AQA A2Business Studies

BUSS3 - Strategies for SuccessRevision Workshop

Student Name

2 AQA A2 BUSS3 Revision Workshop

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.

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 emphasiseprotection of endangered species and conservation.

400,000Animal Adventure(5 locations)

Market PositioningBrand

Targeted at families, each Florida Fun location features a standardlayout of over 40 water slides, wave machines, lagoons and flow-riders. Each location also includes a themed hotel and conferencecomplex.

800,000Florida Fun(5 locations)

Jon Prior retired from day-to-day control of the businessin June 2012 and was succeeded as CEO by MichelleClark who was previously International Development Director for Merlin Entertainment. Following a difficultsummer in 2012 due to poor weather and the adverseimpact of the 2012 Olympics, Michelle conducted astrategic review of the UK business. The main purposewas to identify strategies which could improve the competitiveness and financial performance of PEG.

PEG's origins date back to 1995 when property developer Jon Prior opened the first Animal AdventurePark near Windsor. Four further Animal Adventure parks were opened in the following two decades. In2011 PEG plc floated on the London Stock Exchange and, in 2012, PEG raised new share capitaland bank debt to finance the acquisition of Florida Fun Inc. for £200m. Florida Fun operates five waterparks across Florida.

With 6 million visitors in 2013, PEG is a well-established and profitable operator but it is substantiallysmaller than the market leaders in the global visitor attraction market.

PEG's two theme park brands can be summarised as follows:

Average Annual Attendance(visitors per park)

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Issues Identified from the UK Strategic ReviewThe Strategic Review included a comprehensive benchmarking exercise which comparedthe competitiveness of PEG against the likes of Merlin Entertainment, Disney, Six Flagsand other leading theme park operators.

The benchmarking identified that PEG’s unit costs in the UK were substantially higher thancomparable UK attractions. This had already been highlighted as a problem by Finance Director Jamie Harrison who was concerned that individual parks rarely managed to achieverevenue 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, wouldaddress these problems. He proposes that each Animal Adventure park is treated as a profit centrefrom 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 revenuegeneration. 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 outsourcePEG’s IT system development operation.

As part of the review, PEG’s HRM department conducted a major employee survey focusing onhow “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 organisedand managed. She believes that the decentralised approach taken by Florida Fun together than withtheir flat organisational structure at each location is a model that will help improve the competitivenessof 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.

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Hotels: Accommodation and Conference Facilities in the UKEach Animal Adventure park has substantial unused freehold land and it is proposed that a new hotel andconference facility is built at each one, similar to the successful facilities at competitor attractions like AltonTowers 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 withPEG on this growth project. Whitbread propose that the hotels use the Premier Inn format and that PEG ispaid a profit share based on annual performance – this proposal will be considered by the Board togetherwith the original approach of funding and managing the hotels as an internal project.

New Parks in ChinaMarket research commissioned by PEG suggests that China represents a significant growth opportunity. TwoChina-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 theHaichang 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 £100mand they wish the Board to focus on just one of the two growth opportunities.

Michelle’s Proposed StrategyIn addition to the functional strategies outlined above, Michelle hasproposed two key investment projects to support higher returns forshareholders in the medium-to-long term:

1 Transforming the UK theme parks into destination resorts byadding accommodation and conference facilities;

2 Launching the successful Florida Fun brand and format in China

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Appendices

Appendix 2: HRM Data

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 £75Marketing costs as a percentage of revenues 12% 15% 20%% of visitors with an annual pass 7% 17% 21%

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 DecentralisedLevels of hierarchy 5 3Average span of control 7 12Average labour turnover 80% 70%

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Appendix 3: Operations Data

Selected operations dataAnimal 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 5: Investment Project Data

Extracts from the investment appraisal of the two growth projectsAdd Accommodation to UK Parks Expand into China

Project Add hotel & conference facilities Build 5 Florida Funto UK parks water parks in China

Proposed method Own build 50:50 joint venturewith Haichang Group

Total investment £100m £100mMethod of finance Bank loan / debenture # CashIncrease in annual operating profit £20m £25mARR 15% 25%Payback Period 5 years 8 yearsNPV * £30m £50m

* NPV calculated using a 10% discount rate# Assumes an interest rate of 8%

Appendix 4: Financial Data

Extracts from Prior Entertainment Group plc.’s annual accounts

2012 2013

Number of issued shares 20,000,000 20,000,000Dividend per share (£) £0.30 £0.12Non-current assets (£m) 690 720Current assets (£m) 120 125Cash included in current assets (£m) 95 105Current liabilities (£m) 140 145Non-current liabilities (£m) 215 210Revenue (£m) 280 310Operating profit (£m) 42 56Total equity (£m) 455 490Share price (31 Dec) £15.00 £12.00