(a)

Corporate appraisal is a critical assessment of the strengths and weaknesses, opportunities and threats (SWOT) analysis in relation to the internal and environmental factors affecting an entity in order to establish its condition prior to the preparation of the long-term plan.

        Strengths

• The company has been operating in the cosmetics and skin product sector for more than 20 years, so the management will have accumulated significant experience of operating in this business area, initially in Great Albion but then increasingly in other countries, particularly Zamunda.
• The company still has 90% of the naturally based cosmetics and hair-care market. Even after 20 years of being open to competition, competitors still only amount to a 10% market share. GP is seen as being the obvious choice as the place to go to buy environmentally friendly cosmetics, a message that has been maintained through working to offer high quality products and good customer service.
• The company’s Africa division is still highly profitable, earning operating profits last year of GH¢26 million on sales of GH¢175 million, an operating profit percentage of 15%.
• The company’s sales are increasing rapidly, rising from GH¢154 million two years ago to GH¢175 million last year. This is a 14% rise in sales from year to year.

             Weaknesses

• Some observers have suggested that the company will need to abandon its environmentally friendly aims if it is to compete in the current aggressive corporate climate. However, the Chairman is adamant that this shall not be the case. Thus, the company seems to be pursuing mutually inconsistent objectives; to grow and prosper, while at the same time to uphold good environmental principles.
• The company’s environmental principles are a key strength in the view of many customers, so the management of GP should think long and hard before they change the company’s strategy in this area.

         Opportunities

• The public internationally are becoming more concerned with the impact that companies have on the environment, so GP’s leadership and reputation in operating responsibly will prove increasingly beneficial. Initiatives such as campaigning against animal testing in the cosmetics industry will also attract customers, providing the company with a significant competitive advantage over other companies.
• Since 75% of the company’s retail outlets are located outside Great Albion, and there is a large production facility in Zamunda, managers will already have experience of operating abroad, which will help in continuing a successful overseas expansion programmed.

           Threats

• Competition is increasing, with GP’s share of its core market having declined from 100% to 90% over the past 20 years. The increased competition, together with difficult trading conditions generally, has led to a reduction in reported profit of the Africa division last year. The enlargement of the Zamunda production facilities has increased the burden of overheads and must be made to pay for itself.
• Environmentally responsible retailing may go out of fashion, particularly if global fluctuations in the economy continue. Consumers may no longer be willing to pay premium prices for natural products if they are short of disposable income. The Chairman seems to have decided that GP’s ethical USP is vital and insists that, no matter what happens elsewhere, the company’s “green” credentials will be maintained. Such a lack of flexibility may prove costly if the market-place changes.
• Some experts believe that products which have not been tested on animals are inherently less safe than conventional cosmetics which have been so tested. It might only take one widely publicized health scare for the public to change its attitude toward the testing of cosmetics on animals, which would have serious implications for the company’s future.
• The company’s external activities, such as campaigning for human rights and helping the homeless, cost money, which has to be recovered through sales of products. The company may find that it has a higher cost base than its competitors and so cannot compete on price terms, which become more important as the economic downturn continues.                                                                                                                                                                                                                                                                            (b)

  The two possible strategic options to be evaluated are:
  (i) invest in quality improvement, or
  (ii) increase the level of promotion to attract a higher market share.

  Consider first the most likely outcomes:

  Quality improvement
  An investment of GH¢50m in the Africa division next year would result in an expected net benefit of GH¢37.996m arising over a four-year period. This equates to a benefit of GH¢0.76 per cedi invested.

  Increased promotion
  An investment of GH¢10m next year would result in an expected net benefit of GH¢30m arising over a four-year period. This equates to a benefit of GH¢3 per cedi invested.

  It thus appears from considering the most likely outcomes that the company should invest GH¢10m next year in boosting the promotional activities.

  Considering the best and worst outcomes from the quality improvement option, the investment of GH¢50m could lead to a gross return of GH¢100m over four years if the market response was strong, or GH¢60m over four years if the response was weak. These results can be presented more clearly in a table.

  | | Investment | Net benefit over four years | | |——-|————|—————————–|
  | | GH¢m | | GH¢m | | Quality | 50 | Expected | 37.996 | | | | Lowest | 10 | | | | Highest | 50 | | Promotion | 10 | Expected | 30 |

  Which of these options the management should choose depends on the managers’ attitude to risk. A strongly risk-adverse management would choose the promotion option, to avoid the possibility of earning a benefit as low as GH¢10m. A risk-seeking management would choose the quality option, being attracted by the possibility of earning a net GH¢50m. A risk-neutral management would probably choose the promotion option for the argument given above, that it earns a net GH¢3 for each cedi invested in the plan as well as to avoid the possibility of earning only GH¢10m from a GH¢50m investment in quality improvement.

  The most important reservation that one should have concerning the above analysis centers on the inevitable inaccuracy of the forecast numbers. In practice it is impossible to accurately forecast the results of improving quality or increasing promotional activity. The estimated costs of each option are likely to be reasonably accurate, but the estimated cash inflows will be no more than educated best guesses.

  So, in the real world, managers will take such decisions on the basis of their “gut instincts” after having studied the quantitative analysis. These gut instincts will include their taking account of the uncertainties inherent in the figures and their attitude to risk, as well as their bias towards one of the options. Production managers would unconsciously Favour the quality option, while sales managers would Favour the promotional option. At the end of the day a decision must be taken, and it might be taken as much on the political muscle of the individual managers in the company as it is on the basis of computational analysis.

  The potential reaction of competitors to either option must also be taken into consideration. If GP chooses the quality option, competitors will most likely try to match the new higher quality levels, though this will take some time to achieve. If GP chooses the promotional option, competitors will most likely increase their own promotional spend to negate GP’s advantage. Thus, the difference in reaction arises because of the time lag involved in competitors recruiting new skilled employees or implementing new processes to achieve the higher quality levels.

  The managers at GP’s Africa division must consider competitors’ likely reactions as part of their process of reaching a decision between the two possible options. Some sort of scenario planning in advance would be valuable, so that any areas of vulnerability to counterattack have been identified before the main option is implemented.                                                                                                                                                                                                                                                                                             (c)

  To a company like GP, which uses its green credentials as a key selling point, environmental areas will feature strongly among the company’s strategic aims. Therefore the management accounting function of the company must monitor this area and provide regular reports to the directors to assist them in assessing the company’s progress in this area. These reports should highlight both the costs and the benefits of following an environmentally responsible line. Topics that could usefully be covered include the following:

  The efficient use of energy
  GP is committed to promoting the efficient use of energy, so the various energy costs incurred by the Africa division should be identified and reported clearly. In order to drive down energy costs, budgets could be set with each year’s energy usage lower than the previous year. Managers are then free to develop their own methods of meeting the budgets, by insulating against heat loss, by using low energy lighting, by not heating warehouse areas etc.

  Keeping waste to a minimum
  The actual volume and cost of waste materials should be reported and compared with budgeted figures. For example, expensive packaging should be refused from suppliers and not provided to customers. Recyclable materials should be used as far as possible. Once customers have been educated not to expect expensive packaging, this will become an attraction for the company’s products which also saves the company money. Special investigations into the company’s activities could be carried out to identify further possible cost savings in this area.

  Using recoverable resources where possible
  All the company’s brochures and published statements should be printed on recycled paper; any output not on such paper should be reported to senior managers together with any special reason why this was so.
  The company could sell liquids (e.g. shampoo, bath oil, etc.) by volume by inviting customers to bring empty bottles to the shops to be filled with the product they want. Again, this will save the company money and boost the company’s green image. Managers should be provided with reports of what proportion of the company’s products are sold in this way.

  Legislation
  A large body of environmental legislation now exists in different companies around the world with which the company must comply, especially where goods are to be exported to other countries. Managers could be presented with reports of the extent to which the company is meeting these rules, together with comparative data of the extent to which competitor companies are complying.

  Other matters
  Since there is a fear that the costs of the company’s environmentally-friendly objectives may render products uneconomic, management accountants should report the unit cost of the green policy as part of each product line. That way, management are aware of the implications of the policy in their pricing and investment decisions.
  Attention to environmental matters should be seen as pervasive to all the company’s operations, rather than being a separate topic for reporting to management. For example, even though a potential new project has a positive net present value, it could still be rejected if it contravenes the company’s environmental aims. Similarly, a new product line might be rejected even though it is forecast to generate a positive contribution, because it is inconsistent with the company’s aims.
  Finally, management accountants could be responsible for establishing a reward structure for employees and managers that reflects the importance of environmental matters to the company. Therefore, the usual sort of scheme to award bonuses based on growth in sales or profits may not be appropriate. Internal bonuses might be given to staff members who propose successful ideas for the company to act more responsibly towards the environment.                                                                                                                                                                                                                                                                                            (d)

  GP has decided to remain true to its environmental responsibilities, so managers must make the best of this strategy. There will be costs involved in following this strategy (e.g. paying to process waste into safe inert materials or recycling it wherever possible). However, there will also be benefits as GP will earn a competitive advantage in the market place as a result of its reputation for responsible environmental behaviour.

  GP should therefore publicise its green behaviour as widely as possible, stressing for example that no animals suffered during testing of the company’s cosmetics. This will be a powerful message among the shop’s customers (mainly young and female) who can empathise with the message.

  The company’s strategic options for the future can be summarised in Ansoff’s product-market growth vector as drawn below:

  	Existing product	New product/service
  Existing market	Internal efficiency Market penetration	Product development
  New market	Market development	Diversification

  Market penetration involves continuing to sell naturally-based cosmetics existing markets, so looking for increased sales of current products in the existing shops.
  Market development involves selling the current products in new market we know that the company has embarked on this option since 75% retail outlets are now outside Great Albion and the company is still expanding.
  Product development depends on the company’s research and development activities which are described as being extensive, in Africa, Great Albion and South Meridian. This should lead to new products being offered in the company’s shops.
  Diversification involves the company moving outside the area of cosmetics sales and entering new markets. However the company can still trade on reputation for greenness. Perhaps a clothing company could be bought so that eco-clothes could be sold, or a travel company could be bought so that eco-tours could be offered. Diversification offers the riskiest strategy forward.

  The revenue of GP’s Africa division increased last year, so there is still appetite for the company’s goods in the market. It is the responsibility of management to translate this appetite into economic success in the future that meets the company’s growth aspirations while remaining true to the long-standing environmental responsibility that has been the company’s hallmark.