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Exam 2 June, questions and answers
Strategic management (6112)
Addis Ababa University
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Strategic Business Leader Specimen 1 Examination Valid from September 2018 Exam Session Time allowed: 4 hours including reading, planning and reflective time This question paper is an integrated case study with one section containing a total of 100 marks and ALL Tasks must be completed. All Tasks contain Professional Skills marks which are included in the marks shown above Do NOT open this question paper until instructed the supervisor. You must NOT write in your answer booklet until instructed the supervisor. This question paper must not be removed from the examination hall. Paper SBL Strategic Professional Essentials Examination The Association of Chartered Certified Accountants Strategic Business Leader Specimen Paper 1 You are Hoi Lui, a management consultant leading a small team which has been commissioned to prepare a consultancy report for the Data Communications Services (DCS) Company directors to help them plan for the next three years. DCS Company has two product areas. The largest area is the manufacture of data communications components which it mainly sells to original equipment manufacturers (OEM). The other smaller and less developed area is based on supply and support contracts for specialist IT management network systems, mainly to domestic enterprises. You are a qualified accountant and your colleagues are Danny Leman, a company researcher, and Freddie Lithium who is a finance professional. You and your team have collected and analysed the following information about DCS Company to help you prepare the consultancy report. Exhibit 1: A report on DCS organisational overview, the external environment and the business model sourced and prepared Danny Leman, your colleague Exhibit 2: A transcript from interview which was held between you and Java Peraya, the CEO of DCS Company. Exhibit 3: Summary of financial and business performance of DCS Company extracted from the Integrated Report presented to you the finance director of DCS Company Exhibit 4: The October board report, a recent board meeting notes which include strategic choices facing DCS Company presented to you the marketing manager of DCS Company Exhibit 5: An evaluation of alternative future strategies being considered the DCS Company board, prepared and presented to you your colleague, Freddie Lithium Exhibit 6: Minutes from the focus group meeting you held with middle management of DCS Company Following your findings you are now starting to prepare the consultancy report and associated tasks for DCS Company. The case requirements are included in the tasks shown below: 1 (a) From the information you have collated, draft a section of the consultancy report for the directors of DCS Company to include the following: (i) An analysis of the industry and market which DCS Company is competing in, using an appropriate model. (15 marks) (ii) An evaluation of the overall performance of DCS Company between 2012 and 2015 from an integrated reporting perspective. (12 marks) Professional Skills marks are available for demonstrating evaluation skills relating to DCS environment and performance. (4 marks) (b) You are now reviewing the transcript of the interview you held with Java Peraya, the CEO of DCS Company and you identify some key weaknesses relating to the governance of DCS Company which you want to include in the consultancy report. Required: Explain the key weaknesses of the current governance structure of DCS Company since it became a public limited company, recommending how they should be addressed. (12 marks) Professional Skills marks are available for demonstrating scepticism skills in identifying key weaknesses from the information given. (2 marks) 2 3 You have highlighted from your interview with Java Peraya and from your notes from the middle management focus group meeting, that there are some key stakeholder management and engagement issues at DCS Company. You are now preparing working notes, with relevant visual aids, which will form a key part of your presentation of the overall consultancy report. Required: (a) Using appropriate stakeholder analysis, evaluate how the relative power and interests of the following three stakeholder groups and the strategies for engaging with them should have changed after DCS Company became a public limited company. Lenders. (9 marks) Professional Skills marks are available for analytical skills for assessing the relative power and interest and how to engage with these stakeholders before and after flotation. (2 marks) (b) Criticise the and HR ethical and professional behaviour relating to the design, conduct, and reporting of the staff satisfaction survey. (5 marks) Professional Skills marks are available for scepticism skills in identifying ethical and professional issues in the conduct of the survey and communicating these criticisms to the client in a way that is appropriate. (2 marks) (18 marks) 4 Exhibit 1 Background report to the DCS Company To: From: Subject: Date: Hoi Lui Danny Leman Organisational overview, the external environment and the DCS business model 20 November 2015 Notes: Organisational overview Data Communications Systems (DCS), a publicly listed company on the small capitalisation (SmallCap) index of a national stock exchange, used to be a privately owned high technology company established in 1997 computer engineer, Java Peraya. Due to a rapid expansion over the following years, DCS needed to source additional capital to fund its future growth and was floated on the national stock exchange in 2006. This allowed Java Peraya to realise his majority shareholding in the private company. of the flotation was purchased institutional investors and DCS also borrowed funds to leverage the newly issued share capital. Before flotation, the company was almost exclusively financed from the share capital, retained earnings and finance. External environment DCS has its headquarters in Prydain, a prosperous developed nation with a stable and well established political system and which has highly developed labour laws including a national minimum wage and a newly introduced obligatory contributory pension scheme. The government, like many governments worldwide, has invested heavily in a national telecommunications infrastructure which has led to a significant growth in social media and where virtually of the population are connected to the internet through a range of devices including mobile technology. The government is also proposing a new carbon tax which will affect companies which manufacture and provide IT network services such as data communications components and systems. The electronics and IT industry has recently been identified as a sector with an increasing carbon footprint caused their applications, such as component cooling devices, complex telecommunications network components and cloud computing technology. Although DCS Company can approximately estimate its total carbon footprint from the manufacture and supply of components from its factory, it has not yet developed formal systems and processes to manage its carbon footprint throughout the value chain. Business model DCS has two distinct areas data communications components manufacture and the supply and maintenance of network management systems, including technical support. The DCS employees are a mixture of technically qualified engineers, working in research and development factory staff manufacturing and assembling products and an IT sales and service support team. Since the flotation of the company, of production employees in the data communications components factory joined a major trade union. In 2012 the country suffered an economic downturn which led many companies to postpone technological investment and then DCS employed 150 employees. The main revenue source for DCS is the low cost data communications component manufacture part of the business and it has of the total market share, which accounts for approximately of total turnover. DCS mainly sells and supplies large volumes of data communications components to original equipment manufacturers (OEMs), of which are based outside Prydain on a continent which has a single currency which is devaluing against the Prydain dollar. Success in the data communications components sector comes from the economies of scale achieved producing high volumes of reliable components and keeping prices low. DCS Company has achieved this despite producing components in a country where there is significant employment legislation setting minimum wage rates and conditions. The second product area is much smaller and is based on supply and support contracts for specialist IT management network management systems, mainly to domestic enterprises, which currently yields a relatively higher gross profit margin than the data communications component products. A key aspect of this second product area is the installation and support of big data analytics capability along with cloud computing storage, which can be used to replace existing costly IT architectures such as unsophisticated data warehouses to allow business clients to collect and analyse more targeted and timely data about their own customers and purchasing patterns. Much of this can be obtained from data held within social and business networking software. 5 As far as recruitment, remuneration and succession planning is concerned, I personally approve and manage all middle to senior staff recruitment and staff promotions, so there is no need for formal induction processes for our directors or senior management. You: Now that you are a listed company, how do you report to and engage with your shareholders, particularly institutional shareholders? Java: DCS does not have special governance or reporting structures to engage with shareholders, including institutional shareholders, but of course we do meet our minimum company law obligations in relation to statutory reporting to shareholders, shareholder democracy, voting and other constitutional rights. You: That was all very useful Mr Peraya, but what I would like now is more data on the overall performance of DCS and a copy of the October board report, which I know was considering the strategic options facing DCS. Java: Certainly, I will ask Tosh Mondal to send you our summarised integrated reporting data attached on a spreadsheet. I will also ask the marketing director to send you the board report for October. You: Thank you very much Mr Peraya. 7 Exhibit 3 Extracts of the integrated reporting data from the finance director Tosh Mondal Financial performance: (all figures in Financial periods: Sales revenue (domestic and international) Cost of sales Gross profit Overhead expenses Profit before tax and finance costs Finance costs Tax expense Profit for the year Other data: Number of employees Staff turnover of orders delivered late Forward contract order book (number of orders) Customer complaints as a percentage of total orders and existing contracts Employee satisfaction survey score max) Investment in manufacturing equipment as a percentage of sales revenue expenditure as a percentage of sales revenue Carbon emissions in kg per sales revenue 8 2015 2014 2013 2012 2015 127 2,500 2014 135 3,750 2013 143 4,150 2012 150 3,505 80 75 65 60 Conclusions: The DCS board should now evaluate the risks and opportunities and take a key decision. DCS also needs to consider how it will implement its chosen strategy and how it will finance it. See further information below. Forecast tangible benefits and costs resulting from various potential scenarios In 2015 we have estimated that the net cash contribution from the data communications components segment of the business is and the net cash contribution from the network supply and support is These are after interest and tax. The expectation is that total cash flow contribution will continue to decline about each year if we do nothing. strategy: We can implement this strategy our sales and support teams, making manufacturing cost efficiencies and targeting our data communications component customers more effectively. If we are successful, we estimate that we can at least maintain the total cash contribution of DCS at the current level of for the next three years. strategy: With a of the business towards the network supply and support segment, the net cash contribution from the communications components sector is forecast to decline per year for the following three years. This is regardless of how the net cash contribution from the network and IT systems support business is expected to grow under any of our assumptions. Forecast annual fixed costs and working capital savings from the decline in the data communications manufacturing area are expected to be from general costs and will also result in annual carbon tax cost savings of giving a total saving of per annum for the next three years Note that these forecast savings are independent of which growth forecast below emerges. Table 1 below shows the projected growth in the cash flow from the network supply and support segment in the next three the additional fixed costs of this and the savings to be made in the data communications division, should the and additional investments take place. Table 1: Alternative growth forecasts for DCS Company under the strategy strategy and probabilities for growth Probability of growth materialising Forecast annual increase in cash fixed costs Forecast annual savings from decline in data communications segment Additional cash contribution from the network support business will grow each year for the next three years from the 2014 level 60 Additional cash contribution from network support business will grow each year for the next three years from the 2014 level 30 Additional cash contribution from network support business will grow each year for the next three years from the 2014 level 10 10 Exhibit 5 An evaluation of strategy choices facing DCS Company You asked your colleague Freddie Lithium to evaluate the alternative strategies based on the information contained in the October board report. Freddie has now given you his work in the spreadsheet below: Strategy evaluation for DCS, using payback method Strategy 1: strategy: 2015 2016 2017 2018 With total cash contribution maintained: Data communications Network supply and support (1) Total for Strategy 1: Strategy 2: strategy Growth: Network supply and support Probability: (4) Total cash contribution from Strategy 2: (2 3) (5) Incremental cash contribution (4 1): (2) Expected value from network growth: (3) Data communications decline Additional annual fixed costs based on expected growth: Growth: Network supply and support Probability: (6) Expected value of additional cash fixed costs: (7) Cash fixed cost savings (Data comms) (8) Net additional cash fixed costs: Incremental cash contribution from Strategy 2: (5) Incremental cash fixed costs (8) Incremental net cash contribution from Strategy 2 compared with Strategy 1 Cumulative payback period 2 years and eleven months 11 Answers Strategic Professional Essentials Examination Strategic Business Leader Specimen Exam Answers In the Strategic Professional Examinations it is not always possible to publish suggested answers which comprehensively cover all the valid points which candidates might make. Credit will be given to candidates for points not included in the suggested answers, but which, nevertheless, are relevant to the requirements. In addition, in this integrated case study examination candidates may points made in other questions or parts of questions as long as these are made in the specific context of the requirements of the question being answered. The suggested answers presented below inevitably give much more detail than would be expected from most candidates under examination conditions, and include most of the obvious points evidenced from the case information. The answers are therefore intended to provide a structure of the approach required from candidates, and cover the range and depth of knowledge relating to each task which might be demonstrated the most well prepared and able candidates. They are also intended to support revision and tuition for future examinations. 1 (a) Background section of consultancy report One mark per relevant point for discussing any relevant environmental model such as Porters five forces, or PESTLE. Introduction The first part of this report analyses DCS market and the industry using the Five Forces model. (i) Bargaining power of buyers DCS is competing in two markets. In the data communications component market which is more mature and where it has less than of the market share, it is a supplier of marginal significance, despite of its gross profit or cash contribution being generated in this segment. Its customers in the neighbouring single market with its own currency are likely to demand low prices, high quality and reliability. They may not accept late delivery of orders. It appears that alternative sources of supply are readily available and that switching costs are relatively low. Multinational OEMs have significant bargaining power in this market, particularly the OEM which accounts for of current data communications component sales. In the second market, where network management systems are supplied to mainly domestic, SMEs and a few larger companies, the buyers appear to have less bargaining power. DCS is catering for each specific needs and so each solution is, to some degree, a bespoke solution. This makes it much harder for buyers to compare products and prices of potential suppliers. Alternative sources of supply are much more difficult to find as there only three companies (including DCS) in this specialist marketplace. The bargaining power of suppliers Although DCS manufactures of all components used in its data communications products, reducing its overall reliance on suppliers in this sector, it seems unlikely that DCS will be able to exert much influence on its suppliers, which provide the other As a relatively small player in the data communications market, the company does not have the power to exert buyer pressure on its two large suppliers, either in terms of price or delivery. Current problems associated with the delivery of components are having a significant impact on the ability to meet customer deadlines and expectations. Suppliers of financial capital, namely lenders, have gained more bargaining power as DCS has had to borrow more to sustain their recent growth. If labour is seen as a supplier, then evidence again suggests that DCS is in a relatively weak position particularly since there has been a limited trade union membership since 2006. However, the union members are mainly in the data communications components division where employee remuneration and employment rights are already compliant with national employment laws. The scenario also indicates the difficulty of finding high calibre network staff with small size and location making it difficult to attract the key personnel necessary for future growth in this sector. Threats from new entrants DCS is operating in an industry where the costs of entry are significant because it is capital and knowledge intensive. Economies of scale compel new entrants to enter at significant output levels or suffer a cost disadvantage. Furthermore, the need to offer comprehensive aftersales support, although a problem for DCS, does also create a significant barrier to new entrants. Finally, the exit costs and barriers such as knowledge, skills and assets, reduce the attractiveness of the marketplace to new entrants. Threats from substitutes There is evidence that large, successful, high technology companies are particularly vulnerable to ignoring the challenge from disruptive new technologies which can replace the need for certain high technology products and services overnight. However, the relatively small size of DCS may give it a competitive advantage in its ability to respond quickly and flexibly to change, as long as it can attract the right calibre of expertise to achieve this. Rivalry amongst competitors Very different levels of competition are being experienced in the two market places DCS is operating in. It is clear that the high volume, component business offers intense competition with buyers who are able to use their size to extract favourable prices. DCS only has of this market. The ability of DCS to generate better market share and volumes through product innovation in this market seems highly unlikely. 15 Natural capital It is clear that DCS has a growing carbon and that it is unable to identify where precisely in its value chain the carbon footprint is most problematic. The information in the case shows that the overall carbon emissions are increasing. Carbon emissions have risen since 2012. The case clearly indicates that the main cause of the carbon footprint is in the data communications components manufacturing division. This is already a high volume and relatively lower margin sector of the business which will be subject to additional carbon taxes under the government proposals. There is also likely to be a greater carbon cost with this sector as a significant proportion of these components are exported to the near continental trading community. Conclusions DCS needs to be aware of the dynamics relating to its market and industry, particularly the power of key customers and over reliance on two main suppliers. It must also be aware of and manage the threats from substitutes and new entrants in its two main business segments. On the performance against the six capitals of performance in several areas is weak and indicates a strategic drift which will need to be addressed. (b) Governance and internal control Introduction In case there seem to be significant shortcomings in regard to the governance structures against broad principles of good governance. In particular, as a listed company, the board of DCS Company will be accountable to institutional investors. This formal investor relations function seems to be lacking at DCS and should be formalised. However, there are general weaknesses in a range of governance arrangements at DCS and these include weak internal controls, which are a key responsibility of the audit committee and these may have led to the poorly managed policy and the ineffective capital budgeting process. These specific shortcomings are as follows: of the role of chairman and CEO This is a serious weakness and leads to lack of independence within the board vesting too much power in one individual who may be able to dominate the board of DCS. The two roles are very different in nature. The CEO is responsible for directing and implementing strategic plans and for leading the executive team. The chairman is responsible for ensuring that the board of directors operates effectively, that it is properly constituted and is managed impartially to encourage open and transparent discussion. These roles should be separated. Lack of independent directors and diversity DCS only has one independent NED to scrutinise the executive directors and to exercise independence of judgement and scepticism where appropriate. independent NED is an executive director of one of two main suppliers which is inappropriate. The company should appoint NEDs who are and increase the diversity of the board, both in terms of functional expertise and business acumen and to benefit from the broader experience of those who have worked for other companies. The gender balance on the board needs addressing. Only the HR director is female. No director or senior management induction policy There seems to be no director induction process at DCS which is important in ensuring that directors and senior managers understand the mission, strategic objectives and cultural values of the organisation. Introducing such a programme will help integrate new senior staff into DCS and help them make more immediate and valuable contributions. Lack of risk, nominations and remuneration committees DCS seems to have no formal board appointed committees for the above. A public limited company is expected to have a committee which identifies, assesses and recommends strategies to mitigate risk. There is also no independent committee to consider board appointments or their pay structure. A particular problem related to appointments and rewards is evident from the case. At the senior level, this could have been avoided having a formal nominations and remunerations committee to consider such appointments. A key shortcoming is the failure to adequately align director pay with the interests of the shareholders. on the board is allowed share options and all are on a fixed salary meaning that company performance is not aligned to their rewards. A nominations committee would also have addressed some of the problems regarding poor selection and appointment of senior candidates, and the lack of succession planning. Poorly constituted audit committee The audit committee seems to be unsatisfactory for a number of reasons. First there seems to be with any real financial expertise and this may be why costs are getting out of control. Most of the members are technical managers from the operating core of the business. There is only one independent NED when generally accepted principles of corporate governance would recommend at least two, if not more. The audit committee does not seem to have proper oversight over the capital budgeting of the company or scrutinise significant expenditure on capital expenditure or DCS should therefore change the constitution of the audit committee to include more NEDs and members with more financial expertise. It should also review the remit of the audit committee to include induction and responsibility for oversight of the capital budgeting process, and to scrutinise the effectiveness of the financial reporting process, and its relationship with external auditors. 17 Inadequate reporting and engagement with institutional shareholders There is a block of institutional investors who seem to be largely ignored or treated as if they were like any other private individual shareholder. This is a key weakness as the institutional block vote is significant and if the shareholding is withdrawn or sold, this could create uncertainty in the market and a serious reduction in the share price. DCS needs to create formal reporting and communication channels with its institutional investors to ensure that they continue to engage with and invest in DCS. (c) Candidates may well approach these slides differently but the main benefits and opportunities they should identify should fall under the following main headings: Cost reduction More sophisticated analysis of customer data including customer behaviour, sentiments and preferences Faster and better Research and development analysis for new products and services Presentation slides Slide 1: Benefits of big data analytics Bullet points: Sentiment analysis Soft surveillance and consumer behaviour tracking Open communication channels with clients Predictive analytics (which can monitor inventory levels and ensure product availability) Analysis of purchasing behaviours Notes: As DCS operates in a country with of the population connected to the internet and presumably purchasing a significant proportion of their products and services online, DCS can sell data analytics capability to its clients. It can do this showing them how to use this capability to capture, store and process data from their customers. developing sophisticated marketing analytics with big data, clients can properly evaluate their own marketing performance, gain insight into their purchasing patterns, discern key market trends and permit them to make marketing decisions. Slide 2: Further opportunities to DCS customers of big data analytics Further opportunities offered big data analytics for customers, include the following: Bullet points: Potential to unlock significant value Ability to collect more accurate and detailed performance information Big data allows segmentation Sophisticated analytics can substantially improve Big data can be used to develop the next generation of products and services Notes: Big data analytics makes information about DCS clients more transparent and allows customers to collect more accurate and timely information at a fraction of the costs of hosting expensive architectures such as data warehouses and allows clients considerable cost savings using cloud computing capability or open source software such as for storing and processing large amounts of data. Using this, and through using social and business networking data, clients can undertake a much more sophisticated analysis of their customers and therefore much more precisely tailor their products or services allowing valuable insights which would otherwise remain hidden and unlock more customer value. The other key opportunity is to allow clients to develop bespoke products for their customers based on their precise needs and consumer behaviours. (d) Recommendations about sustainability issues Environmental and sustainability issues should have more prominence at DCS. When it was a private company, there would have been more flexibility regarding and a private company is not as visible to the general public as far as its social and environmental policies are concerned. However, a public limited company is expected to take into account environmental capital in its strategies and policies. DCS has a reputational stake in this. It also has a financial stake, because a carbon footprint which is not properly controlled usually leads to financial inefficiencies as well as environmental costs. DCS would gain benefits from the expertise of a reputable consultancy firm which specialises in environmental and carbon control. They would need to ensure that DCS is not accused of paying to green issues but visibly reducing their carbon footprint. They would analyse value chain from its suppliers, its logistics to its manufacturing processes and to its outbound logistics. These consultants would examine from top to bottom the policies, processes and procedures of the company. They can advise on the carbon content of raw materials and components and on how to be more fuel efficient in ordering, in production, avoiding or reducing waste and improving their quality control and recycling capabilities. They could advise on carbon offset programmes, ethical sourcing, green manufacturing, more sustainable travel policies and about the logistics of delivering their products and providing their services to customers. For example, having to send staff all over the country and to the near continent has a carbon cost, but also a financial cost. 18 Environmental risk DCS is not itself at risk of potential environmental impact, but is facing a risk of creating an increased carbon footprint or environmental impact which it is not effectively managing and which may itself create environmental costs and incur a carbon tax liability. This risk could be transferred through carbon offset strategies, avoided ceasing to manufacture or distribute goods in a way that creates such a significant carbon footprint, or reduced through pursuing tactics or strategies to avoid waste and reduce emissions. (b) (i) Table 1 of exhibit 4 makes a number of assumptions. These are as follows: The strategy is not considered an option the board. A reasonably quick financial analysis would confirm that this is not a viable option, but that confirmation has not been included in the October board report or in Freddie spreadsheet. Therefore, a financial evaluation of the option against the other two options would give a more complete picture. In fact, are there any other strategic options available to DCS? These do not seem to have been considered the board. Is it reasonable to extrapolate that a recent decline of in total DCS revenues is indicative of future trends in cash contribution segment? There seems to be no explanation of how the relative cash contribution of each segment in 2015 was arrived at, other than being calculated after interest and tax. The definition of cash contribution also needs to be investigated further to verify whether it is calculated before capital expenditure or is a free cash flow, because the forecasts might differ, depending on how this cash flow is defined. Is it possible to assume that annual additional fixed costs will be constant in each year of the forecast planning period as stated? In reality, there might be greater fixed cost expenditure in the first year of the new strategy and less in the subsequent years. Is it reasonable to assume that fixed cost savings in the data communications plant would be the same regardless of which growth forecast emerges? This seems unreasonable as potential savings in that division would probably depend to some extent on the level of growth which materialises from Strategy 2, if implemented. The calculations within the spreadsheet all seem accurate, but time value for money has not been taken into account. If the cash flows after interest and tax were discounted, they would need to be discounted the geared cost of capital, which is estimated at Making this adjustment to the cash flow will yield a net present value for the project and will change the payback estimate. This is shown below: 2016 Net incremental cash flow from 2017 2018 Net present value x x x This means that Strategy 2 (the strategy) has a negative NPV of which means it does not pay back in the planning horizon. (ii) Recommendations to the DCS board The purely financial evaluation in (b) above shows that DCS should not towards the more differentiated network support segment, although undiscounted payback would indicate that it just repays for itself within three years. However, the strategic and broader business benefits to be gained from in this way are that it will help DCS become a differentiator, concentrating on higher value, lower volume business, rather than continuing to maintain an increasingly challenging cost focus. This might be preferable to remaining as active in the high volume low margin data communications manufacturing business, particularly as the company is so reliant on two key suppliers, where supplies are being disrupted and where of their OEM customers are representing an increasing risk of higher currency translation costs. From the performance data in the spreadsheet, it seems that manufacturing cost control is one of the key problems for DCS, so the business benefits will include the ability to transfer resources from the manufacturing to the support side and the potential to make labour cost savings in the manufacturing area which is more labour intensive and where labour and employment costs in Prydain are high. DCS can also reduce its carbon footprint further and reduce its environmental impact. The IT benefits for DCS will be that it will develop greater capability in the new emerging technologies of cloud computing and big data processing services which will give it a competitive advantage over traditional players in the data electronics market. The strategy to the business will make a small negative net present value of over the next three years, which on the face of it would not justify the strategy on financial grounds alone, assuming that the forecasts were valid. However, while DCS directors were unable or unwilling to consider the cash flows beyond a planning period, due to subjectivity and prudence, it is reasonable to assume that there would be additional positive net cash flow benefits accruing to DCS, well beyond the planning horizon. These seem to be rising exponentially from the trend observed. It 20 could also be assumed, particularly in such a competitive and innovative sector as data communications, that the ability of DCS to maintain its current market share and overall turnover over time could be questioned, should no investment or of the business take place. Therefore considering both strategic and wider business reasons, DCS would be advised to implement the of the business and focus on expanding the network support side of the business and invest in the necessary fixed costs, staff recruitment and working capital required, using internally generated funds or issuing more shares. 3 (a) Working notes with relevant visual aids Using the Mendelow matrix it can be established that before DCS was listed or quoted on the national stock market, it had the following stakeholder groups: Before flotation: Shareholders Employees Lenders Described follows: these were private shareholders comprising the majority holding and possibly those of family and close business associates mainly and loyal to a smaller family oriented business insignificant borrowings before flotation presumably overdraft and other loans After flotation: Shareholders Employees Lenders Described as follows: wider group of public individual investors and a holding institutional investors more skilled staff, but operating core staff mostly unionised much more powerful and interested higher gearing and covenants in place The following table shows the Mendelow matrix positioning and strategies for these groups before and after flotation: (Note: Alternatively a grid could be presented where arrows could be used to indicate where stakeholders had moved within and between quadrants after being publicly listed) Stakeholder groups Shareholders Mendelow grid position and strategy before flotation High interest actively involve Employees Low interest keep informed Lenders Low interest minimal effort Mendelow grid position and strategy after flotation Lower interest keep informed (particularly institutional shareholders) Higher interest satisfied or involve more actively Higher interest keep well informed and keep satisfied The strategies DCS Company management would adopt and would differ as determined the changed positions on the Mendelow matrix. The main change in strategies would be as follows in relation to the above stakeholders: Shareholders: Clearly before the flotation, private shareholders, being the owner and his family or close friends, would have far more interest and power than the majority of shareholders after the flotation, so the need to actively involve is less necessary, but evidence from the case suggests that there is a lack of engagement with institutional shareholders which could be problematic as this group has far more power than other shareholders, so DCS should develop reporting and communications channels with this important group. Employees: Before flotation most employees were and the culture of DCS was not to involve, engage or inform employees and expect them to follow instructions. After flotation of the data communications workforce are now unionised and additional employment legislation such as minimum wage and mandatory company pensions are being introduced which will force DCS to not only keep employees and their representatives informed and fairly well satisfied, but also to more actively involve in particular regarding the pension arrangements. Lenders: Before flotation DCS was predominately funded from funds and had few borrowings, so this stakeholder had little power or influence and possibly little interest in DCS, particularly if the loan capital represented an insignificant proportion of the total portfolio. After the flotation, DCS has become increasingly more highly geared in order to expand into new markets and therefore the risk faced the lender is greater and this increases the level of interest in DCS and its ability to sustain this level of borrowing and to repay the original capital. As lenders have placed legally binding covenants on the company preventing it from exceeding its current gearing levels, it also has more power over DCS, meaning that DCS will have to keep lenders well informed and certainly keep them satisfied. (b) Professionally and ethically, there are some issues relating to how the staff satisfaction survey has been conducted, which we would like to highlight. In theory, such surveys are beneficial to organisations and to staff if conducted properly as they help management gain a better understanding of how staff are thinking, what their attitudes and opinions are and can act as a sounding board from which management can act and make the necessary changes which can improve the culture and productivity of staff. Lack of integrity Unfortunately it appears that staff may have been misled in that there were assurances given that the survey responses would be anonymous, but the personal information required gives the impression to staff that management can identify the respondents of the survey. 21
Exam 2 June, questions and answers
Course: Strategic management (6112)
University: Addis Ababa University
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