Nzonzi Uganda Limited's Organogram Board of Directors CEO Human Resource Information Finance International Sales & Marketing Operations Internal Audit Technology Senior Accountants Sales & Marketing Business Development Procurement HR staff (all based at IT support team (HQR teams HQRS) based) (reporting and Officers (store based) operations) Store based Sales Executives Stores Officers Management AccountantsThe above matters may provide yet more evidence of the challenges faced by family-run businesses. According to a leading business analyst. \" ...... It is increasingly evident that the passion that comes with familyrun businesses ceases to be strength after businesses expand beyond a certain size. NUL appears to have grown beyond that optimum size such that the evident shortages in professionalism in key areas have become the firm's major weaknesses. Authors have written about this and experienced entrepreneurs have also commented severally. but the same governance syndromes keep derailing companies otherwise destined for greatness. They start well. grow but fail to let go of the 'baby' when the time is right. Ugandans must learn that building a lasting brand requires professionals to be deployed in the right places and empowering them to make decisions. It further calls for appreciating the practical relevance of the agency theory in the governance arrangement of a company." Although no minutes of the shareholder meetings are kept. their interactions with the management consultant have indicated that the owners are not satisfied about the acting CEO's performance for the past one year. They are particularly concerned that financial information is not provided on time yet NUL is on a market rebound strategy. The owners are therefore guletly looking for a CEO who will take decisive steps to return NUL to the charts of leading companies in the country's retailing and departmental stores sector. Internal audit operations An internal audit function is in place. headed by the internal audit manager. who is supported by one internal auditor based at each branch. The branchbased internal auditor's main role is witnessing stock deliveries and ensuring that the cash collected from sales is banked. The internal auditor is also charged with collecting all the cash received by cashiers on a daily basis and banking it the following day. A fireproof safe accessible only by the internal auditor is available at every branch to ensure overnight safe custody of the cash sales proceeds. The auditors have previously complained of working till late as they wait for collecting the cash from the tllls pending banking the following day. They argued that in comparison. their counterparts who attend to the customers work in shifts and therefore it is not fair to them. They also argued that involvement in cash handling is a finance department responsibility which limits the time available to witness stock deliveries or to engage in stock verification in the stores. The payroll is managed by the human resource department which makes available relevant staff costs for Incorporation in the financial reports. The department also determines the allocation of staff and consequent determination of direct labour costs during branch performance assessment and. at the end of month. for the allocation of general overheads. A stores performance report Is also prepared. following consolidation of information from the above reports. The report shows the sales per store! branch and the sales per product in the store. including revenue per store. the related costs and gross profit. Overhead costs are also allocated based on the floor area occupied by the department. Branch managers receive a copies of the performance reports. which are subsequently discussed in the management meetings. Details ot the stores performance report as at 30 June. 201? are reflected In the Chief Finance Officer (CFD}'s report to the shareholders (see Appendix 2}. Governance The new company owners. four of whom are from the same family have not constituted an independent board of directors (BOD). The shareholders all of whom constitute the board are Gregory Bwete {majority shareholder and chairperson}. his wife. Connie Bwete. their two eldest daughters {Jeanice Bwete. an MBA holder and Patricia Bwete a procurement specialist] and a long time business associate. Jolly Joe Kweterana. Their view is that since they are close family members and business associates. there Is no need to antagonlse their relationship by bringing on board outsiders. In a discussion with the management consultant. the constitution of a BUD was considered but the owners were not convinced of the need for one. For all matters that require key decisions to be made. all five shareholders slt to discuss the Issues at hand. with nothing implemented unless they all agree. They have decided that all decisions should be made by consensus so that their personal relationships are not antagonised. Whereas this arrangement has fostered unity among the shareholders. It seems to have Impacted a number of other business functions for which decisions have been delayed owing to failuref delay to reach consensus by the shareholders. An example is the delayed confirmation of Mr. Bltarabeho Richard as a substantive Chief Executive Officer (CED). He is the CFO but has been acting as the CEO for the past one year. following the takeover of NUL by the current shareholders. Briefs from the Heads of Department Sales and Marketing The Head of Marketing acknowledged the poor sales performance by his team. but quickly added that growth was registered in the new line of business online shopping. He shared the sales performance report for the past three years and emphasised the company's success in selling its own branded products. He highlighted the economic difficulties faced by the country and the entire region as a maior challenge to NUL's growth plans and expressed optimism that performance would recover. He further recommended an increase in NUL's own branded products since these offered higher margins while at the same time cementing the company's status in the market. He cited several examples of competitors for whom manufacturers had commenced producing branded items. Citing changes in customers' tastes and preferences. he also made a passionate plea for management to consider further expansion into the retail centres outside the cities and closer to the residential areas where parking facilities are readily available. He concluded his presentation by emphasising the need for an increased marketing budget in order to improve the company's brand image and maintain its position in the market. Relatedly. the funding would enable the department improve awareness in the areas of online shopping, by improving the order processing time. Human Resource Management The Head of Human Resources made a very brief presentation. stating that the company had very highly trained and skilled employees in all key roles. She. however, expressed concerns at management's delays in sanctioning recruitment decisions for key positions such as the CEO. Going forward. however, she expressed optimism that management will be more responsive to the staffing needs of the company, adding that a manager in charge of foreign branches had been successfully recruited, with a mandate to look after the foreign branches. Citing the proposed closure of some outlets. she also urged management to be cautious when scaling down staff numbers, since the human resource manual had specific provisions on severance pay. She indicated that if these were not followed. NUL would be exposed to possible law suits. HFFUIIUIA 'l Extracts from the financial statements for the year ended 30 June: Income statement 2017 2015 Note Shs 'billion' Shs 'billion' Revenue 1400 5,400 Best of sales 1 [5.0351 15.1321 Gross prot 1.315 913 Operating costs [1.3001 1,9001 Operating profit 15 13 Financing costs 2 L181 L201 Profit! {loss} before tax 4.3.1 421 Statement of financial position as at June: 2017 2015 Non-current assets: Note Shs 'billion' Shs 'billion' Land & buildings (book value) 3 33,000 35,500 Motor vehicles (book value] 4 2,300 2.500 Inventory 17,000 14,000 Receivables 1,500 1.800 Cash & cash equivalents 355 350 Total assets 53.116 55.5.5.0 Equity 5 liabilities: Ordinary share capital 1,200 1.200 Retained earnings 7,453 7.450 Term borrowings 5 27.503 30.000 Payables & accruals 13.000 16,000 Total equity & liabilities 55,115 51,550 Notes: 1. Costs charged include cost of inventory. direct wages, depreciation, rent. utilities 8: marketing. 2. Excludes interest on the Shs 15 billion loan whose grace period expired on 31 December, 2015. 3. Comprises of buildings housing the pioneer stores located in the city. Some are currently used as warehouses, while others were put up for rent. However. they have not attracted tenants owing to the need for repairs. Includes delivery vans and vehicles for all shareholders. Includes a Shs 25 billion loan whose interest accrual commences January, 201?. 5"?\" entrants require low capital investment. are in close proximity to where potential shoppers reside. sell at lower prices given their low overheads and offer credit facilities to their customers given the close relationship. However. NUL and similar stores have better quality products. more variety and they offer a better shopping experience. On the other extreme are the increasing specialty shops which are mainly foreign owned with links to popular global brands. The large supermarkets are also challenged by changing demographic patterns with an increasingly younger population who have dynamic buying behaviours. Analysts claim that there is a growing psychological disconnection among young shoppers who consider supermarkets as old-fashioned and outdated. They. therefore, prefer to buy things online or from specialty stores and renowned brand outlets. Ironically stores like NUL's are also failing to maintain their appeal to the older affluent customers. There is also evidence to show that completion of the government-funded Internet fibre cable has significantly increased access to low cost Internet facilities countrywide. Flelatedly. the growth in the use of smart phones and tablets through which the Internet is easily accessed cannot be discounted. These devices are used for browsing through online stores. receiving promotional offers and other marketing material. searching for price information among others. This has served as a massive boost to online shoppers. a development that also benefited NUL. For the financial year ended June. 2016 the company registered a 10% increase in its Internet sales up from an increment of 3% the previous year. Some of NUL's competitors. however. experienced online sales growth in excess of 30%. with online sales comprising of up to 40% of the entire sales volume. With Uganda considering an anti-competition policy which will limit large retailers from business combinations that may lead to monopolistic tendencies. NUL must find ways of dealing with the competitive threats. One of the strategic responses under consideration was the rebranding of NUL as the online shop of choice and further expansion into neighbouring South Sudan and the Central African Republic where a civil war had recently ended. Two years down the road. however. the results do not seem to be satisfactory to the company's new owners. Following a recent shareholders' meeting. it was decided that the Ag. CEO will not be confirmed into the role as the job is being offered to somebody else. Instead. he will revert to his substantive role as CFO. The shareholders were particularly infuriated that the company's troubles had started leaking to the press, as was covered by the Uganda Business Daily newspaper (Appendix 3). You have been offered the iob as Chief Executive Officer (CEO) at NUL on a three-year contract. According to the job offer. your main deliverable is to turnaround the company and restore its past glory. However, the shareholders would like you to urgently submit a report diagnosing NUL's present position. Based on the briefing by the majority shareholder who also availed you with a copy of the Chief Finance Officer's (CFO) most recent report and other documents, you have learnt that the company faces numerous challenges particularly arising from slow response to market changes. weaknesses in governance processes and fast rising competition. You are. however. concerned that there was no mention of 'risk management' in your entire discussions with the owners and management! The following notes were entered in your diary following receipt of your job offer. ....... \"One of NUL's biggest chellenges is the poor understanding of risk. Whereas management has been pushing hard for online shopping channels, little investment has been made to ensure that the risks that come with online transactions are adequately understood and mitigated. The absence of a substantive CEO for this long and the fact that NUL last prepared a strategic plan 15 years ago are indicators of a poor risk management culture.\" Eager to get on with the job, you requested the heads of department to prepare brief reports for presentation in the first management meeting due later today. Copies of these reports are highlighted in Appendix 6. You have also reviewed an article from the Uganda Business Daily about NUL and you believe that the writer could not be farther from the truth. As part of the preparations for your report writing, you have decided that the report should be structured under the following themes: Governance matters. Strategy and Business development and Finance and Accounting aspects. Section A: Governance matters A1: A risk profile for the company. A2: Critical governance reforms for NUL. A3: Relevance of the \"agency theory' to NUL. A4: Mechanisms to counter negative press coverage. Section B: Strategy and Business development Bf: Assessment of NUL's operating environment. B2: A roadmap for NUL's turnaround. B3: Relevance of change management to the developments at NUL. B4: Considerations prior to outsourcing an IT function for a company like NUL. commercial bank. This development attracted a lot of negative publicity for the company. In another development. the company was forced to close its bakeries across the stores following a failed health inspection of three of its bakeries in Kenya. The ensuing negative publicity amidst an emergence of other competitor stores such as Capital Shoppers in Kampala led to further reduction in customer numbers at NUL's stores. The competitive landscape was also re-shaped by the increased use of online shopping channels and the emergence of new product innovations. Whereas NUL has an online shopping section. this business unit was never given management attention despite the emergence of clear signs that electronic commerce (e-commerce} was taking root in East Africa. As early as 2005. the East African governments under the auspices of the East African Community had signed a deal with a European based technology giant to construct an undersea cable to link Europe to East Africa. thereby easing communication. This initiative significantly reduced the cost of communication. with the Internet becoming one of the most popular means of communication. In Uganda. this development was followed up by the laying of fibre cable linking nearly all towns of the country by underground cable. This focus on infrastructure development eased communication thereby revolutionlsing communication and hence the growth at e-commerce. in the telecommunication sector for example. competition shifted from voice to data. as It emerged that a good number of customers preferred the emerging social media platforms to traditional phone calls. This change In testes and preferences indirectly hit IIIUL as the Increased access to the Internet meant that most people did not have to physically visit the stores for their purchases. Instead. online orders started being made. with delivery fees being paid for as part of the online payment. The more tech savvy competitors quickly eroded lIIUL's market share. Unfortunately for NUL. this model was not Immediately embraced, with the company continuing to spend expensively on employees manning the display shelves and the expansive warehouses. The adaptation to e-commerce was slow. leading to a significant decline in market share. By December 2015. the majority shareholders were fed up with the declining fortunes of NUL. therefore selling off their 75% stake to the current owners. The new owners quickly implemented a number of cost cutting measures. including closing some branches and reducing job role duplication. The company was also re-branded even though the name was not changed for fear that the most loyal customers who had stood with the company during the difficult years would also be lost. The measure seemed to pay off as the company's vibrant position in the market was partly restored even though the revenues and profits remained considerably below the levels at which the company had traded three years earlier. More efforts were devoted to roll out technology and the related online shopping options in an attempt to revive the company's market leadership but the competition still remained excessive. Subsequently. it became clear to the new owners that NUL's market dominance in the region was over. Matters were not helped by increasing rumours about the company's financial health. In one particularly damaging message spread via text and WhatsApp. it was alleged that the points on NUL's customer loyalty reward cards were expiring on 31 May. 2017. The message urged all customers to flock to the stores and redeem their points or risk losing them. For a company which was already struggling to meet its suppliers\" payment terms. this was yet another blow that further complicated the cash flow constraints faced. Seeking professional assistance In an effort to put the company back on track. a management consultant was engaged to conduct a diagnostic study of NM. Her tindings are highlighted in the following sections. 1. Management information system The company's management information system is supported by a variety of sub-systems. These include the sales module (billing and invoicing) which captures selling prices by bar code readers. This module is supposed to have an auto-interface with the general ledger managed by the head office finance team. However. the functionality failed at all branches and the teams resorted to manual update of the general ledger. with sales reports generated at the end of every week. Stock. on the other hand. is controlled and issued through a separate system, with cost of goods sold being allocated to the stores by category as and when deliveries are made from the distribution centre. This is then held as store stock within the relevant branch until matched with sales by the billing and invoicing system. Whereas the majority of goods sold are owned by NUL. other shops are allowed to operate on concessionary terms within the supermarkets for products that the company does not deal in. These include specialised perfumes. food supplements. jewelry and other designer clothing items. It is unclear how these concessions are run. but information available indicates that these entities pay rent to NUL at subsidised rates. Other unconfirmed reports indicate that the shops pay a fixed percentage of their revenue as rent. Section c: Finance and Accounting 01: Assessment of the financial position and financial performance of NUL. 02: Feasible financial strategies to be considered. 03: Basis for allocating overheads to cost centres. 04: Measures to enhance performance management. Required: Prepare a company diagnosis report for the Shareholders of Nzonzi Uganda Limited. Information and Communication Technology As a man of few words, the company's Chief Information Officer focused on what he termed as system related deficiencies at NUL. Surprisingly. he did not go into technical details, but rather made his points with reference to the business implications of the technological deficiencies. He began by highlighting the embarrassing times when the stock management system misreported the balances of goods in stores leading to stock outs of certain fast moving consumables. This, he stressed, was not acceptable for a company of NUL's stature. He further noted that the existing systems architecture did not provide for the needed integration between the warehouse stock management system and the online shopping portal, yet this was essential for the desired customer experience. Consequently. there were delays in processing customer orders in addition to high volumes of customer inquiries about products that are listed on the portal but with no samples for visual inspection. In addition, the system functionality allowing customers to use their mobile phones and tablets while on the move was quite slow and unresponsive. Competitors, on the other, hand reportedly offered seamless system integration that supported online ordering and online payment with goods delivered to specified addresses. In closure he noted that since 70% of the information technology facilities were outsourced. the above deficiencies warranted a review of the outsourcing arrangement. He added that benefits envisaged earlier on seemed not to have fully accrued to NUL therefore justifying a review of the decision. Finance Department The Chief Finance Officer's presentation summed up what the other heads of department had presented, emphasising the financial implications of the decisions to be taken. He generally run through the report which he had earlier on submitted to the shareholders. Key highlights of his presentation were that NUL remained profitable even though it was falling further behind its competitors in terms of market share. He noted that competitors had significantly reduced operating costs due to adoption of online shopping services, supported by technology. 0n the contrary, NUL continued to incur high overheads particularly for storage and warehousing. He therefore emphasised that there was need to devise cost control initiatives. These would also save cash flows which would then be used to meet the growing unpaid supplier fees. in winding up. he reminded management that the grace period on the medium-term loan that the company had taken out two years earlier had expired. Loan repayment installments were due to commence the next quarter. Overview and background Nzonzi Uganda Limited {NUL} is a general retail company dealing in a variety of goods ranging from fast moving consumables such as bread, milk. confectionery and packed foods to clothing, toiletries electronics and furniture. The company's products are sold through both the online trading platform and the various branches located across the major towns in East and Central Africa. In most of the towns where it operates. NUL runs well organised self-service supermarkets in carefully selected locations. The supermarkets are run under the trade name 'Nzonzi Supermarket', a brand that Is quite recognisable all over the region. NUL's head office is located In Kampala, Uganda with a staff compliment of approximately 300 spread across the East and Central African region. The head office also houses the company's warehouse. from which goods are distributed to the four regional centres in Uganda and the neighbouring countries. A copy of the company's organogram is shown in Appendix 1. At its peak. NUL had fifteen outlets located in the maior towns within the East and Central African region. The company was at the time frequently cited by analysts as one of the best business models for indigenous Ugandan companies. Plans were even made for the company to concurrently be listed on the Uganda and Nairobi securities exchanges. NUL was treated as a model business entity by both the business community and politicians alike. It also took pride in being among the best paying employers in Uganda, with business surveys ranking it as number 1 employer of choice for the period 2003 to 2009. These achievements were registered partly due to the company's differentiation strategy through quality In terms of products offered and the service rendered to its customers. in addition to a clear focus on the middle class who were willing to pay a premium for extra service and shopping comfort. Change in the tide By December. 2013 NUL's market dominance In the region was waning. The region was faced with a general economic slowdown that was exacerbated by elections in Uganda and Kenya during 2011 and 2012 respectively. The high inflation and depreciation of the local currencies negatively Impacted NUL's fortunes. The economic hardships directly hit NUL's target market whose purchasing power was significantly affected. As customers stayed away from high-end shopping centres such as NUL's outlets. the company started facing cash flow constraints leading to reports of unpaid suppliers and accumulated debts at some outlets. Matters were not helped by the liquidation of Nzonzi Flwanda Ltd over failure to pay back a USD 1 million loan to a leading On his part Mr. Bitarabeho has argued that it is quite a heavy iob load for him to oversee both the finance function and the highly demanding GEO's role. This is not to mean that he is not interested in a substantive appointment as CEO. but rather to imply that his low performance rating could be attributed to the divided attention he has to give to strategic company matters and the finance function. He notes that most of the company's challenges are posed by changes in the company's operating environment, while others arise from internal weaknesses which can be addressed. He has also complained about the failure to meet with the shareholders since they are reportedly busy most of the time. This has particularly been cited as the reason for the delay in developing a new strategic plan. Pressed further on strategic planning at MUL, he lamented thus; ..... ."How can a mere employee determine the company's strategic direction? Such issues are fundamental to the mandate of a company. Unfortunately, I am unable to get the bosses to act by giving us some guidance on their thoughts about the future. l have a lot of respect for them, given that they have been very successful in their real estate projects across the region. But I need to have their full support and guidance on what their plans are, now that they have made entry into retail business. The dynamics may not be the same\". He added that ...... \"Other than the distractions arising from my additional roles in the CED's office. the finance team is finalising a paper on the proposals for cost rationalisation strategies at the company, and measures to improve the capital structure\". The changing retail industry in Uganda Several business commentators have publicly shared their opinions about the changing retail business landscape in Uganda, which has led to changes in business strategy as well as iob losses for senior managers at different companies. As the case was for most retail businesses, NUL located its supermarkets in popular shopping areas in the maior towns in Uganda. This, however, subsequently became a disadvantage as the population rose and the population density in and around cities increased. Cities became too crowded therefore losing appeal for shoppers owing to absence of parking space. Unfortunately for NUL, this development was not immediately responded to. Competitors on the other hand were quick to book space on buildings in upcoming residential suburbs around the towns and cities. These shopping centres have since replaced the town centres as the preferred shopping places for customers. Competition has also come from other non-conventional shopping avenues such as online shopping stores as well as village shops and family stores. These new