In the T4B case study exam, the knowledge and competence you gained in previous CIMA papers, especially the strategic level papers will be of immense help in analysing the pre-seen case study and writing your report in the exam for full potential marks. This guidance is aimed at providing you with useful information, such as:

T4B Knowledge Map

An overview of the technical models How to use technical models in analysing the pre-seen? How to use technical models in the exam, in writing the report? Relevant CIMA past paper questions to test yourself.

Please read this article written by the T4B case writer, who explains what theories and models you will have to use in your T4 part B exam.

In this guide, the examiners’ full suggested answers to exam questions have been provided, you can use these to refresh your knowledge about the technical models. Remember, in the T4B report and appendices, you are expected to demonstrate the application of such models, and hence detailed explanation of such models will not be required.

An overview of the following technical models can be found in this guide.

SWOT Analysis

PEST Analysis

Porter’s Five Forces

Mendelow’s Matrix

Balanced Scorecard

Porter’s Three Generic Strategies

Ratio Analysis

Value Chain

Porter’s Diamond

Evaluation of Strategy

SWOT Analysis

What is SWOT analysis?

“SWOT analysis summarises the key issues from the business environment and the strategic capability of an organisation that are most likely to impact on strategy development” (Johnson, Scholes & Whittington)

This brings together the strengths and weaknesses of an internal appraisal (how well does the company create value for customers/stakeholders) with the opportunities and threats of the environmental analysis

(what is going on in the outside world that affects the organisation).

How to use when analysing the pre-seen material?

Prepare a SWOT analysis before the exam. Know not only what but also why a particular feature is a strength or weakness of the organisation. This will help you to understand the organisation well.

Within each category, identify with reasons which factors are more significant than others, as it will be helpful to prioritise problems / issues in the organisation.

How to use in your report?

The first appendix in your report has to be the SWOT analysis (3 – 5 significant factors from each category). All new problems / issues which appear in the unseen should go into the SWOT, along with a few from the pre-seen.

This will be the forerunner of your prioritisations in your report, with an opening sentence such as, ‘based on the SWOT analysis (see Appendix A) issues identified below have been prioritised.’

Your recommendations must be based on the SWOT analysis. E.g. how to use the organisation’s strengths to capitalise on opportunities identified

Test Yourself

<Question 1> Nov 2006 - Q3 - Paper P6

PEST Analysis

What is PEST analysis?

PEST analysis is a framework for analysing the general environment of an industry, and anticipating the future. The following factors must be assessed in terms of their impact on the organisation being analysed. Political and legal – e.g. changes in competition policy, consumer protection, changes in employment law, health & safety and data protection etc Economic – e.g. GDP changes, inflation, interest rates, foreign exchange rates etc. Social and cultural – e.g. demographics, change in consumer tastes, culture Technological – e.g. e-commerce, m-commerce etc. How to use when analysing the pre-seen?

Construct a PEST analysis before the exam. This will help you to understand and familiarise yourself with the environment surrounding the organisation. You need to be very clear as to how changes to the above PEST factors will bring threats or opportunities to the organisation. First, construct the PEST analysis with the information in the pre-seen, and then extend it with the information you will gather in your industry research. How to use in your report?

It is worth considering reproducing the full PEST analysis in an appendix, if you evaluate the possibility of investing in a new country or an industry. Otherwise, just give only an extract with the key points that will refer in your report.

Test Yourself

<Question 2> May 2008 - Q3 a) - Paper P6

Michael Porter’s Five Forces Model

What are Porter’s five forces?

Porter’s Five Forces Model structurally analyses an entire industry or strategic group of close competitors. The main uses of this model are in understanding the inherent attractiveness or profitability of a particular market segment (or industry). Further, it can help identify actions relating to each individual force on the organization that mitigate their damaging effects (threats), and/or promote the beneficial effects (opportunities). According to Michael Porter the industry competition and so profitability is influenced by the pressures of five competitive forces. They are:

Threat of new entrants (barriers to entry) Threat of substitutes Bargaining power of customers Bargaining power of suppliers Competition and rivalry

How to use when analysing the pre-seen?

You may use this model for a quick scan of the environment to understand the attractiveness of the industry and thereby the future potential profitability of the organisation. You may assess the apparent strength of the five factors and consider how they will be relevant for the strategic direction and shape of the organisation. In prioritising the issues in the report, it will be useful to have an idea about the level of the factors influencing the five forces.

How to use in your report?

It is not recommended that you produce Porter’s five forces as an appendix as it will be a complete waste of time and energy. Therefore, simply refer to the model in the report, and demonstrate your understanding of the industry attractiveness and potential profitability (e.g. organisation’s gross or net margins).

Test Yourself

<Question 3> May 2011 – Q2 a) - Paper E3

Stakeholder mapping (Mendelow’s matrix)

What is stakeholder mapping?

Stakeholder expectations are varied and potentially conflicting. Mendelow devised a (2 by 2) matrix for classifying stakeholders in terms of their relative level of interest (strength and area of influence).and power (the extent they may influence organisation’s strategy). The stakeholder map indicates the stakeholders’ support or opposition to a stated strategy. The company must then decide if dissenting parties can be persuaded to change their opinion, or can be moved around the grid to lessen their influence (e.g. change suppliers). Further, it can be used to track the stakeholder influence on the organisation over time.

How to use when analysing the pre-seen?

Try to identify all possible stakeholders for the organisation in the pre-seen, and try to group them according to their level of power and the level of interest. This will help you to understand how the position of the stakeholders may change with the new issues introduced in the unseen.

How to use in your report?

With the information in the unseen, identify whether new stakeholders have been introduced and assess whether the position of the stakeholders you have already identified has changed. Ascertain, how the stakeholders, more importantly the ‘key players’ (stakeholders with High Power and High Interest), are driving the change, clearly showing the implications of the stakeholders on the organisation and its future direction.

Test Yourself?

<Question 4> May 2011 – Q4 a) and b) - Paper E3

Balanced Scorecard

What is the balanced score card?

This model is helpful to identify the issues within an organisation which are applicable to different stakeholders; there are four perspectives.

How do we look to shareholders? (financial perspective) How do customers see us? (customer perspective) What must we excel at and what business processes should be improved to enhance

efficiency? (internal business process) Can we continue to improve and create value? (innovation and learning)

How to use when analysing the pre-seen?

Start by identifying the Critical Success Factors (CSF) which will be helpful for you to prioritise issues and analyse potential solutions. Then, consider appropriate Key Performance Indicators (KPI) for each of the CSF you identified. This will help you to handle the information in the unseen. If any KPIs are given in the pre-seen, you may compare them against the real world organisations to assess the performance of the organisation.

How to use in your report?

It is advisable to make the balanced scorecard part of your recommendations. Therefore, it will be useful to give (one or two) examples of KPIs for each of the four perspectives in an appendix. Test Yourself?

<Question 5> Sep 2011 – Q2 b) - Paper E3

Porter’s three Generic Strategies What are Porter’s three generic strategies?

Michael Porter attempted to answer the question, ‘Why should customers buy from us?’ is it because: We offer the products at the lowest price

We offer something

in the market, and this is possible through least-cost production (cost leadership strategy). The internal activities will have to be organised to support low production costs – e.g. bulk production, automation etc.

different

We

from our competitors (differentiation strategy) and as a result customers are willing to pay a premium price – e.g. superior product quality, brand, ethics etc.

focus

our business efforts to profitably satisfy the needs of a niche market – a particular buyer group, section of the product range or market segment.

How to use when analysing the pre-seen?

Try to identify the competitive strategy used by the organisation. Be critical to find out whether the present competitive strategy is ‘working’ for the organisation especially in line with the SWOT analysis. Identify whether the organisation is ‘stuck in the middle’ where it tries to achieve both cost leadership and differentiation and is therefore heading towards ‘disaster’.

How to use in your report?

This could be used in your report in both issues prioritisation and strategy evaluation. Issues prioritisation – you have to demonstrate how the organisation could maintain

competitive advantage in a competitive market by addressing the most important issues for the organisation. In depth discussion in the main part of your report will enable you to earn both technical and application marks.

Strategy evaluation – in assessing potential alternative strategies, it is important to keep the competitive strategy in mind. You will have to explain what course of actions the organisation will have to take for the competitive strategy chosen (say, cost leadership) and challenges it may face in pursuing that strategy.

Test Yourself

<Question 6> Specimen Paper – Q4 a) - Paper E3

Ratio analysis

What is ratio analysis?

Overview Ratios can be used to systematically analyse financial statements and other financial data. Commonly used ratios include:

Efficiency ratios such as asset turnover and return on capital employed Gearing ratios such ratio of debts to total assets and interest cover Liquidity ratios such as current ratio and quick ratio Profitability ratios such as gross & net profit margin, profit-earnings ratio and return on capital

employed Investment ratios such as dividend yield, earnings per share and dividend cover

How to use when analysing the pre-seen?

It is very useful to understand the historic financial performance and position of the organisation. Your findings can be compared with industry averages you may find in your industry research. On the other hand, the findings in the ratio analysis can support your SWOT analysis – e.g. financial strengths and weaknesses, and possible causes and consequences on the organisation. Of course, all these are possible depending on the information given in the pre-seen scenario.

How to use in your report?

The unseen may provide you with new financial information. In such situations, you have to update the ratios you have already calculated with the information in the pre-seen, and understand the potential impact on the organisation. For instance, the updated ratios may alter the priorities of the issues and hence you must carefully consider how they will impact on the recommendations in your report. You may calculate the relevant ratios in an appendix if the ratios have an impact on issues prioritisation or your recommendations are based on any ratios. Remember, to give clear reference to the ratios in the appendix while giving a concise commentary on any assumptions you made.

Test Yourself

<Question 7> May 2010 – Q7 a) - Paper F2

Value chain What is the value chain?

Michael Porter developed the value chain to analyse how firm’s activities are organised in order to create or add value. This is a very useful tool to understand the organisation for a ‘helicopter view’. According to Porter, the understanding of the strategic capability must start with an identification of the separate value adding activities of an organisation. The activities in the value chain are as follows:

Inbound logistics – receiving, storing and handling stocks of raw materials Primary activities

Operations – processing raw materials into finished goods Outbound logistics – storing finished goods and distributing them to customers Marketing and sales – marketing and selling activities Service – after or during sales services separate from the product (eg warranties)

Procurement – purchasing function Secondary / support activities

Human resources – all functions related to staff recruitment and development Technology development – management of IT and R&D functions Infrastructure – everything else! (e.g. senior managers and finance function)

How to use when analysing the pre-seen?

The usefulness of this model depends on the scenario you receive. If the pre-seen has adequate information for you to identify the key internal activities, it will be helpful to understand how the organisation has organised the internal activities to achieve a competitive edge (e.g. via cost efficiency, differentiation or focus).

How to use in your report?

If you have to mention the organisation’s competitive strategy in the report, it is useful to mention this model. Ensure that you explain how the activities within the organisation should / could be re-arranged to gain strategic capability and competitive advantage.

Test Yourself

<Question 8> May 2010 – Q2 a) - Paper E3

Porter's Competitive Advantage of Nations (popularly known as Porter’s Diamond)

What is Porter’s diamond?

Michael Porter observed that some nations’ industries are more successful than others. He suggested reasons why some nations are more competitive than others. According to Porter, the combination of factors below can create a ‘cluster’ of extremely competitive firms that are well placed to compete internationally.

Resources enjoyed by a country, both natural resources such as climate, semiskilled or unskilled labour (basic factors) and factors requiring development such as communications, education of the workforce, research capability (advanced factors) - Factor Conditions

Strong demand and sophisticated customers tastes will drive quality up and costs down through economies of scale and the learning curve - Demand Conditions

Related and supporting industries may provide a good local supply chain and therefore quality and cost advantages

Organisation’s strategy, structure, rivalry – e.g. national cultural factors in the nation and social attitudes can lead to an advantage in certain industries. Intense domestic rivalry means that firms need to perform well to survive and may encourage them to look for export markets.

How to use when analysing the pre-seen?

This model will only be useful if the pre-seen has provided adequate information about the geographical location of the organisation, and is considering relocation to a new country. If you use this model, ensure that you understand how the organisation has derived competitive advantage through the four factors of the Porter’s Diamond.

How to use in your report?

If you happen to use Porter’s Diamond in your report, ensure that you don’t waste time explaining this model. There will be marks for explaining how the organisation has derived competitive advantage through the four factors of the Porter’s Diamond. Test Yourself

<Question 9> Nov 2011 – Q2 c) - Paper E3

Evaluation of strategies

What is evaluation of strategies?

Johnson & Sholes suggest that three criteria should be used to judge the most appropriate strategy:

Suitability - Does the proposed strategy help to solve the organisation’s problems? Does it fit the organisation’s mission and goals? Does it suit corporate culture?

Acceptability - Is the strategy acceptable to our key stakeholders? Feasibility – Does the organisation have the strategic capability to practically implement the

strategy, especially financial resources, management skills, skilled staff, required competencies and knowledge etc? If not, will it be possible to acquire them, and if so does it have the required money and time?

How to use when analysing the pre-seen?

If the pre-seen has included a proposed or ongoing strategy, you may use the SAF model to evaluate the effectiveness. How to use in your report?

In every report, you will get a chance to use this model. Make sure, under each heading of SAF, you clearly demonstrate your arguments and justifications. The questions listed in each of SAF above could be used as a guidance / check list. Test Yourself

<Question 10> Nov 2012 – Q3 - Paper E3

Test Yourself - Question bank SWOT Analysis Question 1: Nov 2006 - Q3 - Paper P6 DDD is a relatively small, specialist manufacturer of chemicals that are used in the pharmaceutical industry. It does not manufacture any pharmaceutical products itself since these are made by different processes and under different conditions. DDD obtains its raw materials, which are quite simple, from large chemical companies, and modifies them by a number of patented processes before selling them on to a few pharmaceutical companies. DDD makes significantly higher margins than its suppliers, which manufacture in bulk. Several patents are due to expire in the next three years. The large pharmaceutical companies, which are DDD’s customers, are suffering reduced profits as governments reduce the price they are prepared to pay for drugs. As a result, the pharmaceutical companies are pressuring DDD to reduce its prices. The majority of the shares are owned by members of the family which started the business some years ago and who still take an active part both as managers of the business and as development chemists. There is a share option scheme for the employees and this is well supported. Required: As management accountant for DDD you have been asked to:

a) Advise the Board of Directors of the possible threats related to the patent expiries. (10 marks) b) Evaluate suitable courses of action that DDD might take to maintain its profits in the face of

the threats identified in (a). (12 marks) <Read the Answer 1> PEST Analysis Question 2: May 2008 - Q3 - Paper P6

Based in a European country, BBB is a charity which raises funds to provide portable equipment to remove the poison arsenic from drinking water in villages, in less developed countries. Run by a board of Trustees, the organisation operates on laissez faire management principles. There are few full-time paid employees and BBB is heavily dependent upon the work of volunteers. Although these volunteers are dedicated, many have said that they do not feel the organisation knows where it is going and have said that they are not confident about the future of BBB.

Funding comes from appeals to the general population, which are made through newspaper advertisements. BBB does not use the Internet to promote or raise donations and, generally, does not use available technology to any extent in its organisation. Additionally, BBB receives corporate donations, most of which come from old school friends of the trustees. There is no government funding.

Recently BBB has had difficulty in attracting donations and is at risk of not being able to carry on its work. The charity industry has become more competitive and many other organisations within it have become more aggressive in their marketing and promotion.

None of the Board of Trustees has a commercial background. The Chairman of Trustees has recently been to a number of conferences where the value of foresight and the need to conduct a frequent and thorough ‘environmental analysis’ have been discussed.

The Chairman has accepted that there is a serious gap in the knowledge that the trustees have about the environment in which BBB operates. Recognising that BBB needs a more proactive approach to the environment in which it operates your help as a management accountant has been sought.

Required:

a) Discuss how conducting a frequent and thorough environmental analysis would help the Board of Trustees of BBB. (14 marks)

<Read the Answer 2> Porter’s Five Forces Question 3: Nov 2011 – Q2a - Paper E3 BBB is an international bank with retail banking operations in many countries. BBB’s retail banking is geared primarily towards individual customers and is provided through branches as well as the Internet. BBB offers a wide variety of retail banking products including savings and cheque accounts, debit and credit cards, insurances, mortgages and personal loans. BBB has a strong international brand image and a long record of success, particularly in Western countries. BBB has offered retail banking services in country R since 2008. BBB decided to invest in R because R then had a rapidly growing economy and in 2008 BBB considered there were good retail banking opportunities as only 50% of the population of R had a bank account at this time. BBB initially invested $200 million entering R, establishing a branch network in 2008. It also purchased a local bank in R for $150 million just after the start of the global financial crisis in 2007. R liberalised its economy in 1993 which means it now allows the free flow of capital into and out of the country. The banking sector contains some state-owned institutions that compete strongly for retail banking business. The largest state-owned bank, SB, has half of R’s retail banking business and has a strong position of dominance. This has been strengthened recently due to a reorganisation in its senior management and the launch of some successful new retail banking products. These new products have proved to be very popular with customers and are very profitable. One banking analyst has recently commented that "R’s government has chosen to energise the banking sector through SB. It is less keen on foreign competition. The potential rewards for retail banking in R are great. There is plenty of growth left in this market and the margins are excellent. However, R’s population is very conservative, they don’t like change." Within R, mortgage and consumer lending has grown at 20% per year compound from 2007 to the present day. BBB’s economic intelligence unit has forecast that this growth will continue for the foreseeable future because this reflects the policy of R's government. There are a number of foreign banks which have been established in R for over 15 years and these are all profitable. They have 35% of R's retail banking market. Since the beginning of 2011, BBB has identified two foreign banks which entered R at the same time as BBB, but which have withdrawn from R. One of the foreign banks has stated its reason for withdrawal as being 'Our operations in R have reduced group profitability.' Required: Evaluate using Porter's Five Forces model, BBB's future potential for a profitable retail banking business within country R. (14 marks) <Read the Answer 3> Mendelow’s Matrix Question 4: May 2011 – Q4a) and b) - Paper E3 HWS is a chain of shops which sells groceries. HWS was established in 1844 by a group of ethically motivated investors. Its mission was stated as ‘.. to sell the best quality groceries at the cheapest prices’. Because of their religious beliefs the original investors restricted HWS from selling any alcohol or tobacco products. This restriction represented what was considered responsible business practice at that time. However, this restriction was an informal one and did not appear in the mission statement or the memorandum and articles of association of HWS. HWS became a ‘Public Limited Company’ (Plc) and was floated on the London Stock Exchange in 2007. Its current market value is £450 million. It’s most recent reported profit was £40 million. Its

current shareholders are:

In 2010, HWS decided to become the ‘24/7/365 grocer’. This means that all its shops are always open, that is, 24 hours a day, every day of the year. Since then, HWS has found that many of its customers wanted to buy alcohol and tobacco products, particularly those customers using its shops between 2 am and 6 am. The Board of HWS has decided to implement a new retailing strategy and sell alcohol and tobacco products from 1 June 2011. HWS believes that this will give a substantial boost to its profits. HWS’s Managing Director has announced in a statement to the Stock Exchange that ‘...this widening of our product portfolio should increase profits by at least £10 million a year by the end of 2012'. This announcement has attracted criticism from the HWS charitable trust which stated: ‘...this is against the whole ethos of HWS’. Required:

a) Evaluate, using Mendelow's matrix, the levels of power and interest of HWS's shareholders in the decision to sell alcohol and tobacco. You should justify your evaluations. (14 marks)

b) Advise HWS's Board of TWO other stakeholders who would be interested in the decision to

sell alcohol and tobacco. You should state the reason for the interest of these stakeholders. (4 marks)

<Read the Answer 4> Balanced Score Card Question 5: Sept 2011 – Q2b) - Paper E3 SAH is a family owned company employing 32 people, which builds and sells medium sized yachts which normally retail at £100,000. SAH operates in a very competitive market. SAH’s yachts are usually bought by amateur sailors with high disposable incomes who value quality, reliability and performance. In 2011 it plans to sell 25 yachts. SAH's Managing Director, N, has a vision for the company to be 'regarded as the best yacht builder for the private owner'. SAH has always emphasised the high quality of its yachts and knows that its customers are very knowledgable. Each yacht is built to a specific order and there is usually a period of at least one year between an order being placed and the yacht being delivered to the customer. SAH’s construction process is very traditional: most of its designs are at least 20 years old and much of the construction work on its yachts is done by hand. SAH regards its workforce as ‘craftspeople’ who have learned their skills through their work experience. SAH employs school-leavers and provides apprenticeships lasting seven years. However, most of its competitors employ university graduates who have studied yacht design and construction. SAH designs all its yachts manually which is very time consuming, although most of its competitors now use CAD/CAM* suites for their designs. SAH does not have any staff with CAD/CAM experience. SAH uses natural materials: for example, cotton for the sails. However, recently some natural materials have become difficult to obtain and the prices of these have risen by as much as 40% in the

last two years. Many of SAH’s competitors have replaced natural materials with synthetic ones as these are easier to obtain, cheaper and give enhanced performance. In 1985, SAH employed a consultant who designed a standard costing system for use in its manufacturing operations. This system is still in use at SAH today. N, relies on the standard costing system which is his only control system for the company. N knows that the manufacturing cost of a yacht amounts to 60% of its total cost and believes that if he is in control of 60% he is in control of the majority of cost. However, N has experienced some difficulty in his role as the control system only reports financial results. N would like a system that gives him integrated control over all aspects of the business and has been considering the use of a Balanced Scorecard. SAH’s business comes from repeat orders and recommendations. However, it has experienced criticism in the last year because it failed to meet the promised delivery time for 30% of its orders and has lost business because the potential customers said that SAH’s yachts looked ‘old-fashioned’ and were ‘too slow’. Cash flow is particularly important for SAH, because of the long lead times for each yacht, and has been under pressure recently. SAH has had to increase its overdraft facility by £50,000 to £150,000 and this is nearly fully used. Every year since its inception SAH has reported a profit but in 2010 its Return on Capital Employed was 3% which N has stated is unacceptable. *CAD/CAM: Computer-Aided Design, Computer-Aided Manufacturing Required: Advise N:

i. how the Balanced Scorecard could be applied and used within SAH. You should also suggest and justify ONE measure for each of the balanced scorecard's perspectives. (10 marks)

ii. of THREE potential problems he might encounter if he introduces the Balanced (6 marks) <Read the Answer 5> Porter’s Three Generic Strategies Question 6: - Specimen Paper – Q4 a) - Paper E3 GHK is a restaurant chain consisting of eight restaurants in an attractive part of a European country which is popular with tourists. GHK has been owned by the same family for the previous15 years and has always traded at a profit. However, a number of factors have meant that GHK is now in danger of making a trading loss. There has been a substantial drop in the number of tourists visiting the region whilst, at the same time, the prices of many of the foodstuffs and drinks used in its restaurants has increased. Added to this, the local economy has shrunk with several large employers reducing the size of their workforce. The owners of GHK commissioned a restaurant consultant to give them an independent view of their business. The consultant observed that the eight restaurants were all very different in appearance. They also served menus that were very different, for example, one restaurant which was located on a barge in a coastal town specialised in fish dishes, whereas another restaurant 20 miles away had a good reputation as a steak house. The prices varied greatly amongst the restaurants; one restaurant in a historic country house offered ‘fine dining’ and was extremely expensive; yet another located near a busy railway station served mainly fast food and claimed that its prices were ‘the cheapest in town’. Three of GHK’s restaurants offered a ‘middle of the road’ dining experience with conventional menus and average prices. Some of the restaurants had licences which enabled them to serve alcohol with their meals but three restaurants did not have such licences. One restaurant had a good trade in children’s birthday parties whereas the restaurant in the historic country house did not admit diners under the age of 18. The consultant recommended that GHK should examine these differences but did not suggest how. The owners responded that the chain had grown organically over a number of years and that the location, style and pricing decisions made in each restaurant had all been made at different times and depended on trends current at that time.

Required: Advise the owners of GHK how the application of Porter’s Three Generic Strategies Model could assist them in maintaining or improving the profitability of their restaurants. (10 marks) Note: You are not required to suggest individual generic strategies for each of GHK’s restaurants. <Read the Answer 6> Ratio Analysis Question 7: May 2010 – Q7a (CIMA, paper F2) A friend is seeking advice on one of his investments, KER.KER manufactures stationery supplies. The entity appointed a new Chairman in 2008 and since then has been implementing an expansion strategy aimed at pursuing new markets with its existing product base.

The Chairman’s report included in the 2009 annual report announces the success of the expansion plan, citing increased revenues and profits as evidence of the entity’s success, and noting that the entity has invested in non-current assets to ensure revenue continues to increase. Your friend is intending to retain his investment in KER based on the positive chairman’s report but has asked you to consider the financial information to assess whether the figures support the chairman’s claims.

The statement of financial position as at 31 December 2009 and its comparative is shown below:

The statement of comprehensive income for the year ended 31 December 2009 and its comparative is shown below:

Required: Analyse the financial performance and financial position of KER for the year to 31 December 2009 and comment on the Chairman’s claims on expansion (8 marks are available for the calculation of relevant ratios). (20 marks)

<Read the Answer 7> Value Chain Question 8: May 2010 – Q2a (CIMA, paper E3) JGS is a long-established retailer which specialises in the sale of antiques*. JGS is owned by a married couple who both work in the business. They have no employees. Their premises consist of a large modern shop and there is an apartment above this in which the owners live. Over the last five years the local area has become very fashionable and the shop is now surrounded by smart restaurants, cafes and up-market fashion outlets. This area has also become a very popular place to live which has meant that property values have increased substantially. The owners believe that if they disposed of their premises they would make a substantial capital gain. The owners have noticed that the fixed costs of their property, including insurance, local tax, security and maintenance have risen very sharply during the last five years.

Since establishing the business the owners have developed their expertise. They now have a national reputation in the antiques trade and many repeat customers. They traded profitably between 1980 and 2008 but in the last year have made an operating loss for the first time. The owners are often consulted by other antique traders and collectors by letter and telephone and they have developed a

considerable income stream by charging for their advice. However, they have found that their location is becoming increasingly problematic. Although the popularity of their area of town has increased and led to many more people living and visiting the area, unfortunately for the owners most of these people are not interested in antiques. They are young people who like the area but do not have the disposable income to spend on antiques.

A further problem is that the shop is not situated in a large city and it is very inconvenient for many antique traders and collectors to visit. The owners believe the location has recently restricted the success of their business. The owners know that a very popular development in the antiques trade has been the establishment of ‘Antiques Fairs’ where antiques are bought and sold. Some of these have established international reputations and have many thousands of visitors. However, because of JGS’s location and the need to keep their shop open, the owners do not attend these. The owners recently set up a website which has basic information about their business on it such as their address, telephone number and the opening times of their shop. The website has received a large number of hits but it does not seem to have increased sales. * Antique = ‘a decorative object that is valuable because of its age’. (Oxford Concise Dictionary) Required:

Analyse the strengths and weaknesses of JGS using the value chain model. (8 marks)

Note: You are not required to draw a value chain diagram in any part of your answer to this question <Read the Answer 8> Porter’s Diamond Question 9: Nov 2011 – Q2c (CIMA, paper E3) BBB is an international bank with retail banking operations in many countries. BBB’s retail banking is geared primarily towards individual customers and is provided through branches as well as the Internet. BBB offers a wide variety of retail banking products including savings and cheque accounts, debit and credit cards, insurances, mortgages and personal loans. BBB has a strong international brand image and a long record of success, particularly in Western countries. BBB has offered retail banking services in country R since 2008. BBB decided to invest in R because R then had a rapidly growing economy and in 2008 BBB considered there were good retail banking opportunities as only 50% of the population of R had a bank account at this time. BBB initially invested $200 million entering R, establishing a branch network in 2008. It also purchased a local bank in R for $150 million just after the start of the global financial crisis in 2007. R liberalised its economy in 1993 which means it now allows the free flow of capital into and out of the country. The banking sector contains some state-owned institutions that compete strongly for retail banking business. The largest state-owned bank, SB, has half of R’s retail banking business and has a strong position of dominance. This has been strengthened recently due to a reorganisation in its senior management and the launch of some successful new retail banking products. These new products have proved to be very popular with customers and are very profitable. One banking analyst has recently commented that "R’s government has chosen to energise the banking sector through SB. It is less keen on foreign competition. The potential rewards for retail banking in R are great. There is plenty of growth left in this market and the margins are excellent. However, R’s population is very conservative, they don’t like change." Within R, mortgage and consumer lending has grown at 20% per year compound from 2007 to the present day. BBB’s economic intelligence unit has forecast that this growth will continue for the foreseeable future because this reflects the policy of R's government. There are a number of foreign banks which have been established in R for over 15 years and these are all profitable. They have 35% of R's retail banking market. Since the beginning of 2011, BBB has identified two foreign banks which entered R at the same time as BBB, but which have withdrawn from R. One of the foreign banks has stated its reason for withdrawal as being 'Our operations in R have reduced group profitability.'

Required: Advise BBB how it could use Porter's Diamond in its preliminary analysis when considering future investment in new foreign countries. (6 marks) <Read the Answer 9> Evaluation of strategies Question 10: Nov 2012 – Q3 - Paper E3 GGG is a privately owned unlisted company which runs 20 residential care homes for the elderly. A residential care home for the elderly is a building where a number of older people live and receive care (that is, their physical needs are provided for), normally on a full-time basis. The elderly residents may pay the care home fees themselves or they may be paid by their relatives or by the local government authority. The elderly residents of GGG’s care homes are all capable of making decisions for themselves. All of GGG’s care homes are located in and around two cities both located in the south of country X. GGG employs around 400 staff in the care homes, some of whom work part-time, and a small team of highly experienced administrators. GGG’s care homes all have modern facilities and their staff are highly trained and dedicated. GGG has always been a profitable business, even though its care homes normally have a small amount of spare capacity. GGG has approximately 25% market share in the south of country X. The remainder of the market is shared by a small number of local government funded and operated care homes and some other small private businesses. Due to the rising costs of operating care homes as a result of increased regulation and the general economic environment, a number of small privately owned care homes in the region have recently closed. The owners of some other privately owned care homes are considering closing or selling them. GGG is also aware that this trend is occurring nationally across country X. A national shift in the demographics of the population in the last 30 years has resulted in a significant rise in the proportion of elderly members of society. Added to this, the increased social movement of families has resulted in an increasing demand for care home places for the elderly. GGG undertakes limited advertising, relying more on word-of-mouth recommendations and referrals from local hospitals and doctors to obtain its customers. The prices charged to care home residents by the local government authority run care homes are lower than those charged by GGG, due to central government subsidies. However, the Managing Director of GGG is confident that the services and facilities provided by GGG are superior to those offered by the local government funded care homes. Although GGG currently offers only full-time care for its elderly residents, there is a growing need for the market to offer ‘relief care’ packages. This is where elderly people, who do not normally live in residential care homes, could use any of the 20 care homes’ facilities for short periods of time (normally 1 week), in order to enable their normal carers (usually family members) to take holidays or rest periods. A number of GGG’s elderly residents are often referred to local hospitals by their doctors for treatments and therapies. Many of GGG’s staff are fully qualified nurses and these treatments and therapies could be undertaken by the staff of GGG in each of its care homes. These hospital visits for treatments and therapies can be disruptive and upsetting for residents who often prefer to remain in GGG’s care homes and be cared for by staff with whom they are familiar. However, if GGG were to offer these additional facilities within its care homes it will need investment in training and new facilities. Required:

a) Analyse the opportunities available to GGG, using Ansoff's strategic directional growth vector matrix. (10 marks)

b) Evaluate the opportunities available to GGG in each of the four areas of the Ansoff strategic directional growth vector matrix using Johnson, Scholes and Whittington's Suitability, Acceptability and Feasibility framework. (10 marks)

c) Recommend, with your justifications, which strategic directions, as set out in Ansoff's strategic directional growth vector matrix, would be most appropriate for GGG to follow. (5 marks)

<Read the Answer 10> Test Yourself - Suggested Answers SWOT Analysis Answer 1: Nov 2006 - Q3 (CIMA, paper P6) Answer a) At the present time DDD is in a favoured position compared to both its suppliers and its customers. With regards to its suppliers, it is making higher margins than the suppliers using processes which are protected by patents. The fact that the majority of shares are held by members of the family protects it from hostile takeover. With regards to its customers, the large pharmaceutical companies, the same situation is true. There is patent protection and, as a family business, the threat of takeover is limited. The patent protection also prevents other manufacturers from entering DDD’s market and competing directly with it, and will allow DDD to charge reasonably high prices. Once the patent protection expires this situation will change and will become worse. Other companies could enter the industry offering the same products as DDD or the larger chemical companies from whom DDD obtains its supplies could forward integrate and manufacture the same products as DDD, most probably at a lower cost. It is unlikely that DDD will be able to build any differentiation advantage for the chemical intermediaries it is manufacturing. With that in mind, the only advantage possible for DDD is one of cost leadership – particularly with the pressure currently being exerted by the pharmaceutical ompanies. It is unlikely that the pharmaceutical companies will wish to backward integrate into DDD’s industry since the processes are most probably different. It may be the case that DDD is able to operate at higher margins than its suppliers because of a lower overhead cost structure due to its relative size. However, if the large chemical companies wish to enter this market because the margins are better there would be little to stop them charging DDD a premium price for the intermediates. This would put pressure on the margins that DDD could charge and eventually force it out of business or make the prospect of takeover more attractive to the family. Alternatively the chemical companies may just put up the price and look for a ‘fairer’ split of the profit that DDD makes by modifying the chemicals for use by the pharmaceutical companies. Due to the difference in the process used it is unlikely that the chemical companies would want to enter DDD’s market by organic growth. In summary the threats facing DDD are:

- Margins squeezed by pharmaceutical companies; - Margins squeezed by suppliers; - Threat of forward integration and takeover by suppliers; - Threat of new entrants to the market.

Answer b) There are a number of options which DDD might choose to adopt in the face of the changes to the market and these should be evaluated using the tests of suitability, acceptability and feasibility and sustainability.

First, it may decide to do nothing and hope that the situation will not be as bad as it expects. This is not a suitable option since it does not remedy the situation. Similarly it is not likely to be acceptable to the family or the employees who would wish the business to continue profitably. It is, however, feasible, in that no action is necessary. The option offers no sustainable advantage. A second option might be to develop new processes to replace those that are due to go ‘off patent’ in the near future. This option would be suitable in that the new processes would be patent protected, and would be acceptable to both the family and the employees. The feasibility of doing so would depend upon the expertise of the development chemists within the firm and the funds that are available for R&D. In terms of sustainability, this option would be viable since, if a steady stream of new products and patents could be developed, the firm could maintain the current situation. A third option would be to look for alternative markets for its existing products. If this were successful it would expand its market and increase its revenue but would do little to prevent both the suppliers and customers squeezing its margins. Therefore, although it may be feasible it fails the suitability and acceptability and sustainability tests. A fourth option would be to form a joint venture with one of the suppliers seeking to gain the protection of a large partner to keep other suppliers at arms length. To some extent this would prevent the pharmaceutical companies squeezing margins excessively but would involve DDD sacrificing some margin to its new partners. There would be the risk, however, that the partner would know an increasing amount about DDD’s business and this might make eventual takeover, or substitution, a bigger threat. Although this does not fail the suitability test it is not the most suitable option and may not be completely acceptable to the family or the employees since it could be seen as a loss of some independence. The option is feasible but offers little in the way of sustainable advantage. A fifth option would be to decide now to be taken over by one of the chemical suppliers since DDD could command a higher asking price whilst its processes are still under patent. While this is feasible it will not be acceptable to the family or the employees and is not suitable in terms of the long term future of the company. The option offers no sustainable advantage to DDD. <Go back to list of models> <Go back to Question 1> PEST Analysis Answer 2: May 2008 - Q3 - Paper P6 There are two main models of environmental analysis that BBB would need to apply to the environment in which it operates. Firstly, Porter’s five forces model which considers

- rivalry amongst existing firms; - bargaining power of buyers; - bargaining power of suppliers; - threat of new entrants;

- threat of substitute products or services.

This model is primarily used for commercial organisations but there is relevance for BBB in that there are clearly rivals, its buyers can be conceived of as the donors who get personal satisfaction, there will be threats from new entrants and there are many substitutes for making donations to charities. Thinking of the environment in these terms should help BBB to more rigorously identify changes which will impact upon it.

There will be other existing charities which are providing similar aid to disadvantaged groups in the less developed world – BBB should be more aware of those groups. It can monitor their fund raising campaigns to better time its own advertisements and possibly learn from the approaches used by its competitors.

Rivalry

Buyers

A closer look at its existing donors, particularly the corporate ones, to discover their values and why they give (and to who else they give) will help BBB better tailor its appeals.

Monitoring the charity literature and the media in general for news of new charities starting to address the kind of issues that BBB tries to aid will make BBB better able to retain its donors.

New entrants

Clearly donors, both individual and corporate, have other things they could do with their funds. A better understanding of those alternative uses will help BBB appeal to donors to continue giving. This will be particularly true of corporate donors where corporate social responsibility considerations will come into play. Those donors may well be convinced to give to BBB rather than to enter more directly into the area of philanthropy.

Substitutes

Secondly, PEST analysis looks at the various influences on the environment in which the organisation operates:

- Political/legal influences - Economic influences - Social and demographic patterns and values

- Technological forces.

It has been suggested that PEST is an insufficiently detailed acronym to describe the macroeconomic environment and that PESTEL, where the two additional letters describe Ecological and Legal factors, adds more depth. Practically this is irrelevant – as long as the organisation is aware of the need to monitor any important themes in the macro environment and changes to those themes.

BBB currently receives no funding from governments and this may be because it has never attempted to or because of past government policy. Carefully monitoring this policy at both national and E.U. level may identify opportunities for BBB to start receiving government funding.

Political

Economic influences will have an influence on BBB in that most charitable giving comes from discretionary disposable income and monitoring this will give a better idea when to launch appeals for funds. Monitoring bonus payments to those in the financial services industry and the profitability of individual firms might help target funding requests.

Economic

BBB would also benefit from considering the demographics of the groups from which it seeks donations. Particular segments of the community, for instance school children, may be more persuadable in terms of donations. Similarly, if there are large groups of Diasporas from the affected countries it may well be able to target them for donations.

Societal

In terms of technological factors BBB should be monitoring to see if there are more cost effective methods available to address the problem of arsenic in well water. Additionally, it should be looking for other ways to make its appeals for donations – at present it advertises in newspapers – the internet is well established now and may well provide a better way to attract donors. This would be particularly appropriate if it could persuade one of the corporate donors it was monitoring to fund a website for it.

Technological

In summary, BBB needs to formalise the process of information gathering and processing within the company so that it is better able to react to the environment in which it operates. <Go back to list of models> <Go back to Question 2>

Porter’s Five Forces Answer 3: Nov 2011 – Q2a) - Paper E3

BBB has entered a market which contains state owned institutions that compete strongly for retail banking business. SB, which is the major state-owned bank has half of the retail banking business and has a position of dominance. There are also some well-established foreign banks that have 35% of the market. However, two foreign banks that entered country R at the same time as BBB have decided to withdraw from the country.

Competitive rivalry within retail banking

All of the above factors suggest that the competitive rivalry within R’s retail banking market is intense.

The customers are the people of R who either have, or would like to have, a bank account. In 2008 only 50% of the population had a bank account. A citizen of R who wants a bank account in 2011 has the following possible providers:

Bargaining power of customers

- SB, the state owned bank, which has 50% of R's retail business - Other state institutions - Foreign banks who have 35% of the retail banking market - BBB - Any other banks or institutions which have a share of the 15% of the market and are not

accounted for above The choice of providers of retail bank accounts for the citizen of R is a wide one. This would not give the individual customer any power over a bank ‘per se’. However the wide degree of choice will contribute to the degree of competitive rivalry.

As R has a Western style liberal economy, this would permit the free movement of funds so BBB should have access to cash both inside and outside of R. BBB should, therefore, be able to supply its capital needs subject only to normal financial market conditions. There is no information given in the scenario about other inputs which BBB might require, so no judgement is given about this.

Bargaining power of suppliers

Country R’s economy is a liberal one which suggests that entry into the retail banking market should be possible for any bank able to meet R’s regulatory requirements. However, the extent of the investment which BBB made to enter this market, $350 million, would constitute a barrier to entry for many businesses. The dominance of SB and the implied customer loyalty possessed by that bank would be further barriers. The recent experience of the two foreign banks which decided to withdraw from R could also dissuade other banks from entering R as does the conservatism of the citizens.

Threat of new entrants

This threat bears a relationship to the position of buyers who have a great degree of choice as regards a bank to supply them with a bank account. The way in which a bank account can be operated has changed lately with an increasing proportion being operated via the Internet. However, these are supplementary rather than substitute products.

Threat of substitute products

Any innovation which BBB might introduce to differentiate itself is likely to be imitable by its competitors. Within a liberal economy, citizens are likely to become increasingly reliant on a bank account for which there is no equivalent substitute. Summary Porter’s Five Forces Model attempts to describe an industry or market in terms of its competitiveness and resultant attractiveness. The retail banking market within country R can be summarised thus:

The aggregation of the Five Forces suggests that this market should be a profitable one. However, this does not imply that the market will be equally profitable for all the participants. <Go back to list of models> <Go back to Question 3> Mendelow’s Matrix Question 4: May 2011 – Q4a) and b) - Paper E3 Mendelow's matrix (shown below) measures the power and interests of stakeholders:

Low power/low interest Private investors: on average each investor has a shareholding worth less than £1,000. It is unlikely that most of these shareholders would take an active interest in HWS’s affairs. Collectively, as they only hold 3% of the equity, they have little power to affect any of HSW’s decisions. Low power/high interest HWS charitable trust: although this holds 10% of HWS’s share capital, on its own it has a very limited amount of power as regards the company’s decisions. However, as its recent criticism of the decision to sell alcohol and tobacco demonstrates, it has a high degree of interest in the company’s affairs. HWS employees: like the private investors, the employees have little power to affect any of HWS’s decisions. However, as their jobs are associated with their shareholdings, which are worth almost £9,000 on average, they are likely to have a high degree of interest. High power/low interest Pension funds and investment trusts: there are six of these which have 30% of the equity. If they act collectively they have a high degree of power. Their investment is worth £135 million at the current market price which suggests they would have a high degree of interest. However, these investors have not traditionally been interested in the day-to-day running of the companies in which they hold investments. They are more likely to be passive rather than active investors. High power/high interest HWS directors: these have a disproportionate, in relation to their shareholding, amount of power. It was their decision which is now being criticised and they are able to change it or withdraw it instead of implementing it. RCB: private equity fund: this holds a significant proportion of HWS’s equity, 25%. If it held another 5% it would be obliged to make an offer for the company which may be its intention. This puts RCB in a powerful position. Its motive for investing is to see short-term profits, so it is likely to have a high degree of interest in the decision. UK clearing bank: this will be interested in the decision because it has both a substantial shareholding worth £90 million and because HWS is its client. This shareholding gives the UK clearing bank substantial voting power and it will also have power arising from its position as HWS’s bank. <Go back to list of models> <Go back to Question 4>

Balanced Score Card Question 5: Sept 2011 – Q2b) - Paper E3 (i) The Balanced Scorecard is designed to ‘translate mission and strategy into measures and objectives’. Its purpose is to inform employees about the drivers of success and direct their attention towards actions that will help to deliver the organisation’s Vision and Strategy. The Vision and Strategy should be made explicit within the Balanced Scorecard.

- Aggregate contribution margin: An improvement in this measure should improve ROCE which is currently unacceptably low.

Financial perspective: Proposed measures

- Receivables: Cash flow is very important for SAH and it has been under pressure recently. A reduction in receivables will improve SAH's cash flow.

- Performance against delivery dates: This was a weak area for SAH in 2010/2011. SAH would want to improve its performance here and so improve its image to its customers and potential customers.

Customer perspective: Proposed measures

- Order book: As each yacht is built to order and takes at least a year to build, it is important that SAH knows it has continuity of demand. SAH can gauge the popularity of its yachts by the number of people who have placed an order for one.

- Number of staff with advanced craft and academic qualifications: SAH has had a policy of developing its staff from within. However, it has experienced criticism because its yachts look 'old fashioned'. It may be that SAH's ability to change and improve has been inhibited by a lack of staff with advanced qualifications.

Learning and growth: Proposed measures

- Number of design innovations: This measure would demonstrate SAH's ability to change its manufacturing processes to improve efficiency and reduce cost and its product designs to meet customers' needs.

- Materials price variance: This would focus attention on a current area of difficulty for SAH, which is having to deal with increasing material prices.

Internal business perspective: Proposed measures

- Build time per yacht: If SAH could reduce its build time it might be able to avoid late deliveries, sell more yachts and use its working capital more efficiently. This could improve its profitability.

The introduction of Balanced Scorecard into SAH does not necessarily mean that it should abandon its standard costing system. As this deals with 60% of the total cost of a yacht, the standard costing can still give valuable control information. Examiner’s comment: Although only one measure was required there is a great deal of possible measures which SAH could use within a Balanced Scorecard. Two possible ones have been given for each perspective. Candidates who proposed alternative, credible measures were appropriately rewarded. (ii) N could encounter the following problems when he introduces the Balanced Scorecard: Gaining management commitment to the concept of the Balanced Scorecard Kaplan suggests that some managers prefer to be measured solely by financial measures because these are inaccurate and obscure individual's responsibility for performance. As the Balanced Scorecard does not link directly to profit, some managers believe it not to be relevant to them. Congruency of measures Although the measures proposed for the Balanced Scorecard are supposed to be congruent, i.e. mutually reinforcing, they may not be. Thus, for example, an initiative to improve the customer experience may adversely affect a financial measure, for example, Return on Capital Employed.

Measuring only the things that are easy to measure This may occur because the business is unaware of the processes that add value to the business. Balanced Scorecard measures need to reflect aspects of the business operations that contribute towards the achievement of its vision. Such aspects may not previously have been measured and the formulation of new measures may be difficult, for example, measuring quality. This may lead managers to ignore these aspects and concentrate their attention on measurable but less important aspects of the business operations. Allocating responsibility for developing the measures The measures should be developed by staff with an all-round understanding of the business. These will not necessarily be from within the finance function. If the measures are developed within the different functions there is likely to be a variable degree of expertise available to perform this task. If the measures are developed centrally, they may be resisted by managers if they have not been consulted in the process. <Go back to list of models> <Go back to Question 5> Porter’s Three Generic Strategies Question 6: - Specimen Paper – Q4 a) – Paper E3 Porter’s ‘Three Generic Strategies Model’ was developed in 1980 and since then has gained international dissemination. The model analyses how firms can achieve competitive advantage which Porter suggests can come about by adopting one of the following policies:

Overall cost leadership: the firm is the lowest cost producer relative to its competitors.

Differentiation: the firm can create something which is unique and for which consumers will pay a premium.

Focus: the firm serves a narrow strategic target more effectively than its competitors who are

competing more broadly. Porter asserts that each generic strategy requires different attributes and, therefore, it is unlikely that any firm can pursue more than one generic strategy simultaneously and be successful. He cautions against firms becoming ‘stuck in the middle’. As well as Porter’s model being used analytically, it can also be used pro-actively to help a firm design its competitive strategy. In the case of GHK no coherent strategy has been followed with respect to its eight restaurants. A preliminary analysis suggests that the following strategies are being followed:

Overall cost leadership: (the firm is the lowest cost producer relative to its competitors), at the restaurant near the busy railway station.

Differentiation: (the firm can create something which is unique and for which consumers will pay a premium) at the ‘fine dining’ restaurant in the historic country house.

Focus: (the firm serves a narrow strategic target more effectively than its competitors who are competing more broadly) at the fish restaurant, the steak restaurant, the restaurant offering children’s birthday parties.

Stuck in the middle: three ‘middle of the road’ restaurants with conventional menus and average prices.

The generic strategy which GHK decides to follow will be linked to a marketing strategy. It is not necessarily the case that GHK is wrong to follow a number of generic strategies because if each restaurant is taken as a strategic business unit it will have a particular catchment area from which it draws its customers and looked at in isolation that strategy might be the optimal one for that restaurant. However, a systematic examination of each restaurant using the logic of Porter’s model and examining the basis by which that restaurant competes and whether this will yield a long-term competitive advantage will be invaluable.

With respect to the restaurant near the busy railway station, if this is attempting to compete on the basis of being the lowest cost producer and, therefore, charging its customers the lowest prices, it is doubtful that this can give a long-term competitive advantage. The prices of a restaurant’s inputs, mainly food and labour, are set within their local markets and available to any competitor. The technology and processes of restaurants are mature ones and it is unlikely that GHK could innovate in this area to secure competitive advantage. The three restaurants which are ‘stuck in the middle’ should be given immediate attention as Porter’s model suggests they are unlikely to be successful. If the owners of GHK use Porter’s ‘Three Generic Strategies Model’ it will give them an appreciation of the basis upon which their various restaurants compete and should prompt them to make modifications to their strategy and attempt to secure long-term competitive advantage. It may be the case that GHK treat each of its restaurants as a strategic business unit and, therefore, employ a number of different generic competitive strategies. Alternatively, GHK may wish to trade as a homogenous entity which would imply it would use only one of the three generic competitive trategies to avoid being ‘stuck in the middle’. <Go back to list of models> <Go back to Question 6> Ratio Analysis Answer 7: May 2010 – Q7a (CIMA, paper F2) The expansion to new markets has resulted in a 40% increase in revenue. This appears to have been achieved, however at the expense of the profit margins. Gross profit margin has fallen from 31% to 26%in the last year, and with the same product base it is likely then that this is caused by selling at reduced prices to break into new markets. The distribution costs have increased by 58% from 2008 and although an increase would be expected with the expansion, it is considerably higher than the increase in revenue. It is possible that the new markets are a significant distance away geographically. The profit for the year appears to have increased slightly, but this is in fact due to the inclusion of the associate’s profit. Without the associate’s profit in 2009, the profit margin is 2.8% compared with 9% in 2008. This is a significant decrease and is likely to be caused by a combination of reduced gross margins, high distribution costs and finance costs which have doubled in the year. Interest cover has fallen from 5.2 in 2008 to 3.7 as a result of diminished profits, increased long-term borrowings and the introduction of an overdraft facility. Although there is still adequate cover, it increases KER’s vulnerability to increases in interest rates. The gearing ratio has also increased significantly despite the increases in equity from the revaluation of property, plant and equipment and investments. The increased loans have resulted in an increase in gearing from 43% to 60% and this together with falling interest cover may affect KER’s ability to raise further finance in the future. The return on capital employed has been maintained, however a significant part of the increase in capital employed has come from revaluation and so will not necessarily bring increased future revenues. The increased revenues have, however resulted in an increase in non-current asset turnover from 2.5 to 3.0. The expansion has clearly put pressure on working capital. In addition to moving from a positive cash balance to an overdraft, the receivables days have increased from 48 days to 63 days, and yet payables days have remained static. Inventory days have increased from 34 days to 50 days which although may be as a result of increased orders about to be met, is nonetheless tying up cash. This is a common result of expanding too quickly, however KER must improve its debt collection if it is to avoid a cash crisis. The Chairman’s summary is biased towards the increases in revenue, but the expansion has reduced profitability and compromised cash flow as a result of increase in receivables. In addition, the increases in non-current assets appear to come from revaluation rather than investment in assets for

the future generation of trading revenue and so future revenue increases may not be sustainable. The profit share from the associate masks the falling margins resulting in KER being sensitive to interest rate changes in the future. <Go back to list of models> <Go back to Question 7> Value Chain Question 8: May 2010 – Q2a (CIMA, paper E3) Using the categories of Porter’s value chain the business has the following strengths and weaknesses:

Inbound logistics - No information given, so unable to classify this. Primary activities

Operations - The business has outgrown the need for shop premises. The owners are unable to attend antiques fairs which have very good business potential. WEAKNESS. Outbound logistics - The assumption is that storage and distribution is carried out at the shop premises. Mention was made in the case of the increasing cost of security, as the antiques require protection from theft. It could be that the shop premises are no longer the best place to store and distribute antiques. Possible WEAKNESS. Marketing & Sales - The owners used to gain their business because of their location, but this is no longer as important. Latterly, they have built up a reputation and have many repeat customers. However, their use of the Internet is primitive and does not contribute to their business. This was a strength now turning into a WEAKNESS. Service - As the owners have a national reputation and many repeat customers, this is classified as a STRENGTH.

Firm infrastructure - The owners have had a long history of profitable trading. However, recently they have made losses. WEAKNESS.

Support Activities

The owners’ premises, if sold, would enable them to realise ‘a substantial capital gain’. STRENGTH. Human Resource Management - The owners work in the business and there are no employees. Their long survival in the business and their reputation as experts are STRENGTHS. However, the people are the business and there is little possibility of succession. Further if the owners have been in business since 1980 they may be approaching retirement age. WEAKNESS. Technology development - This seems to have been neglected. See Marketing & Sales. Procurement - No direct evidence of this but longevity of business suggest that this has been a STRENGTH. <Go back to list of models> <Go back to Question 8> Porter’s Diamond Question 9: Nov 2011 – Q2c (CIMA, paper E3) BBB should find this model helpful because it examines the competitiveness of countries. It suggests that there are inherent reasons why some countries are more competitive than others and why particular industries within countries are more successful than others. If BBB is considering investing in a new foreign country it could use Porter's Diamond as a screening mechanism to reject countries where it seems investment will not be fruitful. On the positive side, the model will indicate countries where the business environment will be favourable.

The model implies that national advantage is due to the inter-relationship of the following: Firm strategy, structure and rivalry: consideration of these factors will give BBB an appreciation of the likely competition it will face. Factor conditions: this will inform BBB of the availability, within the country under consideration, of the factors it will need in order to do business, for example, the supply and skill levels of its potential workforce. Demand conditions: this will reveal the sophistication of the country's consumers and how demanding they are. BBB will then be able to determine whether its product offerings will appeal. Related and supporting industries: an understanding of this will enable BBB to determine if the country has the infrastructure to support its operations. Porter also points out that two other factors may influence the ability of a country to produce world-class firms: • Government: whose policies can impact on the four aspects of the Diamond given above. • Chance events: for example wars and civil unrest or chance discoveries can also change the four aspects of the diamond unpredictably. However, even if Porter's Diamond suggests a country is a good environment, the results of the analysis should be used advisedly. <Go back to list of models> <Go back to Question 9> Evaluation of strategies Question 10: Nov 2012 – Q3 - Paper E3 a) GGG could utilise the Ansoff growth vector matrix to analyse the possible future strategic directions it could follow. Market Penetration GGG could attempt to increase its market share with its existing services to its current market or region. The market is a growing one; with the change in demographics, therefore, market penetration is a real option for GGG. As it currently has 25% of its region's market with the rest fragmented between local government run and privately owned care homes, there is potential for GGG to undertake promotional activities in order to obtain business from these competitors. In particular, the sale and closure of a number of the privately run care homes could be an opportunity to obtain a greater share of the market through targeting these care homes customers. GGG may have to consider its pricing strategies however, as its prices may well be higher than its competitors. It may need to consider a reduction of prices or some form of discounted offer to attract customers who are currently paying less than they would be charged in GGG’s care homes. Product Development GGG could attempt to offer new services to its existing market or region. Within the scenario, there is mention of a new ‘relief package’ facility that is becoming popular with customers. GGG could consider offering its facilities for customers within its region for this new service. This would have to be investigated further to ensure that GGG has the capacity and facilities to offer such a service. If there is clearly a growing need for this type of package, then GGG could try to gain early market entry in order to gain early mover advantage. The issue for GGG is likely to be capacity constraints and the need to weigh up the benefits and costs of the option against those of offering continued longer term care to its residents. In addition, the additional services that could be offered by the qualified staff and nurses of GGG to its patients as an alternative to referral to hospitals could be a form of product development. However, this is likely to involve investment in re-training and facilities.

Market Development GGG could attempt to increase its revenues by offering its current services to new customers or at a different geographical location. One option would be to consider moving into another geographical region in its own country to offer its services to the elderly. This is a possibility as the national geographic trend suggests increasing demand nationally for elderly care. However, this is a riskier strategy as GGG currently has no experience of its competitive environment outside its own region and the competitive market may be very different. In addition, GGG would require heavy investment in facilities outside of the region. However, the market conditions are likely to be the same as in its own region and, therefore, it could consider buying or merging with another private care home outside of its current region. However, GGG must consider the rising costs of running care homes and the consequent need for it to price its services accordingly. Diversification GGG could consider offering new services to new customers. For example, the trained staff and nurses could be used to offer other nursing and rehabilitation services to individual customers, other care homes or to GP surgeries. These could be offered within the facilities of GGG or could be offered on site in customers’ homes. GGG’s administrators are also highly experienced and GGG could consider utilising their experience to offer consultancy and management services to other care homes which might consider outsourcing their management and administration function to GGG. b) According to the Johnson, Scholes and Whittington approach, an organisation's potential strategies can be evaluated against the following criteria: Suitability: whether a strategy fits with the organisation's operations and its strategic position. Acceptability: whether a strategy fits with the expectations of the stakeholders. Feasibility: whether the strategy can be implemented, taking into consideration practical considerations such as time, cost and capabilities. GGG must consider if the proposed strategy is suitable to respond to environmental events and opportunities and whether it fits with the current strategic position. It would need to consider whether it had the right level of resources and competences. It would also have to consider its key stakeholders in terms of both risk and return. It is important to note that GGG must also consider ‘who’ their customers are, as customers will include not only the actual residents of the care home but also their families or their current carers. Reviewing each of the strategies identified in the Ansoff matrix, GGG should consider: Market penetration Suitability: This strategy would appear suitable as GGG has spare capacity and also this option builds upon GGG’s current expertise so there is clear strategic fit. Acceptability: The key stakeholders such as staff and management are unlikely to be opposed to this strategy as it is a mere development of the current activities of GGG. Existing customers should find it acceptable as long as current standards of operation are not affected if the care homes now take on more customers. Feasibility: GGG has the resources in terms of capacity and competences to undertake this strategy. However, further growth could mean the need to invest in more facilities if spare capacity limits are exceeded. GGG would also need to consider the costs of advertising. Product Development Suitability: This strategy continues to fit with GGG’s strategic position and would certainly exploit an obvious market opportunity. It will complement the existing long term care facilities and should help to balance GGG’s portfolio. Therefore it is suitable. Acceptability: Staff may find this strategy unacceptable if it requires additional training or detracts them from the care of GGG’s existing long term care customers. Existing customers should be neutral in the decision as long as it does not affect the standard of their care and potential customers are likely to be positive towards the proposal. Feasibility: Investment in facilities and training may make this option unfeasible but GGG would have to weigh up the long term benefits of building market share through subsequent conversion from

short-term care residents into long-term residents and by improving quality of care by providing services in-house rather than necessitating referral to hospital. Market Development Suitability: There is certainly a potential for opportunities outside of its current geographical region. The national trend suggests increasing demand nationally for elderly residential care. However, GGG has no experience of its competitive environment outside its own region and the competitive market may be very different. GGG does not know whether its own service would be superior from that offered by competitors. Acceptability: Staff and managers may not find this strategy acceptable as it might affect their own workloads, location and roles. However, current customers are likely to be neutral to the proposal. Feasibility: Can GGG find the right facilities or a suitable partner to merge with or acquire? Costs of relocation of some staff or recruitment and training would need to be carefully considered. There might be some resistance from staff and competitors. Also, GGG needs to consider timescales and possible local Government resistance. Therefore, market development may not be feasible. Diversification Suitability: GGG has the necessary skills to undertake diversification although additional training may be required. In the present climate it would appear that the opportunities for this development may be limited. It would fit with the current activities of GGG and therefore has strategic fit. Acceptability: The staff may find this acceptable as it would develop their skills and enhance their job roles. Existing customers are also likely to find this acceptable as it would not mean disruption to them assuming the new services do not detract from their own care. However, GPs and hospitals may not find this acceptable as they may not agree that the same level of care can be offered by GGG’s staff. Feasibility: GGG will have to invest heavily in training and facilities which may make this unfeasible. There may also be resistance to this from local GPs and hospitals. Therefore, GGG may find this strategy unfeasible. c) In the current market and competitive environment, where GGG is managing to remain profitable despite other similarly businesses failing, the recommended options for GGG would be to follow a market penetration strategy with product development. The current geographical market clearly has potential for GGG so there is no need for a market development strategy. A market penetration strategy would allow GGG to exploit the current trends and build upon its own strength and reputation. It is also the least risky option in a time when costs are clearly rising. Product development with the care relief packages should also be considered as it has clear potential for GGG to exploit its current spare capacity and to use its expertise to develop a clearly growing market need. <Go back to list of models> <Go back to Question 10>