P3 – by Dr. Parmindar Singh These slides are meant for students taking the P3 subject for ACCA. These slides are not meant for the purpose of selling, editing and anything else whatsoever without the permission of Dr. Parmindar Singh. The author also does not allow these slides to be used by other lecturers, students and any other agents for the purpose of lecturing, tutoring and any other forms of delivery without the author’s consent.
Transcript
P3 – by Dr. Parmindar Singh
These slides are meant for students taking the P3 subject for ACCA.
These slides are not meant for the purpose of selling, editing and anything else whatsoever without the permission of Dr. Parmindar Singh.
The author also does not allow these slides to be used by other lecturers, students and any other agents for the purpose of lecturing, tutoring and any other forms of delivery without the author’s consent.
Products – BCG, PLC, GE Strategic options – what basis, direction, how; TOWS analysis
Culture – JSW’s Cultural Web Evaluate strategies – FAS
Process – strategic importance – Harmon Organization configuration – Mintzberg
Strategic change, elements of change, types of change – Balogun
and Hope Hailey’s ARER
Strategic change, elements of change, types of change – Balogun
and Hope Hailey’s ARER
Contextual factors/features – Balogun and Hope Hailey’s 8
factors/features
Change – Lewin’s (Force-field, 3-step, French and Bell’s
Organizational’s ‘Iceberg’
Financial performance review
Liquidity ratios
Current ratio = current assets/current liability
Quick ratio/acid test ratio = (total current assets – stock)/total current
liability
Profitability ratios
Gross profit margin = gross profit/sales * 100
Net profit margin = net profit/sales * 100
ROCE = [Net profit/(Shareholders’ funds + Long term loans) – used
by previous examiner] PBIT/Capital employed (Total assets – current
liabilities)
Return on equity = net profit/equity * 100
Return on net assets (RONA) = net profit /capital employed * 100
Return on sales/operating profit margin = operating profit/sales * 100
Financial performance review
Efficiency ratios
Stock turnover ratio (inventory days) = average stock/cost of sales * 365
Asset turnover ratio = sales/total assets
Fixed asset turnover ratio = sales/fixed assets
Receivables collection period = receivables/sales * 365
Payables payment period = payables/cost of sales * 365
Gearing ratio
Gearing ratio = debt/equity or debt/(debt + equity)
Financial performance review
Investor ratios
Interest cover = profit before interest and taxes/interest payment (or
finance costs)
EPS = profit after tax/number of ordinary shares
P/E ratio = market price per share/EPS
Dividend cover = EPS/dividend per share
Extras:
Net assets = total assets – total liability
Working capital = current assets – current liability
Working capital turnover ratio = sales/working capital
Remember
Use the 3W’s – what, where, and why
Put financial information in tabular form
Show formulas
Example – December 2011
Figure 1: Selected information for GET in 2010 Extract from the statement of financial position: All financial figures in $m ASSETS Non-current assets $m Property, plant, equipment 2,175 Intangible assets 100
–––––– Total 2,275
Current assets Inventories 275 Trade receivables 10 Cash and cash equivalents 300
–––––– Total 585
–––––– Total assets 2,860
–––––– EQUITY AND LIABILITIES Share capital 550 Retained earnings 110
–––––– Total equity 660 Non-current liabilities Long-term borrowings 2,000
–––––– Total non-current liabilities 2,000 Current liabilities Trade and other payables 199 Current tax payable 1
–––––– Total current liabilities 200 Total liabilities 2,200
–––––– Total equity and liabilities 2,860
––––––
Extract from the statement of comprehensive income All financial figures in $m Revenue 320 Cost of sales (210) Gross profit 110 Administrative expenses (40) Profit before tax and interest 70 Finance cost (60) Profit before tax 10 Tax expense (1) Profit for the year 9
Extract from the annual report Number of employees 3,010 Number of rail kilometres 920
Figure 2: Financial information for the Rudos rail industry as a whole Measure National rail industry average ROCE 4·50% Operating profit margin 10·00% Gross profit margin 22·00% Current ratio 2·1 Acid test ratio 1·2 Gearing ratio 48% Revenue/employee per year $85,000 Number of employees per rail kilometre 4·1
Question requirements
(a) Using appropriate models and frameworks, analyse GET’s current strategic position from both an internal and external perspective. (20 marks)
Partial answer
The financial analysis for GET is shown below. For the sake of consistency, the ratios used below are
Current ratio (current assets/current liability) 2.9
Acid test ratio ((current assets – stock)/current liability) 1.6
Gearing ratio (debt/(equity + debt)) * 100 75%
Revenue/employee per year $106,312
Number of employees per rail km 3.3
Compared to the industry average, GET’s ROCE is lesser by 1.87 percentage points. This can be due
to a higher amount of capital employed. Ways must be contemplated on how to reduce its capital
employed without affecting its operating profits. On the upside, GET’s operating profit margin is more
than double industry average. The gross profit margin for industry average is only slightly more than
half of GET’s. As such, GET’s profitability ratio, in general, is much better than industry average.
In terms of liquidity, GET is much more solvent than its competitors. Its current ratio is more than
industry average. Likewise, for its acid test ratio.
Its gearing ratio is 27 percent points more than industry average. However, its interest cover is 1.17
and therefore GET is still able to service its debt. However, GET must be careful so as not to increase
its financial risk.
GET’s revenue per employee is much more than industry average by $21,312. This indicates that
employees of GET can be more efficient and productive as compared to its competitors.
Finally, its number of employees per rail kilometre is lesser indicating more efficiency as fewer
employees are needed to man each kilometre of rail line.
Hence, its profitability ratio, its current ratio and its efficiency ratio are much better than its competitors
but due regard must be given to ensure its gearing ratio does not rise unnecessarily.
June 2009 – Q. 3(a)
Figure 1: RiteSoftware Accounts
Extract from the statement of financial position $000 Assets Non-current assets 2008 2007 Property, plant and equipment 30 25 Goodwill 215 133 ––––– ––––– 245 158 Current assets Inventories 3 2 Trade receivables 205 185 ––––– ––––– 208 187 ––––– ––––– Total assets 453 345 ––––– ––––– Liabilities Current liabilities Trade payables 257 178 Current tax payable 1 2 Bank overdraft 10 25 ––––– ––––– 268 205 Non-current liabilities Long-term borrowings 80 35 ––––– ––––– Total liabilities 348 240 ––––– ––––– Equity Share capital 105 105 ––––– ––––– Total equity and liabilities 453 345
Extract from the statement of comprehensive income Revenue 2,650 2,350 Cost of sales (2,600) (2,300) ––––– ––––– Gross profit 50 50 ––––– ––––– Other costs (30) (20) Finance costs (10) (4) ––––– ––––– Profit before tax 10 26 Income tax expense (1) (2) ––––– ––––– Profit for the year 9 24 Extract from the annual report Number of staff 90 70
Required: (a) W&P concluded in their report ‘that there were clear signs that the company (RiteSoftware) was in difficulty and this should have led to further investigation’. Assess, using the financial information available, the validity of W&P’s conclusion. (13 marks)
2008 2007 Gross profit margin 1.89% 2.13% Net profit margin 0.34% 1.02% Current ratio 0.78 0.91 Quick ratio 0.76 0.90 Return on sales 0.75% 1.28% ROE 8.57% 22.86% RONA 4.86% 17.14% Interest cover 2 7.5 ROCE 10.81% 21.43% Gearing ratio 0.76 0.33 Trade receivables days 28 29 Trade payables days 36 28 Inventory days/stock turnover ratio 0.42 0.32 Fixed asset turnover ratio 10.8 14.9 Asset turnover ratio 5.85 6.81 Sales per employee $29.4 $33.6
From the figures above, RiteSoftware’s gross profit margin has taken a dip due to a 13% increase in the cost of sales. In addition, the net profit margin has decreased by three times due to a more than a double increase in interest payments as well as an increase in other expenses. RiteSoftware’s current ratio has also decreased in 2008 reflecting a decrease in working capital. Furthermore, its quick ratio has also taken a downfall indicating a decrease in liquidity. Its return on sales has also decreased by nearly half due to a decline in operating profits. Similarly, RiteSoftware’s return on equity has also decreased around three times while its return on net assets has declined by four times due to its decreasing net profits. RiteSoftware’s interest cover has dramatically fallen from 7.5 to 2. This indicates that RiteSoftware is starting to feel the pinch of paying off its interests. This has occurred due to borrowings that had doubled since 2007. Its ROCE has also similarly taken a downward spiral as not much returns are being generated from its capital employed. RiteSoftware’s gearing had also increased by 43% points due to borrowings.
RiteSoftware’s trade receivables days remain with the normal range of 30 days while it is taking a longer time to settle its payables. These payables may have been settled by using its overdraft facility since overdraft facility has fallen by more than 50%. Its inventory days had also increased. Its fixed asset and asset turnover ratio have both decreased. However, this figure was calculated with goodwill being incorporated. Excluding goodwill, its fixed asset turnover ratio had changed from 94 to 88. Finally, its sales per employee had decreased from $33600 to $29400. Based from the financial information above, there are signs that RiteSoftware can be experiencing some difficulty. Its profitability, efficiency, and liquidity have all decreased while its gearing has increased. This warrants greater investigation and hence W&P’s conclusion is valid.
Break-even point
Total sales revenue
Costs ($)
Total costs
Break-even point
F
Volume of activity (units of output)
Margin of safety
Is the extent to which the planned volume of output or sales lies above the BEP, i.e. to make a profit. Margin of safety = expected volume of output or sales – BEP
Example
Motormusic Ltd makes a standard model of car radio, which it sells to car manufacturers for
$60 each. Next year, the business plans to make and sell 20,000 radios. The business’ costs
are as follows:
Manufacturing
Variable materials $20 per radio
Variable labor $14 per radio
Other variable costs $12 per radio
Fixed costs $80,000 per year
Administration and selling
Variable $3 per radio
Fixed $60,000 per year
Required: (a) Calculate the break-even point for next year,
expressed both in quantity of radios and sales value.
(b) Calculate the margin of safety for next year, expressed both in quantity of radios and sales value.
Contribution per unit = sales revenue per unit (selling price per unit) – variable costs per unit
Contribution – fixed costs = net profit
Accepting or rejecting special contracts – consider only the effect on contribution; if there is additional contribution, then the contract should be accepted
Determining the most efficient use of scarce resources – the limiting factor is most efficiently used by maximizing its contribution per unit
Make-or-buy decision – take the action that leads to the highest total contributions
Closing or continuing decisions – should be assessed by net effect on total contributions
Contribution application
Accept or reject contract
Cottage Industries make baskets. The fixed costs of operating is $500. Each basket requires materials that costs $2. Each basket takes an hour to make and pays the basket makers $10 per hour. There is spare capacity. An overseas retail chain has offered the business an order for 300 baskets at a price of $13 each. Should the business accept the order?
Answer Additional revenue per unit = $13 Variable cost per unit = $12 Contribution per unit = $1 Since there is additional contribution, the contract should be accepted, provided all other factors are the same. (However, other factors may also need to be taken into consideration)
Determining the most efficient use of scarce resources
A business makes three products, the details of which are as follows:
Product (code name) B14 B17 B22
Selling price per unit ($) 25 20 23
Variable cost per unit ($) 10 8 12
Weekly demand (units) 25 20 30
Machine time per unit (hours) 4 3 4
Fixed costs are not affected by the choice of the product because all three products use the
same machine. Machine time is limited to 148 hours a week. Which combination of products
should be manufactured if the business is to produce the highest profit?
Product (code name) B14 B17 B22
Contribution per unit 15 12 11
Contribution per machine hour $3.75 $4 $2.75
Priority 2nd
1st 3
rd
Since there is only 148 hours, produce
20 units of product B17 ----------- 60 hours
22 units of product B14 ---------- 88 hours
-----------
148 hours
------------
This leaves unsatisfied the market demand for a further 3 units of product B14 and 30 units of
product B22.
Additional question
What steps could be contemplated that could lead to a higher level of contribution for the
business?
Answer
Consider obtaining additional machine time either through sub-contracting, buying a new
machine or both. A careful cost-benefit analysis has to be done. If sub-contracting, should
not exceed the contribution for B14 and B22.
Redesign the products that require less time per unit on the machine
Re-engineer the production process
Question – June 2011
Outsourcing To address the first internal weakness, Universal Motors is considering outsourcing the manufacture of the EcoLite model to an overseas company. Information relevant to this decision is presented in Figure 2. The potential manufacturer has quoted a production price to Universal Motors of $3,500 per car. The manufacturing plant is approximately 300 miles from Erewhon, which includes crossing the 40 mile wide Gulf of Berang. There are 112 production hours available in total per week at the Lags Lane site (seven days per week, two eight hour shifts) which can be used for a combination of the three product lines. The weekly overhead costs are $35,000 per week at Lags Lane. If the production of the EcoLite model is outsourced,it is forecast that overhead costs will fall by $1,250 per week. The transportation cost is estimated at $250 for each outsourced EcoLite produced.
Eco EcoPlus EcoLite Selling price per car ($) 9,999 12,999 6,999 Variable cost per car ($) 7,000 10,000 4,500 Weekly demand (cars) 6 5 6 Production time per car (hrs) 9 10 8
(b) Universal Motors is considering outsourcing the EcoLite model to an overseas manufacturer, whilst retaining in-house production of the Eco and EcoPlus models. Required: Evaluate the financial and non-financial case for and against the outsourcing option. (15 marks)
Financial case for outsourcing option (i) Overheads By outsourcing the Ecolite model, the overhead costs will decrease by $1,250 to become $33.750. (ii) Variable costs The variable cost of Ecolite per car is $4,500. If outsourced, the production price is only $3,500 and hence there is a savings of $1,000 per car. If transportation is taken into consideration, the savings per car will be $750 per car. (iii) Time saved By outsourcing, there will be 48 hours saved per week. Besides than reducing overhead costs, this time savings can also bring about savings in terms of inventory management.
Financial case against outsourcing option (i) Contribution
Eco EcoPlus EcoLite Selling price per car ($) 9,999 12,999 6,999 Variable cost per car ($) 7,000 10,000 4,500 Contribution per car ($) 2,999 2,999 2,499 Production time per car (hrs) 9 10 8 Contribution per hour ($) 333 300 312 Weekly demand (cars) 6 5 6 Priority 1
st 3
rd 2
nd
Based on the above, it would not be appropriate to outsource Ecolite if EcoCar was to maximise its contribution. EcoCar should produce: 6 Eco cars using 54 hours, 6 EcoLite using 48 hours and 1 EcoPlus using the remaining 10 hours With the above combination, all the 112 hours are used and the remaining 4 EcoPlus cars can be outsourced. If the above combination was produced at the Lags Lane site, the profits would be: [(6 × 2999) + (6 × 2499) + (1 × 2999)] – 35,000 = $987 If EcoLite was outsourced, then: [(6 × 2999) + (5 × 2999)] – 33,750 = -$761 with 8 hours remaining from the 112 hours. (ii) Economies of scale The EcoLite shares 70% of the same components with Eco. While it is lesser than the EcoPlus, there is still a high degree of common components. If EcoLite was done in-house, the components produced will be ordered in bulk and there will be some bulk discounts, and thus, economies of scale.
Closing or continuing business
Goodsports Ltd. is a retail shop that operates through three departments, all in the same
premises. The three departments occupy roughly equal-sized areas of the premises. The
trading results for the year just finished showed the following:
Total Sports Sports General
($) equipment ($) clothes ($) clothes ($)
Sales revenue 534 254 183 97
Total costs:
Fixed 138 46 46 46
Variable 344 167 117 60
Profit/(loss) 52 41 20 (9)
Should the general clothes department be closed?
Answer
Total Sports Sports General
($) equipment ($) clothes ($) clothes ($)
Sales revenue 534 254 183 97
Variable 344 167 117 60
Contribution 190 87 66 37
Since the general clothes department makes a contribution of $37, it should not be closed
(without any other developments) as closing it would make the business worse off by $37.
Any other developments to the general clothes department should generate at least $37 a
year.
Indirect costs/overheads apportionment
Full-costs of a job/output = direct cost of the job + fair share of the indirect costs for the job
Direct costs – these are costs that can be identified with specific cost
units. A cost unit is one unit of whatever that is having its cost
determined. It can be one unit of a product (service or a manufactured item). Examples are direct labour and direct materials.
In a motor car repair – direct costs – costs of parts used in repair
(direct materials), costs of mechanic’s time (rate of pay of direct workers)
In an electrical business – direct costs – wages of electricians who did the job, the cost of the cable and other materials used on the job
Indirect costs
Indirect costs (or overheads/common costs) – all other costs
that cannot be measured in respect of each particular unit of
output.
Rent of workshop to repair the car
Depreciation (wear and tear) of the tools used by
electricians
Salary of the electrical business’s accountant
In a legal firm – rent, lighting, heating, cleaning, building
maintenance
Question
Johnson Ltd, a business that provides a personal computer service to its customers, has overheads of $10,000 each month. Each month, 1,000 direct labour hours are worked and charged to units of output (repairs carried out by the business). A particular repair undertaken by the business used direct materials costing $15. Direct labour worked on the repair was 3 hours and the wage rate is $16 an hour. Overheads are charged on jobs on a direct labour hour basis. What is the full (absorption) cost of the repair?
Answer
Overhead absorption (recovery) rate is
$10,000÷1,000 hours = $10 per direct labour hour
$
Direct materials 15
Direct labour (3×16) 48
Overheads (10×3) 30
Full cost of the job 93
Question
Marine Suppliers Ltd undertakes a range of work, including making sails for small sailing boats on a made-to-measure basis. The business expects to incur the following costs during the next month as shown in the next slide. The business has received an enquiry about a sail. It is estimated that the particular sail will take 12 direct hours and will require 20 square metres of sailcloth, which costs $2 per square metre. The business normally uses a direct labour hour basis of charging overheads to individual jobs. What is the full (absorption) cost of making the sail?
Direct labour costs $60,000 Direct labour time 6,000 hours Indirect labour cost $9,000 Depreciation of machinery $3,000 Rent and rates $5,000 Heating, lighting and power $2,000 Machine time 2,000 hours Indirect materials $500 Other miscellaneous indirect costs $200 Direct material cost $3,000
Answer
Overheads are: $ Indirect labour 9,000 Depreciation of machinery 3,000 Rent and rates 5,000 Heating, lighting and power 2,000 Indirect materials 500 Other miscellaneous indirect costs 200 Total indirect costs 19,700 Overhead recovery rate is $19,700÷6,000 hours = $3.28 per direct labour hour
Answer cont’d
Thus, the full cost of the sail would be expected to be: $ Direct materials (20 ×2) 40 Direct labour (12 × ($60,000÷6,000 hours)) 120 Indirect cost/overheads (12×3.28) 39.36 Full cost 199.36
Q&A
Question: Suppose that Marine Suppliers Ltd used a machine hour basis of charging overheads to jobs. What would be the cost of the job detailed if it was expected to take 5 machine hours as well as 12 direct labour hours? Answer: Total overhead is $19,700. Overhead recovery rate, on a machine hour basis is $19,700÷2000 hours = $9.85 per machine hour Full cost of sail is $ Direct materials (20×2) 40 Direct labour (12× ($60,000÷6,000 hours)) 120 Indirect costs (5×9.85) 49.25 209.25
Question
A business consists of four departments: Preparation department Machining department Finishing department General administrative department (GA) The first three are product cost centres and the last renders a service to the other three. The level of service rendered is thought to be roughly in proportion to the number of employees in each production department. Overhead costs, and other data, for next month are expected to be as follows:
$ (000s) Rent 10,000 Electricity to power machines 3,000 Electricity for heating and lighting 800 Insurance of premises 200 Cleaning 600 Depreciation of machines 2,000
Salaries of each of the indirect workers are as follows: $ (000s) Preparation department 2,000 Machining department 2,400 Finishing department 1,800 General administrative department 1,800
The general administrative department has a staff consisting of only indirect workers (including managers). The other departments have both indirect workers (including managers) and direct workers. There are 100 indirect workers within each of the four departments and none do any direct work. Each direct worker is expected to work 160 hours next month. The number of direct workers in each department is: Preparation department 600 Machining department 900 Finishing department 500
Machining department direct workers are paid $12 an hour; other direct workers are paid $10 an hour. All of the machinery is in the machining department. Machines are expected to operate for 120,000 hours next month. The floorspace (in square metres) occupied by the departments is as follows: Sq m Preparation department 16,000 Machining department 20,000 Finishing department 10,000 GA department 2,000
Assume that the machining department overheads are to be charged to jobs on a machine hour basis, but that the direct labour hour basis is to be used for other two departments. A job has the following characteristics: Preparation Machining Finishing Direct labour hours 10 7 5 Machine hours - 6 - Direct materials ($) 85 13 6 What will be the full (absorption) cost?
Overheads All in $ (000s)
Preparation Machining Finishing GA
Allocated costs:
Machine power - 3,000 - -
Machine depreciation - 2,000 - -
Indirect salaries 2,000 2,400 1,800 1,800
Apportioned costs:
Rent 10,000
Heating and lighting 800
Insurance of premises 200
Cleaning 600
11,600
Apportioned by floor area 3,867 4,833 2,417 483
Departmental overheads 5,867 12,233 4,217 2,283
Reapportioned GA costs by
number of staff
(including the indirect workers) 695 993 595 (2,283)
Total overheads by department 6,562 13,226 4,812 -
Overhead recovery rate for preparation department (direct labour hour based): $6,562,000÷(600×160) = $68.35 Overhead recovery rate for machining department (machine hour based): $13,226,000÷120,000 = $110.22 Overhead recovery rate for finishing department (direct labour hour based): $4,812,000÷(500×160) = $60.15
The cost of the job is as follows:
$ $
Direct labour:
Preparation department (10 × 10) 100
Machining department (7 × 12) 84
Finishing department (5 × 10) 50 234
Direct materials:
Preparation department 85
Machining department 13
Finishing department 6 104
Overheads:
Preparation department (10 × $68.35) 683.50
Machining department (7 × $110.22) 661.32
Finishing department (5 × $60.15) 300.75 1,645.57
Full cost of the job 1,983.57
ABC sees overheads as being caused by activities.
Identification of the activities puts management in a position where it may well be able to control these activities effectively.
Activity-based costing (ABC)
Comma Ltd manufactures two types of products – Standard and Deluxe. Both of these products are made in batches. Each new batch requires that the production facilities are ‘set up’. Details of the two products are: Standard Deluxe Annual sales 12,000 12,000 Sales price per unit $65 $87 Batch size – units 1,000 50
Direct labour time per unit – hours 2 2 1
2
Direct labour rate per hour $8 $8 Direct material cost per unit $22 $32 Number of special parts per unit 1 4 Number of set-ups per batch 1 3 Number of separate material issues from stores per batch 1 1 Number of sales invoices issue per year 50 240
In recent months, Comma Ltd has been trying to persuade customers who buy the Standard to purchase the Deluxe instead. An analysis of overhead costs for Comma Ltd has provided the following information: Overhead analysis $ Cost driver set-up costs 73,200 Number of set-ups Special part handling costs 60,000 Number of special parts Customer invoicing costs 29,000 Number of invoices Material handling costs 63,000 Number of batches Other overheads 108,000 Labour hours
Required: (a) Calculate the profit per unit and the return on sales for Standard and Deluxe using: (i) The traditional direct-labour-hour based absorption of overheads; (ii) Activity-based costing methods (b) Comment on the managerial implications for Comma Ltd of the results in (a) above.
(a) (i) Overheads $ Set-up costs 73,200 Special part handling costs 60,000 Customer invoicing costs 29,000 Material handling costs 63,000 Other overheads 108,000 333,200 Overhead recovery rate = total overheads ÷ number of labour hours = 333,200/ [(12,000 ×2) + (12,000 × 21 2 )] = $6.17 per hour
Standard Deluxe Direct costs $ $ Labour 16.00 20.00 Material 22.00 32.00 Indirect costs Overheads ($6.17 per hour) 12.34 15.43 Total cost per unit 50.34 67.43 Return on sales Standard Deluxe $ per unit $ per unit Selling price 65.00 87.00 Total cost 50.34 67.43 Profit 14.66 19.57 Return on sales 22.55% 22.49%
(a) (b) (c) (d) (e) Overhead Driver Standard Deluxe Total Costs Driver Cost pool driver driver driver $ rate volume volume volume $ (a+b) (d/c) Set-up Set-ups per batch 12 720 732 73,200 100 Special Special parts per part unit 12,000 48,000 60,000 60,000 1 Customer Invoices per invoices year 50 240 290 29,000 100 Material Number of handling batches 12 240 252 63,000 250 Other Labour hours overheads 24,000 30,000 54,000 108,000 2
(ii)
(f) (g) Overhead Total costs Total costs Unit costs Unit costs Cost pool Standard Deluxe Standard Deluxe (a×e) (b×e) (f/12,000) (g/12,000) $ $ $ $ Set-up 1,200 72,000 0.10 6.00 Special part 12,000 48,000 1.00 4.00 Customer invoices 5,000 24,000 0.42 2.00 Material handling 3,000 60,000 0.25 5.00 Other overheads 48,000 60,000 4.00 5.00 Total overheads 5.77 22.00 Total cost per unit calculations as follows: Standard Deluxe $ per unit $ per unit Direct costs Labour 16.00 20.00 Material 22.00 32.00 Indirect costs Overheads 5.77 22.00 Total costs per unit 43.77 74.00
The return on sales is calculated as follows: Standard Deluxe $ per unit $ per unit Selling price 65.00 87.00 Total cost 43.77 74.00 Profit 21.23 13.00 Return on sales (profit/sales × 100%)32.67% 14.94% (b) The ROS for the traditional approach is broadly the same; however, the ABC approach shows that the Standard product is far more profitable. Hence the business should reconsider its policy of trying to persuade customers to switch to the Deluxe product.
Another example: Psilis Ltd. makes a product in two qualities, Basic and Super. The business is able to sell these products at a price that gives a standard profit mark-up of 25% of full cost. Management is concerned by the lack of profit. Full cost for one unit of a product is calculated by charging overheads to each type of product on the basis of direct labour hours. The costs are as follows: Basic Super $ $ Direct labour (all $10/hour) 40 60 Direct materials 15 20 The total overheads are $1,000,000. Based on experience in recent years, in the forthcoming year, the business expects
to make and sell 40,000 Basics and 10,000 Supers.
Recently, the business’s management accountant has undertaken an exercise to try to identify cost drivers in an attempt to be able to deal with the overheads on a more precise basis than had been possible before. This exercise revealed the following analysis of the annual overheads: Activity (and cost driver) Cost Annual number of activities $000 Total Basic Super Number of machine set-ups 280 100 20 80 Number of quality control checks 220 2,000 500 1,500 Number of sales orders processed 240 5,000 1,500 3,500 General production (machine hours) 260 500,000 350,000 150,000 Total 1,000 (a) Deduce the full cost of each of the two products on the basis used at present and from these, deduce the current selling price. (b) Deduce the full cost of each product on an ABC basis. (c) What conclusions and advice would you offer?
(a) Full cost (present basis) Total direct labour hours worked = (40,000 ×4) + (10,000 ×6) = 220,000 hours Overhead recovery rate = $1,000,000/220,000 = $4.55 per direct labour hour Basic Super $ $ Direct labour (all $10/hour) 40.00 60.00 Direct material 15.00 20.00 Overheads 18.20 (4.55 × 4) 27.30 (4.55 × 6) Total 73.20 107.30 Selling price for: Basic: $73.20 × 1.25 = $91.50 Super: $107.30 × 1.25 = $134.13
(b) Full costs (ABC) Activity Cost Basis of apportionment Basic ($000) Super ($000) $000 Machine set-ups 280 number of set-ups 56 (i.e. 20/100) 224 Quality inspection 220 number of inspections 55 165 Sales order processing 240 number of orders processed 72 168 General production 260 machine hours 182 78 Total 1,000 365 635 Overheads per unit Basic: $365,000/40,000 = $9.13 Super: $635,000/10,000 = $63.50
Thus on an activity basis, the full costs are as follows: Basic Super $ $ Direct labour (all $10/hour) 40.00 60.00 Direct materials 15.00 20.00 Overheads 9.13 63.50 Full cost 64.13 143.13 Current selling price $91.50 $134.13 (c) It seems that Super is being sold less than they cost to produce. If the price cannot be increased, there may be a strong case for abandoning the product. At the same time, Basic is very profitable to the extent that it may be worth considering lowering the price to attract more sales revenue. However, abandoning Super cannot be done drastically as other factors may come into play such as resistance from staff related to the production of Super.
Variance analysis
Sales volume variance = profit of original budget – profit of flexed budget
Antonio plc makes product X, the standard costs of which are: $ Sales revenue 31 Direct labor (2 hours) (11) Direct materials (1 kg) (10) Fixed overheads (3) Standard profit 7 The budgeted output for March was 1,000 units of product X; the actual output was 1,100 units, which was sold for $34,950. There were no inventories at the start or end of March. The actual production costs were: $ Direct labor (2150 hours) 12,210 Direct materials (1170 kg) 11,630 Fixed overheads 3,200 Required: Deduce the budgeted profit for March and perform the necessary variance analysis. State which manager should be held accountable, in the first instance, for each variance calculated.
Answer
Antonio Plc
Original Budget Flexed budget Actual
Output 1000 units 1100 units 1100 units
(production and sales)
$ $ $
Sales revenue 31,000 34,100 34,950
Raw materials (10,000) (1,000 kg) (11,000) (1,100 kg) (11,630) (1,170kg)
Year Discounted net cash flow (PV) CNCF 0 (1000) (1000) 1 455 (545) 2 331 (214) 3 225 11 4 68 79 Discounted payback for Project S = 2 + 214/225 = 2.95 years
Problem – ignores all cash flows after the payback period
Net present value Internal rate of return
Given by the equation, NPV = (CFt /(1 +k)t ); CFt = expected net cash flow at period t and k = cost of capital.
The NPV for project S at 10% discount
rate = (1000) + 455 + 331 + 225 + 68 = $79
An NPV of zero signifies that the
project’s cash flows are exactly sufficient to repay the invested capital and provide the required rate of return on that capital
If a project has positive NPV, then its
cash flows are generating an excess return
The IRR is defined as that discount rate which equates the present value of a project’s expected cash inflows to the present value of the project’s expected costs
That is, PV (inflows) = PV
(investment costs) or (CFt/(1 + IRR)t) = 0
Job One $000s Costs Year 0 Year 1 Year 2 Year 3 Year 4 Hardware costs 50 0 0 0 0 Software costs 50 0 0 0 0 Maintenance costs 10 10 10 10 10
Required: (a) Barry Blunt has criticised the investment appraisal approach used at 8-Hats to evaluate internal jobs. He has made specific comments on payback, discount rate, IRR, intangible benefits and benefits realisation. Critically evaluate Barry’s comments on the investment appraisal approach used at 8-Hats to evaluate internal jobs. (15 marks)
Partial answer
(a) Payback Is the time taken to recover the original investment. In general, a shorter period in recommended. For job 1, Year net cash flow cumulative net cash flow 0 -110 -110 1 50 -60 2 15 -45 3 40 -5 4 60 55 Payback period = 3 + (5)/60 = 3.08 years For job 2, Year net cash flow cumulative net cash flow 0 -90 -90 1 40 -50 2 15 -35 3 30 -5 4 25 20 Payback period is = 3 + (5/25) = 3.20 years Based on a simple payback analysis, Job 1 would allow a faster recoup of original investment which is similar to the recommended job using NPV. However, the payback period does not take into account a discount factor and therefore the above values may be altered if discount payback was taken into account. In addition, Job 1 has greater net cash flows after the payback period as compared to Job 2. This would not be taken into account if payback analysis was used.
Discount rate Is the factor a future cash flow must be multiplied in order to obtain its present value. The discount factor chosen here was 8%. Barry was commenting that since inflation is well below this factor, the discount rate chosen should have been between 3% to 4%. The scenario does not explain how 8% was derived; however, taking into account inflation rate to determine the discount factor would definitely not be enough. The opportunity cost of investing in the jobs must also be considered. In addition, the risks involved in the jobs must also be given due consideration. Hence, to determine the discount factor, one has to look at, among others, the inflation rate, the opportunity costs and the perceived risks of the jobs. If the perceived risks are higher, than the discount factor will also be higher. Therefore, Barry’s assertion that one has to look only at inflation rate is not correct.
IRR Is the discount factor when NPV = 0, i.e. present values of cash inflows = present values of cash outflows. Since the NPV of job 1 is higher than job 2, in all likelihood, if the IRR is decided at 8%, job 1 would still be chosen. Hence, Barry’s remark that job 2 will be chosen if IRR was used is wrong. Intangible benefits Both Job’s 1 and 2 included intangible benefits such as better information and improved employee morale. While it is true that intangible benefits are just as important as tangible benefits, it is not stated how these intangible benefits have been quantified. It is also unknown how then intangible benefit of improved staff morale is underestimated in Job 2. Notwithstanding the above, if intangible benefits were removed from both jobs, the result is the following at a discount factor of 8%: NPV Job 1 -59.415 Job 2 -37.06 Both have negative NPV’s and will not be considered. In conclusion, Barry, from the scenario did not explain why improved staff morale is underestimated in Job 2 and as long as the quantification of intangible benefits are not certain, the net cash flows for both job’s 1 and 2 would have some degree of error. Also removing intangible benefits for both jobs would give negative NPVs.
Mission statement sources
Campbell and Yeung
Ackoff
Drucker
Campbell and Yeung
Purpose – why is the company in existence? Mission statement addresses the question: “What is the reason for our existence?” (raison d’etre)
Strategy – what is the company’s competitive position and distinctive competence?
Values – what are the company’s beliefs, moral and principles?
Behavior standards – what are the company’s policies, SOPs and behavior patterns (such as management style)
PSVB
Benefits of mission statement
Unanimity of purpose – glue that binds all employees together – conflict resolution
Helps to formulate goals, objectives, strategies and resource allocation
Super-ordinate goals
Communication tool
Enduring long term success (Collins and Porrras)
Problems of mission statement
Rhetoric – more form than substance
Difficulty in crafting – words, contents, impact
No competitive advantage
Time
Question – June 2012
(c) Advise the Hammond family on the importance of mission, values and objectives in defining and communicating the strategy of Hammond Shoes. (12 marks)
Vision statement
Is the desired future state of the organization. It is an aspiration around which the strategist, perhaps a CEO, might seek to focus the energies of the members of the organization
It addresses the question “What do we want to become?”
Truskie’s 3C – clear, concise, compelling
Goals
Henry Mintzberg defines a goal as “the intention behind a decision or action”, identified 4 system goals:
Resources and capabilities that gives an organization a sustainable advantage over its competitors (Hitt, Ireland and Hoskisson)
To be considered a core competence, must pass three tests (Hamel and Prahalad):
Customer value (perceived)
Differentiation
Extendibility
Stakeholders
Are those that can affect and are affected by the strategic outcomes of a company’s operations and therefore have an enforceable claim over a company’s performance
Use of Mendelow’s power-interest matrix to classify stakeholders
Level of interest (in organizational strategies)
Low High Low Power High
A. B.
Minimal effort Keep informed
(e.g.
community)
C. D.
Keep satisfied Key players
(e.g. institutional
investors)
Mendelow’s power-interest matrix
Identify all stakeholders – non should be omitted
Classify them accurately
Undertake proper stakeholder relationship management via stakeholder engagement
Firms that undertake a proper stakeholder relationship management than others can achieve a competitive advantage
In November 2009 ABCL acquired Ecoba Ltd. Gillian Vari agreed to stay on for two years to assist the management of the ownership transition. However, her business partner became seriously ill and ABCL have agreed, on compassionate terms, for her to leave the company immediately. ABCL, from experience, know that they must manage stakeholders very carefully during this transition stage. (c) Identify the stakeholders in Ecoba Ltd and analyse how ABCL could successfully manage them during the ownership transition. (10 marks)
Benchmarking - types
Historical benchmarking – comparing performance to previous years
Industry/sector benchmarking
Best-in-class benchmarking
Stages in benchmarking
Identify those processes needing improvements (process flow, process performance standards, process performance management)
Identify an entity (intra-firm, inter-firm, inter-industry) performing the process
Contact the managers of that entity and if agreed, make a personal visit interviewing managers and workers - many companies select a team of workers from that process to be on a benchmarking team
Analyze data – collect data and analyse to see the differences in what your company is doing as compared to benchmarked entity
Implement and review – if there are deficiencies in own company processes, then implement the benchmarked process and review regularly.
Benefits of benchmarking
Improve organizational performance
Can help to drive organizational change
Can provide advance warning of deteriorating competitive position
Problems of benchmarking
Resistance
Reactive
Time consuming
Changes in external and internal factors
Can reduce managerial motivation
Not easily done – causal ambiguity and social complexity
Critical success factors
The few areas where things must go right for a business to flourish
GOALS and Objectives CSFs MEASURES (Kpi)
Example
CSF PI
Customer satisfaction Number of customer complaints, number of closed customer accounts or number of dormant accounts, number of goods returned, change in market share
Sound image in financial market High P/E ratio
Improve efficiency Stock-holding cost, time taken to market, amount of waste
produced
High employee morale Number of staff turnover, number of absenteeism, change
in productivity
Advantages of CSFs
It focuses on current information needs. CSFs are flexible: they can be changed quickly and should be continually reviewed.
It incorporates hard and soft information. CSFs measures need not be
restricted to typical computerized information such as financial data: the CSF method often indicates a need for data not currently held to be collected. This data may be soft, for example informal comments on employment conditions by employees.
It produces a limited amount of focused information which even senior
managers feel comfortable monitoring. It gives senior managers a feeling of ownership since they are able to apply
the method themselves. Therefore they are more likely to use the information. It can be used at different levels of aggregation. The method is equally
valid when applied to an organization, a function or and individual.
Question – December 2011
(c) Critical Success Factors (CSFs) and Key Performance Indicators (KPIs)
are important business concepts in the context of franchising rail services.
Explain and discuss these concepts in the context of GET and the rail
industry. (10 marks)
According to Rockart, CSFs are the few areas where things must go right for a business to flourish.
To ascertain whether an organization has achieved its CSFs, it need certain indicators, called KPIs.
According to Rockart, to help a firm decide its CSFs and corresponding KPIs, it has to know its goals
and objectives, both financial and strategic. CSFs and can be objective and subjective and as such so
are KPIs.
In the context of GET and the rail industry, the CSFs and corresponding KPIs are explained and
discussed below.
(i) CSF: Cost reduction
GET in particular and the rail industry in general must be able to manage costs. Only by managing its
costs and GET and the rail industry improve their profits. Since there are many cost factors to
manage, there are many KPIs pertaining to costs such as:
- Cost per available seat kilometre (Cost per ASK)
- Energy costs
- Maintenance costs
- Customer handling costs, among others.
(ii) CSF: Customer satisfaction
Customers must be satisfied in using the rail service, otherwise, they may use alternative transport
and affect the revenue of GET and the rail industry in general. GET must be very customer centric
and to a certain extent has done so as evidenced in the first three years of its formation. The KPIs
are:
- Number of customer complaints
- Passenger load
- Passenger yield
- Changes in customer market share, among others.
(iii) CSF: Improve efficiency
GET and others must try to improve efficiency to ensure that its resource usage is optimal. This
indicates that its operations and value chain activities must be done in a cost efficient manner without
compromising quality. With improve efficiency, its cost as mentioned above, can also be reduced. The
Internet booking system and its innovative booking system had allowed GET to be more efficient. The
KPIs should focus on its value chain activities and benchmarking will also need to be carried out.
The KPI can be:
- Punctuality of arrival at train stations
- Time to embark and disembark passengers
- Punctuality of trains departing
- Turnaround times of trains, among others.
(iv) CSF: Innovation and learning
GET and the rail industry must continue to innovate and learn to enable it to be relevant. In the threat
of substitutes such as road, air and sea transport, it has to “think out of the box” to be relevant.
GET and the rail industry must come out with different travel packages, and work with other industries
such as hospitality and also with other transport operators such as taxis and airlines. Among the KPIs
are:
- The number of new packages
- Number of alliances
- Level of creativity and innovation
Levels of strategy
Corporate level
Business level
Operational level/functional level
How strategies are developed (JSW)
Strategy as design – through a formal, detailed, thorough, logical analysis encompassing identifying mission, vision, goals, objectives, performing external-, internal- and stakeholder-appraisal
Strategy as experience – through the cumulative experience of
managers and the prevailing culture of organization Strategy as ideas – changes in environment and changes internally
may give rise to new ideas. These ideas will result in the emergent of strategies to best address problems (weakness and threats) or to exploit certain opportunities
Strategy as discourse – strategies being developed through the
mastery of the language of strategy
Question – December 2008
(c) Johnson, Scholes and Whittington identify three strategy lenses;
design, experience and ideas.
Examine the different insights each of these lenses gives to
understanding the process of strategy development at the National
Museum.
Note: requirement (c) includes 2 professional marks. (10 marks)
manage conflict, politics, and change; manage people
and systems
Review and
control
Strategic Management Process
Macro environment – PESTEL analysis
Political Economical Social-cultural Technological Environmental Legal
Government
(stability/instability)
Business cycles Demography ICT GHG Taxation
Wars Unemployment Lifestyle changes Global climate Employment
Terrorism GDP Linguistic
differences
Disasters Environmental
protection
Xenophobia/
nationalism/
populism
Inflation Consumerism Foreign trade
regulations: tariffs,
excise, quotas
Money supply Customs
Interest rates Social mobility
Currency
fluctuations
Diseases and
pestilences
Energy Religious issues
Stagflation
BUGIMICES TEEF
Question – June 2011
(a) Universal Motors have explicitly recognised the need for analysing the
external macro-environment and marketplace (industry) environment of
EcoCar.
Required:
Analyse the external macro-environment and marketplace (industry)
environment of EcoCar. (16 marks)
Competitive/task/market/ industry environment
threat of new entrants
bargaining power of Competitive suppliers rivalry bargaining power of buyers
threat of substitutes products and services
Supplier
Potential new entrants
Buyers
Substitutes
Threat of new entrants Defensive strategy
Economies of scale - unit costs are reduced by making a large number of products
Proprietary product differences/differentiation - means the provision of a product or service by the user as meaningfully different from competition - e.g. Marks &
Spencer for reliability and quality
Brand loyalty - is there a strong brand image to overcome?
Switching costs - the cost incurred form moving from one firm to another
Capital requirements of entry - the cost incurred by an organization to enter and operate successfully in a market - e.g. retail clothing cost of setting lesser than
chemical, or power firm
Access to distribution channels - relates to the availability of profitable channels of distribution - e.g. brewing companies in the UK, France and Germany have
invested in the financing of bars and pubs, which have guaranteed the distribution of their products and made it difficult for competitors to break into their markets
Government policy/legislation - is there governmental/legislative protection afforded to existing organizations? In 1995, the US government threatened the Japanese government with trade sanctions because, it argued, the Japanese
government promoted restrictions to the access of foreign competition
Expected retaliation - if a competitor considering entering a market believes that the retaliation of an existing firm will be so great as to prevent entry
Cost advantages independent of size - established companies may have cost advantages independent of size due to favorable locations, learning or experience curve, incumbent knows market well, has good relationships with key buyers and suppliers, knows how to overcome market and operating problems, government
subsidies, favorable access to sources of raw materials etc.
Supplier’s bargaining power
heterogeneity of inputs, i.e. supplier’s product is differentiated
switching costs from one supplier to another is high
presence of substitute inputs is few
few suppliers
importance of volume to purchaser
threat of forward integration
supplier’s customers are of little importance to the supplier
if the brand of supplier is powerful
supplier’s customers are highly fragmented - less bargaining power of customers
Customers’ bargaining power
high buyer concentration
buyer volume
buyer switching costs low
buyer information (high bargaining high)
threat of backward integration
availability of substitute products
price sensitivity
suppliers’ product is undifferentiated or homogenous
high fixed costs - likely to result in competitors cutting prices to obtain the turnover required, which can result in price wars
addition of extra capacity is in large increments - creating short term over-capacity and increased competition
existence of global customers - may increase competition among suppliers
the extent to which the competitors are balanced - where competitors are of roughly equal size, there is a danger of intense competition; most stable markets have
dominant organizations within them
December 2009
Required:
Xenon usually analyses an industry using Porter’s five forces framework.
(a) Using Porter’s framework, analyse the business analysis
certification industry (BACTI) in Erewhon and assess whether it is an
Related and supporting industries – suppliers of inputs: people, money and materials:
People: colleges, universities, vocational schools, other educational institutions
Money: banks and other financial institutions
Materials: high quality material suppliers
Factor conditions – locational economies (land, labour- wages, government policies/legislations); communication infrastructure; transportation infrastructure; administrative infrastructure; natural resources; trade union
Factors to consider by government to encourage FDI
Firm strategy, structure and rivalry – provide fair-level playing field; no/minimal protectionist policies
Demand conditions – encourage people/consumer/citizens to choose only the best – be it domestic or foreign; encourage high levels of consumerism
Related and supporting industries – suppliers of inputs: people, money and materials
Factor conditions – locational economies (land, labour- wages, government policies/legislations); communication infrastructure; transportation infrastructure; administrative infrastructure; natural resources; trade union
Factors to consider by government to improve domestic firms’ competitiveness
Firm strategy, structure and rivalry – encourage competition among domestic firms; no protectionist policies – competition toughens domestic firms so that they are able to compete internationally
Demand conditions – encourage people/consumer/citizens to have high level of consumerism; encourage people to seek and demand only the best; formation of consumer associations and tribunals
Related and supporting industries – suppliers of inputs: people, money and materials
Factor conditions – locational economies (land, labour- wages, government policies/legislations); communication infrastructure; transportation infrastructure; administrative infrastructure; natural resources; trade union; seed funding or cradle investments for enterprising domestic firms
Internal appraisal
Resources audit
McKinsey and Co.’s 7S
Value chain/system
Resources audit
Machinery - age, condition of machinery, obsolescence, location - to determine the usefulness in gaining competitive advantage
Money - sources of money (debt or equity), uses of money, debtor and creditor control
Manpower (Human resource) - number and types of skills available, human resource planning, management succession
Materials - do suppliers have excessive control of materials, favorable access to materials?
Make-up - what type of structure do we have?
Markets/products - are markets declining?, growing?, new markets emerging?, products? (cash cow, star, problem child, dog)
Intangibles - “goodwill” (due to brand name, good contacts, company image etc.)
7S
Super-
ordinate
goals
Skills Strategy
Structure Style
Staff Systems
Value chain
Firm infrastructure Margin Human Resource Development Technology development Procurement Inbound Operations Outbound Marketing Service logistics logistics and sales Margin = Total value added – total cost = total selling price – total cost
Activity Definition
Inbound logistics materials receiving, storing, and distribution to manufacturing premises. This includes materials handling, stock
control, transport
Operations transforming inputs into finished products or service. This includes machining,
packaging, assembly, testing etc.
Outbound logistics collecting, storing and distributing products to customers. For tangible
products, this would be warehousing, materials handling, transport, etc. In the
case of services, it may be more concerned with arrangements for bringing customers to the service
Marketing and sales promotion and sales force, whereby consumers are made aware of the
product/service and are able to purchase it. This would include sales
administration, selling, promotion mix
Service
service to maintain or enhance product
such as installation, repair, training, spare parts
Corporate/firm infrastructure support of entire value chain, such as general management, planning, finance, accounting, legal services, government affairs, and quality management. Also
consists of structures and routines of the organization which sustain its culture
Human resource management recruiting, hiring, training, and development,
rewarding etc.
Technology development improving product, service and manufacturing
process through technology development
Procurement process for acquiring the various resource inputs
to the primary activities
Value system Supplier value Channel value chains Customer chains value chains Organization value chain
Linkages - driver Internal linkage:
Primary - primary
Primary - support
Support – support
External linkage:
Vertical integration - attempts to improve performance through ownership of more parts of the value system (takes over supply - backward integration; takes over distributors - forward integration)
Specification and checking supplier and distributor performance – quality assurance
Total quality management - working with suppliers and distributors to improve performance
Reconfigure value chain - by deleting activities/distributors, for e.g. direct selling
Strategic alliance between different organizations in the value system to reduce cost, share expertise etc.
E-commerce
SWOT
Using internal appraisal model/frameworks to identify strengths and weaknesses
Using external appraisal model/framework to identify opportunities and threats
Barney’s VRIS – value, rare, imperfect imitability and non-substitutability
It provides the franchiser with a constant flow of income and the franchisee has a product/service and a marketing package that can be quickly purchased by the market
It allows the business to grow rapidly in a number of locations
without the considerable investment of capital that would be required if the company (the franchiser) grew in a more organic fashion
It eliminates some of the need for the development of managerial
skills required to mange a large dispersed organization It is a suitable strategy for a small firm to get involved in. The risk is
considerably lower than with an independent start-up
Problems of franchising
Quality control/assurance (appoint master franchisee) Poor performance of the retail outlet Franchised outlets in competition with one another Marketing issues Competitor (e.g. Minor group, franchisee for Pizza Hut in Thailand
for 20 years discontinued its pizza operations with Pizza Hut and opened its own pizza chain called, The Pizza Company)
Free-rider problems
Recovery strategy – Bowman and Singh
Financial restructuring
Organizational restructuring
Product portfolio restructuring
June 2011 – pilot paper Q. 2
Required: Internal development, acquisitions and strategic alliances are three development methods by which an organisation’s strategic direction can be pursued. (a) Explain the principles of internal development and discuss how appropriate this development method is to EMS. (8 marks) (b) Explain the principles of acquisitions and discuss how appropriate this development method is to EMS. (8 marks) (c) Explain the principles of strategic alliances and discuss how appropriate this development method is to EMS. (9 marks)
Evaluate/justify/recommend strategy
Feasibility – financial, resources and competencies
Products with relative high market share in a low growth market
Since market is low growth, it may soon become mature
If exit barriers are low, then competitors may exit; therefore a firm may incur less costs in competition, promotion and product development
Hence cash rich
Earnings from cash cow can be used to finance stars and some ‘problem child’
If cash cows are about to reach decline, then the need to consider reviving (licensing, marketing mix) after careful analysis
Should have adequate cash cows
Stars
Products with relatively high market share in high growth markets
Since market is high growth, may encourage competition (especially if competitors are well-balanced)
While revenues may be high, significant costs may be incurred to maintain “visibility” amidst increasing “clutter”
The profits earned may be marginal or breakeven due to intense competition
Stars need to be retained as it can become future cash cows
Need to have adequate stars
Problem child/Wild cat/Question mark
Careful examination. If possibility of becoming a future ‘star’, then retain, otherwise, divest.
Dog
If dog can provide some economies or can act as a “traffic builder”, then retain, otherwise, divest.
Product lifecycle
Sales & Profit ($) Product Introduction Growth Maturity Decline Development Stage Time
profit
sales
Introduction Stage
If product is slow moving, assess reasons why and perform necessary modifications
If after a while, still slow moving, then divest/harvest
Growth Stage
Invest in product/service – promotion, R&D, market research
Retain
Maturity Stage
Improve brand loyalty
Retain
Decline
Analyse whether the need to revive or divest
GE business planning grid
Competitive Position Strong Medium Weak High Market Attractiveness Medium Low Invest/grow Selectivity/earnings Harvest/divest
Corporate parental value creation
Portfolio manager
Synergy manager
Parenting matrix
Portfolio manager Synergy manager
Buy undervalued assets (either from stock market or private firms), improve them and sell them (perhaps through an IPO)
Any units underperforming – divest; those that are performing – retain up to a point
Parent company’s HQ normally small and parent pursuing an unrelated diversification or conglomerate strategy
A corporate parent seeking to enhance value across business units by managing synergies across business units – building a common purpose, facilitating cooperation, and providing central resources and services
Parent company’s HQ normally large and parent pursuing a related diversification strategy
Low
Misfit between CSFs and parenting characteristics High Low High Fit between parenting opportunities and parenting characteristics
Stories Power structures Rituals and routines Organizational structure Control systems Symbols Paradigm SPROCS-P
Schein’s 3 levels of culture
Artifacts
espoused values
basic underlying assumptions (attention, resource allocation, role modeling, crisis, selection and dismissal, reward allocation)
Project management
A project is a job/work that consists of a start and end time, divided into stages/phases/activities, consumes resources such as time, money, HR and other resources; has deliverables and directed toward some major output
Work breakdown structure
Activity Preceding activity (PA) Duration (days)
A - 4
B - 3
C A 6
D B 8
E C, D 3
Feasibility study – Feasibility Report
Project Initiation Document
Project Plan
PID
Background of project – why is it necessary
Project objectives
Project scope – work to be carried out, deliverables, constraints
Communication plan (reports, meetings etc.)
Controls in place – steering committee, project sponsor
BOSCC
Project plan
Objectives Methodology Analysis and evaluation:
WBS Gantt chart/timeline Network diagrams – critical path, critical activities, total elapsed time, minimum
total costs Resource Histogram
Tools
Duration
Activity
A
B
C
D
E
4
6
3
3 8
End E Start
C A
D B
. Resource histogram
no. of
men
10
9
8
7
6
5
4
3
2
1
0
Critical path – path that connects all critical activities
Critical activity – activity that has no slack resources
Critical period/total elapsed time – fastest time taken to complete project given there is no additional resources allocated
If an activity has slack, it ought to be used up
Successful projects
Proper project sponsor
Experienced project manager
Experienced project team being seconded
Clear defined objectives
Proper resources allocated
Business case While certainly there are benefits and costs incurred, these benefits must be quantified and all other costs and related problems should as much as possible be quantified too. Also the timing of benefits (cash flow) and costs (cash outflow) needs to be ascertained as accurately as possible. Hence with proper quantification of benefits (made as tangible as possible) as well as costs and problems, proper capital budgeting techniques can be applied such as NPV, payback analysis and IRR using appropriate discount factors. Managing benefits The project, if implemented must be managed to ensure that it remains on track and schedule to deliver value to the organization. There must be proper work breakdown structure, timelines and critical path analysis done so as to ensure project and progress remains on track. Post-project review A post-project review takes place once the project has been completed. In fact, it can often be the last stage of the project, with the review culminating in the sign-off of the project and the formal dissolution of the project team. The focus of the post-project review is on the conduct of the project itself, not the product it has delivered. The aim is to identify and understand what went well and what went badly in the project and to feed lessons learned back into the project management standards with the aim of improving subsequent project management in the organisation. Post-implementation review A post-implementation review focuses on the product delivered by the project. It usually takes place a specified time after the product has been delivered. This allows the actual users of the product an opportunity to use and experience the product or service and to feedback their observations into a formal review. The post-implementation review will focus on the product’s fitness for purpose. The review will not only discuss strategies for fixing or addressing identified faults, but it will also make recommendations on how to avoid these faults in the future. In this instance these lessons learned are fed back into the product production process.
Benefits realization review A benefits realisation review also takes place after the product has been delivered. It is primarily concerned with revisiting the business case to see if the costs predicted at the initiation of the project were accurate and that the predicted benefits have actually accrued. In effect, it is a review of the initial cost/benefit analysis and any subsequent updates made to this analysis during the conduct of the project. It may be part of a post-implementation review, although the long-term nature of most benefits means that the post-implementation review is often held too soon to properly conduct benefits realisation. In fact, it can be argued that benefits realisation is actually a series of reviews where the predicted long-term costs and benefits of the business case are monitored. Again, one of the objectives is to identify lessons learned and in this case to feed these back into the benefits management process of the organisation.
Harmon’s terminology:
Process improvement – tactical level, incremental technique that is appropriate for developing smaller, stable existing process
Process redesign – intermediate scale process that need significant change
Process re-engineering – strategic level rethinking of core processes
Process re-engineering
Is it possible to eliminate activities
Is it possible to combine activities
Is it possible to simplify activities
Is it possible to create new processes/activities
Use IT such as workflow software
Script Handling System Candidate Invigilator HQ Admin marks < 45
Marks > 55
45-55 marks
Marker Auditor Courier
Complete
examination
Collate
scripts
Transport
scripts
Distribute
scripts
Transport
scripts
Mark scripts
Transport
scripts
Determine
audit reqs.
Allocate
auditor
Publish
results
Receive
results
Transport
scripts
Transport
scripts
Audit scripts
Transport
scripts
Question – June 2011 – Q. 3 (b)
(b) Eventually, the IAA decided not to develop a bespoke solution but to use an established software package to implement its multiple choice question management and examination requirements. The selected package, chosen from a shortlist of three, includes the delivery of tests, question analysis, student invoicing and student records. It is already used by several significant examination boards in the country. Explain the advantages of fulfilling users’ requirements using a software package solution and discuss the implications of this solution for process re-design at IAA. (10 marks)
Costs The first advantage of using a software package solution would definitely be the cost factor. Building a bespoke software would not have the economies of scale as compared to a software package solution. Currently, there already exist several examination bodies using this software and if IAA were to adopt this software package, the software house will be able to spread the costs to a larger customer base and hence the costs of using this software package can be further reduced. The implication to IIA will be a significant cost savings as a result of this economies which a bespoke solution will not have.
Advantages Disadvantages
Comparatively cheap as compared to tailor-made, or bespoke
User will be dependent on supplier for maintenance and upgrades
Readily available - time saving All users will get the same standard features, therefore no competitive advantage
Normally come with easy to follow manual Sometimes, especially the older software, WYSINWYG/WYSINWIR
Staff savings - since the company does not need to hire in-house programmers if it is going to rely entirely on
packages
There could be a high turnover of programmers in an environment that advocates the use of packages
Easy to use - GUI, context sensitive help function May have problems such as illogical data entry, unclear field entry, inconsistent cursor control,
commands/terms used not the same as used in organization
Continuously updated Also may not follow the business flows needed, functions and features not sufficient
Relatively tried and tested, written by specialist, reputable - confidence
May still have bugs – impossible to try and test completely
Maintenance contract - Can form User Groups Supplier may close business
Try before you buy
Software package selection
Business case – formal CBA undertaken Formal requirement specification – fact-finding ITT Benchmark testing UAT Implementation – direct changeover, parallel run, pilot run, staged/phased changeover
December 2010 – Q. 2(a)
(a) Determine the main drivers for the adoption of e-business at TMP and identify potential barriers to its adoption. (5 marks)
E-commerce
The process of selling, buying, and exchanging products, services, and information over computer networks, including the Internet
E-business and e-commerce Supplier value Channel value chains Customer
chains value
chains
Organization
value chain
E-commerce
E-business
Drivers/benefits for e-business Barriers to e-business adoption
Improve communication with customers, staff, suppliers/improve relationships
Lack of resources – time, skills, knowledge
Keep up with progress Staff resistance
Keep up with competitors/competitive pressures Integration problems
Increase speed of access to information Lack of board interest
Standardize/simplify/integrate processes Difficult of changing processes
Customer, management, employee, supplier demands
Security
Improve/shorten delivery time Insufficient government regulations
Increase range of products/services Technology – current bandwidth problems
Increase IT knowledge
Increase customer base
Improve corporate image/enhancement of brand
Faster product development lifecycle
Identifying new partners/supporting existing partners better
Generic benefits of E-Commerce
Cost savings Convenience Access to Improves Simplifies Improves Global
more decision business customer reach
information making process service
Access
To greater
expertise
Communication Anywhere, Shorter
Anytime time to
market
Paperless Ease of usage
People
Publications &
distribution
CBT
Partial answer
Drivers of e-business adoption for TMP
- Cost reduction – the entire costs for commissioning, printing and distributing can be very expensive. The use of e-business can to a certain extent help to reduce paper and any other ancillaries.
- Declining sales and profits – TMP had had three straight years of declining sales and profits. With some cost reductions that can accrue as a result of e-business would definitely help to prevent further slide of sales and profits.
- Survivality – with intense competition, coupled with the emergence of online book sellers and increasing costs have made survivality a key issue. Bookshops are going out of business every week in Arcadia.
- Better value proposition – the benefits of e-business such as convenience of buying, different payment options coupled possible discounts provide customers with a better value proposition.
- Global reach – TMP is able to market and sell to anybody that has an Internet connection.
- Environmentally friendly – paper is getting more expensive, trees are getting scarcer; with e-business, usage of papers and consequently felling of trees can be reduced. TMP environmental footprint can be reduced.
December 2010 – Q. 4(a)
(a)Evaluate the perceived benefits and costs of adopting e-assessment at the IAA. (15 marks)
collaborative filtering, questionnaire on web site
Individualization – mass customization/personalization
Integration – seamless ordering, integrated communication
facilities (phone, e-mail etc.), integration of databases
Industry restructuring – disintermediation, re-intermediation,
Independence of location – anywhere, anytime
6Is of Internet/new media
June 2011 – Q. 4(a)
(a) Evaluate how the principles of interactivity, intelligence, individualisation and independence of location might be applied in the e-marketing of the products and services of CAR. (16 marks)
Partial answer
Interactivity E-marketing is made possible with the advent of the Internet and the WWW. CAR can use its existing website to place its advertising to complement the display advertisement in the newspapers. The advertisement in the website will be interactive as there will be hyperlinks and prospective customers and existing customers will definitely feel that it will be more interactive, dynamic and engaging as compared to newspaper advertisements that are more static. Apart from the advertisements in the website, the website of CAR will also generally be more interactive as there will be links to other sites and customers can experience a two-way engagement. In addition, to increase the interaction among customers and CAR, a chat or forum link can be created so that customers, both current and prospective can ask questions and receive answers. To complement this, customers can also upload their experiences and testimonials which must be properly authenticated to ensure that there are no fake ones.
