P3-RK-Answers - for acca students PDF

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P3 Answers Environmental issues, competitors and markets and strategic position 1. Budget Airlines (a) Traditional Airlines and Budget Airlines An appropriate model to assess the competitive environment would be Porter’s Five Forces model. The Five Forces are: (i) The bargaining power of suppliers. (ii) The bargaining power of buyers. (iii) The threat of new entrants. (iv) The threat of substitutes. (v) The level of competitive rivalry within the industry. Looking at the traditional airlines: The barriers to entry have been relatively high because of the high cost of the aircraft, the regulation of routes and landing slots, the restrictions on airport services and government concern for national flag carriers. The power of suppliers has been medium as they depend on supplies of aircraft and fuel as well as on the labour force and other non-core services such as catering. Although there are few suppliers of both aircraft and fuel, the aircraft suppliers have few customers and rely on volume which reduces their power while the fuel suppliers are subject to the world oil price and intense price competition. Non-core services have often been outsourced which increases the power of the subcontractors and the labour force, being skilled and well-paid has high power. The threat of substitutes has risen as rail becomes a viable alternative for short-haul flights and conferences and meetings can be conducted without all the participants being in the same place using sophisticated technology. The power of buyers is not high for individual customers but large corporate customers might exercise some buying power. However, in the context of the airline’s total revenue, this is minor. Competitive rivalry is increasing as customers become more cost conscious and the industry has a high level of fixed costs and high exit barriers. This has been partly offset by forming alliances between airlines. The budget airlines have managed to manipulate the five forces to their advantage as follows: – Barriers to entry have been overcome by using secondary airports, remote from city centres, at which landing slots are available, leasing rather than buying aircraft and focusing on short-haul flights. – Supplier power has been reduced by leasing aircraft through intermediaries, dispensing with many non-core activities and hard negotiations with staff. – Buyer power has been kept low by concentrating on the consumer market and selling direct, often over the Internet, to reduce costs. Although the threat of substitutes has been reduced by competing simply on price, the competitive rivalry remains intense.

(b) Sustainable Competitive Advantage Competitive advantage is usually achieved through either differentiating the service and charging extra, or offering lower than normal prices. The budget airlines have clearly gone for the second of these, but it will only be sustainable if they can continue to make profits at these low prices. This depends on their ability to maintain large volumes (to compensate for their small margins) and to keep their costs at the lowest possible level so that they still make a margin on such low prices. Having recognised the potential of this market, the companies concerned have enjoyed the advantage of being first into this market over the traditional airlines. However, the low cost approach is highly susceptible to any fall in volumes and threats of terrorism, or a downturn in the economy could have an impact on the number of flights taken by consumers. As more budget airlines are set up and look for secondary airports, the balance of power is shifting to these airports so that the price of landing slots and other services may rise; at the same time the first of these airlines often received regional subsidies for bringing employment to the local economy but these have now declined as the local authorities have achieved their objectives. The traditional airlines have responded to the budget airlines by becoming more cost conscious and in some cases have set up their own budget airlines which use slots at more centrally located airports, which are far more convenient to customers. As a result, although budget airlines have developed a business model that has been successful in the shortterm, it is unlikely that all of these companies will continue to achieve this level of success in the future. 2. Stakeholders EEE (a) Stakeholder analysis establishes who the organisation’s stakeholders are and the various discrete categories into which they fall; the nature of their ‘stake’, or interest, in the organisation, and therefore their probable objectives; and the extent of their power to influence the organisation’s behaviour. An analysis of EEE’s stakeholder groups using Mendelow’s criteria of power and influence is shown below. Key players (high degree of both interest and influence) The founding family forms a majority of the board and holds 30% of the share capital, it therefore, collectively controls the company. Its members are likely to give strong support to adoption the new process since it will confer a definite competitive advantage. If local government operates as in the UK, it will have extensive power to regulate industrial processes and developments. It will be very interested in EEE because it is a major element in the local economy and in the new process because of the complaints of the local residents. The council will therefore have mixed feelings about the new process. EEE’s employees depend on the company for their livelihood and make a major contribution to its success. They also control or influence 20% of the shares in the company. Their interest lies in the successful introduction of the new process, since the competitive advantage it gives should also be to their benefit in terms of job security and, possibly, pay. Note: The trade union representative who is also a local councillor falls into two of these categories: like the council itself, he may have mixed motivations, to the extent that he suffers from a conflict of interest that he should formally declare to his fellow councillors. Keep satisfied (low degree of interest, high degree of power) The institutional shareholders control 20% of the share capital; the extent of their activity in relation to the running of the company is unknown, but is likely to be minor. They will probably be content if EEE continues to operate reasonably successfully. However, they have the capacity to become interested if a major and costly problem arises. Keep informed (high degree of interest, low degree of power) Local residents fall into two sub-categories. Both will be directly interested in the new process, but any influence they can bring to bear on the company will be mediated through intermediaries. The affluent residents that have complained can only have significant effect through the local council and, possibly, by a media campaign. The effectiveness of either route will depend on how well EEE manages its press and public relations. In addition, the ambivalence of the council already commented on will limit this group’s power.

Other local residents may also be concerned about unpleasant odours, but many of them are likely to be connected to the company through the employment of a family member; this group is more likely to be sympathetic to the new process. Minimal effort (low degree of interest and influence) The remaining shareholders own 30% of the shares but are unlikely to be particularly interested in the new process or to act as a group. (b) The economic advantages of the new process are such that all of the key players are likely to agree that it is very desirable for EEE to adopt it on a large scale. However, the company cannot afford to ignore the feelings of those local residents that object on grounds of amenity. People can be very stubborn and a campaign against the company could, eventually, be very damaging. The company should therefore adopt the process but should also take two important steps to safeguard its position. First, it should be prepared to make a reasonable investment in developing the technology in a way that will minimise the objectionable odours. This might involve further chemical processing or filtering or merely something as simple as only using the process on days when the wind is in an appropriate direction. This will both reduce the potential for actual dispute and provide a basis for the second step, which is careful PR management. EEE should ensure that its operations are presented in the best possible light, stressing the economic benefits to the area and the company’s efforts to be a good neighbour. This will assist the local council to take a positive view of the company and will discourage the formation of a single-issue pressure group by the objecting affluent. 3. CSC clothing (a) In his book The Competitive Advantage of Nations (1992), Porter asked the questions: (i) Why do certain countries have so many successful global firms? (ii) How do these firms sustain this superior performance in a global market? (iii) What are the implications of this for government strategy in relation to competition policy? Porter suggested four reasons and this is known as Porter’s Diamond. Demand conditions at home This allows the firm to enjoy economies of scale, therefore launching a successful platform from which to build up export. This strategy was used by Japan in the 1950s and 1960s, who imposed 400% tariffs on imported motor cars allowing domestic producers to build up their market share in Japan. Related and supporting industries It is important that the dominant firm or industry is supported by world class production of components and related products. The example used by Porter is Sweden, where wood pulp is the major export. This is well supported by a thriving commercial vehicle industry – SAAB and Volvo, and the chemical industry also provides excellent support. Firm structure strategy and rivalry National cultures and competitive conditions create a distinct business focus. If we take Germany as an example – BMW, Porsche, Audi, Mercedes, Volkswagen, are all successful motor manufacturers, especially if we compare them with Ford or General Motors. The car industry in Germany is still competitive within the country. Factor conditions These can be subdivided into two types: Basic factors – such as land, raw materials, labour and capital. Advanced factors – these would include technology, skills, infrastructure and research and development. Applying Porter’s Diamond Forces to CSC Demand conditions at home Although initially a small market their products met the requirements of the Scottish hill farmers and were then bought by affluent city dwellers who saw the product as a brand. Related and supported industries Through collaboration, design synergies were achieved between firms operating within the value chain. Firm structure strategy and rivalry Intense rivalry leads to firm with strong competitive characteristics which were shown by CSC who emerged as

the market leader with the specialist garment business. Factor conditions Basic factors such as climate, labour and the evolution of knowledge and skills play an important part but there is less evidence of advanced factors. Therefore Porter’s Diamond provides a useful framework for analysing national competitive advantage. (b) We can turn to one of Porter’s other models to answer this question. In order to gain a competitive advantage, Porter suggests that a company is either: – A Cost Leader – A Brand (ie differentiated) – A Market Niche The strategy currently pursued by CSC is one of brand and product differentiation, thereby creating a perception of high value to the customer and charging a high price for it. On this basis the decision to switch production from Scotland to South East Asia cannot be based on cost alone. CSC products are not bought on the basis of price but on the basis of buyers seeking to acquire reflected status associated with the product. Each garment is hand made using traditional craft and design, which is a key part of what the customer is buying into. There are two opportunities here, firstly, to reduce costs of CSC products by using inferior raw materials and cheaper labour. The KZ Corporation might also achieve economies of scale and other synergies by having a centrally based production function. However, the risk is far greater. By switching production the company runs the risk of destroying the CSC brand. A similar incident happened in real life. Pringle of Scotland were world renowned for their Cashmere jerseys. They were acquired by a Chinese multinational and production was switched to South East Asia. The Pringle brand has recovered but initial reaction was not favourable. 4. Independent Living (December 2009)

Tutor's Tips Make sure you read the requirements carefully. Part a) states that you just have to say what the organisation is actually doing at the moment, in part b) you should say what is wrong and how to fix it. Also, note that we are dealing with a charity, not a company, so do not make any references to profits / losses!

(a) Independent Living (IL) is a charity that provides work for disabled people. The business processes that IL uses can be examined using Porter’s value chain. Inbound logistics Inbound logistics refers to the receipt and storage of raw materials. IL makes smaller items out of scrap metal collected from local dealers. They use scrap metal in order to keep costs down. In addition, they use their own lorry to reduce costs. Larger items are delivered from the manufacturer and stored on-site. Operations Operations refers to turning raw materials into finished goods In line with the purpose of the charity, IL’s workers appear to be carrying out relatively straightforward tasks in making small items or checking and repackaging larger items. Outbound logistics Outbound logistics refers to getting finished goods to customers. IL takes orders over the phone or internet and allows customers the opportunity to make a donation to the charity. IL uses a courier company to deliver its products in order to be able to supply its products nationwide.

Marketing This refers to letting potential customers know about products and taking their orders. IL advertises in Doctor’s surgeries since this is where many potential customers will be found. IL accept orders via the internet and by phone to allow a choice for the consumer. After Sales Service This refers to any help or support a customer gets after purchasing a product. IL do not provide service for the smaller items since it is not really needed, presumably they simply replace damaged items. Service for larger items is carried out by the manufacturer. The above business processes do not appear to be particularly efficient or effective when compared to low-cost manufacturers since IL had a deficit of $160,000 last year. (b) Looking at ways to improve IL’s efficiency and effectiveness in each area. Inbound logistics The lorry used in collecting the scrap metal is old and unreliable. This is inefficient due to high maintenance costs and ineffective if production has to be ceased due to raw materials not being delivered. The lorry needs replacing, probably with a newer second-hand lorry (to reduce purchase costs) or it may be possible to lease a new vehicle (for better cashflow management). Some of the larger inventory has become obsolete by being left in the warehouse too long. A more efficient method might be to have very low stock levels or even to order a product only when a customer has requested it, i.e. a just-in-time system. Operations Although these operations may not be as efficient and as effective as rivals, to change them would be to go against the objectives of the charity. Outbound logistics For smaller items ordered by local customers, IL might decide to deliver the items themselves as this will be cheaper than using the courier company. For customers living further away, they will probably still need to use a courier, although they may be able to negotiate lower rates. They could also consider acting as an agent for the manufacturers of the larger items. In other words, IL would simply pass on the order to the manufacturer in return for a commission (similar to Amazon marketplace). This would solve problems with both inbound and outbound logistics since the manufacturer would deliver the product directly to the customer. Marketing IL only uses a single-sided leaflet. That may be able to raise revenue by charging another company to advertise on the other side. An alternative might be to make it clearer to potential customers that IL are a charity providing work for disabled people and so their prices might be higher than companies out simply to make a profit. In other words this is trying to add value to the customer by justifying higher prices. At the moment, prices on the internet are the same as for telephone orders even though they should be cheaper to process. Customers might be encouraged to purchase via the internet by lowering internet prices. The telephone ordering appears inefficient and ineffective since class take ten minutes and only 50-% result in sales. Perhaps staff need some kind of customer service training. Again, it might be sensible to encourage internet purchases. After Sales Service Although there is very little that IL can do with regard to the small products they manufacture, they might try to put advice on their website for people suffering with a temporary or permanent disability. This could reflect suggestions for managing pain, caring for someone with a disability etc. The website might also look at the work done by the charity; this again, should add value to justify the higher prices charged. If IL pursues some of the above suggestions, they will obviously have to make sure all the relevant workers are given alternative jobs in the organisation.

IL will never be able to be as efficient as some of their rivals; the key for their success will be to reduce non-value adding costs (such as the obsolete inventory costs) and to improve effectiveness through adding value. 5. NESTA (June 2013) (a)

Tutor's Tips The Examiner asks you to assess the attractiveness of a particular strategy which means your conclusion must say whether you feel it is a good or a bad idea.

NESTA are considering entering a new market. This should be examined using Johnson and Scholes Suitability, Feasibility, Acceptability approach. For the purposes of this answer we are only looking at Suitability. We can do this by using Porter’s Five Forces model. Competition from New Entrants NESTA will be the new entrant if they decide to enter this market so it is important to look at the barriers which could keep them out. To set up a chain of stores will take a large amount of capital, however it appears that NESTA have this. NESTA will need to find locations to situate their stores, however it appears that landlords are currently willing to offer short-term rentals at low rental costs. At the moment only 5% of consumers have heard of NESTA compared with 90% awareness for the other major stores. This means that NESTA may have to spend extra on marketing Competition from Existing Rivals The existing rivals all advertise extensively and are committed to growth, this would create a lot of competition between them (and for NESTA if it enters the market). However the market is growing (total revenue grew by 28.3% between 2012 and 2014) so there is a possibility that all can grow. Power of customers In the case of NESTA this relates to the final consumers buying products in their shops. Consumers tend to have more power in circumstances where switching costs are low (as they are in this industry) and products are undifferentiated (which again they will be here since they are unbranded). Powerful consumers usually aim to force sales process down or prevent prices going up, however it is difficult to see how either of these would work in a market where sales prices are fixed anyway. As such, this high power may not be particularly relevant. Power of suppliers In the case of NESTA, the same reasons that make their consumers powerful (undifferentiated products and low switching costs) also make NESTA powerful in relation to their suppliers. In addition, NESTA are much larger than an...