IMPROVING YOUR PAPER P5 ANSWERS–PART 2
This article aims to give a clarity on the level of response that is required in a Paper P5 answer.It will address a specific past paper question that caused considerable difficulty in the June 2014 session.The article follows on from the first part(see'Related links')giving examples of weak answers,and will discuss two possible passing solutions to this question.Then it will consider a marker’s view of each one.
In reading through these solutions and the marker’s comments,candidates should gain a better understanding of the breadth and depth of solution that a marker is expecting.Comments are made in[ ]after each paragraph,where appropriate.
Before reading this article,it is essential to have read the scenario and requirement for Question 1,part(i)of the June 2014 Paper P5 exam and it will be helpful to keep these to hand.The requirement is repeated here for clarity.
Write a report to the CEO of Cantor to:
(i)Evaluate the current performance report in Appendix 1.(15 marks)
The first example(numbered 3 to be consistent with the earlier article)is based on several,very good solutions seen.The spelling and grammar has been slightly tidied up but not perfected so that this solution is understandable but not overly polished.This solution’s length reflects real exam efforts.
EXAMPLE SOLUTION 3–AN EXCELLENT,PASSING SOLUTION
The current performance report has the following merits to it:
∎ It represents the results of the two subsidiaries separately along with total group results,thus enabling for specific management and measurement of the subsidiaries,which represents different types of business and also allowing for internal benchmarking.
[Comment:Valuable here are the implicit identification of the different users of the report,different businesses(though,more accurately,it is their different stage of development)and the appropriate use of the jargon term‘internal benchmarking’.]
∎ The report also shows comparisons of budgeted and actual results,allowing for analysis and continuous improvement of planning and budgeting processes.
∎ The report also provides a list of margins on the group level,so allowing for efficiency and profitability analysis and conclusions.
[Comment:Notice how,in the second and third points,the author has not just identified what the report does,but has then said why it is helpful(‘allowing for analysis and continuous improvement of planning and budgeting processes’).]
∎ The report shows industry averages,thus allowing for external benchmarking and preventing company from internal focus,smugness and putting company’s performance into perspective.
[Comment:The language strays here a little from the professional(‘smugness’)but a marker would allow some latitude as the general point is well made.]
∎ The report also shows detailisation for food and drink sales within the group and subsidiary,enabling detailed analysis of product mix and product margins.
[Comment:‘Detailisation’is an overly complicated way of saying‘a breakdown’.Markers prefer simple,clear language.Also,the breakdown is not at a product level so this comment is not entirely accurate.Better would have been to mention what detail is given and then to say what detail would be helpful for the boards.]
∎ Operational costs are very detailed allowing for deep evaluation which is in line with the idea of cost control and cost reduction,which is a vital part of most business management processes.
[Comment:A prime reason why this is a good answer is that most of the points are structured to state what the report does and then why(and often,how)this is beneficial.Notice that the answer does not just declare that the point at issue in the report is‘good’,it explains why this is so.]
However,there are some drawbacks to the report:
∎ The report is obviously overloaded with information.It’s difficult(almost impossible)to understand for non-financial people and members of the board.This is helpful information for the financial managers but it will prove of little use for the top level of the company.
[Comment:This point is a little confused.It actually appears to be making two points.First,that there is information overload and secondly the use of excessive financial jargon.It might also be considered insulting to the board to imply they cannot read a basic set of accounts.It would be improved by a specific example of how the report goes wrong–for example,poor rounding choice or how to improve the report–eg which margins should be highlighted.]
∎ The report consists only of financial information,lacking some non-financial aspects which are very important for the business of Cantor,such as customers’satisfaction,brand awareness and brand loyalty,staff turnover(especially in the light of new staff angle of the mission statement).
[Comment:This may not be perfectly put,but is an excellent point as it is justified by using the mission of the company.]
∎ Some vital financial information is missing as well.Cantor is a listed company stating maximisation of shareholders’wealth as its primary objective–but there are no measures of shareholders’wealth on the report.It could be useful to include such traditional measures as total shareholders return(TSR),price to earnings(P/E),earnings and dividend yields,earnings per share(EPS)and such.However,this matter is expected to be addressed after the introduction of VBM and EVA as its main part.
[Comment:Again,this is well justified by reference to the mission though a logical approach would have put point 3 ahead of point 2.Also,a marker will like the fact that the solution links the point about VBM to this area as it shows that the candidate is grasping an overall view of the problems faced by Cantor.]
∎ As we know,Cafes and Juicey are very different types of business,Cafes is a mature business with a saturated market and low expected growth,whereas Juicey is a young,rapidly developing business.According to the BCG matrix,they can be classified as cash cow and star respectively,so it would be logical to introduce different measures for them.For Cafes–cash flows,cost measures(cost margins,cost variances,cost trends)and for Juicey–profitability,market share,number of new Cafes launched and such.
[Comment:Here is a good illustration of how to use the models that the Paper P5 syllabus contains in a suitable context.It is a common mistake here to realise the BCG matrix may help but then to wander away into a lengthy(and unnecessary)definition and description of the BCG matrix.The solution has used the jargon correctly in context and demonstrated this in the specific advice given.A very good approach.]
∎ Properties are very important for restaurant business in general and so for Cafes and Juicey as well.This part of activities need special control and attention.Cafes are renting on the open market and use standard lease terms(here we should control lease payments to ensure they don’t exceed market levels).Juicey is experiencing the monopoly of one supplier(strong bargaining power according to Porter’s Five Forces model).So the calculation of rentals which is a percentage of revenue should be controlled.
[Comment:These are useful performance management points but they are in danger of not being relevant to the question asked.They can be made clearly relevant to the report(and so the question)by explaining what metrics should be appearing in the report(for example,benchmark of open market fixed and variable rental charges or alternatively,the market inflation rate of these amounts).It would not be wise,however,to take this advice as implying that it would be better to add to the report many new metrics since this contradicts point 1 above.However,given that the solution has justified this specific point as of particular importance to Cantor,it would seem reasonable to make such a suggestion here.A further improvement might be to suggest what data in the existing report should be dropped to allow for this inclusion.]
∎ It’s also not recommended that Cantor use one report for the purposes of all three boards.Cantor should customise its reports,issuing three different reports which would address special strategies and factors of both Cafes and Juicey and would be more aggregated for Cantor as a parent company.
[Comment:Much more could be said about this,however,the answer has at least shown how this improvement could be done(‘more aggregated for Cantor’).]
∎ I’d also recommend the rounding up of figures to represent them in thousands(‘000),not in dollars–it adds little but excessively clogs the report.
[Comment:A marker would be happy to see this minor point towards the end of the list.]
∎ It also would assist managerial decision making and appraisal if previous year’s comparative figures would appear on the report allowing for year on year comparison.
[Comment:Again note that this solution does not just say include historic comparatives,it states why,although it might be better put as‘allowing for historic trends to be shown’.]
Overall,the answer has a good logical structure–merits then drawbacks which is what is expected when the verb‘evaluate’is used.Within the lists of points,there is some effort to prioritise but this could be improved–see third drawback.
More and different points could be made,but in a time-limited examination this is an excellent effort.It may be worth noting that this answer contains c.600 words while the poor answer example for the same question(in the earlier article)had c.800 words and would have scored less than half as many marks!Quality not quantity is what markers and your future employers seek.
EXAMPLE SOLUTION 4–THE MODEL SOLUTION
A detailed commentary on this solution is provided at the end.
Current performance report
The current report has a number of strengths and weaknesses.These will be discussed according to whether the report:
∎ addresses the overall aims of the group
∎ assists the individual subsidiaries
∎ is well presented
∎ contains appropriate information for decision-making.
The current mission of the group can be broken down into three parts:
∎ to maximise shareholder value
∎ supplying good value food and drink,and
∎ providing appealing environments for our customers.
The report does not directly measure shareholder value which could be done through considering net present value or economic value added(EVA™)or share price and dividends.This problem has been recognised and is addressed in a later section of this report.The current report uses period profits as its main measure of performance.This can suffer from being short term unlike the shareholder value measures mentioned.The report does compare budget and actual performance which gives an indication of whether plans are being followed and is helpful in controlling the organisation.
There is an indirect measure of the customer value being offered by the group through the gross profit which,when compared to the industry average,gives a partial measure of value but without data on the price/quality mix compared to competitors,it is difficult to be conclusive about this.Revenue growth compared to industry growth would aid in giving an impression of the attractiveness of our offering to the customer.However,no historic information is given which would allow trends to be calculated.
Measuring the appeal of the sites to customers will be difficult and involve subjective non-financial measurements.Customer loyalty and price elasticity of demand will give some indication of the appeal but it will be difficult without directly surveying customers to untie this from the issues of price/quality mentioned above.
The main board would probably find it easier if less detailed figures were given and a clear statement of the key measures of subsidiary performance provided.
The report seems to treat the subsidiaries in the same way as the group,using profit and comparison to industry average margins and budgets as the main assessment tools.As already mentioned,the reporting of performance against budget is a helpful control tool.However,as the subsidiaries will have more detailed issues than the group,it does not seem appropriate to be using the same high-level overview as for the group board.For the subsidiaries,it would be expected that there would be a more detailed breakdown of revenues and gross margins by product line.Marketing,which is a significant cost,is not attributed to specific sites/products which would help to explain the changes in these categories.The subsidiary managers would probably benefit from the inclusion of a breakdown of profit by geographical region as well.It would seem that the measure being used to assess subsidiary performance would be the operating profit,which is appropriate as it contains the elements of performance controllable by the subsidiaries’managers.The annual reporting period would also appear to be too lengthy to allow the detailed control of operations required by the subsidiary boards.
In terms of presentation,the data is clear and in a form which would be easily recognisable to those used to reading accounts.However,it is common to provide a narrative commentary with such a report in order to highlight the key features in the report,such as major deviations from the budget or performance well outside industry norms.The report could be made easier to read by rounding all figures to thousands and thus removing unnecessary detail.
To summarise,additional information which could be supplied in the report also includes:
∎ historic information to demonstrate trends(especially important at Juicey with its fast growth)
∎ greater detail by product or site to aid the managers of the subsidiaries
∎ competitor information relating to their performance in the three areas of Cantor’s mission(shareholder value,product value,site appeal)
As with all model solutions,this is longer than a marker would expect to see produced in the time limits of the exam.This model solution has more than 15 marks within it(probably about 20 marks).
However,this is the top of the standard expected in terms of the depth of points made–not beyond that standard!It would be wise to study how each point is supported by evidence or argument from the scenario or else is developed.The answer tries to avoid making unsupported judgements.As an example,in the second last paragraph,the solution does not only say‘However,a narrative commentary should always be provided in such a report.’Instead,it says‘However,it is common to provide a narrative commentary with such a report in order to highlight the key features in the report,’(reason/benefit)‘such as major deviations from the budget or performance well outside industry norms’(specific example).It is the italicised clauses that the marker is looking for.
Another feature of the model solution is its logical structure.The model solution begins with the most important point of view:the group board’s perspective.It lays out the group strategy and then assesses whether the report is measuring the achievement of the strategy.Then,it goes deeper by considering the needs of the subsidiaries’boards.Finally,it finishes with probably,the least important points about general presentation and provides a short summary.
Having read this article,prepare(or if already done)/review your own solution to this question so that you can see where improvements can be made.]
Written by a member of the Paper P5 examining team