ACCA P3 Business Analysis - 2010 - Study text

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Answers to practice questions

(d) Suggested answer

Financial targets Customer satisfaction targets

% of total income from corporate sources, or

from foreign students

Administration costs as a % of total costs

Academic costs as a % of total costs, or

target for the average annual cost of a full-

time member of the academic staff.

Targets for fund-raising or annual growth in

fund-raising

(Customers = students and employers of

students on completion of their courses, or

the government as a provider of funds)

Targets for % of students obtaining 1

class

honours degree

% of students from state schools

Target prices for student accommodation

Availability of student accommodation

Targets for the enhancement of internal

processes

Targets for learning and growth

Targets for room utilisation

Target for the average number of full-time

students per computer terminal

Number of applications made for research

grants each year, per member of the

academic staff

52 Key success factors

(a) (i) Low-cost operations (allowing the airline to offer low-cost flights to

passengers)

(ii) The development of a route network (using ‘secondary airports),

avoiding direct competition with other low-cost airlines

(iii) Brand development and successful marketing (for example, selling

direct to the customer and avoiding the cost of the ‘middle man’ such as

travel agents).

(b) Suggestions for an answer

Financial targets Customer satisfaction targets

Return on capital employed

Financial gearing

Average revenue per seat/kilometre

Gross profit margin per seat/kilometre

Number of complaints

Amount of compensation payments

% of customers who are repeat customers

Targets for the enhancement of internal

processes

Targets for learning and growth

Targets for aeroplane load factor

Punctuality targets

Targets for avoidable delays

Targets for the conversion ratio of enquiries

into sales

E-commerce performance targets

Route network development targets

Average time for anew route to break even

Career progression rates for employees in

the company

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53 Entity P: financial performance

Note: If you were given similar financial numbers to analyse in an examination,

there might only be time to make the more important calculations. The answer

provided here misses out the analysis of Year 2 figures, on the assumption that Year

1 (the starting point), Year 3 (now) and Year 4 (next year’s forecast) are more

important figures to analyse.

Year 1

Year 3

Year 4

(forecast)

Cost of sales/Sales 63% 70% 70%

Marketing costs/sales 9% 6% 5%

Distribution costs/sales 13% 8% 6%

Administration costs/sales 2% 2% 2%

Interest charges/Sales 0% 4% 8%

Operating profit/sales 13% 10% 9%

Loans/Sales revenue 0% 50% 67%

Inventory/Sales 10% 14% 18%

Sales/Non-current assets 4.7 times 1.9 times 1.2 times

$ $ $

Average sales per employee 600,000 1,032,000 888,000

Average sales per product 281,000 185,000 234,000

Average sales per supplier 750,000 726,000 651,000

Analysis

 The decline in operating profit margin is a key issue.

 Higher costs of sales (63% in Year 1 to 70% now) and interest charges are clearly

a problem.

 The fall in marketing and distribution costs as a percentage of sales is very

substantial: does this mean that the entity is putting fewer resources into these

operations? If so, what might be the consequences?

 The large increase in borrowing must be a matter for concern. High interest costs

are reducing profit margins.

 Why is the large increase in investment in non-current assets and inventory

necessary? These increases seem to explain the need to increase borrowing.

 The projected increase in employee numbers next year is large, but possibly

reasonable if employees are currently over-worked (see the average sales per

employee figures).

 The growth in the product range is not unreasonable (see the average sales per

product figures) but the number of suppliers is increasing at a faster rate, and

this may eventually lead to operating difficulties in the value chain

(procurement and inbound logistics).

Answers to practice questions

54 ABC Group: financial analysis

Workings

Division A

Year 1

Year 2

Year 3

(forecast)

Sales revenue growth 4% 5%

Volume growth

2% 2%

Cost of sales growth

2.7% 2%

Gross profit/Sales 45%

46% 47%

Transport costs/Sales 5%

5% 5%

Division B

Year 1

Year 2

Year 3

(forecast)

Sales revenue growth 12.2% 12.3%

Volume growth

10% 10%

Cost of sales growth

8% 8%

Gross profit/Sales 40%

42% 44%

Transport costs/Sales 3.5%

3.5% 3.6%

Division C

Year 1

Year 2

Year 3

(forecast)

Sales revenue growth - 9.3% - 3.6%

Volume growth

+ 7% + 6.5%

Cost of sales growth

+ 4.6% + 3.2%

Gross profit/Sales 35%

27% 22%

Transport costs/Sales 6%

8.5% 10%

Analysis

Division A

 Good financial performance, but market share falling in spite of a small increase

in volume.

 R&D spending low

 This product group may well be reaching the maturity stage of its life cycle, and

is a ‘cash cow’ for the group.

Division B

 Strong growth in volume and sales prices.

 Cost of sales as a percentage of sales revenue is falling, presumably because of

the effect of fixed costs in the cost structure.

 R&D spending high.

 Market share unchanged in a fast-growing market.

 This product group may well be a ‘star’ for the group, and the high R&D

spending would therefore be justified.

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Division C

 Still profitable, but sales revenue is falling.

 Costs are rising as a percentage of sales revenue.

 R&D spending is moderate.

 Market share still fairly high.

 However, this product group may well be a ‘dog’ in the terminology of the BCG

matrix. The group should beware of investing heavily in risky attempts to

sustain the products of Division C.

55 Role of the accountant

(a) (i) Accountants provide support activities for the entity: invoicing, debt

collection, provision of management information, and so on).

(ii) Accountants also act as a regulator of management decisions, by

establishing a financial framework within which management decisions

should be made (investment appraisal systems, budgetary control

systems).

(iii) In some entities, they are involved in developing business strategy (see

below).

(iv) In some entities, they may act as an agent for change, through their

understanding of acquisitions and mergers and franchising as strategic

options.

(b) Involvement in business and marketing strategies

Accountants ought to be involved (although they are not always involved) in

business strategy:

 Provide support to line management in screening new products for

development. However, to perform this role successfully, accountants

must share the innovative and entrepreneurial culture of their colleagues,

and must not be excessively cautious and risk-averse.

 Accountants should also be involved in strategic investment appraisal.

This involves assessing not just the potential financial returns from

strategic investments, but whether the investments would be a good

‘strategic fit’ for the entity. (Investments should be undertaken if they offer

a high financial return and are a good strategic fit. Decisions about

investments with a lower return but good strategic fit, or a high return but

a poor strategic fit, should be a ‘tactical choice’ for management.)

 Accountants should also be involved in the evaluation of marketing

decisions (price review, marketing sales budget analysis, product

differentiation decisions, evaluation of the effectiveness of advertising).

Accountants should provide management information relating to market

segments and distribution channels, not just profitability by product and

product group.

Answers to practice questions

56 HR plan

 The current work force and the expected work force in five years’ time should be

analysed. The work force should be divided into employees with different skills

and at each level of seniority within the management hierarchy.

 For each category of employee currently employed, an estimate should be

prepared of how many will leave each year, and how many are likely to be

promoted or transferred to a different job within the company.

 An estimate can therefore be made of the likely numbers of employees in each

type of job (= current numbers minus leavers plus numbers promoted or

transferred into the job), assuming that there is no external recruitment.

 The difference each year between these employee numbers and the number of

employees required will give us a ‘gap’ to be filled with external recruitment or

faster internal promotion.

 In the case of IT staff, where staff numbers will fall, the analysis may show that

some staff may have to be made redundant.

The HR plan can then be used to formulate strategies or plans for recruitment,

transfers, re-training and redundancies.

57 Strategic management styles

Strategic planning

style

Head office is involved in formulating strategy for the organisation. Long-term

planning for the organisation is therefore centralised.

This style is appropriate when the activities of the organisation are highly-

interdependent, and it would therefore be difficult to decentralise strategic

planning decisions to business units.

Financial control

style

Head office allows divisions/business units to formulate their own

independent commercial strategies. However, these strategies must conform

to budget targets. Head office exercises control over business units through

short-term financial controls (for example, budgets).

Strategic control

style

Head office attempts to strike a balance between the strategic planning style

and the financial control style. Business units are given the independence to

develop their own commercial strategies, but these must be consistent with

the overall strategic objectives for the group as a whole.

Holding company

style

There is little or no input to strategic management from head office, which is

simply a holding company for investments in the different subsidiaries.

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Paper P3

Business analysis



Index

4Ps of the marketing mix 87

4Rs model of transformational change 256

6Is of the e-marketing mix 319

7Ps of the marketing mix 318

7S approach to change management 256

Acceptance testing 352

Accountants role in business strategy 392

Acquisitions 214

advantages 215

disadvantages 215

Activities: analysing 285

Activity analysis worksheet 285

Activity based leadership theories 408

Adair 373

Adhocracy 244

Advertising: traditional media and

the internet compared 322

Ansoff 27

Ansoff’s growth matrix 202

Anthony, R N: levels of planning 22

Ashridge Portfolio Display

(parenting matrix) 173

Backward vertical integration 217

BalogunandHopeHailey

 (Contextualfeaturesmodel) 260

Bargaining power of customers 65

Bargaining power of suppliers 64

Bartlett and Ghosal

(transnational companies) 162

Benchmarking 92

Benchmarking and quality management 334

Bespoke IT system 290

Boston Consulting Group matrix

(BCG matrix) 166

Bowman (strategic clock) 180

Burns (transactional and transformational

leaders) 408

Burns and Stalker 240

Business analysis - scope 28

Business ethics 138

Business process 270

redesign patterns 274

re-engineering 276

Business strategy (competitive strategy) 21

Capabilities 112

Capability Maturity Model (CMM) 354

Capability profile 116

Career development 428

Cartels 196

Cash cow 167

Centralisation 236

Challenger 188

Chandler: strategy 16

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Change 246

agent 255

attitudes to 248

consequences 248

incremental 246

planned 246

transformational 246

triggers 247

unplanned (reactive) 246

Change and organisation culture 249

Clusters 49

Collaboration 103, 192

Commoditisation of business processes 290

Competences 109

Competency frameworks 429

Competition analysis 61

Competition and markets 58

Competition cycle 71

Competitive advantage 112, 178

role of government 54

Competitive benchmarking 334

Competitive rivalry 65

Competitive strategy (business strategy) 21

Concentric diversification 205

Conglomerate diversification 206

Consolidation strategy 209

Contextualfeaturesmodel

 (BalogunandHopeHailey) 260

Contingency theory of organisation

structure 240

Convergence of industries 59

demand-led 60

supply-led 60

Core competences 109

Corporate culture 143

Corporate governance 127

risks from bad corporate governance 130

stakeholder view 131

traditional view 130

Corporate knowlege 114

Corporate social responsibility (CSR) 141

Corporate strategy 19

an international perspective 156

selection 165

Corrective strategy 209

Cost efficiency 113

Cost leadership 21

Cost leadership strategy for competitive

advantage 184

Critical path analysis 381

Critical success factors (CSFs) 89

CSR and competitive advantage 142

Crosby (quality management) 338

Cultural web (Johnson and Scholes) 145, 264

Culture 143

Customer needs 86

Customer relationship management (CRM) 326

CRM software system 326

Customers and markets 58

Cycle of competition 71

Data workers 434

Davis and Lawrence (matrix organisation) 231

Decentralisation 236

Deliberate strategy 30

Demand-led convergence 60

Deming, W Edwards (quality management) 336

Development and training 427

Differentiation 21

Differentiation strategy for competitive

advantage 185

Directional policy matrix 171

Diversification 216

Diversification strategy 205

Divisional organisation structure 230

Drucker

mission statement 125

strategy 16

Dynamic capabilities 112

Earned value analysis 383

E-branding 324

E-business 296

barriers 302

information flow 296

E-business and the supply chain 307

E-commerce 296

e-commerce and the globalisation

of business 300

Economies of scale 113

Economies of scope 114

Index

Efficiency ratios 399

E-mail marketing

(direct mail and the internet) 323

E-marketing 313, 318

7Ps of the marketing mix 318

promotion strategy 322

Emergent strategy 31, 266

Entrepreneurial organisation 229

Environmental analysis models 41,40

E-payment 310

E-procurement 299, 309

E-purchasing 310

E-shopping 299

E-sourcing 310

Ethical codes 140

Ethical issues in business 138

Ethnocentric orientation 159

External relationships 237

Extranet 305

Factors 51

Finance and business strategy 392

Financial analysis for business strategy 398

Financial gearing 395

Financial implications of strategic choices 398

Five Forces model 66, 67

Focus strategy for competitive advantage 185

Follower 188

Forcefield analysis (Lewin) 252

Foreign subsidiaries as a portfolio of SBUs 163

Forward vertical integration 217

Franchising 194

Functional organisation structure 229

Functional strategy 21

Gap analysis 207

Gearing ratios 399

Gemini 4Rs 256

Generic software 290

Geocentric company: Ohmae 160

Geocentric orientation 160

Global competition 156

Global organisations 158

Globalisation 158

Goals 126

Greiner’s growth model 212

Growth vector analysis: Ansoff 202

Hamel and Prahalad 199

core competence 109

Harmon’s process-strategy matrix 272

Hersey and Blanchard (leadership style) 407

Herzberg (job enrichment and design) 424

Horizontal integration 217

Human Resource Development (HRD) 404

Human resource management 410

Human resource planning 411

Hypercompetition 190

Incremental change 246

Incremental strategy 31

Industry: generic types 59

Industry competition: Five Forces model 61

Information systems: quality 346

Integration 217

arguments for and against 217, 218

horizontal 217

vertical 217

Integration testing 351

Intended strategy 266

Interaction theory of user resitance 371

Internal benchmarking 334

Internal customers 277

Internal development 211

Internal relationships:

centralisation versus decentralisation 236

International diversity 158

International scale operations 157

Internet 303

Internet and industry structure 297

Internet service provider (ISP) 303

Intranet 305

Investment ratios 400

ISO9000 341

Paper P3: Business analysis

Japanese management approach 425

Job design 423

Job enrichment and job design: Herzberg 424

Job re-engineering 426

Johnson and Scholes

cultural web 145, 264

six-step approach to using CSFs 91

strategy lenses 32

value chain 96

Johnson, Scholes and Whittington (strategy)

17, 24

Joint venture 193

Juran (quality management) 338

Key performance indicators (KPIs) 91

Knowledge management 433

advantages 436

functions 434

Knowledge workers 434

Leader 188

Leadership

styles 404, 405

theory 405

Learning organisation 430

Levers of change 251

Lewin

force field analysis 252

unfreeze, change, re-freeze 254

Licensing 195

Life cycle analysis 221

Life cycle model 69

Life cycle portfolio matrix 221

Liquidity ratios 399

Lock-in strategy 190

Machine bureaucracy 243

Macro-environment 40

Market development strategy 204

Market niche 188

Market penetration

pricing 315

strategy 203

Market segmentation 77

Marketing skimming pricing 315

Marketing concepts 313

Marketing mix (4Ps) 87

Matrix organisation structure 231

McKinsey’s 7S approach 256

Mechanistic organisation 240

Mendelow’s stakeholder

power/interest matrix 136

Mergers 214

advantanges 215

disadvantages 215

Mintzberg (mission statement) 125

Mintzberg’s five building blocks for

organisational configurations 242

Mintzberg’s six organisational

configurations 243

Mission 124

Mission statement 25, 125

Multinational companies (MNCs) 158

National competitive advantage 49

Network analysis 381

Nicher 188

Objectives 126

Ohmae (the geocentric company) 160

Operational planning 23

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

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