ACCA Strategic Business Leader Mock Examination 2 Question Paper Time allowed 4 hours including reading, planning and reflective time. This question paper is an integrated case study with one section and ALL Tasks must be completed. All Tasks contain Professional Skills marks as well as Technical Skills marks. DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS 323 324 Mock exam 2: questions Strategic Business Leader – Mock Exam 2 You are Dilip Khan, a management consultant leading a small team which has been commissioned to provide advice on a range of strategic issues for the Green Transport Group (the group) which is based in the country of Meeland. The current date is October 20X6. Part of your brief requires the preparation of a consultancy report to help the board of directors plan the future direction of the business. The principal activities of the group are the transportation and storage of goods on behalf of large commercial customers. The group consists of three operating companies: Terry Green Road Transport (TGRT); Terry Green Warehousing (TGW); and Terry Green Rail (TGR). You are a qualified Chartered Certified Accountant and your colleagues are Russell Davis, a company researcher, and Sarah Roughton who is a part-qualified accountant. You and your team have collected and analysed the following information about the group to help you prepare the consultancy report. Exhibit 1: A report on the Green Transport Group and its operating companies, sourced and prepared by Russell Davis Exhibit 2: Summary of group operating company performance data (20X1–20X5) prepared by Sarah Roughton Exhibit 3: An extract of financial statements for Marston airport for the year ended 31 December 20X5 provided by Derek Horsnell, the Finance Director of the Green Transport Group Exhibit 4: A copy of a press release announcing the proposed purchase of Marston airport Exhibit 5: An extract from a business newspaper commenting on the proposed acquisition of Marston airport Exhibit 6: An email received from Gary Walsh, the Logistics Manager at Terry Green Road Transport (TGRT) concerning the issues facing the company Exhibit 7: A newspaper article from the Meeland Herald detailing the events surrounding the train crash involving a Terry Green Rail (TGR) train Exhibit 8: Extracts from the website of Action Now! downloaded by Sarah Roughton Following your findings you are now starting to prepare the consultancy report and associated tasks for the group. The case requirements are included in the tasks shown below: 1 (a) You are reviewing the organisational overview and operating companies report, and the summary of group operating performance data (20X1–20X5) prepared by your colleagues. Required Prepare extracts for your report which analyse current performance and the contribution of each of the three operating companies in the Green Transport Group portfolio, and assess their relative significance in its future strategy. (21 marks) Professional skills marks are available for demonstrating analytical skills relating to the performance of the three operating companies and assessing their relative significance. (4 marks) 325 (b) You are now reviewing the extract of financial statements for Marston airport for the year ended 31 December 20X5. To support your understanding of the acquisition of Marston airport you have also reviewed the press release and the newspaper article commenting on the proposed acquisition. Required Critically evaluate the proposed acquisition of Marston airport. (16 marks) Professional skills marks are available for demonstrating scepticism skills relating to the proposed acquisition of Marston airport. (4 marks) (Total = 45 marks) 2 (a) You are looking over the email received from Gary Walsh, the Logistics Manager of Terry Green Road Transport. Gary’s response was prompted by your earlier request for details of the major issues facing the company. This information is required as it will form part of a presentation that you have been asked to give to the board concerning the future viability of the Ice World contract. Required Prepare information for two presentation slides to be presented to the group board of directors, including relevant points and supporting notes. The first slide should evaluate the issues surrounding Terry Green Road Transport’s performance of the Ice World contract and the second slide should evaluate the likelihood of the contract being extended. (6 marks) Professional skills marks are available for communication skills in identifying issues connected to performance of the contract and the likelihood of the contract being extended. (2 marks) (b) Sir John Watt is keen to explore the opportunities to offer frozen food deliveries to a wider range of customers. He is particularly interested in understanding how a greater use of data could help improve TGRT’s performance. He has asked that you include some detail on this matter in your presentation. Required Prepare information for a presentation slide, including relevant points and supporting notes which illustrate how the use of big data technologies and data analytics could improve TGRT’s performance of future frozen food contracts like the current one with Ice World. (8 marks) Professional skills marks are available for demonstrating commercial acumen skills in discussing the use of big data technologies and data analytics. (2 marks) (Total = 18 marks) 3 It is a month since you gave your presentation to the board. Sir John Watt, on behalf of Green Transport Group’s board, has asked for your input following the recent train crash involving TGR. In preparation you are reviewing the newspaper article from the Meeland Herald which provides details of the incident. Sir John Watt has requested that you provide him with briefing notes: 326 Mock exam 2: questions Required (a) Using an appropriate stakeholder analysis framework, analyse the relative power and interest of the following THREE stakeholder groups in the activities of TGR following the accident outlined in the newspaper article: Families of employees on the train ‘Flower Power’ wildflower protection group Meeland Environment Agency (6 marks) Professional skills marks are available for demonstrating analytical skills in assessing the relative power and interest of the three groups. (2 marks) (b) Using your stakeholder analysis, briefly recommend different strategies for managing each of the THREE stakeholder groups. (3 marks) Professional skills marks are available for demonstrating commercial acumen when making recommendations. (2 marks) (Total = 13 marks) 4 (a) The board have asked for your advice in handling the planned protests as outlined by the extracts taken from the Action Now! website. Sir John Watt has informed you that he is keen to hire extra security guards from a Meeland-based security firm to patrol the TGRT depot which has been targeted by the protestors in order to minimise the disruption caused. Required Assess the decision to hire extra security guards when dealing with the planned protests using an appropriate ethical model. (10 marks) Professional skills marks are available for demonstrating evaluation skills relating to the board’s decision-making process. (2 marks) (b) In light of the proposed protests by Action Now! the group board of directors are keen to find out more about the role of corporate social responsibility (CSR) in business. One of the director’s has suggested that a good starting point would be to compare the Action Now! group’s approach to CSR to that of a commercial entity. Draft a briefing note which explains the term CSR and discusses the ways in which CSR and ethical stance might differ between the Action Now! group and a commercial ‘for profit’ business. (10 marks) Professional skills marks are available for demonstrating communication skills around the issue of CSR. (2 marks) (Total = 24 marks) 327 Exhibit 1 – Background report on the Green Transport Group To: From: Subject: Dilip Khan Russell Davis Organisational overview and operating companies The Green Transport Group (the group) was formed five years ago, in 20X1, when the owners of Terry Green Road Transport decided to create a group structure to facilitate the acquisition of companies which complemented its existing operations. The group consists of three operating companies: Terry Green Road Transport; Terry Green Warehousing; and Terry Green Rail. The CEO of the group is Sir John Watt, a highly experienced businessman, and he is assisted by a financial director and an operations director. The managing directors of all three operating companies also sit on the board of the group. The majority of shares in the group and operating companies are owned by the Green family. Terry Green Road Transport (TGRT) TGRT was founded 60 years ago by Terry Green. It is the largest road freight company in Meeland, with over 2,000 trucks. It specialises in the haulage of consumer food and drink and has significant contracts with most of the large supermarket chains. TGRT’s supermarket contracts require the collection and transportation of goods from the supermarkets' distribution centres (and often go via the group’s own warehouse facilities) to the supermarkets' out-of-town stores, which are often situated just off major roads and motorways. Taxes for roads are levied through a fuel tax and an annual road fund licence. The managing director of TGRT is Terry Green Junior, who was originally employed by his father as a driver. He still drives a truck for one day every month, so that 'he never loses touch with the business'. TGRT's distinctive green and white trucks are seen all over the country. They have attracted a fan club, whose members spot the trucks on the road and record their movements on a dedicated internet site. 'Terry’s Wanderers’ have helped to make the TGRT brand a household name. TGRT replaces its trucks every three years to ensure reliability, improve efficiency and to reduce its carbon footprint. TGRT is keen to project a modern image which is attractive to customers. Terry Green Warehousing (TGW) The growth of consumer internet purchasing has created demand among TGRT’s customers for an integrated transport and storage solution. The group acquired a number of warehouses from its customers who wished to divest these operations. In 20X1 it consolidated these and a number of small warehousing companies it had acquired, to form TGW. Nationwide, TGW owns 4 million square metres of warehousing, with its warehouses painted green and white and prominently displaying the Terry Green logo. The warehouses are efficient and highly automated. Finding development land for warehouses is becoming increasingly difficult and the cost of land is rising. The average price for warehouse development land in Meeland is now $20,000 per hectare. (A hectare is 10,000 square metres.) Terry Green Rail (TGR) Increasing fuel costs, road congestion and concern about the environmental consequences of road transport caused the group to look at opportunities offered by rail transport. In 20X2 the group purchased the Freight Direct Rail Company (FDRC). FDRC was formed a number of years ago, when the Meeland government privatised the country’s rail freight business. FDRC had struggled to survive in an industry dominated by two large companies who share the majority of the lucrative bulk freight contracts (coal, iron ore and oil) between them. The FDRC locomotives were quickly painted green and white, and FDRC was renamed TGR. TGR's use of the rail tracks is directly charged by the state. Despite experienced managers being transferred to the company from other companies in the group, TGR (like FDRC) has struggled to make a significant impact in the rail freight sector. Most of its customers are at locations which are not directly accessible by rail. Furthermore, the lucrative bulk rail freight contracts (coal, iron ore and oil) are in products which companies within the group have limited experience in managing. 328 Mock exam 2: questions Despite this, TGR inherited a small contract to transport oil for companies in the shipping industry when it acquired FDRC. The group's senior management have struggled to understand the culture and economics of the rail freight industry and there has been a failure to recognise that train driving requires far greater skills and training than truck driving. TGR has developed an innovative minicontainer system which can easily transfer goods between trucks and trains and makes more effective use of warehouse space. Most of the supermarkets in Meeland, attracted by the environmentally friendly image, are very supportive of the rail initiative and wish to be associated with it. Exhibit 2 – Summary of group operating company performance data (20X1-20X5) prepared by Sarah Roughton Table 1: Financial data for operating companies in the Green Transport Group 20X5 20X4 Green Industry Green Industry Terry Green Road Transport Revenue 575 2,050 565 2,025 Operating 10.80% 9.98% 10.75% 9.95% profit ROCE 12.25% 11.50% 12.15% 11.45% Terry Green Warehousing Revenue 315 3,200 275 3,010 Operating 14.55% 14.50% 14.25% 14.15% profit ROCE 14.50% 14.15% 14.25% 14.10% Terry Green Rail Revenue 112 3,150 110 3,000 Operating 4.75% 12.45% 4.50% 12.35% profit ROCE 3.50% 8.75% 3.65% 8.55% 20X3 Green Industry 20X2 Green Industry 20X1 Green Industry 550 2,015 520 2,050 500 2,000 10.80% 9.93% 10.45% 9.50% 10.25% 9.57% 12.05% 11.45% 11.95% 11.30% 11.95% 11.35% 270 3,050 255 2,950 250 2,850 14.20% 14.25% 14.00% 14.25% 13.85% 14.15% 14.15% 14.10% 13.95% 13.90% 13.95% 13.85% 105 2,850 105 2,650 105 2,500 4.85% 12.25% 4.95% 12.75% 5.15% 12.85% 3.75% 8.55% 3.85% 8.35% 3.85% 8.25% The performance of each group company is shown under the columns headed Green. Industry figures (provided by Freight Line International) are shown under the columns headed Industry. Operating profit and ROCE figures are averages for the industry while revenue figures are totals. All revenue figures are in $m. Notes: 1. Terry Green Warehousing first traded in 20X2. The 20X1 figure is compiled from companies which were consolidated into Terry Green Warehousing. 2. Terry Green Rail was formed after the takeover of FDRC. 20X3 was the first reporting period for Terry Green Rail. The 20X1 and 20X2 figures are for FDRC. 329 Exhibit 3 – An extract of financial statements for Marston airport for the year ended 31 December 20X5 Marston airport is situated on the outskirts of Marston town where TGRT already has three transport depots and warehouses. The airport occupies a site of 450 hectares and it has two tarmac runways, four hangars and a small terminal/flying club facility. The airfield is exclusively used by private flyers and two flying clubs. The airport is adjacent to the motorway which connects North and South Meeland. Financial information for Marston airport is below. $'000 Assets Non-current assets Property, plant and equipment 6,000 Goodwill Total non-current assets 250 6,250 Current assets Inventory Trade receivables 550 80 Cash Total current assets 370 1,000 Total assets 7,250 Equity and liabilities Share capital 2,550 Retained earnings 250 2,800 Total equity Non-current liabilities Long-term borrowings Current liabilities Trade payables Short-term borrowings 4,050 120 250 Current tax payable Total current liabilities Total liabilities 30 400 4,450 Total equity and liabilities 7,250 STATEMENT OF PROFIT OR LOSS Revenue 975 Cost of sales (700) Gross profit 275 Administrative expenses (125) Finance costs (100) Profit before tax 50 Tax expense (10) Profit for the period 40 330 Mock exam 2: questions Exhibit 4 – A copy of a press release from August 20X6 announcing the proposed purchase of Marston airport Press release from Sir John Watt announcing the proposed purchase of Marston airport The Green Transport Group is pleased to announce that it has signed an initial agreement in principle to purchase Marston airport from the Marston Airport Company for the sum of $7m, funded from retained profits from within the group. We see this as a natural extension of our transport capabilities. Road, rail and air have long been complementary forms of transport and we are pleased to be able to offer our customers all three, using our innovative mini-container system as an effective transhipment method between transport modes. We also hope to attract a low-cost airline to the airport, encouraged by low landing fees and a population of over 150,000 people living within 20 miles of the airport. Marston Airport Company will become an operating company within the Green Transport Group, and renamed Terry Green Air. Exhibit 5 – Extract from a business newspaper commenting on the proposed acquisition of Marston airport. The renowned aviation consultant, Peter Brown, appears much less optimistic than Green Transport Group about the potential contribution that Marston airport can make to the Group. Mr Brown has recently carried out an analysis of the 20X5 financial performance medium-sized light aviation airports (like Marston) in Meeland. This revealed the following performance statistics across the sector as a whole: Operating profit margin 17.5% Return on capital employed 8.5% Current ratio Acid test ratio Gearing ratio 2.25 1.50 40% (The standard payment terms in Meeland is payment within 30 days of the invoice date.) Peter Brown has also cast doubt on Sir John Watt's statement about attracting a low-cost airline to Marston airport. He says that a local regional population of at least 500,000 people is required to make such a service attractive. As such, Mr Brown believes that the population of the Marston area is much too small to make passenger services from the airport economical. 331 Exhibit 6 – Email received from Gary Walsh, the logistics manager at Terry Green Road Transport concerning the issues facing the company To: From: Subject: @ d.khan consult.com g.walsh @ tgrt.com Issues affecting Terry Green Road Transport (TGRT) Dear Dilip, Having reflected on your request for input, I can honestly say that the biggest issue TGRT faces at the moment concerns the Ice World (IW) contract. TGRT recently won a hard fought tender process to transport deliveries for the rapidly growing supermarket chain, IW. The contract is initially only for a six-month trial period. We are already half way through the trial. At the time of signing the contract representatives from IW stressed that TGRT’s performance during the trial period would be central to extending the deal. Unlike the other supermarkets which TGRT has contracts with, IW does not sell dry goods or chilled products, it only sells frozen food products. As a result this requires us to use adapted trucks which are capable of transferring frozen goods. We have had to hire 15 specialised trucks for the six-month duration of the contract from our usual truck supplier. The contract obliges TGRT to collect deliveries from IW’s central Meeland distribution centre and make deliveries to the company’s 50 stores, all of which are located in town centres nationwide. IW operates by selling high volumes of a limited range of frozen food products at low prices. The limited range means that every IW delivery contains the same products regardless of which store it is going to. Although the contract represents a great the opportunity for us, it has caused some problems. Increasing road congestion increases the likelihood that our deliveries will miss their allocated delivery slots. The contract stipulates that late deliveries require TGRT to pay a flat penalty charge of $5,000 per occurrence. Since the contract began TGRT has made $60,000 of penalty payments. Our drivers complain that the problem is made worse by the difficulty of accessing the 50 stores. Navigating through town centres is problematic due to restrictions on the roads that larger trucks (such as those used by TGRT) are permitted to use, which adds on time when making deliveries. TGRT is obliged to pay a penalty for any food which spoils while in transit, this occurs when the onboard freezer unit fails to keep the temperature below zero degrees. This has happened twice. Interestingly, the other day I noticed that one truck appeared to have used more fuel than would have been expected given the distance covered. Upon investigating the matter I discovered that the freezer unit was operating at temperatures lower than required to keep the goods frozen! I hope the above proves useful. 332 Mock M k exa am 2: que estion ns E hibiit 7 – Ne Exh ews spa ape er arti a icle e frrom m th he Me eela and dH Herrald d Me M ee ela and d He Hera ald d Tw wo o die d e in rail disa aste er Byy Steve e Dean n, M Mee elan nd Cor C resp pon ndent Yesterddayy saw w one o of the e wo orst raiil diisassterss inn rec cent historry whe w en a fre eigh ht trrainn de erailed sho ortlyy a r lea after avin ng a ra ailw wayy de epott ne ear the villlage e off Blueb bell Hill, le eaving two dead d d. TThe freiightt tra ain, op pera ated d by y Te erry Grreen n Ra ail ((TG GR), wa as p pulling sevven tan nk cars c s full off shiipping oil a wa and as en-ro e oute e to o the e po ort of Sea S aford d whe w n it leftt the e tra ackks and cra ashe ed into i o a nnea arbyy fie eld. The c h occu cras o urre ed near n r the e viillag ge of o Blue B ebell Hill w which is i re eno own ned as an are ea of o o outstand ding natural b uty due beau e to o the e wildf w flow werss that grow g w in n th he reegion. Du uring g th he cras c sh one o of thee tan nk cars c s ruptured d c sing caus g thoussand ds of o liitress off oil to lea ak onto o o thee su urro ound ding g la and and wild w flow werr me eadow ws. Residen R nts in i th aim to havve hea h rd a lo wed by an ora ang ge eexpllosion and d he villa v age cla oud noise folllow p mes of black smo plum oke rising over 100 1 0 fe eet high h h. Foot e ta aken n on n mob m ile pho oness off the e in ncid dentt byy F tage lo oca al re esidents ha as alre a eadyy sttarte ed to t surfa s ace e on e in ntern net.. It is i curre ently y uncle ear wh hat cau c used d the n the trrain n to deraill, ho owe ever, e expe ert sou s rce es we w show s wed d the ama a ateur fo oota age to agrreed hat the t inccide ent d th m y we may ell hav h e been ause ed by b the t train trav t vellin elievved d tha at th he ttwo o ind dividua als that t t b n ca ng too fasst. It iss be d d we died ere the ain drivver and d assisstan nt drive er, tthey y we ere the e on nly peo ople e on n-bo oard e tra d at the time of the in ncid dent. A sp poke esp person for TG GR yyeste erday claime ed thatt a full mentt wo ould d be e issue ed sshorrtly. Latte f stattem y erday eve yeste ng the gov g vern nme ent-ffund ded d Meela d En nvironm men nt Agen A ncyy (M MEA A) deecla ared d ‘a a enin and significa ant eco gica al disa d aster’. Con C ncerns havve b en heig h ghte ened d byy th he air a poll p utio d byy the e olog bee on cau c sed ra aging fire es o he trac t ck siide wh hich h too ok seve s eral ho ourss to bring und der contro ol. Dur D ing a telev t vision on th hin n ws broa new adca dayy evvening,, the e Head d off MEA nted d tha at TGR T R wo ould d su uffeer ex xten nsivve p puniitive e ast yessterd M fiinan ncia al pena p altie es for any a y wrrong gdo oing g whic w h leed to th he disa d aster. MEA M A ha as pro p missed to con c nducct a fulll in nvestig gatio on into o the e ca ause of o th he disa d sterr. TThe wildflo owe oup ‘Flo owe er Pow P wer’, whic mote es the con c nserrvattion of Me eela and’’s er prote p ection gro w h prom in ndig gen nouss ve on, cla aimss to o ha ave recceivved rep portss fro om Blu uebe ell Hill H resside entss tha at an a area a a off egetatio la and d wh hich h co ainss a rare e ty ype of orchid flo oweer ha as bee b en a affeccted d byy th he oil o spill . onta 33 33 E hibiit 8 – Exttra Exh acts s fro om m th he we website of Ac ctio on No Now!! prrep pare ed by y Sa ara ah Roughto on A tio Act on No Now w! A ou Ab ut us u Actio A on No ow!! iss a not-f n for-p proffit, vo oluntaryy eenviiron nme enta al acti a on grroup p whic w ch em mphasisses the im mpo orta ance e of ta aking actio a on in i ta ackkling g cllima ate cha ang ge. The T e efffectts of o clima ate cha ang ge are a all aro ound d u frrom us m rissing g tempera ature es cau c sing g drou ughtt in some pa arts of the t wo orld, to o rissing g se ea leve els ccau using g fllood ding g in n ottherr re egio ons.. Alltho ough h, it is an n incon nven nien nt trruth h, we w all a kno ow tha t man--made acttivitty a the and e bu urning of foss f sil fuelss is the e ce entra al caus c se of o glob g bal cclim mate e ch hange.. Th his nneeds to t stop s p be eforre itt is too o latte. Politticia P ans in Me eela and and arou a und the e world w dh have e fo or to oo many yea ars sim mplyy pa aid lip--servvice e to o the g wing grow g need d to o take the isssue of clim mate e chan nge seriou uslyy. Th here eforre we w urg ge a all our o sup ppo orters to g invo get i olve ed tto help p us put the e isssue e of clim matte cchan nge e firmlyy on n the e agen nda a. Newssfe Ne eed d A re ecen nt Unite U ed Nation ns re epo ort rank r ked d Meela and d in the e To op 1 10 wo w rst poll p lute ers, as measu ured d byy CO O2 ghlighted the e ssio emis ons perr he ead of pop pula atio on. The T rep port hig e ne eed forr glo oba al goveernm men nts to t p prom mote e th he use u of alte ative envirronmen ntallly frien f ndlyy fuuel sou n bu usiness. erna s rcess in F rthccomiing For g cam c mp paig gn n evventss In n re ecog gnittion eela and d’s rank r king g in n the e Unite U ed Nat ns re epo ort Acti A ion No ow! is planning a serie es of o n of Me N tion p estss aimed at prote ome e off the e co oun ntry’’s wors w st C ollutterss. We W urg ge all a Acti A on No ow! sup ppo orters to o a so CO2 po jo oin us at the t following loccationss ne ext wee w ek: TThe gates of the t ma ain dep d pot of Terr T ry Gree G en Roa ad Tran T nsp port,, ne ear Centra al C erry Grreen n City.. Te R ad TTran Roa nspo ort is i ra ankked the e 52 2nd wo orstt CO O2 Mee M elan nd pol p lute er by y Actio A on N w! Now TThe enttran nce of the log gistiics firm f m Chestnutt Ro oad d Ha aula age e, lo ocatted nea ar Mar M rsto on Town. C estnut Roa Che H lage iss ra anke ed the t 67tth wor C 2 Meela and d po olluter by Acttion n Now! R d Hau w st CO Iff yo ou can n jo en ple ease e do. In ord der to cause e maximum disr d rupttion n annd to hig ghlig ght ou ur oin us the c paiign to low cam wer the e levvelss of CO O2 poll p lutio on ccau used d byy prriva ate ente e erprise e in Meeela and d ple easse bring b g w m cloth warm c hes as we e are p plannin ng on cha ainiing ourselvess to o the e entra ance gate g es a es. Eve en if at both site w can we c n sto op both fiirmss fro om getting g th heirr po ollutting g tru uckss on nto the e roadss fo or a co o dayss the en it ouple of w havve bee will b n wort e to o see you there! w th itt. Hope 334