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5%andanetprofitmarginof8·
2%.Thishasdeclinedsteadilyovertheperiodunderconsideration.Thefiguresfor
2009were20·
0%and4·
7%andfor2011,17·
9%and2·
9%respectively.Therehasbeenageneralfailuretokeepcosts
undercontroloverthisperiod.Saleshavefallenby$150minfouryears–almostan18%decrease.Incontrastthecostof
saleshasdecreasedbyonly$75m,adecreaseofabout11·
5%.Thisprobablyreflectstheproblemofreducinglabourtoreact
tolowerdemand,particularlyinacountrywheregenerousredundancypaymentsareenforcedbylawandinanorganisation
whichseestheemploymentoflocallabourasoneofitsobjectives.TheReturnonCapitalEmployed(ROCE)hasdropped
substantially,from24·
14%in2007to6·
45%in2011.
Gearing:
Thecapitalstructureofthecompanyhaschangedsignificantlyinthelastfouryearsandthisisprobablyofgreat
concerntothefamilywhoareaversetoriskandborrowing.Long-termborrowingshaveincreaseddramaticallyandretained
earningsarefalling,reflectinghigherdividendsbeingtakenbythefamily.Traditionally,thecompanyhasbeenverylow
geared,reflectingthesocialvaluesofthefamily.Thegearingratiowasonly6·
9%in2007,buthasrisentoover22·
5%in
2011.Duringthisperiod,retainedprofithasfallenandanincreasingnumberoflong-termloanshavebeentakenoutto
financeactivities.Overall,gearingmaystillappearquitelowandindeedthisisprobablytheviewoftheseniormanagement
ofthecompany.However,thespeedofthesefundingchangesisaconcern,particularlywhentradereceivablesandtrade
payablesareconsidered.
Oneofthevaluesheldbythefamilyistheimportanceofpayingsuppliersontime.InArnland,goodsarenormallysupplied
on30dayscredit.In2007,HammondShoes,onaverage,exceededthistarget,payingon28days.Howeverby2009this
valuehadrisento43daysandby2011to63days.Duringthesameperiod,tradereceivables,fromtheselecteddata
provided,appeartohavecomedownslightly(from38·
65daysin2007to36·
50daysin2011).Itisdifficulttoescapethe
conclusionthatHammondShoesisincreasinglyusingsuppliersasasourceoffreecreditontopoftheloanstheyhavetaken
fromthebanks.Financingcostshaverisensignificantlyoverthelastfouryears,affectingprofitsandalsocausingtheinterest
coverratiotofalldramaticallyfrom14to1·
33.
Thefinancialanalysisessentiallysupportsthedescriptiveanalysisprovidedbythebusinessanalysts.Profitsarefalling,with
thefirmunabletocutcostssufficientlyquickly.Thecompanyisincreasinglydependentonexternalfinancewhichislikelyto
causedisquietamongsttheowningfamily(onethicalgrounds)andmayconcernsuppliers.
Investmentanalysis:
Thetwoscenariosdevelopedbytheseniormanagersalsoreflectthepessimismofthecompany.Thereseemstobeuniversal
acceptancethatinthenextthreeyearsthecompanywillstillexperiencelowsalesevenafterthecompanyinvestsinthenew
productionfacilities.Beyondthat,managersonlyseea30%chanceofhighersalesresultingandthisdependsupon
favourablechangesinthebusinessenvironment.
Forbothscenarios,thenetbenefitsofthefirstthreeyearsare$5mperyear,givingatotalof$15m.
Forthenextthreeyears,managerssuggestthatthereisa0·
7chanceofcontinuinglowdemand,leadingtonetbenefits
stayingat$5mperyear,givingafurtherbenefitof$15mtotal,withanexpectedvalueof$10·
5($15mx0·
7).Higher
demandwouldleadtonetbenefitsof$10mperyear,providingatotalof$30m,butwithanexpectedvalueofonly$9m
($30mx0·
3).
Thustheexpectedbenefitsoftheprojectareonly$34·
5($15m+$10·
5m+$9m),whichisbelowtheproposedinvestment
of$37·
5m.Onlyifthesecondscenariomaterialisesafterthreeyearswilltheinvestment(inbroadterms)havebeenjustified.
Thisscenariowouldreturn$45m.
However,ithastoberecognisedthattheprojectiononlycoversthefirstsixyearsofthenewproductionfacilities.Thefactory
waslastupdatedtwentyyearsagoandsoitseemsreasonabletoexpectnetprofitstocontinueformanyyearsafterthesix
yearsexplicitlyconsideredinthescenario,butitmustberecognisedthatpredictingnetbenefitsbeyondthathorizonbecomes
increasinglyunreliableandsubjective.
(b)Thisquestiondoesnotrequirethecandidatetouseaspecificframeworkforgeneratingstrategicoptions.Anumberof
possibilitiesexist.TheTOWSmatrix,thestrategyclockandtheAnsoffmatrixallcometomind.Eachoftheseframeworkshas
sufficientfacetstogeneratethenumberofoptionsordirectionsrequiredtogainthemarksonoffer.Forthepurposeofthis
answer,theTOWSmatrixisused,becauseitfitssowellwiththeSWOTanalysisproducedbytheconsultants.However,the
focusisontheoptionsgenerated,nottheframeworkitselfandsootherframeworksmaybeasappropriate.
TheTOWSmatrixisawayofgeneratingdirectionsfromanunderstandingoftheorganisation’sstrategicposition.Itbuilds
directlyontheworkoftheSWOTwitheachquadrantidentifyingoptionsthataddressadifferentcombinationoftheinternal
factors(strengthsandweaknesses)andexternalfactors(opportunitiesandthreats).
Takingeachquadrantinturn:
SO–usingstrengthstotakeadvantageofopportunities.Anumberofpossibleoptionsmightbeconsideredhere.Hammond
Shoes’retailexpertiseisanacknowledgedstrengthofthecompany,anditmaybepossibletouseittotakeadvantageofthe
opportunitiesprovidedbyincreasedconsumerspendingandconsumerisminArnland.Twopossibleoptionscometomind.
Firstly,thecompanycouldconsidersellingcompetingproductsorcomplementarygoodsinitsretailshops.Thiswouldgive
consumersagreaterchoiceofproductsandallowHammondShoestoreapsomeoftheprofitmarginsenjoyedbyits
competitors.Giventhecompany’sacknowledgedretailexpertise,thisoptionshouldhelppreservethelong-termfutureofthe
shops.
Secondly,theincreasingappetiteofthepublicforsafe,car-freeshoppingfromavarietyofshopsmightsuggestthe
developmentofretail‘villages’onthelandthatHammondShoeshave,bothinPetatownandinthe,nowdisused,factoryin
thenorthofthecountry.Thisoptionwouldcombinethetwinstrengthsofretailexperienceandtheavailabilityoflandowned
bythecompany,toprovideconsumerswithanexperiencetheyincreasinglyseekandvalue.Thefactthatonlytwositesare
availableintownswheretherearecurrentlynoHammondShoesretailshopsmeansthatthereisnoapparentreasonwhy
thecreationoftheretailvillagesshouldnotbecombinedwiththediversificationoftheproductsofferedintheretailstores.
Thesoftwareexpertiseofthecompany’sinformationsystemsdepartmentcanalsobeusedtofulfilconsumer’sdesirefor
increasedpurchasesovertheInternet.Uptonowthissoftwareexpertisehasbeenmainlyusedtodevelopin-houseproduction
andretailsystemswhichareacknowledgedasbeingamongstthebestintheindustry.Thisexpertisemightbeusedtodevelop
aninnovativee-commercesite.This,ofcourse,alsoopensupthepossibilityofsalesoutsideArnland,somethingthatis
unlikelyatthemoment,giventhatalltheretailshopsarewithinthecountry.
WO–optionsthattakeadvantageofopportunitiesbyovercomingweaknesses.Tosomeextentthisoptioncontainsthe
approachsuggestedbytheBoard,upgradingproductionmachinery.Thisisaddressingaknownweakness(out-dated
productionfacilities),simultaneouslytacklinganotherweakness,thecostofproduction.Heretheapproachistoreduceunit
costbyimprovingproductivityandreducingenergycoststhroughtheuseofmodernproductionequipment.TheBoard
perceivesthatovercomingtheseweaknesseswillallowthecompanytocontinuetocompeteinthemarkettheyarefamiliar
with.
ReducingenergycostsmightalsobeusedtoappealtotheincreasingnumberofgreenconsumersofArnlandwhotakeinto
accountethicalissueswhenmakingpurchasingdecisions.Thebusinessanalystshaveidentifiedthesesavingsasan
opportunityintheirSWOTanalysis.Theyshouldbeattractedtoaproductthathasbeenproducedusinganenergyefficient
process,andhasnottravelledthousandsofkilometres(usingenergyconsumingboats,roadtransportandtrains).Atthetime
ofwriting,thereisanincreasedinterestinmeasuringproductmilesorkilometres,atermusedtoassesstheenvironmental
impactofdeliveringaproductfromitspointofproductiontoitspointofsale.Althoughthemeasuresarecontroversial,this
neednotnecessarilyconcernthemessagesputoutbyHammondShoes’marketingdepartment.
HammondShoesmightalsousethenegativeimpactoftelevisionprogrammesshowingtheuseofcheapandexploitedlabour
intheproductionofgoodsinOrietariaaspartoftheirmarketingmessage.Althoughtheconsultantshav