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Mock One. Business Analysis P3BA-MK1-Z17-A. Answers & Marking Scheme Becker Educational Development Corp.

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Mock One Business Analysis P3BA-MK1-Z17-A Answers & Marking Scheme 2017 Becker Educational Development Corp. Tutorial note: The answers that follow are fuller and more comprehensive than would have been
Mock One Business Analysis P3BA-MK1-Z17-A Answers & Marking Scheme 2017 Becker Educational Development Corp. Tutorial note: The answers that follow are fuller and more comprehensive than would have been expected from a well-prepared candidate. They have been written in this way to aid study and revision for candidates. 1 DPP (a) Assessment of advantages and disadvantages of acquiring Papier Presse Acquiring PP may be a way of achieving growth in revenues and profits in an industry that has reached maturity, where organic growth appears elusive. The paper industry for which DPP manufactures textiles is in decline, due to the emergence of substitutes such as the TV and internet. PP has a high market share in Awayland, so offers DPP the opportunity to expand into this country quickly. The acquisition may lead to synergies. Synergy is the concept whereby two entities combined produce more value than two separate entities. This may arise due to cost savings, increased market share or other synergistic benefits. An obvious source of synergy is that some activities such as marketing and management are likely to be duplicated, and some cost savings will be available from rationalising these. It will be only be necessary to have one marketing and sales department for the two entities after acquisition, and the current management of PP would probably not be required. Another source of synergy would be the sharing of capabilities. PP has very good customer service capabilities, for example, and DPP could benefit from adopting these throughout the group. It seems that DPP excels in product innovation, and so acquisition would allow the customers of PP to benefit from these. The combined entity would have more bargaining power with than two separate companies. PP also has 25% market share in other European countries, which along with DPP s own share of 15% would lead to a combined market share of 40%. This is likely to give the company greater bargaining power with both customers and suppliers. From a financial perspective, PP s performance should be analysed. A comparison of DPP and PP shows the following: DPP PP Gross profit margin 38% 25% Operating profit margin 11% 12% Return on capital employed (ROCE) 36% 46% Revenue per employee $156,400 $120,000 Gross profit margins are only 25% at PP compared to 38% at DPP, so it seems there are opportunities for cost savings to be found. This may relate to the higher staff levels at PP revenue per employee at DPP is 30% higher than at PP, so there may be some opportunities for cost savings to be made there, although the factories are heavily unionised, so reducing headcount may lead to industrial action. The operating margin and ROCE of PP are higher than DPP. DPP depreciation accounts for 5% of revenue at DPP but at PP this is only 1%. This may reflect under investment in machinery at PP, which would also explain the higher ROCE. If acquisition does take place therefore it may be necessary to modernise plant and machinery Becker Educational Development Corp. All rights reserved. 2 A big question relating to the acquisition is the price to be paid. PP s revenues are 46% of those of DPP, so it the acquisition will represent a significant investment. DPP may have to pay a premium over the fair value of PP in order to persuade the owners to sell. There is considerable evidence that the biggest winners in acquisitions are the shareholder of the firm being acquired, who enjoy the benefits of the premium; the shareholders of the acquiring company have to wait before the enhanced cash flows and profits of the combined entity justify the price paid. Following the acquisition it will be necessary for two organisations with different cultures to come together. PP has three very heavily unionised manufacturing plants. PP is also an owner managed business in contrast to DPP. Since DPP is the acquirer, it is likely that the staff of PP would be expected to fit into the existing culture of DPP. If PP staff do not like that culture, this may lead to conflicts or a high number of resignations, which may damage the business due to the loss of know-how and customer contacts. The sales, service and distribution systems of the two companies are currently separate, so would have to be unified at some point, particularly since the two companies share some customers. This is likely to be a large project. PP has very little in the way of sales outside of Europe, so DPP is unlikely to gain in terms of additional global reach. Overall it does appear that the additional bargaining power that an acquisition brings and the potential synergies of the acquisition outweigh the potential pitfalls of acquisitions, so it would appear to be a suitable strategy. WORKINGS Financial ratios DPP PP 1. Gross profit margin = Gross profit Revenue = 37% = 25% 2. Operating profit margin Operating profit = Revenue = 11% = 12% 3. ROCE = Debt Equity + debt = 36% = 46% 4. Revenue per employee Revenue = Employees $195.5m $90m = $156,400 = $120,000 1, Tutorial note: Although no particular model is used in the model solution above, an alternative approach could have used the suitability, acceptability and feasibility tests to provide a structure to the answer Becker Educational Development Corp. All rights reserved. 3 (b) Advantages and disadvantages of greenfield option From the information given in the scenario, DPP will face significant problems if it chooses to develop a greenfield site. The bureaucratic planning procedures adopted by the host government can add considerable time to get an efficient plant up and running. In some ways, such governments are in a dilemma, anxious to secure foreign direct investment, but at the same time protect inefficient domestic manufacturers. Certainly, DPP in its own risk assessment would need to take political risk into account. In assessing the risks of a Greenfield site, Ken could use Porter s diamond to good effect. Factor conditions might be seen as quite favourable, with an educated, trained, albeit low productivity, labour force. However, the lack of demanding tough global customers, a weak and inefficient domestic industry to supply the new venture and competitors who have been highly protected mean that DPP will have to battle to create a supportive and sustaining environment. Financial exposure may be increased through currency risk. Clearly, the fresh start will allow integrated information systems to be developed and the latest technology to be used. However, the new capacity will have a significant impact on DPP s existing plants. The extent to which expatriate management is used is clearly an issue. The host government is likely to require some commitment to the training of local management and the degree of autonomy given to the new plant may well be an issue. Cultural issues and sensitivities will be significant often shop floor workers and managers will be used to high levels of absenteeism being tolerated in government owned and controlled firms. Also the issue of involvement and participation could be an issue there may be a marked reluctance on the shop floor to contribute ideas towards raising productivity and quality. DPP is part of a group that has experience of operating abroad and there is a real need to access information on key problems in greenfield operations. In many ways the move to a greenfield site links the macro environmental analysis generated by a PESTEL analysis to five forces industry analysis with its focus on customers, competitors and suppliers. Certainly, creating an integrated value chain with DPP s existing business will be a real challenge to the management. It also adds capacity to a Regional industry where there is already a problem. Choosing between the two options to achieve the strategic goal of a lower cost base can be done using the tests of suitability, acceptability and feasibility. The decision will not be an easy one. (c) Strategic drift Strategic drift is where changes the strategy of an organisation is no longer aligned with the external environment. It occurs where the external environment changes significantly, while strategy is typically developed incrementally. If strategic drift continues unchecked, it may ultimately lead to corporate failure (bankruptcy) of the organisation. DPP provides textile fabrics for the paper industry. The paper industry itself provides paper mainly to book publishers and newspapers. Due to developments in technology, such as the development of e-books and the competition from the internet and TV, the paper industry itself appears to be in decline. There is little indication from the scenario that DPP has made any changes to its strategic direction other than attempting to increase capacity through acquisition or investment in greenfield sites described in (parts (a) and (b)). If strategic drift can be identified at an early stage, actions can be taken to bring the strategy of an organisation back in line with the environment. It seems that in the case of DPP the strategic drift is in an early stage, since the company still appears to be making reasonably good return on revenue and capital employed (see part (a)), although without comparative figures for earlier financial periods it cannot be seen whether these are declining Becker Educational Development Corp. All rights reserved. 4 Using the Ansoff matrix as a tool to help come up with new ideas may be a useful exercise. The Ansoff Matrix suggests that growth can come from two dimensions the first is to develop new markets for existing products, the second dimension is to develop new products. Taking the first dimension, the development of new markets for DPP could be taken to either mean new geographic markets, or new market segments. If DPP aimed for a strategy of selling its existing products in new geographic markets, the company would probably only be buying time, as the whole market for paper and related products appears to have reached maturity and may soon decline, so this may not be a good option. In a specialised industry such as paper manufacturing, there are unlikely to be too many market additional market segments of any size to offer feasible alternatives. This suggests that product development may be the more obvious method of finding new areas of growth. Clearly developing related products would be less risky than developing entirely new products, as this would build on the existing capabilities of DPP. Since DPP is making textiles for paper machinery, the company clearly has capabilities in the textile industry and could consider other customers of textiles. An obvious market would be the clothing industry, but there may be other types of machinery that require the use of textiles. My suggestion therefore would be to explore opportunities to change the products and provide textiles to industries where demand is still buoyant. Tutorial note: This solution used Ansoff as a tool. There was no requirement to use Ansoff or any model credit is given for any sensible comments relating to alternative strategies that DPP could pursue. 2 GOOD SPORTS (a) Advantages and disadvantages of e-business To: From: Date: Good Sports XYZ 15 th Dec 20XX E Business strategy Clearly, the markets that Good Sports operates in are being affected by the development of e- business and its experiences to date are mixed to say the least. In many ways the advantages and disadvantages of e-business are best related to the benefit the customer gets from the activity. Technology can help Good Sports to identify, anticipate and satisfy customers' needs and wants. Advantages Through integrating and accelerating business processes e-business technologies enable response and delivery times to be sped up. There are new business opportunities for information-based products and services. Websites can be linked with customer databases and provide much greater insights into customer buying behaviour and needs. There is far greater ability for interaction with the customer, which enables customisation and a dialogue to be developed. Customers may themselves form online communities able to contact one another Becker Educational Development Corp. All rights reserved. 5 Disadvantages Despite the many advantages for companies adopting this new way of doing business, there are barriers to making use of it. Customer service: The key to Good Sports survival is customer service in strategic terms they are very much niche marketers supplying specialist service and advice to a small section of the local market. The nature of the business means that face-to-face contact is crucial in moving customers from awareness to action (AIDA awareness, interest, desire and action). High investment costs and the availability of the technical infrastructure Technical and integration problems: Systems are not compatible around the world. Integrating them after an acquisition or merger can be very difficult. Often integration has to be completed before companies then can begin to put in e-commerce solutions among all the parties. Culture and resistance to change: The fax was a wonderful device years ago, only to be replaced by newer technology. But it still works and people tend to prefer familiar technology to new devices said to improve efficiency. They are afraid of new technology and fear to be made redundant. Lack of education and training: New processes and procedures mean employees must learn to use the new systems as well as change their behaviour from the we ve always done it this way attitude. The money that must be spent to accomplish this change can be more than the total cost of the hardware and software needed to implement e-commerce. Some people who have gone through this process say the costs can be as much as five times more. Processes most likely effected Electronic business methods enable companies to link their internal and external data processing systems more efficiently and flexibly, to work more closely with suppliers and partners, and to better satisfy the needs and expectations of their customers. Software solutions allow the integration of intra and inter firm business processes. E-business can be conducted using the Web, the Internet, intranets, extranets, or some combination of these. It involves business processes spanning the entire value chain: electronic purchasing and supply chain management; processing orders electronically; handling customer service; cooperating with business partners. (b) E-business support for niche strategy Good Sports has pursued a conscious niche or focus differentiation strategy, seeking to serve a local market in a way that isolates it from the competition of the large national sports good retailers competing on the basis of supplying famous brands at highly competitive prices. Does it make strategic sense for Good Sports to make the heavy investment necessary to supply goods online? Will this enhance its ability to supply their chosen market? 2017 Becker Educational Development Corp. All rights reserved. 6 3 HCC In terms of price, e-business is bringing much greater price transparency the problem for companies like Good Sports is that customers may use their expertise to research into a particular type and brand of sports equipment and then simply search the Internet for the cheapest supply. The Internet has tended to weaken industry profitability and made it more difficult to hold onto operational advantages. Choosing which customers you serve and how are even more critical decisions. However the personal advice and performance side of the business could be linked to new ways of promoting the product and communicating with the customer (e.g. CRM). The development of customer communities referred to above could be a real way of increasing customer loyalty. The partners are anxious to avoid head-on competition with the national retailers. One way of increasing the size and strength of the niche they occupy is to use the Internet as a means of targeting their particular customers and providing insights into the use and performance of certain types of equipment by local clubs and users. There is considerable scope for innovation that enhances the service offered to their customers. As always there is a need to balance the costs and benefits of time spent. The Internet can provide a relatively cost effective way of providing greater service to their customers. There is little in the scenario to suggest they have reached saturation point in their chosen niche market. Overall there is a need for Good Sports to decide what and where its market is and how this can be improved by the use of e-business. Tutorial note: Porter s analysis of competitive forces provides a framework for part (a); part (b) can be broken down along traditional SWOT lines. (a) Five forces model Michael Porter analyses the competitive forces facing businesses under five headings, and these are used as the framework for discussing the position of HCC below. Rivalry among competitors The company faces strong competition for haulage work and haulage contractors operate on a low-margin basis. This latter factor makes successful competition more difficult, since the possibility of competing on the basis of price is limited. The fact that smaller companies often subcontract from large-scale hauliers makes it that much more difficult for HCC to obtain profitable jobs. Threats from potential entrants Matt set up HCC by simply taking out a loan and buying himself a heavy goods vehicle. This illustrates that barriers to entry in this industry are not difficult to surmount and the threat from potential entrants is therefore high. Once into the market new entrants face little difficulty in acquiring a customer base because they are able to take on subcontract work from larger firms Becker Educational Development Corp. All rights reserved. 7 Bargaining power of customers In general the position of customers in the industry is a strong one. The large number of firms operating haulage services provides potential customers with a good level of choice, and competition makes it difficult for the hauliers to increase their margins. In the case of HCC in particular the position is critical. The company is heavily dependent on a single company, which is undesirable at the best of times. At present, it is even more dangerous than usual because Capok has sought other suppliers and significantly reduced the volume of business sent to HCC one third. Bargaining power of suppliers For the supplies necessary to run the business vehicles, equipment, labour, etc. there appears to be no particular problem for HCC. The one other vital resource finance is more problematical. As things stand the bank is happy to extend additional loan facilities, but this situation may be precarious. Only a short time ago the company was close to liquidation in the opinion of the bank and any further doubts on this score would endanger future financing. Threats from substitutes The business of HCC is to offer transportation in a particular mode (road haulage). There are alternative modes of transportation such as rail freight or airfreight, as well as heavy competition within the road haulage sector. (b) Position appraisal In preparing a position appraisal it is usual to distinguish between internal factors (namely strengths and weaknesses of the organisation) and external factors (namely opportunities it can exploit and threats it faces). Internal factors strengths The main strengths of the business are as follows. The personal abilities of Matt. These have been demonstrated in his single-handed founding and management of the business over the past 12 years. The customer base and goodwill built up over the same period. Although there appears to be scope for new firms to enter the market fairly easily, these will not bring the same advantages with them. However, there is some danger that this strength is declining because of the loss
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