast-food concept.
He is currently in the process of putting together a business plan which will
outline his strategy to enter the market place. Having recently attended a seminar
on what to include in a business plan, T remembers that he will need to determine
what the critical success factors (CSFs) for his business are, but he is confused
about how these differ from core competences.
Required
(1) Analyse why T needs to determine the CSFs as part of the development of
his strategy and how they differ from core competences. (6 marks)
(2) Outline what the CSFs might be for T's chain of fast food restaurants.
(4 marks)
(LO 7.3.2) (Total = 10 marks)

45 SBU
It is important that the strategies of a strategic business unit (SBU) link to both the
overall corporate strategy of a company and to the company's functional
strategies.
Required
Explain why this is the case.
(LO 7.2.1) (10 marks)

46 J plc
J plc manufactures a range of cars. The company is structured on a divisional basis
with each division having responsibility for a segment of the market. One of the
divisions manufactures the most popular car in J plc's own country and, based on

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this success, J plc is now looking to expand into new markets. The Finance
Director of J plc has made a statement that 'the company needs to consider its
strategic growth possibilities and the emerging economies of Brazil, Russia, India
and China (BRIC) might be markets for future consideration and for establishing a
manufacturing presence. Competing successfully and delivering effectively in
these markets will be important to delivering the promise to shareholders of 5%
profit growth over the next two years.'
Required
Explain with reference to the above statement the different levels of strategy that
will exist within J plc, with specific reference to the growth possibilities within the
BRIC economies.
(LO 7.1.1) (10 marks)

47 N Airline
N Airline operates in the short haul flight industry. Unlike many of its competitors
who are constantly seeking to reduce costs, often at the expense of customer
service, the foundation of N's business strategy is based on providing a superior
quality of service. Its mission is to be market leader, providing unrivalled
customer service, in flight comfort and reliability in the short haul airline industry.
N Airlines views its customers as central to strategic developments, and values its
staff in building success.
Required
(1) Differentiate between the concepts of mission and objectives. (4 marks)
(2) Using examples, demonstrate how the mission for N Airline could be
translated into strategic objectives. (6 marks)
(LO 7.3.1) (Total = 10 marks)

48 DLC
DLC provides private telephone network services exclusively to business
customers. Since its foundation three years ago (in 20X2), DLC has been very
successful and has been able to charge a premium price for its services. In
financial years 20X3 and 20X4 DLC achieved a Return on Capital Employed
(ROCE) of 50% and 48% respectively. DLC's success has been built on excellence
in two key success factors: Technological Innovation and Customer Service. DLC
currently employs 80 people and this year will have annual revenue of US$24
million.

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Technological innovation
DLC has been able to continually innovate due to the skills of its founder and chief
executive, X, who previously worked in a research institute. X owns 100% of DLC's
share capital. DLC's innovation requires substantial, continued capital investment
and DLC spent US$6 million on this in 20X4.
Customer service
DLC's business has been the design, installation and maintenance of private
telephone networks for large organisations. A recent contract completed by DLC
was for a large media organisation to provide a network to support 7,000 current
users, with provision for this number to be extended to 10,000 within three years.
This type of business is very rewarding for DLC as it is not price sensitive.
However, meeting the service requirements of the client is vitally important.
DLC's control system
DLC's control system involves budgeting, preparing monthly management
accounts and computing ROCE.
DLC's strategic aims
DLC has no formal written strategy, but X has said that she wants the company to
continue expanding within the same market/business segment, and to provide a
rewarding lifestyle for herself and secure well-paid jobs for DLC's employees.
Required
(1) Discuss one use and one limitation of DLC's control system. (2 marks)
(2) Advise X how non-financial performance measures could assist in the
evaluation of DLC's two key success factors. (8 marks)
(LO 6.1.1, 7.4.1) (Total = 10 marks)

49 JSW
In a widely published model, Johnson, Scholes and Whittington characterise the
strategic management process as consisting of three inter-related elements:
 Strategic analysis
 Strategic choice
 Strategic implementation

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Required
Explain why strategic implementation is included in the Johnson, Scholes and
Whittington model.
Note: You are not required to draw the model.
(LO 7.1.1, 7.4.1) (10 marks)

50 Soft drinks
Firms A and B are the two market-leaders in the soft drinks market in a country,
and between them they hold virtually 100% of the market share. Firm A is
considering launching a major advertising campaign, because its marketing
director believes this will not only increase its own sales and profit, but will also
reduce those of its rival (B).
However, the marketing director in A has not considered B's response. Firm B has
become aware of A's campaign, and is now considering launching a campaign of its
own to restore its market share.
At the moment, both A and B make profits of US$250m per year. Firm A is thinking
of spending US$25m on its campaign, because it wants a major campaign to
generate a significant increase in revenue. The anticipated increase of revenue
resulting from the campaign is US$75m.
Because A and B essentially share the market, A's revenue increase is expected to
come from customers who switch to it from B (ie overall market sales will remain
largely the same despite the advertising campaign). Therefore, alongside A's
revenue increase of US$75m, B will suffer a revenue reduction of US$75m.
Consequently, at the end of A's initial campaign, and in the short term, B will have
suffered a reduction in profit of US$75m, while A will have enjoyed an increase in
profit of US$50m (US$75m revenue less US$25m marketing costs).
However, if B then runs its rival campaign, also costing US$25m, it will also
generate US$75m additional revenue.
Required
Explain the impact these campaigns have on A and B's profits, and the overall
profits earned by the soft drink industry using gaming theory to frame your
answer.
(LO 7.5.1) (10 marks)

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51 TDM
RCH, an international hotel group with a very strong brand image has recently
taken over TDM, an educational institution based in Western Europe. RCH has a
very good reputation for improving the profitability of its business units and
prides itself on its customer focus. The CEO of RCH was recently quoted as saying
'Our success is built on happy customers: we give them what they want'. RCH
continually conducts market and customer research and uses the results of these
researches to inform both its operational and longer term strategies.
TDM is well-established and has always traded profitably. It offers a variety of
courses including degrees both at Bachelor and Masters levels and courses aimed
at professional qualifications. TDM has always concentrated on the quality of its
courses and learning materials. TDM has never seen the need for market and
customer research as it has always achieved its sales targets. Its students
consistently achieve passes on a par with the national average. TDM has always
had the largest market share in its sector even though new entrants continually
enter the market. TDM has a good reputation and has not felt the need to invest
significantly in marketing activities. In recent years, TDM has experienced an
increasing rate of employee turnover.
RCH has developed a sophisticated set of Critical Success Factors which is
integrated into its real-time information system. RCH's rationale for the take-over
of TDM was the belief that it could export its customer focus and control system,
based on Critical Success Factors, to TDM. RCH believed that this would transform
TDM's performance and increase the wealth of RCH's shareholders.
Required
(1) Advise TDM by selecting four Critical Success Factors which would be
appropriate it to use. (5 marks)
(2) Recommend, with reasons, two Key Performance Indicators to support
each of the four Critical Success Factors you have identified. (20 marks)
(LO 7.3.2, 7.7.1, 7.7.2) (Total = 25 marks)

52 GHK Restaurants
GHK is a restaurant chain consisting of eight restaurants in an attractive part of a
European country which is popular with tourists. GHK has been owned by the
same family for the previous 15 years and has always traded at a profit. However,
a number of factors have meant that GHK is now in danger of making a trading
loss. There has been a substantial drop in the number of tourists visiting the
region whilst, at the same time, the prices of many of the foodstuffs and drinks

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used in its restaurants has increased. Added to this, the local economy has shrunk
with several large employers reducing the size of their workforce.
The owners of GHK commissioned a restaurant consultant to give them an
independent view of their business. The consultant observed that the eight
restaurants were all very different in appearance. They also served menus that
were very different, for example, one restaurant which was located on a barge in a
coastal town specialised in fish dishes, whereas another restaurant 20 miles away
had a good reputation as a steak house. The prices varied greatly amongst the
restaurants; one restaurant in a historic country house offered 'fine dining' and
was extremely expensive; yet another located near a busy railway station served
mainly fast food and claimed that its prices were 'the cheapest in town'. Three of
GHK's restaurants offered a 'middle of the road' dining experience with
conventional menus and average prices. Some of the restaurants had licences
which enabled them to serve alcohol with their meals but three restaurants did
not have such licences. One restaurant had a good trade in children's birthday
parties whereas the restaurant in the historic country house did not admit diners
under the age of 18.
The consultant recommended that GHK should examine these differences but did
not suggest how. The owners responded that the chain had grown organically
over a number of years and that the location, style and pricing decisions made in
each restaurant had all been made at different times and depended on trends
current at that time.
Required
(1) Analyse the application of Porter's Three Generic Strategies Model to GHK,
including how this could assist them in maintaining or improving the
profitability of their restaurants. (10 marks)
Note: You are not required to suggest individual generic strategies for each
of GHK's restaurants.
(2) Advise how GHK could employ a range of organisational information
systems to support whichever generic strategy it chooses to adopt.
(15 marks)
(LO 6.1.1, 7.4.1) (Total = 25 marks)

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Part A: Introduction to Business Value Creation

1 PW
PW has been asked to give a presentation on social responsibility to an annual
conference. The audience will include cynics who view socially responsible
business driven strategies as unrealistic, conflicting with profits and detracting
from creating shareholder wealth. She should include the following points in her
presentation:
The concept of social responsibility
Social responsibility is the duty the organisation has towards the wider
community or society. A business that is exercising social responsibility
acknowledges that its responsibility is wider than just meeting the needs of its
shareholders. There are many groups in society with an interest in the
organisation's activities. Businesses should provide goods and services which
meet the needs of users and society as a whole. However, they should also
acknowledge the costs that their activities impose upon society which they
themselves do not bear (externalities). Businesses may then exercise social
responsibility by minimising these external costs or through compensating society
for their actions. Examples may include, amongst others, the activities of PW, such
as recycling, community-based projects and reducing carbon footprints.
Key benefits that companies can gain from developing strategies which are
socially responsible
PW should acknowledge that social responsibility from an organisation may have
an adverse effect on profits and detract from creating shareholder value. Social
responsibility may lead to a reduction in profits, at least in the short run through:
(a) Additional costs such as those of environmental monitoring
(b) Reduced revenues as a result of refusing to supply certain customers
(c) Diversion of employee effort away from profitable activities
(d) Diversion of funds into social projects
However, these costs may be outweighed by the benefits of developing strategies
which are socially responsible:
(a) Socially conscious customers and investors may be attracted to buy the
company's products and provide its capital and ethical investment funds
may buy its shares.
(b) Socially responsible actions may have a positive impact on the corporate
image of the company and improve its public relations.

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(c) There may be an improvement in the motivation and morale of


management and staff of a firm that behaves in a socially responsible way.
It will also be easier to attract and retain staff. In addition, staff may be
willing to accept lower remuneration.
(d) Businesses that do not conform to society's expectations and are not socially
responsible may be unsustainable in the long run.
(e) Being socially responsible improves relations with governments, and may
moderate moves to introduce strict legislation.

2 OD Company
Power and interest of stakeholders
In considering whether to accept the takeover bid, J must identify the key
stakeholder groups and weigh up their respective levels of power and interest.
Mendelow classifies stakeholders on a matrix whose axes are power held and the
level of interest in the organisation's activities. This is not an exact science, but a
useful tool.
Level of interest

Low High

Low A B
Power
C D
High

This analysis could be usefully employed by OD Company when considering how


to deal with its stakeholders.
Key players are found in segment D: the takeover must be acceptable to them,
at least. J, the owner, falls into this category. He has significant power in making
the decision, and significant interest. His interest will be in the money he stands to
make from the takeover bid, but this may well not be the only consideration.
Assuming he is a good employer, he will be aware of the responsibility he has
towards other stakeholders, such as his employees and the wider community.
The Board of ZZ Company, which is making the takeover bid, probably belong
in Segment D. They naturally have a high interest in the outcome, which would
give them access to the brand and design capability of OD Company, and it is likely
that they have a lot of power in terms of the money they can offer.

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Stakeholders in segment B do not have great ability to influence strategy, but


their views can be important in influencing more powerful stakeholders,
perhaps by lobbying. Employees in the manufacturing function fall into this
category: they clearly have a high interest in whether the bid is accepted since
they stand to lose their jobs. As individuals they have little power to influence the
decision, but collectively they may well do, since they could lobby the local council
of LM town and draw negative publicity.
In conjunction with the trade union, manufacturing employees begin to move
into Segment D (high interest, high power). Trade unions have a strong interest
in the outcome of the bid, to which they are opposed, and could organise
employees into taking industrial action. This would have a damaging effect on
production and goodwill, and could even put the bidder off.
Employees in the design or retail function have high levels of interest, although
not quite as high as those in manufacturing, because their jobs are not necessarily
at stake. Nevertheless, they will have a new owner, ZZ, which is based in another
country, and could well bring in different working practices and a different style of
management. As they have relatively little power to influence the decision, they
belong in Segment B. In conjunction with the trade union, who would likely
protest any detrimental changes to working arrangements, they would acquire
more power.
Another Segment B category (high interest, low power) consists of the current
domestic suppliers of OD Company. If the bid goes ahead, they will lose
business to overseas suppliers. How strong an interest they have depends on
whether OD is a major customer. A well diversified supplier might belong in
Segment A of the matrix (low interest, low power).
Finally, OD Company is a major employer in LM town, and the local community is
therefore a stakeholder in Segment B (high interest, low power). The local
community includes families of those losing their jobs. Since members of the
community can influence the reputation of OD Company by causing negative
publicity, lobbying the media and politicians, their views should not be
discounted.
The final decision is with J, but he should not make it without due consideration to
all the stakeholder groups.

3 Y Corporation
General
In the context of global competition, certain environmental influences are
especially important. Porter's diamond suggests that there are inherent reasons

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why nations are competitive, and why specific industries within these nations
achieve competitive success and profitability.
The national home base plays a big role in securing competitive advantage
abroad. The home market contains environmental factors that the company
operating overseas can build upon. In the case of the Y Corporation (Y), the home
base is the USA. This is one of the strongest and most self-sufficient economies in
the world, and its cultural influences are spread globally.
Y has itself contributed to this influence with its particular brand of family
entertainment. Whether or not this is an influence to be universally welcomed, the
dominance of US culture nevertheless paves the way for companies like Y to enter
overseas markets with relative ease and with huge resources to back them up.
Taking each of the elements of the diamond in turn:
Factor conditions
As referred to already above, the US has vast resources. These include labour and
skills, physical resources, a strong knowledge base and education system, and
sophisticated capital markets. Its infrastructure is highly developed. The
availability of resources (particularly labour) in the Far East must be confirmed.
Home demand
The demand for family entertainment at home in the US has developed into a huge
market that is transferring overseas. The levels of customer service that are
demanded in the US are very high, and the target market of children and their
parents has become ever more sophisticated. Y will benefit from success in such a
demanding environment, but it needs to be sure that customers in the home
environment are representative of customers in the Far East.
Y has not just followed market demand however, but has helped to create it. The
range of characters that it has developed, along with its theme parks, has helped to
boost those demand levels. It has a unique product, brand image and reputation.
This development will continue in the future.
Related and supporting industries
Ranging from catering and construction to film making and the application of
technology, Y has a sound base of supporting industries in the US that could
support it in any overseas ventures. However, the host government should also
help to support the company with a suitable infrastructure.
Firm strategy, structure and rivalry
The market for theme parks in the US is a large and competitive one, with many
parks for children and parents to choose from. Y, however, has a strong and
unique brand image, and has become a household name to the extent that it
dominates the family entertainment market. It has economies of scale in its

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operations that will help it to keep costs down. The presence of competition in the
Far Eastern location must however be considered. The host government may be
able to give information about the development of other attractions in the future.

4 Service Company Value chain


(1) Conducting a value chain analysis can deliver the following benefits for C:
Identify sources of value – The value chain illustrates the way business
activities link together to add value from the end-user's perspective. As
customers are increasingly complaining that prices are too high, C could use
the ideas of the value chain to identify whether there are some activities
which are not adding value from the customer's perspective and should
therefore either be discontinued or done more cheaply.
Alongside identifying sources of value, the value chain also illustrates how
costs are caused in a business. One of the key benefits of the value chain is
in forcing an organisation to look at the relationship between the value
being added and the costs being incurred in its business activities.
See the business as a whole – The value chain could also be useful for C in
that it will encourage it to look at the business as a whole, rather than
considering individual functions or process stages in isolation. To this end,
the idea of linkages in the value chain is very important.
Identify potential sources of competitive advantage – One of the main
purposes of the value chain is to help firms secure competitive advantage;
for example, either by combining activities in new and better ways, or by
managing linkages to increase efficiency and therefore reduce cost.
In this respect, the value chain can be used to complement Porter's generic
strategies. At the moment, it appears that C is following a differentiation
strategy because it solves clients' problems better than its competitors do.
However, it appears that clients' lower cost solutions are becoming
increasingly more attractive to clients.
Therefore, the value chain can help support C's management in deciding
their strategy going forward – in particular, whether they want to maintain
a differentiation strategy in the light of clients' comments about costs.
Identify process improvements – A firm can secure competitive advantage
by inventing new or better ways to do activities. By forcing a firm to look at
all its activities, value chain analysis may highlight processes which could be
re-designed or outsourced. For example, it is possible that C could
outsource the manufacturing part of its business and concentrate on
design activities.

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Benchmark against competitors – C's clients have remarked that their


competitors might not solve their problems as well as C, but they charge less.
C could use the value chain as a model for analysing their competitors'
activities, to see what activities they are doing differently, and where they
are making cost savings.
Implement performance measurement – At the moment, there is a
suspicion that the manufacturing and installation activities are not
contributing as much to profits as they could, due to their costs being too
high. However, there do not appear to be any performance measures to
confirm this.
C could use the value chain as the basis for analysing the value added by
each stage of the process, and for introducing key performance measures
based on the costs and value added at each stage of the process. Once such
measures are introduced, the directors will have much more reliable
information about the contribution each stage makes to the business
profitability overall.
(2) It is not designed for use with service businesses – The most notable
criticism of the value chain model is that it cannot easily be applied to
service organisations. One of C's key capabilities is the expertise of its
engineers, and they use their expertise to design solutions in response to the
complex problems presented by their clients. Although solution design is a
critical business process for C it does not fit with neatly with the primary
activities described in the value chain. They are more suitable to processes in
manufacturing organisations which deal with tangible inputs and outputs.
Role of technology development – Technology development is a secondary
activity in Porter's value chain, however most of C's work is technology
development. Therefore, technology development is actually the main
primary activity for C.
The idea of the value system is difficult to apply to network
organisations – The focus of the value chain is on how value is created
within the internal structure of an organisation's value network, but it is
much harder to apply to the wider context of value networks. This is
important for C, because the solution design stage is a collaborative
process between C's engineers and the client's engineers; and therefore
does not fit with the idea of an entirely internal process.
This idea of a collaborative network would become even more important if C
outsourced its manufacturing stage.

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Detailed costing required – To make best use of the value chain idea
requires a degree of activity based costing to establish the costs of the
value activities. Given that C has to rely on estimates as to how much each
stage of its business model contributes to profit, it is unlikely that C currently
uses any activity based costing. Therefore it would be time-consuming and
expensive to introduce, particularly if new systems have to be introduced to
capture the costing data required.
Viewed as unnecessary and overly complicated – In addition, the
engineers at C may not see the value of analysing their business in the depth
that is required for a full value chain analysis. It is unlikely the engineers will
appreciate the benefit of investing time and energy in the value chain
analysis, because it will not help them with their design work, at which they
are already skilled experts. If they feel that management are introducing
seemingly unnecessary bureaucracy and administration the engineers'
motivation for producing good quality designs may suffer as a result.
The cost of the analysis may exceed the benefits – The time and effort
involved in setting up the value chain analysis (particularly if new cost
capture systems are required) will be considerable. However, there is no
guarantee that the value chain model will lead to increased profitability.
Although detailed analysis could identify the stages of C's business which
clients value most, and areas where C's costs could be reduced, this in itself
will not necessarily reduce the loss of market share which C has suffered at
the hand of its competitors.
(3) In the value chain, the finance and accounting function is a part of the firm
infrastructure. The role of the accountant is to provide information for
management, to assist with decision making. The quality of decision making
by management depends on the quality of the information they use.
Traditionally, accountants have provided management with information
from sources within the organisation. Now, particularly at a strategic level,
accountants also provide information from sources external to the
organisation.
Accountants fulfil several functions. The most important are:
• Providing information to management
• Management of information systems
• Supporting management decisions
• Providing information for the directors to report to shareholders and
other stakeholders
• Managing the organisation's finances and cash flows

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Part B: Role of Supply Chain in Value Creation

5 Chains
The supply chain
The supply chain refers to all the stages and activities involved in getting a
finished product or service delivered to the customer. In the case of a
manufactured product, the supply chain starts with the sources of raw materials,
and includes not only production activities, but also distribution (logistics) and
storage and support activities such as purchasing.
Managing the supply chain involves ensuring a smooth flow of the product to
the customer, through all the stages of the chain. It therefore involves
management of the relationship with suppliers, and ensuring that suppliers
deliver their goods to the required specifications on time.
The value chain
The value chain also refers to all the stages and activities involved in getting a
product or service to the customer, but the focus is on the value added at each
stage of the chain.
Managing the value chain is concerned with identifying ways in which more
value can be added at each stage of the chain, perhaps by doing things in a
different way. Activities that fail to add value should be identified and eliminated.
E-procurement and outsourcing
E-procurement and outsourcing are ways in which it might be possible to add
value in the supply chain.
E-procurement involves purchasing items from suppliers through the Internet
(although other methods of electronic purchasing, such as electronic data
interchange (EDI), might be included in the definition). A company that buys
regularly from a supplier might make an arrangement whereby the computer
systems of buyer and seller might exchange data and make supply transactions.
There will normally have to be pre-agreed terms and conditions of supply, product
specifications and fixed prices or a formula for pricing. A company needing to buy
goods from a supplier might be able to generate an automatic order within its own
computer system, and despatch the order to the supplier's system. The supplier's
system will respond by confirming availability and delivery arrangements. The
automatic electronic processing of purchase orders, given an established
buyer/supplier relationship, can result in significant cost savings as well as
greater purchasing efficiency. Human intervention and paperwork are removed
from this stage of the supply chain.

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Outsourcing involves the purchase of products or services externally, rather


than making the product or performing the service with the organisation's own
staff. The outsourcing of production work involves having products made by an
external supplier rather than making them in-house. Numerous services might
also be outsourced, including IT services, facilities management and the
accounting function. The term 'outsourcing' in fact usually refers to putting
services out to an external provider. The organisation, having outsourced
activities at which it is not particularly specialised, is then able to focus on its
core activities, where it can add value more effectively. The provider of the
outsourced service should have the relevant expertise which will enable it to
perform the service more efficiently than the organisation's own staff. If this is
the case, outsourcing can add value to the supply chain/value chain. The
management of the organisation is responsible for managing the relationship with
the service provider, but is no longer responsible for the detailed management of
the service itself.

6 Cronin Auto Retail (CAR)


Procurement relates to organisational purchasing and involves locating items of
the right price, that are available at the right time, of the right quality, in the right
quantity and from the right source. E-procurement looks at the potential
opportunities that can be gained from automating aspects of the procurement
process.
CAR is involved in two very different procurement processes: production-related
procurement (cars) and non-production procurement (office supplies etc).
Production-related procurement
The purchase of cars and parts is directly linked to the core activities of the
organisation. Cars could be purchased through e-auctions, where bids are made
on-line with no need for a physical presence. However, this could be risky as it is
not possible to physically inspect the car for quality prior to purchase. This risk
could be minimised if this technique is only used to buy cars that are less than two
years old with a full service history.
Non-production procurement
CAR currently orders parts needed for service and maintenance from motor
factors or manufacturers. CAR has long-term relationships with a number of
regular suppliers and employs a systematic sourcing method.
In the current process, all requisitions have to be passed through procurement
manager incurring cost, delay and customer frustration. A backlog of requisitions
has built up, which creates particular problems when a customer's car is in the

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garage awaiting a part. Not only is the customer annoyed by the delay, but the
garage space cannot be put to other, more profitable use.
This is made worse by the restricted working hours of the manager. This means
that urgent requisitions can only be processed when he is at work and the building
backlog is placing him under increased strain, leading to increases in costly
mistakes. This has also led to the increased frustration of the mechanics who,
despite working longer hours, can only make orders when the procurement
manager is also at work.
E-procurement could help reduce these problems by providing a procurement
system and giving mechanics the authorisation to order parts up to a pre-defined
limit through agreed internet channels. This should speed up repairs and services,
reduce cost and lead to an increase in customer goodwill.
CAR could also use e-procurement to facilitate the competitive bidding for the
supply of parts over the internet. They would do this by publishing their
requirements on their website and inviting suppliers to bid. This would mean that
parts could gain the lowest price for each part by using many different suppliers. If
this is combined with just-in-time supply, the costs of holding stock could be
significantly reduced.
Overall CAR can greatly benefit from e-procurement as it should reduce the
burden on the procurement manager, allowing him to focus on more strategic
aspects of the procurement process.

7 Jayne Cox value chain


Porter's value chain groups the various activities of an organisation into value
activities in order to illustrate how the organisation creates value.
If the organisation is successful, it will create a margin. This margin is the excess
that the customer is prepared to pay over the cost to the firm of obtaining
resource inputs and providing value activities. It represents the value created by
the value activities themselves and the linkages between them.
Primary activities are the activities involved in making the product, selling it, and
providing the customer with the product and after-sales service and assistance.
Support activities provide purchased inputs, human resources, technology and
infrastructural functions to support the primary activities. These activities are
involved at each stage of the value creation process and support the entire value
chain.

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With the exception of after sales service, about which there is limited information,
the primary activities of the value chain, and the associated weaknesses, at Jayne
Cox Direct (JCD) are considered below.
Inbound logistics relates to the receiving, handling and storing of inputs to the
production system. The inputs at JCD include wood, upholstery, textiles and other
raw materials and the inbound logistics relates to the storage and inventory of
these items prior to their use in production.
A key weakness in this area of the value chain relates to the issues with the e-mail
purchase order system. At least one large order was not received due to a failure
of this system.
The high levels of inventory indicated in the scenario may indicate a further
weakness and the rationale for this should be investigated.
Operations relates to the processes of converting the resource inputs (including
materials and human resources) into finished products. At JCD this is the
manufacturing processes used to make the furniture. JCD keep high levels of
inventory, and run a relaxed and relatively undisturbed production process, yet
they still fail to meet 45% of their estimated delivery dates due to products
running late. This could be caused by inefficiencies in the production process, or
simply be down to over-optimistic quoting of delivery dates. Investigations into
the cause of this failure should be carried out as it causes increased administrative
costs to be incurred as well as causing disappoint and disruption to the customer.
Outbound logistics includes the storing of the finished product, ie the completed
furniture and distributing it to customers. This will include the safe packaging of
the furniture for transit and delivering it to the customer on the specified date.
JCD has several weaknesses in this area. First, the failure of JCD to provide
sufficient notice to customers of a revised delivery date means that customers
have to defer this date yet further to a more suitable date. This causes their
completed item of furniture to remain in storage longer than necessary causing an
increase in inventory holding costs. A second cause of increased storage
requirement results from the return of delivered goods where no-one was
available to collect the delivery. This again causes an increase in the cost of
holding inventory, as well as increases in both administrative and transport costs
as the delivery date has to be once again re-arranged.
Marketing and sales involves informing customers about the product, convincing
them to buy it, and enabling them to do so.
The main weakness here is that the website does not give any indication of the
length of time a customer can expect to wait for their furniture to be delivered
until after their order has been placed. This results in a significant number of

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cancelled orders at this stage. This is likely to leave the customer feeling frustrated
with the company for wasting their time and are therefore unlikely to return to
JCD in the future. Procurement, a support activity, is also relevant for JCD. This
activity and the associated weaknesses are as follows.
Procurement includes all of the processes involved in acquiring the resource
inputs to the primary activities, eg purchase of materials, subcomponents and
equipment. The effectiveness of these processes will have a significant impact on
both the cost and the quality of the finished products. For JCD, the price paid for
wood, textiles and upholstery will have a direct effect on the cost charged for the
final product. The company currently sources 95% of its wood from three timber
suppliers and the company has used the same suppliers since its first year of
business. Long-term relationships such as this may mean that JCD is no longer
benefiting from the best prices due to the complacency and un-competitiveness
this may bring about in the suppliers. This should be further investigated to
determine if savings could be made with alternate suppliers.

8 Jayne Cox supply chain


Upstream supply chain
Upstream activities in the supply chain are those that relate to suppliers and the
obtaining and storing of raw material. Therefore, the problems that can be
addressed via technology in the upstream supply chain are those relating to
procurement and inbound logistics.
Problems Suggested solutions
Long-term supplier Use e-procurement websites to identify a broader
relationships may have range of suppliers.
created uncompetitive, The suppliers which may offer the best balance of
complacent suppliers quality and cost can then be more easily selected and
cost savings can be made.
Cumbersome ordering The occasional failure of payment system to correctly
process leading to the match purchase orders to supplier invoices has led to
occasional failure to payment delays and criticism from suppliers
receive deliveries JCD could implement a linked procurement and
payment system which connects via electronic data
interchange to their suppliers. This would allow orders
to be automatically entered into the supplier's system
and all invoicing an payments would occur
electronically.
This system may not be compatible with the above

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Problems Suggested solutions


suggestion as it may be necessary to retain a smaller
supplier base in order to implement such a system.
However it would reduce administrative costs,
improve the relationship with suppliers and solve the
non-delivery problem the company has experienced.
Delays as a result of An integrated system could be installed which allows
inventory shortage suppliers to view demand for particular products. This
might allow them to anticipate demand and therefore
supply materials to JCD quicker. This could help JCD to
meet a greater proportion of estimated customer
delivery dates and reduce delivery lead time. This is
most likely to work with trend-driven demand such as
that for particular textiles and the usefulness of such
linkages should be investigated.
Poor inventory JCD currently stock high levels of inventory. This could
management be addressed via integration between the stock system,
the ordering system, and the suppliers' systems. This
would allow suppliers to produce to order (rather than
to stock) and JCD could move towards a just-in-time
system so that stock is only ordered just before it is
needed. This would also enhance the suppliers'
understanding of demand allowing them to improve
their own inventory management. This could create
cost savings which may be reflected in the prices
charged to JCD and therefore lowering input costs. JCD
should also be able to implement systems that optimise
the quantities of products ordered as a result of the
improved understanding of demand and the costs of
ordering and storing inventory.

Downstream supply chain


As JCD sells directly to the customers, the downstream supply chain is reasonably
straight-forward. The main weaknesses that could be addressed by technology in
the downstream supply chain are therefore the ones relating to outbound logistics
and after-sales support.

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Problems Suggested solutions


Failed deliveries 30% of deliveries currently fail, causing an increase in
the cost of storing finished goods, increased
administrative costs, and the costs of repeat deliveries.
Route planning software could improve van utilisation,
while the use of automated emails/text messages and
updates on delivery slots would increase the chances of
customers being at home when the delivery is made.
Failure to update Following the initial delivery estimate provided at the
customers on order time of ordering, customers receive no more updates or
status communication from JCD until a week before the
delivery is due to take place. This date is often different
from that originally quoted as a result of issues with
JCD's procurement processes. This date is often not-
suitable for the customer (who has often planned to be
available on the date previously quoted). Yet another
date then has to be arranged and the completed
product must be stored until that date.
JCD could address this by implementing an 'order
tracking' facility on their website. This involvement
would enhance customer satisfaction and also leave
them more informed and more likely to be available on
the date of delivery as they can now better plan for this.
This would reduce storage costs as well as the costs
associated with multiple delivery attempts.
Poor/limited after-sales An FAQ section could be provided on JCD's website, eg
service 'how do I clean my new sofa?' and 'how do I order
replacement materials?' For questions relating to
replacements a link can be provided to the relevant
page where such orders can be made quickly and
directly on line.
To improve customer retention, targeted emails,
newsletters and 'existing customer only' special offers
could be sent out on a regular basis.

9 Perfect Shopper
(1) The primary activities of the value chain of Perfect Shopper comprises:
Inbound logistics. Handling the bulk orders delivered by suppliers and
storing them in bulk in purpose-built regional warehouses.
Operations. Splitting the bulk orders into smaller units; re-packaging,
sealing and storing these smaller units.

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Outbound logistics. Deliver the smaller units to neighbourhood stores


every two weeks using specialist local haulage contractors.
Marketing and sales. Provide specially commissioned signs for the shops
and personalised sales literature. Undertake the ordering process based on
standing order agreed by sales representative.
Service. Provide specialist in-store display units for certain goods. Manage
distribution of promotional material and leaflets for all shops.
(2) Perfect Shopper's upstream supply chain is relatively short. It makes bulk
purchases of branded goods from suppliers and these are then delivered to
Perfect Shopper's warehouses by logistics companies.
However, it is possible that by re-structuring its logistics arrangements
Perfect Shopper could also improve brand recognition, which is one of the
issues raised by the franchisees.
Inbound logistics
At the moment, products are delivered from suppliers to the regional
warehouses by haulage contractors appointed by the suppliers.
When Perfect Shopper was established, it decided not to have its own
distribution network. However, it needs to review this decision now, in
conjunction with a review of its outbound logistics arrangements.
Obviously there will be cost implications entering into a contract with a
logistics company, but these may be balanced by a reduction in the price
Perfect Shopper have to pay their suppliers now that they no longer have to
incur the distribution costs. Perfect Shopper should perform a cost-benefit
analysis to assess whether this option is financially viable.
However, a key benefit of Perfect Shopper having its own distribution
contract is that it will be able to have the lorries and vans it uses branded
with its own logo. This will significantly increase its brand visibility.
Outsourcing warehousing and packaging
If Perfect Shopper uses an integrated logistics contractor to manage the
supply and distribution of their goods, it is possible they could also get the
contractor to supply storage and warehousing solutions for them.
If this were the case, Perfect Shopper could outsource all its distribution,
warehousing and packaging activities to a single integrated logistics
company. It is likely that this will result the Perfect Shopper contract being a
sizeable one for the logistics company, so Perfect Shopper should be able to
negotiate a good price.

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Nonetheless, Perfect Shopper would need to undertake a detailed cost-


benefit analysis before deciding to proceed with this plan. Also it would need
to critically evaluate its core capabilities and competences, to make sure it
focuses on the areas most likely to generate competitive advantage for it.
However, if it did decide to proceed, Perfect Shopper could re-position itself
as being primarily a sales and marketing operation.
Again, this would allow it more time to focus on improving its brand
awareness, and benchmarking prices against the supermarkets which
should address issues raised by the franchisees.
Ordering process
Perfect Shopper should also review how it communicates orders with its
suppliers. The reliance on the supplier to arrange the delivery suggests that
the process is a relatively straightforward one, in which case there may be
opportunities for sharing information and allowing the suppliers access to
forecast demand. This could be done through an extranet system.
Many companies have allowed suppliers access to their information to
reduce costs and improve the efficiency of their supply chain, and it is likely
that Perfect Shopper could benefit from adopting this process too.
Changing product range
The three ideas listed so far assume that Perfect Shopper continues to supply
only branded goods.
However, it could re-structure its upstream supply chain more dramatically
to commission the suppliers to supply its own brand rather than buying
branded goods.
If this was the case, then the franchisees would be able to offer 'own brand'
products to compete more directly with the supermarkets who also focus on
own brand products. It is likely that the range of products Perfect Shopper
supplies its franchisees will increase if it commissions its own brand.
This strategy would also increase the visibility of the brand.
However, if Perfect Shopper is contemplating this strategy, much more
research is required into its viability before it is selected. For example:
• The company will need to assess the prices it can negotiate with the
suppliers to produce its own brand.
• It will have to consider the extent of its product range, and whether it
orders its own brand products alongside, or instead of, the existing
brands.

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• It will have to consider the impact that supplying own brand goods
instead of branded produce will have on the image of the company and
the franchise.
• It will have to undertake market research to identify whether the
customers of the neighbourhood shops want to buy own brand
products, or whether they prefer to buy branded goods.
(3) Downstream supply chain
As we have identified in relation to the upstream supply chain, Perfect
Shopper should revisit its logistics and distribution arrangements.
Currently, distribution to the neighbourhood shops is carried out by local
haulage contractors. However, it may be possible for Perfect Shopper to
negotiate a contract with one single integrated logistics company to carry
out both its inbound and outbound logistics.
This single contract will afford economies of scale, but it should also provide
opportunities for increased brand awareness if the delivery vehicles are
branded with Perfect Shopper's logo.
Shop ordering and delivery system
One of the key reasons for the discontent among the franchisees' is the
inflexibility of the ordering and delivery system. This is characteristic of the
'push model' supply chain which Perfect Shopper is currently using.
Perfect Shopper should consider introducing a much more flexible ordering
system, in which shops can make orders to match demand and deliveries can
be made as required.
However, again Perfect Shopper should assess the costs and benefits of such
a change before committing to it.
The main reason why Perfect Shopper gets discounted prices from the
suppliers is because it guarantees them bulk orders each month. However, if
Perfect Shopper moves to a more demand driven supply chain there is no
guarantee it will still be able to make these bulk orders. On the other hand, if
it doesn't make the change the neighbourhood stores may leave the
franchise because they are fed up with having to store excessive, unsold
inventories as a result of the inflexible ordering system.
Either way, this scenario illustrates that Perfect Shopper's downstream
supply chain is going to reflect a shift in the balance of power towards the
neighbourhood stores, because they are more able to dictate the terms on
which they deal with Perfect Shopper.

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Redeploy sales representatives


If a more flexible ordering system was introduced, there would no longer be
a requirement for the three monthly meetings between the franchisees and
the sales representatives. This should mean that either Perfect Shopper can
reduce the size of its sales team, or else it could redeploy some of them on
projects to improve the branding and marketing of the business.
IT systems
If Perfect Shopper does move to a demand driven supply chain model, it is
likely that there will need to be improvements in IT systems to support it.
The neighbourhood stores will need to place their orders over the internet,
and then Perfect Shopper can consolidate the demand information from all
the stores and make its orders from the suppliers.
EPoS tills and sales information
Perfect Shopper already produces tailored marketing material aimed at the
end-user consumer. However, it could also extend its downstream supply
chain to include the customers in the neighbourhood stores more directly.
If electronic point of sale (EPoS) tills were installed in the stores (if they are
not already used) then the stores could feed back sales information to a
central data warehouse, and this would allow Perfect Shopper to analyse
sales information more closely.
This sales information could then be used both by the storekeeper for his
own marketing, but also by Perfect Shopper for their tailored marketing
material and for their re-ordering processes. If all the stores were connected
to a central system in this way, supplier orders could be generated
automatically based on purchasing trends.
However, if some storekeepers do not have EPoS tills they may not want to
migrate to them. And other storekeepers may not want Perfect Shopper
being able to see their sales figures, particularly as these would include
information outside the products offered by Perfect Shopper. Either way, the
implications of this EPoS initiative would need to be considered carefully so
as not to damage goodwill of the franchisees.
On line sales
A second way Perfect Shopper could extend is downstream supply chain to
reach the end-user consumer is through establishing an internet-based sales
service.
It is unlikely that individual shopkeepers would be able to establish their
own internet-based service. However, Perfect Shopper may be able to host

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an online marketplace for all its franchisees, through which the end-user
customers can place their orders.
However, there could be a number of issues with this proposal, not least the
scope of the online product range because Perfect Shopper does not offer a
whole-shop service. Other potential issues are the extent to which people
who normally shop at their local neighbourhood store will want to shop
online; and the impact on the outbound logistics chain of having to deliver
individual orders to customers' homes.
Given these concerns, Perfect Shopper may decide this strategy is not viable,
but it is nevertheless an option it could investigate to see if it could improve
the service it offers to its franchisees.

10 Supplying
(1) There are a number of advantages to C's proposal to supply directly to the
pharmacies.
Advantages to C of supplying directly to the pharmacies
(i) Increased profits – Because the wholesalers are no longer taking part
of the margin, C should earn increased profits from the new
arrangement.
(ii) Customer loyalty – By offering a share of the increased margin to the
pharmacies, C should be able to build a loyal customer base, and may
be able to increase sales by capturing business which previously went
to its competitors in the market.
(iii) Customer relationships – The removal of the wholesalers will
shorten the supply chain, and will allow C to build closer
relationships with the pharmacies. This could allow them to gain a
better understanding of the market.
(iv) Good public relations – There may also be some public relations
benefits to C from the new arrangement. If they are seen to be
championing the cause of the small pharmacies, this would be a
positive message to sell to the pharmaceutical industry.
In addition, there may be some political capital to be gained from the
proposal, since government ministers have expressed concern about the
power of the supermarkets.
However, there are also a number of disadvantages to the proposal.

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Disadvantages to C of supplying directly to the pharmacies


Supplying directly to 4,000 independent pharmacies will require very
different logistical arrangements to supplying to 10 wholesalers.
(i) Higher inventory costs – Under the new arrangements, C will have
much higher inventory costs than it currently incurs, because it will
have to hold all the inventories itself rather than having them held at
wholesalers' premises.
(ii) Increased distribution costs – Equally, the new arrangements will
increase C's distribution costs, as a result of servicing 4,000
destinations rather than 10. C may even have to increase their
transport fleet to cope with the increased demand.
(iii) Uncertainty of order levels – It is also likely that the independent
pharmacies ordering systems will not be as sophisticated as the
wholesalers, which could make it harder for C to plan their deliveries
and inventory levels in advance.
(iv) Increased sales and marketing costs – The new arrangements may
also increase C's sales and marketing costs, because instead of dealing
with 10 wholesalers it will now need to with 4,000 independent
customers. It may need to take on additional sales staff to deal with this
increased burden.
(v) Threats to market share – C could also lose access to the main part
of the market. Supermarkets are taking a large share of the business
and by refusing to supply them C will leave the market open to rivals to
take increasing market share. This will particularly important if the
independent pharmacy sector declines with the growth of supermarket
pharmacies.
(vi) Bad debt risks – C's exposure to bad debt risks will increase. C will
need to assess and monitor the credit worthiness of 4,000 clients
rather than 10. This will be expensive and, it is assumed, some of the
4,000 may still end up as bad debts.
The additional costs arising from (i)–(vi) are likely to significantly reduce the
benefits gained from not having to pay the wholesalers a share of the margin.
C may feel the increased number of customers is not desirable from a supply
chain management perspective, and so it may decide not to supply all of the
independent customers. Instead it may choose to concentrate resources on
the pharmacists which buy relatively more drugs. However, restricting the
market in this way will reduce sales below the level they would be if C
continued to supply all the pharmacies.

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It is also possible that the independent pharmacies may prefer dealing with a
wholesaler rather than the manufacturer. Therefore, if C changes its practice
some of the pharmacies may stop buying from it and choose to buy their
drugs from one of C's six competitors who still use the wholesaler.
At a broader level, the competition from the supermarkets represents a
potential threat to the long-term viability of the independent pharmacies. If
the supermarkets can capture market share from the independents, possibly
even forcing some of them out of business, then C's sales will decline unless
it also moves to supply the supermarkets.
It is possible that the supermarkets may also use their buying power to
depress the cost of the drugs supplied by the pharmaceutical companies.
This again will present a threat to C's future income streams.
(2) There are a number of advantages to C's proposal to outsource the transport
function if it decides to supply the independent pharmacies directly.
Advantages to C of outsourcing the transport function
(i) Removes uncertainty over costs – If C decides to supply the
independent pharmacies directly, then its transport costs will increase
significantly. However, by outsourcing the transport costs – and
agreeing a contract for a fixed price with the transport company – then
any uncertainty about the level of future costs is removed.
(ii) Avoids capital expenditure – The decision to outsource will mean
that C does not have to increase the size of its transport fleet to cope
with the extra number of deliveries required to service 4,000
independent pharmacies. This could result in a considerable saving in
capital expenditure if C has a policy of buying assets rather than
leasing them.
(iii) Focus on core competences – C will be concentrating on its core
business of pharmaceutical manufacturing rather than diversifying
into transport and distribution which it has less experience in.
(iv) Benefit from economies of scale – The transport company should
benefit from economies of scale in transport and distribution costs
which C cannot match. Therefore outsourcing should lead to cost
savings at a cost per unit basis (although not all of these will be passed
on to C because the transport company will look to make a profit on its
operations).
(v) Scalability of resources – Outsourcing will allow flexibility in
transport services which C could not provide in its own right. The

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transport company will be able to scale up or scale down resources


depending on demand whereas C could not do this in its own right.
(vi) Transfer of risk. Providing the service agreement has penalty clauses
built in, C can receive financial compensation for breakdowns in
logistics which, if it operated its own logistics, it would not.
However, there are also a number of disadvantages to the proposal.
Disadvantages to C of outsourcing the transport function
(i) Transport and distribution are crucial to the success of C's
business model – Although transport is not part of C's core business,
under the new proposals the success of the transport and distribution
network will be crucial to the relationship between C and the
pharmacies. By outsourcing the transport function, C's control over the
service delivery to its customers may be reduced, and if service levels
slip then C's reputation with its customers will be affected.
Management may decide that transport is too important a part of the
business model to be outsourced.
(ii) Loss of control – The potential loss of control over the transport
function is indicative of a general issue with outsourcing which C's
management will need to be aware of. Outsourcing leads to a loss of
managerial control, because it is more difficult to manage outside
service providers than managing one's own employees.
(iii) Redundancies and negative PR – Because C already has a transport
function, then the employees currently working in this area will be
made redundant when it is outsourced, unless their contracts can be
transferred to the external company. Such redeployment seems very
unlikely though. The redundancies may generate negative publicity,
which will reduce the PR benefits which we noted C could gain through
being seen as a champion of the independent pharmacies.
(iv) Tied in to contract – If C signs a long-term deal with the transport
company, it may find itself locked into an unsatisfactory contract,
especially if it has no previous experience of arranging similar
contracts.
(v) Hidden costs – There may also be hidden costs associated with the
outsourcing contract. These could include the legal costs related to
drawing up the contract for services between C and the transport
company, and the time spent co-ordinating the contract.

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(3) We recommend that the following stakeholders should be informed in the


ways outlined below:
Internal stakeholders
Transport department staff – This group of stakeholders needs to be
handled sensitively because this department is the one likely to be most
affected by the changes. The message should be communicated by a member
of the management team, accompanied by an HR representative, in a face to
face meeting with the department.
Although we do not know whether the transport function is going to be
outsourced, the staff are still likely to be concerned about the changes which
the new proposals will have on their work. So the meeting should try to allay
these concerns as far as possible, and show C to be a reasonable and
considerate employer.
Connected stakeholders
Independent pharmacies – Initially, C should send a letter to all the
pharmacies explaining the changes, with the letter including the date the
changes will come into effect and the practical implications of them for the
pharmacies' regular drugs orders. C should also consider setting up a web-
site with some 'Frequently Asked Questions' which the pharmacies can
consult to see how the changes will affect them.
Following the initial mail-out, C should arrange some area meetings, in
which the sales representative for an area invites the pharmacies in that area
to come and discuss any issues with him or her. This face-to-face contact
should help reinforce the relationship between C and the pharmacies.
C should also consider placing a general announcement in the trade press
summarising the changes.
Wholesalers – The decision to stop using wholesalers should be
communicated to each wholesaler individually in a meeting between a
member of C's management team and a member of the wholesaler's
management team. C should explain the reasons behind the decision, and
also agree a timetable for implementing the new arrangements.
External shareholders
Doctors' surgeries – C should write to all the doctors' surgeries
explaining why they are changing their distribution networks, and
emphasising the benefits for the local pharmacies and the local communities.
Local communities – C should consider publicity in local newspapers to
promote their public relations message that they are protecting the local

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community and the local traders against the encroachment of the


supermarkets.
Both of these communications to external shareholders should be designed
to encourage people to use the local pharmacies, because this will in turn
support C's sales.

11 QW
(1) QW's present production and inventory policy
QW manufactures machine parts to specific customer order and does not
hold an inventory of finished items. This is an example of a just-in-time
(JIT) production system.
QW does not use a JIT purchasing system and holds the equivalent of one
day's production of sheet metal, to reduce the risk of being unable to cater
for customer orders at short notice. However, raw material inventory
levels are kept to a minimum which is in keeping with the JIT
philosophy and helps to control holding costs.
Traditional production systems
The proposed system for the metal ornaments is an example of a traditional
production system where products are produced at a constant rate
throughout the year and stored in inventory until sold. This system will
enable QW to predict the levels of raw materials that it requires and budget
for them accordingly.
However, traditional production systems can lead to inefficiencies if not
monitored on a regular basis. Holding high levels of inventory will
increase costs whilst inventory may become damaged or obsolete if not
managed effectively.
(2) The importance of TQM in a just-in-time environment
Total quality management (TQM) is a philosophy of business behaviour
based on the concepts of employee involvement and continuous
improvement in order to improve quality.
TQM is essential in just-in-time production systems such as that used by
QW. If products are not of sufficient quality, they cannot be replaced as there
is no inventory, due to the policy of making machine parts to specific
customer order. Such a scenario will adversely impact the company's
reputation as well as resulting in lost sales.
In a traditional production system where products are produced at a
constant rate, any failings or poor quality products can be 'hidden' within

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inventory. It is important that management are notified of any failings to


ensure that faulty products are not supplied to customers.
As the focus on quality is often less critical for traditional production
systems, it is harder to convince employees to follow quality control
procedures.

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Part C: Creating Value Through Operations

12 HT Consumer Goods
(1) (i) Costs of quality conformance
The cost of conformance is a discretionary cost which is incurred with
the intention of eliminating the costs of internal failure and
external failure. Costs of conformance may also be incurred as a result
of achieving specified quality standards.
(ii) Costs of quality non-conformance
The cost of non-conformance, on the other hand, is the cost of failure
to deliver the required standard of quality. Costs may be incurred as
a result of supplying an item of insufficient quality to the customer
(external failure cost) or due to a product needing to be re-worked
(internal failure cost). The cost of non-conformance can only be
reduced by increasing the cost of conformance.
(2) The relationship between quality conformance costs and product
selling prices in HT
The market in which HT operates is highly competitive and consumers
focus on price and quality when buying products. As a result, there is likely
to be a trade-off between price and quality.
HT should consider undertaking market research to understand the extent
to which customers are willing to pay for quality.
The more HT invests in developing quality products, the higher its costs will
be. As a result, the selling price of products will need to be higher to cover
the development costs and ensure that HT is profitable.
HT will need to decide whether to follow a high price, high quality strategy
or something closer to a low price, low quality strategy. As the market
leader with 15% market share, the strategy that HT adopts is likely to be
followed by some of its competitors.
(3) The definition of Kaizen
Kaizen principles are built around the theory of gradual, continuous
improvement and focus on obtaining small incremental cost reductions
during the production phase of the product life cycle.

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How HT can use Kaizen to extend the life of its products


The life cycle of products in the market in which HT operates is extremely
short. Extending the life of these products would make HT more
profitable.
Kaizen principles could achieve this by tightening internal quality standards
to improve the overall quality of finished products. Tightening internal
quality standards is also likely to result in small reductions in production
costs which will improve HT profit margins.

13 Quality Costs
REPORT
To: Managing Director
From: Management Accountant
Date: 23 May 20X6
Subject: Quality costs and their significance for the organisation
1 Introduction
This report explains quality costs and their significance for the company.
2 Quality costs
There are two main types of quality cost, these being costs of conformance
and costs of non-conformance. Conformance costs are further analysed into
prevention costs, and appraisal costs. Costs of non-conformance can be
further analysed into internal failure costs and external failure costs.
Prevention costs are the costs incurred prior to or during production, to
prevent substandard or defective products or services being produced.
Examples of these include the costs of quality engineering and design or
development of quality control or inspection equipment.
Appraisal costs are the costs incurred to ensure that outputs produced
meet required quality standards. Examples would include acceptance testing
costs and the cost of inspection of goods inwards.
Internal failure costs are the costs arising from inadequate quality, which
are identified before the transfer of ownership from supplier to purchaser.
Relevant examples include re-inspection costs and losses due to lower
selling prices from sub-quality goods.
External failure costs are the costs arising from inadequate quality
discovered after the transfer of ownership from supplier to purchaser.
Relevant examples would include product liability costs and costs of
repairing products returned from customers.

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3 Significance of quality costs for the company


To remain successful in the modern business environment, organisations
must offer customers a competitively priced, high-quality product.
Consideration must therefore be given to the optimum balance between the
costs of conformance and the costs of non-conformance. There is a trade-off
between the two: the higher the expenditure on conformance (to ensure that
customers receive the high quality products they demand) the lower the cost
of non-conformance (as there are fewer quality failures) and vice versa.
The problem organisations face is determining the level of quality customers
expect and hence the acceptable level of external failure cost. Some sort of
research into customer preferences could be undertaken maybe with focus
groups looking at our products and giving feedback on acceptable mixes of
price and quality.
 A zero defects policy could be adopted, but this would be extremely
costly and time consuming and would drive up the costs of
conformance.
 A sample testing approach could be taken. This would keep down the
costs of conformance but at the risk of increasing the costs of non-
conformance.
I hope this information has proved useful but if I can be of any further assistance
please do not hesitate to contact me.
Signed: Management Accountant

14 F Company
Resource-based approach
The resource-based approach to competitive advantage emphasises the
possession of scarce resources and core competences by the organisation. The
resource-based approach suggests that an effective strategy involves exploiting an
organisation's scarce, or unique, resources, skills and capabilities – its core
competences – in order to gain competitive advantage. This approach lies behind
the growing practice of outsourcing: the organisation concentrates its efforts on
those parts of its operations that no other organisation can perform for it.
Resources may be obvious things, such as favoured access to a particular raw
material or a piece of legally protected intellectual property. They may also take
less tangible forms, such as a well-known brand or in-house skills in electronics,
for instance, or design. F Company may be able to utilize these ideas by
emphasizing quality or innovation in its future operations.

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It is important to realise that it is possible to acquire or develop new competences,


but this takes time. The possession of a particular advantage thus constitutes a
competitive advantage but its validity may decline if other firms develop
equivalent capabilities.
Competences must therefore be developed and kept up to date on a continuing
basis. Johnson, Scholes and Whittington define core competences as those that
both outperform competitors and are difficult to imitate.
The resource-based approach is not without its difficulties.
(i) Core competences are difficult to identify and assess: A wrong appraisal
could lead to the loss of wider competence or source of advantage by
misdirected outsourcing.
(ii) Attempts to apply core competences (or other resources) widely across a
range of markets and operations may make the firm vulnerable to more
focused, single market operations.

15 Netcrit
(1) 12 days are needed for the critical path A-E-G.
Activity-on-node style
D F
ID 1 ID 3
A 3 8 4 9
ID 3
0 0 E G
ID 6 ID 3
3 3 9 9
Key
B C Activity letter
ID 5 ID 2
ID Duration
0 2 5 7
EST LST

(2) The dependencies given mean that the activities can be thought of as
forming three main strands as shown in the Gantt chart below. Two of these
strands can be manipulated to reduce the staff requirement on day 6 to the
five people needed for activity E.
(i) Activity B is started on day 1 and is therefore complete by the end of
day 5
(ii) Activity C, which depends on activity B, is not started until day 8. This
allows it to be completed by the end of day 9 so that activity G is not
delayed.
(iii) Activity D can be undertaken on any day from day 4 to day 9 inclusive.
We show it happening on day 4.

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The disadvantage of this manipulation is to produce a requirement for


thirteen staff on day 9.
1 2 3 4 5 6 7 8 9 10 11 12
A E G
6 5 3
B C
3 2
D F
4 3
Total
9 9 9 12 8 5 5 7 7 6 6 6
The minimum number of staff is therefore five workers.

16 S Company
(1) Activities in the planning phase
Note: We have assumed that the requirement for 'setting up a customer
service contact team' means bringing the existing team to a state of
operational readiness in the new premises rather than setting up a new team
from scratch, with all that that implies in the way of recruitment, selection,
training and development.
Clarifying objectives
Very little planning can be done for any activity without a fairly clear idea of
the objectives that are to be achieved. In this case, the overall objectives are
indicated quite well and we might say that the aim is to prepare for and
execute the move of S Company headquarters staff to their new premises.
This overall aim will be supported by several subsidiary or enabling
objectives.
(i) Ensure that all necessary and appropriate building services and
facilities are in place and functioning properly.
(ii) Design, install, test and commission an upgraded office IT support
system.
(iii) Close down the existing headquarters building.
(iv) Move portable equipment to the new building and install it.
(v) Brief and execute the transfer of existing staff to the new building.
(vi) Deal with any HRM problems arising from the move.
The subsidiary objectives listed above give a fair idea of the scope of the
project; that is to say, the overall amount and type of work that has to be

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done to complete it. Establishing the project's scope in detail is the first step
towards the work breakdown structure necessary for detailed project
planning.
Stating roles and responsibilities
It is clear that the project has, effectively, already been authorised by the
board of S Company and will be undertaken. Nevertheless, there will still be
a need for a clear statement of roles and responsibilities in a project
authorisation document (or project charter), so that all concerned know
what is to be done and who is responsible for which parts. This will be
particularly important in relation to the IT system, since its development
must involve specialists who are likely to have their own ideas and priorities.
If external contractors are involved, clear objectives and standards must be
set for them from the outset.
Detailed planning
Once the objectives are in place and the scope of the work is agreed, detailed
planning can commence. This will require the establishment of a project
team, which should include an appropriate level of project dedicated staff
and representatives from the various headquarters departments. For a
project of this size, D will probably be able to manage with an assistant, so
long as he or she can call upon departmental representatives for advice
when required.
The detailed planning of the work to be done to enable the move to take
place will revolve around three main areas of work: the IT system, the new
building and the details of the move. Network analysis and Gantt charts
will be useful for establishing time and resource requirements and
constraints. The use of these methods also provides for detailed progress
control by the project manager and the establishment of major review gates
at which progress can be checked by P.
Budgeting
Other important aspects of planning are risk and cost. Costs must be
estimated and a budget created so that expense can be monitored. Risk
assessment leads to risk management actions, such as avoidance,
minimisation and insurance.
(2) The role of sponsor as Board representative and D as project manager
P as Board representative
P will initiate the project, appoint the project manager and provide the
resources used in the project.

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P will exercise general supervision over the progress of the project without
becoming involved in the detail of project management. This will involve
giving approval to plans, budgets and specifications; receiving and
approving progress reports and bids for changes; and ensuring that a clear
focus is maintained on the project's objectives and priorities.
P may also act as 'project champion', promoting and defending the project
and providing moral support to D, particularly when delays occur and
problems arise.
D as project manager
D, as project manager is responsible to the Board and to P for the success of
the project. This means delivering the required results in accordance with
planned requirements for cost, time and quality. To do this D must manage
and lead the project team and may have a hand in its selection. He or she
must also be responsible for the proper planning of the project; the
management of the resources allocated to it; overall progress
management and control; and reporting on progress to the Board, via P.
D will also have to manage the expectations of the various project
stakeholders. These include P, the various headquarters groups that are
involved in the move and any external contractors or consultants involved in
the project. This is likely to involve extensive communication, negotiation
and dispute resolution, especially when there are delays or changes of plan
become necessary.

17 P Company
(1) Characteristics of the website development project
In general the work which organisations undertake may be classified as
either 'business as usual' or projects. Whether an activity is classified as a
project is important, as projects require management using specialised
project management techniques.
A project has a number of attributes that distinguish it from 'business as
usual'.
(i) Projects have a defined beginning and end – unlike operations
which tend to be on-going. So, for example, the website project has a
defined objective which is business critical. This often allows a project
to be perceived in terms of a 'life cycle' of defined stages, from project
definition and planning through implementation and control to closure
and review.

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(ii) Projects have resources allocated specifically to them, although


often on a shared basis. Thus, P has manpower from other
departments. At the close of the development project, staff will return
to their departments. The project is likely to have a budget, although
details of this are not given, and time appears to be the main constraint.
(iii) Projects are often unique or 'one-off': intended to be done only once,
in contrast to operations which involve recurring tasks. Thus the
development of the new website is distinguished from on-going
customer service operations.
(iv) Projects follow a specific plan towards a clear intended end-result
(in this case, implementation of the transactional website), in contrast
to operations for which goals and deadlines may be more general.
There will be a specific schedule and resource plan for the project.
(v) Projects often cut across organisational and functional lines, while
operations usually follow the organisation or functional structure.
Here, for example, P is able to draw on expertise of staff from the
Customer Service, Finance and IT Departments, and from other parts of
the organisation.
(vi) Projects have stakeholders, who are all those with an interest in the
progress of the project and its final outcome. These could include:
• The project sponsor, that is the individual or group providing the
funds
• The project steering committee or board, to whom the project
manager reports
• The project customer, or end user
• The project owner
(2) The role and responsibilities of G in her role as project manager
As project manager, G is the person who takes ultimate responsibility for
ensuring the project is completed on time and within budget. G will also have
responsibilities to management, other business areas and the project team. It is
her responsibility to deliver the completed website to the satisfaction of its
users. She is new to this position, and was selected on the basis of her technical
skills rather than her wider management skills.
(i) The project manager must establish an organisation structure for
planning, communicating and control of the project. G should already
have developed a framework for the procedures and structures needed
to manage the project (for example, deciding to have weekly team
meetings, performance reviews and so on).

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(ii) Detailed planning. The project manager is responsible for the


project plan and will oversee the planning process, such as the
preparation of the work breakdown structure, network analysis for
scheduling or Gantt charts for scheduling and resource planning. The
project manager must also take responsibility for the project budget.
(iii) Team building and co-ordination. The project team members have
been drawn from different departments, and a responsibility of G is to
organise these individuals as a team, allocating tasks and delegating
responsibilities to individuals within the team. An effective team will
co-ordinate the efforts of the team members towards the common goal
(completing the project on time, on budget and to specification), and
the project manager must ensure that these efforts are properly co-
ordinated. The project manager must also ensure that co-operation is
obtained also from external parties, such as suppliers and external
service providers. This is probably one of the areas where G feels
particularly weak.
(iv) Building an effective team, and being a team leader. G has a
responsibility to ensure that the team is high-performing. Her role may
therefore involve trying to motivate team members, to create a positive
attitude and team identity and to provide support to individuals if they
have any difficulties or problems in their home life that affects their
work. G also has a supervisory or monitoring role, to ensure that the
team members are performing in a satisfactory way.
(v) Monitoring and control. The project manager should estimate the
causes for each departure from the project plan, and take corrective
measures. This involves monitoring costs, progress towards
completion and achieving the specifications for the planned web site.
(vi) Problem resolution. Even with the best planning, unforeseen
problems may arise and G will be required to deal with them and find
workable solutions.
(vii) G must ensure resources are used efficiently and strike a balance
between cost, time and results. Essentially, G is responsible for
completion of the project on time, to the end users' satisfaction and on
budget.
(viii) Responsibilities to management. G has responsibilities as project
manager to senior management, represented perhaps by the project
steering committee. G must also keep management informed with
timely and accurate communications. The project sponsor and steering
committee will want to be informed.

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(ix) Maintain a customer orientation. G must maintain an awareness of


the requirements of the project's 'customers' and understand that the
project has been undertaken for their benefit. G therefore has a
responsibility to meet customer requirements in the best way possible.
Conclusion
G is certainly correct in recognising that project management calls for
management skills rather than technical IT skills. It is surprising that she
thinks she does not have these skills because senior management appointed
her (presumably) in the belief that she would perform the role well. A useful
way forward may be to appoint a member of the project steering committee
to act as a mentor, and provide advice and support to help her carry out the
project management role successfully.

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Part D: Marketing and Value Creation

18 Thermo Plastics
(1) Relevance of product life cycle concept
The concept of the product life cycle in the context of marketing is based on
the fact that many products pass through a series of stages in their
development and sales life until eventually they decline and are withdrawn
or fade from the market.
Typically, initial sales during the introduction stage are likely to be relatively
slow, followed, where the product is successful, by a rapid growth stage.
Eventually growth begins to slow as the product enters the mature and
saturation stages of its life cycle. And eventually, in the final stage the
product declines.
The plastic garden furniture products of this company are clearly in the
maturity/decline stages of the product life cycle resulting in a fall in sales
and profits. There can be several reasons for this, but in this case it appears
that customers' needs and wants have changed. Customers now want more
'natural' furniture products for their gardens so the company must respond.
(2) Three potential uses of product life cycle concept by 'ThermoPlastics'
(i) Extending the product life cycle: plastic tables and chairs
The first use of the product life cycle, is the development of plans to try
to extend the product life cycle for the company's plastic garden
furniture. Products do not necessarily have to die and indeed many
successful products and brands have, through extension strategies, had
their life cycles continued through many years. In fact, some of the best
known brands in the market such as for example, Kit Kat chocolate
bars, Coca Cola soft drinks, and Oxo stock cubes have been market
leaders for fifty years and more. The marketer can use the concept of
the product life cycle to look for ways to prolong sales and profits for a
product. This can be done through, for example, updating a product's
technology or design, introducing new packaging, or finding new
markets and uses for a product. Obviously a product life cycle cannot
be extended if the basic reason underpinning the decline of the product
cannot be addressed. In this case the company would need to assess
the extent to which the move away from plastic furniture could be
halted or slowed down, perhaps by promoting the relative merits of
plastic versus wood.

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(ii) Developing and launching new products


The second use of the product life cycle is in highlighting the need to
develop and launch new products. Because products eventually mature
and decline, the marketer needs to ensure a succession of new
products in order to sustain sales and profits. Moreover, these new
products need to be in the process of development often long before
existing products enter their mature and certainly saturation stage.
This is because of the length of time often needed to develop new
products allied to the fact that, as illustrated in the diagram, profits
often peak quite early in a product's life cycle. In fact this company
appears to have neglected this use of the product life cycle. Impending
maturity and decline of their plastic garden products should have been
forecast earlier allowing the company to plan new products as
replacements.
(iii) Developing marketing plans for each stage
The third use of the product life cycle is based on the fact that the
different stages have different characteristics from a marketing point of
view and therefore require different marketing activities and plans. So,
for example, in the introduction stage the emphasis must be on making
customers aware of the new product through, say, advertising, and
gaining shelf space in distribution outlets. In the growth stage,
marketing efforts need to be concentrated on expanding the market for
the product and beginning to fight off competition. In maturity and
saturation marketing efforts must increasingly be aimed at protecting
market share. And in the decline stage marketing may be aimed at
extending the product life cycle (see above) and/or planning an orderly
withdrawal of the product from the market. By understanding, then,
which stage a product is at in its life cycle, the marketer is able to
develop marketing plans appropriate to that particular stage.

19 EW
Market segmentation
Market segmentation is the process of dividing a market for a product or service
into distinct sub-markets or sub-segments each of which may be selected as a
potential target market.
Market segmentation recognises that within the total market for a product or
service, different customers may have different needs and wants. So, for example,
not everyone wants the same car, the same hi-fi system, the same computer or if it

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is an organisational customer, say, the same machine tool. Similarly in the case of
Emily's new business not every customer in the market will want the same
interior design service.
By segmenting the market and identifying groups of customers that within the
segment have similar needs but different to other segments in the market, Emily is
able to supply an interior design service that is closer to the needs of particular
segments thereby increasing the chances of competitive success.
The first step in segmentation is to identify the bases for segmenting the market.
Some of the more frequently used bases in consumer product markets include:–
age, sex, income, social class, and more recently, personality and lifestyle.
Whatever basis is used it is essential that it results in segments which are
homogeneous within and heterogeneous between, ie customer preferences and
wants within a segment should be similar, whereas customer preferences and
wants between segments should be dissimilar. For an interior design service
appropriate segmentation bases would include for example: demographic
characteristics – age, income, and social class. However the newer
geodemographic and life style bases for segmenting markets would be particularly
appropriate.
Having identified suitable bases for segmenting the market, Emily can then gather
details on the needs of the various segments, evaluate the attractiveness of the
different segments, and then decide which segments her company is best able to
serve and hence target. As this is a small new company a focused targeting
strategy based on targeting a small number of selected customers would be most
appropriate.
The major benefits of market segmentation to the new venture are:
 Company efforts can be concentrated on those segments which offer the
greatest potential.
 Product and market offerings can be tailored more closely to customer
needs.
 Excessive competition can be avoided.
There is no doubt that market segmentation is one of the most important tools of
the contemporary marketer.

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20 Snack Pack
(1) Advantages
(i) Snack Pack could be included in deals that OC sign with supermarkets,
and so gain a more prominent place in supermarket displays alongside
OC's products.
(ii) There is potential for increased marketing spend on Snack Pack, with
economies of scale on marketing costs being generated as OC already
has a large budget in this area.
(iii) Access to new customers both overseas and via vending machines.
Disadvantages
(i) Potential loss of 'local' customers in Sri Lanka, who might no longer see
Snack Pack as being a local product. OC may also insist that Snack Pack
products are sold at a higher price to bring them in line with OC's
existing product range. Any such prices rises could further reduce
demand for Snack Pack products.
(ii) OC may gain access to the recipe for Snack Pack products and
manufacture them itself.
(2) Types of relationship
(i) Sale. All responsibility and control over the business could be
transferred to OC. Snack Pack appears to have strong local support
amongst consumers, and this may be lost if the brand is acquired by a
multinational company.
(ii) Joint venture. Snack Pack could form a joint venture with OC, with
shared ownership and decision-making. This would allow Snack Pack
access to OC's expertise in marketing snacks to a wider (international)
audience, whilst retaining some independence.
(iii) License agreement. Snack Pack could grant OC a licence to sell its
products abroad. This would have the benefit of allowing production to
remain in Sri Lanka, yet also generating an extra revenue stream from
the licensing income. The licence could be for a fixed period of time,
with an option for renewal if it suited both parties.
(iv) Agency agreement. OC could act on an agency basis for Snack Pack
abroad overseas and in those parts of Sri Lanka where sales are weak.
However, OC is unlikely to promote Snack Pack over its own products,
so this relationship is not one that could be recommended.

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21 SPS
(i) Firm infrastructure
The location, design and layout of SPS's shops will remain an important
source of value, although this may be reduced as physical stores give way to
'virtual' on-line displays and sales. In essence, SPS would move from having
a purely physical infrastructure to having a mixed physical and on-line
infrastructure. Sales revenue through the stores will decrease as some
existing customers choose to shop on-line, but the associated costs of
operating the stores will substantially remain. However, it is likely that SPS's
overall turnover will increase as a result of starting its on-line store.
Although there will be some cannibalisation of the existing shop sales, it
should expect the on-line store to also generate some new, incremental
business. The e-retail avenue may increase the added value of point-of-sale
infrastructure, by enhancing the perceived offering to customers (in terms of
convenience, empowerment and potentially an entertaining on-line
experience), generating additional sales revenue at lower administrative
cost.
(ii) Human resource management
Given that customers continuing to use the retail stores will be doing so
primarily because of the human service element, the capacity of SPS's staff to
add value within the off-line retail segment should be increased. This will,
however, be diluted in overall terms by the shift in sales to e-retail, where
customer value is not significantly added by human intervention. The focus
of HR added value may shift to skills in the design and implementation of the
e-retail system: the ability of IT staff to deliver a quality service at lower
administrative/maintenance cost to the firm.
(iii) Procurement
The e-retail system should increase the added value of SPS's supply
strategies and inventory control systems. It will enable the full range of
goods stocked to be visible to all customers, regardless of location,
maximising the value of an attribute highly valued by customers.
The e-retail system should also support better-quality information-sharing
with suppliers, enabling better demand forecasting and delivery
performance throughout the supply chain. This may enable SPS to add
further value through just-in-time supply strategies, thereby reducing the
amount of working capital tied up in inventories.
Meanwhile, procurement has potential to add new value through the
procurement of IT infrastructure, equipment and services – perhaps through

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managing an outsourced IT support. There may be a further role in


managing outsourced fulfilment activities: many e-retail organisations
outsource their warehousing and distribution systems to specialists who can
cope with the greater-volume of small transactions.
(iv) Technology development and inbound logistics
Integration of the e-retail system with the existing stock control system
should increase its potential to add value. It will empower customers to
access stock availability information, generate orders and track orders at
lower cost than via sales staff intervention. The system should also allow
real-time updating of stock figures – and triggering of stock replenishment –
in response to on-line purchases: this increases the potential for reduced
costs through fully automated and integrated e-procurement.
(v) Marketing
The addition of an e-retailing capacity has the potential to add considerable
value to the firm's marketing activities. It presents highly flexible,
controllable and cost-efficient opportunities for information, advertising,
purchase incentives (eg on-line loyalty schemes and sales promotions),
public relations (eg posted media releases), relationship marketing (eg
gathering customer data, encouraging registration, site personalisation, e-
mail permission marketing) and so on. It particularly enhances
market/customer research, by replacing customer survey data with data
about actual customer browsing and purchase patterns and preferences.
(vi) Additional value-adding activities
It should also be noted that e-retail will create potential for new value-
adding activity in the area of outbound logistics, which currently operates
within the internal supply chain only, (warehouse-to-outlets) and represents
cost without generating revenue. This is a 'waste' activity, which can be
reduced by supplying direct from the warehouse to the customer. Prompt,
reliable and track-able delivery is a major contributor to customer
satisfaction, so outbound logistics has the potential to create significant
value – although the greater frequency and smaller value of deliveries will
also create new costs.
In value chain terms, service means after sales service. This is likely to be
minimal at the moment and consists largely of dealing with returned faulty
goods. With e-retailing, it will be necessary to offer a more comprehensive
reverse-logistics service – which again both adds value and incurs cost.

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22 PG University
(1) Ways in which PG can compete with other institutions
PG has a limited control over its own cost structure, as university lecturers'
salaries are in part determined centrally, and university facilities involve a
high degree of relatively fixed costs (eg buildings, laboratories and so forth).
PG might also have limited control over one of its major sources of revenue:
the level of tuition fees per student is determined by the central government.
Central government also determines how other government funds to
universities are distributed.
Firstly, we must identify what the universities are competing for. In fact, the
university is competing in a number of different markets and market
segments. Therefore we will apply the marketing mix to the different
segments.
Domestic undergraduate students
(a) Product. Generally, the university will be offering an honours degree at
the end of a three year course. To compete, the university should
identify popular subjects. Alternatively, if the university has recognised
strengths in particular fields then these can be used as a basis for
marketing.
(b) Place. Capital expenditure might be limited and restricted. It can seek
the cooperation of a local tourist board, which might be trying to
enhance the image of the town generally, and might see a University as
an important partner in that activity.
(c) Price. There is little that can be done here. High rents for
accommodation in addition to their tuition fees might deter students.
(d) Promotion. There are a variety of promotional measures. Some
universities are well known. Other universities, which might have
equal academic strengths, need to alert prospective students to their
virtues.
(i) Prospectuses sent to colleges and schools
(ii) Inviting teachers to inspect key departments in the hope that
the teachers will recommend the university to their pupils
(iii) Having open days at convenient times for prospective students
(iv) Persuading current undergraduates to take students round the
campus

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(v) Well-publicised ties with local businesses to attract students


from the immediate vicinity
Foreign students
Their fees are likely to be paid by their own governments or by their
families. As the university system has a good reputation, this is likely to
increase the demand from foreign students. However, demand can still
depend on the overall relationship between the countries involved. PG will
be competing with a range of other universities internationally to attract
foreign students.
(a) Product. It might be harder to discover the sort of studies which
foreign students are particularly keen on. However, part of the
attraction for foreign students is that PG offers a quality of education
that they didn't feel they could get from a university in their own
country so PG needs to ensure it maintains the standards it has already
achieved.
(b) Place. PG has to convince foreign students that it is located in a place
where they could feel happy living for the duration of their degree
course.
(c) Price. Foreign students are often charged high fees. Offering courses at
a lower price might attract more students.
(d) Promotion. PG should ensure that its website highlights its key
features, because its website can easily be accessed by foreign
students.
Research students
A research department is a source of prestige to a university and it
encourages the brightest individuals to study at the university. It also
commands respect from the fund-granting authorities.
Mature students
Students who have worked before choosing to do a degree have their own
special interests and needs.
(a) The product element must therefore include flexible course design,
for those who continue to work.
(b) Price is likely to be a significant element in the marketing mix, as many
mature students are self-financing: some might already have financial
or domestic commitments.

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(c) Place can therefore be important: for example, mature students who
have family commitments might prefer to choose a local university
close to their families.
(2) Establishing user satisfaction
The university's product typically takes three years to consume, and so the
final judgement can only be made once a student has left.
The university can ask its students what they think of particular elements of
the learning environment offered by the university.
(a) Basic facilities. It is easy to assess students' views about basic services
simply by handing out questionnaires, and monitoring complaints.
(b) Academic facilities. Similarly, for services such as the use of libraries,
market research would be easy and cheap to conduct. This might lead
to changes in opening hours and other operational adjustments.
(c) Quality of teaching. This is likely to be a contentious area. Brilliant
researchers may be poor public speakers or tutors. The best
communicators may have few original ideas. Or perhaps some
academics see teaching as a necessary but resented distraction from
their principal activity.
For those who have taken time off work, borrowed money, or are
paying privately (eg mature students, overseas students), poor tuition
is likely to be resented.
Students could be asked to complete questionnaires to describe the
level of teaching they have received. However, the university may also
be able to look at the number of applications it receives from new
students each year as an indicator of the perceived quality of its
teaching, and its reputation compared to its competitor.
(d) Quality of research. This can be assessed by the reputation the
university builds up, and by the number and value of research grants it
gets from companies to undertake research projects for them.
(e) Social utility. The university's main customer is the state, and through
the state, the taxpayer. Education is one of the most important long
term investments a society can make. Satisfaction could be gained by
looking at the levels of funding the university receives.

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23 HMC Motors
(1) Market segmentation is the process of dividing markets into sub-groups so
that the members of a group are similar in their wants and buying behaviour,
but that between the sub-groups there are marked differences of behaviour.
The benefit to HMC of segmenting the new car market is that it will enable it
to adopt target marketing. This means it will be able to develop a marketing
mix to position its cars in a way to make them attractive to a particular
segment.
Presently HMC is using mass marketing, trying to sell its cars to please
everyone. As the reviewer says, all cars have the ability to move people
about. To make its cars distinctive and sought-after HMC needs to make
them appeal specifically to the needs of a segment.
Consumer market segmentation is based on the following segmentation
bases:
Psychographic/lifestyle: Motor cars may be sports models, sports utilities,
ecologically friendly, off-road and pick-ups. These cars appeal to the self-
perception of the buyer, and also to their hobbies and lifestyle. This lifestyle
segment will indicate the sorts of media they see and hence it can determine
promotional strategy. For example off-road vehicles could be advertised in
magazines that deal with fishing, sports and mountain biking.
Consumer behaviour: Cars are rarely a spontaneous purchase. However
once the prospective customer is considering buying a car they can be
encouraged to decide quickly by promoting it as a limited edition, or offering
special discounts for a short period of time. Car makers have also tried to
align their cars to other strong brands by joint marketing or using celebrity
endorsements. For example making the car brand the official car for a given
football team or sporting event.
Socio-demographic: Cars can be marketed according to family lifecycle
stage. For example cars with more luggage room and seats can be targeted to
families, whilst smaller cars may suit retired couples. Occupation is also
important. An executive will always prefer luxury marques, whilst a jobbing
builder will prefer a pick-up.
Industrial markets: These are cars bought for fleets. Here the emphasis will
be on reliability and economy in use rather than image or other factors that
would attract a private buyer.

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(2) Consumer-buying behaviour will focus on the benefits to the driver from
owning the car. The selection process is likely to involve a lot of complex
psychological variables. HMC should ensure its product and promotion
satisfy these:
Identification of need: A private buyer is unlikely to replace their car on a
regular basis. Instead they often start searching for a new car as a result of
some unexpected money becoming available, a breakdown in their existing
car, moving house or the arrival of a child. Identifying these triggers can be
useful to target HMC's promotional media to ensure the customer is aware of
the firm's products at these critical times.
Perception of the product: Consumers will buy a car that fits in with the
image of themselves as they are, or as they want to be. Therefore
inexpensive changes such as adding sports wheels will help the consumer
see the car as sporty. The marketing messages of HMC can also underline
these perceptions, such as having a popular role model in the
advertisements.
Complex motivation: When buying a car the private motorist will balance
considerations of economy, utility, status, perception and self-realisation
which lead them to favour one brand and to overlook another. The actual
functionality of the car is less important. The promotional message of HMC
should explain the benefits of its cars and how they meet these needs.
Peer group influence: Consumer buyers will be influenced by what friends
and colleagues say about a vehicle. This may lead them to reject some
imported brands, or to favour one that their friends have made admiring
comments about. Certainly the wish to be seen to have the latest model is a
major reason that leads private motorists to seek up-to-date registrations of
cars.
Key decision makers: The private buyer will generally take the purchase
decision on their own or in the company of close family members. They will
vary widely in the amount of data gathering that has been done to get to a
short-list of models. They will certainly expect to take a test-drive of each car
on their short-list. HMC should provide quick, spontaneous reasons for
purchase, but backed up by detail.
Fashion and trends: This will influence choice of colour and sometimes the
precise model. The present popularity of hybrid cars (powered by both
electricity and gasoline) is part of the trend to greater ecological awareness.
HMC could consider making these.

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Situational influences. Private buyers are influenced by factors such as the


quality of the sales person, the convenience of the servicing facilities, the free
add-ons that are offered (eg mats for the footwell) and the weather. HMC
cannot create these but it should be able to respond to the promotion with
rapid development.
Fleet buyers will feature several differences in their buying process from
the consumer buyer:
The decision making unit (DMU): Unlike the consumer, the industrial
buyer will normally feature a number of people in the purchase decision.
And each will need attracting by a different marketing mix. HMC should
create these.
The initiator will prompt the search for new vehicles. This could be a new
member of staff arriving, a promotion, or it could be initiated by a set date
such as the existing fleet reaching a given number of years since it was
bought and therefore due for replacement.
The influencer will narrow the choice of cars. This could be the budget
holder, or it could be an expert. Influencers will also be outside the firm, such
as motoring writers and insurance firms. HMC should have literature to
appeal to each group.
The decider will be the fleet car manager, or in some situations it may be the
final user who chooses from a short list of cars.
The user will also wish to be consulted. For fleet purchases this would be
some users of the existing fleet being asked for their requirements.
The buyer will be the finance function of the firm, and it might also include a
professional from the procurement department who will try to achieve the
lowest price.
The gatekeeper will control information flows between the decision makers.
Wider set of purchasing criteria: The industrial buyer will consider price,
but also finance terms, reliability of the supplier, availability of back-up and
delivery time. They may also consider how well the car fits with the existing
know-how of the firm and whether any special equipment will be needed.

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24 M plc
(1) Current weekly advertising revenue:
Rs. 1.2Mn per page × 5 pages ×7 days = Rs. 42Mn
Possible pricing strategies
Forecast subscription
revenues Strategy 1 Strategy 2 Strategy 3
Daily subscriptions:
price per page (Rs.) 50 100 150
Daily subscriptions:
forecast number of
subscribers per day 4,000 3,500 1,500
Total weekly revenue
from daily subscriptions
(Rs) 1 1.4Mn 2.45Mn 1.575Mn
Weekly subscriptions:
price per week (Rs) 100 150 300
Weekly subscriptions:
forecast number of
subscribers per week 17,000 15,000 6,000
Total weekly revenue
from weekly
subscriptions (Rs) 2 1.7Mn 2.25Mn 1.8Mn
Total weekly revenue
from subscriptions 1+ 2 3.1Mn 4.7Mn 3.375Mn
Forecast advertising
revenues
Advertising revenue per
page sold (Rs) 800,000 750,000 500,000
Number of pages sold
per day 7 9 10
Days advertising sold
per week 7 7 7
Weekly advertising
revenue (Rs) 39.2Mn 47.25Mn 35Mn

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Total weekly forecast


revenues Strategy 1 Strategy 2 Strategy 3

Subscriptions (Rs Mn) 3.1 4.7 3.375


Advertising (Rs Mn) 39.2 47.25 35.0
Total (Rs Mn) 42.3 51.95 38.375

Uplift/shortfall vs
current revenue
Current revenue 42Mn 42Mn 42Mn

Impact (Rs) 0.3Mn 9.95Mn -3.625


Impact % 0.7% 24% -9%
(2) Financial factors – The calculations in part (i) have indicated that Strategies
1 and 2 would help increase the Web Division's revenue, while Strategy 3
would lead to a reduction in revenue. From a purely financial basis, Strategy
2 is the most beneficial.
Financial and non-financial objectives – However, the decision may not be
purely on financial factors, and X should also consider how well the different
strategies fit with M plc's objectives (as discussed in part (b) below.)
Competitive position – M plc currently maintains all of its websites free of
charge, so moving to a subscription-only service marks a change in strategy.
It is not clear how many (if any) of M's competitors currently offer
subscription-based or free sites, so X needs to consider how far the move
could give M a competitive advantage over its competitors (by adopting a
successful new business model before them) or whether the change is
merely enabling M to catch up with its competitors (because they already
use this business model, and it has proved successful for them). For example,
in the UK, The Times has already successfully implemented The Times
Online as a subscription-based site.
Sensitivities and uncertainty – The figures used in the calculations in (a)
(i) are based on X's estimates. However, there are a number of uncertainties
in these: subscription levels; the mix between daily and weekly
subscriptions; the amount and price of advertising space sold.
Although X has used her experience of subscription-based websites and the
feedback from market research in preparing her estimates, there is still a
degree of uncertainty about how reliable the figures are. Therefore, X should
look at how the impact on forecast revenues from modifying some of the
variables used in the forecasts (eg, subscriber numbers or pages sold).

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This is particularly important in relation to Strategy 1. Although, it looks


marginally beneficial, if the number of pages of advertising sold were 6
rather than 7, the total weekly revenue it would generate would be Rs.
36.7Mn rather than Rs. 42.3Mn, a 13% shortfall on M's current weekly
revenue.
Customer loyalty – Users who subscribe to the website are more likely to be
loyal to it than users of the free website. This could be beneficial to M if it can
sell additional products or services to these users. Therefore, the
subscription model could generate additional revenues which are not
currently included in the forecasts.
Customer profiling – Similarly, the subscription model could enable M to
find out more details about its subscribers which could be useful in relation
to selling advertising space. If M can highlight to potential advertisers that its
readers fit particular market segments, this may encourage advertisers to
buy advertising space in the paper.
External comparison – Again, we do not know if any other news websites
have adopted a similar business model, but, if they have, it would be useful
to compare the changes in their subscriber numbers (as a result of the
change) to the assumptions and estimates X has used in the forecasts.
Scalability – It seems likely that, if the decision to move the 'Daily News'
website to a subscription-based model proves successful, a number of M's
other websites could also be changed to the subscription-based model. This
should generate additional revenue increases for M plc. However, X needs to
consider whether the subscription-based model is appropriate for some of
the smaller websites. For example, would there be enough subscribers to
make it worthwhile for advertisers still to advertise on them?

25 Publishing Company
Product
TMP currently sells physical books. E-business would allow them to either
replace the product with an electronic equivalent (e-book) or to augment the
products by adding additional services such as an associated website which offers
further case studies and questions for example. Augmenting the product in this
way would improve the product the customer receives and would enhance their
experience of it.
Replacing the product with e-books may allow the product range to be increased
as it allows books to be introduced that would otherwise be uneconomical to

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print. This method would reduce the cost of raw materials, because, for example,
TMP will not need to buy paper for the books it is producing in e-format.
Price
E-business should involve lower costs than those incurred selling physical books
in physical shops. By eliminating bookshops (and the commission payable to them
for selling TMP's books) the selling price of the books could be lowered, yet TMP's
profit margin could still be increased.
Current high prices means that overseas sales have been low. This could be
addressed by combining differential pricing (in local currencies) or by offering e-
books at a lower price than printed copies.
TMP will have to monitor competitor costs and react accordingly due to the
existence of price comparison websites. They will also have to be aware of large
existing channels (eg Amazon) that pay commission on books sold through their
site.
Alternative pricing strategies, such as customers subscribing to the site and
getting 'reader' access to a range of management texts rather than having to
purchase individual books, could also be explored.
Promotion
Currently, promotion involves bookshop displays and full-page adverts in
magazines/journals only. This is a classic 'push' approach to marketing as it
focuses on the product, not the customers.
E-business allows information, such as customer details, to be recorded so that
TMP can then target its marketing specifically to individual customers. For
example, there could be online suggestions at the check-out stage ('people who
bought this book also bought the following') or the next time a customer visits the
site they could be given some suggestions for possible future purchases based on
their previous activity.
TMP could also make use of banner adverts on associated websites, such as sites
that provide management advice. Links to academic websites could also be
established via their reading list, so that students looking at the reading list could
then click through the TMP's website to buy a text they want.
TMP will also have to develop their website carefully to ensure it features
prominently in search engines.
Place
Bookshops have limited reach, because they are confined to a particular
geographical location. Moreover, research suggests that the reach and readership
of both bookshops and magazines/journals is in decline.

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The internet, by contrast, has unlimited (potentially global) reach. TMP currently
sells few books (10% of sales) outside Arcadia, and part of this may be due to
customers outside the country not being aware of TMP's existence. The internet
could help address, and having an e-commerce facility would enable customers in
foreign countries to see the range of books that TMP has available and then buy
them online.
Physical evidence
Bookshops have an advantage over the internet (and journal advertisements) in
that they allow customers to inspect books properly to ensure they meet their
needs before deciding to purchase them.
However, this can be partially addressed online by providing customers with a
'look inside' facility. This allows a potential customer to view key pages such as
contents list, index and the first few pages or a sample chapter of a text online
before buying it.
Customer reviews, feedback and ratings can also provide customers with a form of
physical evidence about a book that they are unlikely to obtain from any
bookshop.

26 Accounting Education Consortium


(1) In traditional marketing media, such as advertising and direct mail, the
marketing message is initiated by the supplier sending out a message to
potential customers. However, there is limited interaction with the
customer. In electronic media, the customer plays a much more active
role, for example visiting a website to find out information about a course or
seminar.
Interactivity – Interactivity is a key feature of electronic media, creating a
dialogue between supplier and customer. Usually this dialogue is through e-
mail exchanges. For example, AEC could use e-mails to provide customers
with information about courses which may be of interest to them.
However, in order to do this AEC needs to know the e-mail address of
potential customers, and the courses they could be interested in. At the
moment, AEC only collects personal information about people who wish to
download study material; there is no facility on the website for potential
customers to register their interest in a particular course, so that AEC can
then send them further details about the course, and any special deals
available to encourage them to book on the course.

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In this respect, the functionality of AEC's website is more characteristic of


traditional media (that is, sending out generic messages) rather than
encouraging the interactivity which is characteristic of electronic media.
Individualisation – Electronic media allow marketing messages to be
tailored to specific market segments, whereas with traditional media a
single message is sent to all market segments.
For example, some of AEC's courses are for non-qualified candidates
preparing for their professional exams while others are for qualified
accountants fulfilling their CPD requirements. At the moment, AEC has a
single website for all students. However, students could be asked to indicate
which courses they are interested in (professional exams, or CPD) when they
first visit the website, and then the information could be filtered so that
only parts relevant to them are displayed on the screen, or they are taken to
different screens depending on their interest.
The interactivity noted above also promotes individualisation. Once students
have registered an interest in a particular course, or for a course in a
particular location, subsequently e-mails individually relevant to them can
be sent out advertising courses for related subjects in the nearest centre to
them.
Intelligence – Because advertisers using traditional media do not engage in
any dialogue with potential customers, they cannot use their marketing to
find out anything about customers' requirements, and also which products
or services are meeting them most effectively.
However, website software allows web owners to record information
every time a user clicks on a page. For AEC, this would be useful to see
which pages on its website (ie which courses) potential customers view
most frequently. It would also be useful for AEC to see how the number of
visitors to a web page translates into them signing up for a course or for
study material.
If the conversion rate from hits (visits) to sales is low for particular
products this suggests there is a problem either with the web page
promoting that product (for example, it is not clear to follow), or with the
underlying product itself (for example, potential customers are put off by the
price of a course).
AEC could possibly even get more customer intelligence by including a short
survey on its website asking visitors to the site for their feedback, on either
the site itself, or the products AEC is offering.

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Integration – Advertisers can use the intelligence which they gather from
customers to add value to their products or services, by sharing the
intelligence with other people across their company.
For example, at the moment only 10% of people who view AEC's
downloadable study material proceed to purchase it. The online marketing
team should discuss this low conversion rate with other areas of the
business to assess whether there is anything that could be done to make the
material more attractive to potential customers. These discussions could be
with the authors of the material to discuss if it could be made more student-
friendly, or with the finance department to see if any discounts or incentives
could be offered to make the price more attractive.
Independence of location – By its nature, internet marketing has a global
reach and so allows advertisers to access potential customers who were
outside the reach of traditional media. Moreover, the internet is also
accessible 24 hours a day, 7 days a week so it allows potential customers to
find information about a company's products and services outside normal
office hours.
The ability to communicate globally may be more useful to AEC for selling
study material than selling courses. Although AEC has eight worldwide
centres, it is only likely to be practical for students to attend these centres if
they live relatively close to them. However, study materials can be sent to
students wherever they live.
There are some practical considerations here though, which we will consider
further in part (b). The procedures for booking courses do not support the
'global' aspect of electronic media, for example, because customers cannot
book a course online.
(2) Electronic marketing offers a number of new opportunities which are not
readily available, or affordable, using traditional marketing methods. We can
evaluate how AEC can take advantage of them by looking at how they relate
to some of the key elements of the 7 Ps service marketing mix: product,
price, promotion, place and process.
Product
AEC offers three different products for sale through its website: training
courses for professional qualifications; training manuals for professional
examinations; and CPD training courses/seminars.
Sample products – The website allows customers to see a sample of the
training manuals before they buy a product, so that they can see first-
hand the quality of the product they are buying.

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At the moment, there is no similar way of assessing the quality of the courses
in advance of purchasing them, not least because of their intangible nature.
However, AEC could include some video clips or web-casts from previous
courses on the website to give potential customers a flavour of the training
provided. They could also include some quotes from students who have
been on the most recent courses to endorse the quality of the courses.
Online courses – At the moment, the courses are only run from eight
centres worldwide (three for CPD courses). This is likely to restrict the
number of students who can attend courses to those who live relatively near
to the course locations. AEC should consider whether the courses can be
offered online through web seminars and web casts, supported by a
virtual learning environment and online tutors. This option may allow
AEC to increase its student numbers internationally, though AEC may not be
able to access a truly global audience, because customers will need fast
broadband access to make these web seminars practical.
Product size – At the moment, students pay a fixed fee of US$180 which
gives them access to a complete set of manuals for all the professional
examinations. However, some students may not which to purchase all the
manuals at the same time. Therefore AEC should consider allowing
candidates to buy individual manuals as an alternative to buying the whole
set. (In part (a) we talked about customer intelligence. This is an area where
AEC could benefit from customer research, to understand whether students
would prefer to buy individual manuals or to buy the whole set at once.)
Product updates – It is likely that a number of AEC's training manuals will
need updating each year to reflect syllabus changes or changes in legislation.
AEC can use the website to publicise any such changes. Moreover, if it had a
database of e-mail addresses for students who had registered an interest in
the material which was affected, AEC could send a message to the student
telling them the new, updated version was available.
Price
Bulk discounts – In the section on price, above, we mentioned the option of
allowing students to buy individual manuals rather than having to buy the
whole set. However, if AEC takes up this option it could still offer a
discounted fee for buying the whole set in one go.
Pay per access – At the moment, students pay a one-off fee to download the
material regardless of how much of it they want to use. An alternative
approach may be to allow students to pay 'on demand'. For example, they
would only be charged when they access the material, and the level of the

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charge would depend on how many pages they access. The pricing structure
could be explained on the website.
Price transparency – The internet allows potential customers to compare
AEC's prices to its competitors very easily. Therefore AEC needs to make
sure its prices are competitive in the marketplace.
However, this price transparency could also be problematic for AEC because
it makes it harder to offer differential pricing. Candidates in poorer
countries will be less able to afford the standard prices than candidates in
richer countries.
AEC could consider developing local websites for different countries
(with local domain names), translating the prices into local currency and
possibly adjusting prices to reflect the income levels in the countries. If the
content of the website was also translated into the local language this, in
conjunction with the local domain name, would make it harder for people
from other countries to compare prices internationally.
Dynamic pricing – It is much quicker and easier to change the price of
products advertised on a website than it would be for prices advertised
through traditional media. AEC could take advantage of this to vary the
prices of its courses over time, in the same way that budget airlines do. For
example, when a course first becomes available its price could be relatively
cheap to encourage people to sign up. Then as the course becomes more fully
booked the prices could rise. However, if there remain a number of empty
spaces on a course shortly before it is due to run, the price could be reduced
to try to encourage late bookings.
Promotion
One of the main differences between electronic media and traditional media
is the interactivity of the customer in seeking out information. Potential
customers now use the internet to search for information about possible
products.
Search engine optimisation – AEC needs to ensure that if potential
customers enter a web search for accountancy manuals or courses then
AEC's product offerings come near the top of the resulting listings. The way
AEC's website is constructed will affect the likelihood of it appearing on the
first page of search engine listings.
Click throughs – AEC should also investigate the possibility of building links
to its website from other sites. For example, where it offers professional
qualifications it may be able to build a link from the qualification provider's
website. Although AEC will have to pay a commission for the number of

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visitors who come to its site via the link, it should still prove a beneficial
marketing tactic, because it will increase the number of visitors to AEC's
website as well as improving its search engine ranking.
Currently, AEC's website appears to be a standalone site with no links to any
other sites.
Banner advertising – AEC should also publicise its products and services
through banner adverts. Although the logic behind these is no different to
traditional press adverts, the more places AEC advertises itself will increase
customer awareness about its products and services.
Place
Global reach – Although the internet allows AEC to communicate globally, in
practice this global reach is likely to be more use in selling the downloadable
manuals than the training courses. Customers can download and print of the
training manuals wherever they live.
However, there are currently only eight training centres worldwide, and of
these only three offer CPD courses. Therefore, AEC's training courses are
only likely to be attractive to people who live relatively close to the
centres.
If AEC wants to maximise the global reach electronic media offer, it will
either need to consider opening new centres or, as we have discussed
earlier, provide courses and tutorials online.
Process
Website functionality – At the moment, AEC's website is predominantly
only an information site; for example, students can find information about
courses on the site, but cannot book and pay for their course online.
One of the features of the internet as an advertising medium is that it
operates 24 hours a day, 7 days a week. However, because course students
have to contact an administrator to process their booking and payment
details, this 24/7 flexibility is likely to be lost.
Interestingly, the website does allow students to pay for the downloadable
material online, but AEC should consider adding the functionality to allow
them to book and pay for their courses online.
Online queries – There is also no evidence that students can register any
queries online. This is another feature which the marketing manager should
consider adding to improve the consistency of the overall marketing mix.

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Part E: People and Value Creation

27 Dr Strong
(1) Why C Company's problems may have developed
System of management
Dr Strong's system of management clearly does not support the innovatory
science that the C Pharmaceutical Company depends on for its commercial
success. Dr Strong's system, with its strict financial and personnel discipline,
clearly constrains the creativity of the R&D unit's scientists.
Mechanistic or bureaucratic system in place
It is widely accepted that a management system based on rules, procedures
and routine (that is to say, a bureaucratic system) is unsuited to dealing
with new problems and rapid developments. Burns and Stalker called such a
system a mechanistic system and contrasted it with an organic (or
organismic) system. The latter emphasises interactive teamwork,
collaborative problem solving, respect for individual expertise at all levels
and commitment to the overall task. This is likely to be very effective in
contexts such as R&D.
However, such an approach is not a licence for random, unstructured activity
more or less directed at a vague objective. There is still a need for control of
resources and effort. In an organic system this is achieved largely by
cultural means. There is a network structure of control, with decisions and
plans being made after consultation with all parties concerned. The
bureaucratic idea of power flowing down from the top of the hierarchy is
largely abandoned: prestige and influence can exist anywhere and tend to
revolve around expertise.
(2) Actions to encourage creativity and innovation
Replacing Dr Strong
It is probably impossible for Dr Strong to preside over such a system,
because of his commitment to the more formal current methods. He may
have to go. However, scientists generally will find a more collegiate approach
familiar and easy to operate. If it is necessary to replace Dr Strong, an
important criterion for the selection of a replacement will be experience of
operating a more organic system of management.

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Teamwork and collaboration


It would then be appropriate to encourage teamwork and collaboration
within the R&D unit by employing suitable HRM policies. For example,
recruitment should emphasise commitment to those ideals, appraisal should
be based on actual work done rather than procedures adhered to and
remuneration should be include an element of reward for team success.
However, none of this should be done at the expense of individual creativity.
Innovation can be encouraged in other ways
(a) Leaders must create a vision and a climate of support that takes a
long-term view of R&D. Suitable targets should be set to cover both
short and long-term timescales.
(b) Risk must be accepted. Not all programmes may come to fruition, but
there must be no recriminations for failure not caused by
incompetence.
(c) A careful watch should be kept on what is going on in the wider
pharmaceutical development world. This is not so that so that ideas
can be copied, but so that R&D staff can learn from others and are
stimulated into speculation and experiment. It is also appropriate to
keep abreast of emerging requirements for new products.

28 Delegation
Delegation involves assigning tasks and the associated authority to others. YT can
only do this if his role allows him the authority to delegate. The outcome of his
appraisal confirms he does have this authority.
YT would delegate by giving members of his team the authority to carry out
certain elements of his job. The task would then be carried out by the team
member, but YT himself would remain fully accountable, both for the task and for
any decisions undertaken by his team on his behalf.
Both YT and his team could benefit from delegation in the following ways:
Motivation and development: Delegating authority contributes to the job
satisfaction and development of lower level employees. Increased job satisfaction
means that the team are better motivated and also more likely to produce higher
quality work.
Training, appraisal and succession planning: Increased levels of responsibility
supports training, appraisal and management succession planning as it gives staff
experience and prepares them for promotion.

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Shorter decision making chain: Delegation brings decision making closer to the
situation requiring decisions as it reduces the number of people the information
must pass through. Better decisions may also be made as the decisions are made
by those individuals with specific knowledge of the problems encountered.
More efficient use of resources: YT is currently overloaded as shown by the
exceptionally long hours he has been working. There are physical and mental
limits to the workload of any individual and the hours they are able to work. If YT
were to delegate some of his tasks to appropriate members of his team he will free
up some time to focus on higher-level tasks, such as planning. This will ensure his
time is more effectively used and should also lead to a higher standard of work.
Stronger team: Delegation should not only provide YT with a more realistic
workload but also will provide opportunities for knowledge and skills
development to the staff and an overall improvement in the strength of the team
as a whole.

29 KCC
Organisational culture is 'the way we do things round here'. The culture of an
organisation, such as KCC's, may be differentiated by their structures, processes
and management methods.
When CT first established her business its culture may be described as a power or
club culture. A power culture is shaped by one individual. The culture of KCC
would be based and shaped around CT. Much of the drive for growth would be
through her own passion and enthusiasm. Much of her time would be spent on
creating designs for cakes.
KCC was able to react quickly to change because it was adaptable, informal and
decision-making was quick.
Within KCC, there was little formalisation, and few rules and procedures. As
the organisation was relatively small, all the staff would know each other. CT was
on first name terms with all her staff and CT had direct communication with all
her employees.
As KCC grew it would have introduced more formal structures and control
systems. The culture that emerged is likely to be a role culture. A role culture is a
bureaucratic culture, shaped by rationality, rules and procedures. There is a
presumption of logic and rationality.
The characteristics of the culture that KCC is likely to have now are those of a role
culture and these contrast with the power culture of the company when it was
first set up.

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KCC now relies on formalised rules and procedures for work routines. This is
seen by the employee who was overheard commenting that he felt he was just a
robot on the production line, rather than a craft worker.
Decision making in a role culture, such as KCCs, will be standardised and
bureaucratic. Decisions also tend to be controlled at the centre. KCC has a senior
management team, who are focused on achieving efficiencies, control and bottom-
line performance.
KCC has managers who look after different functional areas of the business.
Communication will tend to be vertical within these functions and creativity
may be stifled. This can be seen by the fact that KCC has functional managers who
seem to have little interest in the creative side of the business.

30 TS Consultants
Herzberg's motivation theory
Staff in the Finance Department of YR Hospital enjoy competitive salaries and
benefits, yet morale is low and they are performing poorly. Herzberg classifies
salary and benefits as hygiene factors, rather than motivator factors. Hygiene
factors are essentially preventative. They prevent or minimise dissatisfaction
but do not give satisfaction, in the same way that sanitation minimises threats to
health, but does not give 'good' health. They are called 'maintenance' factors
because they have to be continually renewed to avoid dissatisfaction.
What the staff lack are motivator factors. Motivator factors create job
satisfaction and are effective in motivating an individual to superior performance
and effort. In this context, missing motivator factors include:
(a) Advancement and growth in the job. Staff have not received any training.
(b) Responsibility and challenges. Staff must keep within a narrow job
description and have no chance take the initiative or make decisions on the
department's activity.
(c) Recognition and achievement. The focus on restricted tasks and close
supervision stifles development and employees do not feel trusted. The main
reason for this is that there is very little feedback on performance.
Herzberg suggested that if there is sufficient challenge, scope and interest in the
job, there will be a lasting increase in satisfaction and the employee will work
well; productivity will be above normal levels.
Task oriented management style
The lack of motivation is a function of management style. Blake and Mouton
identified two basic dimensions of leadership: concern for production (or task

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performance) and concern for people. It is clear that in the Finance Department,
management is task oriented, concentrating solely on achieving results and
ignoring people's needs. In fact, if people's needs are ignored for too long, results
often suffer.
Recommendations
(a) A more participative management style is needed. A participative
management style is defined by Likert as one where the leader has complete
confidence in subordinates who are allowed to make decisions for
themselves. Motivation is by reward for achieving goals set by participation,
and there is a substantial amount of sharing of ideas, opinions and co-
operation.
(b) A more consultative management style, defined by Likert as one where
leader has some confidence in subordinates, listens to them but controls
decision making, motivates by reward and a level of involvement, and will
use the ideas and suggestions of subordinates constructively
(c) Empowerment of staff. This involves making staff responsible for achieving
and in some cases setting work targets.
(d) Delayering. This means cutting the number of levels (and managers) in the
chain of command. This will overcome the 'them and us' culture that
currently exists between management and staff, by pushing the
responsibility further down.
(e) Feedback. Currently staff do not receive feedback. An effective appraisal
system would overcome this.
(f) Learning and development. Training is needed, whether formal or in the
form of mentoring. As staff take on more responsibility, they will need more
knowledge and skills.

31 TR
There are several theories about the leadership or management style that
individuals might use. One of these theories was developed by the Ashridge
Management College Research Unit, developing the views of Tannenbaum and
Schmidt that leadership styles can vary along a continuum from autocratic to
democratic.
Ashridge Management College theory
The theory put forward by the Ashridge Management College is that four
leadership styles can be identified: tells, sells, consults and joins styles.

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(a) The 'tells' style is an autocratic style of leadership. If TR were to adopt this
he would make all the decisions personally and tell subordinates what the
decision is. The advantage of this style is that the leader is able to make
decisions quickly and act forcefully. The disadvantage is that subordinates
may resent being told what to do all the time, especially if they are not
convinced that the leader's decisions are correct. TR thinks that he has not
always been flexible in his approach to problems, and this may be the result
of having a 'tells' style.
(b) The 'sells' style of leadership recognises that subordinates should be
persuaded to accept the decisions of the leader. If TR adopted this style,
decisions would still be made by TR, but he would explain the reasons for his
decisions to his subordinates and he would try to persuade them to accept
that his decision is a good one. Since TR would make the decisions himself,
an advantage of this style is the ability to make quick decisions. The
disadvantage is that subordinates may understand the reason for the
decision, but may disagree with it and may be dissatisfied with their inability
to comment on it.
(c) The 'consults' style involves consulting subordinates before the leader
makes a decision. If TR adopted this style, he would make the final decision,
but would listen to the views and opinions of subordinates before making it.
The advantage of this style is that the leader is able to consider a problem or
decision from the perspectives of several people and so obtain a better
understanding of the problem before making a decision. The potential
disadvantage is that subordinates may resent the leader's decisions if they
are eventually taken without seeming to take their advice or opinions into
consideration.
(d) The 'joins' style is a democratic style of leadership. If TR adopted this style
subordinates would be fully involved in the decision-making process and
decisions would be reached jointly by the work group, and by consensus.
The advantage of this style is that subordinates may be motivated to act on
decisions that are taken. The disadvantages are that the subordinates may
not have the skills or experience to offer a reliable opinion, and decisions
reached by consensus are not necessarily the best decisions in every
situation.
Contingency approach
TR thinks that his management style is not effective in all situations. This suggests
that he should change his style, for example by adopting a consults style (because
this may help him to be more flexible). Theorists such as Fiedler have argued that
the most suitable and effective leadership style varies according to circumstances,
and TR may wish to consider whether he is able to change his style according to
the nature of the problem and the decision that has to be taken.

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32 T Aerospace
Power is the ability to get things done. French and Raven classified power into six
sources: coercive power; reward (or resource) power; legitimate (or position)
power; expert power; referent (or personal) power; and negative power. The
sources most relevant to KK, and how each could help her manage the changes in
the Finance Department, are explained below.
Reward (or resource) power
This source of power is based on access or control over valued resources. KK is a
senior manager in the Finance department and as such is likely to have access to,
and a degree of control over, resources. This could be very helpful to her in
managing the changes in the Finance department as she may be able to obtain
resources such as additional budget or, more valuably, information.
Information is particularly important as failing to provide sufficient information
and the lack of communication is a primary source of resistance to change from
employees. Knowledge of the change and the reasons behind it will greatly
increase the likelihood of a smooth transition to the new roles and responsibilities
within the department.
Legitimate power (authority)
This source of power is associated with a particular position in the organisation.
An individual may have the power to issue instructions because the authority to
do so has been formally delegated, as is the case with KK.
KK has been formally asked to lead the changes. Her legitimate power will help
her manage the changes as the other staff will be aware that she has been formally
given the task and does, therefore, have the right to do certain things or make
certain changes.
Expert power
Expert power is based on experience, qualifications or expertise. This source of
power is dependent on others recognising that expertise.
KK's expert knowledge has been acknowledged and is held in high regard giving
her significant expert power. This could help her to successfully manage the
changes as her acknowledged expertise makes it more likely that people will
accept what she says as fact and less likely to challenge her assumptions or
processes.
Referent power
This power is based on force of personality or 'charisma' which can attract,
influence or inspire other people.

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KK is well liked and respected by her colleagues and is also known for showing
interest in, and providing support to, all those who work for her.
KK's referent power could be very helpful to her in managing the change as the
staff appear to have formed the option that KK is 'on their side' and will be much
more likely to go along with her requests as a result.

33 PCC Co
Culture can be defined as ways of behaving and ways of understanding that are
shared by a group of people. It is 'the way we do things around here'.
These deep rooted ways of doing things and routines that underpin an
organisation mean that it has a significant influence over the organisation's
strategy and structure and the relationship it has with its various stakeholders.
PCC Company's strong culture will have both positive and negative effects on
organisational performance. Positive influences include:
Identity
A strong culture provides employees with a sense of identity and belonging. This
can be motivational and impact positively on staff retention.
Communication
Culture can facilitate good communication and coordination.
Reduce differences
Differences between people, groups and members of staff within PCC Company
will be reduced.
Regulation
A strong culture will regulate behaviours and norms. Dominant values and
attitudes will be reinforced.
Image
A strong culture will reflect the philosophy of the founder or the dominant group.
This will provide an image and identity to the company affecting the way it is
perceived externally. This has the potential to differentiate PCC Company from its
competitors and could be the basis for developing a competitive advantage.
Strategy
A strong culture will directly impact on the strategy of the organisation and its
ability to react to change.
Negative influences of PCC Company's strong culture include:

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Inflexibility
Strong cultures can be deeply ingrained and difficult to change.
Blinkered
It could create a blinkered view which may prevent PCC Company from learning
new skills or taking on new challenges.
Inappropriate values
If the culture of PCC Company is based on inappropriate values it could cause the
performance of the organisation to deteriorate. The effectiveness can also be
hindered if PCC's strong culture does not have positive attributes in relation to
stakeholders and change.
Conflict
Strong cultures have the potential to cause conflict when the organisation is in
contact with another. This is of particular concern for PCC Company given that
future developments may involve a merger with another company. If conflict does
arise it will significantly reduce the likelihood of that merger being successful.
Environment
If PCC Company's strong culture is not aligned with the environment in which it
operates it is unlikely to succeed.

34 S Company
(1) Role culture and why it may no longer be appropriate for the company
Organisation culture may be defined as the complex body of shared beliefs,
attitudes and values that shape behavioural norms in an organisation.
Examples of organisation culture include such elements as its beliefs and
values ('the customer is always right', for example), and symbols such as
corporate logos. Expected norms of employee behaviour (such as dress
codes) and rituals (the staff summer party) are also manifestations of
organisation culture. The concept of organisational culture is one that S
Company needs to take into account, because it is running into difficulties in
a changing market.
A role culture is a bureaucratic culture shaped by rationality, rules and
procedures. It is typically stable, slow-changing formalised, and impersonal.
Authority is based on position and function. Role cultures can be very
efficient in stable environments where workers have the opportunity to gain
expertise. This is one of Harrison and Handy's four possible cultural types
for organisations.

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S Company has experienced a shift in its environment away from a


comfortable monopoly position to competition and is experiencing severe
difficulties.
The stable, slow moving role culture is no longer suitable for a
competitive environment where S Company needs to be flexible and
innovative, quickly responsive to changes in the environment and
competitor initiatives.
Workers have expertise but they are unwilling to collaborate and work
outside their specialism or function. This hinders innovation and the
ability to develop new services.
In summary, the role culture worked well or at least was more suited to S
Company's situation as a monopoly provider. Once competition destabilised
its environment, S Company found itself unable to cope with the need for
organisational flexibility.
(2) The type of culture to which the company now needs to move
Using Harrison and Handy's classification the 'best fit' type of culture would
be a task culture. The task culture is one where management is directed at
solving problems and completing projects. The focus is very much on
getting the job done. The culture is team-based, horizontally-structured,
flexible and values expertise.
Management in S Company clearly need to direct their energies into
solving any problems and getting projects completed. This requires
focusing on outputs (ie products) and on resolving staff problems, especially
'work to rule' attitudes.
This would enable new innovations in services to be offered to customers
sooner than at present.
Staff must learn to work in teams which cross functional boundaries
and draw on specialisms as they are needed. They need to embrace a
culture of problem solving and team working to get new products and
services into the market place.

35 ABC
HR planning is the process of estimating future requirements for employees,
analysed according to the work or jobs they will do and their level or position in
the organisation structure: these estimates should specify the expected numbers
of each type of employee.

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The forecast should cover a planning period of several years, although the plan for
the short term, possibly the next 12 months, will be more detailed than the
forecasts for the longer term due to greater uncertainty about the long-term
future.
The HR plan should also estimate the available numbers of employees of each
type, allowing for losses through resignations and retirement.
There will be a gap between forecast requirements and forecast staff available,
and the HR plan should include provisions for closing the gap.
ABC needs formal human resource planning for the following reasons:
ABC is a human capital business. An accounting firm sells the expertise of their
staff. If it does not have sufficient staff available it will lose potential sales. If it has
too many staff available it will incur excessive costs. If the staff are not of the right
quality it will lose customers and may face legal action from clients or regulators
for any errors it makes in the service it gives.
ABC needs to retain and motivate existing staff. At least 75% of ABC staff have
chosen to pursue a professional career and therefore will be motivated by
progression, responsibility and higher earnings. Human resources planning can
help these staff to perceive ABC as a place where they can progress their careers,
and this will encourage them to stay with ABC and work hard.
ABC needs to avoid risk. The accounting profession is closely regulated and firms
are frequently subjected to litigation and scrutiny. Firms like ABC must ensure
that staff are adequately trained and experienced in the work they do. It must
ensure that there is succession planning for key roles.

36 Recruitment and selection


Recruitment and selection consists of two-stages. Recruitment starts when a job
vacancy is identified. It is the process of obtaining a supply of suitable possible
candidates to fill the vacancy.
Selection is the process of appointing the most suitable candidate to a job vacancy,
by choosing the best individual from the candidates available.
When job vacancies arise, an organisation should want to have a choice of
applicants who seem able to do the job and who want to do the job.
Recruitment process
• Identify the vacancy.
• Identify skills and personal qualities needed for the job.
• Obtain applicants for the job. This can be done through advertising directly
or through an external recruitment agency.

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Selection process
• Select candidates for interview from the applicants.
• Conduct selection interviews.
• Prepare a short-list of preferred candidates .
• Offer the job to the person at the top of the list.

37 NGV
(1) Financial ratio analysis – Depending on the ratios the Director chooses to
use, financial ratio analysis could allow him to assess the profitability and
returns NGV makes.
Currently, NGV does not have a management accounting function, and so the
Director has to estimate how well the company is performing.
In this respect, introducing a more formal performance measurement
system (ie formal ratio analysis) should allow the Director to exercise
greater financial control.
Lack of control – The size of the department (320 staff with expenditure in
the region of Rs. 4,000 to 5,000 Mn) would suggest that it would benefit from
a system of financial control, but it also seems rather surprising that a
department of this size doesn't already have one in place. For example, it
would be useful for the department to compare its actual expenditure
against budgeted expenditure on a regular basis. And having an
understanding of the amounts the department is actually spending would
also be useful when agreeing the next year's budget with the government
minister.
Moreover, the fact that NGV normally has a deficit at the end of the year
suggests that it would benefit from tighter financial controls.
Lack of information – However, in practical terms, if NGV continues not to
have a management accounting function, it may be debatable how the
Director will be able to get the financial information he will require for his
ratio analysis.
For example, we might expect the ratio analysis to take place in the context
of periodic management accounts, comparing actual results to budget or
forecast. But, in the absence of a management accounting function, or
any regular management accounts, this information will not be available.
Organisation structure – Perhaps more importantly, NGV is not run as
either a profit centre or an investment centre, and records neither the

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sales revenues accruing from its innovations in its own results, or its own
assets on its balance sheet.
Given this, any ROI generated under the current accounting structure is
likely to be rather misleading. In order for a meaningful ROI figures to be
calculated, NGV would need to show the sales revenues accruing from its
innovations in its own results, and would also need to show the value of the
department's capital equipment on its own balances.
Change of policy – Consequently, under the current organisational
structure, if the Director starts using financial ratio analysis it may have little
impact on NGV's ROI.
However, if the introduction of financial ratio analysis were also
accompanied by a reclassification of NGV as an investment centre (rather
than a cost centre) the analysis should have more impact in helping NGV
achieve an adequate ROI.
It is likely to be the change in the classification of NGV which is critical for
helping NGV to produce an adequate ROI, not simply the introduction of
financial ratio analysis into the current organisational structure.
(2) Knowledge management – The aim of NGV's knowledge management
strategy will be to capture, organise and make widely available all the
knowledge the department possesses, whether it is currently recorded
(explicit) or in people's heads (tacit).
This is particularly important for NGV given the amount of 'tacit' knowledge
it currently possesses through its research experts, but which it is vulnerable
to losing if these experts leave it to join a commercial organisation.
Consequently, the knowledge management strategy should try to capture as
much of NGV's 'tacit' knowledge as possible and convert it into 'explicit'
knowledge (by recording it and making it available to the organisation).
Senior management support – In order for the strategy to be successful, it
will need to be supported by the Director and the other members of the
senior management team within NGV. (The management structure of NGV is
not identified in the scenario.) One important reason for this is that
implementing the strategy will cost money, and will lead to changes in
operating procedures for the staff. There may even need to be changes to
the organisational structure; for example, NGV may need to appoint
knowledge managers who are responsible for implementing the strategy.
Knowledge managers could play a vital role in collecting and categorising
knowledge, and encouraging other people in NGV to use the available
knowledge.

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However, more generally, senior management support will be vital to


approve the spending required to implement the strategy, and to help
overcome any resistance to change when it is introduced.
It seems likely that the Director will support the strategy because he has
already articulated his concern at the 'brain-drain' within NGV, and the lack
of a system for capturing tacit knowledge.
Identify aims of the strategy – It is important that the aims of the strategy
are identified early in the process so that the knowledge managers (or
whoever else is responsible for implementing the strategy) know what they
are trying to achieve. Identifying the aims will also be important for
subsequently measuring how successful the strategy has been, and how well
knowledge is used in the organisation.
Capturing and storing knowledge – NGV's size (320 staff) means that it
will need some technological infrastructure in place to capture, store and
distribute the knowledge. This is likely to take the form of an Organisational
Management System (OMS), which could include databases, intranets and
data mining tools.
It is important that the OMS doesn't only deal with explicit knowledge, but
also helps NGV capture knowledge which is currently tacit so that in future it
can be exploited by the department.
Structuring knowledge – In order for NGV to be able to maximise the value
NGV can get from the knowledge it stores, the knowledge needs to be
effectively organised and accessible. In this respect, NGV could look to
build 'repositories of knowledge' in which a network of contents pages
provide links to other databases where the actual knowledge is stored. This
cataloguing of knowledge could be a complex and time-consuming process,
so NGV may need to use an information specialist (such as a librarian) to
help build the repository.
Pay review – However, as well as developing a system to capture to capture
knowledge, NGV should also be looking to reduce the number of people
leaving the department. In this respect, the Director could instigate a review
of the current pay structures and pay rates, because it is likely that
uncompetitive pay is exacerbating the current loss of tacit knowledge as
NGV's staff are leaving to join other organisations who pay them more.
Cultural change – Importantly, however, as well as implementing the
physical IT systems which will be necessary to capture and store knowledge,
NGV will also have to address the 'softer' aspects of implementing the
strategy.

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Perhaps the most critical factor in the success of the strategy will be NGV's
ability to create a culture of knowledge sharing within the department. If
NGV's research staff continue to view knowledge as being their own
personal possession, they will resist any demands to share this knowledge
with the organisation. As a result, knowledge will continue to remain tacit
rather than explicit.
In order to overcome the staff's resistance to change in this respect, NGV will
need to convince them of the benefits of the new strategy – both for the
department and for them as individuals – for example, by allowing NGV to
undertake more complex and interesting research projects.
At a personal level, the staff appraisal system could also be amended so
that staff are rewarded according to the amount they share knowledge and
contribute knowledge to the knowledge management system.
Training and usage – Once the knowledge management technology is in
place, the databases will need to be populated and NGV's staff trained and
encouraged to use their contents. Again, the knowledge managers are likely
to play a key role in encouraging the staff to use the OMS, but the staff are
likely to need some formal training before they start using it.

38 FPC Co
(1) The purpose of training in communications
Training should have a purpose. In FPC Company, PR has recognised a
problem of poor communication by finance staff that is ongoing, with no
effort to resolve it. The overall aim of the training sessions should therefore
be to create awareness among finance staff that there is a problem with
communication, for which they are responsible. They also need to
understand the consequences of poor communication, which is that the
information provided is not understood and acted on in the way that it
should be. Having recognised the problem of poor communication, staff
should then be trained to learn methods that can be used to improve their
communication skills. It will then be the responsibility of PR to ensure that
these skills are then applied in practice, by introducing change into the way
that financial (and non-financial) information is communicated by the
finance team.
Communication problems and a communications model
Training should initially focus on the problems that exist in FPC Company. As
a way of structuring the problems, it will be useful to discuss a simple
communication model. Communication occurs between the creator of a

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message and its recipient or consumer of information. The information is


provided through messages, which are delivered in a language used by the
creator that the consumer must interpret and 'decode'. The information is
delivered through chosen media. A basic communications model therefore
consists of creator and consumers, the message, the language of the message
and the medium for transmitting the message. Training should encourage
finance staff to understand that problems in communication can occur with
any of these, making the communication process ineffective.
Training sessions should go on to cover the nature of communication
problems in more detail, how they arise in FPC and what can be done to deal
with the problem.
The creator and the message
A training session might focus on the creators of information and the content
of the messages they send.
Finance staff should be trained to think about the purpose of the information
they send out and what they should be trying to achieve with the
information. This includes recognising that the purpose of much
communication is to prompt a reaction by its recipients. To do this, the
recipients need to be aware of the information and understand what it
means.
Staff should be taught about the need to recognise the level of understanding
of the recipients of information. In the case of financial information, it is
particularly important to recognise that non-financial staff do not have a
strong understanding of the technicalities of finance and accounting and are
unlikely to understand or use the jargon that finance staff commonly use.
Awareness needs to be established that in FPC messages are often too
complicated and there is excessive use of financial jargon. Training should
include methods of presenting relatively simple messages in language that
the recipients can understand.
The recipients of messages and the medium
Another training session might focus on how recipients get the messages and
how they use them. This might also include training on the choice of medium
or channel for sending the information.
Communications should mean something to the recipient and should prompt
the recipient into action where appropriate. This means that the messages
should 'grab their attention' and sustain their interest. Messages should
therefore highlight information that matters to the recipients, and should be
seen and understood by them. Finance staff need to understand that

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recipients of information respond to messages about non-financial as well as


financial matters, and may be disinclined to study financial indicators alone.
Training should also help staff to recognise the importance of using suitable
communications channels for messages. We are told that there is excessive
use of e-mails, in which it is difficult to identify relevant information. It might
help to make finance staff aware of the number of e-mails that managers in
FPC have to deal with each day, and how they respond to the many e-mails
they receive.
Staff should also be encouraged to think about the form in which the
message is delivered. We are told that financial spreadsheets are used, in
which it is difficult to identify the significant information. Training should
address the issue of whether non-financial staff are familiar with
spreadsheets, and whether other methods of presenting information – for
example in graphical form, or by highlighting significant information in
another way, might be appropriate.
Feedback
A training session should try to get finance staff to understand the value of
feedback, and the need to monitor how recipients have responded to the
messages sent out. Information has value only if it is used for decision-
making, and finance staff need to be aware of how the information they
provide is used by managers within the company. If the information is not
being used in the ways that are intended, measures need to be taken to make
the messages more effective.
To bring the training to an end, PR should lead a session on what needs to be
done to improve the quality and effectiveness of financial (and supporting
non-financial) information within the company. He might do this by
announcing that he wants to establish a communications plan in which all
the issues – the purpose of information sent out by the finance department,
its content, form, timing, avoiding the use of technical language or jargon,
and monitoring how it is understood and used – are all considered. Training
in best practice needs to be converted into actual best practice.
(2) Staff appraisal
Staff appraisal schemes usually have several purposes.
In FPC, staff do not have clear targets or objectives. When there are annual
appraisals for members of staff, the process can be used to establish
performance standards and targets that are expected from individuals.
Informing individuals about what is expected of them might encourage them
to work in conformity with standards or towards the stated goals.

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Having established targets or standards for individuals, annual appraisals


can be used to monitor actual performance by comparing it with the target.
Individuals can be made aware of how well or how badly they have
performed. Giving praise for good performance may motivate individuals to
maintain their standards in the future.
Appraisal schemes are often linked to reward schemes, and annual bonuses
for achieving or exceeding targets. Pay is considered a strong motivator, and
the offer of rewards can help individuals to focus on achieving the targets
they have been set. A criticism of reward schemes is that individuals may
focus on achieving targets to the exclusion of all other considerations, and
incentive schemes must be carefully structured if they are to have the
desired effect on overall performance.
Another use of appraisal schemes is to encourage the personal development
of individual employees. Appraisal interviews can be used by a boss to
discuss with each team member individually what they have achieved in the
year, and what they have done well or badly. This constructive discussion
can then be used to consider ways of improving performance and helping
the individual to develop in the future. The outcome of an appraisal
interview may be an agreement to send the individual for training in
particular subjects in order to develop their knowledge and skills. There may
also be agreement on how the individuals can be encouraged to improve by
doing more varied work in the future or taking on more responsibility.
Appraisal interviews that are used to agree measures for training and
development for the individual can motivate the individual. It should create
awareness that the organisation is concerned about the individual and wants
to encourage the individual to develop and improve. It also helps the
individual to recognise more clearly the ways in which he or she should be
trying to improve.
To have any value, appraisal interviews should happen regularly, typically
once a year. If they are held only infrequently, as in FPC Company, they will
be ignored as nothing more than an occasional wasteful administrative
exercise by the HR department. Line managers need to take ownership of the
appraisal process for the process to be effective. It may also be argued that
although formal appraisal interviews should occur annually, there should be
continual monitoring and mentoring of individuals throughout the year, to
improve and sustain their personal development.

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Part F: Value Creation Through Technology and Innovation

39 MST
Internal business perspective
Actual introduction schedule compared to plan – One of the key changes which
Mr G is looking to introduce at MST is moving the staff away from pure research
projects onto the development of commercially viable products. One way he could
introduce more discipline and structure over the development process is to
develop a timetable for when new products become commercially available.
Alongside this it would then be important to measure when the new products
actually become commercially available compared to the original timetable.
Development vs research time – Another way of assessing how successfully the
shift in focus from 'research' to 'research and development' is being adopted by
the scientists will be to measure how much of their time is spent on pure research
projects compared to how much is spent on their commercial development.
Innovation and learning perspective
Number of patents filed – Although MST's engineers have published a number of
academic papers, they have not filed any patents. However, patenting new ideas
could help MST develop a competitive advantage over its rivals. Therefore,
measuring the number of patents filed will indicate the scientists' success in
developing commercially viable new products.
Number of modifications required in product development – Initially, it is
likely that the pure research ideas will have to go through a number of
modifications and prototypes as the scientists develop them into a commercially
viable product. However, as the scientists become used to developing their ideas
they should need less modifications to develop their initial idea into a product.
Therefore measuring the number of modifications required will indicate how
successfully the scientists are adapting to the new commercial process.

40 AAA
An organisation's Information Systems (IS) strategy is its long-term plan for
systems to use information in order to support the overall business strategies
or create new ones.
So, IS strategy will have an impact on corporate and business objectives through
the way which it contributes to an organisation's ability to achieve those
objectives. To this extent, IS strategy can be seen as a functional (operational)

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strategy, in that the relative success of its implementation will help determine
the success of business and corporate strategies.
In most cases, functional strategies are designed in the light of the more strategic
corporate or business strategies. However, IS strategy is unusual in this respect
because it can act as a change trigger which requires an organisation to change
its corporate strategy, business strategy and its other functional strategies.
Impact on corporate strategy. An IS strategy of implementing e-commerce in an
organisation based in a single country could lead to a corporate strategy of market
development, to take advantage of the global range of the internet.
Impact on business strategy. The increased availability of performance
information should highlight which products and markets are performing well for
an SBU, and which are performing poorly. Therefore the IS system may lead to a
change in the products and/or markets served with by a business unit.
Impact on other functional strategies. The production systems, logistics, and
accounting systems may all need to be changed to meet the demands of e-
commerce. Marketing and customer services strategies may also need adapting to
reflect the business's changing marketplace. In turn, this may affect staffing levels,
the skill sets staff need, and may also change the locations where staff are
employed (for example if operations are outsourced or off-shored).

41 Gardening Services
(i) Information systems (IS) strategy
Purpose
The IS strategy should identify the systems that will enable GS to use
information to support her new business strategy. In this context,
'systems' will include the activities, records and people which GS will need
to employ to meet the demands placed on the business, as well as the
technology used.
Benefits
Business led – An IS strategy should be business-driven, so developing it
will encourage GS to identify the ways in which information will support her
new business strategy. Historically, GS's information systems have been very
basic (based largely on her diary), but developing an IS strategy should
encourage GS to appreciate that her IS strategy and the business strategy
need to be inter-related.
Demands for information – For example, the IS strategy will focus on the
demands the business may make for information.

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Creating new strategic options – However, by looking at the way


information can be used strategically, GS may also be able to generate new
ways of doing business which could allow her to secure a competitive
advantage.
Commercial focus for information – Historically, the level of profit the
business earned has not been of primary importance for GS, and she has
been happy to rely on her diary as her source of business information. As the
business takes on a more commercial focus, GS will need to look at
information more critically: for example she should look at how much it
costs her to undertake different jobs and to identify which clients are most
profitable. Equally she will need to ensure the levels of service and quality
provided to the hotel meets its expectations. The IS strategy should help GS
define how she will generate the information she needs to manage the
performance of the business.
(ii) Information management (IM) strategy
Purpose
The IM strategy will define the roles of GS's staff (and GS herself) in using the
IT equipment, the relationships between them, and the design of any
processes needed to exploit IT resources. The IM strategy should also define
how data is stored and accessed.
Benefits
Define responsibilities – Historically GS has managed all the business'
information herself, but now that the business has expanded, GS will be
sharing some of the responsibilities with her administrative assistant. It is
important that GS defines which tasks the assistant will do, and which she
will continue to do herself. Information requirements – It is likely that GS
will also require information about the business' performance on the hotel
contract. The three gardeners, GS's assistant and GS herself may all be
involved in collecting and collating this information. Again, the IM strategy
will be important in defining who needs to provide what information.

42 KPG Systems
A corporate appraisal, or SWOT analysis is a critical assessment of the strengths,
weaknesses, opportunities and threats facing the organisation in relation to the
internal and environmental factors affecting it, carried out in order to establish its
condition prior to the preparation of a long-term plan. Strengths and weaknesses
are discovered by internal analysis, whereas opportunities and threats are
diagnosed by environmental analysis.

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The internal analysis should determine strengths that can be exploited and
weaknesses that should be improved upon. The external analysis should
highlight opportunities which could be exploited, and need to recognise threats
facing the organisation. The threats need to be assessed to determine their
potential effect on the organisation itself and its competitors.
Strengths
One of the main strengths of the business is the commitment, enthusiasm and
technical ability of the owner, Michael Banda. Customer care is also a major
strength in that products are designed to the requirements of individual
customers, which gives KPG a competitive edge. Allied to this is the importance of
the technical support provided by the company. As technology becomes more
complex, it is likely that companies will rely more on specialist technical support
rather than on in-house abilities.
Weaknesses
One of the major weaknesses of the firm, and one that Michael has recognised, is
that it may have lost its direction. There is also a lack of creative marketing
strategies and allied to this a failure of business forecasting. Although the
technical support activities of KPG are a strength, there is also a problem with
providing support throughout Sri Lanka. Finally, there would appear to be an
over-dependence upon Michael Banda, which may mean that there will be
senior management problems as the firm grows further.
Opportunities
In this age of high-technology, there is little doubt that KPG's market will continue
to grow and expand. The opportunity here is for KPG to increase its share of this
market. In this area there are likely to be many innovations and advances that
KPG could adapt and embody in its products.
Threats
One major threat to KPG is that it is only a small player in this market with a small
and vulnerable market share. Many of its competitors are larger companies
with heavy investment in market, product and competitor research, which may
give them a competitive edge over KPG. A further threat to all participants in this
market is the global economic downturn, which may affect potential customers'
investment plans and will almost certainly make customers more price-conscious.
Changes in technology are considered as an opportunity if KPG has the technical
expertise to capitalise on them; however, if KPG cannot keep abreast of changes in
technology, the company may fall behind its competitors.

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43 LM Recruitment
(1) Information Systems strategy (IS) decides the types of information
available to members of the organisation.
Information Technology strategy (IT) determines the hardware, software,
and communications used to deliver that information.
Increased strategic importance of IS / IT
As LM has grown rapidly, so have its information needs to enable
communication, and to allow monitoring of activities. LM now needs an
overall strategy for its information technology (IT) and information systems
(IS) to ensure it can obtain the information it needs to sustain its growth.
Proper management attention
The managing partners do not currently appreciate IT's strategic
significance for the business, which may suggest they are not monitoring
how well it is adding value, or whether it is delivering any competitive
advantage to the business.
Control levels of IT expenditure
The level of IT expenditure (US$1 million) is the same as the forecast profits
for 20X5. However, as well as highlighting the importance of IT to the
business, this size of this figure might also suggest that the current piecemeal
approach to IS / IT is not efficient. For example, if each division buys its
hardware and software separately, LM might be paying more for them than
if it had central purchasing of IT. Therefore LM may be spending more on IT
than it needs to.
To ensure integration and communication
LM's current strategy means that each division operates autonomously, but
this is causing difficulties and inefficiencies in relation to IT - both internally,
and in customer-facing transactions. For example, the lack of a common
software means there are difficulties in transferring information between
divisions. This could lead to inefficiency and mistakes.
Impact on customer service
The differences in style and quality between the divisions' web pages means
that LM does not offer its clients a consistent level of service. and LM appears
less professional to clients and customers that other agencies with better
maintained sites. This could be very damaging because it may mean that LM
loses revenue if clients transfer their business to its competitors.

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Benefits of common overall strategy


LM's current problems reflect its current piecemeal approach to IS / IT, and
the failure to recognise them as strategically important. Introducing a
common overall strategy would address all these issues. In doing so, it
should also lead to greater co-ordination and control, as well as improved
performance within LM.
(2) Overall purpose of IS/IT strategy – The strategy needs to identify how
information is going to be used in the business to support its operations and
to achieve competitive advantage over its rivals, for example, through
databases which allow it to match prospective candidates to vacancies more
accurately than rival agencies can.
The strategy should also highlight the benefits (or deliverables) that IS/IT
are expected to provide to LM so that expenditure and performance can be
properly evaluated.
IS strategy
Support of the business
The strategy must formalise the ways in which information supports the
business. Doing this will ensure LM addresses a number of the issues it is
currently facing.
For example, although each division operates in specialist markets and so
may need some bespoke features in its software, there still needs to be a way
of sharing information between divisions. The overall strategy could control
these things by introducing a degree of standardisation to the software.
Similarly the strategy could identify service standards for the website, to
reduce the current levels of variation between the different divisions' pages.
IT strategy
Hardware and software
IT strategy could formalise the process for selecting and managing hardware
and software. For example, it could identify the specification of computers to
be used in the business, and could establish a consistent replacement policy
across the divisions. Equally, the strategy could formalise purchasing
procedures so that LM gets the best price for its purchases.
Structure and governance
As well as looking at standards for hardware and software, the overall
strategy also needs to address the role of LM's staff in relation to
information. For example, the strategy could highlight the need for someone

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to maintain the corporate website and ensure consistency of branding and


maintenance between the divisional web pages.
The strategy should also formalise the way that IS / IT is managed
throughout LM; for example, by making one of the Board members
responsible for IS / IT to reduce the autonomy of the divisional managing
partners in this respect. The strategy could also consider whether LM will be
better served by having one single centralised IT function, or by keeping
three separate divisional ones.
Performance measurement
The overall strategy also needs to indicate how performance is going to be
controlled and measured. This could include setting parameters for the IT
budget and performance measures; for example, in relation to IT
expenditure (eg, as a proportion of client revenue) or in terms of service
levels (eg, minimising the amount of time the website is 'Under
construction').

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Part G: Strategy for Value Creation

44 T Venture
(1) Using Critical Success Factors
Critical Success Factors (CSFs) are a small number of areas in which:
(a) satisfactory results will enable successful competitive performance and
(b) an organisation must excel in order to outperform competition. Johnson
& Scholes recommend six or fewer CSFs. T must attempt to determine
the CSFs for his new venture for a number of reasons.
(i) It is the only way he can present potential investors with a
sound business case for his venture. He is convinced he can
succeed with his fast-food concept, but he needs to show he can
define what success is, and what is necessary to achieve it, within
the business sector he has chosen.
(ii) CSFs provide a basis for strategy formulation, as they focus on
the strategic goals that must be pursued in order to compete
successfully: the features of T's product/service that will be most
highly valued by customers, and which will be a potential source
of competitive advantage. The fast food market is highly
competitive, so outperforming competitors will be a helpful
priority.
(iii) CSFs offer an alternative to a more comprehensive goal
structure or hierarchy of objectives, which may be too rigid
for a small start-up venture in a new market: they will enable T
to focus on competitive essentials and remain flexible in how he
(and individual outlets within his chain) will pursue them at the
tactical and operational level. This will allow for variations in
local markets, infrastructure, product availability, outlet manager
ability and so on.
(iv) CSFs provide a useful framework for identifying the business
processes and activities which will yield each CSF; defining
the Key Performance Indicators (KPIs) which will be used to
evaluate performance in delivering them; and monitoring
competitor activity for its effect on the CSF structure.

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Distinguishing CSFs from core competences


Competences are 'the activities or processes through which the
organisation deploys its resources effectively.' (Johnson & Scholes). Core
competences are competences which both outperform competitors and are
unique or difficult for competitors to imitate.
Core competences represent the distinctive abilities that T's venture must
develop and display if its CSFs are to be achieved. The two concepts are
related, in that CSFs should focus attention on whether the venture has or
can develop the core competences to compete successfully: both concepts
take a competitive view of strategy. However, the emphasis has shifted from
what must be achieved (CSFs) to the special skills and processes that will
enable the required achievement (core competences).
(2) Possible CSFs for T's chain of fast food restaurants
The CSFs for T's chain of fast food restaurants could include the following.
(i) Right restaurant locations. Proximity to significant centres of
population, easy access and adequate parking facilities
(ii) Distinctive brand identity. Recognisable and distinctive brand with a
good reputation for quality of service and diversity and freshness of
product
(iii) Speed of service. Must meet customer expectations based on
benchmark standards set by competitors
(iv) Child friendly facilities. Needs of children and families must be
catered for successfully

45 SBU
Strategic business unit
A strategic business unit (SBU) is a division with a large amount of independence.
It usually develops and markets its own products, but is part of a greater
organisation. There is a hierarchy of strategies within an organisation. These
strategies may be divided into three distinct levels:
(a) Corporate strategy is the most general level of strategy in an organisation.
Corporate strategy is ' concerned with what types of business the company
as a whole should be in and is therefore concerned with divisions of scope'
(Johnson and Scholes).
(b) Business strategy defines how an organisation approaches a particular
market or the activity of a particular business unit.

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(c) Functional strategy (also called operational strategy) involves decisions of


strategic importance but which are made or determined at operational
levels.
The strategies of a strategic business unit are thus in the middle of this
hierarchy. SBU strategies should be consistent with the strategies both above and
below it in the hierarchy.
Corporate strategy
It is important that SBU strategies fit with the overall direction of the company, its
purpose and scope as set out in its corporate strategy.
(a) Purpose. A strategy developed at the SBU level should aim to meet the
objectives of the strategies set at the higher corporate level.
(b) Scope. The SBU's strategy should align with the direction of the corporate as
a whole. For example, decisions such as which products / services should be
developed, how the SBU might gain competitive advantage, and how the SBU
may segment its market.
A strategic business unit must obey corporate strategic priorities, for example to
work to ensure that the overall performances of the group matches promises
made to shareholders. It must also work to maximise synergies and avoid action
that may undermine corporate strategy, such as inter-divisional competition for
clients or actions that undermine brands.
Functional strategies
Functional strategies are also called operational strategies. These decisions
include product pricing, investment in plant, personnel policy, and so on. It is
important that these strategies link to the strategic business unit strategies and
through those strategies, in turn, to the corporate strategy, as the successful
implementation of these is necessary for the fulfilment of both corporate and
business objectives.
An SBU strategy must determine the functional strategies to ensure that finance,
IT, marketing, production and other functions are pursuing courses of action that
contribute to the realisation of business goals, rather than 'empire building' or
'doing their own thing'. In addition, the various functions should be mutually
supportive, for example, IT should support a marketing strategy that leads to a
financial advantage for the firm.
In conclusion, successful implementation of strategy will depend upon there being
congruence in planning, implementation and control at each level within the
organisation's strategic hierarchy.

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46 J Plc
Strategy exists at three main levels: corporate strategy at the top, followed by
business strategy which then cascades down to functional strategy. These three
levels of strategy are inter-linked and, to be successful, there should be goal
congruence; the lower levels should support the higher level strategic objectives,
which in turn influence the lower levels.
Corporate strategy
Corporate strategy is concerned with the overall vision of the organisation. The
purpose, scope, strategy and principles of J company will be set out at this level.
The expectations of J Company's stakeholders should be considered here as the
corporate strategy should deliver value to key stakeholders who can both support
or oppose a strategy.
Top level decisions such as acquisitions or the closing down of areas of the
organisation will be made at this level. J Company is currently considering
entering the new markets in the BRIC economies and the corporate objective of
delivering 5% profit over the next two years has also been set. A market that can
deliver this will need to be chosen at this level and the framework for achieving
this will cascade down to the lower levels of strategy.
A further element of corporate strategy is the development of corporate policies,
such as corporate social responsibility. J Company's official stance on such issues
will be determined and documented at this level.
Business strategy
Business strategy defines how an organisation or a particular business unit
approaches a particular market. This level of strategy looks at how competitive
advantage can be obtained.
J Company's management at the business level is responsible for beating
competition and winning customers and will need to formulate strategies to allow
them to do this in the emerging markets. They will therefore be concerned with
decisions such as what range of cars to offer in these markets, how to segment the
markets and which segments to target.
The objectives cascaded down from the corporate level will provide a framework
within which the business strategy should be formulated. This will ensure every
area of the business is working towards achieving the objective of 5% profit
growth in two years.

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Functional strategy
Functional, or operational, strategy involves decisions of strategic importance, but
which are made at operational level, eg product pricing. It is these decisions that
determine the success of the strategy as, effectively, strategy is only implemented
at this level.
These decisions are made by functions across J Company such as finance, human
resources (HR) and marketing. The higher level strategy is filtered down to the
functional units which then translate the strategy into specific targets, objectives
and action plans. They ensure the specific resources are in place for the strategies
to be successful. For example, J Company's HR function will need to establish what
skills and knowledge are needed to deliver the strategy and where it should be
sourced from.
For J Company's strategy to be successfully implemented, these functional
strategies must be consistent with the business and corporate objectives of the
company. If there are conflicts between the strategies that are implemented and
the overriding strategy of the organisation, then it will inevitably fail.

47 N Airline
(1) Mission and objectives
Mintzberg says that mission 'defines the organisation's basic function in
society, in terms of the products and services it produces for its clients'. A
wider definition of mission would include reference to four elements.
(i) Purpose would differ among types of organisations, but would define
why the organisation was created.
(ii) Strategy would define the nature of the organisation's activities and
would therefore cover Mintzberg's definition quoted above.
(iii) Policies and performance standards as overall imperatives can be
included in mission to emphasise their importance.
(iv) Values are the pervasive beliefs and attitudes that underpin the
organisation's culture.
Mission is therefore the overall definition of what the organisation exists to
do.
Objectives are specific, well, defined targets whose attainment will support
progress towards achieving the mission. They translate the generalised
aspirations of mission into more specific, measurable and concrete terms
that can be used to organise the organisation's work and provide specific

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targets to measure its success against. They therefore flow from and support
mission.
While an organisation generally has only one mission, it is likely to
have many objectives. These will be arranged in a hierarchy, with a
relatively small number of high level objectives directly derived from and
supporting the mission, and each of these being broken down into a cascade
of supporting departmental, functional and even individual supporting
objectives.
(2) Strategic objectives for the airline
It is commonly considered that objectives should be specific, measurable,
attainable, realistic and time bounded: SMART. The last quality in the list is
probably inappropriate for many strategic objectives, since they will have
continuing applicability.
Highest level of customer service
A high level of customer service is clearly a major part of N Airline's
strategic vision and is intended to constitute its chief point of differentiation
from its competitors. This might give rise to an objective such as the one
below.
'To provide the highest level of customer service on the ground and in the air
as measured by customer survey, unsolicited feedback and competitor
benchmarking.'
The quality of customer service achieved will depend largely on the people
who deliver it. HRM objectives might therefore be regarded as subordinate
to the overall customer service objective. However, N Airline may wish to
elevate its HRM objective to the strategic level in order to underscore its
commitment to and dependence on its staff.
'To optimise recruitment, selection, training, development and remuneration
practices so that all staff have the ability and motivation to deliver the
highest level of customer service.'
Careful management of costs and revenues
N Airline's business model will inevitably involve a level of costs higher than
those incurred by its rivals. This must imply higher revenues from higher
ticket prices, which, in turn, will limit its market. Careful management of
costs and revenues will be required if the company is to avoid cash flow
crises. This is quantifiable in terms of gross and net margin, but the problem
will be to set targets that are both adequate and attainable. An objective
might be defined in terms such as those below.

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'To manage the company's costs and revenues so as to facilitate the


attainment of its objectives for customers and staff while generating a gross
margin of X% and a net margin of Y%.'

48 DLC
(1) DLC's control system involves budgeting, preparing monthly management
accounts and computing ROCE.
Use
Budgets as a planning tool – The process of preparing a budget should
encourage managers to think about the services planned for the budget
period, and plan for any resource requirements needed to deliver the
services which are planned. Preparing the budget should also provide a
means of co-ordinating activities within the different areas of DLC's
business.
Limitations
Inappropriateness of ROCE – X considers ROCE to be the best control
measure available for her to use. However, ROCE may not actually be a
suitable measure for DLC at the moment. ROCE is best suited to mature
organisations, but DLC (founded three years ago) is still a relatively young
company, and because it is successful it is likely to be growing quite fast.
(2) Non-financial key success factors - DLC has identified Technological
Innovation and Customer Service as its two key success factors, which
suggests that it feels these are the areas in which it needs to outperform its
competitors to remain successful.
These key success factors are non-financial, and so DLC should have some
way of measuring performance in these non-financial areas as well the
financial ones it currently measures. However, at the moment, DLC's control
system focuses only on financial performance, and so doesn't provide any
measures of non-financial performance.
CSFs and KPIs – Although DLC has not formally recognised them as such,
Technological Innovation and Customer Service are, in effect, its critical
success factors (CSFs).
Therefore, DLC would benefit from establishing some key performance
indicators (KPIs) to show how well it is performing in these key areas. For
example, measuring the number of customer complaints could provide an
indicator of the level of customer service DLC is offering.

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Timeliness of information – Currently, DLC's performance is only


measured once per month, through the monthly management accounts and
ROCE calculation. However, KPIs measuring the performance of the key
operational processes could be reported much more frequently; for example,
customer complaints could be reported on a daily basis. In this way,
managers can take action to address any performance issues much more
quickly than if they had to wait for the current monthly reports to become
available.
Moreover, the current reports are unlikely to provide sufficient detail to
allow the managers to identify any issues in the key operational processes.
Evaluating key success factors –Monitoring its non-financial performance
measures should provide X and the other managers with better information
about how well DLC is achieving its key success factors. However, this
doesn't, in itself, assess the value of (evaluate) the key success factors.
The value of the key success factors should be assessed in terms of how well
achieving them allows DLC to achieve its goals. The business's goals are
continued expansion, providing a rewarding lifestyle for X and securing well-
paid jobs for the staff. Technological innovation and customer service are
likely to be important for the continued expansion of the business, which in
turn should provide secure, well-paid jobs for the staff.

49 JSW
The focus of strategic analysis is on understanding the current strategic position
of an organisation. Strategic choice involves choosing between the alternative
strategies the organisation can pursue, while strategic implementation looks at
how these strategies are actually put into practice.
Strategic implementation is the conversion of the strategy into detailed plans or
objectives for operating units. Therefore it is a vital part of the strategic
management process, because a strategy can only start delivering benefits to an
organisation once it has been put into practice. In order to be beneficial to an
organisation, a strategy must be able to be implemented. In this respect, the focus
on strategic implementation highlights key issues such as resource availability,
organisational structure and change management.
Johnson, Scholes and Whittington emphasise that the strategic management
process should not be seen as a linear model, as for example, the traditional
rational model portrays it. Rather, strategic implementation is inter-linked with
both strategic analysis and strategic choice. For example, in the process of
implementing a strategy, an organisation might discover features of its resources

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and structure which will lead to it to re-evaluate its assessment of strategic


position and strategic choices.

50 Soft drinks

Interestingly, after the advertising campaigns both firms are worse off than they
were before, and the industry profit has reduced by the cumulative cost of the
advertising campaigns. So overall the advertising campaign creates a 'lose – lose'
situation.
The figures show that although one firm can gain in the short run from a
competitive strategy, in the long run both firms are likely to be better off by
working together and not advertising, rather than competing with each other.
One of the assumptions of game theory is that the firms do not have any collusive
agreements and do not know what the other is going to do. So A and B must select
their strategies based solely on the outcome which they think is best for them,
regardless of the decision made by their rival.
Under these circumstances, both firms will choose to advertise. Individually, they
hope to increase their profits by advertising; however, collectively this course of
action causes them each to lose US$25m (ie profits fall from US$250m each to
US$225m each).
Note, however, that this example assumes that there is no increase in the overall
size of the market following the advertising campaigns. In practice, this may not
be the case as the advertising campaigns might encourage additional people to
start drinking soft drinks, although they had previously bought neither Firm A's
nor Firm B's drinks.

51 TDM
(1) Four critical success factors which would be appropriate for TDM are:
• Customer satisfaction with courses and learning materials
• Employee satisfaction
• The quality of its teaching and materials
• Reputation and brand image

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(2) KPIs for each of the CSFs could be:


Customer satisfaction
Student satisfaction rating – at the end of a course, or at the end of a
module within a course, students could be asked to complete a questionnaire
rating their satisfaction with various aspects of the course (for example, the
knowledge levels of the staff, the quality of the supporting materials, and the
approachability / availability of staff to ask them questions).
If students are happy with the level of tuition they receive, they are more
likely to book on subsequent courses with TDM than if they are dissatisfied
with the courses. Similarly, they may share their experiences with their
peers, in turn influencing their decision about where to book courses.
Consequently, TDM needs to ensure that student satisfaction levels are
maintained as high as possible, and it is important that TDM knows how its
students (its customers) feel about the services it offers.
Client retention – A number of the students attending the courses aimed at
professional qualifications are likely to have been funded by their employers.
If employers continue to send their students to TDM rather than one of its
rivals in the market, this suggests they are happy with the level of tuition and
service their students are receiving. The pass rates that students achieve are
likely to be a significant influence on client satisfaction in this respect.
Employee satisfaction
Staff turnover – The quality of TDM's teaching staff is crucial in maintaining
customer satisfaction, so it is important for TDM to retain its best staff. TDM
has been experiencing an increasing rate of employee turnover, and this
could be indicative of dissatisfaction amongst the staff. The management at
TDM should be keen to prevent this upward trend in staff turnover from
increasing, making this an important measure to look at.
Staff absenteeism – High levels of absence are likely to also indicate
dissatisfaction among the staff. If absenteeism is rising, in conjunction with
employee turnover, then there is a danger that the quality of service
provided to students will suffer. For example, if an experienced lecturer
phones in 'sick' at short notice, their classes may have to be taken by an
inexperienced lecturer who is not such an expert in a subject, meaning the
students could receive lower quality tuition.
Quality of teaching and materials
Market share – TDM currently has the largest market share in its sector,
despite carrying out relatively little marketing activity, and despite new
entrants continually entering the market. It will important to monitor TDM's

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market share, because the share of the market TDM can capture will have a
direct impact on its revenues and consequently on the wealth of RCH's
shareholders. Customers will only continue to use TDM if they feel it is
providing courses and materials which are high quality, and also which offer
value for money. If market share starts to fall, it may be an indication TDM is
not delvering this value for money to its customers.
Accreditations – TDM's courses will be accredited by academic and
professional bodies. TDM has always concentrated on the quality of its
courses and learning materials, so external accreditations will provide an
independent corroboration of this quality. The quality of course tuition and
learning materials, in turn, is likely to feed back into the level of customer
satisfaction with TDM's courses.
Reputation and brand image
Brand reputation – TDM has never seen the need for market and customer
research, and has always had a good reputation. However, given the
continuing entrance of new competitors into the market, TDM needs to
ensure that its brand reputation is maintained. This is important if TDM is to
ensure potential customers will choose to come on its courses rather than
going to one of its competitors.
Pass rates – TDM's students consistently achieve passes on a par with the
national average. However, if some of TDM's rivals regularly achieve passes
rates above the national average the competitors will be able to use this as a
marketing message to try to win business away from TDM – particularly in
respect of the professional qualifications business. If students, or their
employers, think that selecting one tuition provider in preference to another
can affect their chances of passing their exam, they are likely to select the
tuition provider with the highest pass rate.

52 GHK Restaurants
(1) Choosing a competitive strategy – Porter's logic behind his Three Generic
Strategies Model is that a firm should follow only one of the generic
strategies in order to achieve competitive advantage. According to Porter,
if a firm tries to combine more than one of the strategies it risks becoming
'stuck in the middle' and losing its competitive advantage.
Applying these ideas could help the owners of GHK assess whether their
restaurants are following a coherent competitive strategy – either
individually or as group – or whether they are becoming 'stuck in the

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middle.' If they are becoming 'stuck' in this way, the lack of a clear strategy
might be contributing to the decline in GHK's profits.
Generic strategies – Porter suggests firms should choose a potential
strategy based on one of three generic strategies: cost leadership,
differentiation or focus.
Cost leadership – If GHK chooses to become a cost leader, it must ensure it
has the lowest costs in the industry as a whole. By having a lower cost base
than its competitors, GHK could achieve a greater profit than them, even if its
sales prices were the same as theirs.
Although this aspect of Porter's strategy focuses primarily on cost rather
than price, it appears that GHK's restaurant near the railway is pursuing
this kind of strategy, since it claims to be 'the cheapest in town.' However, to
maintain its profitability, the restaurant must ensure it can continue to keep
its cost base lower than any of its competitors' cost bases.
Differentiation – If GHK chooses a strategy of differentiation, it must deliver
a product or service which the industry as a whole believes to be unique. As
a result of this uniqueness, GHK will be able charge its customers a
premium price.
It appears that the extremely expensive 'fine dining' restaurant in the
historic country house is charging a premium price in this way. However, to
maintain its profitability, the restaurant must ensure it maintains its
distinguishing features – be they the quality of the menu; the service, or the
ambience. These features are what differentiates the restaurant from others
in the industry and they make attractive to customers, even though it is
charging a premium price.
Focus – A focus strategy will involve segmenting the industry, such that GHK
would then pursue a strategy of cost leadership or differentiation within a
single segment of the restaurant industry.
Three of GHK's restaurants seem to following this type of strategy and
tailoring their offering to a specific market niche: the lakeside restaurant
specialising in fish dishes; the steak house; and the restaurant catering for
children's birthday parties.
Stuck in the middle – GHK has eight restaurants in total. We have identified
five of them as following one or other of Porter's generic strategies, but this
means the other three (with conventional menus and average prices) are
likely to be stuck in the middle.

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In this respect, GHK needs to look urgently at finding a way of establishing a


competitive advantage for these three restaurants. This should allow them to
improve their profitability.
Strategy and marketing – We do not know whether all the restaurants in
the chain are branded unilaterally as GHK restaurants, or whether they have
retained their own names as well as their own styles and prices. If GHK is
trying to run the restaurants as a single group, under a single brand name,
then the analysis of the restaurants' current position indicates that the
group as a whole is at risk of being 'stuck in the middle' due to the
diversity of its strategies.
In this respect, Porter's generic strategies model suggests that GHK would be
best advised to run the restaurants as separate business units, and to
develop marketing strategies which support each restaurant's individual
characteristics.
However, even if GHK chooses to do this, it still needs to consider whether
the restaurants' current strategies can deliver a sustainable competitive
advantage. For example, the prices of foodstuffs and drinks are rising in
GHK's country, which will increase its cost base. So, how sustainable is a cost
leadership strategy, particularly as there is little evidence of specific
technologies or processes which will allow GHK to sustain a lower cost base
than any of its competitors?
Given the overall economic context in which GHK is operating, GHK's owners
might decide that Porter's focus strategies (either cost-focus, or
differentiation-focus) offer them the most practical way of maintaining or
improving the profitability of their restaurants.
(2) Market share analysis – At a strategic level, GHK should try to get overall
market revenue figures for the various market segments in which it
operates, and compare its own performance against these overall market
figures. This will indicate whether its market share is increasing or
decreasing, and therefore will give some indication of how successful GHK's
strategies are proving.
Customer Information – We do not know whether customers need to book
in advance to eat at GHK's restaurants, but it is likely they do for the 'fine
dining' restaurant and for the birthday parties, at least.
If GHK develops a website which customers can use for booking, this will
allow GHK to build up a database of contacts. If customers give an e-mail
address when they book, GHK can use these addresses for future e-
marketing campaigns.

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GHK could also introduce a loyalty card programme as a way of getting a


database of customers, finding out which of its restaurants they use, and how
frequently they use them.
Such information could have two different uses:
(i) Customer relationship management – On the one hand, it can be
useful for customer relationship management. For example, GHK could
send reminder emails to lapsed customers who have not been to one of
its restaurants recently, or it could inform customers of any special
offers they might be interested in at restaurants they have visited
recently. Given that the local economy has shrunk recently,
maintaining customer numbers is likely to be an important issue for
GHK.
(ii) Trend analysis –On the other hand, the database could be analysed to
highlight patterns and trends in customer usage at the different
restaurants. Understanding these trends could, in turn, be useful for
marketing campaigns or operational decisions; for example, working
out staffing levels.
Management Information Systems – GHK's owners are clearly concerned
about the performance of their business. Therefore it will be important that
they have timely and reliable management information which they can use
to see how the restaurants are performing. For example, the owners might
find it useful to have summary reports which provide them daily or weekly
snapshots of restaurant revenues and customer numbers, and the gross
profit margins at each of the restaurants.
Operational information systems – In order to provide this summary
information, GHK will need a way of capturing detailed operational
information. If the waiters and waitresses in all the restaurants recorded
customer orders on hand-held personal digital assistants (PDAs) this
information from these could be captured, and ultimately transmitted back
to a central data warehouse. The PDAs could capture, for example,
customer numbers, the days and times of orders, and the dishes being
ordered. Analysing this information could highlight, for example, whether
some items on the menu more popular than others, or whether some times
of day busier than other.
This information could then be used to help the owners make decisions such
as whether the menus need changing, or whether the opening hours need
revising. For example, if there are some items on the menu which do not sell
well, they should be removed or replaced. If they were removed, and the
menus were shortened, this would mean that GHK needed to hold fewer

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ingredients in stock, which would be beneficial in a period of rising food


prices. Equally, if there are times of day where customer numbers are low,
the owners may decide not to open the restaurants all day, or they might
decide to introduce some special offers to try to attract additional
customers during those off-peak periods.
In addition to the hand-held PDA's, the tills in the restaurants should also
be linked to a central data warehouse, so that the management information
system can update figures for sales receipts and cash takings on a real time
basis. Given that GHK is now in danger of making a loss for the first time, it
will be important to be able to monitor sales figures closely, to see what
impact any new strategies have on sales and cash flows.
Performance information – There is no indication that GHK has any key
performance indicators (KPIs) for its restaurants. However, the information
available from the operational information systems could be used in KPIs.
The management accountant could report how well the restaurants are
performing in certain key areas, for example, spend per customer head, or
spend per waiter. These again can provide useful headline information to the
owners to enable them to see how the business is performing in areas which
are critical to its success.

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Section 1

Compulsory question.
Total marks for Section 1 are 50 marks.
Recommended time for the section is 90 minutes.

1 AVN
AVN designs and assembles electronic devices to allow transmission of
audio/visual communications between the original source and various other
locations within the same building. Many of these devices require a wired solution
but the company is currently developing a wireless alternative. The company
produces a number of different devices depending on the number of input sources
and the number of output locations, but the technology used within each device is
identical. AVN is constantly developing new devices which improve the quality of
the audio/visual communications that are received at the output locations.
The managing director recently attended a conference on world class
manufacturing entitled 'The extension of the value chain to include suppliers and
customers' and seeks your help.
Required
Explain
(i) The components of the extended value chain (3 marks)
(ii) How each of the components may be applied by AVN (7 marks)
(LO 1.1.1, 1.5.1) (Total = 10 marks)

2 JIT and TQM


A company experiences changing levels of demand but produces a constant
number of units during each quarter. The company allows inventory levels to rise
and fall to satisfy the differing quarterly demand levels for its product.
Required
(1) Explain the reasons for three cost changes that would result if the company
changed to a Just-In-Time production method
Assume there will be no inventory at the start and end of the year. (6 marks)
(2) Outline the importance of Total Quality Management to a company that
operates a Just-In-Time production method. (4 marks)
(LO 3.3.1, 3.3.2) (Total = 10 marks)

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3 Fizzy Fruit
Fizzy Fruit is a company that manufactures and distributes soft drinks in Sri
Lanka. Its main product is called Fizzy Fruit. The recipe is a closely guarded secret,
but it is made using local spring water and contains natural ingredients that act as
a stimulant, helping alertness and concentration. Fizzy Fruit is popular with adult
consumers.
Industry background
Overall sales in the industry have increased by 45% in the last 10 years because of
increased consumption of bottled water and fruit juices. However, sales of fizzy
drinks have been falling in the last three years. This is mainly due to increased
consumer awareness of the health risks associated with products high in sugars.
As a result, a number of companies in the industry, including Fizzy Fruit, have
introduced 'Diet' products which have a lower sugar content.
The future
At a recent board meeting, the directors have suggested the introduction of a
marketing campaign to make consumers outside Sri Lanka aware of Fizzy Fruit,
prior to an international launch of the product.
Required
Outline how Fizzy Fruit could exploit some of its critical success factors to form
the basis of a successful marketing campaign for Fizzy Fruit outside Sri Lanka.
(LO 4.6.1) (10 marks)

4 Elizabeth
Elizabeth owns a small flower arrangement business.
Elizabeth has 15 customers. While she is regularly approached to take on more
customers, in the past she has decided not to do this, as she was worried about
managing the extra administration and complexity.
Elizabeth has a mobile phone but maintains most of the records of her work on
paper, in a journal that she then uses as the basis for her invoicing. Elizabeth
writes her invoices by hand and believes that all her customers pay promptly,
although she never checks if there are any amounts outstanding. She does not own
a computer.
Elizabeth is aware that a contract for the flower arrangements of a large luxury
hotel will be up for tender in the near future. She thinks this might be the right
opportunity to expand her business. The hotel contract will run for the next two

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years, with the possibility of a rolling annual extension, dependent upon Elizabeth
meeting the high levels of quality and service expected by the hotel. The hotel has
a reputation for excellence and will be a very demanding client. It monitors
suppliers very closely for adherence to contract specifications. However, it pays
premium prices to its suppliers.
If she secures the contract, and continues to service her existing customers,
Elizabeth would need to employ at least three flower arranging staff and an
administrative assistant to deal with the hotel's requirements.
Required
Outline what actions Elizabeth will have to take to implement.
(i) An information systems strategy
(ii) An information technology strategy
(LO 6.3.1, 6.3.2) (10 marks)

5 Emily
Emily Waters has decided to go into business providing an interior design service
to households in her local town.
Emily is a very experienced and talented interior designer but has little or no
business experience or training. However she is aware that effective marketing
will be particularly important to the success of the new business.
Required
Explain the meaning and application of the 4Ps of the marketing mix to Emily's
new business, indicating how a knowledge and understanding of this element of
marketing will help the new business.
(LO 4.3.1) (10 marks)

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Section 2

Compulsory question.
Total marks for Section 1 are 50 marks.
Recommended time for the section is 90 minutes.

6 DDD Biotech
DDD is a biotechnology company which develops drugs. It was founded seven
years ago by three scientists when they left the university medical school, where
they had been senior researchers. The Company employs ten other scientists who
joined from different universities. All of these employees are receiving relatively
low salaries but participate in a share option scheme. This means that when DDD
is successfully floated on the stock exchange they will receive shares in the
company.
DDD currently has a number of new, innovative drugs in development, but the
earliest any of these drugs might come to market is two years from now. It is
expected that there would be one successful drug launched in most years after
that for at least six years. However, successful drug launches are never
guaranteed, due to the speculative nature of biotechnology and the long period of
clinical trials through which any new drug must pass. DDD has to invest a
significant amount of resources into the development of each potential drug,
whether they are successfully launched or not. Currently, it has 12 drugs in
development, a number of which may not be successfully launched. Due to the
speculative nature of the industry, companies such as DDD are unable to obtain
bank loans on commercial terms.
DDD is funded by an exclusive arrangement with a venture capital company.
However, there is only sufficient cash in place to maintain the present level of
activity for a further nine months. The venture capital company owns 15% of the
equity of the company. The rest is owned by the three founders. It has always
been the intention of the venture capital company and the founders that, once the
company has a sufficient number of drugs in production and on the market, the
company would be floated on the stock exchange. This is expected to happen in
five years' time.
Recently there have been a number of approaches to DDD which might solve its
cash flow problems. The three founders have identified the following options:
(a) The venture capital company has suggested that it will guarantee the cash
flow until the first drug is successfully launched in commercial quantities.

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However, it would expect its equity holding to rise to 60% once this offer is
accepted.
(b) A large pharmaceutical company has offered to buy DDD outright and retain
the services of the three founders (in research roles) and a few of the staff.
(c) Another biotechnology company has offered to enter into a merger with
DDD. This company has also been established for seven years and has one
drug which will be launched in six months. However, of the four other
potential drugs it has in development, none are likely to be commercially
viable for five years. This company would expect the three founders to stay
with the newly merged company but feels a rationalisation of the combined
staff would be needed.
As the financial advisor to the three founders you have been asked to comment on
the approaches that have been made.
Required
(1) Describe the 'Suitability, Feasibility and Acceptability' (SFA) framework as
used for evaluating strategic options. (6 marks)
(2) Using the SFA framework, evaluate the strategic options identified by the
founders. (12 marks)
(3) Evaluate one other strategic option that the founders might pursue.
(5 marks)
(4) Recommend the most appropriate strategic option based on your analysis
above. (2 marks)
(LO 7.6.1, 7.6.2) (Total = 25 marks)

7 D Management Consultancy
D is a management consultancy partnership providing complex computer
modelling services to utility companies. Three partners started the business ten
years ago but rapid growth in the past four years has seen it increase to fifteen
partners. Each partner has a team working exclusively for, and reporting directly
to that partner. Competition between the teams is fierce and, sometimes, heated.
The loyalty of each team to its respective partner is very strong.
Members of each team are rewarded with an annual team bonus based on the
amount of new business they bring in each year. However, recently it has been
discovered that teams have been competing with each other for the same potential
new client.

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Partners recruit all consultants as trainees, usually after they have obtained a
doctorate in pure mathematics or economics. After a six months probationary
period they are either confirmed in post or asked to leave. The rewards for those
that stay are high with at least 60% of income derived from the team bonus.
Typically a basic salary of US$40,000 would be boosted to US$100,000 if the team
has worked aggressively and found new clients.
The service that the partnership provides is highly specialised and at the forefront
of available technology. Each team will write computer simulations to address its
clients' problems. These models are not made available outside the company and,
on some occasions, have not even been shared with other teams in the
consultancy.
At a recent partners' meeting, it was agreed that the inter-team rivalry was not
working in the partnership's best interest, since teams were competing in such a
way as to damage the firm's reputation, profitability and its prospects for growth.
Recognising that the current performance measurement system encouraged this
behaviour, the partners agreed that an appropriate performance measurement
system should be introduced which was less one-dimensional. The partners
believed this would encourage better practice in terms of knowledge sharing and
a coordinated approach to their existing clients and potential clients. They have
recognised that the introduction of a multi-dimensional performance
measurement system will involve a significant training programme for their teams
to redirect their current focus away from only finding new business.
Required
As a first stage in this process, you have been appointed as management
accountant and practice manager.
(1) Advise the partners of the functions that an effective performance
measurement system will perform for D.
Note: You are not required to describe, in detail, any particular system.
(10 marks)
(2) Recommend the process that should be used in developing the performance
measurement system to be used within D. (15 marks)
(LO 5.4.1) (Total = 25 marks)

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Section 1

1 AVN
(1) The value chain was described by Michael Porter. Its ultimate goal is to
maximise value creation while minimising costs.
The value chain is the sequence of business activities by which, from the
perspective of the end user, value is added to the products and services
produced by an entity.
These value-adding activities are categorised as primary and support
activities.
The primary activities are: Inbound logistics, operations (production),
outbound logistics, sales and marketing, and service (maintenance).
The support activities are: Administrative infrastructure management,
human resources management, R&D, and procurement.
Costs and value drivers are identified for each value activity.
The idea of the value chain has been extended beyond individual
organisations. Where this occurs, the value chain is known as an extended
value chain, and it can apply to whole supply chains and distribution
networks. Individual organisational value chains combine to deliver value to
the end user.
Porter terms this larger interconnected system of value chains the 'value
system'. A value system includes the value chains of an organisation's
suppliers), the organisation itself, and its distribution channels, retailers,
customers and so on to the ultimate end user. Value chains may extend to
become global.
(2) AVN should be looking at how it can lower costs and enhance value
throughout the extended value chain, thereby gaining competitive
advantage.
The first step AVN should take is to map its extended value chain of
suppliers, distributors and customers to determine the various activities in
the chain and allocate costs and revenues to each.
Then AVN needs to look at controlling the executional and structural drivers
for the costs of each activity.
Suppliers
AVN could look at its relationships with suppliers of the parts in its
electronic devices. One way of doing this is through improving its supply

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chain management. For instance AVN could switch to new suppliers by


purchasing online.
AVN could require its part suppliers to be located near its assembly plant to
minimise the cost of transportation. The company could also consider tying
its suppliers into a JIT agreement so that inventory levels are kept to a
minimum, saving on stockholding costs. However this does need to be
balanced against the risks of stock-outs and damaging relationships with
customers.
AVN could try to negotiate cheaper prices for the components it buys in.
Furthermore, the organisation could agree quality standards and inventory
levels with its suppliers, thereby building in quality without increasing cost.
Retailers and customers
AVN should look at price and the company could consider negotiating better
margins on its products, or consider undertaking some market research
prior to development of new products to establish exactly what the customer
sees as a quality product. This would control the research costs it incurs and
direct effort to where value is added. It would also reduce the complexity of
products being offered if some of these aren't selling. AVN should also
consider the transport costs and reliability of supplying its product to
customers.
Other ideas
 AVN could share technology with suppliers and streamline its
expertise.
 AVN could consider outsourcing activities that aren't core.
 AVN could standardise components and products so it reduces
complexity without compromising on product availability.

2 JIT and TQM


(1) Cost changes resulting from changing to JIT.
(i) Non-value added activities
A JIT system seeks to eliminate any activities that do not add value to
the final product. Therefore there should be a reduction in inspection
costs and costs of moving products from one department to another.
(ii) Inventory costs
The practice of allowing inventory to rise and fall during the year will
be eliminated and with it the cost of storing inventory. The idea behind

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JIT is that it responds to demand – production levels will change to


suit demand levels rather than continuing to produce units for
inventory. The absence of inventory means that space may be freed up
for expansion of production facilities.
(iii) Labour costs
One potential problem with the JIT system for this company is the
possibility of having to pay overtime to the workforce when demand
is heavy. At the moment production is constant, with inventories being
used to satisfy fluctuations in demand. If inventories were eliminated,
increases in demand could only be met by the workforce working extra
hours, at a premium.
(2) Importance of Total Quality Management
When a firm operates a JIT system inspection costs (which check for quality)
are eliminated. As a result, it is important for each individual to take
responsibility for the quality of their own output. In the context of TQM,
quality means 'getting it right first time' – this is particularly important for a
JIT system where there are no inventories to act as a buffer in the event of
production problems. Any such problems would result in lost sales. The use
of TQM encourages the delivery of good quality products all the time, thus
reducing the possibility of stoppages due to poor quality.

3 Fizzy Fruit
Critical success factors and marketing
(i) The main CSFs in relation to Fizzy Fruit are taste, the unique recipe, and the
fact that the product is popular with a different age group to its competitor
products.
(ii) The fact that Fizzy Fruit also contains a natural stimulant which helps
maintain alertness and concentration gives it a unique selling point which its
competitors cannot match.
(iii) In addition, Fizzy Fruit has a strong relationship with local consumers..
Continuing to use the local spring water in the production process is also
likely to be part of this critical success factor.
The CSFs could be used in a marketing campaign for Fizzy Fruit as follows:
1 Product: Emphasise the unique taste and recipe of Fizzy Fruit, and also the
fact that it is a local rather than global product, which may help it to create a
unique identity in a crowded marketplace. This is likely to appeal to overseas
consumers who want something that is less generic than many soft drinks. It

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may also appeal to expatriate Sri Lankans, who want to feel connected to
their home
2 Promotion/Place: Because Fizzy Fruit is currently popular with older
(adult) consumers, the company should consider targeting the mediums that
this age group tends to use, such as magazines, or newspapers, websites and
social media and it should investigate whether it could get Fizzy Fruit to be
sold in workplace canteens and clubs. The company should also consider
sponsoring some television programs that such an age group is likely to
watch and which has a strong connection with Sri Lanka, such as sports. Any
promotions could also should emphasise the range of Fizzy Fruit products
that cater for all needs (eg the low sugar option).
Fizzy Fruit should use its loyal local customer base to promote the product
to their family and friends overseas.
3 Price: To gain a foothold in new markets, the company should consider 'Buy
One Get One Free' deals or offering and free samples at targeted outlets.

4 Elizabeth
(i) IS strategy
Define business strategy – Before Elizabeth can define her IS strategy, she
needs to define the business' strategy now that it has moved from being a
lifestyle business to a more commercially oriented organisation.
Seek advice – The fact that Elizabeth would appear to have no experience in
developing business or IS/IT strategies means that she should not try to plan
these all out herself. To this end, she should discuss the business'
information requirements with an IT consultant.
Capture existing knowledge – Although Elizabeth has historically used
journals to record this information, she has still built up some useful
information about the business – for example in terms of seasonality of
work, the time taken for different types of jobs, and customer feedback on
the work done. She also needs to take better control of her cashflow by
identifying those customers who are slow payers.
It will be important for Elizabeth to analyse this information to identify
trends which can then be built into the future strategy of the business (for
example, if there are specific aspects of Elizabeth's service which customers
value, then it will important to try to ensure these are still provided in the
future.)

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(ii) IT strategy
Increased complexity – Elizabeth will have to manage the demands of the
hotel contract alongside those of her existing clients, and, for the first time,
she will also have to oversee the staff working for her. This means that
Elizabeth's current IT systems – her journal and mobile phone – will no
longer be sufficient for the business' requirements.
Expenditure requirements – As a result, Elizabeth will need to purchase
the IT equipment which she needs for the business.
This is likely to include: computers for herself and her assistant; software
packages (for recording written and numerical data); a printer; and a
landline telephone point with an internet (broadband) connection.
Depending on how successful the business becomes and how much Elizabeth
wants it to grow, she may also consider creating a website.
Budget – Before committing to any IT expenditure, Elizabeth should prepare
a budget for that expenditure to ensure that it remains under control.

5 Emily
The marketing mix
Marketing mix is the term used to describe the blend of controllable marketing
variables that a company can use to achieve its objectives in target markets. First
proposed by Neil Borden the marketing mix encompasses four main elements
namely: Product, Price, Promotion and Distribution (or 'Place'). Because of this,
Borden's marketing mix is often referred to as the '4Ps'. In fact each of these
major mix ingredients can be further subdivided. Some examples of this are
shown below:
Service
 Branding – the 'look and feel' of Emily's logo, website and promotional
material will be vital creating the desired impression of her business
 Features – does Emily have a style that she is particularly associated with?
Does she create cosy corners, or minimalist chic?
 Quality – What level of quality is Emily pitching her work at? Is she a
designer for exclusive, luxury homes (a lucrative but niche market) or for a
broader market? The level of service will vary accordingly, which is likely to
be reflected in the level of customer service provided to the customers.

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Price
 Level – this will be linked to the quality
 Discounts – may be offered as the business starts or during quiet periods
 Credit policy – while customers may find credit attractive, Emily may find
that the risks of default outweigh the potential business gains
Promotion
 Advertising – in property magazines
 Personal selling – customers are likely to want a personal connection with
Emily before they sign up for her service
 Public Relations
 Sales Promotion
Place
 Channels – furnishing shops may have relationships with particular
designers, estate agents may provide recommendations to new homeowners
 Intermediaries
 Delivery
This list of some of the main elements of the marketing mix illustrates that mix
decisions involve the selection of a wide range of factors which can be used in
marketing. Emily must understand the full range of available marketing mix tools
and which will be most appropriate and effective in developing her new business.
In making these decisions she will need to pay careful attention to the following
factors
 Target markets/customer requirements
 Competitive offerings
 Company objectives and resources
The advantages of understanding and applying the marketing mix are as follows.
 The full range of competitive marketing tools can be considered
 These can be blended in the most appropriate and effective way
 Customer needs are likely to be more effectively met
In conclusion, careful attention to the selection of the marketing mix will enable
Emily's new company to plan its position in selected target markets in order to
achieve business and marketing objectives.

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Section 2

6 DDD Biotech
(1) Strategic choices are evaluated according to:
• Their suitability to the organisation and its current strategic logic
• How feasible it will be to implement them given the organisation's
resources
• How acceptable they will be to the organisation's various stakeholders
Suitability – A strategy must fit with an organisation's current operational
circumstances and its strategic goals. In this context an organisation should
consider the choices in relation to a corporate appraisal:
 How well does it exploit the organisation's strengths and distinctive
competences?
 How well does it address any weaknesses?
 Does it help the organisation take advantages of opportunities
available to it?
 Does it allow the organisation to deal with threats facing it?
Alongside these questions, an organisation should also consider whether a
strategy will help it generate or maintain competitive advantage over its
competitors.
The most suitable strategy for an organisation will be the one which allows it
to do this most effectively.
Feasibility – For a strategy to be feasible, an organisation must have
sufficient resources to carry it out successfully. In this context, resources
include money, technology, materials, staff and time. If a strategy cannot
be implemented using an organisation's existing competences, and therefore
demands new competences to be acquired, it may not be feasible.
Acceptability – This aspect of the framework looks at the acceptability of a
potential strategy to an organisation's various stakeholder groups – for
example, customers, management, staff, shareholders and bankers. To assess
a strategy's acceptability, an organisation should consider the values and
interests of key stakeholders and then assess how well these fit with the
strategy. Two key considerations when considering a strategy's acceptability
will be the financial return it is expected to deliver, and the level of risk
involved in adopting it.

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(2) (a) Cash flow guarantee from venture capital company


Suitability
DDD's main weakness is a shortage of cash, and the guarantee from the
venture capitalists will ensure there are sufficient funds to allow DDD
to continue until the first drug is successfully launched in commercial
quantities.
The injection of cash will not, in itself, add to DDD's strengths, but
assuming the new drug proves commercially successful the funding
could allow DDD a competitive advantage which it would have
otherwise been denied.
The venture capitalists have only agreed to guarantee DDD's funding
until the first drug is successfully launched, and so there may still be
question marks about the longer term funding requirements between
that launch and DDD's flotation, unless cash inflows from the launch of
that drug are sufficient to support the business' cash needs.
However, to the extent that the venture capitalist funding will meet
cash needs in the short to medium term and bring at least one new
drug to market this option is suitable.
Acceptability
Venture capitalists – This plan will see a significant rise in the venture
capitalist's shareholder in the company – from 15% to 60%. As the
venture capitalists have proposed the plan, we can assume it is
acceptable to them.
Founders – However, the increase in the venture capitalist's
shareholding will mean that the founders' stakes in the company are
significantly reduced. This may not be acceptable to the founders,
particularly in the context of the profits they might make when the
company is floated in five years' time.
Employees – Similarly, the plan will not be acceptable to the
employees because it will reduce the numbers of shares available to
them through their share option scheme. Currently, the employees are
prepared to accept relatively low salaries because they will receive
shares in the company when it floats. However, if this option is
removed they are likely to either want higher salaries, or will leave the
company altogether. If too many employees leave, DDD's ability to
develop its new drug may be jeopardized.

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Feasibility
This option does not, in itself, affect the internal resources of the
company so there are no problems about its feasibility.
(b) Purchase by pharmaceutical company
Suitability
This option will allow at least some of the drugs which DDD is working
on to be brought to market, but not by DDD as a company in its own
right.
Given the foundations intention to float the company on the stock
exchange, it seems likely that one of the strategic goals was to run DDD
as an independent company. From that perspective, the outright
purchase by another company is not a suitable option.
Acceptability
Venture capitalists
This option is unlikely to be acceptable to the venture capitalists, not
least because they have proposed an alternative option. However,
possibly more importantly, they are unlikely to be happy that whereas
they invested in DDD expecting to see significant returns when it
successfully launches its first new drug, they will no longer get the
benefit of these returns. We do not know the terms of the deal under
which the pharmaceutical company has offered to buy DDD (for cash,
or for shares) but either way it is unlikely that the venture capitalists
will receive the same returns as they would if DDD have successfully
launched the new drug as an independent company.
Founders
This option may not be acceptable to the founders either, because
while they currently have the independence and status of being their
own bosses, under the new structure they will simply be employees
(researchers) in a much larger company. If the large company offers
the founders a favourable price to acquire DDD now, (rather than them
having to wait five years to benefit from the flotation) the relative
acceptability of this option may be increased. However, this will
probably be unlikely – especially if the larger company is aware of DDD
cash flow problems.
Employees
The employees will be concerned about the acquisition because the
larger pharmaceutical company only intends to retain 'a few of the

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staff'. Therefore there is a risk that some of the current employees will
be made redundant, which will not make this an acceptable option for
them.
The other issue for all the employees to consider is that they will lose
the potential benefits accruing from DDD's share option scheme in the
event of it floating. However, if the larger company offered them higher
base salaries than DDD did, they may be prepared to accept the
security of a higher salary instead of the potential benefits of the share
option scheme.
Feasibility
There are no problems with the feasibility of this option.
(c) Merger with another biotechnology company
Suitability
Because the other biotechnology company's new drug will be launched
in six months' time this will provide a short term cash injection to
support DDD until its first new drug is launched.
However, whereas DDD is then expecting to launch one new drug in
most subsequent years, the other company is not expecting to have any
other new drugs commercially available for another five years.
Therefore, it is debatable whether the other company has the same
strength in developing new drugs as DDD. If the merger effectively
means that the other company provides a short-term cash injection in
return for piggy-backing on DDD's competences in the longer term,
then that is unlikely to be a suitable option for DDD.
Acceptability
Venture capitalists
Again, this option is unlikely to be acceptable to the venture capitalists,
because it would mean DDD rejects the option they have proposed.
Also the merger would dilute the venture capitalist's share in the new
company which is unlikely to be acceptable.
Founders
As with the acquisition by a larger company, the merger would reduce
the founder's independence and autonomy, because the directors of
the other company would now be jointly responsible for business
decisions and strategy. This change may not be acceptable to DDD's
founders. Moreover, there is no indication of how long the founders

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would be expected to stay with the newly merged company. If they are
expected to remain for a long time, they may find this restrictive.
Also, there is no indication whether the newly merged company would
still look to float in five years' time. If it would not, this again may be
undesirable for DDD's founders.
Employees
The merger is very unlikely to be acceptable to the employees, because
the rationalisation of the workforce will mean that some employees are
made redundant.
Also, if the newly merged company does not intend to float, the
employees who remain will lose the potential benefits from the share
option scheme. It is possible that they may be offered higher base
salaries to compensate for this, but this appears unlikely since the
other company has fewer new drugs in the pipeline that DDD and so
on-going cash flow could still be a problem for the business.
Feasibility
The feasibility of this option will depend on how similar the research
and development practices of the two companies are. The merger is the
only option which will involve the integration of the systems from two
different companies. This could mean that there are some significant
changes to DDD's operating systems, and the time taken to complete
the merger could also be an issue.
In addition, DDD's founders have no experience of managing a merger
process which could increase the risk of the merger being unsuccessful.
(3) At the moment, DDD has 12 drugs in development, a number of which may
not be successfully launched. One option which DDD could pursue is to
reduce the number of drugs in development and concentrate funds on
those drugs which can be brought to market soonest.
Suitability
This option will not in itself generate an additional cash inflow for the
business. It will only be suitable if by concentrating resources on a small
number of drugs they can be brought to market quickly enough to cover
the cash short-fall in nine months' time.
There may also be issues around which drugs to stop developing. Those
which can be developed most quickly may not be the ones which will be
most commercially successful in the longer term.

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Moreover, as with any development, there is no guarantee that the drugs


which DDD chooses to continue with will be commercially successful.
Acceptability
Venture capitalists – This option may be acceptable to the venture capital
company in that it doesn't involve any dilution of their share in the company.
However, if reducing the number of drugs in development reduces DDD's
future earnings this may be less acceptable to the venture capitalists. DDD's
perceived earnings potential will affect its value when it floats on the stock
exchange.
Founders – This option will be acceptable to the founders because it
maintains their independence and does not dilute their shareholding in
the company. As with the venture capitalists, however, the founders have a
vested interest in not restricting DDD's future earnings too much however,
because they will be the principal beneficiaries of a successful flotation.
Because this option will reduce the number of new drugs DDD is working on
at any time, it may decide to delay the flotation to allow the number of drugs
launched to be increased before it floats.
Employees – This option is unlikely to be attractive to the researchers
working on the drugs whose development is discontinued.
From the perspective that this option will not change the company structure
or the employees' share options, it may be relatively more attractive,
although not if the flotation is significantly delayed.
Feasibility
There should be no problems with the feasibility of this option.
(4) DDD should select its preferred option by considering its impact on the three
main stakeholder groups (venture capitalists, founders, employees).
Option 1 (Additional funding from venture capitalists) – This is
relatively unattractive to the founders and the staff due to the reduction in
shares available
Option 2 (Acquisition by large company) – This will not be acceptable to
any of the stakeholder groups
Option 3 (Merger) – This is also unlikely to be acceptable to any of the
stakeholder groups
Option 4 (Reduction in development portfolio) – This will be the most
attractive for the founders and the staff, and should be acceptable to the
venture capitalists.
Therefore, DDD should reduce the number of drugs in development.

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7 D Management consultancy
(1) The functions that an effective PMS will perform for D are shown below, and
can be summarised as the 'Four CPs of Measurement'.
(i) Check position – Effective performance measures will allow the
partners to understand how well D is performing at present.
The performance measures can be both financial (revenues,
profitability) and non-financial (client satisfaction), and they should
look to benchmark actual performance against target figures for each
measure chosen.
Performance can be measured for both the partnership as a whole and
also for individual teams within the partnership.
Given the current problems with inter-term rivalry, the partners may
wish to include a measure looking at the degree to which teams work
together to secure business rather than the current practice of
competing against one another.
The partners should also use PMS to benchmark D's overall
performance in key measures against its competitors to gauge how
well the partnership is performing.
(ii) Communicate position – Once the current performance levels have
been measured, they should be communicated to the partnership's key
stakeholders.
The key internal stakeholders here will be the partners (as both the
owners of the business and the team leaders), and the consultants
themselves. The consultants need to be aware of both the performance
of their individual teams but also the partnership as a whole.
By communicating performance in the key measures chosen, the
partners will be able to demonstrate how the current practices of
teams competing against each other for business are damaging the
firm. This in turn will help them justify the need for a new performance
measurement system.
(iii) Confirm priorities – The performance measures chosen to be
included in the PMS should be those which are important for the
success of the business. By extension, their inclusion in the PMS
communicates this importance to the stakeholders of the business.
Therefore the inclusion of measures around client satisfaction and
knowledge sharing alongside the existing targets for new client

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acquisition will reinforce the importance of changing the


organisational culture of the partnership.
Perhaps equally importantly, the new PMS will formalise this change,
and communicate the new priorities to the consultants.
(iv) Compel progress – The consultants currently get paid large bonuses
on the basis of their performance against a single performance
measure – acquiring new clients.
We expect that the consultants will still be able to earn large bonuses,
but in the future bonus payments will be linked to their performance
across the range of multi-dimensional measures.
This should again help change the behavioural culture in the business,
not least because the consultants' pay and career development
prospects will now be linked directly to the new PMS. This will force
the consultants to realise that it is no longer sufficient simply to bring
new business to the practice at any cost, and that working together
with colleagues and sharing knowledge with them instead of
competing against them is equally important.
However, the new PMS will compel progress not only in individual
consultants, but also across the partnership as a whole. If the
partnership overall is failing to reach its performance targets this will
be highlighted through the PMS, and so the partners will need to
introduce remedial measures to improve performance.
(2) D should go through the following stages when developing its performance
measurement system:
(i) Obtain senior management commitment and support for the
project, and achieve buy in from the key stakeholders
It is important that the rationale for the new performance
measurement system is communicated to all stakeholders in order to
overcome potential barriers to its implementation. This will be
particularly important in D, because although the partners are
committed to the new multi-dimensional performance measurement
system (PMS) the consultants who have earned high bonuses under the
existing structure will need to be convinced of its merits.
The partners' support for the project could be demonstrated through a
briefing to the consultants explaining the rationale for the new PMS,
and showing how it will benefit the partnership as a whole. They could
also demonstrate that the new system is not designed to prevent the
consultants from earning bonuses. By contrast, they will still be able to

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earn their bonuses, but in order to do so they must buy in to the new
culture being promoted by the PMS.
(ii) Identify the key outputs required from the PMS
The key outputs should relate back to the stakeholders requirements.
In D's case this will be providing cutting edge computer simulations for
its clients (client requirement) in a manner which promotes the profit
and reputation of the partnership (partner requirement).
(iii) Identify the key processes in providing the outputs
An effective control system needs to consider the inputs and processes
in a system as well as the outputs from it. In D's case this should be
done by documenting the business cycle from winning new business to
delivering a finished model to a client. The documentation should
involve a walkthrough of the current process, plus discussions with
management and staff about the issues they face with the current
process.
(iv) Identify the interfaces between the various parts of the firm and
with other key service providers
D will need a number of people to all work together to provide a high
quality service to its clients. For example, sharing knowledge between
teams, and sharing best practice in customer relationship management
will help teams improve the service they provide to their clients,
alongside the current technical expertise they use in developing their
models.
(v) Develop performance indicators for the key processes
Performance indicators are critical for D to be able to measure how
well it is managing the key areas of its business. Whilst there are
obviously financial indicators around new business earned, chargeable
hours billed and profits generated, the new multi-dimensional
performance system should also look at non-financial indicators such
as client satisfaction and levels of knowledge sharing between teams.
(vi) Identify data sources for performance indicators chosen
The data required will ultimately depend on the performance
indicators which D chooses to measure (stage 5 above). As far as
possible they should all be quantifiable, although it is likely that some
measures may have to be qualitative.
The following are some possible measures D may consider using
alongside the core financial indicators: chargeable time to non-

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chargeable time ratios; customer satisfaction surveys; percentage of


key deadlines achieved; staff satisfaction surveys (particularly around
aspects of training and development).
(vii) Develop reporting system
Again, the precise nature of how this is developed will depend on how
D's management want to communicate information, but we suggest
one suitable method will be through an electronic report circulated to
the teams or posted on an intranet.
(viii) Implement the system
Note that the implementation of the new system should be
accompanied by staff training to ensure that the consultants (and the
partners) know how to interpret the data, and can identify which areas
of performance need to be improved.
(ix) Review effectiveness of the system
There are three aspects to consider here:
• When the system is introduced initially it may have some bugs or
faults in it. So the partners would be advised to pilot it on one
team before rolling it out across the whole partnership.
• Once the system has been introduced it will be important to
assess whether it does actually lead to any change in the culture
and performance of the partnership.
• It will be important to regularly review the processes and
indicators measured to ensure that they remain relevant if the
nature and scope of D's work changes over time.

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