Financial Analysis of Grainger's Mobile Phone Manufacturing: Cost Structure and Sales, Study notes of Accounting

Download Financial Analysis of Grainger's Mobile Phone Manufacturing: Cost Structure and Sales and more Study notes Accounting in PDF only on Docsity! Exam and question tutorial management case study 2019 CIMA Professional Qualification Exam tutorial The case study exam tutorial allows you to gain familiarity with the technology used to deliver the exam. It is also available 15 minutes prior to starting your test and can be accessed here. Question tutorial The management case study question tutorial provides you with an opportunity to practice a full length case study exam using computer based assessment. We have prepared two sample case study exams based on the 2019 CIMA Professional Qualification. This document contains all the supporting material you will need before and after you have completed the tutorial. Before the tutorial Pre-seen material which applies to both variants can be accessed here Take the tutorial The question tutorial can be accessed here To access an exam you will need to create an account and then select the exam. There is no charge. Exams can be taken immediately or within 1 month. After the tutorial Review model answers and marking schemes: • Model answer for variant 1 can be accessed here • Marking scheme for variant 1 can be accessed here • Model answer for variant 2 can be accessed here • Marking scheme for variant 2 can be accessed here Management case study Prototype – pre-seen material GRAINGER Contents Page Job description 2 Organisation background` 3 Mobile network infrastructure 4 Network providers 4 Sim cards 5 Mobile phones and their uses 6 Software issues 7 Radio frequencies and data connections 8 Mobile phones generations 9 Latest developments 9 Battery technology 11 Extract from Grainger’s Integrated Report 12 Management Structure 14 Grainger’s sales graph 15 The cost of manufacturing a mobile phone 16 Extracts from Grainger’s Financial Statements 17 Exhibits 21 Management case study Prototype – pre-seen material 4 Mobile network infrastructure Mobile phones themselves would be useless without the extensive infrastructure created by the network providers that make it possible for the phones to make or receive calls from almost any populated area on Earth. The infrastructure is based on relatively low-powered radio base stations that have adjoining or overlapping coverage, so that a phone user is always within range of at least one base station. The base stations can be free standing, or mounted on top of buildings. In cities, there are often small systems mounted on the sides of buildings. The base stations have a relatively short range and so establishing a mobile phone network is a complicated and expensive undertaking, in order to ensure that population centres are covered. It is also necessary to build and operate base stations alongside motorways and other major roads. Mobile network providers Mobile phone manufacturers such as Grainger do not provide the phone services or infrastructure. Most countries have several network providers who compete to sell connections to phone users. Users pay to use these services in two ways: ‘pay monthly’ and ‘pay as you go’. Under a pay monthly contract, the customer pays the mobile network provider at the end of each month for calls made and other services that have been used. There is usually a fixed element to the monthly payment, which covers access to the network and also some calls and other services. There will be an additional variable element to the payment if the customer uses additional call time or other services. The network provider has the customer’s bank details and collects monthly payments by direct debit. Pay monthly contracts are typically for two years. The network providers usually give the customer a phone as an incentive to sign the contract and a replacement (or ‘upgrade’) phone when the user renews at the contract’s end. Those phones will either be ‘free’ or will require the customer to pay a heavily discounted price that is usually 20-25% of the phone’s retail value. The networks are effectively selling these phones on credit because they recoup their costs by building a repayment into the fixed element of the monthly fee. Pay monthly customers are effectively being sold new mobile phones every two years, whenever they renew their contracts. As an incentive to attract or retain customers, the network providers use their buying power to obtain discounts when they buy phones and they pass much of that discount onto their customers. A pay as you go customer must pay in advance to use the mobile network. Advance payments can be made by buying a voucher from a shop, by making a card payment or by using some bank automated teller machines (ATMs). The resulting credit is tracked by the network providers’ systems and is used whenever the phone makes a call or accesses another service. The network providers ensure that pay as you go phones are sold at a discount to their full retail value, again as an incentive to attract customers. That discount is less generous for a pay as you go phone than for pay monthly because a customer who buys a pay as you go phone is under no legal obligation to buy further credit. Management case study Prototype – pre-seen material 5 Sim cards Each mobile phone is identified by a SIM card, which carries unique identifying data. The network provider issues the SIM card to the user. Changing the SIM card changes the identity of the phone, including its phone number. All phone manufacturers, including Grainger, generally ‘lock’ their phones by entering an encrypted setting in the phone’s operating system. A locked phone will work only with a SIM card issued by a designated network provider, thereby forcing the phone’s owner to use that network provider’s service. Locking the phone protects the network provider, who has given the customer a discount from the retail price. Otherwise, customers could buy their phones from one network and insert SIM cards from another. It is possible to buy unlocked phones, which will work with any network. The lack of a discount from the network supplier makes them expensive to buy. Network providers often have their own retail channels to sell phones and SIM cards. These can include both shops and online sales. These channels carry the network provider’s brand. They sell pay monthly and pay as you go phones, with associated service contracts, that are locked to their own networks. Mobile phones can also be purchased from independent retailers, who generally sell phones on behalf of a variety of network providers. Network providers give the retailers commissions so that the customer pays the same for a pay monthly contract or a pay as you go phone obtained through a retailer or through the network provider. Although Grainger’s business model does not include selling mobile phone’s directly to the phone user, it does have a direct relationship with the users. In order for users to take advantage of Grainger’s standard manufacturer’s warranty for their phone, they are required to register their details online on Grainger’s website. This also allows the users to receive advance information about new phone models that are in development, as well as to access the online support forum. This involves the user registering their email address to create an account which is password protected. Full name and address details are also required to be provided as part of the registration process. Users can also take up the option of an extended warranty on their phone. The cost of this depends upon the length of time they wish to take the extended warranty out for and whether they also want to include accidental damage cover. Payment for this is taken by credit card. Management case study Prototype – pre-seen material 6 Mobile phones and their uses When mobile phones were first developed, their primary function was to enable users to make and receive phone calls when they were away from home. Over time, various functions have been added and voice calls have become increasingly irrelevant to many users. For example, SMS text messaging rapidly gained popularity and it became commonplace to communicate by text message in place of making voice calls. The function of mobile phones is constantly being redefined, thanks to the flexibility associated with the underlying technology. A mobile phone is essentially a handheld computer that incorporates radio facilities for wireless communication. In addition to the wireless connection to the mobile phone network, most phones have the ability to connect directly to wireless local area networks through Wi-Fi and to other nearby electronic devices through Bluetooth. Mobile phones are frequently used to access the internet and email and are frequently used to update social media accounts and to engage in online commerce. Many phones come equipped with cameras. Many users rely on their camera phones for their photographic needs, to the point where phone cameras are rivalling basic digital cameras in terms of quality. Camera sales are declining because of improvements in phone cameras. Phones are also used as personal music players and handheld games consoles, again displacing audio players and portable games devices. It is becoming increasingly common for householders to dispense with traditional landlines for making phone calls. Landlines are often used for internet access and mobile phones are used for all voice calls. Quite apart from the technical developments, many users regard their phones as fashion accessories. Perfectly functional phones are often replaced in order to remain abreast of current trends. So-called ‘smartphones’ offer the level of functionality described above, although there is also a market for basic mobile phones that may be used by those who find smartphones too complicated or who need an inexpensive phone to allow, say, a child to stay in contact when away from home. Most manufacturers, including Grainger, concentrate their development efforts on their smartphones. Upgrades to existing models are often incremental, for example a slightly better camera or a slimmer, more lightweight or attractive case. Management case study Prototype – pre-seen material 9 Mobile phone generations Each generation of mobile phone has been numbered. Today, most mobile phones operate as either 3G or 4G. 3G remains in widespread use around the world and offers features such as basic internet browsing, receiving and transmitting data files (such as photographs). 4G phones are faster still in comparison to 3G, and 4G networks are now generally available. Phones are generally ‘backwards compatible’ which means that they can use older networks when required. So, a 4G phone that is out of range of a 4G network can connect to any available 3G or 2G network, albeit at the slower speeds specified by those earlier generations. Latest developments 5G is the name given to the latest generation of wireless networks. The relevant standards are still in the process of being defined. The ambiguity around 5G is because it’s still largely a concept at this point, and the wireless industry hasn’t settled on any standards around the new network. Some key goals of 5G include:  Significantly faster data speeds: Currently, 4G networks are capable of achieving peak download speeds of one gigabit per second (Gbps), though in practice it’s never that fast. With 5G, this would increase to 10Gbps.  Ultra-low latency: ‘Latency’ refers to the time it takes one device to send a packet of data to another device. Currently with 4G, the latency rate is around 0.05 of a second, but 5G will reduce that to about 0.001of a second. This is a significant improvement when data has to be communicated in as close to real time as possible. For example, the precise operation of remote industrial equipment or the safe navigation of driverless cars will benefit from this reduction in latency.  A more ‘connected world’: a phenomenon referred to as ‘The Internet of Things’ involves building connectivity into products and devices such as domestic appliances, cars and even wearable devices. So, if your car develops a fault it could email details to your local garage and enter the service appointment into your online diary. The growth in this technology will cause an exponential growth in the number of devices connected to the internet and will require a network that can accommodate billions of connected devices. Part of the goal behind 5G is to provide that capacity, and also to be able to assign bandwidth depending on the needs of the application and user. Clearly, 5G offers capabilities that go far beyond enhancing the use of mobile phones. For example, the 5G network would have sufficient bandwidth for household appliances to communicate routinely over the internet. A domestic fridge could have a scanner that reads the barcodes on products as they are purchased and subsequently used. The fridge could then order replenishments from an on-line supermarket or its owner could use an app to check whether there is, say, fresh milk in the fridge before coming home. Each new generation of phones has created opportunities and challenges for phone manufacturers. Grainger’s earliest models were made for 2G. Now the company offers a range of 4G smartphones. Grainger’s management team is studying the potential created by 5G, even though it is unlikely to be operational before 2020 and, even then, it is likely to be another two years or more before 5G networks become widely operational across most of the countries in which Grainger operates in. Thus, although work continues on developing a new range of 5G ready smartphones, Grainger’s current focus remains on improving the company’s range of 4G phones to further exploit the opportunities offered by new and Management case study Prototype – pre-seen material 10 improved versions of the operating systems and the ever-increasing range of smartphone apps that are being developed. Management case study Prototype – pre-seen material 11 Battery technology Mobile phones depend on batteries for power. A battery is essentially a pair of electrodes that are connected electrically by a substance called an electrolyte. Chemical reactions between these components create electricity when a circuit is completed between the two electrodes. For example, switching on a mobile phone completes an electrical circuit and electricity flows from the battery until the chemical reaction has finished. Some batteries are rechargeable, which means that the chemical reaction that created the electricity can be reversed by running an electrical current through the battery. This can be repeated many times, although most batteries deteriorate slightly with each recharging cycle and eventually lose the ability to be recharged. The potential to create electricity from a rechargeable battery is generally a function of the materials used in its construction and also the size of the battery. Battery life is a significant aspect of a mobile phone’s performance. Whenever a mobile phone is switched on, it makes frequent connections to the network in order to update the network’s ability to route calls and other messages to the phone. Calls and messaging consume power, as does any activity that requires the use of the screen because the backlighting that makes the screens LCD panel visible consumes a great deal of power. Battery life is also constrained by trends and tastes in phone styles. Users value slim phones that are easy to carry and that look sleek. Making phones slimmer leaves less internal volume for a large battery. Mobile phone manufacturers are constantly evaluating the latest battery technology because users are often frustrated by their phones running out of charge. It is not uncommon for users to be forced to recharge their phones every night in order to obtain a full day’s use next day. Rechargeable batteries can create problems for manufacturers and users. They produce a fairly high current and the process of charging and discharging rechargeable batteries can also create a great deal of heat. That can raise safety concerns. For example, fuel stations forbid the use of mobile phones while operating fuel pumps because of the slight risk of a spark created by a rechargeable battery igniting the vapour from the car’s fuel tank. Management case study Prototype – pre-seen material 14 Management Structure Nisha Patel CEO Frank Williams Sales Director Serena Lopez Chief Technical Officer Jacques Maine Finance Director Janine Frier Senior Financial Manager Carla Letz Production Director Thomas Allen Head of R&D Management case study Prototype – pre-seen material 15 Grainger’s sales graph Grainger is one of the largest global mobile phone manufacturers, expressed in the number of phones sold. 0 10 20 30 40 50 60 70 80 90 2013 2014 2105 2016 2017 2018 Grainger - Annual phone sales (millions of units) Management case study Prototype – pre-seen material 16 The cost of manufacturing a mobile phone The cost of manufacturing one of Grainger’s most popular models is shown below: D$ Memory 28.56 Display screen 57.40 Processor 26.60 Camera 18.20 Wireless section 44.80 User interface and sensors 21.00 Wireless connectivity 5.88 Power management 10.50 Battery 5.04 Case and buttons 39.20 Box contents (charger, earphones, etc) 9.80 Total materials 266.98 Manufacturing labour and overheads 11.20 278.18 Management case study Prototype – pre-seen material 19 Note 1 – segmental information Revenue 2018 2017 D$ million D$ million Europe 12,708 10,118 Asia 9,531 9,420 America 7,148 6,629 Middle East 4,368 2,791 Other 5,957 5,932 39,712 34,890 Operating profit 2018 2017 D$ million D$ million Europe 1,830 996 Asia 1,321 868 America 813 579 Middle East 457 321 Other 661 450 5,082 3,214 Management case study Prototype – pre-seen material 20 Note 2 – intangibles Goodwill Development Patents Trademarks Total D$ million D$ million D$ million D$ million D$ million Cost At 31 December 2017 160 89 78 45 372 Additions - 30 8 4 42 Disposals - - (11) (8) (19) At 31 December 2018 160 119 75 41 395 Amortisation At 31 December 2017 - 55 32 19 106 Charge for year - 11 7 5 23 Disposals - - (9) (7) (16) At 31 December 2018 - 66 30 17 113 Net book value At 31 December 2018 160 53 45 24 282 At 31 December 2017 160 34 46 26 266 Note 3 – property, plant and equipment Property Plant and equipment Total D$ million D$ million D$ million Cost At 31 December 2017 1,232 3,901 5,133 Additions 27 722 749 Disposals - (267) (267) At 31 December 2018 1,259 4,356 5,615 Amortisation At 31 December 2017 244 1,467 1,711 Charge for year 47 286 333 Disposals - (249) (249) At 31 December 2018 291 1,504 1,795 Net book value At 31 December 2018 968 2,852 3,820 At 31 December 2017 988 2,434 3,422 Management case study Prototype – pre-seen material 21 Exhibits Mobile Technology Weekly Are you DPSA compliant? The Data Privacy and Security Act (DPSA) was introduced earlier this year by the Deeland Government. This new legislation builds upon the original Data Protection Act that had been in place for over 20 years and attempts to reflect the sheer volume and variety of data being held by organisations, especially relating to their customers, in the ever-evolving digital economy that we find ourselves in today. The two key areas of focus of the DPSA are to ensure that data held by an organisation is only used for the purposes agreed with the customer (or user) and that the data is protected from unlawful access by third parties. Although there have been no prosecutions to date under the new legislation, several high profile Deeland-based organisations are currently under investigation for various degrees of data breaches, including mobile network giant Access who, it is alleged, were subject to a major data breach resulting in a third party gaining access to the personal data of over 500,000 customers, including name, address and credit card details, as well as user names and passwords. A spokesperson for the Deeland Information Office (DIO), who are responsible for overseeing the DPSA, stated that, whilst they couldn’t comment on specific ongoing cases, if any organisation was found guilty of an offence of this magnitude, the DIO would consider seeking the highest penalty possible under the act, which is a fine of D$50m or 1% of annual revenue, whichever is greater. Prototype 2020 2 Management Case Study Exam Department taking full responsibility for the whole project, so that the responsibility for the problems with the prototypes remained in-house. Proper ownership would have addressed the lack of coordination between Grainger and the two outside companies. The external design companies should have been submitting samples and models to Grainger and staff there should have been checking that all dimensions were within design tolerances. Then a formal decision could have been taken as to how to rectify any compatibility issues. The responses by the external companies imply a blame environment. Neither company could quite meet the specifications that had been imposed by the design and both attempted to deal with that by submitting a component that did not quite meet the specification. A more constructive “no surprises” environment would have encouraged the designers to have approached the main design team at a much earlier stage to report that there were issues. Perhaps the overall design could have been modified slightly to accommodate the design problems with the battery and the case. The short deadlines have robbed Grainger of the scope to redesign. That may have been a conscious decision because the products have a short lifecycle and there are commercial and marketing considerations, but there is little opportunity to adapt to the problems. It might have been possible to address partly by setting far stricter criteria for the designers, so that a battery that was even fractionally too large would be deemed unacceptable. That would have meant that Dare and Dring would not have tried to pass off slightly out of spec items at the last minute. Task 2 Accounting treatment The expenditure may be capitalised as development if it meets the criteria set out in IAS 38 Intangible Assets. The definition of development involves the application of research findings to the planning or design of new products before the start of production or use. In principle, that definition would encompass the work done on Trams because Grainger is planning to launch the new phone. IAS 38 sets out generic criteria for the recognition of an intangible asset. Grainger will only be permitted to capitalise the costs as intangibles if it is confident that the expenditure will yield future economic benefits. It is also necessary for the cost of the asset to be determined reliably. Grainger’s Board will have to consider each element of the D$275 million outlay to date separately. The IAS sets out a further set of criteria that relate specifically to development in order to apply these generic criteria. Failure of any one of those criteria would require the cost to be written off. The D$75 million paid to Dring appears to have resulted in a viable battery design that uses new technology. If Grainger intends to proceed with the Prototype 2020 3 Management Case Study Exam manufacture of Trams then it would be possible to capitalise the D$75 million and amortise it over the product’s expected life. It may be possible to modify this treatment if the contract with Dring gives Grainger ownership of the intellectual capital in the new battery design. In that case, it may be possible to amortise it over a longer period if Grainger is confident that it will use the battery on further new products. The D$60 million paid to Dare for the design work can only be capitalised if the Trams phone will go into production. That would require the technical problems that have affected the prototypes to be resolved and the commercial concerns voiced in the business press to be dismissed by Grainger’s Board. If the phone is not expected to go into production then the design work will have little real value in itself and IAS 38 will require that it be written off. The treatment of the D$140 million spent in-house in Grainger’s laboratories will also depend on the Board’s intentions to proceed with Trams. The R&D costs incurred in-house will also have to be costed accurately. It would, for example, be necessary for the design engineers to have kept records of the time spent on this particular project and for all bought-in materials and components to be traced to the development of Trams. Integrated report Grainger’s intellectual capital will be increased by the development of this new product. The phone has design features, notably a thin case and compatible battery combination, that will give the company an advantage over competitors. The report should explain the form that the intellectual capital takes, including whether it comprises contractual rights, patented products and processes and knowledge that will benefit the entity. The creation of this new phone will also enhance Grainger’s human capital by developing skills in the development of new products and in marketing the new technology. The integrated report should explain how the work done to date on Trams has helped the staff employed in the project to develop their understanding of the implementation of Grainger’s strategy. The phone has also enhanced Grainger’s social and relationship capital, primarily through the work that it has undertaken with Dring and Dare, through developing the ability to work closely with those companies and through the development of an effective interface between those two key suppliers. Grainger could also indicate the impact of this new product on natural capital. The intention behind Trams is that it will encourage customers to upgrade their mobile phones, which will lead to the unnecessary consumption of natural capital, such as scarce materials and the emissions associated with their mining and transportation. Hopefully, Grainger will be able to report some mitigation of those harmful effects. Prototype 2020 4 Management Case Study Exam Task 3 Target costing We need to make quite a significant saving of D$15.04/315.04 = 5%. There is unlikely to be scope in saving anything on the power management component because we have just negotiated that cost. We may have to find a large number of very small savings in order to get the overall price down. One challenge is that many of the costs appear to be the same as for our previous model. That implies that we have had these costs under review for some time and have been unable to change them. We might be able to have the engineers review those aspects that are under our direct control, such as asking whether there could be any savings in the manufacturing costs. We should investigate the big-ticket items that have pushed the price up, such as the case. Presumably, the cases used on the old model were of an acceptable quality and so we might be able to find a way to make or buy a presentable phone case that costs a little less than D$52.70. The engineers might be asked to assist us in reengineering these parts. Our engineers may help us to argue that the battery price is excessive because the designers at Dring did not achieve their design brief. The incremental cost of the new battery is a major part of the problem. The slim design forces us to use a bespoke battery, but we may be able to force a better price out of the supplier. Disruptive technologies Disruptive technologies involve the displacement of established technologies and generally brings about major change in industries. They can have the potential to create a new technology altogether. The fact that Grainger is a major manufacturer of mobile phones could mean that the company is a little too dismissive of the opportunities arising from disruptive technologies, such as the new battery. It could be argued that the mobile phone industry is one in which the companies that take the lead in implementing and applying disruptive technologies will have an advantage over their competitors. It could be argued that most smartphones offer very similar functions and that there is very little real need for consumers to buy replacement phones. Arguably, a truly disruptive technology would have the capacity to create a desirable new product that could boost demand. The whole point of a mobile phone is that it can operate wirelessly, powered by its internal batteries. It is well recognised that battery life is a major factor in determining how a phone can be used. If Grainger can develop expertise in a significantly improved battery technology then its mobile phones will have a massive advantage over competitors’ products. Thomas’ concern appears to be that the Board is too heavily focussed on making a profit in the short term, without considering the long-term advantages that might follow on from a successful implementation of a new battery Management Level Case Study Question Tutorial – Sample Assessment 1 Guidance for markers 1 About this marking scheme This marking scheme has been prepared for the CIMA 2019 professional qualification question tutorial. The indicative answers will show the expected or most orthodox approach; however the nature of the case study examination tasks means that a range of responses will be valid. The descriptors within this level-based marking scheme are holistic and can accommodate a range of acceptable responses. A marking scheme is a working document and will evolve during marking standardisation – this document, of course, has not been subject to that process. The marking scheme CIMA will publish after examinations will include any amendments which are discussed and agreed during marking standardisation. General marking guidance as would be given to markers is given below to aid with understanding of how the scheme should be applied. It should also be noted that markers would also be subject to extensive training and standardisation activities and ongoing monitoring to ensure that judgements are being made correctly and consistently. This document is provided to help students and learning partners understand the guiding principles behind the marking of case study examinations for the 2019 professional qualification. However, care must be taken not to make too many assumptions about future marking schemes on the basis of this document. While the guiding principles remain constant, details may change depending on the content of a particular case study examination form. General marking guidance • Marking schemes should be applied positively, with candidates rewarded for what they have demonstrated and not penalised for omissions. • All marks on the scheme are designed to be awarded and full marks should be awarded when all level descriptor criteria are met. • The marking scheme and indicative answers are provided as a guide to markers. They are not intended to be exhaustive and other valid approaches must be rewarded. Equally, students do not have to make all of the points mentioned in the indicative answers to receive the highest level of the marking scheme. • An answer which does not address the requirements of the task must be awarded no marks. • Markers should mark according to the marking scheme and not their perception of where the passing standard may lie. • Where markers are in doubt as to the application of the marking scheme to a particular candidate script, they must contact their lead marker. Management Level Case Study Question Tutorial – Sample Assessment 1 Guidance for markers 2 How to use this levels-based marking scheme 1. Read the candidate’s response in full 2. Select the level • For each trait in the marking scheme, read each level descriptor and select one, using a best-fit approach. • The response does not need to meet all of the criteria of the level descriptor – it should be placed at the level when it meets more of the criteria of this level than the criteria of the other levels. • If the work fits more than one level, judge which one provides the best match. • If the work is on the borderline between two levels, then it should be placed either at the top of the lower band or the bottom of the higher band, depending on where it fits best. 3. Select a mark within the level • Once you have selected the level, you will need to choose the mark to apply. • A small range of marks may be given at each level. You will need to use your professional judgement to decide which mark to allocate. • If the answer is of high quality and convincingly meets the requirements of the level, then you should award the highest mark available. If not, then you should award a lower mark within the range available, making a judgement on the overall quality of the answer in relation to the level descriptor. Summary of the core activities tested within each task Sub-task Core Activity Sub-task weighting (% section time) Section 1 (a) C. Manage performance and costs to aid value creation 50% (b) B. Implement senior management decisions 50% Section 2 (a) D. Measure performance 60% (b) E. Manage internal and external stakeholders 40% Section 3 (a) C. Manage performance and costs to aid value creation 40% (b) A. Evaluate opportunities to add value 60% Section 4 (a) B. Implement senior management decisions 50% (b) E. Manage internal and external stakeholders 50% Management Level Case Study Question Tutorial – Sample Assessment 1 Guidance for markers 3 SECTION 1 Sub task (a): Significant risks I need a report from you on the significant risks associated with committing ourselves to proceeding with the launch of Trams in February 2020. Trait Risk identification Level Descriptor Marks No rewardable material 0 Level 1 Identifies a single relevant risk or some insignificant risks 1 Level 2 Identifies some relevant risks 2-3 Level 3 Identifies a good selection of relevant risks 4 Risk explanation Level Descriptor Marks No rewardable material 0 Level 1 Analyses, to a limited extent, risks arising in the scenario 1-2 Level 2 Analyses, in a clear and logical manner, risks arising in the scenario 3-5 Level 3 Analyses, in a clear, logical and comprehensive manner, the risks arising in the scenario 6-8 Sub task (b): Project management I am also keen to learn any lessons that we can from this case. Please give me your views on the errors that we made in managing the project. Trait Identify errors Level Descriptor Marks No rewardable material 0 Level 1 Identifies a single serious error 1 Level 2 Identifies some serious errors 2-3 Level 3 Identifies a good selection of serious errors 4 Explain errors Level Descriptor Marks No rewardable material 0 Level 1 Analyses, to a limited extent, errors in project management that have been identified. 1-3 Level 2 Analyses, in a clear and logical manner, errors in project management that are apparent from the scenario 4-6 Level 3 Analyses, in a clear, logical and comprehensive manner, the errors in project management that are apparent from the scenario 7-9 Management Level Case Study Question Tutorial – Sample Assessment 1 Guidance for markers 6 SECTION 4 Sub task (a): Team building Please draft a paper that I can incorporate into my proposal that indicates the challenges associated with ensuring that my proposed team will be effective. Trait Challenges Level Descriptor Marks No rewardable material 0 Level 1 Describes problems associated with inter- departmental teams. 1-4 Level 2 Communicates, in a clear and logical manner, the challenges facing the effectiveness of the proposed team 5-8 Level 3 Communicates, in a clear and logical manner, the challenges facing the effectiveness of the proposed team, taking account of the rivalries, different perspectives and historical reliance on the R&D Department. 9-12 Sub task (b): Transfer pricing My proposed team will be acting in support of the Research and Development Department. I believe that we will have to charge a realistic transfer price from Sales, Finance and Production to Research and Development and that should be based on the opportunity cost to those departments of seconding a senior manager for five days per month. I need your paper to identify the challenges associated with determining those opportunity costs and suggest how those challenges might be overcome. Trait Identify Level Descriptor Marks No rewardable material 0 Level 1 Identifies a few problems with no justification or a single problem with some justification 1 Level 2 Identifies some problems and justifies their selection 2-3 Level 3 Identifies a good selection of problems and justifies their selection 4 Overcome Level Descriptor Marks No rewardable material 0 Level 1 Produces a limited response to overcoming the problems associated with determining opportunity costs 1-3 Level 2 Produces a clear and logical response that would overcome the problems associated with determining opportunity costs. 4-7 Level 3 Produces a clear, logical and comprehensive response that would overcome the problems associated with determining opportunity costs. 8-11 CIMA 2019. No reproduction without prior consent. MANAGMENT CASE STUDY PROTOTYPE EXAM ANSWERS Variant 2 These answers have been provided by CIMA for information purposes only. The answers created are indicative of a response that could be given by a good candidate. They are not to be considered exhaustive, and other appropriate relevant responses would receive credit. CIMA will not accept challenges to these answers on the basis of academic judgement. Task 1 Key negotiation issues and why they matter The unit price charged to Thorp will be a key issue for negotiation because both parties’ interests diverge in the sense that the agreed price will have a significant impact on the profit earned by the two companies. Both companies appear to expect a high consumer demand and so even a small adjustment to the price will be significant. Grainger is in a particularly vulnerable position because it cannot sell the new phone to anyone else, which could lead to a major opportunity cost if it sells the phones for too little. Similarly, Thorp may be unable to sell at an attractive retail price if it agrees to pay too much to Grainger. Thus, there is a need to aim for a win-win outcome. Thorp’s management and promotion of Rapide will also be a matter for negotiation and agreement. Grainger will be unable to sell the phone to any other network until a year after Rapide’s launch and so it will only profit if Thorp sells Rapide in volume. The two companies will have to negotiate an acceptable compromise over the extent to which Rapide will be promoted. Thorp will wish to retain some flexibility in case consumer demand for Rapide is weaker than expected or another manufacturer develops a competing phone that might be sold in even greater volume or at a higher profit. Grainger must ensure that Thorp aims to maximise sales of Rapide, or at least commits itself to selling Rapide in sufficient quantity to compensate for the agreement to give Thorp exclusive rights. The length of the overall contract will have to be agreed, with a further agreement as to when the opportunity for a renegotiation will be inserted. At present, the contract appears to roll over if Grainger launches a new phone within the year after Rapide’s launch and it could even apply to new phones developed after that. Grainger may be unwilling to commit itself to giving Thorp exclusivity into the indefinite future because other networks may be prepared to offer a better deal if the launch of Rapide is as successful as hoped. Thorp may i I i i l . i i i t t l i i t . i i , i l l i i . I ill ll i i j . Prototype 2020 2 Management Case Study Exam not necessarily wish to be tied to any commitments that it has to make to Grainger with regard to any future models that it launches. The two companies should agree to discuss the contract at, say, the end of the first year. Grainger’s relationship with other networks will have to be part of the agreement. It would appear that Grainger will continue to sell phones other than Rapide to the other networks and could, in theory, sell new models that do not use the patented antenna as well. That could be a source of friction between Grainger and Thorp if, for example, Grainger were to start offering large discounts on its existing models so that other network could sell them cheaply and in high volume. Or if a new model was developed that did not use the patented antenna but that had some other major selling point. Thorp will not wish to have sales of Rapide undermined by such behaviour and Grainger will not wish to be prevented from earning revenue. Effect of agreement on value chain The agreement should simplify inbound logistics and operations in terms of manufacturing phones prior to the launch of Rapide. Thorp will be prepared to commit itself to a sizeable initial order in order to ensure that the launch itself is a success and that customer demand is met, at least as far as possible. That should enable Grainger to schedule production in time for the launch, secure in the knowledge that Thorp will place a formal order for that quantity. Grainger can make best use of that relationship by working as closely as possible with Thorp’s marketing department to agree an ongoing production schedule that rolls forward throughout the year after launch. That should enable Grainger to meet anticipated demand without having to disrupt operations or put suppliers under pressure for components and without making too many units and so tying up cash. Thorp will have an incentive to invest heavily in marketing and sales and so might reduce the pressure on Grainger to promote the new phone. Thorp is closer to the retail customers who will actually buy and use the phone and so Thorp will have the expertise to market the phone effectively. Grainger should work closely with Thorp in order to make best use of the arrangement for marketing purposes. Grainger should aim to articulate its own promotional activities with Thorp’s, with a view to maximising the demand for Rapide. It may be possible for the two companies to promote one another for the duration of the exclusivity. Support activities could also be enhanced, particularly in terms of technology development. Thorp will have detailed knowledge of how Rapide is being used and will be able to obtain feedback from customers. Thorp may be able to provide better feedback and suggestions for new product features because of that association and will have a greater incentive to assist Grainger because of the exclusivity agreement. Prototype 2020 5 Management Case Study Exam set too high then the launch will be a disaster and could undermine consumer confidence in the phone. The manner in which the price-skimming is applied will be a factor in its success. It may be that Thorp simply intends to sell the phone at a smaller discount than customers are used to, rather than selling Rapide at a traditional retail price that exceeds the price paid to Grainger. If the launch is managed effectively then the The only other concern is that Grainger’s credibility may be harmed if the faster connection speeds offered by Rapide are insufficient to attract sales at the initial price point. In that case, the story will be that Grainger exaggerated the benefits that its new phone would offer and so the company could be viewed as misjudging and misunderstanding its market. That could undermine demand for the phone, even once the selling price is reduced. It could also undermine the credibility of future phone launches. Prototype 2020 6 Management Case Study Exam Task 3 Communicating with customers of Rapide The first challenge is that the customers have already had a confusing and conflicting announcement from Thorp that it is recalling all Rapide phones. Our position is that only 5% of the phones sold to date are defective, but any comment that we make to that effect will be viewed as self-interested and will lack credibility. Customers will often be heavily reliant on their mobile phones and so they will be very concerned about the possibility that their phones could be defective and might let them down at an inconvenient time. The second challenge is that this story is likely to be reported widely in the press. That will encourage users whose phones have failed to make posts on social media. Again, that will have the effect of creating the impression that the problem is more widespread than it actually is and that Rapide is a defective product. Stories about customers being affected by a defective product will be far more newsworthy than any responses put forward by the company that sold that product and so it is debateable whether Grainger’s responses will attract much attention. Overcoming the first challenge would be best accomplished by actively encouraging all customers to download the app as soon as possible. If it has not already done so, Grainger should ensure that the app has a clear interface and offers a diagnosis that can be easily read and understood. Ideally, the app should direct the customer to a website or contact telephone number in the event that the phone fails, so that customers can report their problems easily. Grainger should work with Thorp to ensure that affected customers can easily make contact. For example, websites should have sufficient bandwidth and contact centres sufficient lines to enable customers to get through. The second challenge will require careful management of any contact with the media. Grainger should instruct all senior managers to refer all requests for comment to a designated contact, such as a press office on Grainger’s marketing department. All managers and staff should be instructed not to make any comments about the problems with the phone unless they are trained and briefed on discussion points. Grainger should accept responsibility for the fault, but should avoid making things worse by offering ill-judged responses. Relevance of figures and accounting treatment of claim The first figure of D$2,980 million is a significant amount, equivalent to 7.5% of 2018 revenue. It seems highly unlikely that we will ever be required to pay such a large amount. It could be argued that the amount reflects an overreaction by Thorp to the problems with some of the phones and that the potential costs of the returns are largely due to Thorp’s negligence rather than the technical problems with Grainger’s phones. Nevertheless, we do have the threat of a claim against us for that amount and so IAS 37 Provisions, Contingent Liabilities and Contingent Assets would require us to show that as a contingent liability. The D$164 million that we have offered to Thorp is 0.4% of revenue, which is not quite a material sum, but it is a significant amount. It has no particular Prototype 2020 7 Management Case Study Exam significance from a financial reporting perspective because we will almost certainly not be making a payment of that amount to Thorp. It has been offered as a counter to Thorp’s much larger claim as a part of the ongoing negotiations. The D$164 million will not be reported, but it may suggest that any provision that is made would be for at least that amount. Our starting point in deciding the accounting treatment should be to discuss the likely outcome of this case with our lawyers. If they can use their understanding of similar cases to estimate the likely cost of settling this claim then we can consider whether that estimate is sufficiently reliable for us to recognise it in the financial statements as a provision. In this context, reliability should be judged from conversation with the lawyers. If they are unwilling to commit themselves to a realistic estimate then we cannot make a provision. If the lawyers are unwilling to commit to a provision then we will have to account for the claim as a contingent liability. The claim would have to be described in a note to the financial statements so that the shareholders were made aware of the possible consequences of the claim. In indicating the financial impact of the claim we would still have to offer a realistic estimate of the upper limit. Hopefully, we will have had some success in our negotiations by the time that we are finalising the financial statements and our note will reflect the amount that is actually being claimed rather than the opening bid of D$2,980 million. Management Level Case Study Question Tutorial – Sample Assessment 2 Guidance for markers 1 About this marking scheme This marking scheme has been prepared for the CIMA 2019 professional qualification question tutorial. The indicative answers will show the expected or most orthodox approach; however the nature of the case study examination tasks means that a range of responses will be valid. The descriptors within this level-based marking scheme are holistic and can accommodate a range of acceptable responses. A marking scheme is a working document and will evolve during marking standardisation – this document, of course, has not been subject to that process. The marking scheme CIMA will publish after examinations will include any amendments which are discussed and agreed during marking standardisation. General marking guidance as would be given to markers is given below to aid with understanding of how the scheme should be applied. It should also be noted that markers would also be subject to extensive training and standardisation activities and ongoing monitoring to ensure that judgements are being made correctly and consistently. This document is provided to help students and learning partners understand the guiding principles behind the marking of case study examinations for the 2019 professional qualification. However, care must be taken not to make too many assumptions about future marking schemes on the basis of this document. While the guiding principles remain constant, details may change depending on the content of a particular case study examination form. General marking guidance • Marking schemes should be applied positively, with candidates rewarded for what they have demonstrated and not penalised for omissions. • All marks on the scheme are designed to be awarded and full marks should be awarded when all level descriptor criteria are met. • The marking scheme and indicative answers are provided as a guide to markers. They are not intended to be exhaustive and other valid approaches must be rewarded. Equally, students do not have to make all of the points mentioned in the indicative answers to receive the highest level of the marking scheme. • An answer which does not address the requirements of the task must be awarded no marks. • Markers should mark according to the marking scheme and not their perception of where the passing standard may lie. • Where markers are in doubt as to the application of the marking scheme to a particular candidate script, they must contact their lead marker. Management Level Case Study Question Tutorial – Sample Assessment 2 Guidance for markers 2 How to use this levels-based marking scheme 1. Read the candidate’s response in full 2. Select the level • For each trait in the marking scheme, read each level descriptor and select one, using a best-fit approach. • The response does not need to meet all of the criteria of the level descriptor – it should be placed at the level when it meets more of the criteria of this level than the criteria of the other levels. • If the work fits more than one level, judge which one provides the best match. • If the work is on the borderline between two levels, then it should be placed either at the top of the lower band or the bottom of the higher band, depending on where it fits best. 3. Select a mark within the level • Once you have selected the level, you will need to choose the mark to apply. • A small range of marks may be given at each level. You will need to use your professional judgement to decide which mark to allocate. • If the answer is of high quality and convincingly meets the requirements of the level, then you should award the highest mark available. If not, then you should award a lower mark within the range available, making a judgement on the overall quality of the answer in relation to the level descriptor. Summary of the core activities tested within each task Sub-task Core Activity Sub-task weighting (% section time) Section 1 (a) E. Manage internal and external stakeholders 40% (b) C. Manage performance and costs to aid value creation 60% Section 2 (a) D. Measure performance 40% (b) A. Evaluate opportunities to add value 60% Section 3 (a) E. Manage internal and external stakeholders 50% (b) D. Measure performance 50% Section 4 (a) B. Implement senior management decisions 50% (b) B. Implement senior management decisions 50% Management Level Case Study Question Tutorial – Sample Assessment 2 Guidance for markers 3 SECTION 1 Sub task (a): Negotiation Identify the key issues that we will have to negotiate with Thorp, explaining why they matter to both companies. Trait Issues Level Descriptor Marks No rewardable material 0 Level 1 Identifies a single relevant issue for negotiation 1 Level 2 Lists some relevant issues for negotiation 2-3 Level 3 Lists a good selection of relevant issues for negotiation 4 Matter Level Descriptor Marks No rewardable material 0 Level 1 Explains clearly why one of the identified issues matters. 1-2 Level 2 Develops a clear and logical explanation of the significance of matters for negotiation arising from the scenario. 3-4 Level 3 Develops a clear, logical and comprehensive explanation of the significance of the matters for negotiation arising from the scenario. 5-6 Sub task (b): Value chain Explain how the proposed agreement with Thorp might enhance Grainger's value chain and suggest how we might make best use of those enhancements. Trait Enhancement Level Descriptor Marks No rewardable material 0 Level 1 Identifies a single way in which the company’s value chain might be enhanced. 1-2 Level 2 Lists some ways in which the company’s value chain might be enhanced. 3-4 Level 3 Lists a good selection of ways in which the company’s value chain might be enhanced. 5-6 Optimise Level Descriptor Marks No rewardable material 0 Level 1 Offers a realistic explanation of how one of the identified opportunities might be exploited. 1-3 Level 2 Develops a clear and logical explanation of how opportunities arising from the scenario might be exploited. 4-6 Level 3 Develops a clear, logical and comprehensive explanation of how the opportunities arising from the scenario might be exploited. 7-9