Business Management Pillar. Strategic Level Paper. P6 Management Accounting Business Strategy. 18 November Tuesday Morning Session

Transcription

1 Business Management Pillar Strategic Level Paper P6 Management Accounting Business Strategy 18 November 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, 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. You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is, all parts and/or subquestions). The question requirements are contained in a dotted box. ALL answers must be written in the answer book. Answers or notes written on the question paper will not be marked. 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. Answer TWO of the four questions in Section B on pages 8 to 13. Maths Tables and Formulae are provided on pages 15 and 16. These pages are detachable for ease of reference. 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. P6 Business Strategy Tick the appropriate boxes on the front of the answer book to indicate which questions you have answered. TURN OVER The Chartered Institute of Management Accountants 2008

2 SECTION A 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER THIS QUESTION 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 Marketing courses Law courses Human Resource Management (HRM) courses Other courses 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

3 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 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 Estimated Market Share (% market revenues) Finance and Accounting (F&A) faculty Marketing faculty Law faculty Human Resource Management (HRM) faculty 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 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 } }Not }budgeted } } } }Not }budgeted } } Question one continues on page 5 which is detachable for ease of reference TURN OVER November P6

4 [This page is blank] P6 4 November 2008

5 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 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. Note: There are up to 2 marks available for calculations in this requirement. (8 marks) (b) (i) Produce a quantitative analysis of the performance of AAA. Note: All 14 marks are for calculations in this requirement. (14 marks) (c) (d) (ii) Using your quantitative analysis, identify and evaluate the strengths and weaknesses of AAA s performance. (12 marks) 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) Analyse the main opportunities and threats' to AAA in its business environment. (8 marks) (Total for Question One = 50 marks) (Total for Section A = 50 marks) End of Section A Section B starts on page 8 TURN OVER November P6

6 [This page is blank] P6 6 November 2008

7 [This page is blank] TURN OVER November P6

8 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) (Total for Question Two = 25 marks) Section B continues on the opposite page P6 8 November 2008

9 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) (Total for Question Three = 25 marks) Section B continues over the page TURN OVER November P6

10 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) (b) (c) Explain the components of the Balanced Scorecard model. (4 marks) Recommend, with reasons, two measures that DD should use in each of the components of the Balanced Scorecard model. (16 marks) 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) (Total for Question Four = 25 marks) Section B continues on page 12 P6 10 November 2008

11 [This page is blank] TURN OVER November P6

12 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 antibusiness. It would like to see all foreign companies removed from country F and all foreignowned 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

13 Required (a) Explain the advantages to E of conducting a stakeholder analysis of its operations in country F. (b) Produce a stakeholder analysis for E s operations in country F. (4 marks) (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) (Total for Question Five = 25 marks) (Total for Section B = 50 marks) End of Question Paper Maths Tables and Formulae follow on pages 15 and 16 which are detachable November P6

14 [This page is blank] P6 14 November 2008

15 Present value table MATHS TABLES AND FORMULAE 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% Periods Interest rates (r) (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% November P6

16 Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n years n 1 (1+ r ) r Periods Interest rates (r) (n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Periods Interest rates (r) (n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 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: 1 1 PV = 1 n r [1 + r ] Perpetuity Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r% per annum: 1 PV = r P6 16 November 2008

17 [This page is blank] November P6

18 [This page is blank] P6 18 November 2008

19 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. 4 ANALYSIS How you are expected to analyse the detail of what you have learned. 5 EVALUATION How you are expected to use your learning to evaluate, make decisions or recommendations. Apply Calculate/compute Demonstrate Prepare Reconcile Solve Tabulate Analyse Categorise Compare and contrast Construct Discuss Interpret Produce Advise Evaluate Recommend To put to practical use To ascertain or reckon mathematically To prove with certainty or to exhibit by practical means To make or get ready for use To make or prove consistent/compatible Find an answer to Arrange in a table Examine in detail the structure of Place into a defined class or division Show the similarities and/or differences between To build up or compile To examine in detail by argument To translate into intelligible or familiar terms To create or bring into existence To counsel, inform or notify To appraise or assess the value of To advise on a course of action November P6

20 Business Management Pillar Strategic Level Paper P6 Management Accounting Business Strategy November 2008 Tuesday Morning Session P6 20 November 2008