Comprehension worksheet
Question
Answer
How did Kirsty come to own Green
Farm?
She inherited it from her father in the early 1990s
What is the main business of Green
Farm?
Crop farming (barley, wheat, oil seed etc) – the core business
Poultry farming – small scale (sideline)
Describe how Kirsty sources the
workforce of the farm
Mixture of employees:
Permanent staff
Temporary staff
Many roles taken by low-paid migrant labour
What were the three areas of
concern that Keith had identified in
relation to the farming operations?
Wastage
Labour efficiency
Crop yields
Describe the key features of Phase
One for the wind power project
Install one, small wind turbine to provide farm with free
electricity + potentially generate a small surplus to sell
Get specialist support from engineers re turbine installation
Obtain planning permission
Gain support of local residents (stakeholders)
OPTION ONE
Answer the following questions about Option One
Describe the new product
opportunity for Option One
Farming - new hybrid oil seed
Crop well suited to Green Farm conditions
Can be used in production of biofuel
What are the main business issues
raised by this Option?
Crop yields for oil seed
Who would process the oil seed?
Investment requirement
Likely selling price & costs
Environmental credentials of the petrol replacement
Distribution channels
OPTION TWO
Answer the following questions about Option Two
How does Kirsty plan to expand the
existing wind turbine operation?
Add three big turbines
The main operational challenges
facing Kirsty with Option Two are?
Obtaining planning permission (Appendix 3)
Need to be more professional in setting up a distribution
mechanism (selling)
Insurance
Maintenance & technical support
Question
Answer
OPTION THREE
Answer the following questions about Option Three
The business venture being
considered is?
Operating a paintball centre
Describe the investment
requirement for Option Three
£50,000 for the paintballing equipment
Capital cost of building an arena and support facilities
The main attractions of Option
Three as viewed by Roger include
what?
Low investment requirement
Low risk
Year –round activity = less seasonal demand
Weak competition
Low break-even point with potential for good profits
Green Wind Farm - Exam-style Exercise
Ansoff Matrix
Tasks
(1) (a) List the four quadrants in the Ansoff Matrix below (use dotted line)
(b) Insert each of the three options available to GWF into the correct quadrant
Products
Existing
Markets
New
Existing
Market penetration
.....................
Option One
Already producing wind
power – albeit on a small
scale
Phase Two is about scaling
up the existing product
Product development
.....................
New
Market development
.....................
Option One
A new market use for an
existing crop – oil seed
Diversification
.....................
Option Three
Although described as “low
risk”, this is a new product in
a new market
(2) Explain, using the Ansoff Matrix as a guide, which of the three options presents
the greatest risk to GWF
Option One
An activity that GWF is already good at – arable farming
Involves growing a different variety of seed – but no major
changes to farming processes
Marketing issues need to be addressed – as with any crop.
Relatively low risk and low investment
Option Two
The most complex project and the option that is likely to require
the biggest investment – all of which adds to the risk
Explicit mention of “risks and huge financial resources required”
[line 67-68]
Risk can be managed by using experienced contractors – but this
will reduce the profits/returns
Risk could be shared by obtaining financial investment (e.g.
neighbouring farmers)
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
Need to obtain local stakeholder support too
GWF has existing experience of wind-farm operation – but on a
much smaller scale
Overall risk – high because of financial investment and
operational complexity
Option Three
Diversification – normally associated with a higher risk strategy
GWF has no experience of operating a leisure attraction – will be
easy to under-estimate the quality and service required
However, the capital investment required is low
Main risk is in the marketing and the threat from the economic
downturn – what will need to be spent in order to build a
customer base? How will local competitors respond?
Medium risk overall
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
Breakeven
As part of her business plan for Option Two, Sue has identified the following data in relation
to the sales and costs of the Phase two wind farm extension.
Sue has found out that the average selling price for supplying generated units of electricity
to the National Grid is £90 per ‘000 kwh. Other data in Sue’s plan is as follows:
Units of electricity produced and sold ('000)
3,000
Selling price per '000 units (kwh)
Variable costs per '000 units
Fixed costs (£'000)
£90
£5
£350
Tasks:
(1) Calculate the contribution per ‘000 units of electricity produced and sold (show your
workings)
(2) Calculate the breakeven output and margin of safety using the data provided
(3) Sue believes that a government grant of £100,000 may be available to finance the
investment in Option Two. Explain what the effect on the breakeven level of output
would be if GWF were able to obtain this grant and the other business plan
assumptions remained the same
(4) Assess the extent to which breakeven analysis is useful to the strategic decisionmaking by GWF
Workings:
Units of electricity sold ('000)
Selling price per '000 units (kwh)
Variable costs per '000 units
Fixed costs (£'000)
Contribution per '000 units (£90 - £5)
Breakeven output (‘000) £350k / £85
Margin of safety (3,000k units less breakeven output)
Grant available (£'000)
Breakeven output if obtained (reduces fixed costs by £100K)
Usefulness of breakeven to GWF on Option Two:
The project involves substantial fixed costs and a significant investment
© Tutor2u (www.tutor2u.net)
3,000
£90
£5
£350
£85
4,118
-1,118
100
2,941
Green Wind Farm - Exam-style Exercise
There is also much uncertainty about the selling price that can be achieved and the
volume of electricity that will be generated (wind conditions etc)
Breakeven analysis is hugely useful because it focuses Kirsty and the team on the
viability of the project. It takes account of the sensitivity of selling prices and
volumes and focuses them on minimising the fixed costs of the project.
The availability of a grant, for example, significantly reduces the breakeven output in
the first year. But will this be available in subsequent years?
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
Investment Returns
Using figures supplied by Keith, Sue and Roger, Kirsty calculated the likely net cash-flow for
each of the three options:
New Crop
Wind Phase 2
Paintball
Time (year)
Option 1
Option 2
Option 3
0
-75,000
-350,000
-50,000
1
50,000
25,000
25,000
2
50,000
50,000
40,000
3
40,000
100,000
50,000
4
40,000
100,000
50,000
5
40,000
100,000
50,000
Tasks
(1) Calculate, showing your workings, the Payback Period for Option 1 (show your
workings)
Payback occurs half way through the second year.
In year 2, the cash flow is £50,000, which turns a negative cumulative total of
£25,000 (end year 1) into a positive net cash flow of £25,000 by the end of year 2
I.e. payback = 1.5 years
Note: this assumes that the cash flows from Option 1 arise evenly during each year.
(2) Calculate, showing your workings, the ARR for each option (show your workings)
Option 1
Option 2
Option 3
220,000
375,000
215,000
Initial investment
75000
350000
50000
Average return per year
44000
75000
43000
Avg return / investment
58.7%
21.4%
86.0%
Total returns (Years 1-5)
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
(3) Describe one advantage and one disadvantage of using each of the Payback
Period and the ARR as investment appraisal techniques
Payback
Advantages
Disadvantages
It is simple to use and gives
an immediate view on how
long it will take to recoup an
investment
Ignores cash flows that arise
once payback has been achieved
(which may be substantial)
Focuses on cash flows
Not concerned with the overall
return on investment
Does not address the risk of an
investment and the investor’s
required rate of return
Can be overly simplistic
Ignores qualitative aspects of the
decision
ARR
Provides a measure of the
overall return on investment
Not necessarily focused on cash
flows, rather the profits earned
ARR can be compared with
Ignores qualitative aspects of the
investor’s required rate of
decision
return – which will take some
account of the risk of the
investment
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
Labour efficiency
Keith is concerned about some aspects of the farm’s performance. He has produced some
data for Kirsty to review:
Data by type of
staff
Green Farm - Performance Data
Permanent
Temporary
Number of farm labourers (avg per month)
20
40
Farmed output (tonnes per month)
50
35
Wastage (tonnes per month)
1.0
1.4
1
6
Working days per month (avg)
25
25
Unauthorised absences (days per month)
0.8
3.0
Leavers (per month)
Tasks
(1) What is meant by the terms “wastage” and “staff efficiency”?
Wastage:
Can be of two types for GWF:
a) The proportion of finished output that is not suitable for sale (e.g. a crop that
does not meet the quality standards of the customer)
b) Excess use of inputs into the farming process – e.g. excessive use of fertilizers
Staff efficiency:
A measure of the productivity of each employee – how much output is produced by
each employee
Note – not all employees will be as “efficient” as others – it will depend on what
roles they perform, what farming technology they use, their skill and experience etc
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
(2) Complete the following calculations for temporary workers at Green Farm
Permanent
Staff
Temporary
Staff
Wastage level (%)
2.0%
4.0%
Staff turnover
5.0%
15.0%
Absenteeism
3.0%
12.0%
(3) Explain why, from a strategic perspective, Kirsty should take the performance
data produced by Keith seriously
The core business of GWF remains arable farming (despite the three alternative
projects under consideration). The farm is doing well [line 41], but there is a concern
that the income from farm subsidies might fall (appendix 1).
It is essential, therefore, that GWF focuses on the efficiency/productivity of its
business.
Labour costs will be a substantial part of GWF’s operating costs – arable farming
remains a labour-intensive operation, despite the use of technology.
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
Marketing Strategy
Kirsty decides to go ahead with Option Three and invest in a paintball facility at Green Farm.
Task
(1) Outline a suitable marketing strategy for the launch of the GWF paintball
business
A good framework to use in a question like this is the marketing mix.
The starting point for a marketing strategy will be the marketing objectives:
-
What sales and profits does Kirsty wish to achieve from the Paintballing project?
-
Over what timescale will the marketing objectives be measured?
An outline marketing strategy:
Product
Place
Variety of paintballing zones and
challenges within GWF “arena”. May
require substantial part of spare land and
wooded area
Core product – “pay as you play” – fullday; half-day or hourly sessions
Options to book for hen, stag and
children’s parties
Full protective clothing provided within
inclusive play package
Product extras to be bought at the venue
(e.g. extra paintballs, grenades,
smokebombs)
Creation of zoned paintballing arena at
GWF
Create dedicated visitor facility –
reception, catering & equipment stores
Potential to add additional venues once
business is established
Promotion
Price
Launch aim is to encourage trial use
Direct marketing using online and
printed materials
Promote on online paintballing websites
and social networks
Local sales promotions – leaflets and
vouchers
Limited advertising – e.g. local papers
Offer range of gift vouchers as part of
sales promotion
Pricing tactic has to encourage customer
trial
Encourage full-day attendance to
maximise catering sales - e.g. £9.99 for a
full day; £7.99 for half-day
Corporate group rates
Party rates
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
Option Evaluation
(1) Complete the following analysis of the three options open to GWF
Option One
Biofuel crop
Option Two
Wind farm extension
Option Three
Paintball
Level of investment
(Low | Medium | High)
Low
High
Medium
Fit with existing activities
(Low | Medium | High)
High
Medium
Low
Potential for profits
(Low | Medium | High)
Medium / High
Medium / Low
Low
Strength of competition
(Low | Medium | High)
Medium
Medium
Medium
Operational complexity
(Low | Medium | High)
Low
High
Medium
Overall risk to GWF
(Low | Medium | High)
Low
High
Low
(2) Recommend and fully justify which option GWF should choose.
The answer – over to you! However…
Notes:
The three options are not mutually exclusive – it is possible for Kirsty to do more than one.
Much depends on the financial resources required.
Kirsty also has the option of doing none of the options – she is financially-astute: if the
business plans do not suggest that any of the options are viable, or that they meet her
required return, then she can choose not to proceed
GWF is already a successful arable farm – the options presented are designed to add
additional income to the business, not save the business
In the exam you will be presented with some additional data about the three options (e.g. a
break-even calculation, or some payback ARR data) which you should use as part of your
evaluation of the three options.
Don’t forget the importance of strategic objectives. We are not told much about Kirsty’s
objectives for the business – however, these play a key role in determining which option she
may choose.
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
Also consider sources of finance – only Option Two seems to be of a size that requires
additional external sources of finance (proposal is to set up a limited company and perhaps
sell shares to local farmers). But consider the alternatively – e.g. a bank loan or seeking out
government grants.
Your analysis of the Ansoff Matrix can help shape your decision. Option three (paintballing)
is the diversification option, which might suggest a higher risk. Option one and two
represent GWF getting involved with existing products.
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
PEST Analysis
Tasks
(1) Explain what is meant by PEST analysis
PEST analysis is concerned with the external environmental influences on a business.
The acronym stands for the Political, Economic, Social and Technological issues that could
affect the strategic development of a business.
(2) Explain why PEST analysis might be useful in GWF’s strategic decision-making
GWF identification of PEST influences would be a useful way of summarising the external
environment in which the business operates. However, it must be followed up by
consideration of how a business should respond to these influences.
For example, the research into Option Two has identified a number of significant political
and legal issues which GWF needs to address if it is to successfully develop its wind-farm
operations. The planning permission regime in the UK is complex and rapidly changing.
GWF needs to take account of this as part of its business plan for Option Two.
Similarly, whilst the long-term trend in consumer spending on more leisure activities is
positive for Option Three [appendix 4], the effect of the economic downturn in the UK is a
significant negative influence. Will businesses and private groups cut back on paintballing
trips during the recession? What are the implications of this for Roger’s business plan
assumptions?
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
(3) Complete a PEST analysis for GWF
POLITICAL / LEGAL
ECONOMIC
Changes to method of subsidising and paying Availability and price (wages) of permanent
farmers – may reduce overall level of subsidy and temporary labour force
(threat to existing arable activities of GWF)
Price pressure from food manufacturers and
Planning permission regime (environmental supermarkets on farm-gate prices
use of farmland) [appendix 3]
Long-term increase in consumer spending on
Conflicts with stakeholder groups opposed
leisure activities [appendix 4]
to proliferation of renewable energy projects
Economic downturn / recession likely to
mean lower corporate spending on
hospitality events like paintballing – will put
pressure on pricing
SOCIAL / ETHICAL
TECHNOLOGICAL
Changing flows of migrant labour across
European Union
Changes in farming technology – impact on
efficiency, productivity
Attitudes of local communities to installing
wind farms
Alternative uses for arable crops – e.g.
biofuels
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
Strategic and Tactical Objectives
Tasks
(1) What is meant by the terms “strategic objective” and “tactical objective”?
Firstly – what is an objective? An objective is a statement of a specific outcome that
is to be achieved. These are often set in financial terms (e.g. sales, profits), but don’t
have to be.
Strategic objective
Set by senior management. Strategic objectives set out
what the business as a whole needs to achieve. These are
goals for the entire business
Tactical objective
A more details objective that translates a strategic objective
into a series of more detailed, operational objectives
(2) Identify one possible strategic objective and one tactical objective for each of the
three options under review
Option Strategic Objective
Tactical Objective
1
Achieve a return on investment in oil
seed crops of 20% within 2 years
Agree supply contracts with 5 major
biofuel processors within 12 months
2
Achieve a 1% share of the market for
wind-turbine energy within 3 years
Achieve a selling price per kwh of at
least £10
3
Become the marketing leading
paintballing destination in the region
by 2012
Achieve a minimum of 25 group
bookings from the launch direct
marketing activity
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
SWOT Analysis
Tasks
(1) What is meant by the term SWOT analysis?
SWOT analysis is a way of analysing the competitive position of a business
SWOT stands for:
Strengths
What the business does better than the competition – core
competencies. These are sources of competitive advantage
Weaknesses
Areas where the business is weaker than the competition – a
source of disadvantage
Opportunities
External opportunities which they business could exploit in order
to achieve its objectives
Threats
External threats to the competitive position of the business – a
business needs to respond to significant external threats
(2) Explain how a SWOT analysis could assist GWF in formulating its strategic
objectives
SWOT analysis is an important tool for auditing the overall strategic position of a
business and its environment. It helps highlight the key strategic issues that GWF
needs to address.
Once key strategic issues have been identified, they feed into business objectives,
particularly marketing objectives. SWOT analysis can be used in conjunction with
other tools for audit and analysis, such as PEST analysis and Porter's Five-Forces
analysis.
SWOT analysis would help Kirsty identify the successful, core activities of GWF and
provide a strategic context for evaluating the three options under review.
© Tutor2u (www.tutor2u.net)
Green Wind Farm - Exam-style Exercise
(3) Complete a SWOT analysis for GWF
S
W

GWF operates successfully as an
arable farm (range of crops + smallscale poultry rearing)

Kirsty is experienced and financially
astute

Farm assistant team are high quality
and specialists

Use of up-to-date farming technology
(impact on efficiency)

Project management skills
O

Concerns raised about wastage,
labour efficiency and crop yields

Changing political attitudes and
approaches to subsidies of arable
farming

Uncertain planning permission
regime towards wind power

Variability in prices & returns for
biofuel crops

Attitude of local stakeholders if
growth projects are pursued
T

Alternative uses of arable crops – e.g.
biofuels

Further diversification of the farm
land and facilities

Extension of the wind farm operation
© Tutor2u (www.tutor2u.net)
OCR AS Applied Unit 9 – Exam Topics
Recent key topics examined in Unit 9 are:
Specification Area
Jan 2007
June 2007
Jan 2008
June 2008
Mission Statements,
Aims and Objectives
Definition and benefits of
mission statements
Definition & identification of
stakeholders
Potential conflicts between
stakeholders
Defining business objectives
Identifying strategic objectives
for the case study business
Identification of stakeholders
Issues causing conflict
between stakeholders
Strategic objectives of a
partnership over time
Definition of mission
statement
Stating a strategic objective for
a small firm
Business Planning,
Strategy and
Decision-Making
Analysis of case study business
using Ansoff Matrix
Evaluation of usefulness of
Ansoff Matrix in making
strategic decisions
Evaluation of the usefulness of
Porter’s work in assessing
strategic options
Application of Porter’s generic
strategies to achieve
competitive advantage
Labelling Ansoff’s matrix
Entry of strategic options onto
matrix
Evaluation of strategic options
Financial BusinessPlanning
Completion of critical path
analysis
Evaluation of usefulness of
critical path analysis in
supporting decisions
Calculation of payback period
and ARR for the three business
options under review
Completion of decision tree
and recommendations for best
option
Usefulness of decision trees
Drawing break-even chart;
calculation of break-even
output and margin of safety
Calculation of the profit from
one option using data provided
Calculation & interpretation of
break-even & margin of safety
Limitations of break-even
analysis
Calculation & interpretation
using critical path analysis
Investment appraisal
calculation using NPV
Calculation of payback & ARR
using data supplied in exam
paper
Completion of decision-tree
and assessment of usefulness
of decision-trees to strategic
options
Sources of finance for
expansion
Define labour turnover &
productivity
Calculation & interpretation of
labour efficiency ratios
Definition of labour
productivity
HRM implications of a
potential merger
Calculations and problems of
labour turnover
Human-Resource
Planning
Specification Area
Jan 2007
June 2007
Jan 2008
June 2008
Integrated Marketing
Planning/Strategy
Recommendation &
justification of which strategic
options to chose
Recommendation of which of
three strategic options to
chose
Evaluation of strategic options
Marketing strategy for one of
the options
Contingency Planning
and Crisis
Management
How might contingency
planning help the case study
business?
The main themes in the EETL case study for June 2008 are:

Point