P3 ACCA Workbook

171 Pages·2014·0.94 MB·English

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ACCA P3 - Business
Analysis
Workbook
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Lecture 1 - Strategy
Formation
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Illustration 1
F is a leading manufacturer of plastics. Its major products are beer crates and small
containers for food sold in supermarkets. Together these two product ranges constitute
90% of F’s business, the remainder coming from selling more technologically sophisticated
products.
The company is faced with a number of difficulties and may have to issue a profits warning
in the coming year. Although the profit levels have been uneven for the past five years, this
is the first time that F will have to report significantly reduced profits.
F has been adversely affected by the aggressive marketing of foreign companies importing
beer crates into the market, such that F’s market share has fallen from 80% to 60% in the
past three years. Consolidation in the brewery industry has meant that profit margins for
crate manufacturers have been squeezed.
The company is heavily dependent upon the home market, which accounts for 75% of its
total sales. Exports have been mainly of food containers for supermarkets in neighbouring
countries.
F has invested heavily in research and development (R&D) and, although there is one
exciting proposition in electro-plastics, most expenditure has been on projects selected by
R&D managers who have little commercial awareness. There is the possibility that some
new products may be developed from the electro-plastics research.
F is highly centralised, with many decisions taken by the 20 members of the board of
directors. The workforce is highly unionised, with a number of different unions represented.
Each factory has several negotiating committees set up to agree pay and conditions.
Negotiations are often time consuming and confrontational. This has resulted in very
precise job definitions, which are strictly adhered to. This has further resulted in
considerable inflexibility, together with a complicated system of labour grades.
The directors have had little communication with stock market analysts and investors, who
have little knowledge of the company other than what is shown in the published accounts.
An informal group of institutional shareholders has asked for a strategic review and has
suggested that F should withdraw from the beer crate market.
Required:
(i) Discuss the main difficulties faced by F.
! ! ! ! ! ! ! ! ! ! ! (5 marks)
(ii) Identify and evaluate alternative strategies that F could adopt to address its difficulties
and recommend those that are most appropriate
! ! ! ! ! ! ! ! ! ! ! (12 marks)
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Solution
(i)
F is faced by a number of difficulties at the present time.
The company's turnover and profits are being affected by the loss of home market share
which, if not remedied, will lead to foreign companies dominating the market.
The price "war" that is occurring in the market for beer crates is also affecting turnover and
profits. This is a very damaging state of affairs for F since the sale of beer crates
constitutes a large part of its business.
The company has problems with labour relations and working practices which will be
affecting efficiency in production processes and hence profitability. Unless this is resolved
it will not be possible to remedy some of the other difficulties faced by F.
The R&D department in F is dysfunctional and developments are not achieving
commercial success. This represents a high cost with little positive impact on the
profitability of the company. Although there are exciting prospects, past performance
suggests that these will not come to market unless changes are made.
F has problems with its institutional shareholders who it has failed to keep sufficiently
informed of its operations. Although this does not have an immediate effect on profitability
it will make it harder for F to make, or where necessary fund, changes to remedy its other
difficulties.
(ii)
Home market price war
An immediate priority must therefore be to stabilise, and if possible improve, profits in the
company's existing markets. If price is a key factor in the marketing mix for beer crates, as
it would appear, the company should:
keep its prices competitive as long as the price war lasts, in order to retain market share,
and
try to reduce costs, in order to increase profitability.
Despite the suggestion from the institutional shareholders, F should not withdraw from its
home beer crate market. The company is still the dominant manufacturer in its home
market. Although the long term prospects for crates do not appear to be good, withdrawing
from the home market would leave a gap in supply that a rival producer would inevitably
fill.
The company should be wary of "inviting" a rival producer to take over a share of the
market, and a strategic evaluation of beer crates as a product should be carried out first.
The company should consider producing beer crates for other markets in the world. By
exporting, F could achieve larger volumes and economies of scale, allowing it to compete
more aggressively in the home market. This would be even more effective if F was to
establish a manufacturing base in other countries. The fact that foreign companies are
able to compete by importing crates to F’s market suggests that there are cost issues in
F’s manufacturing process.
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The company appears to be heavily dependent on its home markets, and a strategy for
developing other foreign markets should be considered. One way of doing this, which may
be possible, is the acquisition of plastics manufacturers which already have a good market
share in the target countries. Acquisition targets should either be crate manufacturers, to
provide economies of scale, or companies operating in related product areas that can
provide economies of scope. However, acquisitions will be difficult without the support of
shareholders.
The issues with labour relations and working practices
An initiative ought to be made by the board to rationalise working practices within the
company as a whole, and make them more flexible. The company is currently faced with
rigid work practices, too many labour grades, rigid job demarcation and a cumbersome
negotiating system.
This may well account for the cost structure that is impeding F’s performance in the
market. The support of the workforce and unions should be sought, for agreement in
principle to change and simplify these practices. Rationalising work practices and making
them more flexible should:
help reduce operating costs; and
create some redundancies.
The matter will require careful negotiations with the workforce at individual factory level. In
the short term, the costs of redundancies will probably off-set the labour cost savings but
the long term benefits should be worth pursuing.
The issues with the R&D department
The market for beer crates would appear to be price sensitive, but there seem to be new
product possibilities in the field of electro-plastics, where the market is presumably only
just being created. Other elements in the marketing mix (particularly the product design
itself) could be critically important. The company should develop a strategy of making R&D
investments more "commercially aware". This could be done by
putting greater emphasis on marketing in the group, especially in the factories responsible
for the new electro-plastic technology;
encouraging factory managers to find out what sort of products customers want;
requiring R & D to invest the bulk of its funds into projects selected by the operating
factories and
ensuring that the R & D is adequate to keep the company at the forefront of the new
technological developments.
Recommendation
In summary, the company's strategy should be
to protect existing markets and market shares by cutting and controlling costs, helped by a
decentralisation policy and a reorganisation of work practices;
to widen its markets and not rely so heavily on the home market; and
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to try to exploit new technological developments by having a “market driven” R & D
department. If the plastics price war ends and prices go up, or if sterling were to fall in
value, making UK plastics relatively cheaper compared with foreign products, the company
should be in a position to obtain better profits from either a bigger profit margin or a bigger
market share.
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Lecture 2 - External
Factors
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Illustration 1
D is an international logging company, which cuts down timber and supplies sawmills
where the timber is seasoned and then cut to appropriate sizes for use in a range of
industries. D will work with any timber, ranging from softwoods used in construction or
paper manufacture to exotic hardwoods used in expensive furniture. Its usual approach is
to secure the rights from a landowner, or in some cases a national government, to cut
timber. This can often involve the payment of large initial cash deposits to these suppliers,
money which D usually borrows. A logging team then cuts down the trees as quickly as
possible and hauls the timber to a convenient river where it is floated to a sawmill. Moving
on rapidly to the next site, the loggers usually leave considerable surface damage behind
them.
Since an increasing proportion of the company’s work has been in the tropical rainforest, it
has recently come under pressure from environmental groups that have protested that it is
not socially responsible to act in this way. Whilst the softwood forests can be regenerated
in a couple of decades by replanting, hardwoods in tropical forests take far longer to
mature.
The Chief Executive of the company has argued that he is not concerned about these
protests since, as far as he is concerned, the company always acts ethically, as it has the
agreement of the national government in any country in which the company operates.
A recent development in the timber industry has been the harvesting of timber from the
bottom of reservoirs which have been created by flooding valleys. Although the capital
equipment required for this approach is significantly more expensive than that used in
conventional logging, the operating costs are lower. Waterlogged trees in reservoirs have
balloons attached, are cut, float to the surface and are towed to a sawmill. The underwater
process is quieter and less disruptive to wildlife and the environment.
It has been estimated that there are over half a billion trees, or 20 years’ supply,
submerged in reservoirs across the world, but it can take considerable research and
expense to find them. As long as the timber has remained submerged deeply enough, it is
of the same quality as timber harvested from the land. There is currently only one
company conducting underwater logging, although a number of other companies are also
considering this development.
Some of the board of directors feel that D should pursue this underwater approach and
abandon land based logging. The Chief Executive and one other director feel that the
underwater approach carries too high a risk.
Required:
(i)  Briefly explain the differences between business ethics and corporate social
responsibility (CSR).
" " " " " " " " " " (5 marks)
(ii)  Discuss the CSR issues relating to D’s business and how the company might
improve its CSR position.
" " " " " " " " " " (8 marks)
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Solution
(i)
Although the two terms, business ethics (BE) and corporate social responsibility (CSR)
are often used interchangeably it is wrong to do so.
BE can be defined as ‘behaviour judged to be good, just, right, and honourable, based on
principles or guides from a specific ethical theory’.
CSR is defined much more broadly as ‘The continuing commitment for business to behave
ethically and to contribute to economic development while improving the quality of life of
the workforce and their families as well as of the local community and society at large’.
Therefore BE is only a component part of CSR. An alternative definition of CSR states that
society can:
I. require business to discharge its economic and legal duties.
II. expect business to fulfil its ethical duties.
III. desire business to meet its philanthropic responsibilities.
It has been argued that philanthropy is not the best approach for CSR unless it is guided
by principles which will develop the local population economically, and educationally.
(ii)
In the context of D’s logging business the chief executive argues that the company ‘always
acts ethically since it has the agreement of the national government...’ This presupposes
that the government itself is acting in the best interests of society. This is not always the
case and much of the focus of both the OECD and WTO is on the unethical behaviour of
governments as well as businesses. With a logging business, which has the potential to
create considerable environmental damage in remote areas of a country, the possibility of
unethical behaviour is high.
From a CSR perspective, D needs to think carefully about its business practices if it is to
continue with land based logging. The ecological damage must be minimised and, once
logging has finished, as much as practicable should be done to restore the habitat to its
previous condition. In the event that the areas in which it operates have a population, D
should be looking for ways to minimise the damage to the livelihoods and wellbeing of
those people that live there. This could be done by providing education facilities, offering
training for those who previously lived off the forest. If possible, it should consider
replanting the area which has been harvested with appropriate trees to provide an element
of sustainability.
Taking a more global perspective, D should work with the environmental groups that have
criticised them. The company should be seeking to conduct its logging in sustainable
forests and take advice to ensure that it minimises its environmental impact.
Having said this, it must not be forgotten that D is a commercial organisation and must
continue to make the best, sustainable, profit for its shareholders.
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Illustration 2
E is a multinational organisation and is one of the largest global producers of chocolate,
coffee and other foodstuffs. E categorises the countries in which it operates as follows:
Less developed countries, from which E sources raw materials, but where there is no
established local market for the finished products.
Fully developed countries, into which E imports raw materials, manufactures, and serves
the local and export markets.
In every country in which E operates, it follows the OECD (Organisation for Economic
Cooperation and Development) guidelines for multinationals.
In the particular case of country F, a less developed country, E has helped the local
farmers to organise themselves into cooperatives to produce their crops. E has also
funded schooling for the children of both the farmers and their workers, built and staffed a
hospital and has provided other welfare benefits. E considers itself to be a good ‘corporate
citizen’ and is used as an example of good practice on the OECD website.
Although the farmers’ cooperatives are free to sell to E’s two main competitors, they tend
not to do so because of the close and friendly working relationship that they have with E.
Both of E’s main competitors are multinationals, but both are smaller than E.
E has recently been receiving some bad publicity in country F. The management of E feels
that this is being organised by the government and the national labour union of country F.
The government of F is reasonably supportive of business, but won the last election with a
narrow majority. The government is now under pressure to raise the standard of living of
the population. An election is due within the next fifteen months. The national labour union,
which is increasingly being supported by the main opposition party in country F, is
extremely anti- business. It would like to see all foreign companies removed from country
F and all foreign- owned assets, and co-operatives nationalised.
The government of country F has stated that the prices paid for cocoa beans are too low,
and that country F is not gaining sufficient tax revenue from the exports. The government
of country F has threatened to impose an export tariff on cocoa beans, unless prices are
increased, and unless E opens a manufacturing facility in the country F. The management
of E feels that it has been targeted by the government because it is the largest of the three
multinationals operating in the country.
The national labour union of country F has argued that the farm workers are being
victimised by the farmers, who have become too powerful because of the cooperatives. It
states that the government of F should not allow the farmers to operate in this way.
The management of E does not want to build a factory because the transport costs from
such a factory to the nearest market for finished products would force the company to
operate the factory at a loss.
The Chief Executive of E is due to meet with government ministers from country F to
discuss E’s future operations and involvement in the country.
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