ACCA P3 Business Analysis - 2010 - Study text

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Answers to practice questions

(b) Suggested answer

Strengths Weaknesses

Profitability

Growth in non-food business

Large and increasing market share

Reputation for low prices and reasonable

quality

Reputation for good service

No weaknesses are apparent in the

information provided.

Opportunities Threats

Continuing growth in the size of the market

Further out-of-town and in-town expansion

High investor expectations about future

performance

Activities of competitors

Possibility of government action against

monopoly position

18 More SWOT

(a) Suggested answer

Strengths Weaknesses

Large continuing investment in R&D Operations are based in Western Europe

and North America: high labour costs

compared to competitor companies?

Clinical failure of new drug

Opportunities Threats

Opportunities for growth in the market for

pharmaceutical products outside North

America and Western Europe?

Establish operations in other countries: lower

labour costs, but are the skills available?

Public concerns about the safety of new

drugs

Concerns about the regulation of drugs and

about regulatory decisions by national

authorities

(b) AZ Group could perhaps look for future growth in its markets outside North

America. If these markets grow, there will be opportunities for switching

production facilities to these countries to reduce costs.

19 Cultural web: culture and strategy

(a) The six elements in the cultural web are:

(i) Routines and rituals. These are the established ways in which things get

done.

(ii) Stories and myths. These are established tales about how the entity got

to where it is today, that have become embedded in the way that

individuals view the entity and what it should be doing.

(iii) Symbols. These are accepted signs that represent the character of the

entity and what it represents.

(iv) Power structure. This refers to the sources of power within the entity. In

many cases, power is in the hands of management, who control the

resources of the entity. Sometimes, other individuals can wield power

and influence, even when they are not in an official position.

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(v) Organisation structure. Culture is affected by organisation structure. For

example, large bureaucracies have a very different culture from small

entrepreneurial businesses with a flexible organisation structure.

(vi) Control systems. Control systems, particularly systems of rewarding

employees, help to establish a sense of what is important. Individuals

will focus on what they regard as important.

An understanding of all the elements in the cultural web in an entity can help

management to consider the obstacles to change. The cultural web is therefore

a useful concept for planning strategies for change.

(b) Here are three suggestions.

(i) Takeovers, especially in the service sector, where employees from two

different cultures will be combined into a unified group.

(ii) Any major change in policies or processes, such as implementing

recommendations for business process re-engineering (BPR).

(iii) Adopting a new strategy for growth and development in other countries.

20 Mendelow

(a) The power/interest matrix can be used by an entity to ‘map’:

 the relative interest of various stakeholders in the decisions of the entity,

and

 the power of each of these stakeholder groups to affect the outcome of

those decisions.

Power is rated on a scale of 0 to 10 (low to high) on one side of the matrix and

interest is also rated on a scale of 0 to 10 (low to high) on the other side of the

matrix.

(b) Sources of the power of individual stakeholders or stakeholder groups include

the following:

Internal stakeholders: sources of power External stakeholders: sources of power

Position in the management hierarchy Control over key supplies

Control over strategic resources Involvement in the implementation of the

decision

Relevant knowledge/skills Relevant knowledge/skills

Personal influence

Ability to block a proposal (e.g. shareholders

may be able to vote down a management

proposal)

When the government is a stakeholder:

power to regulate

for each stakeholder or stakeholder group, the strength of their interest in the

change and their power to influence its outcome.

Answers to practice questions

Measures can then be taken to satisfy each stakeholder, and reduce the risk of

their opposition to the planned change. In general terms the matrix provides

the following recommendations:

Power Interest Tactic

Low Low Minimal effort required

Low High Keep these stakeholders informed about plans and developments

High Low Make sure that these stakeholders are kept satisfied

High High Key players: these stakeholders must be given the most attention and

consideration.

21 CSR and environmental strategy

(a)

 Business ethics and ethical conduct

 Concern for the environment

 Concern for the sustainability of business

 Concern for human rights

 Concern for employees

 Concern for societies and communities

(b) An environmental strategy is a strategy to achieve specified objectives for

environmental standards. It is usually associated with ecological issues, such

as reducing pollution and waste, and sustainable development (such as the

preservation of forests and fishing stocks).

several reasons.

 Its reputation as an environment-friendly company might improve its

reputation with potential customers. The general public is increasingly

aware of ‘green’ issues.

 The strategy should force the company to develop environmental-friendly

processes and products at an acceptable cost.

 The strategy might help the company to anticipate future changes in the

law or environmental regulations.

 The strategy could therefore help the company to develop and sustain its

business over the longer term.

(d) Environmental standards are measurable targets for achievement in relation to

environmental issues, such as measures of pollution (carbon dioxide

emissions, toxic chemical content of waste and so on). Standards may be set by

individual companies, by industries or more generally for all industries.

(e) Risk management:

Management may need to consider the risks from environmental issues:

 to its reputation

 from additional regulation

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 from costs of breaching regulations

 from costs of complying with regulations

 from costs of clean-up in the event of pollution

Corporate governance:

Many shareholders now expect to be informed of environmental issues by

their companies. Many companies produce a social and environment report

annually. In the UK, quoted companies are required by legislation to produce

an annual business review, which will normally be expected to consider

environmental risks.

22 Ken Day

(a) Highwater is not yet a stock market company, and it is planning to gain

acceptance for trading on the second-tier market in London, not the main

market. The UK’s voluntary Combined Code on corporate governance does

not apply to Highwater, and Highwater is not in breach of any corporate

governance regulations.

However, the company does not apply best practice in corporate governance,

for several reasons.

 Ken holds the positions of both CEO and chairman. This is considered bad

governance practice, because it puts too much power (leadership of the

executive management team and leadership of the board of directors) into

the hands of one person.

 The board is dominated by executive directors. One of the NEDs is not

independent (being a family friend of Ken Day and also having been on

the board for over nine years). In the UK, the Combined Code

recommends that at least 50% of the board should consist of independent

non-executive directors, to give it balance.

 The board appears to have few responsibilities, or does not take its

responsibilities seriously. It is generally recognised that the board should

be responsible for deciding and agreeing strategy. In Highwater, the board

appears to accept, with little or no question, the strategic plans produced

by a small executive team led by Ken Day.

 The company does not appear to have an audit committee (of independent

NEDs), a remuneration committee (of independent NEDs), or a

nominations committee.

 There would appear to be inadequate communication between the

company and its shareholders. The evidence for this is the unwillingness

of Ken Day to meet with institutional investors, who might soon be asked

to invest in the company when it seeks entry to AIM.

(b) In a company that adopts best practice in corporate governance, the role of

NEDs (and in particular independent NEDs) should be to:

 Provide members for the audit committee, remuneration committee and

some (or all) of the nomination committee.

Answers to practice questions

 Check that best practice in corporate governance is actually adopted (for

example, by ensuring that the annual review of the adequacy of internal

control and risk management systems is carried out).

 Contribute to board decision-making, particularly in the area of strategy.

NEDs should be able to bring the benefits of their experience outside the

company to the discussions about strategy.

 Provide balance and objectivity to decision-making by the board of

directors.

23 BCG

(a) The BCG matrix is not drawn here, but can be found in the text. It is a 2 × 2

matrix, with one side of the matrix representing the rate of growth in the

market (high or low) and the other side representing the relative share of the

market enjoyed by a firm’s product/service.

(b)

Strategy

Low market

growth, high

market share

Cash cow

Defend and maintain market share.

Possibly low spend on R&D.

Use cash from this product to invest in other business

units/products.

High market

growth, low

market share

Question mark

The product will need a lot of cash to increase market

share. The strategic choice is between investing a lot of

cash to boost market share or to disinvest/ abandon the

product.

High market

growth, high

market share

Star

Promote aggressively.

Invest in R&D.

Stars should generate enough cash to be self-

sustaining.

Low market

growth, low

market share

Dog

These might generate some cash for the business, and

if they do, it might be too early to abandon the product.

The product has a limited future, and strategic

decisions should focus on its short-term future.

There is a danger that the product will use up cash if

the firm chooses to spend money to preserve its market

share.

The firm should avoid risky investment aimed at trying

to ‘turn the business round’.

a product.

(ii) The growth rate in the market is not the only indicator of the

attractiveness of a market.

(There is an assumption in the BCG matrix that these are the two key factors

for making strategic decisions about products.)

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24 Matrices

(a) Both matrices are used by firms to ‘map’ their products or business according

to the strength of the market and the current position of the product/business

in its market. The BCG matrix is a 2 × 2 matrix with its two sides representing

the rate of market growth and the product’s share of the market. The Shell

directional policy matrix is very similar: it is a 3 × 3 matrix, with its two sides

representing the prospects for the business sector/market and the company’s

position in the sector.

The main difference is that the BCG matrix considers products and markets,

whereas the Shell directional policy matrix considers business sectors.

(b) Both matrices can be used as an aid to deciding strategies. The BCG matrix

can be used to help with a decision about the portfolio of products or business

units that a company should invest in. The Shell directional policy matrix can

be used to decide the strategic direction for its products or business units (for

example decisions about whether to invest or withdraw from a market)

25 Global

(a) Global firms often develop out of companies that initially try to market their

products internationally, but produce them domestically for export.

Companies become global when they establish operations in many other

countries, and are no longer based in a single country.

 Market convergence. This describes a situation where the markets in

different countries become much more similar (converge), and the needs of

customers in the different markets converge. For example, markets in the

US and Western Europe might converge. Market convergence creates

opportunities for a global business to develop.

 Cost advantage. Producers in one country might have a cost advantage over

producers in another country, which means that they can produce the same

goods more cheaply. Low labour costs or high investment in technology can

create cost advantage. The existence of cost advantage means that production

costs can be reduced by switching production facilities to low-cost countries.

This encourages the development of global companies.

 Government pressure. Governments might put pressure on foreign

companies to invest more in their country. (The government might be a

large buyer of the company’s product, or might threaten to restrict

imports. Alternatively a government might offer tax incentives for inward

investment.) In order to gain access to the markets in another country, it

might therefore be necessary to make some investment in that country, for

example by investing in a manufacturing or assembly plant. This type of

government pressure encourages the development of global companies.

 Currency volatility. Currency volatility refers to the way in which

exchange rates between currencies vary up and down in unpredictable

ways. Currency volatility affects companies exporting goods or importing

goods, because the transaction has to be in a foreign currency for at least

one of the parties to the transaction. When exchange rates are volatile,

there is more risk in transactions of this type: movements in an exchange

rate can even eliminate expected profits. Currency volatility can be

Answers to practice questions

reduced by matching the currencies of income with the currencies of

expenditure. Global companies are able to do this much more than

companies that are based in a single country.

 Trade barriers. Trade barriers are government measures to restrict

international trade (or the free movement of currencies). They are usually

created by charging duties on imports, or placing a ban or quota on the

volume of imports. To overcome trade barriers, companies have to set up

operations within the country concerned. This encourages the

development of global companies.

 Emergence of global competition. The creation of global companies, with

a global brand, and with production facilities in the low-cost countries

leads to a response from rival companies that need to remain competitive.

An effective response to a global competitor is to become a global

company yourself.

(b)

 Export goods produced domestically and sell them in another country

through an agent.

 Give manufacturers in other countries a licence to produce and sell your

goods.

 Set up production (and marketing) facilities in other countries – possibly in

a joint venture with another company

 Acquisitions: buy the existing business of a foreign company

(c)

 Ethnocentric management structure. The company has the culture of its

country of origin, and most or all senior managers come from that country.

For example, a US company might have operations in many countries of

the world, all managed by US managers.

 Polycentric management structure. The company operates in different

countries, and most or all senior managers in each country are ‘local’

(nationals of the country). For example, a US company with operations in

other countries will use French managers to manage its subsidiary in

France, Japanese managers to manage its subsidiary in Japan, and so on.

Each subsidiary acquires the culture of its host nation.

 Geocentric management structure. This is used by a truly global

company. The company builds its own ethos and culture, which cannot be

identified with any country in particular. Its management team is

international, and top management positions are filled by the best person

for the job, regardless of his or her country of origin.

Paper P3: Business analysis

26 Collaboration

Rival firms may collaborate in any of the following ways.

(a) Firms may form a price cartel, to sell their products to the market at the same

price. Cartels may be illegal.

(b) Firms may co-operate to promote the interests of their industry as a whole; for

example firms may collaborate through trade associations or professional

associations.

(d) When there are only two firms in an industry (when there is an oligopoly), the

firms may avoid competing with each other, particularly on price, and are

content to hold on to their existing share of the market. Non-competition

allows oligopolies to maximise their profitability.

27 Sustainable competitive advantage

A company can achieve sustainable competitive advantage by:

(1) choosing a suitable strategy – cost leadership, differentiation or focus

(2) sustaining the strategy by

 building up core competencies (special skills, experience, and so on)

 marketing expertise and

 new investment.

28 Generic strategies

(a) Cost leadership. Trying to gain competitive advantage by being the cheapest

producer in the market may be found in business-to-business markets, such as

the supply of raw materials and component parts. The customer tries to buy

cheaply in order to keeps its own production costs down. However, in theory,

only one firm in any market (or niche market) can be the least-cost producer:

other companies need to adopt product differentiation strategies.

(b) Differentiation. Forms often compete in a market by differentiating their

products from the similar products of competitors. The basis for

differentiation is often product design (television sets, items of furniture,

clothing, mobile telephones and so on). Other product features or marketing

methods (advertising, or the selection of a different channel of distribution)

might also be used to create differentiation.

chosen niche, the company needs to pursue a cost leadership or a product

differentiation strategy. For example, within the broader market for hi-fi

systems and sound systems, a company might specialise in providing

headphones and speaker systems.

Answers to practice questions

29 Mission

(a)

Purpose of mission statement In the fastPlane mission statement

To state the purpose of the entity and the

business it is in (and will be in)

Providing safe, good value point-to-point

services, at attractive prices, for business

and leisure passengers within Europe.

To express the values and beliefs of the

entity, to influence the views of key

stakeholder groups inside and outside the

firm

Safe, good value, consistent and reliable

services

To provide a guide for strategic decisions Develop employees

Establish good relationships with suppliers

Limit services to Europe

Leisure and business passengers

Safety standards

Reliability standards

Mission statements should be re-visited regularly, to make sure that they

remain relevant. For example, fastPlane would need to reconsider its mission

statement if it were to consider the possibility of providing non-air transport

services, or to open routes outside Europe.

(b) The RIBC developed five strategic objectives from its mission statement. You

can check your ideas against them. The RIBC strategic objectives were:

(i) To demonstrate the benefits of good cake-making, for the economy,

community and individuals

(ii) To promote and enhance these benefits, in collaboration with industry

and partners.

(iii) To facilitate the delivery of good cake-making – raising the average

through professional training and development

(iv) To provide high-quality support services to its members, clients,

industry associations and the public

(v) To develop its own capabilities to deliver these strategies.

These strategic objectives were then used to formulate strategies to achieve the

objectives.

30 Product-market strategy

Market penetration

Increase market share

Product development

Market the installation of satellite dishes to the existing customer

base

Market development

Expand the business into another area of the city

Diversification

Start up a new business operation by offering office cleaning

services

Paper P3: Business analysis

31 Growth strategies

Organic/internal growth

(1) Expand existing production facilities and market the product in new markets

(2) Build a new production facility in a different location. Possibly establish a

foreign subsidiary.

(3) Use agents in other countries to sell the product

(4) Set up a franchise operation and sell franchises

(5) Grant licences to other producers in other countries

External growth

(1) Takeovers (acquisitions of other companies)

(2) Joint ventures

32 Suitability, acceptability and feasibility

Suitability

Does the strategy deal with the position or circumstances the entity is facing.

Does the strategy make sense in these circumstances?

Does it deal with the problem?

Alternative strategies can be raked according to their suitability. Some will deal

with the problem more effectively than others.

Acceptability

Is the strategy acceptable in terms of its expected outcome (for example, is the

risk/reward pay-off acceptable to shareholders?)

Feasibility

Does the entity have the competencies and the resources to deliver the

strategy and make it work?

33 Strategy selection

(a) The product is in the growth stage of its life cycle.

(b) When the patents expire, competitors will inevitably enter the market, and the

ability of Entity X to charge monopoly prices will end. Profitability will fall

dramatically

the US competitor to breach its patent rights.

However, it is not clear whether the patent rights will be sufficient to prevent

the US competitor from entering the market in a few years’ time. Entity X

must therefore develop alternative strategies, to give it a competitive

advantage over competitors when they eventually get into the market. These

strategies should include:

(i) improving the efficiency of operations

(ii) developing the brand name for its product

(iii) investing in larger and more efficient production facilities

(iv) make sure that supply can meet demand.

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

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