acca p3 revision mock - answers _d11

ACCA

Paper P3

Business Analysis

December 2011

Revision Mock – Answers

To gain maximum benefit, do not refer to these answers until you have completed the revision mock questions and submitted them for marking.

ACCA P3 BUSINESS ANALYSIS

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© Kaplan Financial Limited, 2011

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REVISION MOCK ANSWERS

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ANSWER 1

(a) To: The directors, Famenti Co

From: A Consultant

Date: December 2010

A review of the position of the Famenti Co

Introduction

This report examines the company’s current position in both strategic and financial terms. Each area has been examined separately, but they are very closely linked together and strategic success and financial success often go hand-in-hand.

Strategic analysis

A summary of the company’s position is provided using a SWOT technique. The key points from this model are analysed below:

[Tutorial note: This answer uses the SWOT technique but other models such as PEST, 5 Forces and the resource audit could also have been used.]

Key strengths

[Tutorial note: Due to timing, only one or two issues can be discussed in detail/ developed in each category of the SWOT. It is not particularly important which issues are chosen, but when a key issue is determined then a student should aim to explain why it is a key issue for the business and what the implications will be going forward.]

Famenti's key strength is the competitive advantage it has in production sizes and lead times. This flexibility allows it to meet the needs of customers and react to changes in the market. It should look to use this advantage in any new strategy pursued by the business

Its other key strength is its financial position. Although the cash reserves on the balance sheet have been used up, there appears to be scope to raise further finance. Paul suggests that there is capacity to raise enough cash to finance both opportunities identified by Lisa.

Other strengths

[Tutorial note: any other recognised issues which have not been developed further can simply be listed out into the answer.]

• Lisa’s industry experience

• Good geographic location for European sales

• Opportunistic

• Use of Far East suppliers to control costs

• Good range of LCDs

• Use of casual staff in busy periods


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Key weaknesses

Famenti's market has matured and begun to decline –and the 5% decline experienced so far in the market may accelerate further. The product is near the end of its life cycle and, although short-term profits may be available, the market is likely to become more and more competitive and margin will fall further. It will therefore be important to seek out new products and markets for growth opportunities.

The company is reliant on one core product and is reliant on one key customer (60% of sales are made through Dingle). This lack of diversification could seriously impact on the company's viability. Dingle may be tempted to switch to rivals or use their buyer power to achieve further price discounts, and, as the market has matured and become more predictable, Famenti’s competitive advantage may no longer be valued.

Other weaknesses

• Owner managed

• Seasonal business

• Rivals are bigger and cheaper

• 6% of European market, only 2% of world market

Key opportunities

Lisa has clearly identified the opportunities that she believes will best lead to success. These are evaluated later in the report in more detail. If these strategies are not pursued then there are other options such as geographic expansion or forward integration. However, these ideas have not been developed and the report focuses solely on the opportunities identified by Lisa.

Key threats

The biggest threat to the company is the increased competition. As the market matures and customer power increases pricing is likely to become more important. Famenti’s rivals are larger and will have better economies of scale than Famenti. This will give them lower production costs and the ability to beat Famenti in price wars.

It would also appear that there are many substitute technologies to PCs that do not require stand alone monitors. A further social change towards preferring these types of technology would further worsen the company’s position –especially if, during the current economic downturn, PC users also cut back on monitor replacements/ upgrades.

Other threats

• Recession

• Increasing buyer power

• Loss of Dingle

Financial analysis

A review of Famenti’s financial results highlights the following issues:

Revenue has fallen by over 37% in the last two years due to a combination of a drop in volume (the market fell by 5% p.a. on average) and falling selling prices. Famenti appear to have been worse hit than rivals and market share is likely to have fallen. This may indicate that during the current economic climate and in a declining market, the company’s competitive advantage is less valued than the low prices offered by larger rivals.


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Gross margin during this period is 10% lower, which reflects the increasing price pressure. But Famenti should have experienced a higher drop due to the 25% discount given to Dingle on the new contract. So they have done well to manage cost of sales and reduce the impact of this cut.

Overheads have risen by 10% as a percentage of turnover – mainly caused by admin costs only falling by 16% when turnover fell by more than twice this. Coupled with high interest payments on debt, this has lead to a position where the company is now making losses and needs assistance in moving forward in more profitable areas:

The cash on the balance sheet has been used over the last two years but overall liquidity has remained reasonably steady. However the company needs to take a closer look at working capital management. For example, inventory levels have only fallen by 12% despite a 25% fall in cost of sales.

On the positive side, gearing has fallen and the company does seem to have the capacity to raise further debt finance The overall financial position of the business highlights the urgency in finding a new direction in which the business can grow and move profits back in a positive direction.

Overall

Famenti’s market is becoming more competitive and its problems are likely to worsen – especially if the Dingle contract is lost. The company urgently needs new strategies. On the positive side they have a competitive advantage and the ability to raise finance in order to facilitate success in new areas.

(b) Assessment of proposed new strategies

Product development

Using the Ansoff matrix, the introduction of the LCD TVs and selling new products to existing markets is an example of product development. In order to assess the appropriateness of the strategy we should use three criteria:

Feasibility

It is likely that this strategy will use similar production techniques, similar components to those already sourced overseas, and use the same staff as existing production (although some extra training may be necessary). Famenti should also be able to fit this in alongside existing production and make use of existing distribution channels.

There may be a skills gap in design and development. However Famenti could follow the innovations made by rivals who have already entered the market for LCD TVs as well as allowing Dingle to be involved in creating the correct specification. In fact, this may further bond Dingle to the company and secure Famenti’s key source of business.

So overall this strategy appears to be a very feasible one.

Suitability

Famenti’s core market is mature and it needs to find new products and markets and extend its product range. This new product could achieve this, as well as using up spare capacity at existing production facilities.

The key issue may be the timing of the strategy. LCD TV's are not likely to be seen as a necessity and in the current economic climate it may be a bad time to enter the market. Analysis suggests growth of 6% p.a. over the next eight years but this rate may be an average of a short-term downturn before larger growth in two/three years time when the economy has recovered. However from Famenti’s point of view a key sale already appears to be in place with Dingle so this threat is reduced.


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The other threat may come from rivals who already operate in this market and Famenti may encounter similar problems to those in its existing market in terms of price wars etc. But Famenti has a one year exclusive agreement with Dingle which will give it a chance to develop loyalty, experience and the skills needed to better cope with this competition in the future.

So, although there are risks in the strategy, this would appear to be a suitable direction in which the company to move.

Acceptability

This strategy is likely to appeal to Lisa and Paul as it is very similar to their existing operations. Staff are also likely to be comfortable with any minor changes that might be required to operations.

Famenti’s key customer have suggested the strategy and are willing to enter a one year exclusive agreement which reduces the overall risk of the venture, The one year exclusivity does cause some problems for Famenti in that it won’t be able to deal with other customers or enter other markets with the product. But this period should allow the company to develop the skills it requires to compete well in the market as well as determining the full impact of the current economic crisis.

Overall, the strategy appears to meet all criteria and would appear to be an appropriate way for Famenti to proceed.

Acquisition

The acquisition of the French company is an example of market development – Famenti will attempt to sell existing products to new customers. It can be assessed in the same manner as the product development strategy:

[Tutorial note: Alternatively, Porter’s tests for acquisitions could easily be applied here.]

Feasibility

The strategy would require few changes to operations and build on existing resources and competencies. However further systems may need to be put in place in order to cope with the ownership and control of an overseas subsidiary.

Paul believes Famenti have the finances to fund the acquisition and the seller’s valuation appears to be low compared to previous valuations. The French company is actively seeking an investor so there should be little resistance from the sellers. Overall market share for the combined business will still only represent a small fraction of the overall European market so there is unlikely to be significant resistance from legislators.

So this would certainly appear to be a feasible strategy.

Suitability

There may be some synergies to be gained from combining the businesses. Excess spare capacity could be sold off, systems such as financing could be shared, and bulk discounts may be available from suppliers. If the companies sell to the same customers or markets there may also be savings in marketing and distribution.

However this move is unlikely to solve Famenti's problems. It will continue to experience the same issues it is finding in the European market. It’s market will continue to mature and Famenti will continue to lose price wars. The French company is likely to be experiencing similar problems to Famenti, and the fact that they have struggled financially and are seeking a buyer might indicate that they are less able to


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cope with the market changes. They may be at a greater competitive disadvantage to Famenti and an acquisition may negatively affect Famenti’s own competitive advantage of flexibility if some production is switched to France and this leads to an increase in lead times.

Post acquisition the combined entity will still be smaller than most larger rivals so it will still not have the required economies of scale required to cope in the market. It will also increase exit costs with respect to costs such as redundancy make it harder to exit the market in the future volume declines further.

This strategy is likely to worsen Famenti’s position rather than improve it, and it therefore seems an unsuitable way to proceed.

Acceptability

The current low value of the French company may make it appear to be an attractive acquisition. But this may not be an undervaluation and may reflect the changes seen in the business during that time. The market is much more competitive (Famenti’s sales are down almost 40%) and the French company is struggling to cope with this. Also, share prices in general have fallen during this time. A further analysis is necessary before this valuation is deemed acceptable.

Also, Lisa and Paul have no acquisition experience and Famenti as a whole have little experience in foreign markets and may struggle to cope with cultural staff differences. So the risk in this strategy seems high.

Overall

Famenti should focus on the product development opportunity presented by LCD TV's. The acquisition of the French company seems inappropriate and risky and should be avoided.

(c) Project planning

A project plan aims to ensure that the project objectives are achieved within the constraints of quality, cost and time. For such a fundamental project such as launching a new product range there are several steps that need to be carefully planned:

1 An overview of the project

Definite objectives should be set for the project with associated time limits, financial constraints and limitations on the scope of potential limitations. Paul expects the total cost to be around €10m and objectives for design, production etc. should be set that fall within this budget. It will also be important for the project to be completed quickly in order to make best use of the one year exclusivity deal with Dingle. So Lisa should have a definite idea of when the project will be completed. Overall responsibility for the project should be allocated to a senior manager – this should be Lisa due to the fundamental strategic importance of the new development. Dingle may be given some input into this stage in order to give objectives for specification, volume, timing etcc.

2 The project resources

It then needs to be determined what resources will be used – which factories will be switched to the new product or whether new factories will be required. Also, have Famenti got enough staff to produce both the existing and the new product. Finally, the capability of suppliers and machinery to deliver and produce the correct inputs and output needs to be assessed. In Famenti’s case this is unlikely to be a major concern as the new product will have a lot of similarity to the existing products.


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3 The detailed plan

The detailed plan will use techniques such as Gantt Charts and Critical Path Analysis to provide detailed schedules for all processes and resources.

4 The evaluation plan

A performance management process will then need to be carried out in order to set definite targets and KPI’s for the project. These might relate to production per day, cost variances, tests on specification targets.

5 The quality plan

Quality standards need to be set to ensure the needs of customers are met. Dingle may play a role again at this stage to suggest the quality of output that they expect. Famenti should also consider the use of their own internal quality management programmes such as TQM and Six Sigma and the level of performance required by these programmes.

6 The dissemination plan

The dissemination plan will explain how the project plans to share outcomes with shareholders, such as Paul, customers, such as Dingle, as well as the company’s staff, lenders and other key stakeholders. It should be planned in consultation with key managers and approved by Dingle.

The dissemination plan also identifies and organises the activities to be performed in order to promote the commercial exploitation of the project’s results and the widest dissemination of knowledge from the project. This will ensure that any lessons, skill or knowledge acquired from the project will be used in the best possible ways in the future. In that way, even if the new project does not solve Famenti’s problems it may give some ideas for strategies which will do so.

7 The exit and sustainability plans

It will be important to plan ahead – especially with the existence of only a one year exclusivity deal. Lisa needs to set up plans for what Famenti will do in one year’s time based on a range of different scenarios – for example, if Dingle wants to renew, if Dingle don’t want to renew but Famenti want to continue, if Famenti want to abandon the new product. Plans need to be made for hiring new staff or making existing staff redundant, for seeking out new strategic areas or improving marketing etc. Lisa should also consider improving performance/quality etc. over time if it is decided that the product is viable.


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Marking scheme Marks (a) (Answer must be linked to scenario) Strategic analysis (2 marks per valid

point) Answers require a good spread of analysis across all areas of the business Key issues for students to discuss: • Competitive advantage • Importance of Dingle • Market maturity • Need for new strategies Up to 10 marks Financial analysis Answers should choose some key financial data Each issue needs to discuss the cause of any change and the implications for the business Up to 10 marks Conclusion 2 marks Total Max of 18 marks

(b) Strategies should be evaluated using an appropriate technique (e.g. feasibility, suitability, and acceptability)

(2 marks per valid point)

Product development Acquisition

Up to 10 marks for each strategy. No credit should be given for general

comments which do not relate to the

scenario Conclusion 2 marks Total Max of 18 marks

(c) Project planning Up to 2 marks for each of the seven steps Total Max of 14 marks

TOTAL 50 MARKS


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ANSWER 2

(a) NPV calculations

(i) Finance director

$

Scenario I

PV of cost savings ⎟⎠⎞

⎜⎝⎛

1.0000,150

1,500,000

Scenario II

PV of cost savings ⎟⎠⎞

⎜⎝⎛

1.0000,50

500,000

Expected value of cost savings

(1,500,000 x 0.5 + 500,000 x 0.5) 1,000,000

NPV of project = –1,250,000 + 1,000,000 –$250,000

(ii) Production director

Scenario I

NPV in 1 years time = PV of inflows – outflow

= 1,500,000 – 1,250,000

= +$250,000

NPV in current terms = NPV in one year discounted to time zero

= 250,000 x 1.11

= +$227,273

Scenario II

NPV in 1 years time = PV of inflows – outflow

= 500,000 – 1,250,000

= –$750,000

NPV in current terms = NPV in one year discounted to time zero

= 750,000 x 1.11

= –$681,818


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(b) Evaluation of DCF techniques

The weaknesses associated with the DCF method of project appraisal are as follows

• The technique requires estimates of future cashflows to be made, in the case of our project, into infinity. These estimates are, by their nature, subjective and uncertain. As can be seen from the directors differing calculations, changes in these estimates have considerable impact on the NPV of the project.

• Focusing purely on the financial effects of a project also ignores many non-financial factors that may be equally important to the project decision. Ward and Daniel identify other benefits such as measurable and quantifiable ones that cannot be included in the financial appraisal but which will still contribute to the success of the project. For example, this redesign may lead to reduced staff turnover, better market share, better reputation, etc. that can aid the business in the longer term.

• There are many examples of interdependencies between projects, both over time and between projects. In the case of the former, a decision made now will effectively commit a firm to a particular course of action in the future (i.e. it is difficult to accommodate flexibility within the decision criterion).

Similarly, when there are dependencies between projects, it is really necessary to consider them jointly. For example, one director highlights that this cost reduction programme will have knock-on impacts on sales and market share and therefore may affect other projects that are already operating within the business.

In both cases, the problem is really that cashflows cannot easily be isolated and attributed to a specific investment outlay. Effectively, therefore, capital expenditure will have to be incurred if a business, or a substantial part of it, is to continue. As a result, a decision to engage in new investment may best be made by calculating budgeted current (opportunity) cost operating profits, after allowing for interest charges on the funds committed. If the budgeted figure is positive, there will be a prima facie case for supporting the proposed investment.

• There are considerable problems associated with the choice of an appropriate cost of capital. They include the following

– by using a constant cost of capital in the appraisal, we are assuming that it does not change over time. This is unlikely to be the case, as changes in inflation and underlying interest rates will affect it. (Inflation would also affect the project cash flow estimates).

– in raising $1.25m to invest in the project, Chemelec is likely to change the financial structure of the business. As the existing cost of capital reflects the existing financial structure, it will be inappropriate to use it in the appraisal.

A more rigorous calculation of cost of capital needs to be undertaken, taking into account appropriate business and financial risk levels, and the impact of inflation.

• It is commonly suggested that the issue of risk and uncertainty in project appraisal can best be dealt either by including a premium in the interest rate to allow for risk; or that the probabilities of different outcomes should be assessed, the present values then being averaged to deduce expected net present values (ENPVs).



However, neither of these approaches is really satisfactory. With the former, a major problem in using an adjusted interest rate for discounting is that any adjustment may be arbitrary and be affected by levels of business risk, diversification, weighting of capital etc. It is not always true, for example, that more risky projects increase the cost of capital. It may be that by carrying out this project Chemelec are deemed to be less risky than had been previously though and therefore a lower cost of capital should be used.

As for the ENPV approach, it arises because (sensibly) an attempt is made to assess the probabilities associated with various possible outcomes. The difficulty is that it makes no direct allowance for the nature of the probability distribution associated with likely outcomes. For example, where there are, as with Chemelec, just two envisaged scenarios with very different expected outcomes the procedure is found wanting. In such circumstances, the average of the two projected outcomes is clearly not regarded as a separate possibility.

It may be that extreme outcomes are what must be considered: for example, the success or failure of this venture. It follows that half measures are not a possibility when major strategic decisions have to be taken, and the traditional ENPV approach in DCF evaluation is therefore inadequate.

The need to examine the best and worst scenarios would seem more appropriate, with the use of sensitivity analysis being used to examine the effect of changes in particular variables.

Whilst Discounted Cashflow is a theoretically sound methodology for assessing Chemelec’s project, it needs to be complemented with techniques to capture the non-quantifiable elements of investment appraisal and the uncertainties in the cashflows.

The basic discounted cashflow calculation should be built on with cost benefit analysis to build in benefits such as growth potential and research and development.

Sensitivity analysis should also be undertaken to assess the projects sensitivity to volume changes, changes in the cost of capital and changes in the start date. The later will be particularly important if cash is in short supply in the current period.

These techniques should help assess whether the project is suitable in terms of shareholder wealth and other stakeholder objectives, acceptable in terms of risk levels, and feasible given the resources available.

(c) Business Process Redesign

Business Process Redesign (BPR) usually takes a ‘clean sheet’ approach rather than build on previous inefficiencies and procedures. Paul Harmon recommends this is achieved in five stages:

1 Plan the project

The plan will need to have clear goals linked to the business drivers such as the need to achieve flexibility and drive down costs to at least match the levels achieved by rivals. It should be led by a senior manager, possibly the director responsible for business strategy, with a budget (which appears to be $1.25m) and scope to achieve these goals.

2 Document and analyse the existing process

It will be important to document the existing process and to determine weaknesses in the system. Chemelec should be looking for reasons why existing costs are so high and this should help develop a general plan for the redesign.



3 Design a new improved process

The project leader must then explore different alternatives for solving the problems identified in stage 2. This often involves eliminating unnecessary activities, moving activities to other areas, changing the order of activities and possibly introducing new production and information technology systems to drive down costs.

4 Develop resources for this new process

This will involve changing work practices and maybe even combining some job roles for staff. It will involve an investment in new assets and machinery and possibly an investment in new information technology. This is likely to be where the bulk of the $1.25m will be spent. New incentive systems and management information systems will also. be needed.

5 Manage the implementation of the new process

The final stage will be to test and trial the process. Extra training may be need for staff and further modifications may be need for the process. The project team should also consider the hand-over process to operational management.

These redesign stages should also be combined with proper project management skills. A project team should be created and led from a senior level. They should follow best practice techniques such as regular reviews, detailed planning, clear team goals etc. The project management team could perhaps consider performing a lessons learnt review on past projects to determine why they failed and how best to avoid these problems in the future.

Combining project management skills with Harmon’s stages of process redesign is the best way for Chemelec to avoid the problems that it has experienced in the past.

Marking scheme Marks

(a) NPV calculations

Finance director’s calculations 2

Production director’s calculations 4

(b) DCF problems

Interdependencies Up to 3 marks

Cost of capital Up to 3 marks

Allowing for risk and uncertainty Up to 3 marks

Other problems Up to 3 marks

Maximum 11 marks

(c) BPR

Up to 2 marks for each stage 6

Link to project management 2

Total 25 __



ANSWER 3

(a) Strategic Planning

[Tutorial note: The examiner, when explaining his approach to the syllabus, stated that the Johnson, Scholes and Whittington model was a fundamental model for the syllabus and that the syllabus had been designed around their text. Therefore students should always reference this model in any question concerning strategic planning.]

The ‘rational approach’ to strategic planning

The traditional approach to strategic planning is to follow a structured, linear process in the following manner:

1 Strategic analysis

An assessment of the business’ environment is made by examining competitors, the market and customers. The centre’s ability to succeed in this market is then assessed. This should develop a range of issues and opportunities for the centre to assess

2 Strategic choice

These opportunities are assessed and a decision is made as to which one(s) are most feasible, suitable and acceptable to the centre.

3 Strategic implementation

The strategy is then put into action. This involves developing marketing plans, managing staff and raising finance.

It can therefore be seen that the finance decision generally comes near the end of the process. VILEC would only arrange finance when a choice of strategy has been made. It ensures that finance is only raised for projects which are suitable to the centre’s environment and acceptable to the centre’s key stakeholders (see part b)).

However, as Tanya Daly suggests, it means that there will be occasions when a strategy is chosen but the finance cannot be raised – especially in the current economic climate. Therefore the process would have to start again in order to choose another strategy that fits within the centre’s ability to raise finance. This will delay the decision making process and it could result in lost opportunities.

An alternative/modern approach

In Exploring Corporate Strategy, by G Johnson, K Scholes, and R Whittington, a modern redesign of the rational approach was suggested. This follows the same principles of strategic analysis, choice and implementation (or ‘strategy in action’), but suggests instead that rather than being a linear process that these phases are interdependent. It means that each ‘stage’ should be constantly reviewed after the assessment of each other stage.

This model also suggested that the strategic planning process can begin at any stage. Because each stage is inter-related, the starting point is less relevant. Therefore in the current economic climate, where capital rationing makes financing a key/limiting factor, businesses will often start at the strategic implementation stage. They will then move on to the other stages of the rational approach but will constantly adjust their implementation and financing plans as new issues arise from their analysis and choices.



Impact

So if VILEC where to start with the financing decision (part of what Johnson, Scholes and Whittington called ‘strategy in action’), this would limit the analysis and choice to those options which are actually feasible. It means that the financing issue would be resolved before a definite project is determined. However, any project would still be assessed for suitability and acceptability and therefore projects would not proceed simply because the finance would be available. All three stages of the planning process would still be performed and the project would only proceed if it was the right choice – financing would only be one decision in a long list of analysed options.

[Tutorial note: credit would also be given for a discussion of other strategic approaches such as the emergent approach and incrementalism]

(b) Stakeholder Analysis

The principal stakeholders of VILEC can be analysed using Mendelow’s Power-Interest Matrix. This might give the following results:

LOW Visitors Trustees

Volunteers

Power

Culture department Tanya Daly

HIGH Other board members

LOW HIGH

Interest

Visitors and volunteers

These are unlikely to be directly affected by the launch of the conference centre and will therefore have low interest in the decision. Although visitors provide 20% of all income and volunteers provide operational support to the centre, they will not have the power (especially on an individual basis) to influence the decision makers. Therefore Mendelow suggested that these stakeholders will require little effort. They can be informed of the decision when it is made and don’t need to be included in the process.

Trustees

The trustees, as original founders, appear to take a key interest in the business and have quarterly meetings with Tanya Daly. However they have passed power over to the board of directors and take little participation in strategic decisions. But Mendelow suggested that it will still be important to keep this stakeholder group informed on the centre’s plans. It will be important to avoid a position whereby the trustees become so concerned that they begin to put pressure on those with power such as the Culture Department and other board members. If this were to happen then it may be difficult to get agreement on any strategies at all.



Culture Department and VILEC’s other board members

The Culture Department provide 55% of the centre’s revenue which makes them a powerful stakeholder. But they seem primarily concerned with visitor number targets, which VILEC appear to be easily satisfying, and the government are unlikely to be concerned with day-to-day operations unless they were given obvious issues to become concerned with. The board also have the ability to influence decisions (though they tend to allow Tanya Daly a final say) but perhaps take less interest in the day-to-day operations of the centre. Mendelow suggested that this group of stakeholders need to be kept satisfied and ensure that they are given no reason to become concerned and take an interest in the centre’s decision making process.

Tanya Daly

Tanya Daly has become the centre’s key stakeholder. She has the full delegated power of a managing director and is interested in driving the centre forward into more commercial areas. She will be the main driver of change and have a significant influence on both business objectives and strategies. To be able to successfully follow these objectives and strategies it will be important that she follows Mendelow’s advice on the management of the other strategic groups in the centre.

Marking scheme Marks

(a) Strategic Planning

Explanation of traditional, rational approach 5

Explanation and justification of JSW approach 5

Impact on VILEC 2

Total Max of 12 marks

(b) Principles of IT plan

Use of Mendelow’s matrix 1 mark

Assessment of each group of stakeholders 3 marks each

Max of 13 marks

Total 25 __



ANSWER 4

(a) Fiddler Ltd is exhibiting features of what Handy called a “role culture”. There are clear controls over staff and a formal hierarchical structure. Tasks are clearly set out and employees are expected to perform them to the best of their ability without stepping outside the boundaries of the controls and their authority. Power and influence stem from a central source – John Harte, the owner and founder – and staff appear to have very little influence in setting goals or objectives.

Role cultures can provide a number of problems for a business:

• Staff can become inflexible and “stuck in their ways”. This may affect their ability to satisfy the needs of customers. Staff may be unwilling to step outside their area of authority despite occasions when this may be the only way to satisfy the demands of customers.

• Staff create significant barriers to change and are reluctant to move outside their comfort zone. This can make it difficult to develop new strategies and business processes that will move the business forward.

• Staff are unlikely to develop ideas for the business or seek out new skills which may help the business grow.

• It can be difficult to cover for absenteeism and sickness as staff are not flexible enough to cover the work of different staff members with different roles and controls.

• Controls need to be closely monitored and evaluated as staff expect managers to be autocratic and authoritarian. This can use up parts of senior management time that might be better used elsewhere in the business.

AMG’s culture is very different. Staff are more involved in developing new ideas and controls are changed to match the changes in the environment. This is likely to give much more flexibility in meeting the needs of customers. It will also allow staff to develop new skills and abilities that will help the business as it grows into new areas and technologies.

(b) If AMG were to acquire Fiddler there is likely to be a significant cultural clash. AMG’s culture seems more suited to a variable and unpredictable market. Fiddlers staff are likely to fall behind the industry standards and their lack of flexibility could ultimately lead to the failure of the business in the current environment. It will therefore be important for AMG to change this culture post-acquisition if the venture is to be a success.

Lewin suggested that effective change is achieved in three steps:

1 Unfreeze existing behaviour

This involves breaking down the barriers to change and convincing staff of the undesirability of the current situation. Fiddler’s staff may have significant barriers to change. They have been doing the same job for an average of 8 years each, have a clear and rewarding career path and have a culture that will not readily accept change. They also may feel that any suggested post-acquisition change is an implied criticism of past techniques.



AMG therefore need to work at breaking down these barriers. As an acquisitive company they are likely to have experienced these problems before and will have acquired skills in breaking down the barriers to change. They should be able to show staff at Fiddler how employees in other acquired businesses have successfully made the change and have benefited from it.

It will also be important to highlight to Fiddlers staff the risks if no changes are made. Perhaps failed companies in the existing industry who have not adapted to the change in the environment could be used to highlight the threat.

Finally reassurances should be given over job security and pay. Fiddlers staff might be concerned about the fewer management levels and less structured career path at AMG. This could perhaps be addressed by exhibiting other motivators for staff such as greater participation and more rewarding work.

2 Make the change

When the barriers have been broken down and staff are willing to make the change the management then have to decide what to change and how to lead that change. For Fiddler it would appear that changes are needed in controls, policies, staff participation and organisational structure.

In leading the change there are a number of management styles that AMG could adapt and these often depend on a number of contextual elements such as staff readiness, staff capability, time and scope. As Fiddlers staff are likely to have built up high barriers to change, this change in culture needs to be made reasonably quickly. AMG may therefore have to adopt a more manipulative or coercive approach to making the change. A participative or negotiative style is unlikely to achieve the desired results – though it could be argued that, as AMG will want staff to be more involved in the future, these approaches to the change management may set the tone for the future culture of the business.

3 Refreeze the new behaviour/culture

The final step will be to reinforce the new behaviour and culture. New targets and controls will be needed and rewards and bonuses should be linked to the achievement of the new goals. The aim is that going forward the new culture will feel like the normal behaviour for the business that employees are familiar and comfortable with.

The cultural web

The cultural web maps out the areas that are used in creating, designing and maintaining an organisational culture. It consists of six inter-related areas: symbols, power, organisational structure, control systems, routines, and stores/myths.

The cultural web is likely to form a key part in changing the culture of Fiddler. It will highlight the areas in which change is needed: Fiddler will have to adapt to a new organisational structure, new controls will be needed, staff routines will have to change, and power will have to shift away from John Harte and towards the employees.



AMG can use the cultural web to help refreeze the new behaviour. They can change the structure of the business so that staff feel more involved, they can use stories of successful change and encourage others to follow them, they might change the symbols by, for example, creating awards for innovation for staff members.

These are just some examples of how the cultural web will permeate the entire change process and form a vital role in the successful integration of Fiddler’s staff into AMG’s business.

Marking scheme

Marks (a) Existing culture Identification of existing culture Up to 3 marks Discussion of problems 2 marks per point

Max 10 marks (b) Managing change Application of an appropriate model Up to 12 marks Explanation and use of the cultural web Up to 10 marks Max 15 marks TOTAL 25 MARKS

acca p3 revision mock - answers _d11

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