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 authors consent.

ACCA
PAPER P3 BUSINESS ANALYSIS

Syllabus outline
LESSON 1 TOPIC (OVERVIEW) Financial performance review, marginal analysis, overhead apportionment in full-costing, ABC, variance analysis and capital budgeting Mission, vision, goals, objectives, competencies, stakeholders, performance: balance scorecard, benchmarking, CSFs

3 4 5 6 7 8 9 10 11 12

Strategy, strategic management, strategic planning gap analysis SWOT analysis External and internal appraisal Strategic options Strategy evaluation and decision making Organizational structure and design Motivation, change, conflict, culture Outsourcing Project management Software, e-commerce/e-business, CRM, data warehousing, SCM, business processes

13

Marketing and e-marketing

Analysis of past year papers

Topic

Dec 07

Jun 08

Dec 08

Jun 09

Dec 09

Jun 10

Dec 10

Jun 11

Dec 11

June 2012

December 2012

June 2013

Financial performance review, marginal analysis, variance analysis and capital budgeting

1(a)

1(a)

3(a)

2(a)

1(a)

1(b), 2(a)

1(a), 3(b)

1(a), 3(c)

Mission, vision, goals, objectives, stakeholders, competencies, performance: balance scorecard, benchmarking, CSFs, managerial performance

1(c)

1(a), 2(a)

1(c)

1(c)

1(c), 2(a)

Strategy, strategic management, strategic planning gap analysis

1(c)

1(b)

SWOT analysis External and internal appraisal 1(a), 3(a), (b), (c) 1(a), 1(c) 1(a)

1(a) 1(a), 2(a, b) 1(a), 2(b)

1(a) 1(a) 1(a) 4(a, b) 1(a), 2(a) 2(a)

Strategic options

b(i), 1(c)

(ii),

1(b), 4(a)

2(a, b)

2(b)

1(b)

1(b)

3(a, b)

Strategy evaluation and decision making

1(c)

1(b)

1(c)

1(b), 4(a, b)

3(b)

1(a), 4(a, b)

2(b)

Organizational structure and design

3(b)

2(b)

1a(ii)

Motivation, change, conflict, culture

1(c), 4(b)

1(b)

1(b) (i,ii), 3(a)

2(a)

1(b)

1a(ii), 4(b)

Quality issues (no more in syllabus)

4(a), (b)

1(c) (i), 3(b)s/w, 4(b)

Outsourcing

2(a), (b) 2(a) (b) 1(c) 3 (a), (b), (c) 4(a) 3(b, c) 4(a, b) 3(a) 2(a), 4(a) 3(b) (i,ii), 4(a, b) 3(a)

3(a)

1(b, c)

2(b) 3(a, b) 3(a) 1a(i) 4(a)

Project management

HRM and leadership

4(a, b) 1(b, 3(c) c), 2 (a), 4(a,b) 3 (a, b), 4(b) 2(b), 3(c) 2(a, 4(b) b); 2(b)

Software, e-commerce/ebusiness, CRM, data warehousing, SCM, business processes

3(a,b)

Marketing and emarketing

3(a), (b)

2(b)

4(a)

4(b)

Combination

1(c)

1(c) (ii); 2(a)

3(b)

1(a), 4(c)

Key words for P3

Stakeholder framework: Mendelow Models/framework for performance: BSC

Upstream/downstream activities framework/model: Value chain/system Strategic options: what basis, which direction, how Evaluate strategies/recommend/justify strategies: FAS Change classification (scope/extent of change and nature of change): Balogun and Hope Haileys ARER Contextual features of change: Balogun and Hope Hailey Styles of managing change: Kotter and Schlesinger Excellence: Peters and Waterman

General/macro environment: PESTEL

Current position/current situation/strategic position: SWOT Competitive/industry/market/task environment: Porters 5 forces Model/framework for Nations: Diamond model Process/strategic importance framework: Harmon

Models Stakeholders Mendelow

Frameworks Mendelow

Competitive/task/industry/market environment Porters 5 forces

Macro environment PESTEL

Nations Porters Diamond

Marketing mix 7Ps

Activities, upstream and downstream activities Porters Value Resource audit 9M, 1I chain/system Generic strategies, Bowmans strategic clock McKinsey and Cos 7S Products BCG, PLC, GE Generic strategies Internet 6Is, 6Cs Strategic options what basis, direction, how; TOWS analysis

Culture JSWs Cultural Web Process strategic importance Harmon

Evaluate strategies FAS Organization configuration Mintzberg

Strategic change, elements of change, types of change Balogun Strategic change, elements of change, types of change Balogun and Hope Haileys ARER and Hope Haileys ARER

Contextual factors/features Balogun and Hope Haileys 8 factors/features Change Lewins (Force-field, 3-step, French and Bells Organizationals 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 3Ws 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 Property, plant, equipment Intangible assets Total Current assets Inventories Trade receivables Cash and cash equivalents Total Total assets EQUITY AND LIABILITIES Share capital Retained earnings Total equity Non-current liabilities Long-term borrowings Total non-current liabilities Current liabilities Trade and other payables Current tax payable Total current liabilities Total liabilities Total equity and liabilities

$m 2,175 100 2,275

275 10 300 585 2,860 550 110 660

2,000 2,000

199 1 200 2,200 2,860

Extract from the statement of comprehensive income All financial figures in $m Revenue Cost of sales Gross profit Administrative expenses Profit before tax and interest Finance cost Profit before tax Tax expense Profit for the year Extract from the annual report Number of employees Number of rail kilometres 3,010 920 320 (210) 110 (40) 70 (60) 10 (1) 9

Figure 2: Financial information for the Rudos rail industry as a whole Measure ROCE Operating profit margin Gross profit margin Current ratio Acid test ratio Gearing ratio Revenue/employee per year Number of employees per rail kilometre National rail industry average 450% 1000% 2200% 21 12 48% $85,000 41

Question requirements

(a) Using appropriate models and frameworks, analyse GETs 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 the same as used for industry financials. ROCE (PBIT/capital employed * 100) Operating profit margin (operating profit/sales * 100) Gross profit margin (gross profit/sales * 100) Current ratio (current assets/current liability) Acid test ratio ((current assets stock)/current liability) Gearing ratio (debt/(equity + debt)) * 100 Revenue/employee per year Number of employees per rail km 2.63% 21.85% 34.38% 2.9 1.6 75% $106,312 3.3

Compared to the industry average, GETs 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, GETs operating profit margin is more than double industry average. The gross profit margin for industry average is only slightly more than half of GETs. As such, GETs 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. GETs 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 Assets Non-current assets Property, plant and equipment Goodwill $000 2008 30 215 245 3 205 208 453 2007 25 133 158 2 185 187 345

Current assets Inventories Trade receivables

Total assets Liabilities Current liabilities Trade payables Current tax payable Bank overdraft

257 1 10 268 80 348 105 453

178 2 25 205 35 240 105 345

Non-current liabilities Long-term borrowings Total liabilities Equity Share capital Total equity and liabilities

Extract from the statement of comprehensive income Revenue Cost of sales Gross profit Other costs Finance costs Profit before tax Income tax expense Profit for the year Extract from the annual report Number of staff

2,650 (2,600) 50 (30) (10) 10 (1) 9 90

2,350 (2,300) 50 (20) (4) 26 (2) 24 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&Ps conclusion. (13 marks)

2008 Gross profit margin Net profit margin Current ratio Quick ratio Return on sales ROE RONA Interest cover ROCE Gearing ratio Trade receivables days Trade payables days Inventory days/stock turnover ratio Fixed asset turnover ratio Asset turnover ratio Sales per employee 1.89% 0.34% 0.78 0.76 0.75% 8.57% 4.86% 2 10.81% 0.76 28 36 0.42 10.8 5.85 $29.4

2007 2.13% 1.02% 0.91 0.90 1.28% 22.86% 17.14% 7.5 21.43% 0.33 29 28 0.32 14.9 6.81 $33.6

From the figures above, RiteSoftwares 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. RiteSoftwares 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, RiteSoftwares 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. RiteSoftwares 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. RiteSoftwares gearing had also increased by 43% points due to borrowings.

RiteSoftwares 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&Ps conclusion is valid.

Break-even point
Total sales revenue
Costs ($)

Total costs
Break-even point

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 Variable labor Other variable costs Fixed costs Administration and selling Variable Fixed $3 per radio $60,000 per year $20 per radio $14 per radio $12 per radio $80,000 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.

Marginal analysis - contribution

Contribution = sales revenue (selling price)

variable costs Contribution per unit = sales revenue per unit (selling price per unit) variable costs per unit Contribution fixed costs = net profit

Contribution application

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

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) Selling price per unit ($) Variable cost per unit ($) Weekly demand (units) Machine time per unit (hours)

B14 25 10 25 4

B17 20 8 20 3

B22 23 12 30 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) Contribution per unit Contribution per machine hour Priority

B14 15 $3.75 2nd

B17 12 $4 1st

B22 11 $2.75 3rd

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 9,999 7,000 6 9 EcoPlus 12,999 10,000 5 10 EcoLite 6,999 4,500 6 8

Selling price per car ($) Variable cost per car ($) Weekly demand (cars) Production time per car (hrs)

(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

Selling price per car ($) Variable cost per car ($) Contribution per car ($) Production time per car (hrs) Contribution per hour ($) Weekly demand (cars) Priority

Eco 9,999 7,000 2,999 9 333 6 1

st

EcoPlus 12,999 10,000 2,999 10 300 5 3

rd

EcoLite 6,999 4,500 2,499 8 312 6 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 equipment ($)

Sports clothes ($)

General clothes ($)

Sales revenue Total costs: Fixed Variable Profit/(loss)

534

254

183

97

138 344 52

46 167 41

46 117 20

46 60 (9)

Should the general clothes department be closed?

Answer

Total ($)

Sports equipment ($)

Sports clothes ($)

General clothes ($)

Sales revenue Variable Contribution

534 344 190

254 167 87

183 117 66

97 60 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 mechanics 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 businesss 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 $10,0001,000 hours = $10 per direct labour hour $ Direct materials 15

Direct labour (316)

Overheads (103) Full cost of the job

48
30 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 Depreciation of machinery Rent and rates Heating, lighting and power Indirect materials Other miscellaneous indirect costs Total indirect costs

$ 9,000 3,000 5,000 2,000 500 200 19,700

Overhead recovery rate is $19,7006,000 hours = $3.28 per direct labour hour

Answer contd

Thus, the full cost of the sail would be expected to be: $ Direct materials (20 2) 40 Direct labour (12 ($60,0006,000 hours)) 120 Indirect cost/overheads (123.28) 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 $19,7002000 hours = $9.85 per machine hour Full cost of sail is Direct materials (202) Direct labour (12 ($60,0006,000 hours)) Indirect costs (59.85)

$ 40 120 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: Preparation department Machining department Finishing department General administrative department $ (000s) 2,000 2,400 1,800 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 Preparation Allocated costs: Machine power Machine depreciation Indirect salaries 2,000

All in $ (000s) Machining Finishing GA

3,000 2,000 2,400

1,800

1,800

Apportioned costs: Rent Heating and lighting Insurance of premises Cleaning 10,000 800 200 600 11,600 Apportioned by floor area Departmental overheads Reapportioned GA costs by number of staff (including the indirect workers) Total overheads by department 695 6,562 993 13,226 595 4,812 (2,283) 3,867 5,867 4,833 12,233 2,417 4,217 483 2,283

Overhead recovery rate for preparation department (direct labour hour based): $6,562,000(600160) = $68.35 Overhead recovery rate for machining department (machine hour based): $13,226,000120,000 = $110.22 Overhead recovery rate for finishing department (direct labour hour based): $4,812,000(500160) = $60.15

The cost of the job is as follows: $ Direct labour: Preparation department (10 10) Machining department (7 12) Finishing department (5 10) 100 84 50 234 $

Direct materials: Preparation department Machining department Finishing department 85 13 6 104

Overheads: Preparation department (10 $68.35) Machining department (7 $110.22) Finishing department (5 $60.15) 683.50 661.32 300.75 1,645.57

Full cost of the job

1,983.57

Activity-based costing (ABC)

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.

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:
Annual sales Sales price per unit Batch size units Direct labour time per unit hours Direct labour rate per hour Direct material cost per unit Number of special parts per unit Number of set-ups per batch Number of separate material issues from stores per batch Number of sales invoices issue per year Standard 12,000 $65 1,000 2 $8 $22 1 1 1 50 Deluxe 12,000 $87 50 1 22 $8 $32 4 3 1 240

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 Number of set-ups Number of special parts Number of invoices Number of batches Labour hours

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

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 Special part handling costs Customer invoicing costs Material handling costs Other overheads $ 73,200 60,000 29,000 63,000 108,000 333,200

Overhead recovery rate = total overheads number of labour hours

= 333,200/ [(12,000 2) + (12,000 21 2)] = $6.17 per hour

Direct costs Labour Material Indirect costs Overheads ($6.17 per hour) Total cost per unit Return on sales

Standard $ 16.00 22.00 12.34 50.34

Deluxe $ 20.00 32.00 15.43 67.43

Standard $ per unit

Deluxe $ per unit

Selling price Total cost Profit Return on sales

65.00 50.34 14.66 22.55%

87.00 67.43 19.57 22.49%

(ii)
(a) Standard driver volume 12 12,000 50 12 24,000 (b) Deluxe driver volume 720 48,000 240 240 30,000 (c) Total driver volume (a+b) 732 60,000 290 252 54,000 (d) Costs $ 73,200 60,000 29,000 63,000 (e) Driver rate $ (d/c) 100 1 100 250

Overhead Cost pool Set-up Special part

Driver

Set-ups per batch Special parts per unit

Customer Invoices per invoices year

Material Number of handling batches

Other Labour hours overheads

108,000 2

Overhead Cost pool

(f) Total costs Standard (ae)

(g) Total costs Deluxe (be) $ 72,000 48,000 24,000 60,000 60,000

Unit costs Standard (f/12,000) $ 0.10 1.00 0.42 0.25 4.00 5.77

Unit costs Deluxe (g/12,000) $ 6.00 4.00 2.00 5.00 5.00 22.00

$ Set-up 1,200 Special part 12,000 Customer invoices 5,000 Material handling 3,000 Other overheads 48,000 Total overheads

Total cost per unit calculations as follows:

Standard $ per unit

Direct costs Labour Material Indirect costs Overheads Total costs per unit 16.00 22.00 5.77 43.77

Deluxe $ per unit

20.00 32.00 22.00 74.00

The return on sales is calculated as follows: Standard $ per unit 65.00 43.77 21.23 Deluxe $ per unit 87.00 74.00 13.00 14.94%

Selling price Total cost Profit

Return on sales (profit/sales 100%)32.67%

(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 $ 40 15 Super $ 60 20

Direct labour (all $10/hour) Direct materials 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 businesss 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) Number of machine set-ups Number of quality control checks Number of sales orders processed General production (machine hours) Total Cost $000 280 220 240 260 1,000 Annual number of activities Total 100 2,000 5,000 500,000 Basic 20 500 1,500 350,000 Super 80 1,500 3,500 150,000

(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 $ 40.00 15.00 18.20 (4.55 4) 73.20 Super $ 60.00 20.00 27.30 (4.55 6) 107.30

Direct labour (all $10/hour) Direct material Overheads Total Selling price for: Basic: $73.20 1.25 = $91.50 Super: $107.30 1.25 = $134.13

(b) Full costs (ABC) Activity Machine set-ups Cost $000 280 Basis of apportionment number of set-ups number of inspections number of orders processed machine hours Basic ($000) 56 (i.e. 20/100) 55 72 182 365 Super ($000) 224 165 168 78 635

Quality inspection 220 Sales order processing 240

General production 260 Total Overheads per unit 1,000

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 $ Direct labour (all $10/hour) Direct materials Overheads Full cost Current selling price 40.00 15.00 9.13 64.13 $91.50 Super $ 60.00 20.00 63.50 143.13 $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 Sales price variance = actual sales revenue flexed budgets sales revenue Direct materials usage variance = (actual quantity of materials flexed budgets quantity of materials) budgeted cost for unit of direct materials Direct materials price variance = actual costs of direct materials (actual quantity of direct materials used cost per unit at budget)

 Direct labor efficiency variance = (actual labour

hours flexed budgets labour hours) budgeted hourly rate Direct labour rate = actual labour cost (actual labour hours budgeted hourly rate) Fixed overhead variance = actual overhead cost flexed/original overhead costs)

Example
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) Direct materials (1170 kg) Fixed overheads 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. $ 12,210 11,630 3,200

Answer
Antonio Plc

Original Budget Output (production and sales) $ Sales revenue 31,000 1000 units

Flexed budget 1100 units

Actual 1100 units

$ 34,100

$ 34,950

Raw materials Labour Fixed overheads Operating profits

(10,000) (1,000 kg) (11,000) (2,000 hours) (3,000) 7,000

(11,000) (1,100 kg) (12, 100) (2,200 hours) (3,000) 8,000

(11,630) (1,170kg) (12,210) (2,150 hours) (3,200) 7,910

Variance

Description

adverse/favourable

Reasons variance

for

adverse

Sales volume

Profit of original budget profit -ve ------- favourable of flexed budget +ve------- adverse

Check from manager Poor performance sales personnel

sales by

Deterioration of market conditions between the setting of the budget and the actual event Lack of goods or services to sell as a result of some production problems

Sales price

Actual sales revenue flexed +ve------- favourable budgets sales revenue -ve------- adverse

Lower prices charged

being

Poor performance by sales personnel Deterioration of market conditions between the setting of the budget and the actual event

Direct usage

materials (Actual quantity of direct -ve ------- favourable materials flexed budgets quantity of direct materials) +ve------- adverse *budgeted cost for unit of direct materials

More materials used than budgeted Responsibility of the production manager Poor performance by production department staff, leading to high rates of scrap/wastage Substandard materials, leading to high rates of scrap, defective materials Faulty machine, causing high rates of scrap

Direct price

materials Actual costs of direct -ve ------ favourable materials actual costs of +ve------- adverse direct materials allowed

Actual costs of direct materials allowed = actual quantity of direct materials used * cost per unit at budget

Paying more than budgeted cost increased prices charged by the supplier, delivery costs Poor performance of buying department staff, inefficient buying procedures Change in market conditions between setting the standard and the actual event Using a different supplier who is more expensive Buying smaller-sized orders and losing planed bulk purchase discounts

Direct efficiency

labour (Actual labour hours worked -ve ------- favourable flexed budgets labour +ve------- adverse hours) * budgeted hourly rate

Poor supervision Workers skill was poorer than anticipated

Low-grade materials, leading to high levels of scrap and wasted labour time
Problem with customer for whom a service is being rendered Problems with machinery, leading to longer labour time Dislocation of materials supply, and employees being unable to proceed with production

Direct labour rate

(Actual cost allowed costs -ve ------- favourable at budgeted rate per hour) +ve------- adverse

Higher rates paid Poor performance by the personnel function Using a higher grade worker than was planned

Change in labour market conditions between setting the standard and the actual event
Unexpected increase in basic rates of pay

Fixed overhead

Actual overhead flexed/original costs

costs -ve ------- favourable overhead +ve------- adverse

Poor supervision of overheads

General increase in costs of overheads not taken into account in the budget

Variance Sales volume (8000 7000) Sales price (34,950 34,100) Materials price [11630 (1170 * 10)] Materials usage (1170 1100) * 10 Labour rate [12,210 (2150 * 5.5)] Labor efficiency (2150 2200) * 5.5 Fixed overhead (6,000 6,350)

$ 1000 (F) 850 (F) 70 (F) 700 (A) 385 (A) 275 (F) 200 (A)

Manager accountable Sales Sales Purchasing Production Personnel Production Various depend on O/H

Capital budgeting
Discount factor
Is given by the formula,

Payback period

1/ (1 + where k = cost of capital; n = time period Present value, PV = Future value (FV)/ (1 + k)n Is the factor by which a future cash flow must be multiplied in order to obtain the present value.

k)n,

Is the expected number

of years (or time periods) required to recover the original investment In general, a shorter payback period is favourable

Payback period
Payback = year before complete recovery + (unrecovered investment/cash flow during the year in which complete recovery occurs)
Net cash flows Project S ($) Project L ($) (1000) (1000) 500 100 400 300 300 400 100 600

Year 0 1 2 3 4

For project S: Year Net cash flow ($) 0 (1,000) 1 500 2 400 3 300 4 100 Using formula: 2 + 100/300 =

Cumulative net cash flow ($) (1,000) (500) (100) 200 300

years

Discounted payback assuming discount factor of 10%

Year Project S ($) cash flow (PV) 0 (1000) 1 500 2 400 3 300 4 100 Discount rate (10%) 1.0000 0.9001 0.8264 0.7513 0.6830 Discounted (1000) 455 331 225 68 net

Year 0 1 2 3 4

Discounted net cash flow (PV) (1000) 455 331 225 68

CNCF (1000) (545) (214) 11 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

The IRR is defined as that

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 projects 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

discount rate which equates the present value of a projects expected cash inflows to the present value of the projects expected costs (investment costs) or

That is, PV (inflows) = PV

(CFt/(1 + IRR)t) = 0

Job One Costs Hardware costs Software costs Maintenance costs Total Benefits Staff savings Contractor savings Better information Improved staff morale Total Cash Flows Discount Factor at 8% Discounted CF

Year 0 50 50 10 110 0 0 0 0 0 110 1000 110000

Year 1 0 0 10 10 40 20 0 0 60 50 0926 46300

$000s Year 2 0 0 10 10 5 10 0 10 25 15 0857 12855

Year 3 0 0 10 10 0 10 20 20 50 40 0794 31760

Year 4 0 0 10 10 0 10 30 30 70 60 0735 44100

NPV = 25015 Job Two Costs Hardware costs Software costs Maintenance costs Total Benefits Staff savings Contractor savings Better information Improved staff morale Total Cash Flows Discount Factor at 8% Discounted CF $000s Year 2 0 10 10 20 10 15 0 10 35 15 0857 12855

Year 0 50 30 10 90 0 0 0 0 0 90 1000 90000

Year 1 0 10 10 20 30 30 0 0 60 40 0926 37040

Year 3 0 0 10 10 5 15 10 10 40 30 0794 23820

Year 4 0 0 10 10 0 15 10 10 35 25 0735 18375

NPV =2090

Question June 2011

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 Barrys 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 0 1 2 3 4 net cash flow -110 50 15 40 60 cumulative net cash flow -110 -60 -45 -5 55

Payback period = 3 + (5)/60 = 3.08 years For job 2, Year 0 1 2 3 4 net cash flow -90 40 15 30 25 cumulative net cash flow -90 -50 -35 -5 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, Barrys 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, Barrys remark that job 2 will be chosen if IRR was used is wrong.

Intangible benefits Both Jobs 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 Job 2 -59.415 -37.06

Both have negative NPVs 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 jobs 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 detre) Strategy what is the companys competitive position and distinctive competence? Values what are the companys beliefs, moral and principles? Behavior standards what are the companys 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? Truskies 3C clear, concise, compelling

Goals
Henry Mintzberg defines a goal as the intention

behind a decision or action, identified 4 system goals: Growth business and financial Survival Efficiency Control of the environment

Objectives Thompson and Strickland

Financial and strategic objectives SMART (stated,

measurable, agreed upon, realistic, time-assigned) Examples:

$5b operating profit by 2014 Chrysler 13% market share by 2014 Chrysler Revenue more than $1.4b by 2015 Puma Revenue of $100b by 2017 - Target

Core competencies

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 companys operations and therefore have an enforceable claim over a companys performance Use of Mendelows power-interest matrix to classify stakeholders

Level of interest (in organizational strategies) Low Low High

A. Minimal effort

B. Keep informed (e.g. community)

Power

High

C. Keep satisfied (e.g. institutional investors)

D. Key players

Mendelows 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

Stakeholder relationship management

Stakeholder engagement

Shareholders

Employees

Community

Customers

AGMs, Meetings

Meetings, PA, rewards Annual dinner, Family day,

Town-hall meetings, open day, CSR programs

CRM

Question December 2009

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 Customer satisfaction PI Number of customer complaints, number of closed customer accounts or number of dormant accounts, number of goods returned, change in market share High P/E ratio

Sound image in financial market

Improve efficiency
High employee morale

Stock-holding cost, time taken to market, amount of waste produced 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. managers feel comfortable monitoring.

It produces a limited amount of focused information which even senior

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. valid when applied to an organization, a function or and individual.

It can be used at different levels of aggregation. The method is equally

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 managers and the prevailing culture of organization

Strategy as experience through the cumulative experience of

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)

Strategic Management Process

Set mission, vision and goals

Establish objectives

Strategic Position

External appraisal

Internal appraisal

Stakeholder appraisal

Generate strategic options

Evaluate strategic options

Strategic Choice

Select strategy

Implement strategy - design organizational structure, manage conflict, politics, and change; manage people and systems

Strategic Action

Review and control

Macro environment PESTEL analysis

Political Government (stability/instability) Wars Terrorism Economical Business cycles Social-cultural Demography Technological ICT Environmental GHG Legal Taxation

Unemployment GDP

Lifestyle changes Linguistic differences Consumerism

Global climate Disasters

Employment Environmental protection Foreign trade regulations: tariffs, excise, quotas

Xenophobia/ nationalism/ populism

Inflation

Money supply
Interest rates Currency fluctuations Energy Stagflation BUGIMICES

Customs
Social mobility Diseases pestilences and

Religious issues

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

Potential new entrants

threat of new entrants

Supplier

bargaining power of suppliers

Competitive rivalry

Buyers
bargaining power of buyers

threat of substitutes products and services

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.

Suppliers bargaining power

heterogeneity of inputs, i.e. suppliers 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 suppliers customers are of little importance to the supplier if the brand of supplier is powerful suppliers 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

Threat of substitute products/services

relative price performance of substitutes switching costs of customers buyer propensity/tendency to substitute

Competitive rivalry
market growth rates - development, growth, maturity, decline product differences are low - undifferentiated brand identity switching costs is low for buyers high exit barriers diversity of competitors 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 Porters five forces framework. (a) Using Porters framework, analyse the business analysis certification industry (BACTI) in Erewhon and assess whether it is an attractive market for ABCL to enter. (20 marks)

Generic strategies
Competitive advantage Lower cost Differentiation

broad target

Cost leadership

Differentiation

Competitive scope narrow target Cost focus

Differentiation focus

Bowman strategy clock

4 High 3 5

Perceived Value Added

Std value

Low Low

1 8 Std. Price Price

7 High

Failure strategies

Hybrid strategies Blue Ocean

Nintendo Wii: -Low cost processor in MHz, used off-the-shelf components, cheap parts, use of 3rd party software games -Differentiation Wii remote, more games LAvion:

-Low cost lands at suburbs, Boeing 757 (lighter), code sharing with OpenSkies -Differentiation business class facilities
Target Expect more, pay less

IKEA

Hypercompetition
Repositioning

Overcoming competitors barriers:

Shorter life cycle Undermine strongholds Counter deep pocket advantages

Competitive strategies in hypercompetitive conditions

Competing successfully:
Pre-empt competition (new strategies) Do not attack competitors weaknesses Disrupt the market Be unpredictable Mislead competitors

Overcoming competitors market-based moves:

Block first-mover advantages Imitate product/market moves

Porters Diamond
Firm strategy, structure and rivalry

Factor conditions

Demand conditions

Related and supporting industries

Diamond - Porter
Why certain companies in certain nations are more

competitive than others? Factors to consider for organizations when moving to new overseas markets? Factors to encourage the inflow of FDI Factors to consider by government to improve firms competitiveness?

Factors to consider when moving to new overseas markets

Firm strategy, structure and rivalry analyse potential competitors in terms of strategy, structure and intensity of rivalry; perform market research Demand conditions demand? Fulfill customer expectations? Levels of consumerism? Perform market research. 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) Management Methods methodologies, procedures, policies, processes, activities, functions MIS SICMARDSS; 5Es Intangibles - goodwill (due to brand name, good contacts, company image etc.)

7S
Strategy Skills

Structure

Superordinate goals

Style

Systems

Staff

Value chain
Firm infrastructure Margin Human Resource Development Technology development Procurement Inbound logistics Operations Outbound logistics Marketing and sales Service

Margin = Total value added total cost = total selling price total cost

Activity Inbound logistics

Operations

Outbound logistics

Marketing and sales

Definition materials receiving, storing, and distribution to manufacturing premises. This includes materials handling, stock control, transport transforming inputs into finished products or service. This includes machining, packaging, assembly, testing etc. 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 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 to maintain or enhance product such as installation, repair, training, spare parts 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

Service

Corporate/firm infrastructure

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 chains Channel value chains Customer 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

Barneys VRIS value, rare, imperfect imitability

and non-substitutability

Strategies
What basis Generic strategies: Cost leadership Differentiation Which direction Alternate directions: No change/do nothing Consolidate How /Which method Alternate methods: Internal growth organic growth, Greenfield External growth (Acquisitions and mergers) Joint development/alliances

Focus/niche Hybrid/Blue Ocean Hypercompetition

Market penetration Market development Product development Diversification International Decline/divest

Market penetration
Why?

Growing market or high economic growth Competitors market share/sales greater

How/when?

Marketing mix: Product mix essence/gist of product remains the same; branding; packaging; labeling Pricing objectives, determine demand, estimate costs, analyze competitors prices, costs and other offerings Promotion mix HRM HRP, HRD, PA, rewards

Market development
Market development

Domestic

Overseas

A particular segment in existing market

Why? Push factors Kotter Pull factors Ohmae 5Cs: company, customers, country, competitor, currency

New overseas market development Initial issues: Porters Diamond & market research, Cultural familiarity theory, institutional distance Market orientation/basic entry strategy: Perlmutter and/or Bartlett and Ghosal Detailed strategies: what basis, which direction, how Marketing: STP, marketing mix

Product development
Short product life cycles To increase market share/sales/customer base Changing lifestyle Recovery strategy and/or competitive reasons

 Diversification

Product

Geographic

Related / Concentric

Unrelated/ Conglomerate

Advantages

SROCS
Survivality Risk Opportunities Greater control over value system activities Synergy operational and financial

Acquisitions

Vertical acquisitions

Conglomerate acquisitions
Horizontal acquisitions

Reasons/benefits
Ansoff and McDonnell risk, synergy and

performance JSW speed, lack of resources/competencies, cut down on competitive retaliation, financial motives, cost efficiency Dunning OLI ownership, locational advantage and internalization

Post-acquisition issues
Asset restructuring and resource deployment

downsizing (lay-offs, outsourcing), downscoping (divestment, spin-off) Issues pertaining to value chain Cultural problems Malekzadeh and Navahandis model Expensive and risky due diligence Hubris Hypothesis (Roll) top managers overestimating their ability to make the acquisition work due to an exaggerated sense of their own ability Managerial self-interests empire building

Organic growth internal growth

Core competency Control Costs spread costs Cultural or conflict Minimize disruption

No suitable target
Government discouragement Experience/learning curve OLI Protection of proprietary technologies

Problems of organic growth

Slower penetration of markets Competitors may raise barriers to entry Financial benefits slow to materialize Adds new capacity price wars

Internationalization
Mode Non-equity mode equity mode (FDI)

Export

Non-equity alliance

Equity alliance

Wholly-owned subsidiary

Direct Indirect

Franchising Licensing Turnkey/BOT Outsourcing

JV strategic investment

Greenfield Acquisition

cross-shareholding

Strategic Alliances
Complementarity Compatibility Capability Commitment

Joint ventures
F- financial outlay I independence N nationalistic feeling E - local expertise R reduce risk S Synergy FINERS, OLI

Problems of JVs
Control Conflict Risk to transferring technology to partner creating

a competitor (e.g. JV between Nestle and Lotte, Japan)

Licensing
Licensing

Royalty (% of net sales)

Licensor

intangible property

Licensee

Costs: Production, marketing mix etc.

Manufacturing

Intellectual property

P, I, D, F (patent)

software, music, videos, books, articles, journals, notes (trademark/copyright)

When licensing
Product is at the mature stage; competition is

strong; profit margins are declining lacks financial and management resources presence of barriers

Licensing issues
Involve heavy policing costs The risk of creating a competitor Reputation affected if licensing produced poor

quality goods Refusal to pay Post cross-licensing issues

Franchising
Used in retail, service (fast-food, hospitality), distribution, education, healthcare
Up-front fee; royalty (% of monthly sales); promotion (% of monthly sales)

Franchisor

intangible property , know-how

Franchisee

Franchising process
Franchise applicants
Vet/select

Master franchisee

Chosen franchisee
field audits, mystery customer

Training, provide documentation/manuals, logo etc.

Fanchise operates

Mc Donalds: up-front fee = $1m, royalty = 5% of monthly sales, promotion = 3.75% of monthly sales Pinkberry: up-front fee = $40,000, royalty = 5% of monthly sales promotion = 2% of monthly sales Wendys: up-front fee = $0.5m

Benefits of franchising
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 without the considerable investment of capital that would be required if the company (the franchiser) grew in a more organic fashion skills required to mange a large dispersed organization

It allows the business to grow rapidly in a number of locations

It eliminates some of the need for the development of managerial

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 organisations 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 Acceptability returns, risks, stakeholder reactions Suitability environment (PESTEL, market forces),

exploit strategic capabilities, stakeholder expectations and influences, cultural influences

Company B1 P1 B2 P2 B3 . P3 ..

Product portfolio models

BCG growth-share matrix Product life cycle GE business planning grid

BCG market share-growth matrix

High

STAR

PROBLEM CHILD/WILD Rate of growth of market (%) CAT

Low

CASH COW
High

DOG
Low Relative market share

Cash Cow 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 Development Stage Growth Maturity Decline

sales

Time

profit

 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

Strong Competitive Position 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
Buy undervalued assets

Synergy manager
A corporate parent seeking

(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 companys HQ normally small and parent pursuing an unrelated diversification or conglomerate strategy

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 companys HQ normally large and parent pursuing a related diversification strategy

Parenting Matrix
Low

Ballast

Heartland

Misfit between CSFs and parenting characteristics

Edge of Heartland

High

Alien territory

Value trap

Low High Fit between parenting opportunities and parenting characteristics

Parenting characteristics structure, systems, skills possessed, resources Parenting opportunity potential for parent to improve business unit

What is the CSFs of business? Is there any parenting opportunity? What is parents characteristics? Ballast examine Value trap examine Alien territory divest Edge of heartland retain and move to heartland Heartland - retain

Decision tree
Mary is a manager of a gadget factory. Her factory has been quite successful the past three years. She is wondering whether or not it is a good idea to expand her factory this year. The cost to expand her factory is $1.5M. If she does nothing and the economy stays good and people continue to buy lots of gadgets she expects $3M in revenue; while only $1M if the economy is bad.

If she expands the factory, she expects to receive $6M if economy is good and $2M if economy is bad. She also assumes that there is a 40% chance of a good economy and a 60% chance of a bad economy.
Draw a Decision Tree showing these choices.

Trend analysis
Exponential smoothing Time series

Exponential smoothing

Ft+1 = .Xt + (1-).Ft

Time series

Y=T+S+C+I
A Part 1 Year 2006 B Quarter 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 C Units 56 70 74 60 60 80 80 70 62 82 80 70 60 84 82 68 D E Trend F Variation G Seasonal H Residual

2007

2008

2009

524 538 554 570 582 586 588 588 586 586 590 590

65.50 67.25 69.25 71.25 72.75 73.25 73.50 73.50 73.25 73.25 73.75 73.75

8.50 -7.25 -9.25 8.75 7.25 -3.25 -11.50 8.50 6.75 -3.25 -13.75 10.25

7.35 -4.73 -11.65 9.02 7.35 -4.73 -11.65 9.02 7.35 -4.73 -11.65 9.02

1.15 -2.52 2.40 -0.27 -0.10 1.48 0.15 -0.52 -0.60 1.48 -2.10 1.23

Part 2 2006 2007 2008 2009 Total Average Adjusted New average

3 8.50 7.25 6.75 22.50 7.50 0.15 7.35

4 -7.25 -3.25 -3.25 -13.75 -4.58 0.15 -4.73

-9.25 -11.50 -13.75 -34.50 -11.50 0.15 -11.65

8.75 8.50 10.25 27.50 9.17 0.15 9.02

0.58 0.00

Organizational structure/design
Entrepreneurial structure, functional structure,

divisional structure, matrix structure Shamrock organization Mintzbergs organizational structure

Mintzberg

Configuration

Environment (external) simple/ dynamic

Internal factors small, young firms, simple tasks, CEO control old, large firms, regulated tasks, technocrat control simple systems, professional control old, very large firms, divisible tasks often young firms, complex tasks, expert control middle aged firms, often enclaves, simple systems

Key building block strategic apex

Simple structure

Key coordinating mechanism direct supervision

Machine bureaucracy

simple/ static

technostructure

standardization of work

Professional bureaucracy

complex/ static

operating core

standardization of skills

Divisionalized bureaucracy

simple/ static diversity

middle line

standardization of outputs

Adhocracy

complex/ dynamic

operating core, support staff

mutual adjustment

Missionary

simple/ static

ideology

standardization of norms

Matrix structure
Advantages Develop employee skills increases skill variety, improves motivation and performance Allows experts to be moved to crucial areas as needed People working participatively in teams synergy Disadvantages Not everyone adapts well to matrix system - team members must have good interpersonal skills and be flexible and cooperative Morale can be adversely affected when personnel are rearranged when projects are completed and new one begins Possibility of divided loyalties on the part of members of project teams in relation to their project manager and their functional managers Role conflict, role ambiguity and role overload may result for managers and staff Possible many time consuming meetings

Formal bureaucracy is replaced by direct contact of employees flatter structure Managerial motivation - development of management through increased involvement in decisions Avoids unnecessary duplication - since each project is assigned only the number of people it needs By working together, people come to understand the demands faced by those who have different areas of responsibility Helps to improve coordination

Time taken to make decisions may be longer because consensus must be obtained vertically and horizontally Functional manager may feel that his authority, to a certain extent could be undermined

Change, resistance and culture

Scope of change Realignment Transformation

Incremental Nature of change

Adaptation

Evolution

Big Bang

Reconstruction

Revolution

Contextual features/factors
Power what power does the change leader have to impose power? Capacity what is the degree of change resource available? Readiness how ready for change is the workforce? Capability what is the managerial & personal capability to implement change? Time how quickly change is needed? Scope how much change is required?

Strategic change programmes

Preservation what organizational resources and characteristics need to be maintained?

Diversity how homogenous are the staff groups & divisions within the organization?

 Resistance to change/Restraining force to change:

Kanter, Stein and Jick Reasons for resistance CUDS-CW

Loss of control Fear of the unknown Distrust Status/security Lack of confidence Increasing of workload

Force-field analysis
Forces for change Forces restraining change

Current level of performance

Desired higher level of performance

Dont push too hard for change Understand potential resistances Weaken these potential resistance, then implement the change necessary

Managing resistance or styles of managing change

Education and communication Participation and involvement Facilitation and support Negotiation and support Manipulation and co-optation Explicit and implicit coercion

3-step process for managing change

Unfreeze Awareness of need for change Change movement from old state to new state Refreeze Assurance of permanent change

old state

new state

French and Bell organizational iceberg

French and Bells organizational iceberg

Visible/formal goals, strategies, structure, systems and procedures, resources, management style Invisible/informal values, attitudes, beliefs, culture, politics, conflict, informal groupings eyes
formal

informal

JSW cultural web

Stories Power structures Rituals and routines Organizational structure Control systems Symbols Paradigm SPROCS-P

Scheins 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)

C, D

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

C 6

Start

End

. 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 postimplementation review will focus on the products 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 postimplementation 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.

Harmons 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 Complete examination Receive results

Invigilator

Collate scripts

HQ Admin Distribute scripts Determine audit reqs.

marks < 45 Marks > 55

Publish results

45-55 marks

Allocate auditor

Marker

Mark scripts

Auditor Audit scripts

Courier Transport scripts Transport scripts Transport scripts Transport scripts Transport 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 redesign at IAA. (10 marks)

Software development

In-house

Outsource

Bespoke

tailor-made

off-the-shelf tailor-made bespoke

Partial answer
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 Comparatively cheap as compared to tailor-made, or bespoke Readily available - time saving

Disadvantages User will be dependent on supplier for maintenance and upgrades 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 There could be a high turnover of programmers in an environment that advocates the use of packages

Staff savings - since the company does not need to hire in-house programmers if it is going to rely entirely on 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 Maintenance contract - Can form User Groups

May still have bugs impossible to try and test completely 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 chains Channel value chains Customer value chains

Organization value chain

E-business

E-commerce

Drivers/benefits for e-business Reduce costs/increase turnover

Barriers to e-business adoption

efficiency/profit/increase Costs

Improve communication with customers, staff, Lack of resources time, skills, knowledge suppliers/improve relationships Keep up with progress Keep up with competitors/competitive pressures Increase speed of access to information Standardize/simplify/integrate processes Staff resistance Integration problems Lack of board interest Difficult of changing processes

Customer, demands

management,

employee,

supplier Security Insufficient government regulations

Improve/shorten delivery time

Increase range of products/services

Increase IT knowledge Increase customer base Improve corporate image/enhancement of brand Faster product development lifecycle

Technology current bandwidth problems

Identifying new partners better

partners/supporting

existing

Generic benefits of E-Commerce

Cost savings

Convenience

Access to more information

Improves decision making

Simplifies business process

Improves customer service

Global reach

Access To greater expertise

Communication Anywhere, Anytime Paperless People Publications & distribution Ease of usage

Shorter time to market

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 ebusiness, 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)

Generic limitations
Cost Security Technical Legal issues Negative demand/ Breakdown

(contd.)

limitations

elements problem

mindset

of human
relationships

Start-up cost Upgrades Maintenance

Bandwidth

Pornography

Data-transfer rate Compatibility issues

On-line gambling Terrorist sites

Anti-God etc.

Security
Fraud spoofing Hacking modifying data, inserting malicious

software, defacing web site Sniffing DoS Spamming

(i) Start-up, upgrades and maintenance costs With the e-assessment system, IIA need to invest in computer systems and their relevant related costs. Start-up costs will be incurred when installing the new e-assessment systems. This can be hardware and software costs and well as other communication costs. Furthermore, this computer network will have to be upgraded from time-to-time. There is also maintenance costs incurred to ensure the e-assessment is up and functioning. (ii) Security breaches With the e-assessment system, IIA must also ensure that there is proper security to ensure no security breaches. This can occur due to hacking, malware and other unscrupulous means such as DoS attacks, (iii) Licensing costs The licensing costs for the software installed in the e-assessment for marking and checking will have to be paid for. There will also be costs incurred for software that has to be installed for advanced level students to type. (iv) Online support costs Similarly, there should be online support in the case of any event. The foundation level students who are sitting anywhere and anytime may need this online support in case of any problems arising. (v) Redundancy costs With the implementation of the e-assessment system, there would invariably be some redundancies. IIA may not need many full-time administrative staff and therefore may be considered for laying-off. As such, there will be some redundancy costs incurred. (vi) Training costs Also, there will be training costs incurred as markers need to be familiar with the system so as to mark seamlessly.

December 2011 Q. 3(c)

(c) HomeDeliver does not have a benefits management process and so a benefits realisation review is inappropriate. However, it does feel that it would be useful to retrospectively define the benefits to HomeDeliver of the new electronic ordering system. Identify and discuss the potential benefits to HomeDeliver of the new electronic ordering system. (7 marks)

Answer
The potential benefits are: Costs reduction With the e-ordering system, fewer staff can be employed by HomeDelivery. There can be a reduction of order entry administrators as well as managers dealing with order fulfilment and invoicing. In addition, there can also be less inventory stored, thereby reducing stock-holding costs. Better cash flow With this system, payments would be paid directly into HomeDelivery bank account at the end of each day. Therefore, there will be faster collection of cash and improved liquidity. Delivery times As the business cycle of the e-ordering system is much shorter than its predecessor, the delivery times of customers receiving the household goods will be much shorter. There can be better customer satisfaction and this will help to cement the image of HomeDelivery. Accuracy There can also be better accuracy as the data entry is done only once. Prior to this, the agents will have to fill up the forms and these forms are collected at the end of the week to be sent to the order entry administrators. Due to possibly poor handwriting and perhaps large number of completed order entry forms, there could be errors in data entry. However, with the new e-ordering system, the agents will key-in themselves and it is hoped that this will reduce the occurrence of data entry errors. Security In addition, with the e-ordering system, security can be enhanced via proper encryption options and standards.

E-marketing

E-marketing is the application of the Internet and

related technologies to achieve marketing objectives (Chaffey et al., 2003

E-marketing plan
Situation analysis Control Objectives

Action

Strategy

Tactics

Situation analysis

Objectives

PESTEL analysis Competitor analysis

E.g. Lululemon 8% of

total revenue by 2012

Resource analysis
Demand analysis Intermediary analysis

Strategy

Tactics
Marketing mix: Products Price Place Promotion People sales and marketing personnel (can be automated by auto-responders, e-mail, web site) Process procedures, processes in place to achieve all marketing functions Physical evidence how customer purchases and uses a product, physical site

Decide on e-marketing

strategy penetration, brand loyalty, improve service, pull customers

Action

Control

Level of investment Training

Monitor, review and

change

Implementing and

maintaining a dynamic web site

6Is of Internet/new media

Interactivity in the form of advertisements. Can also have dialogue in Internet media, chat/forums, blogs Intelligence cookies, agents, clickstream tracking, 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

June 2011 Q. 4(a)

(a) Evaluate how the principles of interactivity, intelligence, individualisation and independence of location might be applied in the emarketing 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.

ALL THE BEST GOD BLESS