Topic: Analysing the external environment

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  • 40 Marks

CSEG – Nov 2015 – L2 – Q1 – Analyzing the external environment

This question involves analyzing the external environment affecting Grace Telecom Ltd., assessing market development opportunities using Ansoff’s Matrix, understanding economic data relevance, evaluating expansion plans, and outlining methods for obtaining a stock exchange quotation.

CASE STUDY: GRACE TELECOM LIMITED

Introduction: Grace Telecom Ltd. is a well-established company providing telecommunications services both nationally and internationally. It offers telephone services, telephone lines and equipment, and private telecommunication networks. Recently, it has expanded into mobile phone services, an expanding global market.

The company has a diverse customer base, including residential users, multinational companies, government agencies, and public sector organizations. Grace Telecom Ltd. handles approximately 100,000 million calls each working day and employs nearly 140 personnel.

Strategic Development: The Chairman of Grace Telecom Ltd., in the latest Annual Report, identified three main growth areas reflecting the evolving telecommunications market. The company aims to:

  • Expand its telecommunications business nationally and overseas, acting independently or through partnerships.
  • Diversify into television and multi-media services, including telephone shopping and broadcasting.
  • Extend joint ventures and strategic alliances already established in West Africa.

The Chairman emphasized the company’s intent to become a world leader in communications by focusing on long-term development, improving customer services, developing high-quality products, and maintaining innovation, flexibility, and market-driven approaches to deliver world-class services at competitive costs.

Financial Information: The following comparative statistics show extracts from the company’s financial performance in the national telecommunications market over the last two years:

Last year Previous year
Revenue/Turnover (GHS’000) 16,613
Profit before interest and tax (GHS’000) 3,323
Capital employed (GHS’000) 22,150

The company estimates its cost of capital to be approximately 18%.

Business Opportunities: The Chief Executive of Grace Telecom Ltd. identified major opportunities in:

  • Encouraging greater telephone usage.
  • Providing advanced services, including research and development into new technologies.
  • Benefiting from the increasing deregulation of global telecommunication services.

An extensive advertising campaign was used to penetrate the residential market further, offering various charging incentives to residential customers.

To increase long-term shareholder value, the company is considering investing GHS200 million annually for three years in new technology and quality improvements in its national market. This investment, due to its specialized technical nature, is not expected to have residual value at the end of the three-year period.

Following the investment, the directors believe the company’s rate of profit before interest and tax to turnover in the national telecommunications market will remain constant, at the same level as last year, for the three years of the investment.

Markets and Competition: Grace Telecom Ltd. is experiencing market share erosion and faces strong competition in the mobile phone market. Despite leading its national market with an 85% share, the company has seen reduced demand for residential lines over the past five years due to increased competition.

The market for telecommunications equipment is perceived as static. The planned investment of GHS200 million annually is estimated to increase Grace Telecom Ltd.’s market share to 95%. This improvement is expected to be fully realized in the first year and maintained for the full three-year period. Without further investment, the market share is expected to revert to current levels due to competitive pressures.

Industry Regulation: A government regulatory organization has been established to promote competition and deter anti-competitive behavior. Due to regulatory activities and aggressive pricing strategies, charges to customers are anticipated to remain constant for the full three-year period of new investment.

All cash flows are assumed to occur at the end of the year to which they relate. The cash flows and discount rate are in real terms.

Future Outlook: The business remains under family control, but the board is considering an expansion program, which would require raising GH¢200 million in equity or debt finance. However, there are risks associated with the expansion, such as the declining market for fixed telephone lines. New income is expected from expanding into mobile money transfer services. The company’s key to profit growth lies in generating sales growth, though it faces stiff competition from larger telecom companies.

Grace Telecom Ltd. must carefully consider external factors, including government economic policy. Recent key economic data include:

  • Bank base rate reduced from 22% to 20%, with a forecast of a further 0.5% reduction within six months.
  • Annual inflation rate reduced to 12% from 14% in the previous quarter and 16% twelve months ago, with no further declines expected in the medium term.
  • Personal and corporate tax rates expected to remain unchanged for at least twelve months.

Required:

a) Explain the nature of the political, economic, social, and technological forces which will influence Grace Telecom Ltd. in developing its business and increasing its market share. (8 marks)

b) Apply Ansoff’s Product/Market Growth matrix to assess the extent of the potential market development opportunities available to Grace Telecom Ltd. (12 marks)

c) Explain the relevance of each of the items of economic data listed in the case to Grace Telecom Ltd. (6 marks)

d) Explain whether Grace Telecom Ltd. should continue with its expansion plans. Clearly justify your argument for or against the expansion. (10 marks)

e) Outline FOUR (4) methods whereby Grace Telecom Ltd. can obtain a quotation for its shares on the Ghana Stock Exchange. (4 marks)

a) Explanation of Political, Economic, Social, and Technological Forces (8 marks):

  • Political factors: Grace Telecom Ltd. dominates its national telecommunications market with an 85% share. The company will face political pressure from the government to reduce its dominance by opening up the market to competition and reducing prices for telecom products. The government-appointed industry regulator will closely scrutinize Grace Telecom Ltd., making political forces a major factor in the company’s operations and planning. Additionally, political conditions in international markets where Grace Telecom Ltd. operates must be considered.
  • Economic factors: Grace Telecom Ltd. must consider various economic elements, including:
    • Shareholder wealth: The company’s shareholders aim for profit maximization and rising share value, especially as the company plans to obtain public funds from the stock exchange.
    • Contribution to the national economy: The telecom industry plays a crucial role in economic growth, and Grace Telecom Ltd. has a responsibility to develop new technology and provide reliable services.
    • Economies of foreign countries: Economic conditions in each foreign country where Grace Telecom Ltd. operates should be considered, such as foreign currency exchange rates and national economic cycles.
    • National economic indicators: Favorable economic indicators, such as reduced interest rates, can help Grace Telecom Ltd. capitalize on cheaper debt capital for its expansion plans.
  • Social factors: Grace Telecom Ltd. should understand the social needs of its customers and provide reliable services. The company should portray itself as socially responsible and keep close contact with consumers by offering services for different demographic groups, such as elderly citizens. Additionally, the company should consider the cultural aspects of the different markets in which it operates.
  • Technological factors: The telecommunications industry is highly dynamic, and Grace Telecom Ltd. must remain innovative to maintain its competitive advantage. The company should invest in research and development to ensure a constant supply of new products and may need to integrate after-sales support services as a core activity in its value chain, especially as it plans to invest in high technology.

b) Application of Ansoff’s Product/Market Growth Matrix (12 marks):

  1. Market penetration strategies: Grace Telecom Ltd. currently has 85% of its national market, leaving little room for growth by increasing market share. Most households and businesses already have a conventional telephone line, so products in this category may be at the maturity stage of their life cycle, offering limited growth prospects. Some market growth might be achieved by encouraging existing customers to use the telephone more, but this strategy offers limited potential.
  2. Product development strategy: This strategy involves introducing new products into existing markets. Grace Telecom Ltd. has already achieved a good track record for new product development and should continue investing in research and development to maintain its momentum. There is significant opportunity in the industry for this strategy, such as further developments in mobile phone and internet technology.
  3. Market development strategy: Grace Telecom Ltd. has pursued a successful strategy of expanding into foreign markets with existing products. The company currently operates in North America, Europe, India, and the Far East. The Chairman mentioned developing countries, such as those in Africa, where the company has operations. Market development in these regions presents a significant growth opportunity.
  4. Diversification strategy: This involves introducing new products to new markets and is considered a high-risk strategy. Grace Telecom Ltd. is a large, profitable company with an innovative culture. The company should carefully evaluate the risks of any diversification strategy, but if opportunities exist, they should be considered. For example, digital television technology could be a potential area for diversification.

The company should pursue all four strategies, with an emphasis on product development and market development, as these strategies exploit the company’s strengths in research and development and growth in foreign markets.

c) Relevance of Economic Data (6 marks):

i) Reduction in bank base rate:

  • Change in borrowing costs: A fall in interest rates will make borrowing cheaper, reducing the cost of raising finance for expansion plans. This reduction in the cost of capital could increase the NPV of the company’s investment proposals.
  • Level of demand: A fall in interest rates could increase the overall level of demand within the economy, although the impact on Grace Telecom Ltd.’s products, which are relatively inelastic, may be limited.
  • Economic confidence: Lower interest rates may boost general economic confidence and encourage expansion, although this may not significantly affect the demand for low-value basic products offered by Grace Telecom Ltd.

ii) Effect of present and forecast rates of inflation:

  • Interest rates: Low inflation rates suggest that interest rates are unlikely to rise, maintaining favorable borrowing conditions.
  • Costs of purchases: The cost of inputs for Grace Telecom Ltd. should remain stable due to low inflation. Wage rates may also be less affected.
  • Price increases: In a low-inflation environment, it is challenging to increase prices without losing business. Grace Telecom Ltd., which offers low-value products, may find it difficult to raise prices, reducing its competitive advantage.

iii) Effects of stable tax rates:

  • Consumer demand: Stable personal tax rates are unlikely to significantly affect demand for Grace Telecom Ltd.’s products, which are inelastic.
  • Tax relief: Stability in tax rates allows for confident financial planning, particularly concerning tax relief available to the company and individual equity investors.

d) Argument for or against Grace Telecom Ltd.’s Expansion Plans (10 marks):

Arguments in favor of expansion:

  1. Need to increase sales: Grace Telecom Ltd. needs to increase sales to trade profitably. Given the low recent sales growth, despite new product additions, opening new outlets may be the only way to significantly boost sales.
  2. Bulk order discounts: Expanding the business will increase purchase volumes, potentially improving buying power with suppliers and allowing the company to take advantage of bulk order discounts. This could positively impact gross margins and profitability.
  3. Wider geographical spread: A broader geographical presence will reduce vulnerability to local events, such as rising unemployment or new competitors.
  4. Economies of scale: Expansion could lead to economies of scale, such as more efficient use of regional management resources.

Arguments against expansion:

  1. Nature of products: Expansion may not address the fundamental weakness of the business, which lies in its focus on low-value products with strong price competition. There is limited growth potential, and other factors, such as the convenience of larger stores, work against the business.
  2. Risk of political pressure: Expanding further could subject Grace Telecom Ltd. to greater political pressure due to its large market share (already 85%), potentially leading to increased regulation and costs.
  3. Competitive pressures: Strong price competition due to low inflation and competition from the supermarket sector is likely to continue, limiting the benefits of expansion.

Conclusion: Grace Telecom Ltd. should carefully consider the expansion, as it may not significantly increase margins and profitability. The company might explore alternative strategies, such as offering higher-value products or entering markets with better opportunities for price-based competition.

e) Methods for Obtaining a Quotation on the Ghana Stock Exchange (4 marks):

  1. Offer for sale: This involves offering securities already in issue or for which the company has agreed to subscribe to the public through an issuing house or broker.
  2. Offer for subscription: This method involves offering new securities to the public for the first time.
  3. Rights issue: This is an issue of shares at a special price by the company to existing shareholders in proportion to their holdings.
  4. Bonus/Capitalization issue: This involves issuing additional shares to shareholders instead of paying a dividend, in proportion to shares already held.
  5. Placing: This refers to selling or obtaining subscription for securities privately by an issuing house or broker through the market and their own clients.
  6. Introduction: This describes an application where no marketing arrangements are required because the securities to be listed are already widely held, ensuring adequate marketability.
  • 40 Marks

CSEG – May 2019 – L2 – Q1 – Analysing the external environment | Analysing the internal environment

Analyze the waste management sector in Ghana, recommend an organizational structure for Omega Group Ltd, conduct portfolio analysis, calculate NPV for a recycling project, and suggest waste management measures.

Waste Management in Ghana

Ghana has been battling with domestic and industrial waste for many years and successive governments made it one of the topmost priorities to address the menace. However, all the well-intended measures adopted in the past have not yielded significant result in addressing the waste menace. The current government which assumed office in January 2017 created a new ministry, Ministry of Sanitation and Water Resources, in a bid to give new impetus to the waste management agenda. Two years on, the general public verdict is that much has not changed as heaps of waste can be seen in every nook and cranny of the major cities in the country. The President has the vision to make Accra, the nation’s capital city, the cleanest within the sub-region but the vision is deemed to be far from realisation. It is estimated that Ghana generates 1.7 million tonnes of waste per year and Accra alone generates 3000 tonnes of waste per day.

It also appears that the state has lost the battle on the desecration of the country’s major beaches with litter and open defecation in abundance. The other national monuments such as colonial forts and castles along the coastal belts have not been spared. These areas are major tourist attraction centers and the negative financial consequences cannot be overemphasized. A popular river, River Odorna, which runs through the national capital has been silted with plastic and organic waste, displacing the water which runs through it and terminate in South Atlantic Ocean. The nation has not recovered from the twin disaster of flood and fire which claimed over 100 lives when River Odorna was overflooded. This resulted in nearby petrol filling station being flooded and with oil displaced fire from unknown source that triggered massive fire killing all the people who had taken refuge there.

The current national policy on waste management is based on decentralisation to the various Metropolitan, Municipal and District Assemblies (MMDAs) who are the sub-national organs responsible for administration of various urban, peri-urban and towns in the country. The MMDAs manage waste within their jurisdiction by signing contracts with various privately-owned waste management companies and to some limited extent MMDAs-owned trucks which has proven to be less effective with frequent break downs of those trucks. The waste so collected is disposed at various landfill sites constructed by the MMDAs but most of those sites are now full and are turning into mountains of waste. The hosting communities of landfill sites are up in arms for their closure as health and environmental negative impact takes a heavy toll on the residents. There is currently pending a plethora of law suits by affected residents to get the courts to force MMDAs to shut down the landfill sites.

The citizens engage in indiscriminate disposal of waste everywhere in the country. The culverts, drainage systems and streets are suffocating under the pressure of waste especially that of plastic. Rubbish are thrown onto the streets from moving commercial and private vehicles alike. At various lorry stations where dustbins are provided, drivers’ mates dispose waste to the floor where cars are parked. Citizens build up wastes in front of their houses day time and by the following morning those waste have vanished. It has been established that a number of residents are beginning to dispose waste into gutters and shoulders of major roads at night. Although, all MMDAs have punitive fines and sanctions in their bye-laws nobody seems to suffer any consequences engaging in littering.

Waste Management Sector

The waste management sector has a number of actors including a few large companies with large concessions and a lot of trucks for waste collection and disposal, MMDAs with their internal waste collection units, small companies with few trucks and hence limited concessions, and recently individuals with tricycles, without concessions, have emerged to cater for unserved new residential areas springing up at the outskirts of the cities. The large companies have a fleet of garbage trucks with capacity to collect huge tonnes of waste within their concession areas. Thus, the large companies are better resourced and able to do mass collection of waste. Many small companies with few garbage trucks are actively involved in waste management effort and are generally granted concession over smaller areas. Despite the collective effort by large and small companies as well as MMDAs, large amount of waste remains uncollected and in fact the amount of waste generated is on the rise. This situation has led to individuals using tricycles to collect waste from households for a fee.

The waste management companies get paid in two ways – directly by households and companies that have been provided waste bins and containers and indirectly by MMDAs for the picking of waste containers provided at vantage points for use by market centres, lorry stations and households that may not subscribe to direct service. Payments to waste companies are persistently in several months of arears with serious implications on their financial positions. This situation has resulted in irregular collection of pool waste containers with attendant consequence of mounting waste in urban centres.

The Group and Company

One of the major large companies operating in the waste sector is Waste Tiger Ltd and is part of Omega Group Ltd (OGL) of Companies. The other subsidiaries under OGL include Sewerage Systems and Medical Waste Treatment Ltd, GCD Diamond Ltd, JB Plant Pool Ltd, ACB Bank Ltd and Recycling & Compost Plant. A brief description of the business of each of the subsidiaries follows:

Waste Tiger Ltd (WTL) – is involved in collection of solid domestic and commercial waste in various MMDAs across the country.

Sewerage Systems and Medical Waste Treatment Ltd (SSMWT) – handle liquid and medical related waste across the major cities.

GCD Diamond Ltd (GDL) – a mining company involved in extraction and processing of raw diamond which was added to the group 4 years ago.

JB Plant Pool Ltd (JPPL) – leading supplier of heavy duty and earth moving plant and equipment, buses and renders total service support for all products sold in case of faults or breakdowns.

ACB Bank Ltd (ABL) – is an indigenous financial institution providing retail, corporate and treasury services to diverse clients.

Recycling & Compost Plant (RCP) Ltd – is involve in recycling of waste, export of waste and production of fertilizer for local market.

The Group CEO, Mr. Joseph Quainoo is not enthused at the rising cost of the group and its subsidiaries due to duplication of functional areas within each subsidiary. He wants to reconfigure the existing organisational structure in which there will be dual line of reporting and responsibilities. The CEO wants a structure that combines functional specialisms (marketing, finance, Human resource and Information technology) and the subsidiaries and by so doing eliminates subsidiary-specific functional areas. Again, the structure should result in keeping subsidiaries largely independent but with necessary intervention with respect to functional activities.

The Group CEO wants to do performance analysis of the various subsidiaries based on the extent of cash generated and used by respective subsidiaries. The group Chief Finance Officer (CFO) was tasked and has generated a summary of cash inflows and cash outflows for each subsidiary. The cash flow information is summarised in Exhibit 1 below:

The Group CEO wants a portfolio matrix constructed to analyse the various subsidiaries and advice on strategic option to pursue for each subsidiary so as to inform resource allocation within the group.

Recycling & Compost Plant (RCP) Ltd

RCP Ltd is the latest subsidiary incorporated and commenced business/operations in January 2018. The idea to start RCP Ltd followed from a waste management conference Mr. Joseph Quainoo attended in China and his encounter with the CEO, Chun Juan, of the largest waste management company in China. At the said private meeting Chun shared the idea of how lucrative recycling of waste is becoming, the fact that China is importing waste and how fertilizer is being produced from waste. Armed with this information and the absence of waste recycling in Ghana, Mr. Quainoo decided to venture into that segment of waste management.

RCP Ltd has three major lines of business – production of organic fertilizer from organic waste, plastic from plastic waste to be sold to plastic processing companies and finally process some organic and plastic waste for export to China. The establishment of RCP Ltd is the first significant intervention to change traditional use of landfill sites in waste management to waste recycling which is more sustainable and also generate economic activities. Although, various governments have always proposed to set up a recycling plant but that never materialised. Perhaps, the inertia and apparent lack of commitment by governments to build recycling plant is because it is capital intensive. The company has a combined permanent and contract workforce of 570 and as business picks up, more hands would be engaged. Kindly refer to exhibit 2 for the data that was used in performing investment appraisal. The current capacity of the company only allows it to process 30% of total waste generated in the capital city. The vision of Mr. Quainoo to is to expand to all the major cities in the country.

Exhibit 2

The plant and equipment and all related cost necessary to make it operational has been pegged at GH¢1,500,000. This recycling plant has an expected life of five years, after which it would have to be replaced and will have no residual value at the end of this period. The plant can produce and process a maximum of 75,000 tonnes of waste per year over five years. The revenue per processed ton is GH¢110. To ensure that the maximum output is achieved, the company will spend GH¢250,000 a year in maintaining the plant over the next five years.

Based on the maximum output of 75,000 tonnes per year, the following expected costs per ton excluding the maintenance costs above are: waste and treatment material GH¢32.5, labour GH¢27.5 and overhead cost GH¢42.5. The following information is also relevant:

The waste and treatment materials figure above include a charge of GH¢10 for treatment (chemicals) materials that is currently being stocked by one of the subsidiaries in the group and can be used for waste treatment. Each ton of waste requires 1,000 liters of the chemicals and the charge is based on the original cost of GH¢5 per 500 liters for the chemicals. It is a material that is currently used in one of the other subsidiary and the cost of replacing the chemical is GH¢7.50 per 500 liters. The chemical could easily be sold at a price of GH¢6.25 per 500 liters.

The labour cost relate to payments made to employees that are directly involved in recycling the waste materials. The labour cost include some employees who have no work at present and if there were no production, they will be made redundant immediately at a cost of GH¢1,150,000. However, if production takes place, the employees are likely to find another work at the end of the five-year period and so no redundancy costs will be incurred.

The overhead cost includes a depreciation charge for the new machinery and equipment. The policy of the business is to depreciate non-current assets in equal instalments over their expected life. All other overheads included in the above figure are incurred in recycling.

The company uses a cost of capital of 20% to assess projects. The management of the company is interested in determining the net present value of the recycling plant and equipment at the end of the five-year period.

Required: a) Assess the legal, economic and social factors in the environment of the waste management sector in Ghana. (6 marks)

b) Recommend appropriate organisational design that will help the group coordinate and control activities among the subsidiaries. Your recommendations should include THREE (3) benefits and THREE (3) demerits associated with that design. Support your answer with appropriate diagram. (10 marks)

c) Using an appropriate portfolio matrix, explain the various categories of businesses within the Omega Group Ltd and advise the CEO of appropriate portfolio strategy (or strategies) to adopt for each subsidiary. Justify your choice of a particular portfolio matrix and categorization of the subsidiaries based on your selected matrix. (8 marks)

d) Using information provided on recycling plant and equipment, determine the net present value of the project after five years. (12 marks)

e) Recommend FOUR (4) practical and tangible measures government can adopt to deal with the waste menace in the country. (4 marks)

a) Assessment of the Legal, Economic, and Social Factors in the Environment of the Waste Management Sector in Ghana

Legal Factors

  • There’s a national policy on waste management based on decentralization to the various metropolitan, municipal, and district assemblies (MMDAs).
  • There’s currently a plethora of lawsuits by affected residents to get the courts to force the MMDAs to shut down the landfill sites.

Economic Factors

  • Littering in major tourist attraction centres could discourage tourists, which could have financial consequences like a reduction in foreign exchange to the country.
  • The hosting communities of landfill sites are up in arms for their closure as health and environmental negative impacts take a heavy toll on the residents. This has economic implications as it increases the cost of living for the citizens.
  • Exportation by Omega Group Ltd. and importation of equipment have foreign exchange implications for the economy.
  • Loss of revenue to the state as a result of a decrease in tourists into the country.
  • Cost to the MMDAs in terms of waste management.

Social Factors

  • The citizens engage in indiscriminate disposal of waste everywhere, which creates a social implication as their culture. There’s a need for punitive fines and sanctions for citizens who engage in indiscriminate disposal of waste.
  • A new Ministry created by the current government in a bid to give new impetus to waste management can be seen as a social intervention by the government to curb the waste management menace in the country.

(2 marks each for Legal, Economic, and Social Factors = 6 marks)

b) Appropriate Organizational Design for Omega Group Ltd and Its Benefits and Limitations

The structure that is able to achieve the CEO’s requirement of combining functional specialisms with subsidiaries while eliminating duplication is the Matrix Structure. A matrix structure combines different structural dimensions simultaneously, for example, product divisions and geographical territories or product divisions and functional specialisms. A matrix structure is a combination structure in which the organization is organized along two or more dimensions at once (e.g., business, geographic area, value chain function) for the purpose of enhancing cross-unit communication, collaboration, and coordination.

Advantages of Matrix Structure

  1. Knowledge-sharing: It promotes knowledge-sharing across the organization (in this case, Omega Group) because it allows separate areas of knowledge to be integrated across organizational boundaries.
  2. Efficient Resource Utilization: Allows more efficient utilization of resources. Since matrix structure eliminates duplicated functions in the subsidiaries, the group would make some savings in terms of staff costs and other related costs.
  3. Flexibility: Matrix structures are flexible, because they allow different dimensions of the organization to be mixed together, combining subsidiaries with centralized functions/specialisms.
  4. Professional Development: Increases professional development through a broader range of responsibility.

Disadvantages of Matrix Structure

  1. Uncertainty in Accountability: Dual-reporting relationships can result in uncertainty regarding accountability.
  2. Power Struggles: Intense power struggles may lead to increased levels of conflict.
  3. Impeded Decision Making: Excessive reliance on group processes and teamwork may impede timely decision-making.
  4. Violation of Unity of Command: Violates the unity of command principle.

Matrix Structure Diagram:

c) Portfolio Matrix Analysis Using the Boston Consulting Group (BCG) Matrix

The BCG Matrix categorizes businesses into four types based on their market share and market growth: Stars, Cash Cows, Question Marks, and Dogs.

Star:

  • Waste Tiger Ltd and JB Plant Pool Ltd fall under this category, given their high cash inflows and high cash outflows, resulting in neutral to marginal positive or negative net cash flows. The strategic option for these businesses is a Build strategy, focusing on long-term profitability by making heavy investments in them to grow their market shares.

Cash Cow:

  • ACB Bank Ltd is a Cash Cow with very high cash inflows and low cash outflows, resulting in high positive net cash flow. The strategic option for this business is a Hold strategy, making necessary investments to maintain market share while using excess cash to subsidize other businesses within the group.

Question Mark:

  • SSMWT Ltd and Recycling & Compost Plant (RCP) Ltd are Question Marks with negative net cash flows. The strategy options are Build where there are prospects for market share growth or Harvest where growth prospects are low.

Dog:

  • GCD Diamond Ltd falls under this category, with low cash inflows and outflows. The strategic option is to Divest this business from the group.

(8 marks)

d) Net Present Value (NPV) Calculation

|

e) Measures for Government to Deal with Waste Menace in Ghana

  1. Complete Ban on Non-biodegradable Plastic: The government should legislate to ban the use of non-biodegradable plastic in packaging applications and criminalize its use with strict penalties.
  2. Strict Enforcement of MMDAs By-laws: The government should enforce existing by-laws related to waste management, ensuring that offenders are prosecuted to set an example.
  3. Building of More Recycling Plants: The government should encourage private sector involvement in building recycling plants by offering tax waivers and holidays.
  4. Active Public Education: The government should intensify public education on the importance of proper waste management through the National Commission for Civic Education (NCCE).
  • 10 Marks

CSEG – May 2016 – L2 – Q6c – Analysing the external environment

Identify and explain five determinants of barriers to entry for new entrants into an industry, focusing on factors that protect existing firms from new competitors.

A new entrant into an industry will bring extra capacity and more competition and so could, in turn drive down profits. The strength of the threat posed by new entrants is likely to vary from one industry to another and depends on the strength of the barriers to entry and the likely response of existing competitors to the new entrant.

Required: Identify and explain FIVE determinants of barriers to entry to new entrants into an industry. (10 marks)

Determinants of barriers of entry to potential new entrants into an industry

i. Economies of scale: High fixed costs often imply a high breakeven point, and a high breakeven point depends on a large volume of sales. If the market as a whole is not growing, new entrants into the industry would have to capture a large slice of the market from existing competitors. This is expensive. Thus, if significant scale economies are already enjoyed by existing firms, potential new entrants experience strong barrier to entry into the industry.

ii. Product differentiation: The degree to which existing firms have succeeded in differentiating their respective products or services from the competition determines how strong the barrier to entry for potential new entrants. Existing firms may have built up a good brand image and strong customer loyalty over a long period of time. A few firms may promote a large number of brands to crowd out the competition.

iii. Capital requirements: The amount of capital required to enter an industry determines the extent of difficulty new entrants face in their quest to enter the industry. When investment requirements are high, the barrier against new entrants will be strong, particularly when the investment would possibly be high-risk.

iv. Knowledge requirements: As well as high capital requirements, knowledge and know-how are also a barrier to entry. It is much more difficult to enter an industry which requires significant specialist knowledge, and skills, than an industry where no specialist skills are required.

v. Switching costs: Switching costs refer to the costs that a customer would have to incur by switching from one supplier’s products to another’s. Switching costs is a composite of three costs namely: time, money and convenience. Switching costs are usually higher for industries with greater extent of product differentiation. If switching costs are high, new entrants into the industry experience a strong barrier to entry since they have to invest heavily in differentiating their product and also creating awareness for its products so as to build its own loyal customers. The barrier is even stronger where the market is saturated.

vi. Access to distribution channels: Distribution channels carry a manufacturer’s products to the final consumer. New distribution channels are difficult to establish and existing distribution channels hard to gain access to. Existing distributors are usually reluctant to accept new products to market since they are unsure of their acceptability and patronage by the final consumers. Thus, usually potential new entrants face significant barriers to entry where access to distribution channels is difficult.

vii. Cost advantage of existing producers, independent of economies of scale: Sometimes existing producers in the industry enjoy significant cost advantages which are independent of economies of scale such as patent rights, experience and know-how effects, government subsidies and regulations and favoured access to raw materials. If these advantages are significant for existing producers it contributes to the strength of barrier to entry for new entrants. Existing producers find it easier to engage in price wars to ward of potential new entrants.

  • 40 Marks

CSEG – May 2016 – L2 – Q1 – Analysing the external environment | Analysing the internal environment

Conduct strategic analysis and prepare cash budget for Richward Ltd, a small haulage contracting company, addressing competitive forces, SWOT, and financial planning.

ICHWARD LIMITED

Background Mr. Kwesi Bonku is the Managing Director of Richward Ltd, a small haulage contracting company, which he founded 15 years ago. Originally, Mr. Bonku was a heavy goods vehicle driver himself, working for other contractors, but he had the intent of establishing his own business. Having received his pension, he acquired an articulator truck and began to work from home. Over time the business expanded and now Richward Ltd operates a fleet of 15 heavy goods vehicles. Five of the current fleet of trucks was acquired in the last financial year, replacing older units which were becoming too expensive to maintain. The Company now employs 20 full-time and varying number of part-time driver mates. The part-time staff work as and when required.

Mr. Bonku acquired two plots of land six years ago and built a house on it, which he and his family occupy. In addition, he built a garage with facilities for minor servicing and repairs on the same site. Living on site has enabled him to offer a 24-hour service to clients. Consequently, movement of the trucks in and out of the site occurs at all times of day and night. There have been objections raised by the residents in the neighbourhood to disturbance and the local Radio Stations has at various times reflected this criticism.

In addition to the haulage business, the company also obtained license and established a driving school. This had proved to be a successful diversification as there is a regular stream of customers. This training takes place mostly in Richward Ltd’s own garage facilities. It became clear to Mr. Bonku that the land on which the garage facility is built was inadequate for the needs of his growing business.

Acquisition of land One year ago, Mr. Bonku entered into negotiations to lease some land which would be more than satisfactorily for the company’s operations. The land is situated on an industrial estate five kilometres from the existing facility. In addition, there is room to build a workshop facility which would be adequate for the needs of the fleet.

Following agreement of a lease arrangement, which was concluded just before the completion of the last financially year, Richward Ltd occupied the land on which there were no building erected or utilities supplied. Since taking possession of the land, a large security fence has been erected and a small portable cabin placed on site. Water and electricity services have been supplied and negotiations are taking place for the installation of a large diesel tank adequate to service other vehicles besides those of Richward Ltd.

Accounting Mr. Bonku recruited Mrs. Efua Dadson, a part-time accountant, four years ago. Prior to Mrs. Dadson’s arrival, Richward Ltd applied a policy of paying all invoices immediately on receiving them. As debtors were frequently taking over and above the credit period (30 days) allowed, Richward Ltd suffered a cash flow shortage, which resulted in a large bank overdraft.

Mrs. Dadson introduced some basic financial accounting procedures into the company. In addition to exercising some control on Richward Ltd expenditure, Mrs. Dadson has reduced the debtors’ collection period to about half its former level. Creditors are now paid when the invoices fall due rather than immediately upon their receipt. Such control had been lacking prior to her arrival at the company.

The company faces strong competition for haulage contract work. Typically, haulage contractors operate on a low-margin basis and smaller companies often sub-contract from large-scale hauliers. Richward Ltd carries haulage for a variety of customers as well as undertaking some subcontracting. Much of the haulage work the company carries out is seasonal.

One of its top clients, Grace Ltd, recently appointed a new transport manager. The new Manager of Grace Ltd. has begun to employ other hauliers besides Richward Ltd. Over the last two months, the haulage work Richward Ltd has received from Grace Ltd has reduced by about a third.

In order to address the competition, Richward Ltd recently diversified into the sale of hydraulic oil. Sales have been running at a steady rate of 50 gallons each month for some time, but the company is dissatisfied with this level of sales and from next month June 2016, the company intends to advertise actively. This is expected to increase sales by 10 gallons per month from June to October inclusive after which it will remain steady at 100 gallons per month.

Each gallon costs GH¢1,500 and sells for GH¢2,000. All purchases are on one month’s credit and sales on two month’s credit. The company feels that, to give a good service to customers, it must have sufficient inventory at the end of each month to meet the whole of the following month’s sales.

Additional non-current assets (a delivery van to help cope with the increased sales) will be bought and paid for in July 2016 at a cost of GH¢15,000. Corporate tax of GH¢25,000 is due for payment on 1st August, 2016. The balance of cash at 31st May, 2016 is planned to be GH¢30,000.

Operating costs will rise to cash payments totaling GH¢10,000 each month. The advertising will cost GH¢20,000 in June and GH¢10,000 for each month from July to September inclusive, payable one month in arrears.

The Accountant has not yet had a cash budget prepared for the rest of the year, but she feels that the sales expansion plans are likely to lead to cash flow problems.

Suggestions have been made that, if her fears are justified, it might be possible to overcome the problem by increasing the creditor payment period to two months and buying inventory as it is used (i.e. zero inventory at month ends).

Required: a) Assess the nature of competitive forces of Richward Ltd. (8 marks)

b) Present a SWOT Analysis for Richward Ltd. (8 marks)

c) Advise Mr. Bonku on the strategic management accounting information which should be provided to assist future decision making and cost control. (8 marks)

d) Prepare a cash budget for Richward Ltd Limited for the six months ending 30th November 2016, showing the planned cash position at the end of each month; on the basis of the original planned credit and inventory holding periods. (6 marks)

e) Redraft your cash budget to reflect the suggested alterations to these planned periods. (5 marks)

f) Suggest what other aspects Richward Ltd Limited should consider to solve the expected cash flow problem, should the suggested solution be unachievable. (5 marks)

a) The five competitive forces related to the business of Richward Ltd care:

  1. Rivalry amongst existing competitors Richward Ltd faces strong competition for haulage contract work and it appears that there are several firms operating in the market. Profit margins are low, which indicates that work is undertaken at low prices. A major customer, Grace Ltd, uses other haulers, which suggests that competition for business is fierce. Richward Ltd is facing strong competition from existing competitors. The strong nature of competition is also exacerbated by low switching costs of customers.
  2. Threat of a new market entrant The main constraints on setting up a road haulage business will be obtaining a license and having sufficient capital to purchase or lease a tractor unit and trailer. Finance for such an operation will be readily available. The only other significant entry barrier might be low profit margins. It appears that, overall, the road haulage industry has few major entry barriers so this will always be a threat to established business such as Richward Ltd.

Note: Any of the points under barriers to entry that is well explained may considered – capital requirements, low switching costs of customers, degree of differentiation, economies of scale, knowledge requirements, etc.

  1. The power of customers The customer of Richward Ltd will be primary organisations that employ skilled people who know the road haulage industry and how to negotiate contracts. As there are many competing businesses in the trade, this puts the customers in a strong bargaining position. This is shown by the fact that Richward Ltd’s major customer Grace is using other hauliers and is, no doubt, assessing its supplier’s prices and performance. The power of customers in the market is strong; this poses a serious threat to Richward Ltd.

Note: Other points which may be considered are switching costs, concentration risks (demand), number of competing firms, negotiating skills, profit margin of customers.

  1. Power of suppliers The main suppliers to Richward Ltd will provide vehicles, other plan and equipment, formal services and labour. It is unlikely that any supplier is in a strong monopolistic situation, except possible providers of capital. Richward Ltd is in an established position and while it remains profitable will probably be able to obtain reasonable amounts of capital. The power of suppliers does not appear to be very strong.
  2. The threat of a substitute product The main substitute for road haulage services is freight carried by the railway industry. The current dire state of this industry means that rail freight cannot be considered a serious threat to Richward Ltd.

Note: Other points which may be considered are switching costs, concentration risks (demand), number of competing firms, negotiating skills, profit margin of customers.

Overall, Richward Ltd’s competitive position is not strong as it faces a number of competitive threats.

b) SWOT Analysis for Richward Ltd.

Strength

  • Richward Ltd is an established business with an experienced management team
  • Bonku lives on site enabling Richward Ltd to offer a 24-hour service to customers
  • The company acquired a lease on a new site that has quite a lot of potential
  • The company has diversified into truck driver training which reduced dependence on read haulage for income.
  • Replacement of old trucks and other equipment. This increases the efficiency of operations.

Weaknesses

  • Richward Ltd’s existing site is too small, so it will have to locate the new site that requires more capital and will disrupt business operations.
  • Richward Ltd currently does not have an effective management accounting system, which means Richward Ltd’s managers make decision without having sufficient information
  • The company is too dependent on Grace Ltd, which account for majority of its business

Opportunities

  • The enlarged premises will enable the company to attract new business and offer new services e.g. overnight trailer parking and a vehicle repair service.
  • Richward Ltd should be able to establish stronger links with existing customers, which should help to retain their business.
  • Location of land/business premises.

Threat

  • The most serious threat facing Richward Ltd is the loss of Grace Ltd’s custom. In the last two months one third of this business has already been lost.
  • There are a large number of competitors working on low profit margins and this forces price down. There appears to be little prospect of Richward Ltd being able to increase its prices.
  • Local residents are opposing operations from the current site and the company is receiving bad publicity in the local press.

c) Advice to Mr. Bonku

Competitor Information

  • Information about competitors can be very useful as it provides a benchmark against which Richward Ltd’s performance can be compared.
  • Budgeting will provide information to forecast patterns and trends. This will be very useful when making decisions and setting objectives and targets e.g. market growth rates.

Financial information

  • Investment appraisal Information can be provided to evaluate each capital investment project undertaken by Richward Ltd. This will be very useful when developing the new site.
  • Variance analysis This is a very important management accounting control tool. The expected costs and revenues will be forecast and actual costs and revenues compared with them. Variances can then be identified and investigated to find their cause. This will establish some of Richward Ltd’s strengths and weaknesses.
  • Customer account profitability Costs incurred by Richward Ltd can be related to each customer and the profit generated by each customer calculated. This will be very important information used by Richward Ltd’s managers to make decisions relating to each customer e.g. Grace Ltd.
  • Quoting prices Most of Richward Ltd’s customers will be other organisations. They will expect a price to be agreed before awarding a contract to a supplier. Management accounting can supply the information for quoting competitive and realistic prices when negotiating with customers.

d) RICHWARD LTD: CASH BUDGET FOR SIX MONTHS ENDING NOVEMBER 2016

e)

f) Suggested ways of improving the cash situation of Richward Ltd

  • Raising new capital
  • Ploughing back profits
  • Raising new loans
  • Leasing or renting non-current assets instead of buying them
  • Raising prices
  • Selling for cash
  • Asking for a extended period from creditors
  • Cutting down costs
  • 4 Marks

CSEG – Nov 2017 – L2 – Q4c – Analysing the external environment

Identify and explain four effects of technological change on organizations.

Technology is one of the most powerful forces within the external business environment that has significantly changed how business is conducted, especially within the 21st Century. For instance, information technology (IT), when well exploited, can have a significant impact on all five forces of competition.

Required:

Identify FOUR effects of technological change on organizations. (4 marks)

1. The type of products or services that are made and sold: Technological advancements can lead to the creation of new products or services or the enhancement of existing ones, allowing organizations to better meet customer needs and stay competitive in the market.

2. The way in which products are made (e.g., process automation, new raw materials): Technology can streamline manufacturing processes, improve efficiency, reduce costs, and enable the use of new materials or methods that can improve the quality or functionality of products.

3. The way in which goods and services are sold: Technological change has revolutionized sales methods, such as the growth of e-commerce and online sales platforms, which allow organizations to reach a global audience, reduce overhead costs, and offer personalized customer experiences.

4. The way in which firms are managed: Information technology encourages the delayering of organizational hierarchies, enables remote working, improves communication, and allows for better data-driven decision-making. Technology also facilitates greater integration between buyers and suppliers through the use of extranets and other collaborative tools.

Take control of your business data with insight and in-depth understanding by taking this course. 

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