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N – Unseen material provided for mock exam 5

Additional (Unseen) information relating to the case is given on the following pages.
Read all of the additional material before you answer the question

ANSWER THE FOLLOWING QUESTIONS

The Finance Director of N has asked you, the management accountant, to provide advice and
recommendations on the issues facing N.

Question 1 part (a)

Prepare a report that prioritises, analyses and evaluates the issues facing N and makes appropriate
recommendations.
(Total marks for question 1a = 90 Marks)
Question 1 part (b)
In addition to your analysis in your report for part (a) you should prepare a graph which shows the original
revenue targets for 2014, 2015, 2016 together the updated revenue targets assuming that all three of the
opportunities described are pursued. You should supplement this with no more than 5 bullet points
summarising your overall recommendations on these three opportunities.

(Total marks for question 1b = 10 Marks)

Note: Marks for calculations, relevant to Question 1 part (b), are awarded within the Assessment Criterion of
Application included in Question 1 part (a).
Your script will be marked against the T4 Part b Case Study Assessment Criteria shown on the next page

IKE513 Mock Exam 5 23

 Case Study Assessment Criteria

Analysis of Issues 25
Technical 5
Application 15
Diversity 5

Strategic Choices 35
Focus 5
Prioritisation 5
Judgement 20
Ethics 5
Recommendations 40
Logic 30
Integration 5
Ethics 5

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N – unseen material provided for mock exam 5.
Read this information before you answer the question

Franchise offer
An international franchising company, GlobalFranc (GF), has approached N’s Sales and Marketing Director
with a proposal to assist N to expand its network of stores worldwide via franchising. GF specialises in
establishing and adapting the brand names of retail organisations in specific markets, tailoring the stores to
meet local market conditions. The proposal was presented to the Board last month and the initial response is
favourable. GF has stated that it has over 100 franchisees ready to open stores under the N brand name,
offering ranges of quality clothing and furnishing products which are tailored to tastes and cultural customs
in specific countries. GF goes to great lengths to secure the best locations for stores. The Board’s initial
feeling is that N’s business could be very successfully franchised and this would enable it to grow very
quickly. GF has also stated that it is considering offering its franchise service to two other retailers based in
Europe, but has decided to allow N to have first refusal provided a response is made within 2 weeks.

GF will use its contacts and experience to recruit and manage franchisees, which would then operate
franchised stores under the N name. During initial talks, GF has expressed its need to be sure that N is
financially and operationally committed to these arrangements and also wishes to ensure that the franchisees
can build up their business. GF has therefore stipulated that N must cap the total number of stores at existing
levels until 1 April 2016. However, the Sales and Marketing Director has suggested to the Board that it would
be virtually impossible for GF to enforce these terms and that therefore this should not be a major factor in
making the decision.

The Estates Management Director confirmed that over the period of the GF proposed contract N was planning
to open further stores as follows:
Year end
2014 2015 2016

New stores to be opened in each year

Middle East 4 4 6
Asia 2 3 3
Europe 0 1 4
North America 0 2 2
Country Z 2 2 2

Each of these stores is planned to generate cashflows of Z$0.7m in their first year, increasing by 6% each
year. (Assume stores opening in year ended 2014 generate full year cash flows.) The new openings in
Country YX and Europe include “flagship” openings similar to the one in City T. The Finance Director of N has
confirmed that the net present value of the cost of opening these stores, using N’s cost of capital of 10%, is
Z$15m.

The proposal is that for each new franchised store, N would receive 9% of the gross sales revenue from each
store. In return N would provide full IT and marketing support to all franchisees and give them access to
designs, products and suppliers. The IT and marketing support required will, it is estimated, cost N up to
Z$2.5m per annum. The franchisees would then negotiate with suppliers to make amendments to products
which will reflect local tastes and customs in the relevant markets. The cost of these changes would be borne
by the franchisee. GF has stated that its fees for locating franchisees and managing the franchising business
for N would be a fee of Z$40,000 for each new store opened, plus a fee of 6% of the franchised revenue for
the first year of each store opening. After the first year of each store opening GF would charge a flat fee of
2% of the franchised revenue for the contract period. GF has prepared the following forecast post-tax cash
flows for the next 3 years based on its projections of franchised stores opened:

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 Zm 2014 2015 2016
Franchise income payable to N
Share of gross store revenues 23.4 27.5 30.7

Franchise fees payable by N to GF

Z$40,000 per franchised store 3.4 5.7 6.1
Share of first year revenue 2.6 4.1 4.6
Share of total revenue 1.1 1.3 1.8

Acquisition opportunity
The recession has hit some of N’s competitors very hard, with some retailers going into liquidation and
others being put up for sale by administrators and receivers. For some months the Board has been watching
the performance of YX, a rival in North America, whose fortunes have fallen dramatically as key management
personnel have left and cash for investment has dwindled. YX is privately owned and shareholders are known
to be looking for a swift cash only sale but no buyers have yet come forward. A few years ago YX’s brand
was widely recognised and heavily promoted through sports sponsorship and controversial billboard and
magazine advertisements but in recent years its profile has declined due to a lack of investment in innovative
designs. It currently has 110 shops across 20 states of North America, 60% of which are owned and the
remainder of which are rented under short-term leases. Approximately half the shops are in strong locations
in out of town retail parks and city centre sites with parking, but all outlets have suffered from
underinvestment and the facilities are tired and outdated. YX‘s e-commerce capabilities are less advanced
than N’s at present. YX has supplied N with summary information of its recent performance as follows,
translated into Z$:

Year ended June 2013 (unaudited) June 2012 (audited)

Z$m Z$m
Sales revenue 1,760 1,934
Gross profit 126 162
Distribution costs 29 27
Administrative expenses 36 35
Finance costs 15 15
Taxation 14 26
Dividend paid 20 20
Retained profit 12 39
Other information
Total number of employees 17,320 17,300
Gearing ratio (debt/debt + equity) 73% 66%
Net assets Z$265m Z$277m
Cash balance Z$1.7m Z$1.9m

YX’s projected revenue figures for 2014, 2015 and 2016, converted using the most up to date exchange rate
between the US$ and the Z$ are as follows:
2014: Z$1,703m
2015: Z$1,725m
2016: Z$1,780m

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N’s Finance Director has identified two similar retail companies to YX, neither of which are for sale but both
of which are quoted on the US stock exchange, and has provided you with the following information again
with $ data converted into Z$:

Company 1 Company 2
Revenue (Z$m) 1,402 2,201
Gross profit % 11% 14%
Post-tax profit % 4% 5%
Share price (Z$) 5.39 5.66
Number of shares 114.5m 175m

As part of your assessment of this proposal you should assess the likely cost of acquiring YX using the
earnings based method for valuation. The Finance Director has explained that cash can be made available for
this acquisition but only up to a maximum of Z$200m.

VP proposal
VP is a major white goods manufacturer with factories in Germany and Eastern European countries (white
goods are items such as fridges, freezers, washing machines and tumble driers). The goods manufactured by
VP are cheap and simply designed and do not come in alternative colours or sizes. One of the ways in which
VP keeps its costs down is by using component parts which do not give their products particularly good
energy ratings. This is because the goods use a higher than average amount of electricity to run and none of
the component parts can be recycled. A further way in which costs are minimised is by offering a 3 month
warranty rather than the usual 12 month warranty, a tactic which is consistent with the pricing.

Ms. Bilder has had dealings with VP in the past when she worked for a large hypermarket chain in Country Z
called B. She enjoyed a very positive relationship with VP and found it easy to deal with and very reliable. At
B, when she switched suppliers and introduced VP white goods into B’s stores, the margins on white goods
improved dramatically and B’s profits increased sharply. VP has used the advertising slogan “German
engineering at its finest” which, together with the very low prices, has been a very attractive marketing
message which successfully attracts high numbers of customers. VP would want to use this slogan in its
partnership with N (discussed below). However Ms Bilder is aware that the majority of the goods that VP
would be supplying to N would be assembled in Eastern Europe, with 85% of components being purchased
from China.

The proposal being discussed involves each of the items supplied by VP to N being dual branded so that the
two organisations are presented to customers as partners. The items will be sold in all of N’s stores in the
Home (Household) department and online. Based on estimates supplied by VP and scrutinised by both the
Sales and Marketing Director and Ms. Bilder it is believed this venture, if it is successful, could increase N’s
revenues by the following amounts:
2014: Z$303m
2015: Z$525m
2016: Z$780m

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 Distribution centre accidents
An increasing number of small accidents have occurred in N’s distribution centres in the last six months.
These accidents have occurred when goods on pallets are being moved from the forklift trucks onto the
shelving where they await despatch to stores. Until March 2013 N provided all distribution centre staff with
steel-toed boots and heavy gloves but a cost reduction exercise saw the removal of this policy and now
employees are asked to buy their own gloves and boots. Some employees in the distribution centre are
turning up for work in training shoes and failing to wear any gloves at all. As a result the number of injuries
to toes and fingers from moving pallets has increased and on a couple of occasions people have lost toenails
and fingernails, which has resulted in time off work.

Marketing expenditure
As N has attempted to reduce the widening gap between itself and its main rivals, its expenditure on
marketing has increased sharply. Some initiatives have yielded successes in terms of revenue but others
have been costly mistakes and there has been very little in the way of coordination across the N group. Some
stores have unilaterally gone ahead with knee-jerk marketing initiatives such as discounts, sales, local events
involving celebrities and themed fancy dress days for staff. Increasingly, there is a culture of “try anything to
get sales” in both N’s head office and N’s individual stores.

Ms Bilder and the Finance Director are not happy with the control being exercised by the Sales and Marketing
Director and his management team. They have asked you, as a qualified management accountant, to discuss
the ways in which the accounting function can help address this situation, by controlling expenditure and
ensuring that the marketing budget is spent on genuinely beneficial initiatives in the future. They are aware
that you have recently studied topics such as strategic marketing, performance evaluation and information
management and believe that you will be able to make sensible suggestions on how best to control N’s
marketing expenditure.

End of Unseen Material

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SOLUTION
AND MARKING GRID

The solution that follows is a comprehensive answer showing

Mock Exam 5
the range of points and calculations you could undertake. As
the marking grid shows, in the exam you would not need to
make all the points in order to be awarded high marks.

33
 ANSWER TO QUESTION 1A
REPORT
To: Finance Director
From: Management Accountant
Date: July 2013
Contents
(1) Introduction
(2) Terms of reference
(3) Identification and prioritisation of issues
(4) Approaches to resolving the main issues
(5) Ethical considerations
(6) Recommendations
(7) Conclusion
Appendices
(1) SWOT analysis
(2) Mendelow’s matrix
(3) Franchising
(4) Acquisition
(5) 1b

1 INTRODUCTION
Despite stabilising its position in the years following its management buy-out in 2004, N is still struggling to
find a viable competitive position in its domestic market. N’s sales growth is well below its competitors, and
it has weaknesses in on-line sales growth, the integration of its multi-channel sales platform and
unfashionable clothes ranges.
N needs to create a sustainable competitive position, either in terms of differentiation or cost leadership
(Porter) or it will become ‘stuck in the middle’. In the challenging economic conditions within Country Z, even
well-known companies that are ‘stuck in the middle’ will struggle to survive. This is illustrated by the failure
of many established high street retailers in the UK, such Woolworths, in recent years.

2 TERMS OF REFERENCE
This report identifies and evaluates the issues facing N and offers appropriate recommendations.

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3 IDENTIFICATION AND PRIORITISATION OF ISSUES
The issues below have been prioritised based on the potential impact each could have combined with their
urgency. A full SWOT analysis is presented in Appendix 1.

3.1 First priority – Franchise offer from GF

This issue must be treated with urgency, as GF has requested a response within 2 weeks. It is the most
important issue due to this and its high impact upon N, as N is currently looking to expand international
operations. The strategic impact this will have cannot be understated, with over 100 new stores under N’s
brand name, resulting in greater public exposure and Appendix 3 showing gross revenues of Z$23.4 m in
2014 and rising each subsequent year.

3.2 Second priority – Acquisition of YX

The opportunity to acquire YX must be treated with some urgency, as it is known that the
shareholders are looking for a swift sale. Competitors may currently be evaluating this possibility.
The impact upon N would be significant as there would be 17,000+ additional employees to
consider, putting greater strain on head office staff, and the number of stores would increase
from currently 160 to 270 if all the shops remained open. It would also be a very expensive
decision (see Appendix 4).

3.3 Third priority – VP Proposal

This proposal is less urgent due to no timescales being specified, and is thus ranked third . However this
issue remains a priority because of the potential impact upon N’s revenues – an increase of 75% in just one
year. This would also impact on N in terms of training, store planning, and advertising.

3.4 Fourth priority – Marketing Expenditure

This issue has not been prioritised because future marketing expenditure will be driven by the decisions
made regarding the first 3 issues. It makes sense to decide upon marketing budget spending and controls
once N’s strategies are decided. The lack of coordination across N means this issue does require
intervention.

3.5 Other issues facing N

The increase in distribution centre accidents has been included in the ethical section of this report. Other
issues are identified in the full SWOT analysis.

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 4 APPROACHES TO RESOLVING THE MAIN ISSUES
4.1 Franchise offer from GF
This opportunity will be evaluated using Johnson & Scholes SAF approach.
Suitability
GF’s proposal offers opportunity for international growth, a strategy N is seeking to pursue given the
saturation and the competitive pressures that it is experiencing in its domestic market. This also allows that
growth to be almost instantaneous – rather than a long term plan taking time to plan, allocate resources and
implement. The International Operations Director has previously stated franchising is the principal mode of
expansion under consideration for N.
The franchisees GF proposes to use already have products tailored in keeping with N’s reputation as a
differentiator. Having customised products should also alleviate the Merchandising Director’s fears that
certain aspects of the clothing range are unfashionable.
N will give the franchisees access to designs, products and suppliers, all of which could work to N’s benefit,
such as greater bargaining power with its suppliers, and the sharing of designs possibly resulting in more
varied products being available.
Acceptability
Key players are identified in Appendix 2. This proposal should be acceptable to 4J because it offers
opportunity for growth and thus increased revenue and profits. Because of the reduced outlay (Z$15m) on
the proposed new stores this results in a positive NPV for the project of Z$11.6m. This NPV assumes that the
stores that we planned to open in year ended 2014 would not be opened, costing $0.7m each in lost
cashflow; this is likely to be an overstatement given that we are half way through the financial year ending
2014. This will boost the NPV of he project further, although not by a significant amount.
In addition risk is kept to a minimum by adopting a franchising approach thereby avoiding the high risk of a
direct investment approach. In 2013 Tesco has announced that it is exiting their failed US venture, Fresh and
Easy; its failure in this market has cost Tesco over £1 billion.
A downside is the additional strain placed upon administration at head office. N would have to provide full IT
and marketing support. There have already been instances of stock outs within N’s stores showing that the
administration is currently not efficient. An overhaul of IT may be required. Additional staff may be needed,
alongside training. The Board and Ms Bilder must be aware of this impact upon their systems and must try to
estimate costs more accurately .
The prohibition on N opening stores would be a problem, as that would be 37 stores N was planning to open
being delayed for up to 3 years. This represents a large amount of revenue foregone, and proposed flagship
openings would also be delayed. Such delays may allow competitors to expand, including opening large
flagship stores, restricting N’s future opportunities.
Feasibility
This option is easier to finance than the acquisition of YX because it involves no initial financial outlay.
Therefore current cash reserves can be protected and used to fund IT changes, staff training and dividend
payments.
GF is a specialised company, with contacts and experience and therefore should have the skills to make the
project a success.
If N does not take up this offer, GF may try to work with its competitors, resulting in greater threats to N, and
fewer opportunities (see Appendix 1).

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McDonald’s has become a brand known worldwide thanks to successful franchising. Despite the difference in
market, this model proves franchising can lead to market dominance, a position N used to hold.
Options
1. Decline GF’s offer. N may feel it can move forward alone.
2. Approach other franchising companies with a view to a similar deal, but without the prohibition on N
opening new stores.
3. N may accept the offer and the terms of GF unequivocally.
4. Alternatively, N can enter into negotiations with GF to alter the deal, especially the cap on total number
of stores.

4.2 Acquisition of YX
Suitability
This opportunity is also suitable as it offers scope for international growth. The stores currently owned /
leased by YX are spread across 20 states of North America, allowing N greater market access across a large
swathe of the country.
N is also hampered by its government’s policy of preventing takeovers that may reduce competition. Looking
to take over a business abroad is a move which circumvents this issue.
A significant problem surrounding the acquisition however is that YX currently has less advanced e-
commerce capabilities than N. Acquiring YX will not help N meet increasing trends towards online
purchasing.
Acceptability
Appendix 4 shows an approximate value of YX. This would potentially utilise all of N’s available cash
resources, as YX’s shareholders want a cash sale. This would result in no cash left to fund other activities, or
for shareholder dividends. It is unlikely this purchase would be acceptable to shareholders.
There is also the risk of taking on a company with a high gearing ratio (which has increased since the
previous year) and a history of decreasing sales revenue and decreasing gross profit. If debt has increased
and revenue and profit decreased, there is a serious risk that in the future YX will no longer be viable.
The value of YX company has been reached using the average of two proxies P/E ratio, scaled down as YX is
a private company. This is risky because there is no assurance the PE ratio used will be right – it should also
have been adjusted to take account of YX’s debt level, which is likely to be different to those of the proxies
and to reflect YX’s poor growth prospects. There is no guarantee the value of YX calculated is accurate, and
this should be of concern to the Board, particularly the Finance Director.
Feasibility
Financially this would be likely to increase N’s debt levels. With the upcoming negotiations around the loan
finance position, now may not be the best time to request further loans.
A final thing to consider is that YX is in North America and therefore fluctuations in exchange rates need to
be taken into account. The projected revenue figures could turn out to be lower in Z$ terms if the US$
devalues.
Options
1. Press ahead with attempts to acquire YX. Because YX’s shareholders are looking to sell, YX may be
available at a cheaper price than anticipated.
2. Stop monitoring YX and do not purchase. This will not reflect badly on N because no offer has been
made.

IKE513 Mock Exam 5: Solution and marking grid 37

 3. Look at alternatives for acquisition. With funding available and expansion planned, there are
alternatives for N to consider.
4. Make an offer for certain stores only. This would be financially more viable, and less of a strain on
other resources.

4.3 VP Proposal
Suitability
The Sales & Marketing Director has noted that competitors are successfully following a strategy similar to
this, so on that basis the proposal would have some strategic logic.
However the proposal from VP is not consistent with N’s current strategy as a differentiator priding itself on
offering quality products and excellent customer service.
To take up the proposal from VP would result in N becoming ‘stuck in the middle’, as Michael Porter phrased,
as the cheap products offered by VP would clash with N’s current strategy. Other businesses found guilty of
being ‘stuck in the middle’, such as Woolworths and JJB. Both of these have now folded.
Stocking such products is unlikely to assist with N’s plan to become once again a leading force in the market.
There will be a clash of brands and image. The dual branding proposal could mean negative publicity that
may adversely impact sales of other products.
Acceptability
Ms Bilder would be quite happy to deal with VP, since she has worked with it before and had no issues,
finding it to be quite reliable.
The margins on the products and proposed revenues are likely to be appealing to the investors, although
there is no profit figure stated. The estimates have been supplied by VP. There is no guarantee of accuracy
even after scrutiny.
The 3 month warranty period should be a serious consideration. Whilst the Sales & Marketing Director is
pushing for increases in own brands, these must still fit with overall company image. The fact the products
do not come in alternative sizes or colours is also a downside – in Argos for example there are many versions
of such products, coming in a variety of different colours and sizes. Shoppers are far more likely to use
competitors such as Argos for these items.
Feasibility
There is no initial financial outlay mentioned, therefore this would not seem to be an issue.
Sales training will be required in VP’s products.
Floor space is also an issue. To sell these items N would have to either rearrange stores, or potentially stop
selling other product ranges. All of this could damage reputation and the customer experience.
Options
1. Agree to the deal and begin stocking and selling the items.
2. Negotiate the terms of the deal to avoid the dual branding issue in order to protect N.
3. Reject the proposal.

4.4 Marketing Expenditure

Options to control N’s marketing expenditure:
1. Budget setting & variance analysis

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 By setting marketing budgets for each store or product line, N will have greater control over spend as
it will identify which areas are over or under spending against their budgets. The finance team can
then highlight areas needing to curb expenditure.
This process will also (if done properly) allow for specific levels of marketing at various different
times. For example, if a new flagship store was to open, in the run up to opening the marketing spend
would be expected to increase.
2. Benchmarking
By benchmarking N’s activity against rivals it will be possible to see how N does in comparison to its
direct competition. This can involve comparison of overall activity, activity directly in certain markets,
or marketing activity in direct relation to certain products.
The results of such benchmarking analysis will highlight areas N outperforms the competition, and
areas where N is not performing adequately. These areas, which might well include on-line marketing
and marketing to smartphones, can then be looked at in more detail and resources allocated more
effectively. This could be based upon benchmarking regions, stores, product lines, and then
comparing sales performance and revenues.3. Authorisation controls
By implementing a system where only certain managers within the business are allowed to sanction
levels of expenditure, N will be able to identify poorly-controlled expenditure areas.
This may also have the effect of making staff more aware of how and what they are spending. Waste
may then be avoided.4. Yield analysis
This process would involve comparing sales and contribution against the money spent on marketing.
This will identify how much additional revenue comes from each additional dollar spent on marketing.
Better performing items can be identified and marketed further. Highlighting items which are
unprofitable could mean that those products are removed from stores, this freeing up space for more
profitable products.

IKE513 Mock Exam 5: Solution and marking grid 39

 5 ETHICAL ISSUES
5.1 Suggestion to not stick to GF’s proposed terms
Why is this an ethical issue
This is part of the deal stipulated by GF around the franchise offer. Entering the deal without intending to
honour it is dishonest and a breach of integrity.
Recommendation for this ethical issue
N should either stick to the terms stipulated by GF, or renegotiate to more favourable terms. N does not want
to gain a reputation as an untrustworthy business partner.

5.2 VP’s “German engineering” branding

Why is this an ethical issue
The products that VP will provide will not be engineered in Germany – they will be assembled in Eastern
Europe, the vast majority of the component parts being purchased in China. This statement misleads
customers.
Recommendation for this ethical issue
Assuming that N enters into partnership with VP, the products cannot be marketed under that slogan. N must
remain firm on this point if VP argues.

5.3 Distribution centre accidents

Why is this an ethical issue
N has a responsibility to ensure safe working conditions for all staff. At the moment N is in breach of that
responsibility. It is morally questionable to tell staff to bring in their own gloves and boots when the risk is
that toenails and fingernails can be lost.
Recommendation for this ethical issue
N should, despite the cost, immediately re-issue gloves and boots. It should make it a condition that staff
wear these whilst working in distribution centres.

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6 RECOMMENDATIONS
6.1 Franchise offer from GF
Recommendation
N should take up the offer from GF, but negotiate over opening new stores
Justification
This option represents the least risky method of global expansion for N. The franchisees are already in place
with specifically tailored products. Franchising will give N greater media coverage and advertising far quicker
than could be achieved otherwise. It is also a quicker way of generating sales than opening up new stores. By
allowing the franchise N will enjoy revenues, and allow its management to consider other potential routes of
expansion, without the distraction of having to worry about the franchised stores, as GF will be tasked with
supervising them,. However the blanket prohibition on N’s organic growth is too broad and restrictive.
Actions to be taken
1. Contact should be made with GF immediately indicating a willingness to agree a deal if certain
agreements can be reached.
2. GF’s proposed franchisee stores are within specific countries. N should suggest no more
stores be opened only in those particular countries until the franchises have built up a
reasonable base. This should not include Country Z where N should continue its modest store
opening program.
3. A proportion of the Z$15m, which was set aside for the opening up of new stores in countries
where franchises will operate, should now be used in other areas of the business. This could
be used to fund further development of the online platform.
Regular meetings should be set up between GF and N to monitor franchisee performance.

6.2 Acquisition of YX
Recommendation
N should not consider YX as a potential acquisition and focus on growth through franchising.
Justification
The acquisition of YX is too risky. N needs to look to move to online retail, as that is the current shopping
trend, and YX has inadequate e-commerce capabilities. N could make an offer for only certain stores within
YX, but it is most likely that YX’s shareholders will look to sell the company as a whole. Buying a limited
number of stores may well be more trouble than it is worth, as there may be problems of integration and the
North American market does not currently offer many opportunities for growth. Companies like Carrefour
have found that spreading resources over a wide range of geographical markets does not work well.
Carrefour has recently started to retrench to focus on a number of targeted overseas markets. N’s target
growth markets are in the Middle East and Asia and it would presumably concentrate on these if it decided to
narrow its focus..

IKE513 Mock Exam 5: Solution and marking grid 41

 Actions to be taken
1. Focus on identifying other acquisition targets, profiling companies either with good online
retailing competences and / or companies in the Middle East /Asia..
2. Keep an eye on what happens with YX as this may provide strategic insight into the situation
abroad.

6.3 VP Proposal
Recommendation
N should cease discussions with VP regarding this proposal, and communicate that there will not be a
partnership.
Justification
VP’s products do not fit with N’s brand image. N is a differentiator, and VP’s products are more of a cost
leader’s products. N is trying to enhance its competitive position, and to do so there must be a clear strategy
with every aspect of the company focussed and pulling together. Partnership with VP is likely to cause more
problems than potential benefits, mainly through damage to N’s image.
Actions to be taken
1. The situation should be explained politely to VP and discussions aborted.
2. It is recommended that N looks to implement an electrical home goods line, as this is a
product line sold successfully by many of N’s competitors, such as M&S and Tesco.
3. N should research other suppliers of white goods and make contact with appropriate suppliers
with a view to supplying products.

6.4 Marketing Expenditure

Recommendation
N should look to implement all of the options of control mentioned.
Justification
N needs to ensure that its marketing expenditure is under control. Especially at a time when the business is
looking to expand, it is essential that costs are kept under control to ensure that targets are met. By
implementing the processes, wastage will be reduced and N will become more streamlined. With budgetary
training, the skill set of N’s workers will be increased, and future business decisions will be supplemented
with more accurate marketing planning and information.
Actions to be taken
1. Regional sales teams should undergo training programmes and have budget targets in place.
2. Regional teams and store managers should be given a maximum limit of expenditure
authorisation, with large expenditure cross-signed by the Sales & Marketing Director.
3. The Sales & Marketing Director should undertake a benchmarking analysis, with a team to
assist, and yield analysis. The findings of these reports should be scrutinised by the Board.
4. Monthly cycles of reporting should be put in place to ensure that all expenditure is under
control and variances are reported.

42 Mock exam 5: Solution and marking grid IKE513

7 CONCLUSION
This report has identified and evaluated the issues facing N and has offered appropriate recommendations.

IKE513 Mock Exam 5: Solution and marking grid 43

 Appendix 1: SWOT analysis

Strengths Weaknesses
 History of N including brand loyalty and  Location of N stores - no longer prime
reputation locations
 Cash availability for acquisition  N's poor online presence
 Ms Bilder (track record of success)  Capping of N's existing stores levels
 Ms Bilder's relations history with VP  Distribution centre accidents - safety
standards & sickness
 Marketing expenditure not adequately
controlled
Opportunities Threats
 Franchise Offer (GF)  GF could offer franchising to N's rivals
 Acquisition of YX  Possibility of legal action from distribution
 VP Proposal centre employees

Appendix 2: Mendelow’s matrix

Low interest High interest

Low Minimal Effort Keep Informed

power  Distribution centre employees  GF
 VP
 YX
Keep Satisfied Key Players
High  Institutional investors  4J
power
 Board
 Ms Bilder

44 Mock exam 5: Solution and marking grid IKE513

Appendix 3: Franchise
Year end
2014 2015 2016

New stores to be opened in each year

Middle East 4 4 6
Asia 2 3 3
Europe 0 1 4
North America 0 2 2
Country Z 2 2 2
Total 8 12 17
Cumulative total 8 20 37
0.7 foregone rising at 6% 5.6 14.8 29.1

Year end
2014 2015 2016
Franchise income payable to N
Share of gross revenues per store 23.4 27.5 30.7

Franchise fees payable by N to GF

Z$40,000 per franchised store 3.4 5.7 6.1
Share of first year revenue 2.6 4.1 4.6
Share of total revenue 1.1 1.3 1.8
Support costs 2.5 2.5 2.5
13.8 13.9 15.7

Cashflow benefit / loss 8.2 -0.9 -13.4

DF 0.909 0.826 0.751
DCF 7.5 -0.8 -10.1
NPV -3.4

NPV including costs of opening = -3.4 + 15 = Z$11.6m

IKE513 Mock Exam 5: Solution and marking grid 45

 Alternative solution
Z$m Z$m Z$m
2014 2015 2016

revenue 23.4 27.5 30.7

IT etc -2.5 -2.5 -2.5
GF costs
per store -3.4 -5.7 -6.1
1st yr rev -2.6 -4.1 -4.6
total rev -1.1 -1.3 -1.8

opportunity cost (lost cashflows from stores that would have been opened)
2014 store openings -5.6 -5.9 -6.3 growing at 6% pa after 1st year
2015 store openings -8.4 -8.9 growing at 6% pa after 1st year
2016 store openings -11.9 see workings

net 8.2 -0.4 -11.4

df 10% 0.909 0.826 0.751

PV 7.5 -0.4 -8.6 -1.5

nb $15m of costs are saved this changes the NPV to 13.5

Workings
stores opened in 2014 8
stores opened in 2015 12
stores opened in 2016 17

46 Mock exam 5: Solution and marking grid IKE513

Appendix 4: Acquisition
Company 1 Company 2

Share price 5.39 5.66

Earnings 56.08 110.05
Shares 114.5 175
EPS 0.49 0.63
P/E 11 9

Z's PAT 32
Scaled down P/E (10*0.6) 6
Value of Z using proxy Pes 192

Appendix 5: Graph

 The franchise opportunity should be pursued – but only if the conditions over store openings
can be restricted to the countries in which GF intends to have operations. This will result in an
NPV of approximately Z$11.6m.
 The acquisition should not be pursued – the benefits to be gained do not fully justify the risks
and the costs in this case
 The opportunity with VP should not be pursued as the business models employed by each
company are too different
 N needs to stick to its core competencies and seek growth with the minimal amount of
uncontrolled risk

IKE513 Mock Exam 5: Solution and marking grid 47

 Workings

Z$m 2014 2015 2016

Revenue per original forecast 2,080.6 2,132.6 2,185.9
Additional revenues
Franchise 23.4 27.5 30.7
YX 1,703.0 1,725.0 1,780.0
VP 303.0 525.0 780.0
Revised revenues 4,110.0 4,410.1 4,776.6

48 Mock exam 5: Solution and marking grid IKE513

Marking Grid for Mock Unseen
Total marks
Criteria Issues to be discussed Marks available
Technical SWOT/PEST/Ansoff/Porter’s 5 forces/Porter’s
generic strategies/Mendelow/Suitability,
Acceptability, Feasibility/ BCG/Balanced
1 each max 5 Max = 5
Scorecard/Life cycle analysis/Marketing
knowledge
1 mark for EACH technique demonstrated.
Application SWOT – to get full 3 marks the script must
1–3
include all the Top 4 issues
Other Technical Knowledge applied to case 1–2
material in a meaningful relevant way – on merit Max 5 for
application of
theory Max = 15
Calculations:
Franchise 1–7
Acquisition 1–4
Total marks available (but max = 15) 16
Diversity Display of sound business awareness and 1 mark each
relevant real life examples related to case example used Max = 5
on merit
Focus Major issues to be discussed:
(only award if issue is in
the main report)
Franchise 1
Acquisition 1
Max = 5
VP 1
Marketing 1
Distribution centre 1
Total marks available – award 5 marks for 4
5
issues (but max = 5)
Prioritisation 5 marks if 4 issues are prioritised and the
rationale for ranking is good AND the top 2 5
issues are ranked in the correct order
3–4 marks if top 2 priorities are in top 3 but
3–4
ranking rationale is weak Max = 5
2 marks maximum (marginal fail) if EITHER of
the top 2 issues are not in top 3 priorities,
Up to 2
irrespective of quality of rationale for ranking of
other priorities

IKE513 Mock Exam 5: Solution and marking grid 49

 Total marks
Criteria Issues to be discussed Marks available

Judgement 4 key and 1 minor issue available for detailed

analysis in this case:
Marks on merit based on depth of analysis and
commercially realistic comments
Franchise – needs a full evaluation of the
financial and non-financial factors with a focus 1–7
on risk
Acquisition - needs a full evaluation of the
financial and non-financial factors with a focus 1–6
on risk Max = 20
VP – another opportunity – less on numbers
1–5
here but still must consider risk v benefits
Marketing – MUST provide imaginative ideas 1–4
here from a management accounting perspective

Accidents – small commercial impact which

1–2
requires some ideas to address

Total marks available (but max = 20) 24

Logic Recommendations:
(Marks on merit. Max 1 mark if only an
unjustified recommendation is given)
Franchise – this is a difficult one to turn down so
0–7
look for strong arguments
Acquisition – overlap with franchise (wouldn’t do 0–6
both in reality) Max = 30
Q1 (a) – 20
VP – Look for a “no” here argued on the basis of
0–5 Q1 (b) – 10
brand clash and generic strategies
Marketing – marks on merit 0–5
Accidents – buy equipment ? 0–2
Total marks available (but max = 20) 25

50 Mock exam 5: Solution and marking grid IKE513

 Total marks
Criteria Issues to be discussed Marks available

QUESTION 1b 1 mark for each valid bullet point. 4 for graph, 1

10
for referring to the numbers.
Total marks available 10
Integration Judge script holistically and whether
recommendations follow on logically from 1–2 if weak
analysis of the issues and refers to data in 3–5 if script is Max = 5
appendices. How well written is the report: good
professional language?
Ethics Ethical issues in case include:
Up to 5 for
identification
and discussion
 GF of issues
 VP Up to 5 for Max = 10
 Accidents recommend-
ations on how
to address
those issues

Total 100

IKE513 Mock Exam 5: Solution and marking grid 51

52 Mock exam 5: Solution and marking grid IKE513