kb5 - business value creations model questions question 1 · cb is a recently qualified ca...

KB5 with Trevin Hannibal

KB5 - Business Value Creations – Model Questions Question 1 JALL is an independent retailer of office products selling 2,000 different items such as paper, stationery,

printer cartridges, diaries and planners. JALL has been established for over 50 years and has successfully

served the needs of its customers in the small town in Kandy where it operates its three shops. The nearest

competitor for JALL is ten miles away. JALL employs 50 staff and had revenue of Rs.7,000,000 in the last

financial year.

JALL has been owned by the same family since it began and many of its staff have worked in the shops all

their lives. Staff turnover has always been very low and staff morale very good. JALL’s managers know all

their staff and major customers personally. JALL’s managers are prepared to listen to suggestions and

complaints and they like to ‘keep a finger on the pulse’ of the business. Staff appraisals are conducted

informally once a year when the profit-sharing bonus is announced. JALL has paid its staff a bonus every year

since it was established. JALL’s customers benefit from competitive prices and a very high standard of

service. JALL’s suppliers are very pleased to work with JALL because its procurement procedures are very

efficient and it always pays its accounts within the credit period.

Recently there have been a number of changes at JALL. Customers have noticed signs in the shop window

stating ‘Clearance sale: all items must go!’ Suppliers have noticed that they are not always being paid on time.

Within the shops, a manager is not always present and the staff have been told that JALL is to be sold to

LNR, a large national chain of stationery retailers. When the staff enquired about the safety of their jobs they

were told by their manager that there will be a meeting, at a future date, when they would be told whether or

not they would be made redundant. However, the existing managers will keep their present jobs under the

new ownership.

The effects of these changes are:

• Staff are very worried about their future with JALL and morale is at an all time low.

• Suppliers are thinking about changing their credit terms with JALL and are concerned about their future

trading relationship.

• Customers are unsure about the future of JALL and some have switched their business to other retailers.

• JALL’s revenue has fallen considerably and there is little inventory on display within the shops.

Required

(a) Advise the management of JALL:

(i) Why it might encounter resistance to the change in ownership.

(6 marks) (ii) How it could overcome this resistance to change.

(7 marks)

(b) Advise the management of LNR:

(i) How it could use the Balanced Scorecard to manage its strategic performance.

(6 marks) (ii) How it could construct targets for JALL's staff within an incentive scheme and use these targets to support the Balanced Scorecard.

(6 marks)


Question 2 JIK is a manufacturer, retailer and installer of domestic kitchens. It started business in 1980 and its market

segment has been low to medium income earners. Until recently, its business model has been based on

selling high volumes of a standard kitchen, brand name ‘Value', with a very limited degree of customer choice,

at low profit margins. JIK’s current control system is focused exclusively on the efficiency of its manufacturing

process and it reports weekly on the following variances: Materials price, Materials usage and Manufacturing

labour efficiency. JIK uses standard costing for its manufacturing operations. In 2011, JIK employs 40 teams,

each of which is required to install one of its ‘Value’ kitchens per week for 50 weeks a year. The average

revenue per Value kitchen installed is Rs.100,000. JIK would like to maintain this side of its business at the

current level. The Value installation teams are paid a basic wage which is supplemented by a bonus for every

kitchen they install over the yearly target of 50. The teams make their own arrangements for each installation

and some teams work seven days a week, and up to 12 hours a day, to increase their earnings. JIK usually

receives one minor complaint each time a Value kitchen is installed and a major complaint for 10% of the

Value kitchen installations.

In 2014 JIK had launched a new kitchen, brand name ‘Lux-Style’. This kitchen is aimed at high net-worth

customers and it offers a very large degree of choice for the customer and the use of the highest standards of

materials, appliances and installation. JIK would like to grow this side of its business. A ‘Lux-Style’ kitchen

retails for a minimum of Rs.10 million to a maximum of Rs.50 million. The retail price includes installation. In

2015 the average revenue for each Lux-Style kitchen installed was Rs.20 million. Currently, JIK has 2 teams

of Lux-Style kitchen installers and they can install up to 10 kitchens a year per team. These teams are paid

salaries without a bonus element. JIK has never received a complaint about a Lux-Style kitchen installation.

JIK’s business is generated from repeat orders, recommendations, and local press advertising. It employs two

sales executives who earn an annual salary of Rs. 800,000 each. It offers a twelve month money back

guarantee and this has to be honoured for 1% of its installations. JIK has always been profitable but was

surprised to see that in its results for 2015 it only made 0.1% net profit on its turnover.

Required (a) Evaluate the appropriateness of JIK's current control system.

(7 marks)

(b) Recommend TWO Critical Success Factors (CSFs) which could assist JIK achieve future success. You

must justify your recommendations. (6 marks)

(c) Advise JIK of the changes it will need to make:

(i) To its current control system following the introduction of the CSFs recommended in part (b) of your answer;

(4 marks) (ii) To its standard costing system, reporting frequency and information requirements to achieve improved control.

(8 marks)


Question 3

CB is a recently qualified CA accountant. He has just started a job as a Marketing Accountant for a

newly built hotel, the Futurist. Currently, the Futurist has no marketing staff. The hotel, which has

not yet opened for business, intends to generate profit from its rooms and its restaurants. However,

other hotels in the local area get much business by providing a ‘wedding package’. A wedding

package usually includes the provision of a venue for the wedding ceremony, a meal for the wedding

guests, entertainment after the wedding and overnight accommodation for the bride and groom.

These competitor hotels market their weddings in a number of different ways. One hotel, the ‘De

Luxe’, situated in a castle in a beautiful, rural setting, charges a minimum price of Rs.10 million for

its wedding package which includes a meal for 100 guests and rooms for a bridal party of 10 guests

for one night. The De Luxe has won many international awards for its food and for the high standard

of its facilities and bedrooms. In contrast, another competitor hotel, the ‘Royal Albert’ offers its

wedding package for 100 guests for a total cost of Rs.200,000, with no overnight accommodation

provided in the basic price. The Royal Albert is a budget hotel situated next to a busy transport inter-

change in the nearby town. There are another five hotels which the Futurist regards as competitors:

these other hotels charge between Rs.7,000 and Rs.10,000 for each guest attending a wedding at their

hotel. CB has been asked to join a team consisting of the hotel’s General Manager and the

Restaurants Manager to formulate a strategy for the Futurist to offer a wedding package.

Required

(a) (i) Identify TWO models that the team could use to analyse the external environment. Briefly

explain the models.

(4 marks) (ii) Explain how these models could assist the team in formulating a wedding package strategy for

the Futurist hotel.

(6 marks) (b) (i) Explain how an understanding of Porter's three generic competitive strategies could help the

team design a successful wedding package strategy for the Futurist hotel.

(9 marks) (ii) Advise the team how information systems strategies could support the three generic competitive

strategies.

(6 marks)

Question 4

SAH is a family owned company employing 32 people, which builds and sells medium sized yachts which

normally retail at Rs.20 million. SAH operates in a very competitive market. SAH’s yachts are usually bought

by amateur sailors with high disposable incomes who value quality, reliability and performance. In 2017 it

plans to sell 25 yachts. SAH's Managing Director, N, has a vision for the company to be 'regarded as the best


yacht builder for the private owner'. SAH has always emphasised the high quality of its yachts and knows that

its customers are very knowledgable. Each yacht is built to a specific order and there is usually a period of at

least one year between an order being placed and the yacht being delivered to the customer. SAH’s

construction process is very traditional: most of its designs are at least 20 years old and much of the

construction work on its yachts is done by hand. SAH regards its workforce as ‘craftspeople’ who have

learned their skills through their work experience. SAH employs school-leavers and provides apprenticeships

lasting seven years. However, most of its competitors employ university graduates who have studied yacht

design and construction. SAH designs all its yachts manually which is very time consuming, although most of

its competitors now use CAD/CAM* suites for their designs. SAH does not have any staff with CAD/CAM

experience. SAH uses natural materials: for example, cotton for the sails. However, recently some natural

materials have become difficult to obtain and the prices of these have risen by as much as 40% in the last two

years. Many of SAH’s competitors have replaced natural materials with synthetic ones as these are easier to

obtain, cheaper and give enhanced performance. In 1985, SAH employed a consultant who designed a

standard costing system for use in its manufacturing operations. This system is still in use at SAH today. N,

relies on the standard costing system which is his only control system for the company. N knows that the

manufacturing cost of a yacht amounts to 60% of its total cost and believes that if he is in control of 60% he is

in control of the majority of cost. However, N has experienced some difficulty in his role as the control system

only reports financial results. N would like a system that gives him integrated control over all aspects of the

business and has been considering the use of a Balanced Scorecard. SAH’s business comes from repeat orders

and recommendations. However, it has experienced criticism in the last year because it failed to meet the

promised delivery time for 30% of its orders and has lost business because the potential customers said that

SAH’s yachts looked ‘old-fashioned’ and were ‘too slow’. Cash flow is particularly important for SAH,

because of the long lead times for each yacht, and has been under pressure recently. SAH has had to increase

its overdraft facility by Rs.10 million to Rs.30 million and this is nearly fully used. Every year since its

inception SAH has reported a profit but in 2015 its Return on Capital Employed was 3% which N has stated is

unacceptable.

Required

(a) Evaluate the strengths and weaknesses of SAH's current control system.

(9 marks) (b) Advise N:

(i) How the Balanced Scorecard could be applied and used within SAH. You should also suggest and justify

ONE measure for each of the balanced scorecard's perspectives.

(10 marks) (ii) Of THREE potential problems he might encounter if he introduces the Balanced Scorecard.

(6 marks)


Question 5

JGS is a long-established retailer which specialises in the sale of antiques. JGS is owned by a

married couple who both work in the business. They have no employees. Their premises consist of a

large modern shop and there is an apartment above this in which the owners live. Over the last five

years the local area has become very fashionable and the shop is now surrounded by smart

restaurants, cafes and up-market fashion outlets. This area has also become a very popular place to

live which has meant that property values have increased substantially. The owners believe that if

they disposed of their premises they would make a substantial capital gain. The owners have noticed

that the fixed costs of their property, including insurance, local tax, security and maintenance have

risen very sharply during the last five years. Since establishing the business the owners have

developed their expertise. They now have a national reputation in the antiques trade and many repeat

customers. They traded profitably between 1980 and 2014 but in the last year have made an

operating loss for the first time. The owners are often consulted by other antique traders and

collectors by letter and telephone and they have developed a considerable income stream by charging

for their advice. However, they have found that their location is becoming increasingly problematic.

Although the popularity of their area of town has increased and led to many more people living and

visiting the area, unfortunately for the owners most of these people are not interested in antiques.

They are young people who like the area but do not have the disposable income to spend on antiques.

A further problem is that the shop is not situated in a large city and it is very inconvenient for many

antique traders and collectors to visit. The owners believe the location has recently restricted the

success of their business. The owners know that a very popular development in the antiques trade has

been the establishment of ‘Antiques Fairs’ where antiques are bought and sold. Some of these have

established international reputations and have many thousands of visitors. However, because of

JGS’s location and the need to keep their shop open, the owners do not attend these. The owners

recently set up a website which has basic information about their business on it such as their address,

telephone number and the opening times of their shop. The website has received a large number of

hits but it does not seem to have increased sales.

Required:

(a) Analyse the strengths and weaknesses of JGS using the value chain model. Note: You are not required to

draw a value chain diagram in any part of your answer to this question. (8 marks)

(b) The owners propose to convert their website to facilitate e-commerce in order to increase turnover and

profit. Advise the owners of JGS what they will have to do immediately, and also on a continuing basis, to

carry out this e-commerce solution. (8 marks)

(c) Evaluate how the introduction of e-commerce could affect JGS’s value chain. (9 marks)


Question 6

E is a multinational company operating in a number of different countries around the world. The

company imports and supplies a full range of scientific equipment to both private and public

education systems in the countries in which it operates. In one of these countries, Y, there has

recently been an election and a change of government.

As the global economic situation has worsened and there is currently no economic growth, tax

revenues for most countries have shrunk. Therefore, governments are under pressure from their

electorates to be seen to be effective in their relationships with business.

The government of country Y has announced that it wishes Y to benefit more from the business

conducted by E and other multinationals operating within the country. The government of Y has

given E 12 months to employ at least 50% of its staff from the local population. Additionally, E is

required, in the same period, to find a local partner and to sell to it 25% of the business at a price to

be determined by the government of Y. The government of Y has said that further sale of company

assets to local business will be required in the future, at a time which has not yet been determined.

Many of the staff of E, based in Y, are already from the indigenous population and do not agree with

the government’s policy. They feel this will damage the performance of E and is likely, eventually,

to put their jobs at risk. The Managing Director of E is concerned that the government’s policy will

damage the economy of Y.

However, the unions in Y, which are very supportive of the new government, are in favour of the

proposals but have said they would prefer the initial local ownership to be set at a larger percentage.

E’s business in Y is profitable. In response to the government’s proposals, the Board of Directors of

E is considering the following three suggestions:

1. Sell the whole division operating in Y and leave the country.

2. Remain in Y and comply with the wishes of the government.

3. Stay in Y and seek legal advice about resisting the government’s proposals.

Required

(a) Produce a stakeholder analysis for E in country Y.

(16 marks)

(b) Evaluate the three suggestions that the Board of Directors is considering in response to the proposals

of the government of Y.

(6 marks)

(c) Based on your evaluation in part (b) recommend, with justification, the most appropriate course of

action for E.

(3 marks)


Question 7

5NX is a growing regional company that has successfully used local radio advertising to raise

awareness of its products. The company supplies fresh 'quality' sandwiches, home baked snacks, the

finest coffee and freshly squeezed fruit juices for sale at relatively high prices in petrol filling

stations. Products are produced by traditional methods from very early morning by a team of

employees at a central depot and are delivered throughout the day by temporary workers in a fleet of

company vehicles. Drivers bring back order sheets at the end of a shift for future deliveries to be

scheduled. Invoicing for payment takes place some time afterwards.

5NX is, for the first time, undertaking a full strategic marketing planning process in conjunction

with a local business advisor. So far, limited market research, financial projections and a SWOT

(strengths, weaknesses, opportunities, threats) analysis have been prepared. One weakness already

identified as part of the SWOT analysis is that the number of deliveries required is increasing, while

some of the drivers are becoming unreliable. The owner is worried that this may create a poor image

with customers and lead to delays in delivery. She is also interested in two opportunities that have

emerged from the planning process:

• The use of time saving food preparation and packaging equipment. This will mean considerably

fewer people being involved in food preparation but some employees could be redeployed as drivers

on a permanent basis.

• In addition to making deliveries, drivers could get direct feedback from customers, persuade petrol

stations to take new product lines and provide intelligence on competitors' products. If time allows

they could also leave promotional brochures with staff at other petrol stations and outlets (such as

railway stations and newspaper shops) in the hope of future business. The business advisor has

suggested that the owner captures the elements of 5NX's marketing mix for incorporation into its

marketing plan.

Required:

(a) Discuss how 5NX's marketing mix might contribute to its marketing plan. (10 marks)

(b) From the information that is given, illustrate the extent to which 5NX is following the marketing

concept. (10 marks)

(c) Describe other ways in which Information Systems (IS) and Information Technology (IT) might

assist 5NX's marketing operations in the future. Your answer should not include reference to food

preparation and packaging equipment. (5 marks)

Question 8

3C is a medium-sized pharmaceutical company. It is based in Sri Lanka, but distributes and sells its

products world-wide.

In common with other pharmaceutical companies, 3C has a large number of products in its

portfolio, though most of these are still being developed. The success rate of new drugs is very

low, as most fail to complete clinical trials or are believed to be uneconomic to launch. However,


the rewards to be gained from a successful new drug are so great that it is only necessary to

have a few successful drugs on the market to be very profitable.

At present 3C has 240 drugs at various stages of development; being tested or undergoing

clinical trials prior to a decision being made whether to launch the drug. 3C has only three

products that are actually ‘on the market’:

� Epsilon is a drug used in the treatment of heart disease. It has been available for eight

months and has achieved significant success. Sales of this drug are not expected to

increase from their current level.

� Alpha is a painkiller. It was launched more than ten years ago, and has become one of the

leading drugs in its class. In a few months the patent on this drug will expire, and other

manufacturers will be allowed to produce generic copies of it. Alpha is expected to survive a

further twelve months after it loses its patent, and will then be withdrawn.

� Beta is used in the hospital treatment of serious infections. It is a very specialised drug, and

cannot be obtained from a doctor or pharmacist for use outside the hospital environment. It

was launched only three months ago, and has yet to generate a significant sales volume.

The directors of 3C meet every month to review the product portfolio and to discuss possible

investment opportunities. At their next meeting, they are to be asked to consider three

investments. Due to a limited investment budget, the three investments are mutually exclusive

(that is, they will only be able to invest in ONE of the options). The options are as follows:

� The directors can invest in a new version of Alpha, Alpha2, which offers improved

performance. This will allow 3C to apply for a new patent for Alpha2, and maintain the level

of sales achieved by Alpha for an additional five years. Alpha2 has successfully completed

all its clinical trials, and can be launched immediately.

� The directors can invest in a major marketing campaign, to promote the use of Beta to

specialist hospital staff. While this investment should lead to a significant growth in the sales

of Beta, 3C is aware that one of its competitors is actively promoting a rival product with

similar performance to that of Beta.

� The directors can invest in the final stage of clinical trials for Gamma. This is a

‘breakthrough’ drug, as it has no near rivals on the market. Gamma is used in the treatment

of HIV, and offers significantly better success rates than any treatment currently available.

The team of 3C specialists managing the development of Gamma is confident it can

successfully complete clinical trials within six months. The team also believes that Gamma

should be sold at the lowest price possible, to maximise the benefits of Gamma to society.

However, the marketing department of 3C believes that it would be possible to earn very

large profits from Gamma, due to its success rate and breakthrough status.

Required:

(a) Briefly explain how the product life cycle model can be used to analyse the current

product portfolio of 3C (that is, BEFORE the planned investment).

(10 marks)

(b) Evaluate the potential impact of each of the three investment options (Alpha2, Beta

and Gamma) on the product portfolio of 3C, referring to your answer to part (a) above.

(15 marks)


Question 9

YY has worked for the manufacturing company RU2 all his adult life and is currently Production

Manager. Although he can be uncooperative and single-minded at times, he is respected for his

experience, honesty, direct speaking and the results he achieves. Change is coming to RU2 and many

senior managers have gradually been replaced by younger managers with different ideas and

approaches. A new Managing Director (MD) was appointed six months ago but YY’s first dealing

with him did not go well. YY requested that some of the production machinery be upgraded but his

request was declined until a full written proposal including an investment appraisal analysis was

produced. No proposal has been produced and no machinery has been upgraded since this time.

When RU2’s Senior Sales Manager retired last month he was replaced by a new Marketing Manager.

(The job advertisement referred to RU2 as a company 'undergoing significant change and looking to

develop a more customer-led approach'). YY is irritated to find that the MD has approved the

purchase of a Customer Relationship Management (CRM) system straightaway. YY told colleagues

that the CRM system will be 'a waste of money that could be spent elsewhere'. Now the new

Marketing Manager is, for the first time, developing a comprehensive marketing plan and she has

invited a number of senior colleagues across the organisation to help contribute to the plan including

YY. YY immediately declined the invitation telling the Marketing Manager that she would do well

to 'concentrate on the basic job of selling rather than wasting time drawing up pointless plans'.

Required:

(a) The new Managing Director wants RU2 to have more of a marketing focus and become more

customer-led. Describe the impact on RU2 of such a development. (10 marks)

(b) Explain the benefits of developing a marketing plan for RU2. (10 marks)

(c) Identify the range of possible costs associated with a Customer Relationship Management

(CRM) system. (5 marks)


Question 10

BC4 is a manufacturer of bedroom furniture with four factories in the south of the country. As a

result of declining company financial performance, the Managing Director (MD) engaged a

management consultant to conduct an overall review of BC4’s activities and highlight the issues of

greatest concern. The management consultant’s main findings are as follows: • No systematic

Quality Control exists and differing operating efficiencies exist both within and between BC4’s

factories;

• There is an increasing incidence of furniture being returned which requires replacement or

reworking. There are also a substantial number of items returned as part of extended guarantee

arrangements;

• Currently BC4 tries to sell its full product range to all potential customers, even though it is

geographically difficult to fulfill obligations to customers in the north of the country. BC4 needs to

rethink this marketing approach and should undertake careful market segmentation.

Having considered the consultant’s report, the MD has decided that BC4 will conduct a detailed

exercise in market segmentation and, furthermore, will put in place measures to improve product

quality. He thinks that obtaining certification under international quality standard ISO 9000 should

deliver significant benefits to BC4, even though the company has no immediate plans to sell

globally. The Production Manager has, however, previously suggested to him that the way forward is

to employ dedicated Quality Control (QC) inspectors as part of a Quality Control (QC) system.

Required:

(a) Describe the advantages of market segmentation to BC4. (10 marks)

(b) Describe the advantages of quality standard ISO 9000 certification to BC4. (10 marks)

(c) Discuss briefly how the Production Manager's suggestion could benefit BC4 as part of an

alternative Quality Control (QC) system. (5 marks)


Question 11

The company 2TW manufactures and sells products throughout Europe and is organised into dozens

of strategic business units (SBUs). SBU managers, who report to regional directors, have for many

years been paid bonuses on total SBU sales generated. This has led to a rapid growth in overall

turnover but 2TW has experienced declining profitability over the past few years, and the Chief

Executive fears a loss of control over SBU operations. As a result, six months ago 2TW's Chief

Executive used management consultants to conduct a complete organisational review. The

management consultants have now reported that:

• Inadequate quality control systems exist within the company, which has led to differing operating

efficiencies between SBUs;

• There are significant numbers of returned goods which require replacement or reworking; • current

incentives for SBU managers are inappropriate given 2TW's declining profitability.

In an open letter to all SBU managers, the Chief Executive announced two new initiatives:

• A company-wide introduction of international quality standard ISO 9000 certification which should

deliver significant organisational benefits;

• 2TW's HR department will redesign the remuneration and reward package for SBU managers

including the existing bonus scheme. Performance related pay for achievement of individual

'performance targets' will replace existing bonuses. Suitable performance-based measures of

profitability and quality will be designed as part of this approach and SBU managers will need to

agree targets as part of the normal appraisal processes.

Informal discussions amongst SBU managers confirm that the Chief Executive was right to take

action over declining profitability but some are doubtful that ISO certification will deliver the

benefits the Chief Executive hopes for. Others are eager to see details of the new reward scheme and

whether it has taken account of all relevant factors.

Required:

(a) Describe the potential benefits of quality standard ISO 9000 certification to 2TW. (10 marks)

(b) Discuss the factors that should be taken into account by the HR department when redesigning the

remuneration and reward package for SBU managers. (10 marks)

(c) Suitable measures of performance for SBU managers will be designed as part of the redesigned

remuneration and rewards package. Describe the desirable features of such measures. (5 marks)


Question 12

2JN is a large manufacturing organisation which is structured with a number of supervisors each

responsible for their own work production unit. Supervisors report to a team of senior managers who

in turn are accountable to a Managing Director (MD). Operations are supported by 2JN's own

finance, sales, distribution and human resource units. Within the past two years, 2JN has

implemented a series of initiatives aimed at reducing product defects and customer complaints. The

initiatives have included the appointment of a few quality control inspectors to support supervisors.

Despite these efforts, 2JN has lost some of its major customers to its competitors and its profits are

declining. After discussions with customers and suppliers, the MD has discovered that other

companies within the same industry have successfully adopted a Total Quality Management (TQM)

approach. At a recent senior management meeting he announced that a TQM programme would be

introduced within 2JN as a matter of priority. To support this, a Quality Committee will be

established to oversee the programme's introduction and operation. He has tasked the human

resource unit to establish Quality Circles to meet on a regular basis and arrange training in TQM for

all staff. The MD concluded by saying that TQM was vital to 2JN and that high quality 'will both put

costs down and revenue up'.

Required:

(a) Explain the requirements for achieving a Total Quality Management (TQM) approach within

2JN. (10 marks)

(b) Identify the important issues and work groups that need to be considered when organising the

TQM training in 2JN. (10 marks)

(c) Discuss the claim that high quality 'will both put costs down and revenue up'. (5 marks)


Question 13

CXC is a long established company supplying a variety of general, wholesale and personal

insurances. CXC’s headquarters occupies a large traditional building in the country’s capital city

where the activities of the company are monitored and company policies and procedures formulated.

CXC has a traditional organisational structure of a General Manager and six Regional Managers,

who are responsible for all the activities in their region. There are also Assistant Managers,

Supervisors, and Team Leaders but it is the Sales Associates who deal directly with the customers.

Although the Sales Associates receive referrals from CXC’s headquarters, most business is generated

by them working independently and using their own initiative, (for instance by getting further

business from existing customers and developing links with local private medical companies,

automobile traders, and travel companies, etc.). The Sales Associates are paid a flat-rate monthly

salary but the General Manager is looking into the idea of implementing a bonus scheme to increase

sales. CXC’s most popular line is annual life insurance policies but a growing part of its business is

mortgage protection and other mortgage linked insurances. The company does not feel that online

trading is the way forward but, following a successful pilot scheme, a direct selling service by

telephone was introduced for a number of its key products. First feedback is that whilst customers

felt that the service was initially excellent in dealing with their enquiries, after the purchase had been

made there was a generally poor service. Two years ago the company enjoyed 12% of the home

market for all insurances but this has since declined to 10%. The company is now facing a new

challenge in that it has lost a lucrative business with a pension fund. By way of compensation, it has

some very profitable business in neighbouring countries A, B and C. The General Manager knows

that CXC faces some difficult challenges and that strategic weaknesses and threats must be

addressed. As a result, a working party has been formed from CXC’s Regional and Assistant

Managers to examine CXC’s current situation in order to develop a new strategic marketing plan. It

is also tasked with giving some guidance to the General Manager before any bonus scheme for Sales

Associates is implemented.

Required:

(a) Discuss the strategic weaknesses and threats in marketing that CXC currently faces. (10 marks)

(b) Describe how the working party should go about developing a new strategic marketing plan. (10 marks)

(c) Explain the factors that CXC should take account of when devising a bonus scheme for its Sales

Associates. (5 marks)


Question 14

A professional management body is funding a major research project into the relationship between

certain HR systems and workplace motivation. As part of this project the University of S2013 has

been engaged to investigate the use of staff performance appraisal systems in large organisations.

The University's work involves a number of stages:

• Stage 1: questionnaires issued to all large organisations to understand the range of performance

appraisal systems operating.

• Stage 2: initial results from stage 1 discussed with a group of senior managers (such as HR

directors and chief executives).

• Stage 3: focus group meetings with employees at all levels within the organisations surveyed to

understand employee motivations, attitudes and experiences.

• Stage 4: final report to the professional body and subsequent dissemination of findings.

Stage 3 has now been completed and a number of interesting issues have emerged:

• The use of formal performance appraisal systems varies significantly between sectors from 80% of

financial service organisations to only 50% in the retail sector.

• Organisations not using an appraisal system do not feel that the potential benefits of a formal

system justify the time and cost involved in operating it.

• Of the systems in operation, 90% involved an annual meeting between employees and their

appraiser, normally their line manager.

• 15% of organisations used the outcomes from the system to help determine pay.

• There was little relationship between levels of motivation and the existence of a staff performance

appraisal system. (Motivation was more closely related to issues such as organisational reputation

and the operation of environmental action and sustainability programmes.)

• Employees were generally critical of their own organisation's system of formal staff performance

appraisal

Required:

(a) Describe the potential benefits of a formal staff performance appraisal system for a large

organisation. (10 marks)

(b) Explain the possible reasons for employees being critical of their own organisation's system of

formal staff performance appraisal. (10 marks)

(c) According to the research findings, environmental action by organisations and sustainability

programmes are highly regarded by employees. Explain why this might be the case.


Sample answer structure for Question 14

a)

It is apparent from the University’s investigation of performance appraisal systems that a significant

number of organisations choose not to operate such a system (as many as 50% in the retail sector).

The reason appears to be the belief that the potential benefits of a formal system do not justify the

time and cost involved. However, for a large organisation a number of potential benefits arise from

such a system and these are described below.

Assist performance management

A good appraisal system would assist performance management across an organisation. Appraisal of

performance is a vital part of the HR cycle and performance appraisal systems provide a convenient

systematic method of linking overall corporate objectives to actual levels of performance. The

approach also offers an opportunity to identify possible reasons for unusual performance, particularly

where there is apparent 'underperformance'.

Provide individual workers with necessary feedback

Individuals need to be reassured that their past efforts have been worthwhile and are recognised by

management. Individuals also need to know that their planned future activities meet with the

satisfaction of their superiors. The activity associated with a staff performance appraisal system can

contribute to the success of an organisation by providing such feedback and reassurance.

Identify training needs and maximisation of budget

A performance appraisal system could help provide a foundation for structured education,

development and training for the workforce as a whole. The system could contribute towards:

• developing the abilities of employees by identifying training needs that support technical,

professional and management development;

• maximising the effectiveness of an organisation’s training and development budget;

• monitoring the effectiveness and results of past staff development activities.

Source of motivation

The University’s findings suggest that there is little relationship between levels of motivation and the

existence of a staff performance appraisal system. Other research suggests however, that an effective

system of staff performance appraisal could, if properly administered, be a source of staff

motivation. (The professional management body apparently believes this to be the case, hence the

project). If the system offers an opportunity for staff to be listened to and helps foster an open,

healthy atmosphere then it can only be beneficial. A system for rewarding employees Only 15% of

organisations surveyed used outcomes from the process to help determine pay yet this represents a

tantalising possibility. Increasingly organisations are trying to relate pay to performance (rather than


status). The performance appraisal system could also enable the achievement of rewards other than

pay such as promotion, opportunities for development, job enrichment and secondments, etc.

'Talent spotting'

It is sometimes healthy for a large organisation to experience some degree of staff turnover.

However, this should be balanced against the need for continuity and retention of its most valued

workers. A performance appraisal system could be a systematic and thorough means of identifying

particular individuals for advancement, so allowing a degree of succession planning and reducing the

loss of a company’s most talented workers.

Develop relationships

A formalised system can help develop the relationship between a line manager and an individual

subordinate by providing an agenda for discussion in a way that would not normally be possible

b)

As explained in response to sub question (a) there are many potential benefits of a formal staff

performance appraisal system for a large organisation. Employees in the research project however

were critical of their own organisation’s system and there are a number of possible reasons for this

System feature: system is dated

Systems require periodic review in order to ensure that they are still robust and relevant. Whilst a

system may originally have been fit for purpose it may now fail to reflect current organisational

needs, and staff will be critical as a result

System feature: Poor system design

A system may have a poor reputation amongst employees because it has been poorly designed. If

there is an over-reliance on standardised procedures and paperwork then the system may seem too

restrictive and unduly bureaucratic. Conversely, ill-defined processes and a lack of standardisation of

paperwork may mean that the system operates haphazardly. Individual performance assessments

should be supported by rational performance criteria (including performance indicators and

measurable outcomes). Poor system design can allow undue levels of subjectivity which may

undermine the scheme as a whole and render it unfair and ineffective.

System feature: Organisational 'fit'

It is also important that the nature of the system is 'right' for the organisation concerned. For instance,

a 180 degree feedback scheme is better suited to an organisation that has a high degree of project

team working or a matrix structure. If the organisation has an open, reflective organisational culture

then 360 degree feedback might be even more appropriate.

Lack of address of identified needs

For a system to be regarded as meaningful by a workforce, it requires an organisation to commit

appropriate effort and resources to address the outcomes of the process. For instance, where training


needs are identified a budgetary provision should be made. Similarly, it is unhelpful to formally note

impediments to effective performance without attempting to address these matters.

Promotion policy ignores scheme outcomes

Decisions over staff promotions may be made without taking account of past performance. This

would be very frustrating for an employee with a solid record of achievement evidenced by appraisal

documentation being overlooked for promotion and would undermine the scheme as a whole.

Inadequate rewards attached

Only 15% of organisations surveyed used outcomes from the process to help determine pay, yet this

represents a tantalising possibility. The performance appraisal system could also enable the

achievement of rewards other than pay such as promotion, opportunities for development, job

enrichment and secondments, etc. Divorcing rewards from the formal performance appraisal system

may mean that the system lacks the necessary incentives to make it successful and well regarded by

staff.

Adequacy of communication and training

Communication and training systems should explain the purpose of the system to the workforce as

well as outlining ways to conduct appraisal interviews effectively. The organisations surveyed by the

University may not have given sufficient attention to these issues and this is reflected in the

dissatisfaction of the workforce that is expressed.

Ineffective appraiser technique and lack of planning

It is desirable that the system is participative and enables those being appraised to have a meaningful

input. Poorly conducted appraisal interviews may frustrate this taking place. Insufficient training,

nervousness, a lack of organisation or time may lead to poor appraisal interviews and negative staff

experiences. Careful planning should be a feature of the scheme and it may be that either or both

parties have failed to plan properly for the appraisal interview

c)

The research reported in the scenario has indicated that motivation is more closely related to the

existence of environmental and sustainability initiatives than to the existence of a performance

appraisal system within an organisation. Action on sustainability and the environment are long term

commitments involving an organisation in series of programmes, practices and policies which appear

(from this research) to be important to its workforce. There are several reasons for this.

Giving employees a voice

Employees are likely to have many valuable ideas to contribute. If they are listened to then they will

feel they are doing something tangible to further these agendas and this may provide a powerful

source of motivation. Top management can be a little divorced from the 'action' whereas an

organisation’s workforce is closest to daily practices that can be improved upon to achieve


environmental and sustainability agendas. By way of example, the greatest energy efficiency savings

and performance improvements can come from focusing on the operation of an office building,

warehouse, or manufacturing facility. This is where workers can make a contribution through close

monitoring of temperature levels and questioning the need for lights to be lit and equipment to be left

on stand-by.

Employer branding and enhancement of job content

Environmental action and sustainability programmes within an organisation may be well received by

employees if they are given a role to play. According to Hackman and Oldham’s job characteristics

model, high levels of satisfaction and motivation follow critical psychological states of 'experienced

meaningfulness of work', experienced responsibility, and knowledge of the results of their activities.

All three states might be enhanced through participation in organisational environmental and

sustainability initiatives.

Job security through organisational stability

Practices associated with sustainability include improved energy and water consumption and waste

reduction, etc. Such practices can also ultimately lead to a lowering of operating costs. Sustainable

practices will also offer opportunities to enter new markets and appeal to a different customer range,

so increasing sales. In short, these programmes should provide a platform for organisational stability

and success and so provide some reassurance of job security to individual employees, hence the

levels of satisfaction that are evident.

Employee pride in the organisation they work for

There are many ways in which an organisation can tangibly demonstrate its social responsibility. For

example, if it takes the trouble to measure its total carbon footprint this will allow it to take effective

actions towards reducing the climate change impact of the business and its supply network. If actions

such as these strike a chord with the personal values and beliefs of employees then this will instil

them with a pride in the organisation they work for and will be better motivated.

Develop a positive culture

At the heart of an organisational culture is a shared paradigm. If environmental concerns and

awareness of a need for sustainable practice are dominant features of organisational life and a shared

world view this can help shape a positive organisational culture. A positive organisational culture

and meaningful corporate agendas are likely to be valued by employees.

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