In the Strategic Professional Examinations it is not always possible to publish suggested answers which comprehensively cover all the valid points which candidates might make. Credit will be given to candidates for points not included in the suggested answers, but which, nevertheless, are relevant to the requirements. In addition, in this integrated case study examination candidates may re-introduce points made in other questions or parts of questions as long as these are made in the specific context of the requirements of the question being answered.
The suggested answers presented below inevitably give much more detail than would be expected from most candidates under examination conditions, and include most of the obvious points evidenced from the case information. The answers are therefore intended to provide a structure of the approach required from candidates, and cover the range and depth of knowledge relating to each task which might be demonstrated by the most well prepared and able candidates. They are also intended to support revision and tuition for future examinations.
1 (a) Background section of consultancy report
One mark per relevant point for discussing any relevant environmental model such as Porters five forces, or PESTLE.
Introduction
The first part of this report analyses DCS Company’s market and the industry using the Porter’s Five Forces model.
(i) Bargaining power of buyers
DCS is competing in two markets. In the data communications component market which is more mature and where it has less than 1% of the market share, it is a supplier of marginal significance, despite 65% of its gross profit or cash contribution being generated in this segment. Its customers in the neighbouring single market (30%) with its own currency are likely to demand low prices, high quality and reliability.
They may not accept late delivery of orders. It appears that alternative sources of supply are readily available and that switching costs are relatively low. Multinational
OEMs have significant bargaining power in this market, particularly the OEM which accounts for 40% of DCS’s current data communications component sales.
In the second market, where network management systems are supplied to mainly domestic, SMEs and a few larger companies, the buyers appear to have less bargaining power. DCS is catering for each customer’s specific needs and so each solution is, to some degree, a bespoke solution. This makes it much harder for buyers to compare products and prices of potential suppliers. Alternative sources of supply are much more difficult to find as there only three companies (including DCS) in this specialist marketplace.
The bargaining power of suppliers
Although DCS manufactures 50% of all components used in its data communications products, reducing its overall
reliance on suppliers in this sector, it seems unlikely that DCS will be able to exert much influence on its suppliers, which provide the other 50%. As a relatively small player in the data communications market, the company does not have the power to exert buyer pressure on its two large suppliers, either in terms of price or delivery. Current problems associated with the delivery of components are having a significant impact on the company’s ability to meet customer deadlines and expectations.
Suppliers of financial capital, namely lenders, have gained more bargaining power as DCS has had to borrow more to sustain their recent growth.If labour is seen as a supplier, then evidence again suggests that DCS is in a relatively weak position particularly since there has been a limited trade union membership since 2006. However, the union members are mainly in the data communications components division where employee remuneration and employment rights are already compliant with
Prydain’s national employment laws. The scenario also indicates the difficulty of finding high calibre network staff with DCS’s small size and location making it difficult to attract the key personnel necessary for future growth in this sector.
Threats from new entrants
DCS is operating in an industry where the costs of entry are significant because it is capital and knowledge intensive.
Economies of scale compel new entrants to enter at significant output levels or suffer a cost disadvantage. Furthermore,the need to offer comprehensive aftersales support, although a problem for DCS, does also create a significant barrier to new entrants. Finally, the exit costs and barriers such as industry-specific knowledge, skills and assets, reduce the attractiveness of the marketplace to new entrants.
Threats from substitutes
There is evidence that large, successful, high technology companies are particularly vulnerable to ignoring the challenge from disruptive new technologies which can replace the need for certain high technology products and services overnight. However, the relatively small size of DCS may give it a competitive advantage in its ability to respond quickly and flexibly to change, as long as it can attract the right calibre of expertise to achieve this.
Rivalry amongst competitors
Very different levels of competition are being experienced in the two market places DCS is operating in. It is clear that the high volume, low-margin component business offers intense competition with buyers who are able to use their size to extract favourable prices. DCS only has 1% of this market. The ability of DCS to generate better market share and volumes through product innovation in this market seems highly unlikely.
The intensity of rivalry in the network management systems sector is significantly less in this specialist market. DCS is dealing with a smaller number of large and medium-sized users, designing products specific to their needs. In Porter’s terms, DCS is adopting a focused differentiation strategy. In these low-volume high-margin markets, the emphasis has to be on increasing the volume side of the business, but at the same time making sure that they have the resources to attract and support new customers.
(ii) The following is an evaluation of the performance of DCS against the six capitals of <IR> and how these are being transformed at DCS between 2012 and 2015.
Financial capital
The financial data shows revenue reaching a peak in 2014, before falling away (by just over 9%) in 2015.
Although 2014 was a record year for revenues, increased cost of sales meant that gross profit declined significantly. The gross profit margin has declined every year in the period under consideration, and the reasons for this need to be investigated. The rapid fall in 2015 suggests that operating costs have not been brought under control to reflect the sudden sales decline.
Manufacturing capital
Working manufacturing capital seems to be reducing. This is confirmed by the forward contract order book. This has fallen from 3,505 in 2012 to 2,500 which will require fewer components, work-in-progress and finished products needed at the factory. It is also clear that capital budgeting and investment is slowing from 10% to 7% of turnover over the period. The R&D budget is also falling and is at 3% of turnover in 2015 compared with 6% in 2012, which is a
50% decline. These statistics indicate a clear depletion of the manufacturing capital of DCS.
Human capital
DCS seems to be seeing a depletion of high value human capital and morale may be seen as low. Recruitment and succession planning seem to be poorly planned and coordinated – leading to insufficient skilled people being recruited or promoted to replace staff either leaving the company or retiring early. There is just over 15% fewer staff at DCS in
2015 compared with 2012.
However, human capital has performed reasonably well from a productivity perspective. Analysing the data, productivity reached a peak in 2014 and has only fallen slightly in the last financial year:
Social and relationship capital Social capital measures cultural health within the company and one of the ways this can be assessed is by using staff
satisfaction surveys. The case indicates that employee satisfaction has been declining between 2012 and 2015. The increase in trade union membership may be a symptom of this. The case indicates that the survey measures such aspects as confidence in the leadership, opinions about personal growth and individual wellbeing. Each year since the surveys were launched, the satisfaction ratings have fallen by more than 15%.
Intellectual capital
Another area where DCS seems to be failing is in its maintenance and transformation of intellectual capital. There has been a depletion of intellectual capital, through skilled staff being either underutilised or leaving the company. This can be related to two areas:
– Staff turnover
– R&D.
Clearly the stock of intellectual capital is closely correlated to the stock of human and cultural capital. DCS seems to be depleting all three of these and its staff turnover has increased by 150% since 2012.
Natural capital
It is clear that DCS has a growing carbon ‘footprint’ and that it is unable to identify where precisely in its value chain the carbon footprint is most problematic. The information in the case shows that the overall carbon emissions are increasing. Carbon emissions have risen by 1/3 since 2012.
The case clearly indicates that the main cause of the carbon footprint is in the data communications components manufacturing division. This is already a high volume and relatively lower margin sector of the business which will be subject to additional carbon taxes under the government proposals. There is also likely to be a greater carbon cost with this sector as a significant proportion of these components are exported to the nearby continental trading community.
Conclusions
DCS needs to be aware of the dynamics relating to its market and industry, particularly the power of key customers and over reliance on two main suppliers. It must also be aware of and manage the threats from substitutes and new entrants in its two main business segments.
On the company’s performance against the six capitals of <IR>, DCS’s performance in several areas is weak and indicates a strategic drift which will need to be addressed.
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