ACCA

Paper P3
Business Analysis

Tuition Mock Examination

June 2012

Answer Guide

Health Warning!
How to pass Attempt the examination under exam
conditions BEFORE looking at these suggested
answers. Then constructively compare your
answer, identifying the points you made well
and identifying those not so well made.
How to fail Simply read or audit the answers
congratulating yourself that you would have
answered the questions as per the suggested
answers.
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Question 1

Tutorial help and key points
Part (a) of this question requires you to use models to support your arguments
in analysing PITs three product groupings, together with the position of the
organisation as a whole. Other models could have been used here, such as
SWOT analysis and the product life-cycle, for example.
Part (b) required a discussion of possible strategic options, and a
recommendation as to how PIT should proceed. Several strategic options
models exist, but as a minimum you ought to consider a generic competitive
strategy, and possible directions and methods of growth. Lots of clues are given
in the scenario as to areas PIT should withdraw from; it is unrealistic to expect
PIT to try to grow in any area without the resources released from withdrawal
elsewhere.
Part (c) was looking for some suggestions as to how the culture of PIT could be
changed. Be careful to talk about the existing culture so as to show how your
suggestions for change would work. Any sensible suggestions related to the
scenario will score well here. Culture and cultural change are a favourite topic
of the examiner, and are likely to be recurring themes for this paper.

(a) 1 mark for each relevant point:
up to 6 marks for the evaluation of each product group
up to 6 marks for evaluation of position of overall company
2 marks per relevant model correctly used, up to 4 marks
...up to a maximum of 25 marks.
Evaluation of the performance of the three product groups and their
contribution to overall company results:
Cable Jointing Tapes (CJT) products:
13% increase year-on-year in sales.
Clearly exceeding the increase in the cost of sales with a consequent
improvement of the gross margin.
Little gems referred to by the Marketing Manager are probably to be
found here (as evidenced by future expansion of product range).
Significant R & D spend and the development of products are meeting
the exacting demands of the cable manufacturers.
CJT seems to be catering for the needs of a clearly identified customer
base.
Despite the threat of strong US competition, increasing sales and a
stable market share are good signs for PIT.
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PVC Industrial Tapes (PVC) products:
Seems very stable with sales and costs increasing in line with one
another.
Gross margin predicted to stay a healthy 45%.
This is the best margin achieved out of the three tape groups.
Wide spread of customers is having some impact on transport costs.
Decline in market share, perhaps reflecting the impact of low cost tapes
from Europe and the Far East.
PVCs inability to reduce its manufacturing costs may leave it exposed to
further market share erosion.
Little likelihood of new products stemming the tide of foreign
competition.
Paper Masking Tapes (PMT) products:
Sales are slipping while at the same time costs are increasing.
Market share is being maintained, but at a price.
Overcapacity leading to high operational gearing.
Increase in logistics costs is significantly outstripping the increases in
sales volume.
Loss of control over manufacturing and selling costs despite the
investment in a modern factory.
Moderate levels of R & D spend seem to be generating little, if any,
benefit in competing against their main rival.
Possible models to use to evaluate the overall position of PIT:
BCG matrix:

Questionable whether PIT has the strategic know-how and information
systems needed to turn CJT into a future cash cow.
Cash cow
PVC?
Star - CJT
Dog PVC?
FMT
Problem
child
Low market
growth
High market
growth
High market
share
Low market
share
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Doubt over PVCs true position in the matrix, particularly as little
management information is provided about their product lines and
market share of small customer accounts.
Is PIT willing to treat PMT as the dog it is, considering the high levels of
investment made in its warehousing and production facilities?
GE matrix:

Questionable whether PIT has the access to finance and information
systems needed to develop CJT in the way it might wish to.
Is PIT willing to divest of PMT as the matrix suggests it should,
considering the high levels of investment made in its warehousing and
production facilities?
Porters generic competitive strategies:
PIT is stuck in the middle:
- no signs of cost leadership
- only CJT have products with positive signs of differentiation.
In CJT a focused differentiation strategy meeting the particular needs of
the cable manufacturers seems to be yielding positive results.
PITs competitive scope seems to be fairly broad, covering a wide range
of customers, such channel complexity has to be managed.
Porters five forces model:
Key forces are:
- power of large industrial customers
- increasing competition for PIT in its key industrial and consumer
markets.
Invest for
growth
Invest
selectively and
build
Develop
selectively for
income PVC
Market attractiveness
Invest
selectively for
growth - CJT
Harvest or
Divest
Develop for
income
Develop
selectively,
build on
strengths
Harvest Divest - PMT
High Low Average
High
Low
Average
Competitive
strength
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Some large customers may be sensitive to any price increases in their
own markets and use their bargaining power to PITs disadvantage.
Porters Value Chain:
The modern PMT factory cannot generate the low product costs achieved
by its North American rivals.
Costs incurred by the new warehouse and PITs own in-house transport
operation are generating few, if any, benefits to the customer.
Lack of integration between primary and support activities:
- Lack of product profitability information of products offered by PIT.
- Links between sales and marketing and the R & D teams are ad
hoc and underdeveloped.
- Little co-ordination of the overall R & D effort.
- Factories and functional departments are operating independently
of one another and, as a consequence, vital information not being
shared.
Porters Value System:
PIT clearly has access to some large and influential manufacturers.
There is no real attempt to influence the key decision makers in these
firms.
Lack of an effective cost control system means that again the firm may
be losing money on the small wholesale and retail customers.
Overall:
The firm is passively accepting the fact that many of its products are
mature and suffering from severe price competition in these commodity
products.
This relates to the usefulness of the product life cycle in shaping
company strategy. - Managers who see products as mature and
commodities may create a self-fulfilling prophecy and ignore
opportunities for innovation at their peril.
25 marks maximum
(b) 1 mark for each relevant point:
up to 3 marks for a discussion of the best generic competitive strategy
to follow
up to 6 marks for a discussion of possible directions of strategic growth
up to 4 marks for a discussion of possible methods of strategic growth
up to 4 marks for justifying the recommended strategy that PIT should
follow
...up to a maximum of 15 marks.
The main strategic options open to PIT:
Generic competitive strategy
Cost leadership seems very unlikely to be attainable for PIT:
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- increasing competition makes economies of scale through volume
growth unlikely
- increasingly out-of-date production plant and equipment
- overcapacity in at least one division causing high fixed cost base.
Focused differentiation in CJT is working well.
Focused differentiation might work well for the other two divisions if PIT
can produce the information needed to work out which products are
favoured by the highest value customer groups.
Possible directions of strategic growth
Ansoffs Growth Matrix is best to use here.
Better access to information would allow phased withdrawal:
- from poorly performing products
- from poorly performing markets
- freed up resources can thus be better used elsewhere
...and expansion elsewhere
- PVC product innovation
- CJT product innovation (such as Retardon).
Possible methods of strategic growth
Mature markets mean organic growth would be difficult.
PITs weakening financial position means acquisitive growth would be
difficult to finance.
Therefore, a strategic alliance with another tape manufacturer might
yield rewards:
- shared product innovation
- shared distribution networks
- more focused marketing strategies.
Recommended strategy for PIT to follow:
Divestment from PMT seems a sensible option, despite the attractive
market share high cost base:
- dominant American competitor
- restrictive technology licensing agreement.
This would allow for freed-up resources (high-tech warehouse,
production equipment) to be better used elsewhere, particularly in the
CJT and PVC divisions.
15 marks maximum
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(c) 1 mark for each relevant point:
up to 5 marks for discussing implications of cultural change
up to 5 marks for discussing methods of implementing cultural change
...up to a maximum of 10 marks.
How PIT might change from a technology-driven culture to a
marketing-led culture:
Current culture is currently very much production or technology led:
- significant use of graduate chemists
- organisational structure of the company defined by the product
range of the factories
- separate R & D programmes
- recent conversion to the relevance of marketing.
Richard Johnson should be explicitly encouraging change in systems and
structure to reinforce this change in culture.
Increase the technologists exposure to marketing by involving them in
developing a customer database, highlighting the key decision makers
among their industrial customers.
Set up information systems which give timely information about
customers and their buying profile.
Create cross functional teams (particularly for R&D).
Demonstrating that company performance without marketing will
continue to decline is a powerful motivator.
Institute a graduate training scheme for chemists, including short
rotations in other functional areas of the business including marketing,
production etc.
Development of a much more proactive communication policy with its
key customers through PR activities such as seminars.
Johnson must recognise that there is likely to be resistance, therefore
the culture shift has to be well thought out and implemented.
10 marks maximum
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Question 2

Tutorial help and key points
Part (a) of this question specifically requires you to use a model in analysing the
way in which entering dress manufacturing has affected EFs competitiveness.
The obvious method to use is Porters Value Network; though the value chain
might also have been used to good effect.
Part (b) requires you to talk about both the consequences and the change in
competencies required of a move into retailing. Make sure you address both
parts of the question. For 13 marks, you are going to have to make a lot of
sensible points; therefore, think as widely as you can for both headings. If you
are having difficulty thinking about changes in competencies, imagine you
suddenly became the manager of a shop - what would you need to learn how to
do quickly to make a success of it? This will give you a few ideas to work with.

(a) 2 marks for relevant model, 1 mark for each relevant point, up to a maximum
of 12 marks:
How the EF strategy of integrating forward into dress manufacturing
has affected its ability to compete:
Model to use: Value network
Originally, EF was a member of a three-step value network:
- EF (manufactures fabric) - Clothing manufacturers - Clothes
retailers.
Forward integration has reduced this to a two-step value network:
- EF (manufactures both fabric and clothing) - Clothes retailers.
This will improve EFs competitiveness in some ways:
- access to manufacturers profit pools
- better control over the uses the finished fabrics are put to
(targeting particular consumer segments)
- closer to retailers means EF better understand needs of retailers
and consumers
- a guaranteed internal customer for the fabrics EF produces
- possible reduction in stock holdings across group
- reduced distribution cost and time for finished fabric
- better control over the particular retailers that are allowed to stock
EF products
- increased turnover and profits suggest competitiveness has
improved.
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However, this move may have reduced EFs competitiveness in other
ways:
- reduced organisational flexibility through increased requirements
for internal control
- possible loss of focus from original fabric manufacturing core
competencies
- loss of previous customers - ie the other clothing manufacturers
that were customers but are now competitors
- possible reduction in competitiveness of fabric manufacturing arm
due to presence of guaranteed internal customer
- possible reduction in competitiveness of fabric manufacturing arm
due to lack of access to cheaper fabric suppliers (these are now
competitors).
NB: Other models, such as the value chain model, could have been used.
12 marks max
(b) 1 mark for each relevant point, up to a maximum of 10 marks:
The consequences of a move into retailing for EF:
Typical benefits of this move would be:
guaranteed outlets for the clothing EF is manufacturing
improved marketing of EF brand by being even closer to end consumers
improved information flow across the value network, improving quality
control and design
a base for expansion of the chain of retail stores to be purchased
reduced reliance on low-margin business from the large multiple stores.
However, such a move would also have its drawbacks:
large increase in debt financing present on EFs statement of financial
position, increasing financial gearing considerably
large increase in fixed cost base, increasing operational gearing
further reduction in organisational flexibility
adverse reaction of existing independent-stores customers - they are
now competitors
need to source complementary products (belts, shoes etc) from EFs
competitors may reduce competitiveness of retail stores.
1 mark for each relevant point, up to a maximum of 5 marks:
The change in competences which would be required by the newly
expanded business:
Lots of new competences would be required by EF:
managing multiple retail sites
IT to link stores information systems to EF
merchandising skills
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internal controls to handle increased fraud risk (shoplifting, handling
cash in tills etc)
further marketing and branding skills
inventory management skills (to ensure completeness of range in sizes,
etc).
13 marks max
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Question 3

Tutorial help and key points
Part (a) of this question revolves around the advantages and drawbacks of
outsourcing customer enquiries to an external provider. This has been a
controversial talking-point in the media and in business circles for the past
decade or so, and questions such as this one reinforce the importance of
reading widely as part of your studies. If you are having difficulties, a few
marks can be gained by thinking of your own relationship with your own bank,
and how this might be altered if your bank chose to outsource (or insource!) its
customer enquiries activities.
Part (b) involves applying the resource-based view of competitive advantage,
that it is derived from a thorough understanding of core competencies, to a
bank.
For both parts of this question, some candidates in the exam found it difficult to
produce sufficient volume in their answers for the marks. Remember that our
aim is to pass the exam, not necessarily to score maximum marks for
example, four advantages and five drawbacks in (a), and four sensible
comments about core competencies in (b), would have been sufficient to pass
the question nanything more than this is icing on the cake!

(a) 1 mark for each relevant point, up to a maximum of 8 marks:
Advantages of moving the customer enquiry service to an outside
provider:
If customer service is a non-core competence, outsourcing this activity
allows Focus Bank to focus on its core competencies.
Outsourcing will also simplify in-house decision-making processes,
potentially simplifying the organisational structure of Focus Bank.
Reduced organisational complexity increases flexibility to respond to
environmental change, such as actions of competitor banks.
Remaining competencies may therefore be improved through quicker
internal communications and decision-making processes.
Cost savings should also accrue from simplified operations, as the
outsourced provider should enjoy economies of scale to exploit. These
may be passed on to Focus Bank as reduced outsourcing fees.
Another source of cost savings from the outsourced provider might be
improved productivity through staff specialisation in particular tasks.
Legal action may be taken to enforce adherence to the service level
agreement (SLA). This is not possible with an internal process.
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If the outsourced company has distinctive capabilities in customer
service, this might enhance the service quality enjoyed by Focus Banks
customers.
1 mark for each relevant point, up to a maximum of 10 marks:
Disadvantages of moving the customer enquiry service to an outside
provider:
If customer service is a core competence, outsourcing means the loss of
this core competence from Focus Bank.
It could be difficult, or near impossible, for Focus Bank to retrieve this
core competence if the outsourcing agreement is unsuccessful.
Outsourcing any activity results in a potential loss of control over that
activity, unless the outsourcing SLA is both well-drafted and enforced.
This is a key source of risk for Focus Bank, in that it must trust a third
party to maintain its relationship with its customers.
By outsourcing customer service, Focus Bank may lose the chance to
use this competence as a source of competitive advantage over its
rivals. Future competitive options may therefore be limited.
As the loss of customer-service skills from Focus Bank become
entrenched, the bargaining power that Focus Bank has over the
outsourced provider is reduced. Therefore, upon contract renewal,
Focus may find initial cost savings being reversed.
Possible damage to the morale of remaining staff may be caused by
outsourcing, particularly if customer service staff are made compulsorily
redundant as part of the outsourcing process.
Additionally, redundancies may result in Focus Banks trade union taking
industrial action and causing widespread disruption to the Bank.
Outsourcing to lower-wage economies may be held to be unethical by
some of Focus Banks key stakeholders, including customers and staff.
It is possible that outsourcing may cause reputational risk for Focus
Bank.
The SLA still needs to be monitored and enforced. This may cause some
of the initial cost savings from outsourcing to be reversed.
Maximum of 17 marks overall
(b) 1 mark for each relevant point, up to a maximum of 8 marks:
Competitive advantage the bank might gain from a better
understanding of its core competences:
Core competencies are ways of using resources that competitors find
difficult to imitate, and that customers value. By understanding core
competencies, Focus Bank can leverage competitive advantage from
them.
Such leverage could be achieved by drawing attention to Focus Banks
core competencies in marketing communications, improving the
effectiveness of marketing activities.
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If it understands its core competencies, Focus Bank will understand why
its customers value Focus Bank more than its rivals. They can therefore
use these competencies as a source of differentiation with its rivals.
Process improvement or process re-engineering programmes require a
comprehensive understanding of core competencies in order to be
successful.
Core competencies often originate from the staff and managers of the
organisation. By identifying these core competencies, training can be
given to improve staff ability to deliver these competencies.
Additionally, organisational knowledge management systems can be set
up to allow expertise in core competencies to be shared around the
organisation, and to reduce the risk posed by a key member of staff
leaving.
An understanding of core competencies enables staff performance
management systems to set targets around these activities, so as to
motivate staff to improve in these areas.
Additionally, core competencies can be used to help improve recruitment
and selection processes, reducing future training costs and improving
future delivery of those processes.
Maximum of 8 marks overall
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Question 4

Tutorial help and key points
Part (a) of this question mentions significance of resources the word
resources ought to have you thinking of the 9 Ms model as a possible in-route
to answering this question. The scenario gives you lots of resources to discuss,
and by the time you reach the end of reading the scenario you ought to be
aware of the apparent tension between what seems like a successful business
and their inability to impress financial backers.
Part (b) required a discussion of the usefulness of the Balanced Scorecard for
Lawson. Lots of the resources discussed in the scenario relate to the three non-
financial perspectives of the BS, and you should have noticed and identified this
in constructing your answer. For a question such as this, however, it is difficult
to see how all ten marks could be gained without discussing some of the
drawbacks of the BS in this case.

(a) 1 mark for each relevant point, up to a maximum of 15 marks:
The significance of the companys resources for its future success:
A good model to use for assessing resources is the 9 Ms model:
Machinery:
Inadequate premises and facilities, hence need for expansion.
Make-up:
World-wide reputation for excellence.
Positive can-do, customer-centric culture led by Joe Lawson.
Management:
Joe Lawson has a good attitude and philosophy.
Markets:
Customers are major industrial customers, many are globally-
recognised, high-profile.
Lawson has long-term relationships with them, helped by the superior
performance gained from Lawson supplies.
Products command premium prices.
Management information:
Assume this is not present, hence reference in b) to creating a balanced
scorecard.
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Materials:
Long-term relationships with exotic material suppliers aid R&D projects.
Manpower:
Highly skilled engineers have been recruited.
Methods:
Prestigious international awards for product and process innovation.
Prestigious international awards for quality.
Money:
Inadequate sources of internal financing for new factory.
A lot of the positive resources identified are intangible in their nature
(reputation, culture, long-term relationships etc).
Although difficult to value intangible resources, it is not impossible - it is
up to Lawson to convince the potential investors of the value of these
resources.
This should be done by comparing Lawson with other engineering firms
to identify and highlight sources of competitive advantage.
Overall, if funding can be sourced and new facilities developed, future
success seems likely for Lawson.
15 marks maximum
(b) 2 marks for each relevant point, up to a maximum of 8 marks for advantages
and 4 marks for drawbacks, 10 maximum:
The usefulness of a balanced scorecard for assessing the overall
performance of Lawson Engineering:
Advantages of balanced scorecard approach:
Helps capture performance measures from different perspectives, not
simply financial.
Such information would help Lawson develop a convincing argument for
achieving long-term financing for the new factory.
Customer perspective would help Lawson preserve competitive-
advantage giving high-focus differentiation competitive strategy
currently being pursued.
Balanced scorecard helps develop understanding of strategic linkages in
organisation, eg between process efficiency and quality and customer
satisfaction.
Customer retention far cheaper in long term than attracting new
customers.
Internal perspective helps ensure reputation for engineering excellence
is preserved.
Learning perspective helps capture data on staff development and
ensure success of future research and development.
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Drawbacks of balanced scorecard approach:
Takes time and commitment to develop a good-quality and meaningful
set of performance indicators.
Difficult to include indicators for short-, medium- and long-term
performance.
Possible realignment of performance indicators along process, rather
than functional, lines may cause cultural conflict.
Possible conflict between perspectives can be difficult to reconcile, eg
between investing in R&D to improve learning and growth, and between
short-term profitability.
10 marks maximum