Professional Level – Essentials Module, Paper P3Business Analysis1(a)December AnswersShoalFishA PESTEL analysis of ShoalFish would focus on the fact that it is fishing in an area where fish stocks are rapidly declining(environmental) and it is increasingly exposed to government intervention and restrictions (political). It is a relatively smallplayer (12% market share) in a large, but declining market place (5% over two years). Profits are declining, although ShoalFishappear to have arrested the decline in the profit margin. The gross profit margin (4·9%) shows an increase over the figure (4·7%). This may mean that the company has been able to bring operating costs in line with the declining turnover.In terms of the Boston Box, it has the characteristics of a dog, a company with a small market share in a declining market.However, Shoal plc perceives that there are important synergies between ShoalFish and the other companies in the Shoalplc portfolio. For example, it helps secure a significant proportion of the raw materials required by ShoalPro. ShoalPro is alsoShoalFish’s main customer, accounting for 40% of the company’s catch. ShoalFish also has an intended role following thepurchase of the Captain Haddock group of restaurants. Shoal plc would like ShoalFish to directly supply the Captain Haddockrestaurants and so potentially reduce raw material costs at Captain Haddock.Shoal plc needs to look carefully at the viability of maintaining this fleet. They are operating in an area where owner-skippersare very common (almost half of the boats in the western oceans are owned and operated by the boat’s captain). There maybe an opportunity for ShoalFish to sell, lease or rent their ships, perhaps to individual owners, with the promise of guaranteedsales to ShoalPro (and potentially Captain Haddock). Alternatively, they could tolerate declining performance from this part ofthe portfolio, in the knowledge that it forms an important part of the supply chain for other companies in the portfolio.ShoalProShoalPro is a profitable and expanding organisation. A significant percentage of its raw fish supply is currently provided byShoalFish, but this percentage is declining as it increasingly processes fish for other companies. It is in a mature, but stillexpanding ( 2% from to) market-place where it holds a significant (40%) and slightly increasing market share.Gross profit margins are improving slightly (from 10% in to 10·6% in), suggesting that costs are increasing at aslower rate than revenues.Its consistent profitability would classify this business, using Boston Box terminology, as a cash cow. A company with asignificant market share in a low growth market.A PESTEL analysis would focus on the fact that ShoalPro factories are in a region which attracts national grants due to highlocal unemployment (political and economic). This reduces operating costs and the persistence of high unemployment suggeststhat a local skilled workforce is still accessible to ShoalPro (socio-cultural). Analysis suggests that ShoalPro is an important partof the Shoal plc portfolio and should be retained and maintained.ShoalFarmShoalFarm is a relatively new acquisition. It currently has a relatively low market share (10%) in an expanding market-place.ShoalFarm is itself growing ( 12% from to), but not as fast as its market ( 20% in the same period). A PESTELanalysis would reveal a market-place that is perceived as ethically acceptable, stressing the conservation of fish supplies(socio-cultural). It seems likely that this will increase in importance in the future although the difficulty of finding potential sites(environmental) may be a significant factor. Gross profit is high (14% in, comfortably out-performing ShoalFish andShoalPro) but declined in (12·7%), recovering slightly in (13·3%).ShoalFarm may also have a significant role to play in providing raw materials for both ShoalPro and the potential acquisition– Captain Haddock restaurants. In terms of the Boston Box classification, ShoalFarm is probably a question mark or problemchild. It needs increasing investment to ensure that it becomes a key player in a significant market-place. If Shoal plc isprepared to do this, then the recommendation is that they should expand and develop. If they do not – and the potentialsynergies with Captain Haddock are not realised – they may wish to divest.Overall, the three companies can be seen as integrated parts in a comprehensive value chain. Conflicting environmental forcesare at work, on the one hand reducing the level of dependency between the companies and, on the other hand, reinforcingthe competitive advantages (synergies) of being in a vertically integrated group. The potential acquisition of Captain Haddockcould further enhance these advantages but only if the correct inter-firm trading relationships are established.(b)(i)Shoal plc recognises that there is no ‘one right way’ to manage change. The success of any planned change programmewill depend upon an understanding of the context in which the change will take place. Balogun and Hope Haileyhave highlighted a number of important contextual features that need to be taken into account when designing changeprogrammes. These features are used as a basis for this model answer. However, other frameworks that recognise thecontext that changes takes place within could be used by the candidate and appropriate credit will be given.Shoal plc has little time to complete the acquisition and effect the strategic change necessary. The decline in CaptainHaddock’s turnover and profits is increasing dramatically. The resignation of the chairman and managing director of thecompany was triggered by concerns about breaking bank covenants. If Shoal plc does acquire Captain Haddock thenstrategic change will have to be implemented quickly.Shoal plc will need to put into place policies that help them preserve the aspects of Captain Haddock that need to beretained for future success. It is recognised that the employees and the training they receive are first rate. Steps need to beput in place to ensure that these employees remain within the company. Similarly, the Captain Haddock brand is strongand needs to be re-affirmed.11

Change is usually easier if there is a diversity of experience, views and opinions within the organisation. This is notdiscernable at Captain Haddock. The suggestion is that most employees are recruited directly from school or universityand then remain within the Captain Haddock training programme as they progress through the company. There is verymuch a policy of ‘recruit from below’. In such circumstances it is unlikely that norms and practices will be challenged.A homogenous internally shared view was developed that Captain Haddock did things the right way, whatever waschanging in the world outside. Shoal plc will have to be sensitive to this, as well as recognising that it will need to bringthe required diversity of thinking to the company.Capability is concerned with the extent or experience of managing change in the organisation. Within Captain Haddockthere appears to be little experience of such change. Indeed the preservation of established norms and practices was thefocus of management and the supporting training. In contrast, Shoal plc have experience of managing change and this isa major capability that it should bring to Captain Haddock. However, it has to be recognised that this capability has notbeen tested in the restaurant sector and Shoal plc will have to be sure that their capability is applicable to this sector.The capacity of an organisation for change considers the resources available to support change. Change may be costly,both in real financial terms and management time. Captain Haddock has little capacity for change from its own resources.So, this is again something that Shoal plc will bring to the company. Substantial investment will not only be requiredto improve Captain Haddock’s financial position, in terms of fulfilling bank covenants, but also to finance the changeprogramme necessary within the company.There appears to be little doubt that Captain Haddock is ready for change. Two senior members of management whocould have been the focus for some resistance to change have left the company and employee representatives are keenfor someone to come in and ‘effectively lead employees who have become increasingly demoralised by the decline of thecompany’. Shoal plc should acquire an organisation that is receptive to appropriate change.It is necessary to identify people in the organisation who have the power to effect change. Again, this will be a keyresponsibility of Shoal plc if they acquire Captain Haddock. They must give the appointed management sufficient powerto implement the required changes.So, in summary, Shoal plc will be faced with ensuring that many of the contextual requirements for successful changeare put in place. They will need to provide management with appropriate capability and diversity and then give them thepower and capacity to effect required changes. They will have to move quickly to preserve Captain Haddock’s strengths,but they will find a workforce that is receptive for change.The final contextual feature that needs consideration is the scope of change. The type of change required at CaptainHaddock can be viewed in the context of the following model.Nature of changeIncrementalBig BangScope of ReconstructionRevolutionAdaptation is change that can be accommodated within the current paradigm and can be introduced incrementally in theorganisation.Reconstruction is change that may be rapid and create upheaval in the organisation but which does not fundamentallychange the underlying paradigm.Evolution is a change that does require a paradigm change but one that can be introduced over timeRevolution is a change that requires rapid change associated with a change in paradigm.Reconstruction appears to fit the situation at Captain Haddock.(ii)This part of the question can be answered in a number of ways and all legitimate approaches will be given credit.However, it is suggested that the answer should consider:–––––Focusing on profitable and/or core activitiesDivesting non-profitable and/or ill-fitting activitiesChanging senior managementEffective stakeholder managementFinancial restructuring.This model answer uses the structure suggested by Johnson, Scholes and Whittington for implementing a turnaroundstrategy. Change is required quickly but there is no need to radically change what the organisation is doing. There is aneed for a realignment of strategy rather than a fundamental change of strategic direction. It has already been recognisedin the previous answer that Captain Haddock requires reconstruction. This is often associated with a turnaround situationwhere there is a need for structural changes to deal with a decline in financial performance and changing marketconditions. In a turnaround situation the emphasis should be on rapid change and rapid cost reduction and/or revenuegeneration. Thus Shoal plc should be aware of some of the main elements of a turnaround strategy as they will needthese if they acquire Captain Haddock. These main elements could form the basis of a strategy for change to return thecompany to profitability.(1) The change strategy might commence with crisis stabilisation with a short-term focus on cost reduction and revenueincrease. One of the synergies identified by Shoal plc (the provision of fish directly to Captain Haddock restaurants)12

(2)(3)(4)(5)(6)(7)should aid cost reduction. There is evidence that focusing on reducing operational costs is a significant factor in asuccessful turnaround strategy.Implementing management changes at the top level. The resignation of the chairman and managing director ofCaptain Haddock has already facilitated this. Their resignation will also support the reduction of costs. The reductionof the costs of senior management is a further characteristic of a successful turnaround strategy.Gaining stakeholder support. It is vital that key stakeholders are kept informed during the change process. A clearassessment of the power of different stakeholders will be vitally important. Evidence from the scenario suggests thatemployees are supportive of change. The banks should also welcome the acquisition by a large and well-establishedcompany such as Shoal plc.Shoal plc will have to clarify target markets and re-establish the Captain Haddock brand. There is evidence that thecompany has unsuccessfully diversified into new market-places which did not deliver profits. The company has toget ‘back to basics’ and re-establish itself in its traditional market-place.Captain Haddock will need to be re-focused on core activities and products. It may be possible to dispose of the landbought for investment. Clarifying the target markets provides the opportunity to discontinue products or services thatare not focused on those markets.Financial restructuring of Captain Haddock is necessary and is part of the capability that Shoal plc will bring to thecompany. Evidence suggests that Captain Haddock should be delivering gross profits of about 11million per year,so making the 15million investment a relatively modest outlay.Shoal plc will need to prioritise critical improvement areas, delivering quick and significant improvements.Finally, Shoal plc need to be aware that a successful turnaround strategy should focus on getting the existing businessright, rather than quickly diversifying into new markets and businesses.(c)Portfolio managers, synergy managers and parental developers represent three corporate rationales for value creation in amulti-business organisation as suggested by Johnson, Scholes and Whittington. The distinction between the three is consideredhere.Portfolio managers act as an agent on behalf of financi