You are Hoi Lui, a management consultant leading a small team which has been
commissioned to prepare a consultancy report for the Data Communications Services
(DCS) Company directors to help them plan for the next three years. DCS Company
has two product areas. The largest area is the manufacture of data communications
components which it mainly sells to original equipment manufacturers (OEM). The other
smaller and less developed area is based on supply and support contracts for specialist
IT management network systems, mainly to domestic medium-sized enterprises. You are
a qualified accountant and your colleagues are Danny Leman, a company researcher,
and Freddie Lithium who is a part-qualified finance professional. You and your team
have collected and analysed the following information about DCS Company to help
you prepare the consultancy report.
- Exhibit 1: A report on DCS Company’s organisational overview, the external
environment and the business model sourced and prepared by Danny Leman,
your colleague
- Exhibit 2: A transcript from interview which was held between you and Java
Peraya, the CEO of DCS Company.
- Exhibit 3: Summary of financial and business performance of DCS Company
extracted from the Integrated Report (2012–2015) presented to you by the
finance director of DCS Company
- Exhibit 4: The October board report, a recent board meeting notes which
include strategic choices facing DCS Company – presented to you by the
marketing manager of DCS Company
- Exhibit 5: Minutes from the focus group meeting you held with middle
management of DCS Company
Following your findings you are now starting to prepare the consultancy report and
associated tasks for DCS Company. The case requirements are included in the tasks
shown below:
1 (a) From the information you have collated from the report on DCS Company’s
organisational overview and the October bord report, draft a section of the
consultancy report for the directors of DCS Company to include the following:
(i) An analysis of the industry and market which DCS Company is competing
in(15 marks)
(ii) An evaluation of the overall performance of DCS Company between 2012
and 2015 from an integrated reporting perspective. (12 marks)
Professional Skills marks are available for demonstrating evaluation skills relating to
DCS Company’s environment and performance. (4 marks)
(b) You are now reviewing the transcript of the interview you held with Java Peraya, the
CEO of DCS Company and you identify some key weaknesses relating to the
governance of DCS Company which you want to include in the consultancy report.
Required: Explain the key weaknesses of the current governance structure of DCS
Company since it became a public limited company, recommending how they
should be addressed. (12 marks)
Professional Skills marks are available for demonstrating scepticism skills in
identifying key weaknesses from the information given. (2 marks)
(c) You have noted from information you have gathered that DCS Company has an
increasing carbon footprint, which it estimates in total, but is failing to control
adequately. As part of the consultancy report you are considering recommending
to DCS Company that it commissions a specialist environment and sustainability
consultancy company to assess these issues at DCS Company.
Required:
Draft a concise section of the consultancy report which constructs the case for
commissioning an environmental and sustainability audit of DCS Company, from
both a financial and environmental perspective, suggesting ways in which the
consultants might assist DCS Company managers to become more sustainable in
the management of the DCS Company carbon footprint. (5 marks)
Professional Skills marks are available for demonstrating commercial acumen in
identifying how DCS Company could benefit from the findings of the audit. (2 marks)
2. You are now reviewing Minutes from the focus group meeting, some of the
comments have peaked your interest.
Criticise the CEO’s and HR director’s ethical and professional behaviour relating
to the design, conduct, and reporting of the staff satisfaction survey. (5 marks)
Professional Skills marks are available for scepticism skills in identifying ethical and
professional issues in the conduct of the survey and communicating these criticisms
to the client in a way that is appropriate. (2 marks)
Exhibit 1
Background report to the DCS Company
To: Hoi Lui
From: Danny Leman
Subject: Organisational overview, the external environment and the DCS business
model
Date: 20 November 2015
Notes:
Organisational overview
Data Communications Systems (DCS), a publicly listed company on the small
companies’ capitalisation (SmallCap) index of a national stock exchange, used to
be a privately owned high technology company established in 1997 by computer
engineer, Java Peraya. Due to a rapid expansion over the following years, DCS
needed to source additional capital to fund its future growth and was floated on
the national stock exchange in 2006. This allowed Java Peraya to realise his majority
shareholding in the private company. 30% of the flotation was purchased by
institutional investors and DCS also borrowed long-term funds to leverage the newly
issued share capital. Before flotation, the company was almost exclusively financed
from the founders’ share capital, retained earnings and short-term finance.
External environment
DCS has its headquarters in Prydain, a prosperous developed nation with a stable
and well established political system and which has highly developed labour laws
including a national minimum wage and a newly introduced obligatory contributory
pension scheme. The government, like many governments worldwide, has invested
heavily in a national telecommunications infrastructure which has led to a significant
growth in social media and where virtually 75% of the population are connected to
the internet through a range of devices including mobile technology. The
government is also proposing a new carbon tax which will affect companies which
manufacture and provide IT network services such as data communications
components and systems. The electronics and IT industry has recently been
identified as a sector with an increasing carbon footprint caused by their
applications, such as component cooling devices, complex telecommunications
network components and cloud computing technology. Although DCS Company
can approximately estimate its total carbon footprint from the manufacture and
supply of components from its factory, it has not yet developed formal systems and
processes to manage its carbon footprint throughout the value chain.
Business model
DCS has two distinct product/service areas – data communications components
manufacture and the supply and maintenance of network management systems,
including technical support.
The DCS employees are a mixture of technically qualified engineers, working in
research and development (R&D), factory staff manufacturing and assembling
products and an IT sales and service support team. Since the flotation of the
company, 60% of production employees in the data communications components
factory joined a major trade union. In 2012 the country suffered an economic
downturn which led many companies to postpone technological investment and
by then DCS employed 150 full-time employees.
The main revenue source for DCS is the high-volume low cost data communications
component manufacture part of the business and it has 1% of the total market
share, which accounts for approximately 65% of DCS’s total turnover. DCS mainly
sells and supplies large volumes of data communications components to original
equipment manufacturers (OEMs), 30% of which are based outside Prydain on a
continent which has a single currency which is devaluing against the Prydain dollar.
Success in the data communications components sector comes from the
economies of scale achieved by producing high volumes of reliable components
and keeping prices low. DCS Company has achieved this despite producing
components in a country where there is significant employment legislation setting
minimum wage rates and conditions.
The second product area is much smaller and is based on supply and support
contracts for specialist IT management network management systems, mainly to
domestic medium-sized enterprises, which currently yields a relatively higher gross
profit margin than the data communications component products. A key aspect of
this second product area is the installation and support of big data analytics
capability along with cloud computing storage, which can be used to replace
existing costly IT architectures such as unsophisticated data warehouses to allow
business clients to collect and analyse more targeted and timely data about their
own customers and purchasing patterns. Much of this can be obtained from data
held within social and business networking software.
Exhibit 2 Transcript from interview held between you and Java Peraya, the CEO of
DCS Company.
You Thank you very much Mr Peraya for showing me around the offices and
factory. I found your staff and their comments very interesting. First of all,
could I ask you to tell me how you would describe how your company is
structured and managed?
Java I would describe DCS as fairly highly centralised. I suppose in
‘management speak’ we would describe the DCS management
structure as a ‘functional bureaucracy’. We prefer not to allow too
much managerial or departmental autonomy, for their own good of
course, to ensure that they act in the best interest of DCS and to avoid
irresponsible risk taking, which unfortunately has happened
occasionally in the past.
We expect middle managers to respect and respond positively to
senior management requests or directives and not to question these
unless they are very sure of their facts. This is probably a legacy from the
pre-flotation era, where much of the strategic direction was always
decided by me and my closest senior directors, most of whom were my
family and trusted friends.
You Would you mind explaining how your company is directed by describing
your corporate governance arrangements to me please?
Java Yes I can – please look at this chart.
Java Since 2006 DCS has been governed by a board of directors with me acting
as CEO and chairman, giving me sufficient control to effectively direct the
company and take strong leadership over the board, encouraging debate
and driving the agenda. The board comprises a marketing director, Jules.
He was my original sales manager employed by the company, who I have
known a long time now. We also have a production and IT director, Tony,
who has been with the company for over 10 years. He has a strong
background in data communications hardware components. Tosh is our
finance director. He joined the company just before the company was
listed on the national stock exchange. Trish Hopkins is our female HR
director and we also benefit from an independent non-executive member
of the board. We were very fortunate to appoint Asaf because he is a very
talented businessman and also an executive director of one of our two
largest suppliers. This means that he has a really good knowledge of our
business and of the data communications industry.
You That is really useful background Mr Peraya. So what about standing
governance committees which presumably report to the board?
Java We have an audit committee constituted of three experienced network
engineers who focus on and investigate internal control and quality failures
when they arise. To promote more independence, we have also
appointed a non-executive director as chairman on this committee who is
a former compliance officer at an airport, whose background is in air traffic
control and aviation regulation, but she is also a telecommunications
expert.
You What about a risk committee and do you have nominations or
remunerations committees?
Java DCS has no separate board appointed risk, remuneration or nominations
committees. All strategic and long-term planning initiatives are initiated
and decided upon by the main board led by myself and, of course, our
management structure and culture is such that we embed risk
management through having that close control over staff that I mentioned
to you previously. As for salary, we strongly believe that all board members
should be on a fixed salary to encourage them to take a longer term
perspective rather than rewarding them with short-term performance
bonuses.
As far as recruitment, remuneration and succession planning is concerned,
I personally approve and manage all middle to senior staff recruitment and
staff promotions, so there is no need for formal induction processes for our
directors or senior management.
You Now that you are a listed company, how do you report to and engage
with your shareholders, particularly institutional shareholders?
Java DCS does not have special governance or reporting structures to engage
with shareholders, including institutional shareholders, but of course we do
meet our minimum company law obligations in relation to statutory
reporting to shareholders, shareholder democracy, voting and other
constitutional rights
You That was all very useful Mr Peraya, but what I would like now is more data
on the overall performance of DCS and a copy of the October board
report, which I know was considering the strategic options facing DCS.
Java Certainly, I will ask Tosh Mondal to send you our summarised integrated
reporting data attached on a spreadsheet. I will also ask the marketing
director to send you the board report for October.
You Thank you very much Mr Peraya.
Exhibit 4
The October board report for DCS Company
To: The Board of Directors – DCS Subject: Strategic overview – DCS Company From:
Jules Debrey (marketing director)
Date: 12 October 2015
Introduction:
This report is based on information obtained from all the executive directors of DCS,
under several main headings. The report highlights risks, opportunities and the future
outlook for DCS. It also focuses on strategy and resource allocation, highlighting a key
strategic decision which the board will need to make in the near future.
Risks and opportunities: What are the specific risks and opportunities which affect DCS’s
ability to create value over the short, medium and long term, and how is the
organisation dealing with them?
By 2014, the international market for data communication components started to
saturate and decline.
For the supply and support of contracts for specialist IT network management systems,
we are now finding it increasingly difficult and costly to maintain the required level of
network support. It is getting harder to recruit high calibre staff to DCS. The
headquarters of DCS, although a modern site, is in a geographical location which is
unattractive for key personnel to relocate to. Our specialists in the systems support side
of the business are currently overstretched because many key staff have been ‘head
hunted’ or taken early retirement.
Lenders have until recently been quite willing to lend DCS additional long-term funds at
competitive interest rates, but are now tightening their credit lines to the company and
placing covenants on us to keep financial gearing within acceptable limits. They are
also increasing their interest rates to compensate for the additional financial risk. It is
unlikely that any future growth or investment can be financed from further debt and we
would need to use our considerable cash reserves or utilise internally generated funds.
Currently, DCS has a geared cost of equity capital of 12%.
Future outlook: What challenges and uncertainties is DCS likely to encounter in pursuing
its strategy, and what are the potential implications for its business model and future
performance?
DCS currently manufactures approximately 50% of all data communications
components used in its own products. The rest of the complete components, including
semiconductors and microprocessors, are bought in from two multi-national global
suppliers. These suppliers have since 2006 become the key players in the market
through a succession of acquisitions and mergers, where previously there were many
more suppliers, all with a much smaller market share. Recently, serious production
problems have resulted from periodic component shortages from these key suppliers,
creating significant delays in manufacturing, assembly and customer deliveries. One of
our recently acquired OEM customers accounts for 40% of our sales in this area.
Marketing forecasts for 2016 and beyond indicate stronger growth from the supply and
sales support for specialised IT management services to currently installed networks in
the domestic financial sector, rather than from the manufacture of components to
OEMs or for the installation of new networks to large companies. The other potential
growth area is in providing cloud computing and big data analytics capability to the
SME sector. Including DCS, there are currently only three companies which provide
these specialist services in Prydain.
Exhibit 5
Notes from the middle management focus group meeting
Having read the integrated reporting data and studying the transcript of the
conversation you had with Java Peraya, you needed more background information
about some of the key issues which had come to your attention. You therefore invited a
representative team of middle managers to a focus group meeting and asked them
key questions, from which the following comments were noted:
Quote 1 from an engineer in the network supply division:
‘What really annoys me is the fact that in 2011, the CEO and HR director introduced an
annual staff survey. Although they promised anonymity, the survey required us to give
details of our age, ethnicity, length of service and the department in which we are
employed. I was called to a meeting last year by the production manager who
implicitly threatened me and made comments such as ‘if you don’t like working here,
why not look for another job?’ It was made very clear to me that this meeting was
private and was to be kept confidential. I was not permitted to discuss the existence or
outcomes of these meetings with other members of staff, or there would be
consequences.
Quote 2 from a technician in the data communications components division:
‘I felt the staff satisfaction survey was designed in a way which dissuaded negative
feedback and key issues known to be of concern to staff obtained from the informal
‘grapevine’ were deliberately omitted from the survey questions. In addition, the way
the results were presented by managers, and the visual graphics used, seemed to play
down the negative feedback and concentrated only on the positive factors. For
example, emphasis was made of how well staff regarded their own performance, and
that of their team members, which seemed to have more favourable feedback,
compared with other questions about confidence in the leadership of the company. I
didn’t think this presented the true picture of our feelings.’
Quote 3 from a sales support engineer:
‘We are rushed off our feet. Due to key staff leaving, our sales areas are getting larger
and it is difficult to get around to all our customers. This means we have difficulty getting
our orders in on time and are often late to appointments. Although sales productivity
might be improving, because fewer of us are covering a greater geographical area,
customers are not as satisfied as they used to be and are making more complaints.’
After this meeting you went back to your office and scheduled a meeting in the
following week with Danny and Freddie, to start preparing the consultancy report
findings for DCS Company.
