Section A – This ONE question is compulsory and MUST be attempted
MFP (Mutual Farm Products) was formed in 1910 as a co-operative shop network owned by farmers in the country of Arboria. It progressively opened small shops across the country selling products produced by Arborian farmers. Over time its expanding network of shops began to offer non-farming products from a wide range of suppliers, but it has remained true to its co-operative roots. All employees are shareholders and receive annual dividends. Customers can also become shareholders and are rewarded with dividends which reflect the value of their spending in the shops. An increasing number of customers are becoming shareholders, reflecting a renewed interest in the country in mutual organisations, such as co-operatives. MFP only operates in Arboria and it has no plans to expand overseas. Arboria itself is a wealthy, industrialised country which continues to grow.
Supermarkets in Arboria
When supermarkets were first introduced in Arboria, MFP reflected this trend by opening its own supermarkets. However, its supermarkets tended to be (and continue to be) smaller than its well-known competitors and its network of smaller shops was largely retained. In contrast, other supermarkets focused on developing large out-of-town sites serving a large catchment population. In the top-ten supermarkets of Arboria, only MFP has, in addition, a network of smaller shops.
In 2012 MFP was the eighth largest shop and supermarket chain in Arboria. It reported revenues of $10bn, compared to the $40·5bn revenue of the market leader, HypCo. By 2016, MFP was the ninth largest shop and supermarket chain in the country, with revenues of $11bn, compared with HypCo’s $45bn. During this period, two new supermarket chains have entered the Arborian market. These two new entrants, Super24/7 and Letto, already have a combined revenue of $50bn and are fourth and eighth respectively in the top ten Arborian supermarket chains. Both of these companies are overseas-based supermarkets operating a no-frills approach to retailing. Overall, the revenue of the top ten supermarket chains has increased from $300bn to $350bn in the last five years.
Margins in the sector are always under pressure and the large supermarkets continue to aggressively market their goods, highlighting price savings. They also provide customer incentives, such as loyalty cards and account discount schemes in an attempt to retain customers. For many products and services, price comparison websites show consumers the prices charged by competing supermarkets.
With the exception of MFP, all supermarkets are quoted companies with their shares largely owned by institutional investors who look for significant dividends and capital appreciation. MFP is the only co-operative in the top ten Arborian supermarket chains. Generally, suppliers to supermarkets are relatively small companies. Supermarkets’ control of consumer spending is so great that many suppliers aggressively compete to have their products stocked by the supermarket chains.
MFP has continued to promote and follow its ethical principles. It ensures that new shops and supermarkets are energy efficient. It also continues to pay its employees significantly more than its competitors. This concern for its employees’ welfare appears to lead to excellent customer service performance. For example, in a recent independent survey of supermarket customers, MFP was ranked first for personal customer service.
There is some evidence that people in Arboria are becoming disillusioned with their supermarkets and this is reflected in Appendix A, an extract from an article by the journalist Liz Bones in the influential daily newspaper, Arbor Today. Appendix B is an extract from an information sheet issued by the government to companies trading in Arboria.
Management at MFP
Management at MFP is aware that the company has certain weaknesses. For example, it acknowledges that it needs to streamline its supply chain and achieve cost savings. It also recognises that it has failed to exploit technological advances in product control, movement and storage.
However, before making changes, the management wishes to better understand the strategic position of MFP and the models used to assess this position. It has asked for a report which includes:
– An explanation of the purpose and value of PESTEL analysis and Porter’s five forces framework.
– An analysis which identifies external factors from the perspective of four elements of the PESTEL analysis: political, sociocultural, environmental and legal.
– An analysis of the market place using Porter’s five forces framework.
– The potential role of critical success factors (CSFs), key performance indicators (KPIs) and integrated reporting on formulating and monitoring strategy at MFP. The company does not currently use such concepts.
Appendix A: Have Arborians fallen out of love with the supermarket? By Liz Bones
For many years, the trend towards supermarket shopping has seemed unstoppable. The high streets of our towns have become increasingly deserted as grocers, butchers, toy shops and bookshops have disappeared under the combined onslaught of online retailers and expanding supermarkets. For example, ten years ago in the high street of Milton Magna there were three grocers, four butchers, two toy shops, one bookshop and only two supermarkets. Now, only one grocer and one butcher survive on the high street and both supermarkets have moved to out-of-town locations. In fact there are now five out-of-town supermarkets serving the people of Milton Magna.
However, there is increased evidence that shoppers are becoming disillusioned with supermarkets and yearn to return to the days when shops were smaller and service more personal.
Fiona McLean, of the department of sociology MidShire University, says that, ‘our research suggests that there is a significant number of consumers, commonly called green consumers, who are increasingly concerned about the environmental impact of food and other products that they are purchasing. This is not only in terms of the excessive and elaborate packaging of the goods, but also in terms of the ‘food miles’ that the product has travelled before it reaches the shelves of the shop or supermarket.’
In general, these green consumers have higher than average disposable income and they are prepared to pay a price premium for products which have been ethically sourced. Fiona also suggested that such consumers are part of a group who are increasingly angered by what they consider as the excessive profits of the large supermarket chains, the high remuneration packages paid to senior management and the large dividends paid to their institutional shareholders. ‘There is a feeling that supermarkets are run by fat-cat managers, exploiting small suppliers to reduce costs to create a margin for dividends that pacify demanding institutional investors’, she said.
Even the newer entrants, Super24/7 and Letto, are under threat. There is a consumer reaction against these overseas-based supermarkets which have followed a low-cost, no frills approach, with shelves stacked intensively with low priced products and where customer service is both impersonal and kept to a minimum. The low wages paid to staff in these supermarkets is also an issue for the green consumer.
So, perhaps Arboria is on the brink of a supermarket revolution! Television personalities such as Alexis Piazzio urge us to ‘think local’ and ‘shop local’. Perhaps after all, small is beautiful when it comes to shopping!!!
Appendix B: Arborian government information sheet 4560 (extract)
Disability legislation (The Access Act
The recent extension of disability access legislation requires shops and supermarkets to help all disabled customers to access all shelf areas within the store. The previous legislation just required shops and supermarkets to provide disability access to the store areas. However, many disabled customers found that goods were out of reach when they were actually in the store. This extension to the legislation addresses this issue. So, for example, all products held within the store must be reachable for a person who is in a wheelchair and, if not, a store attendant must help. Failure to adhere to this legislation will lead to a fine of up to $1,000 per incident.
Pension reform
The new government recognises that the current state funded schemes will lead to a significant pension shortfall in the future. Consequently, it has declared its intentions to make it mandatory for employees to pay 5% of their gross pay into a pension scheme of their choice. The amount paid in will be matched by that paid in by the employer. So, for example, an employee earning $10,000 per year will pay $500 per year into his or her pension fund and the employer will also be required to pay $500 per year into the same fund. It proposes that the employer will be responsible for ensuring that pension payments are correctly made into government authorised schemes and to accurately process these payments, through automatic payroll deductions, every month. These proposals for pension reform are currently under discussion.
Required:
Write the report required by MFP management which:
Analyses external factors from the perspective of FOUR elements of the PESTEL analysis: political, sociocultural, environmental and legal. The analysis should include an assessment of the likely effect of such factors in the context of the strengths and weaknesses of MFP. It should also include an explanation of the purpose and value of a PESTEL analysis.
To: The board of MFP
From: Accountant
Date: 8 June 2017
Subject: Strategic position of MFP
This report analyses the strategic position of the company by looking at the external factors and the market place (industry) factors which would likely affect MFP. It also explains the purpose and value of the models which have been used in the analysis. Finally, the report considers the potential role of critical success factors, key performance indicators and the integrated reporting in monitoring strategy at MFP.
A PESTEL analysis is designed to identify external factors which are currently, or potentially, affecting an organisation. These factors are largely outside the control of the organisation, although if the organisation is large, or if it can unite with other organisations to form a powerful group, it might be able to successfully petition agencies, such as the government, which influence these external factors. However, in general, companies undertake a PESTEL analysis to understand the drivers in the external environment and to help them prepare an appropriate organisational response to such drivers.
The PESTEL analysis contributes towards the threats and opportunities of the SWOT analysis. In such an analysis we should be able to identify internal strengths which allow us to counter threats and exploit opportunities. We should also be able to identify and address weaknesses which make us vulnerable to threats and unable to exploit opportunities. Addressing a threat might include withdrawing from the market place altogether.
In the PESTEL analysis for MFP, we have been asked to identify external factors from the perspective of four elements of the PESTEL analysis: political, sociocultural, environmental and legal. We have been asked to comment on the likely effect of such factors in the context of the strengths and weaknesses of MFP.
Political
The new government’s manifesto has declared its intentions to make it mandatory for employees to pay 5% of their gross pay into a pension scheme of their choice. The amount paid in will be matched by the employer. It proposes that it will be the responsibility of the employer to ensure that payments are made into a government authorised scheme and to process these payments, through automatic payroll deductions, every month.
Possible implications:
(1) An increase in labour costs of 5% due to the requirement to match the deduction of the employee.
(2) An increase in administration costs associated with setting up, monitoring and processing pension payments.
(3) Possible demands for employees for pay rises to compensate them for the 5% of their gross income which the government intends to make them pay into a pension fund.
The cost of labour can be viewed as a competitive weakness of MFP. The fact that it pays its employees more than its competitors means that the 5% increase will have a larger absolute effect on its costs. Margins are already under pressure, and these proposals will lead to an increase in direct and indirect labour costs, cutting margins even further if prices are not increased. Although competitors will be affected, they will not be affected as much as MFP by these proposals.
Sociocultural
There are two significant sociocultural trends relevant to MFP.
First, there is increased nostalgia for the perceived personal service of the past. This appears to be a consumer reaction against large supermarkets which have increasingly followed a low-cost, no-frills approach. These supermarkets are stacked intensively with low priced products and customer service is both impersonal and kept to a minimum. However, there is now a trend within society for customers to value personal service. MFP ranks first amongst supermarkets for personal service, and so this sociocultural trend provides an opportunity for MFP to stress and exploit its strengths in this area. Furthermore, it is unique in having a network of smaller shops and so what, from a cost perspective, might appear to be a weakness, can be presented as a strength and emphasised in its marketing campaigns.
Second, there is increased reaction against large supermarkets which pay high salaries to their management and significant dividends to their institutional shareholders. The concept of co-operative ownership, where employees and customers are also shareholders, appears to be increasingly popular. MFP is again unique in that it is the only top-ten supermarket chain which is a co-operative. It should seek to exploit this opportunity by stressing this in its marketing approach.
Legal
The recent extension of disability access legislation requires shops and supermarkets to provide customers with unattended access to all shelf areas within the store. The previous legislation just required shops and supermarkets to provide disability access to the store areas. However, many customers found that goods were out of reach when they were actually in the store. This extension to the legislation addresses this issue.
Possible implications
(1) Re-arrangement of products within the store to allow compliance with this legislation. Failure to comply will lead to $1,000 fines per incident.
(2) Possible reduction in stock displayed in the store because of reduction in high level storage.
Overall, this should have minimal effect if stock is held in external storage areas and moved to the shelves when required. This may be a problem in the smaller stores, where storage space might be at a premium, so again the small size of these stores is a weakness. However, the requirements of this legislation might be the stimulus MFP requires to streamline its supply chain and achieve economies. It is recognised that MFP has weaknesses in this area and has not exploited technological advances in product control, movement and storage. This threat from legislation provides an opportunity for addressing this weakness. This may also be an area where competitors are at a disadvantage. The ‘pile it high’ approach associated with no-frills retailing may be incompatible with the legislation.
Environmental
Some consumers are increasingly concerned about the environmental impact of food and other products which they are purchasing. This is not only in terms of the excessive and elaborate packaging of the goods, but also in terms of the ‘food miles’ which the product has travelled before it reaches the shelves of the shop or supermarket.
MFP has always been sensitive to these green consumers, for example, by ensuring that new shops and supermarkets are energy efficient. It is aware that this image of environmental sensitivity, combined with its status as a co-operative, makes it the supermarket of choice for many such consumers. It is also aware that the average wealth of these consumers is above the national average. This image of environmental sensitivity can be reinforced by:
– Ensuring minimal packaging, or charging for packaging. As well as stressing the company’s green credentials, this also has the practical effect of bringing down costs and improving profit margins.
– Stressing that local shops means fewer food miles. This is an advantage which MFP has over its competitors who have concentrated on building large stores to serve big catchment areas. Again, the network of local shops can be presented as a strength of the company.
Overall, exploiting external issues which concern the green consumer exploits a strength of MFP and these opportunities seem likely to continue into the future.
Analyses the market place (industry) using Porter’s five forces framework, assessing its implications for MFP. This analysis should also include an explanation of the purpose and value of the five forces framework.
Although customers are individual consumers, their bargaining power is relatively high and this is why supermarkets are so sensitive to price and so keen to establish schemes which tie the customer in some way, such as loyalty cards. At MFP the dividend scheme for customers plays such a role. The bargaining power of customers (buyers) is high because:
– Alternative sources of supply (shops and supermarkets) are available and easy to find;
– Switching costs are very low, from one supplier to another. In fact, if the customer is not in a loyalty scheme, then there are effectively no switching costs;
– Customers have knowledge about prices of products from the marketing campaigns of competitors. For certain products and services, comparison websites provide pricing information across a range of suppliers.
In contrast, the bargaining power of suppliers is low. A number of factors contribute to this:
The customers of the suppliers (the supermarkets) are much larger and more concentrated than their suppliers. In fact they are so large that they can usually dictate terms and prices of supply. This is essentially how margins are preserved. Lower prices to entice customers are paid for by lower prices paid to suppliers. The switching costs from one supplier to another are generally very low, and indeed suppliers often compete with one another for the privilege of having supermarkets stock their products. MFP’s stance on ethical sourcing will almost certainly give them a price disadvantage because of higher payments to suppliers. Consequently, it has to be sure that customers are aware of the sourcing of the product and that they are also willing to pay a price premium for it.
The threat of new entrants should be relatively low. After all, substantial investment in infrastructure and marketing will be required to compete with the established supermarkets, who enjoy economies of scale and strong brand identities. Any new entrant might also have to establish its own distribution channels and will be entering a competitive market where aggressive marketing and price wars are rife. However, despite this, evidence from the scenario shows that two major supermarkets from overseas have entered the market in the last five years and made considerable gains. Both were well established in their own countries and so presumably had the capital to invest and the expertise to exploit the Arborian market. They also entered using a low-cost, no-frills model which distinguished them from established supermarkets. So, the threat of further new entrants from overseas remains, particularly as the Arborian economy remains strong.
The five forces framework also considers the threat of substitute products. In this context, supermarkets are essentially a mechanism for selling goods and services to the public. They were substitutes for the network of smaller shops which provided this in the past. In a sense, the smaller shops which remain are potential substitutes for the supermarkets, particularly now that sociocultural trends suggest that these should be valued, rather than avoided as uneconomic and inconvenient. Again, MFP is in a good place, as it can position itself as an organisation which recognises the relative values of both supermarkets and shops. A more significant substitute would be the direct supply of goods from suppliers to end customers. This indeed could be a virtual supermarket with customers picking products online and having them delivered directly to their home. In fact, many supermarkets already offer this service, although products tend to be selected from the physical supermarkets which customers can visit. However, there may be no need for such physical locations in the future, products might be held in large warehouses inaccessible to the public, or by the suppliers themselves who are given orders from the ‘supermarkets’ for products which are directly sent to the customer. This threat of substitution should be acknowledged because many trades and shops traditionally on the high street have disappeared to be replaced by virtual substitutes. Many bookshops and toy shops have closed to be replaced by online alternatives.
Finally, the framework considers the competitive rivalry in the industry itself. This is relatively high because:
– As we have discussed already, buyers can easily switch from one supplier to another.
– Products (in this context, supermarkets) are not particularly well differentiated and so there is little brand loyalty. Thus schemes to try to encourage brand loyalty (vouchers, loyalty cards, customer account discounts) are rife.
– Given how much investment is required to enter the industry, the consequent exit costs are high.
– The industry has relatively high fixed costs and so responding to price pressure is difficult. The usual response to such price pressure is to transfer this pressure to suppliers and to find, or demand, cheaper supply prices.
– There are many competing firms and potential substitutes.
However, despite this, the industry appears to still be attractive to a limited number of new entrants. The market has grown by almost 17% in the last five years and so this increased capacity in the market place has been particularly exploited by overseas-based supermarkets. MFP’s revenues have increased by 10% over this period, which is almost as much as HypCo, the country’s largest supermarket. Arboria remains a wealthy country and its economy is still growing and so the market may continue to expand, easing competitive pressure.
Evaluates the potential role of CSFs, KPIs and integrated reporting in setting and monitoring strategy within MFP.(10 marks)
Professional marks will be awarded in question 1 for the structure, coherence, style and clarity of the report. (4 marks)
CSFs refer to critical success factors. These are the few key areas where things must go right for the business to flourish and compete successfully. An often quoted example is a CSF of food hygiene in the food supply industry. History shows that food suppliers with a poor hygiene record find it very difficult to compete and many have made vigorous efforts to improve poor records to allow them to successfully continue trading.
Some writers have suggested that CSFs should be primarily associated with the organisation’s customer and so provide value to that customer. Johnson, Scholes and Whittington believe that CSFs are those ‘product features that are particularly valued by a group of customers’ and, therefore, where the organisation must excel to outperform its competition. For example, if customers especially value after-sale service, then the fulfilment of this expectation is a critical success factor. So, in the context of MFP, if a group of customers values ethical sourcing, then this becomes a critical success factor for the company.
However, a wider perspective of CSFs also seems quite appropriate, perhaps with CSFs developed from each of the four quadrants of Kaplan and Norton’s balanced scorecard. Admittedly, one of these quadrants is the customer perspective, but CSFs could also be defined for business processes (fast, secure payment systems), learning and growth (staff skills and accreditations) and finance – such as profitability. This final area seems particularly significant as it is no use the business meeting customer service aspirations if it cannot do it profitably. For example, MFP has to profitably deliver ethical sourcing if the business is to continue to exist.
CSFs have to be measures in some way so that their achievement can be assessed. This is the role of key performance indicators (KPIs). An appropriate KPI for profitability might be the return on capital employed (ROCE). An appropriate profitability target, such as 10% ROCE, represents a specific performance objective for a defined period. Importantly, the KPI remains the same across periods, but the desired level of achievement might change to reflect different circumstances and aspirations. So, the ROCE performance objective might be 10% for the next year, but fall to 5% the following year to reflect changes in the external environment. Thinking about KPIs helps sharpen the CSFs. Ethical sourcing might be a reasonable objective, but how are we going to measure it and what performance objective for that measure would convince customers that we had achieved it?
CSFs and KPIs are an important input into the setting of realistic strategic objectives. These objectives reflect the mission of the organisation. However, mission statements tend to be aspirational and generic. For example, fulfilment of employee aspirations might be an important part of the mission statement. However, what (if any) critical success factor does this relate to, how should we measure it, and what degree of success should we aim to achieve? Thinking about these helps better formulation of objectives and clearer determination of the strategies and tactics designed to achieve these objectives.
Integrated reporting provides the organisation with the opportunity to re-communicate and reinforce the organisation’s mission to stakeholders and also to report on progress made to achieve the objectives which reflect that mission. Integrated reporting is much greater in scope than financial reporting. For example, CSFs associated with ethical sourcing can be re-stated in the report and progress towards desired targets (KPIs, performance objectives) can be reported. This means that strategy remains within the focus of all stakeholders. It is a continuing preoccupation, not just something developed or expressed once per year and assessed only at the end of the planning cycle.
ACCA provides a good example to follow, as it has embraced the integrated reporting concept in its own corporate reporting. For example, it set a strategic objective of sustainable growth. This was to be measured by the gross operating surplus, which is in effect a KPI. For a given period the performance target for this KPI was £15·83m. It was able to report in its annual report that the actual performance was $20·147m and so the target was easily exceeded. The wider scope of integrated reporting should fit well with the ethos of MFP which has important objectives beyond solely financial ones. It will be able to include key messages on strategic performance, value creation and the fulfilment of stakeholder aspirations, before reporting on financial performance.