Question Practice Flashcards
Explain the concept of the project life cycle
The product life cycle (PLC) describes the phases of development that a product goes through.
The key stages of the life cycle are:
- Introduction: a newly invented product or service is made available for purchase and organisations attempt to develop buyer interest
- Growth: a period of rapid expansion of demand or activity as the product finds a market and competitors are attracted by its potential
- Maturity: a relatively stable period of time where there is little change in sales volumes year to year but competition between firms intensifies as growth slows down
- Decline: a falling off in sales levels as the product becomes less competitive in the face of competition from new products
Describe the factors that may affect the length of the project life cycle
- The way in which a product is defined can determine the life cycle. It could be determined by a broader term. E.g., broad technology like a digital camera. Or it can be defined by a more niche term i.e., digital camera. Typically, the wider definition would have a much longer life cycle which will only reach maturity when there has been a fundamental shift in the industry
- Successive products may overlap: as one product is declining, another is simultaneously being introduced. This may be because of continuing product loyalty by consumers for the old product. Alternatively, it is common to sell only the new product into key markets (eg, Europe and the US) but sell the older product at lower prices into other geographical markets such as developing nations where there is higher price elasticity. This will prevent internal competition between the two products, as long as there is no leakage between the two types of market.
- You can extend the PLC of a product through minor technological improvements and design modifications
- If a product is about to enter its introductory phase, the PLC is likely to be uncertain and there are many uncertainties about the future.
Factors affecting the life cycle: - Success of R&D activities in developing replacement technology
- Success of R&D activities by rivals which may reduce the product’s sales and cause it to enter the decline phase sooner than expected
- Changes in customer tastes and preferences
- Pricing policies of the company and its rivals
- New entrants to the industry
- Developments in competing technologies - Willingness and ability of the company to engage in product improvement of the product to extend its product life
What is strategic procurement?
- The development of a partnership between a company and a supplier of strategic value. The arrangement is usually long-term, single-source in nature and addresses not only the buying of parts, products or services, but product design and supplier capacity
What are some advantages of strategic procurement?
This type of relationship can be beneficial for some organisations which may need to establish close links with companies in the supply chain to meet their own production needs or strategic objectives.
Some advantages:
- Consistent product (shape, size, quality, clarity) from a single supplier
- Easier to monitor quality
- The supplier may be dependent on the client as a major customer, and is therefore more responsive to their needs, if a large amount of its income is being earned from the company
- More scale economies can be earned by the supplier to reduce costs which can then be passed on the the company in reduced prices
- Communication, integration, and synchronisation are easier (eg, integrated IT systems)
- Collaboration is easier and more mutually beneficial in developing new products because all the benefits come to one supplier
- The supplier has an existing relationship with the company and therefore there is less risk and greater awareness
What are some issues with strategic procurement?
Single source supplier issues:
- If there is disruption to output for the supplier, there is disruption to supply for the company. This may mean that the company has to hold inventories
- If there are variations in demand by the company, a single supplier may not be able to satisfy these in the short term (another reason they may hold inventory)
- The supplier may exert upward pressure on prices if it knows the company is tied into it for a number of years (over the product life cycle) and therefore has no alternative source of supply
What are the benefits of multiple suppliers?
- The company can drive down prices charged to it by encouraging competition between suppliers who know that they have a choice of alternative suppliers
- Switching sources of supply is possible by dropping a supplier altogether if it is delivering a poor quality product or service
- The company can benefit from innovation in future product development from many companies rather than just one
What are the problems with multiple suppliers?
- Each supplier has a smaller income from the company than a single source supplier and so may lack commitment
- Multiple communications become more difficult and more expensive for the company (eg, more difficult to integrate multiple IT systems)
- Reduced scale economies
- Suppliers are less likely to invest in bespoke equipment and produce a bespoke product for the company as production volumes may be insufficient
- The lead times and uncertainty of delivery time are greater if the geographical distances are greater
- Cross-border supply chains may produce regulatory, language, cultural, exchange rate and tax problems
- New suppliers may create some initial uncertainty and front-end costs in establishing new relationships and communications systems
What does the integrated supply chain model propose?
The integrated supply chain model proposes that it is whole supply chains which compete and not just individual firms.
While the integrated supply chain model is about more than cost reduction, this can be a key benefit, particularly where the components are fairly generic. Supply chain management is therefore needed to be able to obtain these benefits.
What is supply chain management?
Supply chain management (SCM) is the management of all supply activities from the suppliers to a business through delivery to customers. This may also be called demand chain management, reflecting the idea that the customers’ requirements and downstream orders should drive activity or end-to-end (e2e). In essence it refers to managing the value system.
Upstream supply chain management does not deal with customers.
The main themes in SCM are Responsiveness, Reliability, and Relationships but the question can request specifics e.g focus solely on costs and the reliability aspects of SCM.
What are the benefits to opening a distribution center in another country to hold significant inventory for distribution in that country using a third party courier?
- Inventory can be held ‘locally’ in the US to meet surges in demand more quickly and with less uncertainty for customers than by supplying directly from production output in another country
- This consequence is driven by customer need, which is central to the end-to-end business model. The distribution center means that the company is closer to its customers and could perhaps better understand their needs
- If the company owns the distribution facility then it has more control over this aspect of operations than with a joint venture
- Presence in the country, rather than delivery directly from the production factory in another country, means they can use local employees with local knowledge
- The company can more easily achieve KPIs
- If there are a large volume of sales in this country already, managing customer service for this extent of sales from another country seems inappropriate and a distribution facility seems to be a minimum response to satisfy the needs of that market
- Opening a distribution center indicates a more substantial response to sales growth in that country
- A distribution facility holding inventory is a much cheaper alternative than a second manufacturing site which would increase fixed costs and would need an appropriate skills base without any history of production in the country
What are the issues to opening a distribution center in another country to hold significant inventory for distribution in that country using a third party courier?
- Leaves a large geographical distance between the distribution facility and much of the population. A single distribution facility may therefore only be a partial solution to the need to improve customer service.
- The fixed production facility increases fixed costs and therefore increases risk from operating gearing
What are the benefits to setting up a joint venture with another international company to operate a distribution function in another country (e.g., the US)?
- Collaboration takes advantage of common aims of both companies and sharing fixed costs from owning a distribution facility. This will give economies of scale.
- Given that both companies have common customers there are economies of scope from deliveries to the same location. Even if this were not the case, there are likely to be economies of scope from deliveries to the similar locations.
- Without a joint venture there may be insufficient volumes of sales for either company to sustain a feasible distribution network
- The joint venture means that ownership of vans to make the distribution directly to customers is possible, so there is more control over all aspects of physical distribution without needing to trust third party couriers
What are the problems with setting up a joint venture with another international company to operate a distribution function in another country (e.g., the US)?
- There may be a conflict of interest in prioritising deliveries of each company where their needs, or the timing of needs, do not coincide.
- With a joint venture, one party may wish to terminate the agreement. This may require exit costs and create uncertainty over continuing viability
- If there is common control between the two companies then issues of governance may arise if a key decision needs to be made that the two parties disagree about (eg, a decision to expand or develop)
- Governance could be contractual or through a joint venture entity. This would impact upon risk sharing, exit costs, control and cost sharing. This would need to be clearly agreed.
- If one party is larger than the other, and therefore gains more benefit from the joint venture, the issues of sharing costs, sharing benefits and sharing control arise. Unless there are transfer prices from the parent entities, the joint venture is not revenue generating which may create a range of problems over how the benefits and costs are shared.
Boom’s missing statement is to ‘maximise the return on investment for our shareholders whilst striving to recognise our corporate responsibility to wider society’
At a recent board meeting to discuss Project SA, Boom’s finance director commented: “Our responsibility as directors is to look after our shareholders. If we have to spend money keeping these environmentalists happy, at best we will reduce profits and at worst some of our projects will not be viable. I think the two parts of our mission statement contradict each other.”
One non-executive director (NED) took a different view. “I recently attended a conference looking at the NED’s role. They said that, as directors, we have a legal duty to promote the success of the company for the benefit of its members as a whole. This means having regard to the long-term consequences of any decision and the impact of the company’s operations on the community and the environment as well as its employees, suppliers and customers. This leads to a sustainable business. Surely therefore we need to consider these environmentalists, if only from a risk management point of view.”
Discuss the views of the two directors in relation to Boom’s mission statement. In doing so, you should explain the directors’ duties in respect of corporate governance and corporate responsibility.
Finance Director: The finance director believes this is contradictory. In the short term any measures taken by Boom to enhance the health and safety of its employees or to protect the local environment by reducing the amount of natural capital that it uses, such as spending on recycling water or controlling pollution, may increase costs and reduce profits.
Reduce profits imply reduced shareholder wealth in terms of dividends foregone or lower capital growth.
The finance director’s view is consistent with the traditional view that it is the duty of the directors, as agents appointed by shareholders, to maximise shareholder wealth. This might suggest that social factors which sacrifice shareholder wealth should not be taken into account. This is the approach that the finance director is taking when he suggests that money spent ‘keeping the environmentalists happy’ may make certain projects non-viable.
However the mission statement is not necessarily contradictory - it does not say that Boom has to make sure that society is not disadvantaged in any way by its activities; rather it implies that the company will do its best to take society into account in its decision making and operations
When is it best to hedge?
- At low interest rates, it’s better not to hedge
- At high interest rates, it’s better to hedge
- You must consider whether the option premium is too expensive
- What is the board’s attitude to risk?
