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Professional Stage Examination

Monday 7 December 2009


(2 hours)

BUSINESS STRATEGY
1.

Answer all THREE questions.

2.

Answers to questions must begin on separate pages. Use both sides of the paper in your
answer booklet.

Submit all workings.

4.

Ensure your candidate number is written on the front of your answer booklet.

5.

Answer each question in black pen.

6.

The examiner will take account of the way in which material is presented.

7.

The questions in this paper have been prepared on the assumption that candidates will not
necessarily have a detailed knowledge of the types of organisation to which they relate. No
additional credit will be given to candidates displaying such knowledge.

IMPORTANT
Question papers contain confidential information and must NOT be removed from
the examination hall.
You MUST submit this question paper with your answer booklet and enter your
candidate number in this box.

IF YOU FAIL TO DO SO YOUR SCRIPT WILL NOT BE MARKED.

DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO BEGIN WORK.

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1.

Green Cards Ltd (GC) is a specialist retailer of good quality greeting cards, operating through a chain
of shops.
Industry background
Greeting cards are traditionally purchased by consumers and sent by post to celebrate special
occasions such as birthdays, religious festivals, weddings, births, and other important personal
events.
The greeting card market in the UK is substantial, with estimated retail sales of 1,500 million in 2009.
It is a mature market which has experienced slow, but steady, growth (Exhibit 1 on page 5).
There are several different types of retailer of greeting cards. Specialist retailers, such as GC, are
those companies which sell greeting cards as their only, or major, product. These retailers are
dominated by the big five companies with large chains of shops spread throughout the UK. Nonspecialist retailers include department stores, supermarkets, stationery shops, charity shops and
small general shops.
There is significant competition in the industry at all levels, with smaller retailers constantly leaving
and joining the industry. The larger retailers tend to be mid-market, selling for an average of about
2.50 per card and paying suppliers about 1.50 per card. The smaller retailers try to compete on the
quality of the cards and customer service. The highest quality hand-made cards with special design
features are sold through small specialist shops. A recent entrant to the retail market, Cardworld Ltd,
sells very low price cards, all at 1.00 each, while paying suppliers about 0.90 per card.
A recent alternative to a traditional greeting card is electronic cards (e-cards) sent via the internet.
While there has been rapid growth in the use of e-cards, they have not, to date, significantly affected
the traditional greeting card market.
Suppliers of cards
Greeting cards are supplied to retailers by card manufacturers, as even the largest retailers do not
design and print their own greeting cards. The card manufacturing industry is concentrated, with 88%
of the UK market being controlled by the 19 largest companies. In developing the market, card
manufacturers have shown innovation in designs and features and have invested heavily in highly
specialised greeting card printing machines.
The card manufacturers sell their cards to retailers, but also sell directly to UK and international
consumers through mail-order and the internet.
Company history
GC currently has over 40 shops located in large towns and cities in the UK. It sells good quality cards
with up-market designs. GC has retail prices averaging about 4.00 per card and it pays suppliers an
average of 3.00 per card. GCs sales have grown slowly, but steadily (Exhibit 2 on page 5). The
company chairman, Louise Green, explained the companys strategy:
We cannot compete with the larger retailers on price or range as we do not have their scale. By far
the largest retailer in the industry is Mood Cards plc (Mood Cards), (Exhibit 3 on page 5). We
therefore sell in a market niche of higher quality cards, although this niche is only around 10% of the
total market, as most people do not want to pay any more than necessary. We do not, however, sell
the most expensive hand-made cards, which retail at two or three times the price of our cards, as the
market is very small. Also, we pride ourselves on customer service.

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We import most of our cards from a large card manufacturer in the Netherlands, Haad Cards. We
have formed a good relationship with Haad Cards and they dont sell to many other retailers in the
UK, so our cards tend to be different from those of other retailers. However, prices from Haad Cards
have risen over the past year or two.
We are constantly looking to expand. When we see an opportunity to open a new shop in a new town
or city, we will take advantage, but it can take some time for it to become known in a new local
market. We try not to have more than one of our shops in the same town or city.
Environmentally friendly cards
Last year we launched a range of cards to take advantage of consumer support for environmental
issues. These environmentally friendly cards are displayed on separate shelving units in each shop,
occupying about 5% of floorspace. The cards are purchased from new suppliers at an average cost of
3.00, and they retail at an average price of 5.00. They are printed on a mixture of 10% recycled
paper and 90% ordinary paper, and we have made sure they contain the label Made from Recycled
Paper. For each card sold, we donate 0.01 to environmental charities supporting the sustainable
planting of trees.
After a recent review it was decided we are not making enough profit on these cards, so we will
withdraw from this market as soon as possible.
Proposals for a new strategy
Louise and the board have become impatient with slow growth, despite the fact that profits are being
made. Two alternative strategies have therefore been put forward.
Strategy 1
GC has been approached by a high quality cake and confectionery company, Cakes4Occasions Ltd
(C4O), with a business proposal. C4O makes cakes and other decorated confectionery for particular
occasions such as birthdays, weddings and birth celebrations. It makes the decoration specific to the
customer (i.e. with the individuals name or a special message written onto the cake).
C4O has proposed that it takes 20% of the floorspace in all GC shops, in order to make its own sales.
C4Os marketing director explained the proposal at a recent meeting between the two companies:
Our proposal would give us space in key locations, and it would link our product to GCs cards which
are also up-market and are bought for special occasions. This cross-branding would benefit both
companies. We would be prepared either to pay GC a rental of 100 per square metre per annum, or
to pay a fee of 10% of the revenue that we generate in GC shops. Initially a one year agreement
would be appropriate.
Strategy 2
GCs finance director has proposed an alternative strategy. He argued: If we cant increase sales,
then we need to improve profit by cutting costs. Staffing is the largest cost, so I propose we reduce
staff by the equivalent of one full-time employee in each GC shop. I think we will see the benefits in
profits quickly.
It is not possible to undertake both Strategy 1 and Strategy 2.

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Requirements
(a)

Prepare analyses for the following sections of the Porters Five Forces model for the greeting
cards retail industry in the UK.
(i)
(ii)

(b)

Power of suppliers
Threats from substitutes. (7 marks)

Using the Exhibits and other information provided for the years 2007, 2008 and 2009:
(i)
(ii)

prepare an analysis of GCs competitive position in the greeting cards market, and
explain any threats to GCs competitive position
evaluate the performance of GC and draw comparisons with Mood Cards plcs
performance. (18 marks)

(c)

Discuss the ethical and business implications of GCs participation in, and withdrawal from, the
environmentally friendly cards market. (6 marks)

(d)

As an assistant to the finance director of GC, prepare briefing notes which:


(i)
(ii)

evaluate each of the two proposed new strategies; and


give clear and reasoned advice as to which of the strategies GC should choose.

Use relevant data and calculations to support your arguments where appropriate. (12 marks)
(43 marks)
Exhibit 1 UK greeting cards retail sales data

Sales revenue (m)

2009
estimated

2008

2007

1,500.0

1,435.0

1,396.0

2009
estimated

2008

2007

10.58
0.846
46
6.9

10.08
0.806
42
6.3

9.50
0.760
38
5.7

460

420

380

Exhibit 2 Data for GC

Sales revenue (m)


Operating profits (m)
Number of shops
Total floorspace
(000s sq metres)
Number of employees

Exhibit 3 Data for market leader Mood Cards plc

Sales revenue (m)


Operating profits (m)
Number of shops
Total floorspace
(000s sq metres)
Number of employees

2009
estimated

2008

2007

460.0
46.0
920
184

418.0
37.6
930
186

380.0
30.4
940
188

9,200

9,300

9,400

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2.

Jon Toman and Mike Landowne resigned their lecturing posts in Computer Science at the University
of Northern England in 2007 in order to set up Efficiency Systems Ltd (ES), which develops and
markets software for operational processes in businesses and public sector organisations.
Expanding the business
After an initial two year period establishing ES, it became apparent that more finance would be
needed to expand. Great Western Bank (GWB) offered to consider making a loan, provided that ES
produced an appropriate business plan.
Jon and Mike, the two directors, have drafted some sections of the business plan, but have
approached their firm of business advisers for assistance in completing the plan in a form that can be
presented to GWB. The directors also require advice on the likely risks arising from their strategy and
operations that may concern GWB.
NOTE: The draft business plan, prepared by the two directors, is the Exhibit on pages 8 and 9.
Requirements
As a senior in the firm of business advisers acting for ES:
(a)

Prepare the following sections for inclusion in the business plan:


(i)
(ii)

critical success factors


mission statement. (8 marks)

(b)

Critically assess each section of the directors draft business plan (see Exhibit) to be
presented to GWB to raise the required finance. Identify additional information that should be
included. (15 marks)

(c)

Explain the key risks facing ES, assuming that the required finance is provided by the bank.
(9 marks)
(32 marks)

PLEASE TURN OVER

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Exhibit

DRAFT BUSINESS PLAN EFFICIENCY SYSTEMS LTD


Efficiency Systems Ltd
Contents
1. Introduction and management
2. Products and services
3. Fees
4. Marketing
5. Competition
6. Financing requirements
7. Revenue and cash flow
8. Mission statement (to be completed)
9. Critical success factors (to be completed)
1. Introduction and management
ES was established in 2007 by ourselves (Jon Toman aged 45 and
Mike Landowne aged 62) in order to develop software to promote efficiency
in clients operational processes. We are the sole shareholders and directors
and we do not currently have any employees.
2. Products and services
ESs key product is a process scheduling software programme, Comax. This
measures and monitors the efficiency of operational processes in a wide
range of industries by recording and monitoring the time and resources spent
on individual tasks. This data can be applied to optimise how labour and
other resources are used in operational processes. Comax works as a
standard programme, but it can also be adapted and customised to suit the
needs of each client.
ES owns the intellectual property rights to its products and has recently
rejected an offer of 500,000 from a large company for the rights to all its
programmes currently in operation and under development.
Example - Case study
One existing client provides gas maintenance, repairs and fitting services to
individuals and businesses. The use of our Comax software enabled:
visits to be scheduled more efficiently, thereby improving labour usage
inventories of parts held on vans to be managed more effectively to
prevent return visits
the client to monitor the output of its service engineers more effectively
We intend to develop ES by writing new programmes which will link to mobile
phone technology. We call this Z-Info. This will enable real-time monitoring
of clients operations and the immediate capture of information. Z-Info has
not yet been fully completed, but initial testing is promising.
3. Fees
Fees are generated from a number of sources:
(a) Initial sale and installation of our software
(b) Initial training of clients staff to use the software
(c) Continuing advisory work on systems and operations to enhance cost
reduction by using the software

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As most of the fees are earned from initial installation and training
undertaken in the first year with a new client, it is essential that more new
clients are attracted in future. New finance for the development of the Z-Info
system is therefore essential for the expansion of ES.
4. Marketing
Our existing client base comprises small companies. In order to obtain larger
clients we need to win competitive tenders. Public sector organisations,
service companies, and industrial maintenance and repair businesses are
our key target markets. To win tenders we need to operate on a larger scale.
With the additional funds Mike will complete the development of Z-Info. A
pilot version has been well received in a trial run at one client. However, it
needs further refinement before it can be sold commercially. We will also
employ two support staff.
5. Competition
The key competition comes from eight medium-sized firms (with over 10
employees) offering similar services to ours.
We expect between three and five credible tenders to be made for each
contract we try to win. These will mainly be from among the medium-sized
firms, but one or two will come from smaller companies such as ourselves.
We believe ESs competitive advantage comes from a product that is
superior to that of most of our immediate competitors.
6. Financing requirements
We each initially invested 100,000 in the business through personal
borrowing. ES currently has no debt as it previously had no historic record of
trading.
ES needs to borrow 250,000 and we are prepared to use our homes, in
which there is equity of 400,000, as security for the company loan.
7. Revenue and cash flow
2007
2008
2009
2010
2011

Revenue
200,000
320,000
350,000
550,000
750,000

Net operating cash flows


50,000
60,000
60,000 (estimated)
100,000 (forecast)
200,000 (forecast)

Assumptions
- Directors remuneration will continue at 40,000 per year each
- Sales of Comax and Z-Info for 2010 and 2011 are stated on the
assumption that new finance will be available to finish the development
of Z-Info and that one tender in three is won (which has been the
average achieved to date)

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3.

Total Equipment Hire Ltd (TEH) hires out plant and equipment to construction companies and small
building firms. The company has a high level of debt.
Company background
TEH has three product lines:
Product line

Examples

Customer type and period of


hire

% of
TEH's
revenue

Heavy
equipment

Bulldozers, cranes, diggers,


excavators and concrete pumping
vehicles (includes trained operator)

Large construction companies


for periods of over a month

70%

Small tools and


equipment

Hand tools and small items of plant,


such as generators and pumps

Small building firms for periods


of less than two weeks

20%

Scaffolding

Scaffolding

Existing customers who will also


hire large or small equipment at
the same time as scaffolding

10%

Each product line is run as a separate division, although all equipment is stored and maintained at
one site, so many of the costs are incurred jointly.
TEHs equipment is of good quality, reasonably new and well maintained. The companys support
service is also good, with prompt and efficient delivery to the customers site for all items. As a result,
the business is perceived as being above average quality and hire charges therefore include a price
premium over many rivals.
Total revenue was 240 million in the year ended 31 December 2008, but is estimated to fall to
around 180 million in the year ending 31 December 2009. The reduction is reasonably evenly
spread, in proportionate terms, across the three divisions and is due to both volume reductions and
price discounts.
Impact of the recession
The building and construction industry has suffered in the recession. As a consequence, demand for
equipment hire has reduced very significantly in 2009 compared to 2008. There has been a significant
reduction in the number of days hiring, but also there is fierce competition in the industry resulting in
downward pressure on hire charges.
The key industry benchmark is a utilisation rate of 90% (i.e. equipment is being hired out nine working
days in every ten) but, up to the end of 2008, TEH operated with a utilisation rate of around 80%. This
lower utilisation rate was due to TEH holding a wide variety of equipment to satisfy customers
occasional needs for infrequently used equipment. Customers were therefore attracted to TEH for all
their equipment needs as a comprehensive service was provided. In 2009 TEHs utilisation rate has
fallen to 70%, compared to an industry average of 78%.
TEH estimates that it will make a loss for the year ending 31 December 2009. Operating cash flows
have been negative and the company is unable to borrow further. As a result, there is doubt over
whether the company will be able to make the half yearly interest payment of 15 million that is due
on 1 January 2010. A board meeting has recently taken place.

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The board meeting


Helen Chen, the finance director, opened the meeting: We need to generate cash quickly by selling
some of our equipment. I know we will make a loss on sale, but I think we need to sell off about 20%
of our equipment in order to generate cash of around 60 million. Where we have more than one item
of the same type of equipment we could sell off one, so we maintain our product range. We also need
to cut costs. We spend far too much on customer service and delivering equipment promptly. We
need to reduce our labour and transport costs, even if the service to customers deteriorates.
Paula Penny, a non-executive director, interrupted: I agree that cash needs to be generated from
selling equipment, but we should be more focused on closing down one division: either small tools or
scaffolding. The performance of these divisions needs to be measured to decide which one to close.
Frank Fitt, the operations director, was furious with these suggestions: If we sell off that amount of
equipment we will destroy our whole strategy, as we will lose customers who want a complete product
range from one hirer. During the recession, we know we will also only raise cash for about half what
the equipment is worth.
The managing director, Jeff Jones, joined in: I prefer not to sell equipment. Instead, I have entered
into some tentative negotiations with a multinational shipping and transport company, International
Transport and Trading plc (ITT). A central African country is having a major dam constructed and it
has an urgent, but temporary, need for heavy plant and machinery. ITT has suggested a joint venture
whereby, under a three year contract, we would make available up to 40% of our heavy plant and
machinery.
According to the proposed contract, this equipment needs to be available for immediate transport to
Africa on request. ITT would transport the equipment to Africa and deal with the customers in return
for 50% of the rental fee. ITT would collect the fees directly from the client and then pay TEH its
share. It is estimated that the gross rental fees would be about 75% of the equivalent hires in the UK,
but utilisation will be near 100% for requested items during their time in use on the project in Africa.
ITT has offered, on signing the agreement, to make an upfront payment of 10 million to TEH in
respect of our share of future hirings on the project, to help us with our short-term liquidity problem.
Requirements
(a)

Explain the potential impact on TEHs strategy and operations which could arise from Helen
Chens proposals for divestment of equipment and cost reduction. (8 marks)

(b)

Discuss the issues to be considered in measuring the financial and non-financial performance
of the small tools and scaffolding divisions in order to determine which division should be
considered for closure, in accordance with Paula Pennys suggestion. (8 marks)

(c)

Evaluate the benefits and problems of Jeff Jones proposed joint venture arrangement with
ITT. Identify any matters that need to be clarified between TEH and ITT before a decision on
whether to proceed with it can be made. (9 marks)
(25 marks)

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