Question 1

NN Ltd manufactures and markets a range of electronic office equipment. The company currently has a turnover of $40 million perannum. The company has a functional structure and currently operates an incremental budgeting system. The company has a budget committee that iscomprised entirely of members of the senior management team.

No other personnel are involved in the budget-setting process.

Each member of the senior management team has enjoyed an annualbonus of between 10% and 20% of their annual salary for each of the pastfive years. The annual bonuses are calculated by comparing the actualcosts attributed to a particular function with budgeted costs for thatfunction during the twelve month period ended 31 December in each year.

A new Finance Director, who previously held a senior managementposition in a 'not for profit' health organisation, has recently beenappointed. Whilst employed by the health service organisation, the newFinance Director had been the manager responsible for the implementationof a zero-based budgeting system which proved highly successful.

Required:

(a)As the new Finance Director, prepare a memorandum to the senior management team of NN Ltd which identifies and discusses:

(i)factors to be considered when implementing a system of zero-based budgeting within NN Ltd;

(ii)the behavioural problems that themanagement of NN Ltd might encounter in implementing a system ofzero-based budgeting, recommending.

(b)Explain how the implementation of azero-based budgeting system in NN Ltd may differ from the implementationof such a system in a 'not for profit' health organisation

Question 2

Hawk Leathers Ltd ("Hawk") is a company based in the UK thatemploys around 60 people in the manufacture and sale of leather jackets,jeans, one and two piece suits, and gloves. These are aimed primarilyat motorcyclists, although a few items are sold as fashion garments.

Hawk sells 65% of its output to large retail chains such asMotorcycle City and Carnells, exports 25% to the USA and Japan, andsells the remaining 10% to individuals who contact the company directly.The latter group of customers specify their requirements for a made tomeasure suit (they are often professional racers whose suits must beapproved by the authorities such as the Auto Cycle Union). The largeretailers insist on low margins and are very slow to settle their debts.

There are around a dozen companies in the UK who make similarproducts to Hawk, plus very many other companies who compete with muchlower prices and inferior quality. Hawk's typical selling price for aonepiece suit is 1,000, whereas the low quality rivals' suits retailat around 400. As Hawk say in their literature "if you hit thetarmac,there's no substitute for a second skin from Hawk". Syntheticmaterials are waterproof, unlike leather, but do not currently offersufficient protection in an accident.

Sales of leathers in the UK are growing rapidly, mainly due to aresurgence of biking from more mature riders of large, powerfulmachines. Such riders are often wealthy and have family and financialcommitments. Currently Hawk, and its rivals for quality leathers arefinding it hard to keep up with demand. However, Government policy andEU emissions controls are likely to limit motorcycle performance, andsome experts predict that these regulations will cause sales of largemotorcycles to level off.

Whilst supplies of leather from Asia, Scandinavia and the UK areplentiful, a key problem is recruiting and training machinists to stitchand line the garments. Hawk has been able to invest in modern machineryto help production but the process is still labour intensive. Hawk hasfound that the expertise, reputation and skilled labour needed tosucceed in the industry takes years to build up.

Although the industry is fairly traditional, there are some newdevelopments such as a website for individual customers to browse andspecify requirements, and new colours such as metallics for leathers,and a small but growing demand from non bikers who are interested in'recreational' and 'club wear' items.

Required:

(a)Analyse the issues facing Hawk's industry using PEST analysis.

(b)Using Porter's 5 forces, evaluate the strength of each competitive pressure facing Hawk.