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Question 1iv

Lopten Industries is one of the largest, listed consumer durables manufacturers in the world, making washing machines, tumble dryers and dishwashers. It has recently expanded into Beeland which is a developing country where incomes have risen to the point where demand is increasing for Lopten’s goods among the growing middle-class population.

Lopten believes in the economies of scale of large manufacturing sites with dispersed selling branches in the markets in which it operates. Therefore, it has entered the Beeland market by setting up a local sales force and supporting them with a national marketing campaign. The company is currently selling only two products in Beeland (both are types of washing machines):

– a basic product (called Cheerful) with functions which are comparable with the existing local competitors’ output and
– a premium product (called Posh) which has functions and features similar to Lopten’s products in other
developed countries.

Both products are manufactured and imported from its regional manufacturing hub, which is in the neighbouring country of Kayland.

The competitive environment in Beeland is changing rapidly. The washing machine market used to be dominated by two large local manufacturers who make simple, cheap and reliable machines. There are two other major international manufacturers apart from Lopten. One of these has already opened a factory in Beeland and is producing machines similar to Cheerful to compete directly with the existing local producers. The government of Beeland has supported this new entrant with grants, as it is keen to encourage inward investment by foreign companies and the resulting expertise and employment which they provide. The other international competitor is now considering entering the Beeland market with more highly specified machines similar to Lopten’s Posh brand.

Lopten’s stated mission is to be the ‘most successful manufacturer of its type of products in the world’. The board has set the following critical success factors (CSFs) for Lopten’s Beeland operations:
1. to obtain a dominant market presence
2. to maximise profits within acceptable risk
3. to maintain the brand image of Lopten for above average quality products.

The board is considering using the following key performance indicators (KPIs) for each product: total profit, average sales price per unit, contribution per unit, market share, margin of safety, return on capital employed (ROCE), total quality costs and consumer awards won.

(Note: Margin of safety has been defined as [actual sales units – breakeven sales units]/actual sales units.)
The board has asked you as a consultant to assess its current performance measurement systems. They want a report which calculates the various indicators suggested above and then assesses how the key performance indicators address issues in the external environment. The report should assess the balance between planning and controlling represented by the KPIs as they want to ensure that these match what they should be doing at the strategic level in Lopten. Also, it should evaluate how the KPIs fit with the CSFs which have been selected. The data given in Appendix 1 has been collated for your use.

Finally, the board is considering two new marketing strategies going forward:

Plan A is to continue operations as at present allowing for 4% growth p.a. in volumes of both Cheerful and Posh.

Plan B is to dramatically reduce the marketing spend on Cheerful and to reallocate resources to focus the marketing on Posh. This is expected to lead to an anticipated growth in volume of 15% p.a. for Posh and flat sales for Cheerful.

The target operating profit for the Beeland operation in two years’ time is set at $135m and the board wants an evaluation of these strategies in meeting that target.

Appendix 1
Beeland operation’s information for the most recent financial year

Cheerful Posh Total
Variable costs $ per unit $ per unit
Materials 90 120
Labour 60 80
Overheads 40 50
Distribution costs 45 45
Quality costs 20 30
Fixed costs $m $m $m
Administration costs 18 18 36
Distribution costs 16 16 32
Quality costs 6 6 12
Marketing costs 80 80 160
Other data $m $m $m
Revenue 448 308 756
Capital employed 326 250 576
Units Units Units
Total market size (millions) 9·33 1·33 10·66
Beeland operation’s sales (millions) 1·12 0·44 1·56

Notes:
1. Cheerful has won one best buy award from the Beeland Consumer Association.
2. Posh has won four best buy awards from the Beeland Consumer Association.
3. The allocations of fixed costs are based on a recent activity-based costing exercise and are considered to be valid.

Required:
Write a report to the board of Lopten which:
(iv) assesses the extent to which the suggested KPIs would be suitable for use in planning rather than controlling; (5 marks)