ACCA Paper P3 Business Analysis Mock Exam

Questions

Paper P3

Business Analysis

ACCA Paper P3 Mock Examination for December 2010 Examination By Mr. Andy Tan Instructions: Section A: Answer ALL questions. Section B: Answer TWO questions only.
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ACCA Paper P3 Business Analysis Mock Exam

Section A This ONE question is compulsory and MUST be attempted. The following information should be used when answering question 1.

Questions

1 Case Study
Introduction Universal Roofing Systems is a family owned and managed business specialising in the design, assembly and installation of low maintenance PVC roofing products for domestic housing. These products include PVC fascia boards and rainwater drainage systems. Set up in 1995 by two brothers, Matthew and Simon Black, the firm has grown year on year, achieving almost $1 million sales by the year 2001. Universals products, or rather services, are primarily for private house owners, though a significant amount of sales are coming from commercial house owners, mainly local government authorities and housing associations, providing cheaper housing for rent. Universal have recently received central government recognition and an award for their contribution to proving employment in deprived inner city areas. In 2002 and 2003, they were the fastest growing inner city firm in their region. Origins and competitive environment Matthew and Simons decision to go into business owed a considerable amount to the experience and skills they had gained working in their fathers local cabinet and carpentry business. At their fathers insistence, both were skilled cabinet-makers and shared his commitment to quality workmanship and installation. Their decision to start a business using PVC materials as opposed to wood came as an unwelcome shock to their father. However, the opportunity to install PVC roofing boards on the house of a commercial contact provided the stimulus for them to go into business on their own account. In the UK there are some 25 million houses, of which 17 million are privately owned and 8 million rented. New housing is now usually built with PVC doors and windows installed, so it is the replacement market of rotten wooden doors and windows in existing houses that the manufacturers and installers of PVC windows and doors focus on. PVC offers some significant advantages to be owner/occupier it is virtually maintenance free and improves the appearance of the house. Consequently, there is a high demand for PVC replacement doors and windows, estimated at $1.5 billion in the year 2000. This has attracted some large-scale manufactures and installers. They compete aggressively for market share and use equally aggressive direct sales and promotion techniques to attract house owners to their product. Although the market for PVC windows and doors is reasonably mature, there has been no significant movement of large companies into the installation of roofing products. Their complex design and location at the top of a house mean that these products are much more complex and difficult to install. Economies of scale are harder to achieve and as, a consequence, the installation of PVC roofing systems is largely in the hands of small businesses able to charge high prices and frequently giving a poor quality service to the house owner. In a market with potential sales of $750 million a year, no firm accounts for more than 3%. It was against this fragmented, but significant market that Universal wanted to offer something distinctively different. Operational processes Matthew and Simon looked at the whole process of delivering a quality service in replacement PVC roofing systems. The experience of the PVC door and window installers showed the long-term rates of growth possible through actively promoting and selling the service. Supplies of PVC boards and fitting were reasonably easy to obtain from the small number or large UK companies extruding PVC boards in large volumes. However, the unequal bargaining power meant that these suppliers dominated and were difficult to involve in any product development.

ACCA Paper P3 Business Analysis Mock Exam

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Sales were generated by door-to-door canvassing, followed by a visit from a company sales representative who tried to complete the sale. Advertising in the press, radio and TV now supported this sales activity. In the early days the opportunity was taken to sell the service at Saturday markets and, being so small, Universal could often pleasantly surprise the house owner by offering virtually immediate installation. Matthew and Simon promoted, sold and installed the systems. One of their key early decisions was to use a new Mercedes van with Universals name and logo prominently displayed, to carry the bulky PVC materials to their customers houses. In one move they differentiated themselves from their low cost/low quality competitors and got the companys name recognised. The skills and experience of the brothers meant that they were able to critically examine the installation process being used by their small competitors to deliver a poor standard of service. Their eventual design incorporated innovative roofing design and parts from Europe and a unique installation stand or frame that provided the installer with quick, easy and safe access to the roofs of the houses being worked on. This greatly improved the productivity of Universals installation team over competitors using traditional methods. The brothers recognised that without the ability to offer a service that could be packaged, given standard prices and procedures and made as installer friendly as possible they too would be limited to small scale operation and poor service. Being able to replicate a process time after time was the key to delivering an improved service and preventing each job being seen as a one-off. In Matthews word, Whenever the customer can have a predictable experience and you can say that this is what we are going to do, this is the way we are going to do it and this is how much it will cost, the product/service usually goes problem free. Ultimately, the installers of the roofing systems determined quality. The brothers quickly built up a team of installers, all of whom worked as sub-contractors and were not directly employed by the company. This gave the company the flexibility to vary the number of teams according to the level of customer demand. Installation took place throughout the year, though it could be affected by winter weather. The two man teams were given comprehensive training in installation and customer care. Payment was by results and responsibility for correcting any installation faults rested with the team doing the particular installation. Sales and marketing Marketing and promotion were recognised as key to getting the companys name known and its reputation for a quality installation service established. Comprehensive sales support materials were created for use by the canvassers and sales representatives. Sales representative were able to offer significant discounts to house owners willing to make an immediate decision to buy a Universal roofing system. In addition Universal received a significant income stream from a finance house for roofing systems, sold on extended payment terms. Universal offered a unique 10-year guarantee on its installations and proudly announced that over 30% of new customers were directly recommended from existing satisfied customers. The growth of the company had led to showrooms being set up in six large towns in the region and the business plans for 2005 and 2006 will see a further nine showrooms opening in the region, each of which costs $30K. Brand awareness was reinforced by the continued use of up-to-date Mercedes vans with the companys logo and contact details prominently shown. Company structure and performance By 2005, the organisational structure of the company was in place, based on functional responsibilities. Matthew was now Managing Director, Simon was Operations Director with responsibility for the installation teams, and Matthews wife, Fiona, was Company Secretary and responsible for the administration and scheduling side of the business. Two key appointments had facilitated Universals rapid growth. In 2002, Mick Hendry was appointed as Sales and Marketing Director. Mick had 20 years of experience with direct sales in a large installer of PVC windows and doors. Through his efforts, Universal achieved a step change in

ACCA Paper P3 Business Analysis Mock Exam

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sales growth, with sales increasing from $1million in 2001 to $3.3 million in 2002. However, the increased costs involved meant the company made a loss of some $250,000 2003-saw sales increase to $5.4 million and a profit generated. 2004 saw further sales increase to $6.8 million and a net profit of about $400k. Matthew recognised the increasing pressure on his own time and an inability to control the financial side of the business. 2003 saw Harry Potts appointed as Finance Director and put in much needed financial and management information systems. Future growth and development By 2005 Universal had seen 10 years of significant growth and was facing some interesting decisions as to how that growth was to be sustained. Firstly, there was the opportunity to move from a largely regional operation into being a national company. Indeed, the companys vision statement expressed the desire to become the most respected roofing company in Britain, based on a no surprises philosophy that house owners all around the country could trust. Economic factors encouraging growth looked fairly promising with a growing economy, stable interest rates and house owners finding it fairly easy to raise additional funding necessary to pay for home improvements. Secondly, there was a real opportunity to develop their share of the commercial housing market. The government had committed itself to a significant improvement in the standard of housing provided to people renting from local authorities and housing associations. Despite the appointment of a Commercial Manager to concentrate on sales into this specialist market, Universal had real difficulty in committing sufficient resources into exploiting this opportunity. In 2002 commercial sales represented over 11% of total sales, but currently commercial sales were around 5% of the total sales. Such were the overall growth predictions, however, that to maintain this share of sales would need commercial sales to more than double over the 2005-7 period. Without the necessary commitment of resource, particularly people, this target was unlikely to be realized. Universals products also need to be improved and this largely depended on its ability to get into partnerships with its large PVC suppliers. There were some encouraging signs in this direction, but Universals reliance on PVC opened it to future challenges from installers using more environmentally friendly materials. Above all, however, the rate of projected growth would place considerable pressures on the senior management teams ability to manage the process. The move towards becoming a national installer was already prompting thoughts about creating a regional level of management. Finally, such had been the firms growth record that its inability to meet the budgeted sales targets in the first quarter of 2005 was causing real concern for Matthew and Simon.

ACCA Paper P3 Business Analysis Mock Exam

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Table 1: Information on Universals current sales and financial performance ($000) (where appropriate) Universal Roofing Systems Financial information 2001 Domestic sales Commercial sales Total Sales Material Direct Labour Gross Margin Sales commission Canvassers commission Marketing Total sales costs Contribution before overhead Total overheads Trading profit before commission Finance income Net profit Required: (a) Using Porters Value Chain analysis, analyse the ways in which Universal has provided a superior level of service to its customers. (20 marks) Include 2 professional marks (b) Using the information provided in the case scenario, strategically evaluate the performance of the company up to 2004, indicating any areas of particular concern. (20marks) Include 2 professional marks Matthew Black is well aware that the achievement of the growth targets for the 2005 to 2007 period will depend on successful implementation of the strategic, affecting all parts of the companys activities. (c) Explain the key issues affecting implementation and the changes necessary to achieve Universals ambitious growth strategic. (10 marks) (50 marks) 854 36 890 169 329 392 20 74 32 126 266 272 -6 0 -6 2002 2,914 362 3,276 589 1,105 1,582 369 563 171 1,103 479 723 -244 25 -219 2003 5,073 269 5,342 766 1,941 2,635 627 764 223 1,614 1,021 862 159 65 224 2004 6,451 324 6,775 925 2,290 3,560 781 962 398 2,141 1,419 1,140 279 115 394 2005 Budget 9,600 450 10,050 1,339 3,333 5,378 1,171 1,420 657 3,248 2,130 1,536 594 167 761 2006 Forecast 15,000 750 15,750 2,105 5,125 8,520 1,845 2,190 1,020 5,055 3,465 2,030 1,435 262 1,697 2007 Forecast 20,500 1,100 21,600 2,890 7,019 11,691 2,501 2,993 1,374 6,868 4,823 2,627 2,196 342 2,538

ACCA Paper P3 Business Analysis Mock Exam

Section B TWO questions ONLY to be attempted.

Questions

Seemore Company is family owned and managed video and DVD rental business. Currently the business has thirty-five stores located throughout the region. The company was established in 1982 when Michael Seymour opened a video rental shop on the outskirts of the city. Originally, many of the information systems were paper based but Michael was quick to implement computer based systems as and when required. During the last twenty years the business has expended from the original single outlet to its current thirty-five stores. The central office is the hub of the business where all the business operations are managed. Each store is automated in so much as membership details, video/DVD rental details and local stock recording systems are held locally on personal computers. Each stores computer system is networked to the central office computer system. This network permits details of business operation to be transmitted automatically to the central office. As well as the financial information collected, the central office maintains a company-wide stock recording system. Effective and efficient stock management is a key factor for the companys continued success. Each store maintains a membership database. To become members customers must register with a local store. Following identity checks, members are issued with a membership card. These cards are valid in any of Seemores outlets. Membership is free. Members may visit a store and pick a video/DVD of their choice. The transaction is recorded and the member pays the rental fee if film is available. Members can reserve a film for a specific date either by visiting a store or making a reservation by telephone or fax. There is an increasing trend by members to use this reservation facility, as it avoids the disappointment of films not being available when required. Seemore Co has always adopted the policy that the customer comes first. Maintaining high levels of personal service and customer satisfaction has always been a high priority within the business. The central office conducts all business transactions with its suppliers via an extranet. The extranet, implemented three years ago, is widely viewed as successful. Speedy stock replenishment and acquisition of new tiles are essential to the running of this highly competitive business. There are three permanent IT professionals based in the central office. They maintain and enhance the business information systems. The majority of the existing business systems are off-the-shelf packaged based software that in some cases have been adapted to meet Seemore Cos specific requirements. During the past fifteen years the IT staff did not develop business information systems for Seemore and external staff were contracted in to supply the service. The initial implementation of the network was outsourced to a local vendor. In the early 1990s Seemore Co developed a postal membership system (PMS). To become a postal member, customers pay a monthly premium. Each month they are sent brochures of the latest releases and classic titles available. The members complete an order form and return it to central office. Within two days of receipt of an order the rental packages are dispatched from the warehouse together with a pre-paid package label for the return of rentals. Details of members and their transactions are maintained in a customer database. Although generally business has been steady, fierce competition has been negatively affecting profit margins. Senior management is concerned about the current position and is attempting to develop ides that will reverse the downward trend. One suggestion proposed by Michaels brother Edward is to incorporate video ordering via the internet. He believes the power of the web can strengthen the companys business position and help to increase its share of the rental market.

ACCA Paper P3 Business Analysis Mock Exam

Questions

Assuming that Seemore Company decides to proceed with development and implementation of the internet video ordering system. Required: (a) Discuss the characteristics of an effectively designed website reference to Seemore Company. (8 marks)
Discuss the advantages and disadvantages of Seemores decision to proceed with the internet video ordering system from the perspective of a customer.

(b)

(5 marks) (c) Explain Customer Relationship Management (CRM) with reference to Seemore Company. Include in your explanation the use of online and digital technologies and CRM software in supporting Seemore Companys CRM. (12 marks) (25 marks)

ACCA Paper P3 Business Analysis Mock Exam

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3 Global Imaging is a fast growing high tech company with some 100 employees which aims double in size over the next three years. The company was set up as a spin out company by two research professors from a major university hospital who now acts as joint managing directors. They are likely to leave the company once the growth objective is achieved. Global Imagings products are sophisticated imaging devices facing a growing demand from the defence and health industries. These two markets are very different in terms of customer requirements but shared a related technology. Over 90% of sales are from exports and the current strategic plan anticipates a foreign manufacturing plant being set up during the existing three-year strategic plan. Current management positions are largely filled by staff who joined in the early years of the company and reflect the heavy reliance on research and development to generate products to grow the business. Further growth will require additional staff in all parts of the business, particularly in manufacturing and sales and marketing. Paul Simpson, HR manager at Global Imaging is annoyed. This stems from the fact that HR is the one management function not involved in the strategic planning process shaping the future growth and direction of the company. He feels trapped in a role traditionally given to HR specialists, that of simply reacting to the staffing needs brought about by strategic decisions taken by other parts of the business. He feels even more threatened by one of the joint managing directors arguing that HR issues should be the responsibility of the line managers and not a specialist HR staff function. Even worse, Paul has become aware of the increasing number of companies looking to outsource some or all of their HR activities. Paul wants to develop a convincing case why HR should not only be retained as a core function in Global Imagings activities, but also be directly involved in the development of the current growth strategy. Required: a) Write an explanatory note on the way a Human Resource Plan could link effectively with Global Imagings growth strategy. (15 marks) What advantages and disadvantages might result from outsourcing Global Imagings HR function? (10 marks) (25 marks)

b)

ACCA Paper P3 Business Analysis Mock Exam

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Angus Cairncross has recently been appointed as Head of Strategic Operations to the main board of Global Industries plc. This company is a UK-based conglomerate organisation, which had achieved significant expansion during the 1960s and 1970s when focusing on core businesses was not the fashion. The company has managed to maintain a leading position within the UK but is increasingly meeting competition from foreign competitors, both at home and abroad. Angus, prior to this recent appointment, had been Managing Director of one of Global Industries subsidiary companies, Control Systems Ltd. This subsidiary company had focused on building control systems, including central heating, air conditioning and security equipment. The market had been mainly in the industrial sector as distinct from the general housing market. This subsidiary had traditionally not been a significant profit earner for Global Industries but Angus had been able to radically improve the position by his ability to control costs and, with judicious capital investment, improve the output per employee. He had also identified new markets overseas, particularly in China, and the rapidly developing countries of South East Asia. The recent global economic problems faced by these countries had only marginally affected Control Systems business and now sales are again following an upward trend. The Chairman and Managing Director of Global Industries are both impressed with Angus and are hoping that his proven abilities in managing a focused company can be transferred to managing a conglomerate. Recently Global Industries has experienced a downturn in profits. The variety of businesses incorporated in the Company is large. The presence in industrial markets is considerable, ranging from design and construction within the nuclear power industry, rail track construction, components for the motor vehicle assembly industry and the building control systems. Apart from the industrial sector Global Industries is also heavily involved in the defence industry, particularly in weapon systems and avionics. Finally Global Industries has a significant position within the consumer durable industry. It manufactures electric cookers and refrigerators within its kitchen appliance subsidiary, and also has recently purchased a number of franchises in the automobile distribution sector. Global industrys strategy of diversification has enabled it to be less dependent upon one market or one industrial sector. However, in order to cope with the complexities of such a widespread business, the business is organised on divisional lines with each subsidiary reporting to the centre on a financial basis only. Each subsidiary is given financial targets by the centre (after consultation with the subsidiary) and then strategy formulation, implementation and control are delegated to the subsidiary companies. Because there appears to be little synergy between the companies their corporate and brand names are not even related to each other. At the end of a financial year most of the profits are returned to the Global Industries Headquarters, with a proportion being available for re-investment. The company acts in a shareholder role. It takes no active part in management but if profits from a subsidiary are considered to be inadequate then the likelihood of funds for investment in innovation or on new capital equipment will be low. In the final resort the subsidiary may be sold off. Angus has sympathy with this management philosophy. Its attitude towards delegation and the freedom to develop strategies had benefited him at Control Systems. However he also is concerned with a lack of support from the centre. Each subsidiary, by acting as an independent company has to provide its own support infrastructure - R & D, marketing and sales, finance and human resources. He believes that there must be some benefit in developing an organisational structure which can provide some direction and help, other than the Global Industries Headquarters controlling the subsidiaries only through financial discipline.

ACCA Paper P3 Business Analysis Mock Exam

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However, Angus appears to have a more urgent task to attend to as The Board has become very concerned about the performance of its kitchen appliance subsidiary. Over the past few years the performance of this company has deteriorated. This subsidiary originally produced and marketed these appliances within the UK market. However over time it acquired five foreign companies with their own product brands two in Europe, two in the Far East and one in South America. The management at that time decided that it would be worthwhile continuing to promote these products under their original brand names. It also believed that by maintaining separate production facilities the kitchen appliance subsidiary could still appear to be a local company, so customising products for distinctive markets. Initially this had seemed to be a sensible strategy. Sales actually increased for a short time. However over the past three years sales have fallen significantly. Competition is mainly from one major global company who has grown rapidly over the past few years by pursuing a focus strategy. Its strategy has been to concentrate on a restricted number of models, both of cookers and refrigerators, promoted under a single corporate brand name. It has also decided to source its products from just two manufacturing sites. Its marketing strategy has also been centralised, with apparently little reference to local demand conditions. Initially the Global Industries kitchen appliance subsidiary attempted to correct its position by increasing its promotion. However the inability of the company to halt the slide in sales and the resultant loss in profits now means that Global Industries is now unwilling to finance any increased expenditure. Whereas Angus still believes there is profit potential within the kitchen appliance industry the majority of the members of the Board of the Global industries plc do not believe that the subsidiary can be turned around and is considering disposing of the company. Unless the Board can see an improvement in sales or at least be presented with a strategic plan which will identify opportunities to turn around the situation then it will look for a buyer or starve the subsidiary of cash, milk the current operations and then withdraw from that sector.

Required: (a) Discuss the main problems of Global Industry with focus on the kitchen appliance subsidiary, particularly when compared with its major competitor. (10 marks) Discuss the benefits and problems which Global Industries plc is likely to experience, operating as a decentralised group of companies, using mainly financial controls as the major management control system. Suggest how the company can provide more help from the Headquarters, without becoming over-involved in day-to-day operations. (9 marks) Examine the factors which should be considered before a company decides to dispose of a subsidiary. Consider how each of these factors might relate to the disposal of the kitchen appliance subsidiary by Global Industries plc. (6 marks) (25 marks)

(b)

(c)

End of question paper

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