Section B – TWO questions ONLY to be attempted
Luvij manufactures high quality, luxury women’s footwear. It sells its products on its own website and also to small independent retailers. In order to monitor performance and aid decision-making, Luvij collects sales data on all of its footwear ranges and feedback on its designs from customers and retailers. In addition, to ensure that prices remain competitive, Luvij has a team of staff to monitor the prices of similar products on competitors’ websites and to identify design trends in the market, which change frequently, and from season to season. Generating new footwear designs consistent with changing market trends is a critical success factor for Luvij. The large volume of data collected is entered into a complex spreadsheet by one data entry clerk.
Luvij operates a functional structure with different departments for sales, production, purchasing and design. The spreadsheet is sent by email to the senior manager of each of these departments at the end of each quarter. The senior manager for the sales, production and buying departments are expected to generate the relevant sales, production and purchasing forecasts by analysing information contained in the spreadsheet. The senior manager of the design department uses the information to generate new footwear designs consistent with market trends.
Luvij has a strategic objective to become the market leader in the sale of high quality, children’s footwear to small independent footwear retailers. It has already invested heavily in market research and developing innovative designs. To reduce the risks of not achieving this strategic objective, for example, by having insufficient capacity to produce a larger range of footwear styles, the board is considering entering into a joint venture with Shirville.
Shirville is a large manufacturer of exclusively children’s footwear. Its advanced manufacturing machinery and production techniques mean that it can produce the high volumes required to supply supermarkets and chain stores* found on the main streets of most towns and cities. Shirville’s objective for the joint venture is to utilise spare production capacity it has in a factory which it holds on a lease which expires in three years.
One recently appointed board member at Luvij has commented, ‘I believe that the external information on market trends and competitors’ prices compiled in the quarterly spreadsheet is of limited usefulness as I have heard complaints from managers that they have difficulty understanding the large volume of data given to them, and that they often receive this too late. The company I worked for in my previous job used a unified corporate database to share information in real time across all parts of the business. A similar unified corporate database may be useful for Luvij. I am also concerned about the potential problems of measuring and managing the performance of the joint venture with Shirville. The fact that the two businesses have different objectives is just one example of why these problems may occur, though there will also be other reasons.’
*Chain stores are large retailers with multiple stores based in different locations.
Required:
Explain the factors which might limit the usefulness of the external information currently used by Luvij, and evaluate how the use of a unified corporate database could help to overcome these limitations.
Relevant
For the external information to be useful, it should be relevant to the needs of the users. The information in the quarterly spreadsheet contains both sales data and information on market trends in designs. All of this information may not be relevant for all of the departments to which it is circulated. For example, data on design trends may not be relevant to the production department using it to plan production capacity.
A unified database, integrating data from different sources, would make data more relevant to users by giving users only information and reports which are relevant to them and sharing data from all relevant departments. Users would not waste time interpreting data which is irrelevant to them.
Timely
For external information to be useful, it must be available when needed. This is particularly so in the fashion industry where designs change quickly and where competitors may offer short-term discounts. The external information at Luvij is only sent at the end of each quarter, which is likely to be too infrequent in the fast moving industry in which Luvij operates. Additionally, as the information is prepared by one staff member, there could be delays in producing it if they were on sick leave, for example.
A unified database would ensure that data was available instantly, especially if linked to retailers’ own systems’ real-time sales data. This should improve the speed of decision making.
Accurate
To be useful, information must be accurate. Entering large volumes of data into a complex spreadsheet is prone to error, as well as being time-consuming. Inaccurate data may lead to poor decision making. A unified database would process all data automatically with minimal human intervention, and would thus be less prone to inaccuracies. All departments would share identical data.
Communication
Though the spreadsheet of external information at least ensures that all departments have access to the same data, the large volume of data may be difficult to understand. Managers may be overloaded with data, much of which they do not need. A unified database would allow users access only to information which they need. This would be in an easy to use format, perhaps with the ability to drill down to more detailed information held in the database.
Emailing data to a large number of staff may mean that confidential or commercially sensitive information, such as on design trends, is shared with staff who do not require it. A unified database would restrict access to information, using passwords, only to staff who are authorised to receive it.
Cost
The cost of producing the external information should not exceed the benefits of doing so. Costs of the current system include not only the costs of employing the team to compile the information but also time spent collecting, processing or interpreting data which may be inaccurate, irrelevant or out of date.
Using a unified database would incur costs of buying, maintaining and developing the system, as well as staff training. An evaluation must be made whether these costs are justified by the benefits. Some adaptation of the existing system, such as increasing the frequency of reporting the information, or sending different sets of information to different departments, may be more cost effective.
Tutorial note: The use of the characteristics of good information is one way this answer can be structured. There are many other approaches which would be acceptable.
Advise the board on the potential problems with the measurement and management of the performance of the joint venture with Shirville.
Problems of performance measurement
Measuring the performance of the joint venture may require Luvij and Shirville to share confidential information, which they may be unwilling to do. Luvij’s innovative designs for children’s footwear and Shirville’s knowledge of advanced production techniques are both likely to be commercially sensitive.
It is unclear exactly what is each of the parties’ contributions to the joint venture. Luvij is providing innovative designs, and Shirville is providing advanced manufacturing machinery and production techniques. As each party is providing different things to the joint venture, it may be hard to measure the contribution, to profit for example, from each party.
Luvij and Shirville will have their own information systems. These may be incompatible, or it may be difficult or costly to integrate them. Each party may measure or collect information in a different way, which will mean information used to measure the performance of the joint venture is not prepared on a consistent basis.
Problems of performance management
Luvij’s objective for the venture is to become the market leader in high-quality children’s footwear. Shirville’s objective is to utilise spare production capacity in a factory where the lease is due to expire in three years. As the parties have different objectives, it may be hard to develop performance metrics for the joint venture. The share of the chosen market may be a key performance metric for Luvij, and return on capital employed may be appropriate for Shirville. The metrics chosen may conflict, and their relative importance may be unclear. This will make it difficult for managers to manage the joint venture according to each party’s objectives.
Luvij’s objectives for the joint venture are long term, whereas Shirville may choose to end the joint venture upon expiry of the factory lease in just three years. Establishing timescales for performance objectives may be difficult as each party has different time horizons for the venture.
Luvij is entering a new market and has already invested heavily in market research and product design. Shirville seems to have a much lower risk appetite, as it only wants to utilise spare capacity. Managing performance may be difficult because Luvij may wish to make decisions which involve a higher level of risk than Shirville may wish to accept.
The parties have may have different expectations of the level of quality of products arising from the joint venture. Luvij manufactures high-quality footwear and will want its range of children’s footwear to be of a quality consistent with its women’s footwear range. Shirville supplies supermarkets and high street stores, probably with lower quality products. Disagreement about acceptable levels of quality may reduce the performance of the joint venture.