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1 T4 Part B Case Study Exam – Suggested Answer September 2014

T4- Part B – Case Study – Suggested Answer September 2014

Report on the issues facing EL September 2014

To: Finance Director of EL

From: Management Accountant

Contents

1.0 Introduction

2.0 Terms of reference

3.0 Prioritisation of the issues facing EL

4.0 Discussion of the issues facing EL

5.0 Ethical issues and recommendations on ethical issues

6.0 Recommendations

7.0 Conclusions

Appendices

Appendix 1 PEST analysis

Appendix 2 Five Forces analysis

Appendix 3 SWOT analysis

Appendix 4 Supporting calculations

Appendix 5 Part (b) An email on the the strategic and financial importance to EL of

accurately forecasting its future levels of profit.


1.0 Introduction

EL has grown rapidly to become a global player in the car making business. Unlike many of its competitors it has weathered the storm of the recent financial crisis very well and posted good performance figures for every year since the turnaround year of 2008. As the PEST analysis Appendix 1, indicates however, while opportunities present themselves in the growth of demand from emerging economies, demand is relatively weak in developed economies and especially in Europe. Furthermore, environmental concerns and uncertainly about future oil supplies make forecasting difficult. The Five Forces analysis Appendix 2, provides no comfort for car manufacturers: over capacity in the industry, an oligopolistic structure consisting of a few competing global giants and continuing pressure for trade liberalisation makes for fierce competition. The SWOT analysis Appendix 3, shows that while EL has demonstrated outstanding performance in recent years, a number of developments have occurred that give cause for concern Perhaps the most unsettling is the sudden debilitating stroke that took Mr A Tan, the Company’s gifted leader and acclaimed strategist from his post at the head of the organisation. Since his departure, the Company has encountered a number of problems which threaten to derail EL from the outstanding performance and growth trend it had become used to under his guidance. The strategy for growth over the next four years about to be announced by Mr B Tan will require a determined effort. The proposed increase in capacity, additional capital spending and the extra marketing spend required to meet the 10/10+ growth plan will have to be achieved while at the same time dealing with a number of other problems/constraints that have recently presented themselves. The over-riding problem for Company EL is to deliver Plan 10/10+ when faced with a number of challenges, in order to meet the short-term demands from the large institutional investors, an important stakeholder in Mendelow’s framework. In particular, the car market is very competitive, and companies can struggle to create a market niche. For example, in the UK in 2013 both Audi and Skoda had excellent years because of customer perception that they stood for something; in the case of Audi being perceived as a premium quality brand, and for Skoda being a value for money brand. EL will need to determine what kind of Car Company it wishes to be perceived as if it is to achieve its aim of being in the top 10 car manufacturers. The challenges include the disruptive effect of a strike at one of EL’s production plants, a problem with the organisational structure that has gradually become more problematic with the growth and dispersal of operational units around the world and the difficulties arising from the need to recall a large number of cars.

The key issues are prioritised in section 3 of this report, and discussed and evaluated in section 4. Section 6 then summarises the main findings and makes recommendations.

2.0 Terms of reference

I am the Management Accountant appointed to write a report to the Finance Director which prioritises analyses and evaluates the issues facing EL and makes appropriate recommendations. I have also been asked to prepare an email for the FD explaining the strategic and financial importance to EL of accurately forecasting its future levels of profit, including relevant reference to the analysis of Plan 10/10+.


3.0 Prioritisation of the issues facing EL The priority listing has been arrived at following an evaluation of the essential timing of each issue and in terms of an issue’s ultimate importance to the organisation. 3.1 Top Priority – Plan 10/10+ Plan10/10+ is fundamental to the medium term strategy of the Company. It encompasses two straightforward KPI indicators which Mr B Tan intends to implement as essential in achieving increasing market share whilst maintaining profitability. As such it will be a key to achieving medium term results and forms the cornerstone of the Company policy to be promoted to investors. The reason why this has been made the first priority is because of a number of urgent issues which affect the possible achievement of the plan in 2015 and future years. Mr B Tan is about to announce the plan, but is concerned about the credibility of doing so. In particular the Company will need to show that it is taking steps to ensure that the effects of rising commodity and fuel prices are mitigated. Plan 10/10+ will have significant implications for EL’s bond holders, Tan family shareholders and EL’s institutional shareholders. Plan 10/10+ quantifies the Company’s strategy over the coming year and is therefore an important statement of intent from the Board. The Board in particular needs to respond to the demand for an improvement in short-term results from the large institutional investors. It is important to establish exactly how the predicted changes will affect the Company in terms of sales and profitability and consider how best to alleviate any shortfall against Plan 10/10+ in both the short and long term. 3.2 Second priority – Decentralisation/Safety issues The second most important issues are considered to be the decentralisation and safety issues with fuel tanks and potentially faulty brakes. The reason for considering this as a high priority is that the Company has recently suffered an embarrassing and expensive recall of 459,000 vehicles. The root cause of the problem appears to be one of management style and structure and EL must find a way forward to minimise the risk of such an event happening again in the future. This is an essential strategic move. The Company has operated on a highly centralised decision making structure, all major decisions are taken at the centre by the various functional committees and the main board. This has resulted in the Company becoming unresponsive to the changing market and economic conditions and also slow to react to customer complaints and correcting faults. The reason for considering this as a high priority is that without a decentralised structure the Company will find it difficult to retain familiarity with developing markets and the impetus for new and improved products. Decentralisation will enable some input from people at lower levels in the organisation, concerning production methods and labour organisation. It is unlikely that improvements in sales and profitability will be achieved without organisational change. Specifically with reference to safety issues the company needs to ensure effective procedures are in place to avoid poor design and procurement issues leading to potential safety problems. 3.3 Third priority – Industrial relations Industrial relations in Country X is deemed to be the third priority. This is an important issue because it has implications for EL’s current and future operations. Plant stoppages are both expensive and risk damaging EL’s brand image. A solution must therefore be found to resolve this issue.


This is considered as the third issue because although it only involves one part of one plant there is potential for this to escalate into a major dispute affecting production and profitability. It encompasses the provision of both good working practices and working conditions. Ethical issues associated with this are considered in section 5. 3.4 Fourth priority – Competitor analysis Competitor analysis is considered to be priority number four. The rationale for including this as one of the four main business issues is because of the size of the on-going risk to EL’s market share. This is treated as a lower priority issue than the other three as it is more of an on-going issue. EL needs to put adequate systems in place to monitor current and potential competitors if it is to continue to grow the business. Continual business development will require more informed competitor analysis. As such this needs to be an essential part of medium / long term strategy and is not seen as an immediate priority but processes and procedures will need establishing soon. 3.5 Ethical issues The ethical issues of health and safety and staff participation and faulty products need to be attended to directly but these can be managed alongside the other issues. 4.0 Discussion of the issues facing EL Overview EL has been very successful to date, expanding its operations around the globe, exploiting its traditional skills and vehicle technology in traditional markets. However the Company is facing an increasingly competitive global trading environment as the traditional market mix and customer behaviour in terms of the important features of car purchase, fuel efficiency, safety and technology become increasingly important factors. Improvements in the product profitability and volume mix and production methods in achieving value adding activities are required to ensure EL is organised and prepared for all aspects of the changing market for cars. This is particularly relevant to customer purchasing trends where ease of access to on-line information regarding purchases means that product comparison is now much easier. Cars must be up to the standards required by the market both in terms of quality and price. Competitor information is lacking at present, an area which will need addressing in the near future. EL will need to address potential industrial relations issues such as working conditions and union organisation to provide a safe and equitable working environment. Improved information flows mean a well-informed workforce will expect comparable conditions. 4.1 Plan 10/10+ (i) The plan 10/10+ concept requires the improvement of results based on the 2014 expectations, of 10% or better operating profit, combined with a 10% year on year increase in sales revenues. It is ambitious in that whilst 10% operating profit is forecast in 2014, 9.6% was achieved in 2013 with an increase in sales revenues of 9.1% over 2013 forecast for 2014. The operating profit for 2014 is forecast to be X$ 2,600 million, a 13.9% increase over 2013. Whilst this would be a good result, if achieved, EL’s operating profit for 2013 was 32% higher than in 2012. The forecast 2014 performance is therefore an indication of tougher market conditions.


Plan 10/10+ is not achieved in terms of both sales growth and profitability. According to the plan this should be sales of X$ 28,600 million (X$ 26,000 million + 10%) and operating profit of at least X$ 2,860 million (X$ 28,600 million x 10%), in this respect the forecast results for 2015 indicate a sales shortfall of X$ 1,880 million or 93.4% of 10/10+ forecast and an operating profit shortfall of X$ 345 million or 88% of 10/10+ forecast. The key factors affecting the planned operating profits are the 10% reduction in volume of executive cars, a price freeze across all ranges and an increase in the cost of steel. However even the updated Plan 10/10+ could still be difficult to achieve. In particular it still assumes that the volume of mid-range and compact models will increase by 10% over 2014. This implies a growth in the total market size for these kinds of cars, or an increase in EL’s market share for these vehicles. Is this really realistic in current market conditions? Calculations are shown in Appendix 4.1 Demand for EL’s cars could be affected by market reaction to the braking system problem on EL’s latest family car, and if industrial relation problems on the Goliath line spread to other plants then EL could have capacity/supply problems. EL needs to handle these two issues carefully, as discussed later in this report, if it is to achieve the planned sales volume increases. A further concern with Plan 10/10+, is whether fixed costs (both manufacturing and selling and admin. costs) can be held at their 2014 levels. This would have implications for the work force and for suppliers. The details of how Plan 10/10+ are to be achieved are not given, it involves the Company achieving an overall target. With the product mix now changing and production costs increasing we are informed that selling and administration expenses will remain as in 2014. If these are maintained, and the Company achieves the increased sales of X$ 28,600 million a gross margin of X$ 8,945 million x 1.1 X$ 9,840 million should be achieved, which less the direct factory overheads and selling and administration expenses of X$ 6,345 million would result in an operating profit of X$ 3,495 million or 12.2% of sales. But as mentioned without the details of the plan we must assume that it incorporates an increase in these expenses to assist in achieving the sales growth to achieve at least 10% operating profit. (ii) A short term view may be to cut selling and admin expenses by 4% X$ 157.0 million (2,672 - 2,515 = 157/3,900 = 4%) in order to achieve 10% operating profit on reduced sales, but this is likely to conflict with the plans of the various functional heads, which all involve increasing rather than reducing expenditure. The Marketing Director’s requirements will require considerable extra funding, but his proposed campaign promotes the least profitable product, and in any event the question is can these cars be produced in the volumes required in the short term? The Production Director’s proposals require long term investment in new plant to improve production techniques and possibly relocate to lower labour cost areas. There is a potential for labour disputes and disruption to production if labour relations are not effectively managed, this will involve HR resources to ensure effective transition. Short term cost savings on materials will almost certainly affect product quality in the longer term with consequences for the Company reputation, strict purchasing and quality procedures will be required to ensure that any cost savings do not have a detrimental effect. The Company needs to consider the product development cycle. The overlapping lifecycles of different models requires consideration. The traditional larger executive higher margin models are becoming less popular, being replaced by smaller lower margin more economically and environmentally friendly models. Fuel efficient engines for the larger cars are a solution but will require time and investment to develop. Manufacturing methods will require review, operating practices and design will be driven by cost reduction, but care will be needed to emphasise that quality should not be compromised.


R&D can be brought forward, but once again this will involve increasing resources in the short term for uncertain benefits longer term. A review of current and proposed R&D projects should be initiated and ranked according to likely success. The profitability dilemma is interlinked with all areas, a more fuel efficient engine for the larger models will enable margins to be maintained, R&D expenditure and lean manufacturing together with more efficient production techniques will enable cost reductions. More effective purchasing is required with guidelines set for supplier relations and the establishment of quality and value standards and expectations. A summary of possible future proposals is shown below

Director Proposal Advantages Disadvantages

Marketing Increase in advertising and promotions for compact models.

Promotes EL’s image Expenditure reduces profit. Compact cars are loss making.

Production Investment in lean production. Savings in material costs. Open up new plants in low-cost areas.

Should reduce costs in the longer term. May increase short-term profits. Should reduce costs in the longer term.

Short-term cash flow and profit implications. Risk to EL’s quality reputation unless EL wishes to change focus towards a cost leader (Porter’s Generic Strategies) Would require significant investment. Also risk of industrial unrest in country X. Also increases problems of communication.

R&D Further investment to speed up development of a new fuel efficient engine.

Would help drive sales across the range if successful.

Short-term cash flow and possibly profit implications.

Finance Small cars are useful. Any investment in small cars should be funded from operations.

Promote Company image, eco-friendly and socially responsible. Would prevent any increase in losses from sale of small cars.

Compact cars are currently not profitable. None if this is one of EL’s target markets.

It is unlikely that the investment required can be financed by operating revenues. Decisions as to the balance of the financing requirements will need consideration. Short term loans may be required for immediate investment decisions. Bond issues and possible equity increase may be the solution to long term investment. Investor relations will be critical, explaining that the Company is effectively reacting to the changing market conditions indicating the product/ marketing plans are in place for both long and short term, but that now market trends are becoming clearer the Company is reacting positively to these conditions. Stakeholder analysis will also form an important element of the strategy review, as above with investors forming a key role having high power high interest.


It is important that the Company portrays a solid determination to achieve the desired plan but not at the expense of short term cuts which will damage long term prospects. 4.2 Decentralisation/Safety issues EL had an embarrassing product recall in late 2013 affecting a very significant 459,000 cars, and recently potential faults with poor quality brake assemblies. It is essential therefore that the Company learns from this experience and either puts new systems in place or changes its organisation structure. A review of the present structure and control system has highlighted the following significant weaknesses:

There is a lack of participation in decision making. This is evidenced by for example staff members in the production plants not being asked for their views and plant operatives’ suggestions not being acted on by first line management.

As a consequence plant management have become over-reliant on HQ and have fallen behind other car manufacturers. This is evidenced by reliance on traditional manufacturing methods and little attempt to review the supplier base.

Decision making can be ineffective. This is evidenced by HQ committee structures being very slow in responding to market changes, and with the generation of production and financial information delayed and sometimes regarded as inaccurate.

Poor design and procurement policies combined with an inability or unwillingness to

communicate these effectively to the relevant management levels have led to both actual and potential safety issues, expensive recalls and a lack of due care towards customers by allowing them to buy and use potentially dangerous vehicles.

The above weaknesses with the current structures and systems indicate an ineffective process that if not resolved will prevent EL moving forwards in a satisfactory way. In the note to EL’s organisation chart it is stated that as far as possible product divisions produce models suitable for a particular geographic region. It follows therefore that such product divisions have a direct link with the regions and therefore need to be responsive to their needs. However it also needs to be recognised that EL’s HQ must retain control over the broad direction in which the Company is to go, for example by increasing the use of platform sharing across models in a range, and in setting profit targets. A move to a more decentralised and participative structure, despite opposition from some senior managers at EL HQ, would both free up plant management to respond to market conditions in their area more promptly and effectively, and enable HQ to pull away from more routine decision making, and focus instead on EL’s strategy for the future. If demanding profit targets are agreed between the plants and HQ then this would provide a focus for plant management if the ways in which this was to be achieved were left to their discretion subject to broad controls i.e. capex authorisation limits, or approval on new model developments. However whilst a decentralised and participative structure would speed up the decision making process it would involve a change of culture, and possibly employee training, and probably the implementation of a new reward system. It would also be necessary to clearly lay down what kind of decisions should be made locally and what would have to be referred to HQ for ratification. Considering the weaknesses with the present processes, as outlined above, a decentralised structure linked to a number of key metrics (possibly using the Balanced Scorecard) such as volume growth, market share growth, production efficiency and employee satisfaction could be used to drive the Company forwards.


This could be linked to a performance related pay system within the manufacturing plants, and rewards for employees for cost saving suggestions, or recognising potential quality issues. HQ could make available on a regular basis an inter-plant comparison report on statistics such as machine utilisation, labour productivity, scrap rates and cost savings to encourage a learning organisation and as a driver towards a leaner manufacturing process.

It is also clear that supplier relations need a thorough overhaul. Suppliers of common parts throughout the product range may be best reviewed centrally by HQ because, subject to higher shipping costs, economies of scale may be feasible by dealing with only a few suppliers. On the other hand where manufacturing plants are using more local suppliers then they should be reviewed on a regular basis by local management, and possibly offered longer-term supply contracts for cheaper prices and improved quality. Offering suppliers longer-term contracts could also be used to involve them on R&D initiatives. Finally it is apparent that a radical overhaul of the production and financial systems is urgently required. This must meet not only the needs of local management, but also EL’s HQ for control reports and financial consolidation purposes. However, despite the potential benefits from decentralisation it needs to be recognised that the management of change is unlikely to be an easy task. It needs to be remembered that EL is a very traditional company and with over 40 years’ experience of its current way of working there are likely to be many entrenched views as evidenced by ‘much opposition’ to change within EL’s HQ. The move from a centralised structure to a more decentralised one will incur increased costs but the overall savings from efficiencies are estimated to make this a cost neutral project. A review of the decision making processes is now regarded as essential as the Company has been slow to respond to market trends and purchasing and procurement have tended to be very traditional with little attempt to investigate alternative suppliers, in some cases, such as the potential brake fault, this has led to key substandard parts being procured. The collating and transfer of production and financial information has been slow, The reporting of monthly results for management purposes has taken longer and this has led to a system of adjusted estimates evolving, the monthly reports being estimated on the basis of information available with subsequent adjustments in the next month. This has in turn led to difficulty in making decisions with regard to production scheduling and stock holdings. A tendency has developed to hold more stock than necessary to cover possible errors. The financial reports have also become regarded as inaccurate and managers have become reluctant to base decisions on the information they contain.

The production of the annual report is slow, and whilst the content has been good, the timing is an irritation to some of the institutional investors. The disadvantages of a more decentralised structure include the following: To the extent that EL’s globally dispersed operational units enjoy substantial autonomy it might lead to co-ordination problems. There might be lack of uniformity and inconsistent procedures depending on the extent to which operational units have the authority to formulate their own policies and procedures. There may be a slower pace of decision-making through a requirement to consider ideas and suggestions from staff in operational units. In the short term the cost of reorganisation in terms of benefit packages recruitment and provision of suitable accommodation will need to be considered.


Although the distance of the senior management from the operating units has its problems it must be acknowledged that they possess tremendous experience and expertise. Splitting this up may cause short term problems.

The present structure allows a centralised strategic view of the Company, and strong control.

This may be lost in a decentralised structure.

There will be an increase in co-ordination costs, more meeting costs etc.

There will be an increased reliance on IT and subsequent increase in IT provision costs.

The move from a centralised structure to a more decentralised participative one will incur increased costs as estimated in the confidential part of the report but there will be additional costs that are more difficult to estimate.

The granting of more autonomy to divisional and geographically dispersed units may also give rise to problems of control and it will be necessary to consider different forms of control than the personal control that became established practice during the reign of Mr A Tan. In particular In order to avoid the costs of bureaucratic forms of control, output controls might be considered so that performance can be monitored and measured from the centre and a system of management by exception introduced. As to the benefits arising from a more decentralised structure and a more participative management style, a certain number of benefits may follow.

A greater involvement and commitment of employees would follow from the feeling that they were part of a Company that valued their opinions. This in turn could lead to increased morale and potentially higher levels of productivity.

Feedback from EL’s distant geographical regional operating units would be more likely and improved communications would help prevent the kind of expensive disasters experienced by EL due to the recall of its cars due to faulty fuel tanks.

Improved feedback from the regions could be beneficial to EL in providing improved marketing data on which to base its marketing communication. This improved feedback from the regions would also be useful to product development staff in ideas for improving future models that would best meet the needs and wants of customers in a particular region. This will result in quicker reaction to market trends.

There will be faster collation of information at a local level.

There will be more accurate and relevant production and financial information

Marketing decisions will be more relevant to local markets

Local supplier agreements can be facilitated

Local labour agreements can be facilitated With specific reference to the potential braking problem the cost of recalling all the models of this car will be huge and if EL does not recall the cars the potential costs could be even greater.

The cost of recall will include a number of items including the following:

The cost of contacting all owners via news broadcasts and individual letters or e-mails.

The cost of replacing or modifying the braking system on all recalled cars.


The cost to the reputation of EL for selling unsafe cars and further damage to the EL global Brand.

The potential costs of not recalling all the models of this car are as follows:

The risk of legal action for selling an unsafe car and being fined heavily for failing to take the safety of the car drivers and their passengers into consideration.

The reputational damage that comes from selling an unsafe car and the additional damage resulting from an attempt to avoid responsibility.

The longer term damage to the Global Brand of EL and the long term financial damage from this arising from lost sales.

The costs of having to recall all the models of the car and fix the braking systems as set out above.

The cost of admitting its negligence in selling an unsafe car and any legal damages payable in respect of subsequent accidents.

4.3 Industrial relations This has both a business as well as an ethical aspect. The ethical aspect has been discussed in section 5.1 later in this report. This problem has arisen due to the faulty air conditioning system, despite an agreement between the Company and the workforce to temporarily close the plant when this breaks down. This is apparently an on-going problem since the production line supervisor has regularly requested that local management take action to resolve the problem. The main sticking point for senior plant management appears to be their concern about loss of bonuses, although the argument they put forward is one of cost.

The investment decision can be evaluated using Johnson, Scholes and Whittington’s SAF framework. Suitability – this would resolve an on-going problem with the workforce, and at the same time improve production efficiency (and hence senior plant management bonuses) by reducing plant stoppages. The investment would therefore be suitable.

Acceptability – from appendix 4.2 it can be seen that the capex cost of X$ 6 million would be recovered in just over 9 months based on the typical loss of 2% production arising from industrial action from plant stoppages of this kind. This investment in repairs would therefore be acceptable to the Company, falling as it does within the policy of a one-year payback. This does assume however that all production can be sold and is simply not just manufactured for inventory.

Feasibility – EL has no cash constraints for this size of investment, which in any case offers a very quick payback.

This problem however raises a number of other important issues for EL. In particular these are:

There is evidence of a cultural problem in the Goliath plant, and possibly within EL itself, as demonstrated by lack of concern over employee welfare.

The instance of intolerance to a sick employee and the treatment of production line workers is tantamount to attempted bullying by the management.


This is exacerbated by a PRP system linking senior plant managers’ bonuses to plant efficiency targets.

For a company like EL with aspirations to become one of the top 10 car manufacturing companies in the world, industrial relations problems can be very damaging to its reputation.

Fundamental to the maximisation of productivity in a labour intensive operation like EL’s car production plant is the action necessary to gain and to maintain the cooperation and commitment of the workforce so that the necessary motivation can be achieved. In the case of car assembly, this is not easy to attain because assembly line work is notable for its repetitive and highly pressured nature. It is also a job that allows little discretion because of the controlled and fragmented nature of the tasks. Many production line jobs require little skill and training so workers can easily be replaced. All this leads to a feeling of powerlessness and insecurity. It also leads to a lack of job satisfaction as workers come to see themselves as appendages to a machine over which they have little if any control. In the words of the psychologist Frederick Herzberg, the key motivators, like challenging and stimulating work, a sense of achievement and the chance to obtain recognition, opportunities for advancement and a sense of responsibility are all missing. Even more de-motivating in the case of EL’s production plant is the damage that is being done to what Herzberg called hygiene factors. In this particular case, deteriorating working conditions due to the frequent breakdown of the air conditioning system, the poor quality of company policy and administration in the form of lack of investment in plant and equipment and a dysfunctional plant management performance related payment system combined with the poor quality of supervision makes for poor management worker relationships. As if this situation were not bad enough, the employees on the assembly line have no independent voice that enables any grievances to be properly aired because they are denied access to a free and independent trade union to represent them. Instead they have a company union which they believe represents the interests of EL management rather than their own interests. Hence whilst it is the case that EL’s employees enjoy relatively good working conditions and wages as compared with employees more generally in Country X, it is hardly surprising, given the cocktail of de-motivating factors described above that when temperature and humidity levels exceeded agreed levels, a colleague collapsed from heat exhaustion and the foreman ordered assembly work to continue that workers walked off the job. Although this may be seen as the immediate cause of the industrial action, it can be seen that underlying causes are also important. Most notable of these include the performance related payment system for the plant management. They seem to have been more interested in protecting their performance related payments than looking after the safety needs of the staff they were charged with supervising and managing. The other important cause of the deteriorating industrial relations in the plant is the poor maintenance of the air conditioning system and the reluctance of senior management to fund the necessary investment in this important part of the production plant. The industrial action that has resulted from this situation will have a damaging effect on EL both in terms of lost production and in terms of its reputation. Frequent industrial action can damage the brand of a company and EL will be keen to avoid this given the massive investment in promoting its brand in recent years. 4.4 Competitor analysis. Competitor analysis (CA) in marketing and strategic management involves the collection of data and its analysis to assist in an assessment of the strengths and weaknesses of current competitors. It also helps to inform a company like EL of the potential for the reaction by competitors in the event that EL makes a particular strategic move.


More generally, CA is part of the wider evaluation of an organisation’s external environment and thus forms part of competitive analysis. Until relatively recently, many companies did not conduct this type of analysis and relied instead on informal impressions, intuition, guesswork and snippets of information acquired haphazardly. The outcome of such informal methods was the development of blind-spots due to poor information and to a lack of robust analysis. This is a critical success factor for EL, and the Company could usefully reflect in particular why the demand for its Executive range of cars has rather suddenly gone down for its cars in 2015 – this seems to have been unexpected.

The type of information that needs to be collected in respect of competitors would include:

Details of any new models being developed in order to benchmark against EL’s current and proposed range of cars.

How long current models have been in production for. Car manufacturers typically have a number of ‘facelifts’ to models before a completely new car is developed.

Any planned expansion or closure of existing manufacturing facilities would be a significant pointer as to where competitors see the market is developing.

Evidence of new manufacturing plants being built, particularly overseas, would be a strong indicator of lower cost or market development strategies being undertaken.

The kinds of marketing and promotion activities since they typically focus on important factors to customers such as price, the use of extended warranties, quality and carbon emissions.

Any evidence of quality concerns, such as product recalls, that could serve as a warning for EL to review its own suppliers.

Market share in different car market segments to determine the effectiveness of the 4P’s (i.e. product, place, price and promotions) of competitors actions, and

Financial performance as an overview of competitor’s success. In more detail, the aim of CA is to systematically study information about competitor’s products, R&D activity, production methods, revenues, costs, market size, market share, market growth, organisational structure, financial status, market strategies and so on to determine the competitor’s relative strengths and weaknesses. In order to elicit information that will be useful in competitor analysis it is necessary to ask the appropriate questions. These should include questions about:

Competitor’s strategies for development including information about acquisitions, strategic alliances, new products.

Competitor’s resources, modes of operation, and potential offensive strategies.

More particularly, it should review the recent development of competitor’s resources including financial, human, technological and productive capacities and any potential new entrants to the market.

Sources and methods of collecting information In respect of sources of information, these may be divided into traditional sources and new sources now available from the internet. Traditional sources of information for competitor analysis include that provided by specialist industry analysts. These analysts provide regular assessments of the industry including a wide range of comparative data such as latest trends, new innovations, assessments of market share and a range of financial data.


Data is also available in the business sections of quality newspapers where business/financial journalists compete for investor readership by being first with the latest investor information considered likely to give one or other company the competitive edge. Other data has long been available in the form of Annual Reports. These are full of useful financial and non-financial information and have some credibility in that the data provided has to meet regulatory accounting standards. It must be borne in mind however, that companies preparing their annual reports will try to avoid giving anything away that could be used by the competition. Other information can be gained from the study of competitors’ products. Engineers can disassemble competitors’ latest models and learn much about materials used, how produced and so forth. Information from on-going market research is also a means of collecting competitor information that has been made use of for many years past. Information on the latest production techniques employed by competitors is also difficult to keep secret. Interviews with employees or ex-employees can yield useful information on competitor’s latest production techniques. In fact, in the new world of social media it is difficult to keep anything secret for very long. Perhaps the key to competitive advantage therefore is not so much obtaining the latest information but the ability to analyse and respond to any threats perceived appropriately. Finally EL could commission its own research. The benefit of such an approach is that EL could have the research tailored to answer specific questions it has about the competitors and the market for automobiles rather than having to rely on the general data provided by research organisations. But ways of accessing much of the above mentioned information have changed radically. The game changer has been the use of the internet. This now provides access to global information at the stroke of a key. Not only does the internet provide convenient access to a mountain of data and information on competitors, but the rise of social media has made available to all, useful feedback on competitor products. In addition to the corporate sites of its competitors, EL can gain much information on consumer attitudes towards its own and competitor’s products from social media sites like Face book, Twitter Linked in and others. The use of what has come to be known as ‘competitor intelligence’ (CI) is now well advanced and specialised companies have grown up to provide competitor information for clients in a whole range of industries. Competitor intelligence Software is also available to users to help access and analyse the available data in respect of financial performance, product launches, mergers and acquisitions and so on. Other sources include field intelligence data not available on the Web including that from sales people working in the field. Other such sources include information obtained from attending conferences and exhibitions. Journalists in trade magazines and newspapers regularly write articles on the launch of new cars and new developments in the industry such as initiatives on carbon emissions and overseas ventures by car manufacturers. Of course any recall of cars for whatever reason becomes big news and is well publicised. An important source of information on potentially brand new, or updated models is from the large motor shows, for example in Frankfurt or London, where manufacturers are always keen for publicity by demonstrating their current and planned product innovations.


Marketing initiatives, particularly those on pricing, servicing and warranties have plenty of exposure in television and radio advertising, and on bill boards. Car production volumes and market share data are regularly produced by the association of car manufacturers. Financial performance on companies is available from their annual accounts and from regular updates to shareholders. Government initiatives are another good pointer as to where the car industry may be going. This could be for example in carbon emissions and for grants to expand production facilities or perhaps support for exporting. The in-house team that has been proposed therefore would need to have a number of methods to capture this kind of information. This would include regular scanning of trade journals and newspapers, attendance at motor shows, monitoring of relevant government announcements affecting the car industry, a regular review of publicised market share and capacity data, and a review of any announcements, including financial reports, made by competitors. EL could consider buying a nominal number of shares in competitor companies and/or key suppliers to the industry for additional information, and could consider using the services of a market intelligence company. While the above data is collected and processed openly and legally, it is important to be aware of the fact that some data is collected covertly and illegally. According to one recent report there are 2000 industrial spies in operation trying to obtain information.

Organisation and analysis of the data. The development of the profiles of competitors is a key end product of CA as it can provide a summary of competitor strengths and weaknesses, and as such, a basis for effective strategy formulation. Benchmarking against the leaders in the field is another form of analysis as it provides information of where one stands in relation to the competition. Prior to collecting information, it is important to define who the major competitors are, especially direct competitors and their respective markets. During the profiling process it is also useful to order the competitors by market and in terms of the threats they pose. This kind of analysis is useful in enabling a company to place the threat from particular competitors in some kind of priority order both in terms of magnitude and immediacy. Where feasible this information should be organised and analysed in a number of ways. This would need to be done by product range – at least broadly by Executive, Mid-Range and Compact Range market segments. This would also be needed by geographic area, particularly those affecting developing countries. In particular the key drivers for customer choice would need to be monitored i.e. competitors’ prices, perception of quality and reliability, warranties and running costs. These all would need to be benchmarked against EL’s own product range.

4.5 Other Business Issues Apart from the above four main business issues, EL is also facing two other specific issues that have both a business as well as an ethical aspect to them. The ethical aspects are discussed separately in section 5 below. The business aspect of each issue is briefly discussed as follows: 4.5.1 Industrial relations, working conditions


The recommendations on this issue are included in the Ethics Section in 5.

4.5.2 Brake faults This issue is discussed above in section 4.2 and the recommendations on this issue are included in the Ethics Section below. 5.0 Ethical issues and recommendations on ethical issues 5.1 Industrial relations, working conditions Aside from, but related to the business aspect noted above are the ethical implications of this situation. All levels of management appear to have neglected their responsibilities to the employees within their charge. In one respect they can be seen to have neglected their social responsibility to one of their key stakeholders- their employees; in another respect they appear to have acted unethically in putting their own interests before the health and safety of their employees. In the case of the plant management, it is a case of putting their performance related payments before the safety of the workforce, while in the case of senior management it seems to have been a case of neglect in not ensuring the plant was safe from a health and safety perspective. It is clear that unless firm action is taken that the industrial relations problems in the EL plant will continue.

The business aspects of this issue have been discussed in section 4.3 earlier. However the reason why this issue is also considered to be unethical is that the Board owes a duty of care to its workforce to provide them with a reasonable working environment. Heat exhaustion shows that EL is failing in the fundamental principle of professional competence and due care to its employees at this plant. Senior management in the plant are showing a lack of integrity by putting their own bonuses above employee health, and accepting the pressuring of the workforce to carry on working come what may. At the end of the day the Board is leaving itself open to the accusation of putting cost issues before employee welfare. This issue also has some other unethical aspects, and in particular the threat of dismissal by the assembly plant manager and the apparent lack of proper employee representation by the trade union set up by EL.

A number of recommendations are therefore made on this issue. It is firstly recommended that irrespective of any financial implications that the air conditioning system is repaired, and that the workforce is informed accordingly. Secondly that the HR director is given the brief of reviewing the plant management-employee relationship, and in particular the appropriateness of the trade union set up by EL. 5.2 Brake faults The failure of the braking system and the neglect by EL to take any action to date to recall all models of the car is both a business (as discussed above) and an ethical issue.

This case also poses an ethical issue because it appears that one of the reasons for EL having delayed its decision to take action was the projected heavy cost to EL of carrying out a recall of the many thousands of cars affected and of correcting the faults in the braking system. This is a matter of putting the financial interests of EL before that of the safety of the consumers who have bought this particular model. The dangers of this course of action have been highlighted in recent years by the huge fines imposed on leading car companies by the courts in a number of countries.

The recommendations are as follows:


That EL should immediately recall all the models of cars in which the faulty braking system has been installed, ensure the braking system is fixed with minimum inconvenience and free of charge to its customers. Conduct an investigation as to how the faulty braking systems were not detected by EL’s testing procedures and ensure future testing is rigorous enough to prevent future problems of this kind. An investigation should also be conducted into the quality of the parts obtained from the low cost supplier to ensure they did not have any role in the failure of the braking system. If it is the case that these components have caused brake failure at high temperatures a review of the testing process should be conducted. Conduct a review of the internal communication system and especially that between the technical people on the Safety Monitoring team and Marketing to ensure those messages and their implications are clearly worded, listened to, understood and acted upon. To draw attention to EL’s ethical code of conduct and the penalties for any breaches to the code and to spell out to all stakeholders that EL is a socially responsible organisation and that the safety of its cars is the prime concern.

6.0 Recommendations

6.1 Plan10/10+

6.1.1 Recommendation It is recommended that plan 10/10+ is not announced at present, rather the issue of the expected forecast results for 2014 and 2015 should be accompanied by a review of the Company strategy in both the long and short term. A number of issues have been discussed in section 4.1. It is recommended that Plan 10/10+ as initially envisaged by the CEO (i.e. increasing sales revenue by 10% whilst maintaining at least 10% operating profit) should be revised, and that the updated plan be used for the forthcoming press conference to the business community. The rationale for this is that current predictions mean that the original Plan 10/10+ is no longer achievable. The updated operating profit for 2015 of X$ 2,515 million is X$ 345 million lower than the original minimum Plan 10/10+ requirement (of X$ 2,860 million) and it is unrealistic that such a shortfall could be recovered over the next 12 months. In this briefing the CEO should explain that whilst the forecasted operating profit for 2015 is X$ 85 million lower than is forecasted for 2014 this is due to a significant reduction in demand for its Executive range of cars that is beyond its control, being affected by world-wide economic conditions. However the Company is planning an ambitious growth strategy for its other product ranges, but that competitor price pressures will make for a difficult year. The CEO should emphasise that the Company is still aiming for a medium term strategy to be one of the top 10 car companies in the world. The CEO should also explain that the Company is planning to introduce stringent controls over its fixed costs to help mitigate world-wide increases in steel costs in particular, and is undertaking a number of other initiatives that will help the Company in future years (as commented on below).

Other recommendations on EL’s senior management proposals are:

Not to increase advertising and promotions for compact models since such models are loss making.

To undertake research into lean production techniques and to learn what other car manufacturers are doing in order to control costs in the longer-term.


To discuss with materials suppliers potential cost reductions but to ensure that stringent quality assurance procedures are in place. In particular EL must take care to comply with ISO26262 on any issues affecting product safety.

Opening up new plants in low-cost areas – a working group should be set up to consider the feasibility of this possibility.

Increasing the speed of development of a new fuel efficient engine should go ahead. A number of other companies are creating good publicity for this activity – for example the Nissan Leaf and Toyota Prius models.

6.1.2 Justification EL needs to balance short term measures against long term investments and effectively communicate these plans to stakeholders emphasising the commitment to maintain profitability and long term growth. It is vital if the Company is to grow that it maintains its credibility with stakeholders.

6.1.3 Action to be taken The Company should still promote plan10/10+ as the long term objective with the current situation as a temporary setback, with economic events beyond control of the Company and indicate that measures are in place to ensure long term success and to mitigate the short term setbacks. An effective communication campaign should be implemented to inform stakeholders of the trading expectations. EL needs to consider short term and long term implications of changing market and economic conditions. The relevant elements of PEST should be identified analysed and acted on. Overall the FD has effectively implied a form of capital rationing, investment must be self-financing. This should be emphasised as a control measure in ensuring the Company invests in the most effective projects. A thorough review of all the proposals should be undertaken; they should be ranked according to their potential to achieve the desired result against forecast outcomes with effective investment appraisal techniques applied 6.2 Decentralisation/Safety issues 6.2.1 Recommendation Given the problem with the lack of communication which resulted in the last recall of cars and given the other advantages cited in 4.2 for decentralisation and participation it is recommended that a degree of decentralisation is implemented so that managers and staff at divisional and functional levels are able to participate in the implementation of decisions which impact on their area of work. Care will be required in this moving to a more decentralised and participative system. Centralisation and decentralisation are a matter of degree and it is important that there is an appropriate balance between the two. Just what the balance will be depends on the Company’s objectives and its present structure and culture. Any change of this kind will inevitably require careful management and resources will need to be committed to the setting up of consultative groupings of various kinds including the development of team meetings, quality circles and cross functional groups. There will also need to be regular meetings between managers and their staff at different levels in the Company hierarchy to ensure that divisions and departments are working to the same goals.


These changes will inevitably incur additional costs but as noted above the benefits listed will justify the costs.

It is recommended that in principle that EL should move to a decentralised structure. The main justification for this is that it would provide EL with the best opportunity for profit growth. This would be achieved in 3 ways – a quicker response to market conditions, a more profit focused plant management, and employees who would feel that they have more of a say in the business. It may also reduce the possibility of further major product re-calls. This would be a major change in the way that the business is run, and possibly outside help may be needed. It is therefore suggested that in the first instance the HR director be given the role of “champion of change” and chair a sub-group of other directors and appoint a change agent with practical experience of implementing change in other organisations (possibly using change management frameworks such as Lewin or McKinsey 7S for example). Once the basic process has been agreed this will then need to be rolled out to senior management throughout the organisation to get their buy-in, and finally cascaded down to all employees. As part of this change management process there are a number of related issues that will need to be addressed (as commented on in section 2.2). In particular there will need to be changes to bonus structures, a new financial and reporting information system, and a major review of supplier relationships. 6.2.2 Justification The potential for long term benefits outweigh the short term costs with the following advantages

Quicker reaction to market trends

Faster collation of information at a local level

More accurate and relevant production and financial information

Marketing decisions more relevant to local markets

It will improve the adaptability of the Company to markets. ‘Think global act local’

Local supplier agreements facilitated

Local labour agreements facilitated

6.2.3 Actions to be taken

Revise organisational structure, by country, by product.

Establish global company wide KPI’s to enable overall control measures all divisions expected to operate within and according to these and report monthly results to strict deadlines

Decisions delegated to local management.

Ensure new structure will enable faster more accurate and relevant reporting.

Ensure new structure will enable employees to feel more motivated.

6.3 Industrial relations

6.3.1 Recommendation This issue was discussed in sections 4.3 and 5.1. In support of the ethical discussion on this issue it is recommended that the air conditioning system be repaired.


The business rationale for this recommendation is that it offers a quick payback of just over 9 months and helps improve industrial relations in the Goliath plant. This action would also be helpful in providing a message to all of EL’s employees that the Company is prepared to listen to their grievances. EL should also inform the local newspaper and trade journals of its ‘significant’ investment in employee welfare to help boost its reputation as a good employer within the industry. There have been a number of examples over the years of companies whose reputation was damaged by abusing its workforce (for example Primark which had to reverse its practice of paying below the minimum wage to some employees in its UK factory). This investment by EL could provide useful publicity. It is further recommended that consideration should be given to the senior plant management bonus system. Perhaps a broader spread of measures could be used including production efficiency, employee satisfaction and cost reduction. Employees could be involved through rewards for cost saving suggestions. It is suggested that the HR director should report back to the Board with some suggestions.

Assure the work force that their health and safety is a top priority.

Assure the work force that the problem of high plant humidity is being dealt with. Review the plant managers’ performance related payment system and the introduction of a performance related payment scheme for the workforce. Commence discussions concerning the introduction of independent trade unions.

Review the policies concerned with all aspects of industrial relations in the Company and in particular with the health and safety of the workforce in production plants.

6.3.2 Justification The Company cannot allow a reputation for poor labour relations to develop. It will have an economic impact on the performance of the Company. A perception of a ‘poor’ employer may develop; the Company may find it difficult to recruit suitable employees which may adversely affect its development plans. The Company must act in an ethical manner towards its employees, with a safe and reasonably well provided working environment. The workforce must feel that it is being treated in a fair manner; with suitable representation otherwise motivation will suffer. This in turn may affect product quality. 6.3.3 Actions to be taken Repair the air-conditioning system. Call a meeting with representatives of the workforce in the EL plant and assure them that their health and safety is a top priority and assure them that the air conditioning system will be fixed or replaced. Reform the plant managers’ performance related payment system so that lost time due to plant breakdowns does not impact on their performance related payments. Consider the introduction of a performance related payment scheme for the workforce but ensure that this is cost effective.


Inform the workforce representatives that attempts will be made to persuade the Board of EL to allow the introduction of independent trade unions but to make clear that this is something that will involve a major change of policy and may take some time. Commence a review of policies concerned with all aspects of industrial relations and in particular with the health and safety of the workforce in production plants.

6.4 Competitor analysis 6.4.1 Recommendation

In order to provide effective competitor analysis it is necessary to collect a wide range of information of both a financial and non-financial nature. It is necessary to collect information and data by a range methods including desk research, market research, reverse engineering of competitors’ products, tailored research by observation and listening at conferences and trade fairs and from sales personnel working in the field. The most useful tools of analysis include the use of comparative company profiles and benchmarking against the leaders in the industry. The over-arching recommendation is that a wide range of information is needed to be collected in order to achieve an informed competitor analysis. This should include trade journals, market share data and competitors’ financial performance. It is also recommended that EL acquire a nominal number of shares in competitor companies and in key suppliers in order to become aware of potential early signs of important developments. The services of a specialist market research company should be used in each of EL’s current and proposed geographic markets, in order to track developments in those markets.

6.4.2 Justification EL operates in an increasingly competitive and fast changing technological environment, an understanding of its competitive environment and its place in the industry are vital to maintain its position and profitability. This forms an essential element of producing an effective SWOT. EL has been relying on its traditional manufacturing techniques and model ranges and whilst successful to date will be unable to achieve its forecasts without a full understanding of the competition and their future plans. 6.4.3 Actions to be taken A competitive analysis team to be formed from all disciplines and locations within the Company. The team to coordinate and implement effective information gathering and analysis of the global factors affecting the Company from the range of available sources. Communication systems to be established to ensure that the relevant analysis is made available on a regular basis to the mangers who will benefit. 7. Conclusions EL is at a vital point in its corporate life. To date it has been successful in gaining market share in overseas markets, but based on traditional manufacturing methods and product range. Consumers are increasingly demanding more sophisticated, safer more fuel efficient cars, which is pressurising EL’s margins and abilities to match relevant production volumes to demand.


Appendix: 1

PEST Analysis EL Car Company

Political Factors Environmental concerns: pressure for use of eco-friendly cars. Emission controls by governments. Trade liberalisation. Development of trade blocs.

Economic Factors Economic growth strongest in emerging economies, weakest in Europe. Saturation of car markets in developed countries. Rising fuel costs. Exposure to volatile commodity prices, exchange and interest rates.

Social Factors In emerging economies, growth of middle class is creating demand for luxury cars. Aging population in developed economies resulting in lower demand. Urbanisation resulting in mobility services and car sharing.

Technological Factors Technology for Electric Engine is maturing. Technology of oil extraction from shale is increasing oil supply.


Appendix: 2

Five Forces Analysis of global Car Industry

Threat of New Entrants The car industry in now global and with trade liberalisation and the emergence of foreign competitors, this threat has increased (strong threat)

Power of Suppliers The car supply business is quite fragmented and suppliers depend on the demands and requirements of the car manufacturer and so hold very little power. (Weak power)

Power of Buyer While consumers are very price sensitive, they have limited buying power as they never purchase huge volumes of cars. Fleet buyers have moderate power (generally, weak power)

Availability of Substitutes

Other forms of transport, bus, train and plane (moderate power)

Competitive Rivalry Over capacity in the Industry Oligopolistic industry structure with large global competitors Competition mainly via differentiation (strong threat)


Appendix: 3

SWOT analysis for EL

Strengths

Profitable and cash-rich company

On-going significant investment in R&D

Highly rated brand in quality surveys

Weaknesses

The lack of experience of Mr B Chan, the new CEO

On-going industrial relations problems in some plants (this is also a threat)

Lack of a consistent policy with important suppliers

Opportunities

Plan 10/10+ and senior executives views on the way forward

Improvements in the value chain

The possibility of relocation to low-cost countries

Threats

The large institutional investors are demanding an improvement in short term results and there is now doubt over whether EL can deliver Plan 10/10+

Industrial relations problems which could affect the Company’s reputation

Decentralisation concerns

Excess capacity and competition within the industry

The need to meet environmental challenges


Appendix: 4

4.1

Some supporting calculations

Plan 10/10+ for 2015 (updated)

2014 current forecast X$ million Executive Mid-range Compact Total

Sales 9,400 14,100 2,500 26,000

Cost of sales – variable costs only 5,640 9,165 2,250 17,055

Gross margin 3,760 4,935 250 8,945

Profit from operations 2,600

Current plan 10/10+ for 2015:

Sales (+10% over 2014) 28,600

Profit from operations (10% of sales) 2,860

2015 plan 10/10+ (updated):

Sales (notes) 8,460 (1) 15,510 (2) 2,750 (2) 26,720

Cost of sales – variable costs 5,178 (3) 10,182 (4) 2,500 (4) 17,860

Gross margin 3,282 5,328 250 8,860

Direct factory overheads (note 5) 625 1,400 420 2,445

Gross profit 2,657 3,928 (170) 6,415

Selling and admin. costs (note 5) 3,900

Profit from operations 2015 2,515

Notes: (1) 2014 forecast less 10% (2) 2014 forecast plus 10% (3) 2014 forecast less 10% volume change plus 2% steel cost increase (4) 2014 forecast plus 10% volume change plus 1% steel cost increase (5) As current 2014 forecast

Revised operating profit 9.4% of sales Expected sales X$ 28 600 million - reforecast X$ 26,720 million shortfall X$ 1,880 million 93.4% Expected operating profit X$ 2,860 million – reforecast X$ 2,515 million shortfall X$ 345 million 88%

4.2

Repairs to air conditioning system on the Goliath line

Capex cost would be X$ 6 million.

Lost gross margin from 2 day closure would be:


53000 x 2/260 = 408 cars

408 cars x X$30,000 x 50% contribution would be a loss of X$ 6.12 million.

Total cost assuming lost production could be sold would therefore be X$ 12.12 million.

However the estimated annual production loss of 2% from industrial stoppages would be 1060 cars

(i.e. 53000 x 2%).

If this production could be sold then the gross margin would be X$ 15.9 million (i.e. 1060 x X$30,000

x 50%). On this basis the repairs to the air conditioning system would pay back in 0.76 years or 9.1

months and save X$ 3.28 million in the first year, and X$ 15.9 million in subsequent years.


Appendix: 5 Question 1 part (b): e-mail

To: The Board of EL

From: The Management Accountant

Date: August 2014

Re: Factors to consider in accurate forecasting

Colleagues,

The Finance Director has asked me to prepare an email explaining the strategic and financial importance to EL of accurately forecasting its future levels of profit. This Includes relevant reference to my analysis of Plan 10/10+.

Accordingly please find below the key issues:

E-Mail to the FD on accurate forecasting

Main points

Strategic importance

Accurate profit forecasts are necessary to determine whether or not major changes in strategy are likely to be required, or whether continuing to do more of the same is likely to be good enough.

If for example a demanding profit target is needed to satisfy shareholders then this would probably lead to growth strategies being needed i.e. considering the BCG matrix this could point to the need for a market penetration strategy or even a market development strategy.

On the other hand, as appears to be the case with the updated Plan 10/10+, should the profit forecast be lower than required then different strategies may be required. For example, perhaps short-term cost cuttings may be needed to improve financial performance, or perhaps consolidation of operations, or even a move of operations to a lower cost base.

Financial importance

Accurate profit forecasts are essential for cash planning and investment decisions.

Accurate profit forecasts affect a number of important financial stakeholders who have, or who may wish to have, an interest in the Company. For example in the case of EL large institutional shareholders have a 45% stake in the business and they will be looking for a full stock market flotation at some time in the future as an exit strategy.

Similarly bond holders and the Company’s bank will be concerned about any risks of default on the loans, and will look to management to achieve its future profit forecasts.

Conclusions on Plan 10/10+

Plan 10/10+ would have resulted in an operating profit for 2015 of X$ 2,860 million.

However it is now predicted that the 2015 operating profit will only be X$ 2,515 million which is even lower than the X$ 2,600 million forecast for 2014.


The updated Plan 10/10+ profit at X$ 2,515 million could also be considered to be optimistic because of ambitious volume growth targets for the mid-range and compact car markets, and for tight cost control over fixed costs.

Senior executives of the Company have made some proposals to take EL forward, but it is not considered that these would improve the 2015 profit forecast, but may help future years.

Management Accountant

……… end of the answer ……..

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