TASK 1

a. To: Business Manager

From: Business consultant
Subject: Analysis of FashionFinds’ relationship with Closup

This briefing paper aims to discuss about stakeholder claims, corruption at Athland and the major
risks faced by FashionFinds.

i. Claims of employees and customers

The employees of Closup, will seek fairer terms and conditions, a safer workplace and more secure
employment and better pay from their employers. In some countries, trade unions or labour pressure
groups can express the collective claim of employees. The PWR is an example of this.

You are looking for a continuing supply of cheap garments. Your business strategy is based upon the
assumption of continuing supply at low unit prices. FashionFinds therefore has an incentive to
maintain the pressure on Closup to minimise its costs, including labour costs.

Conflicts in the claims

A potential conflict between your claims and employees’ is in the control of costs. FashionFinds’ low-
cost advantage, is paid for, in part, by the poor terms and conditions of Closup’s employees. If Closup’s
employees were to receive higher salaries and improved work conditions, the increased costs could
make it difficult for Closup to retain its low prices to FashionFinds.

ii. Corruption at Closup

Athland is a country with weak regulatory controls. It is evident that Athland did have the requisite
regulation in place over such important matters as building construction, escape routes and building
occupancy. The problem was the effectiveness of the state in enforcing that regulation.

The first incidence of corruption in the case was the employment of inferior building materials. The
motivation behind this was to achieve a lower total capital outlay for the building and also a quicker
completion time on the project. In both cases, the intention was to make the capital investment lower,
presumably to reduce the debt created by the construction and hence the debt servicing costs. A
certain grade or quality is necessary to ensure the safety and integrity of the building when used and
under stress.

Likewise, bribes were offered to persuade officials to provide a weak level of inspection when the
building work was being carried out. It is common for building inspectors to be present during
construction to ensure that relevant regulations are being adhered to. The Fusilli brothers corrupted
these officials to the point where they did not adequately perform their duties. In doing so, the officials
failed in their duty to the public interest and were complicit in the weak construction that, in turn,
contributed to the building’s collapse.

The Fusilli brothers completed the building without the requisite number of escape routes. Because
each escape route takes up a physical amount of space (with the door itself and the pathway needed
to allow passage to the door), the space available for machines and other value-adding activity would
be reduced and the building would be costlier to construct. This explains the Fusilli brothers’ motive
to make this illegal change to the plans. More people may have been able to evacuate the building
were such regulations adhered to and a safe number of escape routes provided.

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Finally, the occupancy rules were not enforced by officials. Over-occupation can lead to accidents or
other safety hazards. The number of people in the building is also a determinant of the evacuation
time and, in turn, the risk to the safety of the occupants in the event of collapse. The fact that three
times the regulated number of people worked in the building meant that escape plans were rendered
much less effective and this would have significantly contributed to the casualties.

iii.

Exchange rate risk

FashionFinds needs to pay Closup in the currency of Athland whilst selling the garments in its home
currency. Because currencies rise and fall against each other, the loss incurred by that adverse
movement multiplied by the company’s financial exposure is the hazard or impact of exchange rate
risk. So, the cost of a transaction in one currency becomes more expensive

The loss to FashionFinds’ shareholders is the actual loss incurred by an increase in the value of
Athland’s currency against your own and the consequent increase in costs. This can be a material cost,
affecting the buying decision, or it can add to FashionFinds’ expenses and therefore reduce your
profits on the purchases from Closup.
In addition, though, a large amount of exposure to exchange rate risks can incur risk management
costs such as exchange rate ‘hedging’, as well as the increased uncertainty over the volatility of
FashionFinds’ profits.

Supply risk
This is the risk that FashionFinds will not be able to obtain the inputs it needs (garments at the right
quality and cost) to sell in your own stores. In this case, the collapse of Closup’s building in Athland
means that, at least in the short term, Closup will have difficulty in meeting your need for supplies.
With approximately half of the 65% of your Athland supplies coming from Closup, you are likely to
suffer from a shortage of supply.

Any interruption of supply will mean fewer choices for your customers in your stores with potentially
increased prices. In a competitive retail environment, your success, and hence shareholder value, is
dependent on having a range of suppliers to source from, and to play them off against each other in
order to achieve the lowest unit costs and the best supply terms and conditions. So, the realisation of
a supply risk will reduce shareholder value.

International political risk

Political risk refers to a potential failure on the part of the state to fulfil all or part of its functions. It
can also relate to any potential influence a government has on the business environment in the
country concerned. In the case of Athland, the state was believed to be weak in enforcing building and
safety regulation and its failure to adequately do so was one of the causes of the collapse of the
building which not only led to the loss of many lives but also to the loss of a substantial part of your
supplies.

International business transactions, including imports from Athland, work effectively when a sound
legal framework is in place. Regulatory controls, over the quality of materials, labour and distribution,
need to be in effect. For shareholders in FashionFinds, the ineffectiveness of the government of
Athland means that suppliers in that country (such as Closup) become unreliable negatively affecting
shareholder value.

We trust our briefing paper provides a better understanding on the above matters. Should you require
clarification, please contact us.

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b. Press statement from the board of FashionFinds

FashionFinds’ response to recent events

Press release
(For release date/ time)

This statement is to address several issues of interest to shareholders and which have been raised in
the aftermath of the tragic collapse of the Closup building in Athland. FashionFinds extends its sincere
condolences to the victims and their families.

In response to criticisms made, we would like to make several points to clarify our position. This is to
ensure that stakeholders have full confidence in the company and continue to lend their full support.

i. Corporate citizenship

The company resents and strongly refutes any allegations that it has been a poor or irresponsible
corporate citizen. FashionFinds recognises its role as a corporate citizen.

We have responsibility to obey the law, and fit in with the social and ethical norms of society. With
our substantial footprint in society, we do acknowledge and fulfil our responsibilities.

We are a major employer and, through our international supply chains have a large social and
economic impact. We always comply with the laws and social norms of each country we operate in.
This extends to being a good employer, maintaining prompt payment of payables, encouraging good
working conditions at supplier companies and similar areas of good business practice.

Another equally important aspect of citizenship is the exercise of rights. FashionFinds is a business
conducting legal contracts with suppliers and selling legal products. As such, we have the right to be
protected by the law in the pursuit of our legal business activities. In addition, we have the right to
receive the support of society in terms of our investors, employees and customers.

The FashionFinds board would therefore like to remind people that it was not us who occasioned the
tragic collapse of the Closup building in Athland. It was the negligence and corruption of parties
outside our control, and therefore it is unfair to implicate us in any criticism directed at Closup.

ii. Accountability and fiduciary duty

We would like to take this opportunity to address two other important subjects, raised in recent media
coverage about FashionFinds: accountability and fiduciary duty.

The board of FashionFinds recognises its accountabilities in several ways. Accountability is the ability
to call to account and to accept responsibility for our decisions. As a public limited company, our
primary accountability is to our shareholders, discharged in part through annual reports and AGMs.
This is not to say that we are unwilling to work with suppliers to help to improve their employee
conditions. In fact, we fully recognise that such improvements would be to our advantage as well.

Miss Lui’s believes that FashionFinds has accountabilities for events in our supply chain. However, the
board of FashionFinds does not share it. It is unreasonable for us to accept responsibility for events
over which we have no direct control. FashionFinds recognises its accountability to its shareholders to

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deliver sustainable returns and would challenge any view which suggests it should be held to account
for the behaviour of others in the supply chain, such as Closup.

The board also recognises a fiduciary duty it owes to a range of stakeholders. However, our legal
fiduciary duties are primarily to our shareholders and employees in that we comply with all relevant
laws and regulations. The board is appointed to act in the fiduciary interest of our shareholders
through the pursuit of profitable strategies and the management of strategic risks.

Miss Lui is of the view that since we purchase from a certain supplier, it makes us complicit in illegal
and unethical practices at that company. The construction of the building and the conditions of
employment for Closup’s employees is a not a matter over which we has any fiduciary duty as this was
entirely within the control of Closup’s management. Some say it was our pressure for cheap prices
which created the conditions for the tragic events, but Closup freely entered into contracts with us at
agreed prices. Our fiduciary duties extend to our shareholders and employees.

iii. Integrated reporting

We would also like to take this opportunity to talk about our plans to introduce (<IR>). We see a
number of potential benefits for us and for many of our stakeholders also.

First, the need to report on each of the 6 types of capital would create and enhance a system of
internal measurement at FashionFinds which would record and monitor each type for the purposes
of reporting. So, for example, the need to report on human capital, would mean that FashionFinds will
have systems in place to measure our employees’ competences and performance. These systems
would support the company’s internal controls and make the company more accountable in that it
would have more metrics upon which to report.

Second, the information disclosed would create a fuller and more detailed account of the sources of
added value for all stakeholders. <IR> would enable us to show all stakeholders, how we have
accumulated, transferred or disposed of different types of capital. So, for example, by reporting on
the social capital we have consumed, transformed and created, we can show stakeholders the jobs
we have created or sustained (and the value created) in our international supply chain.

Third, <IR> will show how we have created value for many stakeholders and not just for our
shareholders. So, a reporting about social and relationship capital, for example, may be of benefit to
our communities and suppliers. The requirement to report on this change ensures that those
stakeholders who wish to value a particular type of capital from their own perspective can assess the
value of the company in that regard and can also assess how the company’s value has changed in
favour or against their own specific interest in a reporting period.

For more information, press only:

PR Contact Name
Phone number
Email

(48 marks)

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 TASK 2

To: MFP management

From: Dennis Lillee
Date: Today
Subject: Macro-environment and industry factors

This report first aims to assess external factors from the political, sociocultural, environmental and
legal perspectives. The analysis will include an assessment of the likely effect of such factors in the
context of the strengths and weaknesses of MFP. Secondly, the report will analyse the industry,
assessing its implications for MFP.

a. Political, sociocultural, environmental and legal factors

Political
The new government 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 must be matched by the
employer. 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 by employees for pay rises to compensate them for the 5% of their gross income.
The cost of labour can be viewed as a competitive weakness of MFP. The fact that you pay your
employees more than competitors means that the 5% increase will have a larger absolute effect on
your 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 where customer service is both impersonal and
minimal. The trend within society to value personal service is an opportunity for MFP as it ranks first
amongst supermarkets for personal service. Therefore, your network of smaller shops 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

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 popular. MFP is again unique in that it is the only top-ten supermarket chain which is a co-operative.
You 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 shelves within the store as many customers found that goods
were out of reach when they were actually in the store.

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.
This may be a problem in your smaller stores, where storage space might be at a premium, so again
the small size of these stores is a weakness.

This may also be an area where large competitors are at a disadvantage. The ‘pile it high’ approach
associated with no-frills retailing may be incompatible with the legislation.

However, the new legislation might be the stimulus MFP needs to streamline your supply chain. MFP
has weaknesses in this area and has not exploited technological advances in product control,
movement and storage. This legislative change provides an opportunity for addressing this weakness.

Environmental
Some consumers are increasingly concerned about the environmental impact of food and other
products they purchase. This is in terms of the excessive and elaborate packaging of the goods, and
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’s image of environmental sensitivity, combined with its
status as a co-operative, makes it the supermarket of choice for many such consumers. This image of
environmental sensitivity can be reinforced by:

• Ensuring minimal packaging, or charging for packaging. As well as highlighting the company’s
green image, it also brings down costs 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.

b. The second part of this report will analyse the industry in which MFP operates.
Buyers
Although buyers are individuals, their bargaining power is relatively high and this is why supermarkets
are so sensitive to price and keen to establish schemes which ‘lock’ the customer. At MFP the dividend
scheme for customers plays such a role.

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The bargaining power of buyers is high also 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 of competitors. Comparison websites
provide pricing information across a range of supermarkets.

Suppliers
In contrast, the bargaining power of suppliers is low. A number of factors contribute to this:

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.

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.

Threat of new entrants

This is 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 new, large entrants from overseas is still high.

Threat of substitute
Supermarkets are substitutes for smaller shops which provided the products in the past. So, the
smaller shops which remain are potential substitutes for the supermarkets, particularly now that
sociocultural trends suggest that these should be valued. However, the threat is low for MFP, as you
recognise the values of both supermarkets and shops.

A more significant substitute would be the virtual supermarket with customers ordering products
online and having them delivered directly to their home. There may be no need for physical
supermarkets in the future as products are directly sent to the customer. Many shops, bookshops and
toy shops traditionally on the high street have disappeared to be replaced by online virtual substitutes
and so the threat is high.

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 Rivalry
This is relatively high because:
• Buyers can easily switch from one supplier to another.
• Products are not 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 high capital is required to enter the industry, the consequent exit costs are high.
• There are many competing firms and potential substitutes.
Conclusion

Politically, MFP is at a disadvantage because the potential changes will cost MFP more than its rivals.
Legally, the new Disability Access Legislation might require MFP to make changes to its shops, and
incur some costs, in order to provide disability access to the store areas. However, impending socio-
cultural and environmental changes exploit strengths of MFP, giving you an advantage over your rivals
and these opportunities seem likely to continue into the future.

Overall, the industry appears to still be attractive. The market has grown by almost 17% in the last five
years and this has been exploited by large overseas-based supermarkets. MFP has a higher bargaining
power over its suppliers and investment in appropriate technologies should reduce the threat of
online substitutes. MFP’s revenues have increased by 10% over this period, which is almost as much
as HypCo, the largest supermarket. Arboria remains a wealthy country and its economy is still growing
and so the market may continue to expand, easing competitive pressure.

Marking scheme

(a) 2 marks for each well explained but appropriate point. 10 marks
Professional marks 4 marks

(b) 2 marks for each well explained but appropriate point. 12 marks
Professional marks Max 3 marks and 1 mark for a good conclusion

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TASK 3
Letter

To: The Director-General

From: Consultant
Date: Today
Subject: Assessment of current and desired culture

Dear Sir

I trust this letter finds you in good health. This letter aims to analyse the current culture of NM and assess
how you may need to change the culture so as to align the culture with the aims of the government. In
the process, I have questioned some of the existing norms.

Control systems
Current
The BOT also uses HCs as a guide to allocate finance internally. Sections with HCs receive the largest
budgets. The formula of allocating increases based on last year’s allocation, plus a percentage,
perpetuates the division and accentuates it in real financial terms. Hence, smaller sections remain small
and their chance of obtaining artefacts to be defined a HC becomes slimmer every year.

Future
You will have to allocate budgets to sections based on visitor popularity, disability access targets and other
new performance-related KPIs as necessitated by the new government. The sections which meet most of
the KPIs should receive the most money. The idea is to stimulate sections to come up with innovative
ideas that will attract more visitors to the museum.

Symbols
Current
The head of each collection section enjoys many privileges (reflecting their high power), including a large
office, a special section heads’ dining room and a dedicated personal assistant (PA) and is conferred the
title ‘Professor’. Their language also shows a disdain for customers, managers and colleagues.

Future
Remove the head of sections’ dining room and perhaps turn this into a restaurant for visitors. This move
not only reduces operating costs but creates an additional source of income.
Also remove the head of sections’ personal assistants and introduce a support staff pool to reduce
administrative costs.

Very importantly, the section heads must start to recognise and respect the diverse stakeholder groups
that may add value to the museum. For instance, they should refrain from using language or terminology
that shows disdain for visitors and acknowledge them as an important source of income.

Power structure
Current
The current structure is department-based, largely reflecting the power of the section heads who
dominate the Board. Three of the five directors represent collection sections.
The BOT is also dominated by powerful people who are well-known and respected in academic fields
relevant to the museum’s collections. Section heads appear to have close and influential ties with 6 of the
8 trustee members.

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Future
You have to reduce the power of the section heads by appointing just one director on the board for all
collection sections together. You will thus take away the dominance of the collection heads - only one of
six directors will represent the collection sections.

You will also have to appoint a Visitor Services director as visitors will be a key source of income and an
important KPI. Similarly, there is an urgent need to appoint directors for Resources (purchases, property,
personnel), Finance and Information Services (IT, public relations).

Routines and rituals

Current
It is an acceptable routine for directors to directly lobby the BOT and to write letters to the press and
appear on TV programmes to promote their views. In most organisations issues within the boardroom
remain confidential and are resolved there. However, this is not the case at the NM.

Future
You will have to alter existing reporting lines. As a full-time Director-General, you must insist that section
heads report to you and not circumvent you and express their concerns directly to the BOT or the press.

Generating income by charging a reasonable entrance fee, displaying 90% of the exhibits, selling posters,
postcards and other souvenirs and managing the restaurant should be newly introduced routines.

Paradigm
Current
According to the section heads, the museum exists for the good of the nation. It is funded by government
and should continue to be the case as “we are the guardians of the nation’s heritage and culture. What
constitutes heritage and culture is determined by us, the experts.” Your section heads think that they are
more important than anyone or anything else.

Future
Given the impending changes, two more crucial elements are missing from this paradigm: visitors and
customers. The section heads must now accept them as an integral element of NM’s paradigm as they
will be a significant source of income and the key determinant for budget allocation to and within the NM.

Changing the current paradigm will take considerable time and effort. However, such a change is
necessary if the government wishes to successfully privatise the NM.

Please contact me if you need further information or clarification.

Sincerely
MSD

MARKING SCHEME

Up to a maximum of 3 marks for each valid point that identifies required changes
for each of the 6 elements not including the paradigm but total not exceeding 15 marks
15 marks
Up to a maximum of 3 marks for each valid point that identifies required changes
and implications for the paradigm 3 marks
Professional marks 4 marks

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