MOCK EXAM 02
Section A- This ONE question is compulsory and MUST be attempted
QUESTION 1- MEHERLAND SPORTSWEAR (MS)
Meherland Sportswear (MS) is the market leader in sportswear in Zealand, selling a variety of sportswear products under its own well-known brand. It is primarily a product development and marketing business as it contracts out all of its manufacturing to third parties around the world and it mostly sells its products through third-party retailers. It has only one store which is located in the capital city of Zealand. The purpose of this store is to act as a centre for its marketing activities and to be a tangible representation of the MS brand. However, the main marketing activity for MS is the recruitment and promotion of star sports men and women as MS brand ambassadors.
MS tries to have the most well-known sports star in each of the 10 most popular sports in Zealand as an ambassador. You are a performance management advisor to MS, brought into the company by the chief executive officer (CEO) to help the board with a number of issues. The first area which the board of MS requires your input is in a review of the existing performance dashboard for MS (Appendix 1). The dashboard is deliberately kept focused as it is for board use and the CEO has indicated that the three performance headings of ‘financial, design and brand’ will be kept at this time. The board has accepted that there may need to be up to two metrics for each of ‘brand’ and ‘design’ but they want to keep the number of financial metrics at three.
The mission statement of the business is designed to be broadly appealing. It is ‘to inspire Zealanders to compete’. From a business perspective, the aims are more focused, MS aims to grow as a business and to maximise shareholder wealth. The CEO further clarified the broad strategy to achieve these aims saying, ‘We want to inspire competition not just in our customers but also within the company, to seek our greatest competitive advantage. We will achieve this by creating innovative products which provide reduced risk of injury and enhanced sporting performance supported by the best marketing operation in Zealand.’
In order to assist in providing more detailed strategies to achieve these aims, the board has instituted a review of the competitive position of MS by commissioning a SWOT analysis (Appendix 2).
The CEO has asked that your first task be a review of the current dashboard metrics (Appendix 1). You should then review the SWOT analysis to suggest changes to the dashboard metrics within the constraints which the CEO has outlined.
Also, you are given details on a recent new development in the market. Neil Sportswear, one of the major competitors of MS, has recently suffered a scandal which has been widely reported. An investigative reporter discovered that one of the suppliers who manufactured sports shoes for Neil had been using child labour. The country in which the manufacturer worked had rules prohibiting child labour, but enforcement was very weak. This story has been widely covered in the media and has led to consumer boycotts and a review by the Zealand business regulator into Neil’s sourcing policies. It has been discovered that this is common practice in the sports footwear business where manufacturing is outsourced to such countries.
MS’ shareholders have reacted with alarm to the potential damage that this could do to MS’ brand. They have asked the board to consider changing their policy of outsourcing footwear manufacture. The board is considering two alternative responses:
Review and ensure that all outsourced footwear manufacture complies with appropriate employment terms and conditions (where necessary manufacturing would move to third-party companies in countries with appropriate regulation and enforcement); or
Create a manufacturing operation for MS in order to have full control of operations. In response 1, the review of existing third-party manufacturers is being performed by a team from the procurement department. They have also considered the impact of moving all footwear sourcing to more strictly regulated environments. The results of this investigation are given in Appendix 3 and the board wants an evaluation of the qualitative and quantitative impact of this response.
In response 2, the board is considering setting up a factory for the manufacture of all MS footwear. They want to understand the impact of this on MS’ existing performance metrics. First, they need a forecast of the profit from the factory as there are three distinct economic scenarios under which it might operate (see Appendix 4 for details).
Second, the board wants to know how the new factory will impact on the existing performance dashboard. However, since the probabilities of these economic scenarios are under debate, the board has said that they want this work to be independent of the results of the profit calculation from Appendix 4. Therefore, the board wants you to use an estimate of $103m profit before interest and tax from the new factory to evaluate the impact of the new factory on the dashboard. (This estimate is before product development and marketing costs as it only represents the manufacturing operation at the factory.)
Finally, the consultant who did the SWOT analysis has mentioned to the board that if they are thinking of reviewing their existing strategies, then they should consider using the value chain to secure competitive advantage. The CEO thinks that you should assess the implications of using the value chain for the performance management of MS. (An outline of the value chain is given in Appendix 5.)
Write a report to the board of MS to:
a. Assess the existing five metrics (Appendix 1). Using the SWOT analysis in Appendix 2, make suggestions for improvements within the constraints outlined by the CEO. Note: You should ignore the impact of the Neil scandal in this part of the question.
b. Using the data in Appendix 3, assess the qualitative and quantitative impact on performance management at MS of response 1.
c. Calculate the expected operating profit of the new factory and evaluate the use of this method of decision-making under risk.
d. Using 2015 figures as a base, evaluate the impact of the new factory on the values and choice of metrics in the existing dashboard.
e. Explain the implications of using the value chain for performance management at MS.
Professional marks will be awarded for the format, style and structure of the discussion of your answer.
(Total: 50 marks)
MS performance dashboard
Report for the year to March 2015
|Financial % Revenue ($m)
|Operating profit ($m)
|Design awards won
Design awards are national clothing design awards which address both the look and technology in a product. Brand awareness is the percentage of those sampled who could identify the company’s logo and can name at least one of its products.
SWOT (completed before the Neil scandal was reported)
- High market share
- Excellent brand awareness
- Strong revenue growth (compared to industry average of 11%)
- Supply chain management
- Loss of a key brand ambassador (who was injured when he tripped over the laces of his MS boots)
- Weak IT expertise
- New products in the market for new sports (such as those being introduced at each World Championships)
- Growth of social media as main marketing channel
Procurement review of new outsourced footwear manufacturers
Currently, MS buys 2 million pairs of shoes at an average of $21 per unit (a pair of shoes) and we assume an average selling price of $75. Cost per unit will increase by 10%. Additionally, there will be a need to perform annual audits of these suppliers which will cost $0.5m.
The change of policy will be marketed as sustaining the values of MS. The MS ethics code states ‘We will play fair and source our goods responsibly.’ This marketing will cost $0.8m p.a. but it is hoped that this will produce a gain in market share. However, the increase in sales cannot be estimated at this time as competitors are making similar moves. The reviewer commented, ‘It would be helpful to know how many units we would need to sell in order to cover these increased costs so this can be used as a marketing target.’
The data collected on the new factory depends on three possible economic scenarios in response to MS’ change in sourcing policy:
|Units manufactured (000s)
|Variable costs per unit ($)
|Fixed costs ($000s)
|Building and equipping
One unit is one pair of shoes.
Assume all units made are sold.
Assume an average selling price of $75.
The total Zealand market for this type of shoe is estimated as 6.25m p.a.