BUSS3 - Strategies for Success

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AQA A2 Business Studies BUSS3 - Strategies for Success Revision Workshop Student Name

Prior Entertainment Group ("PEG") operates a portfolio of 10 theme parks: 5 in the UK and 5 in the US. PEG's aim is to deliver unique, memorable and rewarding experiences to all the group's visitors. PEG's vision is to become a global leader in branded visitor attractions. The key corporate objective is to maximise the returns earned by shareholders. PEG's origins date back to 1995 when property developer Jon Prior opened the first Animal Adventure Park near Windsor. Four further Animal Adventure parks were opened in the following two decades. In 2011 PEG plc floated on the London Stock Exchange and, in 2012, PEG raised new share capital and bank debt to finance the acquisition of Florida Fun Inc. for 200m. Florida Fun operates five water parks across Florida. With 6 million visitors in 2013, PEG is a well-established and profitable operator but it is substantially smaller than the market leaders in the global visitor attraction market. PEG's two theme park brands can be summarised as follows: Brand Animal Adventure (5 locations) Average Annual Attendance (visitors per park) 400,000 Market Positioning Targeted at families and those seeking an adrenaline rush! An adventure park featuring rope courses, climbing walls, zip lines and other challenges. The animal exhibits at each park emphasise protection of endangered species and conservation. Florida Fun (5 locations) 800,000 Targeted at families, each Florida Fun location features a standard layout of over 40 water slides, wave machines, lagoons and flowriders. Each location also includes a themed hotel and conference complex. Jon Prior retired from day-to-day control of the business in June 2012 and was succeeded as CEO by Michelle Clark who was previously International Development Director for Merlin Entertainment. Following a difficult summer in 2012 due to poor weather and the adverse impact of the 2012 Olympics, Michelle conducted a strategic review of the UK business. The main purpose was to identify strategies which could improve the competitiveness and financial performance of PEG. 2 AQA A2 BUSS3 Revision Workshop

Issues Identified from the UK Strategic Review The Strategic Review included a comprehensive benchmarking exercise which compared the competitiveness of PEG against the likes of Merlin Entertainment, Disney, Six Flags and other leading theme park operators. The benchmarking identified that PEG s unit costs in the UK were substantially higher than comparable UK attractions. This had already been highlighted as a problem by Finance Director Jamie Harrison who was concerned that individual parks rarely managed to achieve revenue targets or keep within annual cost budgets. Investment projects in the UK parks invariably resulted in cost overruns as a result of delays and optimistic forecasting. Jamie believes that the introduction of profit centres in the UK, as used by Florida Fun in the US, would address these problems. He proposes that each Animal Adventure park is treated as a profit centre from 2014 with local management offered a substantial bonus if they achieve budgeted revenue. The benchmarking data also revealed that PEG had some ground to make up in terms of revenue generation. The leading theme park competitors have all invested heavily in online booking and sophisticated flexible pricing systems. Michelle is worried that PEG s systems are outdated and ineffective and has asked Operations Director Rachel Brooks to evaluate a proposal to outsource PEG s IT system development operation. As part of the review, PEG s HRM department conducted a major employee survey focusing on how engaged they felt with the business. Some key survey findings are shown in Appendix 2. Michelle believes that Animal Adventure could benefit from learning how Florida Fun is organised and managed. She believes that the decentralised approach taken by Florida Fun together than with their flat organisational structure at each location is a model that will help improve the competitiveness of the UK parks. However, implementing this change will involve a significant delayering and the potential loss of some highly-experienced middle managers. Another challenge faced by PEG is workforce planning given the unpredictable and seasonal nature of demand for visitor attractions, particularly in the UK. At the next board meeting, HR Director Sian Cahill plans to propose that PEG implement a system of zero-hours contracts for all employees in the UK as way of minimising employment costs and providing attraction management with maximum operational flexibility. A similar system already exists and works well at Florida Fun. www.tutor2u.net 3

Michelle s Proposed Strategy In addition to the functional strategies outlined above, Michelle has proposed two key investment projects to support higher returns for shareholders in the medium-to-long term: 1 Transforming the UK theme parks into destination resorts by adding accommodation and conference facilities; 2 Launching the successful Florida Fun brand and format in China Hotels: Accommodation and Conference Facilities in the UK Each Animal Adventure park has substantial unused freehold land and it is proposed that a new hotel and conference facility is built at each one, similar to the successful facilities at competitor attractions like Alton Towers and LEGOLAND Windsor. The estimated investment returns for this project are included in Appendix 5. PEG has been approached by Whitbread plc, the operator of Premier Inn, expressing interest in partnering with PEG on this growth project. Whitbread propose that the hotels use the Premier Inn format and that PEG is paid a profit share based on annual performance this proposal will be considered by the Board together with the original approach of funding and managing the hotels as an internal project. New Parks in China Market research commissioned by PEG suggests that China represents a significant growth opportunity. Two China-based theme park chains, OCT Group and Haichang Group, are now in the Top 10 global chains. Total theme park visits in China (109m in 2012) are expected to surpass those of the US (132m in 2012) in the near future as millions of people join China s rapidly-growing middle class. Michelle has recently returned from a business development trip to China during which she met with the Haichang Group. They have agreed a draft investment proposal (summarised in Appendix 5) which would involve PEG investing 100m into a joint venture to launch the Florida Fun water park brand into China. Major shareholders and PEG s bankers are supportive of both investment projects. However, they have indicated that the maximum equity and debt funding that PEG might be able to raise is 100m and they wish the Board to focus on just one of the two growth opportunities. 4 AQA A2 BUSS3 Revision Workshop

Appendices Appendix 1: Marketing Data Leading Theme Park Groups Worldwide (2012) Visitors (m) % visitor growth over 2011 Walt Disney Attractions 126 4.7% Merlin Entertainments Group 54 16.4% Universal Studios Recreation Group 35 7.9% Six Flags 26 6.0% Prior Entertainment Group 6 2.6% Seaworld Parks & Entertainment 24 3.0% Haichang Group 8 24.5% Competitor benchmarking Animal Florida Fun Leading Adventure Competitors (average) % of bookings made online 18% 42% 38% Average spend per visitor ( ) 45 55 75 Marketing costs as a percentage of revenues 12% 15% 20% % of visitors with an annual pass 7% 17% 21% Appendix 2: HRM Data Selected results from recent employee engagement survey Statement: % of Employees Agreeing Animal Adventure Florida Fun I have a clear understanding of the company s objectives 51% 90% I am paid fairly 74% 52% I enjoy working here 88% 87% I would like to be given more responsibility 70% 45% Key HRM data Animal Adventure Florida Fun Approach to decision-making Centralised Decentralised Levels of hierarchy 5 3 Average span of control 7 12 Average labour turnover 80% 70% www.tutor2u.net 5

Appendix 3: Operations Data Selected operations data Animal Adventure Florida Fun Index of real unit cost 120 100 % of revenue spent on new rides & exhibits 6% 9% % of customers rating their visit as good value for money 64% 75% % of operating costs from outsourced functions 2% 12% Appendix 4: Financial Data Extracts from Prior Entertainment Group plc. s annual accounts 2012 2013 Number of issued shares 20,000,000 20,000,000 Dividend per share ( ) 0.30 0.12 Non-current assets ( m) 690 720 Current assets ( m) 120 125 Cash included in current assets ( m) 95 105 Current liabilities ( m) 140 145 Non-current liabilities ( m) 215 210 Revenue ( m) 280 310 Operating profit ( m) 42 56 Total equity ( m) 455 490 Share price (31 Dec) 15.00 12.00 Appendix 5: Investment Project Data Extracts from the investment appraisal of the two growth projects Add Accommodation to UK Parks Expand into China Project Add hotel & conference facilities Build 5 Florida Fun to UK parks water parks in China Proposed method Own build 50:50 joint venture with Haichang Group Total investment 100m 100m Method of finance Bank loan / debenture # Cash Increase in annual operating profit 20m 25m ARR 15% 25% Payback Period 5 years 8 years NPV * 30m 50m * NPV calculated using a 10% discount rate # Assumes an interest rate of 8% 6 AQA A2 BUSS3 Revision Workshop