Professional Level – Essentials Module

Paper P3
Business Analysis

Time allowed: 3 hours 15 minutes

This question paper is divided into two sections:

Section A – This ONE question is compulsory and MUST be attempted

Section B – TWO questions ONLY to be attempted

Do NOT open this question paper until instructed by the supervisor.

This question paper must not be removed from the examination hall
Section A – THIS ONE Question is compulsory and MUST be attempted

Question 1 (This question is compulsory)

Introduction
Tenerife Co, based in the north of Country of Bacoda, manufactures personal computer (PC)
monitors for domestic use. At that time Country of Bacoda was undergoing a period of rapid
industrial growth. It is owned and managed by Sam Russo and her husband Paul, the original
founders. When Sam was made redundant from her job in the production department of a large,
international PC manufacturer in 1998, she used her redundancy money to purchase a small,
specialist manufacturer of personal computer monitors. Sam had been working with this
international manufacturer since 1985. She had vast experience and expertise in this industry.

Tenerife – early years

Under Sam’s guidance the company initially experienced a high level of growth as it
developed a reputation for making high quality monitors at a reasonable price. Orders were often
won by Tenerife's ability to deliver various order sizes in short lead times. Some of the success of
Tenerife Co. was due to innovative computer system developed in–house by company’s
information system department. This system not only concerned with the distribution and payment
of orders but could also track deliveries, in order to ensure that each order is delivered on time.
Because of this, Tenerife’s customers are always satisfied with the service provided by Tenerife.
Sam and Paul held a set of beliefs that stressed the social obligation of employers. Their beliefs
guided their employment principles - Secure jobs and good working conditions for employees.

Sam’s greatest success was in her foresight in spotting the low component production costs in the
Far East. Also the labour rates were lower and production facilities were efficient which kept cost
under control. She was an early pioneer in buying in raw material components and gets them
assembled from such sources and this allowed Tenerife to keep costs at levels similar to larger,
international manufacturers. Sam also saw the opportunity that thinner LCD monitors provided
over traditional computer monitors and gradually moved the business in that direction.

Initially the company manufactured the units with the aim of selling them direct to retailers.
This earned some success but after 18 months of existence ,a contract was won with a large US
computer manufacturer, Dingle. Dingle was aiming to expand into Europe with a strategy of
allowing consumers to effectively design their own PC. Dingle liked the flexibility that Tenerife
offered and a contract was agreed whereby Tenerife would produce monitors which were then
branded with the Dingle logo to be distributed and sold by Dingle.

This contract proved very lucrative and successful for Tenerife. Sam took a decision to abandon
direct sales and seek out similar contracts to the one secured with Dingle. Tenerife now has no
direct sales and a number of contracts with various pc manufacturers to produce monitors –
though Dingle continues to make up around 60% of all business.

Country of Bacoda has comprehensive legislation on health and safety as well as statutory
minimum wage and generous redundancy rights and payments for employees.
The competitive environment
Initially Tenerife experienced high levels of growth – especially when they won their first
Dingle contract. Tenerife originally had 10 staff members but by 2016 they now have over 200
full time staff in various departments, as well as employing up to 50 casual members of staff at
busy periods of the year (often the two months either side of Christmas). Staff and management
of company are experienced and are considered to have extensive product knowledge and
excellent customer care. The company produces a wide range of LCD monitors with different
sizes, different technical capabilities and different features that are needed to satisfy all levels of
demand from customers. In 2016, 3 million units were sold in total.

Ten years ago around 50% of components were sourced from the Far East, but now all
components are sourced from this region. These orders are often made in large bulk quantities as
shipping costs are high but storage costs are reasonably low. Tenerife’s initial advantage over
rivals in sourcing overseas has now ended however, with almost all monitor producers sourcing
components from the Far East.

The market has become increasingly competitive and economies of scale are becoming a critical
success factor. There are now 3 large international companies who dominate the European and
worldwide market and who can generally undercut the costs of producers such as Tenerife. Initially
the large manufactures had full order books and demand exceeded supply – which opened the way
for specialists such as Tenerife. However this position has now changed and price wars are
becoming more prevalent as demand for monitors falls. Buyers have become more powerful -
Dingle has negotiated a new 5 year contract with Tenerife with prices 20% below the previous
contract which ended last year.

Software development has focused on internal systems, rather than internet development. The
current website only provides information about Tenerife co. It is not possible to book an order
from company’s website, whereby, customers are getting technologically updated day by day.
There has been an increased desire for purchase over internet.

Demand for monitors has fallen at a rate of around 5% p.a. for the last 3 years. There are many
causes of this. For example, consumers when upgrading now often upgrade the pc but not the
monitor, and they access the internet in other ways (such as through games consoles) which don’t
require separate monitors and can use alternative technologies such as television screens and
mobile phones. This trend is expected to continue for the foreseeable future – especially in the
current economic climate. PC monitor manufactures are therefore expanding into new areas such
as production of televisions, recording devices such as PC peripherals, and Samsung even intend to
launch a range of cars.

However, the number of ‘green consumers’ is increasing in Country of Bacoda. They are conscious
of energy used in production and distribution of products they buy. These consumers also expect
suppliers to be socially responsible towards their employees, customer and to the society as a
whole.
Financial results
A summary of Tenerife’s recent financial results is provided below:

Ex tracted from I ncom e Statem ent (all figures in €m ):

2014 2015 2016
Sales 240 200 150
Cost of sales (120) (105) (90)
Admin (30) (28) (25)
Distribution (12) (10) (9)
Interest (40) (37) (32)
Net profit before tax 38 20 (6)
Tax (12) (5) (1)
Net profit after tax 26 15 (7)

Ex tracted from Balance Sheet/ Statem ent of Financial P osition (all figures in €m ):
2014 2015 2016
Non-current assets 1,160 1,000 1,040
Current assets
Inventories 924 900 820
receivables 456 418 360
Cash and cash equivalents 80 7 0
Long term borrowings 50 100 120
Non-current liabilities 500 400 300
Current liabilities 1,300 1,050 1,040
Share capital 770 775 760

Future prospects
Paul is concerned about the falling sales and profits and is pushing Sam to come up with
some new ideas to move the business forward. Sam has identified two opportunities that she
believes can make use of the business resources and competencies and move Tenerife in the right
direction.

Dingle are considering adding LCD TV’s to their product range and have approached Tenerife about
the possibility of an exclusive supply agreement. Under the agreement Tenerife would add the TVs
to their product range but supply them exclusively to Dingle for the period of one year. Dingle
would buy exclusively from Tenerife. After this period Tenerife would be free to offer the product
to other customers or markets and Dingle could also seek other suppliers or negotiate a new
contract with Tenerife. LCD TVs continue to be a rapidly growing market – especially at screen
sizes below 22” as consumers replace old bedroom and kitchen televisions. Last year over 12
million units were sold in total in Europe and growth is expected to average around 6% p.a. over
the next 8 years.
Alternatively an opportunity has arisen for Tenerife to acquire a French company who make very
similar products to Tenerife’s core range. The advantage that the company has is that they supply
almost 40% of Samsung’s European requirements. However the company has suffered from poor
working capital management which means that they need an urgent injection of cash. Their
position is so bad that they have offered Tenerife a 60% stake in the company for only €30m (only
two years ago the company was valued at €250m at the prevailing exchange rate). Sam sees this
as a way of widening Tenerife’s customer base and gaining better economies of scale And the last
option for Tenerife Co. is to build a shopping village. There has been an increasing appetite of
public for safe, car free shopping from a variety of shops, might suggest development of retail
villages on the land that company has, in the north of country.

Paul’s opinion is that, from a financial perspective, Tenerife could raise enough cash to
pursue these strategies if they decided to do so. Initial costings estimate that the introduction of
the new product line would cost around €10m which would leave enough finance for the
acquisition if that was thought to be necessary. And to build a shopping village they may fund this
strategy with loan if required. However he is wary of making such a large investment in the
current economic climate and has sought the services of external consultants in order to
help the business make its decisions and find a way for it to proceed in the future.

Required:
You work at a firm of business consultants and have been asked to write a draft report for
Tenerife. Draft the following sections which will be included in your report:
a) Using an appropriate model or models, analyse Tenerife’s current strategic position and
financial performance.
(18 marks)

b) Using suitability, feasibility and acceptability criteria, consider whether the

proposed opportunities are appropriate for the business.
(18 marks)

Professional marks will be awarded in part (a and b) for appropriate structure, style and fluency of
the report
(4 marks)

c) Sam occasionally worked and led large projects at her previous employers and is aware
that proper project planning is the key to success. But she believes that she has forgotten
as much as she can remember.

Advise Sam on the key parts of the project plan and how they might relate to the
introduction of the new product range.
(10 marks)

(Total: 50 marks)
Section B – TWO questions ONLY to be attempted
Question 2
INTERWOOD is a large retailer of furniture, based in an Asian country. It has three strategic
business units (SBUs) which specialise in office, bedroom and lounge furniture. Each SBU is
responsible for the design, procurement and retailing of its own range of furniture. INTERWOOD
sells all its product ranges through a chain of large ‘furniture superstores’ throughout its own
country. Each store sells all three furniture ranges. INTERWOOD has been in existence for over 20
years. Recently, the organisation’s profitability has been slightly higher than average for the
furniture retail sector. All the furniture that INTERWOOD sells is designed ‘in-house’. Production
of the designs is outsourced to a number of small local manufacturers. This ensures that
INTERWOOD can keep close control of product features, style and quality, while negotiating down
the unit cost of product

The market leader in bedroom sector is 2TEL with a reported sales revenue from this sector of
$6.35 million. 2TEL sells a much narrower range of ‘basic’ office furniture than
INTERWOOD, through a chain of specialised office furniture stores. Most of its products are
mass produced in large factories elsewhere in Asia, and it is therefore able to sell at much lower
prices than INTERWOOD. However, despite experienced managers being transferred into the
company from other SBUs in the group, interwood has struggled to make a significant impact in
furniture market.

INTERWOOD is market leader in office furniture segment, ahead of NATIONAL FURNISHERS

(revenue of $2.85 million) and MK ($2.14 million). INTERWOOD has a good reputation for the style
and quality of its bedroom furniture, and customers report very high satisfaction levels. It
specialises in bedroom furniture and it has significant contracts with most of large supermarket
chains. Interwood has become a household name and is the most recognizable brand in the
furniture industry. It ensures to provide a reliable and efficient service to customers.

INTERWOOD is a relatively small player in lounge furniture market which is dominated by MK

with its sales revenue of $14.25 million. The second placed competitor is TSC ($11.96 million),
closely followed by NATIONAL FURNISHERS ($8.94 million). Despite having tried to increase its
market share in this segment, INTERWOOD has had little success. Much of INTERWOOD’s lounge
furniture is made to order, with customers allowed to choose from a wide range of styles and
fabrics.

The following information has been available:

2016 2013
Interwood Industry Interwood Industry
Bedroom furniture
Revenue 5.75 20.50 5 20
Operating profit 10.80% 9.98% 10.45% 9.50%
Office furniture
Revenue 1.12 31.50 1.05 25
Operating profit 4.75% 12.45% 4.95% 12.75%
Lounge furniture
 Revenue 1.55 29.5 1.45 29
Operating profit 4.55% 14.50% 4% 14.25%

Dining furniture
The research and development (R&D) manager of INTERWOOD has noticed that the market for
dining furniture, such as dining tables and formal dining chairs, is growing at a rate of about 10%
a year. Furthermore, he is aware that neither 2TEL nor MK has any dining furniture products. This
market segment is served by many small retailers, each of whom sells a similar range. Most of
the dining furniture currently on sale originates from a few large manufacturers.

The R&D manager has proposed to the Board of INTERWOOD that the organisation develops its
first ever range of dining furniture. INTERWOOD should be able to stand out from rivals based on
its design expertise and branding. But he suggested that the production of the furniture
should be brought in-house as he was concerned that outsourcers would use the designs and
offer them to rivals who would compete with INTERWOOD in the future.

Required:
a) Evaluate the current performance and contribution of each of the three SBUs in the Interwood
group portfolio and assess their relative significance in its future strategy.
(13 marks)

b) Explain how businesses should make outsourcing decisions and provide advice to INTERWOOD
for dealing with the R&D manager’s concern.
(12 marks)

(Total: 25 marks)
Question 3
Boston Co. is an acquisitive company and have identified Fiddler Ltd as a potential target. Boston
Co. operate in a market that, until recently, developed in a reasonably predictable manner. But
recent changes in technology and customer requirements mean that businesses are having to react
faster to changes in the market that are happening more often and in more unpredictable
ways. Boston Co. is a venture capitalist who inject money and management expertise into struggling
companies, in exchange for a certain degree of control, ownership and dividend reward. They have
acknowledged financial and management competencies which they have used in a variety of
commercial environments. They are experienced change managers.

Fiddler is a business that has struggled to do this and are in financial difficulties and its bank, Firm
sure, in response to its own financial difficulties, has recently reduced Fiddler’s overdraft facility
creating cash flow crisis.

Fiddler has been an owner-managed company for many years and employs over 200 people in
total. John Harte, the owner and founder of Fiddler, has always had an autocratic management
style. Staff are subject to strict control and are given very clear targets and working policies. John is
always at work at 8.00 am in the morning to make sure that employees arrive on time and he is also
there to ensure that they do not leave early. There is no scope for flexibility within these working
policies. Employees who arrive late for work have to immediately explain the circumstances to John.
If he feels that the explanation is unacceptable the he makes an appropriate deduction from their
wages. Wages, like all costs in the company, are closely monitored by John.

Fiddler currently has 25 employees primarily undertaking sales, warehousing, accounts and
administration. Although employees are nominally allocated to one role, they are required to work
anywhere in the company as required by John. All employees at Fiddler are only given the minimum
holiday allocation. John is increasingly critical of suppliers and society in general. He has also been in
dispute with the tax authority.

Boston Co.'s management style is very different. They encourage staff to get involved and generate
ideas for the business. There are targets to be met, but these are regularly changed and adapted to
meet the changes that are happening in the business’ environment. Boston Co. has a very simple
organisational structure with few levels of management. There are formal organizational hierarchies,
specialized roles and formal controls and systems.

Fiddler’s staff has been employed for an average of 8 years – something that John Harte takes
pride in. This generally rewards loyalty as well as compliance with company policies and achieving
company targets. Boston Co. believes that Fiddler provides an attractive acquisition target because
with a better customer focus the staff could dramatically improve performance.

Required:
a) Comment on the existing culture at both Fiddler and Boston Co. and the potential problems this
may cause for Boston Co. post-acquisition.
(10 marks)
b) Evaluates the effect of contextual features on the introduction of strategic change at Fiddler and
assess the acceptance.
(15 marks)

(Total: 25 marks)
Question 4
Mc Queen is the Managing Director of Tomato Finance Ltd, a company offering a range of financial
services, including home, life and car insurance products, personal and business
loans and mortgages. The company also acts for a variety of local businesses in the
preparation of accounts and managing the raising of finance for capital investment and it has
recently become involved in helping to provide venture capital. The company has thirty offices in
different geographic locations within the United Kingdom; the head office is in Leeds. Within each
office the insurance business is organized as a separate unit. In recent years the insurance side
of the business has lost market share to rivals due to its slowness in introducing information
technology to deliver its products to customers. This has not affected the loans and mortgages
side of the business as much because these customers are more interested in high quality
customer care and on-going customer service. The services that tomato Finance offers are very
competitively priced and the staff are all well motivated and very highly qualified. The company
prides itself on the quality of its service and the loyalty that its customers seem to have.
Most of their customers come back regularly and recommend friends. All of the offices do
their own promotion, following the guidelines set out at head office. It is a combination of local
advertising in leaflets and newspapers and public relations’ events.

Mc Queen is of the opinion that the company should develop a coherent e-business strategy. At the
beginning of May, the board of directors committed to a new operating system and the redesign
of the organisation’s website and intranet. The updated website will improve the
organisation’s marketing as it will allow customers to review all products on offer, to obtain
quotes, to compare quotes with rival companies, to send email queries and to instantly sign up
for insurance products and make payments electronically. A basic website is already in
existence showing all current products on offer and the ability to get online quotes.

Required:
In your role as an independent business analyst produce a report for Mc Queen that:
a) Discuss the benefits of using e-business in a modern competitive environment, and identifies
some of the potential concerns that the firm may encounter
(9 marks)

b) Recommends a suitable hardware and software infrastructure that would be necessary to

develop and support the proposed e-business strategy
(6 marks)

c) Discusses how the firm would need to re-evaluate its traditional marketing approach to
successfully e-market its service to its target customer base
(10 marks)

(Total 25 marks)