OCR Business Studies Strategic Management Case Study Analysis 2012

A revision guide relating to the issues discussed in the OCR Business Studies Strategic Management case study for 2012 (SLSL)

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Nature and Classification of Smallbone, Little & S

There is an impact on cash flow of estate agents if they occur costs in marketing properties before they receive their commission fee.

Estate agents: draw up house sale particulars, advertsise properties, provide details of properties, arrange visits and sometimes conduct the visits.

Estate agents also 'progress chase', meaning they chase the progression of the sale on behalf of the vendor. They do this by keeping in contact with conveyancers etc.

Conveyancing involves drawing up a contract between vendor and buyer.

SLSL refers this work to a solicitor, Boddie Cooper (minor shareholder in SLSL)

An Energy Performance Certificate is required and many estate agents have become qualified energy assessors. This provides an additional income stream, but SLSL do not appear to do this.

SLSL is a private limited company (Ltd). Its shareholders therefore enjoy limited liability.

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SLSL's Stakeholders

Owners / Shareholders - They provide capital investment, and in return expect to receive an annual dividend and hope to make a capital gain. They have the right to attend an annual shareholders' meeting.

Directors & Managers - Shareholders need only appoint one director. It appears that Alistair acts as the managing director. He must set and oversee the achievement of medium to long-term objectives. The managers salary is fixed at a flat rate of £46,000. Perhaps differential payments based on workload and success rate would provide extra incentive to improve performance.

Employees - SLSL employs 19 staff (12 FTE). They receive a fixed salary (£16,100) as well as a quarterly bonus paid to all based on the company's profits.

Customers - SLSL get a great deal of work as a result of reputation (for efficiency, professionalism and ethical behaviour) and word of mouth recommendations.

Local Community - Concerned about nuisance (pollution, noise, congestion). However, SLSL has created 19 jobs and provides business for others.

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SLSL's Stakeholders (continued)

Suppliers / Partner Firms - Supply firms provide SLSL with office equipment, stationary, leased vehicles and energy. SLSL deals with solicitors and surveyors on a frequent basis and it is therefore important to maintain good relations with them.

Lendors - Andrew Boddie lent SLSL £50,000 + interest at 3% above BoE base rate. SLSL is very lowly geared (11.74% = 50,000/426,000 X 100), which provides scope for further borrowing.

Competitors - Very low barriers to exit and entry as there are no costs in terms of qualifications or regulation. The market is 'monopolistically competitive' and 'contestable'.

Government / Local Authority - Changes in the law, taxes, macroeconomic policies (recession, rising unemployment, closure of RAF base six mile from Oakford)

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Strategic Planning

The business analyses:

Where are we now? - Marketing audit, SWOT analysis, PEST-G factors

Where do we want to be? - Creating a vision for going forward

How are we going to get there? - setting SMART objectives to achieve the vision

This will enable SLSL to plan effectively. Businesses should build on their strengths, minimise their weaknesses, seek out opportunities and stave off threats.

Strengths - investing in staff 'effective listening and interpersonal skills', strong 'corporate' image, heavy investment in advertising

Weaknesses - disappointing performance of Stamton, tension between branches

Opportunities - diversification (lettings managment, additional income streams)

Threats - constant threat of new entrants in the market, macroeconomic changes

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Role and Importance of SMART Objectives

Objectives: provide a source of motivation, ensure staff work towards the same goal, a basis for planning, a yardstick by which to measure performance.

SMART stands for: specific, measurable, agreed, realistic, time-scaled

If an objective is perceived to be unachievable, it will only serve to demotivate staff.

SLSL's objective is to increase revenue by 4% over the next financial year.

This objective is specific, measurable and time-scaled.

In nominal terms this is £34,758 (£868,946 X 0.04)

In real terms (with inflation at 3.5%)  it is £65,171 (868,946 X 0.075)

A rise in revenue can be achieved by: increased volume of completed work, increase in house prices, increase in commission rate, moving to the upper end of the market, diversification into other areas (property letting)

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Role and Importance of SMART Objectives (continued

Table 2 suggests some recovery of the market, but this is patchy and may reflect seasonal variation rather than any loner term trend.

Revenue may be increased by improving the performance of the Stamton branch. At Stamton, offers take longer to complete and only 11% of viewings receive an offer.

SLSL can increase its commission rate if it can convince vendors that it offers a superior service,with an increased probability of achieving a sale at the right price.

SLSL currently gains commission from building insurance, home buyers' reports and conveyancing.

SLSL may consider adding a service of mortgage advice. This would provide direct commission and help attract a greater number of customers by offering an enhanced service.

They could also consider becoming qualified energy assessors

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The Monopolistically Competitive Market

The market is 'monopolistically competitive' (line 11)

In monopolistic competition: there are many buyers and sellers, each seller has a small share of the market, the product is (slightly) differentiated and there are low barriers to entry and exit.

SLSL can make use of non-price elements of the marketing mix in order to convince customer to pay a higher price (commission). SLSL could:

offer superior quality house sale particulars (more effective advertising)

offer superior customer care

offer a greater range of services

have a smarter appearance

join a recognised professional organisation

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Projecting a Professional Image

It is important that both vendors and buyers have trust and confidence in the estate agent. This could provide SLSL with a competitive advantage that enables them to capture a larger part of the market, or even charge a higher commission rate.

SLSL project a professional image by:

placing stress on clients trusting staff (33-34) and ethical behaviour (64-67)

the uniform layout of each branch (34)

the absence of clutter (34-35) and modern equipment (35-36)

the smart logoed uniforms (36-38)

the choice of a hybrid car to project a 'green' image (38-40)

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SLSL's Promotional Mix

The task of promotional tools are to move buyers through the spectrum from unawareness, to interest, to desire, and to action (AIDA).

SLSL creates awareness through - the high street location, logoed uniforms, newspaper advertising, online presence and estate agent sign boards

Newspaper advertising costs SLSL £400 per week. it is being overtaken by the internet. This is shown in Table 4's awareness figures.

Pros of internet over newspaper advertising: no geographical boudaries, less expensive, can provide more details, can incorporate text, graphics and videos, and can be measured in terms of performance.

Personal selling pushes the buyer through the remaining stages of the process. This is why the quality, skills and professional image of SLSL is so important.

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Macroeconomic Influences

The housing market is largely affected by the state of the economy.

The ability of people to buy depends on - real incomes, employment / unemployment and the rate of interest to be paid on a mortgage.

Table 2 shows us that, despite historically low interest rates, mortgage lending has not increased substantially, and therefore, the long expected recovery of the housing market has not occurred.

The amount of money available for new mortgages has declined

Mortgage providers may offer 80% mortgages rather than 90%, forcing buyers to pay a higher deposit

Mortgage providers are more cautious over who they lend money to

Table 3 shows us that house prices were no higher in September 2011 than they were one year earlier. The summer of 2011 (should be a peak) shows falling prices.

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Macroeconomic Influences (continued)

A House Price/Earnings ratio of 4.39 means that the average house price is 4.39 times average earnings. The fall in the final few months show that property is becoming slightly more affordable.

Other variables include:

Unemployment - rising unemployment reduces the number of potential buyers

The general rate of inflation - a rise in prices greater than the rise in wages will reduce real incomes

Taxation - e.g. a rise in VAT or income tax will reduce income available

These influences can reduce the number of vendors, buyers and house sales, as well as the price (commission) received by the vendor and SLSL.

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Ethical Issues (62-67)

Transactions are based on 'caveat emptor', meaning "let the buyer beware". This means the seller is not obliged to point out weaknesses, but they should not tell untruths to get a sale.

An inflated valuation of a property misleads the vendor and ultimately will not do any good for SLSL. The property will most likely not sell, and SLSL will not get any commission.

It is also unethical to place a deliberately low value on a property to get a quick sale.

It is important to comply with the law as there are penalties (fines and imprisonment) for non-compliance.

The estate agency business is based on trust. If the agent abuses the trust placed on it, then it acquires a bad reputation which will result in a decline in instructions from vendors and offers from buyers. This is self-defeating in the long run.

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Bonus Schemes

Bonus payments are designed to motivate staff by providing an addition to basic pay. This helps to prevent job dissatisfaction and encourage employees to remain loyal.

It also provides recognition of effort - recognised as a motivator by Herzberg.

Financial incentives are only likely to motivate if they: are clearly understood, worth striving for and are seen to be fair.

The staff at Oakford and Upham want a branch based bonus to be implemented as they feel they contribute more to the company's profits. However, the average house price is over £100,000 less than in Oakford or Upham and the market is also much more competitive.

Also, Stamton: received more instructions, arranged more viewings, received more offers and sold more properties.

Stamtons' 'poor performance' could simply be down to the fact that there are not enough staff to cope with the workload, and it is a relatively new branch.

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Bonus Schemes (continued)

A branch based bonus might be seen to be unfair to staff struggling in less favourable conditions.

The implication is that no-one would want to go to Stamton if it endangered their bonus.

To the Roleys, they would not be in favour of the branch based bonus as it would be payable whether or not the business is profitable, unlike in the current bonus scheme.

Other incentive payments could be considered such as bonuses related to the number of valuations, instructions, viewings and offers linked to individuals.

There is a strong case for a commission related bonus if it can be proved that, by persuasive selling, the branch team can make a real difference in terms of more sales, higher sales prices and faster completion.

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Changing the Fee Structure

Even when a sale is successful, SLSL has to wait a considerable period of time for its money, worsening SLSL's cash flow.

The staged payment would not only improve SLSL's cash flow, but also increase income and profits.

Vendors might be reluctant to instuct SLSL if they are to be faced with a high upfront fee with no guarantee of a sale.

SLSL might be able to win potential vendors over to the new fee structure, but only if it can demonstrate that the company is offering a superior service to that of its rivals.

Alternatively a flat rate upfront payment (e.g. £500) of commission could be required, with the balance payable upon completion. This may not seem fair to lower income vendors and so different flat fees could be used in different branches.

Another alternative is to request a first payment when an offer is accepted (e.g. 20%). Easier to calculate as the sale price is known, more acceptable to vendors.

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Uses and Limitations of CPA

CPA is a planning tool used for the completion of major projects which involve a large number of separate activities.

It enables SLSL to:

estimate/minimise project completion time and identify where activities can be carried out simultaneously

motivate and monitor staff as SLSL can assess how they are doing against targets

transfer resources to critical activities to avoid delaying the sale

In general it can: minimise wastage of resources and maximise profitability.

However, house sales are rarely similar in terms of duration and complexity, it depends on the state of the housing market and SLSL does not have full control over all the processes.

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Speeding up the Process

CPA can be used to ensure completion in the shortest possible time.

We assume that the personal skills of the estate agent, and the quality of their marketing material can speed up the (viewing) process.

Between the offer and completion stages, other professionals take over. The estate agency can try to chase progress and someone could be hired to undertake this work.

SLSL could use benchmarking to judge its own performance against others and try to find the cause for the poor performance in Stamton. It may also be able to identify how the process could be improved.

The early stage is largely dependant on the state of the market, and the latter stage is dependent on other people and the housing chain.

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Assessing Strategic Options

Is it suitable?

In terms of: economic sense? Does it help in achieving SLSL's revenue objective?

Is it feasible?

In terms of: implementation? Does SLSL have the resources (Financial, HR, physical)? How can it obtain the resources?

Is it acceptable?

To the key stakeholders? What are the risks? Will it generate sufficient return in relation to the risks?

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The Opportunity of Lettings Management

This would involve SLSL becoming a managing agent, advertising the property, vetting possible tenants, drawing up contracts and receiving rents.

Suitability: The proposal could contribute to SLSL's objective. A downturn in the owner-occupied market will lead to a rise in the the demand for rented accommodation.

There is likely to be more scope in Stamton, where the population is larger and house prices are lower. It could be seen as a market segmentation strategy.

Feasibility: If additional premises are required, external finance might be necessary to fund for this new venture. Additional staff may be required if those currently employed are fully stretched. There would also be a need for some staff training.

Acceptability: Key stakeholders would like the idea if it can be shown to be profitable.

Ideally, SLSL should move into this market incrementally (in one branch) to reduce the need for significant investment, and then possibly expand depending on results

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Website Move Away From the High Street

Suitability: A high street presence might be important in raising awareness, as well as being considered a convenient and important part of the service offered by SLSL. It would reduce costs which could permit lower commission rates, making SLSL more competitive. Additional income could be raised from selling or renting out the premises owned by SLSL (valued at £350,000).

Feasibility: It is feasible in terms of the technology needed and any finance required could be raised by selling the owned premises.

Acceptability: The Roley's are considering the move, so must find it acceptable. Andrew ,Boddie however, will be concerned with the dividends he receives and the implications for Hanna's career. The employees will judge the idea in terms of their job security, bonus payments and job satisfaction.

The uniforms and logos suggest the directors consider the personal touch to be essential. However this would be lost along with the physical presence.

SLSL risks losing sales by moving online only, so one office could remain open.

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Move Into Market Harworth

In terms of Ansoff's Matrix, this represents Market Development (same product, new people).

Assessing the potential of Market Harworth - an important strategic decision requires more than an afternoon searching websites

From Table 5, it is clear that there are more houses in Market Harworth than Oakford and Upham, it is growing more rapidly, and property values are higher than Stamton. However, it has lower property values than Oakford and Upham, and there is more competition.

Suitability: Whether or not the fourth branch could be opened in time to help achieve the 4% rise in revenue depends on how quickly suitable premises could be found, and staff recruited.

Feasibility: It would involve substantial costs. It is unlikely that SLSL has sufficient internal funds to set up a fourth branch. To open the Stamton branch required a £50,000 loan plus £8,000 share capital. Therefore SLSL need at least £58,000.

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Move Into Market Harworth (continued)

Feasibility: SLSL has a low gearing which could help secure external finance, but banks are now more restrictive in their lending. A new loan will increase the loan burden, impacting profits.

Acceptability: It is likely to be found acceptable by the shareholders. For employees, their attitude towards it will depend on whether it will involve some moving to the new branch, and implications for their bonus.

A fourth branch at Market Harworth remains a potentially profitable strategy, but more information on costs and expected revenues is required.

Market Harworth as a replacement for an existing branch: Stamton is weaker (but it has less FTE staff, is a relatively new branch, there is more competition). It is possible that the Market Harworth branch might struggle just as the Stamton branch has done.

Staff who refuse to relocate might seek redundancy compensation. Savings made from closing the Stamton branch might be insignificant if it is not owned by SLSL.

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Interpretation of Relevant Financial Ratios

Fixed assets are assets of the business which have been held for more than one financial period. Current assets are cash or assets that will be turned into cash in the near future.

Current liabilities are short term debts which must be paid within 12 months.

Net current assets = current assets - current liabilities

Net assets = fixed assets + current assets - all liabilities

Equity Shareholders' Funds: the amount that shareholders have put into SLSL

SLSL: is highly profitable, appears to be highly liquid, is lowly geared and has fixed assets worth £350,000.

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Financial Ratios

Gross Profit = 868,946 (revenue) / 331,200 (employment costs) = £537,746

Net profit before tax = 537,746 (gross profit) / 184,000 (overheads) = £353,746

Net profit before interest and tax = 353,746 + 1,750 (3.5% of 50,000) = £355,496

ROCE= (355,496) net profit before interest and tax / (426,000) capital employed X100

^ SLSL generated £83.45 net profit for every £100 invested (very good)

Current Ratio = (66,000) current assets / (10,000) current liabilities = 6.6 (very good)

Acid Test = (61,000) current assets - stock / (10,000) current liabilities = 6.1 (v. good)

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Revision & Examination Technique

Know the difference between knowledge, application, analysis and evaluation.

Allow at least 3-4 minutes to plan

Brainstorm relevant points

Prioritise the order in which points will be discussed

Explain how you intend to answer the question

Include advantages, disadvantages, impacts/ effects of current and proposed activities. Make suggestions to SLSL. e.g. SLSL may consider...

Conclude each question by stating what is particularly important/ the most appropriate option and why. Consider short-term and long-term when possible.

Relate all answers to the question set, objectives of SLSL, resources available and the likelihood of success.

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This is an excellent example of how revision cards can be used to fully analyse a particular case study. Students can use it as a template for analysing a case study they need to revise for.

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