Question
Speedy Delivery (SD)
Speedy Delivery (SD) is a private limited company that delivers freshly cooked meals by bicycle. SD only delivers. Restaurants subcontract SD to deliver meals to customers who place orders online and expect quick and efficient delivery. SD has been operating profitably for two years. Currently, it has the highest market share in the city.
SD is now facing two issues:
• It operates at 98 % capacity utilization. Recently, some restaurant owners complained to SD that meals arrived late and cold to customers.
• The market for home delivered, freshly cooked meals is growing quickly and some new delivery companies have just entered the market.
The CEO wants to address the delivery quality issues and the threat of competitors, two of whom recently merged. He is considering an internal growth strategy involving investing in new electric scooters and employing more staff to deliver a greater number of meals more efficiently. SD must raise a large sum of finance. Major shareholders are in disagreement regarding the internal growth strategy.
The financial manager has provided some financial information.
Table 1: Current information
a. Define the term market share. [2]
b. Explain one advantage and one disadvantage for $S D$ of working at almost full capacity utilization.[4]
c. Explain one advantage and one disadvantage for $S D$ of using an internal growth strategy.[4]
d. Discuss two appropriate sources of finance for $S D$ to purchase the scooters. [10]
▶️Answer/Explanation
Ans:
a. Market share can be defined as a percentage of an organization’s total sales revenue in relation to the total market sales revenue within a specific industry.
Accept any other relevant definition.
N.B. no application required. Do not credit examples.
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full definition that conveys knowledge and understanding similar to the answer above. A candidate must demonstrate an understanding that the market share is measured as a percentage for [2].
Accept the formula as an indication of percentage.
b.
Referring to the 98% capacity utilization as mentioned in the stimulus should not be treated as application.
Some of the advantages of working at almost full capacity utilization:
• Almost full capacity utilization indicates that there is sufficient demand for SD. All resources are nearly fully utilized, in this case the delivery people, so it is likely that their financial rewards are higher, especially if paid by meals delivered. Even if a fixed salary is paid, high demand at near full capacity utilization may provide opportunities for working overtime.
• Constant work could also increase the motivation of the delivery people due to job security.
• If a fixed salary is paid, SD does not pay its workers for idle time. Better financial management is evident as can be seen by the high 20% GPM.
• Due to satisfying the assumed high demand the profit is likely to increase. See figures presented.
Disadvantages:
• SD flexibility might be reduced if a new organization approaches it to act as a subcontractor. SD will lose out on potential new clients in the currently growing market and growing competition for home delivered, freshly cooked meals.
• The cyclists/delivery people may be overworked and unmotivated. Accidents are more likely to occur when the cyclists are rushed to deliver.
• Quality compromised and SD might lose some contracts, especially as more competitors are entering the markets. There is evidence in the stimulus of some late deliveries, which reduced the quality of the meals delivered.
• The bicycles are more likely to break down, leading to increased costs and further delay of the arrival of the meals to customers. SD will lose many contracts, especially as a stronger competitor is entering the market. SD‘s highest market share/ power will be eroded.
Accept any other relevant and applicable advantage/disadvantage.
Mark as 2 + 2.
Award [1] for identifying or describing the advantage/disadvantage for working at full capacity and a further [1] for a development with respect/ application to SD. Award a maximum of [2].
[2] cannot be awarded per advantage/disadvantage if the response lacks either explanation and/or application.
For example:
• for an identification or a description of an advantage/disadvantage with or without application [1]
• for explanation of an advantage/disadvantage with no application [1]
• for explanation of an advantage/disadvantage and application [2].
c.
Internal growth strategy is proposed. It is expected that candidates describe the nature/meaning of this type of growth where the company grows from within using their own resources and capabilities to expand and grow in size/market share by investing in scooters and employing more staff to deliver the meals.
Advantages:
• The management of SD will have full control of the process of growth in terms of speed, priorities and the amount of capital spent. As the stimulus outlines a large amount of finance is needed and the management could decide on the number of scooters etc. There will be no need for consultation and discussion with another organization be it through merger/takeover, joint venture or strategic alliance. Therefore, SD can react quickly to the current problem of late deliveries.
• It appears that SD is a successful company given the profit margins and perhaps operating within a successful organizational culture. SD will not lose its independence and/or culture. Nor will it experience any cultural clashes with the management and employees of a different organisation. Less change management is required/ less disruption to SD.
• Internal growth is likely to be cheaper than the external growth option of takeover. However, the stimulus outlines that a lot of capital has to be raised, so this option is theoretical rather than applicable. Nevertheless, the 6% return on the investment in scooters is relatively high and the investment is profitable.
• The proposed internal growth strategy will make the working life of the staff easier and more efficient. Motivation is likely to increase.
Disadvantages:
• This method of growth is considerably slower compared to external growth. SD might not be able to compete with the newly merged competitors who are likely to be stronger. SD is likely to struggle against the new competitor and lose its current market leader position. SD will not be able to take immediate advantage of the growing market as the CEO plans.
• Some shareholders are against this option perhaps due to a large sum of finance being required. Shareholders tends to expect short term, quick results/dividends and are likely to block the proposal. The proposed option is against the current trend of consolidation. SD might not be able to compete with the newly created powerful competitor.
Please note that while some text books may say that internal growth is cheaper, there is an indication in the stimulus that this particular option may pose a financial challenge to SD. Options such as a strategic alliance or franchising could be cheaper.
Accept any other relevant/applicable advantage / disadvantage.
Mark as 2 + 2.
Award [1] for identifying or describing the advantage / disadvantage of internal growth and a further [1] for a development with respect to SD. Award a maximum of [2].
[2] cannot be awarded per advantage / disadvantage if the response lacks either explanation and/or application.
For example:
• for an identification or a description of an advantage / disadvantage with or without application [1]
• for explanation of an advantage / disadvantage with no application [1]
• for explanation of an advantage / disadvantage and application [2].
d.
Some of the possible sources of finance:
Issuing more shares – as a private limited company, SD can definitely issue more shares. Currently, SD is highly geared = 65 % so the option of shares might be an appropriate one, especially if the banks will not offer finance. Issuing shares will not require any payback of the loans and will not subject SD to vulnerability of interest rate fluctuations. GPM (20%)/NPM (9 %)are healthy in this industry, so dividends are likely to be paid. The payback is relatively short and the ARR is quite high / reasonable. If the current shareholders buy extra shares, ownership will not be diluted; if other friends and family buy the shares, the current shareholders’ control might be diluted and they may raise objections. However, the current shareholders still control who buys the shares. Control will be not lost.
Going public (IPO) – an expensive and very time consuming source of finance that may not be judged as suitable for SD as a quick reaction to the competitors is needed. However, SD can raise a significant amount of finance needed to purchase the scooters which is much needed as stated in the stimulus. Ownership may be diluted with a risk of losing control.
However, a very low current ratio of 0.9 indicates liquidity problems which might deter investors.
Long term bank loans – If agreed, the money can be given quickly / quicker than issuing shares, this is a very significant advantage for SD given the urgent need for action. However, the banks will be worried about SD being highly geared with its current obligation to pay interest as well as to pay back the loan. Moreover, given the low current ratio, it is likely that the bank’s financial manager will refuse the loan due to liquidity problems. Also, SD does not manage its short term liquidly- see debtors and creditors hence the bank may be worried of insolvency.
Leasing the scooters – could provide a good solution for SD. The scooters can be leased quickly and maintained by the leased company. This fits the managers’ objectives of a quick response. SD will pay a relatively small amount every month, which mitigates the problem of raising a large sum pf money. However, while, if bought, the scooters will become SD fixed assets after 3.2 years (payback), if leased, they will never be SD’s. Still, one may judge this issue as less significant as the need for a quick reaction is vital
Venture capitalists/business angel – As SD is highly geared, coupled with the likelihood that the banks refuse a loan, the use of the above might seem highly suitable especially if there is potential to make a quick /significant profit as seen given the GPM 20% and NPM 9 %. However, venture capitalists/business angels might be reluctant to join SD due to the merger between competitors and some discord with shareholders re: the methods of growth.
However, a very low current ratio of 0.9 indicates liquidity problems which might deter investors.
Accept different arguments for the above option if fully justified.
Using retained profit – SD is profitable. GPM is 20 % and NPM is 4%. While we do not know the industry norm, one may judge this option as highly suitable as SD will not be subject to fluctuating interest rates and repayments. It is also likely that being Ltd, the shareholders will agree to have less dividends to pursue the strategic option of internal finance.
However, some shareholders might object to this option. Despite the percentage given of the profit margin, it might not be sufficient to generate the large sum of finance required and SD might have to opt for external source of finance.
Sell fixed assets – The main assets are bicycles. Selling these assets can generate some finance. However, it might be judged as a limited source /method to raise finance, as the bikes will not generate the cash needed, if any.
Another possibility is to sell some fixed assets like the office.
Accept different arguments for the above option if fully justified.
Please note:
• Long-term or medium-term sources of finance only should be considered.
• Do not accept some short-term sources of finance such as an overdraft, short term loan or creditors.
• Accept debtors or debt factoring if the candidate comments on their unsuitability given the liquidity problem.
• Accept ‘loan’
• If the candidate wrote ‘short term loan’ instead of just ‘loan’ but the arguments for /against are relevant /applicable give some credit.
• It is expected that the candidates suggest the suitability or otherwise of two different sources of finance. Within the above categories, candidates can suggest any source of finance, including some, which might not be highly appropriate, as long as they evaluate the appropriateness of their chosen sources. Candidates are expected to use the financial information provided as part of their evaluation. Not using any quantitative information reduces the quality of application and makes the response rather generic, therefore award up to 5 marks.
• Candidates should not divert into a solution to some cash-flow problem given the debtor and creditors ratios
• It is not expected that the candidate incorporate all of the above arguments.
• Accept any other relevant issue.
• Accept any other relevant discussion.
• A conclusion with judgment is expected.
A balanced response is one that covers at least one issue/argument for and at least one argument against each option.
Marks should be allocated according to the paper 2 markbands for May 2016 forwards with further guidance below.
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].
Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.
Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.
Question
Taxi-M (TM)
Taxi-M (TM) operates 2500 taxis in a developing country. All drivers are full-time employees and have a professional taxi license. Although not compulsory, TM regularly conducts safety inspections of the taxis. Though safe, most of TM’s taxis are old and TM charges high prices. Many customers complain.
However, a multinational company, RE, with offices around the world, has started to offer a mobile application (app) called Best-Taxi (BT). Using their mobile phones, passengers can use BT to book and pay for a car journey. Any car owner can offer journeys through BT. For security reasons, the BT app registers passengers’ and drivers’ personal details.
TM’s sales are falling and profits are down. A number of TM’s drivers are becoming demotivated. Facing lower incomes, poor management and rumours of redundancies, many loyal drivers have left to offer taxi services using their own cars and the BT app. Some of these drivers are earning considerably higher wages than before.
The situation for TM appeared critical. However, local media have reported a higher rate of road accidents by BT drivers than licensed taxi drivers. Several of its drivers have assaulted and robbed customers. In response, TM’s management decided to downsize and differentiate itself from BT by positioning its service as a high-price, high-quality traditional taxi service. TM will:
• sell older cars and lease new luxury cars
• develop a unique selling point/proposition (USP) emphasizing comfort and safety.
Customers can book taxis by telephone and by stopping them in the street. TM’s target market will be business people, higher income families and passengers concerned about safety.
a.Define the term redundancy.[2]
b.Explain one positive and one negative impact of the multinational company, RE, on the developing country.[4]
c.With reference to Maslow’s motivation theory, explain two reasons that some TM drivers left to drive for BT.[4]
d. Discuss the new strategy to differentiate TM from BT.[10]
▶️Answer/Explanation
Ans:
a. When the business can no longer afford to employ a worker or the job does no longer exist or is considered necessary hence a person is unemployed. The business is eliminating the role.
N.B. no application required. Do not credit examples.
Candidates are not expected to word their definition exactly as above.
Award [1] for a basic definition that conveys partial knowledge and understanding.
Award [2] for a full definition that conveys knowledge and understanding similar to the answer above. Redundancy occurs through no fault of the employee.
b.Positive impacts on the developing country:
• TM has new competition; consumers will have access to different taxi services, hence more choice at lower prices for the consumers.
• Tax revenue to the government of the developing country from profits made by RE taxi drivers.
• Working opportunities for drivers in the developing country will grow as any person with a car can download the BT app and begin his/her employment. Income will increase, standards of living will improve. Also, for drivers at TM there will be job creation and job security.
• In the future RE, with a possible increase in demand for the BT app may increase capital spending/infrastructure to manage operations. The developing country will benefit from an increase in economic activity.
• Technological transfer – the introduction of the BT app can be used in other industries to improve efficiency.
Negative impacts on the developing country:
• BT’s competition is threatening TM’s market position and even forcing it out of business.
• RE as a multinational company, is probably a powerful company, which makes TM’s survival even more difficult. TM as a local business cannot compete and has started to experience a fall in sales and profit. TM might end up closing and this would lead to increased unemployment in the country which may result in the government intervening to ensure that the political fallout from such a move is minimized.
• RE takes advantage of a lack of compulsory regulation and BT drivers have a higher rate of road accidents as well as safety issues- assaults and robbery.
• Profits from RE could be repatriated to their home country. The financial benefits may be limited- this argument is not really applicable.
• Award [1] for theoretical possibility.
• Accept any other relevant positive/negative impact.
Mark as 2 + 2.
Award [1] for identifying or describing one positive/negative impact for TM and a further [1] for a development with respect to TM. Award a maximum of [2].
[2] cannot be awarded per advantage/disadvantage if the response lacks either explanation and/or application.
For example:
• for an identification or a description of a positive / negative impact with or without application [1]
• for explanation of a positive / negative impact with no application [1]
• for explanation of a positive / negative impact and application [2].
c.
• Maslow’s physical needs refer to the basic physiological requirements of food, water and shelter. As TM drivers’ incomes are falling they may not be able to earn enough money to meet essential needs. Therefore, even the lowest level of needs is not fulfilled hence the drivers are demotivated. They will leave TM for BT as it seems that many drivers are making considerably more money.
• Maslow’s safety needs refer to the needs of security and protection. TM drivers may want to meet safety needs such as job security. TM is experiencing financial problems and there are rumors of redundancies. Uncertainty at TM could force many drivers to quit TM to a more stable position.
• Poor management may lead to a lack of love and belonging on the part of the workers. There is evidence implied by the stimulus of a lack of teamwork and cooperation, as TM’s drivers are effectively self-employed. Therefore, it could argued that TM’s drivers cannot reach the third level- Love and belonging.
• If the candidate does not use Maslow’s exact classification of any need Award [0]
• The inability to fulfil the higher level of needs are not relevant/ applicable in this case.
• Only credit relevant needs based on the stimulus
• Given that only 2 marks are available per need, a full explanation of the Maslow theory/ model is not expected.
Mark as 2 + 2.
For each need:
• for an identification or a description of one relevant Maslow need with or without application [1]
• for explanation of one relevant Maslow need with no application [1] for explanation of one relevant of Maslow needs with and application [2]. Award a maximum of [4] in total.
• TM’s new strategy is to downsize and reposition the company as a high price and high quality traditional taxi service. Customers that are willing and able to pay for a more exclusive service will probably find the service attractive. This will put TM in a different target segment and will enable differentiation form BT.
• Current security and safety problems due to customers being assaulted by BT drivers and the higher rate of road accidents could help TM to develop a unique selling point emphasizing the fact that all TM drivers have professional licenses and cars have regular safety inspections.
• Leasing new luxury cars seems to be a good financial and operational alternative for TM as they won’t need to cash purchase the new vehicles. New luxury cars emphasize TM’s USP regarding comfort and differentiation from BT. Moreover, the taxi can be upgraded and regularly serviced for extra comfort to the newly targeted segment. Furthermore, customers are unlikely to be concerned whether the taxis are leased or not. This issue can be judged as of minimal / no importance. Leasing is cheaper in the short term and might enable TM to stay competitive in terms of quality/ price ratio.
• Technology can be a barrier for many people such as using mobile apps or even smart phones. Many customers, especially the elderly groups will find it simpler to telephone for a taxi instead of using a mobile app.
On the other hand:
• Using a mobile app to book and pay for a taxi service can be difficult for some groups of consumers, the increasing usage of technology and mobile apps shows that BT is very practical for most groups of potential consumers.
• BT as a multinational company is a strong competitor for TM, probably benefitting from managerial and marketing economies of scale. They may also introduce a service offering an exclusive maintenance that will compete with TM´s new market positioning. TM cannot patent their new service. The idea/service is very easy to copy especially by a MNC.
• Leasing is usually an expensive option in the long term as payments will have to be made over the duration of the agreement. However, this point does not impact on differentiation unless TM increases its price and becomes uncompetitive. This is unlikely.
• Accidents could be reduced if BT makes professional driving license a compulsory requirement to become a driver. Getting a professional driving license is not an important barrier of entry for BT. TM’s USP is easy to imitate and could be quickly eroded.
Overall, TM is in a very delicate situation. BT is a strong competitor and threatens TM’s market position. Although the new positioning strategy has several weaknesses it is a viable alternative to try in the short term before BT or other competitors move in. TM may be able to benefit significantly from first mover advantage. Otherwise, survival of the company is at stake.
Marks should be allocated according to the paper 2 markbands for May 2016 forwards.
• It is not expected that the candidate incorporate all of the above arguments.
• Accept any other relevant issue.
• Accept any other relevant discussion.
• A conclusion with judgment is expected.
A balanced response is one that covers at least one issue for and at least one argument against each action or the candidates may answer holistically by providing at least two arguments for and two arguments against repositioning.
For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].
Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.
Candidates cannot reach the [7–8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.