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With reference to the article in ACCA P3 titled above, referring to the sample question about Sportak, may I know how should students approach question (a) and (c)? Although there were guidance given, but I find it not sufficient to guide me in approaching both questions.
For (a), I have discussed how Sportak have take on both decentralisation and centralisation at different stages. And there were benefits and harms to the company via decentralisation. Should I reach a conclusion whether decentralisation really benefited Sportak overall? What is your opinion, did it benefited or harmed S?
For (c), although the question did ask to use the financial data, I did not explain much from the data because I didn’t find much details in it. And I break down my answer plan into 3 strategies proposed by Jerome, rather than a holistic view of viability of his plans for the company as a whole. How should students answer this question?
(a) You don’t need a conclusion because the requirement just asks for pros and cons.
Pro decentralisation: motivation, fast decisions relating to local areas, smaller head office and no warehouse needed. A pluralist approach ie different managers can experiment with different stock ranges, promotion and pricing.
Pro centralisation: better stock control (there was criticism of stockouts)and discounts, unified marketing. All your ‘eggs in one basket’ ie dependent on what he leader decides.
Decentralistaion might have been fine when the business was smaller, but will not allow economies of scale to be obtained (eg on purchasing) now that the business is much larger and these become important.
(b) You have to do your best to use financial data somewhere in an answer – especially as here you are told to use it.
Suggestions are:
Gearing becomes very high; interest cover is not great. So, high risk.
Current ratio becomes low and, as there is likely to be substantial inventory, the quick ratio would probably become very low.Gross margin % moves from 50% to 57%. That might be rather optimistic.
Expenses/sales moves from 0.4 to 0.51 – which should not really happen if the business is more tightly organised, but presumably this is primarily caused by the extra advertising.. Return on sales falls dramatically. ROE is a quarter of what it was – presumably because of the high price being asked.
Profit ater interest falls from 3 to – 0.79.
Industry sales are forecast to decline – so not a great future perhaps as this will place more pressure on margins as competitors fight for their share of the declining market.
Overall, I’m not sure it’s a good idea. Why increase risk to earn less profit in a market that seems to be declining in 2010?
HTH
Thank you very much for your suggested solution.
On the same topic, question (b), since we are asked to evaluate key features considered to be important and would expect to see in his business plan, the guidance asked us to use issues from strategic analysis/choice and implementation.
Should we only present the positive aspect of the company, environment and proposed strategy, to convince them to provide the finl assistance? Or should we also include the negative picture as well, as illustrated above concerning the viability of the strategy?Yes, concentrate on the positive. No-one is going to draft a business plan which forecasts a poor future.
The article’s response to this part of the question is quite good.
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