CIMA | P6 - Management Accounting Business Strategy Solved Past Papers

© The Chartered Institute of Management Accountants 2004 1

STRATEGIC LEVEL

BUSINESS MANAGEMENT PILLAR

PAPER P6 – MANAGEMENT ACCOUNTINGBUSINESS STRATEGY

This is a Pilot Paper and is intended to be an indicative guide fortutors and students of the style and type of questions that are likelyto appear in future examinations. It does not seek to cover the fullrange of the syllabus learning outcomes for this subject.

Management Accounting – Business Strategy will be a three hourpaper with one compulsory section (50 marks) and one section witha choice of questions for 50 marks.

CONTENTS

Pilot Question Paper

Section A: One scenario question Pages 2-4

Section B: Four scenario questions Pages 5-8

Indicative Maths Tables and Formulae Pages 9-10

Pilot Solutions Pages 11-31 P6 –

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P6 PILOT PAPER 2

SECTION A – 50 MARKSANSWER THIS QUESTION

Question One

ACEP plc (ACEP) is a UK listed company which started as a publishing business over50 years ago and has grown into a company involved in consumer magazines, radiobroadcasting, television production and recorded music production. The company iscurrently based exclusively within the UK. Each industry is represented by a separatedivision within the company, each of which has been added, and grown, by a series ofacquisitions of small companies. All have been successful with the exception of themusic business, which was acquired six years ago.

ACEP entered the music industry believing that the music division would grow to rivalthe larger companies, despite continuing to focus on less well-known artists and groupswho had a specialist following of fans. Although there have been successful courtcases against the suppliers of file sharing software, illegal music copying is still a bigissue for the industry. The losses of royalties are claimed to be considerable.

The regulation of the broadcasting industry has, traditionally, focused on audience sizebut over the past ten years there has been considerable deregulation andconsolidation. ACEP has the maximum number of radio licences possible, as have theother two major industry players. This division regularly runs concerts at popular touristvenues where its target market tends to spend its summer vacation.

The magazine publishing industry structure is similarly concentrated and, althoughthere is no equivalent regulation based on audience size, it is unlikely that furtheracquisitions of companies would be allowed on competition policy grounds. Thedevelopment of new titles by organic growth would, however, be permitted. ACEP hasbeen successful with this approach and has two titles in the top five lifestyle magazinesand six in the top ten teenage titles. Both magazines and radio earned 70% of theirrevenue from advertising in 1999 and 2000. Across the industry, advertising revenuehas been depressed for the past two years.

The television production division produces music programmes for satellite and cabletelevision under the Masthead (collective brand name) of “Taste”, which is the samename as that used for the radio stations and some of the magazines. Although thispresents cross-marketing opportunities in the market segment of 13-30 year olds, whohave considerable spending power, the division is a relatively small player within theindustry.

With the exception of the finance director, who was recently brought in from acommercial radio station, each member of the board has a publishing background andhas been with the company for a number of years. These individuals have a reputationwithin that industry for achieving major post acquisition cost savings.

There are five institutional shareholders, all with significant holdings, who have becomemore publicly critical of both the share price of the company, which has been falling,and the size of the dividend which has been maintained at its present level for the pastfour years. They have said that both television and music should be sold off; thesecould realise £20 million and £10 million respectively. The balance of the shares inissue are broadly held. The results for the past four years are shown in Appendix A.



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Since the company is market leader in its target market, it has been consideringexpanding magazine publication into mainland Europe. A potential acquisition has beenidentified at a cost of £10 million. It is felt that, in the first year only, contribution wouldincrease by £3 million and fixed costs would rise by £1 million. Alternatively thecompany is considering an approach from a significantly larger European publisher andbroadcaster, whose organisation is privately owned, to form a joint venture in thelatter’s country. Discussions have suggested that an initial investment by ACEP of £20million would give rise to an increase in contribution to ACEP of £4 million. Fixed costsfor ACEP would again rise by £1 million for the first year. In both cases, ACEP’s Boardfeels that there would be considerable opportunities for cross marketing to its existingmarket.

The company has also had discussions with a firm which supplies equipment to beinstalled in retail outlets which downloads music to CD on demand. In addition to thecover charge for the CD advertising, revenue is earned depending on the number sold.A major retail chain has expressed an interest in installing the equipment in its 50stores across the country. The equipment could be hired by ACEP for a cost of£2 million for the 50 sites. The board is impressed that the project, based on figuressupplied by the equipment vendor, has an expected annual net profit of £1⋅182 million.This option will not be viable if the music division is sold off. A marketing researchexercise by the equipment supplier has provided the projections shown in Appendix B.

Appendix A£ millions 2002 2001 2000 1999SalesPublishing 425 500 523 419Radio 350 375 380 320Television 65 75 80 70Music 20 30 40 44Total 860 980 1,023 853

Profit before interest & tax 166 256 281 205Capital employed 900 900 870 805

Variable costs/sales ratioPublishing 0⋅49 0⋅45 0⋅45 0⋅45Radio 0⋅26 0⋅25 0⋅25 0⋅25Television 0⋅18 0⋅25 0⋅25 0⋅26Music 0⋅20 0⋅20 0⋅20 0⋅20

Fixed costs/sales ratioPublishing 0⋅38 0⋅32 0⋅31 0⋅37Radio 0⋅43 0⋅40 0⋅39 0⋅40Television 0⋅62 0⋅53 0⋅50 0⋅50Music 1⋅50 1⋅00 0⋅80 0⋅73

Appendix BWith promotional costs per month of £12,000 and a CD retail price of £2⋅00 it isexpected that monthly sales will have the following pattern.

probability sales (units)0⋅4 10,0000⋅5 12,0000⋅1 14,000



P6 PILOT PAPER 4

For sales up to and including 11,000 units, advertising revenue is predicted to be£17,000 per month if sales are over 11,000 units. Advertising revenue is predicted tobe £18,000 per month. Combined monthly fixed costs of production and distribution willbe £16,000 and variable costs will be £0⋅45 per CD. Retailers will receive a 25% marginon sales.

Required:

(a) Regarding the proposal to download CD’s in retail outlets, demonstrate how theequipment supplier has calculated the expected annual net profit, and evaluatewhether it gives a complete picture of the project.

(10 marks)

(b) Discuss the concept of portfolio planning models and, in the light of thecomments of the institutional shareholders, analyse the portfolio managed byACEP.

(8 marks)

(c) (i) Evaluate the risks involved in entering the magazine publishing market inmainland Europe.

(8 marks)

(ii) Discuss the merits of each of the two proposed methods for entering themainland Europe market.

(9 marks)

(d) The Board of Directors has asked you, as Financial Controller, to prepare a reportwhich produces

(i) recommendations regarding the options to purchase the CD downloadequipment, move into Europe and/or dispose of the television and musicdivisions;

(ii) a response to the institutional shareholders explaining how theserecommendations will contribute to sustained business growth for ACEP,recognising any concerns these shareholders might have.

(15 marks)(Total = 50 marks)

End of Section A



P6 PILOT PAPER 5

SECTION B – 50 MARKSANSWER TWO QUESTIONS FROM FOUR

Question Two

The Royal Botanical Gardens has been established for more than 120 years and hasthe following mission statement:

“The Royal Botanical Gardens belongs to the Nation. Our mission is to increaseknowledge and appreciation of plants, their importance and their conservation, bymanaging and displaying living and preserved collections and through botanicaland horticultural research.”

Located toward the edge of the city, the Gardens are regularly visited throughout theyear by many local families and are an internationally well-known tourist attraction.Despite charging admission it is one the top five visitor attractions in the country. Everyyear it answers many thousands of enquiries from Universities and researchestablishments, including pharmaceutical companies from all over the world andcharges for advice and access to its collection. Enquiries can range from access to theplant collection for horticultural work, seeds for propagation or samples for chemicalanalysis to seek novel pharmaceutical compounds for commercial exploitation. Itreceives an annual grant in aid from Central Government, which is fixed once every fiveyears. The grant in aid is due for review in three years’ time.

The Finance Director has decided that, to strengthen its case when meeting theGovernment representatives to negotiate the grant, the Management Board should beable to present a balanced scorecard demonstrating the performance of the Gardens.He has asked you, the Senior Management Accountant, to assist him in taking this ideaforward.

Many members of the board, which consists of eminent scientists, are unfamiliar withthe concept of a balanced scorecard.

Required:

(a) For the benefit of the Management Board, prepare a briefing on the concept of abalanced scorecard, which also analyses its usefulness for The Royal BotanicalGardens.

(10 marks)

(b) Discuss the process you would employ to develop a suitable balanced scorecardfor The Royal Botanical Gardens and give examples of measures that would beincorporated within it.




P6 PILOT PAPER 6

Question Three

Over the past few years the major airlines have suffered a decline in profitability andsome have even filed for bankruptcy. At the same time, some budget airlines haveshown considerable success offering a “no frills service” to an increasing number ofpassengers at heavily discounted fares.

The traditional airlines have, in the main, a vertically integrated service with manyactivities such as baggage handling, ticketing and maintenance delivered by their ownsubsidiaries. Additionally, they have continued to offer a variety of classes ranging fromluxury to economy thus catering for all segments of the travelling market from businessto tourist. These airlines compete fiercely for landing rights at city centre airports andhave formed into two main alliances to share routes giving them global coverage. Thetraditional airlines tend to purchase their aircraft directly from the manufacturerswhereas budget airlines tend to use leasing to source their fleet.

By contrast, the budget airlines have concentrated on the short-haul market and haveheavily promoted low-cost flights to secondary airports with no service other than theflight. These low costs have been partially supported by subsidies provided by thesecondary airports. An additional advantage of these airports is the rapid turnaround ofaircraft on the ground since they are handling fewer flights. Aircrew, at minimumpermitted staffing levels, are responsible for aircraft cleaning. The budget price includesonly the flight; passengers have no in-flight services and book their tickets directly viathe Internet. The budget airlines spend heavily on advertising in all popular media.

Required:

(a) Using an appropriate model of the competitive environment, discuss thedifference in performance between the traditional airlines and the budget airlinesand the business models they are operating.

(20 marks)

(b) Evaluate the business model operated by the budget airlines as a source ofsustainable competitive advantage.




P6 PILOT PAPER 7

Question Four

“Doctors with Wings” is a registered charity that raises funds to send volunteer doctorsand nurses to medical emergencies around the world. Those emergencies can arise forany reason, ranging from famine to war or major outbreaks of disease. Fundingprimarily comes from Government agencies and corporate donations, although thecharity seeks donations from the public, as well as medicines and other supplies frommanufacturers. The majority of volunteers are recruited, often with the support ofteaching hospitals, immediately after qualification. These new doctors are oftenpersuaded to donate their time to the charity during presentations made by volunteerdoctors who have just returned from a medical emergency.

Bryson, in his 1995 book, Strategic Planning for Public and Non-profit Organisations,makes the following statement:

“I would argue that if an organisation has time to do only one thing when it comesto strategic planning, that one thing ought to be a stakeholder analysis.”

Required:

(a) Critically discuss the components and process of such an analysis and thebenefits that “Doctors with Wings” would gain from the exercise.

(10 marks)

(b) Evaluate the principal stakeholders in the organisation and analyse the nature ofthe influence and importance that they hold in their relationship with the charity.




P6 PILOT PAPER 8

Question Five

The SDW Company has been trading for one year. It provides rail travel servicesbetween three major cities in the country in which it operates.

Mr M, the majority shareholder and Managing Director, is keen to expand its operationsand, in particular, to use the Internet as the major selling medium. He has discovered,for example, that doubling sales on the Internet usually results in no additional costs.However, doubling sales using a call centre normally results in a doubling of staff andan increase in costs.

All tickets are currently sold via the company's call centre. The company has anInternet site although this is used for publicity only, not for sales or marketing.Competitors currently use a mixture of selling media, although detailed information onthe success of each medium is not available to the SDW Company.

Mr M has asked you, as a qualified management accountant, to assist him in upgradingthe company's Internet site and, in particular, showing how this will help to reduceoperating costs.

Required:

(a) Advise Mr M on how to establish and implement an appropriate Internet strategyfor the SDW Company.

(13 marks)(b) Discuss the key customer-orientated features of an Internet site, showing how

these can be used to meet the objective of cost reduction required by Mr M.


End of Question Paper

Indicative Maths Tables and Formulae follow on pages 9-10



P6 PILOT PAPER 9

INDICATIVE MATHS TABLES AND FORMULAE

Present value tablePresent value of $1, that is (1 + r)-n where r = interest rate; n = number of periods until paymentor receipt.

Periods Interest rates (r)(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564 7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.42410 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.38611 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.35012 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.31913 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.29014 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.26315 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.23916 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.21817 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.19818 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.18019 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.16420 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Periods Interest rates (r)(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.19410 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.16211 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.13512 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.11213 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.09314 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.07815 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.06516 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.05417 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.04518 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.03819 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.03120 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026



P6 PILOT PAPER 10

Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n years

rr n−+− )(11



FORMULAEAnnuityPresent value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year, discounted atr% per annum:

PV =

+− nrr ][1

11

1

PerpetuityPresent value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r% per

annum: r

PV1

=



P6 PILOT PAPER 11

PILOT SOLUTIONS

Note:In some cases, these solutions are more substantial and wide ranging thanwould be expected of candidates under exam conditions. They providebackground on theorists, frameworks and approaches to guide tutors andstudents in their preparation, studies and revision.

SECTION A

Answer to Question One

Requirement (a)

ACEP plc (ACEP)

Workings Calculation of annual net profit

probability volume weighted volume0⋅4 10,000 4,0000⋅5 12,000 6,0000⋅1 14,000 1,400

Expected volume 11,400

£Retail price per copy 2⋅00Less margin to retailer 0⋅50Net retail 1⋅50Variable costs 0⋅45Contribution per copy 1⋅05

Expected monthly contribution 11,970Advertising revenue 18,000Total 29,970Less monthly promotion cost 12,000Less fixed costs 16,000Monthly net income 1,970

Annual net income 23,640

Net income for 50 stores 1,182,000



P6 PILOT PAPER 12

However, if sales volumes are considered separately:

Sales volume 10,000 12,000 14,000 £ £ £

Contribution per copy 1⋅05 1⋅05 1⋅05

Expected monthly contribution 10,500 12,600 14,700Add advertising revenue 17,000 18,000 18,000Total 27,500 30,600 32,700Less monthly promotion costs 12,000 12,000 12,000Less monthly fixed costs 16,000 16,000 16,000Monthly net income -500 2,600 4,700

Annual net income -6,000 31,200 56,400

Net income for 50 stores -300,000 1,560,000 2,820,000

It should be noted that the figures on which these calculations have been based havebeen provided by the equipment vendor and may be optimistic. (The calculations applyprobabilities to the volumes rather than the final net income figure.)

As can be seen from this calculation there is, in fact, a 40% chance of only 10,000 unitsof sale a month with a potential loss of £300,000. It is only with the sales volumesabove 10,000, which have a collective probability of 60%, that the venture will show aprofit. In the light of the losses already being made in the music division this wouldseem to represent an unacceptable risk to the company and the shareholders.

Bearing in mind the problems that the industry is experiencing with the illegaldownloading of music via the Internet, the company would need to be sure that itstarget market is likely to take up the opportunity of legally downloading music in retailoutlets. As the 13-30 age group become even more computer literate, and as thepressure mounts on the recorded music industry to reach an arrangement with thecompanies that produce file-sharing software, it is unlikely that this venture will beprofitable in the longer term.

Requirement (b)

Portfolio analysis is probably one of the best-known and most widely appliedtechniques of strategy analysis that has been developed. The two most commonlyquoted models are the GE/McKinsey portfolio analysis matrix and the BCG matrix (orBoston box).

The matrix examines the position of a business unit or division in terms of the twoprimary sources of profitability – industry attractiveness and competitive position. In thecase of the GE/McKinsey matrix the two parameters of industry attractiveness andcompetitive position are composites whereas for the BCG matrix they are singlevariables, simply using annual real rate of market growth and relative market share,respectively.

The fundamental idea is to represent the businesses of a diversified company within asimple graphic framework that can be used to assist in four areas of strategyformulation:



P6 PILOT PAPER 13

1 Formulating business unit strategyOn the basis of the same two criteria – industry attractiveness and competitiveposition – portfolio analysis yields simple and straightforward decision rules forstrategic behaviour for the company. For instance, depending on the position inthe McKinsey matrix, the recommendation will be to grow, hold or harvest.Similarly classification within the Boston Box will result in SBU’s being labelled as“Stars”, “Cash Cows”, “Question marks” or “Dogs” with recommendations toinvest for growth, milk, invest for growth or dispose, and dispose respectively.

2 Resource allocationThis facilitates the comparison of its investment attractiveness against that ofother business units within the firm and will offer guidance on the attractivenessof further investment.

3 Setting performance targetsThe classification within the matrix may assist in the estimation of reasonableexpectations of profit performance for the particular business.

4 Analysing portfolio balanceIt is useful to have a single diagrammatic representation of all of the differentbusinesses within the company to assess the overall balance, cohesiveness andperformance potential of the portfolio. Several dimensions can be used whenassessing company performance such as cash flow, continuity and risk. For adiversified company, seeking independence from the capital markets, the balanceof cash flow will be important as businesses in their growth phases, which are netabsorbers of cash, can be balanced with, and supported by, cash generativedivisions. With this in mind companies will often try to maintain a portfolio ofbusinesses which are at different stages of their life cycle so that, as older onesmature and, eventually die, they are replaced by younger, growing businesses.

The concept of the BCG matrix was developed by the Boston Consulting Group at thesame time as the consultancy was promoting the learning curve as a means ofdetermining aggressive pricing for market domination. This, in part, leads to the majorcriticisms of portfolio models:

1. The assumption that each business is independent and that any complementaryfeatures they may have is ignored.

2. It is not always the case that market share and growth rate are necessarilydeterminants of profitability.

3. The ranking of the business units against the two variables of market growth rateand market share will depend heavily on how the market is defined.

4. The normative strategies offered in some versions of the matrices should only beconsidered as a guide. Over-dependence on these prescriptions might preventinsightful analysis and “out of the box” thinking. For instance, a number ofcompanies make a good return from investing in businesses at the end of theirlife cycle and becoming a supplier of last resort. As others leave the market thelast supplier enjoys increasing market share.

In terms of the classification of the businesses in which ACEP operates, bothpublishing and radio occupy a strong position regarding market share. Publishingrepresents market leadership in its target market and radio is one of three equallyplaced market leaders. Both operate in a mature market in which little real growth canbe expected. ACEP’s other interests, television and music, are a different matter. Bothare relatively small in terms of their contribution to the company’s profits and in terms ofmarket presence. We may assume that the growth rate for television production is



P6 PILOT PAPER 14

relatively low, while that for music is actually declining due to the factors explained inthe case. A straight-forward application of the decision “rules” arising from eitherproduct portfolio matrix would suggest that the portfolio is not balanced and that thereis a need for a new vehicle for growth. Further it would suggest that possibly televisionproduction and, definitely, music should be divested since neither have a significantmarket share.

However, while it is difficult to justify continuing to support the music division, there canbe a strong case for retaining and trying to grow the television production SBU. Thecross marketing opportunities between television, magazines and radio could beexploited to the full.

Requirement (c)

(i) As an initial step, an analysis of the business environment concentrating onpolitical, economic, societal and technological factors should be conducted. Likelyareas of concern under each might be:

PoliticalLegislation concerning foreign ownership of media, language content of media,moral issues on content of media, sourcing of materials and working practices.Protectionism in any form and level of bureaucracy.

EconomicTaxation, minimum rates of pay, exchange rates and company law. Strength ofadvertising market, production costs and prevailing rates of pay. Cost ofmagazine quality paper.

SocialIssues of taste and culture, particularly the portability of youth and Englishculture, working practices, reading habits, attitude to music and other forms ofleisure as well as other considerations of lifestyle. The position of magazines inthe life cycle. Age profile and size of target market. Management workingpractices and organisational culture.

TechnologicalPrint process, availability of ISDN and other media transfer.

This initial analysis might lead to the following conclusions about risk:

• the company might not understand the foreign country’s business culture;

• the company may not know how to deal effectively with the nationals;

• the company might underestimate foreign regulations and incur unexpectedcosts;

• the foreign country may change its commercial, media or employment laws;

• the company may not have suitable managers to deal with an internationalsituation;

• the established players may react to keep ACEP out of the market.



P6 PILOT PAPER 15

(ii) The company has two possible avenues for entering the European market, byacquisition or via a joint venture.

Both opportunities are reasonably attractive in purely financial terms. Theacquisition at £10 million yielding a contribution each year of £3 million andincreased fixed costs of £1 million. The joint venture involves ACEP in aninvestment of twice as much at £20 million but will bring an annual contribution of£4 million and increased fixed costs of £1 million. Additionally since advertisingrevenue depends in part on the economy, ACEP will be spreading part of itsbusiness risk.

The main considerations for the decision are non-financial. Aside from the risksdescribed above a number of other factors should be considered.

Generally joint ventures can offer significant advantages in surmounting importquotas, tariffs, nationalist political interests and cultural roadblocks to the product.Economic, competitive, and political realities of nationalism often require adomestic partner so as to gain access to the foreign national market. Localknowledge of the accepted ways of doing business and necessary contactstogether with ACEP’s acknowledged expertise may well make a winningcombination. The formation of a joint venture will reduce competition - had ACEPentered the market in any other way, its potential partner would have been acompetitor.

Additionally ACEP could use the joint venture to gain better market knowledgeshould it subsequently decide to enter the market by acquisition. There is likely tobe less resistance to a joint venture than to an acquisition. Against these potentialadvantages must be set the possibilities of cross cultural management conflictsand how such conflicts would be resolved. There is a considerable differencebetween the management cultures across European countries. To compoundthese differences the potential partner is privately owned and this may well meanthere is quite an entrenched culture within the firm.

A decision should be made at an early stage as the likely duration of the jointventure and the intended end game. Is the intention to learn the market andmethods and, with that experience, buy out the partner and make acquisitions?Additionally some thought should be given to the intentions of the potentialpartner; is it entering this venture with an intention of learning from ACEP, so thatit may launch into the home market?

However with an acquisition there can be no disagreements on strategy, structureand control, and relative freedom to act. Against that must be recognised thatpublishing is a service business and human capital is of vital importance. If keymembers of staff leave post-acquisition there will be a greatly reduced chance ofsuccess.

The question states that “a potential target has been identified”; no mention ismade of the attitude of the present owners to the prospect. If they are willingvendors and are prepared to remain with the company to facilitate the transitionthis will significantly increase the chances of success. Although the company hasa good reputation for post-acquisition rationalisation in the publishing industry thisis not something it has done in geographically and culturally different markets. Ifthis were to be a hostile take-over, that rationalisation task would be made muchharder. The issue of management culture is as important for this option as it is forthe joint venture. Regardless of the quality of the due diligence done prior to the



P6 PILOT PAPER 16

purchase, it is very few acquisitions that do not result in some surprises onceownership is established.

There have been many cases where cross-border acquisitions have failed andthe joint venture would appear to be the route with the least risk.

Requirement (d)

Internal Memorandum to the Board of Directors

From: Financial Controller

Recommendations to purchase CD downloading equipment, move into Europe and/ordispose of the television and music divisions. My recommendations are based on theworkings contained in Appendix 1.

The opportunity to install CD downloading equipment in the retail outlets should berejected. While, according to the equipment supplier, there is a 60% probability that theventure will be profitable, there is a 40% probability of a loss of £300,000. It must alsobe borne in mind that the calculations are based on figures that have been supplied bythe equipment vendor and may well be biased to provide an attractive picture of theproject. As the stable of bands which ACEP controls are of specialist interest, thedemand figures cannot be certain and should be treated with some scepticism.Additionally, acceptance of this project would require retention of the music division andthe current losses of £14 million.

The prospect of an agreement being reached between the software manufacturers andthe major record labels is quite possible and downloading from the Internet to homecomputers becoming acceptable practice should not be ignored.

Additionally, the prospect of a computer-literate market ignoring the legality of thesituation and continuing to download to its PCs makes the demand forecasts, similarly,less reliable.

However, in the event that this type of business does become viable it would attract theattention of the larger record labels which, with a superior knowledge of the musicbusiness, and a significantly stronger back catalogue of music, would be likely to beinterested in entering the market and would compete strongly.

The five institutional shareholders, who wield considerable power – since the rest of theshares are widely held – cannot be ignored. The music division has not performed wellsince acquisition and could be argued to be outside the competence of the companywhere senior management has, primarily, a background and expertise in publishing.As the company is responsible for some of the top magazine titles in both the lifestyleand teenage markets this expertise is considerable. Since the music division is trying toserve a market for specialist bands it is unlikely that there is much cross marketingbetween this division and the other three divisions of the company. The recordedmusic industry is going through a period of increasing consolidation, with increasinglylarger players at one end of the market. However, a number of small bands are startingto distribute their music via the Internet. The smaller producer is likely to be squeezedout of the business in the foreseeable future.

While it is not known how much capital employed is represented in the Music divisionboosting the PBIT for the past year by £14 million would have a significant effect on theresults of the company. Whether the sale price of £10 million suggested by the



P6 PILOT PAPER 17

shareholders is realistic or not is not known, but the division should be sold, preferablyas a going concern, to one of the larger record labels.

However, in terms of PBIT/sales the television division is attractive and in the last yearhas shown a better margin than publishing. For this reason, and the opportunities forcross-marketing with the radio and publishing divisions, the television unit should beretained.

The move into mainland Europe should be undertaken. With the board’s provenexpertise in consumer magazine publishing and its leadership position in both teenageand lifestyle magazines it should develop this expertise abroad. There is talk of a“global teenager” and lifestyle marketing translates across the developed world. Of thetwo options for entering the market the acquisition would involve capital expenditure of£10 million with a forecast to increase PBIT by £2 million in the first year before ACEP’stalent for rationalisation is applied. This, however, might not prove to be that easy toachieve in a foreign market where differences in culture and management style mightaffect the ability to bring about change. Additionally the risk of key, local, staff leavingcannot be ignored.

However, the joint venture at £20 million capital expenditure is projected to increasePBIT, in the first year, of £3 million. On a crude payback calculation this is not asattractive as the acquisition option, but it carries a significantly lower risk. As long asthe management of the two companies can co-operate effectively, then the prospect ofACEP bringing its expertise to bear in terms of rationalisation may well bring about agreater increase in PBIT in subsequent years. ACEP should approach this as anexercise in testing the market with a view to developing sufficient knowledge to morefully enter the market in subsequent years.

The presentation to the institutional investors should make the following points:

• Recognising that there is little synergy between the music division and the rest ofthe business, the music division should be sold as a going concern at the earliestopportunity.

• This should increase PBIT by £14 million in terms of this year’s results and,should the estimates of sales proceeds be correct, provide £10 million for othergrowth opportunities. It must be noted, however, that there may well be offsettingcosts of disposal.

• This will allow management to concentrate on the core business of informationand entertainment for the 13-30 age range market, seeking to maximiseopportunities for cross marketing across the media, that is publishing, radiobroadcasting and television.

• This is expected to consolidate the underlying gains in PBIT which occurredduring 1999 and 2000 in these divisions. The adverse results for 2001 and 2002in those divisions would appear to have been brought about by the depressedadvertising market which is dependent upon the general state of the economy.

• To reduce the dependency on the UK economy and its impact upon advertisingrevenue, the company intends to enter an additional European magazine marketvia a joint venture. Capitalising on local knowledge, via the joint venture partners,and ACEP’s skills in rationalisation and magazine launch are expected, initially, toadd £3 million per year to PBIT.



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It is recognised that there are no further opportunities for expansion in the radiobroadcast industry since the company has the maximum number of licences. Sincegrowth by acquisition in publishing within the UK is not possible, overseas expansionand/or organic growth are the only options open to ACEP. The company will continue tolaunch new titles within the UK where lifestyle surveys suggest that this is feasible, butis taking the exploratory step of expanding into mainland Europe.

Appendix 1

Workings

£ millions 2002 2001 2000 1999SalesPublishing 425 500 523 419Radio 350 375 380 320Television 65 75 80 70Music 20 30 40 44Total 860 980 1,023 853

Variable costsPublishing 208 225 235 189Radio 91 94 95 80Television 12 19 20 18Music 4 6 8 9Total 315 344 358 296

Fixed costsPublishing 161 160 162 155Radio 150 150 148 128Television 40 40 40 35Music 30 30 32 32Total 381 380 382 350

PBITPublishing 56 115 126 75Radio 109 131 137 112Television 13 16 20 17Music -14 -6 0 3Total 164 256 283 207

Capital employed 900 900 870 805

ROCE (PBIT/CE) % 18⋅22 28⋅44 32⋅53 25⋅71

PBIT/SalesPublishing 0⋅13 0⋅23 0.24 0.18Radio 0⋅31 0⋅35 0⋅36 0⋅35Television 0⋅20 0⋅21 0⋅25 0⋅24Music -0⋅70 -0⋅20 0⋅00 0⋅07Total 0⋅19 0⋅26 0⋅28 0⋅24



P6 PILOT PAPER 19

SECTION B

Answer to Question Two

Requirement (a)

Board briefingThe concept of the Balanced Scorecard was introduced by Kaplan & Norton in the earlyNineties to recognise what they considered to be two primary deficiencies in theimplementation phase of many corporate plans.

First, they recognised that, although many organisations measure performance ratiosthese are primarily focused on historical figures and may have little to do with futuresuccess. Although such ratios are important they do not address important aspects offuture strategy, particularly those concerned with the satisfaction of customers and theirloyalty, organisational learning and the commitment of employees.

Additionally, they believed that, although strategic initiatives were formulated, theseoften had little impact on organisational behaviour or performance since they were nottranslated into measures which management and staff could understand and use.

Moving away from purely financial measures they claimed that what really matteredwas the strategy implementation process and described three processes:

1 management – how the leader runs the organisation, how decisions are madeand implemented;

2 business – how products are designed, orders fulfilled, customer satisfactionachieved, for example;

3 work – how work is operationalised, purchased, stored, and manufactured.

The Balanced Scorecard was developed to address any deficiencies in these areasand encompasses four key principles:

1 translating the vision through clarifying and gaining consensus;

2 communicating and linking by setting goals and establishing rewards for success;

3 business planning to align objectives, allocate resources and establishmilestones;

4 feedback and learning to review the subsequent performance against the plan.

They recognised that there should be, on every scorecard, four perspectives:

1 Financial perspective – “To succeed financially, how should we appear to ourshareholders?”

2 Customer perspective – “To achieve our vision, how should we appear to ourcustomers?”

3 Internal perspective – “To satisfy our shareholders and customers, what businessprocesses must we excel at?”

4 Future – the innovation and learning perspective. “To achieve our vision, how willwe sustain our ability to change and improve?”



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For each perspective, a number of objectives, appropriate measures and target levelsof performance together with initiatives for their achievement, would be defined. Thusthe measures chosen under each perspective would reflect the strategic imperativesunder which the organisation operates at the time.

Although the Balanced Scorecard was originally developed for commercialorganisations, over the last few years it has found increasing use in the not-for-profitsector, where the same perspectives are equally important, but measured in a differentway.

The Royal Botanical Gardens would benefit from the introduction of a BalancedScorecard by

• placing the whole organisation in a learning process, aligning everyone tostrategy in a single framework. The Balanced Scorecard has potential to improveitself over time by testing cause – effect hypotheses, refinement of the metricsselected, the measurement processes employed, resource allocation andidentification of suitable initiatives;

• encouraging more rational budgeting in a world of rapid change where resourceallocations are based on performance and systematic, fact-based managementreplaces intuition;

• encouraging and facilitating the anticipation of future outcomes and their impacton the organisation;

• raising the visibility of what is happening, prioritising what most needs to bechanged and helping to identify best practices.

In addition to the internal, managerial, benefits that the balanced scorecard can bring tothe organisation it has the potential to demonstrate to external stakeholders that theirmandates and objectives are being met. In this particular case, where the Governmentwill need to be convinced to maintain, or even increase, the grant in aid, the measuresincorporated can demonstrate that objectives over and above value for money arebeing achieved. It would make it easier for the Garden’s negotiators to demonstrate theachievements in terms of assistance to education, industry, tourism and nationalprestige.

However, it must be recognised that it requires sustained effort to implement fully andrequires a high level of organisational commitment. Its introduction may create fear anduncertainty since it raises both visibility and accountability. As with all otherperformance measurement techniques it will not solve problems – only strategy andinitiatives and their successful implementation can do that.

Requirement (b)

It is important that the Balanced Scorecard is developed by a team of individuals andthe commitment of the senior management is obtained. The team should be crossorganisational and contain representatives of all functional groups within the Gardens.



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The main tasks of the teams are as follows:

• identify strategic themes;

• define perspectives and desired outcomes;

• create a strategy map;

• define performance measures and targets;

• develop strategic initiatives to achieve targets.

Once the team has been established the mission statement should be analysed toidentify the strategic themes that are encompassed by the statement. This will providea more specific focus for planning.

For instance the following themes, among others, might be distilled from the missionstatement:

• knowledge and understanding through research;

• knowledge and understanding through display;

• conservation by living and preserved collections;

• belonging to the Nation.

The next task will be to define the perspectives - the diverse ways of looking at theorganisation from the perspective of different stakeholders. Also to define the meaningof mission success for each perspective and strategic theme. The differentstakeholders for The Royal Botanical Gardens are many and would include, forexample:

1 Financial perspective – government and research foundations that fund some ofthe work,

2 Customer perspective – universities who use the facilities;

3 Internal perspective – botanists using the facilities for research;

4 Future – the innovation and learning perspective – educationalists attached to theGardens.

Within the strategic theme of knowledge and understanding through research, theseperspectives might lead to the following desired outcomes:

1 Financial perspective – government funders would look for value for money in thecollection of novel plants and materials and the production of research papers.

2 Customer perspective – universities who deal with the Gardens would look forseamless access to any plants and materials they required in a cost-effectiveway.

3 Internal perspective – the botanists who work within the Gardens would look forsupport in their research so that they can work productively and advance theboundaries of science.



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4 Future – the innovation and learning perspective – the educationalists might wishto raise the profile of the facilities and attract people to this area of study andwould look to find innovative ways to bring people in.

For each strategic theme, the team would need to develop a chain of causes andeffects that would be expected to lead to the desired outcomes. Each of these chainswould be mapped onto a strategy map. Systems dynamics techniques would help inthis area.

For instance considering the provision of samples to Universities from a futureperspective:

This would mean enhancing information management, improving the employee climateand changing the skills gap. The botanists who work in the Gardens might seethemselves in competition with the Universities. A co-operative approach wouldimprove relationships, while seeking citation or acknowledgement in any researchpublished. From the internal perspective looking for process efficiencies in picking anddespatch would lead to more cost effective operations satisfying the financialperspective, while the enhanced service levels would, from the customer perspective,make them more likely to acknowledge assistance in research publications.

The definition of performance measures and targets would be achieved by answeringthe question “how will we know if this theme/desired outcome is being achieved?” anddeciding how each goal should be measured for example surveys or other means ofdata collection. If available, baseline data should be examined to set schedules andtargets for improvement.

For instance, measures for the theme/outcome of provision of samples to Universitiesmight include:

• financial – cost per sample provided, revenue generated from advice andconsultancy;

• customer – satisfaction surveys, amount of repeat business;

• internal – citations in published research, published research;

• future – new universities seeking samples; reduction in number of unsatisfiedrequests.



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Answer to Question Three

Requirement (a)

(Note: While candidates could apply the industry life cycle and recognise that thetraditional airline industry is entering a mature stage, or refer to the strategic groupsthat exist in the industry, Porter’s Five Forces model needs to be used to determineindustry attractiveness.)

Porter made the observation that the essence of strategy formulation is not just copingwith competition, but also requires that a company competes with both suppliers andcustomers for negotiating power.

Companies must understand the five forces on which the nature of competitiondepends and which determine the industry’s potential for profit. Where there are weakforces there is the possibility for superior profits, but where the forces are strong, thereis more likely to be perfect competition and poor profits.

The five forces are:

• the bargaining power of supplier groups;

• the bargaining power of buyers;

• the threat of new entrants;

• the threat of substitution;

• the degree of competitive rivalry within the industry.

Considering the air travel business as operated by the traditional airlines, the barriers toentry have been relatively high because of

• high capital costs of aircraft;

• regulation of routes and landing slots has restricted access;

• government affection for, and ownership of, national flag carriers;

• the restrictions on airport services.

The power of suppliers has been medium because

• there are only two major aircraft suppliers: these are global suppliers.Regulation places limits on the second hand aircraft market. However, bothsuppliers are also volume dependent which reduces their power;

• although major oil companies supply aviation fuel, the price is determinedby OPEC, which effectively fixes the price of crude oil;

• increasing outsourcing of non-core activities such as catering, baggagehandling, and airport services;

• however, labour power has been high; cabin and crew are traditionally wellpaid with many concessions.



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The power of buyers has been increasing because

• the buyers are becoming more knowledgeable and information more freelyavailable;

• the buyers no longer need to use intermediaries;

• there is an increasing commodity mindset;

• recent press has reduced the power of the brand;

The threat of substitutes has increased because

• high speed rail is a viable substitute across EU;

• teleconferencing for the business market is cheaper and is a lower riskpost-terrorist incidents.

Competitive rivalry within the industry has increased because

• cost-conscious customers put pressure on premium fares;

• high fixed cost component;

• high exit barriers;

• excess capacity partly offset by concentration through alliances and crossairline;

• loyalty programmes.

The budget airlines by contrast have manipulated the five forces as follows. Barriers toentry to the market have been reduced by:

• using secondary airports that are largely remote from city centres, wherelanding slots are more freely available along with subsidies;

• leasing aircraft rather than buying;

• only flying point to point rather than adopting a hub and spoke model;

• focusing on short haul.

Supplier power has been reduced by

• leasing aircraft from intermediaries;

• dispensing with many services such as catering and baggage handling;

• negotiating different agreements with labour force.

Buyer power has been reduced by

• focus on consumer segment of market;

• recognising the service as a commodity and dispensing with intermediaries;

• building a brand and reputation for cost effectiveness.



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Also:

• the threat of substitutes has been reduced by competing on price;

• competitive rivalry remains intense within the target market.

Requirement (b)

The source of competitive advantage for an organisation is an appropriate collection ofstrategic assets, capabilities and competencies – and an appropriate value chain toensure that they are used together effectively to provide some distinctiveness in theeyes of the customers.

Assets will only be strategic if they are rare (or unique), valuable, difficult to acquire orcopy, and with no freely available substitute resources.

Capabilities are based on behaviour within the firm and the perception that customershave when they deal with the organisation. On the basis of these perceptions they willdecide whether they will continue to do business with the organisation. Capabilities willarise because of an underlying set of competencies present in an organisation.

Competencies are more general in that an organisation may have a superior ability inR&D or in control.

Having reconfigured their value chain, the budget airlines have resegmented themarket for air travel appealing to a more cost-conscious group. Having recognised thepotential of this market, the companies concerned have enjoyed first mover advantageover the traditional airlines who have continued to offer relatively high quality service totheir travellers. When the budget airlines started, the traditional airlines adopted a waitand see policy, suspecting that the budget model would fail.

The source of competitive advantage that the budget airlines enjoyed was purely firstmover advantage.

The business model operated by the budget airlines depends on their ability tocompete on price and while volumes are maintained and there are no changes to thefive forces model they have a reasonable chance of survival.

Theoretically, when a company competes on price it is essential that they maintainlarge volume sales. This makes the budget airlines susceptible to any environmentalfactor that can affect their passenger numbers. The threats of terrorism and economicdownturn affecting discretionary disposable income are difficult to ignore as factorswhich can reduce volumes.

The companies concerned have manipulated the barriers to entry by choosingsecondary airports which were under capacity and by negotiating favourable contractswith those airports. Additionally, they were able to secure subsidies from the localgovernment who wished to promote business or tourism in the area. The passengerswere left to make their own arrangements to travel from the airport, often atconsiderable cost and inconvenience. As other budget airlines have started to usethose secondary airports the balance of power in negotiations is shifting towards theairports and costs may rise. As traveller volumes have increased, regional subsidieshave shrunk since the objective of the local authority has been achieved.



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As the budget airlines are charging lower prices and are dependent upon largevolumes, their contribution to sales ratio is far lower. Any cost increases, such asincreased lading fees, have a bigger impact on their profit figures. Similarly, theprospect of increased carbon taxes on the use of fuel and even fuel price increasesthemselves will have a significant effect on their cost structure.

The traditional airlines have reacted to the buyers’ view of airline travel as a commodityand have become more price competitive, taking customers away from the budgetairlines. Since they are using landing slots at airports which are more central to cities,the surrounding infrastructure is better and the impact of delays is less pronounced.

Although budget airlines have developed a business model that has been successful inthe short term, by virtue of first mover advantage, it is unlikely that they will continue atthese levels of success in the future. Sustainable competitive advantage is only rarelyachieved by competing on price.

Answer to Question Four

Requirement (a)

Stakeholders can be defined as people and organisations who have a say in what theorganisation is to do, what resources the organisation can have and what is to beachieved. They are affected by, and feel they have a right to benefit from, or be pleasedby, what the organisation does.

Beneficiaries can be considered as both intended beneficiaries and collateralbeneficiaries who will benefit indirectly from the success of the organisation or theservice it provides.

The process of stakeholder analysis would best be served by a brainstorming processusing a focus group drawn from within the company. Stakeholders should becategorised as internal or external to the organisation. It should be remembered thatstakeholder groups are not mutually exclusive and there will be overlap between them.

The stages of the process should be

• Identify stakeholders;

• Identify their interests, values and concerns;

• Identify sources of stakeholder power;

• Identify what claims they can make on the organisation;

• Rank the most important stakeholders from the organisation’s perspective interms of their ability to influence the organisation;

• Map the relationship between the stakeholder groups;

• Identify the resulting strategic challenges.

When looking to determine the stakeholder values, these could be considered in termsof what they want the organisation to do for them, what the organisation actually doesfor them, and how well they judge the organisation’s efforts. The organisation shouldalso consider how it is informed of stakeholder perception of its performance. It is



P6 PILOT PAPER 27

important to consider why the stakeholders choose to come to this particularorganisation – do they have a choice? Some organisations talk of holding particularvalues, but do not actually live them in practice. It is important to distinguish betweenthe desired, spoken and lived values. For instance, a public transport service may wellhave a desired value of no delays for passengers. The spoken values, espoused interms of targets set, will relate to a lesser performance level. The lived values may wellbe at an even lower level.

Having determined the stakeholders’ value systems there should be an assessment ofthe power they can exercise on the organisation. Power can arise by virtue of:

• possession of expertise;

• control of or access to resources;

• control of or access to information;

• preparedness to fight;

• charisma or referent power;

• networks.

All stakeholders will have an element of power in their dealings with an organisation toa greater or lesser extent. The power that a stakeholder can bring to bear in dealingwith the organisation should be carefully considered since this can affect the way anorganisation chooses to deal with that particular stakeholder or stakeholder group. Thegreater their power the more influential they become.

The importance of stakeholders at any point in time will depend upon their interest inthe strategic initiatives being planned at the time. If the initiative ties in with their valuesand concerns then they must be considered important in the next stage of analysis.Alternatively where a stakeholder may have limited, or little interest in the successfulcompletion of an initiative, they will need to be convinced of the importance for theorganisation as a whole.

Once stakeholders have been classified in terms of their importance and influence theycan be ranked in terms of the way the organisation must deal with them, if strategiesare to be successfully implemented.

The organisation will need to develop excellent working relationships with thosestakeholders who have both high degrees of influence and high importance. They arepotential partners in the planning and implementation of any initiatives.

Those stakeholders who have high degrees of influence, and can affect the initiative’soutcomes, but are of limited importance at this point in time, are a source of riskrequiring careful monitoring and management. They must be consulted and keptinformed.

Stakeholders who are highly important, but of low power to influence, should be keptinformed, but can do little to affect the outcome of the strategic initiative.

Stakeholders of both low influence and low importance will require limited monitoringand evaluation but are, at this time, of low priority.

Having conducted this type of stakeholder analysis “Doctors with Wings” will benefitfrom a clearer idea of the way forward in implementing any strategy it proposes.Strategic initiatives will invariably involve change management and without the support



P6 PILOT PAPER 28

of the stakeholders are unlikely to succeed. By developing a better knowledge ofstakeholders, their power and their value system, it will be far easier for theorganisation to make decisions on how it should deal with the different groups as itintroduces any new strategy.

More informed decisions are needed when the organisation comes to answer thefollowing questions:

• Should it deal with stakeholders directly or indirectly?

• Should it take the offensive or deal defensively with resistance?

• Should it accommodate, negotiate, manipulate or resist stakeholder claims?

• Should it operate with a combination of these approaches or select a singlecourse of action?

Requirement (b)

The list of stakeholders includes:

Government funding agenciesGovernment agencies would expect to see value for money and the good name of thehost country promoted. It is unlikely that a government would want to be associatedwith the funding of a charity which played an active part in a medical emergency arisingfrom a conflict in which that government had an active, or vested, interest. Dependingon the proportion of funding they provide their power could be quite considerable. Theyalso have network power in that they can influence other foreign governments andsupranational funding agencies such as UNESCO to assist the charity or, if notimpressed, to damage its interests.

Corporate donorsThese have similar interests to government agencies in that they would want to seetransparent and cost effective operations, gaining reputational capital by association. Itis unlikely that they would want to be seen to be supporting one side in areas of conflictif they had interests in the region. Their power would again depend on the size of thedonation they made to the organisation. It should be remembered that the donationmight not be purely financial in that they might offer transport and other facilities in theaffected area and would gain additional reputational capital from so doing.

Medical companies that donateAside from philanthropic interests, medical companies would want to improve theirreputational capital by being seen to do the right thing. Power would again depend onthe size of the contribution to the costs of the organisation but, additionally, in particularmedical emergencies they may well provide power in terms of pharmaceutical expertiseto the doctors.

Public donorsThe interest of public donors is philanthropic – they would wish to have a satisfiedfeeling from having done the right thing. Power is not limited to resource manipulationin the size of the donation made, but would also involve their ability to raise the profileof the charity where word of mouth marketing is important.

Doctors and nurses donating time after qualifying for the first timeThe interest of the donors is both philanthropic from a desire to put something back, butalso to gain good quality post-qualification experience. There will also be an element of



P6 PILOT PAPER 29

self-esteem in taking an interest in the charity. Their power is high being based on theirexpertise and preparedness to do the work.

Doctors and nurses returning from medical emergencyThe interest is again philanthropic, and there is also a desire to increase reputationalcapital. Their power is high both in terms of expertise and charisma or referent power.

Teaching hospitals facilitating doctors donating timeThe interest is primarily based on reputational capital in that those they have trainedare seen to be “doing the right thing”. Their power is relatively high in terms of referentpower.

Staff working at “Doctors with Wings”The interest is primarily to do with self-esteem and, bearing in mind the likely salary,somewhat philanthropic. Their power is primarily resource-based in that they providetheir services and time for relatively low rewards.

Other similar charitiesOther charities will be interested in the performance of “Doctors with Wings” from theperspective of both competition for resource from donors, but also quite possibly ascollaborators when some emergencies reach the proportions that, unfortunately, attracta lot of interest.

Beneficiaries and victims of medical emergenciesThe interests of the beneficiaries will be purely self-serving in that they will want promptand effective treatment and relief. Their power is virtually non-existent.

Answer to Question Five

Requirement (a)

Establishing the web siteBefore Mr M tries to establish an Internet strategy, he should look at his overallbusiness strategy. In doing this he should find answers to a number of questions, suchas:

• Is he only going to continue to operate between three domestic cities?

• How far does he want to expand both internally (in the home market as indicated)and beyond (internationally)?

• Does he have the capacity to take on more bookings should they arise?

• Is he aiming at a different market sector?

• Does he have a business plan?

Checking this strategy is essential because the IT strategy must be seen to support theoverall strategy of the company and not drive it. In the case of the SDW Company, thisdoes not appear to be an issue; the owner wishes to develop an e-commerce facility onthe Internet site. However, care must be taken to ensure that the site does not causeunnecessary disruption to other systems within the company.



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Having determined his business strategy, he needs to look at his IT strategy. Would anInternet site for bookings be part of his overall IT strategy or simply an add-on?Piecemeal implementation could affect other areas of his business systems.

The SDW Company already has an Internet site, so development of any new site musttake this into account along with the overall requirements of the business. Expertadvice needs to be obtained as to whether or not to amend this site or design a newone. Experts in web design may have to be employed if this expertise is not availablein-house.

Additional care will be required in implementing the IT, for example in ensuring that noincompatible systems are introduced. The IT systems being used in the new Internetsite must be able to connect to the existing call centre systems. Similarly, the initialfocus of the site must be on selling seats on the company’s trains; other services maybe offered later, but establishing the core business first is essential.

Deciding on e-commerce may have an impact on other parts of the business. Forexample, setting an objective of a given percentage of business through the Internetwill decrease percentages of business in other areas. Within the SDW Company, therewill (hopefully) be a fall in the use of the call centre. This change must be anticipatedand planned for. Staff in the call centre must be kept informed concerning the settingup of the Internet site, and then assurances given regarding job prospects and training,either within the call centre or other areas of the company. Where reductions in staffingare required, it is better to obtain these naturally rather than by compulsoryredundancies.

Mr M should also attempt to obtain information on competitors' sites (and more broadly,sites relevant to the travel industry), to assess particularly their design and ease of use.This would be relatively easy to do – he could even visit the sites himself. This wouldnot tell him how successful the sites were, although some companies boast about theuse of their sites in published information. Some travel operators even offer discountedfares for booking this way. He should be careful that any claims are verifiable, and notjust another way of attracting publicity. It may be possible to commission some surveyinformation to obtain potential customers' views on booking through a website.

Given the need for security and the current lack of in-house knowledge, setting up ane-commerce system will require specialist assistance, either by recruitment oroutsourcing the writing and monitoring of the site.

The services to be offered through e-commerce must also be determined. Decisionsregarding services will have a direct impact on the writing of the website, as the authorswill need to ensure that the required services can be made available. As already noted,the initial focus must be on travel bookings. Additional services and products may bemade available after this core business activity has been satisfied.

Whichever method of writing the website is chosen, budgets must be set for this activityand agreed at Board level. If necessary, a cost benefit analysis will be required, partlyto justify the cost of writing the site and partly to show the potential benefits from usingthe web site rather than a call centre.

Implementation issuesThe charges (if any) for providing services to customers must also be determined. If e-commerce is to be encouraged, then some discount or other benefit can be expected toattract customers to this service. Given that this method of booking results in lowercosts than when booking via a call centre, then the SDW Company can pass on thesecost savings to its customers.



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Prior to the e-commerce service being made available, it will have to be advertised. TheBoard will need to decide where to advertise and how much the advertising budget willbe. Possibilities will include mail-shots to existing customers, perhaps by e-mail, andadvertising on the websites of other organisations.

One of the aims of the provision of e-commerce is to try and remain competitive. Areview of competitors’ and other on-line sites is advisable to help determine the contentand structure of the SDW Company site. This review may also help to identify otherareas where competitors currently have an advantage so that the Board can addressthis.

Requirement (b)

Features of Internet sites focusing on cost reductionThe site must, of course, be very easy to use. SDW should specify simple instructionson a site that is easy to understand and quick to load. The omission of detailedgraphics and providing an “uncluttered” site will also decrease programming costs.

Incentives to book on-line such as obtaining loyalty benefits, cheaper prices or beingable to book earlier (which may not be available on off-line bookings) could be offered.Although this may not save costs on the Internet, it will provide overall cost savings bydecreasing reliance on the call centre, thus limiting the number of staff employed.

Removing reliance on other more expensive selling media, such as the call centre,removes not only salary costs but also accommodation, pension, equipment and similarcosts. Focusing on one booking medium becomes easier to support as only one coststructure is required.

Providing appropriate support to customers within the website which does not involveadditional human contact. For example, provision of FAQ’s, a good help system andadvice on each stage of the booking process. Customers are encouraged to resolvetheir own problems, which limits intervention from expensive staff.

Provision of other information on the website to attract customers to it, for exampledetails of company performance or similar information already available within theorganisation. Placing the information on the website is relatively inexpensive given thatthe information is already required in-house. Setting up web-specific information wouldbe more expensive.

Innovative uses of Internet technology, for example suggesting destinations on alimited budget rather than customers specifying where they want to go. Providing theseideas as unique selling points will attract more customers to the website, again limitingreliance on other media.



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© The Chartered Institute of Management Accountants 2005

Business Management Pillar

Strategic Level Paper

P6 – Management Accounting – Business Strategy

24 May 2005 - Tuesday Morning Session

Instructions to candidates

You are allowed three hours to answer this question paper.

You are allowed 20 minutes reading time before the examination begins during which you should read the question paper, and if you wish, make annotations on the question paper. However, you will not be allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time.

You are strongly advised to carefully read the question requirement before attempting the question concerned. The question requirements are contained in a dotted box.

Answer the ONE compulsory question in Section A on pages 2 and 3.

Answer TWO of the four questions in Section B on pages 4 to 7.

Maths Tables and Formulae are provided on pages 9 and 10. These pages are detachable for ease of reference.

Write your full examination number, paper number and the examination subject title in the spaces provided on the front of the examination answer book. Also write your contact ID and name in the space provided in the right hand margin and seal to close.

Tick the appropriate boxes on the front of the answer book to indicate which questions you have answered.

TURN OVER

P6

– B

usin

ess

Stra

tegy



P6 2 May 2005

SECTION A – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER THIS QUESTION

Question One Pipeco, a wholly owned subsidiary of an international chemical company (the parent group), has for the past twenty years manufactured, by an extrusion process, large bore plastic pipe for use in water, sewage and gas piping systems. (Extrusion is a process whereby hot plastic is forced through a die and takes the shape of the die.) Based in Western Europe, Pipeco has been the major supplier to the infrastructure building projects in most surrounding countries. Pipeco has operated from a single site. All projects, which typically last three or four years, are won by competitive tender and Pipeco has had a success rate, for many years, of over 80% of the contracts for which it has bid. Large bore, extruded pipe, is a commodity product sold, by the tonne, on price. Pipeco’s dominant position, in a very competitive industry, has been achieved by its cost effectiveness and the high technical skill of its sales engineers.

In the last three years, revenue and profits have declined as existing building programmes have neared completion and no new projects have become available from current markets.

The directors of Pipeco feel that they cannot maintain the dividend to the parent group at the present levels beyond the current year. The parent group has made available to Pipeco a budget of $2 million for investment and has suggested a hurdle rate of 10% on any project undertaken. Although the parent group takes a strategic, long term view it is currently under pressure from the shareholders to at least increase the overall profitability of the group and maintain the dividend.

The parent group is particularly concerned about profitability over the next five years because of the cost of the expansion plans in other subsidiaries.

There are a number of possibilities which Pipeco wishes to consider including:

Option 1

Pipeco could expand geographically to countries which are beginning to improve their infrastructure. The recent expansion of the European Union is considered to be an opportunity over the coming years.

Preliminary investigations have identified two possible countries to which some of the existing extrusion plant and equipment could be relocated leaving sufficient capacity to finish existing orders.

Country A would involve an initial capital investment of $1·5 million and Country B would involve an initial capital investment of $2.0 million. Sales volumes, in tonnes per year, are as follows; Years Country A Years Country B Tonnes Tonnes 1 to 5 42,000 1 to 8 63,000 6 to 10 64,000 9 to 14 51,000 11 to 15 20,000 Each tonne of product would sell for $90 and there would be variable costs of $85 per tonne.

Option 2

Pipeco could move into other areas of plastics, producing pipework and fittings for use within buildings. The manufacture of fittings would involve moulding, a very different manufacturing process. There are a number of established firms in that industry, although this is considered to be a strong growth industry within Western Europe, particularly at the prestige design end of the business where gross margins of 55% are quite common. Sales within the industry are made to retail outlets or, for larger building projects, by presentation to the architect.



May 2005 3 P6

Pipeco recognises that this is a different business model to that currently used and the approach used by some departments, notably marketing, will need to change. Research has shown that Pipeco could enter the market by investing an initial $1,450,000 in plant and equipment followed by a further $425,000 for plant and equipment payable at the end of the first year of operation. The market entry would be achieved by buying a small, underfunded company from the owner who wishes to retire. The purchase price is included within the total of $1,875,000. This company is based in Pipeco’s current home market.

Research has shown that the project would give the following projected probabilities and cash contributions from sales per year for the next ten years; Year $000 $000 $000 1 - 10 300 435 265 probability 0·5 0·3 0·2 These figures will only be achieved if the investment in plant and equipment outlined above is carried out and do not reflect the level of performance under current ownership. The directors recognise that Pipeco will need to market more proactively and have decided to consider adopting relationship marketing for this option should it be selected. Pipeco realises that the adoption of relationship marketing would represent a significant change to the way the company operates.

Summary

Whichever option is chosen, Pipeco believes that, with the exception of depreciation, which is based on gross capital expenditure, there would be no increase in fixed costs. All capital expenditure is depreciated on a straight line basis over ten years.

Pipeco has a good employment record, with low staff turnover, and would prefer to retrain and possibly relocate (depending on the option selected) staff rather than make them redundant. It believes the staff would welcome this approach.

Required: As the management accountant of Pipeco:

(a) Make reasoned recommendations on the selection of Options 1 and 2.

Note: up to 16 marks will be awarded for calculations (29 marks)

(b) Identify the additional information that would need to be gathered to compare and contrast the suitability of the two countries identified for possible relocation in Option 1.

(6 marks)

(c) (i) Briefly describe relationship marketing and explain how the approach would benefit the company.

(6 marks)

(ii) Advise how the changes associated with the introduction of relationship marketing and the acquisition should be implemented if Option 2 is adopted.

(9 marks)

(Total for Question One = 50 marks)

(Total for Section A = 50 marks)

End of Section A

TURN OVER



P6 4 May 2005

SECTION B – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER TWO QUESTIONS FROM FOUR Question Two

2XA is an established light engineering manufacturer operating in a single country within the European Union (EU). With 300 employees, the majority of whom are employed in the manufacturing processes, the company is run like a large family business. 2XA supplies components to specialist car manufacturers and manufacturers of light aircraft, all of which are small companies. 2XA has had the same customers for a number of years and there are many personal friendships between the senior management of 2XA and those who own or manage those customer companies.

Since most of 2XA’s sales are a result of repeat business it does not actively market its products. What marketing it currently does consists of an occasional advert in trade magazines and attendance at trade fairs where the Sales Director, and a few office staff, offer light refreshments to their existing customers and anyone who stops at their stand.

In the past two years 2XA has started to lose customers to more aggressive suppliers from neighbouring countries, which have entered 2XA’s home market. The board of directors is concerned at the loss of business and is not really sure why it has happened. It has decided that it is time to become more proactive in its approach to the market and feels the need to know more about both the competitive environment and the competitors themselves.

Required: As the Management Accountant you have been asked to:

(a) Explain what is meant by Industry Analysis using any models you consider

appropriate.

(5 marks)

(b) Describe the information that 2XA might include in such an analysis. (10 marks)

(c) Advise the directors as to the possible sources of the information which 2XA could use

in performing an industry analysis. (10 marks)

(Total for Question Two = 25 marks)



May 2005 5 P6

Question Three The insurance industry is characterised by large organisations producing, packaging and cross-selling a number of different ‘products’ to their client base. Typical products include life insurance, health insurance, house insurance and house contents insurance. Therefore, cost efficiency, repeat business and database manipulation are of significant importance.

BXA is a medium sized insurance company that has grown over the past fifty years by a number of relatively small mergers and acquisitions. Its business is focused on life, automobile and private property insurance. Over the last few years the insurance industry has undergone significant change with increasing consolidation and the squeezing of margins.

The Board of BXA recognises that it is quite old fashioned in its approach to business, particularly in its attitude to information technology. Much of the computing is done on personal computers, many of which are not networked, using a variety of ‘user written’ programs. There are a number of different computer systems in the organisation that have been inherited from the companies that have been acquired in the past. However, these computer systems have not been fully consolidated. It is recognised that this lack of compatibility is causing efficiency problems.

BXA has recently been approached by CXA, an insurance company of a similar size, with a view to a merger. Although BXA has never combined with an organisation of this size before, the Board recognises that this merger could present an opportunity to develop into a company of significant size but that this may also present further problems of system incompatibility.

BXA has decided to proceed with the merger, but the Board recognises that this might only make the situation worse with regards to information management strategy of the resulting combined company.

The Finance Director has asked you, as project accountant, to investigate the potential of outsourcing the information technology function as part of the post-merger consolidation process.

Required:

(a) Discuss the advantages and disadvantages of outsourcing the IT function for the merged organisation at each of the strategic, managerial and tactical levels of the organisation.

(15 marks)

(b) Briefly describe the characteristics of the supplier that BXA will be looking for in the selection of the contractor to take on the outsourcing.

(5 marks)

(c) Identify the factors which should be included in the service level agreement with which the contractor will be expected to comply in achieving the levels of performance that BXA will require.

(5 marks)

(Total for Question Three = 25 marks)

TURN OVER



P6 6 May 2005

Question Four D4D is a politically stable, developing country enjoying a temperate climate and a young, educated population, many of whom are educated to graduate level. Those who have studied at this level have tended to do so abroad since there are limited opportunities to do so in D4D.

The economy is mixed, based on agriculture and some light manufacturing but has enjoyed considerable revenue from oil exploration and production which is based offshore in its territorial waters. Some of this revenue is generated by providing services for the oil industry but the majority comes from a tax on every barrel of oil which the foreign oil companies extract.

The Government has used the revenue to keep personal and property taxes low and to support the largely uneconomic local industry. It now recognises that, although politically popular, this decision might not have been in the best long term interests of the country.

The Finance and Trade Minister of D4D is aware that the oil revenue may only last a further ten years. He wishes to build competitive advantage over the neighbouring countries. The Prime Minister is sceptical and has made the observation that “companies have competitive advantages not countries”.

As a management accountant within the Ministry of Finance and Trade you have been asked to produce a number of documents, for both the Prime Minister and the Finance and Trade Minister, considering how competitive advantage could be achieved for D4D and examining the possibilities of attracting inward investment from foreign companies.

Required: (a) Using any models you consider appropriate, explain the factors which lead to

competitive advantage being present in particular countries. (7 marks)

(b) Identify the aims that D4D should try to achieve in attracting appropriate investors into

the country. You should also compare and contrast those aims with the likely aims of any company investing in D4D.

(10 marks)

(c) Explain the steps that D4D should take to make the country more attractive to appropriate inward investment.

(8 marks)

(Total for Question Four = 25 marks)



May 2005 7 P6

Question Five E5E is a charity concerned with heart disease. Its mission statement is;

To fund world class research into the biology and the causes of heart disease. To develop effective treatments and improve the quality of life for patients. To reduce the number of people suffering from heart disease. To provide authoritative information on heart disease. E5E obtains funding from voluntary donations from both private individuals and companies, together with government grants. Much of the work it does, in all departments, could not be achieved without the large number of voluntary workers who give their time to the organisation and who make up approximately 80% of the workforce.

E5E does not employ any scientific researchers directly, but funds research by making grants to individual medical experts employed within universities and hospitals. In addition to providing policy advice to government departments, the charity’s advisors give health educational talks to employers and other groups.

The Board recognises the need to become more professional in the management of the organisation. It feels that this can be best achieved by conducting a benchmarking exercise. However, it recognises that the introduction of this process may make some members of the organisation, particularly the volunteers, unhappy.

Required: As Financial Controller; (a) discuss the advantages and disadvantages of benchmarking for E5E.

(8 marks)

(b) provide advice on the stages in conducting a benchmarking exercise in the context of E5E.

(13 marks)

(c) provide advice on how those implementing the exercise should deal with the concerns of the staff, particularly the volunteers.

(4 marks)

(Total Question Five = 25 marks)

(Total for Section B = 50 marks)


Maths Tables and Formulae are on pages 9 and10



P6 8 May 2005

[this page is blank]



May 2005 9 P6

MATHS TABLES AND FORMULAE

Present value table Present value of $1, that is (1 + r)-n where r = interest rate; n = number of periods until payment or receipt.

Periods Interest rates (r) (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564 7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Periods Interest rates (r) (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065 16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026



P6 10 May 2005


rr n−+− )(11

Periods Interest rates (r) (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514 Periods Interest rates (r) (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439 13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

FORMULAE Annuity Present value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year, discounted at r% per annum:

PV =

+− nrr ][1

11

1

Perpetuity Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r% per

annum: r

PV1

=



May 2005 11 P6




P6 12 May 2005




May 2005

Tuesday Morning Session



Paper 6 – Management Accounting Business Strategy Post Exam Guide May 2005 Examination

The Chartered Institute of Management Accountants Page 1

General Comments This examination paper is designed to test the candidates’ ability to demonstrate their understanding and application of the following key syllabus areas:

• The evaluation of strategic options. • The impact and influence of the external environment on an organisation and its

strategy. • The nature of competitive environments, distinguishing between simple and

complicated competitive environments. • IS/IT systems and how appropriate they are to the organisation’s strategic

requirements. • The problems in performance measurement. • The role of change management in a strategic context. • Benchmarking.

It was encouraging to see a good level of application of knowledge of the key syllabus areas by many candidates, as would be expected at this level. However, it was very disappointing to see how few candidates could adequately carry out a strategic evaluation and make reasoned recommendations on the basis of their evaluations in Question 1. Part (a) of question 1 was very poorly answered, with very few candidates recognising the importance of profitability to the decision and most concentrating on very basic NPV calculations. Many candidates also did not carry out a non- financial evaluation, or neglected to make recommendations. A vital aspect of the Business Strategy paper is that candidates demonstrate not only their ability to formulate options in terms of financial data, but who can then demonstrate their ability to analyse their options and make reasoned judgements based upon these. It was again evident in many candidates’ answers that there was a serious lack of knowledge of some of the fundamental Business Strategy syllabus areas. Many candidates scored badly on the Section B questions, which was indicative of a lack of depth in knowledge of the key syllabus areas. For example, few candidates adequately answered Question 3(a), when distinguishing between the three managerial levels and the relative merits of outsourcing to each. The main difficulty in this question was that many candidates were unable to adequately link the two areas of knowledge. Similarly, some candidates were clearly unable to use basic models such as Porter’s Five Forces and Porter’s Competitive Diamond. A key weakness in a number of answers was that they were often superficial and lacking in reasoned discussion, with some answers covering little more than 1 or 2 sides of workbook. Clearly this is insufficient to demonstrate not only knowledge, but more importantly the understanding of that knowledge and the ability to apply it in a strategic context. An example of this was in answers to Question 5, where many candidates could give very general answers to part (a) when discussing advantages of benchmarking, but few candidates went on to sufficiently demonstrate an ability to apply this knowledge in any depth to the scenario organisation. Overall, this paper is a balanced test of the key syllabus areas and covers a number of well used strategic tools and models. Candidates should not find any surprises in this paper and a well prepared candidate should have no difficulty in both demonstration of syllabus knowledge and in the application of this to the various examination scenarios.





SECTION A – 50 MARKS ANSWER THIS QUESTION

Question 1(a) Make reasoned recommendations on the selection of Options 1 and 2. Note: up to 16 marks will be awarded for calculations (29 marks)

Rationale This question requires candidates to apply their knowledge of financial evaluation techniques in the context of a strategic investment decision being made by the scenario organisation. Suggested Approach This question requires candidates to undertake a financial and non financial evaluation of the two options under review. It is important that the candidates note that only 16 marks are awarded for calculations, therefore a further 13 marks are available for non-financial evaluation and the recommendations. Therefore, the examiner is looking for a balanced and well structured approach to the decision making process. Marking Guide

Marks

Option 1 Calculation of NPV (A&B) Calculation of profit Calculation of profitability index (A&B)

4 2 1

Option 2 Calculation of probability weighted NPV Calculation of profit Calculation of profitability index Calculation of profit & profitability index for each possible outcome

4 1 1 3

Discussion Definition of criteria to be satisfied, identification of four options including do nothing Comparison of outcomes in terms of NPV Comparison of outcomes in terms of risk (including comment about risk return profile) Comparison of outcomes in terms of board’s profit criteria Reach decision that it is Country B or option 2 - and these should be proposed to the parent group with decision qualified

2 2 2 2 2

Points to the parent group should include relative risk and; Fact that Option 2 is a chance to move to a higher margin business but involves significant change But recognition that Option 1 (either A or B) has a finite life.

1 for each to max of 3

Maximum marks awarded 29





Examiner’s Comments The first part of the question was generally not answered well, with most answers focusing only upon NPV. Very few candidates calculated profitability or the profitability index. More disappointingly was the weakness demonstrated in the non-financial evaluation of each option, with many answers merely discussing the numbers calculated previously. Similarly, few candidates were able to present a structured and well reasoned recommendation based upon their previous analysis. Common Errors • Incorrect application of NPV, using incorrect discount factor, or incorrect methods of calculation. • No profitability calculations. • No non financial analysis of the strategic options. • No recommendations provided, or recommendations which did not fit with strategic analysis carried

out.





Question 1(b) Identify the additional information that would need to be gathered to compare and contrast the suitability of the two countries identified for possible relocation in Option 1. (6 marks)

Rationale This question is designed to test the candidates’ understanding of the importance of the external environment in strategic decision making. Suggested Approach Answers should obviously focus upon the different possible external environments that may be encountered by Pipeco in the two different countries under consideration in Option 1. This may include an analysis of the competitive environments of each country. Marking Guide

Marks

Non financial information to distinguish between countries: • Difference in countries in terms of political stability? • Infrastructure - handled at local or national government level? • How sophisticated are their buying processes • Competitive tender or preferred supplier lists? • Government policy to favour local manufacturers? • Will there be a requirement for a local partner in the process? • If so, do suitable local partners exist? • Possibility of other companies entering the market in each country. • Do any other companies intend to enter the market? 1 for each point listed up to maximum of 6. Where fewer points are made but are elaborated, 2 for each point

6 (max) Examiner’s Comments Most candidates provided a good range of non-financial information to distinguish between the two countries. Many candidates used a PEST analysis or Porter’s Diamond to answer this question, both of which were credited if used correctly. Common Errors • Lack of depth to answers. • Little mention of each country’s competitive environment. • Lack of application to the scenario.





Question 1(c)(i)

Briefly describe relationship marketing and explain how the approach would benefit the company. (6 marks)

Rationale This is a straightforward question testing the candidates’ knowledge of relationship marketing and its usefulness to the company. Suggested Approach This question should be straightforward, starting with a brief definition of relationship marketing, with the majority of the answer focusing upon the advantages of this approach to marketing to Pipeco. Marking Guide

Marks

Definition of relationship marketing Advantages given specifically relating to the scenario (0.5 each listed to a max of 4; 2 for each well described)

2

4 (max) Examiner’s Comments It was disappointing to see so few correct answers to this question and very surprising to see how many candidates did not know what relationship marketing is. It followed that if candidates were unable to produce a correct definition of relationship marketing, then it was unlikely that they were able to discuss the advantages of this approach to Pipeco. Common Errors • Lack of knowledge of relationship marketing. • Lack of application to the scenario when presenting the advantages of relationship marketing.





Question 1(c)(ii)

Advise how the changes associated with the introduction of relationship marketing and the acquisition should be implemented if Option 2 is adopted. (9 marks)

Rationale This question examines knowledge and application of the change management process required, following the decision to acquire an overseas organisation. Suggested Approach It is important that both elements of this question are answered separately, with a discussion on the change management approach required for strategic marketing first, followed by a discussion of the change management activities associated with an overseas acquisition by Pipeco. Marking Guide

Marks

Recognition of components of a change process and that this is a big change Recognition of issues - linked to acquisition

1

1- 4 marks dependent upon detail

Recognition of the importance of staff in both companies Recognition of issues - linked to relationship marketing

1 1- 4 marks dependent upon detail

Maximum marks awarded 9 Examiner’s Comments Generally this question was answered poorly, with very few candidates distinguishing between the different change management activities associated with both relationship marketing and the acquisition. One good point was that most candidates did recognise the importance of the staff and their involvement in any changes undertaken by Pipeco. . Common Errors • Lack of knowledge of relationship marketing. • Lack of application to the scenario when presenting change management activities relating to both

relationship marketing and the acquisition.





SECTION B – 50 MARKS ANSWER TWO QUESTIONS FROM FOUR

Question 2(a) Explain what is meant by Industry Analysis using any models you consider appropriate. (5 marks)

Rationale This is a straightforward question testing the candidates’ knowledge of the models used to evaluate the competitive environment. Suggested Approach This question is a test of the candidates’ basic syllabus knowledge of the competitive environment and should be straightforward. It is obviously important to use appropriate models suitable to analyse an organisation’s industry. Marking Guide

Marks

Identify PEST and discussion of other versions i.e. PESTLE Discussion of importance of thematic approach and inter relatedness of factors Identify Porter model and listing of five factors

1 2 2

Examiner’s Comments This question was answered reasonably well. Most candidates identified PEST/ PESTLE and Porter’s Five Forces as appropriate industry analysis models. However, many candidates spent too long going into depth about these models without explaining how the models were suitable to carry out industry analysis. Common Errors • Answering part (b) in this part of the question, instead of focusing on explaining industry analysis.





Question 2(b)

Describe the information that 2XA might include in such an analysis. (10 marks)

Rationale This question is designed to examine the candidates’ ability to apply the models identified in part (a) in order to evaluate the information they produce. Suggested Approach Candidates are expected to use their knowledge of the models identified in part (a) to describe the different types of information that would be needed to undertake an industry analysis. Therefore candidates need to focus upon the information provided by these models in relation to understanding the competitive environment. Marking Guide

Marks

• Derived demand and the importance of their knowledge of customers’ industry - with

scenario related examples • Change in technology of customers’ product - with scenario related examples • Political and economic factors - with scenario related examples • Socio - political factors - with scenario related examples • Possibility of building barriers to entry - with scenario related examples • Possibility of building customer dependence - with scenario related examples • Any other Porter forces - with related examples

1 for each point listed 2-3 for each

with scenario example

Maximum marks awarded

10

Examiner’s Comments This question was reasonably well answered. Most candidates demonstrated adequate knowledge of the PEST and the Five Forces model. However, many candidates did not answer the question set by the examiner. The question asked for the information that 2XA might use in such an analysis, but many candidates merely described the models in some detail. In order to pass this question the answers needed to focus upon the information that these models provide in a competitive analysis. Common Errors • Misinterpretation of the question, with few candidates focusing upon the information content of the

models. • Internal analysis models used such as SWOT, BCG and internal value chain. Although these have

some relevance, they are not most appropriate to external/industry analysis.





Question 2(c)

Advise the directors as to the possible sources of the information which 2XA could use in performing an industry analysis. (10 marks)

Rationale This question tests the candidates’ ability to determine the sources of information when evaluating the competitive environment. Suggested Approach Candidates are expected to use the answer provided in part (b) to identify where this information may be provided. Candidates should not only concentrate on external sources of information, but should also identify potential internal sources of information. Marking Guide

Marks

• Securities Analysts specialising in manufacturing industry • Engineering regulatory and professional bodies • Engineering standard setters • Press – particularly engineering trade press & the local press at competition sites. • Government - departmental & local • Suppliers of plant and equipment to themselves and competitors • Watchdog groups • Engineering Trade Associations • Internet

½ mark per point for a list

2 marks per point if related

to scenario Maximum marks awarded

10

Examiner’s Comments This question was again reasonably well answered. Most candidates could list a variety of sources of information for the industry analysis. However, few candidates demonstrated a depth of understanding by explaining why these sources of information were relevant to the scenario organisation. Common Errors • Generic lists of information sources with little reference to the scenario.





Question 3(a) Discuss the advantages and disadvantages of outsourcing the IT function for the merged organisation at each of the strategic, managerial and tactical levels of the organisation. (15 marks)

Rationale This question tests the candidates’ ability to evaluate the advantages and disadvantages of outsourcing an organisation’s information system. Suggested Approach This question should be straightforward. It clearly requires the candidate to structure their answer into three separate areas; strategic, managerial and tactical levels and the advantages and disadvantages within each of these levels. Therefore good structure is important in answering this question. The answer should focus upon the advantages and disadvantages of outsourcing of IT for each managerial level, not a general discussion of the relative merits of outsourcing. Marking Guide

Marks

Strategic level Advantages (related to IT function of BXA) Disadvantages (related to IT function of BXA) General identification of strategic level issues in relation to IT Managerial level Advantages (related to IT function of BXA) Disadvantages (related to IT function of BXA) General identification of managerial level issues in relation to IT Tactical level Advantages (related to IT function of BXA) Disadvantages (related to IT function of BXA) General identification of tactical level issues in relation to IT

2 max 2 max

1

2 max 2 max

1

2 max 2 max

1

Examiner’s Comments The answers to this question were generally poor. Many candidates made little reference to the scenario, with answers focusing on a generic discussion of the advantages and disadvantages of outsourcing. Very few candidates successfully distinguished between the different organisational management levels. Some candidates made little or no reference to the IT function at all. Common Errors • Poor structure, with lack of definition between the three managerial levels. • Poor application to the scenario and use of IT as an outsourcing example.





Question 3(b) Briefly describe the characteristics of the supplier that BXA will be looking for in the selection of the contractor to take on the outsourcing. (5 marks)

Rationale This is a straightforward question testing knowledge and understanding of the characteristics of an outsourcing supplier. Suggested Approach Candidates are required to use their knowledge of suppliers in identifying the most appropriate characteristics for a contractor to undertake the IT function for BXA. Application is again very important when answering this question. Marking Guide

Marks

• Financial stability • Capacity • Track record on similar work • Track record on innovation • Track record on retention of transferred staff • Openness during due diligence • Cultural compatibility and fit with own staff • Involvement of people who will run the contract in the negotiation of the contract

1 mark per

point described and applied to

BXA

2 marks max for generic list


5

Examiner’s Comments This question was answered reasonably well, with many candidates providing a comprehensive list of supplier characteristics. However, few candidates obtained maximum marks, as many did not adequately apply these characteristics to the recommended supplier of the IT function to BXA. Common Errors • Poor application to the scenario i.e. providing only a generic list of supplier characteristics.





Question 3(c) Identify the factors which should be included in the service level agreement with which the contractor will be expected to comply in achieving the levels of performance that BXA will require. (5 marks)

Rationale This question tests the candidates’ knowledge of supplier agreements. Suggested Approach This is straightforward knowledge demonstration question. Marking Guide

Marks

• Benefits expected • Definition of the service and required performance • Charges and service credits procedure • Compliance with key obligations • Management information and reporting procedure • Open book charging and right to audit • Continuous improvement plans • Problem management and customer satisfaction surveys • Benchmarking process to be used • Transition or termination (for fault and/or convenience) arrangements • Definition of expected and predicted business transformation

1 mark per point

explained


5

Examiner’s Comments This question was answered well, with many candidates providing a comprehensive list of factors to be included in the SLA. However, the main problem was that many candidates failed to apply their answers to the scenario. Common Errors • Generic list of factors with no reference to BXA.





Question 4(a) Using any models you consider appropriate, explain the factors which lead to competitive advantage being present in particular countries. (7 marks)

Rationale This question examines candidates’ knowledge of competitive advantage within countries and in particular Porter’s diamond. Suggested Approach This is a straightforward question, requiring the candidates to use Porter’s diamond to illustrate competitive advantage within countries. There is no requirement for application to the scenario; therefore this question is an opportunity for the candidates to demonstrate some basic knowledge of a commonly used strategic model. Marking Guide

Marks

Identifying model as Porter naming the four main reasons

1

Description of each reason 0.5 each Recognition that competitive advantages reside in industries or companies not countries 1 Role of government and chance events 1 Description of importance of clustering 2 Maximum marks awarded

7

Examiners comments This question was answered reasonably well. Most candidates demonstrated a sound knowledge of Porter’s diamond, but few candidates provided comprehensive answers which included the role of government and the nature of clustering of firms within countries.





Question 4(b) Identify the aims that D4D should try to achieve in attracting appropriate investors into the country. You should also compare and contrast those aims with the likely aims of any company investing in D4D. (10 marks)

Rationale This question examines candidates’ understanding of the relationship between businesses and the countries in which they invest. Suggested Approach This question is split into two separate parts. The first part requires candidates to identify the aims of D4D when trying to attract inward investors. This requires candidates to examine what D4D would be hoping to achieve for its country and its people as a result of investment from an overseas company. The second part of the question requires the candidate to assess the aims of the investing company, and how these may be similar to, or may conflict with the aims identified by D4D in the first part of the question. It is important that the candidate assesses both the similarities in aims and the potential differences. Marking Guide

Marks

Aims of D4D • Good PR • Attractive industry i.e. clean and growth • Likely attractor for other companies • Good employer for local population • Likely to invest in infrastructure, particularly higher education • Reputable firms – good record on corporate governance

½ mark per point

(3 max)

Aims of investing company

• Stable economy and government • Business oriented government • Skilled and well educated workforce • Attractive base for overseas posting for its own staff • Good infrastructure particularly transport and communication • Good relationship with neighbouring markets for use as an export base • Business oriented planning laws

½ mark per point

(3 max)

Compare and contrast above 4 Maximum marks awarded 10





Examiner’s Comments This question was not well answered. Many candidates adequately identified the aims of D4D, but few candidates compared and contrasted these aims with those of the investing company. In fact many candidates did not attempt this part of the question. There was also a large degree of overlap between the answers to this part of the question and those for part (c), with many answers focusing upon how D4D should attract inward investment, rather than why it should attract inward investment. Common Errors • Poor application to the scenario. • Only identifying the aims of D4D and not those of the inward investing company. • Focusing upon how to attract inward investment (see part (c) answer).





Question 4(c) Explain the steps that D4D should take to make the country more attractive to appropriate inward investment. (8 marks)

Rationale This question tests candidates’ ability to explain how countries can make the necessary changes to influence investment. Suggested Approach This question requires the candidate to prepare a brief set of steps that D4D need to take to attract inward investment i.e. what needs to be done to make the country attractive to inward investors. This should be a straightforward question, focusing upon governmental incentives and activities. Marking Guide

Marks

• Strengthening productivity/ competitiveness of local firms - encouraging business

conditions for investment and training. • Developing a robust capital market within the country. • investing in IT infrastructure. • Investing in transport facilities. • Investing in the universities - providing opportunity for companies to develop R&D

partnerships with local universities. • Developing a strong pre-university education system. • Investment friendly tax and incentive regime. • Building, or maintaining, good trading relationships with neighbouring countries.

1 mark per point


Examiner’s Comments This question was answered adequately well. Most candidates focused upon the main points of offering financial incentives such as tax breaks or financial incentives. Also, many candidates recognised the importance of investment in education and IT. However, few candidates adequately related their answer to D4D and most answers were largely generic lists of points. Common Errors • Lack of depth and focus upon D4D.





Question 5(a) Discuss the advantages and disadvantages of benchmarking for E5E. (8 marks)

Rationale This question examines candidates’ understanding of the pros and cons of benchmarking. Suggested Approach This is a straightforward question requiring the candidates to provide a discussion on advantages and disadvantages of benchmarking in a charitable organisation. It is important for the candidate to frame their answers within the context of the charity. Marking Guide

Marks

Advantages • Improve organisational performance through:

increased client satisfaction reduced waste and costs of poor quality reduced overhead through business simplification transmission of best practice

• Overcoming complacency • Monitor the conduct of competitive strategy • Advanced warning of deteriorating competitive position • Improves management understanding of the value adding processes • Particularly important for E5E, with budgetary constraints • Stakeholder groups need evidence of efficiency and effectiveness.

4 marks max

Disadvantages • Increases diversity of information -information overload • Reduce managerial motivation • Confidentiality compromised • Focus on increasing efficiency of existing business instead of developing new lines • Overloaded with requests for information • The measures become the focus of management attention • For E5E, the time commitment necessary for the exercise is a potential drain and

distraction Maximum marks awarded

4 marks max

8

Examiner’s Comments This question was generally well answered. Most candidates adequately provided advantages and disadvantages, but the main weakness was in the application of these to a not for profit organisation. Common Errors • Lack of depth i.e. basic lists of notes, with little explanation. • Lack of application to E5E.





Question 5(b) Provide advice on the stages in conducting a benchmarking exercise in the context of E5E. (13 marks)

Rationale This question examines candidates’ knowledge of the benchmarking process. Suggested Approach Candidates need to present a plan identifying the logical stages which E5E need to follow to conduct a benchmarking exercise. Each stage needs to be highlighted and discussed separately. Marking Guide

Marks

1. Senior management commitment

1 mark

2. Decide and understand processes and develop appropriate measures

1 mark for mention 2 for detail

3. Monitor process measurement system

1 mark

4. Identify appropriate organisations


5. Analyse data and discuss results with management and staff


6. Implement improvement programmes


7. Monitor and control / continuous improvement



13

Examiner’s Comments This was generally well answered by most candidates. However, the biggest weakness was lack of application to E5E.





Question 5(c) Provide advice on how those implementing the exercise should deal with the concerns of the staff, particularly the volunteers. (4 marks)

Rationale This question examines candidates’ understanding of the management of change in relation to its impact on the people involved. Suggested Approach This answer should focus upon how benchmarking exercises may affect staff, in particular the volunteers working in a not for profit environment. Marking Guide

Marks

• Obvious senior management commitment • Clear explanation of purpose of exercise • Focus on process not individuals • Involvement in mapping process • Involvement in development of KPI’s • Use of their knowledge and expertise

1 mark per point


Examiner’s Comments This question was generally well answered. Most candidates adequately identified the problems for staff when implementing benchmarking and most were able to relate this to the particular concerns of the volunteer staff of E5E.





Strategic Level


22 November 2005 - Tuesday Morning Session



You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, make annotations on the question paper. However, you will not be allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time.

You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is, all parts and/or sub-questions). The question requirements are contained in a dotted box.

Answer the ONE compulsory question in Section A on pages 2, 3 and 5.





TURN OVER

P6

– B

usin

ess

Stra

tegy



P6 2 November 2005


Question One S Company provides transport by sea and air between a country’s mainland and a small group of islands 30 miles off shore. The company operates two ships, which make daily return trips to the islands. One ship carries only freight and provisions while the other transports freight and passengers. The islands are a popular holiday resort.

In addition to the ships, S operates some aircraft which convey passengers to and from the islands on a daily basis. While other airlines also fly to the islands, S is the only operator of ships to the islands, though some tourists visit in their private yachts. During the winter months the ships are repaired and maintained. However, the two ships are never out of service at the same time. The only other time the ships do not sail to the islands is in extreme weather conditions when it is considered unsafe to make the voyage. Major aircraft repairs are undertaken by S itself.

The Islands

The main industries on the islands are agriculture and tourism. Due to their location, the islands enjoy a climate that enables them to successfully cultivate crops ready for market much earlier than can be achieved on the mainland. The islands have established a reputation for growing flowers and vegetables, which they supply to retailers on the mainland. Some of these flowers and vegetables are exported to other locations throughout the world. Much of the produce is transported from the islands on board the ships operated by S.

A strong tourist industry has developed on the islands, peaking during the months of July and August. Most islanders are engaged in tourism, either by providing accommodation, boat trips, catering or retailing. The tourist trade declines sharply after September of each year until the following April. During this period the islanders are mainly engaged in agriculture.

The Company

S has 750,000 ordinary shares in issue, which are owned by the directors and employees of the company.

Over the years the company has established a good reputation for reliability and safety in its passenger services. The passenger ship operated by S was launched in 1979. It can carry a capacity of 200 passengers and can accommodate some cargo. The company charges the same price of £120 per person for a return trip irrespective of whether the passenger is an islander or visitor. This charge per passenger has increased steeply in recent years and considerably reduced the difference that, at one time, existed between the fares for travel by air and sea. Similarly, the other airlines operating to and from the islands do not differentiate between visitors and islanders in their charging policies.

S has secured mooring rights at ports on the mainland and on the islands. However, these are negotiated on a periodic basis and are due for renewal in one year’s time. In the last financial year, the company achieved an after tax profit of £120,000 on a turnover of £4·8m. S has experienced a gradual reduction in profit over time, as it has not been able to cover all its continually increasing operating costs by increasing its passenger and freight charges.

S owns the two ships, which had a net book value of £1·6m at the end of the last financial year. At the same point in time, S had in its accounts a net book value of £2·9m for all property, plant and equipment.

Potential Development

A few years ago, a mainland holiday company (M) applied to the government of the country and islands for permission to build a holiday complex on one of the uninhabited islands. The complex was planned to accommodate a maximum capacity of 500 people constantly throughout the year, and intended to incorporate numerous entertainment facilities associated



November 2005 3 P6

with water and beach sports. In addition, the complex was planned to have indoor swimming facilities as well as its own golf course and bars. The application was refused by the government on the basis that the development would be out of character with the local environment. This decision was well received by the local island communities.

Since the application was made, there has been residential holiday accommodation built on two of the other uninhabited islands. This has been in the form of high quality hotels and apartments. Since these developments have taken place, the government has undertaken an initiative to increase the revenue generated by tourism, and has indicated to M that it would now view its development proposals more favourably. If the development was in a similar style to the other accommodation, the government would not oppose the scheme. M has indicated to the government that it wishes to proceed with a development similar to that previously proposed (that is, for 500 guests). M is preparing to invite quotations, from S and others, for the transport of building materials from the mainland to the site and the subsequent transport of tourists once the complex is operational.

Implications for S

The directors of S are aware that M intends that its visitors would travel to the complex by both air and sea. In order to prepare for a quotation, the directors have recognised that they would need to be willing to increase their sea passenger capacity. They would need to replace their existing passenger ship if they were awarded the contract. A replacement ship with sufficient capacity would cost £7 million and would be bought in two years’ time. The scrap value of the existing ship would be £250,000. The directors estimate that the cash running costs of the replacement ship would be £12 per passenger, the same as for the existing ship.

In order to moor the new ship, extensive building works would be required at the major port on the mainland. S’s directors expect that this will cost approximately £1 million and will take one year to complete. These works will commence immediately upon the contract being agreed with the holiday company, which is expected to be in one year’s time. There will be no increase in passenger numbers until the new ship is bought in two years’ time.

If awarded to S, the contract for the transportation of passengers will be for a duration of five years. It is expected that 90% of the visitors attending the complex will go by the sea route rather than by air. On average, the visitors travelling to the holiday complex will each remain there for two weeks and, due to the extensive entertainment provision at the complex, there will be constant demand throughout the year. There is sufficient capacity available for the existing airlines servicing the islands to carry the extra passengers who wish to travel by air.

If awarded the contract for the conveyance of passengers, the directors of S expect that S will obtain an additional contribution of £2 million for transporting the materials necessary to build the holiday complex. This contribution can be assumed to arise two years from now.

The contract terms (for the conveyance of passengers only) will be that S will receive from M an equal payment each year over the life of the actual contract. Payments to the successful bidder will commence in three years’ time and run for a period of five years. It may be assumed that S will also charge each passenger £120 for a return trip throughout the period of the contract.

S requires a return of 20% on this project, to reflect the degree of risk involved. The directors believe that the value of the new ship will have fallen to £4 million by the end of the contract. All cash flows can be assumed to arise at the end of the year to which they relate unless otherwise stated.

The requirement for this question is on page 5 which is detachable

for ease of reference

TURN OVER



P6 4 November 2005




November 2005 5 P6

Required (a) Explain the threats to S from changing market conditions.

(10 marks)

(b) Identify what price per year the directors of S should quote to M for the contract to convey the additional passengers. You should use the annuity approach to determine the equivalent annual value required.

(15 marks)

(c) Discuss what financial and non-financial control measures could be implemented by S during the bid process and the operation of the contract to convey passengers to the holiday complex.

(15 marks)

(d) Identify how S could develop its business in the long term by extending its operations beyond the transport services it provides.

(10 marks)


End of Section A

TURN OVER



P6 6 November 2005




November 2005 7 P6


Introduction

The 222 Organisation (222) is a large information systems consultancy, based in the southern African country of Jurania. 222 was founded in 1987 and has become very successful, both within Jurania and in neighbouring countries, due to growth in the economies of those countries and the highly developed technology sector of the Juranian economy. 222 advises organisations on the development of Intranet and knowledge sharing systems, and has many clients among the top 100 companies in Jurania.

222 employs over 500 staff in its very impressive modern office building on a business park near the capital city of Jurania. Also based on the business park are several IT hardware and software companies, and the country’s largest Internet service provider (ISP), JuraWeb. Many of 222’s staff were trained at Jurania’s university, which has an excellent reputation. Whenever 222 advertises for additional staff, it receives a large number of applications from suitably qualified applicants.

The Internet strategy

Recognising that the growth of 222 is limited by the size of the local market for its services, the directors of 222 are considering the further development of its rather basic website. At present, the 222.com website only contains a description of the organisation and contact details. The site was designed by employees of 222 and is hosted by JuraWeb. The directors hope that a better website will allow the organisation to develop new business in other parts of Africa, but have no desire to become a global business at this stage.

The directors are considering using the services of a local specialist web design company to develop a sophisticated website with case studies of previous 222 contracts, and detailed descriptions of staff and services. The directors also believe that 222 should be hosting the website itself, and are considering the purchase of a powerful web server. They also want to upgrade the telecommunications infrastructure of the organisation by investing in a new fibre-optic broadband service, which is available from a recently formed company that has just opened its office on the business park.

Required:

(a) Evaluate whether the 222 Organisation might gain a competitive advantage as a result

of being based in Jurania.

(13 marks)

(b) Evaluate the risks to 222 if it decides to pursue its Internet strategy as the directors have suggested.

(12 marks)


TURN OVER



P6 8 November 2005

Question Three C is a large multinational car manufacturer. It has factories in five countries and sells its products through networks of independent dealerships throughout the world. As part of its strategy of reducing unit costs and improving quality, C has entered into a number of ‘sole supplier’ agreements. This means that, on a worldwide basis, C buys all of its requirement for a specific material or component from a single supplier organisation. Such contracts are normally for a five year period.

S is a specialist manufacturer of safety equipment. It has recently been invited, by C, to submit a tender to supply all of the ‘airbag’ safety devices to be installed in C’s cars. This will be the biggest order for which S has ever tendered and, if won, would require a two hundred per cent increase in production capacity (that is to three times its present scale) for S. In return for this large order, S would have to agree to deliver the required parts to each C factory twice a day. Any failure to deliver on time would lead to S being liable for the cost of lost production.

As part of the contract, C would allow S access to its extranet. This would mean that S was able to see C’s forecast production schedules on a real-time basis. C maintains detailed forecasts of the number of each model of car being produced in each factory. This information is available on an hour-by-hour basis for the next month, on a day-by-day basis for the following five months, and a week-by-week basis for the subsequent 18 months. This means that S would be able to view detailed production forecasts for a two year period. The extranet also has a ‘virtual trading room’ where suppliers bid for new contracts. It also contains a lot of car industry information, some of which is not available to organisations that do not supply C.

Required: (a) Discuss the advantages and disadvantages, to S, of the sole supplier arrangement

described.

(15 marks)

(b) Evaluate the benefits, to S, of access to the C extranet. (10 marks)




November 2005 9 P6

Question Four In the ‘five forces model’, one of the conclusions reached by Porter is that firms or strategic business units (SBUs) compete with their customers and suppliers.

The same model can be used to evaluate the competitive environment of the SBUs of large, complex organisations. In such organisations, some of the SBUs may be customer and supplier to one another. This leads to management accountants becoming involved in negotiations leading to the agreement of appropriate transfer prices between these SBUs.

Required: (a) Explain how the forces exerted in a customer-supplier relationship led Michael Porter

to conclude that firms compete with their customers and suppliers. Note: You are NOT required to explain the whole of Porter’s model or draw the

diagram. (10 marks)

(b) Discuss the issues to be considered when negotiating and agreeing transfer prices

between SBU’s within a large, complex organisation. You should make reference to Porter’s model, and your arguments in part (a) where appropriate.

(15 marks)


TURN OVER



P6 10 November 2005

Question Five The MTM Group (MTM) is a major tobacco products manufacturer. As a global organisation, MTM has production facilities on every continent, and a highly sophisticated distribution network. MTM uses the ‘rational planning model’ to produce a strategic plan for each country in which it operates. The plan states any assumptions about the business environment in that country, then forecasts retail price levels, the market size and market share of MTM for each of the next five years. This plan is then used as a basis for next year’s budget for that country. The budget is fixed at the beginning of the year, and used for control and reporting for the year.

The directors of MTM are currently formulating the organisation’s strategy relating to a small Asian country (referred to as the SAC) where the government is known to be considering the introduction of a ban on all tobacco advertising. At present, the probability of such legislation has been estimated at 40%, and the marketing department has estimated that the effect of the ban would be to reduce MTM’s profits in the SAC by 20%. Such a reduction would be significant enough to threaten the viability of MTM’s operations in the SAC. The marketing manager has therefore suggested that the strategic plan should assume an 8% reduction in profits from the SAC (40% x 20%)

Required

(a) Discuss the limitations of the use of the expected values technique in the context of a single strategic decision such as this.

(6 marks)

(b) Recommend how the planning processes of MTM, for the SAC, should be modified to take account of the possible new legislation.

(12 marks)

(c) Evaluate different methods that MTM might use to influence the government of the SAC.

(7 marks)

(Total for Question Five = 25 marks)



Maths Tables and Formulae follow on pages 11 and 12



November 2005 11 P6







P6 12 November 2005


rr n−+− )(11



PV =

+− nrr ][1

11

1


annum: r

PV1

=



November 2005 13 P6




P6 14 November 2005




November 2005 15 P6




P6 16 November 2005




November 2005




Paper 6 – Management Accounting Business Strategy Post Exam Guide November 2005 Examination



• The evaluation of strategic options. • The impact and influence of the external environment on an organisation and its

strategy. • The nature of competitive environments, distinguishing between simple and

complicated competitive environments. • The recommendation of control measures. • Using IT to complement strategy, and for competitive advantage. • Interacting with customers and suppliers. • Approaches to business/government relations.

It was encouraging to see a good level of application of knowledge of the key syllabus areas by many candidates, as would be expected at this level. However, it was very disappointing to see, once again, how few candidates could adequately carry out a strategic evaluation and make reasoned recommendations on the basis of their evaluations in Question 1. Part (b) of Question 1 was very poorly answered, with very few candidates able to provide the equivalent annual value required. A vital aspect of the Business Strategy paper is that candidates demonstrate their ability to provide a quantitative and qualitative evaluation of strategic options. Such failings in basic management accounting skills should not be evident at this level.

It was again evident in many candidates’ answers that there was a serious lack of knowledge of some of the fundamental Business Strategy syllabus areas. Many candidates scored badly on the Section B questions, which was indicative of a lack of depth in knowledge of the key syllabus areas. For example, the question on the five forces model (Question 4) was poorly answered. This is particularly alarming, as this is a ‘core’ theory, and much more than a superficial understanding of it is necessary.

Another key weakness in the majority of answers was that they were lacking in reasoned discussion or application to the context of the appropriate scenario. An example of this was in answers to Question 2, where many candidates could give only very general answers to part (a). Despite the question requiring an evaluation, many candidates provided only a simplistic overview of the theoretical model. Few candidates went on to sufficiently demonstrate an ability to apply this knowledge in any depth to the scenario organisation. This was also the case in Question 4, where answers to part (b) often added little to the answer provided to part (a).

A final key problem, noted frequently in the answers to this paper, was a tendency of candidates to try to ‘force’ theory into answers where it was not required. An example of this is Question 1(c). Many candidates took the opportunity to explain, often at great length, the concept of the balanced scorecard. This was neither required nor expected, and thus earned no marks. Had those candidates used the balanced scorecard as a framework for their answer, this may have ensured that they covered a wide range of control measures (as required). Sadly they did not, and often gave irrelevant (to the scenario) examples to illustrate their explanations of the theoretical model.

Overall, this paper is a balanced test of the key syllabus areas and covers a number of well used strategic tools and models. Candidates should not find any surprises in this paper and a well prepared candidate should have no difficulty in both demonstration of syllabus knowledge and in the application of this to the various examination scenarios.

Note: In a number of requirements, the total number of marks in the marking guide exceeds the total available by a significant margin. This gives candidates the opportunity to cover fewer points in greater depth, or more points in less depth. However, candidates should recognise that depth of argument is desirable in answers to this paper, and a serried of brief points will never be rewarded highly.






Question 1(a) Explain the threats to S from changing market conditions. (10 marks)

Rationale This question requires candidates to apply their knowledge of the ways that the business environment affects organisations. Suggested Approach This question was intended to be an ‘easy starter’. It was only necessary to identify, from the scenario, a few market threats, then explain how they might affect S. Marking Guide

Marks

Up to five valid points, each relevant to the scenario, each up to A conclusion, if given, up to

2 2


Examiner’s Comments The first part of the question was generally not answered well. Surprisingly, many candidates included a very diverse range of threats, most of which were nothing to do with market conditions. While ‘the weather’ may well represent a threat to a shipping company, it cannot really be regarded as a ‘changing market condition’. A significant number of candidates decided to use this requirement as an excuse to write detailed descriptions of either PEST analysis, or the five forces model, or both. This was not required by the question, nor was it an acceptable answer. It therefore earned no marks. Common Errors • Too much diversity, including points that were not related to changing market conditions • Not enough explanation as to how threats might affect S • Theory, rather than application





Question 1(b) Identify what price per year the directors of S should quote for the contract to convey the additional passengers. You should use the annuity approach to determine the equivalent annual value required. (15 marks)

Rationale This question is designed to test the candidates’ ability to evaluate strategic options. Suggested Approach Answers should consist of a net present value calculation, followed by the use of an appropriate annuity to derive an equivalent annual value for the contract price. Marking Guide

Marks

Cost of new berth Cost of new ship (with or without scrap value of existing ship) Revenue from materials transport Passenger revenue and cost (or net figures) Residual value of new ship Four discount factors Net present value calculated (according to candidate’s own figures) Equivalent annual value using an appropriate annuity* Layout of pro-forma for calculation clear and intelligible * For dividing by 5, give 1 mark. For dividing by an incorrect annuity, give 3 marks.

1 1 1 2 1 2 1 5 1


15

Examiner’s Comments Almost all candidates appeared unable to calculate an equivalent annual value. Few were able to provide a clear and relevant net present value calculation. Common Errors • Using irrelevant costs • Putting figures in the wrong years • Failing to include a revenue stream • Failing to calculate an equivalent annual value





Question 1(c)

Discuss what financial and non-financial control measures could be implemented by S during the bid process and the operation of the contract to convey passengers to the holiday complex. (15 marks)

Rationale This is a straightforward question testing the candidates’ ability to apply their knowledge of control information to a specific scenario. Suggested Approach This question should be answered in four stages, as required, as the control measures should be different in each case. As a discussion is required, some indication of the relevance or usefulness of each measure would be appropriate, and a conclusion may be warranted. Marking Guide

Marks

Up to eight appropriate control measures, each at up to A conclusion, if provided

2 1


15

Examiner’s Comments Most candidates were able to provide a number of suggestions, but these were often very general (“use budgets”) and not applied to the specifics of the situation. Few candidates clearly distinguished between controls during the bid process, and those relevant to the operation of the contract. Common Errors • Writing at length about the balanced scorecard • Providing only general or superficial examples





Question 1(d)

Identify how S could develop its business in the long term by extending its operations beyond the transport services it provides. (10 marks)

Rationale This question examines the candidates’ ability to identify strategic options. Suggested Approach It was hoped that candidates would recognise the risks inherent in S concentrating its efforts on one business area, and provide some logical and reasonable opportunities for development. Marking Guide

Marks

Up to 8 suggestions of new developments, each at up to Conclusion, if given Ansoff’s matrix, if used as a framework for the answer

2 2 1


10

Examiner’s Comments Generally this part of the question was answered quite well, though some suggestions were clearly unrealistic (such as building a bridge or tunnel to the islands). Common Errors • Unrealistic suggestions • Suggestions relating to ‘the transport services it provides’, rather than alternatives






Question 2(a) Evaluate whether the 222 Organisation might gain a competitive advantage as a result of being based in Jurania. (13 marks)

Rationale This is a more difficult question than previously asked on this topic (Porter’s diamond) as it only requires application. Suggested Approach Each aspect of the diamond could be related to specific facts in the scenario, to support the required evaluation. As an evaluation was required, some opinions as to the relative significance of each point were hoped for. Marking Guide

Marks

Porter’s diamond; overview and diagram (if provided), up to Demand conditions, up to Factor conditions, up to Firm strategy, structure and rivalry, up to Related and supporting industries, up to Conclusion, if given

2 3 3 3 3 2


13

Examiner’s Comments This question was answered reasonably well by some candidates. Others, however, displayed weak understanding of the theory and an inability to spot ‘clues’ in the scenario relating to each aspect of the diamond. Very few marks were awarded to theoretical discussions of the diamond, nor was it possible to earn a pass mark without mentioning or applying the model. Common Errors • Poor understanding • No application to the facts given • Just an explanation, rather than an evaluation • No mention of Porter’s diamond at all





Question 2(b)

Evaluate the risks to 222 if it decides to pursue its Internet strategy as the directors have suggested. (12 marks)

Rationale This question is designed to examine the candidates’ ability to evaluate the impact of electronic commerce. Although risk analysis forms a significant part of the Paper P3 syllabus, it is introduced in Paper P5 and is therefore examinable here. The identification and evaluation of risks is a key aspect of the evaluation of any strategic option. Suggested Approach It was hoped that candidates would identify risks related to the Internet strategy, and explain whether the chosen method of the directors (doing it themselves) either increased or decreased the risk. Marking Guide

Marks

Up to five risks evaluated, each at up to

3


12

Examiner’s Comments This question not well answered. Most candidates could identify relevant risks, though clues in the scenario were often ignored in favour of ‘generic’ risks that would apply to any strategy. Few candidates provided any evaluation, and were therefore unable to achieve the maximum marks available. Common Errors • Identifying, but not evaluating • Generic risks, not those specific to the situation described





Question 3(a) Discuss the advantages and disadvantages, to S, of the sole supplier arrangement described. (15 marks)

Rationale This question tests the candidates’ ability to discuss how customers and suppliers influence the strategy process. Suggested Approach This question should be straightforward. It clearly requires the candidate to apply their knowledge to a specific situation. Identification and discussion of the advantages and disadvantages, to the supplier, of this sole supplier arrangement was all that was necessary to earn good marks. Marking Guide

Marks

Up to four advantages, each at up to Up to four disadvantages, each at up to Conclusion, if given

2 2 1


15

Examiner’s Comments The answers to this question were generally satisfactory, but a significant number of candidates failed to relate their knowledge to the specific situation described. Some candidates also looked at the situation from the viewpoint of C, despite not being asked to. Additionally, a significant number of candidates included material in their answer to part (a) that related to S gaining access to the C extranet. This was clearly relevant to part (b), so gained no credit. Common Errors • General points • C viewpoint • Part (b) material





Question 3(b) Evaluate the benefits, to S, of access to the C extranet. (10 marks)

Rationale This is a straightforward question testing the application of knowledge relating to IT/IS/IM strategy. Suggested Approach Candidates are required to use their knowledge of IT/IS/IM strategy, specifically that relating to extranets, to evaluate the benefits to a supplier of access to a customer’s system. Marking Guide

Marks

Up to six benefits, each at up to Conclusion, if given

2 1


10

Examiner’s Comments Most candidates were able to identify some benefits, but few were able to evaluate them. To evaluate a benefit, it is necessary to discuss the extent to which it applies in the situation described, or the likely scale of the benefit. Common Errors • Limited or no evaluation.





Question 4(a) Explain how the forces exerted in a customer-supplier relationship led Michael Porter to conclude that firms compete with their customers and suppliers. (10 marks)

Rationale This question examines candidates’ ability to evaluate competitive environments. Suggested Approach This is a very difficult question, on a ‘favourite’ model. A full explanation of Porter’s model is not required. Answers should focus on the factors that lead to customer and supplier bargaining power affecting the level of margin available to a firm. There are no marks available for a general explanation of the 5 forces model, or for a diagram. Marking Guide

Marks

Ability to exert bargaining power, up to Impact on price and/or quality, up to Relative size or reliance, up to Switching costs, up to Other opportunities to buy/sell, up to Other relevant points, up to

2 2 2 2 2 2


10

Examiners comments Candidates are always tempted to answer a question on one of their favourite models, regardless of what that question is. This one is tough, as it requires in-depth understanding of one part of the model. It also has a part (b) on transfer pricing, and part (b) is worth more than half of the marks. Many candidates scored poorly on requirement (a) and worse on requirement (b). Common Errors • Lack of depth • Too few ideas





Question 4(b) Discuss the issues to be considered when negotiating and agreeing transfer prices between SBUs within a large, complex organisation. You should make reference to Porter’s model, and your arguments in part (a), where appropriate. (15 marks)

Rationale This question examines candidates’ ability to relate a common strategy model to a management accounting technique. Transfer pricing is specifically mentioned in the syllabus for this paper. This exam is titled ‘Management Accounting – Business Strategy’. Suggested Approach In large, complex organisations, SBUs are often customer and supplier to one-another. Agreeing transfer prices involves a great deal of (wasteful) activity. The relative bargaining power of the SBUs will determine, to some extent, the transfer price agreed. There will also be other factors. Marking Guide

Marks

Up to 8 issues discussed, each at up to Conclusion, if given

3 1


Examiner’s Comments This question was not well answered. While most candidates could remember some issues affecting transfer pricing decisions, few of these were related to supplier/customer bargaining power. Common Errors • No mention of the model discussed in part (a), as required • Superficial points





Question 5(a) Discuss the limitations of the use of the expected values technique in the context of a single strategic decision such as this. (6 marks)

Rationale This question examines candidates’ understanding of the use of quantitative techniques in strategic decision making. Suggested Approach This is a straightforward question, which is often asked at the managerial level. However, at that level it is normally the last requirement of the question, whereas here it is the first. Marking Guide

Marks

Relevant limitations, each at up to

2


6

Examiner’s Comments Answers to this question were surprisingly poor, despite this being a familiar question, and despite the clues in the requirement (‘single’ and ‘strategic’). Common Errors • Lack of depth • Few ideas





Question 5(b) Recommend how the planning process of MTM, for the SAC, should be modified to take account of the possible new legislation. (12 marks)

Rationale This question examines candidates’ ability to recommend a reactive approach to business/government relations. Suggested Approach Candidates need to identify the problem (risk) and recommend how the planning process could be modified to recognise that risk (scenario planning, for example). Modifications to the plan of MTM were not required. Marking Guide

Marks

Analysis of the problem, up to Up to three modifications, each up to Two relevant recommendations, each at up to

2 2 2


12

Examiner’s Comments This question was not well answered, as many candidates recommended modifications to the plan, rather than to the planning process. Common Errors • Irrelevant recommendations • Too few ideas





Question 5(c) Evaluate different methods that MTM might use to influence the government of the SAC. (7 marks)

Rationale This question examines candidates’ ability to recommend a proactive approach to business/government relations. Suggested Approach Recognise that this is a sensitive area, with an ethical dimension. Identify a number of ways of influencing the government. Evaluate them (i.e. say how likely they are to succeed, or how feasible they are for MTM). Marking Guide

Marks

Ethical issue, up to Up to four methods, each at up to Conclusion (and recommendation) if given, up to

2 3 1


Examiner’s Comments Most candidates were able to identify a couple of methods, but ran out of ideas and performed little or no evaluation. While bribery is a common method in many countries, it cannot be recommended as an appropriate method in this case, as this contravenes CIMA’s code of ethics. Common Errors • Lack of evaluation • Few ideas





Strategic Level







Answer the ONE compulsory question in Section A on pages 2, 3 and 5. The question requirements are on page 5, which is detachable for ease of reference.





TURN OVER

P6

– B

usin

ess

Stra

tegy



P6 2 May 2006


Question One CCC is a specialist car manufacturer, based in Y, a country in Europe. Three ex-employees of a major car manufacturer founded CCC in 1992 as a private limited company. CCC has never required further finance to aid its expansion, and remains a private company owned by the three founders. The three, who are all engineers, decided to leave their former employer in order to establish a business producing hand-built high performance sports cars for wealthy customers. The major car manufacturers are not able to supply such vehicles, as their systems are all based on the assumption that they will produce each car model in sufficient numbers to benefit from significant economies of scale.

CCC has always been profitable, and has grown significantly in recent years. It is now the second largest specialist car manufacturer in Europe and employs 300 staff at its head office and factory near the capital city of Y.

The specialist car industry

The customers who buy specialist cars are very status-conscious, and want a car that is totally unique. They are prepared to pay a very high price for their new car, in comparison to ‘top of the range’ models from the major manufacturers, but require extremely high quality and service levels in return. At present there are fewer than twenty specialist car manufacturers in Europe, and only six of these (including CCC) produce sports cars. The others specialise in off-road vehicles, armour-plated cars or limousines. As the cars are produced to customer order, there has historically been little price competition between the various specialist sports car manufacturers.

CCC, in common with other specialist car manufacturers, has invested a significant sum in creating the design of its two car models. It also spends a large proportion of its annual budget on sales promotion and marketing. This includes placing expensive advertisements in up-market car magazines, and attending many car shows and exhibitions. CCC also has a reputation for paying higher than average salaries to its senior designers and production staff. As a result, staff turnover at CCC is virtually non-existent.

Customers, who are often loyal to a particular manufacturer, can specify modifications to the basic design, such as minor changes to the body shape of the car, or major changes to the engine performance and driving characteristics of the car. The directors of CCC have always assumed that their customers are not particularly price-conscious, as they are often wealthy individuals with high disposable incomes. For these customers, the alternative to buying a car from CCC might be to purchase a yacht or go on a round-the-world cruise.

CCC manufactures most of the components of its cars in-house. The main exceptions are electrical and control equipment, wheels and tyres. The only major bought-in component is the car’s engine, which CCC buys from a major car manufacturer and then sends to SSS (a sub-contractor) for modification and performance upgrades. While the engine is relatively expensive, it is the work of SSS that represents the single most significant cost of producing each car. CCC has, on occasions, paid SSS the equivalent of 25% of the final sales price of a car.

The board meeting

At the most recent board meeting of CCC, the directors discussed the worsening financial position of the organisation. Having spoken to the Sales Manager they came to the conclusion that, with the economies of Y and neighbouring countries in recession, customers had recently become more aggressive in negotiating down the purchase price of their cars. This had put pressure on the profit margin of CCC for the first time in its history. The directors therefore felt it was necessary to commission an independent review of their industry.



May 2006 3 P6

The Finance Director provided the following summary of CCC’s performance:

€million 2005 2004 2003 2002

Revenue 11·75 11·12 10·06 10·10 Pre-tax profit 0·88 1·43 1·55 2·01 Dividend paid 0·08 0·50 0·50 0·50

The directors were particularly alarmed that SSS, the engine modification sub-contractor, seemed to be making almost as much profit on one of the engines as CCC was on the whole car. The Purchasing Manager of CCC said that it was impossible to negotiate a lower price with SSS, as most of CCC’s customers specified that their car must have its engine prepared by SSS. The Sales Manager agreed that one of the ‘unique selling points’ of CCC’s cars was the work done by SSS. At present, SSS does not supply engine modification services to any of CCC’s competitors, but there is no contractual obligation to prevent it from doing so. The Purchasing Manager reported that CCC has no long-term supply contract with SSS, and the owner-manager of SSS had declined the offer of such a contract, believing that to enter into such an agreement would not be in the best interests of himself and his seven staff.

SSS

The Purchasing Manager has obtained the following information relating to SSS.

Extracts from the financial statements of SSS Ltd:

2005 €000

Revenue 2,455 Cost of sales 1,398 Other costs 867 Profit before tax 190 Profit after tax 133 Dividend paid 65

At 31 Dec 2005 €000

Non-current assets 894 Inventories 232 Receivables 146 Cash 32 Payables 244

Equity share capital 100 Retained earnings 960

Question one and the requirement continue on page 5 which is detachable for ease of reference

TURN OVER



P6 4 May 2006

[This page is blank]



May 2006 5 P6

Information obtained from the Motor Trade Association

Automotive component and service suppliers:

Average P/E ratio (for those suppliers with quoted share prices)

7·5

Average annual growth rate in reported post tax profits (1995-2005)

2·5

Average pre-tax profit margin 4·3%Average pre-tax return on capital employed 11·2%Average receivables days 65Average payables days 28Average revenue per employee €128,500

Required (a) Using Porter’s “five forces” model as a framework, evaluate the competitive

environment in which CCC operates.

(15 marks)

(b) Evaluate the financial position and performance of SSS, as at 31 December 2005.

Note: There are up to 12 marks available for calculations in this part of the question.

(25 marks)

(c) Advise the directors of CCC how the organisation might overcome the bargaining power of SSS.

(10 marks)

(Total for question one = 50 marks)


End of Section A

Section B starts on page 7

TURN OVER



P6 6 May 2006




May 2006 7 P6


2B is a medium-sized retailer of sports equipment and leisure clothing. 2B was established in 1987, and currently operates from three retail shops in town centre locations.

The management team of 2B is very careful about how it recruits staff. In addition to the specific skills required to do the job, any applicant must also have a ‘passion’ for sport. This has resulted in 2B gaining a reputation for excellent customer service and enthusiastic staff. A large proportion of staff time is also devoted to training, both on the product range and customer service techniques. According to a recent survey conducted by the store managers, the customers believe that 2B employees are ‘helpful and knowledgeable’. The customers also praised the 2B shops for being ‘well designed’ and said that it was ‘very easy’ to find what they were looking for.

Another feature of 2B that is appreciated by the customers is the range of goods stocked. By developing close relationships with the major manufacturers of sports goods and clothing, 2B is able to stock a far wider range of items than its rivals. Control of this stock was made easier, last year, by the development of a sophisticated computerised stock control system. Using the system, any member of staff can locate any item of stock in any of the shops or the warehouse. If the required item is not ‘in stock’ at 2B, it is also possible to automatically check the availability of stock with the manufacturer.

At a recent management meeting, one of the store managers suggested that 2B consider developing its very basic website into one capable of e-retailing. At present, the website only gives the location of stores and some very basic details of the range of stock carried. Although the development of the website would be expensive, the managers have decided to give the suggestion serious consideration.

Required:

(a) Using the value chain model, explain those activities that add value in the 2B

organisation, BEFORE the e-retail investment.

(10 marks)

(b) Identify those activities in the value chain of 2B that may be affected by the e-retail investment, explaining whether the value added by each of them may increase or decrease as a result of the e-retail investment.

(15 marks)


TURN OVER



P6 8 May 2006

Question Three 3C is a medium-sized pharmaceutical company. It is based in Asia, but distributes and sells its products world-wide.

In common with other pharmaceutical companies, 3C has a large number of products in its portfolio, though most of these are still being developed. The success rate of new drugs is very low, as most fail to complete clinical trials or are believed to be uneconomic to launch. However, the rewards to be gained from a successful new drug are so great that it is only necessary to have a few successful drugs on the market to be very profitable.

At present 3C has 240 drugs at various stages of development; being tested or undergoing clinical trials prior to a decision being made whether to launch the drug. 3C has only three products that are actually ‘on the market’:

Epsilon is a drug used in the treatment of heart disease. It has been available for eight months and has achieved significant success. Sales of this drug are not expected to increase from their current level.

Alpha is a painkiller. It was launched more than ten years ago, and has become one of the leading drugs in its class. In a few months the patent on this drug will expire, and other manufacturers will be allowed to produce generic copies of it. Alpha is expected to survive a further twelve months after it loses its patent, and will then be withdrawn.

Beta is used in the hospital treatment of serious infections. It is a very specialised drug, and cannot be obtained from a doctor or pharmacist for use outside the hospital environment. It was launched only three months ago, and has yet to generate a significant sales volume.

The directors of 3C meet every month to review the product portfolio and to discuss possible investment opportunities. At their next meeting, they are to be asked to consider three investments. Due to a limited investment budget, the three investments are mutually exclusive (that is, they will only be able to invest in ONE of the options). The options are as follows:

The directors can invest in a new version of Alpha, Alpha2, which offers improved performance. This will allow 3C to apply for a new patent for Alpha2, and maintain the level of sales achieved by Alpha for an additional five years. Alpha2 has successfully completed all its clinical trials, and can be launched immediately.

The directors can invest in a major marketing campaign, to promote the use of Beta to specialist hospital staff. While this investment should lead to a significant growth in the sales of Beta, 3C is aware that one of its competitors is actively promoting a rival product with similar performance to that of Beta.

The directors can invest in the final stage of clinical trials for Gamma. This is a ‘breakthrough’ drug, as it has no near rivals on the market. Gamma is used in the treatment of HIV, and offers significantly better success rates than any treatment currently available. The team of 3C specialists managing the development of Gamma is confident it can successfully complete clinical trials within six months. The team also believes that Gamma should be sold at the lowest price possible, to maximise the benefits of Gamma to society. However, the marketing department of 3C believes that it would be possible to earn very large profits from Gamma, due to its success rate and breakthrough status.

The requirement for this question is on the opposite page



May 2006 9 P6

Required: (a) Briefly explain how the product life cycle model can be used to analyse the current

product portfolio of 3C (that is, BEFORE the planned investment).

(8 marks)

(b) Evaluate the potential impact of each of the three investment options (Alpha2, Beta and Gamma) on the product portfolio of 3C, referring to your answer to part (a) above.

(9 marks)

(c) Discuss the social responsibility implications of each of the three investment options, for the directors of 3C.

(8 marks)


Section B continues on the next page

TURN OVER



P6 10 May 2006

Question Four 4D is a large teaching hospital. While it offers a full range of hospital services to its local community, it also has a large staff of professors and lecturers who teach and train all kinds of medical student. 4D has a very good reputation for clinical excellence.

One of the areas in which 4D is very highly regarded is the training of surgeons. Three of the nine operating theatres in the hospital can be observed from a gallery, though only a limited number of students can watch any operation due to space constraints. This allows the students to watch an experienced surgeon carry out a procedure and then ask questions of their lecturer or the surgeon. Later in their training, students can use the same facilities to carry out operations while being observed by experienced staff and fellow students.

The IT department of 4D has just developed a new Information System for use in operating theatres. This system (OTIS – the Operating Theatre Information System) uses web technology to allow students anywhere in the world to videoconference with a lecturer during an operation. The students can observe the operation and the surgical team, and discuss the procedure with the surgeon and their lecturer. The system also works ‘in reverse’ so a surgeon at 4D can watch a student perform an operation elsewhere in the world, and provide guidance and support. The OTIS system is currently being tested, prior to introduction.

Required: (a)

(i) Distinguish between Business Process Re-engineering (BPR) and Process Innovation (PI), and explain the role of information technology in each of these techniques.

(6 marks)

(ii) Discuss whether, in your opinion, the Operating Theatre Information System (OTIS) implementation is an example of BPR or PI.

(4 marks) (b) Evaluate THREE benefits to 4D and TWO benefits to society, of the Operating Theatre

Information System (OTIS)

(15 marks)




May 2006 11 P6

Question Five 5E is a management consultancy practice. It is a limited liability partnership with eight equal partners. Over the past ten years, 5E has invested heavily in the development of knowledge management. It now has a very large knowledgebase, with over half a million documents that have been produced by 5E staff. These range from internal memos, emails and research reports to major client project reports and articles that have been published in professional journals. The knowledgebase is stored on, and accessed through, 5E’s Intranet. The Intranet is currently managed by X, a facilities management company which owns all the necessary hardware and software. PCs and laptops are all owned by 5E and maintained by X.

5E also has a website containing contact details for all of 5E’s offices, and detailed descriptions of the products and services offered to clients. It also has mini case studies of successful 5E consultancy projects. These case studies have each been approved by the relevant client, as some of the content could have been perceived as commercially sensitive. The website is hosted by an Internet Service Provider (ISP). The same ISP also handles all incoming and outgoing email traffic on behalf of 5E.

Ms Y, the Chief Knowledge Officer (CKO) of 5E, has proposed a major upgrade to the Intranet. This would involve a significant investment, and the major aspects of the planned upgrade are as follows:

To bring web hosting and the management of the Intranet in-house. To redesign the website so it gives clients of 5E password-protected access to the

knowledgebase.

Required

(a) Recommend the information technology hardware and software that would be required by 5E in order to complete the Intranet upgrade project.

(10 marks)

(b) Using Mendelow’s stakeholder mapping model, identify FIVE major stakeholders of the Intranet project. Explain the classification you have given, within the model, to each stakeholder.

(15 marks)







P6 12 May 2006




May 2006 13 P6







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May 2006







• The impact and influence of the external environment on an organisation and its strategy.

• The evaluation of financial performance • The assessment of strategic position • The evaluation of strategy options • Corporate social responsibility • The information technology requirements of an organisation • Stakeholder analysis

It was encouraging to see a good level of application of knowledge of the key syllabus areas by many candidates, as would be expected at this level. However, it was very disappointing to see, once again, how few candidates could adequately carry out a strategic evaluation in Question 1. Part (b) of Question 1 was very poorly answered, with very few candidates able to provide more than a very basic financial analysis. In a 25 mark requirement (a quarter of the examination) one would hope for more than five or six ratios and an elementary comparison to industry averages. A vital aspect of the Business Strategy paper is that candidates demonstrate their ability to provide a quantitative and qualitative evaluation of strategic position. Such failings in basic management accounting skills should not be evident at this level. It was again evident in many candidates’ answers that there was a serious lack of knowledge and understanding of some of the fundamental Business Strategy syllabus areas. Many candidates scored badly on the Section B questions, which was indicative of a lack of depth in knowledge of commonly-used strategic models. While this examination covered many of the candidates’ ‘favourite’ models, it should be noted that exam questions on such models will necessarily examine them in unusual or unconventional contexts. These models have been examined many times in the past, so candidates should not expect ‘easy’ questions on them. While candidates seemed better able to apply their knowledge to the scenario data than in previous diets, this exam highlighted a major weakness that has not been evident for several sittings. Candidates are not reading the question requirements carefully enough, and consequently are scoring few or no marks on what should have been relatively straightforward questions. Examples of this included both parts of Question 2, parts (a) and (b) of Question 3, and both parts of Question 5. In this examination, it is a good idea to use the reading time to read the question requirements as well as the scenarios. Candidates should ensure that they understand exactly what they are required to do before answering. Overall, this paper is a balanced test of the key syllabus areas and covers a number of well used strategic tools and models. Candidates should not find any surprises in this paper and a well prepared candidate should have no difficulty in both demonstration of syllabus knowledge and in the application of this to the various examination scenarios. Note: In a number of requirements, the total number of marks in the marking guide exceeds the total available by a significant margin. This gives candidates the opportunity to cover fewer points in greater depth, or more points in less depth. However, candidates should recognise that depth of argument is desirable in answers to this paper, and a series of brief points will never be rewarded highly.






Question 1(a) Using Porter’s “five forces” model as a framework, evaluate the competitive environment in which CCC operates. (15 marks)

Rationale This question requires candidates to apply their knowledge of the ways that the business environment affects organisations, using one of the most common strategy analysis tools. Suggested Approach This question was intended to be an ‘easy starter’. It was only necessary to identify, from the scenario, the major aspects of the business environment of CCC, and evaluate them within the ‘five forces’ framework. Marking Guide

Marks

For correct identification of all five forces For each force, up to 3 marks for discussion of the issues, and a further mark for concluding whether that force is weak, moderate or strong

1 4


Examiner’s Comments The first part of the question was generally answered well.

A few candidates decided to use this requirement as an excuse to write a detailed description of the five forces model. This was not required by the question, nor was it an acceptable answer. It therefore earned only one mark. A further small group of candidates discussed issues that were not mentioned in the scenario. This was unnecessary and meant that they missed a significant number of key issues that were clearly identifiable from the scenario data. Common Errors • Simply repeating the facts given in the scenario, with no explanation of why the issue was relevant or

important • Failing to ‘evaluate’ the forces, by concluding as to their strength.





Question 1(b) Evaluate the financial position and performance of SSS, as at 31 December 2005. (25 marks)

Rationale This question is designed to test candidates’ ability to evaluate the financial position and performance of an organisation as part of the strategy formulation process. Suggested Approach Answers should consist of a number of ratio (or other) calculations, followed by discussion of their possible cause and significance. Marking Guide

Marks

For each appropriate ratio or performance figure calculated For a basic comparison to the industry average For further detailed evaluation/analysis/discussion, up to

1

1/2 11/2


25

Examiner’s Comments Having clearly signalled that there were up to 12 marks available for calculation, and provided sufficient numbers to allow the calculation of about 20 ratios, it was a shock to find that most candidates were unable to provide more than six or seven. Ratio analysis is one of the most basic of management accounting skills, and is commonly used in the evaluation of customers, rivals and suppliers.

It was also horrifying that few candidates were able to provide anything more than the most basic of analysis. Stating that, for example, “SSS has a pre-tax margin of 7.7%, which is higher than the average for the industry” adds nothing to our understanding of its position. Similarly a comment such as “CCC has a pre-tax return on sales of 7.7% and is therefore more profitable than other organisations” hardly provides an insight into the performance of the organisation. Logically, if there are ‘up to 12 marks available for calculations’, that would imply 13 or more marks for analysis. Five or six sentences, however good, are unlikely to be enough to earn anywhere close to 13 marks.

When faced with a 25-mark question, one would hope that candidates would plan to spend about 45 minutes reading, thinking and answering. From the evidence, it appeared the average candidate had spent no more than half of the allocated time. Their reward was in the order of a third of the available marks. This is most depressing, and raises significant questions about the competence of such management accountants.

Many candidates complained that it was not possible to perform a thorough ratio analysis without data for previous years. Others pointed out that a ‘balanced scorecard’ analysis of SSS would have provided a better insight into performance. While both these comments are valid, and would each have received a mark, neither is sufficient justification for refusing to perform any sort of analysis at all. It is very common for management accountants to be asked to analyse incomplete data. The scenario provided sufficient numerical data for a competent candidate to provide a fairly detailed analysis of position and performance. Almost no candidates were able to do so.





A disappointingly low number of candidates recognised that the three requirements in Question 1 were linked by a ‘storyline’. The analysis of the ‘bargaining power of suppliers’ in part (a) gave a number of clues as to the possible reasons for ‘unusual’ ratios in part (b). These ratios gave clues as to possible strategies and issues to discuss in part (c). Also, almost no candidates commented on the limitations of the ‘industry averages’ to the analysis. SSS is by no means ‘average’, and the organisation’s ratios most often signalled the organisation’s uniqueness, rather than ‘better’ or ‘worse’ performance. Common errors • Few calculations • Little or no analysis • Too much focus on CCC and not SSS

Question 1(c)

Advise the directors of CCC how the organisation might overcome the bargaining power of SSS. (10 marks)

Rationale This is a straightforward question testing the candidates’ ability to identify and evaluate strategic options. Suggested Approach In order to ‘advise’, it is necessary to; identify a number of options, discuss the relative merits/problems of each, conclude and possibly recommend. Marking Guide

Marks

Identification of an appropriate strategy Discussion of each strategy, up to Conclusion and/or recommendation, up to

1 3 2


10

Examiner’s Comments Most candidates were able to provide a number of suggestions, but these were often discussed very superficially. It was seldom recognised that there might be problems in implementing some of these strategies, and few candidates concluded or recommended. Common Errors • Little critical insight • No conclusion/recommendation






Question 2(a) Using the value chain model, explain those activities that add value in the 2B organisation, BEFORE the e-retail investment. (10 marks)

Rationale This is a more difficult question than previously asked on this topic, as it only requires application. Suggested Approach A significant range of activities was described in the scenario. Each of them should have been classified with explanation, in the value chain model. Marking Guide

Marks

List of value chain activities, or A diagram For identifying each value adding activity and correctly classifying it in the value chain For explaining the classification of each activity

1 2 1 1


10

Examiner’s Comments This question was answered reasonably well by most candidates. Some, however, displayed weak understanding of the theory and an inability to spot ‘clues’ in the scenario. Very few marks were awarded to theoretical discussions of the model, nor was it possible to earn a pass mark without mentioning or applying the model. Common Errors • Duplication of activity under two or more headings • A failure to recognise that supporting activities support primary activities • Re-writing the facts from the scenario with little attempt at classifying the activities within the value

chain





Question 2(b)

Identify those activities in the value chain of 2B that may to be affected by the e-retail investment, explaining whether the value added by each of them may increase or decrease as a result of the e-retail investment. (15 marks)

Rationale This question is designed to examine the candidates’ ability to evaluate the impact of electronic commerce. Suggested Approach It was hoped that candidates would identify those activities identified in part (a) that would be affected by the investment. Marking Guide

Marks

Identify the affected activity Classify it in the value chain model Explain whether value is increased or decreased

1 1 1


15

Examiner’s Comments This question was very poorly answered. The question clearly stated that candidates were to “identify those activities in the value chain…”, thus directing candidates back to the analysis in part (a), as these are necessarily the activities in the organisation’s value chain. Further, candidates were required to “…explain whether the value added is likely to…”, implying that only those activities adding currently value were to be considered, and that the value added may well reduce. Most candidates, possibly thinking about examples they had discussed during their studies (or Porter and Millar’s work on IT in the value chain) chose a very different approach. They considered every category of activity in the value chain model, whether relevant to the ‘pre-investment’ 2B or not, and identified new activities that might be created by the proposed investment. Sadly, this earned few or no marks, and resulted in a significant proportion of candidates who attempted this question failing to reach pass standard. This was an obvious example of candidates failing to read the question requirement, and in so doing made the question much more difficult for themselves. Common Errors • Misinterpreting part (b) due to not carefully reading the question requirement





Question 3(a) Briefly explain how the product life cycle model can be used to analyse the current product portfolio of 3C (that is, BEFORE the planned investment). (8 marks)

Rationale This question tests the candidates’ ability to analyse the product portfolio of an organisation. Suggested Approach This question should be straightforward. It clearly requires the candidates to explain how a named model can be used to analyse something. Marking Guide

Marks

Diagram, if given Explanation of how the model can be used to analyse a portfolio, up to Classification of current products in the model, with explanation, each at up to

1 4 1


8

Examiner’s Comments The answers to this question were generally weak. As the product life cycle is one of the candidates’ ‘favourite’ models, many of them described in detail the characteristics of products at each stage, and the strategies that might be appropriate for each type of product. This was not required, and received no credit. Virtually no candidates appeared to understand that a ‘product portfolio’ is a collection of products under common ownership. Thus, any analysis tended to look at the products individually, rather than collectively. The whole point of any type of ‘portfolio analysis’, be it financial or product, is to view the portfolio as a whole and to recognise the value of each product to the portfolio. A balanced portfolio is one that achieves the objectives of its owner. Another common misconception is that the term ‘product portfolio’ necessarily refers to the Boston Consulting Group (BCG) matrix. This is incorrect. The BCG matrix is a model used to analyse an organisation’s portfolio, as is the product life cycle. This question was not about the BCG matrix, so any discussion of it received no credit. Again, this is a clear example of candidates not reading the question requirement carefully and instead of answering the question set, they have answered the question they wish had been set. Common Errors • Too much theory • Too much BCG • No discussion of the portfolio • Very poor diagrams





Question 3(b) Evaluate the potential impact of each of the three investment options (Alpha2, Beta and Gamma) on the product portfolio of 3C, referring to your answer to part (a) above. (9 marks)

Rationale This is a straightforward question testing the evaluation of strategic options within the context of a named model. Suggested Approach Candidates are required to consider whether each of three suggested strategies improves or worsens the product portfolio of the organisation. Marking Guide

Marks

For the evaluation of the impact of each option on the portfolio, up to

3


9

Examiner’s Comments As in part (a), almost no candidates appeared to understand the concept of a product portfolio. Answers were therefore limited to saying that each product would move from ‘point X’ to ‘point Y’ in the life cycle. While true, this did not address the core of the question, so received minimal credit. Almost no candidates concluded, for each option, whether the portfolio was strengthened or weakened. Very few recommended which option to pursue. Many candidates seemed to suggest that 3C should pursue all the options identified (though often in sequence, rather than at the same time). This was despite the comment in the scenario that the “…the three options are mutually exclusive (that is, they will only be able to invest in ONE of the options)”. While I appreciate that the scenario for this question was a little longer than normal, candidates should use their reading time (and perhaps some of the exam time) to highlight issues such as this. If candidates are going to choose this kind of question then they must ensure that they take sufficient time to read it thoroughly. Common Errors • No discussions of the impact of each option on the portfolio • Lots of re-writing of the information from the scenario, with very little added evaluation





Question 3(c) Discuss the social responsibility implications of the three investment options, for the directors of 3C. (8 marks)

Rationale This is a straightforward question testing application of candidates’ knowledge relating to Corporate Social Responsibility (CSR). Suggested Approach Candidates are required to use their knowledge of CSR to discuss the implications of each of the three options. Answers could have been structured either ‘option-by-option’ or ‘issue-by-issue’. Marking Guide

Marks

Up to four issues discussed, each at up to Conclusion, if given

2 2


8

Examiner’s comments Most candidates were able to identify some issues, but failed to observe that investing in either Alpha2 or Beta had the consequence that no investment could be made in Gamma. Also, many candidates were short of ideas for the CSR implications of Alpha2 and Beta (price discrimination, product safety, honest advertising, true improvement in health). Instead, they simply repeated the arguments about pricing given in the scenario. Common Errors • Limited discussion • Lack of understanding of CSR





Question 4(a)(i) Distinguish between Business Process Re-engineering (BPR) and Process Innovation (PI), and explain the role of information technology in each of these techniques. (6 marks)

Rationale This question examines candidates’ understanding of BPR and PI. Suggested Approach This is a very difficult question, as many texts are not clear on the distinction. Give two clear ‘definitions’, stressing the differences. Recognise that IT is generally an implementation tool for BPR, whereas it is often a change trigger for PI. Marking Guide

Marks

Explanation of each, highlighting differences, up to Role of IT in each, up to

2 2


Examiner’s Comments Many explanations were unclear and very similar. Some candidates failed to mention the role of IT in each, as required. Most candidates could provide a definition of BPR, but very few understood Process Innovation. Common Errors • Confusion • No mention of the role of IT





Question 4(a)(ii) Discuss whether, in your opinion, the Operating Theatre Information System (OTIS) implementation is an example of BPR or PI. (4 marks)

Rationale This question examines candidates’ understanding of BPR and PI. Suggested Approach Apply the definitions from part (a) to OTIS, and conclude which one fits best. Note – this is difficult to do when the two definitions are very similar or identical. Marking Guide

Marks

Arguments for OTIS being one or the other, each at up to Conclusion, if given (and consistent with the arguments)

2 1


4

Examiner’s Comments More confused than part (a), and sometimes with no conclusion. Common Errors • Confusion





Question 4(b) Evaluate THREE benefits to 4D, and TWO benefits to society, of the Operating Theatre Information System (OTIS). (15 marks)

Rationale This question examines candidates’ ability to evaluate a strategic option. Suggested Approach Do what the question says! Don’t forget to ‘evaluate’ the benefits, though (i.e. say whether each is a major or minor benefit). Marking Guide

Marks

For discussion of each benefit, up to For evaluation of each benefit, a further

2 1

Maximum marks awarded 15 Examiner’s Comments Surprisingly well attempted, though few candidates evaluated the benefits. Common Errors • Benefits not evaluated





Question 5(a) Recommend the information technology hardware and software that would be required by 5E in order to complete the Intranet upgrade project. (10 marks)

Rationale This question examines candidates’ knowledge of IT hardware and software requirements. Suggested Approach Identify a few relevant hardware devices and some types of software, and justify each one. Marking Guide

Marks

For identification of relevant hardware or software items, each at For the justification of each, up to

1/2 11/2


Examiner’s Comments Despite IT being a core topic in the papers of the management pillar, most candidates displayed depressingly poor knowledge. Hardware items were often random (PCs) and commonly irrelevant (printers) and software poorly described (a firewall) or irrelevant (an EIS). Most answers were little more than a list, despite the verb (“recommend”), and candidates often produced only one list, giving the impression that they were unaware of the distinction between hardware and software. Note to tutors – do not ignore the IS/IT/IM section of this syllabus. Common Errors • Lack of ideas and a clear lack of knowledge of this syllabus area • Poor explanation • Confusion between hardware and software





Question 5(b) Using Mendelow’s stakeholder mapping model, identify FIVE major stakeholders of the Intranet project. Explain the classification you have given, within the model, to each stakeholder. (15 marks)

Rationale This question examines candidates’ ability to carry out stakeholder mapping. Suggested Approach Candidates need to identify five stakeholders, classify each in the Mendelow model, and explain why each was classified as it was. Marking Guide

Marks

Mendelow explanation, or diagram, if given Identification of each stakeholder Explanation of why power is high or low Explanation of why interest is high or low Classification, based on the above

1 ½ 1 1 ½


Examiner’s Comments Some candidates, of course, provided a lengthy explanation of the model and its construction. This was, to a great extent, a waste of time. Some candidates ‘invented’ stakeholders (government, shareholders) rather than just using the ones mentioned in the scenario, and received no credit for them. Many candidates, in their explanation of classifications, simply stated that a stakeholder ‘…has high power and low interest’, for example. This is not an explanation, and received no credit. Similarly, many candidates discussed level of power and interest in general organisational terms and not in relation to this intranet project, which again received no credit. Again, candidates are reminded to read the question requirement CAREFULLY. Common Errors • Invention of stakeholders • Unclear explanation of power and interest • Random classification of stakeholders with no explanation of power and interest

















TURN OVER

P6

– B

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P6 2 November 2006


Question One Introduction

AAA is a large manufacturing company that specialises in the design and manufacture of televisions. It was formed in 1985, following the merger of two rival companies, and is now one of the three largest TV manufacturers in Asia. AAA employs over 2000 staff at its head office and four manufacturing plants, which are all in the same Asian country, Jurania. AAA is listed on the Juranian stock exchange.

The production system

TV manufacturing is a mass production industry, with high volumes of identical or similar products being made on a production line basis. The products are generally made to order for customers, who are either other electrical manufacturers (who put their name on the product and re-sell it) or large electrical retailers. The manufacture of televisions is still a relatively labour-intensive process, as many of the components need to be assembled in a precise way. Most of the electrical components used in AAA’s process are bought in from suppliers, as is the TV screen and cabinet (the plastic case in which the screen and components are contained). The staff who assemble the components are mainly semi-skilled, and have been trained by AAA to perform fairly simple, repetitive operations. When completed, quality assurance staff test the TV sets, and any that are found faulty are returned to the production line to be re-worked.

Components received from suppliers are also tested by the quality assurance staff of AAA. As they do not have the time to test every component, they test a sample of components from each batch delivered. If they find more than one faulty component in every twenty tested, the whole batch is rejected and returned to the supplier.

Business Performance

The following is a summary of the performance of AAA last year. AAA reports its performance in the currency of its home country, the Juranian dollar (J$):

Last Year

Financial Performance ActualJ$ millions

Budget J$ millions

Sales revenue Gross (Factory) profit Pre-tax profit Capital employed (average) Cash (closing) Finished goods inventory (average) Raw material inventory (average) Work in process (average)

1,7931,177

652

2,83517938·211·4

0·8

1,941 1,320

790

2,550 485 20·0

9·5 0·3



November 2006 3 P6

Last year

Other performance indicators

Actual Budget

Share price (closing) (J$) Earnings per share (J$) Number of employees (average) Sales (million units) Number of finished units re-worked Percentage of purchases from suppliers rejected (by value) Average production cost of sales per unit (J$) Average sales price per unit (J$) New product lines developed New product lines successfully launched Products returned from customers as faulty (per 1,000 units sold) Warranty claims (per 1,000 units sold) Number of working employee-days lost to industrial disputes

334·50 46·00 2,259

2·35 54,000

4·25 262 763

12 1

28 56

2,500

400·00 50·00 2,128

2·40 30,000

3·00 259 809

10 4

20 30

3,200

The board meeting

At the most recent board meeting of AAA, the Chief Executive Officer asked for suggestions as to how the management of AAA might be improved. One of the non-executive directors suggested that the use of the balanced scorecard might assist in controlling the business, as it had in another company of which she is also a non-executive director. The marketing director mentioned that he had compiled some information about another organisation in the television manufacturing industry, BBB, and asked if that might be of use. The purchasing director mentioned that he had recently been at a conference where a speaker had suggested that the introduction of ‘knowledge management’ was improving the performance of many organisations. As far as the other directors present at the board meeting were aware, this was not an approach used commonly in their industry.

BBB

BBB is a major rival of AAA, and is based in a neighbouring Asian country, Mesnar. BBB is a private company, owned by a wealthy industrialist. BBB compiles its accounts in the local currency of Mesnar, the Mesnari Riyal (RM). Both the Mesnari Riyal and the Juranian Dollar are freely traded currencies, and the current spot exchange rate between the two is J$1:RM2.50. There is free and unrestricted trade between Jurania and Mesnar.

Question one and the requirement continue on page 5, which is detachable for ease of reference

TURN OVER



P6 4 November 2006




November 2006 5 P6

The following information has been obtained from BBB’s filed accounts from last year, and from the trade association of which both AAA and BBB are members.

Sales revenue (RM million) Total production cost of sales (RM million) Profit before tax (RM million) Capital employed (RM million) Closing inventories (RM million) Number of employees (closing) Number of units sold Number of warranty claims in the year

Last year

1,400 435 557

1,589 17

740

780,000 19,800

Required (a) Prepare a balanced scorecard appraisal of the performance of AAA last year.

Note: There are up to 10 marks available for calculations in this section. You are not required to compare the performance of AAA with that of BBB in this section.

(25 marks)

(b) As the management accountant of AAA, prepare a benchmarking report for the directors that compares the performance of AAA last year with that of BBB for the same period. You should refer to your answer to part (a) in making your comparison.

Note: There are up to 8 marks available for calculations in this section, and up to 2 marks for the use of an appropriate report format. You are not required to reproduce the calculations from your answer to part (a) in this section, but may do so if you wish.

(15 marks)

(c) Advise the directors of AAA how the introduction of knowledge management might lead to AAA developing a sustainable competitive advantage over BBB.

(10 marks)

(Total for question One = 50 marks)


End of Section A


TURN OVER



P6 6 November 2006




November 2006 7 P6

SECTION B – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER TWO QUESTIONS FROM FOUR Question Two CTC, a telecommunications company, has recently been privatised by the government of C after legislation was passed which removed the state monopoly and opened up the communications market to competition from both national and overseas companies – a process known as deregulation.

Prior to the deregulation, CTC was the sole, protected, supplier of telecommunications and was required to provide ‘the best telecommunications service the nation can afford’. At that time the government dictated the performance levels required for CTC, and the level of resources it would be able to bring to bear to meet its objectives.

The shares were floated on the C Stock Exchange with 80% being made available to the population of C and up to 20% being made available to foreign nationals. The government of C retained a ‘golden share’ to prevent the acquisition of CTC by any foreign company. However, the privatisation meant that many of the traditional ways in which the industry had operated would need to change under the new regulations. Apart from the money received from the flotation, the government privatised CTC in recognition of both the changing global environment for telecommunications companies, and the overseas expansion opportunities that might exist for a privatised company. The government recognises that foreign companies will enter the home market but feels that this increased competition is likely to make CTC more effective in the global market.

You have recently been appointed as the management accountant for CTC and have a background in the commercial sector. The Board of Directors is unchanged from CTC’s pre-flotation days.

Required:

(a) Explain to the Board of Directors why the objectives of CTC will need to change as a

result of the privatisation of CTC and the deregulation of the market.

(10 marks)

(b) Produce two examples of suitable strategic objectives for CTC, following its privatisation and the deregulation of the market, and explain why each would be an appropriate long term objective.

(4 marks)

(c) Advise the Board of Directors on the stages of an appropriate strategic planning process for CTC in the light of the privatisation and deregulation.

(11 marks)


Section B continues on the next page TURN OVER



P6 8 November 2006

Question Three DDD is a relatively small, specialist manufacturer of chemicals that are used in the pharmaceutical industry. It does not manufacture any pharmaceutical products itself since these are made by different processes and under different conditions. DDD obtains its raw materials, which are quite simple, from large chemical companies, and modifies them by a number of patented processes before selling them on to a few pharmaceutical companies. DDD makes significantly higher margins than its suppliers, which manufacture in bulk.

Several patents are due to expire in the next three years.

The large pharmaceutical companies, which are DDD’s customers, are suffering reduced profits as governments reduce the price they are prepared to pay for drugs. As a result, the pharmaceutical companies are pressuring DDD to reduce its prices.

The majority of the shares are owned by members of the family which started the business some years ago and who still take an active part both as managers of the business and as development chemists. There is a share option scheme for the employees and this is well supported.

Required: As management accountant for DDD you have been asked to:

(a) Advise the Board of Directors of the possible threats related to the patent expiries;

(10 marks)

(b) Evaluate suitable courses of action that DDD might take to maintain its profits in the face of the threats identified in (a);

(12 marks)

(c) From your analysis recommend, with a brief justification, the most appropriate course of action for DDD.

(3 marks)


Section B continues on the opposite page



November 2006 9 P6

Question Four EEE is an established chemical company extracting flavours and oils from plant materials and supplying them to the flavours and fragrances industries. The shareholders include institutional investors (20%), employees and pensioners of the company (20%) and the descendants of the family (30%) who founded the business approximately 100 years ago. The remainder of the shares are in public ownership. The company is reasonably successful but, recently, there has been pressure on margins and its future is not guaranteed.

The majority of the Board of Directors are members of the founding family who have always taken an active part in the management of the business.

When the company was originally started, the surrounding area was mainly used as agricultural land but, over time, a residential area has developed around the factory. Although many of the workers in the factory live locally, some of the housing is quite expensive and has attracted affluent residents from the local city.

The chemical engineers at EEE have recently developed, and patented, a new process which would allow EEE to extract onion oil and garlic oil at far better yields than those obtained by existing processes. The market for these oils is very profitable and presents a significant opportunity for EEE to gain a real competitive advantage in its industry.

Unfortunately, as with all extraction processes, there will be some leakage and, although perfectly safe and compliant with all safety legislation, the smell of the oils will offend some of the more affluent residents who have complained to local government officers.

There is very little other industry in the area and EEE is a large contributor to the local economy. One of the trade union representatives working in EEE is also an elected council member serving in the local government.

Required: As management accountant you have been asked to: (a) Advise the Board of Directors of the advantages to EEE of conducting a stakeholder

analysis in the context of the proposed investment decision;

(5 marks)

(b) Analyse the principal stakeholders in EEE in the context of the proposed investment in the new process;

(15 marks) (c) Recommend an acceptable course of action to the Board of Directors in the light of the

stakeholder analysis conducted in (b).

(5 marks)



TURN OVER



P6 10 November 2006

Question Five FFF is a manufacturer of specialist portable communications equipment, which is designed for use in hazardous and dangerous conditions. Developments of new technology in recent years, such as wireless mobile telephony, infra red thermal imaging and global positioning has allowed FFF to create new products.

The market for such equipment has grown significantly over the past five years. The customer base includes fire services, oil and chemical companies and the government. FFF now recognises that, during this period of rapid growth, the market has attracted a number of new entrants and may even be reaching a level of overcapacity.

The directors feel that they do not know as much as they should about the existing, and new, companies in the industry. The market is now maturing and, although FFF is managing to maintain its margins and leading market share (45%), it is likely that the characteristics of the industry will change.

Required As management accountant you are required to:

(a) Advise the board of the advantages of adopting a formal approach to competitor

analysis; (10 marks)

(b) Advise the directors of the stages in a formal competitor analysis process and identify any information that would need to be gathered at each stage for FFF.

. (15 marks)







November 2006 11 P6







P6 12 November 2006


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November 2006




Paper P6 – Management Accounting Business Strategy Post Exam Guide

November 2006 Examination



• The preparation and evaluation of multi dimensional models of performance measurement

• The preparation of a benchmarking exercise and the evaluation of the results • The evaluation of IS/ IT systems appropriate to the organisation’s strategic

requirements • The evaluation of strategic options • The impact of regulatory regimes on strategic planning and implementation • The evaluation of strategies for response to competition • Stakeholder groups and how they affect organisations.

It was encouraging to see a good level of application of knowledge of the key syllabus areas by some candidates in the Section B questions, as would be expected at this level. However, once again it was very disappointing to see how few candidates could adequately apply their management accounting knowledge to prepare an appropriate balanced scorecard or perform a benchmarking exercise in Question 1. Part (a) of Question 1 was very poorly answered, with very few candidates able to provide more than a very basic set of comparative figures. In a 25 mark requirement (a quarter of the examination) one would hope for more than a basic list of actual versus budget comparisons and a basic statement of whether the figures were higher or lower. Similarly in part (b) of question 1, few candidates were able to demonstrate a sound understanding of benchmarking, with most candidates providing only the most basic of calculations and comparisons which were subsequently not adequately evaluated as part of the benchmarking process. A vital aspect of the Business Strategy paper is for candidates to demonstrate their ability to provide a quantitative and qualitative evaluation of strategic position. Such failings in basic management accounting skills should not be evident at this level. It was again evident in many answers that there was a serious lack of knowledge and understanding of some of the fundamental Business Strategy syllabus areas. Most candidates scored badly on Section A, which was indicative of a lack of ability and practice in the application of some of the key strategic techniques. The Section B questions were answered better by many candidates, and there was evidence of better application of knowledge, in particular in Question 2 and Question 4. However, as stated in previous PEGs, candidates have been examined a number of times in the past on several of the key models in the syllabus, so they should not expect ‘easy’ questions on them. There are still some candidates who fail to apply their knowledge as required in the question and instead re-write everything they know about a particular model. This is not acceptable at this level. It is evident that candidates are still not reading the question requirements carefully enough, and consequently are scoring few or no marks on what should have been relatively straightforward questions. Examples of this include Question 1 part (a), where many candidates failed to make any attempt at preparing an appraisal and in part (b) also failed to recognise their role as a management accountant being requested to prepare a Board level report. This was also the case in Question 2 part (b), Question 3 (b) and in parts (b) and (c) of Question 4. In this examination, it is a good idea to use the reading time to read the question requirements as well as the scenarios. Candidates should ensure that they understand exactly what they are required to do before answering. Overall, this paper is a balanced test of the key syllabus areas and covers a number of well used strategic tools and models. Candidates should not have found any surprises in this paper and a well prepared candidate should have had no difficulty in both demonstration of syllabus knowledge and in the application of this to the various examination scenarios.







Question 1(a) Prepare a balanced scorecard appraisal of the performance of AAA last year. (25 marks)

Rationale This question requires candidates to apply their knowledge of multi dimensional models of performance measurement, using one of the most commonly used tools, namely the balanced scorecard. Suggested Approach This question should be straightforward. As the balanced scorecard is well covered in the study texts and is an often discussed tool, it was expected that the candidates would have no problems preparing a well presented and well evaluated answer. The question clearly asks for an appraisal, therefore a basic preparation of comparisons of actual versus budget for each section of a balanced scorecard would not be sufficient to be awarded a pass mark. Marking Guide

Marks

For correct calculations (½ for each) maximum For insights into performance, or interpretation of calculations, (up to 2½ for each) maximum

10 20


Examiner’s Comments The first part of the question was very poorly answered. Most candidates who failed the examination did so on the basis of their poor performance in this question. It is not acceptable at the strategic level to expect to pass the examination by preparing an answer with little or no strategic analysis within it. It was quite shocking to see how many candidates failed to get any further than comparing actual and budget figures for AAA, and whose analysis was limited to statements such as ‘Gross profit is lower than budget’. This question was worth 25 marks (or one quarter of the examination). Candidates should have planned to spend about 45 minutes reading, thinking, planning and answering this question. From the evidence, it appeared the many candidates had spent no more than half of the allocated time. There were 10 marks available for the calculations (and there were some candidates who easily attained these marks by providing several pages of comparative calculations). This should therefore have indicated to the candidate that there were a further 15 marks available for analysis and appraisal of the figures. However, for the vast majority of candidates, this appraisal was limited to bland statements such as “Actual Gross profit was 66% versus a budget of 68%. This is 2% lower than budget.” This is hardly insightful nor does it go any way to attempt to explain why this may have occurred. There was plenty of information provided in the scenario, both financial and non-financial to provide plenty of pointers and clues as to the reasons for the poor performance and position of AAA.






Also, the poor level of interpretation was quite shocking. Few candidates recognised neither the severe cash problem of AAA nor the probability that this was most likely linked to poor working capital management. The working capital cycle was often misinterpreted with a number of candidates providing incorrect calculations for finished goods days and WIP days and thus making it difficult to provide any meaningful analysis. Many candidates thought that the number of days lost to disputes was worse than budget because it was lower, without thinking about the meaning of the calculation. It would appear that few candidates have the ability to use all of the scenario information in a strategic way and to identify the most important issues. Most candidates merely look at the numbers given and undertake the most basic of calculations, with little thought to their relevance or significance. Also, few candidates were able to relate two or more facts (often the results of simple calculations) to identify and diagnose a strategic issue. A key role of the management accountant in practice is to work with incomplete data and information from a variety of diverse sources and bring this together to form a picture of the strategic position of the organisation. It would seem that few candidates who sat this examination have this skill, which is very worrying indeed. A strong message must be sent out to candidates as a result of the poor performance in this question. This question was not difficult and covered a key strategic tool that is well covered in all study texts for this syllabus. Most candidates clearly demonstrated knowledge of the model, as would be expected, but at strategic level, knowledge of a key model is not sufficient to pass the examination. The candidate must be able to apply the model, to interpret its results and to appraise those results. To state that a figure is higher or lower than budget (without even saying whether that difference makes the variance ‘favourable’ or ‘adverse’) is neither interpretation nor appraisal. Candidates must practice real application of models such as this if they are to pass this examination. Common Errors • Basic financial analysis with no attempt at interpretation at all • Interpretation limited to comments such as ‘Actual ROCE is lower than budget’. These kinds of

statements are meaningless without further qualification






Question 1(b) As the management accountant of AAA, prepare a benchmarking report for the directors that compares the performance of AAA last year with that of BBB for the same period. You should refer to your answer to part (a) in making your comparison. (15 marks)

Rationale This question is designed to test the candidates’ ability to prepare a benchmarking exercise and to evaluate the results. Suggested Approach Answers should consist of a number of calculations comparing AAA and BBB performance, followed by an evaluation of the results. The answer should also have been presented in report format, with a Report Header and introduction and a concluding paragraph. Marking Guide

Marks

For Report Header and Introduction/ TOR For correct calculations (½ for each) For insight into performance, or interpretation of a calc, (up to 2½ for each) maximum Report Conclusion

1 8 10 1


15

Examiner’s Comments This question was poorly answered. Similarly to part (a) candidates provided only the most basic of financial analysis with few candidates offering more than a statement of whether AAA’s figures were higher or lower than those of BBB. Again, many candidates were able to obtain sufficient marks on the basic calculations, but they failed the question as a result of a poor (or absent) analysis of these calculations. There was sufficient detail in the text of the scenario to give the candidates enough information to discuss why BBB’s performance was largely superior to AAA, despite being a smaller organisation. However, few candidates read beyond the numbers provided and consequently failed the question. There were 8 marks available for calculations, meaning there were a possible 7 further marks for analysis. Most candidates did present their answers in the form of a report, but many neglected to identify that this was a Board level report. This means that the report needed to contain strategic level analysis, not basic comparative analysis. Common Errors • Calculations limited to basic comparisons of AAA versus BBB • Little or no analysis • Too much focus on comparisons of the numbers and not enough focus on the strategic level context of

the report






Question 1(c)

Advise the directors of AAA how the introduction of knowledge management might lead to AAA developing a sustainable competitive advantage over BBB. (10 marks)

Rationale This question tests the candidates’ ability to advise managers on the development of strategies for knowledge management. Suggested Approach This is a very difficult question. It brings together both knowledge management and competitive advantage and requires candidates to determine how knowledge management may result in competitive advantage. The question requires the candidate to demonstrate a brief understanding of both and then to use their understanding of knowledge management to advise how it could be used in AAA’s generic strategies. Marking Guide

Marks

For a very brief introduction to knowledge management, maximum For a very brief outline of the generic strategies as ways to achieve a competitive advantage, maximum For each argument relating KM to competitive advantage (for example, by reference to cost reduction, differentiation or focus) up to 2 marks, maximum

1 2

10


10

Examiner’s Comments This question was very poorly answered. Most candidates failed to recognise any link between knowledge management and competitive advantage and most answers either focused upon a discussion of knowledge management only or separate discussions of knowledge management and the generic strategies with no attempt to link the two. A number of candidates also incorrectly focused upon IS/IT strategies related to the introduction of organisational knowledge management. Common Errors • Focus upon knowledge management only or upon competitive advantage only • Focus upon IS/ IT strategies







Question 2(a) Explain to the Board of Directors why the objectives of CTC will need to change as a result of the privatisation of CTC and the deregulation of the market. (10 marks)

Rationale This question tests the candidates’ ability to evaluate the impact of the changing relationship with the government and the changing importance of the stakeholder groups as a result of privatisation. Suggested Approach This should have been quite a straightforward question. The changing role of the government for CTC is a key issue, as is the impact of privatisation upon its key stakeholders. Therefore candidates should focus upon the impact of privatisation on CTC’s objectives and how these will change, and the effect this will have upon the key stakeholders. A further key issue for discussion is the impact upon overseas expansion. Marking Guide

Marks

Identification and explanation of up to five reasons objectives may change (such as overseas expansion, shareholder measures of performance, corporate governance, cost effectiveness, global expansion, increased competition, level of customer service) up to 2 marks each, maximum

10


10

Examiner’s Comments This question was answered reasonably well by most candidates. Most mentioned the pre-privatisation objectives of economy, efficiency and effectiveness and most were also able to identify the new role of the shareholders and their importance in setting objectives. The main weakness was the lack of focus upon the overseas expansion and its future importance as an objective for both the government and CTC. Common Errors • Insufficient number of arguments, or too little depth to earn 2 marks • A failure to recognise the importance of overseas expansion as an objective






Question 2(b)

Produce two examples of suitable strategic objectives for CTC, following its privatisation and the deregulation of the market, and explain why each would be an appropriate long term objective. (4 marks)

Rationale This question is designed to examine the candidates’ ability to recommend and justify appropriate strategic objectives. Suggested Approach Candidates should be able to identify a number of strategic level objectives relevant to CTC’s newly privatised status. The candidates should use SMART to identify long term objectives and not short term ones. Marking Guide

Marks

• For each appropriate, quantified, timed objective (1 mark each) • For justification of each objective, with reference to an appropriate stakeholder or stakeholders

with particular focus on the long term (1 mark each)

2 2


4

Examiner’s Comments This question was not well answered. Many candidates failed to provide strategic level objectives, instead focusing upon short term measures such as profitability levels. Another common failure was the lack of quantification of the objective. For example, some candidates stated “to maintain its position of the main telecommunications supplier in C”. Whilst a viable objective, it needed to be expressed in terms of levels of market share and a time frame for achievement. Similar unquantified objectives included “to be the leading global telecommunications provider” or “expansion into foreign countries”, neither of which are measurable or time based. Similarly, some candidates also failed to justify the objective as relevant to CTC long term objectives. Many answers consisted only of the basic objectives listed with no attempt to explain why each is appropriate. Common Errors • Short term instead of long term objectives • No quantification of objectives or time frame – lack of SMART • Poor explanation of the appropriateness of the objectives to CTC






Question 2(c) Advise the Board of Directors on the stages of an appropriate strategic planning process for CTC in the light of the privatisation and deregulation. (11 marks)

Rationale This question is designed to examine the candidates’ ability to apply a strategic planning model to a given scenario. Suggested Approach This question is a gift. It is a very straightforward question for a well prepared candidate, using the rational planning model as a basis for the majority of the answer. Marking Guide

Marks

• A description of each phase of the strategic planning process (only ½ mark each for a bullet point

answer, only 1 mark if not applied to CTC) up to 2 marks each stage, maximum • Statement qualifying that the process described is a deliberate process and that an emergent

process is more likely

10

1


11

Examiner’s Comments This question was well answered. This was to be expected, as the rational planning model is core to the Business Strategy syllabus. The main weakness was the lack of application to CTC. A number of answers were mainly re-writing of the text book stages of the model with little or no attempt at real application of these stages to CTC in the light of the privatisation. For example, at the environmental analysis stage, few candidates discussed how the PEST should have included an analysis of potential competitors for the market in C and existing competitors in any foreign market into which it is considering expanding. Common Errors • Very brief points • Poor explanation of the appropriateness of the stages to CTC






Question 3(a) Advise the Board of Directors of the possible threats related to the patent expiries. (10 marks)

Rationale This question tests the candidates’ ability to advise how suppliers and customers may influence the strategic process. Suggested Approach This question should be straightforward with a fairly simple analysis of the information presented in the scenario. It is clear that DDD is under threat from a number of the parties mentioned in the scenario and the candidate needs to identify these and determine the threat that each poses. A possible tool to assist in answering this question could be Porter’s Five Forces model. Marking Guide

Marks

Recognition of the current low supplier/customer power and barriers to entry Lack of differentiation for DDD Margins being squeezed by customers and suppliers Supplier actions Threat of new entrants Pharmaceuticals unlikely to backward integrate

3 1 2 2 1 1


10

Examiner’s Comments This question was reasonably well answered. Many candidates used Porter’s five forces model to structure their answer, which was useful. However, some candidates attempted to apply all aspects of the model, which was unnecessary and a waste of the candidates’ time. Clearly the main threats to DDD came from the customers, suppliers and possible new entrants and most candidates recognised this. Few candidates, however, recognised that as a private company, takeover is currently unlikely. A common mistake was that many candidates misunderstood the nature of patents, with many candidates referring to DDD merely overcoming the problem by renewing the patents in some way. Common Errors • Lack of understanding of the nature of patents • Focus upon irrelevant aspects of the five forces model






Question 3(b) Evaluate suitable courses of action that DDD might take to maintain its profits in the face of the threats identified in (a). (12 marks)

Rationale This question examines the candidates’ ability to evaluate strategic options. Suggested Approach The answer to this question should follow on directly from the threats identified in part (a). Candidates should attempt to identify those threats raised in part (a) and present a strategic course of action to reduce or eliminate that threat. A suitable approach would be to use Ansoff’s growth matrix to structure this answer. Also the use of Suitability, Feasibility and/or Acceptability would also be useful. Marking Guide

Marks

Six or seven possible courses of action, each at up to 3 marks, maximum (1 mark only, if option not evaluated)

12


Examiner’s Comments This question was generally not well answered. Most answers had little structure and failed to link back to the threats identified in part (a). Those candidates that used the Ansoff’s matrix did better, but the main weakness was the lack of evaluation of the strategies suggested. The question requirement clearly asks for an ‘Evaluation’ of the suitable courses of action, and this was a clear example of candidates ignoring the question requirement. Many candidates mentioned the need to develop new patents and to invest in new research and development, and also the possibility of entering into a joint venture or partnership with suppliers. However, few used the suitability, feasibility or acceptability to evaluate these courses of action and as result, few candidates answered the question adequately. Common Errors • Lack of evaluation






Question 3(c) From your analysis recommend, with a brief justification, the most appropriate course of action for DDD. (3 marks)

Rationale This question examines the candidates’ ability to evaluate strategic options. Suggested Approach This question leads on directly from part (b), requiring the candidate to make a recommendation based upon the courses of action discussed. Clearly, it is important to only make a recommendation based upon those courses of actions already discussed in part (b). It is important that the candidate recognises the interests of the family and employee shareholders when making a suitable recommendation. Marking Guide

Marks

Clear and justified recommendation based upon the discussions in part (b), up to

3


Examiner’s Comments This question was reasonably well answered. Most candidates did use the answers presented in part (b) to make a recommendation but once again, many candidates failed to read the question requirement fully, and to justify their recommendation. Common Errors • Repeat of part (b) • No justification of recommendation






Question 4(a) Advise the Board of Directors of the advantages to EEE of conducting a stakeholder analysis in the context of the proposed investment decision. (5 marks)

Rationale This question examines the candidates’ understanding of stakeholder analysis. Suggested Approach This question requires the candidate to recognise the difficulties that EEE faces in undertaking the proposed investment decision and how an understanding of the various stakeholder groups could help. A discussion of Mendelow’s matrix was not required for this answer. Marking Guide

Marks

Identification and justification of each advantage (2 marks each, up to) Recognition that strategies without stakeholder support will fail

4 1


5

Examiner’s comments This question was generally well answered, with most candidates recognising the need to have stakeholder support if the investment is to go ahead. Also, most also recognised the importance of focusing upon gaining the support of those with the most power and interest over the decision. However, many candidates wasted time discussing unnecessary theory with little attempt at application. Some candidates also spent too long identifying the stakeholders at this point, which was not required until part (b) of the answer and gained no marks in this part of the answer. Overall, most candidates made a good attempt at this answer. Common Errors

• Theoretical discussions of Mendelow matrix • Focus upon individual stakeholder groups (not required until part (b)






Question 4(b) Analyse the principal stakeholders in EEE in the context of the proposed investment in the new process. (15 marks)

Rationale This question tests the candidates’ ability to recognise and discuss stakeholder groups and how they may influence an organisational decision. Suggested Approach This question should be a gift for candidates. Although stakeholder mapping has been examined before, this question requires the candidates to apply the understanding of stakeholder power and interest in the context of an organisational decision and not the organisation itself. Therefore it is important that the candidate only focuses upon those stakeholders who would be interested in this decision and not the organisation itself. Marking Guide

Marks

Identification of stakeholders (½ mark for each identified, up to) Discussion of power over, and interest in, the decision (up to a further 1½ marks each), maximum Recognition of the complexity of overlaps of stakeholder groups (e.g. employees being local residents and employees)

4

10 1


Examiner’s Comments This question was generally well answered. Most candidates identified the key stakeholders in the decision and could identify their level of power and interest. However, many candidates failed to adequately focus upon the decision itself and instead discussed the stakeholders influence over EEE as an organisation. Also many candidates spent too long discussing irrelevant stakeholders, such as the national government, general suppliers and the media. Few candidates recognised the complexity of stakeholder analysis and the overlaps of some of the key stakeholders such as the employees living close to the factory and the local government. Common Errors • Focus upon non relevant stakeholders • Theoretical answers with little application to the scenario






Question 4 (c) Recommend an acceptable course of action to the Board of Directors in the light of the stakeholder analysis conducted in (b). (5 marks)

Rationale This question tests the candidates’ ability to recommend an organisational approach in relation to government and society. Suggested Approach This question gives the candidate an opportunity to interpret the situation as described in their answers to parts (a) and (b) and identify how EEE might achieve some favourable public relations with regard to the investment decision. The answer to this question should not merely focus upon Mendelow’s strategies of ‘keep informed’, ‘keep satisfied’ etc, but instead should identify the positive actions that the Board of Directors should undertake to ensure that the decision goes ahead and is acceptable to the majority of stakeholders. Marking Guide

Marks

Recognition of a conflict situation Recommendation of whether to go ahead or not with the decision Suggestions for good public relations actions

1 2 2


Examiner’s Comments This question was poorly answered. Most candidates merely discussed the strategies for key stakeholders as suggested by the Mendelow matrix, which was a repeat from part (b) for many answers. Most candidates failed to recognise the importance to EEE of undertaking the decision and how the Board needs to ensure the key stakeholders identified in part (b) could be kept happy. Common Errors • Repeat of suggestions made in part (b) • Lack of focus upon specific courses of action to ensure decision goes ahead






Question 5(a) Advise the board of the advantages of adopting a formal approach to competitor analysis. (10 marks)

Rationale This question tests the candidates’ knowledge of competitor analysis and competitive strategies. Suggested Approach This should be a very easy question as competitor analysis is a key syllabus area, well covered in all syllabus texts. A suitable approach to this question would be to firstly identify why FFF should undertake this approach in the light of its current position. Marking Guide

Marks

For each advantage identified and discussed, up to 2 marks

10


10

Examiner’s Comments Question 5 was the question most avoided by candidates, despite it being a very straightforward question. Although generally well answered, many candidates’ answers lacked depth and many failed to recognise its importance in determining FFF’s own strategies to maintain its market position. Most candidates focused upon finding out about competitors without recognising its importance in helping to formulate FFF’s own strategies. Some candidates also incorrectly focused upon the word ‘formal’ in the question requirement, structuring their answer around procedural issues such as formal documentation and properly held meetings etc. Common Errors • General answers not focused upon FFF • Focus upon the word ‘formal’






Question 5(b) Advise the directors of the stages in a formal competitor analysis process and identify any information that would need to be gathered at each stage for FFF. (15 marks)

Rationale This question examines the candidates’ knowledge and understanding of formal competitor analysis and the ability to apply this to a scenario. Suggested Approach For a well prepared candidate this should be a gift, requiring the application of the stages of competitor analysis to FFF. This aspect of the syllabus is again well covered in all syllabus texts but it is important to ensure that this is thoroughly applied to FFF at all stages of the process. Marking Guide

Marks

Identification of each stage ( ½ mark each, up to) Description of each stage, and the information required ( ½ mark each, up to) Justification of each stage ( ½ mark each, up to) Clear reference to FFF

5 5 5 1


15

Examiner’s Comments This question was reasonably well answered, with most candidates displaying some knowledge of the stages of the competitor analysis process. However, as in many other questions the main weakness was the lack of application to the given scenario. Some answers were mere descriptions of each stage and some were lists only. Most candidates failed to include the information that would need to be gathered at each stage again demonstrating an inability to read the question requirements properly. Most candidates made only fleeting reference to FFF in most of their answer. Common Errors • Lack of knowledge of competitor analysis process • Limited application to FFF • List or basic bullet point answers










You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, highlight and/or make notes on the question paper. However, you will not be allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time.


ALL answers must be written in the answer book. Answers or notes written on the question paper will not be marked.




The list of verbs as published in the syllabus is given for reference on the inside back cover of this question paper.

Write your candidate number, the paper number and examination subject title in the spaces provided on the front of the answer book. Also write your contact ID and name in the space provided in the right hand margin and seal to close.


TURN OVER

P6

– B

usin

ess

Stra

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May 2007 2 P6



AFR is a large retailer of furniture, based in an Asian country. It has three strategic business units (SBUs) which specialise in office, bedroom and lounge furniture. Each SBU is responsible for the design, procurement and retailing of its own range of furniture. AFR sells all its product ranges through a chain of large ‘furniture superstores’ throughout its own country. Each store sells all three furniture ranges.

AFR has been in existence for over twenty years, and has always been profitable. Recently, the organisation’s profitability has been slightly higher than average for the furniture retail sector.

All the furniture that AFR sells is designed ‘in house’. Design staff from each of the three SBUs work in a centralised research and development (R&D) department, where all designs are developed. Production of the designs is outsourced to a number of small local manufacturers. This ensures that AFR can keep close control of product features, style and quality, while negotiating down the unit cost of production.

Segmental analysis

The following figures are extracts from the report and accounts of AFR for 2006. AFR reports its performance in the local currency, the dollar.

$ million

Sales revenue

Office furniture Bedroom furniture Lounge furniture TOTAL

4·23 3·20 6·04

13·47

$ million

Contribution Office furniture Bedroom furniture Lounge furniture TOTAL

0·81 0·44 0·75 2·00

Market conditions

The market for office furniture is estimated to be growing at a rate of about 15% each year. The market leader is DS with a reported sales revenue from this sector of $6·35 million. DS sells a much narrower range of ‘basic’ office furniture than AFR, through a chain of specialised office furniture stores. Most of its products are mass produced in large factories elsewhere in Asia, and it is therefore able to sell at much lower prices than AFR.

The market for bedroom furniture is considered to be declining by about 5% each year. AFR is market leader in this segment, ahead of NKO (with sales revenue of $2·85 million) and MK ($2·14 million). AFR has a good reputation for the style and quality of its bedroom furniture, and customers report very high satisfaction levels.

The market for lounge furniture, such as sofas and easy chairs, is growing at a rate of about 2% each year. AFR is a relatively small player in this market which is dominated by MK with its sales revenue of $14·25 million. The second placed competitor is TSC ($11·96 million), closely followed by NKO ($8·94 million). Despite having tried to increase its market share in this segment, AFR has had little success. Much of AFR’s lounge furniture is made to order, with customers allowed to choose from a wide range of styles and fabrics.



May 2007 3 P6

The following information has been provided by the Government bureau of economic statistics:

$ million

Market volumes (2006)

Office furniture Bedroom furniture Lounge furniture

23·60 12·80 70·00

Dining furniture

The research and development (R&D) manager of AFR has noticed that the market for dining furniture, such as dining tables and formal dining chairs, is growing at a rate of about 10% a year. Furthermore, he is aware that neither DS nor MK has any dining furniture products. This market segment is served by many small retailers, each of whom sells a similar range. Most of the dining furniture currently on sale originates from a few large manufacturers.

The R&D manager has proposed to the Board of AFR that the organisation develop its first ever range of dining furniture. The R&D manager has provided the following estimates of project cost and revenue.

$

Depreciation (per year) Other fixed costs (per year) Variable cost (per unit*) Average sales price (per unit*)

24,000 80,000

560 800

* A unit is one table and six chairs.

The R&D manager has calculated that, to breakeven, AFR must sell just over 400 units per year. He believes that such a level of sales is almost certain due to the stylish designs he has been working on.

The marketing manager is not sure. She feels that sales need to be closer to 500 units each year if AFR are to make a profit. The marketing manager also believes that demand is unlikely to exceed 500 units for such unusual designs. She is also concerned that the new dining furniture may be overpriced at $800 per unit.

The managing director asked the R&D manager how much investment in new capital equipment would be required, and the R&D manager said that the investment cost of $120,000 was already taken into account in the depreciation figure.

AFR evaluates projects over a five year period.

The requirement for Question One is on page 5, which is detachable for ease of reference

TURN OVER



May 2007 4 P6




May 2007 5 P6

Required (a) Evaluate the existing product portfolio of AFR.

Note: There are up to 7 marks available for calculations in this requirement.

(15 marks)

(b) Recommend an appropriate strategy for each existing product range.

(9 marks)

(c) Advise the Board whether to invest in the new range of dining furniture. You should assume a cost of capital of 10% for this project, a project life of five years and no taxation.

Note: There are 6 marks available for calculations in this requirement

(14 marks)

(d) Recommend appropriate control measures, assuming none are currently in place, for

(i) the three existing product ranges;

(6 marks)

(ii) the project to develop the new range of dining furniture should it go ahead. (The project, for the purpose of this question, may be assumed to be the design of the new product range and production of prototype products only.)

(6 marks)



End of Section A


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May 2007 6 P6




May 2007 7 P6

SECTION B – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER TWO QUESTIONS FROM FOUR Question Two B is a media company, publishing lifestyle magazines for the consumer market. These lifestyle magazines contain articles and advertisements about fashion, health and beauty products, homes, furniture, and hobbies and are bought by people aspiring to a high standard of living.

Increasingly, consumers are turning to other media for the information and entertainment traditionally provided by this type of magazine.

Traditionally, 60% of B’s revenue has been derived from selling advertising, the balance being provided by the cover price of each magazine. Over the last four years both the revenue and profits have declined as there has been a steady reduction in the sale of both advertising space and the number of magazines sold.

The industry is very dependent upon the level of discretionary disposable income. If this income is at a low level, fewer luxury goods are advertised. However, people still buy the magazines to read about these goods.

The company has tried to expand abroad but has failed, expensively, to achieve this. Similarly, attempts to enter other segments of the home market, particularly teenage magazines, have failed. Both of these failures have come as a surprise to the Board of Directors who thought that they understood the respective markets well enough to make the appropriate decisions.

New technology, in the form of digital media, has also affected the magazines industry. These changes have been felt in both production methods, such as broadband distribution of proof copies, and the choice of media, such as the Internet, available to consumers. To a large extent, the speed of these developments was a surprise to the directors of B.

Required: As management accountant, you have been seconded to work with the organisation’s forecasting and planning function, to improve its long-range planning.

(a) Evaluate the benefits to B of implementing a process of systematic environmental

analysis.

(12 marks)

(b) Describe the essential stages that should be included in a scenario planning process that could be introduced by B.

(13 marks)



TURN OVER



May 2007 8 P6

Question Three C is a major pharmaceutical manufacturing company producing and supplying a variety of prescription drugs in its home market. C currently uses its own fleet of vehicles to deliver to the wholesalers. There are six competitors who supply drugs which can be used to treat the same diseases as those produced by C.

Up until three years ago, the supply chain for the industry consisted of the manufacturers, and a group of ten wholesalers which covered the whole country and which supplied approximately 4,000 independent pharmacies. These independent pharmacies are all small companies which source their drugs from the wholesalers.

Traditionally, patients would see a doctor who would write a prescription for the correct dose of the required drug which the patients had to take to the pharmacy to get their supply. This was the only way they could obtain their medication. Because of a government subsidy, regardless of the medication prescribed, all prescriptions are charged at a fixed rate.

Three years ago, the legislation changed and for the first time supermarkets were allowed to employ a qualified pharmacist and to supply prescription drugs. Because of their size and buying power, the supermarkets are now refusing to deal with the wholesalers and are insisting on being supplied directly by the pharmaceutical manufacturers.

These changes have not been well received by the independent pharmacies. There has been a significant volume of comment in the press about pressure groups which see this as another encroachment by ‘big business’ on the small independent traders. Some government ministers have also expressed concern about the increasing market power of the supermarkets.

C is considering changing its distribution network so that it no longer supplies the wholesalers but will sell directly to all the independent pharmacies and will share the wholesalers’ margin with them.

Although the transport manager has said that he believes the arrangements can be dealt with in-house, some of the Board of Directors feel that it might be better to outsource all the transport function.

The Board of Directors recognises that there would need to be significant changes in the way the company operates were either, or both, proposals to be implemented. These changes would also have a significant effect on the stakeholders of the business.

Required: (a) Discuss the advantages and disadvantages, to C, of the proposal to supply directly to

the pharmacies.

(10 marks)

(b) Discuss the advantages and disadvantages, to C, of the proposal to outsource the transport function should the proposal to directly supply pharmacies be adopted.

(8 marks)

(c) Advise the project team how C might best communicate the decision, to directly supply independent pharmacies, to each of its principal stakeholders.

(7 marks)




May 2007 9 P6

Question Four D is a management consultancy partnership providing complex computer modelling services to utility companies. Three partners started the business ten years ago but rapid growth in the past four years has seen it increase to fifteen partners. Each partner has a team working exclusively for, and reporting directly to that partner. Competition between the teams is fierce and, sometimes, heated. The loyalty of each team to its respective partner is very strong.

Members of each team are rewarded with an annual team bonus based on the amount of new business they bring in each year. However, recently it has been discovered that teams have been competing with each other for the same potential new client.

Partners recruit all consultants as trainees, usually after they have obtained a doctorate in pure mathematics or economics. After a six months probationary period they are either confirmed in post or asked to leave. The rewards for those that stay are high with at least 60% of income derived from the team bonus. Typically a basic salary of $40,000 would be boosted to $100,000 if the team has worked aggressively and found new clients.

The service that the partnership provides is highly specialised and at the forefront of available technology. Each team will write computer simulations to address its clients’ problems. These models are not made available outside the company and, on some occasions, have not even been shared with other teams in the consultancy.

At a recent partners’ meeting, it was agreed that the inter-team rivalry was not working in the partnership’s best interest, since teams were competing in such a way as to damage the firm’s reputation, profitability and its prospects for growth. Recognising that the current performance measurement system encouraged this behaviour, the partners agreed that an appropriate performance measurement system should be introduced which was less one-dimensional. The partners believed this would encourage better practice in terms of knowledge sharing and a coordinated approach to their existing clients and potential clients. They have recognised that the introduction of a multi-dimensional performance measurement system will involve a significant training programme for their teams to redirect their current focus away from only finding new business.

Required: As a first stage in this process, you have been appointed as management accountant and practice manager. (a) Advise the partners of the functions that an effective performance measurement

system will perform for D.

Note: You are not required to describe, in detail, any particular system.

(10 marks)

(b) Recommend the process that should be used in developing the performance measurement system to be used within D.

(15 marks)



TURN OVER



May 2007 10 P6

Question Five E is a developing country in a group of islands where each island is a separate country. A number of the islands formed a trade bloc five years ago and cooperate economically and in their terms of trade.

Those countries that are in the trade bloc impose no tariffs on imports and exports between member countries but impose a common rate of import duty on any goods or services brought into the group. The trade bloc jointly advertises the attractiveness of the area for inward investment, exports and tourism, and this has been reasonably successful recently. At present, each island has a different currency but full monetary union has been proposed for the future.

E does not belong to the trade bloc at this point in time and is the least developed of the islands in the group although, geographically, it is one of the largest.

There is a fairly large volume of trade between the islands and the majority of E’s exports of agricultural products and light engineering products go to other countries in the group of islands. Since the other islands are more industrialised than E, they are not self-sufficient for foodstuffs.

The school system of E produces well-educated children, many of whom go to a nearby industrialised country, F, to take degrees. F is not part of the trade bloc. Only 10% of those students return to E and usually work in their parents’ business or other small firms. The average age of the population of E is some ten years higher than that of the islands in the trade bloc.

Although E is an attractive location, there is a limited tourism industry in E and there is very little in the way of service industry, although the government has recently received a grant from the World Bank to improve the telecommunications infrastructure of the island.

Required (a) Identify those internal and external stakeholders who would be interested in E’s

decision to join the trade bloc and discuss the nature of their interest.

(12 marks)

(b) Discuss the advantages and disadvantages that could be experienced by the stakeholders based in E if the country were to enter the trade bloc.

. (13 marks)







May 2007 11 P6







May 2007 12 P6


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May 2007 13 P6




May 2007 14 P6




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LIST OF VERBS USED IN THE QUESTION REQUIREMENTS A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for each question in this paper. It is important that you answer the question according to the definition of the verb.

LEARNING OBJECTIVE VERBS USED DEFINITION

1 KNOWLEDGE

What you are expected to know. List Make a list of State Express, fully or clearly, the details of/facts of Define Give the exact meaning of

2 COMPREHENSION What you are expected to understand. Describe Communicate the key features

Distinguish Highlight the differences between Explain Make clear or intelligible/State the meaning of Identify Recognise, establish or select after

consideration Illustrate Use an example to describe or explain

something

3 APPLICATION How you are expected to apply your knowledge. Apply

Calculate/compute To put to practical use To ascertain or reckon mathematically

Demonstrate To prove with certainty or to exhibit by practical means

Prepare To make or get ready for use Reconcile To make or prove consistent/compatible Solve Find an answer to Tabulate Arrange in a table

4 ANALYSIS How are you expected to analyse the detail of what you have learned.

Analyse Categorise

Examine in detail the structure of Place into a defined class or division

Compare and contrast Show the similarities and/or differences between

Construct To build up or compile Discuss To examine in detail by argument Interpret To translate into intelligible or familiar terms Produce To create or bring into existence

5 EVALUATION How are you expected to use your learning to evaluate, make decisions or recommendations.

Advise Evaluate Recommend

To counsel, inform or notify To appraise or assess the value of To advise on a course of action



May 2007 16 P6




May 2007





May 2007 Examination



• The evaluation of a product portfolio of an organisation and the provision of recommendations for appropriate changes to support an organisation’s strategic goals.

• The evaluation of strategies for responses to competition. • The evaluation of the impact and influence of the external environment on an

organisation and a discussion of scenario planning. • How suppliers and customers influence the strategy process and recommendations

on how organisations should interact with them. • The approaches required for business/ government relations and relations to civil

society. • The evaluation and recommendations for appropriate control measures. • Stakeholder interaction and the use of stakeholder mapping.

It was encouraging to see an improvement in the candidates’ ability to apply their management accounting knowledge to prepare a product portfolio analysis and a NPV analysis in Question 1. Part (a) of Question 1 was adequately answered, with many candidates providing a good range of calculations which they were then able to correctly use to analyse the product portfolio of AFR. However, in part (b) of Question 1, few candidates were able to demonstrate the ability to recommend appropriate product strategies based upon the findings of part (a). Although many candidates had correctly calculated high contribution and turnover for lounge furniture, they still recommended divestment, based upon the classification of the product as a ‘dog’ in the BCG model. Many candidates are still not able to use and apply theory appropriately, nor do they recognise the weaknesses and limitations of commonly-used strategy models. A vital aspect of the Business Strategy paper is for candidates to demonstrate their ability to critically appraise the models and theories presented and to rely on them only when appropriate. Part (c) of Question 1 was adequately answered by most candidates, but it is still surprising and most disappointing to see how many candidates are not able to perform a very basic NPV calculation at this level, nor to recognise that an NPV calculation is required. Part (d) of Question 1 was the weakest for most candidates. Few considered the control measures appropriate to AFR’s product portfolio and many failed to recognise that in part (d) (ii), the question asked for controls for the project to develop the dining furniture range. It would appear that candidates did not give themselves enough time to answer this question and neglected it, seemingly due to it being the last part of the question. However this question was worth 12 marks (nearly one quarter of the marks for Question 1) and candidates must not ignore a question of this weighting just because it is the final part of the question.

It was encouraging to see a good level of application of knowledge of the key syllabus areas by some candidates in the Section B questions, as would be expected at this level. The Section B questions were answered well by many candidates, and there was evidence of better application of knowledge, in particular in Question 3 and Question 5. However, it was again evident in some answers that there was a serious lack of knowledge and understanding of some of the fundamental Business Strategy syllabus areas, particularly in Question 4. There are still some candidates who fail to apply their knowledge as required in the question and instead re-write everything they know about a particular model (in particular, the Mendelow matrix in Question 3(c) and Question 5). This is not acceptable at this level.

It is evident that some candidates are still not reading the question requirements carefully enough, and consequently are scoring few or no marks on what should be relatively straightforward questions. Examples of this include Question 1 part (d), where many candidates failed to consider the control measures relevant for AFR’s product portfolio and the controls required for a project. This was also the case in Question 2 part (a), where candidates often undertook detailed PEST and Porters five forces analysis, which were not required. In this examination, it is a good idea to use the reading time to read the question requirements as well as the scenarios. Candidates should ensure that they understand exactly what they are required to do before answering.







Question 1(a) Evaluate the existing product portfolio of AFR.

Note: There are up to 7 marks available for calculations in this requirement. (15 marks)

Rationale This question requires candidates to apply their knowledge of the management of a product portfolio, in particular the application of the Boston Consulting Group (BCG) model. Suggested Approach This question should be straightforward. The candidates were expected to apply the BCG model to the three products made by AFR and to evaluate their position in the portfolio. The question clearly asks for an evaluation, therefore a basic presentation of the model and the required calculations would not be sufficient to be awarded a pass mark. Candidates were expected to consider and discuss each product in terms of its position in the matrix and its value to AFR’s portfolio. Marking Guide

Marks

For each calculation correctly calculated and labelled, (½ for each), maximum For interpretation and discussion of calculations, (up to 1 for each), maximum For BCG Diagram (correctly labelled, drawn and products mapped), maximum For reflections on the limitations of the BCG, maximum For conclusions as to the nature of AFR’s portfolio, maximum

7 7 3 2 3


Examiner’s Comments The answers to this question were satisfactory. Many candidates recognised the need to use the BCG model to answer this question, but few applied it correctly. There were some candidates who failed to discuss the BCG at all and did not recognise the need to evaluate the three products as a portfolio. Similarly, some candidates focused upon the Product Life Cycle model, which again failed to adequately address the need to discuss the three products as a portfolio. Candidates whose answers took the latter two approaches were unlikely to pass this question.

Many candidates failed to correctly calculate ‘Relative market share’ and instead used AFR’s market share for each product to plot each on the BCG model. This led to a common error of classifying the office furniture as a ‘rising star’ product, when in fact it should have been classified as a problem child. Although the diagram was not necessarily required to be awarded full marks, it was disappointing that many of those that did undertake a diagram, did it incorrectly or incompletely. Very few candidates labelled the axes clearly (with appropriate scales), instead merely labelling both axes with ‘high’ and ‘low’ only.






Most candidates scored highly on the calculations, providing a good range of analysis, including; market share for each product, market share of competitors for each product, contribution margins per product and percentage of turnover for each product. However, few candidates then used these fully to explain clearly the position of each product in the portfolio. For example, the lounge furniture was correctly classified by most candidates as a ‘dog’ product in the BCG analysis. However, had they reviewed the contribution margins, they would have seen that the lounge furniture provides 37.5% of AFR’s total contribution, and therefore has many of the characteristics of a cash cow. Similarly, most candidates correctly identified bedroom furniture as a ‘cash cow’ in the BCG matrix, but few candidates recognised from their calculations that bedroom furniture is the smallest product in the portfolio and has the lowest level of contribution, and is therefore more akin to a dog. Thus, although many candidates had correctly calculated the ratios, they failed to use them, in conjunction with the BCG analysis, to evaluate the product portfolio.

A number of candidates chose to apply the product life cycle model, instead of the BCG matrix. While this is a valid way to evaluate a product portfolio, little information was given in the scenario to facilitate such analysis. Candidates should read question scenarios carefully, before deciding on the appropriate analysis tool(s).

Many candidates also focused on each product separately, without recognising the need to evaluate the three products as a portfolio and the impact they have upon each other. Common Errors • Incorrectly drawn and labelled BCG model • Not using relative market share to classify the products in the model • Focus upon the product life cycle instead of the BCG model • Lack of recognition of the portfolio of products and instead focusing upon the individual products as

stand alone






Question 1(b) Recommend an appropriate strategy for each existing product range. (9 marks)

Rationale This question is designed to test the candidates’ ability to recommend a product portfolio strategy based upon the findings of the product portfolio analysis carried out in part (a). Suggested Approach Answers should have been based upon the findings of part (a) and upon the material presented in the scenario regarding the competitors’ current product strategies. Candidates were expected to recognise that, although the BCG model suggests that dog products should be divested, this would have been an inappropriate strategy for AFR. The lounge furniture division, which could be classified as a dog, provides 37.5% of the contribution to AFR’s fixed costs, and it would be unwise to divest such a product. Candidates were expected to use their knowledge of strategic options and to apply it appropriately to the products of AFR, bearing in mind both each product’s position in the portfolio, and the way the products were related to each other. Marking Guide

Marks

Identify (1), evaluate (1) and recommend (1) appropriate strategies for each product (3 marks per product)

9


9

Examiner’s Comments This question was not well answered. Most candidates were able to make recommendations based upon the position of the products and the competitors’ products, and many recognised that for office furniture, competing on price was not an option as the current market leader was already undertaking a successful cost leadership strategy. Therefore many candidates correctly identified that the most appropriate strategy would be to differentiate the office furniture product in order to compete. Similarly, for bedroom furniture, the most appropriate strategy for the product in its latter stages of its life was to attempt to prolong this with some form of differentiation. However, a number of answers were weak, with very general statements such as ‘bedroom furniture is a cash cow, then we need to harvest this product’. Candidates merely took the general strategic advice, as offered by the theory of the BCG model, without reviewing its suitability to this particular product portfolio. The most common mistake in many answers was where candidates advised that the lounge furniture should be divested as it is a dog product. Again, the theory suggests this approach for a dog product, but in reality this would be a very poor strategic choice for AFR, as the lounge furniture is an important contributor to the product portfolio. Candidates must not just assume that theoretical models such as the BCG model can be strictly applied in all cases and they must use their knowledge to selectively apply theory only when it is appropriate. Candidates should refer back to the recent article in the Financial Management magazine (Dec/ Jan 06) for an appraisal of the BCG model. Common Errors • Poor strategic advice based upon theory and not reality • Lack of application of the advice to the scenario i.e. very general and not specific to each product






Question 1(c)

Advise the Board whether to invest in the new range of dining furniture. You should assume a cost of capital of 10% for this project, a project life of five years and no taxation.

Note: There are 6 marks available for calculations in this requirement

(14 marks)

Rationale This question tests the candidates’ ability to undertake an investment appraisal on a new product for AFR. Suggested Approach This was a very straightforward question. Candidates were expected to undertake a NPV appraisal upon the dining furniture proposal at both 400 units and 500 units (or other appropriate levels), to assess whether the product was viable at either of these levels. Then, candidates were expected to use this analysis as part of an overall appraisal of the dining furniture market for AFR, based upon the competitive environment and upon the potential impact of the new product upon the existing portfolio. Marking Guide

Marks

Capital equipment T0 Fixed Costs T1-5 Contribution per unit Contribution from 400 units (or low level) T1-5 Contribution from 500 units (or high level) T1-5 Discount Factors NPV (400 or low) NPV (500 or high) Breakeven sales level Discussion of possible breakeven point(s), up to Other relevant issues discussed, up to Recommendations

½ ½ ½ 1 1 ½ ½ ½ 1 2 4 2


14

Examiner’s Comments This question was reasonably well answered. Most candidates were able to correctly calculate the NPVs at both 400 and 500 units and to determine that at 400 units the project had a negative NPV and was not financially viable, but at 500 units the project had a positive NPV and was therefore financially viable. However, it was most disappointing to see the number of candidates who incorrectly calculated the NPVs and who made very poor attempts at this basic financial analysis. At this final level, it is unacceptable to not be able to carry out a simple NPV calculation.

However, these calculations alone were not sufficient to pass this question. A number of other factors needed to be considered, in particular the current competitive environment for dining furniture and the accuracy of the figures provided to undertake the financial appraisal.






Many candidates failed to attempt to calculate the breakeven sales level, which was an important factor to establish the likelihood of success in this product range. For those that did attempt this, many incorrectly calculated breakeven by dividing fixed costs by contribution per unit (as done by the R&D manager). Few candidates correctly calculated the breakeven of 466, which was closer to the estimate as provided by the marketing manager. Most candidates did not discuss the importance of AFR’s confidence in achieving the breakeven sales level and the apparent discrepancy between the R&D and Marketing managers’ views. However, most candidates did discuss the need to undertake further marketing research in order to make a decision. Common Errors • No calculation of the breakeven • Inclusion of depreciation in the NPV calculations • Weak analysis of the competitive environment and the impact of the new product on the existing

portfolio • No final recommendation made






Question 1(d)

Recommend appropriate control measures, assuming none are currently in place, for

(i) the three existing product ranges; (6 marks)

(ii) the project to develop the new range of dining furniture should it go ahead. (The project, for the purpose of this question, may be assumed to be the design of the new product range and production of prototype products only.)

(6 marks) Rationale This question tests the candidates’ ability to evaluate and recommend appropriate control measures for products in different strategic positions. Suggested Approach This should be a very straightforward question. Candidates should be familiar with a wide range of control measures and should be able to apply them to the scenario. It is important that the candidate recognises in part (ii) of the question that the control measures should be suitable for a project to design the product and produce a prototype only. Therefore, control measures relating to the dining furniture product once in full production were not required. Marking Guide

Marks

(i) For each appropriate control measure and process, up to 2 marks, to a total of

(ii) For each appropriate control measure and process, up to 2 marks, to a total of

6

6


12

Examiner’s Comments The first part of this question was generally not well answered. The main reason for this was the poor application and the level of general answers provided. Most candidates merely listed controls such as budgets and variance analysis or used a standard list of ‘supervisory, organisational, authorisation, personnel’ etc controls with little attempt at application to the products in the scenario. Many candidates used the balanced scorecard to structure their answer, which was appropriate only if it was suitably applied to the three products.

In part (ii), those answers that addressed the question requirement were generally better. The better candidates recognised the need to discuss project control measures and focused their answers upon the need to control the project by means of project teams, proper project planning tools and project budgets and cost control.

Many candidates provided only very brief lists in answer to this question. This was either due to lack of knowledge or poor time management. However, control measures are an important part of the P6 syllabus and must not be ignored. Also, this question was worth nearly one quarter of the marks for question 1, therefore candidates should have planned their time better to ensure they could adequately answer it. Common Errors • Poor application of the control measures discussed • Use of the balanced scorecard, with no attempt to apply it to the three products • Lengthy discussions of PRINCE in part (ii) which were unnecessary







Question 2(a)

Evaluate the benefits to B of implementing a process of systematic environmental analysis. (12 marks)

Rationale This question tests the candidates’ ability to evaluate the impact and influence of the external environment on an organisation and its strategy. Suggested Approach This should have been quite a straightforward question. However, the question clearly asks for an evaluation of the benefits of a system of environmental analysis and NOT an explanation or application of the technique. Therefore candidates were NOT required to undertake a detailed PEST analysis or Porters’ five forces analysis. Marking Guide

Marks

For each benefit given For each benefit embedded in or applied to the case material For each benefit evaluated Maximum of 5 marks awarded if NO evaluation of benefits provided

1 1 1


12

Examiner’s Comments This question was not well answered. Many candidates did not answer the question set, instead providing a detailed PEST and/or Porters five forces analysis, without any evaluation of the benefits of environmental analysis. A number of candidates did provide a discussion of a number of relevant benefits of environmental analysis, but very few evaluated those benefits. Some candidates also undertook a SWOT analysis, much of which was internally focused and thus irrelevant. Common Errors • Lengthy PEST and/ or Porters five forces analysis • Failure to evaluate the benefits discussed






Question 2(b)

Describe the essential stages that should be included in a scenario planning process that could be introduced by B. (13 marks)

Rationale This question is designed to examine the candidates’ ability to discuss scenario planning as a technique to support the strategic decision making function. Suggested Approach This should be a straightforward question. As this is the first time scenario planning has been examined under the current syllabus, the question requires only a basic description of the process. However, application of the process to B was rewarded if provided. A recent article in the Financial Management magazine (March 06) should have helped candidates to structure the answer to this question. Marking Guide

Marks

For each stage described (½ each if bullet points only) For each stage well described or clearly linked to the question scenario, an additional

1 1


13

Examiner’s Comments This question was generally well answered. Those candidates that chose to answer this question largely did so on the basis of having read the recent FM article, therefore they were adequately prepared to describe the stages of scenario planning. Many candidates also made a sound attempt to apply the model where possible to B. The main problem was that some candidates had obviously not revised the topic in depth and only knew the key headings of the process without being able to describe it. Knowing the outline headings is clearly not sufficient to pass the examination. Common Errors • Lack of depth, with bullet point heading provided with no further description






Question 3(a) Discuss the advantages and disadvantages, to C, of the proposal to supply directly to the pharmacies. (10 marks)

Rationale This question tests the candidates’ ability to discuss how suppliers and customers influence the strategy process and how to manage supplier and customer relationships. Suggested Approach This question required the candidate to analyse the information presented in the scenario. Candidates were expected to identify a range of advantages and disadvantages of supplying directly to the independent pharmacies. It was important that the candidate’s answer should focus upon the direct supply to the independent pharmacies, not the wholesalers or the supermarkets. Marking Guide

Marks

For each well reasoned advantage, up to For each well reasoned disadvantage, up to Conclusion if provided

2 2 1


10

Examiner’s Comments This question was reasonably well answered. Most candidates could provide a good range of advantages and disadvantages of directly supplying the independent pharmacies. However, a number of candidates subsequently failed to discuss these adequately, providing merely a statement of the advantage or disadvantage. If the requirement asks for a ‘discussion’, a basic statement without any clarification is not sufficient to pass. Some answers also focused mainly on advantages, with very few disadvantages discussed. Many candidates failed to recognise the increased complexity of operations in delivering to 4000 independent suppliers, nor the potential threat of the powerful supermarkets.

Some candidates incorrectly focused their answers upon supplying directly to the supermarkets instead of the independent pharmacies. The supermarkets are not independent pharmacies. A discussion of the supermarkets was valid if undertaken in the context of the possible problems that may be caused to C as a result of the power and size of the supermarkets in gaining a large share of the market, thus threatening C’s market share. Common Errors • Lack of discussion of the advantages and disadvantages. • Focus upon supermarkets instead of independent pharmacies.






Question 3(b) Discuss the advantages and disadvantages, to C, of the proposal to outsource the transport function should the proposal to directly supply pharmacies be adopted. (8 marks)

Rationale This question also tests the candidates’ ability to discuss how suppliers and customers influence the strategy process and how to manage supplier and customer relationships. Suggested Approach As in part (a) of the question, candidates are expected to provide a range of advantages and disadvantages of outsourcing, based upon the information in the scenario and upon their syllabus knowledge of outsourcing. For the well prepared candidates, this should be a very easy question. Marking Guide

Marks

For each well reasoned advantage, up to For each well reasoned disadvantage, up to Conclusion if provided

2

2 1


Examiner’s Comments This question was well answered. Many candidates were able to provide a good range of advantages and disadvantages of outsourcing the transport function, though some answers tended to be a general discussion of the advantages and disadvantages of outsourcing.

Overall this question was one of the best answered of the whole examination Common Errors • General discussions of outsourcing with no application to the scenario.






Question 3(c) Advise the project team how C might best communicate the decision, to directly supply independent pharmacies, to each of its principal stakeholders. (7 marks)

Rationale This question examines the candidates’ ability to recommend appropriate approaches to business/ government relations and to relations with civil society. Suggested Approach This question required the candidates to firstly identify the principal stakeholders and then to recommend the most appropriate method of communication to these stakeholders. It was important for the candidate to focus upon the principal stakeholders and not to spend too much of their time identifying a wide range of general stakeholders. Stakeholder mapping was NOT a requirement of this question. . Marking Guide

Marks

For identification of each relevant stakeholder group, maximum For each specific communication method, relevant to the stakeholder identified

1 1


Examiner’s Comments This question was not well answered. Many candidates saw the word ‘stakeholder’ in the question requirement and saw this as a signal to undertake a detailed diagram and discussion of Mendelow’s stakeholder mapping. This is not what the question asked and therefore was awarded no marks. Candidates could have used the idea of key stakeholders to identify the principal stakeholders for C but a full discussion of power and interest was not required. Many candidates also failed to identify methods of communication, instead providing general discussion of the need ‘to keep informed’ or ‘keep satisfied’. This question clearly asked for the best ways for C to communicate with the principal stakeholders and candidates needed to be much more specific in their examples of forms of communication. Some candidates did provide methods of communication, but failed to explain why these were appropriate to the stakeholder group identified. The question requirement clearly asked candidates to ‘advise’, which requires a full explanation and justification of each communication method chosen, not just a basic statement of the communication method. Common Errors • Detailed discussions of Mendelow’s stakeholder mapping • Little discussion on the forms of communication appropriate to each stakeholder






Question 4(a)

Advise the partners of the functions that an effective performance measurement system will perform for D.

Note: You are not required to describe, in detail, any particular system (10 marks)

Rationale This question examines the candidates’ ability to evaluate appropriate control measures, in particular the importance of effective performance measurement systems. Suggested Approach This question requires the candidate to evaluate the current performance measurement system being operated by D and to advise the partners as to how a more effective performance measurement system could improve D’s current performance. The question does not require candidates to describe in any detail any particular performance measurement system, for example the Balanced Scorecard. Candidates are expected to focus upon the problems currently being faced as a result of the current performance measurement system, and how this could be improved by a more effective system. Marking Guide

Marks

For each appropriate function described For each function well described and embedded in case material, up to a further

1

1½


10

Examiner’s comments This question was not well answered. In fact, Question 4 was the least popular question of the whole exam. This answer should have been fairly straightforward for a well prepared candidate who had revised the appropriate study material. Many answers were very general and did not address the problems currently being faced by D. Other answers merely focused upon the problems of the current system without discussing the functions of a more effective performance measurement system. Common Errors • Little or no focus upon the functions of an effective performance measurement system • Too much focus on the current problems






Question 4(b) Recommend the process that should be used in developing the performance measurement system to be used within D. (15 marks)

Rationale This question examines the candidates’ ability to evaluate appropriate control measures, in particular the development of an effective performance measurement system for D. Suggested Approach This question requires the candidate to recommend the process that should be followed in developing a performance measurement system. A well prepared candidate should have no difficulty with this requirement, as it is a straightforward discussion of a key element of the syllabus and the study text. It is important that the candidate remembers to apply the stages in the process to D and does not just provide a general theoretical answer. It is also important to recognise that the question asks for a discussion of the process used in developing and NOT in operating the performance measurement system. Therefore answers should focus only upon the development stage. Marking Guide

Marks

For each appropriate step or stage described For each step or stage well described and embedded in case material, up to a further

1 1


Examiner’s Comments This question was not well answered. Many answers to this question were very superficial and largely failed to focus upon the development process of a performance measurement system. Many answers either focused upon how an effective performance measurement system should operate or focused on the performance measures themselves. A number of candidates also failed to apply their answer to D. Common Errors • Poor focus upon the development of a performance measurement system • Poor application to D






Question 5(a) Identify those internal and external stakeholders who would be interested in E’s decision to join the trade bloc and discuss the nature of their interest. (12 marks)

Rationale This question tests the candidates’ knowledge of relevant stakeholders in the organisation and the use of stakeholder mapping. Suggested Approach This should be a very easy question. There were a number of stakeholders presented in the scenario that should be easily identified by candidates. Candidates are only asked to consider stakeholder interests and NOT stakeholder power, therefore a full Mendelow mapping exercise is not required. The question also asks the candidate to discuss the nature of the interest and not the level of interest, therefore candidates are expected to discuss the reason for the stakeholder interest and not whether that interest is high or low. Marking Guide

Marks

For each stakeholder recognised that is related to the case material For a discussion of why each might be interested, up to a further

1 2


12

Examiner’s Comments Question 5 was the most popular question on the exam and in general was answered very well. Most candidates identified a wide range of relevant internal and external stakeholders and could identify why each one would be interested in E joining the trade bloc. A number of candidates wasted time by analysing each stakeholder using the Mendelow matrix, which was unnecessary. However, most candidates that answered this question scored very well. Common Errors • Too much focus on Mendelow matrix • Discussion of level of interest (high/ low) rather than the nature of the interest






Question 5(b) Discuss the advantages and disadvantages that could be experienced by the stakeholders based in E if the country were to enter the trade bloc. (13 marks)

Rationale This question also tests the candidates’ knowledge of relevant stakeholders in the organisation and the use of stakeholder mapping. Suggested Approach Again, this should be a very straightforward question. It is important to focus this answer upon the internal stakeholders of E only. Marking Guide

Marks

For each advantage or disadvantage described For illustration of each advantage by reference to specific internal stakeholder(s) For a conclusion, if provided

1 1 1


13

Examiner’s Comments This question was well answered. Most candidates could provide a good discussion of a range of advantages and disadvantages for most internal stakeholders. The better answers took each internal stakeholder and discussed advantages and disadvantages for each one (where possible). Weaker answers merely repeated the answers from part (a), without considering the difference between the nature of interest and whether this resulted in an advantage or disadvantage to the stakeholder group.

Overall question 5 was the most popular question on the examination and was also the best answered by the candidates. Common Errors • Repeat of part (a) answers • Inclusion of external stakeholders



P6

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TURN OVER






AA is a large food manufacturer, making a range of basic canned and bottled foodstuffs. With a turnover of almost €500 million, AA is a major employer throughout Western Europe. While a few AA brands are recognisable market leaders, notably a range of canned fish and a ‘household name’ tomato ketchup, most of AA’s products are in the second tier of food products. The company also produces a wide range of ‘own brand’ products for major supermarket chains (these are products in packaging bearing the name of the supermarket retailer, rather than the producer).

Financial performance (2007/8)

The following information is taken from the October 2007 management accounts of AA. It relates to the budget and latest forecast for the full financial year ending 31 March 2008:

Year to date

Latest full year

forecast

Full year original budget

€ million € million € million Sales revenue from major supermarket chains

177.0

357.0

Sales revenue from wholesalers 42.9 89.4 Gross sales revenue (after returns) 219.9 446.4 495.6 Discounts given (9.9) (20.1) (15.6)Net sales revenue 210.0 426.3 480.0 Gross profit* 36.2 68.2 99.0

* The prices charged to customers are calculated to generate a gross profit margin, before any discount, of 20% (that is, 495.6 x 20% = 99).

After much discussion about the possible causes of this year’s poor performance, the most recent board meeting of AA discussed possible solutions. The following initiatives were identified, which should increase forecast sales revenue in the five remaining months of the current financial year:

• The Marketing Director stated that the effects of a major advertising campaign, aimed at wholesalers, had been omitted from the most recent forecast. This would be launched shortly, and should result in an increase in sales revenue from wholesalers of 8% for the remainder of the year.

• The Business Development Director proposed that a new product line, planned for launch in 2008/9, should be launched early. The new products are already in stock, and should generate gross sales revenue of €8.4 million by year end, without affecting the sales of other products.

• The Sales Director announced that a new wholesale customer had just been won, in an Eastern European country. This new customer should generate about €12 million of net sales revenue in the remaining five months of the year. This revenue was not included in the latest forecast, as the Sales Director had not expected to win the contract.

P6 2 November 2007



Customer strategy

The directors of AA are concerned about the high cost of servicing some of its major supermarket customers. During a recent brainstorming session, they identified the following possible strategies to deal with the least profitable of these customers:

1. Stop selling to them. This will mean that the customers, if they wished to sell AA products, would have to buy them through a wholesaler.

2. Persuade the customers to reduce the number of cost generating activities (as identified in the forecast data below).

3. Introduce new technologies to reduce the cost of the cost-generating activities.

The Sales Director of AA has provided the following information relating to three of AA’s major supermarket customers:

Forecast for 2007/8

S1 S2 S3Sales revenue (before discounts and returns)# (€million) 58 24 108 Average discount given (%) 3 2 8 Number of sales visits made 12 15 218 Number of purchase orders processed* 59 26 760 Number of ‘standard’** deliveries made 104 318 602 Number of ‘rush’*** deliveries made 7 2 158 Damaged products returned (% of sales revenue)**** 2.1 2.0 3.4

Notes:

# The prices charged to customers are calculated to generate a gross profit margin, before any discount, of 20%.

* Purchase orders are paper documents, specifying items and quantities required, and the expected date of delivery.

** A ‘standard’ delivery is one that is ordered and scheduled in the normal way, that is, at least 24 hours before the delivery is required.

*** A ‘rush’ delivery is one that is ordered and scheduled for delivery on the day of order. This normally happens as a result of unexpectedly high demand causing a supermarket to run out of stock, or due to a customer error in calculating order quantities.

**** Customers are given a full refund for all damaged goods. These goods cannot be re-used or re-sold.

The Operations Accountant has provided the following costing information:

Forecast averages for 2007/8 Cost (€)

Making a sales visit 685Processing a purchase order 148Making a ‘standard’ delivery 2,250Making a ‘rush’ delivery 6,475

The requirement for Question One is on page 5, which is detachable for ease of reference

TURN OVER

November 2007 3 P6




P6 4 November 2007



Required: (a) (i) Briefly explain what is meant by ‘gap analysis’ in the context of strategic analysis.

(4 marks)

(ii) Briefly explain the use of the Ansoff product/market growth strategies model in strategic planning, providing examples relevant to AA to illustrate your explanation.

(6 marks) (b) (i) Calculate the effect of the three initiatives (identified at the board meeting) on the

full year net sales revenue gap.

(4 marks)

(ii) Categorise each of the three initiatives in terms of the Ansoff growth strategies.

(3 marks)

(c) Calculate and analyse the forecast net customer account profitability of each of the

three major supermarket customers of AA, during the 2007/8 financial year.

Note: There are 18 marks available for calculations in this requirement.

(25 marks)

(d) Evaluate the three alternative strategies proposed for the least profitable of AA’s

major supermarket customers and recommend which of these strategies you believe AA should adopt.

(8 marks)



End of Section A


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November 2007 5 P6




P6 6 November 2007



SECTION B – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER TWO QUESTIONS FROM FOUR Question Two D is an international logging company, which cuts down timber and supplies sawmills where the timber is seasoned and then cut to appropriate sizes for use in a range of industries. D will work with any timber, ranging from softwoods used in construction or paper manufacture to exotic hardwoods used in expensive furniture. Its usual approach is to secure the rights from a landowner, or in some cases a national government, to cut timber. This can often involve the payment of large initial cash deposits to these suppliers, money which D usually borrows. A logging team then cuts down the trees as quickly as possible and hauls the timber to a convenient river where it is floated to a sawmill. Moving on rapidly to the next site, the loggers usually leave considerable surface damage behind them.

Since an increasing proportion of the company’s work has been in the tropical rainforest, it has recently come under pressure from environmental groups that have protested that it is not socially responsible to act in this way. Whilst the softwood forests can be regenerated in a couple of decades by replanting, hardwoods in tropical forests take far longer to mature.

The Chief Executive of the company has argued that he is not concerned about these protests since, as far as he is concerned, the company always acts ethically, as it has the agreement of the national government in any country in which the company operates.

A recent development in the timber industry has been the harvesting of timber from the bottom of reservoirs which have been created by flooding valleys. Although the capital equipment required for this approach is significantly more expensive than that used in conventional logging, the operating costs are lower. Waterlogged trees in reservoirs have balloons attached, are cut, float to the surface and are towed to a sawmill. The underwater process is quieter and less disruptive to wildlife and the environment.

It has been estimated that there are over half a billion trees, or 20 years’ supply, submerged in reservoirs across the world, but it can take considerable research and expense to find them. As long as the timber has remained submerged deeply enough, it is of the same quality as timber harvested from the land. There is currently only one company conducting underwater logging, although a number of other companies are also considering this development.

Some of the board of directors feel that D should pursue this underwater approach and abandon land based logging. The Chief Executive and one other director feel that the underwater approach carries too high a risk.

Required: (a)

(i) Briefly explain the differences between business ethics and corporate social responsibility (CSR).

(5 marks) (ii) Discuss the CSR issues relating to D’s business and how the company might improve

its CSR position. (8 marks)

(b) With reference to D, evaluate the two approaches to logging and recommend which you think is most appropriate for D.

(12 marks) (Total for Question Two = 25 marks)

Section B continues on the next page TURN OVER

November 2007 7 P6



Question Three F is a leading manufacturer of plastics. Its major products are beer crates and small containers for food sold in supermarkets. Together these two product ranges constitute 90% of F’s business, the remainder coming from selling more technologically sophisticated products.

The company is faced with a number of difficulties and may have to issue a profits warning in the coming year. Although the profit levels have been uneven for the past five years, this is the first time that F will have to report significantly reduced profits.

F has been adversely affected by the aggressive marketing of foreign companies importing beer crates into the market, such that F’s market share has fallen from 80% to 60% in the past three years. Consolidation in the brewery industry has meant that profit margins for crate manufacturers have been squeezed.

The company is heavily dependent upon the home market, which accounts for 75% of its total sales. Exports have been mainly of food containers for supermarkets in neighbouring countries.

F has invested heavily in research and development (R&D) and, although there is one exciting proposition in electro–plastics, most expenditure has been on projects selected by R&D managers who have little commercial awareness. There is the possibility that some new products may be developed from the electro-plastics research.

F is highly centralised, with many decisions taken by the 20 members of the board of directors. The workforce is highly unionised, with a number of different unions represented. Each factory has several negotiating committees set up to agree pay and conditions. Negotiations are often time consuming and confrontational. This has resulted in very precise job definitions, which are strictly adhered to. This has further resulted in considerable inflexibility, together with a complicated system of labour grades.

The directors have had little communication with stock market analysts and investors, who have little knowledge of the company other than what is shown in the published accounts. An informal group of institutional shareholders has asked for a strategic review and has suggested that F should withdraw from the beer crate market.

Required: (a)

(i) Discuss the main difficulties faced by F. (5 marks)

(ii) Identify and evaluate alternative strategies that F could adopt to address its difficulties

and recommend those that are most appropriate

(12 marks)

(b) Explain why the failure to keep the shareholders more informed is a significant weakness for F.

(8 marks)



P6 8 November 2007



Question Four B is a multinational company with more than 20 divisions operating in various light engineering industries supplying automobile and aircraft manufacturing companies. Each division is managed by a chief executive officer (CEO) reporting directly to the board of directors of B.

B has recently acquired C, a smaller company with only 5 divisions which also operate in light engineering and supply similar customers to B’s existing businesses. Each division is managed by a CEO reporting to the board of directors of C.

In the previous acquisitions that B has made, the acquired companies have been allowed to continue operating independently. This is despite the fact that there are overlapping or competing divisions in the combined enterprise. There is no certainty that this approach will continue.

Using Goold and Campbell’s classification, B operates a system of ‘strategic planning’, and C operates a system of ‘strategic control’.

B has announced that the board of directors of C will retire and each of the former divisions of C will report directly to the board of B.

The board of directors of B recognises that this will represent a considerable change in culture, working practices and expected behaviour for the CEOs of the divisions of C. It is concerned that there may be problems in ensuring the commitment of those CEOs to both B and its ‘strategic planning’ style.

As part of the acquisition team you are responsible for the transition to the new structure.

Required: (a) Discuss the differences between ‘strategic planning’ and ‘strategic control’.

(4 marks)

(b) Discuss the impact that the change in planning culture is likely to have on the CEOs of the former divisions of C.

(11 marks)

(c) Explain how the changes to the reporting arrangements could be implemented to ensure the commitment of those CEOs to B.

(10 marks)



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November 2007 9 P6



Question Five G supplies electronic components to the automobile industry by exporting from the home country in which it is currently based. The company has recently set up a research facility in the home country to develop hydrogen fuel cells. The concept of hydrogen fuel cells has attracted a great deal of interest from the environmental lobby since it offers the prospect of very environmentally friendly vehicles. The market for these vehicles is in the development stage and there have been relatively few sales so far for this new technology. G hopes that the current pressure from environmental groups and governments will lead to large volume sales.

Increasingly, electronic component manufacturers are under pressure to manufacture close to the locations of their customers, the automobile manufacturers.

The research and development (R&D) director has decided that there is a need to open a research facility abroad, to work in partnership with the facility in the home country and capitalise on the benefits that a foreign base could offer. If this venture were successful, G would open a manufacturing facility next to the proposed overseas R&D base.

The board of directors recognises that different countries will offer different potential advantages and disadvantages. It has been decided that the ideal characteristics and factors for the chosen country should be determined, so that potential choices can be screened effectively before a final decision is made.

Required (a) Advise what ideal characteristics and factors should be present in the chosen

country.

(15 marks)

(b) Recommend the nature and sources of information that G should use when evaluating potential countries.

. (10 marks)





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November 2007 11 P6




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P6 12 November 2007




November 2007 13 P6




P6 14 November 2007





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4 ANALYSIS How you are expected to analyse the detail of what you have learned.

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5 EVALUATION How you are expected to use your learning to evaluate, make decisions or recommendations.



November 2007 15 P6






November 2007


P6 16 November 2007



Paper 6 – Management Accounting Business Strategy Post Examination Guide

November 2007


General Comments This examination paper is designed to test candidates’ ability to demonstrate their understanding and application of the following key syllabus areas:

• Strategic decision making and scenario planning, in particular gap analysis. • The evaluation of strategic options and strategic options generation. • The evaluation of the impact and influence of the external environment on an

organisation and its strategy. • Suppliers’ and customers’ influence upon the strategy process and recommendations

on how organisations should interact with them, in particular customer portfolio analysis and customer profitability.

• The approaches required for business/government relations and relations to civil society, in particular the demonstration of an understanding of Corporate Social Responsibility.

• The evaluation of strategies in response to competition. • Stakeholder management. • The evaluation and recommendation of appropriate control measures and the

problems associated with performance measurement. • Change management. • The evaluation of the nature of competitive environments, distinguishing between

simple and complicated competitive environments. This examination, as usual, tested a wide range of syllabus areas. The Question 1 scenario was designed to test a number of key skills including both quantitative and qualitative analysis. Most candidates made a good start to this question, demonstrating a sound knowledge of gap analysis and Ansoff’s product/market growth matrix. However, it was disappointing that many candidates are still not able to apply these and other models to a scenario based question. In part (a)(ii), many candidates could describe and draw the model accurately, but failed to provide suitable examples for the scenario organisation. The most disappointing aspect of candidates’ answers to question 1, was the poor attempt at the numerical management accounting elements of the question, namely requirements (b)(i) and (c). Few candidates correctly calculated the effect of the three proposed initiatives on the current net sales revenue gap, despite this being a straightforward calculation. Many candidates ignored the need to calculate a discount rate and many used an incorrect rate. It was quite disappointing to see how many candidates made such a poor attempt at this simple calculation. For question 1(c), this calculation was more complex and required many individual calculations to be undertaken. Most candidates were able to calculate correctly the cost generating activities for each supermarket, but then failed to calculate more basic elements of the Customer Account Profitability calculation, such as the cost of sales percentage. This is a basic error, which is not expected at this level. It was also very worrying to see how many candidates could not distinguish between absolute ‘Profit’ and the relative measure of ‘Profitability’. This fundamental error led many candidates into drawing the wrong conclusions regarding the profitability of each supermarket. It is strongly recommended that candidates improve their basic management accounting skills and practise more quantitative analysis questions. It was encouraging to see good demonstration of the application of knowledge of key syllabus areas by some candidates in the Section B questions, as would be expected at this level. The Section B questions were answered well by many candidates, and there was evidence of good levels of application of knowledge in Question 2 and Question 5. However, it was again evident in some answers that there was a serious lack of knowledge and understanding of some of the fundamental Business Strategy syllabus areas, particularly in Question 4. There are still some candidates who fail to apply their knowledge as required in the question and instead re-write everything they know about a particular model (in particular, the re-writing of the Mendelow matrix in question 3(b) and a description of Porter’s Diamond in Question 5. This is not acceptable at this level. It is important that candidates review the question requirements carefully and answer only the question set. For example, many candidates in Question 3(a) merely rewrote the facts from




November 2007


the scenario, instead of undertaking a ‘Discussion’ as instructed in the question requirement. An understanding of the verbs used in each question requirement and the associated depth of discussion and analysis is an important aspect in providing a sufficient answer. Similarly in Question 1(c), many candidates failed to undertake any analysis of the calculations provided, despite the question requirement clearly stating ‘Analyse’. Candidates will fail to be awarded marks if they do not attempt each aspect of the question requirement.




November 2007



Question 1(a)(i) Briefly explain what is meant by ‘gap analysis’ in the context of strategic analysis.

(4marks) Rationale This requirement tests candidates’ knowledge of scenario planning and in particular the syllabus content of ‘gap analysis’. Suggested Approach This question is designed to be an ‘easy start’ to the examination, with a short knowledge based question on a popular and straightforward aspect of the syllabus. Candidates are expected to explain gap analysis in the context of strategic analysis and to identify that gap analysis includes the evaluation of strategies to close the gap. A diagram is NOT necessary to pass this question. Marking Guide

Marks

Definition of a gap, up to

Recognition of the role in strategic analysis, up to Maximum marks awarded

2

2 4

Examiner’s Comments This should have been an easy start for candidates and the answers to this question were generally satisfactory. Most candidates defined gap analysis correctly and most also recognised the importance of focusing on appropriate strategies to close the gap. Most candidates provided a diagram to illustrate their answer, which was appropriate, but those candidates who did not provide a diagram were not penalised. Common Errors

• Insufficient emphasis upon closing the gap • Diagram with limited additional discussion




November 2007


Question 1(a)(ii) Briefly explain the use of the Ansoff product/market growth strategies model in strategic planning, providing examples relevant to AA to illustrate your explanation.

(6 marks) Rationale This requirement tests the syllabus content “Strategic options generation” and in particular the application of the Ansoff product/market growth model. Suggested Approach This question examines the candidates’ understanding and application of the Ansoff product/market growth model. Candidates are also expected to demonstrate their understanding of the model further by providing relevant examples for the scenario organisation, AA. Candidates are expected to provide relevant alternative product/market examples to those already provided in the scenario material. Candidates do not have to provide a diagram of the Ansoff product/market model to be awarded full marks. Marking Guide

Marks

For explanation of the axes and categories (inc. Diagram if given) For explanation of the USE of the matrix in strategic planning For examples relevant to AA, (4 at ½ mark each) Maximum marks awarded

2 2 2

6

Examiner’s Comments Most candidates demonstrated a sound knowledge of the model and many provided a correct description of each category and were able to draw the model accurately. However, many answers went little further than this. Many candidates did not sufficiently address the requirement of explaining how the model is used in strategic planning, nor did they provide relevant examples to AA. Many candidates merely restated the three initiatives outlined in the scenario rather than providing alternative examples. Candidates must be aware that if they are asked to discuss or provide a model then they must be able to apply this to the given scenario. Few marks are awarded for basic knowledge demonstration, as in this case, where only 2 of the available 6 marks were awarded for the explanation/presentation of the Ansoff model. Common Errors

• Focus upon presentation and description of the model rather than its application • No/few relevant examples provided




November 2007


Question 1(b)(i)

Calculate the effect of the three initiatives (identified at the board meeting) on the full year net sales revenue gap.

(4 marks) Rationale This requirement tests the learning outcome of “Discuss and apply both qualitative and quantitative techniques in support of the strategic decision making function” and is designed to examine candidates’ ability to use basic management accounting information to analyse the financial effect of the three proposed initiatives. Suggested Approach This question requires the candidate to firstly calculate the current net sales revenue gap from the figures in the Financial performance table provided in the question. The candidate is then provided with information relating to three initiatives designed to increase forecast sales revenue. It is important for candidates to recognise that for the first two initiatives, the information provided relates to gross sales revenue, therefore the candidate must calculate an average discount rate in order to identify the effect upon NET sales revenue. It was also expected that candidates calculate the effect of all three initiatives together upon the net sales revenue gap, rather than taking each initiative separately. Marking Guide

Marks

Calculation of total Net sales revenue gap 1 Calculation of impact of advertising campaign on gross revenue ½ Calculation of impact of advertising campaign on net revenue ½ Calculation of impact of new product line 1 Calculation of ‘other’ or residual gap 1 Maximum marks awarded 4 Examiner’s Comments This question was very badly answered. Many candidates could not even calculate the basic current net sales revenue gap. This was most disappointing and very surprising. With regard to the major advertising campaign most candidates failed to read the question correctly and did not recognise that the advertising campaign would only affect sales for the remainder of the year. Therefore candidates were expected to deduct the €42.9m year to date sales figure from the full year forecast of €89.4m (and not to calculate their own full year forecast, by extrapolating the year-to-date figure, as some did). Therefore many candidates were calculating an 8% increase on the incorrect figure (i.e. sales including year to date). Most candidates also either incorrectly calculated the discount, using a standard value of 20% or completely omitted discounts for both the advertising campaign initiative and the new product line initiative. Many candidates also failed to calculate the effect of all three initiatives on the net sales revenue gap, instead undertaking three separate calculations. Candidates must be careful to read the details of the scenario more carefully. From the answers provided by many candidates it would appear that they do not take the time to fully understand the information they are given. They merely see the numbers but do not appreciate what these numbers represent or mean. At this level candidates should have no difficulty understanding the concept of gross and net sales revenue, yet it would appear that many candidates could not or chose not to distinguish between the two. Common Errors

• Incorrect/no calculations of discounts




November 2007


Question 1(b)(ii)

Categorise each of the three initiatives in terms of the Ansoff growth strategies.

(3 marks) Rationale

This question examines the candidates’ ability to identify and apply the Ansoff growth model categories to the scenario. Suggested Approach This should be a very straightforward question. Marking Guide

Marks

Recognition of each of the three initiatives to the Ansoff categories, each at

1


3

Examiner’s Comments Not surprisingly this question was very well answered and most candidates were awarded maximum marks for this question.




November 2007


Question 1(c)

Calculate and analyse the forecast net customer account profitability of each of the three major supermarket customers of AA, during the 2007/8 financial year.

(25 marks) Rationale This requirement tests the candidates’ understanding and application of Customer Account Profitability analysis. Suggested Approach This is a difficult question, designed to examine candidates’ ability to undertake a detailed Customer Account Profitability calculation for the three supermarket customers highlighted in the scenario. This involves the calculation of gross profitability of each supermarket customer, taking into account the returns and discounts offered and also the inclusion of the cost of sales at 80%. From this gross profitability figure, candidates are required to calculate the effect of the cost generating activities listed in the scenario for each supermarket customer in order to calculate the Customer Account Profitability for each. Marking Guide

Marks

Calculation of reduction in revenue due to returns (½ for each supermarket) 1 ½ Calculation of reduction in revenue due to discounts (½ for each supermarket) 1 ½ Calculation of cost of sales or gross revenue (½ for each supermarket) 1 ½ Calculation of cost of sales visits (½ for each supermarket) 1 ½ Calculation of cost of purchase orders (½ for each supermarket) 1 ½ Calculation of cost of standard deliveries (½ for each supermarket) 1 ½ Calculation of cost of rush deliveries (½ for each supermarket) 1 ½ Calculation of customer profit (½ for each supermarket) 1 ½ Calculation of customer account profitability (up to 2 for each supermarket) 6 Discussion of results, including other relevant calculations, up to 7 Maximum marks awarded

25

Examiner’s Comments This question was not well answered by most candidates. This is a key syllabus area which had not been examined in previous diets, yet it would appear that many candidates were not familiar with calculating customer account profitability. Most candidates were able to undertake the basic calculations of the cost generating activities for the three supermarket customers and most therefore were awarded 6 marks for this part of the calculation. However, many candidates could not correctly calculate gross profit, with the most common error being the omission of the cost of sales from net revenue (i.e. revenue after deducting returns and discounts). This is basic management accounting and should not be something that candidates are getting wrong at this level. A further disappointing aspect of the answers provided by many candidates was the lack of understanding of the difference between ‘Profit’ and ‘Profitability’. Many candidates calculated a final profit figure for the three supermarket customers and labelled this figure ‘Customer Account Profitability’. From the calculations many were identifying that supermarket 3 had the highest level of absolute profit (which is in fact incorrect, as most of these candidates had omitted to deduct cost of sales from net revenue) and were therefore assuming that this was the most ‘profitable’ customer.




November 2007


It is worrying that at this level such a basic level of understanding of financial information is missing. Had candidates calculated the relative levels of ‘profitability’, they should have identified that supermarket 3, although the largest, is also the least ‘profitable’ customer, due to the high cost generating activities it undertakes. A further weakness of the answer was the poor level of analysis of the calculations provided. Many candidates provided no analysis at all, despite the question requirement making it very clear that there were 7 marks of the total of 25 available for this question for analysis. Candidates were expected to review in particular, the level of cost generating activities for each supermarket customer and to determine the effect this has on the profitability of each customer. For those candidates that did attempt this analysis, many did correctly identify that supermarket 3 was generating a significantly higher level of costs in all four areas compared to the other two supermarkets. Common Errors

• Omission of cost of sales from gross profit calculation • Calculation of Profit rather than Profitability • Limited/no analysis




November 2007


Question 1(d)

Evaluate the three alternative strategies proposed for the least profitable of AA’s major supermarket customers and recommend which of these strategies you believe AA should adopt.

(8 marks) Rationale This requirement tests learning outcome “Evaluate strategic options” and is designed to examine the candidates’ ability to analyse and evaluate alternative strategic options based upon the evidence gathered from the scenario and from the calculations undertaken in part (c). Suggested Approach This should be a straightforward question. The three proposed customer strategies outlined in the scenario should be discussed separately with regard to the least profitable customer identified from the analysis undertaken in part (c) of the answer. Candidates are expected to bring together the information provided in the scenario regarding the supermarket customers and their knowledge and understanding from the syllabus regarding areas such as the introduction of new technologies. Candidates are also expected to provide a final recommendation as to which proposed strategy should be adopted. It is important that the recommendation is consistent with the discussions undertaken regarding each proposed strategy. Marking Guide

Marks

For the evaluation of strategies, up to 6 For a recommendation, consistent with the above, up to 2


8

Examiner’s Comments This question was well answered. Also note that candidates were not penalised for using the incorrect ‘least profitable’ supermarket customer carried forward from their answer in part (c). The main marks awarded were for the actual viability of the discussions provided on each of the proposals, based upon AA’s current position and the relative strength of the supermarket customers. Most candidates correctly dismissed the proposal to stop selling to the least profitable customer as this is likely to have a negative effect on both AA’s overall profitability and its reputation. Supermarket 3 was the least profitable customer of AA although generating significantly larger revenue than the other two. Therefore to stop selling to supermarket 3 would be inappropriate and probably have disastrous consequences. Most candidates also correctly identified that the proposal to introduce new technologies as being the most appropriate strategy, particularly if they had identified supermarket 3 as the least profitable customer. A number of candidates demonstrated a good knowledge of available technologies to link AA to its supermarket customers and were able to discuss the benefits of these. As is often the case when candidates are asked to make a final recommendation, a number of candidates either sat on the fence or failed to provide a final recommendation. Some suggested ‘further analysis’ and that ‘further costing information is required’ before a decision can be made. If the examiner asks you to make a recommendation then you must do so, based upon the information you have. Fence sitting is awarded no marks. Common Errors

• No recommendations




November 2007



Question 2(a)(i) Briefly explain the differences between business ethics and corporate social responsibility (CSR).

(5 marks) Rationale This requirement tests the syllabus content of “approaches to business-government relations and with civil society” and focuses upon the candidates’ knowledge of Corporate Social Responsibility and Business Ethics. Suggested Approach This should be an easy question, requiring candidates to merely explain the differences between Business Ethics and Corporate Social Responsibility. Each term should be identified and explained separately and then the candidate must explain how these two concepts are different. Marking Guide

Marks

Explanation of Business Ethics, up to 2 Explanation of Corporate Social Responsibility 2 Explanation of difference, noting BE is component of CSR 1 Maximum marks awarded

5

Examiner’s Comments This question was reasonably well answered. Most candidates provided an adequate definition of both Business Ethics and CSR. However, some candidates did confuse the two and many did not recognise that business ethics is a component part of CSR. A further problem with some answers was that candidates spent too long providing lengthy and unnecessary examples, in particular when discussing Business Ethics. A number of candidates went into great depth on CIMA’s ethical code of conduct, which for a 5 mark requirement, is clearly not required. Candidates must use the mark allocation for each question as an indicator as to the length and depth of answer required. Common Errors

• Confusion between the two terms • Lack of recognition that BE is a component part of CSR




November 2007


Question 2(a)(ii) Discuss the CSR issues relating to D’s business and how the company might improve its CSR position.

.(8 marks) Rationale This requirement tests the candidates’ wider understanding of CSR and their ability to identify CSR issues within a range of business environments and make recommendations for improvement. Suggested Approach This question requires candidates to analyse the scenario information and identify within it the CSR issues relating to the current activities being undertaken by D in their land based logging business. These issues should be easily recognisable, but it is important that the candidate clearly explains why the issue identified is considered to affect D’s CSR position. Having identified a range of issues, the candidate is then expected to discuss for each, how D might improve its CSR position. This should include discussions relating to improving long term sustainability of the rainforests and the need to improve work practices to minimise ecological damage. Marking Guide

Marks

For EACH valid point made regarding D’s CSR position 1 For EACH valid suggestion for how it might improve the CSR position 2 Maximum marks awarded

8

Examiner’s Comments This question was generally well answered. Most candidates recognised the environmental and ecological impact of D’s current business activities and the need for D to reconsider many of its current attitudes and practices. Most candidates also provided a sensible discussion on the ways in which D could improve its CSR position. The most common examples included closer ties with the environmental groups and working more closely with governments to ensure regeneration and sustainability. Many candidates also discussed replanting schemes and revised policies on site clean-up. Overall, candidates made a good attempt at answering this question and most demonstrated a sound understanding of CSR. Common Errors

• Lack of discussion on how to improve the CSR position




November 2007


Question 2(b)

With reference to D, evaluate the two approaches to logging and recommend which you think is most appropriate for D.

(12 marks) Rationale This requirement tests the candidates’ ability to analyse and evaluate the two different approaches to logging described in the scenario, and to make an appropriate recommendation based upon both the CSR and business position of D. Suggested Approach Candidates are required to evaluate both approaches as described in the scenario, weighing up the advantages and disadvantages of each. This evaluation needs to consider both the CSR position of D and its current business position (i.e. consideration of the costs and profitability of each approach). Again, a recommendation is required, therefore the candidate must make a sound recommendation based upon and consistent with the preceding discussion of each approach. Marking Guide

Marks

For EACH reasonable and well evaluated point made about the new approach, up to 2 For EACH reasonable and well evaluated point made about the current approach, up to 2 Clear, justified recommendation on option to be taken, up to 2 Maximum marks awarded

12

Examiner’s Comments This question was generally well answered. Most candidates recognised the advantage of familiarity to D of continuing with the land based logging and that it is currently profitable and with low costs. However, on the downside most candidates also recognised the problem of the dwindling land based resources and the growing pressure from environmentalists and pressure groups. Most candidates also recognised that the underwater approach was obviously more complex and risky, but is also more environmentally friendly and sustainable. The main weakness of the answers to this question was the lack of clear recommendations. Again, many candidates merely sat on the fence, commenting that perhaps D should carry on with the land based logging until it has more information regarding the underwater approach. This failed to recognise the importance to D of being one of the first businesses to undertake this approach. Common Errors

• Discussion of only the underwater approach to logging • No/unclear recommendation




November 2007


Question 3(a)(i) Discuss the main difficulties faced by F.

(5 marks) Rationale This requirement examines candidates’ ability to identify and discuss the impact of a range of environmental and external issues on the organisation. Suggested Approach This should be a straightforward question. Each paragraph in the scenario identifies a different issue and candidates are expected to identify each one AND then to discuss why this issue is a difficulty for F. Marking Guide

Marks

For EACH clearly discussed and embedded difficulty, adding value to the scenario information Maximum marks awarded

1 5

Examiner’s Comments Question 3 was the most popular question on the paper, as most candidates attempted to answer this question. Surprisingly then, this part of the question was not well answered by many of the candidates. Many candidates merely identified the issue as presented in the scenario, with no attempt to add any further value or to explain why this was a difficulty to F. Candidates must understand the meaning of each verb used in the question requirement, and that ‘Discuss’ does not mean ‘Identify’. Many candidates merely re-stated the facts from the scenario which is clearly not a requirement at this level. Common Errors

• No discussion provided




November 2007


Question 3(a)(ii) Identify and evaluate alternative strategies that F could adopt to address its difficulties and recommend those that are most appropriate.

(12 marks) Rationale This requirement tests candidates’ ability to identify appropriate strategies for both responses to external competition and to internal business organisation and operations. It also examines the ability to evaluate these strategies and recommend those which are most appropriate to the scenario organisation and its internal and external environment. Suggested Approach Candidates are expected to use the difficulties discussed in part (a)(i) of the question to identify a range of alternative strategies to overcome these difficulties. Candidates could use a range of approaches to answering this question, including the Ansoff product/market growth model. Most importantly candidates are expected to both identify appropriate strategies for each difficulty identified and then evaluate these strategies. A range of answers is expected here, and the examiner is keen to encourage candidates to discuss a wide range of potential strategies and then demonstrate the ability to evaluate the appropriateness of the strategies for the scenario organisation. Therefore, it would be appropriate to analyse each difficulty separately and then make a final recommendation of appropriate strategies as a conclusion to the answer. It is important that these recommendations be explained and justified. Marking Guide

Marks

Strategies to address problems of price wars, up to 2 Strategies to address problems of home market, up to 2 Strategies to address problems of importance of labour problems, up to 2 Strategies to address problems of need to expand, possible overseas, up to 2 Strategies to address problems with R and D, and what to do about it, up to 2 Clear recommendation(s), up to 2 Maximum marks awarded 12 Examiner’s Comments Candidates used a range of methods to answer this question, including Ansoff’s product/market growth model and Porter’s competitive strategies. Both were appropriate when explained and used correctly. Most candidates identified the importance of addressing the falling home market share and the aggressive marketing of overseas competitors. Many candidates correctly discussed the possible strategies of moving into overseas markets and cost reduction strategies to improve its competitive position. A number of candidates also correctly linked the possibility of reducing costs and improving competitive position by means of re-organisation and rationalisation of work practices. Most candidates also correctly recognised that the complete withdrawal from the home market would be an inappropriate strategy. Overall, this question was answered well, but the main weakness was that many candidates identified a wide range of possible strategies but failed to sufficiently evaluate their appropriateness, nor did they make any final recommendations. Again, many candidates failed to make any recommendations at all, or made recommendations which were not justified in the context of their preceding discussions

.Common Errors • Unbalanced answers, focusing upon only the external market difficulties or the internal operational

difficulties • Poorly justified and explained recommendations/no recommendations made




November 2007


Question 3(b) Explain why the failure to keep the shareholders more informed is a significant weakness for F.

(8 marks) Rationale This requirement tests the candidates’ knowledge of stakeholder management. Suggested Approach This question should be straightforward for candidates, as stakeholder management has been a well examined area in previous examinations. Candidates are expected to discuss the importance of the shareholders as a stakeholder group and to explain why communication to such an important stakeholder group is important to F, in the light of the current difficulties it is facing. The consequences of a failure to keep shareholders informed should be identified and explained. Candidates are not expected to provide a detailed discussion of the Mendelow matrix, or discuss any other stakeholder groups of F. Marking Guide

Marks

For EACH point well discussed and embedded in the scenario material, up to 2 Maximum marks awarded

8

Examiner’s Comments This question was generally well answered. Most candidates recognised the threat of a possible takeover if shareholders are not provided with sufficient information. Most also recognised that many of the proposed strategies recommended in part (b) of the answer would require funding, therefore shareholders must be informed to gain their support and financial backing. The main weakness of this answer was that many were too brief and many answers were generic, in that there was little or no reference to the scenario material. Common Errors

• Generic answers • Focus upon the Mendelow matrix and other stakeholder groups




November 2007


Question 4(a)

Discuss the differences between ‘strategic planning’ and ‘strategic control’.

(4 marks) Rationale This requirement tests candidates’ syllabus knowledge of strategic planning and strategic control. Suggested Approach This question should not be difficult at all, requiring the candidate to merely demonstrate knowledge of key syllabus content. Candidates should provide a basic definition of each, highlighting the differences between the two approaches. Marking Guide

Marks

Definition of strategic control 1 Definition of strategic planning 1 Highlighting the differences 2 Maximum marks awarded

4

Examiner’s comments This question was not well answered. In fact Question 4 was the least popular question of the whole exam. This answer should have been very straightforward for a candidate who had revised the appropriate study material. However, many candidates failed to display any knowledge of the syllabus area at all, often confusing strategic planning with the rational planning model. It was quite disappointing to see the number of candidates who incorrectly defined these terms and displayed no knowledge of this area at all. Common Errors

• Incorrect definitions, demonstrating lack of knowledge of the syllabus area




November 2007


Question 4(b) Discuss the impact that the change in planning culture is likely to have on the CEOs of the former divisions of C.

(11 marks) Rationale This requirement tests the candidates’ understanding of the effect upon managers of changes in planning culture. Suggested Approach This question requires the candidate to discuss how the change from a system of ‘strategic control’ to a system of ‘strategic planning’ will affect the CEOs of the former divisions of C. Candidates are required to discuss how the CEO’s from C would be used to a more hands-off approach from the centre in decision making, but now will be expected to undertake a more formal approach to planning with a greater degree of influence and involvement from the Board of B. Candidates are expected to discuss these differences and the likely impact upon the CEOs and their behaviour as a result of this change of planning system. Marking Guide

Marks

For EACH valid point made, and embedded in the case, up to 2 Maximum marks awarded 11

Examiner’s Comments This question was not well answered. Again, this was mainly due to lack of syllabus knowledge. Most candidates did not clearly discuss the differences in the two styles and how this would affect the CEO’s and their behaviour and morale. Common Errors

• Poor demonstration of detailed knowledge of the two different styles




November 2007


Question 4(c) Explain how the changes to the reporting arrangements could be implemented to ensure the commitment of those CEOs to B.

(10 marks) Rationale This requirement tests candidates’ knowledge of the syllabus content “change management in a strategic context”. Suggested Approach This question requires the candidates to discuss an appropriate change management programme for B to implement to ensure that the CEO’s of the former divisions of C accept the changes in the planning culture. Candidates can discuss a range of change management activities or stages, but which must be applied to the scenario. Marking Guide

Marks

Use of sensible stages/approaches to change management, EACH at up to 2


Examiner’s Comments This question was answered more successfully by candidates. Most candidates discussed a range of change management approaches such as effective communication, participation and consultation. However, the main weakness of this answer was that many candidates provided generic answers with little or no application of these approaches to the former divisional CEO’s of C. Common Errors

• Generic or theory based answers




November 2007


Question 5(a) Advise what ideal characteristics and factors should be present in the chosen country.

(15 marks)

Rationale This requirement tests learning outcome A(iii) “evaluate the nature of competitive environments, distinguishing between simple and complicated competitive environments” and the syllabus content “porter’s diamond and its use for assessing the competitive advantage of nations”. Suggested Approach This should be very straightforward for a well prepared candidate. The question requires the candidate to review the product and industry of company G, as outlined in the scenario material and discuss the ideal characteristics that need to be present in potential countries of investment. The most appropriate approach to answering this question would be to use Porter’s Diamond, but any sensible approach which evaluates a potential country’s characteristics would be acceptable (for example PEST or PESTLE). Marking Guide

Marks

For each factor identified (1 mark), well described (1 mark) and embedded in the scenario material (1 mark), up to

3


15

Examiner’s Comments This question was well answered. Most candidates used Porter’s Diamond to structure their answer and demonstrated a sound basic knowledge and understanding of the model. The main weakness of the answers to this question was the lack of sufficient application and embedding of the answer in the scenario material. Many candidates discussed and described the model well, but few successfully applied all 5 aspects of the diamond to G and it operations. Some candidates used PEST or one of its derivatives, which was acceptable if applied appropriately to G. Common Errors • Generic answers with explanation of the model but little application to G




November 2007


Question 5(b) Recommend the nature and sources of information that G should use when evaluating potential countries.

(10 marks) Rationale This requirement tests candidates’ knowledge and understanding of the sources and availability of data and information for environmental analysis. Suggested Approach The candidates should recognise that they are being asked to recommend the nature and sources of information, therefore a random, unexplained list of sources is not acceptable. Also, candidates are asked for the nature and sources, therefore they must identify and explain what information they require about the potential country (the nature) and then identify where this can be obtained from (the source). Marking Guide

Marks

For each ‘nature and source’, well described and embedded in the scenario material up to 2 marks ( ½ mark for source/ where from, up to 1 ½ marks for what info from each source) Note: Mere listing of sources ONLY ½ mark each up to a maximum of 4

2


10

Examiner’s Comments This question was reasonably well answered. Most candidates were able to identify a wide range of sources of information both internal and external. However, candidates did not score so highly on the nature of the information required, again often providing very generic answers rather than the specific information requirements of G. Some candidates only discussed the sources of information with no reference to what information was required. Some candidates incorrectly assumed that the nature of information related to being timely, accurate, relevant etc, and therefore provided a detailed discussion of the qualities of information. Most candidates passed this requirement, but answers could have been improved with more focus upon the scenario organisation. Common Errors

• Generic answers • Focus upon the qualities of information • Too much emphasis upon the sources of information – imbalanced answers



P6

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usin

ess

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tegy
















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AAA is a small manufacturer of replacement machine components for machinery used in the mining and oil exploration industries. It is based in an African country. It was formed in 1952, as a partnership between two engineers, and incorporated in 1977. AAA now employs 120 staff, and has an annual turnover equivalent to one million US dollars. AAA is proud to offer the very highest levels of customer service. Much of the machinery used by AAA’s customers is quite old and, as a result, components are no longer available from the original equipment manufacturers (OEMs), most of which are large multinational companies. AAA mostly supplies parts directly to the end-users but also receives a small but significant proportion of its business from OEMs, who then supply the components to their customers.

The current business model

AAA has always run its business in a very traditional way. The sales manager receives most orders by telephone or fax. The order specifies the OEM part number that the component is to replace. If AAA has previously supplied that component, the sales manager checks the price list and tells the customer the price. AAA holds very low levels of finished goods inventory, and then only of the most commonly ordered components.

Where AAA needs to make a component for the first time, an AAA ‘estimator’ (a qualified engineer, responsible for producing an estimate of the material and labour involved in manufacturing the item) obtains the original drawings of the component, either from AAA’s extensive archives or from the OEM. The estimator then produces detailed engineering drawings, a list of materials and parts required, and an estimate of the labour hours likely to be used at each stage of the manufacturing process. The estimate is passed to a costing clerk in the accounts department who calculates the likely product cost (labour, materials and overheads), adds a ‘mark-up’ of 50%, and advises the sales manager of the price. If the customer accepts the price, an order is passed to the production department, which schedules and completes the work. If the actual cost of production is significantly different from that estimated, the price list is amended to reflect the actual manufacturing cost. Very occasionally, a customer sends (or brings in) an old component, which cannot be traced back to an OEM. The sales manager gives the component to an estimator, who dismantles the component and produces the necessary engineering drawings and estimate. This process is called ‘reverse engineering’, and is common in the component manufacturing industry. Reverse engineering currently accounts for about 5% of AAA’s business. When an order is fulfilled, the component is delivered to the customer, together with an invoice. Most customers pay within 30 days, by cash or cheque. AAA does not have a problem with bad debts. An increasing proportion of AAA’s business is now transacted in US dollars, as African currencies tend to be unstable. AAA prides itself on the personal service it provides. The close contact it has with its customers means that AAA receives a significant amount of repeat business. AAA has never advertised its services, but grew significantly until 2005 as a result of ‘word of mouth’ recommendations by satisfied customers. AAA, however, has not experienced growth for the last two years, although turnover and profit have remained stable. AAA uses only very basic Information Systems (IS), and reports its performance using a simple comparison between budget and actual, which is produced using a spreadsheet package. AAA’s accounting system is not automated, and transactions are recorded in traditional ledgers.

P6 2 May 2008



Project E: Computerised accounting and e-commerce systems

The sales manager of AAA has noticed that customers are increasingly mentioning that they would like to be able to order online. He knows that there has been a significant growth in business-to-business (B2B) e-commerce in recent years. The sales manager has recognised that in order to grow and to make a move into e-commerce possible, AAA’s accounting system will have to be updated to a computerised one.

Having spoken to a number of potential suppliers, the sales manager has now received a proposal from SSS, a local company, to supply tailored ‘off-the-shelf’ systems for both accounting and e-commerce. SSS has provided a detailed breakdown of its proposal, to be known as Project E, which is summarised below.

The sales manager believes that, following implementation of the new systems (likely to be 12 months from contract agreement) e-commerce should lead to an increase in the company’s turnover of 10% in its first year of operation. Thereafter, the turnover resulting from e-commerce should grow at a rate of 10% each year for the foreseeable future.

The sales manager also thinks that any increase in indirect costs as a result of this higher volume of business will be fully offset by a reduction in administration workload as a result of the new computerised accounting system. The gross margin earned from e-commerce business can therefore be used as the effective cash inflow for evaluation purposes. The current turnover of AAA is, as stated earlier, $1 million a year. The mark-up on products sold by e-commerce will be the same as at present (that is, 50%).

However, the sales manager thinks that a cautious approach should be taken to the evaluation of the proposal, and that any benefits after 5 years from implementation should be ignored. AAA has a weighted average cost of capital (WACC) of 15%.

The following information has been provided by SSS, the preferred systems supplier:

Project E Item

Timing

Cost US$

“Mage Gold” accounting package On agreement of contract 14,000 Tailoring of the above During the first 6 months 20,000 “SellitOnline” e-commerce package On agreement of contract 11,000 Tailoring of the above During the first 6 months 8,000 Populating the e-commerce database During the first 6 months 5,000 Training During months 7 – 12 10,000 Support Split over the five years following implementation 25,000 Hardware, networking and connection During the first 12 months 40,000 Broadband service costs Split over the five years following implementation 20,000 TOTAL COST

153,000

Note: You should assume that all cashflows arise at the end of the period to which they relate, for example ‘Tailoring’ at the end of 6 months, and ‘Training’ at the end of 12 months.

The requirement for this question is on page 5 which is detachable for ease of reference

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May 2008 3 P6




P6 4 May 2008



Required: (a) Briefly explain how e-commerce has impacted on the way business is conducted.

(5 marks)

(b) Briefly discuss how a new Information Systems (IS) strategy might impact upon corporate, business and functional strategies.

(8 marks)

(c) Prepare a financial evaluation of Project E.

Note: You should ignore the effects of inflation and taxation. (12 marks)

(d) Evaluate the strategic and competitive benefits to AAA of the proposed e-commerce system.

(15 marks)

(e) Advise AAA, based on your answers to parts (a) to (d) above, whether or not to invest in the proposed e-commerce and accounting project.

Note: You are not required to reproduce the detail of your arguments from earlier parts of this question.

(4 marks) (f) Discuss how AAA might use its e-commerce system to increase the volume of

business from ‘reverse engineering’ projects. (6 marks)



End of Section A


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May 2008 5 P6




P6 6 May 2008




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May 2008 7 P6



SECTION B – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER TWO QUESTIONS FROM FOUR Question Two CCC is an established company in public ownership comprising the following divisions; construction and building, engineering and machinery, real estate. Although the company has traded profitably, its earnings have been subject to wide variations and some of the shareholders are concerned about the Board’s policy of ‘conglomerate diversification’

In the last year the company had the following earnings figures;

Division Earnings $ million

Construction and building 50Engineering and machinery 20Real estate 30Group 100

Note: It should be assumed that the above divisional earnings are stated after tax.

Industry Current average market sector PE

Construction and building 8Engineering and machinery 13Real Estate 23

CCC is currently valued on the stock market at $1,000 million, and proposed / current dividends are approximately half analysts’ expectations.

Construction and building This activity represents the original business before CCC started to make acquisitions. The divisional management has described the business as ‘mature, stable, offering the prospect of modest but sustained growth’.

Engineering and machinery This activity represents the first acquisitions made by CCC whereby a number of small companies were bought and consolidated into one division. The divisional management has described the business as ‘mature but offering the prospect of profit growth of 10% per annum’. Additionally the division has a broad customer base servicing a number of government agencies – minimising the risk of cash flow problems.

Real estate This division represents the most recent acquisition made by CCC and has provided profit growth of over 20% per annum in the three years since it was formed. The divisional management, which is recognised as the most dynamic management team within CCC, feels that this rate of growth can be continued or surpassed.

HQ Organisation Each division has its own headquarters office in a different town and the group headquarters, which has the responsibility for raising capital and operating a group treasury function is also separately located. The group headquarters is located in the capital, is quite luxurious and has a staff of 50 including the main board directors. Group headquarters, and the staff, is funded by a management charge on the divisions.

The remainder of this question and the requirement are on the page

opposite

P6 8 May 2008



Investors An informal group of institutional shareholders, which holds approximately 20% of CCC’s equity has requested a review of the Board’s strategy and a rationalisation of the company’s portfolio. These shareholders feel that the Board of Directors has destroyed value and that the company should take the opportunity to dispose of the real estate division, reduce costs by closing the group headquarters and relocate the board and treasury functions to one of the divisional headquarters. This, they have said, would allow the company to pay a large, one off, dividend to reward shareholders for their tolerance of poor past performance.

The Board of Directors feels that the suggestions are unreasonable and that its strategy has served the best interests of all shareholders.

Required: (a) Explain the term ‘conglomerate diversification’.

(3 marks) (b) (i) Evaluate the comments made by the institutional investors that the Board ‘has

destroyed value’. (3 marks)

(ii) Evaluate the suggestions made by the institutional investors that

“the company should take the opportunity to dispose of the real estate division, reduce costs by closing the group headquarters and relocate the board and treasury functions to one of the divisional headquarters”.

(7 marks)

(c) Identify and evaluate alternative methods available to the Board for the disposal of the real estate division, should it decide to do so, and recommend the method of disposal most appropriate to CCC.

(12 marks)


Section B continues over the page

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May 2008 9 P6



Question Three Based in a European country, BBB is a charity which raises funds to provide portable equipment to remove the poison arsenic from drinking water in villages, in less developed countries. Run by a Board of Trustees, the organisation operates on laissez faire management principles. There are few full-time paid employees and BBB is heavily dependent upon the work of volunteers. Although these volunteers are dedicated, many have said that they do not feel the organisation knows where it is going and have said that they are not confident about the future of BBB.

Funding comes from appeals to the general population, which are made through newspaper advertisements. BBB does not use the Internet to promote or raise donations and, generally, does not use available technology to any extent in its organisation. Additionally, BBB receives corporate donations, most of which come from old school friends of the trustees. There is no government funding.

Recently BBB has had difficulty in attracting donations and is at risk of not being able to carry on its work. The charity industry has become more competitive and many other organisations within it have become more aggressive in their marketing and promotion.

None of the Board of Trustees has a commercial background. The Chairman of Trustees has recently been to a number of conferences where the value of foresight and the need to conduct a frequent and thorough ‘environmental analysis’ have been discussed.

The Chairman has accepted that there is a serious gap in the knowledge that the trustees have about the environment in which BBB operates. Recognising that BBB needs a more proactive approach to the environment in which it operates, your help as a management accountant has been sought.

Required: (a) Discuss how conducting a frequent and thorough environmental analysis would help

the Board of Trustees of BBB.

(14 marks) (b) Explain the concept of foresight and two techniques for the development of foresight.

(5 marks)

(c) Discuss the difficulties that BBB might, as an organisation, experience in developing a process of environmental analysis.

(6 marks)


Section B continues on the page opposite

P6 10 May 2008



Question Four DDD is a biotechnology company which develops drugs. It was founded seven years ago by three scientists when they left the university medical school, where they had been senior researchers. The Company employs 10 other scientists who joined from different universities. All of these employees are receiving relatively low salaries but participate in a share option scheme. This means that when DDD is successfully floated on the stock exchange they will receive shares in the company.

DDD currently has a number of new, innovative drugs in development, but the earliest any of these drugs might come to market is two years from now. It is expected that there would be one successful drug launched in most years after that for at least six years. However, successful drug launches are never guaranteed, due to the speculative nature of biotechnology and the long period of clinical trials through which any new drug must pass. DDD has to invest a significant amount of resources into the development of each potential drug, whether they are successfully launched or not. Currently, it has 12 drugs in development, a number of which may not be successfully launched. Due to the speculative nature of the industry, companies such as DDD are unable to obtain bank loans on commercial terms.

DDD is funded by an exclusive arrangement with a venture capital company. However, there is only sufficient cash in place to maintain the present level of activity for a further nine months. The venture capital company owns 15% of the equity of the company. The rest is owned by the three founders. It has always been the intention of the venture capital company and the founders that, once the company has a sufficient number of drugs in production and on the market, the company would be floated on the stock exchange. This is expected to happen in five years’ time.

Recently there have been a number of approaches to DDD which might solve its cash flow problems. The three founders have identified the following options:

1. The venture capital company has suggested that it will guarantee the cash flow until the first drug is successfully launched in commercial quantities. However, it would expect its equity holding to rise to 60% once this offer is accepted.

2. A large pharmaceutical company has offered to buy DDD outright and retain the services of the three founders (in research roles) and a few of the staff.

3. Another biotechnology company has offered to enter into a merger with DDD. This company has also been established for seven years and has one drug which will be launched in six months. However, of the four other potential drugs it has in development, none are likely to be commercially viable for 5 years. This company would expect the three founders to stay with the newly merged company but feels a rationalisation of the combined staff would be needed.

As the financial advisor to the three founders you have been asked to comment on the approaches that have been made.

Required: (a) Describe the ‘Suitability, Feasibility and Acceptability (SFA) framework as used for

evaluating strategic options. (6 marks)

(b) Using the SFA framework, evaluate the strategic options identified by the founders. (12 marks)

(c) Identify and evaluate one other strategic option that the founders might pursue. (5 marks)

(d) Recommend the most appropriate strategic option based on your analysis above. (2 marks)


Section B continues over the page

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May 2008 11 P6



Question Five EEE is a divisionalised company, based in F, where it is quoted on the stock exchange. EEE manufactures and sells small electrical equipment products. As a country, F is more highly developed than the neighbouring countries. EEE has enjoyed a strong home market and has exported to the neighbouring countries.

EEE has had a reputation for producing high quality products. Recently, it has come under increasing competitive pressure from new, privately held, companies based in the neighbouring countries.

It appears that competitors based in these neighbouring countries have been selling lower quality products than EEE and have been undercutting it quite significantly in terms of price. Sales in both EEE’s home and export markets have been badly affected by the actions of these competitors in the neighbouring countries.

EEE has looked at a number of possible solutions to this situation and has decided to acquire a manufacturing company in one of the neighbouring countries and move all of its production there, completely closing the manufacturing division in F. This would mean that EEE would purchase one of the companies that has recently become a competitor. EEE would maintain its present divisionalised structure within its home country F and treat the acquired company as a new division.

The Board of Directors recognises the need to carefully select a suitable acquisition target company. The Board also recognises that careful consideration will need to be given to the most suitable approach to performance management once the acquisition has been made. The Board is considering an approach based on either Return On Investment (ROI) or Residual Income (RI).

Required (a) Advise the Board on what information would be required to assess the suitability of

an acquisition target.

(15 marks)

(b) (i) Discuss the difficulties that EEE may experience with the performance measurement of its divisions, post acquisition.

. (6 marks)

(ii) Discuss the disadvantages that EEE may experience if it chooses to use ROI as its primary performance measure.

(4 marks)




Maths Tables and Formulae follow on pages 13 and 14 which are detachable

P6 12 May 2008







May 2008 13 P6




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PV = ⎥⎦

⎤⎢⎣

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11

1


annum: r

PV1

=

P6 14 May 2008





1 KNOWLEDGE





something






Analyse Categorise







May 2008 15 P6






May 2008


P6 16 May 2008




May 2008



• Identify the impact of electronic commerce on the way business is conducted and to recommend an appropriate strategy.

• Evaluate and advise managers on the development of strategies for knowledge management, IM, IS and IT that support the organisation’s strategic requirements, to evaluate the strategic and competitive benefits of IS/IT and advise on the development of appropriate strategies.

• Identify and evaluate IS/IT systems appropriate to the organisation’s strategic requirements and recommend changes where necessary.

• Evaluate strategic options and strategic options generation in relation to a proposed IS investment.

• Evaluate acquisition and divestment strategies and their place in the strategic plan. • Evaluate and recommend appropriate control measures. • Evaluate the nature of competitive environments distinguishing between simple and

complicated competitive environments and the use of ‘PEST analysis’ & ‘Porter’s Five Forces’ model in assessing the external environment.

• Discuss the role of change management in a strategic context. • Evaluate the product portfolio of an organisation and recommend appropriate

changes to support the organisation’s strategic goals and the management of the product portfolio.

• Evaluate strategies for response to competition and to discuss the qualitative approaches to competitive analysis.

• Identify problems in performance measurement and recommend solutions. • Discuss business unit performance and appraisal.

This examination, as usual, tested a wide range of syllabus areas. The Question 1 scenario was designed to test a number of key skills including both quantitative and qualitative analysis. The main focus of this question was the impact of Information Systems strategies upon an organisation’s business strategy and is a key theme that runs throughout all of the learning outcomes of this strategic level subject. Many candidates made a sound start to this question, demonstrating a good understanding of the benefits of e-commerce in answer to part 1(a). However, it was disappointing that a number of candidates made a poor start to the examination, by failing to read this question requirement carefully and discussing how Information Technology in general, not e-commerce, has impacted upon businesses. This recurred throughout many answers, with many candidates answering questions which had not been set by the examiner. In particular, questions 1(b) and 1(d) were most poorly answered, with candidates often not answering the question set. In part (b), which was answered badly by most candidates, many answers focused upon the technology used at each of the three managerial levels identified and not upon the impact of the IS strategy. Many answers focused upon specific systems such as Executive Information Systems, Management Information Systems and Decision Support systems etc, which is not what the question asked. Most answers failed to recognise that the focus of the question was upon the IS Strategy and not upon specific technologies. In part 1(d), again most candidates failed to answer the question set. Many failed to focus their answers upon the strategic and competitive benefits of the e-commerce system, instead focusing upon operational issues. Many answers also failed to focus upon the e-commerce benefits, instead focusing upon the accounting software. A number of answers also spent too much time discussing irrelevant technologies such as ERP, JIT and CAD/CAM, none of which are currently being used by AAA. Many candidates merely used this question as an opportunity to demonstrate their knowledge of manufacturing technologies, most of which was irrelevant to the question set. Candidates must only answer the question set by the examiner. The answer to part 1(c) was also very disappointing. This should have been a very straightforward NPV calculation, with most of the necessary information to complete the analysis provided directly in the table within the scenario. Candidates were required to do a few simple additional calculations to determine cash inflows and to identify the correct timings of cash flows. It was most




May 2008


disappointing to see, at this level, how few candidates were able to undertake this basic calculation correctly and even to determine the correct timings of cash flows. This is a technique practiced at all levels of the CIMA qualification and it is expected that candidates should be able to undertake a basic NPV such as this with little difficulty and few errors. It was encouraging to see good demonstration and application of knowledge of key syllabus areas by some candidates in the Section B questions, as would be expected at this level. The Section B questions were answered reasonably well by many candidates, and there was evidence of good levels of application of knowledge in Question 3 and Question 4. However, it was again evident in some answers that there was a serious lack of knowledge and understanding of some of the fundamental Business Strategy syllabus areas, particularly in Question 2 and Question 5. There are still some candidates who fail to apply their knowledge as required in the question and instead re-write everything they know about a particular model (in particular, the use of Porters Diamond in Question 5 and PEST in Question 3), which was not required. It was also disappointing to see how few candidates could adequately discuss the problems of divisional performance measurement and the problems associated with ROI and RI as measures of performance in Question 5. This again, is knowledge that should have been brought forward from previous CIMA study and candidates must be prepared to use and apply such knowledge at this level. As mentioned previously, some candidates still fail to review the question requirements carefully and as a result fail to answer the question set by the examiner. For example, in question 3(a), many candidates undertook a detailed PEST analysis, but failed to identify the benefits of such an analysis to BBB. Therefore they failed to answer the question set and were awarded few or no marks. Similarly in Question 4(b), the question clearly asked for the candidate to use the SFA framework to evaluate the three options, but many candidates failed to do so. Again, candidates were awarded few or no marks if they failed to use the SFA framework. In addition, an understanding of the verbs used in each question requirement and the associated depth of discussion and analysis is an important aspect in providing a sufficient answer. For example, in Question 2(b) many candidates failed to evaluate the comments made by the institutional investors in that they did not discuss whether or not the comments made were valid or correct. Most candidates merely undertook the basic market capitalisation calculations with no discussion of what these meant. Without this discussion, the candidate cannot undertake an evaluation. Overall, performance in this examination was below standard, largely due to the poor performance by many candidates in Question 1. Information Systems is an integral and often fundamental driver of modern business strategy and it is disappointing that so many candidates failed to demonstrate sufficient understanding of this area.




May 2008



Question 1(a) Briefly explain how e-commerce has impacted on the way business is conducted.

(5 marks)

Rationale This requirement tests learning outcome B(v) ‘evaluate the impact of electronic commerce on the way business is conducted and recommend an appropriate strategy’ and the syllabus content ‘the impact of IT (including electronic commerce) on an industry’. Suggested Approach This question is designed to be an easy start to the examination. Candidates are expected to explain, in general terms, how e-commerce has impacted upon the modern business environment. Candidates are NOT expected to discuss how e-commerce would impact on the way AAA conducts its business. Marking Guide

Marks

For a brief explanation of what E-commerce is, up to For each way in which it has impacted on business, up to Maximum Marks Awarded

1 2 5

Examiner’s Comments This question was generally well answered. Most candidates demonstrated a sound knowledge and understanding of e-commerce and could present a discussion on how e-commerce has impacted upon the modern business environment. However, many candidates failed to answer the question set, providing answers relating to general benefits of Information Technology and Information Systems, such as accounting packages, spreadsheets, CAD/ CAM etc. Many candidates also answered the question from the point of view of the impacts on the individual customer and not on businesses. For example, some candidates discussed the benefits to the customer of features such as price transparency and 24 hour availability. Clearly these features of e-commerce impact on businesses but some candidates failed to identify how these features would impact upon the businesses.

A number of candidates also focused upon the impact of e-commerce upon AAA (i.e. how would AAA use e-commerce themselves). This was not appropriate as AAA has yet to implement e-commerce. Common Errors • Not focusing upon e-commerce specifically, instead focusing upon the general use of information

technology • Incorrect emphasis on the individual and not upon businesses • Incorrect emphasis upon how e-commerce has impacted upon AAA




May 2008


Question 1(b)

Briefly discuss how a new Information Systems (IS) strategy might impact upon corporate, business and functional strategies.

(8 marks)

Rationale This requirement tests the learning outcome D(iv) ‘evaluate and advise managers on the development of strategies for knowledge management, IM, IS and IT that support the organisation’s strategic requirements’ and the syllabus content ‘the purpose and contents of IM, IS and IT and the need for strategy complementary to the corporate and individual business strategies’. Suggested Approach This question examines the candidates’ understanding of the impact of and relationship between a new Information Systems strategy and the corporate, business and functional strategies of an organisation. Candidates are not expected to discuss Information Management (IM) or specific Information Technologies (IT), nor are they required to discuss the nature of decision making at the different managerial levels of the organisation. The examiner is looking for answers which focus specifically upon how a new Information Systems strategy might change/ improve/ determine/ influence the different levels of organisational strategy. Marking Guide

Marks

For an explanation of IS as an implementation tool, up to

For an explanation of IS as a change trigger, up to

For each of the three levels of strategy, each at up to


2

2

2

8

Examiner’s Comments This question was not well answered by most candidates. Many failed to recognise that this question requirement focused upon the impact of a new IS strategy upon all levels of business. Most candidates’ answers placed far too much emphasis upon general discussions relating to corporate, business and functional strategies, with limited emphasis on the impact of a new IS strategy upon these. Some answers failed to discuss the impact of an IS strategy at all, instead providing detailed analysis of various technologies and systems used at the various organisational levels. It was expected that candidates would recognise that an IS strategy is a fundamental aspect of functional level strategy and therefore is an important implementation tool for the business and corporate level strategies. However, for many modern businesses, the IS strategy drives the overall corporate strategy, requiring major changes at business and functional level. Most candidates failed to identify these fundamental issues of a new IS Strategy and as such failed to provide a sufficient answer to this question. This is considered by the examiner to be a key aspect of the Business Strategy syllabus and it was most disappointing that so many candidates failed to identify and understand the integral link between IS strategy and business strategy.




May 2008


Common Errors • Failure to understand the important link between IS strategy and business strategy • Answers focusing upon discussions relating to specific information systems such as EIS, MIS and DSS • Discussions of decision making at the different managerial levels, with limited focus upon information

systems and IS strategy




May 2008


Question 1(c)

Prepare a financial evaluation of Project E.

Note: You should ignore the effects of inflation and taxation.

(12 marks)

Rationale This requirement tests the learning outcome C(i) ‘evaluate strategic options’ and requires the candidate to undertake a straightforward NPV calculation to appraise a proposed systems investment project. Suggested Approach This should be a very straightforward Net Present Value calculation. Candidates are expected to identify the correct timings for both the cash inflows and cash outflows and to determine the correct revenue stream from the investment. This information needs to be presented in a logical and clear NPV format, clearly identifying the net cash flows, appropriate discount factors and the present values. All of the information required to do so is clearly set out in the scenario data. Marking Guide

Marks

Outflows allocated appropriately (some leeway due to interpretation):

T0 items T0.5 items (may be at T1) T1 item T2-6 items – must be in T2-T6

Inflows calculated correctly, using 50% mark-up (i.e. 1/3 of revenue) to get GP (1), taking 10% of turnover or profit (1) and growth of 10% p.a. (1) Inflows timed correctly (T2-6) Cashflows summed correctly Correct discount factors (for 15%) PVs calculated/summed correctly NPV calculated correctly Maximum marks awarded

1 1 1 1

3

1 1 1 1 1

12




May 2008


Examiner’s Comments The answers presented to this question were largely disappointing. Although many candidates earned sufficient marks to be awarded a pass mark, few answers were accurate and many were inappropriately presented or contained numerous basic calculation and presentation errors. Although most candidates were able to correctly identify the timings of the cash outflows, there were a number of candidates who could not correctly deal with cash flows occurring at T0.5. However, most errors occurred in calculating the cash inflows. It was most disappointing and concerning to see how many candidates were unable to correctly calculate a 50% mark up as being 1/3 of the revenue stream. This is basic accounting and should be something that candidates should be able to calculate easily at this level. However, most candidates did attempt to calculate 10% of the gross profit and then grow this by 10% p.a. The final NPV should have identified a slightly negative NPV, but most candidates calculated a positive NPV due to the incorrectly calculated cash inflows. However, candidates were not penalised for an incorrect final NPV if they had followed the basic NPV structure as outlined above. It was expected that most candidates would not find this question difficult, so it was very disappointing to see the poor quality of many answers. This is a basic and much used financial project evaluation technique and candidates must ensure that in future they are better prepared to answer such questions at this level. Common Errors • Poor / incorrect presentation • Inability to recognise correct timings of cash flows • Incorrect calculation of mark-up




May 2008


Question 1(d)

Evaluate the strategic and competitive benefits to AAA of the proposed e-commerce system. (15 marks)

Rationale This question examines the learning outcome B(vi) ‘evaluate the strategic and competitive benefits of IS/IT and advise on the development of appropriate strategies’ and the syllabus content ‘the impact of IT (including electronic commerce)on an industry’. Suggested Approach This is a difficult question. It is designed to test the candidates’ understanding of the strategic importance to AAA of investing in the proposed e-commerce system. Candidates are expected to focus upon the e-commerce system only and not the proposed accounting system. The question also clearly asks for strategic and competitive benefits. Therefore, candidates are expected to identify and discuss these two issues separately. The answers must focus upon the actual strategic level and competitive benefits of the e-commerce system and not upon the operational level changes to activity that may occur as a result of the system. The answer also should not consider other additional systems not yet introduced, such as ERP, JIT and TQM. The answer must focus upon the proposed e-commerce system only, and not on the proposed change to the accounting system. Marking Guide

Marks

For each benefit, evaluated, up to (2 marks for each benefit, a further 1 mark for evaluation) Maximum marks awarded

3

15

Examiner’s Comments This question was not well answered by most candidates. Very few candidates achieved a pass mark for this requirement, mainly as a result of failing to answer the question set. Most candidates failed to focus upon the competitive and strategic level benefits, instead focusing upon operational level benefits such as time taken to process orders and the improvement to information organisation and presentation. A further weakness was the lack of evaluation of the benefits presented. Many candidates identified benefits such as access to a wider market place by using e-commerce, but failed to evaluate the impact this could potentially have on AAA’s future business growth. Most candidates identified a range of benefits but failed to evaluate these benefits. A further weakness of many answers was the failure to focus upon the e-commerce system. Many candidates provided lengthy discussions relating to the benefits of improved accounting software, in terms of improved financial reporting and decision making, but this is not what the question asked. Candidates must be careful to only answer the question as set by the examiner and must read the question requirements more carefully. Common Errors • Unnecessary discussions relating the accounting software • Lack of focus on strategic and competitive benefits • Poor / no evaluation of benefits identified




May 2008


Question 1(e)

Advise AAA, based on your answers to parts (a) to (d) above, whether or not to invest in the proposed e-commerce and accounting project.

Note: You are not required to reproduce the detail of your arguments from earlier parts of this question.

(4 marks) Rationale This requirement tests learning outcome D(v) ‘identify and evaluate IS/IT systems appropriate to the organisation’s strategic requirements and recommend changes where necessary’ and the syllabus content ‘non-financial measures and their interaction with financial ones’. Suggested Approach This is a straightforward question, requiring the candidate to make a final recommendation based upon the analysis presented in their answers to parts (a) to (d) above. The candidate should also review the NPV calculation prepared in part (c) of the answer to provide quantitative evidence on which to base their decision. Marking Guide

Marks

For a conclusion or summary of arguments, up to For a valid recommendation, up to Maximum marks awarded

3 2

4

Examiner’s Comments This question was generally well answered. Most candidates correctly concluded that the project should be undertaken, even though it has a negative NPV. Most candidates recognised that the long term strategic benefits of e-commerce far outweighed the short term financial cost of the project. The main weakness of some answers to this question was that some candidates presented a final recommendation, but failed to explain or justify this decision. Common Errors • No conclusions or summary arguments presented based upon the answers to parts (a) to (d) • Decision made purely on the NPV calculation




May 2008


Question 1(f)

Discuss how AAA might use its e-commerce system to increase the volume of business from ‘reverse engineering’ projects.

(6 marks)

Rationale This requirement tests learning outcome D(iv) ‘evaluate and advise managers on the development of strategies for knowledge management, IM, IS and IT that support the organisation’s strategic requirements’ and the syllabus content ‘the purpose and contents of IM, IS and IT strategies and the need for strategy complementary to the corporate and individual business strategies’ Suggested Approach This should be a straightforward question. Candidates are not expected to have any detailed knowledge of ‘reverse engineering’, as sufficient detail to answer this question is presented in the scenario. The focus of the answer should be upon how the e-commerce system could be used to increase and promote the reverse engineering facility. Marking Guide

Marks

For each valid point made, up to Maximum marks awarded

2

6

Examiner’s Comments This question was generally not well answered by candidates. Most seemed to misunderstand the question requirement and provide a discussion of introducing CAD/ CAM systems and the creation of large databases of components. Again, many candidates failed to identify the role of e-commerce in promoting reverse engineering, and instead focused upon other types of information technology and systems. This appeared to demonstrate both a lack of understanding of the potential role of e-commerce and an inability to read the question requirement. Common Errors • Lack of focus on the potential of e-commerce • Too much focus upon other non-relevant technology and systems




May 2008



Question 2(a)

Explain the term ‘conglomerate diversification’.

(3 marks)

Rationale This requirement tests learning outcome C(i) ‘evaluate strategic options’ and the syllabus content ‘acquisition and divestment strategies and their place in the strategic plan’. Suggested Approach This should be a straightforward question, requiring the candidate to briefly explain a term used within the syllabus. As this question is only worth 3 marks, candidates are expected to provide short answers only. Marking Guide

Marks

Clear definition of conglomerate diversification. For each point clearly made in clarification of the term up to 2 marks Maximum marks awarded

1 2 3

Examiner’s Comments This question was generally well answered. Although Question 2 was the least popular question in the examination, for those candidates that chose this question, most scored a pass mark for this requirement. Common Errors • A basic definition only, with no clarification or explanation of the term




May 2008


Question 2(b)(i)

Evaluate the comments made by the institutional investors that the Board ‘has destroyed value’.

(3 marks)

Rationale This requirement tests the learning outcome D(i) ‘evaluate and recommend appropriate control measures’ and syllabus content ‘assessing strategic performance’. Suggested Approach This question requires candidates to evaluate whether the comment made by the institutional investors is correct. Candidates are expected to use the information provided in the question to calculate the market capitalisation of the three separate divisions and compare this with the current market value of CCC. The candidate can then form a judgement as to whether the Board has destroyed value. Marking Guide

Marks

Calculation of market capitalisation for each division Numerical demonstration that group does not add value Interpretation of figures from perspective of institutional shareholders Concluding remark regarding adding/destroying value Maximum marks awarded

1½

½ 1 1 3

Examiner’s Comments This question was reasonably well answered by candidates. Many candidates correctly calculated the market capitalisation of the three divisions and compared this to the current market value of CCC. However, few candidates then went on to determine how these calculations could be used to evaluate whether the Board of CCC has destroyed value. Very few candidates interpreted the figures from the perspective of the institutional investors, despite the comment referred to in the question being made by them. Common Errors • No interpretation of the figures in terms of whether the Board has destroyed value




May 2008


Question 2(b)(ii) Evaluate the suggestions made by the institutional investors that

“the company should take the opportunity to dispose of the real estate division, reduce costs by closing the group headquarters and relocate the board and treasury functions to one of the divisional headquarters”.

(7 marks)

Rationale This requirement tests the learning outcome D(i) ‘evaluate and recommend appropriate control measures’ and syllabus content ‘assessing strategic performance’. Suggested Approach Candidates are required to evaluate separately each suggestion made by the institutional investors. The first suggestion made is to dispose of the real estate division. Therefore, candidates are expected to evaluate the viability of this proposal based upon the earnings of the division and its market potential, compared to the other divisions. Candidates are also expected to evaluate the viability of closing the group headquarters and relocating the board and treasury function, in order to reduce costs. Each of these issues should be discussed separately and the candidate is expected to provide a discussion on whether these proposals are suitable to CCC as a group and to explain why. Marking Guide

Marks

Recognition of potential risk from shareholders

Evaluation of each suggestion, up to 3 marks for each, maximum of


1

7

7

Examiner’s Comments This question was not well answered. Most candidates failed to address the requirement, with many focusing only upon the possible disposal of the real estate division. Most candidates correctly recognised that the real estate division is providing 30% of the earnings of the group and, in terms of market potential, has both the highest p/e and the most confident comments from its management. However, relatively few candidates then went on to say that it would therefore be inappropriate to dispose of the real estate division. Most candidates provided a very superficial analysis of the possibility of relocating the board and treasury functions, with most answers suggesting that this must be done in order to cut costs, but providing no explanation of why or how this could be achieved. Common Errors • Answers focusing only on disposal of the real estate division • No / limited evaluation of the reality of relocating the head office and treasury functions




May 2008


Question 2(c)

Identify and evaluate alternative methods available to the Board for the disposal of the real estate division, should it decide to do so, and recommend the method of disposal most appropriate to CCC.

(12 marks)

Rationale This requirement tests learning outcome C(ii) ‘ evaluate the product portfolio of an organisation and recommend appropriate changes to support the organisation’s strategic goals’ and syllabus content ‘acquisition and divestment strategies and their place in the strategic plan’. Suggested Approach This should be a straightforward question. The information to answer this question is indicated by the syllabus content, and candidates are required to identify the possible alternative methods of disposal and to evaluate their appropriateness for CCC as viable methods of disposal. Candidates must also remember that they have also been asked to make a final recommendation as to which method of disposal should be used, and this must be suitable and justified, based upon the arguments presented within their evaluation. Marking Guide

Marks

For each disposal method accurately described and related to the scenario, up to 3 marks For a clear justified recommendation based on evaluations made, up to Maximum marks awarded

10

2

12

Examiner’s Comments This question was not well answered by most candidates. Many answers demonstrated a lack of syllabus knowledge, with many candidates being unable to present more than one or two relevant methods of disposal. Many candidates also presented very confused descriptions of disposal methods and most failed to evaluate these in terms of their appropriateness to CCC and the real estate division. A further weakness was that although most candidates provided a final recommendation, very few provided a clear justification for this recommendation. Common Errors • Poor syllabus knowledge of disposal methods • No recommendations provided




May 2008


Question 3(a) Discuss how conducting a frequent and thorough environmental analysis would help the Board of Trustees of BBB.

(14 marks)

Rationale This requirement tests learning outcome A(iii) ‘evaluate the nature of competitive environments distinguishing between simple and complicated competitive environments’ and the syllabus content ‘PEST analysis’ & ‘Porter’s Five Forces model and its use for assessing the external environment’. Suggested Approach This question clearly asks for a discussion on the benefits of conducting an environmental analysis. It does not require the candidate to undertake a detailed PEST analysis or Five Forces analysis. Therefore, answers should focus upon how environmental analysis could help BBB to exploit the opportunities within its environment and to reduce the threats. There are a number of relevant opportunities and threats for the candidate to discuss within the scenario material. Marking Guide

Marks

For general benefits of environment analysis, to BBB, each at up to 2 marks

For valid ,embedded examples for how knowledge of a Five Forces force will help, up to 2 marks for each

For valid ,embedded examples for how knowledge of a PEST factor will help, up to 2 marks for each


4

8

8

14

Examiner’s Comments This question was reasonably well answered by most candidates. Many candidates correctly used either PEST or Porter’s Five forces as a framework to structure their answer. The main weakness of some answers to this question was the lack of focus upon HOW environmental analysis could benefit BBB. A number of answers merely undertook a PEST or a Five Forces analysis without sufficient focus upon the benefits of such an analysis. The scenario information clearly identified a range of opportunities for and potential threat to BBB and candidates were expected to identify how environmental analysis could address these specific issues. Therefore those candidates that merely undertook a PEST or Porter’s Five forces analysis without any reference to how these could help BBB were awarded a fail mark for this question. Candidates must read the question requirements more carefully. Common Errors • Undertaking a PEST/ 5 Forces analysis without any reference to how it could help BBB address its

opportunities and threats.




May 2008


Question 3(b)

Explain the concept of foresight and two techniques for the development of foresight.

(5 marks)

Rationale

This requirement tests learning outcome A(iii) as in part (a) and syllabus content ‘qualitative approaches to competitive analysis’.

Suggested Approach This question should be straightforward. Candidates are required to firstly explain the term identified in the scenario and then to provide an explanation of TWO techniques used to develop foresight. The question is only worth 5 marks, so candidates are not expected to provide lengthy discussions of these techniques. Marking Guide

Marks

For a definition of foresight For each well explained foresight technique, up to 3 marks each Maximum marks awarded

1

4

5

Examiner’s Comments This question was generally well answered. Most candidates provided a correct definition of foresight and were able to identify and describe two methods of foresight. Common Errors • Confused descriptions of methods of foresight, often confusing scenario analysis with gap analysis • Some candidates merely discussed financial techniques such as budgeting and forecasting




May 2008


Question 3(c)

Discuss the difficulties that BBB might, as an organisation, experience in developing a process of environmental analysis.

(6 marks)

Rationale

This requirement tests learning outcome D(vi) ‘discuss the role of change management in a strategic context’ and syllabus content ‘change management in a strategic context’.

Suggested Approach Again, this should be a straightforward question. Using the information provided in the scenario, the candidate is required to identify and discuss the difficulties for BBB of developing a process of environmental analysis. Most of these difficulties can be found directly in the scenario material and relate to BBB’s methods of operation and management style as a charitable organisation. No specific knowledge or understanding of charitable organisations is required to answer this question, as all of the information required to answer this question is in the scenario material. Marking Guide

Marks

For each well described difficulty, up to 2 marks Maximum marks awarded

6

6

Examiner’s comments This question was well answered by most candidates. Most candidates identified the main difficulties presented in the scenario material and were able to discuss why these were particular problems for BBB. Most candidates correctly discussed the laissez faire management style and the poor use of information technology as major issues for discussion. Common Errors • Insufficient depth of discussion of the difficulties/ presentation of a list of difficulties as presented in the

scenario with no additional discussion




May 2008


Question 4(a)

Describe the ‘Suitability, Feasibility and Acceptability (SFA) framework as used for evaluating strategic options.

(6 marks)

Rationale This requirement tests learning outcome C(i) ‘evaluate strategic options’ and syllabus content ‘strategic options generation’. Suggested Approach This question requires the candidate to describe a well known strategic level framework. Candidates are required to describe each of the three criteria separately and must clearly identify how each one tests the viability of a strategic option. Marking Guide

Marks

For a full description of each of the criteria, up to 2 marks each

6


6

Examiner’s Comments This question was well answered by most candidates. Most were able to provide a definition of the three criteria, although some candidates did confuse the three. However, some candidates provided only a basic and brief definition of each of the criteria and failed to adequately describe how each one tests the viability of a strategic option. Common Errors • Brief answers lacking a full description of each of the criteria




May 2008


Question 4(b)

Using the SFA framework, evaluate the strategic options identified by the founders.

(12 marks)

Rationale This requirement tests learning outcome C(i) ‘evaluate strategic options’ and syllabus content ‘strategic options generation’. Suggested Approach This question clearly requires the candidate to use the SFA framework to evaluate the three strategic options presented in the question scenario. Therefore candidates are expected to evaluate each of the three strategic options and discuss their suitability, acceptability and feasibility. Candidates are not required to make a final recommendation in this part of the answer. Marking Guide

Marks

For evaluation of each of the three stated options, using the SFA framework, up to 5 marks Maximum marks awarded

5

12

Examiner’s Comments This question was answered well by most candidates. Many correctly used the SFA framework and were able to adequately discuss each strategic option using the three criteria. However, some candidates failed to use the SFA framework at all and some candidates confused the three criteria, in particular suitability and acceptability. Some candidates discussed suitability in terms of suitability to stakeholders rather that suitability to achieve objectives. However, overall this question was generally well answered. Common Errors • Not using the SFA framework to answer the question • Confusing suitability with acceptability




May 2008


Question 4(c) Identify and evaluate one other strategic option that the founders might pursue.

(5 marks)

Rationale This requirement tests learning outcome C(ii) ‘evaluate the product portfolio of an organisation and recommend appropriate changes to support the organisation’s strategic goals’ and syllabus content ‘management of the product portfolio’. Suggested Approach Candidates are required to identify a further strategic option that DDD might pursue, other than those three presented in the scenario. There are a number of possible options that DDD might pursue and candidates must present valid arguments both for and against the option they identify. Candidates should not repeat the options already presented to them in the scenario. Again, candidates are not required to make a final recommendation in this part of their answer. Marking Guide

Marks

Identification of any reasonable alternative option For evaluation of the identified option, up to 4 marks Maximum marks awarded

1 4 5

Examiner’s Comments This question was generally not well answered by candidates. Very few recognised the most obvious option to improve cash flows open to DDD, that of reducing the number of products in development from the current level of 12, to a level that is more manageable and cost effective. Most candidates merely recommended finding an alternative venture capital company or another biotech company. These options are not sufficiently different to those presented in the scenario. Some candidates did correctly consider the possibility of government funding or attempting to float the company earlier. Some candidates incorrectly suggested a bank loan, despite the scenario clearly stating that this was not a viable option. The main problem with the answers to this question was that few candidates adequately evaluated their suggested option. Most merely stated an alternative but failed to then identify the pros and cons of this strategic option. Common Errors • Not providing a different strategic option to those already presented in the scenario • Limited evaluation of the strategic option




May 2008


Question 4(d)

Recommend the most appropriate strategic option based on your analysis above.

(2 marks)

Rationale This requirement tests learning outcome C(i) ‘evaluate strategic options’ and syllabus content ‘strategic options generation’. Suggested Approach This is a straightforward question, requiring candidates to make an appropriate recommendation based upon the arguments presented in parts (b) and (c) above. Marking Guide

Marks

For a clear recommendation based on the above evaluations Maximum marks awarded

2 2

Examiner’s Comments Most candidates provided a clear recommendation based upon their answers to parts (b) and (c) of the question and therefore were awarded pass marks for this question.




May 2008


Question 5(a)

Advise the Board on what information would be required to assess the suitability of an acquisition target.

(15 marks)

Rationale

This requirement tests learning outcome A(v) ‘evaluate strategies for response to competition’ and syllabus content ‘qualitative approaches to competitive analysis’. Suggested Approach Candidates’ answers should focus upon the suitability of the acquisition target company and not the country in which it is situated. Therefore, a detailed analysis of the neighbouring country, using Porter’s diamond is NOT required. The answer should focus primarily upon the required characteristics of the target company, which could include some discussion of specific national issues, such as culture or infrastructure. Marking Guide

Marks

For each well argued element relating to the target company, up to two marks each Maximum marks awarded

15

15

Examiner’s Comments This question was not well answered by many candidates. The main problem was that very many candidates failed to read the question requirement carefully enough and failed to answer the question set. The question clearly asks for an assessment of the suitability of the acquisition target i.e. the company and not the country which it is in. Many candidates provided a detailed analysis of the country using Porter’s Diamond, which was largely irrelevant if not applied in some way as to its relevance in relation to the target company. Many candidates clearly saw the word ‘country’ within the scenario and immediately (but incorrectly) assumed that this was a Porter’s diamond analysis. Candidates must take more care when reading the question requirements and only answer the question set. For those candidates that did recognise that the question related to the acquisition target company most scored well, discussing issues such as cultural differences, management styles, financial considerations, control issues and resourcing considerations. Common Errors

• Use of Porter’s diamond to discuss the country and not the target company




May 2008


Question 5(b)(i)

Discuss the difficulties that EEE may experience with the performance measurement of its divisions, post acquisition.

(6 marks)

Rationale

This requirement tests learning outcome D(iii) ‘identify problems in performance measurement and recommend solutions’ and syllabus content ‘business unit performance and appraisal’. Suggested Approach The answer to this question should focus upon the difficulties of performance measurement in different companies in different countries and NOT upon specific post acquisition difficulties. The answer should focus upon difficulties relating to measuring performance of companies operating in different countries with different trading conditions and different cultures. Candidates are also expected to discuss the difficulties of using ROI and RI as performance measures and their possible effects upon divisional managerial behaviour within EEE. Marking Guide

Marks

For each difficulty well explained in the context of the scenario, up to 2 marks each Maximum marks awarded

6 6

Examiner’s Comments This question was not well answered by most candidates. Many candidates answered this part of the requirement, discussing only the difficulties of using ROI and RI as performance measures. Many candidates also focused their answers upon ‘post acquisition’ difficulties, rather than on the difficulties in measuring performance of different divisions in different countries. Common Errors • Too much discussion on the problems of using ROI and RI as performance measures, without

considering the problems of measuring performance in different countries. • Focus on post acquisition issues




May 2008


Question 5(b)(ii)

Discuss the disadvantages that EEE may experience if it chooses to use ROI as its primary performance measure.

(4 marks)

Rationale

This requirement tests learning outcome D(iii) ‘identify problems in performance measurement and recommend solutions’ and syllabus content ‘business unit performance and appraisal’. Suggested Approach This should be a straightforward question for candidates, based upon knowledge of a well known performance measurement technique and syllabus content. ROI should be a very familiar performance measure to candidates and it is expected that they should have no difficulty in identifying and discussing the disadvantages of this particular performance measure. Marking Guide

Marks

For each well explained disadvantage of ROI, up to 2 marks each Maximum marks awarded

4 4

Examiner’s Comments This question was generally well answered. Most candidates had a sound knowledge of the problems associated with ROI as a performance measure.



P6

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TURN OVER





Question One Introduction AAA is a privately-owned training college, which specialises in providing courses in business subjects. AAA was founded in 1992 by its current Chief Executive, who is a qualified lawyer. AAA grew rapidly to become one of the largest and most highly regarded colleges in A, an Asian country.

The general situation in A The last two decades have been a period of rapid social change for the residents of A. The country’s economy has developed from being mainly based on subsistence agriculture (that is, agriculture carried out with the aim of feeding the farmer and his/her family), to being much more progressive in all respects. The population is now fairly well educated, with literacy levels much higher among the under-20 age group than in the older population. This is partly as a result of government policy (introduced in the 1970s) aimed at making education to age 16 available to all citizens of A. While subsistence agriculture has declined sharply, commercial agriculture still contributes about 40% of the country’s Gross National Product (GNP). The fastest developing sectors are manufacturing, food production, tourism, financial services and retail.

A is now regarded as a developed Asian economy, with a well-established business and financial community. A is home to many large industrial and commercial corporations, many of which operate globally. Recently, the economy of A has been growing at a rate of about 15% each year. This is better than the growth rates in neighbouring countries. A has a stable, democratic, political system. Its government has been in power for the last six years. A general election is expected at some time in the next two years, and the government is concerned that the main opposition party may be elected. Unlike a number of other countries in the region, A has no recent history of violent unrest or terrorist activity.

The business training market in A The business training industry is dominated by three major colleges (of which AAA is one). There are also a number of smaller colleges. The estimated market shares are shown below.

Market shares % AAA BBB CCC Smaller colleges

• Finance & Accounting (F&A) courses 40 15 30 15 • Marketing courses 15 40 15 30 • Law courses 35 30 25 10 • Human Resource Management (HRM) courses 20 25 40 15 • Other courses - 40 20 40

AAA has grown to its current size by means of organic growth. Both BBB and CCC, on the other hand, have made several acquisitions of smaller colleges in the last five years. Indeed, there have been rumours of a possible merger between BBB and CCC, but there is no evidence to support this. BBB was founded in 1990 by a group of academics from a university. CCC was founded in 1994 by an ex-director of BBB, to specialise in Finance courses. CCC has since recruited a number of experienced tutors from elsewhere in the industry, including an ex-director of AAA.

An independent survey, reported in the press in early 2008, made the following comments about the market:

“The business training industry in A is very buoyant in most sectors. Demand for courses in Law and HRM is rising quite rapidly, while the market for Finance courses is also growing (though at a slower rate). Marketing is the only sector in decline, possibly as a result of the growth in online ‘e-learning’ courses provided by The Marketing Institute”.

P6 2 November 2008



‘The Marketing Institute’ (mentioned in the comment) is the professional body responsible for the development of marketing professionals in A. It is not a college. Currently it is the only professional institute in A to offer its own courses, whether online or ‘face-to-face’. Other institutes are known to be considering the provision of online courses. BBB is known to be developing online courses, though AAA has no plans to do so.

The structure and performance of AAA The Board of Directors of AAA now consists of the Chief Executive and four other directors. They are all senior tutors. Each of the four directors is responsible for a ‘faculty’ of the college, each of which provides courses in a specialist professional area.

The courses provided by AAA range from one day ‘insight’ or ‘update’ courses, on a theoretical or practical topic, to much longer courses leading towards exams for academic and professional qualifications. Courses for diplomas, degrees and professional qualifications require students to attend the college for up to 60 days in any one year. AAA does not provide any full time courses and does not provide any student accommodation.

Almost all the students on one day courses have their courses paid for by their employers. Some students on longer courses are also funded by their employers, but approximately half pay their own tuition fees. The college does not discriminate on price between employer-funded students and those who pay their own fees on individual courses. However, some large employers receive a discount for ‘bulk purchase’ of places on courses. The performance of the college during its most recent financial year is summarised below.

Year Ended 30 September 2008 Actual Budget Sales revenue (A$ Million)

• Finance and Accounting (F&A) faculty • Marketing faculty • Law faculty • Human Resource Management (HRM) faculty

Total for AAA

4.2 0.8 4.0 3.1

12.1

4.5 1.0 4.0 3.5

13.0

Profit (before interest and tax) (A$ Million) • Finance and Accounting (F&A) faculty • Marketing faculty • Law faculty • Human Resource Management (HRM) faculty • Corporate and central costs

Total for AAA

0.6 -0.1 0.6 0.4

-1.4 0.1

1.0 0.5 1.0 1.0

-1.2 2.3

Estimated Market Share (% market revenues) • Finance and Accounting (F&A) faculty • Marketing faculty • Law faculty • Human Resource Management (HRM) faculty

40 15 35 20

} }Not }budgeted }

Staff numbers (equivalent full time employees) • Finance and Accounting (F&A) faculty • Marketing faculty • Law faculty • Human Resource Management (HRM) faculty • Corporate and central staff

Total for AAA

23 6

26 18 14 87

} } }Not }budgeted } }

Student-day numbers (a student-day is one student attending for one day) • Finance and Accounting (F&A) faculty • Marketing faculty • Law faculty • Human Resource Management (HRM) faculty

Total for AAA

2030 410

2100 1150 5690

2000 450

2000 1500 5950

Question one continues on page 5 which is detachable for ease of reference

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November 2008 3 P6




P6 4 November 2008



The recent Board meeting of AAA At a recent Board meeting, the following issues were raised:

• The directors responsible for the F&A and Marketing faculties each raised concerns about a small number of large employer organisations which represent a significant proportion of their faculty’s business. These organisations are starting to demand discounts in excess of 20%. This is far higher than the discounts given to other corporate customers. The director of the Law faculty said that one of the law firms she deals with often books up to half of the places on a course, but now demands a discount of 20%.

• The director responsible for the Law faculty reported that two of her tutors had recently resigned, in order to take up positions with BBB.

• The Chief Executive expressed concern at the poor financial performance of AAA, when compared to the budget for 2007-08. He asked for a volunteer to take responsibility for financial planning and control for the new financial year. The director of the F&A faculty said that he could not help, as he was too busy teaching students and dealing with clients. There was no volunteer, so the Chief Executive reluctantly agreed to continue overseeing the work of the three finance staff.

Required: (a) Using the Boston Consulting Group (BCG) matrix, evaluate the product portfolio of

AAA.

(8 marks)

Note: There are up to 2 marks available for calculations in this requirement.

(b) (i) Produce a quantitative analysis of the performance of AAA.

(14 marks) Note: All 14 marks are for calculations in this requirement.

(ii) Using your quantitative analysis, identify and evaluate the ‘strengths’ and ‘weaknesses’ of AAA’s performance.

(12 marks)

(c) Produce a qualitative analysis of the strategic position and performance of AAA, with each of your findings categorised as either a ‘strength’ or a ‘weakness’.

(8 marks)

(d) Analyse the main ‘opportunities’ and ‘threats' to AAA in its business environment.

(8 marks)



End of Section A Section B starts on page 8

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P6 6 November 2008




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November 2008 7 P6



SECTION B – 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER TWO QUESTIONS FROM FOUR Question Two B is a public company that operates 100 supermarkets in a European country. There are a number of other supermarkets operating in the country and the market is fiercely competitive. All of the supermarkets find it difficult to generate any customer loyalty and have found that customers are very price sensitive.

Like all other supermarkets in the country, B suffers a higher staff turnover than other retail outlets and this is recognised as one of the reasons for relatively low customer satisfaction and retention.

The marketing director has suggested that the company would benefit from introducing a credit card that its customers could use in its supermarkets and in other retail outlets within the country. At present, although all supermarkets in the country accept credit cards for payment for goods, no other supermarket offers its own credit card.

The marketing director claims that, in addition to the appeal to the customers, the credit card would allow B to gather large quantities of data about its customers. He feels this would offer advantages in terms of data mining, data warehousing and relationship marketing.

You are the management accountant for B. The finance director has said that she is unfamiliar with these techniques and has asked you to provide some explanations and advice in the context of B’s business.

Required: (a) Distinguish between data mining and data warehousing.

(6 marks)

(b) Describe relationship marketing in the context of B’s business applying the “six markets” model.

(12 marks)

(c) Recommend, with reasons, three strategies that B can use to develop relationship marketing and improve customer loyalty.

(7 marks)



P6 8 November 2008



Question Three

C is a manufacturer of test equipment for electronic circuits. In the past, C was a dominant player in the international market. However, over the past three years, the company has found that its profits have declined as it has lost market share to other companies in the market.

C’s business model consists of the following stages:

1. C’s highly skilled engineers first visit client sites and, after discussions with the client’s engineers, identify and design the appropriate testing equipment to meet the client’s requirements. C’s engineers are still recognised as the best in the industry, and customers agree that they produce the most effective solutions to the increasingly complex problems presented by C’s clients. This stage of the process is seen as a very collaborative process between the engineers employed by C and the engineers employed by its clients.

2. In the laboratories at C, the equipment design goes through a fairly complicated process. Prototypes are developed, based on the discussions in stage 1. These prototypes are then tested. Once a final design is agreed, the plans are passed to the manufacturing department for production.

3. The manufacturing department of C then produces the appropriate equipment to the desired specification and installs it at the client’s site.

4. After the equipment has been installed, C conducts maintenance on an annual basis.

It is standard practice within the industry for clients to pay a total price for design, manufacture and initial installation of the equipment and an annual maintenance charge after that. Total prices are quoted before design work commences. It is unusual for companies in the industry to maintain other manufacturers’ equipment.

Although clients recognise the high quality of the solutions provided, they are increasingly complaining that the overall prices are too high. Clients have said that although other suppliers do not solve their problems as well as C, they do charge less. As a result, C has reduced its prices to compete with other companies. There is a suspicion that the manufacturing and installation stages of the business are not contributing sufficiently to the business because the costs may be too high.

Some of the Board of Directors of C have recognised that this situation cannot continue and have recommended that a value chain analysis be conducted, to identify the way forward for C. The Board feels that it is important that it identifies which activities in the current business model actually add value and whether all of them should be continued. One of the directors has suggested that C should actually be a solutions provider and not a manufacturer.

Although most directors are in agreement with the proposed value chain analysis, the managing director has argued that value chain analysis is a bad idea. He says that he has heard a number of criticisms of the value chain model.

You are the management accountant for C. The finance director has asked you to do the following:

Required: (a) Explain the benefits that C might gain from conducting a value chain analysis.

(12 marks) (b) Explain the criticisms of Porter’s value chain model that could be relevant to C.

(8 marks) (c) Describe an alternative form of value chain analysis which could be more appropriate

for C. (5 marks)


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November 2008 9 P6



Question Four DD is a research company operating in the computer hardware industry. It has been established for three years. The company employs 30 scientists and engineers working in three research teams. One of those teams has invented an innovative processor which is significantly faster than any processor that is currently available commercially. It is likely that the new processor will be usable in computers used for industrial and, possibly, gaming purposes. The other teams are working in similar areas, developing processors.

Although all of the researchers have done new and innovative work, which has led to a number of published academic papers, no patents have been filed since the company started. Therefore, none of DD’s innovative products has ever become commercially available.

The company is privately funded by an entrepreneur (Mr X), who made $350m from the sale of his previous computer business.

Mr X has, to date, allowed his research staff to conduct research which is focused on creativity rather than commercial viability. He does not want to lose any of the current research staff but now wants to encourage them to be more commercially aware.

Mr X has decided that the company must now capitalise upon the innovative computer processor that one of the DD teams has invented. He intends that some of the focus should shift to the development of commercially available products rather than purely research activities.

Mr X recognises that this will be a significant change in strategy and culture for the company and that the change will require significant planning and management. Mr X intends to hire marketing staff and five additional engineers to bring the processor, and any other potential products, to market as soon as possible.

Currently there is no performance measurement system in place within the company. Mr X believes that the Balanced Scorecard might be the best performance measurement system for DD.

Required: (a) Explain the components of the Balanced Scorecard model.

(4 marks) (b) Recommend, with reasons, two measures that DD should use in each of the

components of the Balanced Scorecard model. (16 marks)

(c) Discuss how the Balanced Scorecard should be introduced and used, in order to help DD achieve the proposed change in strategy and culture.

(5 marks)


Section B continues on page 12

P6 10 November 2008




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November 2008 11 P6



Question Five E is a multinational organisation and is one of the largest global producers of chocolate, coffee and other foodstuffs. E categorises the countries in which it operates as follows:

1. Less developed countries, from which E sources raw materials, but where there is no established local market for the finished products.

2. Fully developed countries, into which E imports raw materials, manufactures, and serves the local and export markets.

In every country in which E operates, it follows the OECD (Organisation for Economic Cooperation and Development) guidelines for multinationals.

In the particular case of country F, a less developed country, E has helped the local farmers to organise themselves into cooperatives to produce their crops. E has also funded schooling for the children of both the farmers and their workers, built and staffed a hospital and has provided other welfare benefits. E considers itself to be a good ‘corporate citizen’ and is used as an example of good practice on the OECD website.

Although the farmers’ cooperatives are free to sell to E’s two main competitors, they tend not to do so because of the close and friendly working relationship that they have with E. Both of E’s main competitors are multinationals, but both are smaller than E.

E has recently been receiving some bad publicity in country F. The management of E feels that this is being organised by the government and the national labour union of country F. The government of F is reasonably supportive of business, but won the last election with a narrow majority. The government is now under pressure to raise the standard of living of the population. An election is due within the next fifteen months. The national labour union, which is increasingly being supported by the main opposition party in country F, is extremely anti-business. It would like to see all foreign companies removed from country F and all foreign-owned assets, and co-operatives nationalised.

The government of country F has stated that the prices paid for cocoa beans are too low, and that country F is not gaining sufficient tax revenue from the exports. The government of country F has threatened to impose an export tariff on cocoa beans, unless prices are increased, and unless E opens a manufacturing facility in the country F. The management of E feels that it has been targeted by the government because it is the largest of the three multinationals operating in the country.

The national labour union of country F has argued that the farm workers are being victimised by the farmers, who have become too powerful because of the cooperatives. It states that the government of F should not allow the farmers to operate in this way.

The management of E does not want to build a factory because the transport costs from such a factory to the nearest market for finished products would force the company to operate the factory at a loss.

The Chief Executive of E is due to meet with government ministers from country F to discuss E’s future operations and involvement in the country.

The requirement for Question Five is on the opposite page

P6 12 November 2008



Required (a) Explain the advantages to E of conducting a stakeholder analysis of its operations

in country F.

(4 marks)

(b) Produce a stakeholder analysis for E’s operations in country F.

(14 marks)

(c) Evaluate the options available to E in its approach to the government of country F and recommend the option that you consider to be the most appropriate.

(7 marks)




Maths Tables and Formulae follow on pages 15 and 16 which are detachable

November 2008 13 P6




P6 14 November 2008







November 2008 15 P6




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P6 16 November 2008




November 2008 17 P6




P6 18 November 2008





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November 2008 19 P6






November 2008


P6 20 November 2008




November 2008



• Evaluate the product portfolio of an organisation and recommend appropriate changes to support the organisation’s strategic goals and the management of the product portfolio

• Prepare and evaluate multi –dimensional models of performance measures • Discuss and apply both qualitative and quantitative techniques in the support of the

strategic decision making function • Evaluate the impact of the external environment on an organisation and its strategy • Evaluate the impact of electronic commerce on the way business is conducted and

recommend an appropriate strategy • Discuss how suppliers and customers influence the strategy process and recommend

how to interact with them • Evaluate strategies in response to competition • Identify an organisation’s value chain • Evaluate and recommend appropriate control measures • Identify relevant stakeholders in respect of an organisation • Recommend proactive and reactive approaches to business/government relations

and to relations with civil society This examination, as usual, tested a wide range of syllabus areas. The Question 1 scenario was designed to test a number of key skills including both quantitative and qualitative analysis. The main focus of this question was the production and evaluation of a detailed SWOT analysis for company AAA, a large business training organisation in country A. Most candidates made a competent start to this question, demonstrating a good understanding of the BCG matrix in applying this to the product portfolio of AAA. In requirement (b)(i), most candidates did well in producing a quantitative analysis of the performance of AAA. However, it was very disappointing to see so many candidates unable to then go on to competently discuss these numbers and to evaluate the quantitative strengths and weaknesses of the company. Many candidates demonstrated a lack of understanding of the difference between strengths and opportunities and threats and weaknesses. Candidates are also advised to be careful when reading the question requirements, as many confused requirement (b)(ii) and requirement (c). The examiner clearly asked for an identification of the ‘quantitative’ strengths and weaknesses in requirement (b)(ii), following on from the quantitative analysis in requirement (b)(i). Therefore, a discussion of the calculations was NOT required in requirement (c). Candidates must ensure that they answer what is asked of them in each of the question requirements. Requirement (c) was answered well by many candidates, with most identifying the key strengths and weaknesses outlined in the scenario information. Generally, requirement (d) was answered well by most candidates, although some candidates clearly did not understand ‘opportunities’, many providing a ‘wish list’ of what they could do, rather than discussing environmental factors that were favourable to AAA. The Section B questions were generally well answered. Question 2 was the least popular question of the whole paper. Most of the (relatively few) candidates who attempted this question were able to answer part (a) reasonably well as this was a general knowledge based question. However, part (b) was answered badly as a number of candidates clearly did not know the six markets model required to answer the question. Candidates should be careful in choosing questions and only attempt those that they have knowledge of. Question 3 was a fairly popular choice, although many candidates answered this question badly. This was mainly due to the lack of application of candidates’ answers to the scenario. The requirements clearly asked for the benefits and criticisms of the value chain in relation to the scenario organisation, but many candidates provided only generic answers relating to the value chain with no attempt at application to C. For those candidates who had read the examiner’s article in the recent FM magazine, part (c) was a gift. Although a few answers




November 2008


were accurate and followed the professional services model many other answers failed to do so and incorrectly discussed issues such as benchmarking, PEST analysis and BPR. Question 4 was a very popular question and in general was well answered by many candidates. Nearly all of those that answered this question answered part (a) accurately, yet it is still disappointing how many candidates do not have basic syllabus knowledge. Part (b) was generally well answered, with most candidates able to provide a good range of appropriate performance measures. However, many candidates incorrectly placed many of the measures, for example stating that market share was a financial measure, rather than a customer measure. Many candidates could provide a range of measures but failed to adequately explain why these measures had been recommended for DD. The question requirement clearly asked for measures, therefore those candidates who provided unquantifiable targets rather than measures were awarded few marks. Question 5 was also a very popular choice for candidates. Most candidates are very familiar with stakeholder analysis and mapping as it has been examined within this paper in previous diets. Most candidates scored well on part (a), demonstrating an ability to explain the advantages of stakeholder mapping. The answers to part (b) were mixed. The candidates who did well used the scenario to identify a wide range of stakeholders, analysed these well in terms of power and interest and were able to map these correctly. However, it was disappointing to see how many candidates could not map the stakeholders successfully and got the categorisation of stakeholder groups wrong. This should have been an opportunity for candidates to undertake a basic stakeholder mapping exercise with all of the stakeholders provided in the scenario. Yet many candidates failed to use these stakeholders or failed to use the information provided in the scenario to map these correctly.




November 2008



Question 1(a)

Using the Boston Consulting Group (BCG) matrix, evaluate the product portfolio of AAA. Note: There are up to 2 marks available for calculations in this requirement.

(8 marks) Rationale

This requirement tests the syllabus learning outcome relating to ‘Evaluate the product portfolio of an organisation and recommend appropriate changes to support the organisation’s strategic goals’. Suggested Approach

This question is designed to be an easy start to the examination. Candidates are expected to evaluate the courses offered by AAA, using the BCG matrix. Importantly, candidates are expected to comment upon the balance of the portfolio.

Marking Guide

Marks

• For calculation of Relative market share, for each faculty ½ mark 2

• For identification of market growth, for each faculty ½ mark 2

• For BCG classification, for each faculty ½ mark 2

• For relevant comment relating to the balance of the portfolio 2

Maximum Marks Awarded 8 Examiner’s Comments

This question was generally well answered. Most candidates demonstrated a sound knowledge of the BCG matrix and were able to correctly categorise all four courses of AAA. However, it is disappointing to see how many candidates still use market share rather than relative market share to categorise the products. Most candidates failed to be awarded maximum marks on this requirement as they failed to adequately evaluate the portfolio and the impact of the position of these products upon AAA’s performance.

Common Errors • Use of market share instead of relative market share • Lack of evaluation of the overall portfolio




November 2008


Question 1(b)(i))

Produce a quantitative analysis of the performance of AAA.

( 14 marks) Rationale

This requirement tests the learning outcome ‘Prepare and evaluate multi-dimensional models of performance measurement’ and the syllabus content ‘non-financial measures and their interaction with financial ones’. This question examines the candidates’ ability to undertake quantitative analysis on a range of performance data provided by AAA. It also tests their ability to identify the most important measures and to calculate and provide appropriate information for management decision making.

Suggested Approach

There is a wide range of both actual and budgetary data provided in the scenario, relating to a range of financial and non-financial performance information and the task is to provide suitable analysis for AAA in an appropriate and clear format. Many calculations could be undertaken so the examiner is expecting candidates to use their professional judgement in order to provide the most relevant and useful information to AAA’s management team. Candidates are not expected to comment upon their calculations in this part of the answer. It is important to provide calculations in a clear and structured way.

Marking Guide

Marks

For each relevant calculation correctly undertaken

½

Up to a maximum of 28 calculations


Examiner’s Comments

This question was generally well answered. Most candidates followed the structure of the information provided in the scenario and undertook basic variance analysis on sales revenues, profit, student day numbers and revenue per student day. It was surprising how many candidates failed to calculate profitability, despite this being a key financial measure of performance for the four courses and for AAA.

Many candidates incorrectly interpreted ‘Student days’ as number of students, but were not penalised for this mistake. Many candidates also failed to calculate ‘total’ variances for AAA, in particular for total sales revenue, total profit and total profitability. This was particularly important, as candidates were asked to review “the performance of AAA” in this and part (b)(ii) of the question.

Overall, most candidates provided sufficient quantitative analysis to be awarded a pass mark for this requirement. Candidates are advised to improve their presentation skills, as the layout of this answer was often very poor and difficult to follow.

Common Errors • Lack of recognition of the importance of calculating profitability • Omission of Totals for AAA • Poor presentation and layout




November 2008


Question 1(b)(ii)

Using your quantitative analysis, identify and evaluate the ‘strengths’ and ‘weaknesses’ of AAA’s performance.

(12 marks) Rationale

This requirement tests the learning outcome of ‘Prepare and evaluate multi-dimensional models of performance measurement’. This question examines candidates’ ability to use the information previously calculated in part (b)(i) to demonstrate understanding of the calculations undertaken and to provide an evaluation of the financial strengths and weaknesses of the business. Suggested Approach

You are only expected to comment on the calculations you have undertaken in part b(i) and therefore, you are not required to provide a detailed analysis of all strengths and weaknesses of AAA (i.e. both quantitative and qualitative). Most importantly, the question asks you to evaluate the performance of AAA, and not to evaluate the individual courses unless they directly impact on overall performance.

Marking Guide

Marks

For each strength of AAA’s performance identified and discussed 3 For each weakness of AAA’s performance identified and discussed 3



The answers presented to this question were largely disappointing. Most candidates merely restated the numbers they had calculated in part (b)(i), with a brief statement on whether they considered them to be a strength or a weakness. The most common mistake was that candidates failed to evaluate the performance of AAA, instead commenting only on the individual courses. This was largely due to most candidates failing to calculate ‘Total’ figures, for sales revenue, profit, profitability and revenue per student day in part (b)(i). This meant that candidates did not have sufficient information to evaluate overall levels of performance for AAA in terms of the key measures, such as overall return on sales and overall profitability of AAA.

Common Errors • Limited/no evaluation. Instead providing mere commentary on whether the figures were

strengths or weaknesses • Limited/ no evaluation of the overall performance of AAA




November 2008


Question 1(c)

Produce a qualitative analysis of the strategic position and performance of AAA, with each of your findings categorised as either a ‘strength’ or a ‘weakness’.

(8 marks) Rationale

This requirement tests the learning outcome of ‘discuss and apply both qualitative and quantitative techniques in the support of the strategic decision making function’ and requires candidates to produce a qualitative analysis of the strengths and weaknesses of AAA. It is important that candidates understand that this requirement does not require comment again upon the calculations in part (b)(i) of the question, but upon the further qualitative information provided in the scenario.

Suggested Approach

This should be a very straightforward question, requiring the candidate to review the scenario information to identify the strengths and weaknesses and then to analyse the strategic position of AAA in the light of these qualitative strengths and weaknesses. Candidates are not required to discuss the information presented in their answers to part (b) of the question, as the scenario provided sufficient information for them to discuss a range of other qualitative factors relating to AAA’s business. It is important that the candidates only focus upon the internal strengths and weaknesses in this answer and do not discuss any external factors (see part (d)).

Marking Guide

Marks

For each qualitative strength of AAA’s performance identified and discussed 2

For each qualitative weakness of AAA’s performance identified and discussed 2


8


This question was reasonably well answered by most candidates. Most candidates were able to identify the key strengths relating to AAA’s reputation as a training provider and that it is one of the three largest business training providers in the country. Most candidates were also able to identify a number of weaknesses, including poor financial planning and control, failure to exploit ‘other’ business and lack of price discrimination between clients. However, a number of candidates failed to use this information provided in the scenario and instead discussed the quantitative strengths and weaknesses again here. Similarly, some candidates confused strengths and weaknesses with opportunities and threats and there was often an overlap between the answers presented in part (c) with those presented in part (d). Candidates must ensure that they can distinguish between internal strengths and weaknesses and external opportunities and threats.

Common Errors • Discussion of opportunities and threats instead of strengths and weaknesses • Discussion of quantitative aspects of strengths and weaknesses again




November 2008


Question 1(d)

Analyse the main ‘opportunities’ and ‘threats’ to AAA in its business environment. (8 marks)

Rationale

This question examines the learning outcome ‘evaluate the impact and influence of the external environment on an organisation and its strategy’ and the syllabus content ‘derivatives of PEST such as STEEP and PESTLE’. This question requires the candidate to complete the corporate appraisal of AAA by undertaking an analysis of the external or environmental factors impacting upon AAA and analyse these as either opportunities or threats.

Suggested Approach

This should be a straightforward question as most of the information required to answer it can be found directly in the scenario information provided. It is important that candidates do not confuse opportunities with a wish list of all the things AAA could do if it had unlimited resources!

Marking Guide

Marks

For each opportunity for AAA identified and discussed 2

For each threat to AAA identified and discussed 2


8


This question was reasonably well answered. Most candidates provided a good range of threats to AAA and discussed these well. However, the main weakness with this answer was the analysis of AAA’s opportunities. Many candidates missed the most obvious opportunities presented in the scenario, such as a buoyant economy, leading to economic and social development and the government policy improving national literacy levels. Instead, many candidates presented a wish list of all of the things AAA could do, such as e-learning and offering full time courses and accommodation. These are not opportunities to AAA, but strategic options and, as such, should not appear in a SWOT analysis.

Common Errors • Lack of understanding of what is meant by the term ‘opportunities’




November 2008



Question 2(a)

Distinguish between data mining and data warehousing. (6 marks) Rationale

This requirement tests learning outcome ‘evaluate the impact of electronic commerce on the way business is conducted and recommend an appropriate strategy’ and the syllabus content ‘competing through exploiting information (rather than technology’).

Suggested Approach

This should be a straightforward question, requiring the candidate to briefly explain two terms used within the syllabus. As this question is only worth 6 marks, candidates are only expected to provide short explanations for each term.

Marking Guide

Marks

Clear definition and brief explanation of data mining. 3

Clear definition and brief explanation of data warehousing. 3


6


This question was well answered. Although Question 2 was the least popular question on the examination, for those candidates that chose this question, most scored a pass mark for this requirement.

Common Errors • Incorrect or muddled explanation of the terms




November 2008


Question 2(b)

Describe relationship marketing in the context of B’s business applying the ‘six markets’ model. (12 marks) Rationale

This requirement tests the learning outcome ‘discuss how suppliers and customers influence the strategy process and recommend how to interact with them’ and syllabus content ‘the customer portfolio: customer analysis and behaviour, including the market audit and customer profitability analysis as well as customer retention and loyalty’.

Suggested Approach

This should be a straightforward question, requiring the candidate to identify and explain the concept of relationship marketing and then apply it to the scenario organisation using the ‘six markets’ model, as described in the syllabus. The six markets model can be found in the CIMA Study material, therefore this question should not be difficult for candidates who had revised this topic.

Marking Guide

Marks

A description of relationship marketing 1

Contrasting RM with transactional marketing 1

1. Customer markets 2. Referral markets 3. Supplier markets 4. Recruitment markets 5. Influence markets 6. Internal markets

2 2 2 2 2 2


12


Despite the fact that few candidates attempted this question, even those who did performed badly. It was clear that few candidates had revised this area of the syllabus. Most candidates could describe relationship marketing, but only a very small number of candidates provided an accurate description of the six markets model. It is clearly part of the syllabus and is contained in the study material therefore it is examinable. Candidates must make sure that they have a wide knowledge of the syllabus and can discuss a range of models and concepts from any syllabus area.

Common Errors • Limited/ no knowledge of the six markets model




November 2008


Question 2(c)

Recommend, with reasons, three strategies that B can use to develop relationship marketing and improve customer loyalty. (7 marks) Rationale

This requirement examines the learning outcome of ‘evaluate strategies for response to competition’ and syllabus content ‘competitive analysis and competitive strategies’. This question provides candidates with the opportunity to demonstrate an understanding of the drivers of customer loyalty and relationship marketing.

Suggested Approach

Candidates are expected to use their knowledge of the syllabus and their experience of real world examples to provide examples or relevant strategies for B. Most candidates will have real life experience of supermarket activities as a customer. Therefore the application of the candidates, own experiences, together with the scenario information should be useful in answering this question.

Marking Guide

Marks

Evaluation of each relevant strategy suggested and discussed 3


7


This question was answered reasonably well. Most candidates used their own experiences to identify strategies such as loyalty cards, store credit cards and bonus point schemes. Most candidates also correctly discussed staff incentive schemes and customer retention initiatives. The main weakness of this answer was that most candidates merely listed the recommendations without providing reasoned arguments for these recommendations. The question requirement clearly asked for ‘Recommend, with reasons’, which most candidates failed to do.

Common Errors • Too few recommendations made • Recommendations not adequately discussed or justified




November 2008


Question 3(a)

Explain the benefits that C might gain from conducting a value chain analysis. (12 marks) Rationale

This requirement tests the learning outcome ‘identify an organisation’s value chain’ and the syllabus content ‘value chain analysis’, and is designed to examine the candidates, knowledge and understanding of the use of value chain analysis within organisations.

Suggested Approach

This question requires a relatively simple explanation of the benefits of value chain analysis for the scenario organisation. It does not require the candidate to undertake a detailed value chain analysis of C. Therefore, answers should focus upon the benefits to C, bearing in mind the current issues it is facing in the manufacturing and installation stages of its business.

Marking Guide

Marks

For each benefit explained in relation to C 2



This question was poorly answered by most candidates. Although Question 3 was a popular choice on the examination, many candidates answered this question badly. This was mainly due to the lack of application of candidates’ answers to the questions set. The requirements clearly asked for the benefits that C might gain from conducting value chain analysis, but most candidates provided only very generic answers, with little or no reference to C. Some candidates undertook lengthy descriptions of the components of the value chain, which was largely irrelevant and awarded no marks. Candidates must make sure that they answer the question set and not describe models when they have not been asked to do so. At this level, it is very unlikely that the examiner is going to ask you to describe a model but more likely you will be asked to apply it to a scenario organisation. Few marks are awarded for basic knowledge of models.

Common Errors • Limited application of answers to C • General descriptions of the value chain, with no attempt to answer the question set




November 2008


Question 3(b)

Explain the criticisms of Porter’s value chain model that could be relevant to C. (8 marks) Rationale

This requirement tests the learning outcome of ‘identify an organisations value chain’ and the syllabus content ‘value chain analysis’, and is designed to examine the candidates knowledge and understanding of the use of value chain analysis within organisations.

Suggested Approach

This question is similar to part (a) and requires a relatively simple explanation of the criticisms of value chain analysis for the scenario organisation. Once again, answers should focus upon the criticisms of the value chain that are relevant to C, bearing in mind the business it is in and the operations and services it undertakes.

Marking Guide

Marks

For each criticism explained, relevant to C 2



As in part (a), the answers to this question were generally weak, with little or no application to C. Most candidates did recognise and discuss the limitations of the value chain in relation to service based businesses and were awarded credit for this. However, most candidates failed to discuss the concept of value networks and their relevance to C. Generic answers were provided for discussions of cost and time taken to undertake value chain analysis.

Common Errors • Generic answers with little application to C




November 2008


Question 3(c)

Describe an alternative form of value chain analysis which could be more appropriate for C. (5 marks) Rationale

This requirement tests the learning outcome of ‘identify an organisations value chain’ and the syllabus content ‘value chain analysis’, and is designed to examine the candidates knowledge of alternative value chain analysis models more relevant to service based organisations.

Suggested Approach

This question requires the candidate to describe an alternative form of value chain analysis more appropriate for C i.e. a more appropriate model that can be used in a service based industry. Therefore candidates are expected to use their syllabus knowledge of the professional services value chain model to answer this question. The question only asks for a description of an alternative model, therefore candidates are not expected to analyse it in any depth.

Marking Guide

Marks

Recognition that the Value shop is cyclical

For each of the alternative primary activities described, up to

1

2


5

Examiner’s comments

This question was well answered by most candidates. Most candidates who answered this question had clearly read the article in the recently published CIMA FM Magazine and therefore had a good knowledge of this alternative model. However, some candidates who had not read the article and who did not know the alternative model, came up with some incorrect alternatives such as benchmarking and BPR.




November 2008


Question 4(a)

Explain the components of the Balanced Scorecard model. (4 marks) Rationale

This requirement examines the learning outcome of ‘evaluate and recommend appropriate control measures’ and syllabus content ‘multi dimensional models of performance measurement’ e.g. the balanced scorecard. This question is designed to be an easy lead in to a question on the application of the balanced scorecard.

Suggested Approach

This question is very straightforward, requiring a basic explanation of the four components of the balanced scorecard. This question is worth only 4 marks and therefore candidates are not expected to provide a detailed description of each component to be awarded a pass mark.

Marking Guide

Marks

For the identification and correct explanation of each component 1



This question was well answered by most candidates. Most were able to provide a correct definition of the four components, although some candidates did confuse internal business process and learning and growth perspectives. The examiner was quite strict when marking these definitions and candidates were only awarded full marks if the perspectives were named and described accurately.

Common Errors • Inaccurate naming of the perspectives • Confused descriptions of the perspectives • Demonstration of a general lack of basic syllabus knowledge




November 2008


Question 4(b)

Recommend, with reasons, two measures that DD should use in each of the components of the Balanced Scorecard model. (16 marks) Rationale

This requirement tests the learning outcome of ‘prepare and evaluate multi dimensional models of performance measurement’ and syllabus content ‘multi dimensional models of performance measurement’. This question is designed to test the candidates’ ability to apply the Balanced Scorecard model and to demonstrate the ability to make sound recommendations.

Suggested Approach

This question clearly requires the candidate to produce a range of performance measures to be included within the balanced scorecard proposed by DD. The question also clearly asks candidates to recommend, with reasons. Therefore, candidates are expected to discuss each measure and explain why they have included it within the balanced scorecard. Candidates who only provide measures, with no explanation for these measures will not be awarded a pass mark for this question requirement.

Marking Guide

Marks

For each appropriate and relevant measure, embedded in the case and well justified 2 (Up to a maximum of 4 marks for each perspective)



This question was reasonably well answered, with most candidates able to provide a good range of appropriate performance measures. However, many candidates incorrectly placed many of the measures, for example stating that market share was a financial measure, rather than a customer measure. Many candidates provided a range of measures but failed to adequately explain why these measures had been recommended for DD. The question requirement clearly asked for recommendations, with reasons, therefore those candidates that only provided a list of unexplained measures were not awarded high marks. The question requirement also clearly asked for measures and not targets, therefore those candidates who provided targets rather than measures were awarded few marks.

Common Errors • Lists of unexplained measures with no explanation or justification • Targets provided rather than measures




November 2008


Question 4(c)

Discuss how the Balanced Scorecard should be introduced and used, in order to help DD achieve the proposed change in strategy and culture. (5 marks) Rationale

This requirement tests the learning outcome of ‘prepare and evaluate multi-dimensional models of performance measurement’. This question tests the candidates’ knowledge and understanding of the process of strategic change management.

Suggested Approach

Candidates are required to provide a discussion on the strategic emphasis of the balanced scorecard with the emphasis upon how it should be introduced in order to assist in changing strategy and culture in DD. The answer to this question should focus upon the change management process needed to manage effective strategic change. Therefore candidates are expected to discuss issues such as communication, planning, feedback and education.

Marking Guide

Marks

For each of the four management processes required, up to 2

Maximum marks awarded 5 Examiner’s Comments This question was generally well answered by candidates. Most candidates recognised the need to discuss the process of change and the management of this change in DD. A range of alternative change management models were used, and if applied to DD, were rewarded.




November 2008


Question 5(a)

Explain the advantages to E of conducting a stakeholder analysis of its operations in country F. (4 marks) Rationale

This requirement tests the learning outcome of ‘identify relevant stakeholders in respect of an organisation’ and syllabus content ‘interacting with stakeholders and stakeholder mapping’. This question is designed to test the candidates’ basic understanding of a key syllabus model.

Suggested Approach

This is a straightforward question requiring candidates to merely present an explanation of the advantages of stakeholder mapping. Answers should focus upon the advantages of identifying the key stakeholder groups and their levels of power and interest and the identification of appropriate strategies to deal with these stakeholder groups.

Marking Guide

Marks

Determine power and interest of each group 1 Need support and agreement of most powerful stakeholders – or fail 1 Identify stakeholders who will cause most disruption Identify so as to decide whether to accommodate, negotiate, manipulate or resist

Maximum Marks awarded

1 1

4


This question was well answered by many candidates. Most were able to discuss the importance of identifying key stakeholders and the importance of identifying levels of interest and power. However, fewer candidates identified that performing the analysis would enable E to identify appropriate strategies for each of these stakeholder groups.

Common Errors • A description of stakeholder mapping rather than application to the scenario




November 2008


Question 5(b)

Produce a stakeholder analysis for E’s operations in country F. (14 marks) Rationale

This requirement examines the learning outcome ‘identify relevant stakeholders in respect of an organisation’, and is designed to test the candidates’ ability to apply their knowledge of stakeholder mapping to a scenario organisation.

Suggested Approach

The answer to this question should focus upon the application of any relevant stakeholder mapping model (including the Mendelow matrix). Candidates are required to identify a range of stakeholders from the scenario. There are enough stakeholders mentioned in the scenario to answer the question sufficiently without having to refer to other stakeholder groups such as the general public or the media. Candidates are expected to identify and explain the level of power and interest of each stakeholder group and to categorise/ map them accordingly. A detailed Mendelow matrix diagram is not required and no marks are awarded for a basic representation of any of the stakeholder mapping models.

Marking Guide

Marks

For each stakeholder, correctly identified, categorised and discussed, up to 3



This question was reasonably well answered by most candidates. Most candidates identified a range of stakeholders presented in the scenario material. However, many candidates introduced other possible stakeholders such as the media and the general public, which were not considered to be relevant and awarded no marks. Most candidates used the Mendelow matrix but credit was given for all relevant stakeholder mapping models, if used correctly. The main weakness of many answers was the incorrect classification of the stakeholders by misinterpretation of their levels of power and interest. If candidates were able to adequately justify their reasoning for their categorisation they were awarded credit, but most candidates did not do this. Again, many candidates wasted time in their answers drawing detailed models and diagrams which were largely irrelevant if not applied to the scenario.

Common Errors • Irrelevant descriptive diagrams of the stakeholder mapping models used. • Incorrect classification of stakeholders with poor/ limited justification for classifications




November 2008


Question 5(c)

Evaluate the options available to E in its approach to the government of country F and recommend the option that you consider to be the most appropriate.

(7 marks) Rationale

This requirement examines the learning outcome of ‘recommend proactive and reactive approaches to business/ government relations and to relations with civil society’ and syllabus content ‘approaches to business/ government relations and with civil society’. This question is designed to test the candidates’.0 ability to evaluate the relationship between E and the government of country F and how best to manage the relationship. Suggested Approach

Candidates are required to evaluate the relationship between E and the government of country F and how best to manage the relationship. Candidates are expected to use the analysis undertaken in part (b) of government F as a stakeholder, to identify appropriate strategies for E in managing the relationship. This question requires the candidate to also consider information provided in the scenario and the reaction of other stakeholders.

Marking Guide

Marks

For each well explained option available, up to For a relevant and justified recommendation

2 2



This question was not well answered. Most candidates provided very limited options and some were unrealistic and occasionally unethical, such as offering bribes to the government or union officials. Many candidates also suggested opening up a manufacturing plant in F, which was considered to be unrealistic. A further failing of answers to this question was that many candidates put forward a number of options but then failed to make a final choice of the most appropriate choice for E. If you are asked to make a final recommendation then you must do so or lose marks.

Common errors • Limited or unrealistic options presented • No recommendations made



Documents

CIMA | P6 - Management Accounting Business Strategy Solved Past Papers