Pack E - Mock Q's Flashcards
(60%)
Hello
I need your help. The board has been considering methods of expanding the business of Daistruk for some time and has been unable to reach any conclusions. I need an independent person to provide
the Board with some options.
- Can you please evaluate the expansion options that are possible for Daistruk, along with a conclusion? I want you to consider not only our existing service offering, and customers, but also the possibility of expanding our range of services or targeting new customers.
Intro: Board is correct, we need to address the perceptions of our shareholders, as share price is stagnant at around $10.
Market Penetration - marketing and promotion:
-Currently 1% of Roundland logistics spend ($2bn) so potential to increase market share. Can do this either by: persuading clients to spend more or stealing clients from rivals such as Carree or persuading new clients to outsource logistics currently handled in-house.
-To increase client spend we need to increase loyalty & engagement. Can do this through providing an excellent service and involve clients as key players in our decisions. Sales staff also need to look out for opps to offer service extensions.
-Positive: we have a high profile in the market so only marginal risk
-Negative: the market is large but finite and large rivals may defend aggressively plus we do not have a specialist marketing department.
Market penetration - acquisition:
-A direct rival, such as Carree, could be acquired if it appears undervalued or inefficient. Acquiring a private company is much easier than a listed company.
-Positive is fast way to achieve expansion and removes a rival from industry
-Negative is very expensive and if we pay too much it may amortise possible future synergies. Roundland competition authorities may see such an acquisition as anti-competitive.
Market development - geographic:
-Market is limited so we may expand into new countries. Neighbouring countries may have similar logistics needs so unsatisfied demand.
-Positive is we can leverage core competences and use advantages with being based in Roundland.
-Negative is we may find competition or radically different needs/cultures limits opportunities for expansion.
Market development - demographic:
-New sectors, such as military or nuclear, may be available within Roundland. Marketing research should identify opportunities.
-Positive is we can find a sector that matches our competences.
-Negative is roundland is a mature market so rivals may already have served these sectors. We do not have a specialist marketing department for research.
Diversification:
-Our vision is ‘the provision of sustainable supply chain strategies and services’, any expansion would change this and require tricky conversations with stakeholders. Diversification into closely related areas such as shipping or airports may be more feasible with lower risk than unrelated diversification.
-Positive is new opportunities not limited by our focus on supply chain logistics.
-Negative is clientele effect risks alienating stakeholders. Increases complexity and threatens vision, shareholders can more cheaply diversify their own portfolios.
Conclusion:
-All options should be considered with awareness of above arguments. Market penetration/geographic market development seems to provide the most interesting opportunities.
(60%)
Hi
The Board of Daistruk is considering submitting a bid to purchase the Logitek company following an initial assessment by Henrik Gerding; see attached.
* Please evaluate and recommend, with justification, whether Daistruk should proceed with the proposed acquisition of Logitek.
Attachment:
I think I have identified an opportunity in which we can increase Daistruk’s revenue whilst limiting our risk of acquiring a company. As you know, Daistruk is always seeking to establish itself as a trustworthy supplier of excellent logistics services. Therefore, it is always worth assessing our options for future growth. I have identified one possible purchase; Logitek, a company that specialises in providing
pharmaceutical logistics services to pharmacies and hospitals throughout Roundland. It is a recommended supplier to the National Health Service (NHS – a government body) of Roundland and, while we already supply NHS with logistics services related to capital projects, there may be other expansion opportunities following on from this purchase to other
government departments. Logitek only has 300 employees, but I understand the current owners are looking to sell the company.
The acquisition should provide a useful expansion option to Daistruk placing less reliance on our existing revenue streams.
Intro: Henrik is right, we need to look for new revenue streams to mitigate the risk in our client portfolio.
Suitability relates to whether the acquisition of Logitek fits with the mission, vision and strategy of Daistruk.
The mission of Daistruk is ‘Daistruk gets things done’. Acquiring Logitek does help us extend this vision into a different market area, hopefully this would be a natural extension of our relationship with NHS.
The vision is ‘to have a positive impact on all stakeholders through the provision of sustainable supply chain strategies and services’. This proposal fits with the vision as they are a logistics company.
As a listed company, shareholders will expect Daistruk to pursue growth areas that ‘fit’ with its business model. This acquisition therefore makes sense from a general strategic perspective.
Acceptability relates to whether the investment will meet the needs and expectations of key stakeholders of Daistruk.
One main stakeholder is shareholders who normally require capital growth in the form of increasing share price and regular dividends. Daistruk currently pay out around 90% of profits as dividends while share price has been fluctuating from $5 to $15 over the last few years. Such a high payout ratio may be considered our shareholders think performance is weak, and they should react positively to identification of a growth opportunity providing it can add shareholder value.
As a client, and legislator, government is a key player. Logitek is small so the government is unlikely to have concerns about fair competition.
The purchase will have to be acceptable to the board in terms of risk profile. We have the skills of logistics service provision and Logitek is based in Roundland where we are familiar with laws/culture so risk is limited. We have made acquisitions before and this appears low risk.
Feasibility relates to whether Daistruck has the necessary resources and competences to make and run the acquisition.
Resources-financing: Daistruk had R$32M available at the end of 2022 but this is unlikely to be sufficient to purchase Logitek whilst meeting current working capital and investment needs. The current gearing ratio of 40% (debt/debt+equity) and interest cover of 10x indicates Daistruk can take on further debt. A surplus of non-current assets is available to secure further debt. The owners of Logitek may be willing to accept shares in Daistruk rather than cash.
Resources-capacity: No information is provided on fleet utilisation, but Logitek will likely have sufficient capacity to meet current demand. Their current management team can also be persuaded to stay. We should note, when conducting an NPV calculation, the existence of a ‘follow-on’ real option.
Competences: Daistruk has expertise to provide logistics services to almost any sector. Extending sales to pharmacy sector is within our competences. It’s possible there may be ‘specialist’ considerations when transporting pharmaceuticals but it’s unlikely to differ greatly from other specialised loads. We would also acquire competences in this area with the purchase.
Recommendation: The acquisition appears to meet all criteria of the SAF analysis. However, further information about potential purchase price is needed alongside a more detailed consideration of financing method before any formal proposal can be forwarded to the board. We should gather information and meet owners to deduce price expectations.
Describe & Define SAF analysis
Suitability is concerned with whether the mission, vision and strategy addresses the circumstances in which an organisation is operating. (talk about how the decision is in line with mission, vision and strategy)
Acceptability is concerned with the expected performance outcomes (such as return or risk) and if this is in line with stakeholder expectations. (talk about how the decision would be treated by key stakeholders)
Feasibility is concerned with whether the strategy could be made to work in practice and Daistruck has the necessary resources/competences. (discuss how core competencies fit in with the decision)
(40%)
Hello,
Doreen Sumpat has drawn my attention to a confidential paper from the Roundland Government regarding the logistics industry. Please see her report below.
- Please can you discuss how Daistruk might look to influence the decision of the Government, as it is not in our interests for this proposal to be implemented. Include an identification of any relevant ethical issues.
Report:
I have just seen a confidential paper from the Roundland Government regarding the logistics industry. As you know, the government has various carbon emission targets to meet over the next 20 years as
part of its international agreement to avert global warming. One effect of this agreement is for the government to find ways of reducing the use of carbon/fossil fuels. Various ideas have been suggested including increasing taxes on petrol and diesel fuels, or taxing energy suppliers for not having sufficient renewal energy sources such as wind and solar power. The aim is to reduce the usage of fossil fuels, and to raise revenue for the government. As you know, fuel costs represent a
significant slice of our operating costs. The effect of higher fuel duty would be significant, whether applied directly to fuel or indirectly to energy suppliers (who have the bargaining power to pass on their increased costs to consumers). I know this is an election year and the government wants to show vote-winning policies but the effect on the logistics industry has not been considered. Politicians! Who would have them? Definitely not to be trusted.
Intro: Hi Mabalemi, happy to discuss how we might influence. I have used my own CIMA code of professional ethics as a model of best practice.
Indirect influence: Daistruck can publicise the negatives of the change, leading to increased awareness among the general public and firms. These audiences will put pressure on the government to rethink.
Direct influence: Daistruck can attempt to lobby the government by providing information to members of the government on why they should not increase fuel duty. Daistruck could also provide briefings and agree that reducing fossil fuel consumption is a priority. However, we do not have a specialised marketing function so we may lack the competences to follow these approaches. Alternatively we could buy in such services, but it would be expensive.
Ethical issues - self interest: through lobbying it may be seen we are doing this out of self-interest as Daistruck will lose profit as a result of the increased fuel duty. People may think we are simply trying to protect profits and not due to the support for sustainability in supply chains.
Ethical issues - professional conduct: there is also the ethical issue of whether Daistruck should try to influence the decision of government in this area. Our vision is ‘to have a positive impact on all stakeholders through the provision of sustainable supply chain strategies and services’. This is also the government’s initiative. Lobbying may show Daistruck is not following its vision and generate adverse publicity, limiting sales.
Ethical issues - professional conduct: Doreen describes the paper as ‘confidential’. How has she come into possession of it? We need to check nobody has breached confidentiality.
Conclusion:
In my opinion, we should directly lobby against the government’s proposal to increase fuel duty on the grounds that replacing vehicles with those using alternative fuels is more environmentally friendly and sustainable. Daistruck must be careful we are not biased and allow self-interest to come into play. We can then work with the government and suggest other ways to address concerns, such as offering incentives to logistics firms that invest in alternative technology vehicles.
We must also discuss with Doreen the establishment of a specialist PR department to handle such relationships.
(50%)
Hi
I have an idea of how we can further develop our services to our customers.
Last week I drove to see a client and, as usual, asked the ‘maps’ app on my phone to direct me on the journey. Part of the way there, the app suggested an alternative route due to an accident ahead. I arrived on-time. Our route scheduling service relies on transportation staff (either ours, or the client’s) planning routes
for drivers. The chosen route optimises driver time and fuel consumption, but is never revised while the driver is on their planned route. Obviously, having transportation staff continually checking road conditions is infeasible, but could artificial intelligence (AI) be built into our route planning? I remember you talking about AI in the coffee room, a few weeks ago.
- Whilst this is only in the ideas stage at the moment, please can you provide me with a briefing note for The Board outlining the arguments for and against investing in this software? I have already raised this idea with Andrea, and she is keen to explore it further. I will probably ask her to lead the Board discussion.
Intro: Hi Doreen,
Please see attached briefing note as requested.
Intro: The use of AI is a clear opportunity to improve service levels and reduce costs. I summarise below the main arguments but a more detailed analysis would be required to prove AI would add shareholder value.
Arguments for:
Reduced cost: this proposal would reduce staff, fuel and vehicle wear costs. This must be offset against the costs of developing (or purchasing) the AI enhancements to our scheduling software. As a side note, we may be missing an opportunity to capitalise and amortise software development, thus reducing the profit impact of the development cost.
Enhanced brand name: Our vision is ‘to have a positive impact on all stakeholders through the provision of sustainable supply chain strategies and services’. The use of AI seems to support this and reduce carbon footprint.
Enhanced services for clients: clients should be able to share cost reductions but should see other benefits such as reduced staffing levels, faster deliveries, less wear and tear and lower carbon footprint.
Competences: as we have a dedicated specialist IT team, we should be able to develop the AI elements in-house. This could give us a new core competency, if our rivals don’t offer AI or buy in. If rivals do develop their own AI, our investment will erode their core competency and make it threshold.
Arguments against:
Incorrect information - adverse publicity: we need to ensure AI scheduling works well, Examples of failures, such as drivers getting stuck, may damage our reputation.
Lack of take-up from clients: we must ensure any development is valued by our clients as value is only recognised if the end-consumer recognises it. If they don’t, we may not see the profit benefit arise.
State of technology - risk: AI is fairly new, common with other ‘disruptive technologies’, there is a risk the AI becomes obsolete before launch due to new AI. An ‘agile’ methodology should probably be used in the management of such a project.
Conclusion:
We must ensure the benefits listed outweigh the cost and risks. We need to understand the potential take up by our main clients to ensure our benefits can be realised and Daistruck will make an acceptable return. We need to estimate the wider impact of a move to AI.
(30%)
Hello
I have just returned from an exciting trade show, on the future of the logistics industry for accountants, where the term ‘Big Data’ was used frequently. I’m not very familiar with the term Big Data but I assume it can be applied to our databases. I know you are about to complete your CIMA qualification, so I assume you’re familiar with this? Others at the trade show were discussing the fact there have been costs associated with utilising Big
Data, but now they use the data it has become a strategic resource for them. We may be missing out.
* Please can you explain to me how Daistruk could exploit Big Data as a strategic resource?
Hi Rasim,
Happy to oblige:
Big data is a phrase used to describe a significant volume of data that moves so quickly that it is difficult to process into any useful information using traditional methods. As well as being too big or moving too quickly, it may exceed our current processing capacity. At present, Daistruck does gather a lot of information from our clients and services but we may not be using it to its full potential.
Big data analytics: having big data is not a core competence, it is a strategic resource that we need to use in order to add value. It is complex, expensive and cloud-based. Our specialised IT department may lack experience in its development/use. It sounds like some of our rivals are using big data so we must bear in mind that clients see this as a threshold competence. If we fail to develop our ability to analyse and use big data, we may risk reputational damage from being viewed as ‘old-fashioned’.
Client data: By analysing data relating to Daistruk’s clients: e.g. supermarkets and car manufacturers, Daistruk could understand exactly what they want and use this information to identify trends and correlations from the data.
Client relationship management: Once we have an understanding of our clients’ needs we can build better relationships. E.g. client liaison managers could select the optimum time to reach out to clients and showcase new services to secure orders. Daistruk may also be able to identify the high value customers and build relationships with these accordingly.
Better budgeting: Daistruk would be able to better predict income and expenditure to give better financial insight.
Better use of resources: big data analytics may give Daistruk a better idea of when their busy periods are, particularly as this is a seasonal industry. This will lead to better planning of resources such as when additional drivers may be needed.
Targeted marketing: Daistruk can undertake a customer segmentation analysis in order to understand their customers better and plan to utilise the marketing budget better. For example, it may be car manufacturers are the most lucrative customers for Daistruk and therefore budget can be spent on attending trade shows and building better relationships with these potential clients. This often has a better pay off for companies than generic marketing campaigns.
Please let me know if you need more information.
SFM
(60%)
“I need some assistance in reviewing the future strategies of Daistruk. The Board has been discussing various options, but I need an independent review of the situation. As you know, Daistruk operates inland ‘ports’. One possible new venture for Daistruk is to acquire or build a seaport, on the coast, for our sole use. The Board needs to decide whether this is an activity Daistruk should investigate further.
- Please can you identify and evaluate, for The Board, the strategic issues that Daistruk should consider when deciding whether to pursue this strategy.
Rasim has asked me to look at the suggestion that Daistruk may develop or buy a seaport. Three perspectives as follows:
Suitability is concerned with whether the mission, vision and strategy addresses the circumstances in which Daistruk is operating. While we pride ourselves on ‘getting things done’ I am concerned the involvement with operating a seaport may be contrary to the sustainability element of our vision. Sea transport uses fossil fuels and stakeholders may view such a development as unwelcome at a time when we should be reducing our environmental impact.
The strategic option is backwards vertical integration, as it moves Daistruk into a business area currently occupied by a supplier (existing port operators). As an example of a diversification strategy, it is a higher risk alternative and there may be less riskier opportunities closer to home.
Acceptability is concerned with the expected performance outcomes (such as return or risk) and if this is in line with stakeholder expectations. Our shareholders are key players of whom we can satisfy through generating an acceptable return at an appropriate cost of capital. Secondly, to what extent might the strategy change the characteristics of their shareholding in Daistruk (such as dividend stream, risk and gearing). We need to get our shareholders views on the proposal.
Our second priority for assessing acceptability is our clients. Many of them already use us to move items imported to Roundland by sea, we need to see if they are happy with the existing service and whether they would support this proposal. We may find there is no demand for additional/improved seaport services.
Shipping company suppliers: there is always an element of competition with suppliers and we must recognise that their interest in our strategic decisions is high. We need to discuss with them whether they would welcome greater choice or increased capacity.
Other seaport operators: Although currently our suppliers, these would be come our rivals if the proposal is accepted. This would change the dynamics of our ecosystem and could lead to problems for us when using seaports we don’t control.
Feasibility is concerned with whether the strategy could be made to work in practice and Daistruck has the necessary resources/competences. We will need to provide funds for investment or acquisition, Daistruck had R$32M at the end of 2022, so we need to assess the magnitude of cost and find a suitable location/target. Daistruk has never operated a port before, so a new specialist team would have to be recruited or acquired.
Cost and other projects: given a large amount of budget would need to be set aside for this there is a strategic implication as the cash spent on proposal could be spent on alternative projects such as increasing research and development to continue innovating and improving Daistruck services. Additional finance would likely need to be raised and given the business risk of this project is outside our current business model, the marginal cost of capital is likely to be high.
Existing operations: from a strategic point of view, this project will take a lot of attention and time from board/management. There is a valid concern this will distract Daistruk from it’s core strategy of providing in-country logistics services. Shareholders will seek reassurance the core business can prosper alongside this proposal.
Conclusion: In my opinion, we need to move carefully and consult the key stakeholders before investigating further, as I have concerns over the acceptability of this strategic option. I also have concerns on suitability and feasability. As per usual SAP analysis, ideally the proposal would be accepted on all 3 criterium.
(30%) + (20%)
Hello
I need your urgent assistance in preparing for the Board meeting tomorrow. The Board is considering two new projects:
- Partner with a major vehicle manufacturer, to develop a limited range of driverless electric trucks. These would initially be for the use of Daistruk only, but may be offered more widely after an agreed period.
- Identifying, and possibly acquiring, an IT company specialising in virtual and augmented reality. This technology could then be integrated into our service offering.
I need your help with the following:
- First, explain the factors the board need to consider when assessing the suitability of these two projects. You do not need to make a recommendation on which project to choose, as they are not mutually-exclusive
- Second, briefly explain the concept of ‘real options’, and how it might apply to these two projects.
Suitability is concerned with whether the mission, vision and strategy addresses the circumstances in which Daistruk is operating. Daistruk’s mission is ‘gets things done’ so it is difficult to test any potential strategy against this. Our vision is ‘to have a positive impact on all stakeholders through the provision of sustainable supply chain strategies and services’. Option 1 directly supports the vision as EV’s are sustainable. However it could be argued truck manufacturing is outside the scope of supply chain activities. Option 2 is clearly within the scope of supply chain services, but may not have a positive impact on stakeholders such as employees.
It is also worth considering how these options fit with Daistruk’s values:
‘Daistruck is passionate about providing excellent service’
‘Daistruk delivers excellent service at all times’
‘Daistruk acts with integrity in dealing with its stakeholders’
‘Daistruk trusts and respects its employees and provides a safe working environment’
Option 1 does not seem to impact any of these values, option 2 runs the risk of alienating employees.
Fits with strategy: option 1 is an example of backwards vertical integration. As this is a type of diversification it moves us away from our core business model, however it exploits a disruptive technology that is a key environmental opportunity. Option 2 also utilises disruptive technology but this time to support and enhance our existing service offering. The strategic fit of this option is much clearer.
When choosing a project, managers will make a choice based on net present value (NPV). Projects with a positive NPV, when discounted at an appropriate cost of capital, will be accepted as they increase shareholder wealth. Negative NPV projects tend to be rejected. Some projects contain an element or elements which make NPV calculation of limited value, as there are strategic aspects not included in the NPV cashflows. These elements are known as real options. When present, real options increase the apparent NPV of a project.
A follow-on option exists where doing a strategic option may lead to further opportunities that may not have existed otherwise. For example, option 1 opens up an opportunity to supply driverless EVs to other organisations.
A delay option exists where the initial investment can be delayed without materially affecting the cashflows. This flexibility adds value, as a decision can be considered for longer. As both options use disruptive technologies, any delay is likely to materially affect cashflows, I do not feel either option includes a delay pathway.
An abandonment option is where, after the initial investment, further work can be suspended then cancelled, without requirement to complete the project. This type of option seems to exist in both cases however option 1 may be bound to completion by contract and option 2 only has this option until the acquisition is made.
(100%)
Hello
Look at this attached extract from Roundland Business News. While not necessarily concerning to our business model at the moment, the volume of proposed legislation is worrying – I just hope we don’t miss anything important. It’s a while since we did an environment analysis, and we’re re-drafting our
strategic plan soon.
- Please can you prepare a full environment analysis, for me to discuss with The Board, to explain possible impacts on Daistruk’s strategy and suggest appropriate responses to each of the different areas of the environment analysis.
Extract:
The Roundland Government’s interesting legislative process continues. This year sees the introduction of the Bats Habitats Regulation bill, the Company Transparency (Carbon in supply chains) bill and Domestic equipment recycling tax to name but three. Most of the proposed legislation appears to affect business in some way. For example, the Bats bills both require businesses running commercial operations to provide safe habitats for these animals with the obvious associated expense. The Carbon bill requires traceability of carbon in areas such as purchases of energy with businesses required to have at least 50% carbon neutral energy supplies by
2025. This places pressure on energy suppliers to source the electricity from carbon neutral sources and will push up energy prices. The Recycling tax places a tax on a company selling domestic equipment where a minimum of 60% of the parts used must be recyclable.
There appears to be no end to this legislation. While some bills are obviously beneficial, with 266 bills currently progressing through parliament it’s a minefield trying to keep up to date with which bill affects what entities. Come back next week for the start of our alphabetical guide to the new legislation in Roundland in 2022
– This is Rick O’Shea - rebounding the news around Roundland.
Hi Rasim,
See attached for my summary environmental analysis.
Our business environment is very dynamic, and a source of both threats and opportunities. Continual environmental scanning is essential to maintain our competitive advantage.
Political : this aspect of the PESTEL analysis looks at the influence the current government in power and any future government may have. Political risk can affect multiple countries; however it tends to be a greater risk in the country the political changes originate from. The actions of Roundland government will impact Daistruk most as this is where it operates. It would also be beneficial to keep an eye on international policies.
Political impact: Daistruk appears to have little impact from political decisions so far. Roundland has an economy providing employment opportunities and companies paying taxes to fund government expenditure. The current legislation appears to affect Daistruk more in terms of costs that will be incurred (increasing fuel and utility bills from carbon directive), rather than our overall mission.
Political response: Daistruk will need to keep track of current/future government policy. Daistruk itself could try and lobby government where policies conflict with Daistruk’s interest. However, this may be difficult and result in adverse publicity if Daistruk is seen to be trying to illegally or unethically influence parliament.
Economic: this relates to macro-economic variables such as growth rates of economies and interest rates. Daistruk is particularly susceptible to changes in the economy of Roundland. However, given Roundland is a developed economy, the core business is well protected as logistics is always needed given the goods transported are needed.
Economic impact and response: we are likely to continue to have clients purchase our logistics services even if there is economic downturn as consumption of consumer goods tends to be stable. Any significant recession will still affect our income. Daistruk will need to continue environmental scanning in some way to keep our eye on changes to the economy so we can process information and action can be taken to alleviate any potential adverse impact to Daistruk. Reading the Roundland Business News is a valid method of environmental scanning.
Daistruk does have borrowings, hence increases in the interest rate will increase our expenditure and decrease profit. Where large increases are forecast our finance team may consider interest rate hedging.
Social: this relates to the expectations of society. Society is becoming more aware of social issues and particularly global warming/greenhouse gas use. While our vision is to move towards a sustainable supply chain world, the fact we still have a fleet of vehicles using fossil fuels means it’s difficult to show movement towards this target.
Social impact/response: Daistruk may come under increasing pressure to invest in more environmentally friendly forms of transport, such as hybrid, electric or hydrogen. Publicising our actions will enhance Daistruk’s reputation in this area. We could gather information on society’s expectations from monitoring wider news/social media. Daistruk’s marketing staff can also continue to monitor social media to understand any societal concerns. These can be reported back to ensure we are providing effective information showing how we support the aspiration of carbon-neutral logistics.
Ecological: this is the impact of companies and their resources on the environment.
Ecological impact/response: Daistruk has a large carbon footprint in terms of fossil fuel usage. Daistruk also uses electricity and gas in lighting and heating facilities; the carbon tracing legislation will impact Daistruk in many ways. To alleviate fossil fuel usage, Daistruk can investigate purchasing or leasing alternative fuel verhicles. We can also look at contracts with ‘green’ energy providers to try and ensure only environmentally friendly electricity is used.
Legislation: this covers the system of laws in a country Daistruk must follow. This is partly dependent on political power and success of political pressure groups presenting their requirements to parliament.
Legislation impact/response: The bills before parliament do have the potential to significantly increase our costs in the next year or two. Monitoring (as with political) will mean ongoing review of the legislative programme from the government. This can be by our lawyers or specialist third party. Given it’s unlikely Daistruck can change proposed legislation, we must consider our approach to new laws. For example, how to ensure Daistruk has a system to trace carbon use. We have internal performance targets but we may also need to evidence our carbon emissions reduction to government.
Competition: this aspect of the environment looks firstly at direct rivals such as Carree. Using a diverse model of competition would lead us to also look at potential new entrants, substitutes, suppliers and clients.
Competition impact and response - rivals: Carree is the market leader in Roundland and provides similar services to Daistruk, including a full intermodal service. It’s likely we engage in competitive tendering and price wars to undercut eachother. Such activity is good for competition, but bad for margins as we both lose out. We must also consider smaller rivals, particularly those with clear differentiation-focus strategies, as they may serve market segments we don’t.
Whilst we must avoid anti-competitive activity, a discussion with Carree about priorities may allow us to reduce the number of occasions where we both pitch for the same contract.
Competition impact and response - potential new entrants: the main barriers to our industry are significant cost of infrastructure, investment in IT and brand names. The first two can be avoided by the use of a different business model or new technologies. We do not currently lease any of our non-current assets, believing this gives us greater control. New entrants leasing will not have to find 0.5bn of capital to invest in infrastructure. There may also be opportunities to establish a large logistics organisation virtually, based on the collaboration between small organisations and self-employed individuals. We must look at our capital structure and explore alternative methods of financing.
Technology is continually developing, and solutions that previously required major investment in development can now be provided by off-the-shelf apps. Our IT staff must be on the lookout for new opportunities and must be willing to buy in software, rather than developing in-house.
Competition impact and response - substitutes: a substitute provides the same service as Daistruk but in a very different way. We must be continually aware of disruptive technologies. This is particularly the case in ‘last mile’ logistics, where many substitutes exist (drones, robots, bicycle couriers).
Competition impact and response - bargaining power of suppliers: most of Daistruk’s inputs come from very large multinational suppliers such as petrochemicals firms, shipping fleets and major vehicle manufacturers. Such organisations are able to control the price and quality of their suppliers. We must work on our relationships with big suppliers, emphasising the benefits of collaboration and value sharing within our ecosystem.
Competition impact and response - bargaining power of clients: we have already seen alternatives exist for logistics services in Roundland. Our large clients, such as car manufacturers (Malttor) or supermarkets (Muddocks) can fairly easily switch to Carree/another rival. Our only defences are low prices and exceptional service quality. Large clients also have the power to dictate payment terms, with supermarkets particularly having a reputation for late payments. At our last year end we had 53 days sales in receivables. This illustrates the problem and a full analysis of client account profitability might show our larger clients are actually our least lucrative.
(20%)
Hello,
The Board of Daistruk is considering acquiring a small privately-owned IT company. We currently use Lec as a supplier, and have been made aware that the current owner wishes to sell so she can retire. I attach two documents which you might find useful.
- Please outline the matters that Daistruk should consider when conducting a resource audit of Lec prior to making a decision whether or not to pursue possible acquisition further.
Notes relating to Lec (from Daistruk IT Operations supplier file) :
Lec Ltd is owned by Diane J, an entrepreneur with a history of tech start-ups. Diane is in her late 50s, and independently wealthy. We have used Lec since 2005, to assist with hardware maintenance, repair and upgrade. Lec is now our main contractor for this service. Lec employs about fifty staff, most of whom are IT hardware engineers. Fewer than five seem to be ‘managers’, with engineers expected to take responsibility for their own work. Engineers are supported by a small administration staff. Lec operates from a leased office and workshop, not far from our Head Office.
Lec focuses on flexibility, getting engineers into Daistruk at antisocial hours (when systems are not busy). They charge a premium for this, but nobody else offers it.
Current level of business $400,000 per year. Believed to be about 10% of Lec’s revenue.
Feedback from interactions with Lec management and engineers (Andrea):
▫ Diane is formidable, and very intelligent. Her background is in marketing, and she has an MBA from a top business school. It’s always a pleasure, and a challenge, to meet her.
▫ Diane is very strategic, and leaves operations to her managers and engineers. She’s very much a ‘hire bright people and let them get on with it’ person.
▫ I have only met one ‘manager’, who is our dedicated client contact. He’s smart and helpful. I get the impression Lec has very few managers, who do client management and leave the engineers to deal with everything.
▫ Our Lec manager has a sophisticated CRM system, and the engineers all carry tablets with cloud access to databases of technical stuff.
▫ All of the Lec engineers I have met have impressed me – they are knowledgeable,
professional, and happy to ‘go the extra mile’. They don’t seem to need to refer to a manager, but just agree what needs doing and do it. My staff treat them like colleagues.
Hi Andrea,
I have used a recognised framework to structure the resource audit and put initial examples under each heading. We need to gather more information, of course, but this should give you an idea of what’s expected:
Tangible resources:
Strategy - Lec seems to focus on flexibility and service level. It has clear strategic leadership with supposedly a differentiation-focus strategy (out of hours, premium price)
Systems- Lec uses IT systems in CRM and engineering for knowledge sharing. It probably lacks a firm set of policies and procedures.
Structure - it appears Lec has a flat, wide structure with a very small support staff and only two levels of management. This makes decision-making very fast. There is a lot of delegation, both to individual managers and engineers.
Staff - knowledgeable, flexible and helpful. It would be interesting to know if Lec suffers from staff turnover and we may need to persuade Diane to stay around if we buy Lec. There’s a risk she might set up another company, and her experience will be of huge value. Consider an earn-out, over 5 years.
Intangible resources:
Skills- staff seem to be very skilled in their own areas, and trusted as ‘experts’. They also have access to knowledge-based systems.
Styles- very hands-off, with a lot of delegation and clear strategic leadership. Professional yet informal, being viewed as colleagues rather than suppliers.
Shared values - quality, flexibility and innovation, coupled with client service.
We also need to look at strategic option in a wider sense, assessing suitability, acceptability and feasibility.
Mckinsey’s 7S model looks at corporate culture and the components its made of. Outline the tangible ‘hard’ factors and intangible ‘soft’ factors you would identify in a resource audit.
Tangible:
Structure - who reports to whom
Strategy - relates to the ways in which the organisation plans to gain a competitive advantage or achieve other objectives
Systems - these are daily activities/procedures followed by staff
Intangible:
Skills - competences of employees
Style - style of leadership
Staff - the people who make the organisation
Shared values - the core values of the organisation
The model suggests all seven elements have to be aligned for an organisation to operate effectively.
(30%)
Hello,
You will be aware that we already use cloud storage and processing to support the logistics services that we provide to clients. It has been suggested that we should extend this, to offer clients the
opportunity to store and process their data on our cloud server – we have competences and capacity to do so, without limiting our existing service growth. Khaled mentioned that his former employer (an automotive manufacturer) used scenario planning to evaluate such opportunities. I’ve never heard of this technique. Can you help? If so,
- Please explain, using two scenarios, how scenario planning could be used to evaluate whether Daistruk should offer cloud-based processing and storage as a service.
Hi Henrik,
Scenario planning is a technique that was much used in the 70s/80s by organisations like Shell. Due to major disruptive events in the environment (Covid, recession, banking crisis) it’s become valuable again. It involves identifying high-impact, high-uncertainty factors in the environment and their associated futures and can be based on either of these scenarios:
One scenario may be based on cloud services becoming a threshold competence in our client industries. Cloud is perceived as secure safe, with cloud service providers being trusted to provide high quality services and business continuity.
A second scenario may be a world in which cloud is viewed with suspicion, and clients are concerned about its security and continuity aspects. This may be due to a series of well-publicised security breaches, creating situations where web-based services were unavailable for extended periods.
Risk mitigation: from these scenarios, we would be able to explore alternative outcomes for our own proposed cloud services activity, identify risks and plan mitigation. An investment in cloud will be more feasible, acceptable and expose us to less risk in the 1st scenario relative to the 2nd. The 1st scenario will also generate better cashflows and predict higher shareholder value.
Conclusion:
Scenario planning can certainly help with decisions such as this, but is generally used at high levels of planning. This application is more like contingency planning.
(40%)
Hello
Henrik has passed me the attached and asked for our thoughts. Please advise me, before I reply:
- Evaluate the arguments for and against the acquisition of Minim by Daistruk.
Attachment:
Dear Henrik,
I am writing to follow up this morning’s video call. As discussed, I founded Minim in 2019 as a specialist IT company focusing on the use of artificial intelligence in logistics. The experts employed by Minim have developed models that can predict the demand for consumer goods, allowing a logistics operator such as Daistruk to vastly improve the efficiency of its operations and to offer greater service to its clients. As I indicated during our video call, my intention is to sell my 100% stake in Minim to a major logistics company. I will stay at Minim, as CEO, for 12 months after the sale. I then plan, after a short holiday, to take up a full-time academic post at Roundland University, where I have been a visiting professor for several years. My asking price for the company and a year of my involvement is R$100 million.
I look forward to discussing this matter further.
Kind regards, Yusuke
Hi Hamid,
Here are the main arguments:
Synergies:
The biggest argument is synergies in operations. Minim’s models would almost certainly help in the development of better internal processes and permit us to further differentiate our service offering.
Sell to rivals:
If Daistruk does not acquire Minim the founder is likely to sell to one of our rivals. This could disadvantage Daistruk because our market is mature, so any small improvement may give a rival competitive advantage. A competitor who masters this approach may find it relatively easy to attract business away from Daistruk.
Technological expertise:
It is clear Minim have very skilled staff in AI and the latest technological advances. This can be complex to manage and recruit in house so having experts could be a source of competitive advantage. It could also be an area for Daistruk to explore in the future to supply software to other companies and use this as an opportunity to diversify.
Create in-house:
It’s not clear whether Daistruk needs to acquire Minim to achieve the operations/service improvements. Daistruk is a successful logistics company with a significant competence in IT development. It should be possible to create in-house models that could be equally effective if not better. This may also be made possible by recruiting former employees from Minim.
Founder loss:
Minim’s founder intends to leave after a year, which may impair the effectiveness of the company. This could be because Yusuke’s expertise was a significant factor in the company’s effectiveness or because staff may be reluctant to stay with the company after their departure. If these issues cannot be resolved in the interim period then Daistruk could be at a loss from the acquisition.
Conclusion:
Given Daistruk’s cash position (R$36M at the end of 2022), this is a significant undertaking for software development we can potentially undertake ourselves.
(60%)
Hello,
I have attached a news article about a security breach at Cloudbor. We use them to provide our cloud storage and processing capacity, as do several of our rivals. They also host our website and Intranet and some back-office services like supplier payment and payroll. The Board has asked me to prepare a briefing for an emergency meeting this evening, and I need your help with the following section:
- Recommend, with reasons, how Daistruk should identify and manage the interests of THREE key stakeholders possibly affected by this breach.
Shoppers are advised to check their credit card statements after Cloudbor, a leading provider of cloud services, admitted that its security has been breached. Cloudbor provides payment facilities for many major retailers, as well as a wide range of
accounting and operations services to major corporations. Most organisations using Cloudbor provide their own ’front end’ to customers, so many may be unaware that they even deal with
Cloudbor.Cloudbor has not yet clarified the severity of the breach. It is believed that a cluster of servers was accidentally left exposed, with inadequate security, during a software upgrade. The
vulnerability apparently lasted several days. It is unclear whether this was due to carelessness, or with malicious
intent.
The starting point to identify stakeholders who have both high interest and high power because they are the key players.
Staff- high power
Our staff are the most important stakeholders in this case. They will have a significant amount of power because we rely on their collective labour and engagement in order to provide our services. The way we deal with this situation could have consequences for motivation, staff turnover and future recruitment. We rely heavily on our ability to recruit and retain employees.
Staff - high interest
Their interest will be high, because they will fear that their personal details (such as identity, address, date of birth, salary and bank account) have been compromised. This might lead to them being subject to fraud, impersonation or direct threat.
Staff - how to manage
Daistruk should start by working with Cloudbor to establish what data has been compromised. We should immediately issue a staff briefing to explain our plans to staff and deal with their concerns, it would be immoral and unethical to hide the situation from staff, or underplay its significance. We should consider setting up a team (from IT or HR) to help individual staff members who might suffer consequences from any data breach.
Cloudbor - high interest
Cloudbor’s interest will be high, because its reputation is at stake. We, and other clients, could stop using Cloudbor, leading to serious financial consequences. Hopefully Cloudbor will share the desire to engage in talks and find a solution in the best interest of our future relationship with them.
Cloudbor - how to manage
Daistruk should immediately arrange a meeting with the board of cloudbor. We should offer our help to support and treat them how we would wish to be treated. We need clarity on whether there is a breach or the data was simply left vulnerable to breach. We then need to assesss the risk to our data and that of our stakeholders, as this will determine our future action. Finally, we might consider forming a joint project team with Cloudbor to investigate the possible breach and mitigate the risk of future vulnerability. We have specialist IT staff who can help Cloudbor test their system.
Clients - high power
The power of clients is high because the services we provide to them are a key component of their value offering. We cannot afford to lose clients such as Malltor or Muddocks who spend a significant amount.
Clients - high interest
Clients will fear their data is compromised and question our ability to supply logistics service continuity. Although Cloudbor is our supplier, we are part of the same ecosystem and our reach extends to both suppliers and customers.
Clients - how to manage
Daistruk should draft a PR briefing, immediately after meeting with Cloudbor, explaining the situation and what we intend to do, and send to all clients. As we lack a marketing function, a firm of PR specialists should be engaged. For larger clients, such as Malltor or Muddocks I recommend high level meetings between Andrea and her counterparts in those firms. Although this is essentially an IT operations matter, and we do not yet have any evidence that client data was compromised, getting our CIO involved will signal how highly we regard our clients.
(40%)
Hello,
At the most recent Board meeting, we had a discussion about CSFs. It was agreed that ensuring continuity of our core IT systems is a CSF, because our ability to provide client services depends on
those systems. I’m struggling to understand how we can take a CSF like systems continuity and translate it into
measurable factors that I can use to manage my departments. Can you help? Rasim suggested that this is one of your specialist areas:
- Please explain, with examples, how we can develop a performance management framework to assess achievement of the CSF “ensure continuity of our core IT systems”.
Hi Andrea,
A CSF (critical success factor) is a vital area which must go right if Daistruk are to survive. The board is right to view system continuity as a CSF but it’s difficult to measure effort due to the subjectivity. This is the case with many CSFs, so there is an approach to be followed:
Competences based on CSFs
First step is to identify what competences are necessary to achieve the CSF. We need to perform each of these competences to an appropriate standard if the CSF is to be achieved.
Core vs Threshold
Threshold competences are required just to survive and be viable, core competences are possible sources of competitive advantage. This is important to differentiate as threshold competences are matching what our rivals are doing and a core competences is exceeding our rivals and offering something special to our clients.
Some suggestions of competences supporting systems continuity:
-Carry out scheduled preventive maintenance activities
-Train users and support staff how to avoid system outages
-Install software upgrades, as available, provided we are confident they are working
The next step is to develop Key Performance Indicators (KPIs) for each competence. A KPI is a performance measure that can be used for performance management, it must be SMART. E.g. For the preventative maintenance suggestions we should have a plan for each core system module and hardware component and update at least annually. Alongside a target for 99% compliance with carrying out planned preventive maintenance activities, in line with the plan, within 1 month of the planned date for all core system and hardware modules.
Another KPI could be % downtime in hours each quarter due to issues with the systems and hardware.
The above examples all concentrate on improving our business processes. We must also think of setting other KPIs covered by the other three areas on the balanced scorecard.
E.g. Financial could be the monthly costs in regard to investing in preventative maintenance. From the customer perspective, Daistruk could send out regular client satisfaction questionnaires to gather feedback, including satisfactions with our systems and their ability to meet needs. The KPI would be to ensure satisfaction remains above a particular level. For innovation and learning, a KPI could be the budget being invested in new technologies to improve the reliability of Daistruk’s systems.
However, the first priority is achieving a threshold competence level in systems continuity, meaning turning CSFs into competences then developing KPIs to measure and report on competence levels.
