Summary of Business Strategy Application Level Interactive Questions With Immediate Answer

Chapter 1 Strategy and business
Interactive question 1: Famous business leaders

Name some corporations which have been made successful by the business leadership given
by a famous individual.
Answer to Interactive question 1

Mittal Steel Lakshmi Mittal
News Corporation Rupert Murdoch
GE (General Electric) Jack Welch
TWA Howard Hughes
Dell Michael Dell
Tata Group Ratan N Tata
Hutchison Whampoa Li Ka-shing
Amazon Jeff Bozos
Virgin Group Richard Branson
Apple Steve Jobs
Microsoft Bill Gates
Sony Akio Morita
Amstrad Alan Sugar
Ford Henry Ford
Interactive question 2: Impact of strategic style on financial management

Assuming the existence of financial controls is at the heart of many accountants' jobs, what
should be the implications of a firm moving from strategic planning to strategic management
for:
(a) Budgetary control and performance management
(b) Control over capital expenditure?
(a) Responsibility centres (budget centres) would take more responsibility for budget setting and
might become profit and investment centres instead of just revenue or cost centres. Budgets
would cease to be based on targets from a long range plan and instead would become stretch
targets to improve managerial performance. Managers would be increasingly incentivised by
bonuses based on the financial performance of business units and of the company as a whole.
Emphasis on non-financial strategic targets would increase with less emphasis on short term
financial targets.
(b) Capital expenditure would be decentralised. There is a danger that capital expenditure would
become more subject to the whims of the strategic manager.
Interactive question 3: Six Continents hotels
Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

[email protected] Cell-01711-981920 Page 1
Global hotel chains
The hotel industry is embracing globalisation. International chains are encircling the world, swallowing local
operations on an almost daily basis.
Tom Oliver, chief executive of the UK group, Six Continents Ltd (formerly Bass Hotels and Resorts), says:
'Brands are everything – as travel becomes increasingly trans-border, hotels which aren't carrying international
brands simply don't deliver the same rate of revenue per room'. The company was unwittingly pushed into the
hotel trade by [the then] UK Trade Secretary Margaret Beckett, who thwarted the group's ambitions to
become a global brewer by blocking the purchase of Carlsberg-Tetley.
The market is changing. In the US, 75% of hotels have a well-known brand, compared with just 35% in
Europe. Lesley Ashplant, a hotels expert at PricewaterhouseCoopers, says: 'Europe is the single largest
tourist destination in the world. It has 6m hotel rooms under fragmented ownership. There are clear
opportunities in scale, in taking advantage of branding and advanced technology.'
Scale
Size is becoming important as expectations rise – international business travellers want internet connections,
widescreen televisions, faxes delivered and push-button blinds in every room. All of this required investment.
Servicing the demands of business customers requires employing more staff than most independent operators
can afford.
Technology
Hi-tech reservation systems are also emerging as a crucial factor. In an industry where 75% of costs are staff
wages, any savings elsewhere are precious. Between a third and half of hotels' revenue comes from food and
drink, but these only contribute 20% to 30% of profit. Attempts to make hotel restaurants more attractive have
generally failed.
Much more profitable are the rooms themselves. The main thrust, therefore, for most operators, is on
improving occupancy. Loyalty card schemes are becoming increasingly elaborate.
Branding
There will be limits to the creeping internationalisation of European hotels. One CEO says: 'The US is a wide-
open country – if you want a hotel, you can just build it. In Europe, there's much less opportunity for new-
builds so you get a lot of conversions, They're harder to fit into the specific model of the US chain'.
It is difficult to turn a 17th century Provençal château into a Holiday Inn, so some independent operators still
prosper. This is bad news for the ideal guest of a multinational chain, who likes to wake up anywhere in the
world in the knowledge that the bathroom is on the left, the blinds are blue and the phone is on the wall, six and
a half inches above the bedside table.
Requirements:
To what extent does the example of Six Continents and the global hotel industry (upward) illustrate the
models of strategy-making described in this chapter?

Emergent strategy – Unwittingly pushed into hotel trade by blocking off purchase of rival
Unrealistic strategy – Failed purchase of Carlsberg-Tetley
– Making hotel restaurants attractive
Deliberate strategy – Upgrading of rooms
– Improved cooking systems
– Exclusion of independent operator by enhancing service levels and
harnessing of brand and economies of scale

Interactive question 4: Superware products
Superware Products Ltd (hereafter Superware) was formed in 20X9 by three colleagues who had left a
major software house to work on the development of accounting software for small businesses.
Superware currently (20Y4) employs 18 staff at the company's head office in Chittagong, and a further
eight regionally-based salespeople in various parts of Bangladesh.
Company structure
The three directors of Superware are Paul Smith (Managing), Karl Lagerfeld (Sales) and Christian Dior
(Development). They each have a small team reporting directly to them and they meet on a daily basis if
they are in the office, to discuss the business and to brainstorm a little over coffee. All three directors
come from a background of software sales to small and medium-sized organisations. Chris is responsible
for six product development staff and two administrators. His staff work full time on developing and
upgrading the Superware product, and meet regularly with the sales staff to get feedback from customers
and users. In addition to the eight salespeople, Karl has two sales administrators and a secretary working
for him. The sales staff meet at head office on a weekly basis and the administrators work closely with the
financial accountant. Paul takes responsibility for the remaining staff who perform general administration,
reception and clerical tasks. His only specialist staff member is Zandra who, with her assistant, maintains a
high level of control over the company's financial reporting and accounts.
Planning and control
Once a year the directors, under the guidance of Paul and with assistance from Zandra, agree a full
budget for the next twelve months. The budget is always based on the previous year's performance, with
adjustments for known changes such as inflation, costs and forecasts of demand from sales staff feedback.
During the discussion of the budget Zandra calculates various ratios to illustrate trends in the company's
profitability and liquidity, and the budget is normally adjusted to ensure that trends are as desired. When
the budget is agreed, a copy is sent to the bank for its records.
Each month throughout the year Zandra produces a management report which shows performance
against budget for every cost and revenue heading. This report, together with a commentary written by
Paul, is sent to each director and they pass copies to their key staff after removing any sensitive
information. Four times each year the remaining periods are reforecast and the adjusted end-of-year
position (or out-turn) is also compared with the budgeted position. Paul writes an additional commentary
in these months which identifies key actions to bring performance back to budget.
The current position
The directors are presently involved in finalising the budget for 20Y4 and are concerned that the process
of budgeting is becoming increasingly meaningless. The results for 20Y3 show a significant shortfall in both
turnover and profitability against both the budget and third quarter out-turn for the year, yet Paul is still
insisting that the 20Y4 budget should be the 20Y3 budget uplifted for inflation and known changes. During
the 20Y4 audit Zandra mentioned the directors' concerns to the audit manager who suggested that you, as
a recently qualified member of the audit team with an interest in strategic planning, might be able to advise
the company on how to proceed. The directors have agreed that this would be useful, and have arranged a
meeting at which you can meet them and discuss the role of planning within Superware.
Requirement
Prepare briefing notes to present at a meeting with the directors of Superware at which
you will be expected to discuss the following.
(i) The current planning process.
(ii) Weaknesses of the current planning process.
(iii) Recommendations for improvement of the planning process. Recommendations
should be clearly justified.

Briefing notes
To The Directors
From The Auditor
Date Today
Subject The strategic planning process of Superware Products Ltd
Current planning process
Currently the planning process in Superware can be illustrated by use of the following model.
CORPORATE CONSTRAINTS IMPLEMENTATION

OBJECTIVES
APPRAISAL AND CHANGES AND REVIEW
Weaknesses
This model is commonly used in smaller organisations, and until 20Y3 was perfectly suitable for the
purposes of Superware. However, such an 'incremental' model, combined with a 'budget-constrained'
management style such as that practised by Paul, does have some weaknesses in a dynamic
environment such as the IT industry. These weaknesses, as illustrated by Superware, are as follows.
(i) The use of corporate appraisal at the first stage tends to lead to a blinkered view of strategy,
which will necessarily focus on the current products and markets of the company.
(ii) The lack of environmental analysis throughout the strategy process, with the exception of known
economic changes as a constraint to business, leads to opportunities and threats not being considered
until too late.
(iii) An incremental approach which led, particularly in 20Y3, to an optimistic plan being
formalised which was possibly not achievable.
(iv) The modification of plans to meet personal objectives of the directors, regardless of the
achievability of those objectives.
(v) The short-term nature of the process, concentrating on a twelve month planning horizon, will tend
to give a distorted view of the future and lead to a lack of direction and consistency in the goals
communicated to managers and staff.
Having said all this, the process does have one significant strength in that the focus on implementation and
review is very thorough, particularly in the revision of out-turns and the targeting of performance
improvements.
Recommended modifications
It is recommended that the company modify the planning process in line with the following model.
EXTERNAL INTERNAL
ANALYSIS ANALYSIS
CORPORATE
APPRAISAL
MISSION AND STRATEGIC

OBJECTIVES ANALYSIS

REVIEW AND
GAP
CONTROL
STRATEGIC STRATEGIC
CHOICE CHOICE
STRATEGY STRATEGY
IMPLEMENTATION IMPLEMENTATION
The detailed content and major changes from the current process are explained as follows.
(i) External environmental analysis is a formal analysis of the context in which the company
does business. It may well include studies of market size, customer needs, competitor behaviour
and changes in technology. Such a study should concentrate on major changes which will affect
Superware either as opportunities or threats.
Examples of such changes might include an emerging customer need for a tax module to cope
with pay and file, demand for an alternative platform such as UNIX, or an opportunity to launch a
totally new product line to meet unsatisfied demand.
Internal analysis of the organisation will identify the current strengths and weaknesses, not
merely in terms of the financial performance but also some of the qualitative aspects.
Examples might include the organisation and resources of the company.
(ii) Corporate appraisal summarised by SWOT.
(iii) Objectives should be agreed, taking into account the requirements of all interested parties, which
are perceived as achievable by the managers and staff. Objectives should also take into account the
risks and opportunities identified as a result of the environmental analysis.
(iv) Strategies can then be formulated, based on all the previous stages, to achieve the
company objectives, protect against threats and exploit opportunities.
Examples of such strategies might be product or market development, or even diversification
into, for example, management software for doctors or schools.
(v) Implementation and review of strategy should still take place as currently, but as part of the
implementation phase it will be necessary to re-evaluate the organisation structure and such
tactical issues as investment.
(vi) The time horizon for the planning process should be extended in order to give better
strategic visibility and to introduce some consistency between years. Due to the volatile
nature of the IT industry, it is probably unnecessary to plan more than three years in advance.
Although the changes outlined seem a radical departure from the process currently carried
out in Superware, the benefits in terms of business performance should be significant.
Interactive question 5: Sony and the chicken and egg question

Sony Corporation is often cited as an example of a firm that creates industries through leverage of
core competences in miniaturisation of electronic circuitry. This has created markets such as:
 Personal audio: Initially through the transistor radio but later the famous Walkman cassette player 

 Home gaming: Via the PlayStation which revolutionised the graphic and interactive quality of games 
though use of PC technology

 Compact home Sony were joint copyright holder of CD technology and have produced the main
audio/video: contender for high density DVD technology to support HD and other applications
Was it these technologies that built a whole new industry or was the industry already there?
Like the chicken and egg question this can't be answered.
 Sony provided a new way to make sales by fulfilling the same need that had previously been satisfied by
books and magazines, conventional television programming and personal conversation. So in a sense
the need was already there and an industry was already supplying it. 

 The value extracted from the needs through sales of players and programmes and the creation of a
range of associated products, made this an industry of colossal scale and, through it, paved the way for
digital players and portable gaming consoles in which Sony retains a key position. 
Interactive question 6: McDonnell Douglas

Consider the following:
With $14bn in sales, McDonnell Douglas was one of the US's largest defence companies. It had
done a good job of turning around the C-17 transport plane program, which a few years earlier
was nearly cancelled by the Air Force over technical flaws and delays. However, its commercial
aircraft arm, Douglas Aircraft, was a disaster, caught in the tailwinds of Boeing and Airbus. In 1994,
McDonnell Douglas's board shocked investors by bringing in an outsider – a brash, controversial
former GE executive, Harry Stonecipher – as CEO.
At first Stonecipher insisted that the firm was committed to building passenger airplanes. At one
point he said the business was so good that if Douglas wasn't already in it, 'we would be looking
for a way to get in'. Unfortunately, years of under-investment had resulted in planes with little
imagination, and Douglas would need to spend billions to catch up. Ultimately Stonecipher wasn't
willing to make that investment, preferring to focus on short-term stock performance. This
involved the reduction of discretionary spending on things such as research and development,
training and better production equipment. There was also a closer control of costs.
During his tenure as CEO, McDonnell Douglas's stock quadrupled (Stonecipher carries a
laminated copy of the stock chart in his briefcase), but critics say the failure to invest in R&D
would have been disastrous eventually. 'This is a company that would have gone out of business in
five years', says Richard Aboulafia, an analyst at Teal Group, an aviation research firm. 'It was
headed to oblivion.'
Eventually, McDonnell Douglas merged with Boeing.
 What planning horizon would you expect a firm in this industry to follow? 

 What factors in the competitive environment, pressure from investors or his personal
incentive package could explain the incoming CEO's short-term approach to strategy? 
An aircraft manufacturer should have a long-term planning horizon because the development of a new
aircraft will take up to a decade and, given their huge capital costs, will need to remain in service and be
fit-for-purpose, for over twenty years. An example of this is the Boeing 747 Jumbo Jet which is still in
service and being made, having first flown in the 1970s).
The short term focus could have come from several causes:
 That the style of the CEO was better at cost cutting and stealing assets than longer term strategic
thought, i.e. he did not have 'the mind of the strategist'. 

 That the CEO realised the shareholders would not support growth because all the remaining
shareholders required a dividend from their holdings in a mature business. 

 That it was a deliberate strategy to increase the value of stock ready for takeover by a large aircraft

manufacturer in an industry characterised by increased concentration. 

 That the CEO was incentivised by the value of stock (e.g. he held stock options, or had bonuses
related to earning per share growth, share price growth or level of ROCE). 
Interactive question 7: Why have ethical standards? [Difficulty level: Intermediate]

The Ethical Code of the ICAB seeks to regulate the behaviour of accountants. Why does ICAB have this?
The work of the accountancy profession is crucial to the effective working of the capital markets (that is
the mechanism for the provision of finance to business and the protection of those who supply it). Put very
simply, investors may lose financially if their investment decisions are based on inadequate information and
this would deter further investment. A loss of confidence in financial reporting could therefore undermine
the economy.
Working to the highest standards of ethics and professionalism allows the public, investors and regulators
to have confidence in the profession. Your ethical behaviour can protect not only your own reputation
but that of the profession as a whole. We have a collective responsibility to apply principles, such as
integrity and objectivity, that will enable high quality financial reporting, and effective financial management
and business practices; to protect investors, businesses and the wider public interest.

Chapter 2 The purpose of a business
Interactive question 1: Barnsfield Engineering Ltd
'It's a tall order, but I'm relying on you to do your best. Business planning is a new area to all of us here. Let me
have your ideas by this evening. I'm meeting young Tim tomorrow ... maybe you should come too. We'll see!' With
that the senior partner had pushed the file across his desk as a signal the meeting was over.
All you know about Barnsfields is that its engineering works is on the Oadby Road, and it's the quick way
home when the traffic isn't too bad. It has been a client of the firm for years. Bill Sawyer has looked after
the account, but is not available to help.
You have the fax from Tim Sawbridgeworth from Barnsfield Engineering which triggered the meeting and a
short briefing note from the senior partner.
Requirement
Prepare a memorandum to brief the senior partner for his meeting with Tim Sawbridgeworth, covering:
(a) The importance of strategic planning
(b) Explaining the terms 'missions', 'objectives' and 'plans'
(c) An approach to the preparation of a strategic plan for Barnsfield Engineering Ltd. This section should
cover the planning process and analytical tools available to managers. Whenever possible it should be
related to Barnsfield's current position.
EXHIBIT 1
Note from the senior partner
Barnsfield Engineering Ltd
Barnsfields was acquired by Joe Sawbridgeworth some fifty years ago, and we have been auditors ever since.
That was before my time, but Joe had a reputation for being a shrewd businessman and this was a good
bargain. The business has made steady if not spectacular profits, though it has seemed to lost its way in the
last few years.
Joe handed over to his eldest son Lionel. As you can see from the accounts, turnover has grown rapidly to CU43m
last year. Profits have not grown in proportion and sales have stuck at around CU40m for the last five years. Lionel
Sawbridgeworth has never invested in new plant. He bought second hand or he made do. He did employ and kept
some good people and the firm has a reputation for top quality work. The works management is good, if
unimaginative, the administration side is well run and the accounts are immaculate – Bill Sawyer who
manages the audit has made sure of that.
Lionel tended to stick to what he knew. He didn't really go after new business. Almost half the sales are to
one customer, a firm it has been supplying for 40 years. Another three customers account for most of the
rest. Financially the business is in good shape. It has always made a profit and the balance sheet is strong.
Mr Timothy, as he is known in the works, has been a non-executive director of the firm for five years,
but he has never shown much interest. All I know about him is that he is in his mid-30s and qualified
as a lawyer after he left university.
EXHIBIT 2
Extract from a fax from Tim Sawbridgeworth
... Father's illness put me in the driving seat rather unexpectedly. I had no intention of joining the firm.
I only came for six months, but father's doctors had advised against his returning to work. So it falls to
me to do the best I can.

We have received a tempting offer to sell out. Father thinks they're trying to steal the business. I
don't believe that but I suspect that, with better management, the firm could be much more
prosperous.
I was shocked at the primitive equipment here, though I am delighted with the wonderful skills of
the people. We have some really skilled craftsmen and it would be sad to see it all disappear.
Father's caution has its advantages. We have substantial liquid assets, there is no overdraft to speak
of, and we own the freehold. So funds could be available for substantial investment.
As I see it we have a choice between accepting the offer or devising our own plan for developing the
firm. My preference is not to sell, but we shall need a lot of help if we are to prepare a plan for the
future. You have been our accountants for as long as I can remember. Do you have anyone amongst
your staff who can help us?
I must respond quickly to the potential buyer. Can we meet tomorrow?

Memorandum
To Senior partner
From Anne Accountant
Date Today
Subject Briefing notes for meeting with Tim Sawbridgeworth
Please find below the briefing notes you requested for your forthcoming meeting. I would be pleased to
discuss with you any areas needing further clarification.
1 The importance of strategic planning
Much of any manager's time is concerned with decision making. A strategic plan is the result of certain
decisions having been taken and provides a framework for future clear decision making.
The introduction of a strategic plan has the following benefits.
(i) Attention is focused on the long-term future of the business rather than getting bogged down in
short-term problems.
(ii) Activities of various sections of the business are coordinated.
(iii) Each manager will know what the firm is aiming to achieve and will have criteria for evaluating
various courses of action.
The more complex the organisation and the more volatile the environment it faces the more
important these benefits are likely to be.
2 Objectives and plans Missions
and objectives
A mission statement is a generalised type of objective and can be thought of as an organisation's raison d'être.
It is a reflection of the values of those that have power in an organisation and external pressures upon it.
Objectives are more specific than mission statements and spell out what the organisation hopes to
achieve. Most organisations have hierarchies of objectives, major objectives setting targets for the
overall business and sub-objectives setting targets for individual divisions or departments.
Plans
Plans also exist in hierarchies.
Corporate strategy covers the entire organisation and is concerned with which types of business the firm
should be involved. It is a particular issue for conglomerate businesses which serve many different markets.

Competitive strategy is about how to compete in each of the markets which the business serves.
Tactical and operational plans or strategies involve the acquisition of resources such as finance,
manpower, plant and machinery, information technology, and their management and organisation.
At the moment I have little detail of Barnsfield's business but it appears to be a medium-sized firm and there
is likely to be little distinction between corporate and competitive strategy.
3 Preparation of a strategic plan

Many formal approaches to strategy development have been suggested. Most authorities agree on the
factors to be considered, but many disagree on the order in which each stage should be carried out. In
reality the arguments are not of great importance, but it is vital that Barnsfield covers the following areas
in its development of a plan.
3.1 Environmental analysis
The direction of a firm's strategy is considerably influenced by what happens around it. Being
unresponsive to environmental change can easily lead to business failure. Barnsfield's operations
appear to have changed little in recent years and significant environmental threats could exist. As a
first stage I suggest it analyses its current environment and attempts to anticipate any likely changes.
The analysis should cover
 Economic factors such as growth in demand for services, levels of interest rates, availability of
skilled manpower etc 

 Political factors such as the opening up of the single market of the Economic Community
and exposure to import competition 

 Social factors such as changes in cultural values, e.g. safety awareness 

 Legal factors including employment legislation consumer protection, and so on 

 Technological factors such as changes in manufacturing methods and technology employed by
customers 

 Demographic factors such as trends in population, size, structure and location. 
Of the above, technological factors are likely to be of immediate concern. The firm is currently
operating with very primitive equipment.
3.2 Competitive forces
Barnsfield must also consider the competitive structure of its industry before strategy can be
developed. Areas for analysis are
 Threats from potential entrants 

 Threats caused by the power of its buyers 

 Threats due to the power of suppliers 

 Threats from substitute products 

 Threats from existing competitors. 
Very few details are available on the firm's competitive position apart from its customers.
All of the output is taken by four customers, and virtually half by one customer. This leaves the
company very exposed to loss of business and puts it in a difficult position when negotiating
prices. Any strategy should attempt to remove this over-reliance on a small number of customers.
3.3 Internal analysis
Several techniques exist to analyse a firm's internal position. These include

 The 5 Ms: analysis of strengths and weaknesses in terms of machines, men, money, markets
and materials 

 Ratios: trend analysis and comparisons with other firms in the same industry should be
carried out 

 Value chains to identify cost drivers and value drivers. 
3.4 Objectives
Mission statements and objectives establish the direction which the firm's plan will take.
Objectives should be clearly defined and be capable of measurement in order that progress can be
monitored.
Barnsfield is a private company and appears to be substantially family owned. Aspirations of the family,
which are likely to involve shareholder returns and continued independence, will therefore affect its
objectives. Tim Sawbridgeworth needs to consider his own objectives for the business. Specifically does
he require growth in future earnings or is he happy to pursue a no-growth strategy and simply receive
existing profit levels? It should not be assumed, however, that existing profit levels can be achieved by
maintaining existing operations.
Other important stakeholders include the highly skilled workforce and the loyal customer base both
of whose interests should be considered in formulating objectives. Remuneration, financial return and
quality are likely to be of importance here.
3.5 Corporate appraisal
The final stage before developing a plan is to consider the firm's current and projected position. This
should allow the firm to assess its chances of achieving its overall objectives and to identify the need for
new strategies to bridge any gap between projected and desired performance.
 SWOT analysis: this involves the identification of a firm's 

Strengths – things that it does well, e.g. management, operations, finance etc
Weaknesses – those areas in which performance is poor 
Opportunities – environmental changes which can be exploited to the firm's advantage Threats –
environmental changes which may lead to a weakening of the company's position. 
SWOT analysis is useful in generating future strategies. An ideal strategy is to exploit
environmental opportunities by using the firm's strengths. 
A brief analysis of the existing data on Barnsfield reveals the following.
Strengths – Reputation for quality
– Loyal customers
– Skilled workforce
– High level of financial resources
Weaknesses – Flat profits and stagnant sales
– Outdated plant
– Reliance on four customers
– Loss of chief executive
Opportunities – No details available apart from potential sale
Threats – No details available.

Gap analysis: this involves the identification of gaps between projected performance and
objectives. 
3.6 Strategy development
Strategy development is an area for creative thinking. It attempts to design strategies that will
bridge the gaps identified under position analysis. Assuming the firm opts for a growth objective,
the following matrix highlights possible strategies.
Existing product New product
Existing market Internal efficiency and market Product development

penetration
New market Market development Diversification
(i) Product development involves selling new products to existing customers and normally
requires research and development expenditure.
(ii) Market development involves selling existing products to new customers and involves
investment in marketing.
(iii) Diversification can be vertical (backward or forward in the firm's existing production chain),
horizontal (acquisition of competitors) or conglomerate (a move into a totally different area).
The above strategies can be implemented by acquisition or organic growth.
Internal efficiency and market penetration involve attempts to reduce cost or further penetrate
existing markets by taking market share from the competition. Cost reduction by the introduction
of modern machinery is one obvious possibility for Barnsfield. Another approach could be
differentiation of the firm from its competitors on a quality basis.
3.7 Internal strategies
Once a strategy has been selected tactical and operational plans need to be put in place.
These include plans for such items as acquisition of resources, capital investment, finance,
manpower etc; plans also need to be made to optimise the use of existing resources, which will
often be expressed in the form of budgets.
3.8 Control
Finally, a feedback system is needed to measure actual results and compare them with planned
performance. A budgetary control system would seem most appropriate in a firm the size of
Barnsfield.
4 Conclusion
By necessity this is a very brief summary of the strategic planning process. It is important that we do
not oversimplify the problem. Strategic decisions are very complex and are made in the context of
great uncertainty. Nevertheless Barnsfield appears to have stagnated over the last few years and the
above issues must be addressed if it is to have a long-term future.
Interactive question 2: Gooseberry Farm Ltd

The entire share capital of Gooseberry Farm Ltd is owned by Giles MacDonald and his wife. Its business is
owning and running a 1,200 acre arable farm located five miles outside a small town not far from Bangkok.
A decline in farm income
In order to cut food surpluses, the basis for determining cereal support prices within Thailand is being switched
from tonnes harvested to hectares cultivated. As a result Gooseberry Farm Ltd faces a sharp decline in its annual

trading profits, which in recent years have averaged CU90,000. Mr MacDonald is therefore considering using 200
acres to establish a new exclusive 18-hole golf course. Local businessmen regard this as feasible, since planning
permission will readily be forthcoming and membership waiting lists at the two existing clubs in the area exceed
350.
The golf club company
It is proposed that Gooseberry Farm Ltd will sign a 100-year lease with a new company, Millennium Golf Club
Ltd, which will pay an annual rent of CU25,000 to Gooseberry Farm Ltd for use of the land. The issued capital
of the golf club company will be two CU1 shares, owned by Mr and Mrs MacDonald, and the remainder of its
initial funding will be CU1 million in the form of 15% per annum irredeemable loan stock. Fifty local
businessmen, including Mr MacDonald, have each agreed to purchase CU20,000 of this stock.
Of the funds thus raised CU225,000 will be spent on converting the arable land to become a landscaped golf
course. A further CU25,000 will provide working capital.
The club house company
The remaining CU750,000 will be used to purchase a 25% stake in a separate company, Century Club House
Ltd, to develop and operate a club house. This will have conference facilities, a sports hall, two bars and a
restaurant. A local property company will subscribe the other 75% of the share capital of Century Club House
Ltd. Millennium Golf Club Ltd will pay an annual rent of CU25,000 for the use of the club house, but Century
Club House Ltd will manage and run all facilities offered there, taking the profits that will be earned.
When ready to commence business in January 20X6, the new golf club will be much better appointed than the
two existing local courses, and the only serious competition for comparable leisure facilities will come from
three hotels in the nearest town.
2
Budgets of the golf club company

Annual operating expenses of Millennium Golf Club Ltd are budgeted at CU450,000, comprising the
following.
CU
Salaries, wages and professional's retainer 125,000
Course maintenance 50,000
Rent of land and club house 50,000
Administration and other expenses 50,000
Finance cost on debenture loan stock 150,000
Depreciation 25,000
The terms of the debenture loan stock issue prohibit a dividend being paid on the two ordinary shares, so
that any surplus is applied for the benefit of the club and its members.
On the revenue side, Millennium Golf Club Ltd's share of profits on the investment in Century Club House
Ltd is expected to total CU100,000 in 20X6, the first year of operations. Green fees, chargeable to non-
members using the golf course, are expected to amount to an additional CU50,000 a year.
On the assumption that target membership levels are achieved, annual subscriptions are initially to be set at
CU500 for each member. This will be CU100 less than for full membership at the two rival golf clubs in the
area. In addition, no joining fees will be payable in the first year of operation, but thereafter (as with the other
two clubs) they will be equal to one year's subscription.
On this basis Mr MacDonald and his associates are sure that they will be able to recruit around 350 members from
the existing two clubs, including a good number of influential local businessmen and low handicap players. In
addition, the new club expects to recruit most of those currently on the waiting lists at its two local rivals.
The policies of the club
The policy of the club will be to keep the annual subscription fee for members as low as possible while
maintaining high quality facilities and helping to preserve the countryside. It is also intended to limit

membership to a maximum of 750 players in order to maintain the exclusive nature of the club.
The constitution of the club will put its overall management in the hands of a committee of 12 persons
elected by the membership, but with the proviso that two thirds must be debenture holders.
Requirements
You are an employee of the firm of accountants used by Mr MacDonald.
(a) Draft a mission statement that might be suitable for Millennium Golf Club Ltd and identify possible key
objectives.
(b) Prepare a memorandum for Mr MacDonald which briefly explains the relationship between, on the one
hand, a mission statement, and on the other, an organisation's objectives and its strategic, tactical and
operational plans.
(c) Prepare briefing notes for Mr MacDonald providing a critical analysis of the financial and operational
arrangements envisaged for the company.
The notes should deal only with the following matters.
  Total demand projections (including a break-even calculation) 

  Downside risk 
  Upside potential 
 Conclusions. 
The conclusions should comprise a succinct summary of the major factors supporting your
recommendations.
(a) Mission statement
The mission of this club is to provide high quality, value for money golfing and leisure facilities. To achieve
this the club will limit membership to a level compatible with ensuring that the course and leisure facilities
will be well maintained, that the environment is protected and that membership fees are as low as
possible.
Key objectives
(i) To commence business on 1 January 20X6
(ii) To achieve target membership of 750 by 31 December 20X6
(iii) To achieve green fees of CU50,000 in 20X6
(iv) To earn CU100,000 from Century Club House in 20X6.
(b) Memorandum
To Mr MacDonald
From Consultant
Date Today
Subject Mission, objectives, strategic tactical and operational plans
The relationship between the elements of planning can be shown in the following diagram.
Mission
The mission attempts to define the purpose of a business. It may include information about the values and
methods. The mission must pay some attention to the environment and markets in which the business

operates. The information might show that the type of business being carried on has little future. If so the
nature of the business would have to change together with the mission statement.
Objectives
Objectives are normally quantifiable targets which are time limited. A statement such as 'We aim to
increase profits in the future' is not an objective, the profit increase has not been quantified nor has a
deadline been set. A valid objective would be 'We aim to increase profits by 20% by 31 December 20X6.'
Objectives can be long term, affecting the whole company. They can then be broken down into
departmental and individual objectives allowing management by objective to be implemented. If everyone
achieves his individual objective, the group as a whole should meet its objectives. In practice, organisations
will often have to cope with multiple and possibly conflicting objectives.
Strategic plans
Strategic plans are long-term plans setting out how the objectives can be met. Typically a strategic plan will
be for a period longer than a year and will affect the whole group. For example, to meet the objective
quoted above, the strategic plan might be to gain a strong presence abroad, or it might be to acquire a
competitor.
Tactical plans
Tactical plans are typically for a period of a year and represent detail as to how the strategy is to be
achieved. For example, the tactics for achieving a strong presence abroad might be to approach foreign
companies with a view to co-operation.
Operational plans
Operational plans are very detailed short-run plans showing exactly what steps have to be carried out.
Continuing the example from above, the operational plan would set out how and when goods are first to
be sold by our new trading partners, what prices will be charged, how the profits will be split.
(c) Briefing notes
To Mr MacDonald
From Consultant
Date Today
Subject The operational and financial arrangements envisaged for the Millennium Golf Club Ltd
1 Total demand projections
Members for the new club are expected to be recruited from two sources.
(i) Those currently waiting for membership of the two existing clubs (350).
(ii) Those who are already members of the two existing clubs (350 expected to change
membership).
CU50,000 of green fees and CU100,000 from the club house are also forecast, giving a break-
even point as follows.
CU
Operating expenses 450,000
Century (100,000)
Green fees (50,000)
300,000
CU300,000
Break-even = = 600 members
CU500

The membership fees are substantially lower than those charged by competing clubs, and to
encourage people to join in the first year of operation, no joining fee will be charged at that time.
This, together with the high quality facilities that are to be offered, should mean that break-even is
achieved (600 members) and that the target membership of 750 is feasible.
To support the projections a market survey should be carried out to gauge the reaction of
members of the existing clubs and those on the waiting lists. It is important to assess total
demand in the area and which of the clubs is potentially the weaker if cut-throat competition
results.
2 Downside risk
The company is very highly geared, with an interest burden of CU125,000. To meet that amount
250 members will have to be recruited. If a smaller than expected membership is recruited, income
from the clubhouse will also fall. If the club fails, the receiver or liquidator will be able to avoid
paying rent for the land and you will therefore have lost the use of the land, will not receive rent or
interest and are likely to have lost the amount you invested in the debentures.
3 Upside potential
Some 200 acres of the farm are being leased to the new company on a 100-year term. The income
you will receive from that will be CU25,000 rent and CU3,000 interest. Income from the farm has
been averaging CU90,000/1,200 = CU75 per acre per year, and this is expected to fall. The 200
acres rented to be leased to the golf club will earn a rent of CU125 per acre. Therefore the
current level of rent is attractive.
Another way of looking at the problem is that you will be earning an incremental annual return of
CU13,000 for an investment of CU20,000. The incremental return is likely to increase since rents of
agricultural land decline as the protection afforded from the CAP is gradually eroded.
In case agricultural rents should increase in the future, it would be an advantage to be able to
adjust the golf club rent upwards in line with those.
4 Conclusions
If the club reaches its targets for membership (750), green fees and income from the club house, a
profit of CU75,000 will be made. If membership is to be limited to 750, there is no great potential for
increasing profits. All the profits are to be retained for the benefit of the club and its members.
No dividends can be paid out to the shareholders.
Interactive question 3: Supavac Ltd

Supavac Ltd ('Supavac') is a listed company which manufactures vacuum cleaners. Some 70% of its output is sold
to Avold Ltd ('Avold'), a major Dhaka-based chain of electrical stores. Vacuum cleaners are sold under Avold's
own label and are regarded as being in the mid to upmarket range. Manufacturing takes place at Supavac's two
factories, both of which are in Bangladesh and are of approximately equal size.
The workforce of Supavac is largely unskilled or semi-skilled and is not unionised.
Avold has been a major customer of Supavac for about 30 years, but a new management team recently took over
at Avold. It informed the board of Supavac that a new annual contract is to be arranged which would involve a
major reduction in prices offered, and that the volumes purchased next year would be only 60% of previous
years. It was also made clear that further price reductions would need to take place in future years if the contract
were to be maintained at the new lower volumes.
As employees became aware of the increasingly competitive conditions, the possibility of factory closure
emerged.
The board of Supavac identified two strategies:

Strategy 1. Close one factory and attempt to cut costs at the other by a policy of efficiency improvements and
redundancies.
Strategy 2. Close both Bangladesh factories and open a new factory in Laos where labour costs are
significantly lower than in Bangladesh.
Requirement
Identify and justify the position of each of the following stakeholder groups in Mendelow's power-interest
matrix with respect to the two strategies.
(i) Bangladesh-based employees
(ii) Potential employees in Laos
(iii) Shareholders in Supavac
(iv) Avold
Interest
Low High
UK employees
– Strategy 1 (-/+)
Low
Eastern European employees
Power
Shareholders
High – Strategy 2 (-/+)
Avold
(i) Bangladesh-based employees

The power of employees to stop or moderate any closure decision is limited. If the entire Bangladesh
workforce is united, then significant costs can arise from disruption. However, once the decision is
announced the employees at the site that is not to be closed have a much lower negative interest in the
decision. Indeed, from the perspective of self interest their employment might even be more secure as a
result of the closure of the other plant; hence they could develop a positive interest.
In general, however, existing employees would favour strategy 1 as there are fewer redundancies.
Perversely, if the redundancy payments are sufficiently high some employees may favour redundancy to
continued employment and thus have a positive interest in strategy 2 (e.g. if they were going to leave
anyway).
(ii) Potential employees in Laos
Potential employees have probably not yet been specifically identified but they would have no power to
influence the decision in either case.
Clearly, once selected, they would have a strong positive interest in strategy 2, particularly if local
unemployment is high and/or Supavac is offering better pay and conditions than local employers.

(iii) Shareholders in Supavac
The ability to maintain the Avold contract is essential to Supavac shareholders as it counts for 70% of sales.
The strategies under consideration appear necessary to reduce costs and thus maintain the Avold contract,
even if not at volumes previously attained. The shareholders would favour the strategy that best achieves
this, having regard to all other factors (such as quality, certainty of supply, transport costs, labour costs).
The shareholders have the ultimate power to determine the direction of the company. While in the short
term the directors are empowered to make the relevant decisions, they can be displaced if these are not
in the interests of shareholders.
(iv) Avold
Given that Avold takes 70% of Supavac's sales, it has considerable power over Supavac and is likely to be
in a position to influence the decision of where production should take place. It will undoubtedly need
assurances, if vacuum cleaners are to be manufactured overseas, as to quality and delivery schedules.
The ability of Supavac to cut costs will have an impact on its ability to deliver price reductions.
Avold is interested in the reorganisation as vacuum cleaner manufacture is a competitive market, with a
range of alternative suppliers available if Supavac fails to deliver cost reductions. (Alternatives are
possible as there is a element of judgement involved, given the information available.)
Interactive question 4: Being socially responsible

What are the implications in the
(a) Short term
(b) Long term
of a company acting in a socially responsible manner?

(a) Short term
 Additional costs – using greener fuels, buying fairly traded products, rebuilding green areas,
paying higher salaries 

 Reduced income – no sales to unethical purchasers 

 Distribution of wealth to non shareholders – giving to charity 

 Distorts focus – one more target for managers 

(b) Long term
 Avoids legislative imperative – will otherwise fall to Government to enforce and measures may be
more Draconian 

 May avoid financial penalties where behaviour is covered by legislation 

 Improves PR 

 Attracts ethical investors 

 Attracts ethical consumers 

 Improves staff morale 
Interactive question 5: Foundry Theatre

The Foundry Theatre is a major regional theatre in Rangpur and was built seventy years ago. In 1976 the
Government awarded the theatre a grant for the first time 'to allow the theatre to undertake more
prestigious productions than their own resources allow'. This grant (of CU5,000) was very significant in that it

marked the transition from commercial to subsidised theatre.
The theatre was refurbished extensively in 1986 with money from Rangpur City Council at a cost of
CU884,000. By 1987 the theatre was in difficulties and heading for considerable financial losses. In a report
published at the time the council's treasurer stated that the theatre should 'slash costs and attract bigger
audiences in order to improve its financial position'. In addition, the theatre was criticised for not staging
enough popular shows, for inadequate use of the building and for having a 'top heavy' management structure.
Again the council offered to step in with financial assistance providing the theatre cut its costs and
implemented a review of its management structure. The theatre administrator refused the council's terms,
indicating that many of the council's proposed savings would severely compromise the theatre's artistic
standards.
Changes were eventually made and the theatre survived.
The objectives of the theatre were enshrined in the memorandum of association of the Foundry Theatre
Trust as follows.
 To promote, maintain, improve and advance education, particularly by the production of educational
plays and the encouragement of the arts of drama, mime, dance, singing and music. 

 To receive, educate and train students in drama, dancing, music and other arts and to promote the
recognition and encouragement of special merit in students. 
The company (and the theatre) then enjoyed varying degrees of success between 1987 and 2003. During this
period attendances rose and fell in line with recession and boom periods in the economy (attendance figures
are given in Appendix I).
The current position
In a recent article in the Rangpur Gazette the following comment was made.
'The Artistic Director has resigned, attendances are down by 50%, productions planned for the new year
are cancelled, the company is heading for a CU250,000 deficit – but there is no crisis at the Foundry, said
Stephen Appleyard, Chief Executive, Rangpur Theatres Committee.'
In carrying out an internal analysis for Rangpur Theatres Ltd the following comments have been made.
James Knowles-Cutler (newly-appointed Artistic director)
'The objective of the theatre is clear to me. We should aim to increase our audiences through a programme of
challenging plays. Rehashing populist plays is not our role. We should attempt to attract well-known (in theatre
terms) classical actors and seek to stimulate debate and interest in theatre through a programme of good
classics (for example, The Caretaker by Pinter, Waiting for Godot by Beckett, etc) and challenging modern plays.
My ultimate objective is to establish ourselves as the leading 'serious' theatre outside of Dhaka.'
Thomas Sutherland (Finance director)
'We are still dependent for a large amount of our funding on central government grants. The percentage of
our funding coming from this area looks to be about 50%. This is misleading because the actual amount of this
funding has been growing very slowly. The fact that it represents up to 50% is due to a reduced proportion of
revenue coming from box office receipts. Therefore, we really have one objective – to boost our sales or
receipts from the box office. Our current revenue includes CU1,117,856 (2006) down from a high of
CU1,596,245. Thus I estimate our ideal objective is to increase our box office receipts by 30% over the next
three years. I believe there are a number of ways we can achieve this.
(1) We can reduce the price of our 'Foundry Card'. This is a membership card which allows the holder to
attend five peak performances (i.e. Saturday and Sunday) for the price of four performances. By reducing
the price we would encourage demand.
(2) We should also reduce our prices on an individual performance basis. I believe this would increase
attendances by such an amount as to increase total revenues overall.

(3) The restaurant/café side could be improved. The theatre occupies a first rate position in the city and has
an excellent atrium space in the entrance hall. This is already used at lunchtimes, etc, but could be
profitably used in the evenings for pre-theatre dinner.'
Brian Johnson (Rangpur City Council, appointed to board of trustees of the Foundry Theatre)
'The trustees for the theatre believe the objective is to broaden the audience. The current composition of our
audience is shown in Appendix II. Clearly the greater proportion of the audience comes from higher income
groups. We need to push more into other market segments. By boosting attendances in this manner we can go
some way to achieving increased revenue figures. We think focusing on the production of highbrow theatre will
only alienate a large group of the very people we are trying to attract.'
Requirements
You are part of a consultancy team appointed by the Rangpur Council to investigate the theatre's position.
(a) In the light of information provided in Appendix II discuss the use of price reductions as a means of
achieving the objectives as stated by the finance director.
(b) Draft a memorandum to the trustees of the theatre explaining the objectives of the theatre as expressed
by the artistic director, the finance director and the trustee. You should comment on their compatibility
and suggest a possible prioritisation of these objectives.
Appendix I
Attendances at Rangpur Theatre 1997 to 2006
Year Theatre Studio Total
1997 159,700 16,600 176,300
1998 168,800 12,900 181,700
1999 167,900 8,000 175,900
2000 167,700 18,000 185,700
2001 210,300 21,200 231,500
2002 206,869 14,902 221,771
2003 175,064 16,533 191,597
2004 159,966 13,491 173,457
2005 175,435 4,903 180,338
2006 100,807 9,510 110,317
Appendix II
Demographic characteristics of theatre-goers and local population
Total population in Foundry audiences Foundry mailing Foundry card
metropolitan list holders
county around 2005 2005
Rangpur
(1) Social class 29% 80% 50% 71%
(% A/B/C1)
(2) Education 3% 50% N/A N/A
(% completing full-
time education,
age 19 or over)
(3) Age (% under 35) 37% Main theatre 55% 25% 7%
Studio theatre 75%
(4) Sex (% females) 51% 50% apiece in main 66% 64%
theatre and studio
(5) Rangpur post code N/A 80% (estimated) 70% 91%
Appendix III

Revenues
Year Box office Government grant
CU'000 CU'000
2000/01 1,144 927
2001/02 1,306 1,072
2002/03 1,330 1,054
2003/04 1,446 1,095
2004/05 1,596 1,065
2005/06 1,117 1,103
2006/07 1,172 1,157

(a) Effectiveness of price reductions
The finance director has a stated objective of increasing sales revenue as far as possible and suggests
reducing prices to achieve this.
As a means of enhancing sales the following comments are relevant.
(i) Given the information on the population in Appendix II, 80% of the audience comes from social
grouping A/B/C1.
It could be argued that going to the theatre represents a small amount of total expenditure for
such groups, and therefore a rise in price may be possible to increase sales revenue.
Alternatively, in order to attract a wider audience (students, children, unemployed), price
reductions may help to raise sales revenues.
(ii) The pricing structure needs to be much more precise, i.e. it needs to take into account
 Time of week and performance (students, cheap mid-week seats) 

 Ability of audience to pay and their income bracket. 
(iii) It also assumes that the demand for theatre seats is driven largely by price. This is a very strong
assumption. Non-price factors which would influence the demand would include the programme of
plays itself, actors involved, time of year, etc. The implicit assumption made by the finance director is
that, all other things being constant, reducing price will increase demand. One badly chosen
programme of plays could reduce overall demand in a given season.
(b) Memorandum
To Members of the Rangpur Council
From ABC Consultants
Date Today
Subject The Foundry Theatre – Objectives and role
1 The nature of objectives
Objectives differ dramatically between organisations and in the way they are expressed. The most
obvious distinction is between open and closed objectives.
Open objectives contain no reference to a quantified target for the objective. For example, a statement
such as 'we aim to increase our market share' is open. Thus there is no guidance on by how much to
increase the target of the objective nor over what timescale.
Closed objectives contain some quantified target value for the objective in question. The following is

an example of a closed objective: 'Our objective is to increase our market share (by volume) by 12%
over the next three years.' This contains a criterion by which to assess the target volume. It gives a
target (12%) and a timescale (three years).
The final point to be made about objectives is that as far as possible they must be consistent. It is important
to have a principal objective in agreement with supporting objectives. It is the duty of senior management to
ensure that objectives are consistent and avoid dysfunctional behaviour.
2 The objectives for the Foundry Theatre
2.1 Introduction
Examination of the objectives for the Foundry Theatre are best undertaken from a
'stakeholder' viewpoint.
From the information given it can be seen that two of the objectives are 'open'. It is difficult to
see how to assess the theatre against such open-ended objectives.
Clearly, in following the trust's objectives audience surveys could be carried out to
determine
  Income bracket 
  Residential area 
 Frequency of attendance, etc 
Thus, given the data in Appendix II on audience composition, this objective will be achieved if, all
other things remaining constant, more C1/C2 males under 35 attend plays and concerts.
The objective can thus be clarified and become closed.
2.2 Compatibility of objectives
Clearly the objectives put forward by the artistic director and the trust are mutually incompatible. If
either objective is to be pursued to the exclusion of the other, stakeholder conflict is assured. If so,
two possible (there may be more) outcomes become apparent.
 The artistic director becomes disgruntled and resigns. 

 The trustees become disaffected and attempt to make changes at the theatre (in the
absence of more information on the memorandum of association of the trust, it is difficult
to say what power they have). 
The next issue is to see whether the objective of the finance director is compatible with the other
two.
The objective of increasing box office receipts is compatible with either of the other two.
(i) From the viewpoint of the artistic director, increasing audience figures (and therefore receipts)
will come from a small percentage of the metropolitan area's population (29% are A/B/C1) and
these already provide 80% of the audiences of the Foundry Theatre.
(ii) Given the increased ability to pay of the A/B/C1 income groups, increasing the attendance
price of tickets and a more challenging series of plays may satisfy both the finance and artistic
directors.
(iii) From the trust's viewpoint, putting on less 'difficult' plays and increasing the number of popular
touring reviews/plays may well boost audiences. Therefore reducing price may well enhance
demand in volume terms, thus increasing box office receipts overall.
2.3 Prioritisation of objectives
There is an additional important element here and that is the amount of government grant.
Appendix III shows the amount of government grant the theatre has received since 2000/2001.
The percentage of revenue accounted for by government grants is less important than the
amount. It can be seen to have grown very little (compound annual growth of just 1.5% between

2001/2002 and 2006/2007). In real terms this has almost certainly fallen.
A critical issue facing the theatre therefore is its role as a subsidised theatre.
The current government is not disposed towards subsidies. There appears little hope of the grant
increasing as a source of revenue.
The most important objective therefore is for the theatre to increase its box office revenues.
Failure to do so (given no growth in subsidy) will eventually diminish the theatre's ability to stage its
own productions.
The reduced ability to stage its own productions means that the artistic director's objective cannot
be achieved.
3 Conclusions and recommendations
The main conclusions are as follows.
 Increasing box office revenue is the primary objective for the theatre. 

 The finance director's assumptions on how this may be achieved are questionable. 

 Audience research should be carried out re frequency/preferences, etc. This will provide
information as to programmes and willingness to pay. 

 The increased revenue appears likely from three principal sources. 

– Increased prices to current A/B/C1 theatre-goers and a challenging programme. 

– Lower prices to C1/C2/D income groups with a change in programme emphasis to 'popular'
plays/musicals. 

– Perhaps a combination of both of these could work with plays/shows at varying prices during the
week. 

 Using the atrium space to provide a restaurant/café would probably increase non-theatre
audience and thus provide an additional source of revenue.

Chapter 3 The macro environment
Interactive question 1 Considering the business environment
For a professional accountancy practice, answer the following questions.
(a) What are the main external factors, in your view?
(b) How do these main environmental/external factors affect the strategies of the practice?
(c) In your view, how do managers perceive the environment of the organisation?
(d) How do you think managers incorporate environmental/external issues into decision-making?

(a) External factors would include:
  Rival accounting firms seeking to take clients themselves 

  Other professional practices which may direct work toward us 
  Regulations such as tax laws, accounting standards and audit standards 
  The labour market for post-qualified and qualified accountants 
 The general state of the economy and its effect on business 

(b) These factors create opportunities and threats. New regulations create a need for professional advisers to
provide guidance to clients. Competitors or a thriving labour market with higher pay create threats
(incidentally notice how you changed your perspective on the last point because you would like to have the
higher pay but you are calling it a threat for your firm). This illustrates how flawed the distinction between
'internal' and 'external' is when we discuss environmental analysis.
(c) This will depend on the managers psychological make-up. Some will see it as a tiresome bind that makes them
have to keep changing things and also which makes it hard to plan or feel certain. Others will see it as
invigorating.
A very interesting test of management is the extent to which they see themselves as powerless in the faces of
environmental changes or whether they believe they can shape and respond to them.
(d) Again, this varies. Some will avoid making decisions which could be affected by environmental uncertainty, and
will wait till it settles down (hence incrementalism). Some will simply ignore environmental issues that cannot be
proven. Perhaps a more balanced approach is to adopt strategies that would still deliver benefit under a number
of environmental developments or perhaps have several courses of action running at the same time, with each
one designed to take advantage of different environments. In another context, energy companies invest in several
different technologies because they do not know how oil prices and environmental regulations will develop.
Interactive question 2: Oil industry scenarios

Oil producers use scenario planning extensively.
Requirements
(a) Identify the factors that make scenario planning popular with oil industries.
(b) Suggest some alternative scenarios that an oil producer might consider in its strategic planning.

(a) Oil producers adapted scenario planning techniques from their original military applications (notably in planning
for the aftermath of thermonuclear war) during the 1970s. This followed the oil price shock when the Arab states
then at the centre of OPEC massively increased the price of oil and caused inflation and recession in industrialised
Europe and North America. This decision was itself justified in part as a response to the perceived support of oil
consuming Western countries for support of the occupation of Palestine and Egypt.
Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group, mozumder@organic-
crop.com Cell-01711-981920 Page 1
It was a response to the high turbulence (e.g. political shifts, vulnerability to economic factors etc.) and dynamism
(e.g. speed of change of political landscape) in the oil industry. Furthermore the very long investment periods in
the industry necessitated long-term strategic plans based on assumptions about the future.
(b) Possible scenarios would incorporate a combination of:
 War in the oil producing countries of the Middle East 

 Aggressive energy politics by countries such as Russia and Venezuela, holders of large reserves of oil and gas 

 High energy demand from newly industrialising countries such as China and India 

 Increasing legislation in industrialised nations aimed at reducing use of carbon dioxide producing fuels 
 Development of new energy sources such as clean coal, biomass fuel, wave and wind, and re-
emergence of nuclear power 

 Discovery of new oil or energy reserves 
Interactive question 3: Newspaper industry

On 12 June 1993 The London-based newspaper The Sun dropped its cover price from 25p to 20p, claiming that this
would help its readers in the recession. The Daily Mirror responded quickly, cutting its price for a single day to 10p, in
an attempt to maintain circulation at the expense of lost revenue.
The resulting increased circulation of The Sun was no surprise for the tabloid market. However, how would the
circulation of the quality papers be affected by a similar strategy?
It has always been felt that broadsheets are price insensitive and therefore that a similar strategy adopted by a
broadsheet publication would be of no benefit: branding was too strong. However, Peter Stothard, editor of The Times,
had begun to disagree, feeling that readers did have brand loyalty but were also very much interested in value for
money. A drop in price, he felt, could enhance a publication's value for money and therefore on 6 September 1993 the
price of The Times dropped from 45p to 30p.
Media analysts were unconvinced, maintaining that any resulting increased circulation would not offset the decreased
revenue, hence losses are the obvious result: CU200,000 for The Times and CU700,000 for The Sun per week (estimated).
Analysts struggled to work out the rationale behind increased circulation bids.
One justification was that it was needed to combat the overall decline in the newspaper market – a 20% fall over the
previous thirty years according to leading accountants. The worst affected by this decline had been the tabloids.
Another argument was that it was done in order to affect Mirror Group Newspapers adversely during the sale of 55%
of its shares in September.
Whatever the reason, the worry was that the price of The Sun would rise again and when it did the success or failure
of the strategy would be shown by how many of the new readers (300,000) were retained. As the tabloid market is
price sensitive, the signs were not good.
The outlook for The Times was slightly different: city analysts felt that a cut in price was necessary as the paper was on
a downward spiral, having lost its previous image. The price cut, they felt, was there to stay: it was envisaged that more
money would flow in from advertisers due to increased circulation.
Advertising was a major concern for newspapers in the recession: a typical tabloid received 20% of its revenues
from circulation, with the rest coming from advertising. Broadsheets, on the other hand, had a 50:50 split.
The total split on advertising spend had changed dramatically in the previous decade.
1981 1993
Newspapers 66% 51%
Television 20% 36%
Radio 14% 13%
The initial reaction to this was to increase newspaper prices but obviously this had limited effect, hence the cuts by
News International. Rupert Murdoch, it was felt, could sustain initial losses from profits elsewhere: his competitors
would not be able to do so.
In 1993 The Daily Telegraph remained number one in the UK broadsheet market, its revenue declining by only 1%
compared with the previous year. This was achieved by a series of promotions including discounted holidays, as well as
by its readers showing remarkable loyalty and an unwillingness to move.
The circulation of The Guardian had fallen by 5.6% and its market position had been affected as The Times overtook
it in the race for second position. However, the paper still remained popular.
The Independent, however, had been hardest hit. It was felt that the strategy of The Times could potentially squeeze it
out of the market. If this were to be the result The Times was sure to benefit. The situation appeared to be mirroring
the experience of the London Daily News a few years previously when it was driven out of business by the Evening News.
Indeed, The Times would benefit both from increased circulation and increased advertising revenue if The Independent
were to be terminated.
However, The Independent was struggling before The Times cut its price. Its circulation had declined significantly since 1988
(20%) and it had been perceived as being 'weak' due to the lack of colour photographs. Although this was corrected it meant
that the price of The Independent had to be increased to compensate. This 5p rise was unfortunate, since it was
implemented a matter of weeks after the reduction by The Times.
The Independent panicked and contacted the Office of Fair Trading, claiming that the price cut by The Times
amounted to predatory pricing and that this was not allowed. This complaint was not upheld: it would have to be
proved that the cut was aimed solely at The Independent and this would have been difficult to establish.
Furthermore, The Independent was not one of the financially strongest companies, having made a loss
approaching CU500,000 in the previous year. A takeover appeared to be a logical next step as
The Independent did have a small niche in the market. However, whoever bought it would have to overcome
the recent batterings which had left it with an image problem.
If newspapers had been allowed to expand into TV, then the competitive picture would have changed
completely.
Requirement
Discuss the environmental factors that affected the newspaper industry, using the following headings.
(a) Political and Economic
(b) Social
(c) Technological
(d) Ecological
(e) Legal

3 Environmental analysis
The factors in the surrounding environment obviously played a significant part in the state of the newspaper
industry at that time. They were largely external and as such outside the control of the individual
newspaper companies, resulting in a reactive approach by the companies to such factors.
(a) Political and economic
One the major factors that influenced the industry was the recession. The industry had and still has two
main sources of income – revenue from individual sales coupled with revenue from advertising.
The tabloid newspapers were heavily reliant on advertising revenue (representing 80% of their income)
whilst the broadsheets had a more even split. Both sources, however, suffered severely in the recession as
disposable income fell. Redundancies, pay freezes, and low inflation all resulted in a decrease in the income
of the individual. The individual therefore cut back on what he perceived to be non-essential items, which
may include his newspaper. Alternatively he will search for a cheaper alternative – the tabloid or the free
issue ('freebie').
Probably the broadsheets were relatively more influenced by government policies such as increased taxes,
which were aimed directly at individuals, decreasing their disposable income and hence decreasing demand
for the more expensive newspaper. This obviously resulted in the price drop for The Times. To some
extent this price drop prevented broadsheet customers deserting to cheaper tabloids, and also hit very
hard the higher priced broadsheets, such as The Independent.
The decrease in the individual's net disposable income would have had a knock-on effect on the
advertisers: if the target market had less disposable income than previously was the case, companies
would be less willing to advertise in newspapers, as it may not have been cost-efficient.
The overall effect was a sharp fall in revenues for newspaper companies. In order to overcome this the
newspapers attempted to increase volume by dropping sales price, hoping that the increased volume
would compensate for the overall decrease in revenues.
(b) Social
At that time, the newspaper market was split into two distinct sections – the tabloids and the
broadsheets. Historically those individuals with lower incomes tended to buy the tabloids and those
with higher incomes tended to buy the broadsheets. Furthermore, the tabloids are intended to be
sold to a more 'lower class' market than the broadsheets.
How the recession would have affected this is arguable. Some held that the 'higher class' image attached
to the broadsheets would prevent a switch by such readers to the cheaper 'lower class' tabloid.
However, the tabloid editors believed that this was not the case: people are money-driven and the
broadsheet readers would be just as price-sensitive as those of the tabloids – hence a switch would be
feasible.
General levels of literacy have declined and the public are less inclined to obtain their news from newspapers
but instead rely on news bursts in the middle of radio and television programming.
(c) Technological
Changes in technology at that time had a considerable effect on the newspaper industry. Colour
photographs, although not too recent an innovation, were considered by then to be the norm for national
newspapers and therefore became a necessity if a newspaper was to compete at a national level. This was
borne out by the experience of The Independent which initially had no colour pictures, resulting in an
uncompetitive stance. The technology required to upgrade the paper to colour printing was very
expensive, necessitating an increase in the price of the paper at a time when a price war was emerging.
Since then the emergence of on-line services such as news websites and 24 hour-news programming on
digital TV have increased the competition to newspapers. As we live in an age where television is the focal
point of many people's lives, the accessibility of news/sport and television information has rendered it less
important for people to have a newspaper on a daily basis.
Newspaper companies have also encountered further costs due to increased technology in the typesetting
area which is now centrally controlled and downloaded to regional areas where the printing is done. Once
again, to compete on a national basis, this has involved major capital outlay for most companies, which has to
be recouped by increased circulation, increased selling prices or increased efficiencies.
Given that newspapers are often bought to while away boredom on journeys to and from work etc the
development of compact multimedia devices such as MP3 music and video players will reduce the casual
purchase of newspapers.
(d) Ecological
Newspaper production and distribution has many ecological impacts. The raw material is timber and the
manufacture of paper involves large amounts of water and bleaches. Print ink was solvent based originally. It
is an industry that requires substantial logistics and so leaves a carbon footprint.
Regulations affecting pollutants, the recycling of paper, and the carbon emissions from a business would
impact sharply on the costs of the newspaper industry.
(e) Legal
During the recession, in order to boost sales, the tabloids in particular tended to search for more 'popular'
stories such as the Royal family and scandals about prominent people. This, however, resulted in an
increase in law suits, as a struggle emerged as to whether the private lives of prominent individuals were
indeed 'private'. The current ruling is that anything that is in the public interest may be published.
However, there remains a grey area as to what is in the 'public interest'.
This was then coupled with the manoeuvring by newspapers on the issue of publishing sensitive
photographs. Some published in order to obtain a short-term boost to their circulation whereas others
decided to publish their 'disgust at those seizing the opportunity' in the hope of a longer-term increase in
circulation.
The legal issues surrounding the competitive nature of the industry also came to the fore, particularly as to
whether the price cuts were an attempt at predatory pricing in order to force a competitor out of business.
Conclusion
The newspaper industry was in a particularly turbulent phase in the 1990s. This was mainly caused by the
recession and the effect this had on disposable incomes. Moreover, with technology ever-improving since that
time, television and radio have taken increasing shares of the media market away from newspapers.
Interactive question 4: A global corporation?

Some would say that such purely global organisations are rare. Industry structures change and foreign markets
are culturally diverse. Even within the USA, there is an enormous variety of cultural differences. Can you think
of a global corporation that fulfils the requirements of the definition given above?

Levitt cited examples such as Coca-Cola in his article. More recently, examples such as Starbucks, Mercedes Benz,
Microsoft and Disney have been called global businesses.
In practice, these corporations offer subtly different products in different markets and their appeal is not global. For
example, Coca-Cola has suffered badly from an anti-American sentiment and Disney has not been as successful in
Europe as it had hoped.
Interactive question 5: Why do banks cluster?
It is easy to see why mining companies should congregate in a cluster around coal seams, or shipping services would
congregate around ports, but why should banks and software companies be clustered in the same way, given plentiful IT and
broad bandwidth communications?

The reasons cited for geographical clustering of Financial and IT businesses are:
 Proximity to educational and research centres. For example, in USA the IT industry clusters around its
universities. 

 Networking and mutual exchanging of staff. 
Interactive question 6: Chinese car industry

At the Beijing Auto Show (in November 2006) China's car makers felt confident enough to show off not just
their newest low-cost runabouts, but also luxury and sports models, 'concept cars' showing future possible
designs and even a few hybrid and electric vehicles. Local car makers in the world's third largest and fastest-
growing car market would appear to have come of age.
Until recently many Chinese car makers built thinly-disguised copies of vehicles made by Volkswagen, GM and
Toyota. In the past few years things have changed. In preparation for a push overseas local firms such as Chery,
Great Wall and Geely have proved they can develop their own vehicles too. Buying designs from international
specialists and installing fancy robotic production lines means more than 100 new models will be introduced in
China this year. Their car makers have captured 27% of the market in China and will export 75,000 vehicles to
over 100 countries this year. Foreign car makers are worried by the Chinese firms' ultra low prices. The latest
Shanghai Maple, for example, with leather seats, anti-lock brakes, air conditioning and a 2 year warranty costs a
mere $6,500. Foreign firms grumble that they cannot even buy the steel needed to make the car for that price.
How much of this miracle is the result of good business sense – rather than special treatment granted to local
firms – is not entirely clear. A lot of early technology was borrowed. The government also offered support to
fledgling firms via direct investments and guaranteed loans. Universities provided technical help, especially in the
development of expensive engines. The authorities even considered a law that would mandate a 50% share for
local firms by 2010. Future legislation is likely to force foreign firms to do more research and development in
conjunction with Chinese partners to ensure continued access to cutting-edge engineering skills.
In a market where buyers are unashamedly experimental, brands have little value so far, except in the
luxury segment. For most buyers cost is more important. With average retail process falling by $1,250 a
year producers are racing to cut costs, not improve quality. The number of faults per 100 cars made rose
from 246 in 2005 to 338 in 2006. Reliability is likely to deteriorate further.
Chinese cars exported today mostly go to Africa, south-east Asia and the Middle East where expectations
are lower and price matters more.
Requirements
(a) Identify, using Porter's Diamond, the sources and nature of any competitive advantage enjoyed by
Chinese car manufacturers.
(b) Recommend a strategy for Chinese car makers based on this analysis.
(a) The scenario suggests the following sources of the Cost Leadership advantages enjoyed by the Chinese car
industry:
1. Demand conditions: China is a very large market (third largest) and fast growing. This enables firms to gain
significant economies of scale and also to justify investment in the new models (100 next year) and production
equipment. With the exception of the luxury segment the demand is for low price cars and this has forced car
makers to concentrate on reducing costs.
2. Related industries: The only cited example is the assistance from universities in R&D. This provides
significant cost advantages compared with in-house development. The low price of the Shanghai Maple
suggests that steel and other components are being sourced cheaply too.
3. Factor conditions: China clearly has a good technical education system. It is also known for having
abundant cheap labour and land available for building car plants. It has good sea links and freight
handling for the purposes of exporting.
4. Firm strategy, structure and rivalry: The scenario mentions only three firms which, between them,
share 27% of the Chinese market. The Chinese government wishes this to increase to 50%. This will give
each significant economies of scale and an incentive to invest in product and process improvement. That
foreign-made cars are allowed into China gives a stimulus to product development and the search for
competitive advantage. It is noticeable that the predominant mode of competition is price/cost and not
quality. The industry seeks to build a me-too version of a foreign car but at a lower price.
(b) The attempt by Chinese car manufacturers to go 'up-market' and develop unique designs and
distinctive brands for export is a mistake. It suggests a vanity that could sacrifice the industry's
competitive advantage.
The appropriate strategy for the industry is to remain a low cost player. It has huge internal markets available
to it that value its present offerings. Its low cost position may enable it to focus on export markets such as
other developing economies where low cost is also important. However its advantages are location specific
and it should access these markets by exporting rather than, say, setting up factories outside China.
The poor quality of its products should be addressed. The number of faults is rising and by giving a two-year
warranty the firms are bearing the substantial costs of rectifying these. It may be cheaper to stop the faults
happening than it is to fix them and it would improve customer perception at home and abroad.
Chapter 4 The industry and market environment
Interactive question 1: Record stores
Sony Music became the largest record label to start selling music on-line in 1997 hoping to ape Amazon's
success with books. Most pundits smugly argued it would end in tears. Book stores, they said, were dead
because they could not compete with Amazon's millions of titles. Customers would stay loyal to music shops
because buying on-line would deprive them of the joy of browsing the aisles and impressing dauntingly hip
sales staff with their insight into obscure acts.
A decade later new book stores are popping up across Britain while record stores are in danger of dying out.
th
On January 11 (2007) HMV, Britain's biggest music retailer, posted a first-half loss. Music Zone, whose 104
rd
shops specialise in cut-price CDs and DVDs, went into administration on January 3 2007.
The assault has come on two fronts. Supermarkets have been selling music aggressively in the past five years and
now account for a quarter of sales and by concentrating on no more than 100 bestsellers that account for about
a third of total album sales. The second threat to high street music shops is the Internet which has made copying
and stealing music easier but also allowed customers to sample, legally, a wider choice of albums than even the
biggest music stores stock. Online music sellers such as Amazon have more than doubled their sales to about
11% over the last five years. Legal download services, including Apple's iTunes, account for less than 3% of the
market.
Source: Economist January 2007
HMV seeks to revitalise business
Shares in music and book retailer HMV Group have fallen 16% after the firm issued a profit warning as it
launched a 'radical' review of the business.
HMV said sales had deteriorated further since the start of 2007 and that annual profits would be lower than
expected.
The retailer is likely to close loss-making stores following a review of its entire estate of 421 HMV outlets and
329 Waterstone's book stores.
Changing trends in the music market, with more and more consumers downloading songs rather than
buying physical copies, has hit HMV hard.
'Waterstone's and HMV are great brands but have not adapted quickly enough to the way customers are
now buying and consuming media,' said chief executive Simon Fox. 'Our performance has suffered as a
consequence.'
HMV said group like-for-like sales - which strip out the impact of store openings and closures - were down 3% in the
nine weeks to 10 March. As part of a three-year turnaround plan, HMV plans to save £40m by 2010 by reviewing all
aspects of its business, including its stores, supply chain and administrative operations.
Unprofitable stores plus those deemed surplus to requirements following Waterstone's purchase of
Ottakar's last year are likely to be closed. HMV also plans to refurbish its stores and introduce new
products including portable music players and gift stationery at Waterstone's.
It will also launch a social networking site for music and film enthusiasts and increase investment behind its
own online retail site.
HMV shares closed down 15.9%, or 24.25 pence, at 128.5p.
'Investor hopes have again been dashed via another downward estimate to profits,' said Keith Bowman,
from Hargreaves Lansdown Stockbrokers.
'Today's update leaves investors requiring a further leap of faith in the group's potential turnaround prospects.'
Source: BBC Website March 2007
Requirements

(a) Identify the factors that have enabled substitutes to cause the financial decline of record stores.
(b) Identify reasons for the apparent continuing success of bookshops.
(c) Suggest strategies that may help the management of record stores to improve earnings.
(a) The main substitutes cited in the extract are:

 Supermarket sales of most popular titles 

 On-line shops such as Amazon able to provide CDs and DVDs 

 Downloads 

 Piracy of tracks by unregulated download sites, file sharing and copying of CDs. 
These substitutes have been able to reduce the customers visiting the shops with the consequence
that sales revenues have fallen from CDs and other spontaneous purchases (magazines, apparel etc.)
The principal reason is the improvement in price/performance of these substitutes.
Supermarkets may be cheaper but are, importantly, convenient because households shop there each
week and so simply add the album to their trolley. Where the household are not minded to follow the
music scene they will not be aware of new albums by popular artists and so will not think of visiting
music-stores. They will buy it if they see it.
Downloads may be free or cheaper, particularly if the listener only wants a few tracks from the album.
They are also more convenient because no special visit to a store is needed, they can be sampled and
they are immediately available for listening on personal digital stereos.
Amazon may be cheaper but also provides samples and customer reviews which enable buyers to have
more information before buying than could be gained by a visit to the music-store.
Surprisingly the extract ignores a further substitute, the market for used CDs which is present on
eBay and Amazon marketplace.
(b) Bookshops may be more successful for several reasons:
 A clientele that is prepared to put more effort into searching for the right item. This means they
will want to handle the book, and to read some parts of it. 

 An enhanced range of services. Many bookshops have coffee shops, reading areas, printed art and
crafts and author signings to generate footfall and interest. This enables them to differentiate
themselves and so avoid buying solely on price. It also boosts earnings. 

 Higher margins. Book prices vary considerably between paperback novels, hardback early
editions and texts. A text book may cost in excess of CU35 whereas CD's are much more
uniform in price. 

(c) Record stores should try to differentiate themselves on service and avoid price comparisons.
Offering coffee areas, live music, clothing and band accessories would create a better
environment for music lovers.
 Record stores should provide a 'custom burned' disc or digital download service in-store. 

 Record store management should develop web-based alternatives to capitalise on their brand. 

 Record store management should consider adding books to their product ranges. 
[HMV (the record store) is part of the same company as Waterstone's the bookshop having been
formed in 1998 when HMV was sold by EMI Music and Waterstone's by W H Smith. It bought
Ottakar's bookshops in 2006 following a series of inquiries by the competition authorities.
Interactive question 2: Profitability of airlines

The airline industry as a whole is loss making (i.e. adding profits of successful airlines to
losses of unsuccessful ones). Even successful airlines struggle to get an operating margin
above 10%.
Using the following models identify contributory factors to the low rates of profits in airlines.
1. Industry life cycle
2. Porter's Five Forces.
Identify potential strategies to restore profitability in the light of your analysis.

Industry life cycle
The industry seems to be at the shakeout phase with overcapacity due to many operators and
liberalisation of competition (so-called 'open skies') leading to greater competition on profitable routes
(e.g. Air France with KLM).
Consolidations and failures (e.g. Swiss Air) have occurred.
Porter's Five Forces
Increased availability has led to more choice in the market

The growth of electronic booking services (e.g. e-bookers, expedia.com,
Buyer power last minute.com) has restricted ability of airlines to charge full price
The change in the nature of the buyer towards short-haul leisure where
price is more important than it was to business travellers
Supplier power Aviation fuel accounts for 30 – 35% of costs and is determined by oil
producer cartels and large oil companies
Airframes are provided by two firms (Boeing and Airbus) and engines by
three firms (GE, Pratt and Whitney, Rolls Royce)
Airport landing plots and services are provided by national monopolies
Substitutes Faster trains with better facilities which travel to centre of cities
Alternative leisure e.g. cruises
Technologies such as video-conferencing
Entrants Low cost point-to-point providers attack by short-haul router
Growth of business only services on major routes (e.g. Silverjet, London
to New York)
Opening up of competition by bi-lateral agreement (e.g. USA and EU) or
under pressure from World Trade Organisations)
Competitive rivalry Very high fixed cost industry makes competition for volume force
prices down towards marginal cost
Limited opportunities for differentiator given similarity of aircraft and
destinations
Volatile demand due to seasons and economic/political factors
Restoring profitability
Consolidation of airline industry to reduce capacity.

Operate alliances to rationalise competition and benefit from economies of scale (ground handling,
fuel purchase etc).
Oppose increasing take off and landing slots or greater competition.
Reduce fixed costs, e.g. by outsourcing, use of operating leases, better capacity planning.
Differentiate service to gain higher yield per passenger.

Chapter 5 Strategic capability
Interactive question 1: Car seats
Y Ltd manufactures car seats for children. Y's home country, Z land, has extensive legislation on car safety
for many years and child seats are compulsory. The company was formed 10 years ago by an
entrepreneur who had previously worked as a technical consultant for an industrial foam company.
Despite strong competition, Y Ltd has succeeded largely by careful marketing.
The car seats come in a range of sizes and there are a variety of options from fully integrated seats for very
young babies to booster seats for older children. The company's main customer is an accessory
manufacturer with a major presence in Y Ltd's home market. It buys the car seats from Y Ltd and sells
them under its own brand as 'safety approved'. It advertises the car seats in accessory brochures and on its
website. The company's second major customer is a large superstore in the home country which specialises
in children's clothing and accessories such as prams and pushchairs. The remaining sales are to a varied mix
of large and small mainly independent car accessory retailers.
The car seats have historically all been produced on a single site in the north of the home country. The Managing
Director uses his connections to source the foam padding from several suppliers with a commitment to
achieving the lowest price but complying with safety standards and expectations. Z land has sophisticated
economy with efficient capital markets; JIT logistics are common in all forms of manufacturing.
The company is considering possible methods of expansion and is currently considering exports to
neighbouring countries.
Requirements
(a) Explain how conditions in Z land could give Y Ltd a competitive advantage when it starts its export
operations.
(b) The Managing Director of Y Ltd is constantly trying to improve the productivity and quality of his
manufacturing operations and is considering a programme of benchmarking. Explain why a
benchmarking programme would help Y Ltd and suggest how it might be carried out.

(a) Porter identifies four elements of national competitive advantage that support the export efforts of
successful firms.
These elements and how they can be applied to Y are explained below.
Factor conditions are a country's endowment of the inputs to production, such as human resources,
physical resources, knowledge, capital and infrastructure. Porter distinguishes between basic and
advanced factors. The latter are more important for sustained success, and include modern
communication and investment in facilities and highly educated personnel. Z land appears well-endowed
with these advanced factors, having sophisticated financial markets and industries using modern systems
such as JIT.
Demand conditions in the home market have determined how Y has responded to customer needs.
Careful marketing has made this response successful and Y has an enviable reputation at home for quality,
innovation, reliability and customer focus that should transfer well to the world market. The success that
has been achieved to date has meant that Y has the necessary economies of scale to be able to compete
globally.
As the home market has shaped Y's priorities, the company would be well advised to use this
experience and seek abroad those segments that have been successfully targeted in the domestic
market. This will require an investment in market research, as the company must determine how well
the products will be received abroad. This is vital, as there is little point in launching products if the
customers do not want them or can see little difference from existing offerings towards which they may

already feel very loyal.
The impact on the home market of more international activity must also be considered. Does Y have
the resources to be able to support both markets, and continue to maintain its accustomed high
standards?
The presence of related and supporting industries at home, which have to date supplied Y with
the components it has needed for its successful products, will be important in launching those
products internationally. The continued support of these suppliers will be vital, at least in the initial
stages of international development. Y must assure itself that these suppliers have the resources to
provide a higher level of support. Otherwise, international suppliers may need to be sought and this
will demand closer and more complex supply chain management.
National firm strategy, structure and rivalry issues create distinctive business environments in
different countries. For example, domestic rivalry is important because tough domestic rivals teach a
firm about competitive success, and rivals for the home market have to try different strategic
approaches.
Y has been successful against strong competition in the domestic market and this has provided good
training for the international market, which may feature more, and larger, competitors than Y has been
used to facing at home. However Y must ask itself whether its reputation for supplying reliable and good
quality products will be enough to guarantee its success in a wider competitive market. It could be that
the wider market does not value reliability and quality as highly as Y's domestic customers. This would
wipe out its main differentiating factor.
(b) Benchmarking can be very useful for business, both in relation to internal processes and to wider
management concerns.
Internally, the adoption of best practice should improve productivity; reduce waste and costs
associated with quality failures; and contribute to increased customer satisfaction.
At the operational management level, benchmarking is useful if there is any tendency to complacency
and it can improve awareness of the processes by which value is currently created and how they could
be improved in the future.
At the strategic level, benchmarking can be an important contributor to awareness of competition in the
changing task environment and how the company is responding to it, both practically and strategically.
There are disadvantages to benchmarking. A full programme can overload managers with demands
for information, restrict their attention to the factors that are to be benchmarked and affect their
motivation by seeming to reduce their role to copying others. It can also undermine competitive
advantage by revealing trade secrets. Strategically, it can divert attention away from innovation and
the future by focussing it on the efficiency of current operations. This is a particularly important
point for Y Ltd, with its current move towards exporting: this will require a great deal of attention by
managers at all levels.
If Y Ltd were to undertake a programme of benchmarking, firm commitment by the Managing Director
would be essential to drive it along. It would then be necessary to identify the areas in which
improvement was sought and to decide how such an improvement would be identified and measured.
Since benchmarking is about processes rather than results, measures would have to be rather
more detailed than the usual summary measures used in normal management reports.
It would then be necessary to identify suitable benchmarking partners. Trade associations or
chambers of commerce may be able to help. Y Ltd need, not, of course, benchmark against
competitors, or even against other motor accessory manufacturers. Its distribution operation, for
instance, might be compared with a similar operation in a completely different industry.
Once a scheme of measurement and comparison is in place, it is necessary to determine what
improvements are possible and to implement them. It will be tempting for the Managing Director
of Y Ltd to delegate this role to a single manager, but better results will be obtained if the

responsibility for making and monitoring the necessary changes is embedded in the normal
management structure. Success and failure in making and continuing the agreed improvements can
then be monitored as part of the normal performance review process.
Interactive question 2: Hairdressers

X Ltd is a chain of hairdressers with fourteen sites operating in the business districts of the capital and
three other major cities. It has a very simple philosophy – quality haircuts for women who are short of
time. It operates a no appointment, drop-in system. Customers take a ticket on arrival and wait in a
large comfortable seating area until their numbers are called. All staff are multi-skilled and there are no
specialists. The company aims to keep waiting times below fifteen minutes.
The salons offer a wide range of services from very simple cuts to more complex styles and treatments.
In 50% of their stores X Ltd also offers beauty treatments, such as facials, in a separate salon on site. The
company's main publicity comes from personal recommendation by satisfied customers, but they also
occasionally advertise in high quality women's magazines.
After a recent period of expansion, the management team of X Ltd feel that their business model is
not being applied consistently throughout the organisation and they have decided improvements and
adjustments need to be made. However, none of the management team knows how to relate their
philosophy to their operations to the best effect.
Requirements
(a) Using the concept of the value chain, explain how X Ltd can adopt the quality and speed
approach throughout its activities.
(b) What are the benefits and problems of value chain analysis for a company such as X Ltd?
(a) The value chain is a model of how firms create value for their customers. The value chain describes
a number of activities carried out in the firm.
Primary activities are directly related to the processes of production and sales.
Inbound logistics are those activities involved with receiving, handling and storing inputs to the
production system.
Operations convert the resource input into the end product. Outbound logistics relate to storage
and distribution.
Marketing and sales inform customers about the product, and include advertising and promotion
After sales service
Support activities obtain purchased inputs, human resources, technology and infrastructure to
support the primary activities
Competitive advantage is obtained by configuring the value chain in certain ways. X Ltd can use the
value chain to ensure that their philosophy of quick, quality haircuts can be adopted and maintained
throughout the business. The main areas that X Ltd needs to concentrate on are Human Resource
Management, Procurement, Technology Development, Operations, Marketing and Sales.
Human Resource Management
An important way X Ltd generates value for its customers is by operating without appointments and
with multi-skilled staff. This means that whatever a customer needs, she can expect to be attended to
quickly and efficiently without having to plan ahead for an appointment.
The company therefore must ensure their staff have the capabilities to meet the objectives of quality and
speed. It is clear that they need to be highly trained as they need to be able to work quickly and avoid

making mistakes. They need to be multi-skilled so that each member of staff can achieve maximum
utilisation and be in a position to deal with any customer and her needs. The company also needs to
ensure that they have an adequate workforce of trained juniors to deal with washing hair, cleaning of the
salon and general fetching and carrying. This will ensure that the stylists themselves are not wasting time
when they could be generating income for the salon.
Technology development
There are many areas in this kind of business where technology can help to achieve the organisation's
stated aims. The simple ticket waiting system might be developed to provide an indication of waiting
time and an option to prefer a particular stylist, for example. The salons could also use modern
technology to make the salon experience more appropriate for their target clientele. This could include
computer terminals in the waiting area for busy clients to check email (assuming they do not have email
capable devices such as Blackberry).
Operations
X Ltd should consider making the beauty salon business entirely separate from the hairdressing salon as
the two businesses seem to offer a mixed message to clients – one of speed but also relaxation.
Furthermore the company needs to analyse its current and potential market and determine whether
they will require more complex services such as colouring as this kind of procedure would add to the
time the stylist needs to spend with each client. They could consider offering a separate area for such
services and having dedicated staff working in this area.
There is potentially a new market for X Ltd to explore by considering the people who are just too
busy to leave the office for a haircut. They could target large office complexes and offer in-house
hairdressing services at convenient times.
Marketing and sales
X Ltd has been fortunate in that its name has become well-known through personal recommendation.
However, it would be unwise to reply on this simple recipe. A sophisticated business needs an
appropriate marketing communications strategy. This may require the assistance of consultants to
develop properly, but X Ltd should certainly consider some kind of targeted campaign, even if only run at
a low level of intensity to ensure its services are known to potential customers. Careful advertising in
local and even national newspapers might be appropriate, though it would be expensive. A high quality
direct mail campaign to business addresses might be more appropriate.
(b) By performing a value chain analysis a company such as X Ltd is forced to look in detail at its activities
and identify areas for improvement. This may never be achieved if the company is simply concentrating
on external analysis as a source of new opportunities
Businesses need to focus on trying to achieve sustainable competitive advantage; by considering each
activity of the business as a potential source of strength or a possible weakness, the company can ensure
that maximises the value that it offers. This analysis can also help to identify core competences, which
are particularly appropriate source of competitive advantage in the long term.
All companies should concentrate on achieving consistency throughout their operations. That is, if a
particular target is set, such as quality or speed or value, then this should be applied to all the activities of
the business to ensure that achievement in one area is not negated by failure in another. Examining the
business in the light of the value chain is a method of ensuring that value created in one area is not
destroyed in another. In the case of X Ltd there is, for example, an element of contradiction between the
aim of targeting women who are short of time and the use of a queuing system rather than appointments.
A further aspect of the value chain that needs to be considered is the application of this concept to
the entire value system and the linkages between that system. By considering these linkages, a
company can achieve better relationships with its customers and suppliers and ensure partners are
sought who hold similar values and conduct business in a similar manner i.e. are compatible.
The value chain also has some limitations in its application. Fairly obviously, it was based on a

manufacturing model and it may be difficult to apply to businesses in the service sector such as X Ltd.
Companies in this situation need to ensure they are comfortable with general principles of the
exercise and not get too caught up in trying to make their business fit within a certain framework.
Companies also need to ensure they don't focus on value chain analysis to the detriment of
environmental analysis and a consideration of competitive forces.
Interactive question 3: Outsourcing R&D

Give two advantages and two disadvantages of a computer software company outsourcing its research and
development.
Advantages of outsourcing R&D
(a) Potentially less expensive if R&D is used on an ad hoc basis
(b) Gain from outside expertise and competence
(c) Flexibility to cope with larger projects or to render cost base more variable
(d) Frees management up to focus on more important or strategic issues
Disadvantages of outsourcing R&D
(a) May be cheaper in-house if R&D is a perpetual and continuing activity
(b) Exposes firm to risk from poor quality or unreliable/unstable provider
(c) Loss of organisational learning
(d) Loss of control over intellectual property (IP). For example, who owns the developments?
Interactive question 4: Outsourcing and core competences

Should a core competence ever be outsourced?
(a) The firm may effectively be surrendering its source of competitive advantage.
(b) If all the knowledge needed to run a business is held 'outside' it, short-term profit improvements
may be made at the (long-term) expense of the ability to innovate.
(c) A current competence may be less relevant in future, in which case outsourcing may be part of an exit
strategy.
(d) Managers may disagree as to the business and processes they consider to be core.
Interactive question 5: Catterall Wentworth

Catterall Wentworth is a large firm of accountants based in London with a number of regional offices. It is
divided into four main areas: tax, audit and accounting, corporate finance and management consultancy.
However in addition to the provision of these general services, additional specific services have been
developed. A partners' meeting has been called to discuss the future strategy of the firm, the accountancy
industry and the place of Catterall Wentworth within it.

Over the past ten years the nature of the accountancy industry has changed significantly. Profits are lower
than they have been for many years and competition is fierce, especially amongst the larger firms. More is
being asked of accountants, and their image has taken a battering following the demise of some important
clients (such as Enron and Parmalat) in the US, the UK, Italy and Australia. There has been a knock-on
benefit. Business has been growing fast in the field of corporate governance advice and products to assist
firms manage the requirements of Sarbanes-Oxley.
Catterall Wentworth has responded by setting up an Assurance division within the Audit and Accounting
Section. The division, offering specific advice on corporate governance and Sarbanes-Oxley has shown
significant growth and there are plans to recruit more staff to expand it further, as the market for these
services continues to develop.
Meanwhile, new accounting standards are being introduced by international accounting bodies. These
demand far greater expertise from UK accountancy firms. Catterall Wentworth have earmarked a significant
proportion of their training budget to IAS training courses and are beginning to see a payback as they have
won a number of new clients recently specifically because of their IAS knowledge.
Margins on audit and taxation services are slim. The industry is growing increasingly concerned about auditor
liability. Whilst auditors are hopeful that they should be able to negotiate proportionate liability with clients
within the next few years, a number of firms are facing legal cases which could result in significant claims
against them, and this situation looks set to continue for some time. Another concern is the Inland Revenue's
strict attitude towards tax avoidance. [Note- The Inland Revenue is the UK equivalent of NBR in Bangladesh]
The Inland Revenue has made plain that specific tax avoidance schemes that it has not vetted will result in the
accountancy firms that sold the schemes being fined. Aggressive tax plans, of the sort Catterall Wentworth
specialised in, are rarely receiving approval.
Another concern is the raising of the audit threshold. Until the end of 2003, any business with a revenue of
CU1m or more had to be audited. However, Government has now raised this threshold to CU5.6m. For
many accountancy firms including Catterall Wentworth, the loss of these small clients has had a significant
impact on their business. In addition, the rules governing independence have made the provision of non-audit
services to audit clients much more problematic which has further reduced the profitability of the audit side
of the business.
Although consultancy is seen by some as the most profitable sector, the firm has seen their revenue rise by
only a modest amount in the area of general consultancy. In an attempt to generate new business Catterall
Wentworth have introduced a new product; tax efficient supply chain planning, which involves multi-
disciplinary teams, from consultancy and tax, working together to help larger clients. As more UK companies
source and sell across international boundaries, the demand for such services is predicted to grow. Catterall
Wentworth are one of the first firms outside the Big Four to offer the service.
Catterall Wentworth's long-established corporate finance department is currently their most profitable area.
The division advises clients looking to raise further funds. They have a number of listed clients and many
more that may well look to list in the future. To support such firms they have just introduced a pre-list
planning service which helps firms prepare for a listing up to eighteen months in advance. It is early days yet
and they are not yet sure how many clients will take up the service.
Requirement
You are an outside consultant.
Using the information above, prepare a report for next week's partners' meeting which analyses the
product portfolio of Catterall Wentworth using the BCG matrix. Your report should explain the logic
behind your reasoning and conclude on the balance of the portfolio.
Catterall Wentworth
To Partnership Board
From ANO Accountant

Date Today
Subject Product portfolio analysis for Catterall Wentworth
I have analysed the product portfolio of the firm using the BCG matrix. The matrix is designed to
consider the products of the firm from two perspectives – how fast the market for such a product is
growing, and what share of the market the firm currently enjoys. In the case of a service industry such as
Catterall Wentworth the term product refers to the services they offer to clients.
The logic behind the use of the matrix is that to be successful it is necessary to have a significant
market share. It is at that point that economies of scale become achievable and brand strength will
become established. However, since all products have limited life spans a firm must also have newer
products to take over as the older products decline.
Catterall Wentworth's products can be analysed as follows.
Question marks
These are products for which the market is growing but where the share of the firm is still limited. Although
they have the potential to become profitable, services in this category are usually expensive to offer as the firm
is not yet operating at full efficiency and share will need defending against other players.
Two of the services offered would fall into this category: tax efficient supply chain planning and prelist
planning. Both are newly offered products and Catterall Wentworth do not yet have significant share.
However whilst the former sounds very likely to become a star (see below) in the near future, the latter is
very much an unknown and it may never get fully off the ground.
Stars
Products in this category are already doing well. Successful market share has been achieved and the long term
future of the product seems likely. However the market is still growing and the risk of losing share to other
entrants before achieving long term success still exists.
Both the Assurance division and the IAS advice services would be considered stars. In both areas Catterall
Wentworth have recently won a number of clients which will have improved their share of the overall
market. However the markets are still growing fast, offering real potential only if they can hold their share
against their competitors.
Cash cows
Cash cow products are the real money earners. Market share is established and a slow down in the growth of
the market should prevent many new players entering. It is the funds from these products that support the
investment in the newer product areas.
Catterall Wentworth's corporate finance department is a cash cow. It is well established and profitable.
General consultancy is probably also a cash cow. Modest increases in revenues are not unusual in slow growth
markets. However if the income from consultancy has been following a downward trend then a new approach
will be needed to prevent share being eroded.
Standard taxation services (such as provision of corporation tax returns) are not specifically mentioned in the
above analysis. It may be reasonable to assume they are a cash cow, since margins are still being earned from
them (albeit slim ones).
Dogs
Dog products are those with a low share of a market with little growth potential. They may be previously
successful products that are coming towards the end of their lifecycle, or question marks that never did
achieve share. They make little or no contribution to profits.
Aggressive tax planning is clearly a dog product. NBR has effectively brought it to the end of its lifecycle by
insisting on prior approval for tax planning schemes.

Using the BCG analysis, audit services would also be defined as dogs. The market for Catterall Wentworth's
audit services is in decline as the smaller firms come within the audit exemption. As liability fears continue to
abound in the industry it is seen as higher risk, and insurance premiums eat into profits. In addition, since audit
clients cannot now be used as a 'way in' to sales of the higher margin non-audit services, the low returns from
audits become more obvious.
Conclusions
Catterall Wentworth has on the face of it a balanced portfolio. It has services in all the key areas. However
closer examination suggests a less optimistic picture.
It is the income from the cash cow products that supports the new investment. It is not clear from the
information provided what proportion of the firm's turnover their cash cows make up. However general
consultancy is only earning limited profits which puts pressure on the corporate finance department to earn
enough to fund the whole business.
The star products IAS advice and the Assurance division will make them money in time. However spending on
staff and training is probably matching any increase in revenue from them at the moment. In addition the
problem children will need to be marketed and developed if they are to be successful and this too takes funds.
Dog products are often a drain on a firm's resources. Whilst the firm may well cease offering aggressive tax
planning, if they continue to offer audit services, these may end up being provided at an effective loss.
Catterall Wentworth will need to make some difficult decisions if they are not to run out of the funds they
need to support their current product portfolio.

Chapter 6 Strategic options
Interactive question 1: Hall Faull Downes Ltd
Hall Faull Downes Ltd has been in business for 25 years, during which time profits have risen by an average of 3%
per annum, although there have been peaks and troughs in profitability due to the ups and downs of trade in the
customers' industry. The increase in profits until five years ago was the result of increasing sales in a buoyant
market, but more recently, the total market has become somewhat smaller and Hall Faull Downes has only
increased sales and profits as a result of improving its market share.
The company produces components for manufacturers in the engineering industry.
In recent years, the company has developed many new products and currently has 40 items in its range
compared to 24 only five years ago. Over the same five year period, the number of customers has fallen
from 20 to nine, two of whom together account for 60% of the company's sales.
Give your appraisal of the company's future, and use a SWOT analysis to suggest what it is probably doing
wrong.

A general interpretation of the facts as given might be sketched as follows.
(a) Objectives: The company has no declared objectives. Profits have risen by 3% per annum in the past,
which has failed to keep pace with inflation but may have been a satisfactory rate of increase in the
current conditions of the industry. Even so, stronger growth is indicated in the future.
(b)
Strengths Weaknesses
Many new products developed. Products may be reaching the end of their life
and entering decline.
Marketing success in increasing market share. New product life cycles may be shorter.
Reduction in customers.
Excessive reliance on a few customers.
Doubtful whether profit record is
satisfactory.
Threats Opportunities
Possible decline in the end-product. None identified.
Smaller end-product market will restrict
future sales prospects for Hall Faull Downes.
(c) Strengths: The growth in company sales in the last five years has been as a result of increasing the
market share in a declining market. This success may be the result of the following.
 Research and development spending 

 Good product development programmes 

 Extending the product range to suit changing customer needs 

 Marketing skills 

 Long-term supply contracts with customers 


 Cheap pricing policy 

 Product quality and reliable service 

(d) Weaknesses:
(i) The products may be custom-made for customers so that they provide little or no opportunity
for market development.
(ii) Products might have a shorter life cycle than in the past, in view of the declining total market
demand.
(iii) Excessive reliance on two major customers leaves the company exposed to the dangers of losing
their custom.
(e) Threats: There may be a decline in the end-market for the customers' product so that the customer
demands for the company's own products will also fall.
(f) Opportunities: No opportunities have been identified, but in view of the situation as described, new
strategies for the longer term would appear to be essential.
(g) Conclusions: The company does not appear to be planning beyond the short-term, or is reacting
to the business environment in a piecemeal fashion. A strategic planning programme should be
introduced.
(h) Recommendations: The company must look for new opportunities in the longer-term.
(i) In the short term, current strengths must be exploited to continue to increase market
share in existing markets and product development programmes should also continue.
(ii) In the longer term, the company must diversify into new markets or into new products and
new markets. Diversification opportunities should be sought with a view to exploiting any
competitive advantage or synergy that might be achievable.
(iii) The company should use its strengths (whether in R&D, production skills or marketing
expertise) in exploiting any identifiable opportunities.
(iv) Objectives need to be quantified in order to assess the extent to which new long-term
strategies are required.
Interactive question 2: Fleetrail

Fleetrail Ltd is a wholly-owned subsidiary of Twenty-first Century Transport Ltd ('TCT'). TCT is a major
Stock Exchange listed holding company whose other subsidiaries are involved in passenger transport,
notably scheduled express coach services linking various UK cities, and scheduled airlines operating both
within the UK and between certain UK cities and destinations in several European Union countries.
Fleetrail Ltd was created to bid for the franchise to operate passenger trains on the main line between
London and Norington, a major UK provincial city ('the route'). The bid was successful and the
franchise became effective from 1 April 1997 to last for seven years. The route represents the only
practical rail link between London and Norington and intermediate stations along the route.
Under the terms of the franchise contract the UK government paid Fleetrail Ltd a subsidy of CU200
million for the year ended 31 March 1998. Subsidies in subsequent years will reduce in annual equally-
sized steps, such that by the year ending 31 March 2004 Fleetrail Ltd will receive a subsidy of only CU35
million. The franchise contract specifies that Fleetrail Ltd is not allowed to reduce services or increase
prices in real terms, relative to the pre-1 April 1997 levels, without incurring significant financial
penalties.
Fleetrail Ltd has to pay Railtrack Ltd, the company which owns the railway lines and stations on the

route, a rental based on the usage of those lines. This rental is a matter of periodic negotiation between
Fleetrail Ltd and Railtrack Ltd, but the government-appointed regulator will intervene and set the price
where agreement is not reached.
Under the terms of the franchise the rolling stock (carriages and locomotives) used on the route are to
be leased from one of the three competing leasing companies. The leasing companies lease rolling stock
out to train operators, including Fleetrail Ltd. These companies will also acquire new rolling stock in due
course, according to the needs of their customers.
In the year ended 31 March 1997, the last year under British Rail management, ticket sales totalled
CU90 million and the route attracted a subsidy of CU250 million. During Fleetrail Ltd's first year
operating costs were roughly met by the total of ticket sales and the CU200 million subsidy. The route
currently employs 4,000 staff, nearly all of whom were 'inherited' by Fleetrail Ltd.
Requirements
(a) As far as the information given in the question will allow, undertake an analysis of the strengths,
weaknesses, opportunities and threats (SWOT analysis) of Fleetrail Ltd. Each point raised must be
explained and justified as to why it is seen as a strength, weakness, opportunity or threat. You
should provide some indication of the importance of each point which you make.
(b) Indicate what additional information you would need to obtain, and why you need it, to enable you
to complete your SWOT analysis of Fleetrail Ltd.
(c) Having carried out the SWOT analysis, how would the management of Fleetrail Ltd use it to
proceed to the formulation of a suitable strategy? (You are not required to identify a suitable
strategy for the company.)
(a) SWOT
analysis
Strengths
 Fleetrail Ltd's main strength is that it has a monopoly position on the train route between
Norington and London. This reduces the pressure to cut fares to be competitive. 

 TCT has the ability to offer through tickets involving rail, coach and air travel. As part of
the group Fleetrail Ltd can benefit from this, though at present this strength does not
appear to be capitalised upon. 

 Fleetrail Ltd can also benefit from TCT's expertise in running transport companies. 

 Fleetrail Ltd is part of a listed group making finance easier to raise. This could
become increasingly important as subsidies are reduced. 

 Government subsidies which give Fleetrail Ltd time to reorganise. These are crucial at
the moment but will reduce over the next six years. 
Weaknesses
 A major weakness of Fleetrail Ltd is that it has inherited the practises and culture of British Rail.
Thus the 4,000 staff may still have a public sector mind set, and view change with suspicion. 

 Without the subsidies the company is making a substantial loss. There is an urgent need
to increase revenue and reduce costs. 

 The franchise prevents Fleetrail Ltd from closing uneconomic lines, making it harder for
the company to break even. 

 Similarly, the franchise agreement restricts Fleetrail Ltd's ability to raise prices again, reducing
the options open to the company as subsidies fall. 


 Unless the Government regulator intervenes Fleetrail Ltd is vulnerable to Railtrack Ltd
exploiting its monopoly position. 

 Fleetrail Ltd has little power over the suppliers of rolling stock to insist that newer units
become available sooner. Thus Fleetrail Ltd will have to continue to try to win customers
while suffering delays and breakdowns. 
All the weaknesses are significant.
Opportunities
 Rationalise cost by downsizing the workforce. This is a significant opportunity as there are
likely to be many inefficiencies in the inherited work system. 

 The Government is keen to persuade people to use public transport rather than drive
everywhere. Linked to this Fleetrail Ltd has a major opportunity to win customers. 

 If successful Fleetrail Ltd could bid for other franchises in seven years' time. 

 Fleetrail Ltd could work together with other TCT companies to provide a more
comprehensive, integrated service. This is unlikely as yet to be a priority for the directors. 
Threats
 The inherited trade union will be strong. Any attempt to reduce the workforce may be met
by strikes and other resistance – a major threat. 

 The main threat facing the firm is that the subsidies will be reduced by around CU30 million
per annum. Fleetrail Ltd will have to see a major improvement in revenue and a fall in costs to
avoid losing money rapidly. 

 Even if Fleetrail Ltd were to make a success of the route it could still lose the franchise in
seven years' time – again a major threat. 

(b) Additional information
The following additional information would be useful.
Information Use
Demographic analysis of Norington and the To ascertain the potential demand for
surrounding area commuters to London
Details of rival coach firms offering transport To help understand the competition for
to London price setting, etc
Nearness of motorways, frequency of traffic To see if the road system is becoming over-
jams and trends in road usage loaded as this will encourage people to
switch to rail
 More details from the Government on their  To anticipate likely demand for rail travel
Integrated Transport System especially and probable time scales for change. 
regarding tolls, taxes on car use, etc 
 Detailed analysis of staff – their skills age,  To see how many staff could be lost, etc
salary levels  through retirement and natural wastage.
Also to calculate likely redundancy costs 
Operational statistics from successful railTo identify key areas of inefficiency
companies in Europe

 People's reasons for not using the train – market
research could be performed to ask them 
 To identify critical areas where change is
necessary 

(c) Use of SWOT to formulate suitable strategy
Having carried out the SWOT analysis the management should proceed as follows.
(1) Assess the SWOT analysis to clarify key strategic issues.
(2) Analyse stakeholder expectations and formulate objectives for the firm.
(3) Decide which markets should be targeted more, e.g. commuters to London or through
tickets for holiday makers.
(4) Decide upon a competitive strategy – should Fleetrail Ltd try to win business by offering a
low cost service or a better one?
(5) Decide upon a time scale for change, e.g. if staff numbers are to be reduced, then how many
and when?
(6) This can then be summarised by setting out a five-year plan.
Interactive question 3: EuroFoods

EuroFoods is a French-German consumer products group with a revenue of CU8 billion a year at
20X2 retail prices. One of EuroFoods' activities is the manufacture of ice-cream.
Medley is an American company. It has worldwide sales of CU5 billion a year and these come mainly
from chocolate products. Three years ago Medley started to diversify. It did this by selling a new
product, ice-cream, in one of its existing markets, Europe. Although Medley had no prior experience
of ice-cream, it believed that it could exploit its existing expertise in food products, marketing and
distribution in this new area.
The European ice-cream industry revenue is CU6 billion at 20X2 retail prices.
Market share %
EuroFoods 60
Medley 10
Local producers* 30
100
* These are defined as manufacturers who sell within only one European country.
Distribution has always been a very important aspect of the food industry. However, it is particularly
so in the ice-cream business. This is because the product must be kept refrigerated from factory to
shop, and also whilst it is stored in the shop.
Many of the shops which sell EuroFoods' ice-cream are small businesses and the freezer which is required
for storage is a costly item for them to buy. EuroFoods has therefore developed a scheme whereby it will
install and maintain such a freezer in these shops. The shop owner does not have to pay for the freezer.
The only condition which EuroFoods imposes is that the freezer must be used exclusively for the sales
of its products.
EuroFoods believes that this arrangement has worked well for everybody in the past. EuroFoods'
expenditures on the freezers have ensured that its products have reached the consumer in good
condition and also enabled it to simplify inventory control. It has also played a part in building its
market dominance by enabling shops which otherwise would not be able to do so, to sell its
products.
The European ice-cream business
The peak time of year for sales of ice-cream in Europe is from mid-June to mid-August. These summer
sales are deemed 'impulse' sales by the trade and are traditionally made from small retail outlets where
EuroFoods tends to have its exclusive arrangements. The other sort of sale is the 'take-home', which

are purchases made in larger quantities at supermarkets. These outlets do not have exclusive
agreements with EuroFoods.
Analysis of European ice-cream sales in 20X2 is as follows.
Volume Value Return on sales – Profit before tax
% CU billion CU billion
Impulse sales 40 4 0.48
Take-home sales 60 2 0.12
Total 100 6
Medley
Medley would like to obtain its future growth from the 'impulse' sector of the market. It owns
14,000 non-exclusive freezer cabinets, mainly in the UK. However, it is costly to maintain
these to sell the eight products which constitute its product range. Another problem is that in
many cases small shops have room for only one freezer and this has often already been
supplied by EuroFoods. As Medley's UK managing director said: 'It means only big competitors
with a full range of products can enter the market'.
Medley would like to be able to place its products in the freezers provided by EuroFoods.
However, when it tried to do this two years ago in Spain, EuroFoods was successful in a legal
action to prevent this.
Medley has now complained to the European Union that EuroFoods' exclusive freezer
arrangements restrict competition and are unfair.
You are presently working for Thunderclap Newman, a merchant bank, as a business
analyst in its Confectionery Division.
Requirement
Write a report to the head of the Confectionery Division of your bank, which
(a) Identifies strategies which lead to competitive advantage.
(b) Makes recommendations to both companies on their possible future strategy
options if the EU decides that exclusive freezer arrangements are:
– Anti-competitive and, in future, freezers should be available to any manufacturer
– Not anti-competitive and EuroFoods can continue to protect the use of its freezers.
You should include a general explanation of how a firm may attain a competitive advantage.
Note: A billion equals one thousand
million.

Report
To Head of Confectionery
From Business Analyst
Date Today
Subject EuroFoods and Medley – the international ice-cream market
1 Terms of reference
This report outlines the strategy options for EuroFoods and Medley under the alternative
scenarios resulting from the pending EU decision on exclusive freezer arrangement.

2 Competitive advantage
There are a number of different 'generic' strategies which lead to competitive advantage for a
firm's products, and these were identified by Michael Porter of the Harvard Business School.
 High volume/low cost (overall cost leadership) 

The cost of manufacture of the product is reduced to the lowest level in the market, thus
leading to increased margins. The firm is also able to engage in price wars more effectively
than its competitors. 

 Differentiation 

Significant differences are developed in the quality, features and marketing of the product.
Customers are therefore willing to pay a higher price, or the market might fragment
altogether, leading to total domination of a niche. 

 Focus 

Either of the above strategies can be combined with a greater or lesser degree of
concentration on a smaller number of potential customers. Use of a focus strategy may
defeat competitors using either of the two strategies above, but targeting a wide market. It
will also be important in devising strategies for EuroFoods and Medley to consider the
effects of the competitive forces in the marketplace. 

3 Scenario 1 – EU decision outlaws exclusive freezer arrangements
This decision will have a profound impact on the ice-cream market throughout Europe, as it will
directly threaten the 'strong supplier' status of EuroFoods in the impulse market. An indication of
how significant this might be can be gained from some analysis of the market data.
Current position
% of European market Volume Revenue Profit
Impulse sales 40 67 80
Take-home sales 60 33 20
100 100 100
It is not clear from the data given exactly what share EuroFoods has of the impulse sales market, but
it is unlikely to be less than its 60% overall share of the market, due to the competitive advantage
gained from its exclusive freezer arrangements. Indeed, the commentary suggests EuroFoods to be
'dominant' in this lucrative market segment. The outcome of an EU judgement in favour of Medley
would therefore be to remove a significant entry barrier – the control of distribution.
3.1 EuroFoods' strategic options
The threat of new entrants to the market must be considered by EuroFoods as significant
when forming a competitive strategy to take account of this scenario. Ideally, the entry barrier
to the impulse sector formerly provided by the exclusive freezer arrangement must be
replaced by another of equal effectiveness.
It would appear that the greatest current advantage that EuroFoods possesses in the EU
impulse sales market, with the exception of the exclusive freezer arrangement, is its scale of
production and established position as market leader.
This suggests that barriers to entry are available in the areas of economies of scale and the
experience effect, both of which should lower the cost of production. It seems clear that an
'overall cost leadership' strategy may well be open to EuroFoods, which would enable
super-profit to be taken.
This profit could be reserved for a future price war, but it is more likely that Medley will

continue with its current differentiation strategy. It seems more apposite to recommend that
EuroFoods invest heavily in product development and marketing in order to produce, brand
and place cheaper products which directly compete with the more exclusive and higher-priced
Medley brands.
3.2 Medley's strategic options
The removal of exclusive freezer arrangements by the EU will present Medley with a major
opportunity for growth. Although there will be a cost impact, as Medley will have to negotiate
a fee for the use of the EuroFoods freezers, this will be far less significant than the removal of a
major entry barrier.
The EU is likely to view a punitive fee strategy by EuroFoods as being similarly anticompetitive.
The strength of Medley seems to lie in its ability to demand a higher price by differentiation
of the product. As the basic product is the same (ice-cream), this is probably by the use of
brand names carried over from the chocolate products.
The profit earned in this way must be reinvested in widening the distribution network into
outlets previously dominated by EuroFoods, and in reinforcing the transfer of brand image
to maintain the margin, while generating additional sales.
Due to the recent heavy capital investment in the European factory, it is unlikely that Medley
can compete under an overall cost leadership strategy, which is the likeliest option for
EuroFoods anyway. Maintaining the focus on the impulse sales segment seems preferable to
attempting to compete in the take-home market which yields far lower margins.
4 Scenario 2 – Exclusive freezer arrangements remain
This represents a continuation of the current market conditions, which suggests that EuroFoods
will find it easier to maintain its dominance of the market. However, Medley has already achieved a
10% market share with a new product and further penetration is likely.
4.1 EuroFoods' strategic options
EuroFoods must continue to exploit its competitive advantage in the impulse segment by entering
into more exclusive freezer arrangements in areas of Europe not significantly penetrated.
In the take-home sector, however, EuroFoods is very vulnerable to attack even though
margins are lower and branding is probably less significant.
EuroFoods may like to consider supplying major supermarket chains with a low-price
'clone' of the Medley product, possibly under an own brand. This should be supported
actively by the supermarkets which will devote more freezer space and force Medley out
of the segment.
The cost advantages of EuroFoods will ensure that Medley cannot compete without a
significant subsidy from the other (non ice-cream) areas of the business.
4.2 Medley's strategic options
If the exclusive freezer arrangements are to continue, Medley must continue its
differentiation-focus strategy by supporting the brand in the impulse segment.
Significant capital expenditure will be required to supply and maintain freezers in competition
with EuroFoods, and many small retailers will be unable to provide space for both.
Medley will have to examine opportunities for alternative retail methods which are less
expensive and more attractive to the retailers.
It may be possible, for example, to invest in the development of smaller freezers which could
be placed on the counter. This would require Medley to limit the number of lines on offer
(possibly to the one existing line) to make the best use of the limited display space and avoid
stock-outs or heavier distribution costs due to more frequent deliveries.

In the take-home segment, the exclusive freezer arrangements do not apply, and Medley
has an opportunity to penetrate the market with multi-buy packs of the same branded
product.
However, the brand will have to be heavily supported by advertising to guard against copies
from EuroFoods. It may be possible to widen the range of lines using other Medley brand
names, if the impulse sale segment seems out of reach.
Medley cannot rely on retailers breaking the exclusive freezer arrangement with EuroFoods,
but can make it known that it will supply non-exclusive freezers if retailers have problems
with EuroFoods. This strategy may backfire if EuroFoods refuses to supply retailers which
break the agreement.
5 Conclusions and recommendations
It can be seen that the decision in the EU is fundamental to the strategy formulation of
both companies. The strategies recommended can be summarised as follows.
Decision pro-Medley Decision anti-Medley

EuroFoods – impulse Overall cost leadership and Maintain entry barriers own-
product development branded clones
EuroFoods – take-home
Medley – impulse Differentiation – focus Differentiation – focus/branding
Medley – take-home n/a Branding, advertising new
products
Interactive question 4: Blue Jeans Group

Note: Assume that the current date is March 20X9.
The Blue Jeans Group was floated in March 20X4 on the Alternative Investment Market with a
capitalisation of over CU22 million. The company was founded eleven years earlier by three Kenyan
Asian brothers who began their venture with a stall on the King's Road market.
Eight years prior to flotation, the business had been built up to such an extent that the brothers were
forced to choose between the wholesaling and retailing arms of their operation. In the event, they
decided to focus their effort on the faster-growing wholesaling activities. The capital released by the sale
of the retail outlets was then used to purchase a warehouse near to the King's Road to stock the
garments. It was at this time that the decision was taken to develop Blue Jeans as the brand name for
the range of jeans and fully co-ordinated casual wear in which they were trading.
When the brothers began their wholesaling operations, the rapid growth in the market for jeans meant
that their largest competitors had full order books and were not in a position to satisfy market demand.
Therefore there was plenty of 'market room' for a company like Blue Jeans. The brothers decided to
concentrate their effort initially on smaller retailers, since many of these were not being adequately
sourced by the larger (mainly US) manufacturers.
Eventually contracts were obtained with John Lewis and the Burton Group, among others. The
small retailer was not ignored but, as Blue Jeans grew, it was forced to direct its efforts towards
the more established shops rather than market traders.
Manufacturing – sourcing policy
In the first instance Blue Jeans turned to Hong Kong to obtain the larger quantities which it required
for its expanding business. It generally takes seven or eight months for a new manufacturing unit to
attain the standards which are demanded by Blue Jeans. Around 90 per cent of the company's orders
are now produced in Hong Kong. Blue Jeans considers that its policy of contracting out the

manufacture of its garments has generally been successful. However, recent delays in producing new
styles of jeans from new patterns have caused problems.
Currently Blue Jeans is radically restyling part of the BSCO brand and hopes to take the market by surprise. A
contract to produce the first batch of 5,000 pairs of the new design is about to be awarded. Two competing
tenders are being considered.
Supplier A An existing Hong Kong based supplier, offering to deliver the garments in three to six
months' time at a cost of CU10 per pair payable on delivery.
Supplier B A new supplier to Blue Jeans, which in the past has worked almost entirely for one of its
smaller competitors. Supplier B is offering to produce the jeans at CU9 per pair payable in
advance. It will deliver in nine months and will pay a penalty fee of CU0.50 per garment
per month for any late deliveries.
On only one occasion has Blue Jeans become involved in the manufacture of its own garments. The
outcome of which was near disastrous. The experience led the brothers to make two important policy
decisions.
First, they decided not to go into manufacturing themselves but to concentrate on buying and selling.
Secondly, they decided to stick with experienced manufacturers and not to attempt to obtain too great a
degree of manufacturing process innovation. Recent changes in textile industry technology, e.g. flexible
manufacturing, JIT, etc, have led one of the brothers to question this approach.
Product market strategy
During the past decade considerable changes have taken place in the jeans market. Therefore flexibility and
ability to respond to fairly rapid changes in fashion are an essential component of the ability of a company, such
as Blue Jeans, to survive in the jeans business.
The current jeans product strategy of Blue Jeans is based upon a portfolio of four brand names, each of which
has its distinctive appeal and identity. First, there is the Blue Jeans brand itself. This is the original brand and is
the leader in the group's international activities. The Blue Jeans brand, which is targeted at fashion-conscious
men and women in the 15-25 age bracket, consists of two main elements. There are basic denim jeans which
are offered on an all the year round basis and there is a casual collection offered on a seasonal basis. The jeans
brand is from time to time strengthened by the addition of jeans-related products. These have included
footwear, marketed under licence, leather jackets and a range of accessories such as belts and watches. It is
envisaged that bags, holdalls and grips will also be introduced.
The Big Stuff Company brand (BSCO) is more 'classical' leisurewear with more contemporary fashions. The
BSCO brand is aimed at both men and women in the 16-25 age group. The Buffalo brand, which was designed
in Bordeaux initially for the French market, has its own distinctive French flavour. Moreover, its sales are biased
heavily towards women, although it caters for both sexes in the 16-24 age group. By contrast, Hardcore is
tough and masculine, based upon a traditional 'macho' image. Since it was introduced it has developed its own
clearly defined niche within the men's jeans market – namely the 16-35 age group.
Company financing
The development of Blue Jeans during its early years was reflected in a steady expansion in its revenue and
profitability. However, five years on, losses were incurred due to a number of unfortunate events. By the
20X2/X3 financial year profitability had recovered and had reached a total of almost CU1 million. In order to
maintain growth in March 20X4 five and a half million shares, representing almost one quarter of the group's
equity, were sold at 100p on the Stock Exchange. This sale raised over CU5m for investment purposes.
Since the floatation of the Blue Jeans Group in March 20X4, the company has gone from strength to strength,
with average sales growth being roughly 50 per cent per annum. (The Appendix contains Blue Jeans' financial
details). Turnover in the year ending 31 March 20X9 is expected to be over CU100 million with profits of
over CU10m. The brothers are keen to maintain this record of sales growth, while at the same time providing
the highest possible returns to their shareholders.
The jeans market

During 20X4 a revival in the jeans market occurred, stimulated by Levi's successful reintroduction of its five
pocket, fly button 501 jeans. This development, backed by a heavy advertising campaign, may be seen in terms
of a more general appeal to nostalgia in society which was prevalent at that time. A craze for stone-washed
jeans also helped to boost sales temporarily. However, this fad had fizzled out by 20X7, by which time overall
sales were again static.
A more important trend during the mid to late 20X0s was for the jeans market to become
increasingly fashion conscious. Traditionally the style of jeans has changed relatively slowly and
manufacturers have relied on making standardised products at high volume. This has tended to
accentuate the importance of production economies of scale.
Jeans market 20X6
United States (490m pairs) Europe (180m pairs)
Levi Strauss 24% Levi Strauss 11%
Lee 14% Wrangler 3%
Wrangler 10% Lee 2%
Guess 3% Lee Cooper 2%
Others 49% Blue Jeans 2%
Others 80%
More recently, rapid changes in style have required companies to exhibit greater flexibility. Designer
jean companies, such as Blue Jeans, have generally done well. Of the major manufacturers, Levi and
Lee have prospered. By contrast, Wrangler and Lee Cooper have suffered from their 'cowboy' and
'old fashioned' images respectively.
In an attempt to reverse the adverse trend, Wrangler initiated a major TV advertising campaign.
This followed an expansion of such activity by Levi and Blue Jeans. Each of the campaigns had one
factor in common – targeting of adolescents, the chief consumer of jeans.
A common feature of the strategic response of the major manufacturers to their business environment
has been a decision to withdraw from manufacturing and source their output from contract
manufacturers in the Far East. The unquestioned European leader in this respect has been Blue Jeans.
APPENDIX
Blue Jeans Ltd financial details
Blue Jeans: Five year trading summary
20X8 20X7 20X6 20X5 20X4
CU'000 CU'000 CU'000 CU'000 CU'000
Revenue 97,461 72,241 50,242 31,113 19,906
Profit on ordinary activities before taxation 12,756 8,399 5,905 4,208 2,633
Taxation 5,019 2,867 2,010 1,718 1,177
Profit on ordinary activities after taxation 7,737 5,532 3,895 2,490 1,456
Minority interests 240 180 160 47 36
7,497 5,352 3,735 2,443 1,420
Earnings per share 31.9p 22.8p 15.9p 10.4p 7.8p
Requirements
(a) Outline the factors Blue Jeans should consider in awarding the contract to produce the first
batch of the new style BSCO jeans.
(b) As a management consultant, prepare a memorandum to the managing director which
(i) Performs a corporate appraisal of Blue Jeans at March 20X9.
(ii) Analyses its future strategy options. In discussing future strategy options, the memorandum
should deal, inter alia, with vertical integration, market development and product.
The Blue Jeans Group
(a) Choice of supplier
Many factors should be taken into account in selecting a supplier. The main considerations are the
following.
 Cost 

Supplier A is more expensive but is paid on delivery. Once penalty payments are incurred
B becomes even cheaper. 

 Delivery 

The importance of prompt delivery needs to be considered. Delivery by B is very late whilst
A's is earlier but uncertain. Late delivery by B may save cost but it could lead to a loss in
profits. Delivery dates quoted on both tenders could be considered to be unacceptably long. 

 Quality 

Supplier B is new to Blue Jeans and may fail to meet the required quality standard. 

 Reliability 

Supplier B is new to Blue Jeans and two significant risks are involved. 

(i) Credit risk – payment is in advance and Blue Jeans are therefore carrying the credit risk.
(ii) Security – there is some danger that the design of the new jeans may be 'leaked'
to Supplier B's existing customers.
In conclusion, Supplier A appears the safer option but delivery dates need to be renegotiated. It
would probably be better to test Supplier B on a less important order before allowing it to
work on new designs.
(b) Memorandum
To Board of Directors, Blue Jeans Ltd
From A Consultant
Date March 20X9
Subject Strategic position of Blue Jeans Ltd and future strategy options
1 Current strategic position
 The current financial position of the firm is strong in terms of profit and sales growth.
EPS has shown a dramatic increase. Its past profit problems now appear to be resolved.
No information is available on liquidity and financial structure and it is necessary to
examine these areas before making a final recommendation. 

 It has a range of products aimed at particular market segments and a 'designer image
which is important in the current market for jeans. It has a clearly focused strategy based
on product differentiation. 

 Its share of the European market is low (20X6) and it appears to have no stake in the large US
market. However, in Europe it is of similar size to most other companies, apart from Levi
Strauss. The jeans market is currently static and intense competition can be expected.
Competition from other leisurewear manufacturers (e.g. track suits, etc) is also possible. 

 It is currently supplied almost exclusively from Hong Kong. This could well have
cost advantages, but several problems are apparent. 

(1) The unstable political situation in Hong Kong could eventually threaten supplies.
(2) Exchange rate changes could lead to uncertainty over costs of products to be sold in
the European market.
(3) A danger of forward integration by existing suppliers also exists.
(4) Long lines of supply and a long lead time in bringing new suppliers up to the required
quality standard may hamper Blue Jeans' ability to exhibit the greater flexibility
needed to cope with rapid changes of style. Changes in production technology may
now be increasing the attractiveness of in-house manufacturing.
 Little information is available as to Blue Jeans' existing customer base and detailed
information will be required before a final recommendation can be made. 
2 Future strategy options
2.1 Introduction
The objectives of the firm are expressed in terms of sales and profits. To a certain extent
these two factors are in conflict as sales can often be increased at the expense of profit
although this has not appeared to be a problem in the past. Maintaining past growth in both
these areas is a considerable task in the face of a static market for jeans, and unless Blue
Jeans can make advances in market share, a gap between objectives and actual performance
is likely to develop if it simply continues with its existing strategy.
2.2 Options
The options for future strategy can be thought of under four headings.
Diversification – moving into new areas
Product development – selling new products to existing customers
Market development – selling existing products in new markets
Market penetration/internal efficiency – growth in sales and profits by increasing
share of existing market, and/or reducing cost.
2.3 Diversification
 Blue Jeans has no experience of diversification into totally different product markets
so this possibility is discounted. 

 Horizontal diversification is a possibility, involving the takeover of an existing
competitor. Two existing competitors (Lee and Wrangler) are currently experiencing
difficulties due to their old fashioned image and could be potential targets. They would
both provide footholds in the US market and possibly allow Blue Jeans to generate
economies of scale. However, on the evidence available both of these companies are
considerably larger than Blue Jeans (see US market share) which could make any
takeover difficult (but not impossible). 

 Vertical integration. Two possibilities exist here. 

(i) Forward integration into retail. Given the nature of jeans retailing this seems
unlikely, however, more detail on existing customers is required before this can
be ruled out.
(ii) Backward integration into manufacture. Although previous attempts have been
unsuccessful, this does not mean that the strategy should be dismissed out of
hand. It is investigated in detail in the next section.
2.4 Establishment of a manufacturing facility

 Advantages 

(i) Savings in transportation costs, search costs, etc.
(ii) Improved quality.
(iii) Greater flexibility in design and manufacture if features such as

flexible manufacturing, JIT, etc are introduced.
(iv) More rapid response to changes in styles.
(v) 'Secrecy' of new designs is also maintained.
(vi) Avoidance of exchange risk if manufactured in UK. (Exchange risk on
exports would still exist.)
 Disadvantages 

(i) Blue Jeans will carry the 'volume risk' of manufacture. If demand falls it will
still have to cover its fixed manufacturing costs.
(ii) Subcontracted suppliers, due to their experience or location, may offer
cost advantages.
2.5 Product development
 Some attempts have already been made to broaden Blue Jeans' product range by
the addition of jeans-related products. 

 This trend could be continued by the introduction of other products such as sportswear
or similarly related products, which could be sold through existing distributors. Careful
analysis of the demand for these new products would be required. Significant marketing
expenditure could be required to promote these products. 

 The possibility of on-line sales should be investigated. This would avoid the need
to find new distributors. 

2.6 Market development
 Blue Jeans' coverage of the European market should be reviewed. Information is
only available on France and the UK. Other countries, including Eastern Europe
states should be investigated. 

 Blue Jeans has no stake in the US market which in 20X6 was three times larger
than the UK. 

 Licensing of the Blue Jeans name to manufacturers in other countries could be
considered, although this could detract from quality and hamper any export drive
at a later date. 

 Online sales could enable Blue Jeans to enter new markets/market segments
without the necessity of a physical presence. This could be a first step before any
overseas expansion is considered. 

2.7 Market penetration
 The situation in the jeans market appears to be changing from one requiring
high volume at low cost to one of product differentiation. 

 Blue Jeans should therefore continue to differentiate its product through
advertising and aiming at particular market segments. New brands for new
segments could be introduced. Online sales/website may encourage loyalty and
repeat purchases. 

 Cost reduction is of course important but this should not be at the expense of the

policy of differentiation. This will be a major consideration in the decision to
establish manufacturing facilities. The increased flexibility of own manufacture and
the ability to introduce new products rapidly may outweigh the benefits of reduced
cost and risk from out-sourcing. Alternatively the internet could be used to seek
new supplies and reduce costs. 
3 Conclusions
 The recent financial performance of Blue Jeans has been strong but in a static jeans
market existing growth rates will be difficult to maintain. 

 Changes in the competitive nature of the jeans markets may lead to a greater emphasis
on flexibility, rather than cost. A detailed financial appraisal of in-house manufacturing is
now required. This could either be by a green field start-up or an acquisition. 

 Blue Jeans' existing policy of differentiation should be continued. 

Chapter 7 Strategies for products and markets
Interactive question 1 Global automobile market
(a) Explain the concept of marketing segmentation and the benefits that it can bring to a global automobile
business like Toyota, Ford or General Motors.
(b) Identify and illustrate, with examples, SIX criteria that can be used to segment the global automotive
market.
(a) The concept of marketing segmentation
The growth of specialised segments in a market has resulted in firms producing goods and services
that are more closely related to the requirements of particular kinds of customers. Instead of treating
its customers the same, the firm identifies sub-groups of customers whose precise needs can be
more effectively met with a targeted approach. A global manufacturer of automobiles can segment
the market into luxury brands including 4x4 leisure vehicles, family saloon car products and small car
ranges. The criteria for segmentation will include executive customers where comfort, quality and
safety are key issues, high mileage business executives who spend much of their working day in the
vehicle and require office specification equipment together with high levels of reliability and low
running costs per mile, and family saloon vehicles that have a high utility requirement such as safety
and convenience. Each of these segmented customer groups have identifiable needs that are required
to be serviced with a matched range of vehicle specifications.
There are three stages of target marketing, which are:
Market segmentation
Identify basis for segmentation
Determine important characteristics of each market segment
Market targeting
Select one or more segments
Product positioning
Develop detailed product positioning for selected segments
Develop a marketing mix for each selected segment
A global automobile manufacturer will need to consider the variables for segmenting the market,
such as:
 Business requirements: Based on level of vehicle specification, value for money within
each segment group, fleet management support including purchase discount policy, and
vehicle maintenance, repair and spare parts servicing levels. 

 Demographic variables: Age, gender, family size, social class and disposable income,
and education. 

 Perceived benefits: Different people buy the same or similar products for quite different
reasons such as considering vehicles as fashion statement as a lifestyle option or as a
product fulfilling particular functional requirements such as family transportation. 

 Loyalty: Analysis of brand loyalty can tell a manufacturer about its customers attitude to its
current brand and thus where it could stretch an existing brand name to include new
products within a range. 

 Lifestyle and cultural considerations: Understanding how the different consumer groups
around the globe spend their time and money, the influence of their cultural attitudes and
beliefs will be seen in the take up and targeting of products incorporating our range of vehicles.
(b) Segmentation criteria

There are a number of criteria that can be used to segment the global automobile market. We need to
understand the performance for each criteria and how effective the targeting and positioning has been
from our efforts. These will include:
Fleet car purchases: The UK and Europe has large purchases of fleet cars for business purposes. This
is a unique characteristic whereas the rest of the world predominantly uses company lease schemes
where the individual purchases the vehicle and the company manage the lease arrangements.
Consequently an important segment in the UK and Europe are the business fleet purchasing managers
that have responsibility for significant purchasing decisions. Often company executives will select a
vehicle from a predetermined list and it is important that the global manufacturer is included in the
company car lists.
Engine fuel: This choice of engine fuel is an important criterion. Diesel is very common in Europe with a
cost benefit compared to petrol as well as vehicles driving longer distances for each journey and in the
car's expected life. Consequently there are more European cars with diesel variants. However the UK
still has more petrol fuelled cars, although diesel has become more popular. Alternative engine fuels
including LPG and hybrid engines are also included in product ranges.
Disposable income: The purchase price is an important criterion and personal customers can be
segmented based on disposable income. This is important for individual customers who have access to
sufficient disposable income to purchase a vehicle outright or are able to afford a loan arrangement to
pay for the car.
Car performance: This is a good criterion to appeal to sports car enthusiasts where a racing marquee
is used to market the car. Performance on a race track can be transferred to an aspirational lifestyle
associated with a particular brand of car and global brands can be marketed with global promotions
such as with Formula 1 motor racing.
Manual or automatic transmission: This is an important criterion for many international markets.
For instance, America and Australia have a high proportion of vehicles with automatic transmission
where the UK has a very high proportion of manual (or standard) gearboxes and crucially this is an
important criterion to understand in segmenting the marketplace.
Gender: With more females entering the workforce there will inevitably be an increase in female
customers with enough disposable income to purchase vehicles. This is a global phenomenon that is a
result of harmonisation of job opportunities between male and female employees across the globe.
Consequently an important criterion is to understand the requirements of this important segment and
include their requirements with tailored products that would appeal to potential female customers.
There is a need to understand the potential for each segment in order for to have the potential to grow.
There is a need to assess current competitor activity and the likelihood of future targeting by other
businesses to these segments. Understanding the unique selling points within each segment is an
important marketing activity.
Interactive question 2: Rex Ltd

Rex Ltd is a Bangladesh-based nationalised car manufacturer that is going to be privatised in the next four
years. It has suffered from years of poor management and under-investment. This has resulted in a poor
public image and a diverse product range. Details of current models are given below.
Off-road division
Range Rex. A market leader with a strong image as being the off-road vehicle to be seen in around town. It
enjoys a high profit margin but is starting to face increasing competition in a growing market.
Land Rex. A leader in the market of 'working' off-road vehicles. Has a huge market share and faces few
competitors in a fairly static market.
Family division
Mindless. A revolutionary design – 30 years ago. This is the original small car. It is now competing against
many larger models including Rex's Matchless in the small family hatchback market. The Mindless is not a
hatchback and, as a result of nil investment over the last 20 years, is regarded as being an anachronism,
bought only by enthusiasts. It is totally unprofitable.
Matchless. An economical and fun to drive small family hatchback. The car is well designed but poorly built. It
has the potential to become market leader but is held back by its poor reputation. This is a growing but highly
competitive market.
Hopeless and Hapless. Two models in the medium-size family market. They are both poorly
designed, poorly built and have astonishingly bad reputations. Neither car has a market share of
any significance. The market is not growing. It is, however, thought vital to have a car aimed at this
market sector.
Executive division
The Rex. What was once a car synonymous with quality has had its reputation somewhat
tarnished lately due to its unreliability. Its existing customer base is loyal but increasingly being
persuaded to buy more reliable imported cars. This is a growing and highly profitable market.
Requirement
As a management consultant you have been asked to comment on the company's existing
products and to provide some advice about future strategy. Write briefing notes for the directors
of Rex Ltd. Your notes should include
(a) An analysis of the existing product portfolio of Rex Ltd showing its market share and
market growth characteristics – explain fully any technical jargon used in this analysis and
suggest how this analysis may help develop future strategy.
(b) An explanation of what the terms 'product positioning' and 'market targeting' mean and
how these might be applied in developing Rex's strategy.

Briefing notes
To The Directors of Rex Ltd
From A Consultant
Date 8 June 20X2
Subject Product portfolio – now and in the future
(a) Firstly I will consider the existing products, classify them using a technique known as the Boston
Consulting Group Matrix and then look at developing future market strategies as a result of these
findings.
Portfolio of products
The Boston Consulting Group Matrix is a technique whereby products can be assessed according to
their market share and the growth of the market they are in. It can be represented as follows.

Question mark Star
Market
growth
Dog Cash cow
Market
share
Definition of terms
Cash cow
A product that has a high market share of a relatively slow growth market.
All companies should have a cash cow as they provide positive cash flows and generally require little
new investment.
Star
A product that has a high market share of a high growth market. As competitor activity in this market
is likely to be strong, this type of product will require continued investment to maintain its market
share.
Question mark
A product that is not doing well in a growing market. With this type of product the company must
decide whether to invest heavily in it and turn it into a star or to withdraw the product from the
market.
Dog
The worst possible product. It has a small share of a market that has little or no growth. It is probably
losing the company money and the best decision will probably be to disinvest.
Application of the BCGM to Rex Ltd's products
Range Rex: A star. As this market is still developing, Rex Ltd will come under increasing competition
from new entrants into the market. To stay as market leader Rex Ltd will have to invest heavily to
support the Range Rex's current success. Investment will be required in the technical aspects of the
vehicle and also in the marketing context. A vital factor that has been identified in the Range Rex's
success is image. This huge market advantage must not be allowed to be lost.
Land Rex: A cash cow. This is a fairly static market with minimal growth. New competitors are not
being drawn into this market. What Rex Ltd must ensure is that it maintains the quality and reputation of
the vehicle so that its strength in this market sector will act as a barrier to new entrants. In this way the
Land Rex should continue being a profitable product.
Mindless: A dog. A unique vehicle as it seems to be in a market of its own! It enjoys no growth and as a
result of its unprofitability should be discontinued. This would have the added advantage of focusing
buyers' attention onto the company's other car in this market, the Matchless.
Matchless: A question mark. A basically sound car that because of its problems has a small share of a
growing market. The decision facing Rex Ltd is whether to discontinue its production or whether to
invest and turn it into a potential star. As this is such an important market and also given the fact that
the company will probably stop making the Mindless, the decision should be taken to invest.

Hopeless and Hapless: Two more dogs! From the information it would appear that these two
models will never become market leaders as their reputation is so poor. The best advice is probably to
cease their production. The money saved could be invested in developing a new car for this important
sector.
The Rex: A question mark. As with the Matchless a decision must be taken about this car – either cease
production or invest. As the car has loyalty and a good reputation, together with the fact that it is a
growing and profitable market, the decision should be to invest. To summarise my findings from using
the BCGM, I suggest you cease production of the Mindless, Hopeless and Hapless and invest heavily in
the Matchless and the Rex, whilst at the same time investing in the Range Rex. Thought should also be
given to developing a new car for the market now vacated by the Hopeless and the Hapless.
(b) Positioning and targeting
Product positioning is a technique which carefully targets various product attributes of the (chosen)
market segments.
Various factors of the product can be considered (e.g. quality and price) and the company can in this
way decide how to position its product. This will also help to focus on the competition and on what
Rex will have to develop if it is to be successful.
Considering quality and price, this might be represented as follows.
High price
BMW
A
High quality Low quality
Lada
Low price
BMWs are regarded as high quality expensive cars; Ladas are regarded as lower profit inexpensive cars.
By focusing on the products in this way Rex Ltd can decide where it wants to position itself. As it enjoys a
high reputation for its off-road vehicles, it might wish to try to move the whole business more upmarket.
A possible position might therefore be at A, i.e. quality to rival BMW but at a lower price. Market
targeting considers how markets can be split into different sectors and then each sector targeted with a
specific product. There are three possible approaches.
(i) Undifferentiated marketing: One product, one market. No attempt is made to segment the
market.
(ii) Differentiated marketing: The market is segmented with products being developed to appeal to
the needs of buyers in the different segments.
(iii) Concentrated marketing: The market is segmented with the product being specifically
targeted at a particular segment.
As Rex Ltd has different products aimed at different sectors, off-road, small, family hatchback, etc it is
obvious that it has adopted a differentiated approach. This might be developed further to produce a
range of a particular model. For example, the new improved Matchless could be produced as a three-
door, five-door, GTi etc. This will be necessary if Rex Ltd is going to win the market share it wants.

Interactive question 3: Sally
Sally is employed by her uncle as a veterinary surgeon's assistant. She has just come back from a holiday on
the west coast of America and while she was there she was amazed at the amount of attention paid to pets in
comparison with the UK. The people she spoke to in the US tended to think of their pets as part of the family
and accorded them the same privilege. The range of services for pets was enormous, from the purchasing
through to their death and coping with all their problems in between.
Because of her interest in animals and also because of the insights of her holiday, she wants to start up in
business operating an undertaker and crematorium or burial service for pets. Sally realises there are spin-off
services that she could also consider, but would need a lot of help getting the new venture off the ground.
Sally is lucky in that she lives in an area in the south of England where there is plenty of disposable income.
Her uncle's surgery is attached to a kennels in an out-of-the-way rural position with a lot of land not currently
being used to any advantage. Her uncle thinks her idea is a winner. He also has many contacts and colleagues
throughout the UK with similar set-ups to his own who might also be interested.
Before Sally and her family invest too much money in this venture, she wants to ascertain whether there is a
market for her proposed services and has asked you for your help.
Requirement
Write a letter to Sally suggesting the types of market research you would carry out, what sources or
individuals you would use to obtain information, and what assistance you could give. You should also suggest
some complementary products and services that Sally and her family could include in their portfolio.

A Consultant
24 High Street
Cambridge
CB1 1JJ
20 January 20X5
Miss S Jones
The Cottage
Townsville
Someshire
CB7 6TY
Dear Sally
Thank you for contacting me regarding the expansion of your uncle's business. Detailed below are my
recommendations concerning market research and complementary products you could offer.
Market research
In order to ascertain whether such a venture would be commercially viable, both desk and field research
would be used.
Desk research
Desk research is concerned with the collection of information from secondary sources and, as it is a
proposed new venture, unfortunately it will not be possible to obtain internal company data as a form of
desk research.
Desk research does not derive information first hand but obtains existing data by studying published and
other available sources of information. It therefore involves contacting people and organisations with
relevant knowledge.
Such information could be classified as economic intelligence – that is, information relating to the economic

environment within which the company will operate. It provides a picture of past and future trends in the
economy relating to such items as gross national products, expenditure, employment, population, and pet
ownership. It is important because the future viability of any new product or service will be significantly
influenced by the general economic climate. A somewhat unusual service, such as an undertaker service for
pets, may perhaps be felt to be more susceptible to economic changes than most services.
Desk research can also generate market intelligence. This is information about a company's present or
possible future markets. The level of sales of competitors' products could be ascertained by looking at the
Business Monitor or Census of Production. The service range offered by competitors could also be
reviewed by examining their sales literature or scanning trade journals and specialist libraries. Because this
is a relatively new idea, there may not be much direct information, and the research may have to rely on
other information, perhaps writing to America to get relevant statistics there over a period of time.
Field research
The results of the desk research should be analysed and then a pattern of field research can be formulated
to obtain the missing information or check on the initial conclusions. Field research involves discussing the
potential new venture with possible customers within your target market. For the pet venture it could
include the use of questionnaires and interviews.
Questionnaires
Using questionnaires, you could gauge the interest in the services proposed by circulating the questionnaires
to pet owners. Perhaps the easiest way to do this would be to circulate them via your uncle and other local
veterinary surgeons. In general the response rate from questionnaires is low unless some incentive is offered
to those who reply.
Alternatively, you could create a website to gauge interest, for example through on-line surveys, requests
for information etc. Cost can be kept reasonable low (particularly if you are prepared to do some of the
work yourself e.g. basic website design and creation).
Interviewing
Interviewing also necessitates targeting the pet owner. This may be best organised at weekends in local
parks and gardens where people take their dogs for a walk or near to a veterinary surgeon where people
take their animals for treatment. Resistance may be encountered as pet owners may not want to consider
the possibility of their pets requiring cremation (or burial). However, such interviews should give a true
insight into the viability of the proposed scheme.
Complementary products
The complementary products and services that you could include in the portfolio depend on how far, and at
what rate, you feel that the UK pet owners will copy the US market. The most obvious products and services
are those offered to people.
 Provision of coffins or caskets 

 Looking after the burial site 

 Headstones 

 Counselling 

 Photographs/videos 
There will be others which are more specific to animals.
 Taxidermy 

 Replacement e.g. using a website to provide links to breeders etc 

 Insurance e.g. links on website. 
If you have any queries concerning any of the above do not hesitate to contact me.

Yours sincerely
Interactive question 4: Marketing mix

Indicate the main characteristics of marketing mixes which would be appropriate for the following.
(a) A large banking group
(b) A company that manufactures electronic components for computer manufacturers.
See Answer at the end of this chapter.

(a) A large banking group
A large banking group has to focus on four key sectors.
(i) The consumer market
(ii) The corporate market
(iii) The small/medium business market
(iv) The financial markets
In all these sectors both international and domestic considerations are necessary.
The bank, whilst essentially a service, offers its customers a range of products. Although some of these
products are intangible, they are nevertheless perceived by customers as offering specific benefits and
meeting specific needs. It is important for a large banking group to engage all the elements of the
marketing mix for these sectors.
In the consumer market distribution has become a major issue, particularly with the advent of direct
banking. Service is an important element of the bank's response to an increasingly competitive
marketplace. New products are being launched as the bank's marketing environment poses new
opportunities and threats. Communication is critical both in terms of customer acquisition and
retention. The heavy use of advertising and direct marketing are evidence of the importance attached
to these components of promotion.
Within the corporate market a different range of tools will be utilised. In particular, relationship
marketing and sponsorship become important elements of the mix. A range of financial services is
offered to corporate clients particularly with investments. The product mix, communication and
distribution structure will vary from the consumer market, with the sales function becoming more
dominant.
For the small/medium business the role of the business adviser is important, along with the various
services the bank provides to assist the business in managing its financial affairs more effectively. It is
not uncommon to see TV advertising targeted at entrepreneurs. Each element has an important part
to play in the bank's competitive position.
(b) Electric component manufacturer
A company that manufacturers electronic components for computer manufacturers will focus its
marketing activities on a relatively few number of customers in the business sector. The need for
consumer marketing activity will therefore generally be unnecessary although organisations such as
Intel have gained a strong market position in the supply of computer chips by building a strong brand
reputation with consumers. The assumption in this case is that this manufacturer is focused upon its
business customers.
The predominant marketing mix activities will focus upon product quality and delivery with strong
sales force and technical support. It is likely that corporate entertainment and the building up of
relationships throughout the customer's organisation will be important aspects of the company's

marketing programme. The role of distribution is important particularly in terms of product availability
and speed of delivery. There is a danger that this market can become price driven as technological
change means new products are copied or become obsolete very quickly. A strong commitment must
therefore be made to research and new product development.
Packaging and branding are less critical components as tools of communication, although they can play
a role in supporting the manufacturer's overall positioning. Publicity, particularly in the trade press, can
be an important tool of communication. The supply of support literature and price structure alongside
easy to access order processes will enhance the competitive position of this company. With a focus on
fewer customers, direct marketing techniques should predominate. The relationship that the
manufacturer has with distributors in the supply chain will also be important to ensure wide availability
of component parts.
Interactive question 5: Canal Cruises

Canal Cruises Ltd is 60% owned by Captain Salmon. The company has 60 narrow boats and is located just
off the Kennet and Avon Canal. There are twenty boats of each of the following lengths, 30ft, 50ft and 70ft.
Boats are hired to families and parties of people during the cruising season, which is April to October.
The narrow boats are regarded generally as being of high quality and their hire charge reflects this. All boats have
a microwave, stereo and colour TV on board. The boats are currently advertised in Waterways World.
Recently Canal Cruises has been approached by the directors of Welsh Cruisers Ltd who wish to sell
their business. Welsh Cruisers Ltd is located on the Llangollen Canal and has 30 narrow boats. The boats
are of a much lower quality than those of Canal Cruises and over recent years less than half of the boats
have been hired out at any one time during the season.
Requirements
Prepare briefing notes for Captain Salmon covering the following areas.
(a) Assuming that Welsh Cruisers is to be acquired and using Ansoff's matrix, comment on the
marketing strategies which the company can now pursue, and state with reasons that which you
would recommend.
(b) Suggest how the company may go about promoting the newly-acquired Welsh Cruisers and
increase the number of boats hired.

Briefing notes
To Captain Salmon
From J Sayso, Chartered accountant
Date Today
Subject Marketing
1 Marketing strategies
If Welsh Cruisers Ltd is acquired, this will represent growth in the business of Canal Cruises. The
information provided suggests that the quality of Welsh Cruisers' boats is much lower than that of
Canal Cruises, as is the level of boat hiring. Four possible growth strategies could be adopted. These
are discussed below.
Market penetration
Market penetration involves selling existing products in existing markets. The overall market of Canal
Cruises is the narrowboat hire market and is restricted to those who read Waterways World. It targets

the top end of this restricted market. To sell more of the existing product to this market it would have
to convert the lower quality Welsh Cruisers' boats into those of a quality similar to its own (e.g.
installing TVs, microwaves and stereos). Such conversion may be very expensive (complete boat refits
and painting may be required) but the company would be operating in a market segment with which it is
familiar. However, there may not be the demand for an extra 30 quality boats.
Market development
Existing products are sold in new markets. Again, conversion of Welsh Cruisers' boats is necessary
and further expense will be incurred in developing new markets (market research, promotion etc).
New markets can be developed by advertising, promotion via channels other than Waterways World
(see 4 below).
Product development
Canal Cruises could leave the lower quality narrowboats as they are and target the lower end of its
Waterways World market. Extra promotional expenses would be incurred as would marketing research
costs (which would be necessary to gain information about the new stage segment).
Diversification
This involves leaving the lower quality boats as they are and selling to potential customers who are not
already in the company's existing market. Marketing research and promotion costs would be incurred as
for 'market development'.
Recommendation
Canal Cruises should pursue a diversification strategy, because Welsh Cruisers already has some
business gained via its existing advertising and promotional channels; the business needs development.
Restricting promotion to Waterways World (product development) may result in lower hirings. The
other two strategies (converting the boats) are likely to be too expensive.
2. Promotion
The main promotional objective will be to increase hirings of Welsh Cruisers' boats to the same level as
that of Canal Cruises. The promotional possibilities are discussed below.
Waterways World
The company could promote all its activities through Waterways World as it does presently. This policy
has been very successful to date. Should the company adopt the diversification strategy above, it is
doubtful whether the target market (those looking for a cheap boat) would read Waterways World, and
the promotional objective would not be achieved.
Adverts could still be placed in Waterways World but other channels should also be used (see below). It is
recommended that the name 'Welsh Cruisers' is maintained and separate advertisements used for the
differing parts of the business, otherwise people may begin to associate the lower quality of Welsh
Cruisers' boats with those of Canal Cruises.
Wider promotion
It has already been mentioned that Welsh Cruisers must have existing means of promotion and they
should be examined carefully to see if they are reaching the target market.
An advertising message needs to be thought out – for example 'value for money' could be emphasised
and this must be communicated to the target market. Advertisements could be placed in the larger
circulation daily or Sunday newspapers (and their supplements), radio adverts could be used, travel
agents could be approached to stock brochures and so on.
The possibility of online sales should be investigated. A website could be created (either for the
company as a whole or for Welsh Cruises alone). Discounts could be offered for online booking,
repeat purchases etc to encourage market penetration and development. The site could be used to
promote a particular 'image' for the business and reinforce the brand.

Other promotional techniques
In order to increase sales and gain repeat hirings, various other 'non-advertising' techniques could be
used. Examples are set out below.
(a) Welsh Cruisers could accept all male or female parties on 'social drinking' holidays (with the
option for the customer of taking out damage insurance!)
(b) '20% off' coupons could be issued to customers for use later in the hiring season or '10% off next
year's hire charge' coupons.
(c) 'Drivers' could be provided at a small extra charge for those who are wary of taking out a boat
for the first time and who would otherwise not hire.
Interactive question 6: Pricing methods

The managing director of a small manufacturing company, specialising in industrial packaging tape,
is worried that the cost-plus pricing method currently used is not necessarily the most
appropriate. She asks you to provide a memorandum that:
(a) Explains the role and importance of pricing to the marketing effort.
(b) Suggests and explains the differences in both competitor-based methods and
demand/market-based methods which could be considered as alternatives.

(a) Memorandum
To Managing Director
From Anne Accountant
Date 6 December 200X
Subject Report on Pricing Methods
1 Introduction
I have been asked to produce a report detailing the importance of pricing in marketing terms and
also to explain the differences in competitor-based methods and demand-based methods.
2 The importance of pricing in marketing terms
Pricing plays an essential role in the marketing of your product. First of all, you need to cover all
of your costs, but the price will help to create an image of your product in the eyes of your
customer.
As part of the marketing mix, price will help the perceived quality, value and image. If the price is
high, then customers generally take the view that the product is of high standard and is good
quality. This of course, needs to be backed up with the other elements of the marketing mix. If
the price is low, there is a danger that the perception is of low quality and is 'cheap and cheerful'.
This is only a danger, however, if you want to position your product as a high quality item. In
general terms, price will help you to position your product in the market. This can be visualised
with as 'perception map'.

The above map shows two dots, which demonstrate that in positioning your product by price, it
will create an image to your customer.
Price can help to gain market share by using methods such as 'price skimming' or 'price
penetration'. Penetration will gain a large marketing share as price is set very low, whereas
skimming pricing is where the price is set high, usually for new products launched into a market
with few competitors and a smaller market share is gained.
3 Key factors that concern pricing

There are four key factors that affect pricing decisions, also known as the 4 Cs:
  Cost – related to the actual costs involved 

  Consumer/customer – related to the price the consumer will pay 
  Competition – related to competitors prices for substitute or complimentary products 
 Company – related to the company's financial objectives 
3.1 Financial issues – cost
 This is the lower level of a price – often accountants use cost when deciding on the pricing
structure. There are at least four different types of costs in regard to a product or service: 

– Fixed cost – a cost that does not change according to the increase in the number of units
produced i.e. rent and rates for the premises 

– Variable costs – a cost that changes according to the number of units produced such as raw
materials 

– Total costs – a sum of fixed and variable cost times the quantity produced 

– Average cost – this is the total cost divided by the number of units produced 

 Contribution – allows the accountant to analyse whether the product can be sold at less
than cost for a period of time, but making a contribution to the costs 

 Breakeven analysis – indicates the amount of units that must be sold at a given price to
cover costs 

 Company's financial objectives – the company's objectives in terms of profitability also need to
be taken into account when considering the price. 

3.2 Economic issues
Economic issues such as the following also need to be taken into account:
 Customers' demand 

 Demand is considered and calculations on how much will be demanded at a certain price
using the demand curve will be undertaken 

 It is useful to know the shape of the demand curve when setting prices as you can set a high
price if your market is inelastic 


 Marketing communications serve to influence the demand curve to make it more inelastic 

 You must consider inflation year on year, affecting the cost of employment, raw materials
and distribution 

 This is also a consideration for customers' disposable income 

 The possibility of the euro currency in the UK must be anticipated. 

3.3 Competitors
 Competitors must be taken into account. 

 The marketer looks at competitors, macro environment, internal environment, stage in the
product life cycle and sets a price at what the market will bear. 
All of the above factors and perspectives play a key role in finalising a price.
(b) 4 Competitor-based pricing

This method is where the pricing policy is based upon competing prices in the market. This is
different to cost-plus pricing in that it takes into consideration how the other competitors are
pricing their products and how their products are perceived by their customers. Cost-plus
pricing does not do this, and merely covers costs and leaves room for a little profit. The price
does not necessarily have to be cheaper than competitors, as discussed before, it depends upon
how you want your products to be perceived by your customers, and compared to your
competitors.
Some of the methods used for competitor-based pricing include price matching, going rate pricing
and predator pricing.
4.1 Price matching: This is where the company guarantees that the product cannot be bought for
less anywhere. If it can be bought for less, they usually refund the difference. Therefore, the price
is very much based on the competitors in the market place.
4.2 Going rate pricing: Here the pricing policy is determined by the competitors' pricing strategy
and a similar price is set (but not guaranteed as above).
4.3 Predator pricing: This is where the pricing policy is set low so that the competition has
problems in competing for market share.
5 Market/demand-based pricing
The final method is more suitable to take into account market needs and wants and relates to
what is in demand. Compared to competitor-based pricing, it takes demand into consideration.
As customers are becoming more demanding, this is a more suitable method of pricing. Economic
issues and the elasticity of demand are considered here.
There are a number of methods such as penetration and skimming strategies, discount and
allowance pricing, segmentation pricing and promotional pricing. I will explain a number of these
methods below.
5.1 Skimming: This is where a high price policy is undertaken to 'skim the cream' of the market.
This is more advisable if you have a product which is new into the market and there are few
competitors. It is important that you are able to lower the price once you have established a
customer base and need to gain more market share.
5.2 Penetration: This is where the price starts off low and market share is gained quickly. It is
difficult however, to increase the price once this has been undertaken.
5.3 Segmented pricing: Companies will often adjust their basic prices to allow for differences in
customers, products and locations. The company sells a product at two or more prices, even
though the difference in price is not based on differences in costs. Examples may be where
different customers pay different prices for the same product such as rail travel First Class and

Standard fares. Another example is time pricing where prices vary by the day or the hour such
as telephone companies and 'off-peak' calls.
6 Conclusion
I hope that this has helped in your consideration of the pricing policy to adopt for the industrial
packaging tape. Please contact me should you require any further information.
Interactive question 7: Services marketing

Your senior partner has requested a memo:
(a) Identifying four differences between services and products and discussing the problems that
these differences present to the marketer.
(b) Identifying the extended marketing mix which a small service company (such as a
management consultancy), would need to consider when marketing its services.

(a) Memorandum
To Senior Partner
From Accountant
Date 7th December 20X0
Characteristics and problems of service provision
Following our discussions earlier I have put together an explanation of the different characteristics and
differences between services and products and problems that relate to service provision. This will, I
hope, allow you to understand the attributes of the financial services that we offer.
There are five characteristics of a service, which are described below:
 Perishability: A service cannot be stored or saved. It has an immediacy that cannot be held
over until sometime in the future. For example, with a loan the repayments start immediately
after it has been set up. If there is a delay with the loan the lost revenue cannot be recovered.
Marketers have to give incentives for customers to purchase at off-peak times to counter this
potential problem. 

 Intangibility: You cannot touch or feel the service offering as it has an abstract delivery. Unlike a
product which you can touch (and smell and see) a service has no physical presence. It is only the
paperwork that accompanies the service which has a tangible element. This can give problems since
customers cannot see what they are getting for their money and they can only make a judgement
based on experience of the service. 

 Inseparability: A key distinguishing feature of a service is that the provider and receiver of the
service are inseparable from consumption and the consumer. The customer has to be present for
the service to take place which presents a problem for the marketer as they cannot always ensure
that the process is enjoyable for the customer. 

 Heterogeneity: The delivery of the service will vary each time to the customer. This is because a
service is dependant on the unique interaction of the provider and the customer which will vary
depending on the interaction between the two individuals. The variability is created by the influence
of human behaviour in the transaction and consistency can become a difficult problem to manage. 

 Non-ownership: Ownership of a service remains with the provider. For instance, banking serves
only to allow the customer to make use of services such as credit cards but is not owned by the
customer. 


These are the differences between a service and a product and their associated problems for the
marketer. 

(b) The extended marketing mix
The extended marketing mix comprises People, Process and Physical Evidence and is to be applied to a
small independent firm of management consultants in order to derive the following benefits.
 People 

There should be a strong emphasis on staff training to ensure a consistently high quality of provision.
Poor customer service is the most commonly quoted reason for a change in sourcing services and is
the most difficult problem to overcome to recover lost custom. The high level of people
involvement in management consultancy demands that their customers are treated in a very
professional manner throughout the delivery process. As their customers will judge the quality of
the service by the conduct of the staff the close proximity of the staff working in a small business
magnifies the need to adequately train all employees. This can include such areas as personal
presentation, dealing with enquiries, providing quotations and maintaining technical competencies in
line with current developments. 
 Physical evidence 

The image of the branches of the consultancy and any correspondence that is sent out in
response to enquiries, including from the website, need to be consistent and include company
brand identity such as logo or accreditation awards. This is crucial as it is one of the means that
current or prospective clients will use to evaluate the consultancy. 

The staff uniforms, interior decoration of the branches, tidiness and signage should reflect a
common and consistent quality image for the management consultancy. It should believe that the
colour scheme and logo reflect its professionalism and trustworthy image which should be
maintained to retain its fresh feel. All its literature and website content should be regularly
updated to provide an impression of current thinking for its clients that enhances quality
perceptions for the offering. 

 Process 

As part of customer service, efficient administrative processes underpin a high quality of
provision. For instance if a client has spent an unnecessary amount of time trying to contact a
management consultant they would become very frustrated and annoyed at the waste of their
valuable time. It sends all the wrong messages concerning the offering and will become a source
of friction between the two parties that will have to be recovered. The small business will need
to consider putting procedures and resources into place to ensure these problems are carefully
managed and that the client's expectations are at least achieved, if not surpassed. 

Conclusion 

Many companies, large and small, often treat these areas of the marketing mix with limited
attention, which results in a poor perceived level of customer service. By paying due attention to
the quality of all the people, the physical evidence and the process involved in the management
consultancy operation will enhance the service marketing provision. 
Interactive question 8: Branding and relationship marketing

Your client is a large automobile manufacturer.
(a) Explain the concept and importance of branding to the company.
(b) Explain the way in which relationship marketing can be used by the company to attract
and retain its customers.

(a) Importance of branding
Introduction to branding
One of the most distinctive skills of professional marketers is their ability to create, maintain, protect,
reinforce and enhance brands. A brand is a name or term like Toyota, General Motors or Ford, a
symbol or design which is used to identify the goods or services of one seller to differentiate them
from those of competitors. Thus the brand identifies the manufacturer and supplier of the product.
Brands, unlike other forms of intellectual property, such as patents and copyrights do not have an
expiry date and their owners have exclusive rights to use their brand name for an unlimited period of
time.
A brand has value to the business, known as brand equity. They can reinforce customer loyalty as well
as name awareness, perceived quality, strong brand associations and other assets such as channel
relationships. Branding also increases innovation by giving producers an incentive to look for new
features that can be protected against imitating competitors. Thus branding will result in more product
variety and choice for consumers.
The use of branding
A brand conveys a specific set of features, benefit and services to the buyer. The brand has four
different dimensions, which are described below.
Attributes
A brand first brings to mind certain product attributes such as build quality, power capability and so
on. A large automobile manufacturer would use these attributes in its advertising and promotional
activities.
Benefits
Customers do not purchase attributes, they purchase perceived benefits. Therefore, attributes must be
translated into functional and emotional benefits. For example, the attribute 'well built' might translate
into benefits demanded by our customers, such as reliability or high resale value.
Values
A brand also says something about the buyer's values. The brand marketer must identify the specific
group of buyers whose values coincide with the delivered benefits package such as high performance,
safety and prestige.
Personality
A brand also projects a personality. The brand will attract people whose actual desired self image match
the brand's image. This would be important for the business customer who purchase from the large
automobile manufacturer as well as the consumer purchasing an automobile.
A company must define its overall branding strategy which affects all of its products. It is necessary to
consider how new products fit into the brand structure particularly as the large automobile
manufacturer will have developed a series of marques that identifies each family of its products.
Safeguarding the association of quality developed with the large automobile manufacturer's products will
be paramount.
(b) The concept of relationship marketing
Introduction
Customer relationship marketing is becoming increasingly more important owing to the increase in
customer education and expectations. Many large firms now have a dedicated policy for this subject

and we need to consider the implications.
Customer lifetime value
For any organisation, the sale should not be considered as the end of the relationship but instead the
beginning of the process to retain that customer. Therefore, it is more efficient to keep existing
customers happy and delighted with their experience rather than finding new customers. This process
should be continued at each sale and be seen as part of a long-term relationship between ourselves and
the customer.
Relationship marketing
This is a long-term approach to creating, maintaining and enhancing strong relationships with customers
and other stakeholders. Organisations need to view each transaction as part of a long-term goal. If the
customer is satisfied with the product or service they have received for the price they have paid, they are
more likely to return. A short-term outlook on the other hand will consider only a quick profit and not
the more important possibility of a repeat purchase.
There are five different distinguishable levels with the relationship that can be formed with customers
who have purchased a product or service. These are:
 Basic 

Selling a product without any follow up. 

 Reactive 

Selling a product with follow up encouraged on the part of the customer. 

 Accountable 

Having sold a product, the follow up occurs a short time afterwards to confirm the customer's
expectations have been met. 

 Proactive 

The sales person contacts the customer from time to time with suggestions regarding improved
products. 
 Partnership 

The company works continuously with the customer to deliver improved levels of value. 

Relationship marketing can contribute to an organisation in a number of ways. It can establish a
rapport with customers creating trust and confidence. It allows an opportunity to interact and
hence communicate the large automobile manufacturer's commitment to satisfying customer's
needs and wants. It can help to improve their experience and adds that personal touch, which
links the emotions of both parties. By creating a notional bond as one of its objectives
relationship marketing strives to achieve a sense of belonging thereby making the customer feel
part of the business. It attempts to tailor products and services to cater for specific needs of
customers, therefore reducing the need to switch behaviour. The use of database management
and information communication technology helps to address the customer needs in a focused
manner and can be manipulated to the individual's requirements. 

There are significant benefits that can be derived from relationship marketing. It can contribute
to cost savings as it is up to five times more expensive to find a new customer than retain an
existing customer. It can help to entice new customers away from competitors as a perceived
added value activity. It will also make it more difficult for existing customers to switch, as there is
an emotional bond that underpins loyalty to the customer and the company. 
Interactive question 9: Socially responsible marketing

Your senior partner has requested a memo for developing into a report to a global food
manufacturer regarded as being a leading exponent of modern marketing practice.
(a) Explain what you understand to be the advantages of a marketing orientation to food
consumers and food manufacturers.
(b) Identify some of the ethical and social responsibility issues that face contemporary
marketers in the food manufacturing industry.

Memorandum
To Senior Partner
From Accountant
Date Today
Subject Marketing and responsibility issues
I shall outline the broader perspectives of marketing to food consumers and food manufacturers and
consider the implications of these issues.
(a) Benefits to business organisations, consumers and society
Marketing touches everyone's life. It is the means by which a standard of living is developed and
delivered to people and is a human activity directed at satisfying needs and wants through exchange
processes. Marketing oriented companies combine many activities – marketing research, product
development, distribution, pricing, advertising, personal selling and others – designed to sense, serve
and satisfy consumer needs whilst meeting the organisation's goals. The core concepts of marketing
are needs, wants, demands, products, exchange, transactions and markets that will benefit the
individual, consumers and society at large, organisations and national and international governments.
Marketers must be able to manage the level, timing and composition of demand from these different
beneficiaries to satisfy their needs and wants. For instance, McDonald's have adopted the broader
marketing concept on a global scale through understanding and responding to the changing needs of
their customers.
Modern marketing is guided by a number of converging philosophies. The production concept holds
that the consumer favours products which are available at low cost and that marketing's task is to
improve production efficiency and bring down prices. The marketing concept holds that a company
should research the needs and wants of a well defined target market and deliver the desired
satisfactions, which is accompanied by long-run societal well being. In marketing-led organisations the
entire workforce share the belief that the customer is all important and that building lasting
relationships is key to customer retention. A company's sales are derived from satisfying existing
customers and attracting new customers. This approach benefits the livelihoods of the employees and
suppliers and their staff. Successfully adopting a marketing approach improves customer retention and
minimises additional costs. A satisfied customer buys more, stays loyal longer, talks favourably to
others, pays less attention to competing brands and is less price sensitive. These benefits are
transferred into gains for consumers and ultimately society at large as success breeds success.
McDonald's divert much of their energies to ensuring that customers repeatedly return to them
satisfied and content with their offering.
(b) Responsibilities of the modern marketer

Marketing is seen as a social force which not only conveys a standard of living but also serves as a force
that reflects and influences cultural values and norms. The boundaries of marketing extend beyond
economic considerations. Marketing concepts and techniques are used to promote the welfare of society
as a whole instead of the traditional approach of providing products that satisfy consumers' needs
efficiently and profitably. They could encompass reduction in poverty, improved education and improved
healthcare. For instance, marketing tools are used in promoting healthier lifestyles through better diets,

encouraging leisure activities and pursuits and social behaviour. Social marketing suggests that a more
ethical and moral orientation be incorporated into companies' marketing strategies: marketers should
consider and incorporate the wider social implications of their products and services, such as natural
conservation or labour exploitation in emerging countries.
Social marketing does not imply a replacement of the traditional marketing concept but it is an extension
so as to recognise and encompass the wider needs of society at large. The criticisms of marketing
generally focus on ethical issues and the extent to which marketing is responsible for a variety of social
and environmental problems. Whatever the reasons, voluntarily or otherwise, marketers have to
consider ecological, environmental and consumer welfare issues together with their wider social role
more frequently in their marketing plans and activities.
Effective and aware marketers have responded to these developments in a number of ways, for
instance, by producing recyclable products and packaging, reducing pollution generated by toxic
products or from contamination and protecting consumers against harmful or hazardous products by
modifying them or withdrawing them from sale.

Chapter 8 Strategy and structure
Interactive question 1: Erewhon Bank
The Erewhon Bank Ltd has branches in Bangladesh, India, Nepal, Thailand and Burma. It grew from the
merger of a number of small local banks in these countries. These local banks were not large enough
to compete single-handedly in their home markets. The Erewhon Bank hopes to attract both retail
and corporate customers, through its use of home banking services and its heavily advertised Direct
Bank service, which is a branchless bank to which customers telephone, fax or post their instructions.
The bank also specialises in providing foreign currency accounts, and has set up a revolutionary service
whereby participating customers can settle their own business transactions in US dollars.
What sort of organisation structure do you think would be appropriate?
The bank basically serves two markets: the personal sector and the corporate sector. However, it would
perhaps be ill advised to organise the bank solely on that basis because:
(a) The banking needs of customers in the personal sector are likely to be quite distinct. This market is
naturally segmented geographically. Users of the telephone banking service, for example, will want to
speak in their own language. Also, the competitive environment of financial services is likely to be
different in each country.
For the personal sector, a geographic organisation would be appropriate, although with the
centralisation of common administrative and account processing functions and technological expertise,
so that the bank gains from scale economies and avoids wasteful duplication.
(b) For the corporate sector, different considerations apply. If the bank is providing sophisticated foreign
currency accounts, these will be of most benefit to multi-nationals or companies which regularly
export from, or import to, their home markets. A geographical organisation structure may not be
appropriate, and arguably the bank's organisation should be centralised on a regional basis, with the
country offices, of course, at a lower level.
Interactive question 2 : Boxer Ltd

Boxer Ltd is a company which manufactures dried pasta, produces ready-to-eat meals and is about
to start making specialist pasta sauces for distribution to independent delicatessen shops.
The dried pasta revenue and profits have been substantial and stable in the last few years, with
sales of the Boxer brand to all large supermarket chains as well as to wholesalers.
The ready-to-eat meals are produced only for two large chains of supermarkets. Products
are badged by the retailers under their own name.
Boxer has recently recruited Jake La Motta from Sauce Specialists Ltd. He has considerable
knowledge of and contacts within the small delicatessen market. Boxer wishes to pursue a
cautious approach to this new area, incurring only limited investment.
Requirement
Design an appropriate structure for Boxer Ltd.

Boxer Ltd
Board
Interactive question 3: Organisational configurations
Identify the organisation configurations suggested in the following cases.

(a) Creation Ltd provides public relations services to clients. It is run by five partners, with a staff of
copy editors, designers, party-throwers and people with contacts in the press. Clients contact
one of the partners who assembles a team to solve a client's problem, though the partner does
not direct the solution.
(b) Smithers Ltd is a small family company. The chief executive and founder is a strong leader and
tends to dominate decision making. He does not believe in discussing his decisions with staff.
According to Mintzberg what would be the key building block and the main co-ordinating
mechanism in Smithers Ltd?
(a) Adhocracy
(b) Professional bureaucracy
Interactive question 4: ROI

An asset costs CU100,000, has a life of four years, and no scrap value. It generates annual cash flows of
CU34,000. Depreciation is calculated on the straight-line basis.
Requirements
(i) Calculate annual ROI using opening carrying amount.
(ii) Calculate annual ROI using historic cost.
(iii) Comment on any problems identified by these calculations.

ROI using opening carrying amount:
Year 1 34 – 25 ÷ 100 = 9%
Year 2 34 – 25 ÷ 75 = 12%
Year 3 34 – 25 ÷ 50 = 18%
Year 4 34 – 25 ÷ 25 = 36%
ROI improves despite constant annual profits thus divisional managers might hang on to assets for too
long. (RI would also improve, giving the same problem.)

ROI using historic cost:
Years 1– 4 34 – 25 ÷ 100 = 9%
(RI would also be constant under these circumstances.)
ROI using historic cost overcomes the increasing return problem of using the carrying amount.
However, it is not perfect.
Interactive question 5: Asset disposal

A manager has the following data.
Year 1 Year 2 Year 3 Year 4
Profit 20 15 10 5
Historic cost 100 100 100 100
ROI 20% 15% 10% 5%
Manager's target ROI = 12% per annum.
Requirement
When would the manager dispose of the asset and what problem might this cause?

The manager would dispose of the asset after two years, i.e. she might get rid of the asset too
quickly. (The same problem occurs with RI with interest at 12%.)
Interactive question 6: ROI or RI?

A division manager has the following data.
Target ROI 20%
Divisional profit CU300,000
Capital employed CUlm
Requirements
Would the division manager accept a project requiring capital of CU100,000 and generating profits of
CU25,000, if the manager were paid a bonus based on ROI?
Would the decision change if the manager's pay were based on RI?
Divisional ROI pre-project = CU300k
CU1m
= 30%
Divisional ROI post-project = CU325k
CU1.1m
= 29.5%
Although the project ROI is acceptable to the company (25%), the manager would not be
motivated to accept a project which lowers divisional ROI. In this particular circumstance, RI would
lead to the right decision as the absolute figure for the division would increase.
RI pre project 300,000 – 20% (lm) = CU100k
RI post project 325,000 – 20% (1.1 m) = CU105k
Interactive question 7: Comparing divisions

A company has two divisions.

Target ROI = 20%
Division I Division 2
Capital CUlm CU100k
Profits
Year I CU200k CU20k
Year 2 CU220k CU40k
Requirements
Which division is performing better
(a) Using RI?
(b) Using ROI?
Residual income
Division 1 Division 2
Year 1
200k – 20% (1m) –
20k – 20% (100k) –
Year 2
220k – 20% (1m) 20k
40k – 20% (100k) 20k
Return on investment Division 1 Division 2
Year 1
200k/1m 20%
20k/100k 20%
Year 2
220k/lm 22%
40k/100k 40%
It is much easier for the larger division to generate a further CU20k of residual income; hence using RI
to compare divisions of different sizes is misleading. ROI gives a better indication of performance.
Interactive question 8: External offer

Unit costs Division A Division B
CU CU
Variable 10 15
Transfer price – 20
Fixed costs 5 10
Profit 5 25
Selling price 20 70
Division A can sell outside at CU20 per unit or transfer internally to Division B at CU20 per unit.
B receives an offer from a customer of CU30 per unit for its final product.
Requirements
(a) Would B accept the offer of CU30 per unit given the existing transfer price?
(b) Is this the right decision from the company's point of view if
– A has surplus capacity?
– A is at full capacity?
(a) Division B would reject the offer as there is a negative contribution of – CU5 (30 – 20 – 15).

(b) If A has surplus capacity, it is acceptable to the company, as contribution is CU5 (30 – 15 – 10).
(c) If A is at full capacity, there is a lost external sales contribution in A of CU10.
Therefore, for the company, contribution = – CU5, thus reject. (B may also lose contribution.)
Interactive question 9: Full cost transfer price

A multi-product company has two divisions.
Unit costs for a particular product
Manufacturing division Selling division
CU CU
Variable 20.00 15.00
Fixed (apportionment of costs incurred for all products) 11.00 –
31.00 15.00
Transfers are at full cost.
Ultimate selling price = CU40.00
Requirements
Are the transfers recommended from the point of view
(a) Of the company?
(c) Of the selling division?

(a) Company: transfers recommended, as contribution = CU5 (40 – 20 – 15).
(b) Selling division: transfers not recommended, as contribution = – CU6 (40 – 31 – 15).
Interactive question 10: Full or variable cost?

A corporate power plant serving divisions A and B:
Power plant
Budgeted fixed cost per month CU10,000
Standard variable cost CU1/kwh
Actual total cost in January CU18,000
Usage of power plant in January
A B
Budgeted usage (kwh) 4,000 6,000
Actual usage (kwh) 4,000 2,000
Requirements
How much are A and B charged if
(a) The charge is based on full actual cost?
(b) The charge is based on standard variable cost plus a share of
budgeted fixed costs?

A B
(a)Actual recharge CU18,000 CU18,000
4,000 2,000
6,000 6,000

= CU12,000 = CU6,000 CU18,000
Expected recharge (per kwh)
CU1 + CU10,000 = CU2/kwh 4,000 CU2 2000 CU2
10,000
CU8,000 CU4,000 CU12,000
CU CU
(b) Proportion of budgeted fixed cost
according to budget usage 4,000 6,000
Standard variable cost of
actual usage 4,000 2,000
8,000 8,000 CU16,000
In power plant CU(18,000 – 16,000) = CU2,000 adverse variance remaining uncharged due to inefficiency.
Interactive question 11: Good governance

Define corporate governance and the key aspects of good governance.
Corporate governance involves the set of rules which governs the structure and determines the
objectives of a company and regulates the relationship between the company's management, its board of
directors and shareholders.
Key aspects of good governance include transparency of corporate structures and operations,
accountability of managers and boards to shareholders and corporate responsibility towards
employees, creditors, suppliers and local community where the corporation operates.

Chapter 9 Risk management
Interactive question 1: Managing risks in an oil company
A multinational oil company is considering exploiting the gas and oil reserves in a country where
the national government has a history of suddenly seizing control of foreign assets and of
introducing taxes to ensure all the profits are taken away.
Identify risk strategies that could be used by the management of the oil company.
Risk avoidance
 Don't invest in the country Risk
reduction 

 Insist on written assurances from the government that they will not intervene or tax 

 Ensure the firm has other sources of oil and gas and of earnings 

 Seek to influence the policy of the government by political lobbying 

 Invite the government to be part owner of the venture 

 Retain as many of the venture's assets as possible outside the country (e.g. administration) 

 Invest small amounts incrementally 
Risk transfer
 Insure the assets 

 Set up the venture as a separate company with own sources of finance 

 Invite involvement and investment from other oil firms or pipeline owners 

 Obtain assets using operating leases 

 Sell the rights to the oil to third parties as soon as possible so they adopt the risk 

 Use local sources of financing the assets (preferably government sources where possible) 

 Enter into joint ventures 
Risk retention
Accepting the remaining loss if and when it occurs
Note: This solution deals with only the political risks from the project. It has not dealt with other risks
such as explosions, fall in the price of oil and gas, unexpected cost overruns, poor weather hampering
production, industrial action, laws being passed to discourage use of fossil fuels to quote some of
numerous examples.
Interactive question 2: Risk management policy of your college

You are probably taking classroom tuition as part of your preparation to pass this exam.
Therefore having you on its premises represents one part of the risks being managed by the
college or training firm offering you the classes.
Suggest the elements of a risk management policy that your college should adopt to treat the
risks of having you in its classrooms.
Elements of a risk policy for a college offering classroom courses would include the following:

Policies to control admission
The college probably has door entry and identification systems to ensure only those entitled to attend
classes can do so. This provides protection for its assets and its revenues. It can also stop undesirables
disturbing students and staff. How tightly these are monitored, for example whether you are asked to
wear photo-ID at all times, whether student passes are inspected, how often door entry codes are
changed and whether security staff are available to eject undesirables, presumably depends on the
colleges attitudes to risk and the its assessment of the likelihood of trouble.
Health and safety policies
This will include whether staff are instructed in how to spot safety hazards (trailing wires, badly stacked
furniture, loose fitments etc.) and whether they have a mechanism for reporting risks. It will also cover
whether there are staff on site who can deal with medical emergencies and whether they have a first aid
kit.
Does the college have a dedicated senior member of staff on site responsible for Health and Safety to
make sure these things are done? Is there someone senior at head office overseeing Health and Safety
and conducting regular training and visits to classrooms? Is anyone responsible for ensuring your desk
is adequately lit, of the right height for the chair, safe and secure etc? Who sees to it that the
electrical equipment above you, or the IT you may use and the sockets you plug it into has been
tested? Who is responsible for ensuring toilets are hygienic and dry or that the vending machines are
safe and the contents suitable to eat?
Identity and data security
Your name is on electronic records. Who ensures they don't get given to the wrong people? If
someone calls asking if you are attending class today who has trained staff to decline the information
in case someone you'd rather not meet would be waiting outside? How does the college ensure that
attendances, results and comments entered on your personal record are accurate and fair?
Course quality
This course is supposed to improve your chances of passing the exam. What processes and policies
are in place to make sure that materials you study are right and that tutors know what they are talking
about? Is the marking of your progress tests and mock exams fair and giving you the right messages to
improve your performance? What policies and plans does the college operate to ensure a suitably
qualified and up-to-date tutor will appear in your class at the start of your lesson?
Interactive question 3: Risk measurement and evaluation

Your corporate client has purchased the following data which provides scores of the
political risk for a number of countries in which the company is considering investing in a
new subsidiary.
Total Economic Debt in Credit Government Remittance Access
performance default ratings stability restrictions capital
Weighting 100 25 10 10 25 15 15
Gmala 37 13 4 5 5 10 0
Forland 52 5 10 9 16 8 4
Amapore 36 12 2 3 9 5 5
Covia 30 9 3 2 15 1 0
Settia 39 15 4 3 11 4 2
Countries have been rated on a scale from 0 up to the maximum weighting for each factor
(e.g. 0-15 for remittance restrictions). A high score for each factor, as well as overall,
reflects low political risk.

A proposal has been put before the company's board of directors that investment should take place in
Forland.
Requirements
Prepare a brief report for the company's board of directors discussing whether or not
the above data should form the basis for:
(a) The measurement of political risk, and
(b) The decision about which country to invest
in.

Report
To Board of directors
From Accountant
Date 17 December 20X8
Subject The evaluation of political risk in investment decisions
The measurement of political risk
Political risk in foreign investment could be defined as the threat that a foreign government will
change the rules of the game after the investment has been made. There are various agencies that
can provide risk scores for different countries, but the key problem for all such approaches is that
the scores that they use will always be subjective. A good example of the limitations of this approach
is the case of Iran. Most commentators believed the regime under the Shah to be inherently stable,
but as it turned out, this belief was completely wrong.
Weaknesses of approach
Considering the data that is being used in this case in more detail, there are a number of
weaknesses that should be recognised.
(a) Economic performance is one of the most heavily weighted factors. However it can be
argued that this is not really a component of political risk.
(b) There is no information as to how the weightings have been arrived at.
(c) A number of factors that could have been included have been ignored. These include:
(i) Cultural homogeneity
(ii) Quality of infrastructure
(iii) Legal system
(iv) Record on nationalisation
(v) Currency stability
Other methods of evaluation

The directors should also consider some of the other approaches to the evaluation of political risk.
These include:
(a) Seeking the views of individuals with direct experience of the countries in question, such
as academics, diplomats and journalists
(b) Social as well as economic analysis

The decision about which country to invest in
The evaluation of political risk must obviously form some part of the decision about which country to
invest in. However, the use of this type of data to evaluate political risk in this context can be misleading
for the following reasons.
(a) Microrisks
These scores are valid at the macro level, but they do not measure the risk that is faced at the
micro level by the industry or firm. Certain industries, such as mining and agriculture are more
prone to political risk than are others. Some activities will be welcomed by countries due to the
perceived benefits that their presence can bring. Examples of this can be seen in the UK economy
where the activities of the multinational biotechnology companies are being severely restricted,
while investment by Japanese microchip companies is welcomed and assisted.
(b) Emphasis on political features
It can lead to an over-emphasis on the political features of the host country while neglecting other vital
considerations such as the strategic fit of the new investment with the company's other operations.
Conclusion
This type of data therefore has relevance to the investment decision, but should not form the sole basis
on which the decision is made. Although Forland comes out best in the overall scores, it has the worst
level of economic performance. If the subsidiary is being developed with a view to serving primarily
the local market, then this factor should receive a higher weighting in the overall decision making process
since it will have a significant impact on the expected cash flow that will be generated.
Interactive question 4: Identification of risks facing an airline

As a consultant specialising in risk management, you have been appointed by the Director of
Corporate Development (DCD) to undertake a comprehensive review of the risks facing the
Bangladesh based SkyWays Airlines (SWA) as a precursor to the latest strategic planning
process.
You are told that the extended supply chain of SWA makes it reliant on suppliers of fuel, aircraft
parts, air traffic control etc. SWA has increased its borrowings this year and its liquidity ratio has
fallen below one and it has negligible retained earnings. It has also experienced increased
dissatisfaction from employees as a result of voluntary redundancies arising from moving to a new
more efficient terminal and, apparently, the loss of control over them by the decline in influence of
the Trades Unions.
The Engineering Director has advised that the International Civil Aviation Organisation has
shown a preference for the International Risk Standard developed by the Institute of Risk
Management.
Requirement
From the information provided and your knowledge of the industry, prepare a report identifying
the range of externally driven risks to which SWA is subject and any internally driven risks. Suggest
appropriate improvements to controls for the risks you identify.
Report
To Director of Corporate Development, SkyWays Airlines
From Financial Analyst
Date XX.XX.XXXX
Subject Risks faced by SWA
Terms of reference

This report has been commissioned by the Director of Corporate Development to illustrate the risks
facing SWA and to identify appropriate controls. The Risk Management Standard developed by the
Institute of Risk Management has been utilised as a framework for this.
Introduction
Risk has been defined as 'a condition in which there exists a quantifiable dispersion in the possible
outcomes from any given activity'. This report does not attempt to quantify the risks faced by SWA.
Rather it seeks to identify the origins of such risk and, for each, suggest suitable controls to manage that
risk.
Financial risks
Interest rate risk: A change in the interest rate can affect the cash flows of the company where there
are debts owed by the company at variable rates. Similarly any incomes related to interest rates, such as
from short-term deposits or where passenger or freight volumes are affected by interest rates, will also
be subject to risk.
This risk can be managed in a variety of ways:

 Avoidance of floating rate debt by switching funding to equity or fixed rate debt or interest
hedging. (It might be noted however that fixed rate debt changes the type of risk but may not
eliminate it altogether. Hedging avoids the cash flow risk in future interest payments but transfers
risk into a fair value risk in term of the susceptibility of the value of the bond to market interest
rate changes). 

 Deliberate purchase of floating rate debt such that the fall in earnings from business
operations as rates rise can be offset by the increase in returns from the investments. 

 Development of lines of business where earnings are negatively co-variant to those of SWA
with respect to interest rates, i.e. internal diversification. 
Foreign exchange risk occurs when exchange rates change and affect the cost of servicing
debts denominated in foreign currency, the receipts from payments denominated in foreign
currency and the changes in the volumes of business as the foreign currency costs of tickets
changes.
Methods of managing this risk include:
 Denomination of debts and sales in domestic currency where possible 

 Exchange rate hedging 

 Development of streams of earnings and expenditures that are matched for each currency. For
example if SWA needs to pay Taka for meals supplied on return journeys to Dhaka it should
consider using the ticket revenues from sales in Bangladesh to pay this. If these are insufficient
then a Taka denominated airline shop should be considered. 

 Diversification of operations across several currency zones 
Credit risk is the disruption to revenue streams by delayed payments from debtors or from bad debts.
This risk can be managed by:
 Credit control procedures 

 Debt factoring 
Operational risks
Regulation risk refers to the costs of complying with changes in aviation regulations, fines for
non-compliance and of disruption to operations if aircraft are grounded.

 The creation of mechanisms for consultation and advance warning with regulators. The
experience and contacts of SWA's Engineering Director will be an important part of this. 

 Compliance with regulations. SWA will need to have robust procedures for all operations that
can be inspected and verified by regulators. 

 Transfer of sensitive operations outside the business. Outsourcing maintenance, staffing, catering
etc. means that the expertise of the provider may reduce some of the risk but also that they will
bear the costs of changes to regulation or fines for non-compliance. Loss of earnings due to
disruption of these activities can be recovered by SWA through legal action. 
Culture risk deals with the danger of commercial failure, reputation damage, or disruption to
operations due to mismanagement of cultural interfaces in the business. Examples include the adverse
effects of staffing or advertising decisions, poor product or service provision. At the highest level it
can include the fall-out from national cultural clashes for the firms in those nations.
 Taking appropriate advice on cultural issues: Many consultancies will provide SWA
with practical advice on doing business in particular countries to avoid damaging cultural
sensibilities. 

 Business partnerships with local operators: These will be more experienced in
dealing with differences. 
 Diversity policy: SWA could take deliberate action to ensure that the breadth of cultures that
it deals with are represented within its staff at all levels. Staff could also be given culture
awareness training such as BA did with cabin staff to make them aware of the variability of dietary
conventions, body language, name conventions, forms of address etc that will be encountered by
a global airline. 

 Organisational development: SWA could take the decision to shift from a national to a
global organisation by a transformational change involving restructuring, recruitment and
changing the perspective of existing staff towards persons from other cultures. 
Board composition: To avoid operational risks the board should have representatives of main
operational areas such that the operational implications of board decisions receive proper
consideration and that operational concerns receive a proper airing.
This risk can be managed by key operations having board representation.
Hazard risks
Contracts: The extended supply chain of SWA makes it reliant on suppliers of fuel, aircraft parts, air
traffic control etc. Particular contract risks in SWA's present situation are its employment contracts with
staff, and potential contracts with the makers of new aircraft. Risks arise where a counterparty is unable
or unwilling to fulfil their obligations under the contract, such as a threat to strike or to withdraw
service, or where SWA wishes to vary the terms of the contract but cannot without penalties.
Management of this risk can be assisted by:
 Proper procedures for supplier selection. 

 Development of dedicated procurement and contracts function within SWA. 

 Multisourcing of inputs to avoid excessive reliance on one. 

 Financial redress for non-performance of contract such as penalty payments. 
Relationship building with counterparties to develop trust and commitment. Regular meetings to air
concerns and address grievances will assist and will also provide SWA with early warnings of potential
risk from the contracts.
Natural events: For airlines this includes hurricanes, snow, rain and fog. These lead to cancellations and

diversions of flights resulting in displaced passengers and aircraft with subsequent costs of relocation
(buses, alternative flights, empty flights), compensation and lost revenue. Such events can also affect
demand for air services such as a lack of snow reducing demand for flights to skiing resorts or the
tragedy of a Tsunami making tourists unwilling to visit island and low lying coastal resorts.
Management controls that can be used include:
 Contingency plans for dealing with disruptions such as alternative schedules, stand by
arrangements with other transport providers and airports. 

 Advance warning such as use of weather forecasts. 

 Contractual clauses limiting SWA's liability for costs of losses due to natural events and force
majeure. 

 Risk assessment of airports used to assess vulnerability to fog, flood etc. 
Suppliers: These are risks arising from the collapse or poor performance of suppliers or aggressive
action on their part such as levying of increased prices.
Many of the management controls for contract risk discussed above apply here too. Additional
controls would include:
 Engagement of suppliers in long-term contracts 

 Creation of parallel sourcing strategies to ensure suppliers remain competitive and sourcing
approach (e.g. a sole reliance on agents or e-trading) is not an additional source of risk. 
Management controls include:

 Development of relationship with key stakeholders (e.g. governments, environmental groups,
local warlords etc). 

 Improvement of physical security of operations. 

 Improvement of information available by environmental scanning and creation of
knowledge management within SWA. 
Strategic risks
Competition: This imposes the commercial risk of reduced profits through lower prices and
volumes and increased costs of participation in the industry (service quality, promotion etc).
 Competitor monitoring and analysis 

 Development of competitive advantage such as brand or unique access or technology. 

 Pre-emptive action such as developing 'flanker' businesses. Faced with challenges from low cost
airlines many full-service airlines developed cheaper second brands (e.g. BA launched Go, British
Midland launched bmi-baby). 

 Diversification of business to reduce expose to particular competitors 

 Negotiation of understandings with competitors (potentially unethical and illegal) 

 Acquisition of competitors 
Customer changes includes loss of key customers, failure of key target customers, or sharp
changes in customer demand patterns. An example is the successful publicity by economy airlines to
name and shame corporations who refuse to use them and hence expend shareholders' money on
flying staff with expensive full-service airlines.
 Operation of a flexible fleet able to be adapted to serve a variety of customer types and destinations 


 Provision of a portfolio of ticket prices and service levels (e.g. BA offer First, Business,
Club and World Traveller classes) 

 Avoidance of reliance on one or a few main clients or destinations 

 Good quality customer information to detect changing tastes or defections to rivals 
Industry changes: This includes the arrival of new competition, merger of rivals and the failure of
rivals. These change the nature of competitive pressure. For example a merger may create greater
economies of scale for the larger firm, a threat to SWA, but may also reduce capacity in the industry
and so relieve price pressure, an opportunity for SWA.
 Environmental information on potential industry changes 

 Ability to launch pre-emptive action such as appeals to regulatory authorities or to mount
counter-bids 

 Leasing some aircraft to enable reduction or changes in fleet composition 
Customer demand refers to unanticipated fluctuations in demand. These are inevitable for airlines
as a consequence of the strategic choice to be an airline. Their profits and survival will depend on
developing strategies to cope with these changes in demand. For example, BA blamed the 5% fall in its
operating profits in 2001 on the outbreak of foot and mouth disease which effectively closed the
British countryside to UK tourists. This can be compared to BA's status with Virgin Atlantic as
premier travel partners of the successful bid to host the 2012 Olympic Games in London. This will
increase volumes by an amount that will depend on the prevailing political and economic climate in
2012.

 Use of flexible staffing (part-time, contract etc) to cope with peaks and troughs in passenger
volumes 

 Dynamic pricing to raise or lower prices to shift demand towards unfilled seats 

 Flexible service and maintenance schedules which allow planes to be pressed into service during
peaks and rested during troughs 

 Variety of plane sizes to enable low demand routes to have small planes and so re-deploy larger
planes to busy routes 

 Multi-skilled staff able to cope with changes of aircraft on their route (in particular pilots who must
be able to switch flight decks) or being asked to work a different route and so be familiar with
passenger demands and able to give information on customs formalities etc. 
Internally driven risks
These are ones that result from the operations of management. The Risk Management Standard makes
clear that some of these risks are incurred as a response to particular external risks, such as the
investment of funds in R&D to gain strategic advantage to reduce strategic risk. Other internal risks leave
the firm exposed to external risk, such as poor liquidity and cash flow leaving a firm exposed to the
financial risks from higher interest rates or banks withdrawing credit. The internally driven risks that can
be identified in SWA are discussed below.
Liquidity and cash flow: Borrowing increased during the latest financial year. SWA has a liquidity
ratio below 1. This means that any interruption to its business and cash flows could potentially leave it
unable to pay its creditors. Moreover it has insufficient retained earnings to meet its present operating
capital needs, hence the increased borrowing in the last year despite a modest increase in business
activity, and so may not be able to repay any loans falling due in the near future. Any fall in liquidity may
make SWA unable to maintain its dividend and hence jeopardise its share price.

Employees and supply chain: Both internal risk drivers are present with the increased dissatisfaction
of employees with the voluntary redundancies resulting from the new terminal and, apparently, the loss
of control over them by the decline in influence of the Trades Unions.
Public access is an inherent risk for all airlines. Admitting passengers and relatives to airport
buildings, airplanes etc also means admitting potential illnesses (such as the avian flu virus) or
terrorists.
Intellectual capital: The customer and flight information held by SWA is of high commercial value, yet
under the codeshare arrangement, is sometimes shared with potential rivals. The board should
remember the scandal that engulfed BA when it was revealed that its seat reservation system, leased to
other airlines for their use too, was being used to break into the passenger details held by Virgin Atlantic
for the purposes of poaching customers – the so-called 'dirty tricks' campaign. The damage to BA's
reputation and the commercial damage to Virgin Atlantic from this episode illustrates the risks inherent
in high dependence of IT/IS.
Conclusions
This report has identified the range of risks present in SWA's environment and also those to which it is
subject from its own internal structure and operations. It has been noted that at present there is no
board position responsible for implementing and monitoring a risk management strategy at SWA. Some
appropriate management controls have been suggested.
Recommendations
SWA should establish a role at board level for risk management by creating a new post or by extending
the portfolio of an existing director. The first task of this role holder should be to assess internal
controls at SWA and, on the basis of this, present a risk analysis to the board.
Interactive question 5: Risk assessment of outsourcing cleaning

The management of a state-funded hospital is considering outsourcing the cleaning of its premises.
This will mean private firms taking over as employers of existing cleaning staff and assuming
responsibility for the cleaning of the areas around beds, corridors and communal spaces.
Increases in incidents of infections during hospital stays by patients, some resulting in death, has been
widely attributed by the media to poor hospital hygiene. Several legal cases for compensation have
been decided against hospitals on the grounds of negligence by management.
What factors should management consider in evaluating the proposal to outsource its cleaning?
The list of factors will be very large. It will include:
Costs and benefits from outsourcing
 Fees charged by contactors 

 Cost presently incurred by using own staff 

 Financial returns from transfer of assets to contractor (floor polishing machines, vacuum cleaners etc) 

 Potential redundancy costs of staff not transferred 

 Costs of writing and agreeing suitable contracts and service level agreements 

 Costs of monitoring compliance of contractors with service agreements 
Risks from outsourcing

 Financial stability and robustness of the contractor 

 Track record of contractor in delivering suitable service elsewhere 

 Availability of controls over performance (e.g. whether staff will take instructions from
hospital managers, performance indicators, regular meetings, legal redress mechanisms) 

 Potential staff and media criticism of decision 

 Extent of proof of link between hospital cleanliness and acquired infections 

 Extent of public hostility to outsourcing as a source of increased infections 

 Will legal liability for negligence claim pass to the contractor or stay with the hospital? 
Risks from continuing to provide cleaning in-house
 Operational risks from cleaners not being available (e.g. strike action) 

 Employment risks of having own staff (e.g. claims for industrial injury, discrimination etc) 

 Rising wages and other employment costs 

 Legal costs of negligence claims resulting from poor cleaning 

 Potential fines for inadequate monitoring of staff (work permits, benefit fraud, health and safety) 
Risk environment and appetite
 Potential changes in government policy resulting in contract penalties 

 Extent of pressure on hospital to cut costs 

 Management's previous experience of outsourcing agreements 

 Relative risks of other cost-cutting measures under consideration 

 Degree of support management enjoys from influential stakeholders (e.g. media, governors,
doctors, nurses) 

 Potential personal consequences for management of bad decision (e.g. personal liability, career
impact, stress of dealing with problems) 
Interactive question 6: Risk monitoring in a fast-food restaurant

What risk monitoring systems should be established by the management of a global fast-food
restaurant chain?
At store level risk monitoring should be established for:
 Temperature of chilled and frozen foods such as alarm bells or luminescent strips that are
activated if temperatures rise 

 Compliance with food hygiene procedures such as visual inspections and questions to staff 

 Compliance with customer service standards such as by mystery shoppers 

 Financial integrity such as by close reconciliations between ingredients supplied and totals from
sales data and wasted stock 

 Staff integrity such as by existence checks on names and personal tax references, confirmations
of employment from past employers. 
At national level risk monitoring should be established for:
 Compliance with laws on hygiene, employment, food labelling 

 Impact of the competitive strategies of rivals 


 Changes in the costs of ingredients, staffing or premises costs 

 Impact of potential legislation 

 Social attitudes towards the firm, its activities and its products 
 Stability and performance of business partners At global level monitoring should be
established for: 

 Changes in cost of capital resulting from market sentiments or interest rate movements 

 Development of new country markets 

 Developments in trading relations between host and home country that may affect access and
earnings repatriation 

 International pressure group activity aimed at the industry or firm 

Chapter 10 Methods_of_development
Interactive question 1: Stock market sentiment
The Financial Times published the following market report. Read it and then answer the questions that
follow.
'Share prices in London moved up again to all- time highs yesterday, measured by the stock market's
main indices, the FT-SE Actuaries All-Share and the FT-SE 100.
There were, however, signs that the market's move to record levels could be running out of steam. Wall
Street, one of the prime motivating forces behind the London market's recent rise, briefly penetrated the
5,000 level on the Dow Jones Industrial Average, shortly after the US market opened for trading. But it
quickly dropped back to the mid-4980s, and around two hours after London closed for business the Dow
was still jousting with the 5,000 mark.
The failure of the US index to move decisively through 5,000 was one of a number of worrying signals
affecting London. Others included the emergence of yet more profits warnings, notably from Rexam,
the paper group, and a decline in international bond markets.
Dealers said London had run into some determined selling pressure when it passed 3,630. 'Above that level,
we ran into some real selling' said one market maker. The FT-SE 100 index finished the day a net 19.6
firmer at an all- time closing high of 3,628.8, after reaching a record intra-day peak of 3,639.5. The FT-SE-A
All-Share index ended at a best ever 1,776.87, up 7.47.'
(a) What is a 'profits warning'?
What was the sentiment or mood of the UK stock market on this day?

(a) This is an announcement by a company that its profits will be lower than had previously been
expected. A profits warning usually results in a drop in a company's share price, because it
means that the company is less valuable than was previously thought.
(b) The market reached an all-time high, reflecting a mood of optimism about the future of the
economy and business performance. There are some indicators, however, that prices have
gone as high as they will for the moment (or that they may begin to fall).

Chapter 11 Evaluation of strategies and performance measurement
Interactive question 1: Strategic control

What do you think the Ericsson case example above says about strategic control?
 In the long-term, the control action focuses on the survival of the firm,
as losses of such magnitude cannot be sustained. 

 Complicated trade-offs are needed. Ericsson will retain some handset
activities to maintain competences needed for other business areas. 

 It is in part responding to external stimulus, the declining handset market, as
there is an element of feedforward control. 

 The control action – withdrawal – is being taken to satisfy the overall company target of
profitability. 
For further context, in 2001 Ericsson had 10% of the global handset market, which had
changed out of all recognition in recent years. From being a specialist item, mobile
phones became a commodity driven by fashion and speed to market, rather
than a specialised technical activity.
The company had improved its time to market and has produced some successful new
models, such as the T20. However this single loop control is not enough.
Strategic control measures might require complicated trade-offs between
current financial performance and longer-term competitive position, and
between different desirable ways of building competitive strength. The main
task is to ensure that the right things are measured.
[In October 2001 Ericsson concluded a joint venture agreement with Sony Corporation
which, by 2006, had allowed it to overtake Motorola to become the second most
profitable handset manufacturer after Nokia.]
Interactive question 2: Profit margin

A company has the following summarised profit and loss accounts for two consecutive years.
Year 1 Year 2
CU CU
Turnover/Revenue 70,000 100,000
Less cost of sales 42,000 55,000
Gross profit 28,000 45,000
Less expenses 21,000 35,000
Net profit 7,000 10,000
Although the net profit margin is the same for both years at 10%, the gross profit margin is not.
Year 1 28,000 = 40% Year 2 45,000 = 45%

70,000 100,000
Requirements
(a) Assess whether this is good or bad for the business.
(b) What would happen to the gross profit margin of (i) a retail company and (ii) a

manufacturing company if they adopted a price penetration policy.
(a) An increased profit margin must be good because this indicates a wider gap between
selling price and cost of sales. Given that the net profit ratio has stayed the same in
the second year, however, expenses must be rising. In year 1 expenses were 30% of
turnover, whereas in year 2 they were 35% of turnover. This indicates that
administration, selling and distribution expenses or interest costs require tight
control.
Percentage analysis of profit between Year 1 and Year 2
Year 1 Year 2
% %
Cost of sales as a % of sales 60 55
Gross profit as a % of sales 40 45
100 100
Expenses as a % of sales 30 35
Net profit as a % of sales 10 10
Gross profit as a % of sales 40 45
(b) (i) The % profit margin would fall as margins would fall, but the gross profit in
absolute terms may rise if volumes increased sufficiently.
(ii) Cost of sales would not vary linearly with any volume increase as there is an
element of fixed costs so the effect on both gross profit % and gross profit
amount would be uncertain.


Chapter 12 Business planning and functional strategies
Interactive question 1: Business plan

Five years ago Elliott Davis established a firm to provide accounting services to small businesses. It has grown
rapidly and today has over 100 clients, mainly coming to Elliott by personal recommendations. Many of them
employ ten or fewer people, and as small businesses were receiving less than satisfactory service from their
current accountants or spending time trying to do their own accounts and getting into difficulties. Elliott has
deliberately kept the costs of his business down. He is responsible for dealing with all the clients, he employs
three accountants part-time to do work for clients and his wife runs the office.
Elliott has recently met Saima Ahmed who runs her own similar sized accounting firm. A business
partnership has been proposed, Davis & Ahmed Associates. They need funding to launch the business.
They have been asked by their bank to provide it with a business plan setting out how the partnership
intends to grow and develop.
Requirement
Write a short report for Davis & Ahmed Associates giving the key features that you consider to be
important and that you would expect to see in the business plan for the business

Report
To Elliott Davis, Saima Ahmed: Davis & Ahmed Associates
From Accountant
Preparing a Business Plan
The presentation of a comprehensive business plan to your bank is an important step towards
obtaining the finance you need to launch and expand your new enterprise. Banks make use of a
range of criteria in making lending decisions and a sound business plan will provide information
relevant to many of them.
Your business plan should be authoritative, comprehensive and logical. It should, therefore, be based
on reasonable assumptions, careful estimation and rational thought. You must present a very
clear view of your business goals and the strategy you intend to use in order to achieve them.
As your proposed partnership is based on two existing businesses, you should give a brief account of the
history and performance of each. Many of your forecasts for the combined business will be based on
extrapolation from past experience, so you must establish the credibility of this foundation. An important
input into credit decisions is the personal history of the owners of the business, so this section
could include a summary of your personal details, qualifications and experience.
The main part of your business plan should start with a statement of the nature and commercial
purpose of your business. You should also mention any special features that differentiate it from
similar enterprises. This would be the place in which to introduce, briefly and in general terms, your
views on improved customer service and use of the Internet.
You might then go on to give a more detailed account of your strategy, giving details of your products,
your target markets (such as the property development market) and your marketing plan. This
could be based on the service marketing mix, product, price, promotion, place, people, processes and
physical evidence.
You should give a full, though not over-detailed, statement of your financial targets. A series of
budgeted accounts for the first three years would be a good start. You should be realistic in your
forecasts, building on your current experience and making reasonable assumptions. Associated with these
purely financial details could be other quantitative measures, such as anticipated client numbers and
growth. If you are able to provide extensive data it is probably a good idea to put most of the
information into an appendix and present a summary in the main part of your plan.
An essential feature of your submission to the bank will be a detailed statement of requirements for
finance. The bank will expect you to have a very clear forecast of how much cash you will need, when
you will need it and where it is to come from. The whole purpose of the document is to help you to
obtain funds from the bank, so you must be realistic and specific about your need for finance. Bear in
mind that your ability to pay interest and repay principal will be a major consideration for the bank in
deciding whether to finance you: the amounts you ask for must be reasonable in the light of your
forecasts for your business, both in terms of what they will enable you to do and what you will be able to
repay.
Finally, when you are happy with your overall business plan, you should prepare an executive summary.
This will precede the main body of the document and summarise its most important elements, such as the
nature and main features of the business; and leading indicators of growth and profitability.
Interactive question 2: Marketing plan

(a) What is a SWOT analysis and how does it lead to an understanding of realistic market opportunities?
(b) Explain the importance of marketing planning for a new consumer product to be launched in your
country.
(c) Using examples, identify the main steps involved in the marketing planning process.

(a) A SWOT analysis identifies the strengths and weaknesses of the organisation relative to the opportunities
and threats it faces in its marketing environment. The SWOT analysis leads to an understanding of realistic
market opportunities through the process of a detailed marketing audit, covering market and
environment analysis, competitor and supplier analysis, customer analysis and internal analysis.
This analysis will highlight potential market gaps, new customer needs, marketing channel
developments, competitor strategies and their strengths and weaknesses. The organisation can
evaluate market opportunities against its strengths and weaknesses and identified threats and
determine what actions to take to exploit the opportunity.
(b) To successfully launch a new customer product into the Bangladesh market the organisation needs to have
clear and realistic objectives, and identification and understanding of its target market segment. Its
channel of distribution, branding, packaging and communications activity need to be in place to support the
launch. Forecasts of future demand, and return on investment need to be assessed and projected.
A formalised marketing planning system that involves all departments, customers, agents and suppliers,
the complexity and timing of activities is required to support the launch to prevent lack of coordination,
resource and ultimate failure. A monitoring system is also required to evaluate the effectiveness of the
launch and take actions as required. A successful launch requires a planning process that pulls all the people
and activities together, co-ordinates what is done, by who, when and with what resource.
(c) Marketing planning involves the following stages.
(i) Market analysis: This phase involves establishing an audit process that assesses the macro and micro
market environment, market segment analysis, customers, competitors and development strategy.
Without a clear understanding of these issues it is difficult to set objectives and develop strategy.
(ii) Objective setting: Once the issues arising from market analysis have been understood, objectives can
be set. Objectives should be consistent with the overall mission of the organisation and goals, and they
must be realistic.
(iii) Strategy development: This phase can begin once the objectives have been agreed. In this process
alternative strategic options will be evaluated to determine the best way forward for the organisation.
Strategy evaluation should consider the organisation's current strengths and weaknesses, market
attractiveness, resource requirements, and profitability.
(iv) Implementation: This is frequently the hardest part of the marketing planning process. Effective
implementation requires co-ordination between different organisations, people and departments.
An organisation structure and culture should support this co-ordination, provide good
communication and access to information and appropriate levels of resources. In reality, many
issues, conflicts and trade offs occur within organisations that act as barriers to effective
implementation.
(v) Evaluation and control: The final phase of the process involves setting an effective system of
monitoring and control to measure and evaluate performance.
Interactive question 3: ScannerTech

ScannerTech is a fast growing hi-tech company with expertise in electronic scanners. It has 100
employees and aims to double in size over the next three years. The company was set up by two
researchers from a major university who now act as joint managing directors. They are intend
leaving ScannerTech once the growth objective is achieved and it is large enough to be sold.
ScannerTech makes sophisticated imaging devices used by the airline security and health industries.
These two markets are very different in terms of customer requirements but use the same basic
technology. Because of growing sales from exports the current strategic plan anticipates a foreign
manufacturing plant being set up within the next three years. Present managers are staff who joined in
the early years of the company and have their expertise in research and development. Further growth
will require additional staff in all parts of the business, particularly in manufacturing and sales and
marketing.
Olivia Marcuse is HR manager at ScannerTech. She is annoyed that HR is the one management
function not involved in the strategic planning process shaping the future growth and direction of the
company. She 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. She feels it is
time to make the case for a strategic role for HR at ScannerTech to help it face its challenges.
Requirement
Prepare a short report for Olivia Marcuse to present to Scannertech's board of directors on the way a
Human Resource plan could link effectively its growth strategy.
Report
From Olivia Marcuse: HR Manager, ScannerTech
To Board of Directors: ScannerTech
Date Today
Human resource planning and strategy
ScannerTech's strategy calls for the company to double in size over the next three years. This will require the
employment of extra staff, particularly in marketing, sales and manufacturing. The ambitious planned rate of
growth and the high technology base of ScannerTech's business mean that these extra staff must be of very high
quality. Human resource (HR) management is thus an essential component of the company's business
strategy and so should be integrated with its development. The alternative is increased potential for
serious shortages of staff and mismatches between job requirements and staff availability. The establishment of a
foreign manufacturing plant will complicate all HR issues significantly and will demand very careful consideration.
Human resource planning follows a logical sequence, echoing the rational model of strategy. This is not
necessarily linear and some of the activities involved in establishing a satisfactory plan can overlap
chronologically. There will also be occasions where the various activities influence one another, as, for
example, when the persistence of staff shortages in important areas leads to a change in reward policy.
An audit of existing staff should reveal those with potential for promotion or employability in new
specialisations. It would also indicate where shortages already exist.
Concurrently, an analysis of likely future staff requirements could be carried out. We anticipate the need
to employ more staff in the areas already mentioned, but we do not really know how many will be required,
whether other functions will need to be increased in size or if more support and administrative staff will be
needed. There are also the related and sensitive issues of management succession and internal
promotion to consider. In particular, we must consider the eventual replacement of our existing joint
Managing Directors, who are likely to leave once the current growth objective has been achieved.
These two studies should enable us to identify the gaps that we need to fill if we are to have the staff
required for our overall strategy.
Recruitment, in the sense of attracting applicants, and selection from within the pool of applicants are the
logical next steps. This work is often outsourced and it will be necessary to decide whether the expertise
and economies of scale offered by outsourcing outweigh the need for deep familiarity with our operations
on the part of the recruiters.
Reward policy must be considered. At the moment, ScannerTech's staff profile is heavily biased towards
people with a background in research and development. Different types of people will be required in the future
and their expectations must be expected to show some differences. A doubling in size to, say, 200 employees
is likely to take the company into an area of HR complexity in which a formal reward policy and structure is
required. Informal decisions about pay and benefits will not be satisfactory. It may be necessary to establish a
more formal scheme of employee relations, possibly along the lines of a works council.
Increasing size is also likely to require the establishment of a policy on appraisal and performance
management. This should be linked to a programme of training and development. No doubt ScannerTech
will continue to hire well-qualified technical staff, but there will be a need for development of staff in other
functions and for management development in particular.
Interactive question 4: Capacity management

Gourmet Cuisine runs high class restaurants in high wealth areas. Each establishment can cater for
approximately 150 guests at any one time, although over an evening it may well serve more guests if tables are
'recycled' (able to be booked more than once). The evening lasts from 6pm to 12pm. Over weekends some
establishments might serve as many as 300 guests in an evening. Each establishment usually employs 8 waiters.
Comment on the following possible ways of allocating each waiter's workload.
 Allocate certain areas to each waiter? 

 Allocate a spread of tables in different locations of the restaurant to each waiter? 

 Allocate tables in turn to a waiter as each table is occupied? 

The method of distributing workloads must be efficient as well as seen to be fair.
 Allocation of tables by area is the simplest way but might be neither efficient nor fair. In most restaurants
there will usually be more popular areas (corners, along the walls, by a window etc) and less popular areas
(by the entrance, near the kitchen, in the middle). 

 Allocating tables spread across the floor space is likely to be fairer but may be more confusing in
practice for a waiter. 

 Allocation in turns is again fairer, but perhaps more complex to operate. Disputes may arise owing to queue
jumping by waiters to serve a generous tipping guest. 
Remember in delivering service quality, flexibility is an important consideration and the rules may need to be
flexed if a guest has a favourite waiter who might, according to the system, not be scheduled for that guest.

Interactive question 5: Lean manufacturing at Toyota

Japanese car manufacturer Toyota was the first company to develop JIT (JIT was originally called the Toyota
Production System). After the end of the world war in 1945, Toyota recognised that it had much to do to catch up
with the US automobile manufacturing industry. The company was making losses. In Japan, however, consumer
demand for cars was weak, and consumers were very resistant to price increases. Japan also had a bad record for
industrial disputes. Toyota itself suffered from major strike action in 1950.
The individual credited with devising JIT in Toyota from the 1940s was Taiichi Ohno, and JIT techniques were
developed gradually over time. The kanban system for example, was devised by Toyota in the early 1950s, but
was only finally fully implemented throughout the Japanese manufacturing operation in 1962.
Ohno identified wastes and worked to eliminate them from operations in Toyota. Measures that were taken
by the company included the following.
(a) The aim of reducing costs was of paramount importance in the late 1940s.
(b) The company should aim to level the flow of production and eliminate unevenness in the work flow.
(c) The factory layout was changed. Previously all machines, such as presses, were located in the same area of
the factory. Under the new system, different types of machines were clustered together in production
cells.
(d) Machine operators were re-trained.
(e) Employee involvement in the changes was seen as being particularly important. Team work was
promoted.
(f) The kanban system [production on demand] was eventually introduced, but a major problem with its
introduction was the elimination of defects in production.
Requirement
Can you explain how each of the changes described above came to be regarded as essential by Toyota's management?

(a) Cost reduction: Toyota was losing money, and market demand was weak, preventing price rises. The
only way to move from losses into profits was to cut costs, and cost reduction was probably essential for
the survival of the company.
(b) Production levelling: Production levelling should help to minimise idle time whilst at the same time
allowing the company to achieve its objective of minimum inventories.
(c) The change in factory layout was to improve the work flow and eliminate the waste of moving items
around the work floor from one set of machines to another. Each cell contained all the machines required to
complete production, thus eliminating unnecessary materials movements.
(d) With having cells of different machines, workers in each work cell would have to be trained to use each
different machine, whereas previously they would have specialised in just one type of machine.
(e) A change of culture was needed to overcome the industrial problems of the company. Employee
involvement would have been an element in this change. Teamwork would have helped with the elimination
of waste: mistakes or delays by one member of a team would be corrected or dealt with by others in the
team. The work force moved from a sense of individual responsibility/blame to collective responsibility.
(f) The kanban system is a 'pull' system of production scheduling. Items are only produced when they are
needed. If a part is faulty when it is produced, the production line will be held up until the fault is corrected.
For a kanban system to work properly, defects must therefore be eliminated.
Interactive question 6: PicAPie Ltd

Gourmet PicAPie Ltd employs a total quality management program and manufactures 12 different types of pie from
chicken and leek to vegetarian. The directors of PicAPie are proud of their products, and always attempt to maintain a
high quality of input at a reasonable price.
Each pie has four main elements:
  Aluminium foil case 

  Pastry shell made mainly from flour and water 
  Meat and/or vegetable filling 
 Thin plastic wrapping 
The products are obtained as follows.
 The aluminium is obtained from a single supplier of metal related products. There are few suppliers in the
industry resulting from fall in demand for aluminium related products following increased use of plastics. 

 The flour for the pastry shell is sourced from flour millers in four different countries – one source of supply
is not feasible because harvests occur at different times and PicAPie cannot store sufficient flour from one
harvest for a year's production. 

 Obtaining meat and vegetables is difficult due to the large number of suppliers located in many different
countries. Recently, PicAPie obtained significant cost savings by delegating sourcing of these items to a
specialist third party. 

 Plastic wrapping is obtained either directly from the manufacturer or via an Internet site specialising in
selling surplus wrapping from government and other sources. 
Requirement
(a) Explain the main characteristics of a Total Quality Management (TQM) programme.
(b) Identify the sourcing strategies adopted by PicAPie and evaluate the effectiveness of those strategies for
maintaining a constant and high quality supply of inputs. Your answer should also include
recommendations for changes you consider necessary.

(a) In a nutshell, Total quality management (TQM) is a management philosophy, aimed at
continuous improvement in all areas of operation.
A TQM initiative aims to achieve continuous improvement in quality, productivity and effectiveness. It
does this by establishing management responsibility for processes as well as output.
Principles of TQM
(i) Prevention
Organisations should take measures that prevent poor quality occurring.
(ii) Right first time
A culture should be developed that encourages workers to get their work right first time. This
will save costly reworking.
(iii) Eliminate waste
The organisation should seek the most efficient and effective use of all its resources.
(iv) Continuous improvement
The Kaizen philosophy should be adopted. Organisations should seek to improve their processes
continually.
(v) Everybody's concern
Everyone in the organisation is responsible for improving processes and systems under their
control.
(vi) Participation
All workers should be encouraged to share their views and the organisation should value them.
(vii) Teamwork and empowerment
Workers across departments should form team bonds so that eventually the organisation becomes
one. Quality circles are useful in this regard. Workers should be empowered to make decisions as
they are in the best position to decide how their work is done.
Point to note:
This is a question that may appear daunting at first, but if you go through and deal with each element in turn it
should not prove too difficult to earn a pass. Ensure you provide justification for the changes you recommend.
(b) Aluminium foil is obtained from a single supplier – a sourcing strategy termed 'single sourcing'.
The advantages of this strategy include:
 Easy to develop and maintain a relationship with a single supplier – which is especially beneficial
when the purchasing company relies on that supplier. 

 A supplier quality assurance program can be implemented easily to help guarantee the quality of
products – again mainly because there is only one supplier. 
Economies of scale may be obtained from volume discounts.
However, the disadvantages of this strategy are:
 PicAPie is dependent on the supplier – providing significant supplier power. Issues such as quality
assurance may not be addressed quickly because the supplier is aware that there are few alternative
sources of supply. 

 PicAPie is vulnerable to any disruption in supply. 
Given that there are few suppliers in the industry this strategy may be appropriate. However, there is no
guarantee that the current supplier will not go out of business so the directors of PicAPie could look for
alternative sources of supply to guard against this risk.
The pastry shell flour is obtained a number of suppliers – a strategy known as multi-sourcing. The
advantages of this strategy include:
 Ability to switch suppliers should one fail to provide the flour. Having suppliers in different
countries is potentially helpful in this respect as poor harvests in one country may not be reflected
in another. 

 Competition may help to decrease price. 
Disadvantages include:
 It may be difficult to implement a quality assurance program due to time needed to establish it with
different suppliers. 

 Suppliers may display less commitment to PicAPie depending on the amount of flour purchased making
supply more difficult to guarantee. 
PicAPie appears to have covered the risk of supply well by having multiple sources of supply. The issue of
quality remains and PicAPie could implement some quality standards that suppliers must adhere to in order to
keep on supplying flour.
A third party is given the responsibility for obtaining meat and vegetables – this is termed
delegated sourcing. Advantages of this method include:
 Provides more time for PicAPie to concentrate on pie manufacture rather than obtaining inputs. Internal
quality control may therefore be improved. 

 The third party is responsible for quality control checks on input – again freeing up more time in PicAPie.
Where quality control issues arise, PicAPie can again ask the third party to resolve these rather than
spending time itself. 

 Supply may be easier to guarantee as the specialist company will have contacts with many
companies. 
Disadvantages are:
 Quality control may be more difficult to maintain if the third party does not see this as a priority. 

 There will be some loss of confidentiality regarding the products that PicAPie uses, although if there
are no 'special ingredients' then this may not be an issue. 
Given the diverse sources of supply, PicAPie are probably correct using this strategy.
The plastic film is obtained from two different sources utilising two different supply systems. This is termed
parallel sourcing. The advantages of this method include:
 Supply failure from one source will not necessarily halt pie production because the alternative source
of supply should be available. 

 There may be some price competition between suppliers. 
Disadvantages include:
 PicAPie must take time to administer and control two different systems. 

 Quality may be difficult to maintain, and as with multiple sourcing, it will take time to establish supplier
quality assurance programmes. Given that some stock is surplus to requirements from other sources,
quality control programmes may not be possible anyway. 
The weakness in the supply strategy appears to be obtaining film from the Internet site – in that quality control
is difficult to monitor. Changing to single sourcing with a supplier quality assurance programme would be an
alternative strategy to remove this risk.
Interactive question 7: Aldine Computers & Training
A new client, Aldine Computers & Training (Aldine), has approached you for assistance in preparing a business
plan to obtain bank funding. Aldine have drafted the following business plan and have requested your comments
on its viability and on how it might be improved to maximise the chance of the bank giving them funding.
Requirement
Draft a report assessing the viability of the business proposal and making recommendations on how the
document may be supplemented to improve the chances of Aldine securing funding.

Report
To Aldine Computers & Training
From An Accountant
Date Today
Subject Evaluation of business plan and application for funding
Terms of reference
We have been asked to comment on the viability of the business proposal by Aldine Computers & Training
(Aldine) to secure funding for an extension to its business and to propose improvement to the proposal
document.
Disclaimer
This report is based on the information given us by the management of Aldine and its accuracy is restricted to
the accuracy of that data. No opinion is expressed on the accuracy of that data. This report is intended solely
for the management of Aldine and is not for any third parties. The authors cannot be held liable for any loss
incurred by third parties relying on this report.
1 Introduction
Aldine has been established three months and is trading. We understand that some initial capital
investment has taken place and that premises have been secured. The business plan therefore is to
secure funding for the expansion of the business.
2 The business model
Business proposals should be evaluated according to the criteria of suitability, acceptability and
feasibility.
Suitability concerns the strength, weaknesses, opportunities and threats of the business and the
industry in which it operates.
The strengths of Aldine include:
  Relevant experience of management in the proposed areas of business 

 Industry links with suppliers and corporate customers 
The weaknesses of Aldine are:
 Very high reliance on its principal managers, Peter and Kate for both direct making and provision of
training and also for business development and client prospecting 

 Relatively small size will deny Aldine economies of scale in the purchasing of components
compared to larger PC makers like PCNow and Dell 

 Its inability to offer a national coverage for servicing and training means it will not be able to gain
access to national corporate clients 

 Low brand and business profile compared to established PC providers 

 Many aspects necessary to run its business have not been considered in its business plan (see
section 3 below) 
The opportunities for Aldine include:
 Continued sales of PCs encouraged by new applications and the desire by firms to encourage
flexible working 

 The perceived service failings and backlogs of rival providers 
The threats facing Aldine include:

 Competition in the PC construction market from larger firms able to access cheaper
manufacturing resources overseas 

 Development of more sophisticated computer-based training and virtual learning which will reduce
demand for the face to face training proposed by Aldine 

 Increased outsourcing of IT by firms will reduce the demand for Aldine's services 

 Forecast economic slowdown in two years will reduce demand for PCs and hence leave Aldine with
excess capacity and costs. 
In summary its business model poses significant risks to Aldine. By focusing on SMEs it is possible that it may
access a market segment overlooked by larger rivals but at the expense of high marketing to sales costs and it
will be serving markets where low IT literacy will necessitate considerable and costly support.
Acceptability means that the business proposal should meet approval from key stakeholders.
Kate and Peter are clearly in favour of the business proposal. There is no research presented to help us form
a judgement about client attitudes to the services proposed and to dealing with Aldine. The remaining key
stakeholder will be the bank. The present report will need some modification before it will secure the banks
agreement to lend the money (see section 4 below).
Feasibility means the ability of the business to carry out its strategic initiatives. This will depend on a
combination of internal resources and external factors.
The production plan seems well-thought through. However questions must be raised over the feasibility of the
40% markup behind the forecast first year profit of CU90,000 which implies a revenue of CU225,000 (100/40
CU90,000) supporting the two founders, the mature office manager and the trainee assembler as well as the
actual costs of production and service provision. Margins in a competitive industry like IT are likely to be
lower and it is an industry with a high failure rate amongst start-ups like Aldine.
The other issue of feasibility seems to be Aldine's reliance on supplier relations build up by Peter whilst at
PCNow. Faced with competition from Aldine there is a danger that PCNow would pressurise its suppliers for
preferential terms over Aldine.
In summary the business model is potentially viable but the founders need to satisfy themselves, and the
bank, on the issues above.
3 Critique of the business plan
The main omissions from the business plan are:
 A statement of the legal entity: It is not clear whether Aldine is to be a company or a partnership. 

 Detailed financial workings to back up the ambitious forecasts on page 8: The business mix between
sales, service and training is not clear and nor are the volumes and costs of each. These should be
included as an appendix together with a sensitivity analysis of profits against price, costs and volumes. 

 The purposes for which the money is required: The initial equipment has been detailed and
purchased. What is not clear is what the further CU40,000 is required for inventory, working capital,
marketing etc. It is not clear. A bank will wish to ensure it is adequate and will not be impressed by
the CU15,000 additional commitment it is being asked to pledge. 

 Any evidence of demand for its services or the preferential supply terms: These are key elements in the
business model and so letters of reference and indications of willingness to buy/supply should be
included. 

 Job roles: Aldine intends to employ office staff, trainees etc. It is not clear what they will do. 

 Security: Details of the assets to be pledged by Peter should be included. 
 Market information: It is not appropriate to leave details of competitors at the level they are.
Evidence is needed of their size, strengths and weaknesses and also their likely responses to
Aldine's arrival in the market. 

 The proposals for the loan: The business plan does not indicate the likely timing for take-up of the
borrowing nor the repayment proposals. 

 Plans beyond 20X3: The plan ceases at the year the economic slowdown is forecast to begin.
There is no indication on how Aldine intends to develop its business then. Most business plans
will be for five years. 

 Detailed operational information such as how clients will be prospected and dealt with. 
4 Suggested improvements to the business plan
As indicated above, there are several elements of the business plan that need improvement. As
a minimum Aldine should include:
 A cash flow forecast broken down by month indicating the likely timing for take-up of the
borrowing and the repayment proposals. 

 Evidence of supplier and client intentions. 

 Details of the security being offered for the loan. 

 A better strategic analysis utilising the SWOT analysis in section 2 of this report and indicating
how the weaknesses and threats may be addressed. 

 Better competitor analysis 

 Job descriptions for the roles being recruited and also how work will be allocated to cover the
manufacture and servicing of the PCs. 

5 Conclusions
Providing the above issues are addressed we believe that Aldine will be successful in business and in the
application for its loan.
If there are any questions on this report, or further assistance is required, please revert to the author.
Chapter 13 Strategies for information
Interactive question 1: Strategic decision making
Decision making at the strategic level in organisations needs to be supported by
information systems that are flexible and responsive.
Requirement
(a) Describe the characteristics of information flows at the strategic level.
(b) Describe the sources of information required for strategic decision making
and the characteristics of an information system used to provide strategic
information.
(a) Long-term outlook
Information flows at a strategic level will be geared towards information expected to impact on
the long-term future of the business. There is a need for high quality information to enable sound
long-term decisions to be made.
Flexible
Organisations are complex systems.
In order to maintain control in a constantly changing organisation the information flows and systems
at strategic level need to be flexible and able to respond quickly to new demands.
For example, if a new competitor enters the market place, or environmental legislation is
introduced affecting production processes or a trading opportunity arises in an overseas territory,
then strategic decisions will be required to formulate the most appropriate response.
Good decisions can only be made when all the implications can be quantified with an acceptable
degree of certainty. Management information systems must be flexible enough to provide
concise, accurate and timely information relevant to the new environment.
Multi-directional
In a business organisation information flows both vertically and horizontally. The familiar
pyramid hierarchy of an organisation sets out three levels of control and information.
Information flows at the strategic level facilitates decision-making that will affect the whole
organisation and provide the framework for long term strategic plans. Internal information will
flow from middle management up to senior management and vice versa.
Information also flows horizontally between different activities in a business. For instance overtime
hours provided by the payroll section may be used by the production department, delivery lead times
from warehouses may be used by the sales team and the level of future orders from the sales
department will be used to forecast turnover and cash flows by the accounts department. The quality
of these information flows will dictate both the efficiency of the business operations and will impact
on the type and quality of information received by senior management.
The complex nature of strategic decisions makes information sharing vital.
An external component
Strategic level information flows will include information from external sources (e.g.
government, suppliers, media etc). Strategic decisions are generally non-routine and require a
high degree of judgement. The quality of information is critical at the strategic management
level.
(b) Information used at a strategic level is often ad hoc – strategic decision making is non-routine

and potentially risky.
Strategic information comes from both internal and external sources.
Internal sources
Most management information systems are now computer-based because of processing speed,
accuracy and the ability to process large volumes of data. Internal data needs to be captured from
day-to-day operations, processed into relevant information and made available in a suitable form at a
strategic level.
Senior management information requirements should play a part in the development of information
systems to ensure that the information required for strategic decision making is able to be produced.
Centralised systems are relatively powerful and usually controlled at senior level.
However, a flexible response to non-routine problems may be lacking.
Decentralised systems may provide more flexibility, however central control and standard
formats are often lacking.
Currently, popular solutions revolve around networked and distributed processing systems.
These can provide information to different levels of management – often from the same
database. They combine the advantages of local control, speed and ease of use with flexibility and
the potential for standardised presentation of information.
Executive Support Systems (ESS) can be particularly useful in this area, providing summarised
high-level information with the ability to view the underlying data if required.
The introduction of an ESS will also encourage senior management to consider which
type of information is really relevant to the business.
An intranet may also be appropriate to encourage the sharing of knowledge and opinions
relevant to strategic decisions (e.g. bulletin boards).
External sources
External information may be in the form of official reports, tax leaflets, technical updates,
press updates and often just word of mouth.
Much of this information is now available via the Internet. Intelligent agents and news-
clipping services can also be utilised on the Internet, to find user-defined information and
forward it – usually via e-mail.
Some organisations are able to access external information through an extranet – allowing
them to enter certain parts of another organisation's intranet.
Interactive question 2: Data and knowledge work

In traditional industrial economies a large proportion of businesses produced or assembled goods and
most employees worked in factories.
Many countries now have an information economy – where most wealth originates in information
and knowledge production and the majority of workers process or create information. Information
work is divided into two groups: data and knowledge work.
Requirements
(a) Distinguish between data workers and knowledge workers.
(b) Outline the role of a professional accountant as both a data worker and a knowledge worker
and briefly describe the support systems they require to work effectively.

(a) Knowledge work is defined as creating/generating new kinds of information or
knowledge. It involves the development of ideas or of expert opinions.
Knowledge workers are professional people, such as engineers, financial and marketing analysts,
production planners, lawyers, and accountants, to mention just a few. They are responsible for
finding, developing and maintaining knowledge for the organisation and integrating it with existing
knowledge.
Knowledge workers are experts in their particular functional area and therefore must keep
informed of all developments and events related to their profession. They also act as advisers and
consultants to the members of the organisation, and as change agents by introducing new
procedures, technologies, or processes.
Knowledge work is supported by a body of knowledge such as a collection of books, articles,
standards and research, which is widely accepted as valid. In other words, knowledge is
codified. This body of knowledge must be capable of being taught at educational establishments
rather than merely passed on as experience. There must be principles, procedures, and methods,
independent of pure experience, for work to be considered knowledge work.
Data work is defined as using, manipulating, or distributing symbolic information. Typical data
workers include bookkeepers, clerical workers and sales personnel. Both data workers and
knowledge workers deal with information. The difference is in how they deal with this
information. Data workers keep track of and disseminate information; knowledge workers
generate new kinds of information.
(b) As a data worker, the accountant may add value to an organisation by supporting management
planning, decision-making and control. This work is based on data and information processing
and reporting. To work effectively as data workers, accountants use operational level
information systems (transaction processing systems) and management level systems, such as
MIS and DSS.
Operational level systems support managers and accountants by keeping track of the
elementary activities and transactions of the organisation e.g., sales, payroll and credit decisions.
Management
level systems support the monitoring, controlling, decision-making and administrative activities of
accountants. They provide periodic reports rather than one-off type information on operations
and may provide facilities for 'what-if?' analysis.
As well as wanting to know what happened in the past, accountants should provide information
that helps senior management decide what action should be taken in the future. As knowledge
workers, accountants add value to the organisation in several ways.
Accountants are required to interpret ever-expanding external knowledge bases, they may
perform internal system/workflow reviews – requiring them to recognise problems and possible
solutions within a complex and changing business environment. Accountants may be called upon to
act as organisational change agents.
The information required by the decision-makers of the future is likely to come increasingly from
environmental scanning and intelligence gathering. Information must be readily available,
of reasonable quality, in the right form, and not too costly. Furthermore, the knowledge worker
must have the skills and knowledge to use it effectively.
For accountants to work effectively as knowledge workers they need easy access to electronically
stored knowledge bases. They also need powerful software that facilitates communication and analysis, and
they must be able to manipulate data and graphics for modelling and presentation purposes.
The IT tools the accountant will use should be powerful, but user-friendly. A user-friendly
interface is particularly important, designed to maximise the use of knowledge workers' most limited
resource – time.

Knowledge level systems include office automation systems and knowledge work systems; they
support accountants in their roles as both knowledge and data workers in organisations. Office
automation systems increase productivity through co-ordination and communication. These
systems include document managers, schedulers and communication tools.
The purpose of knowledge level systems is to discover, organise and integrate new
knowledge into the organisation. One way that IT can integrate the expertise of knowledge
workers into an organisation and assist in improving worker performance is through the use of
intelligent systems. These systems contain the knowledge of super-experts and can disseminate
that knowledge to all employees who need it.
The main support systems for knowledge workers range from Internet search engines that
help them find information, to expert systems that support information interpretation and even to
hyperlinks that help them increase their productivity and the quality of their work.
Within most organisations, knowledge workers are the major users of the Internet because it is an
effective way of accessing up-to-date information on a wide range of topics. Accountants need to
keep abreast of developments in accounting, business and information technology, to communicate
with managers and colleagues, and to collaborate with knowledge workers in other organisations
('knowledge networking') to solve problems.
Interactive question 3: Information and knowledge management

Increasingly the management of information sharing and group working ventures is a fundamental
part of business management.
Requirements
(a) Discuss how the management of information might differ from the management of knowledge.
(b) How can an organisation develop a knowledge strategy?
(a) Information management entails identifying the current and future information needs,
identifying information sources, collecting and storing the information and facilitating existing
methods of using information and identifying new ways of using it. It should also ensure that the
information is communicated to those who need it and not to those who are not entitled to see it.
Mayo defines knowledge management (KM) as 'the management of the information, knowledge
and experience available to an organisation – its creation, capture, storage, availability and utilisation
– in order that organisational activities build on what is already known and extend it further'.
More specifically, knowledge is interpreted in terms of potential for action and distinguished from
information in terms of its more immediate link with performance. This interpretation is consistent with
what the information systems philosopher and professor Charles West Churchman observed three
decades ago in his pioneering work The Design of Inquiring Systems: 'knowledge resides in the
user and not in the collection of information… it is how the user reacts to a collection of
information that matters'.
Databases, or more correctly knowledge bases, need to be designed and developed to store the
organisation's knowledge. This will be particularly difficult because of the tacit nature of much of the
knowledge and also because it is largely inside the heads of individuals. Recording this knowledge will
be very different to recording the fields and records of a traditional database. An expert system
seems one way forward as this has a knowledge base made up of facts, rules and conditions. But much
of this knowledge may have to be represented pictorially as images and 'knowledge maps'. An intranet
that lends itself to full multimedia representation and intelligent searching may therefore be the way
forward.
Knowledge-based companies will vary from industry to industry but there are some broad common

principles about where knowledge resides and how to capture its value. The intellectual capital can be
divided between human capital (the bodies that go home at night), and structural capital. Structural
capital includes innovation capital (intellectual property), customer capital (address lists and client
records), and organisational capital (systems for processing policies and claims). A number of
organisations are creating knowledge management programmes for protecting and distributing
knowledge resources that they have identified and for discovering new sources of knowledge.
 One such programme is the identification and development of informal networks and
communities of practice within organisations. These self-organising groups share common
work interests, usually cutting across a company's functions and processes. 

 Another means of establishing the occurrence of knowledge is to look at knowledge-related
business outcomes e.g., product development and service innovation. While the knowledge
embedded within these innovations is invisible, the products themselves are tangible. 

 Every day companies make substantial investments in improving their employees' knowledge and
enabling them to use it more effectively. Analysis of these investments is a third way of making
KM activities visible. For example how much technical and non-technical training are individuals
consuming? How much is invested in competitive and environmental scanning, and in other
forms of strategic research? 
The process by which an organisation develops its store of knowledge is sometimes called
organisational learning. A learning organisation is centred on the people that make up the
organisation and the knowledge they hold. The organisation and employees feed off and into the
central pool of knowledge. The organisation uses the knowledge pool as a tool to teach itself and
its employees.
There are dozens of different approaches to KM, including document management, information
management, business intelligence, competence management, information systems management,
intellectual asset management, innovation, business process design, and so on. Many KM projects have
a significant element of information management. After all, people need information about where
knowledge resides, and to share knowledge they need to transform it into more or less transient
forms of information.
(b) A knowledge management strategy might take the form shown in the diagram below.

The stages may include the following.
(i) Develop and determine a policy for owning, growing and sharing knowledge within the
organisation.
(ii) Identify critical knowledge functions within each department.
(iii) Audit knowledge to determine its type, location, longevity and whether it is explicit or tacit.
(iv) Document knowledge in a medium that best suits the purpose for which it will be used.
(v) Store it in a repository where it can be easily updated and retrieved.
(vi) Determine ways in which it can be grown and tracked.
(vii) Decide how the knowledge will be disseminated inside the organisation and possibly outside.
(viii) Ensure this valuable organisational asset is kept secure.

Chapter 14 Strategies for change
Case study: Ford Motor Company
The Ford Motor Company could lose as much as $9bn (£4.8bn) this year as it undergoes a huge restructuring in a
desperate attempt to halt its ongoing loss of market share in the US.
Ford announced yesterday [15 September 2006] it would cut a third of all salaried employees – 14,000 jobs – and offer
voluntary redundancy to all of its 75,000 hourly paid workers. It also announced it would close two more manufacturing
plants by the end of 2008, on top of 14 closures already announced this year.
Ford, which hopes the cuts will save it $5bn in operating costs, also admitted it would no longer reach profitability
in 2008 as it had expected.
'These actions have painful consequences for communities and many of our loyal employees,' said chairman Bill Ford, who
this month stepped down as chief executive of the company founded by his great-grandfather, Henry Ford. 'But rapid shifts in
consumer demand that affect our product mix, and continued high prices for commodities, mean we must continue working
quickly and decisively to fix our business.'
The situation at the Michigan-based carmaker could be even worse than it admitted yesterday. The Detroit News reported on
Thursday that an internal company report dated September 6 and prepared by chief finance officer Don Leclair's office
projected that its worldwide automotive operations' losses would be nearly $6bn this year. Once restructuring costs were
included, the report said, Ford's 2006 pre-tax loss could be between $8bn and $9bn.
The central cause of Ford's problems is that Americans are increasingly buying their cars from Japanese competitors
such as Toyota. Ford has lost market share in the US for 10 successive years. It now has a share of only 16%, and said
yesterday it expected that to drop to between 14% and 15%. Above all, it has been hit by falling sales of pick-up trucks
such as the F-150 and sports utility vehicles (SUVs), once best-sellers that generated the bulk of profits, as petrol prices
have hit $3 a gallon.
Ford yesterday revealed details of new, smaller, more fuel-efficient models that it hopes will help it to regain market
share. It announced the launch of a new 'crossover' (a cross between an SUV and a car). But analysts remain
sceptical.
The problems faced by carmakers were underlined yesterday when DaimlerChrysler announced losses of $1.2bn
for the third quarter, double previous forecasts.
Under Ford's previous restructuring plan announced in January, titled the Way Forward, Ford planned to cut 25,000–
30,000 manufacturing jobs and close 14 plants by 2012. It has now decided to bring forward the plans by four years
and complete the cuts by the end of 2008.
The voluntary redundancies at Ford are similar to a plan by General Motors earlier this year that succeeded in cutting
34,000 workers – or about a third of the hourly workforce – from the payroll. GM now employs 95,000 hourly
workers, 39% of the number it employed 10 years ago.
Ford announced last month that it plans to sell Aston Martin, and there has been speculation about sell-offs of other
parts of its Premier Automotive Group, which includes Land Rover and Jaguar. But it insisted yesterday that it had no
plans to dispose of Jaguar. 'Jaguar is not for sale,' Mark Schulz, executive vice-president, said.
Ford's announcement of its restructuring plans came days after Mr Ford stood down as chief executive. Mr Ford
admitted at the time of his move that he was overwhelmed by the job, and he had been 'wearing too many hats'.
In his place he appointed Boeing's head of commercial aircraft, Alan Mulally, who is known as a turnaround expert.
Mr Mulally was not involved in the plan announced yesterday, and whether the company will have to put together
yet another restructuring once he has got his feet under the table remains to be seen.
'We know our work is far from over,' he said yesterday.'
Source: The Guardian Saturday 16 September, 2006
Case study: Tesco goes global
'Tesco Ltd today [9 February 2006] announces that it intends to enter the United States through the
development of a new convenience format, beginning on the West Coast in 2007.
The development of the business will be through organic growth, with initial planned capital expenditure of up to
CU250 million per year, which will be funded from existing resources, with break-even expected by the end of the
second full year of operation. Tim Mason, currently our Marketing and Property Director, will move to the US to run
the business, remaining on the main Board.
The new format is designed for the American market, following extensive consumer research and modelled on
Tesco's highly successful and innovative Express concept, which we now operate in five countries, with over 800
stores serving around eight million customers every week.
International growth forms a key element of Tesco's four part strategy and the business currently trades in 12
countries outside the UK, mainly in Asia and Central Europe. Over half of Tesco's selling space is now outside the
UK. Today's announcement represents a strategic move into another developed market, complementing our entry
into the emerging Chinese market in July 2004. It will allow us to build our position in the world's largest markets,
and brings the population of markets we operate in to 2.1 billion people, contributing over 55% of global GDP.'
Source: Tesco Press Release 9 February 2006
Interactive question 1: Types of change
Classify and explain the following changes using Johnson, Scholes and Whittington model.
 Ford Motor Company turnaround strategy 

 Tesco's entry into the US and Chinese markets 

Ford
Forced: They are reacting to external competitive and environmental changes and the results will be a
significant change in the way Ford is structured and its overall size.
Tesco
Planned: It is proactive, aimed at seizing an opportunity, and given the size of the US and Chinese markets it will
change the character of Tesco in terms of size but also its global profile.
Interactive question 2: Transforming the Royal Mail

Consider the cultural change described in the final paragraphs of the Royal Mail example above and the steps that
have been taken so far.
Requirement
Apply the activities of the Gemini 4Rs approach to this change. Suggest additional actions that management
needs to consider.

Reframing
The major reframing is the term 'commercial business' which implies making profits as the primary goal, or at least
providing as good a service as competitors in a de-regulated environment.
The ensuing strong emphasis on profits and termination of loss-making activities underlines this.
Management needs to consider how to make this a goal that staff will wish to support. In fact, Allan Leighton had
hoped to issue shares to all Post Office staff to give them a stake in profits but was overruled by the UK Treasury.
This was taken as a set-back for him although he is hoping to offer staff 'phantom shares', in effect non-tradeable
rights to shares of profits.
Restructuring
None obviously stated although references to automated sorting suggest there are changes here. In fact, there has been
major restructuring with closures of thousand of network post offices, integration of services, closure of entire
administrative and sorting offices.
Revitalising
'Competing successfully in an open mail market is going to be even more difficult. We've a mountain to climb and
we've only reached the base camp.'
Renewal
The statements are clearly inclusive and emphasise gaining staff commitment. There are new financial control systems
and new reward structures.
Interactive question 3: Gerrard, Dudek & Smicer

Gerrard, Dudek & Smicer are a small long established firm of solicitors. They have recently appointed Eva, a new
business development manager. She has suggested that the firm introduce electronic diaries as staff often don't know
where to find each other. Secretaries also struggle to book meetings as the partners often keep their agendas with
them, which has annoyed some key clients. However, the partners are extremely reluctant to consider such a departure
from their current methods.
Using Lewin's force field model, analyse the above situation and suggest how the new manager could bring about the
change she wants.

Driving forces for change: Technological developments raising customer expectation, irritated customers,
new innovative staff member.
Restraining forces: Partners' habits and possible fear of the unknown, possible concerns over
expense.
Eva should strengthen the driving forces by stressing to the partners the level of clients' concerns and gain the support
of the secretaries in encouraging the partners to consider the system.
The restraining forces should be weakened by producing costings, and explaining clearly how the system would work
and what benefits would arise.

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Chapter 1 Strategy and business

Interactive question 1: Famous business leaders

Answer to Interactive question 1

Interactive question 2: Impact of strategic style on financial management

Interactive question 3: Six Continents hotels

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Answer to Interactive question 3

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

CORPORATE CONSTRAINTS IMPLEMENTATION

MISSION AND STRATEGIC

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Interactive question 5: Sony and the chicken and egg question

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Interactive question 6: McDonnell Douglas

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Interactive question 7: Why have ethical standards? [Difficulty level: Intermediate]

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Answer to Interactive question 1

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

3 Preparation of a strategic plan

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Existing product New product

Existing market Internal efficiency and market Product development

Interactive question 2: Gooseberry Farm Ltd

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Budgets of the golf club company

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

  Total demand projections (including a break-even calculation) 

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Interactive question 3: Supavac Ltd

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

(i) Bangladesh-based employees

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Interactive question 4: Being socially responsible

Answer to Interactive question 4

Interactive question 5: Foundry Theatre

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Answer to Interactive question 5

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Answer to Interactive question 1

  Rival accounting firms seeking to take clients themselves 

Interactive question 2: Oil industry scenarios

Answer to Interactive question 2

Interactive question 3: Newspaper industry

Answer to Interactive question 3

Interactive question 4: A global corporation?

Answer to Interactive question 4

Answer to Interactive question 5

Interactive question 6: Chinese car industry

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

(a) The main substitutes cited in the extract are:

Interactive question 2: Profitability of airlines

Saiful Islam Mozumder, Manager Finance & Accounts, Organic Group,

Answer to Interactive question 2

Increased availability has led to more choice in the market