DUST OF SNOW_BY ROBERT FROST_EDITED BY_ TANMOY MISHRA
T4 case analysis_workbook_may_2011
1. Extract from Kaplan’s
T4 Case Study
Case Analysis Workbook
BeeZed Construction
Services (BZCS)
March / May 2011
2. chapter
8
Planning your answer: Mini
case scenarios
Chapter learning objectives
By the end of this chapter you will:
• Be aware of the different issue types you may be presented with
in the exam
• Know how to deal with each type
• Have practised a process to plan for the different issue types
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3. Planning your answer: Mini-case scenarios
1 Practice makes perfect
At Kaplan, we believe that the secret of success in the case study exam is to
practise using mock exams. However, sitting your first mock exam can often
be quite daunting. Almost like learning to drive, there seems to be so many
things to remember and everything has to be done at the same time.
So, to help break you into your stride for a full exam, this chapter contains a
number of minicase scenarios. Each one replicates a potential section out
of the unseen material and gives the sort of information you would expect to
be provided.
By working through these scenarios, you will feel more equipped to tackle
multiple scenarios at once, within an exam environment.
2 Issue types
Within the unseen you will be told of a number of events (often grouped
under bold headings). In order to produce a report that delivers value to the
reader, you must focus not on the event but on the issue that arises from that
event.
Broadly speaking issues can be classified as either problems or
opportunities. A problem issue is best analysed by evaluating the
alternative solutions. To analyse an opportunity you will need to identify the
advantages and disadvantages to the company.
Whilst this may provide you with some useful subheadings for your report, it
does not necessarily help to drive your commercial thought process.
Analysis of past TOPCIMA and T4 exams performed by Kaplan shows that
issues will fall into one of seven different types. Although the details within
the event / issue will alter, there will be some common threads that can be
used to help drive your thoughts within the exam. The seven different issue
types are:
• A corporate governance issue: This will usually be a problem for the
business, for example, a senior director or crucial staff member might
be leaving or could be “distracted” from their job. This sort of issue will
raise questions over stakeholder confidence, and can lead to concerns
with both short and long term operations.
• A threat to competitive advantage: A definite problem, an issue of
this type is all about the core and threshold competencies and the idea
of the “slip”. For example, problems at one of the call centres that
means customers can't get through. You will be dealing with an issue
that threatens the means by which the company achieves success and
as such is it will usually be a high priority. Your analysis will need to
focus on the impact of the issue and how the company can limit any
damage.
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• A threat to the ability to deliver results: Again, a problem, this is
quite a common issue where the company concerned is a plc. For
example, the company has a published five year plan that it is not
meeting due to market pressures. It is often linked with a threat to
competitive advantage. This will be a significant issue for shareholders
and you will be expected to consider ways in which performance could
be improved. This sort of issue can be presented in two different ways.
In some scenarios, you are given a range of potential solutions to
analyse. In others you will be given more of a "free rein" to suggest
potential solutions.
• A threat to the future survival of the business: A definite problem.
If such an issue arises, it will always be a high prioirity. In a recent post
exam guidance issued by the examiner, it stated "The most crucial of all
issues affecting a company is maintaining its very existence". Such an
issue will require detailed advice on how to resolve the situation. The
sort of issue that comes under this heading would be a take over of the
company or something that threatens going concern
• The implementation of an agreed strategy: Depending on the
specifics of the company and the strategy, this can either be a problem
or an opportunity. As an agreed strategy, the issue is often more about
managing the change process. Such an issue is usually given a lower
priority.
• An event that alters business strategy: Again, this can either be a
problem or an opportunity. For example, the company could face a
problem if a new competitor entered the market or could have an
opportunity if new legislation opened up new markets. Either way, its
business strategy will need to change. You will be expected to analyse
the potential changes that could be made.
• A strategic proposal: Always an opportunity, the majority of proposals
presented in the exam will need to be evaluated. You will need to
consider both the advantages and disadvantages as well as thinking
about the availability of resources and questioning the strategic logic of
any potential project.
Each of the scenarios presented here can be classified as a different issue
type. By working through them all you will be aware of the key things to think
about as you plan your answer.
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5. Planning your answer: Mini-case scenarios
3 Approach to planning
To help provide more structure for you in the exam, we would suggest you
follow a 6 step approach to your planning:
Within the 20 minutes reading time:
Step 1 Read about and identify the event
Step 2 Consider what the issue is
Step 3 Evaluate the impact of the issue. Who is affected,
by how much are they affected and what would
happen if no action was taken?
Within the 20 minutes planning time:
Step 4 What are the alternative courses of action?
Step 5 Identify the advantages and disadvantages of each
(including resourcing needs and implications)
Step 6 Decide on your recommendations thinking about
who should do what, by when and how
Each of the scenarios has a detailed answer. The aim of these is to
demonstrate the thought process and range of ideas you should be aiming
for when planning your answer. They should also help to develop your
judgement and commercial reasoning.
They are not presented as the "correct" answer to your planning and you
should not attempt to write out your planning in this way. You simply won't
have time in the exam! Instead your planning should consist of brief notes
that can later be used to help structure and write your report.
Mini Case Scenario 1 Director resignation
Commercial Director of Infrastructure Projects Division resigns
Mike Kitchen, Commercial Director of the Infrastructure Projects
Division, has just handed in his notice to the MD of BZCS. He has been
offered the chance to run a bigger division in a rival company. His new
position will offer a better salary, a more prestigious position and the
chance to manage projects across the spectrum of construction. Mike
has a six month notice period (longer notice periods are common in
construction).
He is a close personal friend of Gary Walton, who is the Commercial
Director of the Sports Facilities Division. Gary feels that his role in the
winning of the 2012 Olympics bids has never been fully recognised. Gary
also has a six month notice period.
Requirement
Plan an answer dealing with the issues this will raise.
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Mini Case Scenario 2 Staffing problems
Staffing problems
Following a heated conversation between Susan Deates, the
Commercial Director of the Energy Projects Division, and Jason
Parkins, the Project Manager (PM) of the Strate power station project,
Jason has submitted his resignation. In the letter he has cited unrealistic
expectations imposed on him by BZCS as a key reason for resigning.
Having previously occupied the Bid Manager position for Strate power
station project, Jason was aware of the tightly negotiated contract and
the pressure to control costs while meeting the completion deadline.
However, he feels that the recently completed restructuring within BZCS
has compounded the pressure as the project staffing levels were
subsequently reduced by 12% making it near impossible to meet the
quality criteria agreed with the client. In addition, the teething problems
with the setup of the centralised Procurement Department, although now
resolved, meant that some materials for key stages of project
construction were delivered late, making Jason look incompetent in the
eyes of the client and contributing to the breakdown of PMclient
relationship.
Susan Deates responded to Jason’s resignation by agreeing that he is
to take a twoweek holiday after which the matters raised above will be
discussed. Whilst she believes that a cooling off period would be
sufficient to persuade Jason to stay, she is concerned that his feelings
are symptomatic of a wider problem amongst project managers within
the organisation. Therefore a longerterm solution is necessary to
reconcile the expectations of the company, its clients and employees.
Following the recent restructuring, the productivity of BZCS employees
has improved in line with expectations and the staff turnover currently
stands at 2%, an historically low level. Yet, BZCS's HR Director is wary
of taking this as a positive development, having reviewed appraisal
documentation of several other Project Managers she expressed an
opinion that staff are overstretched which is starting to have a negative
impact on their ability to cope with the work requirements.
Requirement
Prepare your plan for this issue.
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7. Planning your answer: Mini-case scenarios
MiniCase Scenario 3 Sale of BZCS
Expansion strategies
The Board of BeeZed have become concerned that the return obtained
from their construction subsidiary (BZCS) is lower than required by the
group overall. BeeZed normally expect a return on assets of 15%;
BZCS did not make this target in 2009 or 2010. They have therefore
informed the BZCS Board of their intention to divest the subsidiary,
possibly to a competitor.
However, selling the division means obtaining an expected sale price;
given that BZCS’s shares are not traded there is no clear market
valuation for the company. Similar companies to BZCS have a P/E ratio
of 9.
The Finance Director of BZCS would like you to calculate the actual
return on assets being obtained by BZCS, an indicative sale price and
then comment on the alternative courses of action open to the BZCS
Board.
Requirement
Complete your planning, together with the calculations requested by the
Finance Director. then write out your answer to this issue. You should
include:
(1) Your statement on the issue and its impact
(2) Your analysis of the alternative proposals
(3) Your recommendations
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MiniCase Scenario 4 Costing a project
Preparing a tender
Within BZCS, all of the accounting for each construction project is
accounted for on a project basis. This enables the company to monitor
its costs carefully against budget (vital where the contract is on a fixed
fee basis), and also to gauge the profitability of each project.
All direct costs are allocated to the respective project, including salary
and associated costs for all of BZCS’s employees working on each
project, as well as subcontractor costs. All nonproject based overhead
costs are allocated to projects using activity based costing techniques,
based on appropriate cost drivers.
BZCS’s Infrastructure Projects Division is currently tendering for a
contract to build a new airport terminal in Madrid. The operating profit
margin for this type of work is an average of 4.6%, and the company is
keen for this to be maintained.
Preliminary analysis shows that the direct costs of this project are
expected to be €440 million.
The 2011 budget in respect of indirect costs contains the following:
• Procurement costs. It is expected that the new centralised
procurement department will incur overhead costs of €30 million in
2011, and process 600,000 purchase orders.
• HR costs. The budget for the HR department is €5 million for the
year to 30 September 2011. This department looks after all aspects
of HR across the company, which currently has 10,100 employees.
• IT costs. The IT department has a budget of €6 million for 2011, and
is expecting to undertake 300,000 hours of IT work in that period.
• Commercial Director costs. The Commercial Director for the
Infrastructure Projects Division likes to visit each project that her
division is working on every quarter. Salary, travel and
accommodation costs in respect of this are budgeted at €500,000
for 2011. The infrastructure division has 5 projects planned for 2011.
You have already done some work on this tender, and have estimated
the following:
• The contract will take 4 years to complete.
• In total, 40,000 purchase orders will be necessary per annum
throughout the 4 year period.
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9. Planning your answer: Mini-case scenarios
• An average of 400 people will work on the construction of the
terminal for each of those 4 years.
• The IT Department will spend 12,000 hours each year on the project.
• The Commercial Director is to continue her policy of visiting each
project undertaken by her division once every quarter.
Requirement
(a) As a management accountant working for BZCS, you have been
asked to suggest a proposed fee for this project, based on
achieving the typical operating margin, and using the 2011 budget
as typical for the next 4 years. Ignore inflation and tax.
(b) Describe how your answer would differ if you were also provided
with a breakdown of employees by department? For example, you
could be told that the procurement department employs 1,500 staff
and the IT department employs 200 staff (provide an illustration but
do not perform a recosting of the project).
(c) You have also been asked to suggest how target costing may be of
use in determining an appropriate tender figure (giving an
illustration).
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MiniCase Scenario 5 Lease v buy
Lease v buy
The Environmental Projects Division has recently won a contract to
construct a new, highly sophisticated water treatment facility in Kuwait.
Due to technology involved in the building, and given it's location in such
a hot climate, BZCS needs to acquire a new specialist drilling machine
in order to complete the contract. The machine is so specialised that at
present, it could not be used on any other project. However, this area of
specialism is one in which BZCS hopes to focus, and if this project is
successful, the Commercial Director is hopeful that further contracts
could be won.
A decision needs to be made over whether to lease or buy the specialist
machine. Relevant details are as follows:
(1) The machine will be required for a period of 24 months during the
first phase of construction.
(2) The cost of the machine is €100 million.
(3) The machine could be sold at the end of two years for an estimated
€25 million.
(4) Alternatively, if a further contract was won, it could be utilised for
another period of up to two years, after which time the scrap value
would be nil.
(5) Maintenance costs would be €10million per annum (posttax) in the
first two years, rising to €15million per annum (posttax) in years 3 &
4 if the asset was retained.
(6) If bought, capital allowances at the rate of 25% reducing balance
could be claimed on the asset with a balancing allowance or
balancing charge arising on disposal. The asset would be bought on
the last day of the accounting period.
(7) Alternatively, the asset could be leased for a two year period at a
cost of €45million per annum, payable in advance. If the lease was
extended for a further two years, the payment would increase to
€55million per annum. The lease payments include all maintenance
expenditure.
(8) BZCS pays tax at an effective rate of 20% one year in arrears.
(9) BZCS appraises all investments at their estimated cost of capital of
10%. The relevant posttax cost of borrowing is 5%.
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11. Planning your answer: Mini-case scenarios
Requirement
(a) Prepare calculations to assess whether the asset should be leased
or acquired depending on whether the asset was needed for two or
four years.
(b) Note down any other factors which should be taken into account
when making the decision.
(c) Now assume that the Commercial Director considers there to be a
60% chance of a further contract being secured. Use you
calculations from part (a) to reach a decision on whether the asset
should be leased or purchased.
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MiniCase Scenario 6 Problems on a big project
Problems on a prestigious contract
For the purposes of answering this question assume it is 1st March
2011.
In 2008 the Office Division of BZCS won a very large and highly
prestigious building project for the delivery of a state of the art office
block in Amsterdam. Work commenced on the project at the end of
2008 with an opening date of the 1st May 2011.
From the beginning of the contract there were a number of problems; the
Project Manager identified that time schedules were tight and the site
selected for the office block was in an area susceptible to flooding; this
increased the time required to stabilise the footprint area, although once
this was sorted progress was rapid and lost time was made up in
subsequent stages.
In line with company policy, the Project Manager has presented financial
and operational issues to the senior management groups on a monthly
basis; all of these have been by video conferencing.
But in recent weeks the project has not been going well. Therefore the
Board called an emergency meeting with the Project Manager at the
head office as additional reports indicate that the opening date is
looking extremely unlikely. Information from the client includes that there
has been no onsite management from the Project Manager in the last
three weeks, non completion of change requests and in some instances
poor quality work, all of which have resulted in a complete breakdown in
communication between the client and the Project Manager.
At the meeting, the Project Manager identified that in the last three
months the number of changes requested by the client increased and in
some cases required a complete rework. The Post Completion
Manager for the Office Division is now on site; he estimates that the
change requests will result in additional costs in the region of €5m (€2m
of which have already been incurred).
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13. Planning your answer: Mini-case scenarios
Below is the extract of the management accounts for the office block
project as at 1st March 2011.
€
million
Revenue (as originally quoted) 102
Costs (as originally expected) 95
Cumulative costs (actual to date) 98
Forecasted costs to complete (based on latest revisions and 6
rectification of quality issues)
Requirement
Complete your planning, then write out your answer to this issue. You
should include:
(1) Your statement on the issue and its impact
(2) Your analysis of potential solutions
(3) Your recommendations
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MiniCase Scenario 7 Reduced public sector spending
The Board of BZCS met recently to discuss the impact on the company
of the current economic situation. Recovery is slow and governments
across Europe have made cutting public spending a priority as they
attempt to address their budget deficits. Whilst BZCS have maintained
their success rate at winning bids, the number of European public sector
contracts being offered for tender in the three months to December 2010
has fallen by 60% on the previous year. The cuts have mainly affected
the Infrastructure, Community and Energy divisions, most of their
projects being in the public sector.
The Managing Director has put forward three proposals to resolve the
issue:
(1) Merge the Infrastructure, Community and Energy divisions to create
one Public Sector Projects division. The merger would result in
operating synergies of €10million, mainly as a result of 500 job
losses and integration of back office systems.
(2) Make further redundancies across all divisions. The Human
Resources director has identified a further 1,000 jobs which he
believes could be lost while retaining BZCS’s ability to fulfil its
current projects and remain competitive in winning bids. This option
would save an estimated €18 million of costs. UCATT, the
construction workers’ union, has let it be known that it considers
further redundancies on top of those already made in 2009/10 to be
unacceptable, and that it would ballot its members on strike action
were any more redundancies proposed.
(3) Undertake speculative building projects. To fill the gap left by the
public sector cuts, the Commercial Director of the Community
Projects division has suggested speculative building. Speculative
building is construction for which no buyer has been identified. A
construction company engaged in speculative building assumes the
risk that a completed project will be difficult to sell at an acceptable
price. The Commercial Director argues that in the current sensitive
political climate, BZCS will always be able to find a buyer for
buildings such as schools and hospitals.
Requirement
Complete your planning, then write out your answer to this issue. You
should include:
(1) Your statement on the issue and its impact
(2) Your analysis of potential solutions
(3) Your recommendations
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15. Planning your answer: Mini-case scenarios
MiniCase Scenario 8 Environmental waste
CSR reporting error
Corporate social responsibility awareness and reporting has increased
significantly in recent years in the construction industry. Six months ago
the BZCS Managing Director was interviewed by the BBC investigative
TV programme Panorama. The programme was investigating whether
the CSR disclosures made by construction companies on their websites
and in annual reports were reliable and fair. BZCS was approached by
the programme production team to provide an example of a company
with an excellent commitment and track record in this area.
Earlier this week the BZCS press office received a call from the
Panorama programme producer to advise them that the programme
was now completed and due for screening in 2 weeks time. The
producer also advised that they had obtained information that suggested
that the widely publicised BZCS site waste non landfill disposal/recycle
figure of 62% was overstated. The producer advised that this information
had only recently been received and was not included in the current
programme content although she would not give any categorical
assurances that it would not be included in the final edit. The producer
asked whether BZCS would like to make an official response to the
allegation before the programme is screened.
An immediate BZCS internal investigation has confirmed that the true
site waste non landfill disposal/recycle figure is just below 50% with the
over reporting due to a number of administrative calculation errors by a
major waste management contractor that were not checked by BZCS
before publishing. Senior management are keen to provide a response
before the screening of the programme in two weeks time but are unsure
whether to fully disclose the outcomes of the internal investigation.
Requirement
Complete your planning then write out your answer to this issue as it
would appear within the ethics section of your report. As an ethical issue
you should include:
(1) Your statement on the issue that should clearly explain the ethical
nature of the problem
(2) Some potential solutions with brief analysis
(3) Your recommendations
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Test your understanding answers
Mini Case Scenario 1 Director resignation
Step 1 Read about and identify the event
The event is the resignation of Mike Kitchen and the possible risk that
Gary Walton will also resign.
Step 2 Consider what the issue is
This is a corporate governance issue plus the strategic issues caused
by the loss of key managers.
Step 3 Evaluate the impact of the issue. Who is affected, by how
much are they affected and what would happen if no action was
taken?
Mike Kitchen currently runs the biggest and most profitable of the BZCS
divisions (representing almost 29% of sales and 48% of operating
profit). It is possible that a large part of BZCS’s reputation for quality and
safety may rest with Mike and his key team members.
If Mike encourages Gary to move to the competitor as well, that could
also damage the performance of the Sports Facilities Division (which
accounts for another 11% of sales and almost 10% of operating profit).
In addition, Mike (and possibly Gary) could be an integral part of current
bids and a conflict of interest exists if the rival company is bidding for the
same work.
Step 4 What are the alternative solutions?
Issues of this type are best thought of in terms of short term and long
term solutions. Although the comments relate to Mike, the solutions could
equally apply to Gary if Mike headhunts him.
Short term
Initially, the BZCS Board must consider whether they should try to
convince Mike to stay. Assuming they decide to let him go, they must
find someone who can fill the role on a temporary basis as finding a long
term replacement could well take time. Options will include another
Commercial Director, a senior member of Mike's team or an external
consultant. In addition the Board will need to decide whether to allow
Mike to work his notice period or instead put him on gardening leave.
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17. Planning your answer: Mini-case scenarios
Long term
A permanent replacement will need to be found. The options can be
divided between internal or external recruitment.
Step 5 Identify the advantages and disadvantages of the
proposals (including resource requirements and implications)
Short term proposals
The Board could attempt to convince Mike to stay with BZCS. However,
this option is rarely successful as once a resignation has been tendered
others may doubt Mike's commitment to the company. Attempts could
be made to renegotiate Mike's contract if the higher salary on offer is
the key reason for his resignation. Alternatively, if it is the more
prestigious role/greater variety which is the key attraction, BZCS cannot
change this for Mike without considering a major review of
organisational structure which will have far reaching impacts on others.
The risk that Mike could steal sales away from BZCS is reduced due to:
• the nature of sales being longterm and contractually binding
meaning all current contracts are safe
• the regulation by OFT which means that bidding for future contracts
having to comply with a fair and transparent bidding process. The
winning bid must demonstratively be the best bid removing the
importance of “relationships”
However the risk is that BZCS may lose its preferred supplier status with
some clients if they have allegiances with Mike and transfer the status to
the competitor.
If a permanent replacement cannot be found within six months then a
temporary replacement must be found. An internal candidate will have
the advantage of knowledge of the business as well as being a quick
solution. However, care must always be taken as this person already
has responsibilities in their current role which will need to be covered.
The Board could try to find a Commercial Director that can cover both
their own and Mike’s role but this could result in suboptimal
performance in both divisions as well as demotivating the individual
concerned.
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You should also question whether a suitable candidate does exist.
BZCS clearly believe that specialism in project areas is key, hence the
current structure (so it is not necessarily the case that another
Commercial Director can automatically fill this role due to its specialist
nature). That would imply a member of the Infrastructure Projects
Division itself (perhaps a highly skilled Project Manager) filling the
position. Finally, if an internal candidate were to 'step up' temporarily,
there could be implications on their motivation levels if they were not then
given the role on a permanent basis.
An external consultant solves the problem of sharing responsibilities.
However, the person selected will know little about BZCS, their
contracts etc so would take a while to get fully up to speed. It will also
cost more.
Long term proposals
With similar arguments to the above, an internal candidate will likely be
cheaper, quicker and easier to find. However, a suitable candidate may
not exist. If one does exist, it will be motivational for both that individual
and others around them, to see internal promotion opportunities being
made available. This would be particularly true in BZCS, which has a flat
management structure with limited opportunities for promotion.
An external candidate may help to bring new blood and fresh ideas to
the company. There are no indications within the preseen material that
BZCS is in need of fresh ideas although there is a distinct lack of
information detailing ongoing strategies so we can't rule out that
appearing within the unseen.
Finding a suitable external candidate could take up to a year or more
and may involve head hunting from a competitor, particularly at this
senior level.
Step 6 Decide on your recommendations and think about who
should do what, by when and how
To score well for your recommendations, you will need to give plenty of
detail on who, what, when and how, provide justifications for what you
are recommending and consider the implications (including resources
required) of your suggestions.
Given the brief information in this scenario, it is not clear whether there is
a strong candidate from within the Infrastructure Division. An external
candidate may be the best long term solution.
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19. Planning your answer: Mini-case scenarios
As a result of this decision, the short term replacement becomes more
of an issue. Mike should be made to work his notice period, although he
should not be involved in any bids that are expected to last for longer
than this. This at least will provide the Board with six months grace. If a
longterm replacement cannot be found after this time, an external
consultant would appear to be the best option. This will at least ensure
the role is given sufficient attention for any intervening period.
In terms of the who, what, when and how, the Human Resources Director
should prepare a job specification in consultation with the BZCS
Managing Director. The job vacancy should be announced immediately
and interested parties should be sent the job specification. Interviews
should be arranged within the month and should principally be conducted
by the Managing Director.
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Mini Case Scenario 2 Staffing problems
Step 1 Read about and identify the event
The event is the falling morale and motivation amongst project managers
leading to 'burnout'.
Step 2 Consider what the issue is
The issue is a threat to competitive advantage as the project managers
are key to the delivery of BZCS's critical success factors of quality,
safety and completing projects on time.
Step 3 Evaluate the impact of the issue. Who is affected, how
are they affected and what would happen if no action was taken?
BZCS's reputation rests on its ability to deliver projects on time and to
high quality standards. If these are undermined in the pursuit of a short
term gain by overworking staff and cutting corners, the company might
find it more difficult to win future business. As a large organisation,
BZCS is not reliant on an individual worker or even a Project Manager.
However, the continuity amongst the management team creates in
depth understanding of the client needs and helps the company to learn
valuable lessons as to how difficult client requests can be approached.
The scenario tells us that productivity has recently improved and staff
turnover is at an historically low level. You may therefore be forgiven for
thinking that this issue isn't that significant. However, in recessionary
times it is common for the staff turnover level to decrease as people see
fewer opportunities to find alternative employment, especially in the
construction industry which has been hit hard by the financial crisis. As
the economic climate starts to improve, BZCS may find itself facing
severe staffing problems as employees, who have been forced to put in
“discretionary” efforts and achieve more with less, start actively looking
for new jobs. In extreme circumstances, burnout at work could even lead
to suicide such as 11 workers of Taiwanese manufacturer Foxconn who
took their lives due to the company imposing excessively rigorous rules
on employees which prompted Foxconn’s biggest customer Apple to
review their supply arrangements. BZCS could be equally facing a public
relations scandal if overstretched employees are involved in an accident
on site.
Step 4 What are the alternative courses of action?
As a problem type issue, you must address what can be done to resolve
the issue. A problem such as this can be tackled in any number of ways
and providing your suggestions are sensible, practical, and justified, you
will score. Perhaps of greatest importance here is that you cover
actions that will reveal the true nature of the issue as well as how to
resolve it.
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21. Planning your answer: Mini-case scenarios
Actions to reveal the nature of the problem might include:
• Oneonone interviews between project managers and HR /
Commercial Directors
• Introduction of counselling services
• Review of exit interviews and minutes of appraisal meetings to
identify key trends or grievances
Actions to resolve the issue might include:
• Payment of bonuses
• Introduction of more flexible working practices and use of technology
(e.g.smartphones)
• Introduction of a mentoring scheme
Don't forget that technical models can often be a very effective way to
identify potential courses of action. For example, here we could use
motivation theories to explore the potential ways to resolve the issue
(based on whether the problem is with hygiene factors or motivating
factors). We could also suggest that a balanced scorecard approach is
taken to develop a range of measures across the four perspectives.
Step 5 Identify the advantages and disadvantages of the
proposals (including resource requirements and implications)
For every solution you suggest, you must evaluate it in terms of its
advantages and disadvantages. You must also consider the
practicalities of the proposal who would need to do what and when in
order to implement the plan, and is this feasible? Let's look at a couple
of the suggestions made above to show how this can be done.
Introduction of counselling services
A counselling service would allow staff to raise any areas of concern they
may have and would therefore allow the HR department to assess the
extent of the problem and design some solutions. Perhaps the first
practicality to address is who would perform the counselling. Someone
from within the company may be the cheaper option but is unlikely to be
as effective. Employees may be more open if they speak to an
independent and impartial individual about their problems, rather than
their line manager. But if an external advisor was used then a feedback
mechanism would need to be established to ensure BZCS were still
able to capture the information on the nature of the problem to enable
corrective action to be taken.
Another key question is whether the expense can be justified at a time
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when BZCS are trying to control costs? A good technique would be to
raise this question in the main analysis section of your report and then
answer it within the recommendations section as part of the justification
you provide.
Introduction of a mentoring scheme
A mentoring scheme would perhaps make the Project Managers feel
like they have someone to share their work problems with, thereby
reducing the stress associated with them. It would also be a very
effective way of developing the skills of the PMs, preparing them for
future promotion and increasing their loyalty to the company.
However, such an initiative would greatly increase the administrative
burden for senior staff while not necessarily being able to accommodate
the needs of all employees due to the variability of individual
circumstances. Perhaps one way to resolve this practical resource
constraint would be to only invite some PM's onto the mentoring scheme;
those that were felt to have the greatest potential, those new to the job or
those who were felt to be most vulnerable. Although this would reduce
the burden, it could result in the demotivation of those who were left.
Top tip: Don't try to give this level of analysis for every alternative course
of action you can think of. If you do, you will overrun on earlier issues
and will fail to complete your report. Instead, try to pick two courses of
action that you feel are most feasible and focus your analysis on these.
Then, for any other suggestions you have, you can perhaps provide
some brief analysis depending on your timings and capabilities on the
day.
Step 6 Decide on your recommendations and think about who
should do what, by when and how
Your recommendations would ideally cover three main things; the
recommendation itself, the justification for it and the specific actions to
be taken. Feel free to use these as subheadings if it helps.
For example you might want to write:
Recommendation
It is recommended that each Commercial Director meets in private with
each of the Project Managers in their division to discuss causes of
stress and worklife balance.
Justification
This will enable a complete understanding of the nature of the problem to
be obtained firsthand, thereby meaning a quicker reponse to the
problem can be developed if required. Project Managers are essential
in the delivery of BZCS's critical success factors and a suspected
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23. Planning your answer: Mini-case scenarios
problem like this must be treated seriously.
Actions to be taken
The HR Director should draft an email that can be sent to all PMs from
their Commercial Director requesting the meeting, explaining the
concerns and outlining the purpose of the meeting. All meetings should
be completed within the next two weeks and should be followed by a
meeting of the Commercial Directors, along with the HR Director, where
the findings can be discussed.
Don't forget, as well as the actions to identify the nature of the problem,
you will also be expected to make some suggestions on how the
problem can be resolved. This will be a little harder in this scenario
since your earlier recommendation acknowledges that the full extent of
the problem is not yet known. All you can do is go on the basis of the
information you've been provided with.
Suggestions such as the mentoring scheme or providing smartphones
for all PMs are generic enough that regardless of the cause of the
problem, providing a mechanism to bounce around ideas or work more
effectively will always be relevant.
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24. chapter 8
MiniCase Scenario 3 Sale of BZCS
Step 1 Read about and identify the event
The event is the potential sale of BZCS.
Step 2 Consider what the issue is
The issue is a threat to the future survival of BZCS and the impact that
any sale would have on the strategy and operations of the business.
Note that you have been asked to address some specific areas,
namely the calculation of actual return on assets and an indicative
sale price. This occurs quite frequently within T4 exams and you must
ensure you address these areas if you are to score well.
Step 3 Evaluate the impact of the issue. Who is affected, how
are they affected and what would happen if no action was taken?
If BeeZed were to divest of the BZCS subsidiary there would be a
potentially significant impact on the future strategy and structure of BZCS
as a company. Any purchaser may look to merge the operations into an
existing business, possibly leading to job losses at all levels of the
organisation. They may choose to change the strategic direction to
focus on different geographic regions or on different aspects of
construction. There may also be a change in culture.
The exact impact would be dependent upon who acquired the company.
Step 4 What are the alternative courses of action?
An initial option to put forward is to do nothing. BZCS could simply
accept the decision of BeeZed and react to any potential purchaser
when the deal is done.
A further option recognises that the two scenarios facing BeeZed are
straightforward; whether to sell or to retain BZCS. BZCS could
therefore try to convince the BeeZed Board not to sell.
A further option would be to consider a management buyout or to
convince BeeZed to complete a spinoff.
Step 5 Identify the advantages and disadvantages of the
proposals (including resource requirements and implications)
Accept the decision
A ‘strawman’ option is one that is presented but is unlikely to be
adopted. Despite this, it is still worth outlining the option in order to
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25. Planning your answer: Mini-case scenarios
argue why it should not be pursued. An alternative of ‘do nothing’ is
often regarded as a strawman option.
In this situation, this would be a very risky strategy for BZCS given the
potential significant impact that a new owner could have. It could
however, be argued that a new owner may revitalise the company, and
could have big expansion plans that would be positive in the longerrun.
Convincing the BeeZed Board not to sell
The return obtained by BZCS over the last two years has been around
11% using ROCE as a measure. This is below the hurdle rate of 15%
expected by the Board and has been a key driver in their proposal to
sell. See working below.
2010 2009
Profit before interest and tax (€m) 34.7 35.2
Capital employed 434.5123.5 = 436.4127.3 =
(total assets less current 311 309.1
liabilities) (€m)
ROCE 11.1% 11.4%
However, the construction industry is highly capitalintensive by nature
and so a lower ROCE will be expected compared to say consultancy
where the main assets are the people within that subsidiary; the asset
base is correspondingly lower generating normally higher ROCE. The
use of a target ROCE figure common to all subsidiaries may be
inappropriate and this argument could be presented to BeeZed. It is
also likely that the ROCE figures are not 100% accurate given the
allocation of revenue under PFI contracts between the three
subsidiaries.
Furthermore, the value generated within the consultancy and
maintenance subsidiaries often derive from or go handinhand with the
original construction contract. There is a risk that if BeeZed cannot
provide the construction facilities then property management and
consultancy contracts will be more difficult to obtain.
Regarding the value of BZCS, this is difficult to obtain because there is
no market for the subsidiary’s shares and BZCS has not remitted any
dividends to BeeZed for at least the last two years.
Using an asset valuation (appropriate for a capitalintensive industry),
the Statement of Financial Position indicates that BZCS is worth €186
million. This is the minimum figure that is required to compensate
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26. chapter 8
BeeZed for their ongoing investment in BZCS.
However, using a P/E ratio of 9, BZCS is worth €197 million (that is
profit for 2010 of €21.9m multiplied by 9).
If the BeeZed Board could be convinced to retain BZCS this would
obviously maintain the status quo. However, their desire to divest may
indicate something more significant, such as a need for a cash injection,
which may mean further investment in the division would be unlikely.
This could restrict BZCS ability to implement future strategies.
Management buyout / Spinoff
A management buyout would enable the Board to continue to operate
the business in the same way. It would protect jobs and maintain the
culture, although there may be a decline in profitability and some
centrally provided services (from BeeZed) have to be funded directly by
the company.
Perhaps the biggest barrier to a management buyout (MBO) would be
the availability of finance. With the construction market expanding 28%
year on year (CNInsight), and BZCS’s order book of €2,400m (30%
higher than one year ago) investment in such a venture would be
attractive. However, given the current economic climate, and in
particular the availability of capital, it will be difficult to fund an investment
of this size from traditional sources of MBO finance.
A potential alternative would be for the BeeZed Board to spinoff BZCS
by listing the company on the stock exchange. This would transfer the
ownership of BZCS directly to the shareholders of BeeZed rather than a
subsidiary relationship. This would allow the management team to
remain in place, and would also enable them to become shareholders in
the company if they wished.
The acceptability of this course of action to BeeZed would depend upon
their motivation for the sale. This option would not raise any cash for
BeeZed although it may improve overall shareholder value, as was seen
when AOL spunoff from Time Warner in 2009.
Finally, by spinningoff BZCS, BeeZed are more likely to maintain a
strong working relationship, allowing them to access the construction
facilities required in order to win consultancy and maintenance contracts.
Step 6 Decide on your recommendations and think about who
should do what, by when and how
It is recommended that BZCS try to convince BeeZed to retain the
construction division. Although the market conditions appear conducive
to sale, the impact on sale on the other subsidiaries of BeeZed needs
further analysis. There is the risk that if BeeZed cannot offer a
construction service then the company will not win contracts in property
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27. Planning your answer: Mini-case scenarios
management or consultancy.
The Managing Director of BZCS should request a full contract analysis
breaking down the allocation of revenue under PFI contracts between
the three subsidiaries. This may reveal a different, more accurate set of
ROCE figures on which to base a decision.
If the Board of BeeZed are committed to divestment, it is recommended
that BZCS propose a spinoff from the parent. Given the information
presented, and assuming there is not a requirement for a cash injection,
this would appear to mitigate many of the risks for both BeeZed and
BZCS, whilst still delivering the results required.
The Board of BZCS should request a formal meeting with the BeeZed
Board where they should outline the benefits of this approach. If
acceptable, professional advisors should be appointed to assist with the
transaction.
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28. chapter 8
MiniCase Scenario 4 Costing a project
Part a Calculations
Costings for Madrid airport terminal project :
€m
Direct costs 440.0
Procurement (€30 m/600,000) × 40,000 × 4 8.0
years
HR (€5 m/10,100) × 400 × 4 years 0.8
IT (€6 m/300,000) × 12,000 × 4 years 1.0
Commercial Director (€500,000/5) × 4 years 0.4
–––––
Total costs 450.2
Operating margin required (€450.2m × 4.6 ÷ (100 21.7
– 4.6))
–––––
Suggested tender bid 471.9
The above calculations suggest that, after considering direct costs,
apportioned indirect costs, and a required operating margin of 4.6%, a
suitable tender figure is around €472 million.
This has been arrived at by considering the costs that are likely to be
incurred first, then deciding a profit figure based on those costs, and
letting the revenue be the balancing figure. It is very much an “inside out”
approach to pricing the project – looking internally to consider costs and
required profit, then externally in imposing a project value.
Part b Apportioning costs
If a breakdown of employees by department was provided, some of the
overhead costs that related to the HR department could be apportioned
to the other support departments (using a sensible basis) before each
department’s total costs (both those originally allocated and the ones
that have been apportioned from HR) were allocated to projects based
on appropriate cost drivers.
So, for example, if 1,500 of the 10,100 employees worked in the
procurement department, we could apportion approximately €743,000
(1,500 ÷ 10,100 × €5m) of the HR costs to the procurement department.
When allocating the costs of the procurement department to projects
using cost drivers, the total cost being allocated would be (€30m +
$743,000) €30.743m, resulting in an overhead absorption rate based on
the number of orders cost driver of €51.2 (€30.743 ÷ 600,000 order)
rather than the original €50.
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29. Planning your answer: Mini-case scenarios
Part c Target costing
Target costing would reverse the process. Under this method, BZCS
would consider the tender figure that is likely to be successful; this
means looking at the bids likely to be put forward by other parties invited
to tender, and also the amount that the customer is likely to be prepared
to pay.
Having determined an appropriate tender value, BZCS would then look
at the level of profit required (presumably 4.6% of the revenue), and the
costs that the company must work within would then be the balancing
figure.
For this reason, target costing is more of an “outside in” approach – look
at the environment you operate in first, then work backwards to identify
the level of costs that can be incurred.
For example, it may be that €470 million as a tender bid is unlikely to be
successful; €450 million is more competitive. The results using target
costing would then be (in € millions):
€m
Tender bid 450.0
Required profit (4.6%) (20.7)
–––––
Target costs 429.3
The company must now identify means of keeping costs within the
€429.3 million identified. This will focus BZCS’s attentions on cost
control and efficiency.
For example, direct costs (currently €440 million) would need to be
reduced. Perhaps cheaper construction labour from other parts of the
EU could be used (obviously without compromising on quality,
employment legislation or health & safety).
Procurement could be reviewed to see if it could be conducted more
efficiently. Each purchase order currently incurs an overhead cost of
(€30 million/600,000) €50 – could a lower number of orders be placed
for the Madrid terminal?
(Note what many construction companies do in reality is subcontract
areas of work and make the subcontractor responsible for all
purchasing relating to that area).
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30. chapter 8
MiniCase Scenario 5 Lease v buy
(a)
(W1) Calculation of the tax relief on WDAs if asset bought and sold at
T2:
Year Narrative Written down Tax saved at Timing of tax
value 20% flow
€m €m
0 Cost 100.00
0 CA 25.00 5.00 1
––––––
75.00
1 CA 18.75 3.75 2
––––––
56.25
2 Balancing 31.25 6.25 3
allowance
––––––
Disposal 25.00
proceeds
––––––
Note: The asset is bought at time t=0 at the end of the accounting
period. This means the first capital allowance will also be awarded at t=0
and given the oneyear time lag on the tax, the first tax effect is at time
t=1.
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31. Planning your answer: Mini-case scenarios
(W2) Calculation of the tax relief on WDAs if asset bought and
sold at T4:
Year Narrative Written down Tax saved at Timing of tax
value 20% flow
€m €m
0 Cost 100.00
0 CA 25.00 5.00 1
––––––
75.00
1 CA 18.75 3.75 2
––––––
56.25
2 CA 14.06 2.81 3
––––––
42.19
3 CA 10.55 2.11 4
––––––
31.64
4 Balancing 31.64 6.34 5
allowance
––––––
Disposal 0.00
proceeds
––––––
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32. chapter 8
Cost of borrowing to buy for 2 years:
Time 0 1 2 3
€m €m €m €m
Asset (100.00) 25.00
Tax relief on CAs 5.00 3.75 6.25
(W1)
Post tax maintenance costs (10.00) (10.00)
––––––– ––––––– ––––––– –––––––
(100.00) (5.00) 18.75 6.25
PV factor @ 5% 1.000 0.952 0.907 0.864
PV (100.00) (4.76) 17.01 5.40
NPV = €(82.35m)
Cost of leasing for 2 years:
Timing Narrative Cash flow DF @ 5% PV
€m €m
0–1 Lease payments (45.00) 1+ 0.952 = 1.952 (87.84)
2–3 Tax savings 9.00 1.859 × 0.952* = 1.770 15.93
–––––
NPV (71.91)
–––––
* or AF 2–3 = 2.723 – 0.952
The cost of leasing is €10.44m lower than the cost of buying when the
asset is only used for two years.
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33. Planning your answer: Mini-case scenarios
Cost of borrowing to buy for 4 years:
Time 0 1 2 3 4 5
€m €m €m €m €m €m
Asset (100.00)
Tax relief on CAs 5.00 3.75 2.81 2.11 6.34
(W2)
Post tax (10.00) (10.00) (15.00) (15.00)
maintenance costs
––––––– –––––– –––––– –––––– –––––– –––––
– – – – ––
(100.00)
(5.00) (6.25) (12.19) (12.89) 6.34
PV factor @ 5% 1.000 0.952 0.907 0.864 0.823 0.784
PV (100.00) (4.76) (5.67) (10.53) (10.61) 4.97
NPV = €(126.60)m
Cost of leasing for 4 years:
Timing Narrative Cash flow DF @ 5% PV
€m €m
0–1 Lease payments (45.00) 1+ 0.952 = 1.952 (87.84)
2–3 Tax savings 9.00 1.859 × 0.952* = 1.770 15.93
2–3 Lease payments (55.00) 1.859 × 0.952* = 1.770 (97.35)
4–5 Tax savings 11.00 1.859 × 0.864* = 1.606 17.67
–––––
NPV (151.59)
–––––
* or AF 2–3 = 2.723– 0.952
and AF 4–5 = 4.329– 2.723
The cost of leasing is €24.99m higher than the cost of buying when the
asset is used for four years.
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34. chapter 8
(b)
Other factors that should be considered in addition to the financial
analysis include:
• The risks of ownership will apply if the asset is purchased. This will
include accidental damage, insurance, higher maintenance costs
than have been estimated etc
• Technological advancement may mean the asset becomes
obsolete before the end of four years. The leasing option would
permit a more advanced machine to be utlised if available
• The estimate of the probability of winning further work is crucial to
the calculation of the expected costs. In reality, further work with
either be won or lost, and the costs incurred will never be the
expected cost. If the asset is purchased and no further work is
obtained, BZCS would have incurred an additional €10.4m of
expense unnecessarily.
• Other variables in the calculations such as the scrap value are only
estimates and are not guaranteed
• Ownership of the asset may provide BZCS with a competitive
advantage, allowing them to differentiate and make it more likely
that further work will be won.
(c)
The Commercial Director considers there to be a 60% chance of a
further contract being secured. This means the expected saving / (cost)
if the leasing option is taken would be:
0.4 × €10.44m + 0.6 × – €24.99m = (€10.82m). The financial analysis
would therefore suggest that the asset should be purchased
Alternatively:
If the lease option is chosen, the cost incurred will be €71.91m in the
first two years. In the subsequent two years, there will be 40% chance
of there being no further cost, and a 60% chance of a further €79.68m
(€151.59m – €71.91m). The expected cost is therefore:
€71.91m + 0.4 × 0 + 0.6 × €79.68m = €119.72m.
However, if the purchase option is taken, the cost incurred will be
€82.35m in the first two years. In the subsequent years, there will be a
40% chance of there being no further cost, and a 60% chance of a
further €44.25m (€126.6m – €82.35m). The expected cost is therefore:
€82.35m + 0.4 × 0 + 0.6 × €44.25m = €108.90m
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35. Planning your answer: Mini-case scenarios
The expected cost of purchasing the machine is €10.82m lower than
the leasing option.
Tutorial comment: Whilst each of the elements of this minicase
scenario (capital allowances, tax adjustments, delayed annuities,
advanced annuities, discounting and expected values) could
appear within the exam, it would be unlikely that they would all
appear within the same calculation as illustrated here. This
scenario has been presented to enable you to revise a number of
techniques at once.
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MiniCase Scenario 6 Problems on a big project
Below is an illustration of what you could have written as your answer to
this issue. The planning guidance has not been given.
1. Issue and impact
With the application of Porters Generic Strategies BZCS follows a
differentiation strategy whereby customers are won and kept satisfied
through the achievement of delivery deadlines, quality work and
maintenance of high levels of health and safety. However; BZCS
operates in an industry with low margins, (2010 gross profit margin for
BZCS was 4.5% (W1)) and therefore needs to maximise quality but
continually address the issues surrounding cost to ensure that expected
margins are maintained. The office block project had an expected gross
profit of €7m, a margin of 6.8% (W2) and could represent as much as
12.3% (W3) of total gross profit for the company; it therefore is a key
project within the current portfolio as it makes an above average
contribution.
There are a number of implications: the financial impact is the loss of
€2m assuming that all the forecasted costs are realised and revenues
remain unchanged. But the issues relating to poor project management
and failure to deliver on time have more serious ramifications for BZCS
including reputational damage, loss of client confidence due to the
implementation of change requests and ultimately the risk that the client
may not sign off and accept the building. As part of the contract details,
penalty clauses are likely to have been stipulated for non delivery that
would potentially increase the losses.
2. Analysis of potential solutions
Solutions will be required to tackle both the potential reputational
damage and the financial loss.
Consultancy services – due to the complete breakdown of the project,
the services of an external consultancy could be employed to review the
existing situation and manage the client interface. This has the benefit of
communicating to the client the importance of the problem by providing
additional expertise. However there will be an associated cost, which
will further increase the loss incurred on the contract.
Appoint another Project Manager – senior management could also
consider removing the current Project Manager and replacing with
another PM or indeed handing the project directly to the Post
Completion Manager given the small amount of time remaining on the
project. Once in place, the new manager could perform an internal
investigation of costs and timings in order to ensure the project is
completed to the client’s satisfaction. Although this would help to restore
client relations, it would take time for the replacement manager to get up
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