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Strategic Professional – Options
(SBL)
Time allowed: 4 hours including reading, planning and reflective time. This question paper is an integrated case study with one section containing a total of 100 marks and ALL tasks must be completed. All tasks contain Professional Skills marks which are included in the marks shown above. Do NOT open this question paper until instructed by the supervisor. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall.
SBL
Strategic Business Leader
Pack Store Deliver Group Co (PSD Group) PSD Group Co (based in the country of Zeeland) was formed in 2009 when the owners of PSD Group decided to create a group structure to facilitate the acquisition of companies. The CEO of The PSD Group is Sir John Watt (SJW), a highly experienced businessman and he has a financial director and an operations director to assist him. The objectives of The PSD Group is to acquire companies which fit well with its existing companies, which would benefit from being part of the Group and which would also bring benefits to companies already in the Group. The PSD Group is a very lean operation. Besides the three full-time directors, it only has 10 full-time administrative employees. There are currently three operating companies in the Group: Deliver Road Transport (DRT), Store Warehousing (SW) and Deliver Rail Transport Limited (DRTL). The managing directors of all three operating companies also sit on the board of The PSD Group. Each of these operating companies has significant autonomy within the Group. The PSD Group, like all the operating companies in the Group, has the majority of its shares owned by the SJW family.
You represent a management consulting firm called SBL Management Consultants. The firm have been appointed by Sir. John Watt as a consultant for his assistance, to consolidate all the companies in the group in an effective manner for better governance. The group is aiming at acquiring an airport in a city called Bolivia. The information you have obtained in your first meeting with SJW, on the Companies he bought and intended to buy, is given in the exhibits. You have also been asked (by your principal consultant) to prepare notes for a meeting with another potential client, the Lambart Water Authority (LWA) You have received an email from MC, your principal consultant around the information he has received from LWA. This is available in Exhibit 8. Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit Exhibit
1 2 3 4 5 6 7 8
– Deliver Road Transport – Store Warehousing – Deliver Rail Transport Limited – Financial information of the PSD group – Extracts of the Minutes of the Annual general meeting – Bolivia Airport and extracts of its financial information - Article by the independent aviation consultant – Email from the Principal Consultant, MC about the Lambart Water Authority
The case requirements are as follows; your role for all tasks is that of a consultant. (1) Prepare briefing notes for consideration by the board of the Group, which evaluate the current performance and contribution of each of the three current operating companies in The Roam Group portfolio and assesses their relative significance in its future strategy. (20 marks) Professional skills marks are available for demonstrating analysis skills in investigating and considering information from a range of sources. (4 marks)
(2) Sir John Watt was surprised when he was told that recruiting John Soria as an NED on the board of Deliver Rail Transport Limited would result in a conflict of interest. He has asked you to prepare a brief presentation to explain this. Prepare a presentation with an appropriate number of slides and accompanying notes to support your findings covering an explanation of the term ‘conflict of interest’ in the context of non-executive directors and a clarification of the potential conflicts of interest relating to DRTL and Soria Supplies if John Soria were to become a non-executive director of DRTL Limited. (10 marks) Professional skills marks are available for demonstrating communication in clarifying relevant information to Sir John Watt. (4 marks)
(3) With reference to the group’s interest in acquiring an airport in Bolivia, prepare a report which evaluates the proposed acquisition. (15 marks) Professional skills marks are available for demonstrating evaluation in assessing and appraising the information given. (4 marks)
(4) A Business Analysis research trainee has suggested that Deliver Road Transport (DRT) pursue a hybrid strategy of offering a price lower than its competitors, whilst simultaneously attempting to achieve differentiation. Draft a concise section of the consultancy report explaining how both elements of this route to competitive advantage (price and differentiation) might be achieved by Deliver Road Transport. (10 marks)
Professional Skills marks are available for demonstrating commercial acumen in identifying how the strategies might be achieved. (4 marks)
(5) To prepare for the upcoming meeting with the Lambart Water Authority, prepare working notes which: a) Explain the importance of the 3Es (value for money) criteria in the evaluation of a public sector investment proposal and use these criteria to evaluate the water diversion project proposals for Housewater and the Coombe Valley, Lambria. (8 marks) b) Evaluate the moral case for or against obtaining the water from the Coombe Valley in Lambria, rather than from Housewater. (10 marks) c) Discuss the contestable nature of public sector policy in Deeland, and how supplying drinking water to Lambart should be decided. (7 marks) Professional skills marks are available for demonstrating communication skills in clarifying and conveying relevant information in the working notes. (4 marks)
EXHIBIT – 1: Deliver Road Transport (DRT) Deliver Road Transport was founded in 1955 by Mr. Stuart Roam. It has grown to be the largest road freight company in Zeeland, with over 2,000 trucks. It specialises in the haulage of consumer food and drink and it has significant contracts with most of the large supermarket chains. There are no toll roads in Zeeland. Taxes for roads are levied through a fuel tax and an annual road fund license. The managing director of DRT is Stuart Roam Junior, who was originally employed by his father as a driver. He still drives a truck for one day every month, so that ‘he never loses touch with the business’. DRT’s distinctive red and white trucks are seen all over the country, and all carry the company’s catchphrase ‘All roads lead to us’. They have attracted a fan club, whose members spot the trucks on the road and record their movements on a dedicated internet site. These so-called ‘New-Roamantics’ have themselves become famous and, partly as a result of this, DRT has become a household name and is the most recognisable brand in the road transport industry. To maintain a modern fleet, DRT replaces its trucks every three years. It wants to ensure that they are reliable, efficient and that they project a modern image which is attractive to their customers.
EXHIBIT – 2: Store Warehousing (SW) The growth of company outsourcing and consumer internet purchasing made it increasingly clear that Deliver Road Transport’s customers wanted an integrated transport and storage solution. The PSD Group acquired a number of warehouses from its customers who wished to divest themselves of this part of their operations. In 2009, it consolidated these, together with a number of small warehousing companies it had acquired, into a company called Store Warehousing. The 2010 figures shown in Exhibit 4 represent the first year that the company traded in its current form. Nationwide, it owns 4 million square meters of warehousing, with its warehouses painted red and white and prominently displaying the PSD logo. The warehouses are efficient and highly automated. However, development land for warehouses is getting more difficult to find and acquisition costs of the land are also increasing. The average price for warehouse development land in Zeeland is now $20,000 per hectare. A hectare is 10,000 square metres.
EXHIBIT – 3: Deliver Rail Transport Limited (DRTL) Increasing fuel costs, increasing road congestion and concern about the environmental consequences of road transport caused The PSD Group to look at opportunities offered by rail transport. In 2010 The PSD Group purchased a Listed Company “Freight Direct Rail Company Limited” (FDRCL). FDRCL was formed in 2000 when the government of Zeeland privatised the rail freight business. FDRC had struggled to survive in a business dominated by two large companies who shared the lucrative bulk freight contracts (coal, iron ore and oil) between them. The FDRCL board welcomed The PSD Group acquisition and the locomotives were quickly painted in the red and white corporate colours and FDRCL was renamed Deliver Rail Transport Limited (DRTL). However, despite experienced managers being transferred into the company from other companies in the Group, Deliver Rail Transport Limited, like FDRCL, has struggled to make a significant impact in the rail freight sector. Most of its customers are at locations which are not directly accessible by rail. Furthermore, the lucrative bulk rail freight contracts (coal, iron ore and oil) are in products which companies within The PSD Group have no experience in. It is still unclear whether the movement of consumer food and drink to multiple locations (The PSD Group’s core business) is suited to rail transport. Furthermore, it has also been 2 difficult for The PSD Group’s senior management to understand the culture and economics of the rail freight business. The railway tracks, which are still owned by the state, are subject to very close control and monitoring and Deliver Rail Transport Limited’s use of these tracks is directly charged. There has also been a failure to recognise that train driving requires far greater skills and training than truck driving. However, on the positive side, Deliver Rail Transport Limited has developed an innovative mini-container system which can easily transfer goods between trucks and trains and it also effectively uses warehouse space. Furthermore, most of the supermarkets, attracted by a green image, are very supportive of the rail initiative and wish to be associated with it. When a non-executive directorship of Deliver Rail Transport Limited became available, John Soria (JS) was nominated to fill the vacancy. John is the brother-in-law of Sir John Watt (SJW). John is also the CEO of Soria Supplies Ltd, PSD’s largest single supplier and is, therefore, very familiar with PSD and its industry. He has sold goods to PSD for over 20 years and is on friendly terms with all of the senior officers in the company. In fact last year, Soria Supplies appointed PSD’s finance director, Susan Schwab, to a non-executive directorship on its board. The executive directors of PSD, all know and like John and so plan to ask the nominations committee to appoint him before the next AGM. Since PSD had seen a period of rapid growth and has recently entered several new ventures, some of which, according to the finance director, are riskier than the long run transport business. John, being the dominant person on the PSD board, has increased the risk exposure of the company according to some investors. They say that because most of the executive directors are less experienced, they rarely question his expansion strategy. This expansion has also created a growth in employee numbers and an increase in the number of executive directors, mainly to manage the increasingly complex operations of the company.
It was thought by some that the company lacked experience and knowledge of new markets as it expanded and that this increased the risk of the strategy’s failure. Some shareholders believed that the aggressive strategy, led by SJW, has been careless as it has exposed PSD group to potential losses on some investments made before all necessary information on the investment was obtained.
EXHIBIT - 4: Financial Information of the PSD Group
2013
2012
2011
2010
2009
PSD
Industry
PSD
Industry
PSD
Industry
PSD
Industry
PSD
Industry
Deliver Road Transport Revenue Operating Profit
575
2050
565
2025
550
2015
520
2050
500
2000
10.80%
9.98%
10.75%
9.95%
10.80%
9.93%
10.45%
9.50%
10.25%
9.57%
ROCE
12.25%
11.50%
12.15%
11.45%
12.05%
11.45%
11.95%
11.30%
11.95%
11.35%
Store Warehousing Revenue Operating Profit
315
3200
275
3010
270
3050
255
2950
250
2850
14.55%
14.50%
14.25%
14.15%
14.20%
14.25%
14.00%
14.25%
13.85%
14.15%
ROCE
14.50%
14.15%
14.25%
14.10%
14.15%
14.10%
13.95%
13.90%
13.95%
13.85%
Deliver Rail Transport Limited Revenue Operating Profit
112
3150
110
3000
105
2850
105
2650
105
2500
4.75%
12.45%
4.50%
12.35%
4.85%
12.25%
4.95%
12.75%
5.15%
12.85%
ROCE
3.50%
8.75%
3.65%
8.55%
3.75%
8.55%
3.85%
8.35%
3.85%
8.25%
The performance of the company is shown under the columns headed PSD. Industry figures (provided by Freight Line International) are shown under the columns headed Industry. Operating profit and ROCE figures are averages for the industry while revenue figures are totals. All revenue figures are in $million. Store Warehousing first traded in 2010. The 2009 figure is compiled from companies which were consolidated into Store Warehousing. Deliver Rail Transport Limited was formed after the takeover of FDRCL. 2011 was the first reporting period for DRTL. The 2009 and 2010 figures are for FDRCL. The standard payment terms in Zeeland is payment within 30 days of the invoice date.
Exhibit 5 - Extracts of the Minutes of the Annual General Meeting Fin Brun is one of DRTL’s largest shareholders and holds a large portfolio of shares including 8% of the shares in DRTL. At the last AGM he complained to DRTL’s chief executive, Stuart Roam Junior, that he needed more information on directors’ performance. Fin said that he didn’t know how to vote on board reappointments because he had no information on how they had performed in their jobs. As a listed company, the governance of Deliver Rail Transport Limited is important to its shareholders, Mr. Stuart said. He also added that the board intended to include “A Corporate Governance” section in future annual reports, to address this and to provide other information that shareholders had asked for. He further clarified that he would not be able to publish information on the performance of individual executive directors as this was too complicated and actually not the concern of shareholders. It was, he said, the performance of the board as a whole that was important and he (Mr. Stuart) would manage the performance targets of individual directors.
EXHIBIT – 6: Boliva Airport & the extracts of the financial information The Boliva airport is situated on the outskirts of Boleyn town where Deliver Rail Transport Limited already has three transport depots and warehouses. The airport occupies a site of 450 hectares and it has two tarmac runways, four hangers and a small terminal/flying club facility. The airfield is exclusively used by private flyers and two flying clubs. The airport is adjacent to the motorway which connects North and South Zeeland. Extracts of the Financial information for Boliva airport is given below. The PSD Group has recently issued the following press release from Sir John Watt: The PSD Group is pleased to announce that it has signed an initial agreement to purchase Boliva airport from the boliva Airport Company for the sum of $7m, funded from retained profits from within the Group. We see this as a natural extension of our transport capabilities. Road, rail and air have long been complementary forms of transport and we are pleased to be able to offer our customers all three, using our innovative mini-container system as an effective transshipment method between transport modes. We also hope to attract a no-frills airline to the airport, encouraged by low landing fees and a population of over 150,000 people living within 20 miles of the airport. Boliva Airport Company will become an operating company within The PSD Group, and renamed PSD Air. Extracts of the Financial Information (Exhibit 6 continued)
All figures in $000s Assets Non-current assets Property, plant and equipment Goodwill
6,000 250
Total non-current assets
6,250
Current assets Inventory
550
Trade receivables
80
Cash
370
Total current assets
1,000
Total assets
7,250
Equity and liabilities Share capital Retained earnings Total equity
2,550 250 2,800
Non-current liabilities Long-term borrowings
4,050
Current liabilities Trade payables
120
Short-term borrowings
250
Current tax payable
30
Total current liabilities
400
Total liabilities
4,450
Total equity and liabilities
7,250
Statement of profit or loss Revenue
975
Cost of sales
(700)
Gross profit
275
Administrative expenses
(125)
Finance costs
(100)
Profit before tax Tax expense Profit for the period
50 (10) 40
Exhibit 7 - Article by the independent aviation consultant In a critical article on the proposed airport acquisition in the financial press, an independent aviation consultant has provided national performance statistics for airports of a similar size and type to Boliva airport. Operating profit margin
Return on capital employed
Current ratio
Acid test ratio
Gearing ratio
17.50%
8.50%
2.25
1.5
40%
Average national performance figures for medium-sized light aviation airports: 2013. He has also cast doubt on Sir John Watt’s statement about attracting a no-frills airline to the airport. He says that a local regional population of at least 500,000 people is required to make such a service attractive. He believes that the population of the Boleyn area is much too small to make passenger services economical.
Exhibit 8 – Email from the principal consultant. HI, hope you are doing good? You must be loaded with the information from Sir. John Watt! Good luck for that! I had a long telephone call with a senior official, Brad Gere, at Lambart Water Authority 2 days ago with regards to a potential project. Brad has sent in the following information and I need your help in preparing working notes for the first face-to-face meeting that we are going to have next week. Lambart, a large and fast growing city in Deeland, is desperately in need of additional supplies of clean water to meet the increasing demand from its growing population. So, following extensive investigation by the Lambart Water Authority (LWA), a suitable location near to the village of Housewater, a site less than 20 kilometres from the city, with a substantial underground reserve of natural water, has been identified. This land is owned by Roger Capstone, a prominent local businessman with powerful connections and influence over some of the key ministers in the national government. He has been effectively lobbying government to ensure that the construction of the necessary water pipe channels from his land to the city of Lambart will not happen, even though it would have a minimal adverse effect on the local natural environment and people; furthermore it would create more jobs in this economically challenged region. An alternative proposal from the LWA is to build a huge dam at the bottom of the Coombe Valley, which is in the neighbouring administrative region of Lambria about 60 kilometres from Lambart. The effect would be to create a large reservoir from which water could be diverted to Lambart. The cost of this proposal is five times greater than the original Housewater option, and would also lead to hundreds of people being relocated to a town to the east of the new dam construction due to their homes being submerged. In addition, the dam project would include major tunnel building and blasting to channel the water from the newly created reservoir to the city of Lambart. This would be through a series of mountains and valleys, many of which lie in an area of outstanding natural beauty and contain many species of protected animals and birds. The Deeland government has stipulated that the total cost of the Coombe Valley project is to be recovered through a special water services tax on Lambart’s householders and the population of Lambria, which already has access to more water than it requires. By contrast the Housewater solution would not require extra taxes to be paid; on a positive note, the Coombe Valley project will create many more construction jobs than the Housewater option would require and is located in the relatively much poorer region of Lambria. The national government of Deeland is seriously considering the costlier Coombe Valley proposal. There have been large scale demonstrations in Lambria. The demonstrators comprise many different groups objecting to the forced relocation of the population, damage to the natural environment and more generally about the additional costs to taxpayers of this much more expensive and disruptive project. I’ll let you know about the areas we will be discussing in the first meeting so that you can prepare your working notes accordingly. Best regards, MC
End of Question Paper