Business Management Pillar. Strategic Level Paper. P6 Management Accounting Business Strategy. 24 November Tuesday Morning Session

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1 . Business Management Pillar Strategic Level Paper P6 Management Accounting Business Strategy 24 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 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. 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. Tick the appropriate boxes on the front of the answer book to indicate which questions you have answered. P6 Business Strategy TURN OVER The Chartered Institute of Management Accountants 2009

2 SECTION A 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER THIS QUESTION Question One Introduction AAA is a small management consultancy practice, based in the capital city of an African country. Since 2004, AAA has grown significantly. In 2008 AAA earned a fee income of US$ 2.8 million (2004: US$ 1.6 million), and profit after tax of US$ 0.6 million (2004: US$ 0.4 million). AAA now employs a total of 14 consultants (including the partners) and 11 support staff. The support staff mainly work in administration, finance, research and marketing roles. AAA s accounts for 2008 showed net assets of US$ 1.1 million (2004: US$ 1.0 million). The business of AAA AAA has a number of clients in financial services, manufacturing, construction, retail and logistics. Most of AAA s clients can still be regarded as Small and Medium Enterprises (SMEs), but a few of them have now grown to become large and successful organisations. Indeed, AAA now has three clients in the top ten of the country, ranked by turnover. In all projects, AAA ensures that the staff of the client organisation are fully involved in the consultancy process. Client staff are normally included as members of the project team, thus ensuring that the project has greater acceptance from the client organisation. As a result of this approach, AAA has a reputation for successful projects and has achieved some client referral and repeat business. The staff retention problem Until 2007, AAA had never lost a key employee. The partnership was, and still is, viewed as a caring and loyal employer, at least matching the market rate in terms of salaries and benefits. The partners were confident that staff loyalty would continue, as AAA was still growing and provided both interesting and challenging projects and opportunities for career progression. The partners were shocked when, in 2007, two consultants resigned to join rival consultancy firms. In 2008, another consultant left, this time to join a client organisation as director of finance. So far this year, a consultant resigned to set up his own business, and another chose not to return to the partnership at the end of an interim management assignment with a client. Although AAA has recruited suitably qualified replacements for the staff who have left, the cumulative effect of all these losses is that about a third of all AAA consultants have been with the firm for less than five years. Mr Amit Mr Amit is the partner of AAA responsible for administration, marketing and IT. He is keen to use AAA itself as a pilot study, with a view to offering knowledge management consultancy services to AAA s clients. Mr Amit has found some information about knowledge management on the internet, part of which is reproduced below. Definition: Knowledge Management (KM) is the use of an organisation s Intranet to allow staff to record their knowledge so it can be accessed by others. It is a modern IT solution to improve communication and facilitate organisational learning. Project resourcing When AAA begins a new consultancy project, the designated project manager recruits the consultancy team from those consultants who are not engaged in another project. Staff are allocated to projects on a first come, first served basis, so it is common for project managers to find that some of the consultants with the greatest experience in the required specialist areas are already engaged on another project and are thus unavailable. P6 2 November 2009

3 XXX Consultants Ltd One of the partners of AAA is a friend of the owner of XXX Consultants. XXX was formed in 1998 by Mr Bell, a former university lecturer in business and IT, and specialises in the provision of information systems and knowledge management solutions to SME clients. As AAA and XXX are not direct rivals, they decided to exchange information for the purposes of benchmarking. Mr Bell has since provided the following information about XXX to the partners of AAA. XXX Consultants key information Total employees 8 (including 6 consultants) (2008 US$ million) (2004 US$ million) Total fee income Profit after tax Net assets (closing balance) Ms Adam, who left AAA in 2007, joined XXX as a senior manager. Feedback from Ms Adam is that she prefers XXX s approach to serving client needs. XXX is so small that the whole organisation can be dedicated to each and every client project. She also likes XXX s emphasis on continuing professional development (CPD), which is not something that AAA feels to be important. Since its formation in 1998, no staff have left XXX. XXX has also received two awards for outstanding customer service levels from the local Chamber of Commerce. Required: (a) (b) (c) (d) Discuss the definition of Knowledge Management that Mr Amit obtained from the Internet. (6 marks) Discuss the three main potential benefits of Knowledge Management to AAA. (6 marks) Produce a benchmarking analysis that compares the performance of AAA with that of XXX, using the Balanced Scorecard as a framework to present your analysis. Notes: There are 12 marks available for calculations in this requirement. You are NOT required to draw or explain the model itself. (28 marks) Advise the partners of AAA how they might best protect the strategic position of AAA, using Porter s five forces model as a structure for your advice. Note: You are NOT required to draw or explain the model itself. (10 marks) (Total for Question One = 50 marks) (Total for Section A = 50 marks) End of Section A Section B starts over the page TURN OVER November P6

4 SECTION B 50 MARKS [the indicative time for answering this section is 90 minutes] ANSWER TWO QUESTIONS FROM FOUR Question Two B is an established publisher of training manuals and other training material for members of professional bodies and for personal development. The products are sold all over the world by major bookshops and online book vendors. Although the company has a website, it does not sell directly to colleges or private individuals. Currently, all stages of the production and distribution processes are conducted within mainland Europe. All stages of these processes are conducted in-house by B. Over the past five years, sales of B s training manuals have declined and the company is expecting to make little, if any, profit in the coming year. B s manuals are of the traditional style, that is, an extensive amount of printed material bound in a single volume. An initial market study has shown that B s training manuals do not appeal to readers, because they are under heavy time pressure and are unable to devote sufficient time to reading these manuals. The manuals, because of their bulk, are also considered to be difficult to work with. There are three other direct competitors in the market, which is highly competitive. In this market the products are difficult to differentiate and profit margins are low. Although B has no firm evidence, the directors believe that all three of their competitors are more profitable than B. However, the directors are not aware that any of the competitors are operating in a different way to B, and their training manuals are virtually identical to those offered by B. The directors of B believe that there are product development and market development opportunities that could be pursued. They also believe that the cost structure of the products could be improved. However, they are prepared to consider any reasonable alternative strategy that will improve the competitive position of the company. Required: (a) (b) Explain how more detailed knowledge about B s competitors would help the directors of B. (7 marks) (i) Evaluate three strategies that would enable B to be more competitive. (12 marks) (ii) Recommend, with justification, the most appropriate strategy for B to implement in the short term. (3 marks) (iii) Recommend, with justification, the most appropriate strategy for B to implement in the long term. (3 marks) (Total for Question Two = 25 marks) Section B continues on the opposite page P6 4 November 2009

5 Question Three C is one of several insurance companies which offer insurance policies covering general risks relating to individuals and families. Cost efficiency is a major factor in the success of the companies in this industry. Competition is fierce. Over the past three years C has seen the volume of business increase but profits have remained static due to declining margins. Although some of the processes within C are computerised, most of the processes which involve communication with customers are still paper-based. Responses from telephone enquiries involve paper-based communications both with the enquirers and internally within C. Additionally, sales staff visit potential customers in their homes to try to sell them insurance policies for their homes and their possessions. These transactions are again paper-based. This process is often slow and has led to complaints both from customers and from the company s sales staff. C has also been receiving a regular, and increasing, number of complaints from current and potential customers about errors in the paperwork that they receive. The Board of Directors of C has announced that there is a need for a business process reengineering exercise to be conducted with the intention of modernising the business. The intention is to streamline the business model as much as possible and to increase the profitability of the company. C intends to computerise almost all of the work done within the company. A number of staff have expressed concern about business process re-engineering and its implications for those who work at C. Required: (a) (b) (c) Briefly explain the principles of business process re-engineering (BPR). (7 marks) Explain the stages involved in implementing a BPR exercise that might be undertaken by C. (8 marks) Discuss the improvements that the Board of Directors of C might expect from the application of BPR to C s business model. (10 marks) (Total for Question Three = 25 marks) Section B continues on over the page TURN OVER November P6

6 Question Four D is a manufacturer of specialised electronic tracking equipment used by police forces. The equipment allows the tagging, and tracing, of valuable equipment and also of prisoners. The company, which was started only five years ago, has a virtual monopoly in its own country. However, there are limited opportunities for growth in that country. As in most countries, the police forces in D s country are funded by the government. The Board of Directors, which owns the company, wish to see the same level of growth in revenue and profits continue. The equipment, which has been available for five years, is protected by a number of patents and involves some sophisticated technology both in terms of the manufacturing process and the components which each device contains. Since the equipment is physically robust, there is only a limited replacement market. The external cases for the tracking equipment are bought in from an outside supplier but most of the other components are manufactured by D in its own factories. The Board of Directors of D has decided that to pursue a growth strategy it will need to develop an export market and wants, within five years, to develop a presence in all major markets in the world. The Managing Director has said that he expects the company to grow rapidly into a multinational company, operating in a number of countries. The Board has identified a number of countries as possible areas in which D might operate. The Board of Directors of D recognises that the political, economic, cultural and legislative environments differ from those which exist in its own country and that this might create problems for performance and control of operations abroad. Required: (a) Evaluate four market entry strategies that D could use to develop a market in one of its identified countries. (16 marks) (b) Recommend, with justification, the most appropriate strategy for market entry for D. (3 marks) (c) Discuss the performance and control issues that D may face if it starts operations in other countries. (6 marks) (Total for Question Four = 25 marks) Section B continues on the opposite page P6 6 November 2009

7 Question Five E is a multinational company operating in a number of different countries around the world. The company imports and supplies a full range of scientific equipment to both private and public education systems in the countries in which it operates. In one of these countries, Y, there has recently been an election and a change of government. As the global economic situation has worsened and there is currently no economic growth, tax revenues for most countries have shrunk. Therefore, governments are under pressure from their electorates to be seen to be effective in their relationships with business. The government of country Y has announced that it wishes Y to benefit more from the business conducted by E and other multinationals operating within the country. The government of Y has given E 12 months to employ at least 50% of its staff from the local population. Additionally, E is required, in the same period, to find a local partner and to sell to it 25% of the business at a price to be determined by the government of Y. The government of Y has said that further sale of company assets to local business will be required in the future, at a time which has not yet been determined. Many of the staff of E, based in Y, are already from the indigenous population and do not agree with the government s policy. They feel this will damage the performance of E and is likely, eventually, to put their jobs at risk. The Managing Director of E is concerned that the government s policy will damage the economy of Y. However, the unions in Y, which are very supportive of the new government, are in favour of the proposals but have said they would prefer the initial local ownership to be set at a larger percentage. E s business in Y is profitable. In response to the government s proposals, the Board of Directors of E is considering the following three suggestions: 1. Sell the whole division operating in Y and leave the country. 2. Remain in Y and comply with the wishes of the government. 3. Stay in Y and seek legal advice about resisting the government s proposals. Required (a) Produce a stakeholder analysis for E in country Y. (b) (c) (16 marks) Evaluate the three suggestions that the Board of Directors is considering in response to the proposals of the government of Y. (6 marks) Based on your evaluation in part (b) recommend, with justification, the most appropriate course of action for E. (3 marks) (Total for Question Five = 25 marks) (Total for Section B = 50 marks) End of Question Paper Maths Tables and Formulae follow on pages 9 and 10 which are detachable November P6

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9 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

10 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 10 November 2009

11 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

12 Business Management Pillar Strategic Level Paper P6 Management Accounting Business Strategy November 2009 Tuesday Morning Session P6 12 November 2009