INSTRUCTIONS TO CANDIDATES: Answer all requirements. Your coursework should not exceed 3000 words in total
EcoUse Limited is a privately owned UK limited company, which recycles household waste items into materials used in the production of a variety of products and packaging. Roy Lewis, the sole founder, established EcoUse Limited in 1984 when the company recycled washing machines, fridges and tumble dryers, selling them on to small businesses operating in the second-hand market. In the first year of trading annual turnover amounted to £30,000. Under Roy’s leadership the business rapidly expanded its operations throughout the UK and by 2005 annual turnover had grown to just over £6.4m. At the beginning of 2006 Roy decided to retire and handed over the ownership and management to his son James Lewis. Roy unfortunately passed away in 2008.
Over the last 10 years EcoUse Limited has been owned and managed by James Lewis.
EcoUse Limited now produces a variety of recycled materials, which can be used in the production of plastic products, plastic and cardboard packaging and a variety of paper used for both commercial and household printing. The company currently employs 32 people most of whom have been with the company for over 15 years. Roy was fiercely loyal to his employees and had a policy of always promoting from within the organisation. The current management structure is relatively loose and whilst James has managed the strategic growth and direction of EcoUse Limited over the last 10 years he has relied heavily on Luther, Operations Director, Elaine, Sales Director and Bruce, Financial Director, all of whom have been with the company for more than 25 years.
In 2012, after a significant amount of effort by Elaine, EcoUse Limited entered into a 10-year contract to supply plastic coverings for a large USB memory stick producer, Memo PLC. The terms of the contract were typically 20% below EcoUse’s normal selling price with limited scope to increase selling prices in the future but after Elaine’s persuasive arguments, in particular the fact that the reduction in selling price would be more than offset by the increase in volume, James decided to go ahead with the new contract. At the time Bruce had expressed his concerns over the deal stating that Memo PLC could wield a significant influence over the company but both James and Elaine dismissed Bruce as being too conservative and argued the deal was just too good not to go ahead. In the January 2016 financial statement, 25% of annual turnover came from sales to Memo PLC.
Subsequent to signing the contract with Memo PLC James and his Board embarked on an asset expansion programme and significantly increased bank borrowing in light of the new contract.
The most recent financial statement, January 2016, showed annual turnover was now £8.1m with operating profit margins of 12%. Over the last 10 years, since James took over the company, growth had increased steadily but had not matched that seen in the early years of the business.
Bruce has been a safe pair of hands and has managed EcoUse’s financial position well, if not a little unadventurously during his term as Financial Director. Until recently, cash flows have been consistent but have not grown in line with competitors.
Operations Director Luther is due to retire in two years’ time and tends to be set in his ways and dislikes change. This was shown when Jack, a young operative who joined the company two years ago, tried to initiate changes to the recycling process which he felt would improve efficiency. Luther was most indignant and threatened to leave if James made such changes. Since Luther and James are long-standing colleagues, and out of respect to his late father, James backed Luther on that occasion and no changes were made. Jack is still working for the company, but this incident has made him rather frustrated.
Bruce and Luther, apart from having a strong working relationship, are also close friends. 8 months ago Bruce had a private conversation with Luther identifying the potential to move production onto a just-in-time basis to reduce the costs of holding high levels of inventory. Whilst Luther appreciated what Bruce had to say, the current state of affairs is still that production tends to jog along at a steady rate regardless of demand and, in addition, purchases of recyclable raw materials tend to be on a ‘hit and miss’ basis. It is mainly by good luck rather than good management that sufficient raw materials are available. In Luther’s opinion, if he can see employees working diligently in the factory, he is satisfied that the business is doing okay.
James has no family to inherit the business and so, due to ill health, he has decided to sell it to Lydia Moys. Lydia has no specific experience of the recycling industry, but she is a very astute businesswoman and expects the demand for EcoUse products to not only grow nationally but also believes there is an untapped market outside of the UK which EcoUse Limited has yet to exploit. As a prelude to investing in the business, Lydia has carried out extensive research into the recycling sector, the specific business environment in which the company trades and its commercial operations. Her investigations have given her some interesting information.
EcoUse Limited owns a large plot of land, part of which has been developed to provide a well maintained factory premises and part of which remains undeveloped. The land was bought and developed in 1998 and no revaluation has taken place since that date. The factory is large and provides room for expansion of recycling operations within the existing building. Its location is ideal for distribution of products to customers and for obtaining raw materials. Lydia feels that the site is likely to be worth considerably more that its book value. The company also owns a fleet of commercial vehicles, which are in good condition.
Unfortunately, the equipment used in the recycling plant is 16 years old and in need of replacement. Lydia has made extensive enquiries and has established that new equipment would cost £5.2m. She would retain the old equipment as a backup, since it has no resale value and there is sufficient factory space to store it. Lydia has a number of business contacts and feels confident that she will have no difficulty in raising the additional funds needed to purchase the new equipment but potential lenders may wish to take an equity stake in EcoUse Limited.
The company currently has an overdraft facility to support its cash flow requirements of £80,000 and Lydia has negotiated a £300,000 overdraft facility available to the company if and when she takes over as owner. However, the bank has said that any further borrowing would have to be supported by budgets and monitoring information.
Based on her analysis, Lydia is optimistic about the company’s prospects. She feels that expansion into new markets, and in particular the European market, will significantly increase demand for EcoUse products in the medium to long term. She has thus agreed to buy the business and take over its management in July 2016. She has already looked carefully at the Statement of Financial Position is a confident, with the exception of the undervalued site, that it is a reasonable assessment of the company’s other assets and liabilities as at January 2016. Lydia has limited experience of accounting and has asked you, her trusted advisor, to advise on the purchase of EcoUse Limited.
a) Assess how a stakeholder analysis will impact upon the development of a performance management system for EcoUse Limited. (Use no more than 500 words – you may use fewer) (8 marks)
b) Analyse the power and interest of the current senior management team, Memo PLC, Lenders (both banks and potential new equity holders) and environmental pressure groups on Lydia becoming the majority shareholder in EcoUse Limited and comment on how these stakeholders should be managed. (Use no more than 500 words – you may use fewer) (8 marks)
c) Advise EcoUse Limited on why Porter’s Five Forces is a useful tool for effective strategic decision-making. (Use no more than 500 words – you may use fewer) (8 marks)
d) Advise EcoUse Limited on how it will manage the Five Forces analysed in Appendix 1. Consider how each of the forces will impact upon performance management and give a justified recommendation of one new performance measure for each of the five forces. (Use no more than 700 words – you may use fewer) (12 marks)
e) Recommend, with justification, an appropriate performance measure for each factor identified in the PESTLE analysis in Appendix 2. (Use no more than 400 words – you may use fewer) (7 marks)
f) Assess the various types and likely sources of management information, which Lydia would need to consider when making the decision to purchase EcoUse Limited. (Use no more than 400 words – you may use fewer) (7 marks)