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ACCA Paper P3 Business Analysis – Mock Exam Questions

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ACCA Paper P3

Mock Examination for

December 2010 Examination

By

Mr. Andy Tan

Paper P3

Business Analysis

Instructions:

Section A: Answer ALL questions.

Section B: Answer TWO questions only.

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Section A – This ONE question is compulsory and MUST be attempted.

The following information should be used when answering question 1.

1 Case Study

Introduction

Universal Roofing Systems is a family owned and managed business specialising in thedesign, assembly and installation of low maintenance PVC roofing products for domestichousing. These products include PVC fascia boards and rainwater drainage systems. Set upin 1995 by two brothers, Matthew and Simon Black, the firm has grown year on year,achieving almost $1 million sales by the year 2001. Universal’s products, or rather services,are primarily for private house owners, though a significant amount of sales are coming fromcommercial house owners, mainly local government authorities and housing associations,providing cheaper housing for rent. Universal have recently received central government

recognition and an award for their contribution to proving employment in deprived inner cityareas. In 2002 and 2003, they were the fastest growing inner city firm in their region.

Origins and competitive environment

Matthew and Simon’s decision to go into business owed a considerable amount to theexperience and skills they had gained working in their father’s local cabinet and carpentrybusiness. At their father’s insistence, both were skilled cabinet-makers and shared hiscommitment to quality workmanship and installation. Their decision to start a business usingPVC materials as opposed to wood came as an unwelcome shock to their father. However,the opportunity to install PVC roofing boards on the house of a commercial contact providedthe stimulus for them to go into business on their own account.

In the UK there are some 25 million houses, of which 17 million are privately owned and 8

million rented. New housing is now usually built with PVC doors and windows installed, so it isthe replacement market of rotten wooden doors and windows in existing houses that themanufacturers and installers of PVC windows and doors focus on. PVC offers some significantadvantages to be owner/occupier – it is virtually maintenance free and improves theappearance of the house. Consequently, there is a high demand for PVC replacement doorsand windows, estimated at $1.5 billion in the year 2000. This has attracted some large-scalemanufactures and installers. They compete aggressively for market share and use equallyaggressive direct sales and promotion techniques to attract house owners to their product.

Although the market for PVC windows and doors is reasonably mature, there has been nosignificant movement of large companies into the installation of roofing products. Their complex design and location at the top of a house mean that these products are much morecomplex and difficult to install. Economies of scale are harder to achieve and as, a

consequence, the installation of PVC roofing systems is largely in the hands of smallbusinesses able to charge high prices and frequently giving a poor quality service to the houseowner. In a market with potential sales of $750 million a year, no firm accounts for more than3%. It was against this fragmented, but significant market that Universal wanted to offer something distinctively different.

Operational processesMatthew and Simon looked at the whole process of delivering a quality service in replacementPVC roofing systems. The experience of the PVC door and window installers showed thelong-term rates of growth possible through actively promoting and selling the service. Suppliesof PVC boards and fitting were reasonably easy to obtain from the small number or large UKcompanies extruding PVC boards in large volumes. However, the unequal bargaining power meant that these suppliers dominated and were difficult to involve in any product development.

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Sales were generated by door-to-door canvassing, followed by a visit from a company salesrepresentative who tried to complete the sale. Advertising in the press, radio and TV nowsupported this sales activity. In the early days the opportunity was taken to sell the service at

Saturday markets and, being so small, Universal could often pleasantly surprise the houseowner by offering virtually immediate installation. Matthew and Simon promoted, sold andinstalled the systems. One of their key early decisions was to use a new Mercedes van withUniversal’s name and logo prominently displayed, to carry the bulky PVC materials to their customers’ houses. In one move they differentiated themselves from their low cost/low qualitycompetitors and got the company’s name recognised.

The skills and experience of the brothers meant that they were able to critically examine theinstallation process being used by their small competitors to deliver a poor standard of service.Their eventual design incorporated innovative roofing design and parts from Europe and aunique installation stand or frame that provided the installer with quick, easy and safe accessto the roofs of the houses being worked on. This greatly improved the productivity of Universal’s installation team over competitors using traditional methods. The brothersrecognised that without the ability to offer a service that could be packaged, given standardprices and procedures and made as ‘installer friendly’ as possible they too would be limited tosmall scale operation and poor service. Being able to replicate a process time after time wasthe key to delivering an improved service and preventing each job being seen as a ‘one-off’. InMatthew’s word, ‘Whenever the customer can have a predictable experience and you can saythat this is what we are going to do, this is the way we are going to do it and this is how muchit will cost, the product/service usually goes problem free’.

Ultimately, the installers of the roofing systems determined quality. The brothers quickly builtup a team of installers, all of whom worked as sub-contractors and were not directly employedby the company. This gave the company the flexibility to vary the number of teams accordingto the level of customer demand. Installation took place throughout the year, though it could beaffected by winter weather. The two man teams were given comprehensive training ininstallation and customer care. Payment was by results and responsibility for correcting any

installation faults rested with the team doing the particular installation.

Sales and marketingMarketing and promotion were recognised as key to getting the company’s name known andits reputation for a quality installation service established. Comprehensive sales supportmaterials were created for use by the canvassers and sales representatives. Salesrepresentative were able to offer significant discounts to house owners willing to make animmediate decision to buy a Universal roofing system. In addition Universal received asignificant income stream from a finance house for roofing systems, sold on extendedpayment terms.

Universal offered a unique 10-year guarantee on its installations and proudly announced thatover 30% of new customers were directly recommended from existing satisfied customers.

The growth of the company had led to showrooms being set up in six large towns in the regionand the business plans for 2005 and 2006 will see a further nine showrooms opening in theregion, each of which costs $30K. Brand awareness was reinforced by the continued use of up-to-date Mercedes vans with the company’s logo and contact details prominently shown.

Company structure and performanceBy 2005, the organisational structure of the company was in place, based on functionalresponsibilities. Matthew was now Managing Director, Simon was Operations Director withresponsibility for the installation teams, and Matthew’s wife, Fiona, was Company Secretaryand responsible for the administration and scheduling side of the business. Two keyappointments had facilitated Universal’s rapid growth. In 2002, Mick Hendry was appointed asSales and Marketing Director. Mick had 20 years of experience with direct sales in a largeinstaller of PVC windows and doors. Through his efforts, Universal achieved a step change in

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sales growth, with sales increasing from $1million in 2001 to $3.3 million in 2002. However,the increased costs involved meant the company made a loss of some $250,000 2003-sawsales increase to $5.4 million and a profit generated. 2004 saw further sales increase to $6.8

million and a net profit of about $400k. Matthew recognised the increasing pressure on hisown time and an inability to control the financial side of the business. 2003 saw Harry Pottsappointed as Finance Director and put in much needed financial and management informationsystems.

Future growth and developmentBy 2005 Universal had seen 10 years of significant growth and was facing some interestingdecisions as to how that growth was to be sustained. Firstly, there was the opportunity tomove from a largely regional operation into being a national company. Indeed, the company’svision statement expressed the desire to become ‘the most respected roofing company inBritain’, based on a ‘no surprises’ philosophy that house owners all around the country couldtrust. Economic factors encouraging growth looked fairly promising with a growing economy,stable interest rates and house owners finding it fairly easy to raise additional fundingnecessary to pay for home improvements. Secondly, there was a real opportunity to developtheir share of the commercial housing market. The government had committed itself to asignificant improvement in the standard of housing provided to people renting from localauthorities and housing associations. Despite the appointment of a Commercial Manager toconcentrate on sales into this specialist market, Universal had real difficulty in committingsufficient resources into exploiting this opportunity. In 2002 commercial sales represented over 11% of total sales, but currently commercial sales were around 5% of the total sales. Suchwere the overall growth predictions, however, that to maintain this share of sales would needcommercial sales to more than double over the 2005-7 period. Without the necessarycommitment of resource, particularly people, this target was unlikely to be realized. Universal’sproducts also need to be improved and this largely depended on its ability to get intopartnerships with its large PVC suppliers. There were some encouraging signs in thisdirection, but Universal’s reliance on PVC opened it to future challenges from installers usingmore environmentally friendly materials.

Above all, however, the rate of projected growth would place considerable pressures on thesenior management team’s ability to manage the process. The move towards becoming anational installer was already prompting thoughts about creating a regional level of management. Finally, such had been the firm’s growth record that its inability to meet thebudgeted sales targets in the first quarter of 2005 was causing real concern for Matthew andSimon.

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Table 1: Information on Universal’s current sales and financial performance ($000) (whereappropriate)

Universal Roofing Systems Financial information

2001 2002 2003 2004 2005 2006 2007Budget Forecast Forecast

Domestic sales 854 2,914 5,073 6,451 9,600 15,000 20,500Commercial sales 36 362 269 324 450 750 1,100Total Sales 890 3,276 5,342 6,775 10,050 15,750 21,600Material 169 589 766 925 1,339 2,105 2,890Direct Labour 329 1,105 1,941 2,290 3,333 5,125 7,019Gross Margin 392 1,582 2,635 3,560 5,378 8,520 11,691Sales commission 20 369 627 781 1,171 1,845 2,501Canvassers’ commission 74 563 764 962 1,420 2,190 2,993Marketing 32 171 223 398 657 1,020 1,374Total sales costs 126 1,103 1,614 2,141 3,248 5,055 6,868Contribution beforeoverhead 266 479 1,021 1,419 2,130 3,465 4,823Total overheads 272 723 862 1,140 1,536 2,030 2,627Trading profit beforecommission

-6 -244 159 279 594 1,435 2,196

Finance income 0 25 65 115 167 262 342Net profit -6 -219 224 394 761 1,697 2,538

Required:

(a) Using Porter’s Value Chain analysis, analyse the ways in which Universal hasprovided a superior level of service to its customers.

(20 marks)

Include 2 professional marks

(b) Using the information provided in the case scenario, strategically evaluate theperformance of the company up to 2004, indicating any areas of particular concern.

(20marks)Include 2 professional marks

Matthew Black is well aware that the achievement of the growth targets for the 2005 to2007 period will depend on successful implementation of the strategic, affecting all partsof the company’s activities.

(c) Explain the key issues affecting implementation and the changes necessary toachieve Universal’s ambitious growth strategic.

(10 marks)

(50 marks)

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Section B – TWO questions ONLY to be attempted.

2 Seemore Company is family owned and managed video and DVD rental business. Currentlythe business has thirty-five stores located throughout the region. The company wasestablished in 1982 when Michael Seymour opened a video rental shop on the outskirts of the city. Originally, many of the information systems were paper based but Michael was quickto implement computer based systems as and when required. During the last twenty yearsthe business has expended from the original single outlet to its current thirty-five stores.

The central office is the hub of the business where all the business operations are managed.Each store is automated in so much as membership details, video/DVD rental details andlocal stock recording systems are held locally on personal computers. Each store’s computer system is networked to the central office computer system. This network permits details of business operation to be transmitted automatically to the central office. As well as thefinancial information collected, the central office maintains a company-wide stock recordingsystem. Effective and efficient stock management is a key factor for the company’s continued

success.

Each store maintains a membership database. To become members customers must register with a local store. Following identity checks, members are issued with a membership card.These cards are valid in any of Seemore’s outlets. Membership is free. Members may visit astore and pick a video/DVD of their choice. The transaction is recorded and the member paysthe rental fee if film is available. Members can reserve a film for a specific date either byvisiting a store or making a reservation by telephone or fax. There is an increasing trend bymembers to use this reservation facility, as it avoids the disappointment of films not beingavailable when required. Seemore Co has always adopted the policy that the customer comes first. Maintaining high levels of personal service and customer satisfaction has alwaysbeen a high priority within the business.

The central office conducts all business transactions with its suppliers via an extranet. Theextranet, implemented three years ago, is widely viewed as successful. Speedy stockreplenishment and acquisition of new tiles are essential to the running of this highlycompetitive business.

There are three permanent IT professionals based in the central office. They maintain andenhance the business information systems. The majority of the existing business systems are‘off-the-shelf’ packaged based software that in some cases have been adapted to meetSeemore Co’s specific requirements. During the past fifteen years the IT staff did not developbusiness information systems for Seemore and external staff were contracted in to supply theservice. The initial implementation of the network was outsourced to a local vendor.

In the early 1990’s Seemore Co developed a postal membership system (PMS). To become

a postal member, customers pay a monthly premium. Each month they are sent brochures of the latest releases and classic titles available. The members complete an order form andreturn it to central office. Within two days of receipt of an order the rental packages aredispatched from the warehouse together with a pre-paid package label for the return of rentals. Details of members and their transactions are maintained in a customer database.

Although generally business has been steady, fierce competition has been negativelyaffecting profit margins. Senior management is concerned about the current position and isattempting to develop ides that will reverse the downward trend. One suggestion proposed byMichael’s brother Edward is to incorporate video ordering via the internet. He believes thepower of the web can strengthen the company’s business position and help to increase itsshare of the rental market.

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Assuming that Seemore Company decides to proceed with development and implementationof the internet video ordering system.

Required:

(a) Discuss the characteristics of an effectively designed website reference toSeemore Company.

(8 marks)

(b) Discuss the advantages and disadvantages of Seemore’s decision to proceed with theinternet video ordering system from the perspective of a customer .

(5 marks)

(c) Explain Customer Relationship Management (CRM) with reference to SeemoreCompany. Include in your explanation the use of online and digital technologiesand CRM software in supporting Seemore Company’s CRM.

(12 marks)

(25 marks)

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3 Global Imaging is a fast growing high tech company with some 100 employees which aimsdouble in size over the next three years. The company was set up as a spin out company bytwo research professors from a major university hospital who now acts as joint managing

directors. They are likely to leave the company once the growth objective is achieved.

Global Imaging’s products are sophisticated imaging devices facing a growing demand fromthe defence and health industries. These two markets are very different in terms of customer requirements but shared a related technology. Over 90% of sales are from exports and thecurrent strategic plan anticipates a foreign manufacturing plant being set up during the existingthree-year strategic plan. Current management positions are largely filled by staff who joinedin the early years of the company and reflect the heavy reliance on research and developmentto generate products to grow the business. Further growth will require additional staff in allparts of the business, particularly in manufacturing and sales and marketing.

Paul Simpson, HR manager at Global Imaging is annoyed. This stems from the fact that HR isthe one management function not involved in the strategic planning process shaping the futuregrowth and direction of the company. He feels trapped in a role traditionally given to HRspecialists, that of simply reacting to the staffing needs brought about by strategic decisionstaken by other parts of the business. He feels even more threatened by one of the jointmanaging directors arguing that HR issues should be the responsibility of the line managersand not a specialist HR staff function. Even worse, Paul has become aware of the increasingnumber of companies looking to outsource some or all of their HR activities.

Paul wants to develop a convincing case why HR should not only be retained as a corefunction in Global Imaging’s activities, but also be directly involved in the development of thecurrent growth strategy.

Required:

a) Write an explanatory note on the way a Human Resource Plan could link effectively with

Global Imaging’s growth strategy.(15 marks)

b) What advantages and disadvantages might result from outsourcing Global Imaging’s HRfunction?

(10 marks)

(25 marks)

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4 Angus Cairncross has recently been appointed as Head of Strategic Operations to themain board of Global Industries plc. This company is a UK-based conglomerateorganisation, which had achieved significant expansion during the 1960s and 1970s when

focusing on core businesses was not the fashion. The company has managed to maintaina leading position within the UK but is increasingly meeting competition from foreigncompetitors, both at home and abroad. Angus, prior to this recent appointment, had beenManaging Director of one of Global Industries’ subsidiary companies, Control SystemsLtd. This subsidiary company had focused on building control systems, including centralheating, air conditioning and security equipment. The market had been mainly in theindustrial sector as distinct from the general housing market. This subsidiary hadtraditionally not been a significant profit earner for Global Industries but Angus had beenable to radically improve the position by his ability to control costs and, with judiciouscapital investment, improve the output per employee. He had also identified new marketsoverseas, particularly in China, and the rapidly developing countries of South East Asia.The recent global economic problems faced by these countries had only marginallyaffected Control Systems’ business and now sales are again following an upward trend. The Chairman and Managing Director of Global Industries are both impressed with Angusand are hoping that his proven abilities in managing a focused company can betransferred to managing a conglomerate. Recently Global Industries has experienced adownturn in profits. The variety of businesses incorporated in the Company is large. Thepresence in industrial markets is considerable, ranging from design and constructionwithin the nuclear power industry, rail track construction, components for the motor vehicleassembly industry and the building control systems.

Apart from the industrial sector Global Industries is also heavily involved in the defenceindustry, particularly in weapon systems and avionics. Finally Global Industries has asignificant position within the consumer durable industry. It manufactures electric cookersand refrigerators within its kitchen appliance subsidiary, and also has recently purchased anumber of franchises in the automobile distribution sector.

Global industry’s strategy of diversification has enabled it to be less dependent upon onemarket or one industrial sector. However, in order to cope with the complexities of such awidespread business, the business is organised on divisional lines with each subsidiaryreporting to the centre on a financial basis only.

Each subsidiary is given financial targets by the centre (after consultation with thesubsidiary) and then strategy formulation, implementation and control are delegated to thesubsidiary companies. Because there appears to be little synergy between the companiestheir corporate and brand names are not even related to each other. At the end of afinancial year most of the profits are returned to the Global Industries Headquarters, with aproportion being available for re-investment. The company acts in a shareholder role. Ittakes no active part in management but if profits from a subsidiary are considered to be

inadequate then the likelihood of funds for investment in innovation or on new capitalequipment will be low. In the final resort the subsidiary may be sold off. Angus hassympathy with this management philosophy. Its attitude towards delegation and thefreedom to develop strategies had benefited him at Control Systems. However he also isconcerned with a lack of support from the centre.

Each subsidiary, by acting as an independent company has to provide its own supportinfrastructure - R & D, marketing and sales, finance and human resources. He believesthat there must be some benefit in developing an organisational structure which canprovide some direction and help, other than the Global Industries’ Headquarterscontrolling the subsidiaries only through financial discipline.

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However, Angus appears to have a more urgent task to attend to as The Board hasbecome very concerned about the performance of its kitchen appliance subsidiary. Over the past few years the performance of this company has deteriorated. This subsidiary

originally produced and marketed these appliances within the UK market. However over time it acquired five foreign companies with their own product brands — two in Europe,two in the Far East and one in South America. The management at that time decided thatit would be worthwhile continuing to promote these products under their original brandnames.

It also believed that by maintaining separate production facilities the kitchen appliancesubsidiary could still appear to be a local company, so customising products for distinctivemarkets. Initially this had seemed to be a sensible strategy. Sales actually increased for ashort time. However over the past three years sales have fallen significantly. Competitionis mainly from one major global company who has grown rapidly over the past few yearsby pursuing a focus strategy. Its strategy has been to concentrate on a restricted number of models, both of cookers and refrigerators, promoted under a single corporate brandname. It has also decided to source its products from just two manufacturing sites. Itsmarketing strategy has also been centralised, with apparently little reference to localdemand conditions.

Initially the Global Industries’ kitchen appliance subsidiary attempted to correct its positionby increasing its promotion. However the inability of the company to halt the slide in salesand the resultant loss in profits now means that Global Industries is now unwilling tofinance any increased expenditure. Whereas Angus still believes there is profit potentialwithin the kitchen appliance industry the majority of the members of the Board of theGlobal industries plc do not believe that the subsidiary can be turned around and isconsidering disposing of the company. Unless the Board can see an improvement in salesor at least be presented with a strategic plan which will identify opportunities to turnaround the situation then it will look for a buyer or starve the subsidiary of cash, milk thecurrent operations and then withdraw from that sector.

Required:

(a) Discuss the main problems of Global Industry with focus on the kitchen appliancesubsidiary, particularly when compared with its major competitor.

(10 marks)

(b) Discuss the benefits and problems which Global Industries plc is likely to experience,operating as a decentralised group of companies, using mainly financial controls asthe major management control system. Suggest how the company can provide morehelp from the Headquarters, without becoming over-involved in day-to-day

operations.(9 marks)

(c) Examine the factors which should be considered before a company decides todispose of a subsidiary. Consider how each of these factors might relate to thedisposal of the kitchen appliance subsidiary by Global Industries plc.

(6 marks)

(25 marks)

End of question paper

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