Further question
practice
HB2022
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1 Bonar Paint
It is early 20X7. You work as a consultant advising organisations undergoing significant strategic
change. The senior management team of Bonar Paint has asked for your advice in evaluating the
current position of the organisation and its attractiveness for a management buyout.
Bonar Paint is a medium-sized paint manufacturer set up by two brothers, Jim and Bill Bonar. The
company is based in Gaulle, a developed country. Bonar Paint’s turnover has been static for some
years and both brothers now want to retire from the business. The brothers have created a loyal
workforce and feel that this loyalty will be strengthened if they sell the business to the three senior
managers: Roy Crawford, production manager; Tony Edmunds, sales and marketing manager;
and Vernon Smith, chief accountant.
The three managers recognise that this is a major opportunity for them, but one that will involve
the raising of significant loan and equity finance to buy the business. Equally significant are the
equity stakes of $100,000 from each of them, which the banks require to show their personal
commitment.
Required
Explain the advantages and disadvantages of developing a formal mission statement to guide
Bonar Paint’s future direction after the buyout and briefly explain the role the mission statement
could play in the strategic planning process.
(10 marks)
Professional skills marks are available for demonstrating communication skills in explaining the
advantages and disadvantages of mission statements.
(2 marks)
(Total = 12 marks)
Exhibit: Company product range and processes
Bonar Paint makes high quality specialist paints for a range of industrial customers. Its major
customers include car manufacturers and steel makers. Bonar Paint also supplies many smaller
industrial customers. Raw materials are sourced from large chemical companies. Jim Bonar has
chemical expertise and Bill has the complementary sales skills to meet the specialised paint needs
of their demanding customers. Bonar Paint has a good reputation for product innovation and its
product range of over 200 paints include paints able to tolerate harsh and demanding conditions.
The small research and development team, headed by Jim, has an excellent track record of
meeting the technical demands and timescales for developing new high performance paints. New
paints are normally developed in response to customer demand and, consequently, there is no
formal process for new product development.
Replacing Jim’s technical skills and leadership will undoubtedly create problems for the buyout
team. The brothers have taken all the key strategic decisions to date, with little reference to the
senior management team. Bonar Paint’s product innovation success has come at a price. Its
product range is far too extensive to sustain, with the majority of the paints produced infrequently
and in small batches.
Customers often experience long lead times when ordering a particular paint. This results in
higher than necessary inventory levels, much of which is unlikely to be bought. Paints are supplied
directly to each and every customer. Unfortunately, Bonar Paint’s management information
systems fail to show the profitability or otherwise of individual paints and the future demand for
the paint. There is little communication between sales and the research and development part of
the business. Roy Crawford has consistently argued for the benefits of reducing the product
range and increasing the size of the batches produced. This would improve control over
production, and lower costs. Higher volumes would justify investment in new production
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technology, and bring labour savings with fewer, less-skilled, workers needed to operate the new
machinery. There has been little recent investment in new plant or machinery.
Competitive environment
The paint industry in Gaulle is very fragmented – at the top end of the industry are large
international paint manufacturers with significant brands, which supply both industrial and
domestic paint customers. They produce in high volumes and offer a comprehensive but limited
range of paints. At the bottom end of the industry are many small and medium-sized paint
makers.
Many have chosen to produce own label paints for the large Do-It-Yourself (DIY) retailers.
Specialist paint makers, such as Bonar Paint, are finding it increasingly difficult to survive, with
neither the sales volumes nor brands to compete. The industry as a whole is seen as mature and
lacks innovation. There is increased environmental concern about the toxic by-products of leadbased paints and the development of less toxic water-based paints is only slowly emerging. Even
more worrying is the increased usage of plastics and other materials, which do not require
painting. The DIY market is dominated by the same large international paint makers and the
market for industrial paint is vulnerable to the usage of alternative materials and the entry of
large overseas paint makers.
Future strategy
Each of the prospective buyout managers has a different view of how Bonar Paint should develop
after the buyout takes place. Roy Crawford sees his proposed reduction of the product range and
increased investment in new production technology as a means of reducing costs, improving
margins and focusing on getting a larger share of the large industrial paint market. Product
innovation should only come when there is a clear and profitable need for a new paint.
Tony Edmunds, however, sees an extension of the customer base as a necessary step in securing
the future of the firm. The product range should be extended to meet the needs of the professional
painters and decorators looking for high performance paints.
Finally, Vernon Smith is anxious that the internal control systems be improved to establish which
paints are, or are not, making money. Investment in new paint ranges or technology should be
resisted until the buyout has been successfully completed. Vernon is also anxious that a fair
valuation is made of the business and that the sales forecasts for 20X7 and 20X8, made by Bill
Bonar, are realistic.
Table 1: Financial information on Bonar Paint ($’000)
20X4
20X5
20X6
20X7
(estimate)
20X8
(forecast)
10,500
10,250
10,000
10,500
11,000
Cost of sales
5,250
5,400
5,500
5,460
5,500
Gross profit
5,250
4,850
4,500
5,040
5,500
100
100
100
150
150
Distribution
1,575
1,650
1,700
1,785
1,650
Administration
2,100
2,150
2,200
2,250
2,200
105
100
100
105
110
1,370
850
400
750
1,390
Sales
Marketing
Research and
development
Net profit
Customer analysis:
Sales to large industrial companies 75%
Sales to small industrial companies 25%
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2 2 ZK
You are a senior manager working in the policy support function of ZK plc (‘ZK’), reporting to the
Chief Executive.
ZK is a publicly quoted company selling cosmetics, cleansing and other beauty products. Its
products are based on raw materials grown in tropical countries and processed either in these
countries or in the eventual sales markets. Processing is undertaken partly by ZK and partly by
sub-contractors. The products are branded and sold worldwide, but mainly in the United Kingdom
and North America. They are sold to consumers through a very large number of outlets.
ZK’s chief executive has always regarded annual reporting as ideally never exceeding minimum
legal requirements and has never considered such reporting to be relevant to anyone apart from
shareholders. However the non-executive directors have for some time expressed concern that the
company has not developed any systems of environmental or social reporting to shareholders, let
alone stakeholders, despite many comparable companies already regularly publishing such
information as part of their Annual Report.
A government minister has now stated that legislation will be considered if all companies do not
make progress on reporting on social and environmental policies and the impact on stakeholders
as well as shareholders. One non-executive director has raised the possibility of going further and
preparing a report based on the principles of integrated reporting.
In order to appear fully briefed and able to contribute to the next board meeting where this topic
is on the agenda for discussion, the Chief Executive has asked you to challenge what he currently
knows so that he can be prepared for the vigorous debate that he is expecting to occur at the
meeting.
Required
Prepare briefing notes for the Chief Executive which will:
(a) Identify the main issues that could be covered in the environmental and social report.
(b) Analyse the impact of business partners and other stakeholders on the content of the
environmental and social report.
Professional skills marks are available for demonstrating scepticism skills in producing this
briefing note for the Chief Executive.
(2 marks)
3 Caius
You work as a freelance consultant advising companies on governance issues, specialising in
companies that are keen to become listed. One such company, Caius, has contacted you for
help. The company’s main business is manufacturing domestic electrical appliances, but it is keen
to expand into telecommunications, particularly focusing on the opportunity to embrace the
‘internet of things’ and connect a number of its products to the web.
In order to support this growth and development, Caius is seeking a listing on the Stock Exchange
of a developed country. The directors of the company are aware that certain listed companies
have attracted considerable criticism in recent years over directors’ pay and conditions. There
have been claims in the media that the pay and conditions of some directors have been far too
generous and that the remuneration policies adopted by some companies have been far from
transparent.
The directors of Caius are keen to ensure that, if the bid for a listing is successful, all aspects
relating to their pay and conditions must be in line with best practice. Consequently, they have
asked for your help in advising them about their remuneration policy for all directors.
Required
Write a report to the directors of Caius which identifies the policies and frameworks that should
be adopted by the company to ensure that directors’ pay and conditions are fair and
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transparent. Your report should include any objections to paying NEDs in shares or share options
and whether you agree with these objections.
(12 marks)
Professional skills marks are available for demonstrating commercial acumen as part of your
explanation of how Caius should remunerate its directors.
(2 marks)
(Total = 14 marks)
4 Joe Swift Transport
You a senior finance manager working for Joe Swift Transport (‘Swift’), and reporting to the
finance director.
Swift is the largest logistics company in Ambion, owning 1,500 trucks. It is a private limited
company with all shares held by the Swift family. It has significant haulage and storage contracts
with retail and supermarket chains in Ambion. (Ambion is a large, industrialised country. It is
densely populated with a high standard of living.)
Joe Swift, the founder and CEO of the company, is becoming increasingly disillusioned with the
business environment in Ambion. In a recent interview, he said that ‘trading here is becoming
impossible. The government is more interested in over-regulating enterprise than stimulating
growth.’
Joe is considering moving large parts of his logistics operation to another country, and Ecuria is
one of the possibilities he is considering.
The finance director has provided you with some notes from recent meetings he has had with Joe
Swift (Exhibit 1), and has asked you to analyse the factors which could influence a potential move
into Ecuria.
Required
In the context of national competitive advantage, assess the factors which could influence Swift’s
decision to move a large part of its logistics business to Ecuria.
(10 marks)
Professional skills marks are available for demonstrating evaluation skills in assessing the
implications of the factors on Swift’s decision.
(2 marks)
(Total = 12 marks)
Exhibit:
The logistics marketplace in Ambion is mature and extremely competitive, and Swift has become
market leader through a combination of economies of scale, cost efficiencies, innovative IT
solutions and clever branding.
However, the profitability of the sector is under increased pressure from a recently elected
government that is committed to heavily taxing fuel and reducing expenditure on roads in favour
of alternative forms of transport. The government has also announced a number of taxes on
vehicles which have high carbon emission levels, as well as reducing the maximum working hours
and increasing the national minimum wage for employees.
Ecuria
Ten years ago, following a period of political change, a number of new independent states were
formed. One of these states was Ecuria. The people of Ecuria (known as Ecurians) traditionally
have a strong work ethic and a passion for precision and promptness. Since the formation of the
state, their hard work has been rewarded by strong economic growth, a higher standard of living
and an increased demand for goods which were once perceived as unobtainable luxuries. Since
the formation of the state, the government of Ecuria has pursued a policy of privatisation. It has
also invested heavily in infrastructure, particularly the road transport system, required to support
the increased economic activity in the country.
The state haulage operator (EVM) was sold off to two Ecurian investors who raised the finance to
buy it from a foreign bank. The capital markets in Ecuria are still immature and the government
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has not wished to interfere with or bolster them. EVM now has 700 modern trucks and holds all the
major logistics contracts in the country. It is praised for its prompt delivery of goods. Problems in
raising finance have made it difficult for significant competitors to emerge. Most are family firms,
each of which operates about 20 trucks making local deliveries within one of Ecuria’s 20 regions.
The two investors who own EVM now wish to realise their investment in the company, and have
announced that it is for sale. In principle, Swift is keen to buy the company and is currently
evaluating its possible acquisition.
5 Chelsea Co
You are Ross Clark, a management consultant heading up a small team of business advisors
which is undertaking an assignment at Chelsea Co (Chelsea). The board at Chelsea have
appointed the firm for which you work, as they are keen to gain a better understanding of the
company’s strategic position. Chelsea Co is a large civil engineering company, which carries out
various building contracts within both its home and in a number of overseas markets. Its main
area of work, particularly overseas, is in road construction. The company has a strong financial
track record and successfully survived a major recession within its home market about ten years
ago.
You and your team have collected and analysed the following information about the group to help
you prepare the consultancy report.
•
Exhibit 1: A review of the economic circumstances facing Chelsea in its overseas markets by
your colleague Katie Parry.
•
Exhibit 2: An email received from Chelsea’s Head of Construction, Andrew Hussain, which
outlines the company’s current work in progress.
•
Exhibit 3: A note detailing Chelsea’s market share prepared by your colleague Klem Speck.
•
Exhibit 4: An extract from a recent article which appeared in the construction industry journal
Building for Tomorrow.
Having reviewed your team’s findings you are now required to putting together a presentation
which is to be presented to the Chelsea board of directors. The presentation will summarise your
key findings to date.
Required
Prepare information for TWO presentation slides to be presented to the Chelsea board of
directors, including relevant points and brief supporting notes which consider the main strengths,
weaknesses, opportunities and threats facing the company.
The first slide should consider Chelsea’s THREE main strengths and THREE main weaknesses.
The second slide should consider the THREE main opportunities and THREE main threats facing
Chelsea.
Professional skills marks are available for demonstrating analysis skills in considering the position
of Chelsea.
(2 marks)
Exhibit 1: A review of the economic circumstances facing Chelsea’s overseas markets
During the last three years, the overseas markets in which Chelsea has been carrying out building
contracts have suffered as a result of a serious economic recession. Business confidence in these
markets has been seriously weakened over this period. One country which has been adversely
affected is Eastlandia. Chelsea has been engaged in carrying out contract work in Eastlandia for
several years. Government action in Eastlandia to protect its ailing economy has also had an
adverse impact on foreign contractors such as Chelsea operating within this country.
The concern felt by Chelsea’s directors regarding the economic situation in Eastlandia has been
increased as a result of recent events involving a large construction company called Derby Co,
which Chelsea had done work for in the past. Derby Co, which was wholly owned by Eastlandian
shareholders, had previously received Eastlandian government backing. However, it has recently
been allowed to go into receivership without any further government support. The government
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announced that partial repayment of debts owed by Derby Co to local subcontractors that it had
used would take priority over those it owed to foreign firms. The result of this is that foreign firms
are unlikely to see any recovery of monies owed for work performed.
The serious economic situation in Eastlandia has threatened to result in an economic recession.
There has been a constant negative effect on related industries within the country, such as steel,
building materials and transport. Another major concern for Chelsea’s directors is the constant
threat posed by currency fluctuations and the possibility of the Eastlandian government being
forced into currency devaluation.
Exhibit 2: Email received from Chelsea’s Head of Construction, Andrew Hussain,
outlining the company’s current work in progress
To:
Ross Clark
From:
Andrew Hussain
Subject: Work in progress
Dear Ross,
Further to your request for details in relation to Chelsea’s current projects please find below a
note which outlines the situation as it stands today.
In recent times Chelsea has increased the amount of work that it undertakes overseas, with a
sizeable amount of this taking place in Eastlandia. Chelsea’s growth has been helped by
increasing criticism in Eastlandia over the poor quality of civil engineering projects which have
been completed by Eastlandian firms. There have been reports of numerous site casualties
among the site workers during the construction process. Some buildings have partially
collapsed after construction has been completed and there have been instances where roads
have started to break up shortly after they have opened. This has caused civilian casualties
with some fatalities and resulted in noisy public protests in Eastlandia about the lack of
attention to safety in civil engineering and building work. As a result Chelsea is well regarded
by the Eastlandian government. It has taken a long time for the directors of Chelsea to build
the company’s reputation and gain recognition in Eastlandia for its workmanship.
Chelsea is currently engaged in the construction of a major road linking two parts of a new
Eastlandian city, bypassing the central congested area. Chelsea is engaged as a
subcontractor to a major Eastlandian development company – after the original
subcontractor, Derby Co, went into receivership recently. The board at Chelsea accepted the
contract to take over the work performed by Derby Co after estimating that it would provide a
high net present value. As far as Chelsea’s overall business is concerned, the contract
represents about 10% of total turnover for the company. The contract commenced three
months ago and Chelsea is to be paid in Eastlands. Progress payments for the work done to
date have been delayed without any explanation. The contract is about 15% complete and is
expected to be completed in 21 months, which is three months later than planned. This will
result in penalty payments being incurred by Chelsea.
The directors at Chelsea recently expressed their concerns about the quality of the work
undertaken by the previous subcontractor. The directors have become increasingly alarmed at
the amount of remedial work which has been needed so far to bring the work performed by
Derby Co up to the required standard. The remedial work has already consumed the total
amount of the financial contingency which was allowed for in the contract estimates.
I hope the above proves useful.
Exhibit 3: Note detailing Chelsea’s market share
Chelsea uses external databases to establish the levels of its own share of the market and overall
patterns of market growth and development. In addition, the management accounting
department of the company provides internal information on market share and growth and
internal capacity to meet its future contractual demands. Over the last two years there has been
a general decline in market opportunities but Chelsea has managed to increase its overall market
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share. This has been achieved because of its strong reputation for using good quality materials
and applying high standards of workmanship.
Exhibit 4: Extract from the construction industry journal, Building for Tomorrow.
Building for Tomorrow
Chelsea Co proposes strategic alliance
Yesterday it was announced that the Eastlandian government had invited well renowned
construction firm, Chelsea Co, to tender for further civil engineering work. We learned late last
night that Chelsea Co’s directors have taken up the invitation to tender. If the company is
successful in all of its tenders, then this would bring the company’s commitment in Eastlandia up
to about 40% of its total order book.
In the last edition of Building for Tomorrow we reported that a number of Chelsea Co’s directors
had grown increasingly concerned at the dangers posed by the insolvency of customers in
Eastlandia. To overcome these concerns we have subsequently learned that the Chelsea Co
board have proposed that a strategic alliance be formed with an Eastlandian civil engineering
contractor who, it is hoped, will have an insight into the financial integrity of potential customers.
The alliance partner would be able to give clear advice as to which of these Eastlandian
customers would be suitable for the establishment of contractual arrangements.
6 Environment Management Society
You have recently started work at the Environment Management Society (EMS) as a senior finance
manager. You report directly to the finance director.
EMS was established a number of years ago by environment practitioners who felt that
environmental management and audit should have its own qualification. EMS is based in the
developed country of Ambion. EMS has its own Board who report to a Council of eight members.
Policy is made by the Board and ratified by Council. EMS is registered as a private limited entity.
EMS employs staff to administer its qualification and to provide services to its members. The
qualification began as one certificate, developed by the original founding members of the
Society. It has since been developed, by members and officers of the EMS, into a four-certificate
scheme leading to a Diploma.
In recent times EMS has experienced a significant fall in the number of candidates registering for
the EMS Diploma qualification. In response, the EMS Board are exploring ways to address the
decline, at the last Board meeting it was agreed that different methods of developing EMS be
explored; including via internal development, acquisitions, and strategic alliances.
The finance director has been tasked with conducting a preliminary evaluation of the three
methods of development mentioned at the Board meeting. He is keen to get your input on the
matter as you are a new employee and as such may offer a fresh perspective on the current
situation facing EMS. He has provided you with some notes (Exhibit 1) about EMS’s operations and
the highlights from the recent Board meeting. He has asked you to assess the three methods of
development in relation to EMS’s current situation.
Required
Assess the factors which could influence the Board’s decision relating to its choice of the three
methods of development discussed in the Board meeting.
(18 marks)
Professional skills marks are available for demonstrating evaluation skills in assessing the factors
relating to the three methods of development currently being explored EMS.
(2 marks)
(Total = 20 marks)
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Exhibit:
Background
EMS employs a full-time chief examiner who is responsible for setting the certificate examinations
which take place monthly in training centres throughout Ambion. No examinations are currently
held in other countries. If candidates pass all four papers they can undertake an oral Diploma
examination. If they pass this oral they are eligible to become members. All examinations are
open-book one-hour examinations, preceded by 15 minutes reading time. At a recent meeting,
EMS Council rejected the concept of computer-based assessment. They felt that competence in
this area was best assessed by written examination answers.
Decline
Candidate numbers for the qualification have fallen dramatically in the last two years. The Board
of EMS has concluded that this drop reflects the maturing marketplace in the country. Many
people who were practitioners in environmental management and audit when the qualification
was introduced have now gained their Diploma. The stream of new candidates and hence
members is relatively small.
Response
Consequently, the EMS Board has suggested that they should now look to attract international
candidates and they have targeted a number of developing countries where environmental
management and audit is becoming more important. They are now formulating a strategy to
launch the qualification in four large, developing nations. However, any strategy has to recognise
that both the EMS Board and the Council are very cautious and notably risk averse. EMS is only
confident about its technical capability within a restricted definition of environmental
management and audit. Attempts to look at complementary qualification areas (such as soil and
water conservation) have been swiftly rejected by Council as being non-core areas and therefore
outside the scope of their expertise. The Board are keen to explore the potential opportunities
offered by three different methods of development: internal development, acquisition and
strategic alliance.
7 Azure Airline
You work as a risk consultant supporting organisations in a variety of industries. You have just
been contacted by the Managing Director of Azure Airline (‘Azure’) for help in managing the
organisation’s risks.
Azure, a limited liability company, was incorporated in Sepiana on 1 April 20X6. In May, the
company exercised an exclusive right granted by the government of Pewta to provide twiceweekly direct flights between Lyme, the capital of Pewta, and Darke, the capital of Sepiana. The
introduction of this service has been well advertised as ‘efficient and timely’ in national
newspapers. The journey time between Sepiana and Pewta is expected to be significantly
reduced, so encouraging tourism and business development opportunities in Sepiana.
Azure operates a refurbished 35-year-old aircraft which is leased from an international airline and
registered with the Pewtan Aviation Administration (the PAA). The PAA requires that engines be
overhauled every two years, putting the aircraft out of commission for several weeks.
The aircraft is configured to carry 15 first class, 50 business class and 76 economy class
passengers. The aircraft has a generous hold capacity for Sepiana’s numerous horticultural
products (eg cocoa, tea and fruit) and general cargo.
The six-hour journey offers an in-flight movie, a meal, hot and cold drinks and tax-free shopping.
All meals are prepared in Lyme under a contract with an airport catering company. Passengers
are invited to complete a ‘satisfaction’ questionnaire which is included with the in-flight
entertainment and shopping guide. Responses received show that passengers are generally least
satisfied with the quality of the food – especially on the Darke to Lyme flight.
Azure employs ten full-time cabin crew attendants who are trained in air stewardship including
passenger safety in the event of accident and illness. Flight personnel (the captain and co-pilots)
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are provided under a contract with the international airline from which the aircraft is leased. At
the end of each flight the captain completes a timesheet detailing the crew and actual flight time.
Ticket sales are made by Azure and travel agents in Sepiana and Pewta. On a number of
occasions economy seating has been overbooked. Customers who have been affected by this
have been accommodated in business class, as there is much less demand for this, and even less
for first class. Ticket prices for each class depend on many factors, for example, whether the
tickets are refundable/non-refundable, exchangeable/non-exchangeable, single or return,
midweek or weekend.
Azure’s insurance cover includes passenger liability, freight/baggage and compensation
insurance. Premiums for passenger liability insurance are determined on the basis of passenger
miles flown.
It is 5 December 20X6 and the Managing Director has requested a report that explains business
risks for Azure and how they can be mitigated.
Required
Draft sections of the report requested by the Managing Director, using the following structure:
•
Explain the business risks facing Azure.
•
Recommend how the risks you have identified could be managed and maintained at an
acceptable level by Azure.
Professional skills marks are available for demonstrating evaluation skills when discussing risks
and how they can be mitigated.
(2 marks)
8 LMN
(a) ACCA Professional skills focus
Communication
You work as a senior advisor for a government department which provides support for
organisations with varying governance needs. You have been asked to contact LMN, which is a
charity that provides low-cost housing for people on low incomes.
The government has privatised much of the home building, maintenance and management in this
sector. The sector is heavily regulated and receives some government money but there are
significant funds borrowed from banks to invest in new housing developments, on the security of
future rent receipts. Government agencies subsidise much of the rental cost for low-income
residents.
The board and senior management of LMN have identified what they perceive to be their major
risks, which are shown in the exhibit below. As a result of this process, they have been able to
produce a risk register as part of the organisation’s risk management process. For each of more
than 200 individual risks, the risk register identifies a description of the risk and the (high, medium
or low) likelihood of the risk eventuating and the (high, medium or low) consequences for the
organisation if the risk does eventuate.
The management of LMN is carried out by professionally qualified housing executives with wide
experience in property development, housing management and maintenance, and financial
management. The board of LMN is composed of volunteers with wide experience and an interest in
social welfare. The board is representative of the community, tenants and the local authority, any
of whom may be shareholders (shareholdings are nominal and the company pays no dividends).
The local authority has overall responsibility for housing and social welfare in the area.
The audit committee of the board of LMN, which has responsibility for risk management as well as
internal control, wants to move towards a system of internal controls that are more closely related
to risks identified in the risk register. They have asked you to help them in this move by using your
skills and experience to advise them on their next steps.
Required
Produce for the audit committee of LMN a draft set of instructions which covers the following:
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(a) An explanation for the audit committee of the importance of a management review of
controls.
(6 marks)
(b) A discussion of the principles of good corporate governance as they apply to the board’s role
in conducting a review of these internal controls.
(6 marks)
Professional skills marks are available for demonstrating communication skills when advising the
audit committee about their next steps.
(2 marks)
(Total = 14 marks)
Exhibit:
Risks for LMN:
•
Insufficient housing stock of a suitable type to meet the needs of local people on low incomes
•
Making poor property investment decisions
•
Having dissatisfied tenants due to inadequate property maintenance
•
Failing to comply with the requirements of the regulator
•
Having a poor credit rating with lenders
•
Poor cost control
•
Incurring bad debts for rental
•
Having vacant properties that are not earning income
9 Pogles
You work as a freelance ethical consultant and have been approached by the chief executive of
Pogles plc to help him understand a problem that has just emerged.
Pogles is a clothing manufacturer, based in an EU member state, with an international market for
its designs. The company’s regular monthly board meeting will take place in a couple of days’
time. It seems likely that most of the meeting will be taken up with discussing one particular issue.
One of the company’s directors has recently returned from visiting a factory located in another
European Union member state. Over the last few years this factory has performed better than any
other in comparison with cost budgets, and has been particularly good at keeping its labour costs
under control. However, on his return from his visit, the director reported some worrying facts to
the chief executive.
The factory had suffered a significant number of losses of experienced part-time female staff.
Although none had been dismissed, other employees still working at the factory made serious
accusations that some had been ‘forced’ to resign by the actions of the factory manager. Among
other accusations, it was suggested that they had been pressurised to take on work outside their
contractual hours, or at times when they had never in the past had to work, such as during school
holidays, weekends or on late shifts.
Some had taken on the extra work in fear of losing their jobs and in the knowledge that other
clothing factories locally had closed down in recent months. However, many of the other staff had
found the new working arrangements impossible to fit in with their domestic situations and had
reluctantly handed in their notice. To replace the staff who had left, the factory manager
recruited full-time staff on flexible contracts, which required them to accept shift changes
provided two weeks’ notice was given to them.
The chief executive has asked you to produce one presentation slide with accompanying notes for
him to present at the upcoming board meeting.
Required
Produce the slide and supporting notes which analyse whether the factory manager’s treatment
of his staff is ethical or not.
(12 marks)
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Professional skills marks are available for demonstrating analysis skills when analysing the
factory manager’s decision to treat staff in this way.
(2 marks)
(Total = 14 marks)
10 Hammond Shoes
You are a consultant who has been asked to advise the management of Hammond Shoes about
its financial position and investment opportunity.
Required
Analyse the financial position of Hammond Shoes and evaluate the proposed investment of
$37.5m in upgrading its production facilities.
(17 marks)
Professional skills marks are available for demonstrating analysis skills in considering the
information from different sources to identify the causes of problems and opportunities.
(3 marks)
(Total = 20 marks)
Exhibit 1: Background information about Hammond Shoes
Hammond Shoes is a well-established company in Petatown, in the country of Arnland, formed
120 years ago by two brothers, Richard and William Hammond and still owned by their
descendants. They are keen to promote ownership and are averse to risk and borrowing. They
believe that all stakeholders should be treated fairly. Reflecting this, the company aims to pay all
suppliers within 30 days of the invoice date. These are the standard terms of supply in Arnland,
although many companies do, in reality, take much longer to pay their creditors. Arnland has
comprehensive legislation on health and safety as well as a statutory minimum wage and
generous redundancy rights and payments for employees.
Although the Hammond family still owns the company, it is now totally run by professional
managers. The last Hammond to have operational responsibility was Jock Hammond, who
commissioned and implemented the last upgrade of the production facilities over 20 years ago. In
the past five years the Hammond family has taken substantial dividends from the company, while
leaving the running of the company to the professional managers that they had appointed.
During this period the company has been under increased competitive pressure from overseas
suppliers who have much lower labour rates and more efficient production facilities. The financial
performance of the company has declined rapidly.
Recent strategies
Senior management at Hammond Shoes have recently suggested that the company should
consider closing its Petatown production plant and move production overseas, perhaps
outsourcing to established suppliers in Orietaria and elsewhere. This suggestion was immediately
rejected by the Hammond family, who questioned the values of the senior management. The
family issued a press release with the aim of re-affirming the core values which underpinned their
business. The press release stated that ‘in our view, the day that Hammond Shoes ceases to be a
Petatown company, is the day that it closes’. Consequently, the senior management team was
asked to propose an alternative strategic direction.
The senior management team’s alternative is for the company to upgrade its production facilities
to gain labour and energy efficiencies. The cost of this proposal is $37.5m. At a recent scenario
planning workshop the management team developed what they considered to be two realistic
scenarios. Both scenarios predict that demand for Hammond Shoes’ footwear would be low for
the next three years. However, increased productivity and lower labour costs would bring net
benefits of $5m in each of these years. After three years the two scenarios differ. The first scenario
predicts a continued low demand for the next three years with net benefits still running at $5m per
year. The team felt that this option had a probability of 0.7. The alternative scenario (with a
probability of 0.3) predicts a higher demand for Hammond’s products due to changes in the
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external environment. This would lead to net benefits of $10m per year in years four, five and six.
All estimated net benefits are based on the discounted future cash flows.
Exhibit 2: Financial information about the manufacturing operations of Hammond
Shoes
EXTRACTED FROM THE STATEMENT OF PROFIT OR LOSS
20X9
$m
20X7
$m
20X5
$m
Revenue
700
750
850
Cost of sales
(575)
(600)
(650)
Gross profit
125
150
200
Administration expenses
(95)
(100)
(110)
Other expenses
(10)
(15)
(20)
Finance costs
(15)
(10)
(5)
Profit before tax
5
25
65
Income tax expense
(3)
(7)
(10)
2
18
55
20X9
$m
20X7
$m
20X5
$m
70
80
90
Share capital
100
100
100
Retained earnings
140
160
170
70
50
20
Profit for the year
EXTRACTED FROM STATEMENTS OF FINANCIAL POSITION
Trade receivables
Long term borrowings
In 20X5, Hammond Shoes paid, on average, their supplier invoices 28 days after the date of
invoice. In 20X7 this had risen to 43 days and in 20X9, the average time to pay a supplier invoice
stood at 63 days.
11 Shop Reviewers Online
Assume it is now 20X6.
You are Gavin Marsh, a business consultant, your firm has recently been engaged to carry out a
review of the IT/IS controls currently in operation at a new client, Shop Reviewers Online (SRO).
Shop Reviewers Online (SRO) was founded in 20X0 by Amy Needham. She felt that many
customers buying from online stores were misled by advertising and that, too often, purchased
products turned out to be unreliable, faulty or failed to meet the customers’ expectations. Amy
believed that the online retail industry was increasingly acting unethically, caring only for profits
at the expense of the needs and expectations of customers. Consequently, she set up SRO to
‘provide an unbiased review of online stores to ensure the customer has all available information’.
You are in the process of preparing sections of the report your team will deliver to Amy and the
senior management team at SRO. One of your colleagues has collated some background detail
on SRO’s business model and the state of the company’s current IT/IS controls (Exhibit 1).
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Required
Using the information in Exhibit 1, analyse the adequacy of the general and application controls
in place within SRO, with respect to its information technology and information systems. Suggest
any improvements you consider to be necessary.
(17 marks)
Professional skills marks are available for demonstrating analysis skills in considering the
adequacy of SRO’s existing controls and for suggesting improvements.
(2 marks)
(Total = 19 marks)
Exhibit: SRO background information
SRO offers reviews of current online stores and provides direct links for customers to shop at the
stores featured on its site. The reviews include price comparisons, provided by SRO, as well as
general reviews provided by registered users of the site. The company has two main revenue
streams. The first is advertising revenue from online stores who place advertisements on the SRO
site. The second revenue stream is commission from sales by online stores to customers who have
clicked on the sponsored links provided on the SRO website. This commission is only paid by stores
who have entered into such a commission arrangement with SRO.
SRO relies upon its website being available online 24 hours a day, 7 days a week. For this reason it
has backup servers running concurrently with the main servers on which data is processed and
stored. The servers are directly linked so that any update to the main servers automatically occurs
on the backup. The servers are all housed in the same computer centre in the company head
office. The computer centre has enhanced its security by implementing a fingerprint recognition
system for controlling access to the site. However, as the majority of staff at headquarters are IT
personnel, and often temporary staff are hired to cover absentees, the fingerprint recognition
system is not comprehensive and, to save time, is often bypassed. Similarly, to save time needed
to set up new permanent staff with passwords to access the company’s systems, a general
‘administrator’ user has been created, with the password ‘password’. Many temporary staff
access the system in this way.
SRO has an intelligent software application which constantly searches the internet for product
price changes, uploading these into the reviews of the online store in question. Sometimes,
however, there have been problems. Usually this is when the application has not recognised an
outdated page and has replaced the correct latest price with an old price found on the outdated
page. Furthermore, this intelligent software application needs permanent continual access to the
internet, and SRO has identified a problem with its firewall which has prevented the software
application from sometimes updating the internal systems. For this reason, it has removed the
firewall protection to help ensure that the correct up-to-date prices of all online stores are shown
on the website.
SRO rarely generates other elements of reviews (such as product experience), leaving this to
registered users of the site. However, it will, occasionally, submit its own review to help boost a
store which pays a higher commission rate than its competitors. SRO is always honest in its
reviews, but the more reviews a store has, the higher up the search list it appears, when a
customer searches for a specific product.
Registered users can submit as many reviews as they wish. Unregistered users may also submit
reviews, which will be published under the name ‘anonymous’, but these reviewers will be unable
to comment on the reviews of others. SRO checks reviews for appropriate content, but does not
contact the store to verify the accuracy of the review. SRO is about to undertake an audit of the
adequacy of its general and application IT controls.
12 Jayne Cox Direct
ACCA Professional skills focus
Evaluation: Assess
You work for Jayne Cox Direct, a company that specialises in the production of bespoke sofas
and chairs. Following a review of its processes and most recent customer satisfaction survey, you
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have been asked by your manager to suggest ways in which technology could be used to improve
its upstream and downstream supply chain.
Required
Using the information in the exhibit, evaluate how technology could be used in both the upstream
and the downstream supply chain to address the problems at Jayne Cox Direct.
(15 marks)
Professional skills marks are available for demonstrating evaluation skills in assessing the options
and recommending appropriate solutions.
(2 marks)
(Total = 17 marks)
Exhibit 1: Background information about the company
Jayne Cox Direct products are advertised in most quality lifestyle magazines. The company was
started ten years ago. It grew out of a desire to provide customers with the chance to specify their
own bespoke furniture at a cost that compared favourably with standard products available from
high street retailers. It sells furniture directly to the end customer. Its website allows customers to
select the style of furniture, the wood it is to be made from, the type of upholstery used in cushion
and seat fillings and the textile composition and pattern of the covering. The current website has
over 60 textile patterns which can be selected by the customer. Once the customer has finished
specifying the kind of furniture they want, a price is given. 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, citing the quoted long delivery time as
their reason for cancellation.
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.
Until last year, they faxed purchase orders through to suppliers. They now email these orders.
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 often 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 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 presents a number of problems. Firstly,
contacting the customer by telephone can be difficult and costly. Secondly, many customers are
disappointed that the original, promised delivery date can no longer be met. Finally, customers
often have to agree a delivery date much later than the new delivery date suggested by Jayne
Cox Direct. This is because customers often get less than one week’s notice of the new date and
so they have to defer delivery to much later. This means that the goods have to remain in the
warehouse for longer.
A separate delivery problem arises because of the bulky and high value nature of the product.
Jayne Cox Direct requires someone to be available at the delivery address to sign for its safe
receipt and to put the goods somewhere secure and dry. 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 subsequently telephone
the customer and 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.
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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.
Exhibit 2: Summary of recent customer satisfaction survey
There was major criticism about the lack of information about the progress of the order after it
was placed. One commented that ‘as soon as Jayne Cox Direct got my order and my money they
seemed to forget about me. For ten weeks I heard nothing. Then, just three days before my
estimated delivery date, I received a phone call telling me that the order had been delayed and
that the estimated delivery date was now 17 June. I had already taken a day off work for 10 June,
my original delivery date. I could not re-arrange this day off and so I had to agree a delivery date
of 24 June when my mother would be here to receive it.’
People were also critical about after-sales service. One commented ‘I accidently stained my sofa.
Nobody at Jayne Cox Direct could tell me how to clean it or how to order replacement fabrics for
my sofa’. Another said ‘organising the return of a faulty chair was very difficult’.
When the managing director of Jayne Cox Direct saw the results of the survey she understood
‘why our customer retention rate is so low’.
13 8-Hats
You are Karen Bardsley, a management consultant working for the firm Business Matters. You and
your team are currently undertaking an assignment at 8-Hats Promotions. 8-Hats Promotions was
formed 20 years ago by Barry Gorkov to plan, organise and run folk festivals in Arcadia. It soon
established itself as a major events organiser and diversified into running events for the staff and
customers of major companies. For example, for many years it has organised launch events, staff
reward days and customer experiences for Kuizan, the car manufacturer. 8-Hats has grown
through a combination of organic growth and acquiring similar and complementary companies.
Recently, it purchased a travel agent (now operated as the travel department of 8-Hats) to
provide travel to and from the events that it organised.
Barry is keen to explore changing the company’s organisational structure and has asked your
team to provide him with some thoughts on the prospect of introducing a matrix structure at 8Hats. One of your colleagues has prepared some notes (Exhibit 1) on 8-Hats’ current set up.
Required
Using the information provided in Exhibit 1, discuss the principles, benefits and problems of
introducing a matrix management structure at 8-Hats.
Professional skills marks are available for demonstrating evaluation skills in assessing the current
situation at 8-Hats and suggesting relevant benefits and problems associated with the
introduction of a matrix management structure.
(2 marks)
Exhibit: 8-Hats
Barry Gorkov is himself a flamboyant figure who, in the early years of the company, changed his
name to Barry Blunt to reflect his image and approach. He calls all the events ‘jobs’, a terminology
used throughout the company. A distinction is made between external jobs (for customers) and
internal jobs (within 8-Hats itself). The company is organised on functional lines. The sales and
marketing department tenders for external jobs and negotiates contracts. Sales managers receive
turnover-related bonuses and 8-Hats is known in the industry for its aggressive pricing policies.
Once a contract is signed, responsibility for the job is passed to the events department which
actually organises the event.
It is known for its creativity and passion
The operations department has responsibility for running the event (job) on the day and for
delivering the vision defined by the events department. The travel department is responsible for
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any travel arrangements associated with the job. Finally, the finance department is responsible
for managing cash flow throughout the job, raising customer invoices, paying supplier invoices
and chasing any late payments.
However, there is increasing friction between the departments. The operations department is often
unable to deliver the features and functionality defined by the events department within the
budget agreed by the sales manager. Finance is unaware of the cash flow implications of the job.
Recently, an event was in jeopardy because suppliers had not been paid. They threatened to
withdraw their services from the event. Eventually, Barry Blunt had to resolve friction between
finance and other departments by acquiring further funding from the bank. The event went
ahead, but it unsettled Kuizan which had commissioned the job. The sales and marketing
department has also complained about the margins expected by the travel department, claiming
that they are making the company uncompetitive.
14 Hooper University
You are Sadiq Patel, a management consultant. Your firm is currently engaged to provide
consultancy advice to Hooper University which is situated in your home country of Mowria. There
are currently over 300 universities operating in Mowria. University tuition fees have increased in
the last few years and students are expecting a better level of service as a consequence of this.
Results of student satisfaction surveys are published by the Mowrian government, and can
greatly influence the student’s choice of university. At Hooper University, students are assessed in
two ways: by examinations and coursework. Both types of assessment contribute towards the
degree classification awarded to students. In a recent, internally commissioned, student
experience report, Hooper University received some negative feedback from students on the
coursework organisation, submission and feedback process. Consequently, the university is keen
to rectify problems in this process and the Vice-Chancellor’s office contacted your firm for
assistance.
You and your team have been asked to review the coursework organisation, submission and
feedback process, and to suggest potential improvements to address any issues you identify. To
help you with your work your colleagues have prepared some background information on the
current process (Exhibit 1), and extracts from the student experience report which details student
feedback relating to the process (Exhibit 2).
Required
Identify and explain four problems in the current coursework, organisation, submission and
feedback process and suggest appropriate solutions to address each of these problems.
(18 marks)
Professional skills marks are available for demonstrating analysis skills in identifying problems
with the current process at Hooper University and for suggesting appropriate solutions.
(2 marks)
(Total = 20 marks)
Exhibit 1: Coursework organisation, submission and feedback process
At the start of a new semester, an administrator distributes term dates and coursework guidance
to lecturers. There are many different subjects within a course and each subject is managed by a
different lecturer. The guidance includes a stipulation that coursework should be marked and
returned to students within two teaching weeks of the submitted coursework being collected from
the course administration office by the lecturer. Lecturers write their own coursework requirements
and set their own deadlines, informing the head of department so that a consolidated course
schedule can be produced.
Coursework requirements are uploaded by lecturers onto a virtual learning environment (VLE)
system, which is accessed by students. Lecturers release these requirements at the beginning of
the course, in accordance with the administrative guidelines. Students download the requirements
and then complete and submit their work.
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Students are required to submit two copies of their completed coursework: a hard copy to the
administration office and a soft copy uploaded into the VLE system. The VLE system produces an
automatic receipt showing the date and time coursework was submitted, as proof of the upload.
An administrator periodically sorts the submitted hard copies by subject, ready for lecturers to
collect. Lecturers collect the coursework when they have some free time in their schedule for
marking.
Once collected, lecturers mark the coursework and type their feedback into a new wordprocessed document, and then upload that document against the student profile on the VLE. The
VLE issues an automatic email to students informing them that feedback is available. The lecturer
also collates total marks onto a spreadsheet and emails this to the administrators. The
administrators input these marks manually into a computerised administration system and then
send a report to the head of department, who records the marks against the individual student’s
assessment profile.
The above information is presented in the coursework organisation, submission and feedback
process diagram shown in Figure 1.
Administrators
Lecturers
Head of
Department
1. Issue term dates
and coursework
guidance
2. Write
coursework and
set deadline
9. Sort coursework
into subjects
4. Issue
coursework and
publish on VLE
10. Collect
and mark
coursework
3. Note deadline
in course
schedule
Student
VLE System
14. Record
marks
11. Submit
marks and
feedback
15. Record
marks on
student record
6. Download
coursework
5. Coursework
available
7. Complete
coursework
and submit
8. Issue receipt
13. Download
marks on
and feedback
12. Marks and
feedback available
for download
Figure 1: Coursework origination, submission and feedback process
Exhibit 2: Student feedback
The following extracts from the student experience report are representative of the feedback
received from students:
‘I received one mark from the VLE system, but when my end-of-year results were released the
mark was different.’
‘My feedback was on a separate document so I found it difficult to relate to the coursework
submitted.’
‘I accidentally submitted an unfinished piece of coursework to the administration office but
submitted the correct one to the system. The lecturer marked the unfinished piece.’
‘It takes weeks to receive my marks, by which time I’ve forgotten what the coursework was about.
When I asked the lecturer she said she had marked it within the time allowed.’
‘We always have about four pieces of coursework to submit at the same time, and then weeks
where nothing is required. I wish the university would manage our programme better.’
‘The lecturer said he did not receive the hard copy of my coursework but I know I handed it in. This
was counted as a non-submission.’
‘There were errors in the initial coursework requirements, which were subsequently significantly
changed. I had already started the assignment so this time was wasted.’
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‘I completed and submitted my coursework early in order to manage my workload better, but then
the lecturer gave an additional lecture to help us with our coursework. This contained very useful
information, which we had not previously covered. I was not allowed to resubmit my work and so
suffered from being efficient.’
15 LDB Bank
You are a senior finance manager working for LDB Bank, and report to the finance director. Part
of your role involves assisting the work of the bank’s project management office (PMO). You have
been approached by the Head of the PMO to help her team identify the elements which
contributed to the successful delivery of a major project at the bank. The PMO conducted a postproject review following the completion of the project but are now carrying out a cold review of the
project documentation to see if any additional lessons can be learned which can be incorporated
into future projects at LDB. The Head of the PMO has provided you with some background
information on the branch rationalisation project (Exhibit 1), and some detail on the issues
experienced during the execution of the project (Exhibit 2).
Required
Using the information provided by the Head of the PMO, identify and analyse the elements of
good project management that helped make the branch rationalisation project successful.
(12 marks)
Professional skills marks are available for demonstrating analysis skills in investigating the key
elements of good project management.
(2 marks)
(Total = 14 marks)
Exhibit 1: Background information: The branch rationalisation project
Four years ago Lowlands Bank acquired Doe Bank, one of its smaller rivals. Both had relatively
large local branch bank networks and the newly merged bank (now called LDB) found that it now
had duplicated branches in many towns. One year after the takeover was finalised, LDB set up a
project to review the branch bank network and carry out a rationalisation that aimed to cut the
number of branches by at least 20% and branch employment costs by at least 10%. It was agreed
that the project should be completed in two years. There were to be no compulsory staff
redundancies. All branch employment savings would have to be realised through voluntary
redundancy and natural wastage.
LDB appointed its operations director, Len Peters as the sponsor of the project. The designated
project manager was Glenys Hopkins, an experienced project manager who had worked for
Lowlands Bank for over 15 years. The project team consisted of six employees who formerly
worked for Lowlands Bank and six employees who formerly worked for Doe Bank. They were
seconded full-time to the project.
Exhibit 2: Project issues and conclusion
During the project there were two major issues. The first concerned the precise terms of the
voluntary redundancy arrangements. The terms of the offer were quickly specified by Len Peters.
The second issue arose one year into the project and it concerned the amount of time it took to
dispose of unwanted branches. The original project estimates had underestimated how long it
would take to sell property the bank owned or to re-assign or terminate the leases for branches it
rented. The project board overseeing the project agreed to the project manager’s submission that
the estimates had been too optimistic and they extended the project deadline for a further six
months.
The project team completed the required changes one week before the rearranged deadline.
Glenys Hopkins was able to confirm that the branch network had been cut by 23%. Six months
later, in a benefits realisation review, she was also able to confirm that branch employment costs
had been reduced by 12%. At a post-project review the project management office of the bank
confirmed that they had changed their project estimating assumptions to reflect the experience of
the project team.
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Further question
solutions
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1 Bonar Paint
When considering advantages and disadvantages you must ensure that your answer brings
balance as well as depth, so you should be looking to generate around four points for each side of
the debate. Assuming one mark per point, that would score eight out of ten, leaving two marks for
the role that the formal mission statement could play in the strategic planning process. As the
requirement explained that this explanation should be brief, two marks seems sensible.
You will find that many of the points in your answer are generated from an overall appreciation of
the case information, and that there is a lot to wade through. This is going to happen in the real
exam, so being able to focus on key information only is a good skill to start practising right now.
How to earn the professional skills marks
The skill that you are required to demonstrate is communication, because you are advising the
senior management team on a subject that is complex and outside their comfort zone, hence your
answer needs to be able to inform in a concise and unambiguous manner, while also clarifying the
complex strategic issues and conveying the information using an appropriate tone.
Suggested solution
The management buyout will be a significant change for Bonar, and so it will be important for the
new owners to make clear their strategy for the business and what they expect from their staff.
They may look to use a mission statement to summarise the purpose of the business going
forward.
Advantages of developing a formal mission statement
Goal congruence
Determine direction – A mission statement will determine the direction of the business after the
buyout, and focus attention on achieving the stated strategy and direction. It will focus the
business’ efforts on a single goal, as expressed in the statement.
Unified strategy – The three members of the senior management buyout (MBO) team each has a
different view of how Bonar Paint should develop after the buyout. Creating a mission statement
will force the buyout partners to reconcile these differences and to determine a unified strategy
for the business.
Communication – Bonar Paint will need to communicate its business model and purpose going
forward after the MBO: for example, what is its business, its products and its markets? Such
matters should be clearly communicated in a mission statement.
Determine market approach
Basis of competition – The mission statement will determine the basis on which Bonar Paint
competes in the industry, for example whether it wants to be a specialist paint maker which
creates a strong brand and a reputation for customer service, or whether it wants to be a low-cost
producer.
It is important for Bonar to establish the basis on which it wants to compete because of the
fragmented nature of the paint industry – from branded international manufacturers offering
luxury, high-end paints, to low-end manufacturers producing own label paints for DIY stores.
There is a danger that without a clear strategy Bonar Paint will be left stuck in the middle, and
will see its profitability fall as a result. This is particularly important as the paint industry is seen
as mature, and so margins will come under increasing pressure.
Consistency of offering – A mission statement will help Bonar Paint ensure that all aspects of its
business are consistent with the basis on which it is competing in the market. For example, if
Bonar Paint decides it wants to focus on the high-end market, then all its processes, from
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manufacturing the paint itself, to customer service and delivery must be of sufficiently high
quality to support this strategic position.
Satisfy key stakeholders
Identify key stakeholders – One of the key elements of a business’ purpose is to satisfy the needs
of stakeholders, and a mission statement should help a business achieve this purpose. However,
before a business can begin to assess the needs of stakeholders it first needs to determine who
the key stakeholders are.
Keep key stakeholders satisfied – Alongside the MBO team, the banks which provided loan
funding for the MBO, Bonar’s employees and customers are all key stakeholders. Therefore
Bonar’s future direction after the buyout needs to keep them satisfied in order for the business to
be successful.
The mission statement should demonstrate how Bonar Paint will serve its customers and reward its
employees, recognising that customer loyalty and employee loyalty will be very important as the
business undergoes a change of ownership.
Disadvantages of developing a formal mission statement:
Wasted time
Time consuming. Creating a mission statement will be time consuming, especially as Bonar Paint
has never had one before and so it will need to be developed from nothing. If the mission
statement does not generate any positive results in terms of corporate values and profitability,
then the time spent will have been wasted. This is especially important given the number of other
issues which need addressing at Bonar Paint.
Identifying priorities. The senior management team will have a number of practical issues – for
example, ensuring that they pay a fair price in the buyout, securing funding from their banks and
working out how they are going to control and manage the business going forward. While
developing a mission statement could be useful in guiding the strategic planning process, it is
debatable whether it is a top priority at the moment. Spending too much time developing a
mission statement could deflect attention from more pressing issues.
May be ignored. There does not appear to be any history of formal planning at Bonar Paint – for
example, there is no formal process for new product development and paints are developed in
response to customer demand. Consequently, a mission statement as part of a formal strategic
planning process may be alien to the company; as a result, employees may not understand the
relevance of a mission statement to their day-to-day activities, and it may ultimately be ignored.
Too restrictive
Deter innovation. Bonar Paint has a good reputation for product innovation and developing new
high performance paints. This is one of the company’s strengths, but if a mission statement
imposes a more prescriptive approach to planning, these qualities of innovation may be lost.
To be successful going forward, it is likely that Bonar Paint will need to balance its innovative
qualities and skills at new product development with an overall company strategy. However, that
strategy could be one which emerges and adapts over time, depending on changes in the external
environment. In this context, a mission statement as part of a formal planning process may not be
appropriate, because it may actually prevent the company taking advantage of new
opportunities which arise.
Role of mission statement in the strategic planning process:
Fits with rational planning model. Mission statements can play an important role in the strategic
planning process, but they are most suitable for companies which follow the full rational planning
model. In such companies, a mission statement can influence the way a company implements its
planned strategy and it can act as a reference document against which future business plans can
be judged.
Limited impact on its own. However, it appears Bonar Paint does not have a formal strategic
planning process in the way the rational planning model suggests. Without that kind of context
and support, a mission statement on its own will have little impact on the strategic planning
process.
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2 2 ZK
Tackling the question
In (a) a good way of thinking through the environmental consequences is to go through the
inputs, processes, outputs model and consider the likely environmental consequences at each
stage. The social issues discussion is a good illustration of why background reading is useful; you
can bring in topics that are currently areas of concern, such as low-cost labour.
In (b) the range of business activity covered will depend on what is significant. The discussion
about how the business can impact on its suppliers is an important acknowledgement that
sometimes these issues cannot be tackled in isolation.
How to earn the professional skills marks
You are being asked to be sceptical as part of your response, so you will be rewarded for
demonstrating the ability to probe into the reasons for the Chief Executive’s reluctance to
embrace environmental and social reporting so far, and challenge this viewpoint with a view to
justifying a suitable counter-argument.
Clearly, the idea of a leader displaying such ignorance of the role that environmental and social
reporting could play is unlikely in the 21st Century, but you need to be driven by the requirement
to produce what is asked for!
(a) The range of environmental and social issues to cover
Consumption of raw materials
The greatest focus from an environmental point of view is likely to be on consumption of raw
materials from tropical areas. You may therefore wish to consider the concept of
‘sustainability’ – is ZK replanting at a rate equal to or greater than that at which it is
harvesting? If so, it is likely to be viewed favourably – however, if not, this could reflect badly
on our environmental footprint (the impact we leave behind on the natural world from our
activities).
Costs of processing
The costs of processing should also be considered, in particular the percentage of energy
coming from renewable and non-renewable sources and the steps taken to increase the
efficiency with which ZK uses energy.
Packaging
Packaging is of increasing concern to many consumers. The proportion of both ZK’s products
and their packaging made from recycled material should be measured, as should the ease
with which they can be recycled after use.
Social issues
Social issues to cover include minimum rates of pay, the minimum age of child labour,
working conditions and living conditions, such as the availability of health care and
education. The public’s interest in consumer markets tends to focus on the discrepancies
between ‘living standards’ in their affluent market compared to those in less developed
countries. In setting standards the board needs to gather data about these issues in the
source countries. Rates of pay expressed in relation to UK earnings may seem derisory but
when expressed in relation to the local average they may seem much more acceptable. Using
children aged just 14 as part of the labour force may seem less offensive if local schooling is
provided up to the age of 12 and ZK provides additional education as part of its benefits
package.
Nature and extent of reporting
How well actual performance compares with what the board considers to be acceptable
standards will determine the nature and extent of any reporting on these issues. If the board
believes ZK’s performance is above average it may well make extensive disclosures in order to
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gain maximum benefit. The poorer the performance, the less it may choose to disclose. If
there are any single issues that, were they disclosed would lead to adverse publicity, it may
choose to make no disclosures until these issues are resolved to an acceptable level.
An integrated report provides an overall framework for understanding the business that a
focus on environmental and social issues may not do. It sets the business in the context of the
overall environment and the opportunities and risks that it faces. It also should describe the
challenges and uncertainties that will arise from the business pursuing its current strategy
and what the business intends to do about them. This is usually expressed in terms of value or
capital used and created by ZK, which makes value creation transparent.
(b) Business partners
ZK also needs to consider whether to report on the activities of ZK alone or on those of all of
its business partners, including those from whom ZK sources its raw materials and the subcontractors it employs during production. It could be argued that ZK cannot control its
sub-contractors, and therefore should not include their activities within its report. For
example, it could be deemed unfair if ZK was held responsible for contractors employing
young children without the board’s knowledge.
It is unlikely that ‘we didn’t know’ would be accepted as a defence were damaging
information made public, however. Once the range of performance benchmarks is
established, ZK should therefore provide it to all of its sub-contractors and advise them that
they are expected to conform to such standards. These could be included as a requirement in
the supplier tendering process.
Impact of other stakeholders
Problems are likely to centre on identifying those issues that will be of concern in the future
to stakeholders. ZK will also need to balance the demands of shareholders for maintaining a
profitable activity with the concerns of pressure groups over the activity in question.
The advent of social media and the ability to share camera footage taken anywhere in the
world means that our customers are likely to want to make an informed purchasing choice
based on the impact our products have on indigenous populations and environments. Our
target demographic for many of our products will also include younger consumers
traditionally more likely to embrace such technology and who can chose to buy more socially
and environmentally friendly products.
Changing viewpoints
The popularity or otherwise of environmental and social issues moves constantly with
changes in public opinion and government policy. The board should endeavour to anticipate
the demands of its stakeholders, however, rather than appear to be simply reacting to the
current ‘popular’ issues.
3 Caius
Tackling the question
A good guideline for this type of question would be to start with the key points relating to
directors’ remuneration that you know from your studies so far, regardless of the jurisdiction. This
will give you an overview of the key areas that are usually to be discussed in such debates around
the world. You can then move on to discuss shares and share options as a viable source of
remuneration for NEDs.
You also need to ensure that your answer is set in the context of the case – the key elements of
strategy for this organisation are growth, technology, risk from research and development and
competition, so build these into your answer to score well.
How to earn professional skills marks
You have been asked to demonstrate commercial acumen, meaning that you need to know what
is commercially viable for directors’ remuneration and what would work well in this industry sector.
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Suggested solution
(a)
To:
Board of Directors of Caius
From:
Consultant
Date:
XX/XX/XX
Subject: Directors’ remuneration
In order to ensure that directors’ pay and conditions are fair and transparent, Caius should
adopt the following policies and frameworks.
Level and make-up of remuneration
The level of remuneration offered to directors should be sufficient to attract, retain and motivate
directors of the quality required to run the company successfully, especially given the need to
recruit directors who can support the aim of growth into telecommunications. However, Caius
should avoid paying more than is strictly necessary for this purpose, especially as it is likely to
attract attention which may erode any competitive advantage within this fledgling industry. The
levels of pay offered by other similar companies can be considered, but such comparisons should
be used with caution.
A significant proportion of executive directors’ remuneration should be structured so as to link
their interests with those of the shareholders and give the directors keen incentives to perform to
the highest levels. This will require a ‘leap of faith’ from shareholders, given the extra risk that
Caius is looking to embrace. Therefore, incentive schemes are acceptable but they must always
be related to performance and they must be geared to the long term rather than the short term.
Where incentive schemes are used the amount paid to the directors should be based upon them
meeting or exceeding clearly defined targets.
Service contracts and compensation
Service contracts for directors are necessary but there must be a balance between the directors’
needs and the interests of the shareholders. In general terms notice periods under contracts
should be set at one year or less. The board must be prepared to dismiss a director for poor
performance and much thought should be given to compensation commitments, although this is
obviously going to need to consider the longer timeframes required for research and development.
The aim should be to avoid being seen to reward poor performance by excessive compensation
payments and the board should take a robust line on reducing compensation to reflect a
departing director’s obligations to mitigate loss.
Remuneration committee
The board should appoint a remuneration committee made up entirely of independent nonexecutive directors (NEDs). The aim of this is to ensure that there is a formal and transparent
procedure for developing policy on executive remuneration and for the remuneration packages of
individual directors. Most importantly, no director should be involved in deciding their own
remuneration.
Communication with shareholders
The remuneration committee should enter into communication with major shareholders about
directors’ remuneration. Shareholders should be invited specifically to approve all new long-term
incentive schemes and significant changes to existing schemes. In your annual report there should
be a report on the remuneration policy and details of the remuneration of each director. The chair
of the remuneration committee should also attend the AGM and be prepared to answer any
questions from shareholders relating to directors’ remuneration. Such transparency will be crucial
in cementing the trust required to support shareholders along the first few years of listing to
reward their faith.
Share payments for NEDs?
In many companies, NEDs receive a fixed cash payment for their services, without any incentives.
However, some companies pay their NEDs in shares.
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They would argue that the more equity the NEDs hold, the more likely they will be to look at issues
from the point of view of the shareholders. There is a risk that a NED holding shares could be more
concerned with short-term movements in the share price and the opportunity of making a shortterm profit from selling their shares. However, a suitable precaution against this could be to obtain
the agreement of a NED not to sell their shares until after leaving the board.
Share options instead?
The argument that NEDs should be rewarded with share options is more contentious, but it has
been widely practised in the UK and is even more common in the US. The argument against
rewarding NEDs with share options is that this form of remuneration could align the interests of
the NEDs more closely with the executive directors, who also hold share options. NEDs should give
independent advice, and it can be argued that it is therefore not appropriate to incentivise them
in the same way as the executives.
Taking the UK Corporate Governance Code (2018) as an example, holding share options could be
relevant to the determination of a non-executive director’s independence. It states that
remuneration for non-executive directors should not include share options or other performancerelated elements.
4 Joe Swift Transport
Tackling the question
The requirement doesn’t specify that you have to use particular model or framework here, but the
reference to ‘national competitive advantage’ should be a clue that Porter’s Diamond is
appropriate here.
The question asks you to ‘assess the factors’ so a sensible approach to this question would be to
explain the different aspects of the diamond, and then think how they relate to Ecuria. However,
don’t spend time drawing the model. You will earn few, if any marks, for drawing the diagram.
Instead you should use the model as a framework for assessing the specific conditions in Ecuria,
as described in the scenario.
How to earn the professional skills marks
The ‘assess’ skill requires you to use professional judgement when considering the scenario. In this
case, this means assessing which of the characteristics of Ecuria make it attractive as a location
for Swift’s logistics and which don’t. So make sure you indicate these points in your answer, and
don’t just describe the environmental factors in Ecuria.
Suggested solution
Porter summarises the factors which determine competitive advantage in his Diamond model, and
we use these factors to assess Ecuria’s attractiveness as a potential location for Swift’s logistics
businesses.
Factor conditions
These are factors – such as skilled labour and infrastructure – that are necessary for firms to
compete in a given industry.
These factors seem to be present in Ecuria, with the work ethic of the people, and the government
investment in the transport infrastructure both potentially being significant benefits for firms
located there.
Demand conditions
The home demand conditions are how firms perceive, interpret and respond to buyer needs.
In Ecuria, there has been a rapid growth in the transport of goods due to the move to a market
economy. The people of Ecuria are traditionally demanding and have a passion for promptness
and precision which has shaped the operations of EVM. (These demands will ensure high
standards in the industry which should help improve international competitiveness.)
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Related and supporting industries
Competitive success in one industry is often linked to success in related industries.
The initial notes about Ecuria (Exhibit 1) do not provide any evidence that it has any
internationally competitive industries related to logistics. The absence of internationally successful
related and supporting industries could be a concern, and is an important factor to take into
account when Swift decides whether to move a large part of its logistics business to Ecuria.
Firm strategy, structure and rivalry
Nations are likely to display competitive advantage in industries that are culturally suited to their
normal management practices and industrial structures.
EVM was created by the nationalisation of the state-run haulage system. There were few
competitors initially and it has been difficult for potential new competitors to raise finance, due to
the structure of the capital markets in Ecuria. As a result, most of EVM’s competitors are small,
family-run firms that offer a local service.
The Diamond model suggests that intense domestic rivalry help to create and sustain competitive
advantage. By contrast, in countries where there is little rivalry, firms tend to be happy to rely on
the home market rather than looking to compete internationally. As such, a lack of rivalry can be
detrimental to national competitiveness, and the evidence suggests that there is little rivalry in the
logistics industry in Ecuria at the moment.
Other factors
In addition to the four main determinants highlighted in the Diamond, competitive advantage can
also be influenced by governments and chance factors.
Government helps to shape the Diamond overall by creating policies which affect all four of the
determinants. Ecuria’s government has influenced factor conditions by investing in infrastructure,
and has influenced firm structure and rivalry via its policies on capital markets.
Chance factors are developments outside of the control of firms and the nation’s government,
such as wars or falls in foreign demand. By definition, it is difficult to assess these factors in
advance, although if any such factors arise – affecting Ecuria – they could have a significant
impact on Swift’s decision.
5 Chelsea Co
Tackling the question
The requirement doesn’t specify the use of a particular model, however it should be clear that you
are, in essence, being asked to perform a SWOT analysis. It is important to remember that
strengths and weaknesses are internal considerations, whereas opportunities and threats arise
from the external environment. It is very easy to muddle weaknesses and threats, however,
remembering that one is focused on internal matters and the other on external factors should help
you to avoid any such confusion.
As the requirement asks you to produce two slides it is important that you give consideration to
the amount of detail to include. Providing lots of detail on the slides ultimately undermines the
prompt in the requirement to include supporting notes. As the solution below illustrates it is the
supporting notes in which the real explanation of the SWOT items is considered.
How to earn professional skills marks
The ‘consider’ skill requires you to make use of the information in the scenario in order to reflect
upon the implications that this brings for the organisation featured in the question. As the
requirement asks you to consider three main SWOT items, the inclusion of the word ‘main’ is a clue
that discussing every single SWOT item that you could possibly identify from the exhibits was not
required. The inclusion of lots of additional points only wastes time and would earn you no
additional marks.
Determining what constitutes a ‘main’ point should be driven by the content of the exhibits. As a
result, careful reading of each exhibit with a view to picking out the key themes is essential. The
suggested solution below is indicative of the points that you could have made when answering the
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question. It is worth noting that when faced with requirements and exhibits such as the ones in
this question there are potentially a number of different, equally valid main points which could be
made and which would still earn marks provided they are well explained.
Suggested solution
Presentation slides
Slide 1: Three main strengths and three main weaknesses facing Chelsea Co
Strengths
•
Strong financial track record
•
Strong reputation
•
Relationship with the Eastlandian government
Weaknesses
•
Exposed to the construction industry
•
Process for determining projects to undertake
•
Growing dependence on Eastlandian work
Notes. Chelsea’s core strengths are evident as the company has built a strong financial track
record which has helped it come through ‘a major recession’ in its home market. This is impressive
given that the construction industry is renowned for being particularly volatile. It is likely that this
strength will prove central to Chelsea’s ability to survive should the economic situation in
Eastlandia worsen. Chelsea’s financial record is closely linked to its strong reputation. It would
appear that the company’s reputation for using good quality materials and applying high
standards of workmanship have helped it to increase its overall market share. This is particularly
impressive given that there has been general decline in market opportunities. As a result of
Chelsea’s reputation it would appear that the company has been able to build a good
relationship with the Eastlandian government. This is evident as it has recently received an offer
from the government to tender for further civil engineering work.
Chelsea faces an inherent weakness in that it operates in a highly volatile industry in which
construction firms such as Derby Co can easily become insolvent. The nature of construction
projects require significant financial commitments are made upfront (ie buying building supplies
and paying workers), all of which increases risk. There would appear to be a weakness in the
process Chelsea uses when determining which projects to undertake. This is evident given the
amount of remedial work needed to complete the road development contract in Eastlandia
appears to have been significantly misjudged and has resulted in the project’s contingency fund
having been used well before the completion of the project. Chelsea’s growing dependence on
getting work in Eastlandia can also be viewed as a weakness as it is increasing its exposure to the
unpredictability of the economy there. If the report by Building for Tomorrow is correct then the
amount of work which may potentially be undertaken by Chelsea in Eastlandia would represent
about 40% of its total orders.
Slide 2: Three main opportunities and three main threats facing Chelsea Co
Opportunities
•
Win new contracts from new customers
•
Win new contracts with the Eastlandian government
•
Exploit the knowledge of alliance partner
Threats
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•
Insolvency of customers
•
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Notes. The poor quality of the workmanship undertaken by Eastlandian construction firms
represents an opportunity. Chelsea’s strong reputation should enable it to exploit the failings of
Eastlandian construction firms and win new civil engineering contracts. Chelsea’s almost
preferred status with the Eastlandian government is evident based on the government’s recent
invitation to tender for more work. All of which is likely to present further opportunities if Chelsea
can continue to meet the government’s needs with its existing contracts. In the event that the
strategic alliance with a local Eastlandian firm is formed, Chelsea should look to exploit the
knowledge of local partners about the construction industry in Eastlandia to ensure that only
viable potential customer contracts are accepted. Exploiting this opportunity would help to ensure
that contracts are only taken on when the risk of customer insolvency is deemed sufficiently low.
One of the most significant threats facing Chelsea concerns the possibility of the Eastlandian
government devaluing its currency. The devaluation of the Eastlandian currency would reduce the
value of work being undertaken by Chelsea, which given the potential size of some construction
contracts may be significant. The insolvency of customers in Eastlandia represents a significant
threat for Chelsea. As the Derby Co case highlights, Chelsea would be unlikely to receive much (if
any) compensation for any work performed, as the Eastlandian government has stipulated that
partial repayments to local firms must take priority before payments are made to foreign firms
(such as Chelsea). Chelsea also faces a potentially significant threat resulting from the economic
conditions in Eastlandia which may lead to a recession. A recession would most likely result in
customers going out of business or those remaining customers deferring construction projects
until the economic outlook improves. A recession would increase the price of building supplies, all
of which would increase the pressure on Chelsea.
6 Environment Management Society
Tackling the question
The requirement clearly sets out that your assessment must focus upon the three methods of
development which were discussed in the Board meeting. These methods of development were
mentioned in the opening paragraphs of the question and were again repeated in the exhibit. This
highlights the importance of carefully reading the detail provided in the scenario as a discussion
of the other approaches to development is not required. You may find it useful to introduce the
key characteristics of each method of development under its respective heading before moving on
to assess each option in respect of EMS. Using headings in this way breaks up your answer and
helps to keep your work focused. The fact that there are 18 marks available is a clue that are six
marks going for an evaluation of each method of development, therefore, writing lots about one of
these will only waste your time and lead you to produce a weaker answer in respect of the other
methods of development.
How to earn the professional skills marks
The ‘assess’ skill requires you to use your professional judgement when considering organisational
issues. Central to this is the ability to take account of the situation facing the organisation
featured in the scenario, in this case EMS, and the implications, ie the advantages and
disadvantages of a proposed course of action which in this case relate to three different methods
of development. The key issues here were that any strategic development initiative needs both to
fit with EMS’s risk-averse culture, and also provide access to new markets. To bring your
assessment to a close it would be useful to the reader of your work, in this case the finance
director, if you provided a short conclusion which outlines which of the three would be most
appropriate to EMS.
Suggested solution
Internal development
Internal development – also known as organic growth – is achieved through an organisation
developing its own internal resources. This is the way EMS has grown up until now. After the
original certificates were developed by the founders of the society, the qualification has been
enhanced by adding additional certificates and then the Diploma programme. These changes
have all been developed by the members and officers of the Society. Internal development offers
the following advantages:
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Low risk. As a means of growth, internal development involves much less risk than an acquisition.
Therefore it is likely to be suited to the culture of the Society, which is notably risk-averse and
cautious.
Easier to plan. Internal development would make the growth of EMS much easier to manage and
plan and offers less disruption than an acquisition.
There are however disadvantages to this approach:
Slow growth. Growth can be very slow, and the problems which EMS are currently facing reflect
that current growth has ceased altogether.
Constrained by resources. Because growth is driven from within an organisation, it is restricted
by the breadth of the organisation’s capabilities. EMS is currently constrained by its narrow
product range, but if it continues a policy of internal development it cannot expand this product
range because its members and officers do not have any expertise in other subject areas. This is
illustrated by the fact that attempts to move into complementary qualification areas (such as soil
conservation) have been rejected by the council as being non-core areas, and therefore outside
the scope of EMS’s expertise.
Barriers to entry. Internal development is an appropriate method for market development in EMS’s
home country of Ambion but it is less appropriate for breaking into new market places and
countries. It will be difficult for EMS to establish itself as a brand in the four developing countries it
is targeting, especially as it does not have any previous experience of developing products in
foreign markets.
Acquisitions
A strategy of acquisition is one where one organisation (such as EMS) takes ownership of another
existing organisation, it is a form of business combination.
Speed of growth. One of the most important advantages of growth by acquisition is that is allows
the acquiring company very fast access to a new market area or product range. In this case, EMS
might look to acquire organisations already offering professional examination qualifications and
certificates in its four target markets. It could then use these existing organisations as a
mechanism for launching the EMS qualifications in these markets. In this way, EMS has effectively
acquired the infrastructure it needs to operate in its target markets, overcoming any
geographical barriers to entry.
New products. The organisation EMS acquires will already offer qualifications of their own, and
it is likely that these will be ones which EMS does not currently offer. Therefore there is an
opportunity that EMS could offer these qualifications in its home market of Ambion, thereby
increasing the range of products it offers. In effect, it has acquired new competences in these
new subjects and so they are now within the scope of its expertise.
There are a number of disadvantages of pursuing development by acquisition.
Cost. Acquiring an organisation usually requires considerable expenditure, and evidence
suggests that the returns delivered from the organisation acquired are often less than promised in
the takeover process. Given the risk-averse nature of EMS, the Board and the Council may not
want to spend a large amount of money when the returns are not guaranteed.
Access to funds. Given the reduction in candidate numbers it is unlikely that EMS will have
enough money to fund the acquisition without looking for external financing. However, because it
is a private company it cannot use a share issue on the stock market to raise additional finance.
It will either have to seek a bank loan, or seek funding from private equity investment or the
society members themselves.
Incompatibility. Acquisitions can bring problems of assimilating employees and different
operating systems. This is likely to be the case here since this is an international acquisition, so
there could well be problems of cultural fit between EMS and the companies acquired. Again,
given EMS’s cautious and risk-averse nature it is unlikely they will be prepared to jeopardise the
corporate culture through acquiring new companies.
Strategic alliances. A strategic alliance is a type of external partnering that involves some form of
co-operation between two or more organisations. Strategic alliances often involve the sharing of
resources and activities to pursue a given strategy.
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Cost. One of the major advantages of a strategic alliance compared to an acquisition is that it
allows an organisation to enter into a new marketplace without the large financial outlay
required to acquire a local organisation. This could be important for EMS, given the difficulties it
may face in trying to finance an acquisition.
Corporate culture. A strategic alliance allows each of the partner organisations to maintain its
own corporate culture, and so it will avoid the cultural dislocation of either acquiring or merging
with another organisation.
Core competences. The motive for the alliance would be co-specialisation, with each partner
concentrating on the activities that best match their capabilities. This would appear to meet EMS’s
requirements. The exact nature of the alliance would need to be considered carefully, and it may
be that different types of alliances are established in the three new markets which EMS is
targeting.
Joint venture. If EMS established a joint venture with an appropriate partner it would have to
contribute to the costs and resources needed by the newly established organisation; such an
approach may be beneficial provided the cost and resource requirements are less than those
needed for an acquisition.
However, the time taken to establish the joint venture may be a problem if EMS wants to move
quickly into a target marketplace to attract new students. When setting up the joint venture, EMS
will have to agree with its venture partner who contributes what in terms of time and resources,
and how future profits will be shared. This could take time to agree if any points are disputed.
Licence agreement. EMS could license the use of its qualification in the target markets. Two ways
this could be arranged are:
(1)
A local organisation could market the EMS qualification as its own and pay EMS a fee for
each certificate and diploma issued.
(2) The qualification could be marketed by the local organisation as an EMS qualification, and
EMS pays the local organisation a commission for every certificate and diploma it issues in
that country.
The licence agreement will require less commitment from EMS than an acquisition, but it will also
bring less financial return because EMS has to split the revenues with the licensees in the three
target countries.
Also, by relying on licence partners to market the qualification for them, EMS will have less control
over how it is marketed. The Board and Council may consider that this loss of control is
undesirable.
Furthermore, if the qualification is successful, there is a risk that the local organisation will
develop its own alternative to EMS’s qualification. It could then promote its own qualification
instead of EMS’s, thereby keeping all the revenue from its own certificates rather than just the
percentage of the fee it receives on EMS’s qualification.
Conclusion
In light of the above assessment it would appear that a strategic alliance is likely to be the most
appropriate method of development for EMS. The potential to establish licensing agreements is
potentially attractive because it offers quick access to new markets without requiring any
significant financial commitment from EMS or causing any cultural change within EMS.
Importantly though, entering a licensing agreement does raise concerns over losing control of the
EMS qualification in foreign markets. Ultimately, whether or not the Board and Council are
prepared to place the necessary trust in a partner organisation may well determine whether this
method is acceptable to EMS or not.
7 Azure Airline
Tackling the question
When asked to identify, you should aim to be brief and not copy out chunks of the scenario.
Instead concentrate on explaining the risks well. In (a) you would probably need to identify and
explain five risks to gain full marks. The answer below contains more than this for illustration. Most
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of the risks identified below are signalled in the question. However, it is acceptable to use your
general knowledge to identify a risk not signposted in the question, such as the fact that the price
of fuel can escalate, and Azure needs fuel to operate. You can easily spend too much time on
competition risk and on (a) in general, though. It’s easy to overrun on this part and lose the
chance of gaining marks elsewhere.
In (b) you are asked for controls for the risks, and you must think widely about how the risks could
be managed. For example, think about the lease contract. It must have contingencies and
protections for Azure’s operation in it. It’s also important to make realistic suggestions. For
example, saying that the company should buy a new plane or employ its own captain and copilot would be irrelevant, as it is only operating two days a week.
How to earn the professional marks
The skill on offer here is evaluation, which is a higher level skill. Fortunately, because you have
been asked to explain and recommend already, the higher level ‘evaluation’ skills of using
professional judgement and making a balanced assessment will hopefully have already been
considered.
Suggested solution
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Factor
Business risks
Managing risks
Leasing of
equipment and
specialist staff
As Azure leases its equipment and
the most specialised of its staff
from another airline, there is a risk
that its equipment and/or pilots
could be withdrawn leaving it
unable to operate
Azure must ensure that the terms of
the contract with the international
airline ensure that aircraft and staff
cannot be withdrawn without
reasonable notice, and, that in the
event of withdrawal, suitable
substitutes will be provided.
Conditions of
exclusive right
The PAA requires Azure’s aircraft
engines be overhauled biannually.
There is a risk that Azure will be
unable to meet this condition, if
the lessor company does not agree
to regular overhaul, or if it will be
too expensive for Azure to meet this
requirement. It could then lose the
right to operate, or its exclusivity,
opening it up to competition. There
may be other conditions which
Azure has to meet, such as the two
weekly flights being a minimum.
Azure must ensure that all staff are
aware of any conditions and the
importance of meeting them.
However, this risk must simply be
accepted, as there is little Azure
can do about conditions imposed
on them by the governing body of
their industry.
Necessary service
suspension
As Azure is required to overhaul its
engines every two years, there will
be a significant period every two
years where Azure will either have
to incur the cost of leasing other
planes (assuming this is possible) or
will have to suspend services. The
cost of leasing other planes might
be prohibitively expensive or the
disruption to service might mean
that conditions relating to the right
to operate might not be met. As
Azure only has one plane, service
would also be interrupted if there
was an emergency relating to the
plane, such as fire or a crash.
Azure must have contingency plans
for service suspension, such as
ensuring its contract with the
international airline ensures
alternative aircraft will be made
available in the event of
maintenance or damage to the
aircraft, or by making
arrangements to lease from a
different airline in the event of
emergency. As a minimum, Azure
must ensure that the airline it leases
from would give it financial
compensation in the event of
aircraft or staff not being available,
so that Azure’s customers could be
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Factor
Business risks
Managing risks
compensated.
Age of aircraft
The aircraft being leased is old. This
raises operational risks (it may not
always be able to fly due to
necessary maintenance), finance
risks (it may require regular repair)
and compliance risks (it may not
meet environmental or safety
standards, now or in the future).
Azure should have plans in place to
be able to lease/afford newer
planes if required to by law. Again,
this could be written into its
contract with the airline. Azure
should manage cash flow and
borrowing facilities so as to be able
to afford ongoing maintenance
when required.
High proportion of
expensive seats
The plane leased by Azure has a
high proportion of empty
expensive seats and therefore
insufficient (overbooked) cheaper
seats. Although Azure can appease
customers by upgrading them, this
means the airline is operating well
below capacity.
Azure should negotiate a
reconfiguration of the plane with
the lessor so that business and first
class seating could be reduced and
more economy seats made
available. If this is not possible with
the current lessor, Azure should
investigate leasing differently
configured planes from a different
company. If it is not feasible to
adjust the plane seating, Azure
should consider its pricing and onboard facilities policies to make
business and first class seats more
attractive to customers. As the
seats are not being sold anyway, it
is probable that a reduction in
prices would increase overall
revenue.
Cargo
The flight route results in the airline
carrying a large amount of
horticultural produce. This raises
various risks. Azure might be liable
to passengers if their cargo
deteriorates in transit. The airline
might be liable for any breaches of
law by its passengers (for example,
if prohibited items are transferred
into Pewta or Sepiana. Many
countries prohibit the importation
of animals or meat products or
plants).
Azure should publish a cargo policy
to ensure that customers are aware
of their legal obligations. They
should ensure that staff are
sufficiently trained to discuss the
contents of baggage with
customers and are aware what
items Azure should not carry. They
should insure against lost and
damaged cargo.
On-board
services
Customers are currently
dissatisfied with the food provision
on the flight and there is a risk that
food prepared in Lyme may
become less appealing and even
dangerous when served on a Darke
to Lyme flight (when it has been
prepared a substantial time earlier,
given a six-hour flight, at least an
hour’s turnaround time, and time
for getting to the airline in the first
Azure should consider entering into
a contract with a company in
Darke to provide food for the Darke
to Lyme journey. Obviously they
must not breach any existing
contract with the Lyme company
and so in the meantime should
review the type of food provided.
For example, it might be safer to
only offer cold food like sandwiches
and cakes until a Darke contract
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Factor
Business risks
Managing risks
place). If the food makes customers
ill, Azure might be faced with
compensation claims.
can be set up. Even if a new
contract is set up, it might still be
best to offer cold food, as there is
less chance of health problems
arising as a result of serving cold
food rather than hot food.
Pricing
There is a complex system of
pricing and a large number of sales
agents, and Azure is at risk of
operating at a sales value less
than required to cover costs (for
example, if too many of the
cheapest tickets are sold).
As discussed above, Azure should
review the pricing policy. It should
also establish limits on how many
of certain types of tickets (nonrefundable/single etc) can be
issued for one flight and it should
institute a centralised system to
ensure that each agent is aware
when limits have been reached. As
the agents must be linked to a
similar system already (to be aware
of whether tickets are available for
sale) this should not be too difficult
to achieve.
Safety
The airline industry has stringent
safety conditions and Azure may
face customer boycotts or
difficulty in recruiting staff if safety
requirements are not met, as well
as the threat of not being allowed
to fly.
The company should appoint a
member of staff to be specifically
responsible for safety operations
(such as training, updating for legal
requirements, educating
passengers) and should ensure that
staff are regularly appraised about
safety issues.
Fuel
The aircraft cannot fly without
fuel, which can be a scarce or
high-cost resource. If fuel prices
escalate due to world conditions,
the company might not be able to
meet the costs of operating.
The company could take out
hedging contracts against the cost
of fuel. Other than this, there is
little it can do about this matter,
and it is another risk that has to be
accepted.
8 LMN
Tackling the question
This question illustrates that questions won’t always be about companies!
It’s necessary to read both parts quite carefully to see what the requirement really wants – an
assessment of how much a review by the professional managers contributes to the work of the
audit committee, and therefore why the review should be carried out. You should start off by
defining what the work of the audit committee is, then consider how much managers’ review
contributes compared with other sources of information that they can use.
In the second part, again you can’t be too theoretical. Any discussion of principles has to be
related to how they impact on the audit committee and board’s reviews. Selected examples from
the scenario information are also needed here to boost the discussion. If you can remember that
the board needs to carry out a regular and annual review and the main elements you would have
scored well here and gone a long way towards passing this question.
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How to earn the professional marks
The question is asking you to demonstrate communication skills here and the reason they are
being rewarded here is because of the need to consider your audience: the audit committee
consists of volunteers so the tone and language you use needs to be appropriate to show that you
can inform, persuade and (above all) clarify these responsibilities.
(a) Suggested solution
Audit committee’s role in internal control
(a) Under corporate governance guidelines, audit committees are responsible for creating a
climate of discipline and control. To do this, they have to obtain assurance that internal
control is working effectively and providing an adequate response to the risks faced; in
particular for LMN, these will be controls over expenditure.
Importance of management review
The management review provides you with evidence of whether the control systems appear to
be effectively managing the most significant risks. It also gives you an indication of the
scope and quality of management’s monitoring of risk and internal control; whether it
appears to be adequate given the risks faced. In the circumstances of LMN, as a board of
volunteers, you will wish to gain assurance that the professional managers are carrying out
their duties effectively and are worth the salaries that LMN is paying them. The review should
provide feedback on weaknesses and should lead to improvements in the control systems.
Other sources of evidence
However, management’s review of internal control is only one source of evidence that you
should use to gain assurance. The audit committee should also receive reports from staff
undertaking important and high-risk activities, such as property investment, and from
control functions,such as human resources or internal audit (if you have any). Feedback
from external sources such as external audit or regulatory visits (from some of my
colleagues!) will also provide information.
Review of internal controls
Taking one example of best practice in this area, the UK’s FRC guidance (2014)emphasises
the importance of organisations conducting an annual review of their internal control
systems. This should involve reviewing the effectiveness of the systems to ensure that the
organisation’s management have ‘considered all significant aspects of risk management and
internal control for the company for the year under review and up to the date of approval of
the annual report and accounts.’ (FRC, 2014).
(b) Regular review
(b) Regular review is an essential part of the strategy for minimising risks. As audit committee
members, you are likely to have responsibility for this review, and as best practice
recommends, you should hold at least three audit committee meetings a year; this is
therefore how often the review should take place. Its findings should be communicated to the
board.
The review should cover the following areas.
(1)
Whether LMN is identifying and evaluating all key risks, financial and non-financial. This
is a very significant task given the variety of risks faced and also the need to devote
limited resources to the most important risks.
(2) Risk responses
Whether responses and management of risks are appropriate.
(3) Effectiveness of internal controls
The effectiveness of internal controls in countering the risks. The board should consider to
what extent controls could be expected to reduce the incidence of risks, any evidence
that controls have not been operating effectively and how weaknesses are being
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resolved. The board would consider such evidence as incidence of bad debts, records of
property occupation and complaints from tenants.
Annual review
The annual review of internal control should be more wide ranging, taking into account the
strategic objectives of the charity and undertaken by the whole board rather than just the
audit committee. It should examine controls and risk management systems in all major areas.
(1)
Changes in risks
The changes since the last assessment in risks faced, and the charity’s ability to respond
to changes in its environment. For example, the board would consider any changes in
LMN’s credit ratings and longer-term trends, such as changes in the incidence of lowincome earners.
(2) Monitoring
The scope and quality of management’s monitoring of risk and control, also whether
internal audit is required. In particular the review should consider whether the scope and
frequency of the regular review should be increased.
(3) Reports
The review should consider the extent and frequency of reports to the board; whether
reports on high incidence, high likelihood risks should be made more regularly.
(4) Impact on accounts
Significant controls, failings and weaknesses that may materially impact on the
financial statements, for example problems over its property portfolio management
should be looked at.
9 Pogles
Tackling the question
You are not asked to use any specific ethical decision-making model as in the real exam so
consider a broad range of issues and stakeholders as well as thinking about breaches of the IESBA
fundamental principles.
There are 10 marks on offer so try to explore 5 different issues in your answer.
How to earn the professional marks
The skill of analysis requires investigation, enquiry and consideration. You are only given the facts
in the case, but you should display the ability to consider information in such a way that their
implications are clear from your answer.
Suggested solution
Slide contents
•
Shareholder wealth maximisation
-
•
Professional competence and due care
-
•
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Employees have been pressurised to accept new working terms and conditions
Objectivity
-
•
Best practice employment practices have not been followed and laws may have been
contravened
Lack of integrity
-
•
Fines or penalties for illegal action may erode profits and shareholder wealth
Employee rights and welfare are being ignored in an effort to deliver higher returns to
shareholders
Professional behaviour
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-
Treating employees in this way is unlikely to stand up to public scrutiny and could damage
Pogles’ reputation
Supporting notes for each category
Shareholder wealth maximisation
At present the decision appears to be profitable. The factory is performing well against budget
and the changes in the employment terms offered to new staff should mean the factory is more
flexible in meeting customer demands. However, if the factory manager’s treatment of staff is
challenged successfully in the courts, Pogles may have to pay fines and compensation.
Professional competence
It appears that the factory manager has not been following human resource management best
practice and his actions could even be held to contravene the law, particularly as Pogles is
located in an EU state. EU law does not look kindly on employers who are unwilling to allow their
staff to work part time as long as this is reasonably practicable for their business, as always
seems to have been the case for Pogles. Pogles will also probably have contravened local
employment laws if the allegations of bullying are held to be justified.
Integrity
Pogles has not acted with integrity in that it has misled long-term employees with regard to the
working hours expected of them. Staff have been pressurised to take on additional work not
included in their original contract term, leading many to resign. The factory manager’s actions
are also not fair to the new employees in the sense that they are working under different terms to
longstanding employees. However, arguably they are being given employment opportunities that
they are willing to take up, so the terms do not appear to be a significant issue for them.
Objectivity
If Pogles is only concerned about shareholder wealth and maximisation of profits, then the
manager’s treatment of staff can be justified. However, most societies would regard bullying in
the workplace as wrong. The behaviour could also be seen to be discriminatory towards women
since the resignations are overwhelmingly amongst female employees. The board would need to
consider the threat to Pogles’ reputation if the behaviour became public knowledge.
Professional behaviour
As a listed company headquartered in a European country Pogles needs to ensure it is practising
good corporate governance. Poor employment practices and bullying of staff will not be well
received by shareholders, customers, suppliers or the public at large, jeopardising Pogles’
reputation. Pogles board therefore has a duty to stakeholders to ensure appropriate working
conditions as well as fair and equal treatment of staff.
10 Hammond Shoes
Tackling the question
As with all analysis of financial statements, the starting point is to calculate relevant ratios. Focus
on the ones that seem most critical, or that can be linked to other information provided.
Profitability ratios are always important, but the company’s shareholders are averse to risk and
borrowing, so it would be helpful to understand the trend in gearing also. The delays in paying
creditors suggest some cashflow issues, so we should look at the trend in receivables days as well.
The second part of the question requires application of expected value, which is one of the
techniques you are expected to be familiar with. However, beyond the calculations, you should be
able to draw out the implications of the analysis, which is not simply the resulting number.
How to earn the professional skills marks.
The ‘consider’ skill requires you to reflect carefully on the evidence and analysis. This would be
demonstrated by not simply performing calculations but linking them to other pieces of evidence
and demonstrating thoughtfulness about their implications. What is particularly concerning
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about the financial information, given the attitude of the shareholders? The expected value is
below the proposed investment but is there a good reason for the six-year time horizon, which has
a critical impact on the calculation results?
Suggested solution
Financial analysis
The financial analysis of Hammond Shoes (HS) is considered below under the key headings of
profitability and gearing.
Profitability
The impact of the cheap imports can be clearly seen in Figure 1 as both revenues and gross profit
have fallen significantly over the four years.
The gross and net profit margins have declined steadily over the years, as shown below:
Gross profit margin
Net profit margin
20X5
20X7
20X9
23.5%
20.0%
17.9%
8.2%
4.7%
2.9%
The company has failed to keep costs under control and, while sales have fallen by $150m over
the four years (approximately 18% decrease), cost of sales has only decreased by $75m
(approximately 11.5%). It is likely that this has been caused by reacting to reduced demand by
reducing labour. Given the large redundancy payments required by law in Arnland and HS’s
heavy use of local labour it is likely that this was a costly exercise.
The Return on Capital Employed (ROCE) has also plummeted from 24.14% in 20X5 to just 6.45% in
20X9.
Gearing
The capital structure of HS has changed significantly over the last few years, no doubt causing
concern to this generally risk-averse organisation. In particular:
•
Long-term borrowings have dramatically increased.
•
Retained earnings are declining, reflecting the higher dividends taken by the family.
•
Traditionally the social values of the family have been reflected in the company’s very low level
of gearing, which was only 6.9% in 20X5.
•
By 20X9 the company was much higher geared, having risen to 22.5%.
•
While this gearing level is still relatively low, the speed with which these changes have occurred
should be of concern to the senior management of HS.
A further concern linked to gearing arises by considering the way the company manages its trade
receivables and trade payables.
Goods in Arnland are normally supplied on 30 days’ credit and back in 20X5 HS had no problem
in meeting this; however, the time taken on average to pay their suppliers has more than doubled.
Over the same period, trade receivables have slightly reduced, as shown below:
Trade payables (days)
Trade receivables (days)
20X5
20X7
20X9
28
43
63
38.65
38.93
36.50
This would indicate that HS appear to be using their suppliers as a source of free credit, on top of
the bank loans they have taken out in the last few years.
Financing costs have also risen over the last few years. This has directly affected profits and has
also caused the interest cover ratio to plummet from 14 to 1.33.
This financial analysis backs up the worrying picture presented in the scenario. Profits are falling
and HS is struggling to make the fast cost cuts needed to survive. It is becoming increasingly
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reliant on external finance which will undoubtedly be a cause of great concern to the owners (on
ethical grounds) as well as to their suppliers who are unlikely to remain loyal to HS should the
worrying trend of increasingly late payment continue.
Investment analysis
The senior management appear to have accepted that the company will continue to experience
low sales despite investing in new production facilities. They then only anticipate a 30% chance of
sales increasing if there are favourable changes in the environment. This pessimistic view of the
company is reflected in both of the scenarios they have developed.
The lower labour costs and increased productivity are projected to provide net benefits of $15m
over the first three years ($5m per year) in both scenarios.
The two scenarios then split to look at the likely outcomes depending on whether low demand
continues (Scenario 1) or higher levels of demand are experienced (Scenario 2). The anticipated
value of the benefits each of these scenarios would provide are shown below:
Scenario 1:
Probability of continued low demand
0.7
Net benefits per year
$5m
Total benefit for Years 4–6 ($5 × 3)
Expected value of benefits ($15 × 0.7)
$15m
$10.5m
Scenario 2:
Probability of higher demand
0.3
Net benefits per year
$10m
Total benefit for Years 4–6 ($10 × 3)
$30m
Expected value of benefits ($30 × 0.3)
Total expected benefits ($15m + 10.5m + 9m)
$9m
$34.5m
The total expected benefits of $34.5 is below the cost of the proposed investment $37.5. This
suggests that this investment would not be financial viable unless the second scenario actually
materialises, in which case the total benefits would be $45m ($15m + $30m).
It must be noted, however, that the projection covers only the first six years and, given that the
last upgrade was carried out 20 years ago, it is likely that net profits would continue for many
years beyond these six. However, it becomes increasingly difficult to predict net benefits beyond
that six-year timescale.
11 Shop Reviewers Online
Tackling the question
To help get started you may have found it useful to highlight the critical importance to SRO of
protecting its IT infrastructure. IT is clearly important as the company’s operations are completely
internet based. Making this point helps to put your answer into context. An appropriate next step
in answering this question was to consider each of the two types of controls separately. Setting
your answer out under the headings of ‘general controls’ and ‘application controls’ should have
made this easier.
To produce a good answer, it was important that you read carefully through the detail in the
exhibit as there was a lots of information available for you to draw upon when identifying control
deficiencies and then classifying them as either relating to general or application controls. To
structure your work you may have found it helpful to adopt the following approach: first, state the
control weakness that you identify and classify it as either a general or application control;
second, briefly explain why this control weakness is potentially problematic; third, make a
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practical improvement suggestion which could be implemented to address the weakness
identified.
How to earn the professional skills marks
The ‘consider’ skill requires you to make use of information in a scenario as to be able to
recommend appropriate actions. In essence this requirement was asking for you to consider
whether the controls currently in place at SRO are likely to be effective in protecting the
company’s IT systems. This was a great opportunity for you display your skills at identifying the
issues outlined in the exhibit and to show that you were capable of generating potential
improvements. As your work is intended to be used by SRO’s founder Amy Needham and her
senior management team, it is of crucial importance that any recommendations provided were
realistic and could be implemented.
Suggested solution
SRO has recognised the importance of the need for functioning systems at all times, and so has
ensured that a backup is available. This is key, as any loss of functionality will affect its ability to
operate, given that the entire operations are carried out online. However, there are some problems
with its general controls, which could severely disrupt business.
General controls
These are controls which relate to the computer environment and, hence, could affect any or all
applications in use. These may be policies with regards to the treatment of hardware or
procurement, for example, or could be specific security procedures which are in place. SRO
appears to recognise the need for general controls by having a separate computer centre, with
secure access, a firewall and a password system to protect against unauthorised access.
However, despite this recognition, there are a number of areas where the general controls are
inadequate.
The computer centre is not secured despite the capability to do so. The reason given saving time
is not sufficient to risk security controls for. Although the ‘majority of staff’ at headquarters are IT
support personnel, there are still some staff who should not have access to the computer centre.
Indeed, not all IT staff need access to the main servers. Temporary staff should not fulfil roles
which are strategically important; to risk the entire operations by providing them with unrestricted
access, SRO is not showing adequate control.
Similarly, the use of a general user ID and simple password means that they have access not just
to the hardware, but to the entire system too. The user ID and password would be simple to guess
should anyone be attempting to hack into the system. SRO must immediately revert to the
fingerprint access system, and must ensure that all staff are aware of the importance of
preventing unauthorised access. The ‘administrator’ user should be removed immediately, and
only those with administrator rights should be afforded them in conjunction with their unique user
ID. Temporary staff should be issued with unique user IDs so that SRO can ascertain who has
carried out any transactions on the system. In addition, users should be reminded of the necessity
of changing passwords regularly and not writing them down anywhere. This could be enforced in
training and by the provision of a procedures document.
The firewall has been turned off to allow the intelligent software to upload its findings onto SRO’s
system. Unfortunately, turning off the firewall not only allows this to happen; it also opens the
systems to the threat of hackers. The firewall should be immediately re-installed. If it is finding
difficulties with the application, it may be that there is a security risk with that. This should be
thoroughly investigated and corrected.
SRO has taken precautions to have a backup system in place as contingency against disasters.
However, the system should be in a remote location, rather than in the same location as the main
servers. If there were a fire, for example, both the main servers and the backup servers would be
affected. Similarly, by having a direct link between the servers, any data corruption or
unauthorised access would affect both the servers and their backups. There should be a slight
time delay in the connection to prevent this from happening, so immediately a problem is
detected the link could be terminated, allowing the backup to be unaffected.
The controls mentioned above would affect all systems. There are some controls which affect only
specific applications used by the organisation. These are known as application controls and help
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ensure that transactions are authorised, and are completely and accurately recorded, processed
and reported.
Application controls
There are some issues with the application controls on the review system, which form a threat to
the accuracy and reliability of the information provided on the system.
The intelligent software itself appears to provide out-of-date information and there is, currently,
no way of assessing whether this is the case. A verification check may be necessary to ascertain
the date of the initial posting of information and whether this is earlier or later than the date of
information already held.
The reviews posted by users may, or may not, be a fair representation of the service offered. SRO
does not verify that the information is correct, nor do they verify whether the users are who they
claim to be. Indeed, the ability for users to post anonymously means that they could post
whatever they like. There is a possibility that the users may be employed by the stores being
reviewed, and giving positive reviews in order to benefit from them. Alternatively, they may be
posting negative reviews about their competitors, again compromising the reliability and
independence of the reviews. If this were happening, and were to be discovered, it could threaten
the entire existence of SRO. It may be that a control needs to be included whereby reviewers can
only submit a review if there has been an actual transaction with the store. Similarly, the stores
should have the opportunity to respond to a review, made simpler if there is a transaction
identifier available.
Overall, it appears that, despite having many of the tools in place, SRO is not using them
adequately. Procedures should be clearly defined and adhered to in order to protect from such
risks.
12 Jayne Cox Direct
Tackling the question
You need to read the question carefully and see that it is specifically asking about how
technology can be used to address the organisation’s problems. This means that you need to
identify the key problems, and also link your suggestions directly to technology, rather than
general ideas about process improvement. As always, your suggestions need to be specific to this
organisation – very generic suggestions will not score well.
How to earn the professional skills marks
The ‘assess’ skill requires you to use your judgement and consider the implications of your
decisions. This means identifying the most critical problems for Jayne Cox Direct to solve, and not
making suggestions that are unrealistic, or would have a negative overall effect on the
organisation. It will also help if you can show evidence of considering alternative solutions, and
then using your judgement to decide on the most appropriate one.
Suggested solution
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
relationships may have
created uncompetitive,
complacent suppliers
Use e-procurement websites to identify a broader range of
suppliers.
The suppliers which may offer the best balance of quality and
cost can then be more easily selected and cost savings can be
made.
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Problems
Suggested solutions
Cumbersome ordering
process leading to the
occasional failure to receive
deliveries
The occasional failure of the payment system to correctly match
purchase orders to supplier invoices has led to payment delays
and criticism from suppliers.
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 and payments would
occur electronically.
This system may not be compatible with the above 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
inventory shortage
An integrated system could be installed which allows 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
management
JCD currently stock high levels of inventory. This could 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 direct to the customers, the downstream supply chain is reasonably straightforward.
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 customers
on order status
Following the initial delivery estimate provided at the time of
ordering, customers receive no more updates or 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
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Problems
Suggested solutions
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
service
An FAQ section could be provided on JCD’s website, eg ‘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 online.
To improve customer retention, targeted emails, newsletters and
‘existing customer only’ special offers could be sent out on a
regular basis.
13 8-Hats
Tackling the question
This requirement effectively consists of three parts, as you are firstly asked to discuss the
principles of matrix management, and to then consider the benefits and the problems that this
presents in relation to 8-Hats. When faced with such requirements you might find it helpful to
present your answer using these three terms as headings around which you can build your
response. Adopting this approach helps to ensure that you have addressed each part of the
requirement. The suggested solution has largely adopted this approach as it begins with a
discussion of the current structure in place at 8-Hats, before moving onto discuss the features of
matrix management and the benefits and issues that this brings.
How to earn the professional skills marks
‘Assess’ is one of the evaluation professional skills. When you are asked to assess a situation this
requires you to use your professional judgement to consider organisational issues, in this case 8Hats’ current structure, and to determine the advantages (benefits) and disadvantages (problems)
of a proposed course of action, in this case the introduction of a matrix management structure at
8-Hats. The trick to producing a good answer was to ensure that you picked up on the clue under
the requirement which asked for ‘relevant’ benefits and problems; this means that you need to
ensure that any points you make relate the detail provided about 8-Hats’ current situation in the
exhibit. Simply listing all the generic benefits and issues associated with matrix structures would
not be sufficient to earn the professional skills marks on offer.
Suggested solution
8-Hats is currently structured on a functional basis. There is a department for each activity of the
company and each job is passed between functions. Each function is focused on optimising its
part of the transaction, and has defined objectives sometimes reflecting the reward system in
place. However, these objectives are not always aligned with those in other areas of the business
and therefore objectives clash. For example the sales department are rewarded based on turnover
(not profit) and so will try to win sales by heavily discounting the price, whereas the events
department focus on providing the best client experience. This will cause problems for the
operations department who then have the task of delivering the functionality promised by the
events department at the price promised by the sales department, while still making a profit.
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Such clashes are typical of a silo mentality with functions (departments) sub-optimising based on
their own interests at the detriment to the organisational overall objectives. These conflicts can
only be resolved by referring upwards, as shown by the scenario where Barry Blunt had to
arrange extra funding to ensure suppliers could be paid before their event was boycotted.
Implementing a matrix structure would be an attempt to manage the key ‘jobs’ (projects) across
various functional departments. Each job has the characteristics of a project – it has a start, runs
for a specified time period, and then an end (often the actual event). Under the matrix structure
the organisation would be split into multi-disciplinary teams drawn from each of the functional
departments. Each of these teams would focus on delivering a successful and profitable project.
Decisions taken within that project will generally represent a consensus view of all those involved
and so their objectives are brought back into line with the overall objectives of the organisation.
Such focus on the event itself should greatly improve customer experience and satisfaction with 8Hats.
A potential drawback of the matrix structure would be that decisions may take longer, due to the
need for consensus. This would perhaps create more conflict within the company, particularly if
cost and profit responsibilities are either unclear or counter-productive. To minimise potential
conflict, the reward systems at 8-Hats will probably have to be re-structured, particularly for
sales managers (currently rewarded based on turnover).
Another matrix structure problem is that job and task responsibilities may not be clear, so 8-Hats
will have to ensure these responsibilities are properly defined. This could be achieved by
transferring responsibilities for profit and work allocation to the project, while maintaining
technical support and employee appraisal and competency development within the departments.
Changing to matrix management is a fundamental change for the organisation and would
therefore require significant cultural changes to take place at 8-Hats.
14 Hooper University
Tackling the question
To stand a reasonable chance of answering the question it is important that you read the
requirement carefully. You are only expected to focus on four problems in the current process.
Failing to pick up on this increases the risk that you may produce a considerably longer answer
than is required, especially given the number of problems outlined in the exhibits.
A good way of structuring your answer is to follow the layout of the three requirement verbs, ie
identify the problem, explain why it is a problem and then suggest a solution to address the
problem. Adopting such an approach should ensure that you address each part of the
requirement. You may also find it useful to include headings above each of the issues you identify;
this should help to ensure that you have considered at least four issues as required.
How to earn professional skills marks
‘Consider’ is one of the ‘analysis’ professional skills; to demonstrate these skills you need to be
able to use information from a variety of sources and to logically process it with a view to
recommending appropriate action. In this case, you are provided with two different exhibits which
provide an insight into Hooper University’s coursework organisation, submission and feedback
process. As a result it is important that you use the detail from both exhibits to construct your
answer. Making generic points with limited use of the detail provided will restrict your ability to
earn the two professional skills marks on offer.
Suggested solution
The current process has a number of problems which may be causing the student comments in
the student experience report.
Timing of coursework deadlines
The course appears to be badly co-ordinated in that similar deadlines are set for different
subjects. This causes periods of high activity for students, followed by periods of low activity. It
would be preferable if the workload was evened out over the duration of the programme. This
would address one of the student comments:
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‘We always have about four pieces of coursework to submit at the same time, and then weeks
where nothing is required. I wish the university would manage our programme better.’
A solution would be to co-ordinate this at the start of the course. The head of department could
play a more proactive role and communicate with the lecturers after coursework deadlines have
been submitted, to organise a more balanced schedule across all subjects.
Timing of the coursework requirements publication
The lecturer releases the coursework requirements on the VLE at the beginning of the course, and
so requirements are available before the work has been covered in class. This means that students
may complete the work without having all of the relevant information to help them. As one student
commented:
‘I completed and submitted my coursework early in order to manage my workload better, but then
the lecturer gave an additional lecture to help us with our coursework. This contained very useful
information, which we had not previously covered. I was not allowed to resubmit my work and so
suffered from being efficient.’
A solution may be to issue a timed release on the VLE, which will release the coursework details as
soon as the lectures relating to that topic are complete. This could also assist with students feeling
that too many pieces of coursework need completing simultaneously, as it will stagger their
release.
Release of marks
It appears there are three different records of student marks, and all are input manually, which
could lead to errors. The student who commented that their end-of-year results gave a different
mark would be rightly concerned that the incorrect mark had been allocated to their degree
classification.
‘I received one mark from the VLE system, but when my end-of-year results were released the
mark was different.’
As a solution, the data should be input only once, by the lecturer marking the work, and a
summary of the marks should be available for download by the head of department and the
administrator, should they still need to do this. The VLE system could also be linked to other
systems within the university, automatically feeding marks directly into these systems, so avoiding
input errors.
Accuracy of coursework requirements
It appears that there are problems with the accuracy of coursework requirements, and that
adjustments have been made after they have been published. As one student commented, this
meant that time was wasted on work which was not necessary.
‘There were errors in the initial coursework requirements, which were subsequently significantly
changed. I had already started the assignment so this time was wasted.’
An additional step could be added into the process, whereby another lecturer proofreads the
requirements and checks them for accuracy, relevance and validity. Although this would add time
to the overall process, it does not appear that time is an issue at the start of the process.
Tutorial note. There are more than four problem areas to discuss, and for tutorial purposes we
have included a range of the areas you could have discussed. However, as the question
requirement specifically only asked for the identification and explanation of four problem
areas, this is all you should have included in your answer.
Marking and feedback activities
The guideline relating to the timing of marking is a little vague, ‘within two teaching weeks of the
submitted coursework being collected from the course administration office by the lecturer’, and
allows the lecturer to delay collection of the scripts in order to delay the marking. This could be
one of the reasons why students complain about the time taken to mark their coursework.
‘It takes weeks to receive my marks, by which time I’ve forgotten what the coursework was about.’
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Additionally, there appears to be no communication to the lecturer when coursework is ready to
mark. The VLE or the administration office should inform the lecturer that scripts are available.
It would appear that the lecturer marks the hard copy and types their feedback onto a new wordprocessed document which is then uploaded on to the VLE. This appears to lead to the feedback
being difficult to understand, as the feedback is on a separate document. As one student
commented:
‘My feedback was on a separate document so I found it difficult to relate to the coursework
submitted.’
There are a number of possible solutions to these problems. The hard copy seems to be redundant
if the VLE system is used for feedback. One possibility is to drop the hard copy submission to the
administrator so that the student makes just a single submission on the VLE. The system could
send an automated email to the lecturer once a submission has been made, or the lecturer could
periodically log on to the system to view submissions.
The VLE system could be upgraded to allow online marking, with the online annotation of scripts,
and automatic addition of marks awarded. This would align the feedback to the coursework and
would ensure that the lecturer marks the correct, up-to-date version of the work submitted. This
should help eradicate the following problems.
‘The lecturer said he did not receive the hard copy of my coursework but I know I handed it in. This
was counted as a non-submission.’
‘I accidentally submitted an unfinished piece of coursework to the administration office but
submitted the correct one to the system. The lecturer marked the unfinished piece.’
The university guideline should be amended to suggest that marking should be completed within
a set number of weeks of the coursework submission date, not the date that the lecturer collects
the scripts from the administration office.
It may be possible for the administrator to be removed entirely from the process; guidelines could
be issued by the head of department, and it has already been suggested that marks could be
automatically fed into the administrative systems, eliminating the need for manual input.
System deficiencies
The system does not appear to allow for the re-submission of completed coursework. This means
that if an upload does not occur correctly, or the student uploads the wrong document, they may
be assessed unfairly.
‘I completed and submitted my coursework early in order to manage my workload better… I was
not allowed to resubmit my work and so suffered from being efficient.’
It should be possible to submit coursework more than once, with a new receipt given each time,
until the final submission deadline. To ensure that the correct file is uploaded, there should be an
additional process whereby the system opens the uploaded file and asks the student to verify that
it is the correct, up-to-date version.
15 LDB Bank
Tackling the question
The requirement was formed of two closely connected parts as you were asked to ‘identify’ and
then ‘analyse’ the elements of good project management. In this case the need to ‘identify’
effectively meant that you needed to state the elements of good project management detailed in
the scenario. The requirement to ‘analyse’ in essence is asking you to explain why the point that
you stated represents good project management practice. As you were only asked to consider the
‘elements of good project management’ any discussion of poor practice would only have served to
waste your time and would earn no marks.
How to earn the professional skills marks
The ‘investigate’ skill requires you to pick out the relevant information from different sources in
order to construct an answer. In this case you were provided with two exhibits. These required you
to read through them carefully so that you firstly understood the nature of the branch
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rationalisation project and secondly appreciated the issues that had occurred and ultimately how
they had been resolved. As mentioned above, to demonstrate your analysis skills you needed to
provide reasoned explanations as to why the elements you identified represented good project
management. Repeating points from the scenario with no attempt at explaining their significance
will lead to a failure to earn the professional marks on offer.
Suggested solution
The elements of good project management that helped make the branch rationalisation project
successful include:
•
Experienced project manager: the project manager was experienced and had worked for the
bank for many years. He was assigned to the project full time allowing him to focus entirely on
the project.
•
Dedicated team: the project team were also seconded full time to the project. This prevents
them becoming distracted by day-to-day pressures. Where project teams are also expected to
continue with their usual role, the project is much less likely to succeed. This is because it has a
long-term focus, whereas day-to-day tasks usually require more urgent attention. The project
will inevitably take a lower priority.
•
Mix of team: the team consisted of 12 members of staff, six of which came from each of the
banks that existed prior to the acquisition. This meant that they had a good understanding of
each of the banks, and that the team was ‘politically’ balanced, not favouring one over the
other.
•
Project sponsor: the operations director, a high-ranking employee in LDB, was appointed as
project sponsor. This indicates management support for the project and shows that they are
committed to its success. His high level within the organisation also means that he has the
authority to make key decisions relating to the project and authorise both decisions and
expenditure. This prevents the project from drifting.
•
Defined objectives: the aims of the project were clearly defined and quantified at the start of
the project (to cut the number of branches by 20% and branch employment by 10%). By doing
this, it was easy to measure whether or not the objectives were met. It also meant that
everyone involved in the project knew exactly what they were working towards.
•
Defined constraints: it was specified at the start of the project that there would be no
compulsory staff redundancies. This meant that those working on the project were clear about
what was outside the scope of the project and prevented the implementation of inappropriate
solutions.
A timescale of two years was also set at the start of the project. This meant staff knew how
long was available for them to complete the project and kept them focused. If there is no clear
time frame, projects can easily expand or lose focus.
•
Potential slippage identified: the timescale was carefully monitored, and both potential
slippage and its cause were identified and dealt with early on. This allowed for a revised
schedule and deadline extension to be authorised.
•
Formal review: at the end of the project, both a benefits realisation review and a post-project
review were carried out. This allowed the team to prove that the project’s original objectives
had been met. It also ensured any lessons learnt were fed back into the project management
system, preventing future teams making the same mistakes.
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