CIPS Professional Stage CASE STUDY ANALYSIS The Retiring Company Ltd May 2006 Copyright abuse: IMPORTANT NOTICE Your purchase entitles you to download one copy of the case study analysis for your personal use. Unless agreed in writing with the publisher, any attempt to download copies for the use of others is a breach of copyright which, if discovered, will be actionable at law, and will also be notified to CIPS as a suspected breach of ethical standards. Published by Profex Publishing Limited 7 North Road Maidenhead Berkshire SL6 1PE www.profex.co.uk This analysis has been prepared for Profex Publishing Limited by Ian Black BSC MA CENG MIEE. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of Profex Publishing Limited. ©Profex Publishing Limited 2006 ii Contents Preface iv 1 Introduction to the case 1 2 Tackling the case study exam 7 3 An overview of the company’s business 9 4 Tools of strategic analysis: an overview 12 5 SWOT analysis 14 6 PEST analysis 19 7 Porter’s five forces model 22 8 Ansoff’s matrix 25 9 Force field analysis 27 10 Further tools of strategic analysis 29 11 Strategic options for The Retiring Company 32 12 Tactical aspects: a review of each division 35 13 A matrix approach to enhancing performance 42 14 Procurement systems and processes 46 15 Management and human resource issues 50 16 Issues relating to quality 53 17 Legal issues: an overview 54 18 Legal issues: more detail 55 19 The financial situation of The Retiring Company 59 iii Preface CIPS has now published the pre-seen material for this month’s Case Study examination, featuring The Retiring Company Ltd a national private company of six divisions providing elderly care, hospital care, a property business, a chain of florists, funeral businesses and related activities. If you have registered for the exam and have not managed to access the pre-seen material you should contact CIPS as a matter of urgency. The exam is on Friday 26 May 2006, so you need to work fast to maximise your chances of success. This Case Study Analysis text is designed to help. You should use the text to assist your study of the pre-seen material, and to focus your revision and preparation in the run-up to the exam. You should take the text with you into the exam room. Its sections may provide a useful structure for the solutions you will be required to produce in the exam, as well as offering a memory-jogger for the key issues. You must not reproduce sections of this text in your examination script: the examiner explicitly states ‘copying or plagiarism will not be tolerated and could result in no marks being awarded…’ Throughout the text, we support statements made by referring to the relevant page and line of the case. References take the following form. 1, line 7ff. This means ‘Page 1, lines 7 and following’. You should take the time to number every fifth line on every page of the case study now, so you can follow these references. The column headed ‘Notes and references’ also includes cross-references to pages and sections within this text. For example: Page 9. This means ‘refer to page 9 of this text’. Section 15. This means ‘refer to Section 15 of this text’. This column also contains occasional references to appropriate websites. For further assistance, our Case Study Study Text offers detailed discussion on how to tackle case study questions, fully-worked examples based on past CIPS exams, and detailed summary notes on the main syllabus areas typically required in the exam. Note that CIPS advises you not to over-burden yourself by taking too many reference texts into the exam room. We have tried to include the most essential information in the space of a single A4 text. Good luck in your examination! Profex Publishing May 2006 iv SECTION 1 Introduction to the Case Notes and references The Retiring Company Ltd The case is concerned with a private UK limited company with a 1, line 7ff 200-staff Head Office in the north of England running six separate divisions, mainly in the south. This structure is dictated by the family tree with Geoffrey Ripon as Chairman, and his four sons and two daughters each running a Division. Residential (Elderly) Care in 50 locations around the UK each 2, line 3 supporting 20-80 elderly residents Private Hospital Division running 15 urban private hospitals 3, line 3 with surgical facilities Residences Division managing 40 UK sites offering warden- 4, line 2 supported housing for between 36 and 80 tenants or couples in each. The division may be very profitable but no figures are available Funeral Division operating in 120 individual business units, 4, line 42 each operating as if it were a local self-contained business Floral Division with 80 retail shops largely servicing the 5, line 38 hospital and funeral business controlled by the family, with supplies mainly from overseas Car Hire Division with 400 chauffeur-driven vehicles driven 6, line 36 by 600 drivers on the books. The division is ‘continuing to lose significant amounts of money’ No staffing or financial turnover information is provided for the group, but the scale of these operations has clearly become very large: add up the evidence in the case and you will find the staff could exceed 5,000. Each division is operating at high demand levels against their capacity, and as a result (with the exception of the Car Hire division) they are trading potentially profitably, but 7, line 27 direction, planning, monitoring, and controls are sadly lacking. 1 Profex Publishing Limited 2006 Notes and references The current situation After developing in its family-run style over forty years into a 1, line 24 national set of operations, cashflow is a serious problem and the bank has raised key concerns on strategic and operational management. The Chairman agreed with the bank that an 1, line 33 independent consultant should report on the current difficulties. This outline report by Debbie O’Rourke is the basis of our study as she reveals serious management issues. No clear strategic direction for a conglomerate clinging to a 1, line 17 family structure when the Chairman of the enterprise is 80 years old and some of his family heading divisions are approaching retirement. We would be careful about age discrimination in employment, but the business needs to be practical about succession and continuity. Poor relationships (demonstrated by the serious lack of commitment, skill, communications or interest by some of the sibling divisional heads), combined with considerable friction between them, undermines any sense of corporate strategy or direction. A diversity of issues peculiar to the individual operating environment of each division. These are itemised separately in Section 12 the report and reviewed below. This complexity and diversity suggest that single, all-embracing responses will not be adequate for the range of problems faced in the respective companies We note the passing reference to media criticism, but this is not taken up elsewhere in the case. There are references to customer complaints in four divisions (residential homes, funerals, flower clients, and hire car customers) but no obvious links to the media. Perhaps the examiner felt we had 1, line 30 enough issues on our plate for this case study. The Chairman and his family must quickly come to terms with the severe business criticism in Debbie O’Rourke’s report. We can see that they are so keen to follow their own personal pursuits outside the business that they are neglecting their duty to their customers and staff. Their minimum responsibility must be to see that they do not trade into insolvency, and the fact that some divisions are looking to extend their overdraft suggests they are running into liquid cash problems. Beyond that stage, it is imperative that the group gets a grip of its strategic direction and translates it into proactive management. 2 Profex Publishing Limited 2006 Notes and references An overview of the case This case represents seven different organisations potentially in distress. Two hundred head-office staff and a large but unspecified 7, line 46 number of operational mangers and staff (we can see this could exceed 5,000 staff from the descriptions of each unit) are running the separate businesses with no clear direction, having absentee divisional heads with little interest in the business except to fund their own hobbies and diversions. The case has problems in abundance in all the CIPS syllabus elements: strategic, tactical, operational, organisational, legal, procurement and human resource issues abound. As CIPS point out they expect to examine at least two of the core syllabus subjects, but we need to look at as many angles as possible in this text. In particular you should consider how questions may be directed at individual operations or across the group as a whole. A key element will be restoring credibility with the bank while establishing leadership and structure to develop positively all the operational, commercial, procurement, contracting and management problems. The bank is demanding a coherent business plan in four weeks: time is of the essence. Issues raised by the case The bank and the consultant Debbie O’Rourke have done the 8, line 10 groundwork for us and it is evident the company must act immediately in the following areas. Creation of plans (and, we must assume, budgets) for future profitability. To satisfy the bank and good commercial practice they should be coherent and indicate the strategic direction of the group and the individual businesses. Correction of adverse financial ratios. These usually start with liquidity ratios in the balance sheet but could extend to any number of productivity and efficiency figures for the operations. Most take a significant time to correct. We do not have the data to judge which are the priorities. Adjustment to the cash position as cashflow problems are creeping up, demanding greater borrowing Planning and implementing succession and management issues arising from the increasing age and decreasing interest of the family currently in control. Age is no bar – but attitude could be a serious issue. 3 Profex Publishing Limited 2006 Notes and references A rapid review of the capital structure and borrowing plans to avoid or minimise overdraft costs Action on some adverse media comments (but we do not have 1, line 30 information for this problem area, except for comment on customer complaints). In addition to these top-level corporate issues, Debbie O’Rourke has identified a detailed list of operating issues with each business unit. Rather than launch into the details here, these are covered in their Sections 12, 13 respective divisional sections but key items are as follows. Procurement issues No evidence of dedicated purchasing professionals Numerous shortcomings in procurement disciplines and controls Unethical placing of contracts Missed opportunities for outsourcing Lack of rigorous supplier vetting and monitoring Contract decisions taken at the wrong levels with inadequate data Operational issues Missed opportunities for synergy between divisions Poor communications between senior management Top-heavy staff and Head Office organisation A long list of individual problems identified by Debbie O’Rourke Profitability concerns Of the six divisions, car hire is losing money and residential care is demanding heavy capital investment in buildings Issues relating to the management of staff Clearly, there are serious personnel management problems because staff are so stressed and under-paid under a difficult regime that they are leaving . The management of stress appears in the syllabus of the Foundation Stage paper on managing human resources. 4 Profex Publishing Limited 2006 Notes and references The structure of this text It is important not to ramble around all these issues, but instead to present your arguments in a logical and coherent way. We try to help with this by the structure of the current text. Case study examination questions are usually built around the three core syllabus areas: strategic planning, tactics and operations, and legal aspects, so we follow this theme. Sections 1 – 3 are introductory in nature. Sections 4 – 11 deal with strategic issues. Sections 12 – 16 deal with tactical issues, including human resources, procurement and organisation. Sections 17 – 19 deal with legal and financial issues. Further reading You must broaden your understanding of the issues in the case by reading relevant articles in the press. This can also enable you to introduce authentic detail into your answers and impress the examiner accordingly. Look in particular in: The Times The Economist Supply Management The Financial Times The Daily Telegraph Note in particular the article on change management in the Supply Management issue of 31 March 2005, written by Andrea Reynolds, an examiner for the case study paper. There, she mentions the ‘soft skills’ in managing behaviour which will be significant in this case. Searches on BBC news web pages will give recent information, and www.helptheaged.org.uk you should look at web sites such as Help the Aged and Age www.ageconcern.org.uk Concern for retirement and social issues. You should also access the CIPS website to have a look at the Chief Examiner’s reports on recent case study exams. In particular the chief examiner pointed out that students often failed to apply their learning of theory to the particular case in question. This is why you must immerse yourself in the particular business conditions in the case and arrive at workable solutions to current problems. 5 Profex Publishing Limited 2006 Notes and references Acknowledging the examiner’s note that ‘all…companies contained in this study are fictional…’ there are plenty of familiar examples of the operations included in these divisions, even if they do not always operate in a family conglomerate like the Retiring Company. We can therefore adopt a building blocks approach, and consider each business separately and then examine the position of the head office and holding company. In your examination preparation, consider live examples of care homes, private hospitals, funeral service, florist, and limo services and think about their respective business positions. Many of these impact on our lives through family and friends and your research for the examination should include enquiring how the selected businesses are operated and managed. We acknowledge that the case is very English in its outlook: notice that funding for residential care, for example, is different in Scotland. We also realise that some of these issues could impact very personally on students and hope we have avoided any insensitive comments which may arise from the issues of elderly care and funeral activities in particular. We are concerned here only with the business issues needed to solve the case study questions for the examination. 6 Profex Publishing Limited 2006 SECTION 2 Tackling the Case Study Exam Notes and references Before digging more deeply into the facts of the case it is worth making some important points about how you should tackle the exam. The case study is a very different type of assessment from the normal three-hour exam, and specialist points of exam technique can prove to be very important. Before the exam Prepare a ring binder to hold your notes (including this analysis text). Include dividers to mark off the main sections. Your objective should be to make your own notes sufficiently detailed to carry you through with only minimal use of textbooks (see next point). Take in any textbooks you think appropriate, but expect to use them only as a last resort. If you own a copy of the Profex Study Text for this subject this should certainly go with you into the exam room, because it contains handy revision notes on the main syllabus areas that are examinable. You are not provided with a new copy of the case in the exam room, so you must remember to take in the copy you already have. During the exam Read all four questions carefully to ensure you understand what is required. There is no choice of questions in the Case Study examination. Begin on the question where you feel most confident of the material. When you start writing, miss a line or two at the top of the page for clarity. Use frequent headings, underlined neatly with a ruler. Under each heading write your ideas clearly, leaving a line or two after each substantial point. This white space forces the marker to recognise that you have finished a point and deserve a mark for it. Underline any authority you cite, such as a statute, or a legal case. If you quote from a published text, acknowledge your source. Don’t overdo such ‘borrowing’: the exam rubric states that: ‘All answers must be the candidate’s own work. Prepared notes may not be included as part of the answer’. 7 Profex Publishing Limited 2006 Notes and references Do not use any of the text in this or any other book word for word. Include carefully drawn diagrams where appropriate. Be very careful about time management. Under no circumstances should you spend more than the allotted time on any question. Avoid waffle: keep your answers short and punchy. The examiner is more concerned with quality than quantity. Attempt all four questions. You will greatly enhance your chances of passing by doing so. Be very careful when using fashionable jargon. For example, there is much talk nowadays of partnership sourcing but this is very rare in practice and you should think very carefully before recommending it. The same applies to specialist techniques such as JIT, or MRP because they hardly apply in the retirement, healthcare and related supply chains. Application of ‘lean’ management principles may be sound, provided you explain how they would work in practice in the context of The Retirement Company Limited in the case. Don’t be judgmental. You and I may think that the Ripon family is variously greedy, arrogant, ignorant, or neglecting its duties. Only some of these are evidenced in the case, and some divisions have been turning in reasonable profits to the Retirement Company Ltd We do not have access to the accounts, however, so try to be objective in setting out facts without being carried away by your own ethical and moral values. Question everything stated in the case, other than simple, objective facts, and look out for the purchasing and supply signposts to potential questions and their required answers. You are a purchasing and supply chain specialist, but don’t assume that purchasing is the only important discipline. There are many general management, organisational, and human resource management issues raised by the Ripon family case. Everything you state in the exam must be supported by the evidence given in the case. You must distinguish between what is stated in the case and what you are tempted to assume from the case. For example, Billy Ripon is enjoying an extravagant lifestyle, but this may not be to the detriment of his branch of the business which is ‘believed to be highly profitable’. 4, line 35 8 Profex Publishing Limited 2006 SECTION 3 An Overview of the Company’s Business Notes and references Summarising the case It is helpful to begin by deciding what you think the case is fundamentally concerned with. Summarising this in a single sentence can help you to focus both on the problems faced by the business and the possible solutions that can be recommended. So what is the case about? One view is that it concerns a family operation which has outgrown its original family roots (compare Greiner’s model of organisational growth) and has reached a crisis of management control as the scale overwhelms the original entrepreneurial spirit and flair. Another way to express it is that the case concerns a lack of corporate strategy and leadership, leading to poor operational performance. An implication of this view would be that we need to overcome the short-term cashflow and management problems and shape the future by drawing up a coherent overall strategy that develops current activity with the possibility of growth, new developments and acquisitions. Strategically, the six divisions represent standalone businesses each of which has a link to looking after the needs of old people, but they can be treated independently or jointly for strategic development You should also take into account that despite the lack of interest and/or incompetence at the top, these separate divisions have grown and may be operating reasonably well, except in the areas highlighted by the consultant. Some management principles must therefore have been applied to reach this size and stage of development. Each of these possibilities is considered in the Strategy section. You Section 11 may be able to think of others which are equally valid. What business are we in? This debate leads on to traditional strategic questions. What business are we in? 9 Profex Publishing Limited 2006 Notes and references What are the commercial environmental pressures to which we must respond? What are the expectations of stakeholders? These questions should yield positive answers to help develop the management of The Retiring Company. Our business is to provide excellent health care and residential services for retired people from all walks of life and eventually to meet their funeral requirements with the same level of professional care and attention to detail. Our business is to maximise the stakeholder value by operating efficiently and effectively to achieve a return on investment in six different commercial environments linked to retirement. What is the current strategy? You could conclude that this is the missing link. Geoffrey Ripon started initially with one residential care home and the business has grown by an indeterminate process which included organic growth and acquisitions. We can only assume that this growth was nurtured by Geoffrey Ripon’s early entrepreneurial efforts in the 1960s and 70s when his children were still being educated. Ripon’s strategy has been to let the divisions stand or fall on their 1, line 19 own performance, with separate corporate structures and accounts for each division. For the purpose of the exam, an important issue may be to suggest strategic directions that may be adopted by Geoffrey Ripon and we discuss this in Section 11. However, an even wider range of questions applies to the operational management of the group. Some possibilities are outlined throughout this text, and explored in Sections 12–19. The organisation of the business We have a picture of a business in six divisions, each led by a son or daughter of the founder, operating from an archaic headquarters and in some cases running steadily towards a cash crisis. Some of the sibling divisional heads are largely absent and apparently do not care 2, line 35 about their operations. Their staff, however, are battling with the operational difficulties. Some are leaving through stress, and some are clearly succeeding where the family have failed. We know virtually nothing about the management teams and their staff from the case. 10 Profex Publishing Limited 2006 Notes and references What is the immediate reaction to the bank’s demands? Who will manage the essential staff work to pull together a business plan in four weeks flat? With the best will in the world our 80-year old Chairman is unlikely to draw up a detailed business plan now; his family barely speak to each other and display animosity in some cases. We must therefore explore the management, operational, human resources, supply chain, procurement, legal, project, and other issues in some detail. This will allow us to open up areas for action by the Retiring Company Ltd to meet the specific directive from the bank to produce a viable business plan, and then manage its way out of this inefficient mess. For practical purposes we could assume that Debbie O’Rourke’s future would include drawing up the plan, in conjunction with the Chairman as she has already started on the groundwork. She has the right background in finance and supply chain management, our key concerns. 11 Profex Publishing Limited 2006 SECTION 4 Tools of Strategic Analysis: an Overview Notes and references The case study exam often requires candidates to use tools of strategic analysis. Indeed in the Retiring Company we see strategic drift to such an extent that the business is crying out for strategic direction: they should apply the rational model of strategy formulation, which would require them to: analyse the near and far commercial environment check stakeholder concerns consider possible responses and options evaluate the possible directions choose and implement a route and in particular communicate (cascade) the direction to the divisions at all levels. In the following sections we attempt to do this using all of the main tools that appear to be useful in the circumstances of this case. We also refer (in Section 10) to a few other tools that appear less useful, with explanations as to why they are less useful. To begin with, though, we give a few general remarks on the use of these tools. If the question specifies use of a particular tool, obviously you must use the one specified. Use of another tool, however valid it may be, will not earn marks. If the question asks you more generally to ‘use appropriate tools’, then use as many as you can without overrunning the time limit. If you are asked to justify the use of certain tools, the information in the following sections should enable you to justify: SWOT analysis, PEST analysis, Porter’s five forces model, Ansoff’s matrix, Lewin’s force field analysis and Greiner’s model of organisational growth. Our analyses in the following sections are not the only possible ones that could be made. For example, though we have tried to analyse all the business’s strengths in the SWOT analysis, you may well be able to think of some that we have omitted. Equally you may not agree that everything we classify as a strength necessarily is a strength. The analyses we provide are meant to help you think clearly about the issues; they cannot be the definitive answer. 12 Profex Publishing Limited 2006 Notes and references Bear in mind that this kind of analysis is not done for its own sake. It is intended to help in shaping the Retirement Company’s future strategy. If you use this kind of tool in the exam be sure to refer to your analysis when recommending strategic possibilities and make them specific to the Retiring Company. Too many exam marks are lost because students write out their view of the theory at length without translating it into specific actions in the case in question. Ensure you use SWOT only as a starting point: the need is to build on the company’s strengths, eliminate or minimise the effect of weaknesses, grasp and develop opportunities, and counter any potential threats. 13 Profex Publishing Limited 2006 SECTION 5 SWOT Analysis Notes and references A SWOT analysis is a listing of the business’s strengths, weaknesses, opportunities and threats as a basis for development and/or remedial action. Strengths and weaknesses are factors that are likely to be internal to the business. Opportunities and threats relate to the external environment of the business. SWOT analysis is appropriate here because the case contains plenty of information on which we can operate. Note that a SWOT analysis must be carried out from the perspective of the business owners; to some extent, we are compelled to make assumptions about the objectives of the Ripon family. The SWOT factors relevant to The Retiring Company Ltd include the following, bearing in mind that some are specific to particular divisions. You may wish to create your own SWOT seven times over: once for each division, and one set for the head office. We have assembled these in the sequence published in the case and you may find more. Strengths 1. A private family firm has flexibility to make decisions without impact on numerous shareholders. 2. The Retiring Company has a portfolio spread of businesses which, though related, will respond separately to the commercial environment, potentially spreading risk. 3. The target markets, including retired and elderly people, www.statistics.gov.uk/census and those looking for private health care, are growing steadily in number. 4. Residential care has assets of 50 large standalone 2, line 3 residential homes. 5. Residential care has 100% bed occupancy and substantial 2, line 7 waiting lists demonstrating demand for their services. 6. The private hospital division owns assets comprising 15 3, line 3 private hospitals all of which are reasonably up-to-date and meet legislative requirements. 14 Profex Publishing Limited 2006 Notes and references 7. Jennifer Ripon (running the hospital division) is a 3, line 2, 46 dedicated health care professional. 8. The private hospital division is operating close to 3, line 5 capacity and demand is high. 9. Residences division has assets in the form of 40 4, line 11ff properties with from 36 to 80 separate flats or apartments in each, furnished to very high standards. 10. Billy Ripon (running the residences division) thoroughly 4, line 25 understands the property business and planning requirements. 11. The residences division is generating sound profits, it is 4, line 35 believed. 12. The funeral division has grown to 120 separate business 4, line 40ff acquisitions operating under one umbrella organisation with turnover exceeding £200m (not including disbursements). 13. The floral division runs 80 retail shops with a good 5, line 39ff geographical spread (though they operate from rented premises). 14. The car hire division has 400 limousines to high 6, line 37ff specifications. 15. The head office is in a large country house owned by the 7, line 29ff family. Weaknesses 1. Doubts exist at the bank over future profitability because 1, line 24 ff of rising costs and the absence of a strategic plan for operations or marketing. 2. Adverse financial ratios have been observed by the bank: 1, line 26 this can cover a multitude of measures but suggests that the business is out of control. 3. There are potential cashflow difficulties and some 1, line 29 divisions are seeking higher borrowing. 4. The bank observed that some directors are less able to 1, line 28 manage as a result of their increasing age. Age does not necessarily disqualify, but the bank has identified the absence of management skill. 15 Profex Publishing Limited 2006 Notes and references 5. Debbie O’Rourke found that some of the directors were not only repeatedly absent from their operation but also uninterested in its performance, except to fund their lifestyle. This absence is demotivating to the management teams. 6. Public sector funding for residential care is capped at cost 2, line 11 levels and the number of private residents is falling so revenues are restricted. 7. Many of the residential buildings are old and poorly 2, line 15 maintained, building up the weight of costs which must be met from revenues. 8. Residential care staff levels are too low and there is 2, line 19 insufficient funding to attract more and better staff: this will seriously affect service levels to clients. 9. Operating costs are rising ahead of inflation when active 2, line 21 purchasing should be limiting the increases. 10. Purchasing procedures for the maintenance of the 2, line 21ff residential care homes are out of control and costs escalate. 11. Residential care managers are stressed and leaving the 2, line 35 company, which will result in overloads on the rest of the teams. 12. Residents are complaining about conditions, staff, and 2, line 37 facilities. 13. Funeral clients (ie next of kin) have complained about 5, line 33 costing errors and omissions. 14. Floral customers are complaining about damaged or 6, line 24 wilting flowers, poor packaging, wrong addresses and late deliveries. 15. Car hire customers are upset too; they have complained 7, line 20 about rudeness, lateness, grubby vehicles, and overcharging. 16. Tony Ripon, head of residential care homes, is usually 2, line 41 absent at race meetings and has run up ‘considerable gambling debts’. 17. There is friction between the divisional heads: some 3, line 47 competition can be positive, but the implication is of 16 Profex Publishing Limited 2006 Notes and references negative forces which usually distract from commercial objectives. 18. The divisional heads lack knowledge and commitment to run their operations, and some favour their extracurricular activities (horse-racing, gambling, lavish lifestyles). 19. Purchasing at every level and in all divisions is fragmented, disorganised, and quite inefficient. Suppliers have been allowed to dictate terms, specifications, and prices, and subcontractors are running without service level agreements. 20. Several operations across divisions are operating to oldfashioned standards and have failed to anticipate or keep up with current business practices. 21. The head office in the North is remote from all of the 7, line 29 operations, requiring a substantial journey for any of the senior team to visit their staff and engage with clients. Opportunities 1. The constituent divisions could generate productive synergy if managed properly. Debbie O’Rourke’s analysis shows many areas of potential overlap which have not been exploited because of poor communications between the Ripon family members: consider fuel supplies, vehicle procurement, vehicle operations, property and vehicle maintenance for example. 2. Demand is high for many of The Retiring Company’s operating services. We are not told about national or local competitive forces so must make some informed assumptions but we can observe the demographic changes that are moving towards an older population, greater demand for health services now that some surgical procedures are so commonplace, and greater demand for small residential accommodation units supported by professional services. 3. A small family concern has built up into a huge organisation under the control of seven people. With the assets at their disposal, and the resources of their numerous staff, then if they can get together and agree a strategy they have a tremendous opportunity to drive forward the organisation. 17 Profex Publishing Limited 2006 Notes and references Threats 1. The bank is withholding further overdraft facilities to the 8, line 8 group until the business plan is produced. 2. Billy Ripon’s hospitality offers to business associates in 4, line 30 the residences division leave him open to accusations of unfair and unethical practice. 3. The laundry business Launder Ltd supporting the private 3, line 37ff hospital division is providing inadequate service. Although Jennifer Ripon has withheld £20,000 from invoice payments, the contractor is unrepentant and clearly not attending to the quality of service. 4. Clients in several divisions are raising serious complaints about the level of service: items 12–15 in the weaknesses above represent real threats to the business as customers will leave and the company’s reputation will suffer in the market place, reducing revenues. Strengths are there to be exploited and developed, weaknesses should be eliminated, while opportunities may form the basis of development and threats should be countered or mitigated. 18 Profex Publishing Limited 2006 SECTION 6 PEST Analysis Notes and references A PEST analysis is a listing of the political/legal, economic, sociocultural and technological factors in the organisation’s external environment. The objective is to list all the factors that may have an impact on the organisation and then build up a coherent strategic position in response. You will find that there is overlap and it may not be clear under which category a particular influence should be listed. Some authorities use PESTLE or more categories, to include say legal and ecological factors. This is not important: the categories are there to help you focus on all the different possibilities, not to act as an analytical straitjacket. PEST analysis is appropriate here but be aware that much is based on a wide range of inferences from assumptions surrounding the case. The PEST factors relevant to The Retiring Company Ltd include the following. Political/legal factors EU impact on employment legislation, working hours, human rights, health and safety regulations. This could impact on many areas of employment in The Retiring Company. EU impact on resources: new sources of low-cost labour, increased sourcing opportunities. Taxi services, buses and many areas of care in the UK increasingly employ overseas staff who are freely mobile within the EU. Increasing regulation, eg in relation to ethical sourcing and corporate governance. Legislation on smoking in public places will impact on the workplace: although the residential care unit (for example) is the home of the client, it is the workplace of the Retiring Company staff. Regulations on minimum wage will affect the group. If the 2, line 19 amount is increased, the company’s wage bill will also increase, because at present some cleaning and caring employees are paid only barely above the minimum. This will impact on employment strategy and outsourcing decisions. 19 Profex Publishing Limited 2006 Notes and references Economic factors Exchange rates: an increase in the strength of sterling makes imported goods cheaper, whereas a weakening in sterling makes imports more expensive. Dutch flowers are imported from the Netherlands under EU regulations so the strength of the pound sterling against the Euro is relevant; the Kenya flower trade would be priced locally in Kenya shillings but probably traded in US dollars. Inflation may start to grow again after a reasonably stable period, affecting the purchasing power of potential residents and clients of The Retiring Company. Interest rate changes affect the cost of capital, impacting on purchase, lease and rental costs for The Retiring Company. We have no data on the company’s cost of capital or their borrowing (gearing) position, but they are already asking for increased borrowing which will become more expensive as rates rise. Increases in the general level of disposable income in the UK economy affect the level of interest in private health care and residential support. Flower purchases are also subject to levels of wealth. Socio-cultural factors (including ecological issues) Demographic studies have for some time indicated that the proportion of old people in the UK is increasing, but the absolute number is also rising as confirmed in the UK 2002 census. The Royal Institution of Chartered Surveyors predicts an increase of 2.9 million people aged 65 and over in the UK from 2001 to 2021. The OECD proposes a ‘housing in place’ policy, to allow older people to stay in their own homes for as long as possible, but even so the UK Government predicts a 10% rise in the number of people 75 and over in institutional care by 2021. This will increase demand on businesses such as The Retiring Company, and also attract competition. www.rics.org: RICS European Housing Review 2005 Michael Ball Both public and private sector hospitals see increases in demand for many procedures, arising from better quality provision and higher expectations: this adds to the business demand for the private hospital division. Increased public knowledge, expectations and sophistication in levels of service, quality, and availability of resources in care and health businesses will place additional demands on the Retiring Company. 20 Profex Publishing Limited 2006 Notes and references Changes in family structure and interests have a direct effect on residential care demands: single parent families, smaller family units, and more sophisticated tastes all contribute to changes in demand. Social changes could impact the hospitals group if they were to cater for increased demand for, say, cosmetic plastic surgery or designer birthing resources. Technological factors Growth in internet activity including use by the elderly and those seeking health care services outside of the NHS environment. Enhanced logistics management systems worldwide using mobile phone technology, global positioning systems, and RFID stock identification, coupled with online stock recording, will affect the volume and frequency of deliveries of flowers. Online ordering for flowers and car hire is developing rapidly, in parallel with other ‘luxury’ items such as wine and chocolates. Web information on care, pensions, and insurances make a better-informed market sector who are very knowledgeable and discerning in their social and health needs. Care facilities increasingly incorporate mechanical handling, hoists, lifts, stair-lifts, and enhanced local and national communications. Hospital facilities need to be maintained up-to-date to include digital imaging, X-rays, digital data transmission, and sophisticated MRI scanners. Keyhole surgery reduces the cycle time of many surgical procedures so that beds can be re-used, enhancing the productive capacity and throughput of the hospital wards. You will be able to extend this analysis imaginatively yourself, but in each case consider the impact of technology on the business: it requires professional procurement in the first place, puts heavy demand on funding, and requires subtle planning and operations management. All of these are necessary before potential savings materialise and a return on investment is achieved. 21 Profex Publishing Limited 2006 SECTION 7 Porter’s Five Forces Model Notes and references The five forces model developed by Professor Michael Porter is a tool for analysing the competitive forces within an industry. The five forces are: threats from potential new entrants to the market, threats from substitutes, suppliers’ bargaining power, buyers’ bargaining power (ie customers), and the general degree of competitive rivalry in the industry. The tool allows the strategic planner to examine external forces or threats and then respond: very useful if that is what the examiner asks. In the case of the Retiring Company, the analysis only makes sense at divisional level because of the diversity of the operations. The forces could include the following factors. Threats from potential new entrants: assessment – serious Porter’s ideas refer to the entire market, where we could envisage the rise of new entrepreneurs with venture capital funding, or investing companies looking for growth on the back of rises in commercial property prices. Each division is susceptible to new entrants, as the respective businesses are already very fragmented. With the exception of Hospitals, the skill levels are relatively low, and new entrants will be a real threat. There are factors that might act as barriers to entry into the separate local markets for our Retiring Company operations, but we do not have enough information to make a full assessment. They could include: investment level required to buy convert or build premises licensing requirements from local authorities. Threats from substitutes: assessment – low risk Residential care, health care, and funeral activities are notably conservative activities with little basic change visible over many years. Ownership and style of delivery may change, but there is little to substitute for one-to-one caring practices. 22 Profex Publishing Limited 2006 Notes and references UK Government policy is to promote the development of care in old peoples’ own homes as far as possible, with visiting resources such as meals provision, nursing, physiotherapy and particularly occupational therapy, co-ordinated through the social services department of local authorities. This is designed to curb demand for residential homes and reduce the cost to service users. Because there are strong moves to provide care in peoples’ own Michael Cross, The homes, a predictable change in elderly care is the growth of ‘telecare’ Guardian, 25 Jan 2006 or remote monitoring of people and premises, to check on ambient temperature, leaks, security and other conditions. This extends the effectiveness of wardens by applying information technology. This is one of those threats which is also an opportunity for The Retiring Company: they too can invest in ‘telecare’. Flower provision is another traditional area not easily substituted: development of artificial flowers has not diminished demand for the real thing. Threats from suppliers’ bargaining power: assessment – serious In several cases where the case company has lost control of their 2, line 30 procurement function (notably, laundry, maintenance contractors, agency staff, coffin transport costs, crematorium services, and flower supplies) no service level agreements exist and the suppliers are holding the upper hand. Lack of purchasing management and expertise has added to high cost and poor service. Threats from customers’ bargaining power: assessment – medium to high risk Residents of the Care Homes are complaining about theft, lack of 2, line 37 care, poor meals, uncleanliness, rude staff, and poor facilities. If not resolved, this will have a direct impact on the public sector’s placement of clients and reduce income in the division. Cost challenges and late payments by large insurance companies are 3, line 25 adversely affecting cashflow in the private hospital division. Customers (whether individual residents, clients or corporate bodies) have reasonable choice and will walk away from a shoddy service. Competitive rivalry within the industry sector: assessment – medium risk In each division there is plenty of competition and The Retiring Company does not appear to demonstrate competitive advantage in cost leadership or differentiation. 23 Profex Publishing Limited 2006 Notes and references Overall, there is clear risk to the Retiring Company immediately from all five of the forces in Porter’s model so steps must be taken to create competitive advantage to mitigate these threats. 24 Profex Publishing Limited 2006 SECTION 8 Ansoff’s Matrix Notes and references Ansoff’s matrix is a two-by-two grid which attempts to classify the options available to an organisation. The two axes of the grid refer to Products (Existing and New), and Markets (Existing and New). You can remember this by the acronym PENMEN. The possible strategies resulting from this, in ascending order of riskiness to the firm, are market penetration, market development, product development, and diversification. Markets Existing Existing MEN New Market penetration Market development Product development Diversification Products New PEN If we apply these possibilities to the Retiring Company we need to think carefully not only about the group strategy but also the strategy of each of the divisions in turn. Here we consider the group and some examples of the individual divisions: you could extend the analysis even further. Group/division market penetration: existing products in existing markets In The Retiring Company the separate divisions are largely operating at full capacity, so that further market share can only be achieved by stepping up the effective use of capacity or by acquiring more. Each division will have its own approach to this strategy. We can consider for example the residential care homes: the acquisition of further buildings either from other companies or by commissioning new builds will increase bed capacity in line with demand More capacity could be released in the hospitals by running shorter procedures, but this would have to be in line with quality standards. Note the converse of growth: if capacity or quality cannot be enhanced to meet demand then preserving the status quo is not usually an option as the competitive forces bite and business is lost. 25 Profex Publishing Limited 2006 Notes and references It may therefore be necessary to look at retrenchment, or shrinkage. This leads to divestment policies where it is better to cut the losses, and amputate the limb for the good of the body. An example here might be the hire car division; if it were found that turning it around would not be feasible in the required time, then it should be sold off/shut down. The assets thus liquidated should then provide capital to support the remaining businesses. Group/division market development: existing products in new markets The Retiring Company could extend its activities geographically by looking at new sections of the market including the rest of the UK and Europe. Much work needs to be done at home first, but in future growth plans external markets must not be ignored. Group/division product development: new products in existing markets This involves selling additional items to the company’s existing customer base. The group should undertake a product development audit, examining from a clean sheet just where separate companies could operate to add revenue at low cost, enhancing profits. Funerals, for example could look at financing packages for prepayment of funeral expenses, and there are areas of contact for developing pensions and insurance activities. Car hire could link to events and their hospitality management, chauffeuring clients to and from hospitality suites in a wide range of sporting and social activity, or even developing into holiday hire and travel. Group/division diversification: totally new activities in new markets. It could be argued that the group has already diversified enough, but the emphasis on care/health/death support could also be restrictive. Logical links from transport and property to car parking, baggage handling, public transport, hotels, and travel are just a few examples that could be explored, exploiting the skills already established. 26 Profex Publishing Limited 2006 SECTION 9 Force Field Analysis Notes and references Introduction If your analysis of the case suggests that change is needed within the company, you should investigate how feasible this is likely to be. One tool for doing this is force field analysis. Force field analysis lets us gain a little more insight into the forces for and against change. It splits them into driving forces for change and resisting forces against change. If the forces for change are stronger then change is likely to ensue; if the forces against change are stronger then change is unlikely. The analysis can then be used as a tool to manage the identified changes by actively working on the system to reinforce the favourable forces and diminish the counter forces. This will be important with The Retiring Company where many entrenched ideas will have to be overcome to achieve effective management and continued profitability. A key feature here is that the changes are most necessary at the level of the divisional heads. We should therefore consider carefully where the driving force for change is to come from. Here the external consultant could be instrumental. A conventional method of performing Lewin’s force field analysis is to draw a diagram in which the forces for change are represented by arrows pointing right (the heavier the arrow the stronger the force for change), while forces against change are arrows pointing left. A suggested analysis is given below. We begin by listing the forces, with numbers to facilitate the diagram. Examples of driving forces for change 1 The bank demands action. 2 The group has no coherent strategy. 3 Complaints from customers demanding better services will prompt management action. 4 The divisional heads are not committed to their enterprise. 27 Profex Publishing Limited 2006 Notes and references Examples of forces resisting change 5 Staff do not like change (an over simplification: some change is very beneficial, and staff will support actions to increase job security, for example). 6 Existing managers will feel threatened by changes. 7 Absence of dynamic managers may make change difficult to achieve. 8 Some staff will feel comfortable in their current roles and will resist attempts to change their job content or apparent status. Force field diagram Driving change) forces (for Current state Resisting (against change) forces 1 5 2 6 3 7 4 8 Conclusion (illustration purposes only: you will need to explore more changes) The diagram confirms that there are stronger forces for change than against change. It will make sense for Debbie O’Rourke or the management team to quickly undo the negative forces (5–8) and to exercise strong management in supporting the positive forces (1–4). 28 Profex Publishing Limited 2006 SECTION 10 Further Tools of Strategic Analysis Notes and references In a real world situation, a management consultant with unlimited access to information about the business might use tools of analysis additional to those already employed in this text. In a case study we are hampered by the limits on available information. In addition, even if we could obtain further information, we might find that a particular tool of analysis was of little use to the business in question. In this section we briefly discuss some familiar tools and models for which there is limited information provided in the case. As we have no data on financial performance, for example, we cannot start plotting any of the following lifecycle profiles, but we can exercise some judgement on relative positions. The product lifecycle The product lifecycle (or PLC) distinguishes between a number of stages in the life of a product or service. It can also be applied to the industry lifecycle. At each stage we are interested in the cashflow and profitability generated by the product (or service or industry) against a time base. A balanced portfolio will include products at each stage of the cycle or a business will have in place a sequence of developments to optimise the growth potential and maximise profitability. The Retiring Company has six distinct divisions representing a range of products and you should consider the stage each has reached. Different authorities analyse the stages in different ways, but a common analysis includes an introduction stage, a growth stage, a maturity stage, and a decline stage. The following diagram illustrates this. 29 Profex Publishing Limited 2006 Notes and references The residential care homes are at a mature stage: well-managed, this should be a lengthy stage. The private hospitals have not yet reached that stage of maturity and could still be growing, particularly as demand is high. The car hire division could well be past its sell-by date: maturity has been reached, it is in decline, and losing money. The Boston Consulting Group (BCG) matrix This grid identifies products as being stars, question marks, cash cows or dogs depending on their position in a grid that matches high or low relative market share against high or low relative market growth. We do not have a great deal of quantitative information about the Retiring Company or its local market shares, but since we know that overall UK elderly care/accommodation and private health care activity are still growing, then the company should be operating at the cash cow-to-star level in these areas. Flowers and car hire could be described as question marks, and the BCG analysis invites us to decide which way question marks are going next: stars or dogs? Make sure you apply your own analysis, and beware sweeping assumptions about market share and growth rates. Greiner’s growth model Greiner drew up a picture of an organisation developing from early small scale entrepreneurial roots to a large conglomerate, much as the Ripon Family have done over 40 years. We do not have all the evidence to check the growth pattern, but as a group it is clear the Retiring Company is at a crisis point similar to Stage 3 on the diagram, and some of the divisions may be at different stages themselves. The point is that management must recognise these crises and work through plans and actions to develop the business, or failure will be spectacular. 30 Profex Publishing Limited 2006 Notes and references Consider the principles at stake here: managers must recognise the difficulties of achieving controlled growth and must adjust their response accordingly at each stage of development. The Retiring Company is losing control in finance, procurement, contracting, marketing, and operations and must therefore act to save the business. 31 Profex Publishing Limited 2006 SECTION 11 Strategic Options for The Retiring Company Notes and references Introduction Having used appropriate tools of strategic analysis to identify key issues facing the company, what conclusions can we come to about possible strategic directions for the future? Bear in mind that the examiner is not expecting you to come up with a single ‘correct’ answer: in the case, as in the real world, there is no such thing. What the examiner does expect though is a reasonable evaluation of the issues, coupled with reasoned argument in favour of one or more plausible possibilities, always allowing for realism in the resources that will be needed to implement your recommendations. Remember the timing constraints for the business: a coherent business plan has been demanded by the bank within a period of four weeks. There is no time for a (say) six months period of reflection, market research, and analytical study. Geoffrey Ripon and his family have some serious thinking to do, and they have failed so far to present a unified front. We have suggested that Debbie O’Rourke will be instrumental in the plan, provided the Chairman supports her work through the family strife. 8, line 9 Both the SWOT and PEST analyses demonstrate the diversity of the group in level of maturity, profitability and commercial strength. Perhaps the stronger divisions are the residences and the hospitals groups, so they could form the nucleus of a new organisation with a pared-down head office. The residential care and the car hire operations are the weaker divisions. The driving force from the analysis tools seem to be the need to build on strengths, exploit the synergies and eliminate identified weaknesses In all cases timing is a key issue: it is easy to overlook the amount of time needed to achieve a turnround in a business, or a change of culture, or simply the physical changes implied in building, fitting out and manning physical operations such as a new hospital or a replacement head office. On the other hand, the longer a project drags on the later are the cash (income) flows and the more risky is the outcome. Management must overcome these difficulties! Recall Porter’s generic approach to strategic development: are we planning to develop on a cost basis, or focus, or differentiation? The answers are likely to be different for the six divisions. Some possibilities are examined below. 32 Profex Publishing Limited 2006 Notes and references 1 No change The base option is to continue with the existing operations in much their present form, but to seek a few tactical workarounds to rectify the current liquidity problems. Such an approach as a ‘caretaker-manager’ is what has created the current mess, and cannot be seriously pursued as a professional response. 2 Re-structure the group, building on strengths and eliminating weaknesses This could include a radical cutting back of operations, by eliminating one or more divisions and putting energy, cash and management expertise into the remainder. This should be combined with linking operations to achieve both efficiency and service improvement, employing sound purchasing principles, outsourcing facilities management to overcome building maintenance and fuel cost issues. For example, the car hire group could be sold off or in the worst case abandoned, the cars sold for cash and the staff laid off to generate a little residual cash for The Retiring Company. Another case could be made for selling off the residential care homes to avoid the infrastructure costs and before they become totally unmanageable as staff leave and costs escalate 3 Work out a procurement effectiveness programme for each division and cascade its effect from board level to grass roots. In some case this will be a rescue plan, but in each case it would involve developing and implementing sound purchasing principles. A strategic procurement head would be established with group responsibilities, and the divisions tailored to suit the new emphasis on procurement. This strategy is necessary whatever you decide to do with the divisions, so it is complementary to structure change. The company should install modern purchasing and supply chain management (PSCM) techniques. Detailed shortcomings in the current PSCM arrangements are highlighted in the SWOT analysis. 4 Adopt customer-led marketing strategy This is equally critical on a short timescale and would require the following actions. Establish customer (resident, patient, client etc) needs in a marketing plan for managing retirement activity and confirm their service expectations for service delivery such as costs, maintenance, and cleaning. 33 Profex Publishing Limited 2006 Notes and references 5 Implement external benchmarking. This is because many parts of The Retiring Company have lost sight of the need for excellent customer service and they need to check on their competition and identify best practice. Educate the team in ‘who is my customer?’ so that they can work together to achieve the overall strategy. Eliminate inefficient practices. Partial re-structure within divisions The group could consider selectively restructuring the weak parts of divisions under new divisional heads to build on the positive parts of the SWOT and cross-fertilise the best practice from one division to others. This could be combined with elements of the procurement strategy and the marketing strategy above, using benchmarking and balanced performance measures to ensure the focus stays on the areas to be improved. 6 Flotation of the business Going public with some or all of the group by selling shares would change the structure from private ownership. To be an attractive proposition for sale, however, some of the strategic and tactical improvements would have to be made in the first place. A flotation would allow the injection of additional funds for investment, opening up further options in the development strategy. In each case the examiner will be looking for demonstrably feasible solutions so make sure you work through the options to meet priorities (cash first, then costs, then volume, etc in a logical sequence); include timing, and resource needs in the most practical way. The recruitment of a procurement professional for example could take several months, unless we decide to make Debbie O’Rourke an offer she cannot refuse. 34 Profex Publishing Limited 2006 SECTION 12 Tactical Aspects: A Review of Each Division Notes and references Having examined a number of strategic issues, we now move on to tactical and operational issues as they form a management action hierarchy cascading from the top down. In the examination you may be asked to demonstrate this linking of strategic decisions and tactical implementation. There are many tactical problems facing the company, some of which we identified as weaknesses in the SWOT analysis. These will have occurred to you as you read through the case, and Debbie O’Rourke’s analysis is the starting point. We have classified them under her divisional headings and generated potential actions which the management team needs to consider. You own ideas may be more appropriate, but in each case consider the logic that you employ to arrive at solutions, and when you describe what to do, make sure you consider the how and why and when. The examiner will look for justified and feasible solutions. Priorities must be set. The November 2004 examiner reminded us that ‘few candidates recognised that not all the remedial action could be carried out at once….’ and emphasised the need for time to plan, and time to execute on a short and long-term basis. The residential care homes division Public sector (and charity) clients are inadequately funded, 2, line 10 restricting the revenues available. Steps should be taken to maximise revenues: some authorities pay better than others: the market should be researched and all potential clients compared. The Retiring Company could re-consider its marketing position and services to be offered. The number of private clients is diminishing, so The Retiring 2, line 13 Company should check the growing market and its competitive forces: where are the clients going and why? Care home buildings are old and expensive to maintain. Instead 2, line 15 of conversion costs to meet statutory needs, they should consider selling off some premises and building purpose-built homes. With cost opportunities on fuel efficiency and lower maintenance, a case could be made for a radical physical restructuring. 35 Profex Publishing Limited 2006 Notes and references Staff cannot be recruited at present salary levels. The Retiring 2, line 18 Company should consider each of the above points and look at re-positioning in the market, to cream off some premium rates for better facilities and recruit staff at higher salary levels. They could look at consolidating some homes to achieve adequate staffing. The residential care homes are not buying their consumables 2, line 22 professionally. Negotiated supply contracts with volume catering sources will allow budget levels of expenditure to be achieved. Laundry should be negotiated on a corporate rather than local scale if this will yield savings and better results. In particular the volume impact of linking up with the laundry servicing for the private hospital division could be explored. The supply of fuel should also be negotiated on a national basis alongside the hospitals and residences divisions for economies of scale. Each care home is employing its own maintenance staff, some 2, line 26 retired, and some subcontracted. Their purchasing and contracting techniques are feeble, resulting in inaccurate estimates, undefined work, and escalating invoices. Imposition of purchasing disciplines should be the first priority, and consideration should be given to outsourcing under rigorous contracts with clear service level agreements. An alternative would be to employ flying squads of in-house maintenance staff. Whichever route is selected, the procurement solution should take into account the other premises and maintenance needs in the rest of the group, to achieve economies of scale and effective working. It may be appropriate to look at a comprehensive facilities management contract across several divisions, taking into account the HR issues and TUPE legislation. Stressed mangers are carrying a heavy load against a 2, line 35 background of poor pay, long hours, and lack of management support. A clear motivational HR strategy across the group should be set up to cope with these difficulties. Quality standards have been allowed to slip. We do not know 2, line 37 the time-scale but the range of complaints from residents suggest a widespread problem which will have built up over time. Rigorous quality standards need to be imposed in the area of service to avoid losing clients and revenue. Tony Ripon is frequently away at horse racing meetings, 2, line 40 missing the opportunity to discuss his operation with Debbie O’Rourke. He has ‘considerable gambling debts’ which will need to be funded. 36 Profex Publishing Limited 2006 Notes and references Private hospital division 15 hospitals in urban sites is an impressive business on its own, 3, line 47 but they appear to be ill-managed because of Jennifer Ripon’s lack of commercial skills (despite her commitment to caring). Demand is high for private services as individuals (and even NHS trusts) wish to avoid waiting for treatment in the public sector. However revenues will be subject to the setting of fee levels and the NHS with its professional purchase and supply agency have made progress in setting flat-fee rates for procedures such as cataract operations, hip and knee replacements, hernia operations and other services. Procurement practice is poor, and high levels of bought-in 3, line 16 services are employed (agency doctors, nursing, equipment, cleaning services) with inadequate selection, monitoring or controls on the spend. Food, drugs and consumables are bought by individual hospitals with no regard for scale economies, bulk purchase, call-offs, logistics, storage, or consignment stocks. Local maintenance is also out of control, 3, line 32 and although a central laundry policy and contract has been set up by Jennifer Ripon, it ignores the related laundry activity undertaken for the care homes division. This laundry contract is 3, line 37 also in a mess: quality is low, deliveries are late, quantity disputes exist and Jennifer Ripon is withholding £20,000 against the resolution of some issues. Launder Ltd’s response is unacceptable because staff and traffic problems could apply to any operator: they must manage adequately to meet client needs. The private hospitals division must get a firm control of its purchasing by setting service standards, agreeing delivery schedules, sourcing appropriately, and establishing contracts on its own terms. If Jennifer Ripon is negotiating her own deal, then perhaps she does not have in place the appropriate professional staff and these are critical to her division’s cash position and profitability. Credit control is poor and insurance companies are allowed to 3, line 23 prevaricate and attempt to re-negotiate over payments. The cashflow problems then delay payments to suppliers which will undermine relationships and quality of supply. A tight grip of credit must be taken, with top level negotiation with the principal debtors at the respective insurance companies. 37 Profex Publishing Limited 2006 Notes and references The residences division Relatively speaking the residences division may be less troubled 4, line 29 than the rest of the family operations but there are procurement problems in Billy Ripon’s ebullient nature and his treatment of suppliers, contractors, local government councillors, and officials. Professional and ethical standards in carefully selecting suppliers and contractors, reviewing and monitoring both performance and relationships, and the transparent application of high commercial standards to tendering, planning, purchasing, and contracting will all enhance the commercial position of this already profitable business. The funeral division The marketing position of this type of operation has been summed up as ‘the nearest undertaker gets the business’ which underlines the fragmented nature of funeral company organisation and the localisation we see. The vehicle fleet is life expired which will create a huge capital 5, line 24 purchasing or leasing challenge in the near future. This should be taken into account alongside the car hire division, to see which of these businesses could possibly support the other. The 5, line 36 case states that ‘there is no synergy with her brother Christopher…’ but this is a personal issue: there must be great potential for commercial synergy between the two businesses. Maintenance of the infrastructure is onerous and may demand further capital expenditure. Owing to the specialist nature of 5, line 2 equipment (refrigerators, hearses) there may not be the opportunity to combine resources or contracts with the other divisions but this option must be evaluated. The question of complaints over disbursements is a curious 5, line 33 inclusion here: as they are unavoidable they represent a cost which must be included in the pricing structure. Funeral pricing occurs in an imperfect market where much is hidden and little choice is really available as customers refrain from ‘shopping around’. The resolution of the problem is in the pricing element of the marketing position. Well-trained staff would then have to decide on creating an all-in pricing package or listing disbursements separately, in either case carefully explaining the cost structure and final prices to the clients. If this no-surprises approach is taken then complaints should be substantially reduced. 38 Profex Publishing Limited 2006 Notes and references The floral division This is a serious supply chain problem on its own. The 5, line 43 operating costs are high, with rented properties each locally subject to profiteering landlords. Professional negotiation of longer leases should reduce the long-term costs. The added impact of business rates should cause a re-think on the operation: are the rented premises in the right locations? Could, say, franchised outlets in other businesses including the funeral businesses be more appropriate? Is it time to divest of a business which does not meet return on sales or investment targets? The supply chain is lengthy and erratic, employing overseas 6, line 2ff growers, and a UK logistics company. This requires active management of the supply chain, whether internally by the floral division or by a committed third party logistics company which is carefully controlled. Flowers are specified by the growers and selected from a 6, line 7 catalogue. This takes control from the buyer and the process should be more aligned to customer needs. Some suppliers work through UK agencies: the cost will be 6, line 9 borne by the buyer, so it would make sense to negotiate further up the supply chain and cut out the middle man. Quality levels are low: damage, incorrect quantities, and 6, line 24ff packaging errors all add to the product cost and if they are allowed to reach the customer will reduce confidence and adversely affect sales. Excuses offered to local managers are commercially unacceptable and a professional buyer should be able to replace or improve on these steps in the supply chain. Extra cost appearing in invoices must be eliminated by careful 6, line 14 attention to purchase orders, supply contracts and pricing. Appropriate use and subsequent monitoring of incoterms should regularise these problems. Marketing costs are high suggesting a buyer could assist in 6, line 18 placing advertising on a better cost basis: some basic research will help the group manage its supply chain and hence costs better. Comparison with supermarkets will allow developments in premium services, deliveries, and added value (design and display advice, installations and flower arranging services, for example) with which the supermarkets will not be able to compete. 39 Profex Publishing Limited 2006 Notes and references Business rates are adding to the rental costs: see discussion 6, line 22 above on location. Local delivery services are damaging the flowers and making 6, line 24ff errors. A professional purchasing review of the delivery services should consider alternatives including the in-house option, larger delivery organisations, and even a link to the car hire business. Dismissing customer complaints by reference to the third party deliverers is missing the point of customer service. There is potential here for a really first-class service through management of the supply chain which the floral division must grasp. Mike Ripon has erred in setting up long-term supply contracts 6, line 33 with the logistics operators. These must be re-negotiated and commercial work-arounds found to reduce the stranglehold on the business. The car hire division Christopher Ripon has assembled an ageing fleet of vehicles 6, line 39ff with increasing maintenance costs, and is feeling the added burden of poor maintenance through inadequate procurement and control of garage services. The entire operation is crying out for professional purchasing controls such as the following. Service provision by garages should be controlled by defining standards, establishing contracts, and monitoring the outcomes. Acquisition of vehicles is a specialised activity and in these times of over-capacity in many areas of car production the fleet buyer is in a strong position to achieve low cost investments in cars for both purchase and lease. The secondhand car market is depressed and further deals should be available to the thoughtful professional purchaser. Fuel should be brought under similar professional controls and fleet contracts sought to include the other divisions. Staff turnover increases suggest disenchantment with the 7, line 10 management of the organisation and require intensive management effort to motivate, train, develop, and retain staff. Employee prosecutions for driving offences are a quality issue 7, line 11 demanding training and staff development. Initial checks should be made, however, to ensure the company is not contributing to the problem by poor scheduling of work or allocation of resources against impossible deadlines. 40 Profex Publishing Limited 2006 Notes and references The headquarters administration The headquarters staff and organisation appears bloated, expensive, and inefficient. Many much larger organisations operate group structures with much smaller head office staff numbers. Remarkably, each divisional director is supported by 7, line 35 separate teams for HR, marketing, supplies, operations, finance and administration. No doubt they have evolved over time, claiming special circumstances in each separate division, but this is clearly wasteful duplication when the numbers are so large, at about 20–30 per division. There will be potential for rationalising and combining resources across the separate divisions, but a basic decision about centralisation or decentralisation needs to be made. ‘Each division buys all its goods and services on the terms and 7, line 44 conditions of the suppliers.’ What greater justification do we need for the imposition of professional purchasing? This multimillion pound turnover business needs to control its spend and buy on its own terms, employing a purchasing portfolio model to cover the range of activity: some commodity purchasing, some purchasing through preferred suppliers, and some partnerships for high spend/high strategic importance items (heating fuel could be one). Only a purchasing professional operating at the highest level will be in a position to set up the portfolio model, and direct the divisions to implement significant changes to the way they operate. Many generic HR issues have been neglected by the head office teams who are letting the operations struggle on with poor motivation, stress, low quality, and absent management. As a result, a lack of communication, team spirit and a common purpose are all missing from the divisions. Attention to each of these may be better handled if responsibility is devolved to the divisions and the head office team split up. Marketing and public relations issues (such as the lack of a customer-led market philosophy, allowing customer complaints to escalate) will eventually lead to rapidly deteriorating public relations. 41 Profex Publishing Limited 2006 SECTION 13 A Matrix Approach to Enhancing Performance Notes and references Examination needs As an alternative to the individual shopping-list approach to the tactical problems described above, we should consider how the examiner is likely to pose the questions. A strategic question could embrace the whole operation or could focus on only one or more of the separate divisions, where perhaps synergy could be demonstrated. For example, a question might focus on the car hire and funeral divisions where high quality, reliable, well-maintained personal transport is the linking factor. A tactical question on, say, purchasing techniques could equally be directed at the whole group, implying central control and standards, or could focus on just one division or operation within a division. The special problems of acquiring flowers for sale, for example, are unique to one division, and your answer to a question in this area will necessarily leave out all the other divisions. A tactical question leading to developing joint operations or outsourcing a shared activity may well spread across two or more divisions. Consequently you should be prepared to match the scale of your answer exactly to the examiner’s requirements. There are plenty of examiners’ reports indicating that this is a source of trouble to some candidates, so we emphasise the need for a structured approach linked precisely to the question. We have produced the guidelines below to indicate likely areas of concern in a matrix, and the areas of concern are explored in the following sections of this text. Adopting one or more of your selected strategies will lead to some of the required service improvements, but each needs tactical planning, priorities and timing, allocation of planning and execution resources, and the setting up of performance measures and benchmarks to measure progress. 42 Profex Publishing Limited 2006 Area of concern Care homes division Private hospitals division Residences division Funeral division Floral division Car hire division Group/or HQ Staff Strategy Growth and/or divestment Growth to meet NHS and individual demands; capacity needs Already negotiating 20 new sites, growth Growth, potential synergy, develop financing and related business Supply chain controls Either: divest, cut losses, or Enhanced quality Enhanced quality Decisions on growth/ acquisition/ divestment Identify target market to maximise revenue Close/sell, or merge and exploit synergies Investment planning Retention and growth Close/sell, or merge and exploit synergies Central vs devolved; organisational structure Potential flotation and funding; mergers and acquisitions 2 Quality standards, setting and monitoring Operations Clients complaining Poor quality service Profex Publishing Limited 2006 Premises need upgrading, fire regs, access Modern premises, meeting statutory requirements High standard accommodation, caretaker Function as 120 separate businesses Maintenance poor Developing, under close scrutiny of Billy Maintenance issues, plant and equipment 100% occupation 80 rented shops in UK, often close to hospitals and funeral business. Use of UK logistics operator 400 vehicles, 600 drivers; chauffeur service Old, high mileage cars Questions of replication, inefficiency, need for Chairman’s social calendar/ staff; separate systems, procedures In-house catering, in-house maintenance, transport Area of concern Care homes division Private hospitals division Residences division Funeral division Floral division Car hire division Group/or HQ Staff Purchasing and procurement Local purchases Local purchases Laundry issue Laundry issue Selection of contractors personal, not analytical. Work given to longstanding contractors. Not transparent. Cost of coffin transport needs review; crematoria exercising power Supply difficulties sourcing from Kenya, Holland Irrational purchases, several different sources. Central vs devolved; some supplies at HQ Structure and organisation 50 premises, South, NE, NW England 15 hospitals, UK towns 40 locations, retirement towns 120 funeral parlours, in UK mainly South of England 80 rented shops, UK 30 depots in UK Six separate divisional staffs in one old house Contracting Maintenance ad hoc; verbal estimates, no specs; possible synergy across group Launder Ltd failing to perform, in dispute Trusted contractors but on informal basis and open to criticism for entertainment Contract for coffins, high transport charges. Dispute with Crema Ltd over market position Locked into adverse contracts with logistics Ad hoc servicing, poor maintenance Devolved to divisions Tony, gambler, at races. Difficult to attract staff; staffing too low. Jennifer, hard working Billy, entertaining contractors Sally operating 120 separate businesses, we assume local and professional controls apply. Mike, nice, but not commercial High staff turnover, prosecutions, complaints Supply chain management 2 HR Profex Publishing Limited 2006 Most work subcontracted No data on flexibility between branches, but staff turnover high 44 Locked out of solus deals at airports 80-yr old Chairman Breakdown in communications, little interaction Area of concern Care homes division Private hospitals division Residences division Funeral division Floral division Car hire division Management Leaving in droves High medical skill, low commercial Billy very active, negotiating, planning, persuading Sally running separate businesses, in effect. Mike, nice, weak, and not commercial Christopher Ripon vague, but likes vehicles. Finance Heavy investment needed: infrastructure; low wages deterring recruitment; high costs at all levels. High staff (agency and medical) costs High profits Withholding invoices High rental costs for premises; profit threatened by high purchase costs, marketing, and fierce competition. Historical and current lossmaker. Client funding capped High turnover, costs, and disbursements, but cash management suffering delayed payments Only complaints over costing, apparently. We assume professional standards maintained in 120 different ways. Customer complaints on most aspects of supply. Poor: customer complaints, some arising from poor systems, maintenance. Deferred payments Cash crisis New sites to pay back in 7 years High promotion costs Fuel costs 2 Quality Poor at client interface: complaints Disputes over laundry High perceived quality of accommodation Profex Publishing Limited 2006 45 Ad hoc capital purchases; high fuel cost ahead of inflation Group/or HQ Staff Massive overhead against operating divisions. Need business plan: NOW! All divisions except residences struggling with no clear drive from the top Absence of TQM SECTION 14 Procurement Systems and Processes Notes and references The group has evolved under its six divisional heads in their own personal styles and the divisions seem to ignore each other’s activities, reflecting the relationships between the members of the Ripon family. Procurement systems are haphazard and the separate divisions have barely asserted their purchasing rights, allowing suppliers and contractors tremendous freedom to rip them off. The key transgressions of sound purchasing principles appear to be as follows. No obvious procurement function at senior level in the company; otherwise the Ripons and staff would not be at liberty to make purchases and enter agreements without professional support. No consideration of economies of scale or of mutual working or support between divisions when making purchases or placing contracts Delaying payments to suppliers. It is not their fault. Unethical behaviour as Billy Ripon is able to treat clients to 4, line 27 hospitality, sports, and weekend trips Tendering and competitive quotations are not immediately obvious Purchases are repeatedly undertaken on sellers’ terms and 7, line 44 conditions when the group should be setting its own purchasing terms. Contract management is ineffective from vendor appraisal and selection, right through to performance, standards, monitoring and conclusion. 3, line 27 There are several indications in the case of poor contracting practice in dealings with suppliers. There is no guarantee of good price, service, or delivery on a long-term basis. There seems to be no effort to insist that quality standards are adhered to, even when such standards have apparently been embodied in the contractual agreements. 46 Profex Publishing Limited 2006 Notes and references No use is made of framework agreements and service level agreements. There does not appear to be any application of the company’s 7, line 44 own terms and conditions of trade, so goods and services are bought on the suppliers’ terms and conditions of contract. In the absence of dedicated purchasing expertise it will be difficult to address these issues. However, a number of specific improvements can be suggested. The need for appropriate specifications is very apparent. Specifications, when used, should be more comprehensive than the current agreements. They should cover aspects such as quality, condition, delivery etc in addition to price. The company could draw up its own standard terms and conditions of purchase. By insisting that such terms apply to all purchases they eliminate the risk of contracting on suppliers’ terms. Such terms and conditions should be included in all purchase orders, and no purchase should be made until a purchase order has been completed and authorised. Only staff with the relevant seniority and expertise should be allowed to bind the company in contract. What to do? As indicated above, the group lacks purchasing expertise. They have small teams at head office handling supplies. Our strategic analysis suggests that a purchasing professional is required immediately. Their responsibilities will then include the introduction of formal disciplines in the areas of sourcing, supplier evaluation and selection, supplier appraisal and management, contract management, and purchasing administration. Basic purchasing techniques such as framework agreements and service level agreements are not understood in the company and its divisions. The appointment of such a professional could be on a consultancy basis (it may be that the cashflows and profitability in the company will easily cover the expenditure, and it will generate a substantial return for the business). In this case, the responsibilities would not only cover the immediate operating issues but would allow careful analysis of the outsourcing options discussed elsewhere. Acquiring this individual is a major procurement challenge itself, demanding sound purchasing principles. Debbie O’Rourke’s consultancy will be able to advise on recruitment and selection of the purchasing executive. 47 Profex Publishing Limited 2006 Notes and references Here is a checklist of actions that the new head of procurement might consider. He or she controls all common procurement items within the group (as well as advising on local purchases). Common items include such things as IT equipment, vehicles, maintenance, cleaning and laundering, catering, consumables Raise the quality levels and capabilities of purchasing staff Set standards and KPIs to assist with corporate objectives Outsourcing decisions (eg catering, cleaning, security, facilities management) Reduce costs Establish a procurement strategy Establish supplier relations based on rational processes, not on ‘old friends’ network, perhaps using Kraljic’s matrix Recruit and manage a purchasing team, all of whom will be CIPS qualified. Director to design a structure of the team Establish policies and procedures Establish ethical practices and CSR framework Establish remuneration policy Insist on use of own terms and conditions Establish system of supplier appraisal Extent of centralisation? Perhaps allow local autonomy up to a certain financial threshold Agreement with a national garage chain to sort out vehicle maintenance. Or just lease the fleet instead of buying it, then it’s the lessor’s problem The need for appropriate specifications is very apparent. Specifications, when used, should be more comprehensive than the current agreements. They should cover aspects such as quality, condition, delivery etc in addition to price. The company could draw up its own standard terms and conditions of purchase. By insisting that such terms apply to all purchases they eliminate the risk of contracting on suppliers’ terms. Such terms and conditions should be included in all purchase orders, and no purchase should be made until a purchase order has been completed and authorised. Only staff with the relevant seniority and expertise should be allowed to bind the company in contract. 48 Profex Publishing Limited 2006 Notes and references Supplier sourcing: how do we find a regional/national company to provide our maintenance requirement? How will we measure their performance? 49 Profex Publishing Limited 2006 SECTION 15 Management and Human Resource Issues Notes and references As you develop the SWOT analysis it becomes very clear that the divisional heads of the company are failing to exercise satisfactory management and organisational control. Six operational areas and the head office are functionally split and working in their own domains. The difficulties in this area are linked to the personalities of the divisional heads but unfortunately we have no further information on the management structures or personalities which make up the remainder – the entire organisation. Whoever we appoint to take charge must grasp this out-of-control management situation and achieve major improvements. Pressure is already on from the bank and business commonsense demands improvements. Debbie O’Rourke may have financial and supply chain management expertise, and she has demonstrated her analytical expertise to a certain extent, but we know nothing of her management skills in relation to driving through a programme of change. Any answers linked to management, organisational, or human resource issues must be practically based to take into account timing, training, and development of the individuals and teams concerned, as covered in your Foundation Stage syllabus. Whichever route is selected, positive gains could be made by outsourcing some or all of the operational activity provided this is managed in a professional way, through careful appraisal and selection of contractors, setting of service agreements, performance levels and measures, and close monitoring of performance. Many companies of all sizes and capabilities offer maintenance and cleaning resources. If outsourcing is selected then the usual procurement and employment guidelines must be followed, including reference to TUPE regulations for any displaced staff. In case of a question on outsourcing, by all means make brief reference to the general principles underlying this kind of decision (which you will find outlined in your Profex study texts). But don’t get carried away with the theoretical general principles: the examiner will be more interested in their direct application to the case of The Retiring Company. 50 Profex Publishing Limited 2006 Notes and references Facilities management is a prime topic for outsourcing, provided the basic procurement ground rules are followed. You should read carefully Maureen Moody’s article in Supply Management, 8 September 2005, and consider how the facilities could be managed by a third party on behalf of The Retiring Company. This would allow the local management time to focus on their caring activities. The case study gives no explanation of the management teams or structures in each Division, except to say that the top-level functions at Company headquarters are replicated for each director in recruitment, marketing, supplies, operations, finance, and administration. We know that a small team liaises with Payplus UK Ltd for payroll purposes. The structure of the top management team is shown on the next page. 51 Profex Publishing Limited 2006 Structure of top management team 52 Profex Publishing Limited 2006 52 Profex Publishing Limited 2006 SECTION 16 Issues Relating to Quality Notes and references In all divisions except the residences customer complaints have surfaced, and the response in the group is unhelpful to the customers. It is very evident there is no sense of customer service. Consider the current evidence of quality issues. Residential care clients complaining of theft, lack of care, poor 2, line 37 catering, uncleanliness, rude staff, and broken-down equipment Hospitals struggling with poor laundry service, including poor 3, line 37 cleaning, late delivery, missing or unbalanced quantities Next-of-kin have disputed unexpected charges apparently 5, line 33 added to funeral arrangement costs Floral customer complaints are increasing: damaged/wilting 6, line 24 flowers, poor packaging, delivered to the wrong address, or bearing the wrong greeting. Car hire is suffering from increased breakdowns, poor servicing, 7, line 2ff driver prosecutions, and customer complaints about rudeness, lateness, dirty vehicles, and overcharging. There is no evidence of a quality management system (QMS) and The Retiring Company must implement some form of system immediately to handle the complaints, initially, then set up management and staff with inspiration, motivation, and training with procedures so that the errors and omissions should not recur. Adopting a total quality management approach is attractive: it would take time, training, and management expertise. It would, however, ensure that all features of the service offered are appraised in detail and all staff would contribute to meeting and exceeding the customers’ expectations. At present, motivation is low and stress is high. While divisional heads and managers are away from their jobs then quality expectations will never be met as quality does not seem to matter. The exercise of strong leadership and coaching in the areas of customer/client care, maintenance, and management will inspire the teams to work far better than in the present regime. As part of a TQM approach, it is imperative that all staff adopt the new approach and benefit from the detailed training required. To jump-start the improvement, however, things may have already gone so far that the only hope is to outsource some or all of the facilities management, and thus buy-in the expertise which is missing. 53 Profex Publishing Limited 2006 SECTION 17 Legal Issues: An Overview Notes and references The CIPS case study invariably includes issues drawing on your studies of the Legal Aspects syllabus. Since these tend to be somewhat technical in nature you may feel worried about your ability to deal effectively with them. Here are some thoughts that may cheer you up There are not many legal issues in the present case study. On past experience, there is likely to be just one question on legal aspects, so the problem is at least confined to 25% of the paper. It would be highly controversial, and rather unlikely, for the examiner to set two questions on these areas. You are training to be a purchasing specialist, not a lawyer. The examiner is not expecting an exhaustive discussion of obscure legal points. He is expecting an informed awareness of the important issues. As long as you are able to set these out in reasonable detail you do not need to arrive at the ‘right’ conclusion to score good marks, or to spot every obscure technical point. In fact there rarely or never is a ‘right’ answer. Even a trained lawyer, with full access to all possible information, could not say definitively that any particular conclusion is indisputably right. That is why legal disputes go to court – to be debated, and eventually resolved by a judge. Very often our analysis will necessarily be incomplete because we do not have full information. Finally, remember that the strict legal position is not always the most important consideration, even if the issue appears to be a matter of law. It may be more important to devise a sensible and pragmatic business approach than to insist on a strict legal position. Continuity of business and sound commercial relationships could be much more appropriate than launching into expensive litigation. This may well be the situation for The Retiring Company in the present case. In the next section we will look at each of the legal issues in turn. 54 Profex Publishing Limited 2006 SECTION 18 Legal Issues: More Detail Notes and references Residents’ access to premises All new builds are subject to the terms of the Disability 2, line 15 Discrimination Act (DDA) 1995 to ensure that people with disabilities can have equal access to public premises. Planners would also be interested when conversion work is undertaken on old premises, and it would be good practice to review all access. It applies not just to entrances, of course, but to other public areas such as toilets and washing facilities. Bear in mind this is not just wheelchair access, but covers other disabilities such as partial sight (legibility of signs) or hearing. The new terms of the DDA 2005 extend the provision to transport vehicles and rented property which will impact on The Retiring Company. Residents’ complaints over service The Retiring Company has residents who are complaining about the 2, line 37ff level of service. Our quality approach needs to eliminate these problems at source, and set up systems to delight the customer – but this takes time. It may be that some residents are sufficiently unhappy to enter into litigation. Care, catering, and cleanliness may be covered in the contract they have with the Ripon family through the Residential Care Homes division. If not, then Section 13 of The Supply Of Goods And Services Act 1982 (SOGASA 1982) may apply. This states that where work is carried out or service provided, it must be completed with reasonable care and skill. Those carrying out that service must show the level of skill appropriate to a person in that profession. Therefore there may be a breach if the reasonable level has not been met. The remedy in law would be damages to cover the losses or 3, line 40ff inconvenience, but if the complaints are just whinges and the level of care is reasonable then there will be no action. We may be more concerned with good customer care here, rather than any legal process. Retiring Company complaints over laundry Where the company has been receiving sub-standard service then SOGASA 1982 could apply. Bear in mind that if no time is stated in the contract, then Section 14 applies. This states that if no completion date is stated in the contract then it is implied that the supplier must complete the work within a reasonable period of time. 55 Profex Publishing Limited 2006 Notes and references What is reasonable will depend on the nature of the contract. The terms of the contract must be considered to evaluate whether they cover the situations outlined. If so there may be a breach of contract. The court may also consider whether the terms of the contract that have been breached are conditions, warranties or innominate terms. If they are conditions, then non-compliance with these will lead to a fundamental breach of the contract and it may be reasonable for Jennifer to withhold the £20,000. If they are only 3, line 42 warranties then it may be that breach will only lead to compensation via damages rather than the contract being void. We do not know if there has been any discussion between the parties or any sort of alternative dispute resolution through mediation or arbitration. If not then simply to withhold payment and breach the contract may attract criticism from the court if legal action were taken. Crema Ltd abusing market power? Sally Ripon has doubts over the position of Crema Ltd in the market 5, line 30 place. Potential competition law issues apply here: national law is covered by the Competition Act 1998. Chapter 2 prohibitions cover the abuse of monopolistic positions. This is the abuse of a dominant position in the market, which may affect trade in the UK. Dominance is where a business, trade or organisation can act independently of others and have an appreciable effect on the markets, for example by directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions. If Sally believes that this is the case and such agreements are not regulated by other legislation then it can be reported to the Director General of Fair Trading (DGFT) who has the power to investigate suspected infringements. The DGFT has the power to request documents and can search premises with or without warrant. If an organisation is acting in contravention of the law then the penalty is up to 10% of their turnover in the UK. The DGFT investigates monopolies and can refer such investigation to the Competition Commission, which also hears appeals against decisions from the DGFT. If a restrictive agreement appears to be against the public interest, the DGFT may apply for a ruling to the Restrictive Practices Court which can prohibit the agreement. The burden of proof (on balance of probabilities) is on the parties concerned to show that it is not against the public interest. 56 Profex Publishing Limited 2006 Notes and references Damaged and wilting flowers The Sale of Goods Act 1979 (implied terms of a contract, Section 13) implies that where goods are sold by description, those delivered should actually match that description. Section 14 implies that the goods will be of satisfactory and merchantable quality and fit for purpose. These terms cannot be excluded by express terms in the business contract. Therefore the company may be liable for the sub- 6, line 24 standard flowers it is delivering. Garages providing poor levels of maintenance 7, line 3 See details of SOGASA 1982 above. Solus deals with airport operators A ‘solus’ agreement is where one party agrees to restrict themselves 7, line 14 exclusively to buying and selling the other party’s product for a given period. An example is petrol deals between petrol companies and garages where the garage proprietor agrees to sell only petrol from one particular company. The petrol companies have a legitimate interest to protect, in that they need secure outlets for their petrol, but the restraint obtained in protection of that interest must be reasonable. The duration of the agreement is the usual problem here. The car hire division may not be able to do anything about this. If the terms are not unfair (eg through abuse of bargaining power) then they are not in a position to object. Incoterms and conditions for international flower deliveries Incoterms are set agreements which facilitate more effective understandable international trade. Ex works and DDP are two of the 13 distinct Incoterms 2000. The two quoted here are at opposite ends of the spectrum regarding the duty of suppliers and buyers. Ex works terms place the least burden on the supplier and therefore 6, line 3 the most on the buyer. The obligation on the supplier is only up to the gates of his premises. All the supplier has to ensure is that the goods are at the warehouse gates by a set time. The buyer must arrange and pay for carriage and insurance of the goods. It is usual for the buyer therefore, to have an agent in the country of origin to arrange such matters. 57 Profex Publishing Limited 2006 Notes and references Delivered duty paid (DDP) – this has maximum burden on the seller 6, line 5 and therefore minimum burden on the buyer. The seller is obliged to deliver the goods to a specified place in the country of importation with the relevant documentation (eg import licence, warehouse warrant, document of transport, commercial invoice and delivery order). The seller bears all the costs and risks including any taxes and importation duties. As there is a problem with large amounts of the flowers being not up to standard, it may be that such issues can be resolved with reference to the bill of lading. The bill of lading is a document signed by the ship owner or agent of the ship owner which states that certain goods have been shipped on a particular ship or have been received for shipment. This document sets out the terms on which goods have been received or delivered by the ship owner and is signed. Not only is the bill of lading a document of title, it is also a receipt for the goods and also evidence of the terms of contract of carriage. The bill of lading is the document that is passed as ownership passes down the supply chain. It therefore also offers proof of the condition of the goods to ascertain whose responsibility it is for sub-standard goods and therefore liability to pay compensation. As the bill of lading provides evidence of identity, quantity and condition of the goods, if the bill of lading does not identify any defects on receipt of the goods then this is good evidence that defects arose in carriage and are therefore the responsibility of the carrier. 58 Profex Publishing Limited 2006 SECTION 19 The Financial Situation of The Retiring Company Notes and references We would normally analyse the financial position of the case company, but this case provides no significant numerical and factual data on the financial status or performance of The Retiring Company. We have already commented on the strategic and operational impact of the many clues in the case, but should a question arise then the main references are as follows. Freeze on borrowing until the business plan is produced 8, line 8 Heavy investment needed in the residential care homes to maintain old premises and meet statutory requirements for disabled access, escape, and fire precautions 2, line 15 Adverse financial ratios – we are not told which, but they are 1, line 26 usually linked with liquidity and efficiency Cashflow problems, demanding greater borrowing 1, line 29 Staff recruitment hampered by low wages 2, line 18 Fuel costs escalating 2, line 25 Agency staff cost more than employees in the hospital division 3, line 18 Billy Ripon is about to commit to huge capital investment to purchase 20 sites with a payback period of seven years. The bank may take a different view 4, line 20 Payments for funerals division can take up to two years when probate is cleared 5, line 28 Floral imports subject to inaccurate invoices 6, line 14 Short-term leases for floral premises subject to escalation on renewal 5, line 43 The car fleet is losing money steadily due to high costs including depreciation 7, line 26 Head office is running up high overheads and not achieving sound management in the group. 59 Profex Publishing Limited 2006 Notes and references All in all, the Retiring Company has its hands full: solving the finance on its own would be a serious issue, but there is a whole range of strategic, operational, and procurement issues to be resolved too. 60 Profex Publishing Limited 2006