Comprehension worksheet - tutor2u · Comprehension worksheet Question Answer How did Kirsty come to own Green Farm? She inherited it from her father in the early 1990s What is the

Comprehension worksheet

Question Answer

How did Kirsty come to own Green Farm?

She inherited it from her father in the early 1990s

What is the main business of Green Farm?

Crop farming (barley, wheat, oil seed etc) – the core business Poultry farming – small scale (sideline)

Describe how Kirsty sources the workforce of the farm

Mixture of employees: Permanent staff Temporary staff Many roles taken by low-paid migrant labour

What were the three areas of concern that Keith had identified in relation to the farming operations?

Wastage Labour efficiency Crop yields

Describe the key features of Phase One for the wind power project

Install one, small wind turbine to provide farm with free electricity + potentially generate a small surplus to sell Get specialist support from engineers re turbine installation Obtain planning permission Gain support of local residents (stakeholders)

OPTION ONE Answer the following questions about Option One

Describe the new product opportunity for Option One

Farming - new hybrid oil seed Crop well suited to Green Farm conditions Can be used in production of biofuel

What are the main business issues raised by this Option?

Crop yields for oil seed Who would process the oil seed? Investment requirement Likely selling price & costs Environmental credentials of the petrol replacement Distribution channels

OPTION TWO Answer the following questions about Option Two

How does Kirsty plan to expand the existing wind turbine operation?

Add three big turbines

The main operational challenges facing Kirsty with Option Two are?

Obtaining planning permission (Appendix 3) Need to be more professional in setting up a distribution mechanism (selling) Insurance Maintenance & technical support

Question Answer

OPTION THREE Answer the following questions about Option Three

The business venture being considered is?

Operating a paintball centre

Describe the investment requirement for Option Three

£50,000 for the paintballing equipment Capital cost of building an arena and support facilities

The main attractions of Option Three as viewed by Roger include what?

Low investment requirement Low risk Year –round activity = less seasonal demand Weak competition Low break-even point with potential for good profits

Green Wind Farm - Exam-style Exercise

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Ansoff Matrix

Tasks

(1) (a) List the four quadrants in the Ansoff Matrix below (use dotted line)

(b) Insert each of the three options available to GWF into the correct quadrant

Products

Existing New

Markets Existing Market penetration

. . . . . . . . . . . . . . . . . . . . .

Option One

Already producing wind power – albeit on a small scale

Phase Two is about scaling up the existing product

Product development

. . . . . . . . . . . . . . . . . . . . .

New Market development

. . . . . . . . . . . . . . . . . . . . .

Option One

A new market use for an existing crop – oil seed

Diversification

. . . . . . . . . . . . . . . . . . . . .

Option Three

Although described as “low risk”, this is a new product in a new market

(2) Explain, using the Ansoff Matrix as a guide, which of the three options presents the greatest risk to GWF

Option One An activity that GWF is already good at – arable farming

Involves growing a different variety of seed – but no major changes to farming processes

Marketing issues need to be addressed – as with any crop.

Relatively low risk and low investment

Option Two The most complex project and the option that is likely to require the biggest investment – all of which adds to the risk

Explicit mention of “risks and huge financial resources required” [line 67-68]

Risk can be managed by using experienced contractors – but this will reduce the profits/returns

Risk could be shared by obtaining financial investment (e.g. neighbouring farmers)



Need to obtain local stakeholder support too

GWF has existing experience of wind-farm operation – but on a much smaller scale

Overall risk – high because of financial investment and operational complexity

Option Three Diversification – normally associated with a higher risk strategy

GWF has no experience of operating a leisure attraction – will be easy to under-estimate the quality and service required

However, the capital investment required is low

Main risk is in the marketing and the threat from the economic downturn – what will need to be spent in order to build a customer base? How will local competitors respond?

Medium risk overall



Breakeven

As part of her business plan for Option Two, Sue has identified the following data in relation to the sales and costs of the Phase two wind farm extension.

Sue has found out that the average selling price for supplying generated units of electricity to the National Grid is £90 per ‘000 kwh. Other data in Sue’s plan is as follows:

Units of electricity produced and sold ('000) 3,000

Selling price per '000 units (kwh) £90

Variable costs per '000 units £5

Fixed costs (£'000) £350

Tasks:

(1) Calculate the contribution per ‘000 units of electricity produced and sold (show your workings)

(2) Calculate the breakeven output and margin of safety using the data provided

(3) Sue believes that a government grant of £100,000 may be available to finance the investment in Option Two. Explain what the effect on the breakeven level of output would be if GWF were able to obtain this grant and the other business plan assumptions remained the same

(4) Assess the extent to which breakeven analysis is useful to the strategic decision-making by GWF

Workings:

Units of electricity sold ('000) 3,000

Selling price per '000 units (kwh) £90

Variable costs per '000 units £5

Fixed costs (£'000) £350

Contribution per '000 units (£90 - £5) £85

Breakeven output (‘000) £350k / £85 4,118

Margin of safety (3,000k units less breakeven output) -1,118

Grant available (£'000) 100

Breakeven output if obtained (reduces fixed costs by £100K) 2,941

Usefulness of breakeven to GWF on Option Two:

The project involves substantial fixed costs and a significant investment



There is also much uncertainty about the selling price that can be achieved and the volume of electricity that will be generated (wind conditions etc)

Breakeven analysis is hugely useful because it focuses Kirsty and the team on the viability of the project. It takes account of the sensitivity of selling prices and volumes and focuses them on minimising the fixed costs of the project.

The availability of a grant, for example, significantly reduces the breakeven output in the first year. But will this be available in subsequent years?



Investment Returns

Using figures supplied by Keith, Sue and Roger, Kirsty calculated the likely net cash-flow for each of the three options:

New Crop Wind Phase 2 Paintball

Time (year) Option 1 Option 2 Option 3

0 -75,000 -350,000 -50,000

1 50,000 25,000 25,000

2 50,000 50,000 40,000

3 40,000 100,000 50,000

4 40,000 100,000 50,000

5 40,000 100,000 50,000

Tasks

(1) Calculate, showing your workings, the Payback Period for Option 1 (show your workings)

Payback occurs half way through the second year.

In year 2, the cash flow is £50,000, which turns a negative cumulative total of £25,000 (end year 1) into a positive net cash flow of £25,000 by the end of year 2

I.e. payback = 1.5 years

Note: this assumes that the cash flows from Option 1 arise evenly during each year.

(2) Calculate, showing your workings, the ARR for each option (show your workings)

Option 1 Option 2 Option 3

Total returns (Years 1-5) 220,000 375,000 215,000

Initial investment 75000 350000 50000

Average return per year 44000 75000 43000

Avg return / investment 58.7% 21.4% 86.0%



(3) Describe one advantage and one disadvantage of using each of the Payback Period and the ARR as investment appraisal techniques

Advantages Disadvantages

Payback It is simple to use and gives an immediate view on how long it will take to recoup an investment

Focuses on cash flows

Ignores cash flows that arise once payback has been achieved (which may be substantial)

Not concerned with the overall return on investment

Does not address the risk of an investment and the investor’s required rate of return

Can be overly simplistic

Ignores qualitative aspects of the decision

ARR Provides a measure of the overall return on investment

ARR can be compared with investor’s required rate of return – which will take some account of the risk of the investment

Not necessarily focused on cash flows, rather the profits earned

Ignores qualitative aspects of the decision



Labour efficiency

Keith is concerned about some aspects of the farm’s performance. He has produced some data for Kirsty to review:

Green Farm - Performance Data

Data by type of staff

Permanent Temporary

Number of farm labourers (avg per month) 20 40

Farmed output (tonnes per month) 50 35

Wastage (tonnes per month) 1.0 1.4

Leavers (per month) 1 6

Working days per month (avg) 25 25

Unauthorised absences (days per month) 0.8 3.0

Tasks

(1) What is meant by the terms “wastage” and “staff efficiency”?

Wastage:

Can be of two types for GWF:

a) The proportion of finished output that is not suitable for sale (e.g. a crop that does not meet the quality standards of the customer)

b) Excess use of inputs into the farming process – e.g. excessive use of fertilizers

Staff efficiency:

A measure of the productivity of each employee – how much output is produced by each employee

Note – not all employees will be as “efficient” as others – it will depend on what roles they perform, what farming technology they use, their skill and experience etc



(2) Complete the following calculations for temporary workers at Green Farm

Permanent Staff

Temporary Staff

Wastage level (%) 2.0%

4.0%

Staff turnover 5.0%

15.0%

Absenteeism 3.0%

12.0%

(3) Explain why, from a strategic perspective, Kirsty should take the performance data produced by Keith seriously

The core business of GWF remains arable farming (despite the three alternative projects under consideration). The farm is doing well [line 41], but there is a concern that the income from farm subsidies might fall (appendix 1).

It is essential, therefore, that GWF focuses on the efficiency/productivity of its business.

Labour costs will be a substantial part of GWF’s operating costs – arable farming remains a labour-intensive operation, despite the use of technology.



Marketing Strategy

Kirsty decides to go ahead with Option Three and invest in a paintball facility at Green Farm.

Task

(1) Outline a suitable marketing strategy for the launch of the GWF paintball business

A good framework to use in a question like this is the marketing mix.

The starting point for a marketing strategy will be the marketing objectives:

- What sales and profits does Kirsty wish to achieve from the Paintballing project?

- Over what timescale will the marketing objectives be measured?

An outline marketing strategy:

Product Place

Variety of paintballing zones and challenges within GWF “arena”. May require substantial part of spare land and wooded area

Core product – “pay as you play” – full-day; half-day or hourly sessions

Options to book for hen, stag and children’s parties

Full protective clothing provided within inclusive play package

Product extras to be bought at the venue (e.g. extra paintballs, grenades, smokebombs)

Creation of zoned paintballing arena at GWF

Create dedicated visitor facility – reception, catering & equipment stores

Potential to add additional venues once business is established

Promotion Price

Launch aim is to encourage trial use

Direct marketing using online and printed materials

Promote on online paintballing websites and social networks

Local sales promotions – leaflets and vouchers

Limited advertising – e.g. local papers

Offer range of gift vouchers as part of sales promotion

Pricing tactic has to encourage customer trial

Encourage full-day attendance to maximise catering sales - e.g. £9.99 for a full day; £7.99 for half-day

Corporate group rates

Party rates





Option Evaluation

(1) Complete the following analysis of the three options open to GWF

Option One

Biofuel crop

Option Two

Wind farm extension

Option Three

Paintball

Level of investment

(Low | Medium | High) Low High Medium

Fit with existing activities

(Low | Medium | High) High Medium Low

Potential for profits

(Low | Medium | High) Medium / High Medium / Low Low

Strength of competition

(Low | Medium | High) Medium Medium Medium

Operational complexity

(Low | Medium | High) Low High Medium

Overall risk to GWF

(Low | Medium | High) Low High Low

(2) Recommend and fully justify which option GWF should choose.

The answer – over to you! However…

Notes:

The three options are not mutually exclusive – it is possible for Kirsty to do more than one. Much depends on the financial resources required.

Kirsty also has the option of doing none of the options – she is financially-astute: if the business plans do not suggest that any of the options are viable, or that they meet her required return, then she can choose not to proceed

GWF is already a successful arable farm – the options presented are designed to add additional income to the business, not save the business

In the exam you will be presented with some additional data about the three options (e.g. a break-even calculation, or some payback ARR data) which you should use as part of your evaluation of the three options.

Don’t forget the importance of strategic objectives. We are not told much about Kirsty’s objectives for the business – however, these play a key role in determining which option she may choose.



Also consider sources of finance – only Option Two seems to be of a size that requires additional external sources of finance (proposal is to set up a limited company and perhaps sell shares to local farmers). But consider the alternatively – e.g. a bank loan or seeking out government grants.

Your analysis of the Ansoff Matrix can help shape your decision. Option three (paintballing) is the diversification option, which might suggest a higher risk. Option one and two represent GWF getting involved with existing products.



PEST Analysis

Tasks

(1) Explain what is meant by PEST analysis

PEST analysis is concerned with the external environmental influences on a business.

The acronym stands for the Political, Economic, Social and Technological issues that could affect the strategic development of a business.

(2) Explain why PEST analysis might be useful in GWF’s strategic decision-making

GWF identification of PEST influences would be a useful way of summarising the external environment in which the business operates. However, it must be followed up by consideration of how a business should respond to these influences.

For example, the research into Option Two has identified a number of significant political and legal issues which GWF needs to address if it is to successfully develop its wind-farm operations. The planning permission regime in the UK is complex and rapidly changing. GWF needs to take account of this as part of its business plan for Option Two.

Similarly, whilst the long-term trend in consumer spending on more leisure activities is positive for Option Three [appendix 4], the effect of the economic downturn in the UK is a significant negative influence. Will businesses and private groups cut back on paintballing trips during the recession? What are the implications of this for Roger’s business plan assumptions?



(3) Complete a PEST analysis for GWF

POLITICAL / LEGAL ECONOMIC

Changes to method of subsidising and paying farmers – may reduce overall level of subsidy (threat to existing arable activities of GWF)

Planning permission regime (environmental use of farmland) [appendix 3]

Conflicts with stakeholder groups opposed to proliferation of renewable energy projects

Availability and price (wages) of permanent and temporary labour force

Price pressure from food manufacturers and supermarkets on farm-gate prices

Long-term increase in consumer spending on leisure activities [appendix 4]

Economic downturn / recession likely to mean lower corporate spending on hospitality events like paintballing – will put pressure on pricing

SOCIAL / ETHICAL TECHNOLOGICAL

Changing flows of migrant labour across European Union

Attitudes of local communities to installing wind farms

Changes in farming technology – impact on efficiency, productivity

Alternative uses for arable crops – e.g. biofuels



Strategic and Tactical Objectives

Tasks

(1) What is meant by the terms “strategic objective” and “tactical objective”?

Firstly – what is an objective? An objective is a statement of a specific outcome that is to be achieved. These are often set in financial terms (e.g. sales, profits), but don’t have to be.

Strategic objective Set by senior management. Strategic objectives set out what the business as a whole needs to achieve. These are goals for the entire business

Tactical objective A more details objective that translates a strategic objective into a series of more detailed, operational objectives

(2) Identify one possible strategic objective and one tactical objective for each of the three options under review

Option Strategic Objective Tactical Objective

1 Achieve a return on investment in oil seed crops of 20% within 2 years

Agree supply contracts with 5 major biofuel processors within 12 months

2 Achieve a 1% share of the market for wind-turbine energy within 3 years

Achieve a selling price per kwh of at least £10

3 Become the marketing leading paintballing destination in the region by 2012

Achieve a minimum of 25 group bookings from the launch direct marketing activity



SWOT Analysis

Tasks

(1) What is meant by the term SWOT analysis?

SWOT analysis is a way of analysing the competitive position of a business

SWOT stands for:

Strengths What the business does better than the competition – core competencies. These are sources of competitive advantage

Weaknesses Areas where the business is weaker than the competition – a source of disadvantage

Opportunities External opportunities which they business could exploit in order to achieve its objectives

Threats External threats to the competitive position of the business – a business needs to respond to significant external threats

(2) Explain how a SWOT analysis could assist GWF in formulating its strategic objectives

SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment. It helps highlight the key strategic issues that GWF needs to address.

Once key strategic issues have been identified, they feed into business objectives, particularly marketing objectives. SWOT analysis can be used in conjunction with other tools for audit and analysis, such as PEST analysis and Porter's Five-Forces analysis.

SWOT analysis would help Kirsty identify the successful, core activities of GWF and provide a strategic context for evaluating the three options under review.



(3) Complete a SWOT analysis for GWF

S W

GWF operates successfully as an arable farm (range of crops + small-scale poultry rearing)

Kirsty is experienced and financially astute

Farm assistant team are high quality and specialists

Use of up-to-date farming technology (impact on efficiency)

Project management skills

Concerns raised about wastage, labour efficiency and crop yields

O T

Alternative uses of arable crops – e.g. biofuels

Further diversification of the farm land and facilities

Extension of the wind farm operation

Changing political attitudes and approaches to subsidies of arable farming

Uncertain planning permission regime towards wind power

Variability in prices & returns for biofuel crops

Attitude of local stakeholders if growth projects are pursued

OCR AS Applied Unit 9 – Exam Topics

Recent key topics examined in Unit 9 are:

Specification Area Jan 2007 June 2007 Jan 2008 June 2008

Mission Statements, Aims and Objectives

Definition and benefits of mission statements Definition & identification of stakeholders Potential conflicts between stakeholders

Defining business objectives Identifying strategic objectives for the case study business

Identification of stakeholders Issues causing conflict between stakeholders Strategic objectives of a partnership over time

Definition of mission statement Stating a strategic objective for a small firm

Business Planning, Strategy and Decision-Making

Analysis of case study business using Ansoff Matrix Evaluation of usefulness of Ansoff Matrix in making strategic decisions

Evaluation of the usefulness of Porter’s work in assessing strategic options

Application of Porter’s generic strategies to achieve competitive advantage

Labelling Ansoff’s matrix Entry of strategic options onto matrix Evaluation of strategic options

Financial Business-Planning

Completion of critical path analysis Evaluation of usefulness of critical path analysis in supporting decisions Calculation of payback period and ARR for the three business options under review

Completion of decision tree and recommendations for best option Usefulness of decision trees Drawing break-even chart; calculation of break-even output and margin of safety Calculation of the profit from one option using data provided

Calculation & interpretation of break-even & margin of safety Limitations of break-even analysis Calculation & interpretation using critical path analysis Investment appraisal calculation using NPV

Calculation of payback & ARR using data supplied in exam paper Completion of decision-tree and assessment of usefulness of decision-trees to strategic options Sources of finance for expansion

Human-Resource Planning

Define labour turnover & productivity Calculation & interpretation of labour efficiency ratios

Definition of labour productivity HRM implications of a potential merger

Calculations and problems of labour turnover

Specification Area Jan 2007 June 2007 Jan 2008 June 2008

Integrated Marketing Planning/Strategy

Recommendation & justification of which strategic options to chose

Recommendation of which of three strategic options to chose

Evaluation of strategic options Marketing strategy for one of the options

Contingency Planning and Crisis Management

How might contingency planning help the case study business?

The main themes in the EETL case study for June 2008 are:

Point

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Comprehension worksheet - tutor2u · Comprehension worksheet Question Answer How did Kirsty come to own Green Farm? She inherited it from her father in the early 1990s What is the