BPP University Business School: September 2015
BSc Business Programmes
Commercial Awareness
[BMT4017]
Coursework Assessment Brief
Winter Term 2015
Submission deadline: 4:00 PM on 18th December 2015
Submission mode: Turnitin online access
BPP University Business School: September 2015
1. General Assessment Guidance
? Your summative assessment for Commercial Awareness (BMT4017) is a Coursework submission.
? The deadline for submission is 04:00 PM on 18th December 2015
? You are required to submit your assessment via Turnitin online access. Only submissions made via the specified mode will be accepted and hard copies or any other digital form of submissions (like via email or pen drive etc.) will not be accepted.
? For coursework, the submission word limit is 1,500 words. You must comply with the word count guidelines. You may submit LESS than 1500 words but not more. Tables, diagrams, bibliography, appendices, annex and headings are NOT included within word count calculations. These will not be marked. You must specify total word count on the front page of your report.
? For coursework, please use font size 12 for body text and the typeface (font) should be Arial or Times New Roman with minimum 1.5 spacing.
? For headers and titles, please use font size 14. Your submission must have standard margins and page numbers.
? Please use English (UK) as your language in the submission.
? Do not put your name or contact details anywhere on your submission. You should only put your student identification number (SRN) which will ensure your submission is recognised in the marking process.
? A total of 100 marks are available for this module assessment and you are required to achieve minimum 40% to pass this module.
? You are required to use only Harvard Referencing System in your submission. Any content which is already published by other author(s) and is not referenced will be considered as a case of plagiarism.
You can find further information on Harvard Referencing in the online library on the VLE. You can use the following link to access this information:
http://my.bpp.com/vle/mod/data/view.php?d=223&rid=596
? BPP University has a strict policy regarding plagiarism and in proven instances of plagiarism or collusion, severe punishment will be imposed on offenders. You are advised to read the rules and regulations regarding plagiarism and collusion in the GAR and MOPP which are available on VLE in the Academic registry section.
BPP University Business School: September 2015
? You should include a completed copy of the Assignment Cover sheet. Any submission without this completed Assignment Cover sheet will be considered invalid and not marked.
2.1 Case Study
Background
Henwell PLC (From now on described as ‘Henwell’) was established in the UK in 1953 selling food and groceries. It is now a global retail company, with operations in Europe, Asia and the United States (US), and selling a wide range of household products and clothing in addition to its original food and grocery range. Sales are made through its chain of retail stores and by on-line delivery.
Following shareholder dissatisfaction with the company’s levels of profitability, and amid rumours of conflict in the Boardroom, Henwell has recently appointed a new Chief Executive Officer (CEO), Olivia Chambers, replacing Michael Moorcroft, who had been with the company for thirty years.
Michael has risen through the levels within Henwell (he started his career with the company in 1985 as a retail assistant in one of Henwell’s stores in Birmingham). This background has meant that Michael was very confident that he knew what was best for the company, and he took decisions quickly, without much consultation with the Board or other stakeholders. While this was acceptable when the company’s profitability was good, shareholders were less forgiving once the company’s position as market leader came under threat in the UK, and his personal and very public association with the struggling US joint venture meant that he lost the confidence of the major shareholders.
Olivia, his replacement, had previously been the CEO of Colour UK, a national chain of clothing retailers, specialising in clothes for young women. During her 10 years in that position, the company undertook a major and highly successful expansion. She has a reputation for getting the best out of her staff through listening to their concerns and consulting before making decisions, although there is never any doubt that she is in charge.
In the first week of her appointment, Olivia held discussions with all the members of Henwell’s Board (notes from which are set out in Exhibit 3). She also received a report from Robert Marshall, the Director in charge of the American operation, on how the US part of the business is doing (See Exhibit 4).
Your role
On taking up her new position, and not having a financial background, Olivia is keen to understand the financial position of the company. She would also like an external and independent review of the problems facing the US joint venture, the ethical issues facing the company, and a consideration of how she should best approach the role she has undertaken.
Olivia has asked the management consultancy firm Webber and Co, for which you are a consultant, to produce two reports for her, which are detailed in the individual requirements for the ‘Understanding Financial Statements’ and ‘Commercial Awareness’ modules.
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A number of exhibits are provided to give you further information below.
Exhibit 1: Extracts from Henwell’s Financial Statements for 2014/15.
Exhibit 2: Key ratio analysis for Henwell’s financial statements.
Exhibit 3: Notes from Olivia’s discussions with the Board of Directors
Exhibit 4: Report from Robert Marshall, Director of the US operation, on the Joint Venture.
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Exhibit 1: Extracts from Henwell’s Financial Statements for 2014/15
Henwell PLC Statement of Comprehensive Income for the year ended 30/06/15£’m – figures in millions2014/152013/14£’m£’mRevenue57,64363,916Cost of Sales(53,554)(58,519)Gross Profit4,0895,397Other operating income120302Administration expenses(1,562)(1,382)Operating Profit2,6474,317Finance costs(687)(279)Profit before Tax1,9604,038Income Tax expense(574)(874)Profit for the year1,3863,164
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Henwell PLC Statement of Financial Position as at 30/06/15£’m – figures in millions2014/152013/14£’m£’mASSETSNon-current AssetsProperty, Plant and Equipment41,36232,047Current AssetsInventories2,8963,598Trade and other receivables197237Cash and cash equivalents2,1632,3055,2566,140Total Assets46,61838,187EQUITY AND LIABILITIESEquityShare Capital6,5005,500Retained Earnings8,9589,037Total Equity15,45814,537Non-current LiabilitiesBorrowings17,72810,599Provisions42058618,14811,185Current LiabilitiesTrade payables13,01212,465Total Liabilities31,16023,650Total Equity and Liabilities46,61838,187
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Henwell PLC Statement of Cashflows for the year ended 30/06/15£’m – figures in millions£’m£’m£’m£’mCashflows from operating activitiesProfit before Interest and Taxation2,6474,317Adjustments for:Movements in provisions(166)0Depreciation3,4711,5365,9525,853Decrease in inventories70292Decrease in trade and other receivables4020Increase in trade payables547430Cash generated from operations7,2416,395Interest paid(687)(279)Income tax paid(574)(874)Dividend paid(1,465)(1,456)Net cashflow from operating activities4,5153,786Cashflows from investing activitiesPurchase of Property, Plant and Equipment(12,786)(855)Net cashflow from investing activities(12,786)(855)Cashflows from financing activitiesProceeds from issue of share capital1,0000Proceeds from long-term borrowings7,1290Repayment of long-term borrowings0(1,058)Net cashflow from financing activities8,129(1,058)Net increase/(decrease) in cash and cash equivalents(142)1,873Cash and cash equivalents at the start of year2,305432Cash and cash equivalents at the end of year2,1632,3052014/152013/14
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Henwell PLC Supporting Notes to the Financial Statements for the year ending 30/6/15Note 1 – Extract of supporting notes for the Statement of Comprehensive IncomeSegment Analysis2014/152013/142014/152013/142014/152013/142014/152013/14£’m£’m£’m£’m£’m£’m£’m£’mRevenue39,53247,6322,9461,39215,16514,89257,64363,916Cost of Sales(37,123)(43,826)(2,842)(1,348)(13,589)(13,345)(53,554)(58,519)Gross Profit2,4093,806104441,5761,5474,0895,397* Henwell’s proportion of the Joint Venture trading.Breakdown of Cost of Sales2014/152013/14£’m£’mOpening Inventory3,5985,689Wholesale purchases30,43735,633Retail employee wages10,76311,012Retail stores – Depreciation3,4711,536Retail stores – movement of goods3,6423,712Retail stores general running costs4,5394,535Closing Inventory(2,896)(3,598)53,55458,519Note 2 – Extract of supporting notes for the Statement of Financial PositionStatement of changes in Equity (Extract)Retained earnings column only2014/152013/14£’m£’mOpening balance9,0377,329Profit for the year1,3863,164Dividend Paid(1,465)(1,456)Closing balance8,9589,037UKUS*Rest of the WorldTotalRetained Earnings
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Exhibit 2: Key ratio analysis for Henwell’s financial statements.
ProfitabilityROCEOperating ProfitEquity + Debt*2647x 100 =7.98%4317x 100 =17.17%15458+1772814537+10599Gross MarginGross Profit4089x 100 =7.09%5397x 100 =8.44%Revenue5764363916Net (Operating) Margin Operating Profit2647x 100 =4.59%4317x 100 =6.75%Revenue5764363916LiquidityCurrent RatioCurrent Assets5256=0.406140=0.49Current Liabilities1301212465Quick RatioCA – Inventories5256-2896=0.186140-3598=0.20Current Liabilities1301212465EfficiencyInventory DaysInventories2896x 365 =19.743598x 365 =22.44Cost of Sales5355458519Payable DaysTrade payables13012x 365 =156.0412465x 365 =127.68Wholesale purchases3043735633Operating Cash CycleInventory Days – Payable Days-136.30-105.24SolvencyGearingDebt*17728x 100 =53.42%10599x 100 =42.17%Debt* + Equity17728+1545810599+14537Interest coverOperating Profit2647=3.854317=15.47Finance costs687279* Debt represents borrowings within non-current liabilities2014/152013/14
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Exhibit 3: Notes from Olivia’s discussions with the Board of Directors
The notes below cover discussions of the period 2014/15 with two of the Board directors.
Sales Director – Elena Lorquist
Clearly the reduction in overall revenue this year has been disappointing. German Discount retailers (like Aldi and Lidl) have recently come to the UK and have been successful in taking away some of our customers and we are losing market share in the UK. We have been trying to respond to this by reducing the prices of various products that we will sell, we are confident this will prevent a further reduction in our market share in the future.
We have tried to make up for this by expanding our markets outside the UK. The large investments we made into our US joint venture have seen our sales grow, but at a disappointing rate compared to our investment, and the growth in sales in the rest of the world has been modest.
The US venture was Michael’s *Moorcroft – former CEO] favourite project, and the lack of significant progress there has caused some conflict with the Board, with some directors keen to continue to invest in the US with the expectation that things will improve, while others want to limit any further damage to the company’s profitability, dispose of our operations within the US and concentrate on our core business in the UK.
It’s fair to say that the major shareholders are unhappy with the current financial position and would like some reassurance that financial results will be rapidly improving now Michael’s gone.
Finance Director – Saqib Chawdry
The revenue reduction which occurred during 2014/15 has meant we needed to focus on actions which could be taken to reduce our costs.
Clearly less customer sales meant we were buying fewer products from our wholesale suppliers, but we also benefited from the general price of commodities (which are the raw materials of the products our suppliers sell to us) falling during 2014/15.
In the short-term (the last 12 months), it has been difficult to reduce other cost areas. In terms of employee wages we have been able to reduce overtime and where feasible not replace people when they leave the company but this has had a small impact.
Likewise most of the running costs of stores (which include items like business rates, light and heat, cleaning materials) will occur whether sales rise or fall. Only by closing stores will we begin to save these costs and we are not at that stage presently.
When considering the costs in moving goods between our warehouses and the retail stores, a review of our logistical arrangements (particularly in the UK) might help us make significant cost savings in the medium term (2018 onwards), but we have a lot of costs in terms of warehouses, trucks and delivery drivers which we cannot reduce at this time.
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The impact of not being able to reduce costs means that the average cost of selling each product has increased, which along with the price reductions noted by Elena above mean that we are making less profit from each product we sell.
It has been disappointing that we have not been able to reduce our administration costs during this period, we have had a number of issues arising in 2014/15 set out below which have impacted on this area of cost including:
? A rent review with the landlord of our Headquarters early in 2014/15 which saw our annual rent rise on the property from £60 million to £80 million (a 33% increase);
? A need to put in place an administration team during 2014/15 in support of the Joint Venture in the US (this included marketing, finance and human resources teams); and
? A redundancy and severance package paid to the previous CEO, Michael Moorcroft which, in total, cost nearly £20 million.
We have an ongoing legal case with a group of customers who had previously purchased ‘vegetarian’ packaged meals which due to a quality control issue with one of our suppliers was found to contain meat. Our legal team has estimated that where legal costs and potential damages were expected to be around £600 million at the end of 2013/14, because of the additional quality checks we have now put in place (which included a change in supplier) the damages we could pay out if the legal action is successful (which the legal team think is likely) will be lower and the expected total cost has now reduced to around £420 million.
As Elena mentioned above, we put a significant capital investment into the US through our joint venture to open nearly 500 stores across the US at the start of 2014/15 but the increase in sales have been disappointing and we’re probably in a position where we might want to consider the future of the joint venture.
With this significant investment in the US, it was important that we managed our cash position carefully during 2014/15 and I believe we were successful in doing that. We were able to finance a significant proportion of the investment via raising equity and debt.
I was pleased we were able to improve the cash generated from our trading, early in 2014/15 the board asked our purchase director to renegotiate terms with our main wholesale suppliers. The outcome of these discussions has been that our suppliers have given us an additional month (in addition to the previous terms agreed) before we are required to pay them.
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Exhibit 4: Report by Robert Marshall, Director in charge of the ‘Delicious & Tasty’ Joint Venture (JV) in the US
Henwell entered into the JV in the US two years ago, partnering with a local retailing chain ‘Delicious & Tasty’. The investment we have made is beginning to show some promising results, although the overall picture is not as good as we had hoped.
Strategy
The intention was to open a number of small convenience stores in the Western US states of California, Nevada and Arizona, offering mainly fresh and healthy produce at reasonable prices, encouraging healthy eating. We entered into a JV with one of the smaller retailers in the region, in the hope that their local knowledge and contacts would help us quickly to establish the brand and develop our market share.
We invested very heavily in real estate (property) early in 2014/15, building an enormous 850,000 square foot warehouse and distribution centre, and opening nearly 500 retail stores. These were designed to appeal to customers who would shop frequently for fresh produce, or visit the store as they walked by on their way to and from work. We introduced a number of self-service tills to increase efficiency and keep our staff costs down (although this obviously increased the initial costs of each store). We decided to limit the number of products in our stores (partly due to the constraints of space within the retail stores), and this meant concentrating more on the fresh produce rather than branded packaged goods.
We also decided that, because our prices were reasonable, we would not offer discounts on any goods, and we restricted our local marketing to the opening period for each store, in the belief that once customers had become used to shopping in our stores, they were likely to remain loyal, as in the UK. This pricing strategy (not applying discounts which regularly occurs in the UK) has been utilised successfully in our previous expansions into Europe and Asia.
Results
Although we have more than doubled our US revenue over the last couple of years, the results have not been as good as we had hoped, particularly in terms of the return on our investment. Where though profitability improved by £60 million in 2014/15, it was a low increase compared to the $16 billion investment (Equivalent of £11 billion in Pounds Sterling) we made early in 2014/15 as noted in the strategy above.
Since the financial crisis of 2008 and subsequent global recession, we have found that American customers prefer to buy discounted goods where possible, and will therefore shop where there are discounts rather than remaining loyal to one local store.
We also underestimated the fact that most Americans appear to prefer driving to a large hypermarket once a week and doing a very large shop for their food, rather than undertaking several smaller shopping trips during the week. In a country where most people drive to and from work, it has also been harder than we anticipated to attract passing trade. (People who visit the store because they happen to be walking past it)
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The profitability of the US operation is not just influenced by revenue but also costs. Unfortunately, the costs in the US part of Henwell are relatively higher than the UK operations which is due to the following reasons:
? Though general commodity prices have fallen (as noted in Exhibit 3) the lack of long-standing trading relationships with US suppliers mean we are paying significantly more for US purchases.
? Due to the longer distances to travel between warehouses and retail stores (the US is a much larger country than the UK) the movement of goods costs is significantly higher in the US than the UK.
Joint Venture
We have been disappointed by our JV partner so far. The aim of working with a local company was to reduce our risk by utilising their brand profile and local knowledge. However, their brand recognition was not as high as we had expected, so it did not have a large core market of customers on whom we could build our customer base.
Their distribution system was also very basic, and therefore we had to introduce our own systems that had been tried and tested in the UK, we therefore needed to invest in a much larger warehouse than we had initially planned, most of which was funded by Henwell directly. (The $12 billion of finance that Henwell raised via debt and equity (Equivalent of £8 billion in Pounds Sterling) was based on the initial plans before needing to invest in this distribution system)
Ethical problems
We relied on the local knowledge of our JV partner to ensure that we complied fully with US regulations around retailing, but as you will be aware the US authorities have recently launched an investigation into whether unethical practices such as bribery of state officials may have been undertaken by our JV partner in order to secure sites quickly for the new retail stores.
At present this investigation is in the early stages, but the eventual report could lead to potential fines and bad publicity for Henwell, particularly in the US, but which may also have an impact in the UK.
Competition
We have seen a high level of local competition from American retailers, particularly as many of them have an advanced online operation which we cannot match as yet. We have also faced competition from a large Japanese chain, which is offering a far wider range of goods in their retail stores than we are, and whose importing costs are lower than ours due to the relative strength of Pound Sterling compared with the Japanese Yen.
Conclusion
Despite these issues, I remain optimistic that ‘Delicious & Tasty’ will be able to overcome these initial teething issues and grow into a major contributor to the Henwell business.
BPP University Business School: September 2015
2.2 Questions
You are a consultant for Webber & Co, and you have been asked to produce a report for Olivia Chambers, the new CEO of Henwell, which sets out your findings based on the questions below.
Question 1 – Prepare an analysis of the business environment of Henwell’s US joint venture (Total of 35 marks for this section)
a) PESTEL Analysis (18 marks)
Using mainly the report from Robert Marshall, the Director in charge of ‘Delicious and Tasty’ (Exhibit 4), prepare TWO sections of a PESTEL analysis of the company’s external environment, using your points to explain why the company has not been doing as well as expected.
ONE of these sections should be the Social Environment, and you should particularly consider the cultural differences between American and UK consumers that have resulted in the lower than expected sales.
The other section should be an analysis of ONE other of the PESTEL environments of your choice from:
? Political
? Economic
? Technological
? Environmental
? Legal
You may refer to any additional research that you have undertaken in respect of the American retail market in this section, but remember that this information must help you explain the difficulties faced by the company, rather than just being included to show that you have done additional work.
b) Internal weaknesses (15 marks)
Discuss THREE mistakes made by the company in its US operation that may have led to the disappointing results. In this section you should choose THREE from the following factors:
? The decision to structure the company as a joint venture
? The decision to use a ‘multi-domestic strategy’ (in which the foreign operation is allowed to be very independent from the parent company)
? Deciding to focus on small stores rather than following the business model that had been successful in the UK of making hypermarkets the main focus of the operation
? The failure to offer any discounts or advertise heavily once a store was open.
? The larger than intended investment in the distribution warehouse.
c) Recommendation (2 marks)
You should reach a conclusion (based on your analysis in parts a and b) about whether the company should continue or whether it would be better for the company to withdraw from the US.
Question 2 Ethical issues and corporate social responsibility (Total of 25 marks for this section)
Choose THREE of the following ethical issues that are detailed in the case study:
BPP University Business School: September 2015
? The bribery allegation in the American company.
? The attempt by the company to promote healthy eating at a reasonable price.
? The potential closure of the American company.
? The company’s treatment of its suppliers
? The redundancy payment to the former CEO.
? The failure to ensure that ‘vegetarian’ meals were in fact meat-free.
For EACH issue you choose, discuss:
a) Whether the company has behaved well or badly (3 marks)
b) How important the issue is for the company (6 marks)
c) Discuss what impact it might have on how the company is viewed by the stakeholders affected. These might be employees, customers, suppliers, shareholders, the US or UK governments or the wider community. Not all stakeholders will be affected by all issues. (15 marks)
d) Finally make ONE recommendation as to how the company could demonstrate its corporate social responsibility (1 mark)
Question 3 a) Briefly explain what is meant by the three different management roles (6 marks):
? Leadership
? Decision-making
? Planning and organisation
3 b) Choose TWO of the following challenges facing Olivia and discuss which role or roles she will be required to employ in order to address the issue: (10 marks)
? What to do about the US operation
? The low morale in the company
? The unhappiness of the major shareholders
? The conflict among the Board of Directors
? The loss of the company’s market share due to a more competitive environment in the UK
Please note that you are not required to discuss what Olivia should do about each of these issues.
3 c) Identify the leadership styles of Olivia and Michael Moorcroft (the previous CEO) (2 marks)
3 d) Briefly discuss whether you think Olivia is likely to be more successful than Michael as a result of her leadership style. (2 marks)
Question 4 Recommend THREE measures Henwell could take to win back its customers in the UK (15 marks)
In this section of the report you should recommend THREE practical ways in which Henwell could try and regain the customers that have been lost to its competitors in the UK.
BPP University Business School: September 2015
These recommendations should be appropriate to the type of business that Henwell is (very large supermarket.)
Question 5 – Professional report format (Total of 5 marks for this section)
Marks are allocated for setting out your answer in the format of a professional business report, and for a good executive summary.
TOTAL: 100 MARKS
2.3 Assessment Submission Structure
Though the case study is identical for both Understanding Financial Statements and Commercial Awareness, it is important that you produce TWO SEPARATE REPORTS and submit each one to the relevant module. DO NOT COMBINE your reports into a single submission.
Each report has a 1500 word limit, so though this is 3000 words in total across the two modules you need to keep within the 1500 word parameter for EACH report (for example, you can’t do 2000 words on your CA report and 1000 on the UFS report as you will then be breaching the word count on CA).
As noted in section 2.2, you are required to put your answer in the format of a professional business report. (For which 5 marks are available) In terms of what we would expect to see in that format, it should include:
? A completed coversheet – as noted in section 1 but this would not be part of your report
? A heading page which sets out who it is to, from (but don’t put your real name, just use your SRN), a date and a title.
? An executive summary – which BRIEFLY sets out the main findings of your report
? Headings with subsections – the question structure in section 2.2 can act as a guide. Within these subsections we would expect to see:
o Paragraphs, not large blocks of writing
o References (if required) but not expecting a lot with this submission (most of your data will come from the case study which you do NOT need to reference.)
2.4 Assessment Marking Scheme
The assignment is marked out of 100. The following table shows the mark allocation and the approach required. Assignment Part Mark Approach
Q1 – Business analysis
35
The PESTEL analysis is covered in week 2 of the course.
Your answer should look at just TWO areas of the PESTEL, one of which should be the SOCIAL environment. There are a lot of marks here, so
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try and think of a number of points to make under this section. You do not need to have an equal number of points under each heading.
In part b) you need to discuss your chosen three issues and explain how they have contributed to the disappointing results of the company.
In part c) it is important to make a recommendation as to whether the company should continue or whether it should be closed down.
Q2 – Ethics and corporate social responsibility
25
Ethics and corporate social responsibility are covered in week 6 of the course.
There are three questions to answer about each of the three ethical issues you choose, so make sure you answer systematically.
Q3 – Management roles and leadership styles
20
Management roles (leadership; decision-making; planning and organisation) and leadership styles are covered in week 7 of the course.
It is very important that you explain what each management role entails, and then consider which role would best suit each of the two issues you choose. Note that some issues are complex and Olivia would need to demonstrate two or three roles in order to address them. Please note that you are not required to discuss what Olivia should do about each issue!
Don’t forget to contrast the leadership styles of Olivia and Michael, and state whether Olivia is more likely to be successful.
Q4 – Winning back customers
15
The importance of marketing, and communicating with customers are covered in weeks 8 and 9 of the course.
This part of the question requires you to be creative and to come up with three practical suggestions for winning back customers.
A good starting point might be to consider why these customers were lost in the first place.
Q5 Professional report
5
See section 2.3 above for approach
Total
100