The example below is relevant to the new SBL syllabus
Championsoft is a specialist software house, which has developed and now markets a modular suite of financial software packages under the product name of Champlan. In addition, the company provides a systems design consultancy service to the financial services industry. The company was established in 1988 and the three founding shareholders are also the three full-time working directors. Extracts from the financial results for the last three years are given below. These show declining profitability although aggregate sales revenue has increased year on year.

Operating profit is before interest charges and taxation. The current interest rate on the medium term loan is 10% per annum.

The current liabilities figure includes an overdraft with the bank of $300,000. This is also the agreed maximum. The company owns its own premises and these comprise the majority of fixed assets. The premises have recently been expanded to cope with the increased sales volume of the Champlan package. Although the consultancy workload of the company has shown some decline in recent years, this has been due to pressure on the software staff to develop more powerful versions of the Champlan package rather than a shortage of potential work. Championsoft is well regarded in the system design services field and attracts good profit margins on the work carried out. It is estimated that the operating profit to sales ratio on system design services is in the region of 15%.

Championsoft employs 18 people mainly as software specialists. There is little subcontract software development undertaken. The managing director and majority shareholder with 40% of the voting capital is Simon Champion. He was the prime mover behind the creation of Championsoft and has substantial experience in the financial services industry. He sees his main role as ensuring the efficient day-to-day administration of the business. The software technical aspects of the business are managed by the technical director, Dr John Chan, who holds 30% of the voting share capital. He is responsible for research and development on the Champlan product range, customer technical support on software products and systems design consultancy projects.

Jill Mortimer, the third director, holds the final 30% of voting shares and is in charge of sales and marketing of both software products and consultancy services. Her background is in the marketing of fast moving consumer products.

Championsoft see its Champlan product range as a market leader in terms of quality and functionality, although this segment of the software market appears to be increasingly driven by price and product awareness. There is also a recent marked tendency for hardware suppliers to bundle in the Champlan product as part of the hardware price of their product. The main competitor to Champlan is the Pennsoft product range. Pennsoft is part of a large international organisation, and its product range is very similar to Champlan if lacking in its level of functionality. Pennsoft software is marketed at prices, which have always undercut Champlan. Jill Mortimer believes that Pennsoft hold about two-thirds of the market, Champlan about one-quarter and the rest is split among a few other software houses. There are few barriers to other software houses entering this market. Almost any quality software house is able to produce a similar product for this market providing that they are willing to devote sufficient resources.

Jill Mortimer has a strong personality and her views have tended to dominate the recent direction of the business. She believes that Championsoft must cut its prices and put more effort into winning sales. ‘Look at the way the software market is developing. Every year there is a bigger market as new users get access to the hardware. Our extra sales effort and a bigger sales force will easily be covered by additional unit sales. We must tackle Pennsoft head on and capture some of their market share.’ Last year Championsoft spent $100,000 on advertising while Pennsoft spent in the region of $500,000.

Simon Champion is not fully convinced. ‘Although our current advertising has generated lots of enquiries, very few of these resulted in firm sales. In fact, the high level of spending on promotion is straining our cash flow.’ He was thinking about the letter recently received from the bank which, while professing continuing support, pointed out that Championsoft’s overdraft was rising year on year and that this must not be seen as a permanent source of finance. The bank had concluded that it would like to see some medium-term projection about how the overdraft was to be brought under control.

As usual John Chan took the opportunity to launch into his familiar attack on the marketing strategy or lack of strategy as he was heard to remark to his software team: ‘We should move away from the package market and into consultancy activities. These build on our reputation and software expertise.

‘The margins are good and we can sell on recommendation not expensive advertising campaigns. As it stands, my team is being torn between development of Champlan and working on software projects. We cannot do both well, we are in danger of losing clients and at the same time failing to keep the edge over Pennsoft.’

Simon Champion was at a loss how to respond. Something had to be done, but what?

Simon Champion has come to see you, as the company’s auditor, and has asked for your objective advice. He feels that Championsoft needs a strategy but is not sure what it should be or how to go about preparing it. ‘Events move so fast in our industry that plans are out of date before they can be implemented’ was a comment made at your meeting.

Requirements
Identify any additional internal and external information, which you need before you could set about writing your report and indicate how you would gather such information.

(12 marks)

Suggested approach
As you can see, the question asked above in the case scenario clearly seeks for information of both an internal and external nature together with how you would gather such information.

All answers in the exam should be roughly planned out and all you need to remember to score well in this part of the question are the mnemonics to help you break down the internal and external factors.

So, to help get some structure for internal factors, think 6Ms and you think:

• Money
• Markets
• Machinery
• Materials
• Manpower
• Make-up

We then need to quickly think which of these 6Ms would be most relevant to the answer. I would expect your thought process to go something like the following:

• Machinery? Is machinery relevant to Championsoft’s business as a specialist software house? How cost effective is the current use of the machinery? You may comment on the fact that in order to remain competitive ongoing investment in the latest equipment is likely to be relevant.
• Money? An analysis of profitability of individual products, how competitive is the interest on the medium-term loan?
• Manpower? Cost/productivity/staff turnover of the current employees compared to the industry average.
• Markets? The growth potential for financial software and the systems design consultancy market.
• Materials? In the case of Championsoft, materials do not seem to be so relevant so I would suggest no comment is needed.
• Make–up? We would need to look at the current culture of the staff and assess whether it would be happy if one side of the business was run down – for example, software development.

Therefore, we have shown how, by using the 6M’s approach in our plan, we can provide ourselves with more than enough criteria on which to comment. We should now be confident in applying five forces and PESTEL in much the same way – for example, questions regarding the five forces would include:

• What are the main barriers to entry for new entrants entering the software and design consultancy business and how much of a deterrent are they?
• Do buyers have the power to ask Championsoft to reduce its prices? You may comment on the fact that it has an alternative choice in Pennsoft and therefore may be able to get a more competitive price than if Pennsoft was not there.
• Are there any other packages out in the market that could be used as a substitute for Championsoft’s products?

Questions of a PESTEL nature would be similar to those used above.

Armed with this information in your plan you should now be able to develop an answer that should fulfil the 12 marks allocated. Do not forget to answer the entire question, which required suggestions as to how you would gather such information suggested. It must be stressed that all of the 6Ms, five forces and PESTEL need not necessarily be used in your answer, but they should almost certainly be used in developing your answer plan.

A further example, which is also relevant to the SBL syllabus

Bowland Carpets Ltd
An example of a question that concentrates on a specific part of the above environmental analysis is given below.

Bowland Carpets Ltd is a major producer of carpets within the UK. The company was taken over by its present parent company, Universal Carpet Inc, in 2019. Universal Carpet is a giant, vertically integrated carpet manufacturing and retailing business, based within the US but with interests all over the world.

Bowland Carpets operates within the UK in various market segments, including the high value contract and industrial carpeting area – hotels and office blocks, etc – and in the domestic (household) market. Within the latter the choice is reasonably wide, ranging from luxury carpets down to the cheaper products. Industrial and contract carpets contribute 25% of Bowland Carpets’ total annual turnover, which is currently £80m. During the late 1980s the turnover of the company was growing at 8% per annum, but since 2018 sales have dropped by 5% per annum in real terms. Bowland Carpets has traditionally been known as a producer of high quality carpets, but at competitive prices. It has a powerful brand name, and it has been able to protect this by producing the cheaper, lower quality products under a secondary brand name. It has also maintained a good relationship with the many carpet distributors throughout the UK, particularly the mainstream retail organisations.

The recent decline in carpet sales has worried the US parent company. It has recognised that the increasing concentration within the European carpet-manufacturing sector has led to aggressive competition within a low growth industry. It does not believe that overseas sales growth by Bowland Carpets is an attractive proposition, as this would compete with other Universal Carpet companies. It does, however, consider that vertical integration into retailing (as already practised within the US) is a serious option. This would give the UK company increased control over its sales and reduce its exposure to competition. The president of the parent company has asked Jeremy Smiles, managing director of Bowland Carpets, to address this issue and provide guidance to the US board of directors. Funding does not appear to be a major issue at this time as the parent company has large cash reserves on its statement of financial position.

Requirements
Acting in the capacity of Jeremy Smiles you are required to outline the various issues, which might be of significance for the management of the parent company.

Your answer should cover the following: 

(a) Suggest and discuss what might be the prime entry barriers prevalent in the carpet retailing sector.

(7 marks) 

(b) In an external environmental analysis concerning the proposed strategy shift, what are likely to be the key external influences that could impact upon the Bowland Carpets decision?

(8 marks) 
(Total: 15 marks)

Suggested approach
In Part (a), you can see that it asks for the prime entry barriers in the carpet retailing sector. All that you need to do here is undertake a quick brainstorm of what we described earlier as barriers to entry and then see whether any of them will apply to the carpet retailing sector.

So thinking back the main barriers to entry which we listed were:

• Capital cost of entry
• Economies of scale
• Differentiation
• Switching costs
• Expected retaliation
• Legislation
• Access to distribution channels

Most of the above could be a potential barrier in the carpet retailing sector, but in order to score high marks you need to apply them in the context of carpet retailing rather than just list them.

• Capital cost of entry. How much investment would be required in a lease and inventory?
• Economies of scale. Are there any current carpet retailers that have superior buying power and economies of scale in distribution and marketing?
• Differentiation. Are there any retailers that have high levels of customer loyalty to their shop, which would prevent them from buying carpets from anyone else?
• Switching costs. Switching costs are not relevant and one would become relevant if a householder were to enter into a lifelong contractual agreement to buy all their carpets from one particular retailer, which is clearly unlikely.
• Expected retaliation. If a retailer existed in the carpet retailing sector that was very aggressive to any potential new competitor this could prove to be a potential barrier.
• Legislation. Are there any planning constraints or specific licences that are needed to operate in the carpet retailing sector?
• Access to distribution channels. How easy will it be for a new entrant in the carpet retailing sector to find a prime retailing site that is appropriate for the sale of carpets?

Therefore, using the framework in an applied way, we have been able to construct an answer that, if presented appropriately, will be worth almost maximum marks. If you look at Part (b) you will see that the external analysis frameworks fit in perfectly again – see if you can do it.