ACCA P3 Business Analysis - 2010 - Study text

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Answers to practice questions

1 Excellence

A bias for action

Decision-makers think about what they need to do, rather than worry

about what might stop them from succeeding.

Hands-on, value-driven

Managers get involved in the operations of the business and are not

distant figures. They also have a commitment to the values of the

entity.

Close to the customer

The entity is close to its customers and seeks to understand and meet

the needs of its customers.

Stick to the knitting

The entity concentrates on its core competencies, and stick to doing

what it does best.

Autonomy and

entrepreneurship

Teams and individuals are empowered to make decisions and to act

in an entrepreneurial way.

Simple form, lean staff

The organisation structure is simple, and staff numbers (especially

head office numbers) are kept small.

Productivity through people

The entity achieved greater productivity by motivating its employees

and recognising their capabilities.

Simultaneous tight-loose

properties

Controls are applied but individuals are trusted to do what is expected

of them. There is an effective balance between ‘freedom of action’

and ‘accountability and control’.

2 PESTEL

(a) Porter’s 5-force model.

(b) (i) Political environment

(ii) Economic environment

(iii) Social and cultural environment

(iv) Technological environment

(v) Environmental/sociological influences

(vi) Legal environment

many of the oil-producing nations, and the use of oil supply and oil

prices by the governments of some of these countries to exert pressure in

world politics. There are also political disputes about the ownership by

nations of rights to drill offshore in some parts of the world.

(ii) Economic environment. Oil companies, like all other commercial

economies, are affected by the current and expected state of the world

economy and national economies. However, the importance of oil is

such that the decisions and activities of oil companies can have a

significant effect on the world economy.

(iii) Social and cultural environment. Oil companies need to consider the

attitudes of societies towards the consumption of oil. The ‘green’

movement is strong in some countries, and there is an increasing

willingness among people to consider using alternative (non-oil) sources

of energy.

(iv) Technological environment. Oil companies are affected by

developments in technology, particularly developments in the

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technology for using alternative energy sources, and R&D into more

fuel-efficient technology that uses oil.

(v) Environmental/sociological influences. Oil is at the centre of concerns

about greenhouse gases. Oil companies are also affected by concerns for

the protection of the environment and the ecology (for example,

concerns about pollution from oil spillages). There are also concerns

about how long supplies of oil will last.

(vi) Legal environment. Oil companies will be affected by continuing

legislation to protect the environment and to punish companies found

guilty of environmental pollution.

3 Air travel

These are suggestions.

General environmental issues

(ecological issues)

Pollution and global warming will inevitably affect airlines, through

cultural, economic, legal and/or technological change.

Social and cultural issues

Growing demand for international travel in many parts of the

world, both developed and developing nations.

On the other hand, the demand for air travel may fall if the cost of

air travel rises due to higher taxation on aviation fuel.

Legal issues

Risks of legal restrictions, for example restrictions on pollution

levels. Possibility of increasing security regulations to deal with the

threats from terrorism.

Economic issues

The business prospects of airlines will depend on the condition of

the world economy.

Also risks from higher operating costs, for example higher fuel

costs, partly due to shortages in supply and partly due to higher

taxation.

Political issues

Threats from terrorist attacks, making air travel more dangerous.

Risk of higher taxation on aviation fuel.

Technological issues

Need to reduce carbon emissions.

Possibility of using larger aircraft, but with limited numbers of

airports able to accommodate them.

4 Diamond

(a) A cluster is a geographic concentration of inter-connected companies,

specialised suppliers and service providers, firms in related industries and

associated institutions (for example universities, standards agencies and trade

associations), all of which operate in a particular industry. These entities

compete, but in many respects they also co-operated with each other to

develop their industry.

The OECD has defined clusters as: ‘Networks of strongly interdependent

firms, knowledge-producing agents (universities, research institutes,

engineering companies), bridging institutions (brokers, consultants) and

customers linked to each other in a value-added production chain.’

Answers to practice questions

(b) According to Porter’s diamond model, the six determinants of

regional/national competitiveness in a particular industry are as follows:

(i) Factor conditions. The presence of a pool of highly-specialised labour

skills, technology and infrastructure, tailored to the needs of particular

businesses and industries. ‘Factors’ are resources – human resources,

physical resources, knowledge resources and infrastructure.

(ii) Demand conditions. The presence of sophisticated and demanding local

buyers/customers.

(iii) Related and supporting industries. The presence of a critical mass of

capable local suppliers and specialised entities that are critical to

innovation (such as research universities).

(iv) Firm strategy, structure and rivalry. The presence of capable and

fiercely-competitive local firms whose strategies drive continual

innovation in the industry.

(v) Government. The existence of strong government policies, and

government initiatives, that support the development of the industry

and also help to create market demand.

A sixth factor is ‘chance’.

Determinant of regional competitiveness

Factor conditions

Specialised pools of labour with skills in the industry

Local universities and R&D laboratories that carry on research into

industry-related matters

A waste management infrastructure (for example, the existence of

local facilities for materials reprocessing)

Specialist investors/venture capitalists in the industry

Demand

conditions

Strong demand from industrial customers (for example water

companies) that drives innovation

Heavy demand for waste recycling from local government authorities

Public sector organisations with ‘green’ procurement policies

Strong demand for cleaning up of former industrial sites

Related and

supporting

industries

The existence of a large number of related manufacturing industries

(in engineering, electronics, plastics and metals)

High quality academic R&D with strong links with firms in the industry

A strong network of advisers, consultants and components suppliers

Firm strategy,

structure and

rivalry

Many competing local suppliers of environmental services

Strong competition that drives innovation

Firms with strong capabilities in the manufacture of environmental

technology

Local firms include leading international companies in the industry.

Government

Government support for environmental industries

Government policy targets for recycling and renewable energy

Public investment in environmental projects, such as flood prevention

measures

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5 Five forces

(a) The five forces model provides a framework for the analysis of an industry in

which an entity operates. It is an aid to the development of strategies for the

future.

(b) (i) Threat from new market entrants

(ii) Competitive rivalry

(iii) Bargaining power of suppliers

(iv) Bargaining power of customers

(v) Threat of substitutes (also described as threats from product and

technology development)

Force Factor affecting its strength

Threat from new

market entrants

Ease of entry into the market/strength of barriers to entry

The cost of investing in the industry

The cost of acquiring the knowledge needed to compete successfully

The availability of routes to market

Geographical factors

Competitive rivalry

The number and size of firms in the industry

The size of the industry and growth trends

The fixed and variable cost structures of firms in the industry

The range of products/services offered

The existence/absence of effective product differentiation strategies

Bargaining power

of suppliers

The number of available suppliers

The brand reputation of suppliers

The geographical area covered by a supplier

The importance of product quality/service level quality

The bidding capabilities of suppliers and the bidding processes used

Relationships with suppliers

Bargaining power

of customers

The number and size of customers

The frequency of changing suppliers

The cost to a buyer of changing supplier

The importance of product quality/service level quality

Relationships with suppliers; for example just-in-time supply

arrangements

Threat of

substitutes

The existence of substitute products and their price/quality

Fashions and trends in customer demand

The strength of patents

Changes in market distribution

Possible consequences of legislation

Answers to practice questions

6 Niche

In the tourism industry, a market niche might be identified according to the type of

holiday preferred by particular groups of customer. If so, niche markets in tourism

could be (for example):

(1) City break holidays

(2) Golfing holidays

(3) Walking holidays

(4) Sailing holidays

(5) Sight-seeing holidays/culture holidays

(6) Skiing holidays

7 Product life cycles

(a) Suggested answer:

Introduction Growth Maturity Decline

Personal identity cards using

‘iris-based’ technology

Smart cards (in

banking)

Credit cards Cheque books

Third generation (3G) mobile

telephones

Portable DVD

players

Personal

computers

Typewriters

E-conferencing E-mails Fax messaging Postcards

(b) Suggested answer: radio

‘Basic’ products have a long-life, and go through periods of regeneration. At

one time, radio was expected to go into permanent decline following the

arrival of television. However, it has been regenerated at various times, by

factors such as radios in cars, local radio stations, digital radio and so on.

Television is another example. Whereas the specific product ‘black-and-white

television’ is probably in decline, televisions themselves are still in the

maturity phase of their life cycle, and might be regenerated more in the future

by flat-screen technology, digital television and so on.

8 Railway company

Possible methods of market segmentation.

(a) Passenger facilities: first class and second class travel

(b) Time: peak time travel, off-peak travel, week-end travel

(d) Commuter travel, business travel, holiday travel

(e) Long-distance travel, short journeys, international journeys

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9 Tuition company

Possible methods of market segmentation.

(a) By professional accountancy body

(b) By level or stage in the examinations

(d) Full time student, revision course student, evening class student, weekend

course student

(e) Learning method: courses, distance learning, other home study method

10 Benchmarking

(a) The purpose of benchmarking is to compare the performance of an entity (or a

product, operation or business unit) against ‘the best in the business’ or

against expectations. Benchmarking helps to identify weaknesses that need to

be improved.

(b) Internal benchmarking. An entity compares the performance of its business

units (for example, its area offices) against the performance of the business

unit that is considered the best.

Competitive benchmarking. An entity compares its performance and its

products against the best and most successful of its competitors.

Operational benchmarking. An entity compares the performance of a

particular operation, such as handling customer enquiries, or warehousing

and despatch, against the performance of a similar operation in a different

entity. This different entity is not a competitor; this means that the

benchmarking often involves collaboration between the two entities.

Customer benchmarking. A slightly different type of comparison. An entity

compares its performance against what its customers expect the performance

to be.

11 Added value

(a) Added value is the net extra benefit obtained from doing something or by

adding an extra feature to a product or service. Ideally, it should be measured

as a money value, which is the extra sales value from the item minus the extra

costs of doing it or providing it (although ‘value’ cannot always be measured

easily in money terms).

Value is added – or should be added – in all parts of the value chain.

The writer John Kay has argued that adding value is the central purpose of

business activity.

(b) Value is added by:

(i) developing core competencies

(ii) that provide an entity with a competitive advantage.

Competitive advantage is achieved through innovation, reputation and

organisational structure.

Answers to practice questions

12 Value chain

(a) Value chain activities

Primary activities Secondary activities

Inbound logistics Procurement

Operations Human resource management

Outbound logistics Technological development

Marketing and sales Infrastructure (general management, accounting etc)

Service (after sales)

(b) Companies compete with each other, and their relative success depends on

their ability to add value throughout their value chain.

Companies should try to develop strategies that add value. They should look

at each activity in the value chain and consider whether it can be improved to

add more value.

A company can also assess its performance by looking at its ability to add

value in each part of the value chain (each primary activity and each

secondary activity).

(i) Publisher or author thinks of the idea for a book. The material is written

or assembled.

(ii) The publisher edits what the author has prepared.

(iii) The text is prepared for printing

(iv) Printing

(v) Warehousing and distribution of books

(vi) Sale of books to intermediaries (bookshops) or direct (schools, colleges

and universities

(vii) After-sales service: taking back returned (unsold) copies

(d) Primary activities

Inbound logistics Operations Marketing and sales After-sales service

Managing incoming

calls: call systems

Taking calls Obtaining customer

information

Handling claims

Providing price

quotations quickly

Targeting customers Detecting fraudulent

claims

Cheap prices for

insurance policies

Advertising and other

forms of marketing

Settlement of

successful claims

13 Dairy farm

The farm appears to have added value in the following ways:

(a) It has switched to organic farming. Some customers are prepared to pay more

for organically-produced items, partly because organic products may be

considered ‘more healthy’ and partly because customers may want to buy

produce of animals that have been well-treated.

(b) It has increased the range of products that it makes and sells.

Paper P3: Business analysis

(d) It has developed a direct marketing capability, which presumably includes a

potential customer database and an e-commerce facility.

(e) It has developed a direct mail gift product.

14 Marketing mix

(a) Product

Place

Price

Promotion

(b)

Stage of life cycle Marketing mix (suggested)

Introduction

Build product awareness

If possible, obtain protection for intellectual property rights (patents,

copyrights, etc)

Establish the brand and the quality to be associated with the brand

Develop the market and distribution channels

Pricing: possibly choose a market penetration pricing strategy, or a

‘price skimming’ (high price) market strategy

Promotions should be aimed at innovators and early adopters in the

customer population: develop product awareness

Growth

Build the brand

Maintain product quality, but add additional features to create product

differentiation

Add distribution channels

Keep prices unchanged: sales growth is rising therefore there is no

need yet to change pricing strategy

Promotion should aim now at a broader audience of potential

customers

Maturity

Continue to enhance the product, adding features to strengthen

product differentiation

Focus on competition in distribution channels, to maintain a share of

the routes to market

Reduce prices due to growing competition

Promotion: emphasise product differentiation

Aim – to maintain market share and maximise profits in the face of

more intense competition

Decline

There are several options, and a different marketing mix would be

developed to go with each. The strategic options are: maintain the

product and try to prolong its life, ‘harvest’ the product to obtain as

much cash as possible in the short term, or disinvest immediately

Answers to practice questions

15 Modelling, measuring, targeting

(1) (i) Value chain analysis

(ii) PESTEL analysis

(iii) Five forces model

(iv) SWOT analysis

(v) Lewin’s three-step change model (or Gemini 4Rs or 7S model)

(2)

 Growth in sales or total sales

 Market share or change in market share

 Sales revenue per $1 of marketing spending

 Sales revenue per $1 of advertising spending

 Sales revenue per $1 of sales promotion spending

However, marketing activity is not always aimed at achieved more sales. In

the early stages of a product’s life, marketing is necessary to create awareness

of the product.

It may therefore be appropriate to assess the effectiveness of marketing by

trying to measure changes in customer awareness, for example using

customer surveys and market research.

For marketing by website, the effectiveness might be assessed by measuring

the number of ‘hits’ on the website every week or every day.

(3) Critical success factors might be:

 reducing the number of cars coming into the city during the day

 increasing the amount of bus and taxi lanes.

Strategies for achieving success

 introduce a ‘congestion charge’ on all private vehicles entering the city at

certain times of the day

 increasing the number and length of ‘bus and taxi only’ lanes.

Key performance indicators might therefore be:

 a target for a reduction in the number of cars entering the city during the

day

 a target for an increase in the number/length of bus and taxi lanes.

Other answers might be equally acceptable. This answer is based on the

experience of London.

Paper P3: Business analysis

16 Core competencies

(a) A core competence is ‘something a company does especially well [in

comparison with] its competitors… A core competence refers to a set of skills

or experience in some activity, rather than physical or financial assets.’

Strong core competencies come from:

(i) well-organised special skills, knowledge, expertise, ownership or use of

technologies, processes or abilities

(ii) which are typically achieved or acquired through long-term

development and experience.

A core competence creates value for the customer because the customer

considers it to be unique and distinguishable, and something that rival

suppliers cannot provide.

A core competence is difficult for competitors to imitate.

An important strategic consideration is that a company should be able to

transfer its core competencies to other products and markets.

(b) Suggestions

(i) Sony has a core competence in miniaturisation.

(ii) Microsoft has a core competence in developing user-friendly software

products.

(iii) Federal Express has core competencies in logistics and customer service.

(iv) Honda has core competencies in small engine design and manufacture.

(Note: These core competencies do not specify particular products. The

competencies could be transferred to a range of different products and

markets.)

achieve long-term (sustainable) competitive advantage in ever-changing

markets.

17 SWOT

(a) The purpose of SWOT analysis is to carry out an analysis of the strategic

position of an entity, through an assessment of its internal strengths and

weaknesses, and the threats and opportunities in its environment. It can be

used as a basis for developing strategies for dealing with risks or exploiting

opportunities and strengths.

However, it is not a tool for evaluating and prioritising strengths,

opportunities, weaknesses and threats.

ACCA P3 Business Analysis - 2010 - Study text - Emile Woolf Publishing

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