ACCA MOCK 4 – HAMMOND

Strategic Business Leader

ACCA – SBL
June 2021

Time allowed:
4 hours including reading, planning and reflective time
This question paper is an integrated case study with one section for
100 marks and ALL Tasks must be completed.
All Tasks contain Professional Skills marks which are included in the
marks shown above
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination
hall.

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HAMMOND SHOES
Hammond Shoe Co Ltd manufactures and sells shoes in the country of Arnland. The company has
strong values and aims to deal fairly in all business transactions.
The company has grown steadily since its inception in that late 19th century but is now facing
significant competitive pressure from overseas suppliers and internet shopping.
In the light of this change in the external environment, the financial performance of the company
has declined rapidly and as a result the directors have recently commissioned a firm of business
analysts (Phoenix Consultants) to undertake a review of the Hammond Shoes business designed
to help them understand the strategic position of the company.
As a result of the decline in recent performance, outcome of this review and the production of
a SWOT analysis by the consultants, the directors are now considering their future strategy.
The following exhibits provide additional information relevant to Hammond Shoes:
Exhibit 1 – company history and background
Exhibit 2 – SWOT analysis of Hammond Shoes (extract from recent consultants review)
Exhibit 3 – email to FD concerning recent strategy discussions
Exhibit 4 – summary financial information
Exhibit 5 – extract from internal control report
Exhibit 6 – memo and email re website project

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The case requirements are as follows and you will be told which role you are taking in each
task:

1 You are a member of the external consultants team involved in the recent review of
Hammond Shoes.
The Board, alarmed by the results of the SWOT analysis, has requested that you provide
them with more detailed information regarding the recent performance of the
manufacturing division. The board is also concerned that given these results, it may not be
wise to invest in the upgrade of the production facilities.
Required:
Prepare a briefing paper for the board meeting which:
(a) Analyses the financial performance and position of Hammond Shoes presented in
the extracts of the financial statements. (10 marks)
Professional skills marks are available for demonstrating analysis skills in considering
the information presented and the impact on Hammond. (4 marks)
(b) Evaluates the financial and non‐financial issues of the proposed investment of
$37.5 million in upgrading its production facilities. (Ignore the time value of money)
(10 marks)
Professional skills marks are available for demonstrating commercial acumen skills to
demonstrate awareness of the impact of the proposed investment on Hammond.
(4 marks)
(Total: 28 marks)

2 You are a recently appointed Finance manager in Hammond Shoes.

The FD has requested that you bring “a fresh pair of eyes” to the strategic options facing
the business which can be determined from the recent SWOT analysis produced by the
external consultants.
Required:
Prepare a report for discussion at the next board meeting which evaluates the alternative
strategic options that Hammond Shoes could choose to secure its future position.
(18 marks)
Professional skills marks are available for demonstrating evaluation skills in assessing the
options presented and the impact of each on Hammond. (4 marks)
(Total: 22 marks)

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3 A few days later the FD called you into his office and expressed concern that following your
review of the strategic options resulting from the SWOT analysis, the purpose and direction
of Hammond seemed to be misunderstood by the management and staff. He is worried
that this misunderstanding may also permeate to external stakeholders e.g. Hammond’s
customers.
The FD has tabled an agenda item for the next board meeting to highlight the need to
establish these key concepts to ensure all stakeholders clearly understand the purpose of
the business.
Required:
Prepare a memorandum for the FD which explains the importance of mission, values and
objectives in defining and communicating the strategy of Hammond Shoes to
stakeholders and suggests how this might be achieved. (12 marks)
Professional skills marks are available for demonstrating communication skills in clarifying
the need for a clear understanding amongst senior personnel and stakeholders of the
future direction of Hammond. (4 marks)
(Total: 16 marks)

4 It is now three months later. A new chief executive has been appointed and is working
closely with the board of directors and the Hammond Family to improve performance. The
CEO is particularly concerned about the recently identified failures in internal control.
You are a new consultant employed by the CEO who has requested that you assist him in
resolving these concerns.
Required:
A briefing paper for the CEO which:
(a) Explains to the CEO why the internal control system at Hammond might be
ineffective and identifies and explains the internal control deficiencies that led to
the increased product failures. (12 marks)
(b) Recommend specific measures which would improve information flow from the
QC lab. (8 marks)
Professional skills marks are available for demonstrating scepticism and communication
skills by basing explanations of significant control weaknesses and recommendations for
improvement on the information provided. (4 marks)
(Total: 24 marks)

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5 The board is also concerned about the perceived failure of the new website project. He
sees this project as a critical development for the future success of the business and wishes
to present his view to the board at the next scheduled meeting.
You are a recently appointed Finance manager in Hammond Shoes.
Required:
Prepare TWO presentation slides, together with accompanying notes, for the CEO to
present to the board which:
Identifies the potential problems with project management and outlines strategies
available to address these identified problems in the website project. (8 marks)
Professional skills marks are available for demonstrating communication skills in presenting
the points in the slides concisely and for supporting notes which will make the issues clear
to the board. (2 marks)
(Total: 10 marks)

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Exhibit 1 – Extract from the current Hammond Shoes website:

Company background and values

Hammond Shoes was formed in 1895 by Richard and William Hammond, two brothers who
owned and farmed land in Petatown, in the country of Arnland. At this time, Arnland was
undergoing a period of rapid industrial growth and many companies were established that paid
low wages and expected employees to work long hours in dangerous and dirty conditions.
Workers lived in poor housing, were largely illiterate and had a life expectancy of less than forty
years.
In contrast, the Hammond brothers held a set of beliefs that stressed the social obligations of
employers. Their beliefs guided their employment principles – education and housing for
employees, secure jobs and good working conditions. Hammond Shoes expanded quickly, but it
still retained its principles.
Today, the company is a private limited company whose shares are wholly owned by the
Hammond family. Hammond Shoes still produce and supply footwear to retailers in Petatown.
They now also own almost one hundred retail shops throughout Arnland selling their shoes and
boots. The factory (and surrounding land) in Petatown is owned by the company and so are the
shops, which is unusual in a country where most commercial properties are leased. In many
respects this policy reflects the principles of the family.
The original Hammond family were keen to promote private ownership and were averse to risk
and borrowing. They believed that all stakeholders should be treated fairly. The current
Hammond family are still passionate about the beliefs and principles that inspired the founders of
the company.
Although the Hammond family still own the company, it is now totally run by professional
managers. The last Hammond to have operational responsibility was Jock Hammond, who
commissioned and implemented the last upgrade of the production facilities some 15 years ago.
In the past five years the Hammond family has left the running of the company entirely to the
professional managers that they appointed.

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Exhibit 2

PHOENIX Consultants

REPORT EXTRACT – SWOT ANALYSIS:

Strengths
Significant retail expertise: recognised as a successful retailer with excellent supply systems,
bright and welcoming shops and shop employees who are regularly recognised, in independent
surveys, for their excellent customer care and extensive product knowledge.
Excellent computer systems/software expertise: innovative computer systems developed in‐
house by the company’s information systems department. These systems not only concern the
distribution of footwear, but also its design and development.
Research and development: acknowledged, by the rest of the industry, as a leader in computer‐
aided footwear design and distribution.
Significant property portfolio: The factory in Petatown is owned by the company and so is a
significant amount of the surrounding land. All the retail shops are owned by the company.
Weaknesses
High production costs: Arnland is a high labour cost economy.
Out‐dated production facilities: The actual production facilities were last updated 15 years ago.
Current equipment is not efficient in its use of either labour, materials or energy.
Restricted internet site: Software development has focused on internal systems, rather than
internet development. The current website only provides information about Hammond Shoes; it
is not possible to buy footwear from the company’s website.
Opportunities
Increased consumer spending and consumerism: Despite the decline of its manufacturing
industries, Arnland remains a prosperous country with high consumer spending. Consumers
generally have a high disposable income and are fashion conscious.
Product development: Parents spend a lot of money on their children, with the aim of ‘making
sure that they get a good start in life’.
Increased desire for safe family shopping environment: A recent trend is for consumers to prefer
shopping in safe, car‐free environments where they can visit a variety of shops and restaurants.
These shopping villages are increasingly popular.
Growth of the green consumer: The numbers of ‘green consumers’ is increasing in Arnland. They
are conscious of the energy used in the production and distribution of the products they buy.
These consumers also expect suppliers to be socially responsible. A recent television programme
on the use of cheap and exploited labour in Orietaria was greeted with a call for a boycott of
goods from that country. One of the political parties in Arnland has emphasised environmentally
responsible purchasing in its manifesto. It suggests that ‘shorter shipping distances reduce energy
use and pollution. Purchasing locally supports communities and local jobs’.

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Threats
Cheap imports: The lower production costs in other countries provide a constant threat. It is still
much cheaper to make shoes in Orietaria, 4000 kilometres away, and transport the shoes by sea,
road and train to shops in Arnland, where they can be offered at prices that are still significantly
lower than the footwear produced by Hammond Shoes.
Legislation within Arnland: Arnland has comprehensive legislation on health and safety as well as
a statutory minimum wage and generous redundancy rights and payments for employees. The
government is likely to extend its employment legislation programme.
Political change: One of the most popular political parties in Arnland has emphasised
environmentally responsible purchasing in its manifesto for the forthcoming general election. It
has also stated that it would be keen to support local businesses to further develop their presence
in the latest technological and environmentally friendly production methods. This presents both a
threat and an opportunity for Hammond.
As previously stated shorter shipping distances will have a beneficial effect on energy use and
therefore pollution. In addition, purchasing locally supports communities and local jobs. To ignore
this political change therefore will be potentially detrimental to the brand and reputation of
Hammond.

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Exhibit 3
Email
From: CEO
To: FD
Subject: Recent board meeting
Date: Today
As you will be aware, senior management have recently suggested that the company should
consider closing its Petatown production plant and move production to another country perhaps
outsourcing to established suppliers in Orietaria and elsewhere.
This suggestion was immediately rejected by the Hammond family, who questioned the values of
the senior management. The family issued a press release with the aim of re‐affirming the core
values which underpin their business. The press release stated that ‘in our view, the day that
Hammond Shoes ceases to be a Petatown company, is the day that it closes’.
Consequently, the senior management team was asked to propose an alternative strategic
direction.
Senior Management Strategic Proposal
 The senior management team’s alternative is for the company to upgrade its production
facilities to gain labour and energy efficiencies.
 The cost of this proposal is $37.5m.
 At a recent scenario planning workshop the management team developed what they
considered to be two realistic scenarios. Both scenarios predict that demand for Hammond
Shoes’ footwear would be low for the next three years. However, increased productivity
and lower labour costs would bring net benefits of $5m in each of these years.
After three years the two scenarios differ.
 The first scenario predicts a continued low demand for the next three years with net
benefits still running at $5m per year. The team felt that this option had a probability of 0.7.
 The second scenario (with a probability of 0.3) predicts a higher demand for Hammond’s
products due to changes in the external environment. This would lead to net benefits of
$10m per year in years four, five and six.
 All estimated net benefits are based on the discounted future cash flows.

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Exhibit 4
Summary Financial information:
The following financial information (see Figure 1) is also available for Hammond Shoes.
Figure 1: Extracts from the financial statements of Hammond Shoes (20X5 – 20X7)
Extracted from the statements of profit or loss 20X7 20X6 20X5
(all figures in $m)
Revenue 700 750 850
Cost of sales (575) (600) (650)
Gross profit 125 150 200
Administration expenses (95) (100) (110)
Other expenses (10) (15) (20)
Finance costs (15) (10) (5)
Profit before tax 5 25 65
Income tax expense (3) (7) (10)
Profit for the year 2 18 55

Extracted from statements of financial position (all figures in $m)

Trade receivables 70 80 90
Share capital 100 100 100
Retained earnings 140 160 170
Long term borrowings 70 50 20
In 20X5, Hammond Shoes paid, on average, their supplier invoices 28 days after the date of
invoice. In 20X6 this had risen to 43 days and in 20X7, the average time to pay a supplier invoice
stood at 63 days.

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Exhibit 5
Extract from Internal Control Report
The Board commissioned an internal control review as a result of a recent increase in products
failing the final quality checks.
An extract of the results of this report are noted below:
Identified weakness
Checks are carried out in the QC (quality control) laboratory, which tests finished goods products
before being released for sale. It was noted that the product failure rate had risen from 1% of
items two years ago to 4% now, meaning an increase of hundreds of items of output a month
which were not sold on to customers. These failed products have no value to the company once
they had failed QC as the rework costs involved were not economic.
Because the increase was gradual, it took a while for the Operation Director to realise that the
failure rate had risen.
Outline of review process undertaken
A thorough review of the main production operation revealed nothing that might explain the
increased failure and so attention was focused instead on the QC laboratory. As a result it was
decided to interview some of the members of staff directly involved in the process.
Extract of interview with the Operation Director:
For some years, the QC laboratory, managed by Miss G, had been marginalised in the company,
with its two staff working in a remote laboratory well away from other employees.
The Operations Director stated:
“Although I was directly involved in the design of the internal control systems in Hammond, I
rarely visited the QC lab because of its remote location”.
On further questioning it was established that the Operation Director never routinely asked for
information on product failure rates to be reported to him and did not understand the science
involved in the QC process. He relied on the two QC staff, Miss G and her assistant Mr Z, both of
whom did have relevant scientific qualifications.
Extract of interview with the two QC staff
Both Miss G and Mr Z considered themselves low paid. Whilst in theory they reported to the
Operations Director, in practice, they conducted their work with little contact with colleagues.
Miss G stated “The work is routine and involves testing products against a set of compliance
standards. A single signature on a product compliance report was required to pass or fail in QC
and these reports were then filed away with no‐one else requesting access to verify the accuracy
of the process”
It was eventually established that Miss G had found a local buyer to pay her directly for any of
Hammond’s products which had failed the QC tests. It was further established that the increased
failure rate had resulted from her signing products as having ‘failed QC’ when, in fact, they had
passed.
Miss G made that following statement. “I kept the proceeds from the sales, and also paid my
assistant Mr Z, a proportion of the proceeds from the sale of the failed products”

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Exhibit 6
Email re emergency board meeting ‐ Failures in website project
To: FD
From: CEO
Date: Today
Subject: New website project
As you will note from the attachment, the board is very concerned at the progress of our new
website as they see this as a key strategy for our future growth.
The board have requested that we consider how to address the issues identified and prepare a
presentation for the board in advance of the meeting with the project manager addressing the
strategies available to Hammond to address the issues in the website project regarding project
constraints.
You will appreciate that this information is required asap.
Attachment:

Update on the website project:

As you are aware, the Board has given the go‐ahead to redesign Hammond’s website to make it
more convenient for customers to use.
The project is currently at week 12 and problems have been identified with the functionality of
the new site and the fact that it is not easy to navigate. The Project Manager has expressed
concern about the rising costs of the project and the time needed to improve the functionality. He
estimates that the change to the functionality will delay the project by three weeks. He
understands that improved customer satisfaction (by making the website easy to use) is
important.
The Board has had feedback from the project team members who have complained that there has
been a lack of visibility of the project manager. Team members have said that they were unaware
of any deadlines as they had not been shown any plan or schedule of work and this had made it
difficult to prioritise tasks and understand how they can contribute to the project.
The Board has called an emergency meeting with the Project Manager in order to come up with
some immediate solutions which address the project slippage.

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