The Business School
Innovations in Management Accounting (Hong Kong)
管理会计创新代考 As requested by the Board of directors, undertake an analysis of the external and internal environments for Dearg.
Academic session: 2021/22
Diet: Trimester 2 May diet
Exam duration (excluding reading time): 3 hours
Reading time: 10 minutes, with 30 mins extra time
Total exam time: 3 hs 40 minutes
Please read the full instructions before you start writing.
Exam paper information
- Total number of pages: 12 (including case study)
- Number of questions: 7
- SECTION A IS COMPULSORY – ANSWER BOTH QUESTIONS
- SECTION B – ANSWER ANY TWO QUESTIONS
SECTION A 管理会计创新代考
QUESTIONS 1 AND 2 ARE COMPULSORY
As requested by the Board of directors, undertake an analysis of the external and internal environments for Dearg. Your answer should include a PESTEL analysis, a 5 Forces analysis, a SWOT analysis and should address the main areas of concern to Dearg that emerge from this analysis as well as addressing the Board of Director’s concerns with regard to Dearg’s strategic position. (50 marks)
Briefly assess the current performance measures in Dearg’s performance management framework report (Appendix 1) in the light of its overall aim. Evaluate, using academic literature, if Dearg would benefit from adopting the Balanced Scorecard or any other performance management framework. (100 marks)
SECTION B 管理会计创新代考
ANSWER ANY TWO QUESTIONS
Using academic literature, evaluate the use of Economic Value Added in Dearg and make a justified recommendation as to whether Dearg should adopt it. Specifically, you should address the concerns that have been raised by the workers (75 marks)
Using academic literature, evaluate whether Dearg would benefit from using a Beyond Budgeting approach. Justify your recommendation. (75 marks)
Using academic literature, evaluate the issues and benefits of Dearg investing in an environmental management accounting system. (75 marks) 管理会计创新代考
Using academic literature, evaluate the potential benefits and drawbacks of Dearg moving away from traditional investment appraisal techniques to more advanced techniques in its prospective purchase of the new manufacturing plant. (75 marks)
Using academic literature, evaluate the issues involved in trying to influence the board of directors to accept any of the proposed changes identified above. (75 marks)
Dearg plc (Dearg hereafter) is a company which operates ferries, principally for tourists, in the country of Zeeland. Zeeland is a large country which has many islands on its eastern cost and those islands have become very popular with tourists over the past decade. Dearg was government-owned until eight years ago when the government privatised the company. A competitive market environment has arisen since then as several other ferry operators entered the market.
Zeeland is a country with warm summers and cold winters. The summer period tends to last from April to September and those are the times when the ferries are in highest demand. There are very few tourists in the winter months and most transport at those times tends to involve locals from the islands travelling to the mainland for health and business reasons. The ferries are also used by businesses to transport provisions to the islands throughout the year.
Dearg’s principal aim is to maximise returns for the owners of the business. It aspires to do this through: 管理会计创新代考
– providing an excellent service for customers
– optimising the use of its assets
– developing a learning culture throughout the company
– ensuring that a sustainability mindset is at the heart of all operations.
Dearg initially thrived after being privatised but has found the last five years more challenging financially. The competition has increased significantly and the infrastructure on many of the islands that Dearg sails to has not sufficiently improved to increase the amount of visitors that can realistically visit those islands. Though this capacity will undoubtedly improve, as more hotels are being built and train lines on the islands are being expanded, such developments are longer-term in nature and are unlikely to signal an immediate change in the size of the market.
Industry – External Environment 管理会计创新代考
Zeeland is an economically well-developed country with a high standard of living though there are significant regional variations in living standards. It is also seen as being a very safe country and has a reputation for welcoming foreign visitors. As such, it is a popular destination for tourists and, increasingly, those tourists come to Zeeland specifically to visit the islands. Many Zeeland residents also visit the islands for their holidays. Currently, approximately 40% of the tourists to the islands are from Zeeland with 60% coming from overseas. This proportion has changed significantly from five years ago when only 15% of the islands’ tourists were from Zeeland.
Zeeland’s industries are well-diversified and, as result, economic “boom and bust” phenomena do not affect it as much as they might some other countries.
There is also a general stability in terms of the modest but consistent rate of growth of Zeeland’s Gross Domestic Product (GDP). Zeeland’s inflation is currently 1.5% and this has been the rate for the last few years. Unemployment has never been a problem in Zeeland – it usually has full employment – and interest rates are currently at 1%.
The government of Zeeland is aware that tourism to its islands has increased significantly in the past decade and introduced a hotel tax in November 20X5. However, this tax only relates to hotels on the islands and was originally met with much resistance from the hotels themselves and the ferry companies, who formed a pressure group called Equality for Island Tourism (EIT). The EIT’s only success was in forcing the government to change the rate of tax from 2% of the hotel fee per night to a flat fee per night of $3. This has still left some of the hotels, noticeably those at the lower end, unhappy with the fee and both the hotels and the ferry companies fear that tourists will be put off visiting the islands by the higher prices that hotels are now forced to charge.
The population of Zeeland has increasingly been spending holidays in Zeeland as opposed to travelling overseas.
Last year, 20X4, saw more than 50% of people who took a holiday actually spending it in Zeeland. However, the EIT has claimed that this figure is misleading as many people may count a holiday on Zeeland itself as being only one or two days in length. Indeed, average stays on individual islands tend to be around two nights.
Those tourists from overseas taking holidays in Zeeland tend to spend between a week and two weeks in the country and the EIT argue that the majority of holiday nights spent by inhabitants of Zeeland are actually still spent overseas. In common with most people, Zeeland inhabitants spend up to two weeks away from home if they take a holiday overseas. The EIT fear that this figure will increase with the proposed hotel tax, which is to be paid by everyone who stays at the hotels on the islands, regardless as to whether they are Zeeland nationals or not. 管理会计创新代考
There has been opposition from the islands’ inhabitants to the growing number of tourists bringing their cars onto the islands. The inhabitants have formed themselves into a group and are in the process of trying to apply pressure to the ferry companies to prevent them transporting cars across to the island. The inhabitants are highlighting the drastic effect on the islands’ environment – and the broader environment in general – of cars and the increase in pollution that has occurred with more traffic jams, increased exhaust fumes and the increase in omissions of CO2.
The inhabitants are arguing that the islands’ main appeal has been in that they are unspoilt areas of natural beauty and this this unique selling point will have disappeared within a few years if present levels of car use on the islands continues.
The ferry companies have argued that they would not deny people the opportunity to transport their cars if they so wanted and have called on the government of Zeeland to intervene by subsidising the ferry companies if these companies have to limit the number of cars they are allowed to transport. A significant part of the ferry companies’ revenue comes from car transportation and they are very keen to ensure that remains the case. Also, having such a facility is vital for business continuity and provision of food for the islanders in the winter months. 管理会计创新代考
There has also been criticism of the ferry companies from the Zeeland Marine Preservation Group (ZMPG). This group is increasingly concerned about the effect of increased ferry travel on the marine eco-system in Zeeland’s waters. The ZMPG was in favour of Dearg retaining its monopoly on travel between the islands as it meant there were fewer ferries in the water and the indigenous marine life was left intact.
With more companies entering the market, however, and approximately four times as many crossings on most routes,
the ZMPG has highlighted significant negative effects on the environment, such as: increased pollution in the water; increased amount of diesel spilled; and a significant destruction to the existing eco-system which is only likely to worsen with the existing state of travel between the islands.
The islands have become an increasingly popular destination for people in the age group 18-25. This age group is one which has been brought up with a changed school curriculum which is much more geared towards the history and culture of Zeeland and, as a result, has encouraged pupils to visit and travel in their own country more than previous generations may have done. This has also aligned with the environmental outlook of this age group, which is more conscious of the potential damage that airplane travel, for example, may inflict upon the environment than previous generations may have been.
The industry is regulated by the Zeeland Port Authority (ZPA), a body which had existed before the deregulation of the industry but which has gained significantly in size and influence following the enhanced competition in the ferry market. The ZPA regulates the industry and sets all ferry times to and from the islands. It is the ZPA’s staff that are employed at every port on both the mainland and the islands.
Ferries tend to last for a significant amount of time, with a normal lifespan being at least 25-30 years. However, a ferry built 20 years ago would not usually be fit for purpose for sailing in 20X5, both in the sense of the mechanics and engine of the ferry and in the sense of the facilities and amenities onboard. Ferries, therefore, require a significant investment initially and significant investment thereafter to maintain their status as “fit for purpose.” 管理会计创新代考
The perspective on what “fit for purpose” actually means can change as the industry changes and customer demands develop.
For example, factors such as environmental impact of the ferry (and the environmental cost of its construction and decommissioning) are much more important and significant for companies such as Dearg than they were 25 years ago. In a similar manner, there is a desire to increase ferry speeds on longer sailings and sailing times on the more extended routes has been cut by approximately 10% in the last 25 years.
The ferry operators also have to ensure they are reacting to customer demand. For example, it is only within the last few years that customers have been able to pay by credit/debit card for on-board catering and that companies have introduced an on-board global positioning system (GPS) to enable customers to track where they are on their journey. 管理会计创新代考
Dearg was slow, in relative terms to its competitors, to introduce these systems. Some of Dearg’s competitors have also introduced entertainment options onto the longer ferry crossings (the longest ferry crossing can take 7 hours for a one-way journey) so that passengers can watch films on a big screen or, in the case of one competitor, on a screen in the back of the seat in front of them. Dearg has not yet adapted to this new environment and is aware that the cost of re-fitting some ferries to accommodate this would represent a significant investment.
Dearg has three main competitors and all of these companies operate on the same routes as Dearg.
In total, there are 42 different destinations. Competing in this industry therefore represents a significant investment for any company and Dearg’s belief was that few companies would attempt to compete given the scale of investment required. Two companies, however, had significant experience of running similar operations in their own countries and one other company was founded by a transport group in Zeeland that had been successful at offering low budget internal flights in Zeeland. There are also two other companies in the market though they are both much smaller in scale and operate across a maximum of eight different destinations each.
Having several companies offering a very similar service ensures that the customers have significant choice in terms of which company they travel with. As a result, competition for favorable crossing times is severe and each of the four main companies attempts to exert influence on the ZPA to achieve the best time slots. The smaller companies accept that the time slots they receive may not be as favorable, time-wise, but these slots tend to be cheaper and the smaller companies can pass on this saving to their customers.
Competition between the companies can be intense and there has been pressure on Dearg to simultaneously reduce costs and achieve a differentiated service.
To help in this regard, Dearg has tried to make it easier for customers to buy tickets. Many tourists may have bought tickets before they left their homes and may have also planned an itinerary beforehand but many tourists do not, and the time they spend on each island (and therefore when they are likely to use a ferry service) might vary depending upon how comfortable they are staying in a specific place and how long they wish to stay there.
Most tickets are now sold online and Dearg, in common with its competitors, has its systems set up to accommodate this. However, for those tourists who are more fluid in their movements, this can sometimes prove to be problematic, particularly if they come from abroad and may have restrictions on the time they can spend on mobile devices due to data limits. Buying a ticket online may not be easy in those situations.
Dearg therefore made the decision to have ticket booths on every port, both on mainland and island ports.
This has represented a significant investment in terms of staff and, in some cases, rent, though the Board of Directors of Dearg is so far content that the investment has paid for itself. The ZPA are now due to review applications from two of three of the other main companies for similar ticket booths. Dearg is attempting to lobby the ZPA to not allow these developments and the other companies are, in a similar manner, lobbying the Competition Commission in Zeeland to ensure that permission for the building of the booths is granted. 管理会计创新代考
There are no airports on any of the islands but two of the larger islands have applied to the government to build small runways. Their justification for the need for a runway is based on health and emergency rather than tourism reasons. A key part of the proposal, for example, highlights how long it would take for a health emergency to be treated if a ferry or boat was the only form of transport available. It is a slightly unfair comparison as there is an ability for any health emergency to be airlifted off any island by helicopter. However, both of the islands’ governing councils are aware that the Zeeland government is under pressure to cut costs wherever possible, particularly on its health spending, and are optimistic that the bids may be successful by emphasizing the lack of reliance on helicopters owned by the Zeeland government’s health service.
Dearg, along with the other ferry companies, is trying to put pressure on the Zeeland government to reject these bids.
All the ferry companies are conscious that the real reason behind the applications is to bring in more tourists through another – quicker – form of transport. The companies have indicated to the government that the airports are not necessary and that their construction and operation would spoil areas of natural beauty.
The main area on which the different ferry companies compete is price. All companies have found it difficult to differentiate their service: all ferries travel at a broadly similar speed, for example, and it is almost impossible for a ferry company to claim it can run the same service more quickly than a competitor.
It is also difficult to make passengers more comfortable when, unlike an airplane, they have freedom to move around the ferry almost whenever they choose. 管理会计创新代考
As mentioned previously, there are increasing attempts to compete on the entertainment and catering offered on ferries but feedback from customers is that they do not have too much of an interest in these areas as they can bring their own entertainment, in the form of laptops, tablets and mobile devices, and their own food on board the ferry.
The ferries themselves are increasingly being viewed as a threat to the beautiful landscapes they service. Most ferries are still fueled by diesel as the cost of producing a new ferry powered by a more environmentally-friendly energy source is prohibitive. Dearg estimated that, if all current ferries could be replaced by more environmentally-powered alternatives, the price per ticket per journey would rise by approximately 55%. That increase does not take account of the potentially increased cost of maintaining and repairing those ferries. However, the pressure from islanders, tourists and, increasingly, the government of Zeeland, is for the ferries to run on an environmentally-friendly basis.
Internal developments 管理会计创新代考
Last year was the first year that Dearg’s profits fell and the Board of Directors is concerned about the company’s strategy and its performance management system, which the Board feels may relate more to the business environment of several years ago. The Board’s current performance management framework template is in Appendix 1.
The company undertakes its budgeting on an annual basis and the budgeted figure in the framework is usually decided about three months before the start of the new year. No adjustments are made during the year. The budgeting process is described by the Board as being “inclusive”: however, the managers within Dearg have complained that they are not included in any of the budget discussions and instead are told what figures they need to achieve. 管理会计创新代考
Dearg is divided into 4 divisions (A, B, C and D), based on the geographical location of the islands that they cover and the budgeting method is identical for each of the four divisions.
Though the service that Dearg offers is very similar in all four areas, some of the islands are far away and can take seven hours to reach, as mentioned previously, and others are very close by and can take 25 minutes.
The practicalities of operating a ferry service that lasts for seven hours are different to offering a service which lasts for 25 minutes. The manager of division C, which has a very large proportion of its business based on long journeys, has always maintained that his division’s performance should be judged on a different basis to the other divisions.
Each division does not have its own separate capital expenditure budget and managers have complained that the divisions have to compete against each other for the investment budget money. The managers have said that it can take a great deal of time to prepare a bid for even a small potential investment and the chances of it being successful appear to be small. 管理会计创新代考
Managers of divisions A and D have both indicated that the routes they service are saturated and that, in the words of the manager of division A: “there are no more islands to sail to.”
The manager of division B has also complained that her division has the oldest ferries. Her previous request to have full time engineers assigned to her division has been refused and she was told that she should treat this request as an investment proposal to be submitted to HO. 管理会计创新代考
All managers agree that the divisions are different in terms of the way in which the business operate. There has been an increase over the past year, for example, in demand for shorter trips to the islands that are nearer to the mainland with a resulting decline, in relative demand, for the islands that are further away.
Potential adoption of Economic Value Added™
The Board of Dearg has heard about Economic Value Added™ (EVA™) and is considering introducing it as a measure of performance throughout Dearg. A presentation has been made to the workforce about its introduction both as a performance measure and as a potential new system of bonus and reward.
Some of the specific comments from Dearg’s employees are presented below:
- “What does economic value added mean and how will I know what I am doing
to add or destroy value?” 管理会计创新代考
- “I don’t understand the EVA™ calculation which we have been told about but I am even more unsure how it will actually work in practice. What I want to know specifically here is – would it be easy to see what the EVA™ is for each individual ferry trip?”
- “If I understand this properly, adopting EVA™ means that we have to earn a quick return on assets that we invest in. Our managers won’t want to invest, than, because it means their performance will be closely monitored to ensure that return is being achieved quickly. This will make my job harder as the company will then not invest in new ferries and I’ll spend all my time trying to fix the old ferries.”
- “I am happy that my bonus is based on the quality of the service that we provide. I see myself as an important part of the quality assurance process. Now, I’m told that part of my bonus is to be based on this EVA™ measure – I don’t have any control over anything to do with that, it’s really unfair.”
The Board of Dearg believes that it has overcome the major difficulty in the culture of the company, which was shifting from an initial status of being a company that had a monopoly to being a company that operates in a competitive environment. The Board believes that this was achieved through incentivisation and a focus on customer satisfaction. 管理会计创新代考
The workers on the ferries, however, feel there an increasing disconnect between themselves the management Board of Dearg in terms of the company’s overall purpose. The workers argue that, contrary to one of the company’s main objectives, it does not have sustainability in its operations at the centre of its decision making and that profitability is prioritised above everything else in the company. The workers have alluded to the difficulty in replacing ferries with those run on more environmentally-friendly fuel sources as a part of this though they do appreciate that this would represent a major financial investment.
The workers have been more concerned around other decisions taken by Dearg’s Board which have had an environmental cost.
For example, a very popular route to one island runs through a well-known local area of coral reef. It would only take 10-15 minutes to re-route the ferries to avoid the reef but, as this would add a significant proportion of time to a scheduled 35-minute crossing, the management have been unwilling to reschedule the route.
The workers are also concerned that the Board are over-using the ferries. Older ferries are less environmentally friendly but there is also a real concern amongst the workers that staff and passenger safety is being compromised. The workers are becoming increasingly vocal, both in company meetings and in more public fora, about the company being exploitative in its operations. The fact that Dearg does not make any contribution to local charities which attempt to aid the development of specific marine-based projects does not help the company’s public image in either an external or an internal sense.
Current Performance Management Framework:
|Measure||Budget Figure||Actual Figure||Difference|
|Return on Capital Employed|
|Profit per customer|
|Repair time per ferry following a minor breakdown||管理会计创新代考|
|Number of new routes|
|Number of employee sick days per year|
^ Customer satisfaction is measured by sending customers an e-mail request to complete a customer satisfaction questionnaire two days after their trip has taken place
* This is a measure of how full the ferries are overall. The report enables the Board to drill down to ascertain the capacity utilisation on certain routes or even on individual trips.