Next month's TOPCIMA paper will focus on a fictitious mobile phone company called Dizz, but it's worth remembering that the industry chosen by the examiners is only a context. They are actually testing your ability to grasp the problems of the business.
A good place to start is Dizz's share price. The pre-seen material states that the firm is committed to delivering shareholder wealth and that the executive directors have share options with an exercise price of 24 [euro] compared with the December 2008 price of 12.04 [euro]. Appendix 4 features the five-year plan, which shows forecast 2014 earnings of 16,325m [euro]. When divided by the issued share capital of 11,400 million shares, this gives an EPS of 1.43 [euro]. To get to a share price of 24 [euro], Dizz would need to have a P/E ratio of 16.8 in 2014. In June 2008 its P/E ratio was 22. So, if the P/E can be held at 22 and the forecast 2014 profits are achieved, this would give a share price of 1.43 [euro] x 22 = 31.46 [euro] and the executive directors could enjoy a gain on their options. This means that the underlying issue is whether Dizz's strategy will deliver the growth outlined in the five-year plan.
A recurring theme in the pre-seen material is the "saturation" of the European mobile telecoms market. Yet Dizz forecasts that the average revenue per user (ARPU) will rise 20 per cent in six years. Appendix 4 shows that the company considers that it's still possible to increase customer numbers in Europe at a rate of 9.7 per cent in 2008-09, albeit slowing to 6.5 per cent by 2013-14.
Adopting the terminology of Michael Porter, the pre-seen material tells us that Dizz is seeking to compete by a strategy of differentiation. The differentiating factor is "the quality of the overall customer experience", which is maintained by the following:
* Good network reliability and coverage.
* Good customer service delivered by well-trained staff in stores and call centres.
* Solid IT systems that permit the ordering and tracking of new handsets.
But we are also warned that the company is seeking to reduce its costs in Europe. The question to consider here would be whether it can maintain differentiation based on service while at the same time cutting costs by outsourcing its call centres and, perhaps, its IT operations.
Dizz is also seeking to differentiate itself through marketing: sponsorships, joint branding and offering phones with broadband web access. Such...