SBL Further Questions - SBL additional practice material PDF

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Further question practice and solutionsFurther฀question฀practice฀and฀solutions฀Chapter฀1฀Strategy,฀leadership฀and฀culture฀ACCA฀Professional฀skills฀focus฀ CommunicationBonar฀Paint฀It is early 20X7. You work as a consultant advising organisations undergoing significant strategic change. The senior man...

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Further question practice and solutions

change. The senior management team of Bonar Paint has asked for your advice in evaluating the current position of the organisation and its attractiveness for a management buyout. Bonar Paint is a medium-sized paint manufacturer set up by two brothers, Jim and Bill Bonar. The company is based in Gaulle, a developed country. Bonar Paint's turnover has been static for some years and both brothers now want to retire from the business. The brothers have created a loyal workforce and feel that this loyalty will be strengthened if they sell the business to the three senior managers: Roy Crawford, production manager; Tony Edmunds, sales and marketing manager; and Vernon Smith, chief accountant. The three managers recognise that this is a major opportunity for them, but one that will involve the raising of significant loan and equity finance to buy the business. Equally significant are the equity stakes of $100,000 from each of them, which the banks require to show their personal commitment.

Paint's future direction after the buyout and briefly explain the role the mission statement could play

customers include car manufacturers and steel makers. Bonar Paint also supplies many smaller industrial customers. Raw materials are sourced from large chemical companies. Jim Bonar has chemical expertise and Bill has the complementary sales skills to meet the specialised paint needs of their demanding customers. Bonar Paint has a good reputation for product innovation and its product range of over 200 paints include paints able to tolerate harsh and demanding conditions. The small research and development team, headed by Jim, has an excellent track record of meeting the technical demands and timescales for developing new high performance paints. New paints are normally developed in response to customer demand and, consequently, there is no formal process for new product development. Replacing Jim's technical skills and leadership will undoubtedly create problems for the buyout team. The brothers have taken all the key strategic decisions to date, with little reference to the senior management team. Bonar Paint's product innovation success has come at a price. Its product range is far too extensive to sustain, with the majority of the paints produced infrequently and in small batches. Customers often experience long lead times when ordering a particular paint. This results in higher than necessary inventory levels, much of which is unlikely to be bought. Paints are supplied directly to each and every customer. Unfortunately, Bonar Paint's management information systems fail to 519

show the profitability or otherwise of individual paints and the future demand for the paint. There is little communication between sales and the research and development part of the business. Roy Crawford has consistently argued for the benefits of reducing the product range and increasing the size of the batches produced. This would improve control over production, and lower costs. Higher volumes would justify investment in new production technology, and bring labour savings with fewer, less-skilled, workers needed to operate the new machinery. There has been little recent investment in new plant or machinery.

paint manufacturers with significant brands, which supply both industrial and domestic paint customers. They produce in high volumes and offer a comprehensive but limited range of paints. At the bottom end of the industry are many small and medium-sized paint makers. Many have chosen to produce own label paints for the large Do-It-Yourself (DIY) retailers. Specialist paint makers, such as Bonar Paint, are finding it increasingly difficult to survive, with neither the sales volumes nor brands to compete. The industry as a whole is seen as mature and lacks innovation. There is increased environmental concern about the toxic by-products of lead-based paints and the development of less toxic water-based paints is only slowly emerging. Even more worrying is the increased usage of plastics and other materials, which do not require painting. The DIY market is dominated by the same large international paint makers and the market for industrial paint is vulnerable to the usage of alternative materials and the entry of large overseas paint makers.

after the buyout takes place. Roy Crawford sees his proposed reduction of the product range and increased investment in new production technology as a means of reducing costs, improving margins and focusing on getting a larger share of the large industrial paint market. Product innovation should only come when there is a clear and profitable need for a new paint. Tony Edmunds, however, sees an extension of the customer base as a necessary step in securing the future of the firm. The product range should be extended to meet the needs of the professional painters and decorators looking for high performance paints. Finally, Vernon Smith is anxious that the internal control systems be improved to establish which paints are, or are not, making money. Investment in new paint ranges or technology should be resisted until the buyout has been successfully completed. Vernon is also anxious that a fair valuation is made of the business and that the sales forecasts for 20X7 and 20X8, made by Bill Bonar, are realistic.

4 Sales Cost of sales Gross profit Marketing Distribution Administration Research and Development Net profit

10,500 5,250 5,250 100 1,575 2,100 105 1,370

20X5

20X6

10,250 5,400 4,850 100 1,650 2,150 100 850

10,000 5,500 4,500 100 1,700 2,200 100 400

Customer analysis: Sales to large industrial companies Sales to small industrial companies

520

75% 25%

20X7 (estimate) 10,500 5,460 5,040 150 1,785 2,250 105 750

20X8 (forecast) 11,000 5,500 5,500 150 1,650 2,200 110 1,390

Further question practice and solutions

Chief Executive. ZK is a publicly quoted company selling cosmetics, cleansing and other beauty products. Its products are based on raw materials grown in tropical countries and processed either in these countries or in the eventual sales markets. Processing is undertaken partly by ZK and partly by sub-contractors. The products are branded and sold worldwide, but mainly in the United Kingdom and North America. They are sold to consumers through a very large number of outlets. ZK's chief executive has always regarded annual reporting as ideally never exceeding minimum legal requirements and has never considered such reporting to be relevant to anyone apart from shareholders. However the non-executive directors have for some time expressed concern that the company has not developed any systems of environmental or social reporting to shareholders, let alone stakeholders, despite many comparable companies already regularly publishing such information as part of their Annual Report. A government minister has now stated that legislation will be considered if all companies do not make progress on reporting on social and environmental policies and the impact on stakeholders as well as shareholders. One non-executive director has raised the possibility of going further and preparing a report based on the principles of integrated reporting. In order to appear fully briefed and able to contribute to the next board meeting where this topic is on the agenda for discussion, the Chief Executive has asked you to challenge what he currently knows so that he can be prepared for the vigorous debate that he is expecting to occur at the meeting.

(b)

Analyse the impact of business partners and other stakeholders on the content of the

companies that are keen to become listed. One such company, Caius, has contacted you for help.

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The company's main business is manufacturing domestic electrical appliances, but it is keen to expand into telecommunications, particularly focusing on the opportunity to embrace the 'internet of things' and connect a number of its products to the web. In order to support this growth and development, Caius is seeking a listing on the Stock Exchange of a developed country. The directors of the company are aware that certain listed companies have attracted considerable criticism in recent years over directors' pay and conditions. There have been claims in the media that the pay and conditions of some directors have been far too generous and that the remuneration policies adopted by some companies have been far from transparent. The directors of Caius are keen to ensure that, if the bid for a listing is successful, all aspects relating to their pay and conditions must be in line with best practice. Consequently, they have asked for your help in advising them about their remuneration policy for all directors.

adopted by the company to ensure that directors' pay and conditions are fair and transparent. Your report should include any objections to paying NEDs in shares or share options and whether you

director. Swift is the largest logistics company in Ambion, owning 1,500 trucks. It is a private limited company with all shares held by the Swift family. It has significant haulage and storage contracts with retail and supermarket chains in Ambion. (Ambion is a large, industrialised country. It is densely populated with a high standard of living.) Joe Swift, the founder and CEO of the company, is becoming increasingly disillusioned with the business environment in Ambion. In a recent interview, he said that 'trading here is becoming impossible. The government is more interested in over-regulating enterprise than stimulating growth'. Joe is considering moving large parts of his logistics operation to another country, and Ecuria is one of the possibilities he is considering. The finance director has provided you with some notes from recent meetings he has had with Joe Swift (Exhibit 1), and has asked you to analyse the factors which could influence a potential move into Ecuria.

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Further question practice and solutions

market leader through a combination of economies of scale, cost efficiencies, innovative IT solutions and clever branding. However, the profitability of the sector is under increased pressure from a recently elected government that is committed to heavily taxing fuel and reducing expenditure on roads in favour of alternative forms of transport. The government has also announced a number of taxes on vehicles which have high carbon emission levels, as well as reducing the maximum working hours and increasing the national minimum wage for employees.

formed. One of these states was Ecuria. The people of Ecuria (known as Ecurians) traditionally have a strong work ethic and a passion for precision and promptness. Since the formation of the state, their hard work has been rewarded by strong economic growth, a higher standard of living and an increased demand for goods which were once perceived as unobtainable luxuries. Since the formation of the state, the government of Ecuria has pursued a policy of privatisation. It has also invested heavily in infrastructure, particularly the road transport system, required to support the increased economic activity in the country. The state haulage operator (EVM) was sold off to two Ecurian investors who raised the finance to buy it from a foreign bank. The capital markets in Ecuria are still immature and the government has not wished to interfere with or bolster them. EVM now has 700 modern trucks and holds all the major logistics contracts in the country. It is praised for its prompt delivery of goods. Problems in raising finance have made it difficult for significant competitors to emerge. Most are family firms, each of which operates about 20 trucks making local deliveries within one of Ecuria's 20 regions. The two investors who own EVM now wish to realise their investment in the company, and have announced that it is for sale. In principle, Swift is keen to buy the company and is currently evaluating its possible acquisition.

undertaking an assignment at Chelsea Co (Chelsea). The board at Chelsea have appointed the firm for which you work, as they are keen to gain a better understanding of the company's strategic position. Chelsea Co is a large civil engineering company, which carries out various building contracts within both its home and in a number of overseas markets. Its main area of work, particularly overseas, is in road construction. The company has a strong financial track record and successfully survived a major recession within its home market about ten years ago. You and your team have collected and analysed the following information about the group to help you prepare the consultancy report. 

Exhibit 1: A review of the economic circumstances facing Chelsea in its overseas markets by your colleague Katie Parry.

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Exhibit 2: An email received from Chelsea's Head of Construction, Andrew Hussain, which outlines the company's current work in progress.

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Exhibit 3: A note detailing Chelsea's market share prepared by your colleague Klem Speck. 523

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Exhibit 4: An extract from a recent article which appeared in the construction industry journal Building for Tomorrow.

Having reviewed your team's findings you are now required to putting together a presentation which is to be presented to the Chelsea board of directors. The presentation will summarise your key findings to date.

including relevant points and brief supporting notes which consider the main strengths, weaknesses, opportunities and threats facing the company. The first slide should consider Chelsea's THREE main strengths and THREE main weaknesses. The second slide should consider the THREE main opportunities and THREE main threats facing

contracts have suffered as a result of a serious economic recession. Business confidence in these markets has been seriously weakened over this period. One country which has been adversely affected is Eastlandia. Chelsea has been engaged in carrying out contract work in Eastlandia for several years. Government action in Eastlandia to protect its ailing economy has also had an adverse impact on foreign contractors such as Chelsea operating within this country. The concern felt by Chelsea's directors regarding the economic situation in Eastlandia has been increased as a result of recent events involving a large construction company called Derby Co, which Chelsea had done work for in the past. Derby Co, which was wholly owned by Eastlandian shareholders, had previously received Eastlandian government backing. However, it has recently been allowed to go into receivership without any further government support. The government announced that partial repayment of debts owed by Derby Co to local subcontractors that it had used would take priority over those it owed to foreign firms. The result of this is that foreign firms are unlikely to see any recovery of monies owed for work performed. The serious economic situation in Eastlandia has threatened to result in an economic recession. There has been a constant negative effect on related industries within the country, such as steel, building materials and transport. Another major concern for Chelsea's directors is the constant threat posed by currency fluctuations and the possibility of the Eastlandian government being forced into currency devaluation.

Further to your request for details in relation to Chelsea's current projects please find below a note which outlines the situation as it stands today.

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Further question practice and solutions

In recent times Chelsea has increased the amount of work that it undertakes overseas, with a sizeable amount of this taking place in Eastlandia. Chelsea's growth has been helped by increasing criticism in Eastlandia over the poor quality of civil engineering projects which have been completed by Eastlandian firms. There have been reports of numerous site casualties among the site workers during the construction process. Some buildings have partially collapsed after construction has been completed and there have been instances where roads have started to break up shortly after they have opened. This has caused civilian casualties with some fatalities and resulted in noisy public protests in Eastlandia about the lack of attention to safety in civil engineering and building work. As a result Chelsea is well regarded by the Eastlandian government. It has taken a long time for the directors of Chelsea to build the company's reputation and gain recognition in Eastlandia for its workmanship. Chelsea is currently engaged in the construction of a major road linking two parts of a new Eastlandian city, bypassing the central congested area. Chelsea is engaged as a subcontractor to a major Eastlandian development company – after the original subcontractor, Derby Co, went into receivership recently. The board at Chelsea accepted the contract to take over the work performed by Derby Co after estimating that it would provide a high net present value. As far as Chelsea's overall business is concerned, the contract represents about 10% of total turnover for the company. The contract commenced three months ago and Chelsea is to be paid in Eastlands. Progress payments for the work done to date have been delayed without any explanation. The contract is about 15% complete and is expected to be completed in 21 months, which is three months later than planned. This will result in penalty payments being incurred by Chelsea. The directors at Chelsea recently expressed their concerns about the quality of the work undertaken by the previous subcontractor. The directors have become increasingly alarmed at the amount of remedial work which has been needed so far to bring the work performed by Derby Co up to the required standard. The remedial work has already consumed the total amount of the financial contingency which was allowed for in the contract estimates. I hope the above proves useful.

patterns of market growth and development. In addition, the management accounting department of the company provides internal information on market share and growth and internal capacity to meet its future contractual demands. Over the last two years there has been a general decline in market opportunities but Chelsea has managed to increase its overall market share. This has been achieved because of its strong reputation for using good quality materials and applying high standards of workmanship.

firm, Chelsea Co, to tender for further civil engineering work. We learned late last night that Chelsea Co's directors have taken up the invitation to tender. If the company is successful in all of its tenders, then this would bring the company's commitment in Eastlandia up to about 40% of its total order book. In the last edition of Building for Tomorrow we reported that a number of Chelsea Co's directors had grown increasingly concerned at the dangers posed by the insolvency of customers in Eastlandia. To overcome these concerns we have subsequently learned that the Chelsea Co board have proposed that a strategic alliance be formed with an Eastlandian civil engineering contractor who, it is hoped, will have an insight into the financial integrity of potential customers. The alliance partner would be able to give clear advice as to which of these Eastlandian customers would be suitable for the establishment of contractual arrangements.

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manager. You report directly to the finance director. The Environment Management Society (EMS) was established a number of years ago by environment practitioners who felt that environmental management and audit should have its own qualification. EMS is based in the developed country of Ambion. EMS has its own Board who report to a Council of eight members. Policy is made by the Board and ratified by Council. EMS is registered as a private limited entity. EMS employs staff to administer its qualif...