Plain Sailing Ahead?

The Merbatty Boat Company is the subject of the next TOPCIMA examination.
Adrian Sims of BPP Learning Media reviews the Pre-seen material and gives a few
pointers on the issues to consider and the technical theories to be revised.

Overview of the Pre-seen material

The Merbatty Boat company (MB) has been in business for 33 years and is
successful. You could conclude that its future will be plain sailing and that
management merely needs to keep it on its existing course. They may think so too.
But they would be wrong. Things have changed and without the right strategic
management responses MB could go badly off course and even founder.

The first significant change occurred just last year when MB floated. It went from
being captained in a hands-on way by its 90% shareholder, Alberto Blanc, to being a
listed company with 40% of its shares in the hands of a wider crew of value-focused
investors. To get the best price for its shares management promised the spectacular
growth of its 5 year plan, seeking to double revenues and profits over 5 years. Its
major new investor, J KL, has a nominee on the Board. Simone Lellet will want them
to hold fast to the growth plan.

The case writers give you fair warning of this on page 2 where they write: Boat
building companies are facing the difficult task of balancing the need to deliver
customer choice and a high specification at a price that is competitive. In addition,
boat building companies need to generate sufficient profitability to invest in research
for future designs in order to stay competitive and to give a return for their
shareholders.

It shows the trade-offs that the newly-listed MB faces. To make good boats costs
money, but can these costs be recovered given a competitive market with new
competitors in Australia and Asia. Also, short term financial returns to shareholders
may be blunted by high R&D spending to make new models.

Therefore at the heart of this pre-seen material is the question can Merbatty realise
the financial targets in its five-year plan?.

There may be other squalls to hit MB, and reefs to avoid. These will be in the unseen
material issued to you on exam day. Several are visible just below the surface of the
pre-seen material. Expect it to be choppy.

Merbattys Five Year Plan

Appendix 5 of the pre-seen shows the financial targets and assumptions behind the
profit forecasts given by Merbattys Board at flotation last year. It shows rising
profits, from 76m last year to 137m in 2011 (80% growth) and rising dividends,
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from 20m last year to 40m in 2011 (100% growth) with revenues rising from
502m in 2006 to 1,000m in 2011 (99% growth).

Merbatty forecasts revenue growth in every geographical segment but most markedly
in the Middle East. It intends to grow revenues from 40m to 180m (350%) in 5
years compared to a mere doubling of revenues (or less) in its other segments in
Europe and the USA. To service this Merbatty plans to open a new boatyard in the
(fictitious) Middle East country of Surania in September 2007.

Is this plan feasible? Appendix 2 tells us that in 2006 only 8% of its revenue came
from the Middle East but that by 2011 it is forecast to rise to 18%. To build the
business there they intend to rely on the same agent who has been selling for 15 years
in Surania and have appointed four further agents in the region.

As the saying goes, turnover is vanity and profit is sanity. The five year plan must
deliver its profit growth in order to satisfy investors. Here an inspection of margins is
interesting. Page 3 shows us that in 2006 Merbatty enjoyed an overall operating profit
margin of 15%. Appendix 5 forecasts 137m operating profit on turnover of 1,000m,
so 13.7%, a fall. This could reflect the greater competition. It does explain why the
Board is considering improving margins by shifting to building higher profit (larger)
boats and trying new models. This makes some sense given that Merbatty has
capacity constraints, indicated by the discussion of the trade-offs between switching
production towards a smaller number of large boats or focusing on small boats to
increase throughput.

This decision may well feature in the exam as a calculation using additional data
provided on the day.

But the saying above has a final message turnover is vanity and profit is sanity but
cash is King. We are told, on page 4, that the finance raised at last years flotation
was sufficient to meet the capital expenditure and working capital needs of the
company over the next few years including a fourth boatyard in 2010. But since that
time, we are told elsewhere in the pre-seen, there have been suggestions for Merbatty
to build more large boats, to roll out more new models than originally planned and so
necessitate greater R&D, to open more than 20 sales offices.

Can they afford all this? The five year plan doesnt contain a cash flow forecast.
Candidates are often required to prepare one in the TOPCIMA exam.

Here you need to read the pre-seen material very carefully, particularly the final two
paragraphs on page 7. I have received confirmation from CIMA that the following is
the correct interpretation of this complex section. Merbatty has allocated 25m in its
five-year plan (shown as Appendix 5) for capital expenditure. This is 15m for
improving existing boat building facilities and 10m for new IT systems. This can be
seen in Appendix 5 under other capital expenditure for 2007. Appendix 5 also shows
90m in 2006 and a further 30m in 2007 for new boat building facilities. This
represents the investment in the forthcoming Suranian facility.

The development expenditure required to expand the range of models by three per
year is treated as an operating cost in the five-year plan. This expenditure will rise
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further if Lukas Dian wins the argument to accelerate product development to 10 new
boats within two years with the possible effect of reducing profits and dividends for
the two years depending on the trade off of increased sales of the new models.

Another aspect of the case is the potential for increased competition. Your initial
research into the industry will reveal the growth of markets and competition from
Asia. China already has a low cost shipbuilding industry which could diversity into
luxury boats. Taiwan and some Middle Eastern countries are taking a keen interest in
developing as boating centres.

Does Merbatty have a strategy?

The five-year plan has been presented to investors and on the basis of the plan, the
investors have put 336m into Merbatty (page 5 states new issues of 120m shares @
2.80). The strategy shows the impact of developing the business in the Middle East,
and it allows for a further, and at 160m a seemingly much more expensive, boatyard
in Asia in 2010/2011.

But since the plan was drawn up additional strategies have come under discussion:
For Merbatty to open 20 sales offices of its own in a bid to eliminate some of the
4% commission currently paid to the existing sales agents
To start making boats for off the shelf sale rather than building to order and
customising them
To extend its use of glass-reinforced plastic and gel coats to smaller boats in USA
and to its European (and Suranian?) boatyards at 3m a time;
To move towards making larger boats to gain higher margins, although at the
expense of reducing boatyard capacity from 180 a year to 140 (22.3%);
To build closer partnerships with its suppliers, of whom five are named;
To widen the range of boats available by investing in more R & D and launching
five new models a year (10 over the next 2 years) instead of the planned 3 each
year.

Advising the management of Merbatty on these six potential strategic departures are
the sorts of tasks the examiner could set in the examination. There is quite a lot of
financial and other data in the pre-seen and more will be supplied in the unseen on
exam day. It would be a good idea to start collecting your arguments on each of these
before the exam day.

My initial thoughts are as follows:

cutting out sales agents and selling directly might add 40m to its 2011 top line
(1,000m x 0.04) but carries with it several risks. Firstly it would increase
competition because presumably the agents would set up selling rivals boats. At
present only a minority sell rivals boats. Established sales agents will already
have a network of contacts. Also they may have the customer relationships
already given that we are told, on page 3, that several customers regularly replace
their boats. Secondly there would be costs incurred in running 20 sales offices that
will need to be incorporated in the five-year plan and these will be largely fixed
costs. A good thing about having agents is that they take the risks; no sales means
no commissions are payable by Merbatty. Finally it would involve Merbatty in a
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more complex management control situation than it is used to. Running remote
sales offices across six continents is a far cry from sales offices attached to their
existing two boatyards. Before recommending this strategic step you would need
to establish how these offices were to be staffed, for example by recruiting
existing agents, the costs involved and organisational arrangements for control
that would be put in place.
building boats for sale seems to be a step in the wrong direction and is based on
the very thin pretext of J esper Blancs confidence that Merbatty could sell, in the
Middle East at least, any boat it builds. The rest of the case emphasises the
importance of customisation of the boats in a competitive market. There are also
significant implications for working capital. Page 2 tells us that the building of the
boats is partially self-financing with 50% of the money coming from the client
prior to final delivery. A build-to-sell approach would require Merbatty to fund
the working capital itself and has not been budgeted for in the five year plan. The
fact that Merbatty are considering this for larger boats is particularly worrisome.
Surely it is amongst the more expensive boats that customisation is most required?
the extension of the coating technology to more boats in USA and to Europe needs
more data but at the moment seems to be merely a pretext to ask candidates to
make some adjustments to the capex line of the five year plan;
the shift to higher margin, larger boats seems sensible providing the anticipated
demand will be there. However inspection of the first table in Appendix A shows
that, except for the very smallest in each of the P and C Series, production
volumes have increased.
building closer partnerships sacrifices some cost flexibility in return for better
information and collaboration in R&D etc. The interesting feature of the pre-seen
is the different degrees of reliance that Merbatty has on each of its named
suppliers. MNE and Marinatron are very large industry players and also supply all
Merbattys rivals worldwide, Aqua Designs cannot support Merbatty in the
Middle East and so Merbatty is already dual-sourcing interior design, Topcrest
seems to be in a close relationship with Merbatty already and SSE seems to
provide commodity products which could be bought elsewhere. You should be
prepared to advise the Board on where Merbatty might benefit from closer
relationships and where they are unlikely to materialise or be of benefit.
the initiative to launch greater numbers of new models will primarily involve a
trade off between the R&D cost involved and the potential for extra sales or better
margins and the impact on short term versus longer term profitability.
Presumably, this will be provided in the unseen material if it is relevant. The need
for extra capital has already been discussed.
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Information strategy

The Merbatty pre-seen has clear similarities to some earlier TOPCIMA cases, notably
Domusco (November 2006) and a much earlier case Sparkle (May 2003). You should
study these, their unseen material and solutions, to see the sort of things that could be
waiting for you in this next exam.

You will notice that Merbatty has a lot more IT/IS in it than some earlier cases. I
understand Merbatty is the first co-authored pre-seen and that one of the authors has a
background in examining systems and project management. Its worth reviewing this
aspect of the pre-seen separately.

Several IT/IS implementations are mentioned for Merbatty:
Production management software. This is operational in USA and Europe and it
is intended that it will also be installed within the new Suranian facility. Given
that the Suranian facility is due to open in less than three months time this seems a
bit of a guarded statement. You should familiarise yourself with the role of this
system (seemingly an Enterprise Resources Planning system) and be prepared to
advise on what to do in the event that it is not commissioned in time.
Lukas Dian wishes to extend CAD/CAM systems to improve boat design and to
support his innovation agenda, according to page 7.
Production equipment such as robotics is mentioned on page 8. The roll-out of the
hull-spraying equipment is part of this.
Some of the supplier relations initiatives being floated by Paul Lavie seem to
point towards another IT/IS application, Supply Chain Management systems.

Page 12 tells us that Alain Mina is the new boy on the Board of Merbatty and is
responsible for IT/IS implementations. He has project management experience but
this is his first Board role and he is happier managing projects than taking on his
Board role, presumably managing the overall IT/IS function and aligning it to
business strategy. He is faced with a potentially large wish-list of demands on his
IT/IS budget and project management resources. It will be a test of his ability to
decide between them and prioritise on the basis of business need.

Be prepared to advise Alain, or the Board generally, on these IT/IS issues.

Management issues

TOPCIMA pre-seens often have a cast of characters from a murder-mystery weekend.
Merbatty is no exception.

With the exception of Alberto Blanc the Board are all still of an age to be pursuing
their careers for the foreseeable future. Key points to notice are:
That Alberto wishes to retire in 2011. Therefore some element of succession
planning is needed for him. Which Director has the necessary experience, Bernie
Ritzol perhaps?;
J esper Blanc seems to have been appointed by Alberto without any qualifications
except being the son of the founder, chairman and main shareholder. You may
take the view that he lacks the background to do his job and this may reflect on
your opinion of his suggestion of a build-to-sell strategy;
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Attitudes to human resource development and training seem polarised between the
old-school views of Alberto Blanc and the more modern views of Marie Lopp and
Tobias Houllier.

Another key theme is the Corporate Social Responsibility (CSR) work of Merbatty.
The five year plan shows a doubling of donations to charity in the next five years and
an even larger increase in secondments of staff to charitable work. This kind of work
is part of the personal ethical commitment of Alberto Blanc and, it seems, Stefan Gil.
There may also be business benefits. But to a newly listed company which needs to
increase its earnings and conserve its cash, these may seem like unaffordable luxuries.
Be prepared to discuss this and make recommendations on continuation or otherwise
of this aspect of Merbattys work.

Other issues

The pre-seen contains some further interesting issues that could be developed by the
examiner.

Merbattys close reliance on Aqua Design for interior design. According to the
pre-seen the contribution of design and customisation adds 11% to the price of the
boats and helps to differentiate them in a competitive market. Yet Aqua Design
will not support Merbatty by going to the Middle East. This seems to make
Merbatty vulnerable and could lead to suggestions that it acquire Aqua or that it
end the outsourcing and bring the design in-house.
Staffing of the Surania facility. We are told that the present intention is to use
local labour in the plant. This has obvious cost advantages but will involve
Merbatty in managing staff from yet another national culture. But we are also told
that the USA facility suffered operational problems until experienced and
committed employees were put in place. This suggests there may be risks in
opening the Suranian facility with purely local staff, given that we are told staff
from existing facilities would be willing to go there.
Performance measurement is mentioned twice; in relation to remuneration of
selling agents and in relation to supplier relations. This is not unusual in
TOPCIMA and could be an element of the exam. You should draft some ideas for
performance measures for these aspects of its work.

Technical knowledge

The examiner rewards appropriate use of relevant technical theory in your TOPCIMA
report. Several theoretical frameworks are suggested by this pre-seen material:

SWOT analysis: this should always be included as Appendix 1 in your report,
updated for the unseen material;
PEST analysis: this should be applied to the opportunities and threats of Merbatty
extending its operations to the Middle East;
Porters generic strategies: Merbatty is in a market for differentiated products.
Within that market should it focus on large or small boats?
Cousins Wheel: familiar to you from P4 this discussed the elements necessary for
mature supplier relations of the sort being sought by Paul Lavie;
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Peppard/McFarlans Applications Portfolio matrix: this may help to assess the
extent to which IT/IS in Merbatty is of strategic importance and as such a priority
issue.
Balanced scorecard: to assist with developing performance measures for sales
teams and suppliers.

Passing the Examination

This is a tough exam because it demands different skills and a different approach from
the ones you have sat so far. My advice is to put all your effort in now and try to pass
it first time.

Before you enter the exam room ensure you:
Fully understand the assessment criterion that your script will be marked against;
Understand the format for reports favoured by the examiner;
But most importantly of all, you need to get some exam practice.

The pass rate for TOPCIMA is greater than 50%. So if you are taking TOPCIMA for
the first time you may think it will probably be the only time you will take it because
the probability is that you will pass. I hope so, but I want to warn you that you could
be wrong; a lot of candidates pass second time around. Many candidates get a nasty
shock from their first sitting and will take it more seriously the second time.

The main key to passing this exam is to get plenty of practice, against the clock, in
writing exam-style answers. You cannot leave it until exam day to find out where
your weak spots lie, any more than you would think of turning up to run a marathon
without first having done some practice.

It is not possible, in an article of this length, to explain all you need to know about the
examination and how to pass it. There is guidance on the CIMA website and in
publications from CIMA Publishing and from other commercial providers.

Working through past TOPCIMA cases and then reading the Post Examination
Guidance is a good start. These PEGs are available for free download from the CIMA
website. Consider purchasing one of the texts, toolkits and practice exams based on
Merbatty produced by private learning media companies.

Pay particular attention to the meanings of the assessment criteria and the sorts of
skills you should exhibit under each. CIMA convened a special meeting in March
2007 to ensure tutors understood the criteria properly. As a rough rule of thumb
consider them to mean the following:
Technical: demonstrating an understanding of theoretical frameworks from
Business Strategy to analyse the case and support recommendations. Particularly
relevant theories for Merbatty are SWOT analysis, PEST analysis (to assess
expanding in the Middle East and investing in facilities in Asia), Porters three
generic strategies and the industry lifecycle. Aim to apply at least five of these in
your report, one mark per theory;
Application: numerical techniques such as investment appraisal, business
valuation and ratio analysis. These can be worth up to 10 marks. In addition the
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quality of the application of SWOT and other technical frameworks gain extra
marks here where the technical framework has been applied to the case material;
Diversity: demonstration of industry awareness by drawing on the products and
experiences of real boat building or leisure industry businesses, and the
experiences of firms building facilities in the Middle East and Asia to illustrate
your analysis. Start researching and collecting these. Also general business
awareness and a sound commercial understanding of key issues are awarded
marks here;
Focus: ensuring you discuss every relevant (ie. priority) issue from the unseen and
pre-seen material in your report and explaining the potential implications of each;
Prioritisation: selecting from all the issues the ones of most importance,
explaining why your have given them priority, and then using most of the time
available writing a report discussing these and making recommendations on what
to do;
Judgement: ensuring that your rationale for prioritisation is valid, communicating
it to management and making level-headed recommendations to management on
what to do about each issue with an analysis of alternative actions or strategies
that could be taken;
Integration: a mark for the overall completeness and quality of your report.
Ensure you have SWOT that includes all the issues your are going to prioritise and
ensuring that, as a minimum, you make recommendations about what to do about
the priority issues;
Logic: marks here are awarded mainly for the quality of your recommendations,
including how you justify them in terms of your analysis of the issues, and also for
the quality of business communication in your report.;
Ethics: identification of potential ethical conflicts in the unseen information and
giving clear advice to management on how to deal with the ethical issues.
Preparing to win the marks for Ethics is always difficult because they rarely
appear in the pre-seen material. They are introduced in the unseen material.
Therefore its a test for you to suggest, from cold, how Merbatty should deal with
the ethical dilemmas that it faces. The examiner has said many times, at
conferences and also in published Post Examination Guidance, that the majority of
the marks for Ethics are awarded for suggesting ways to resolve the issue. Dont
be satisfied with listing loads of ethical issues. Rather you should seek to identify
and explain a smaller number of ethical issues and then ensure you make
suggestions on how to deal with them.

This article is intended as merely an introduction to the pre-seen material. It doesnt
cover it all and it says nothing about the unseen material you will face on exam day. It
is important for you to conduct your own analysis of the pre-seen and the boat-
building and premium leisure-craft industry as a whole.

Bon voyage!

Adrian Sims is a Director of BPP Learning Media Ltd and is responsible for
compiling the TOPCIMA Toolkit for BPP. Adrian is also the Subject Manager for
TOPCIMA at BPP and teaches TOPCIMA at its centres at Luton and Milton Keynes.
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