Business Strategy

May-June 2012

1: As a consultant specializing in risk management, you have been appointed by the Director of
Corporate Development to undertake a comprehensive review of the risk, facing the Bangladesh
based Sky Ways Airlines (SWA), as a precursor to the latest strategic planning process.
You are told that the extended supply chain of SWA makes it reliant on suppliers of fuel, aircraft
parts, air traffic control etc. SWA has increased its borrowings this year and its liquidity ratio has
fallen below one and it has negligible retained earnings. It has also experienced increased
dissatisfaction from employees as a result of voluntary redundancies arising from moving to a new
more efficient terminal and, apparently, the loss of control over them by the decline in influence of
the Trade Unions,
The Engineering Director has advised that the International Civil Aviation Organization has shown a
preference for the International Risk Standard developed by the Institute of Risk Management.
Requirement:

Prepare a report, identifying the range of externally driven risks to which SWA is subject to and any
internally driven risks. Suggest appropriate improvement to control the risks you identify. 20 ·

Answer:
1.0

To Director of Corporate Development, Sky Ways Airlines

From Risk management consultant
Date Today
Subject Identification of major risks of SWA & their management

This report has been commissioned by the Director of Corporate Development to illustrate the risks SWA
are subject to and to identify appropriate controls. This report does not attempt to identify every possible
risk SWA may face, rather tries to identify the major risks from the given information and tries to
recommend suitable controJs to manage those risks.
' .

The report is structured in two-columnar approach where the left column outline the risk and the right
column articulates recommendations to mitigate the respective risk.

1. External Risks
A. Interest rate risk
A change in the interest rate can affect the cash flows Avoidance of floating rate debt by switching
of the company where there are debts owed by the funding to equity or fixed rate debt or
company at variable rates. interest hedging.
B. Foreign exchange risk
I
Loss ma occur when exchanze rates chan e and affect - Denomination of sales in domestic

Page 26
 _Methodology to Manage Risks
adversely the receipts from payinents denominated in currency where possible;
foreign_ currency ahd the changes in the volumes of
business as the foreign currency costs of tickets - Exchange rate hedging;
changes. - Development of streams of earnings and
expenditures that are matched for each
currency.
C. Regulation risk
Loss may occur in the form of the costs of complying Compliance with regulations. SWA will need
with changes in aviation regulations, fines for to have robust procedures for all operations
noncompliance and of disruption to operations if that can be inspected and verified by
aircraft are grounded. regulators.
D. Cultural risk
Risk may arise in the form of commercial failure, - Taking appropriate advice on cultural
reputation damage or disruption to operations -due to issues;
mismanagement of cultural issues like: the adverse . Business partnerships with local operators.
effects of staffing or advertising decisions or poor
service.

E. High bargaining power of suppliers

Over reliance on suppliers may result in the collapse or
poor performance of suppliers or aggressive action on
their part such as levying of increased prices.
F, Intense competition among rivalry
This imposes the commercial risk of reduced profits •
through lower prices and volumes
« and increased costs
of participation in the industry (service quality,
promotion etc).
G. Customer changes
Includes Joss of key customers, failure of key target
customers, or sharp changes in customer demand
patterns.
2. Internal risks
H. Liquidity and cash flow
- Development of dedicated procurement
and contracts function'within SWA;
; Multi-sourcing of inputs to avoid excessive
reliance on one;
• Engagement of suppliers in long-term
contracts.
Competitor monitoring and analysis;
Development of competitive advantage
such as brand or unique access or
technology;
Acquisition of competitors.
• Operation of a flexible fleet able to be
adapted to serve a variety of customer
types and destinations;
Provision of a portfolio of ticket prices
and service levels;
- 'Avoidance of reliance on one or a few
main clients or destinations.
I

Page 27
 4 t
Methodology to Manage Risks
Borrowing increased during the latest financial year. - Tightening the credit collection
SW A has a liquidity ratio below 1. This means that any procedure to reduce receivable collection
interruption to its business and cash flows could period and thus liquidity ratio will be
potentially leave it unable to pay its creditors. improved through increasing in
receivables;
Revised the existing dividend policy for
Moreover it has insufficient retained earnings to meet
a temporary period to improve the
its present operating capital needs, so may not be able
retained earnings;
to repay any loans falling due in the near future. Any
fall in liquidity may make SWA unable to maintain its • Inject fresh capital (if possible) to
dividend and hence jeopardize its share price. increase the company's ability to pay
obligations.
/, Employees and supply chain
Both internal risk drivers are present with the increased - Motivation to employees to be improved
dissatisfaction of employees with the voluntary thorough various means like: increasing
redundancies resulting from the new terminal and, pay-scale, increasing retirement benefit
apparently, the loss of control over them by the decline provisions, provide various non-cash
in influence of the Trades Unions. benefit etc.
Increase control over them by improving
the influence in Trade Unions.

This report has identified the range of major risks present in SWA's environment and also those to which
it is subject from its own internal structure and operations. Some appropriate management controls have
been suggested to tackle those risks.

[Tutorial Note: Alternative approach may be used in writing the report where the ways for managing an
individual risk will be followed the description of that risk. Another way can be used to answer this
question where at first section, all risks will be articulated and the second section will contain the
recommendations for described risks. However, these two approach will take minimum five minutes more
than the two-columnar approach (as used in preparing the report) due to the necessity for repetition of the
words "Ways to manage risks" or name of the risks respectively. Thus Two-columnar approach has used
to solve this question just because of saving. time by not repeating the same thing as for answering a
question of 20 marks, maximum available time is 30 minutes.]

Rage 2&
 2. Y Ltd manufactures car seats for children. Y's home country, Z land, has extensive legislation on
car safety for many years and child seats arc compulsory. The company was formed IO years ago
by an entrepreneur who had previously worked as a technical consultant for an industrial foam
company. Despite strong competition, Y Ltd has succeeded largely by careful marketing.
The car seats come in a range of sizes and there are a variety of options from fully integrated
seats for very young babies to booster seats for older children. The company's main customer is
an accessory manufacturer with a major presence in Y Ltd's home market. It buys the car seats
from Y Ltd and sells them under its own brand as 'safety approved'. It advertises the car seats in
accessory brochures and on its website. The company's second major customer is a large
superstore in the home country which specializes in children's clothing and accessories such as
prams and pushchairs. The remaining sales are to a varied mix of large and small mainly
independent car accessory retailers.
The car seats have historically all been produced on a single site in the north of the home country.
The Managing Director uses his connections to source the padding from several suppliers with a
commitment to achieving the lowest price but complying with all safety standards.
The company is considering possible methods of expansion and is currently considering exports
to neighboring countries.

Requirements:
(a) Explain how condition in Z land could give Y Ltd a competitive advantage when it starts its
export operations. IO

(b) The Managing Director of Y Ltd is constantly trying to improve the productivity and quality of
his manufacturing operations and is considering a program of benchmarking. Explain why a
benchmarking program would help Y Ltd and suggest how it might be carried out. IO

Answer:
2 (a)
There are four elements of national competitive advantage that facilitates the export efforts of a finn. Z
land could give Y Ltd a competitive advantage as Z land's condition contains all of these four elements.
These elements are discussed below:

Factor conditions

These are a country's endowment of the inputs to production, such as human resources, physical
resources, knowledge, capital and infrastructure. Z land appears well endowed with these inputs.
Demand conditions
This element determines how customers response to the product or service of a company. Demand
conditions in the home market have determined how Y has responded to customer needs. Careful
marketing has made this response successful and Y has an enviable reputation at home for quality,
innovation, reliability and customer focus that should transfer well to the world market. The success. that
has been achieved to date has meant that Y has the necessary economies of scale to be able to compete
globally.

ure?v
Related and supporting industries
The presence of related and supporting industries at home, which have to date supplied Y with the
components it has needed for its successful products, will be important in launching those products
internationally. The continued support of these suppliers will be vital, at least in the initial stages of
international development. Y must assure itself that these suppliers have the resources to provide a higher
level of support. Otherwise, international suppliers may need to be sought and this will demand closer and
more complex supply chain management.

National firm strategy, structure and rivalry

Y has been successful against strong competition in the domestic market and this has provided good
training for the international market, which may feature more and larger, competitors than Y has been
used to facing at home.

2 (b)

Necessity of benchmarking
Benchmarking can be very useful for business, both in relation to internal processes and to wider
management concerns. Internally, the adoption of best practice should improve productivity; reduce waste
and costs associated with quality failures; and contribute to increased customer satisfaction.
At the operational management level, benchmarking is useful if there is any tendency to complacency and
it can improve awareness of the processes by which value is currently created and how they could be
improved in the future.
At the strategic level, benchmarking can be an important contributor to awareness of competition in the
changing task environment and how the company is responding to it, both practically and strategically.

How to carry out benchmarking

If Y Ltd were to undertake a program of benchmarking, it would be necessary to identify the areas in
which improvement was sought and to decide how such an improvement would be identified and
measured.
Since benchmarking is about processes rather than results, measures would have to be more detailed than
the usual summary measures used in normal management reports. It would then be necessary to identify
suitable benchmarking partners. Y Ltd need, not, of course, benchmark against competitors, or even
against other motor accessory manufacturers. Its distribution operation, for instance, might be compared
with a similar operation in a completely different industry.
Once a scheme of measurement and comparison is in place, it is necessary to determine what
improvements are possible and to implement them.
For better results to be obtained from benchmarking, it is necessary to embed the responsibility in the
normal management structure for making and monitoring the necessary changes. Success and failure in
making and continuing the agreed improvements can then be monitored as part of the normal
performance review process.

3. (i) Describe how each of the following information system can perform, and the level they serve
in the organizational activity: 15
a) Transaction Processing Systems (TPS)
b) Office Automation System (OAS)

<77
 c) Knowledge Work Systems (KWS)
d) Managerpent Information Systems (MIS)
"
e) Decision Support Systems (DSS)

3 (ii) The airline industry as a whole is loss making, Even successful airlines struggle Lo get an
operating margin above 10%,
Using the following models identify contributory factors to the low rates of profit in airlines .
ft
i) Industry life cycle 3
ii) Porter's Five Forces.
7
iii) Indentify potential strategies to restore profitability in the light of your analysis. 5
Answer:

3 (i) (a) Transaction Processing Systems (TPS)

TPS are operational level systems that perform and record the daily routine transactions necessary to
conduct business. They provide information about the efficiency of operations and activities, but are
limited in the support they provide to management decision-making.
The TPS routinely captures, processes, stores and outputs the low-level transaction data. It is normally
characterized by the use of one of the following methods of processing:

Batch processing -e.g., payroll systems;

Online processing - sales order entry systems;
Real time processing - inventory control systems.

3 (i) (b) Office Automation Systems (OAS)

OAS serves the information nee,ds of the data workers at the knowledge level of the organization. Typical
office automation systems - I'

create, handle and manage documents (through word processing, desktop publishing and digital
filing), -
manage workflow and scheduling (through electronic calendars),
help financial managers manage client portfolios, manage projects and communication (through
electronic mail, electronic bulletin boards, voice mail or teleconferencing).

Spreadsheets, presentation packages, personal database systems and note-taking systems are all part of
OAS and are designed to increase the productivity of data workers in the office.

3 (i) (c) Knowledge Work Systems (KWS)

They are information systems that aid knowledge workers in the creation and integration of new
knowledge in the organization. To do this they need to link the worker to external and internal
( organisation) information.'

Page 3I
Examples of KWS include the following:

Computer Aided Design (CAD) systems

Virtual Reality systems for simulating the real world e.g., flight simulators
Investment workstations - used in the financial industry
Group collaboration systems
Intranet environments include Internet technologies used for communication purposes

3 (i} (d) Management Information Systems (MIS)

Information systems at the management level of an organisation that serve the functions of planning,
controlling, and decision making by providing routine summary and exception reports.

The format of the information supplied is determined by the abilities of the user and by the use that will
be made of it.

Strategic management will require information that is broad, aggregated and summarized;
Tactical management requires information that is more detailed and tailored to the user's needs or
area of responsibility;
Operational management require very detailed information specific to their responsibility area.

3 (i) (e) Decision Support Systems (DSS):

Information systems also at the management level of an organization that combines data and sophisticated
analytical models to support semi-structured and unstructured decision-making.

The DSS does not itself make the decision, it merely assists in going through the phases of decision
making. The system sets up various scenarios and the computer predicts the result for each scenario by
using a process of 'what if?' analysis.

There are three basic elements to the DSS:

A language sub-system (called a structured query language or SQL);

A problem processing sub-system, which includes spreadsheet, graphics, statistical analysis;
A knowledge sub-system, which includes a database function.

3 (ii)

Industry life cycle

The industry seems to be at the shakeout phase with overcapacity due to many operators and
liberalization of competition leading to greater competition on profitable routes. Consolidations and
failures have occurred.'

Rage 32
 Porter's Five Force

Buyer power 1
i

Increased availability has led to more choice in the market;

The growth of electronic booking services has restricted ability of airlines to charge full price;
The change in the nature of the buyer towards short-haul leisure where price is more important
than it was to business travelers.

Supplier power

Aviation fuel accounts for 30- 35% of costs and is determined by oil producer cartels and large
oil companies;
Airframes are provided by two firms (Boeing and Airbus) and engines by three firms (GE, Pratt
and Whitney, Rolls Royce);
Airport landing plots and services are provided by national monopolies.

Substitutes

Faster trains with better facilities which travel to centre of cities;

Alternative leisure e.g. cruises;
Technologies such as video-conferencing.

Threat of Entrants

Low cost point-to-point providers attack by short-haul router;

Growth of business only services on major routes;
Opening up of competi_tiof by bi-lateral agreement.

Competitive rivalry

Very high fixed cost industry makes competition for volume force prices down towards marginal
cost;
Limited opportunities for differentiator given similarity of aircraft and Destinations;
Volatile demand due to seasons and economic/political factors.

Restoring profitability

Consolidation of airline industry to reduce capacity;

Operate alliances to rationalize competition and benefit from economies of scale (ground
handling, fuel purchase etc);
Oppose increasing take off and landing slots or greater competition;

So
Page 33
 Reduce fixed costs, e.g. by outsourcing, use of operating leases, better capacity planning;
Differentiate service to gain higher yield per passenger.

4. Com pany history

Foodfair was established thirty years ago by three friends, Alam, Dula! and Fahim who remain the
company's only shareholders. The firm is in the catering business and currently has an output of I
about 26,000 meals per week. Fahim retired from full- time employment with the company five years
ago and was appointed Chairman. He was regarded as the most talented manager and astute
businessman amongst the founders. Alam and Dulal are still full time working directors but will
probably retire within the next year or so.

Products and markets

The company produces ready- to- eat meals for factories, schools, airlines and social events. Sales are
of two main types-to other catering organizations which have sub-contracted to Foodfair (these
customers are referred to by Foodfair as 'bulkbuyers') and to 'final consumers;

A breakdown of revenue and gross profit (GP) are as follows:

The products which Foodfair sells to the two types of customer are different. Meals sold to other
caterers tend to be bulk sales allowing long production runs of one menu.
The catering customers of bulk sales specify very closely the portion sizes, contents, nutritional
value and cost of the meals; the menus are often standardized. Meals being produced for final
consumers, however, have much more variety and are less standardized. Final consumers take
Foodfair's advice, and the company employs chef and a nutrition expert to design and oversee the
production of these meals.
Foodfair has long-established links with many food suppliers who are adept at supplying
ingredients of the proper quality. A considerable range of quality is used, depending on how the food
is to be cooked and on the cost limits imposed by buyers. Bulk buyers are particularly precise when
stipulating meal contents. Recently a batch of meals was rejected because the carrots had been
chopped into circles rather than into little sticks. The final consumers are not fussy.
Until recently Foodfair followed pricing policy of full cost plus about 14% on all its contracts.
However, the bulk buyers have become very well informed about the raw material and processing
costs. and are thus able to make a good assessmenLof Food fair' s costs. Contracts have become
very competitive. The most recent bulk contract attracted eight bids; the buyer took the three
best bids and divided the order amongst them at the price given by lowest quotation.

Production
Liton (the General Manager) and Waliullah (the Executive Engineer) saw increased efficiency

S(
 as the key lo the firm's survival, and the firm recently spent Tk.500,000 on efficiency
improvements (work study, machine modification, new machines and incentive schemes). Some of
these changes were in anticipation of stringent EU hygiene legislation. Waliullah subsequently
left, taking with him enormous practical expertise. Liton estimates that maximum meal production
at the present factory is 30,000 per week. Recently, it produced 28,000 meals. Pre-
occupation with the machinery and efficiency improvements has meant that Liton has shelved
plans to look for a large building which would have given scope for even greater production.

Management and personnel

Since Waliullah's departure the only managers left below board level with any significant
experience are Liton and the sales manager. Liton sees his major role as that of coordinator. Training
is not given a high priority and no managers have been given anything beyond technical
subjects. Turnover amongst staff is low and there is a friendly atmosphere; wages are regarded as
fairly good. However, Liton is himself thinking of leaving as he can see no prospect of improving
his position at Foodfair unless he were to obtain a seat on the board. Recently a friend of him set up
a catering business and has had a very profitable first year. Liton provided Tk.5,000 of the start-up
capital.

Foodfair's recent performance

Despite the problems noted above, recent sales have been strong. The company has a good
reputation and a lot of business comes through recommendations from satisfied customers.
Foodfair does not advertise exclusive, although recently it did send out a mailshot to local
businesses offering catering facilities for meetings, presentations and general entertainment
functions, there was a negligible response that could be traced to this.
The future
Minutes and reports of recent meetings have raised the following points:

(1) Amongst several large contracts coming up for tender is one for a local large engineering
works (1,200 employees). Despite its size this would not be regarded as a bulk buy contract.
(2) Changes in the food manufacturing business mean that there is an increasing trend among end
users to sub-contract the running of their canteens to caterers which act as catering facility
managers.
Fewer companies are willing to employ their own catering staff. The country has imposed new
hygiene laws and businesses are wary of having themselves to administer and run canteens,
(3) One major catering company is currently building its own food production facility.
(4) Decisions on the firm's future are likely to be made solely by Alam and Dulal, with
little attention being paid to the views of senior managers. Dula] has recently overruled Liton on
a number of production decisions and this caused a loss of efficiency and the scrapping of a
significant number of meals. In addition, a sales representative was appointed by Alam
without reference to the sales manager.

Requiremet

(a) For each of the five years for which information is supplied, calculate the company's overall
weighted average gross profit percentages. Comment on these figures and on the figures
supplied to you. IO

Page 35
 (b) Write a memorandum to the Chairman which covers the following areas:
i) An analysis of competitive pressure within the two customer group.
ii) Appropriate generic strategies.
iii) The implications of chosen strategies for organizational structure.
iv) Options for production capacity.

Your memorandum should make recommendations for what you consider to be key issues facing. 20

Answer:

4 (a) Gross profit percentages

The overall gross profit percentage will be a weighted average of the margins of the two sectors.
Current year (50% X 8%) + (50% X 15%) = 11.5%
20X9 (55% X 10%) + (45% X 14%) =11.8%
20X8 (45% X 11%) + (55% X 13%) =12.1%
20X7 (40% X 12%) + (60% X 13%) =12.6%
20X6 (35% X 12%) + (65% X 12%) = 12.0%

Since 20X7 the company's overall gross profit percentage has fallen. This has been caused by two factors:
(1) The proportion of the low margin bulk sales business has been increasing until current year;
(2) The bulk sales margin itself has been decreasing .
•.
The effects would have been worse if the margin on sales to final users had not increased. In the current
year the proportion of sales to the two sectors has moved back towards final users. If this had not
happened the overall margin would have fallen even more.

4 (b) Memorandum

To: Chairman, Foodfair Ltd.

From: Consultant
Date: Today
Subject: Strategic analysis on competition, possible strategy and future plan

(i) Analysis of competitive pressures

Competitive pressures on bulk buyers and final users are outlined below:

Bulk buyers

These customers are a few in numbers and they possess professional purchasing skills;
Precise requirements and order may be rejected just for a minor deviation from specification;
Severe price pressure and the gross margin from this sector has been falling steadily;

<g age 36
 Strong price competition from rivals;
Switching costs are very low.
{

Final users

Numerous customers not having skill in purchasing;

Customers take advice on menus which gives a greater opportunity to sell on more;
Price competition is much less severe and gross margins have improved steadily.
Opportunity to compete on expertise and service;

Switching costs can be made relatively high as customers will be reluctant to spend time and money
assessing alternative suppliers.

It seems clear that the final user customer group is much more attractively structured than the bulk buyer
group.

(ii) Appropriate generic strategies

To service the bulk buyer group, a strategy of cost leadership will have to be adopted as this group
monitors its costs very carefully and there is keen price competition and the fact that the product for this
group is standardized.

To service the final user group, a strategy of differentiation would be suitable as this group needs bespoke
solutions and products and they would prefer quality to price. Differentiation means making products and
services different from those of competitors at a premium price.

(iii) Implications of the strategies

Cost leadership implies an emphasis on efficiency and stringent control of costs. This is normally·
accomplished with large production runs of standard products (economies of scale), low cost labour
carrying out specialised tasks, clearly defined hierarchies with centralised control, well-defined jobs and a
management information system that monitors and controls costs and output.
I

Differentiation, on the other hand, implies an emphasis on design, service, flexibility, good costing
systems, more consultative management styles with greater delegation and participation. Because there
will be a greater variety of products made in shorter production runs, design, sales purchasing and
production must be very well co-ordinated.

The different structures, styles and values needed to serve the two sectors may best be achieved by
separating the activities. Divisionalisation of the sales and design teams could allow each to focus on its
respective segment.

(iv) Production capacity

The current maximum production capacity is 30,000 meals per week, and average production is 26,000
meals per week. If the large contract for the engineering works is won, there will be approximately 6,000
extra meals per week to prepare.

Therefore, the factory is likely to be operating above its planned maximum capacity, and any future
growth will be inhibited by capacity constraints.

54
Page 37
Foodfair has some choice:

• Look for larger premises that will allow higher production of all output;
• Look for additional premises that will allow another production line to be set up;
Stay with the existing premises and limit output by concentrating on the more attractive, higher profit,
•
i.e., final user sector.

Conclusion
It is important for Foodfair to retain its remaining experienced managers if the company is to continue
successfully. To retain the managers, the two existing directors must become less autocratic. This could
be helped by making one or both of the managers board members.
The final user market appears to be much more attractive than the bulk buyer market. If the company
intends to pursue both, then it will need extra production capacity and reorganisation, perhaps
divisionalisation, to serve each market. This option would appear to have relatively high risk, especially at
a time when management of the company is weak and the two directors are close to retirement. A safer
option would be to concentrate on the final user market and to withdraw from, or not vigorously pursue,
the bulk buyer market.

The End

s5

Page 38- '